10-K 1 npbc10k2015.htm 10-K 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
 
[X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015
or
[   ]        TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________.
Commission file number 000-22537-01
_______________________________________________________________________________ 
(Exact name of registrant as specified in its charter)
Pennsylvania
 
23-2215075
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
645 Hamilton Street, Suite 1100
Allentown, Pennsylvania  18101
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:  800-822-3321
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class:
 
Name of exchange on which registered
Common Stock (without par value)
 
The NASDAQ Stock Market, LLC
 
 
 
Securities registered pursuant to Section 12(g) of the Act:  None
 
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes [x]
No [  ]
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
 
Yes [  ]
No [x]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [x] No [ ]

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        Yes [x] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer," "accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).
 
Large accelerated filer [ x ]
 
Accelerated filer [  ]
 
 
 
Non-accelerated filer [  ] 
 
Smaller reporting company [  ]
 
 
(do not check if a smaller reporting company)
 
 
 
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes [  ]
No [x]
The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates, based on the closing sale price as of June 30, 2015, was $1.5 billion.

As of February 22, 2016, the Registrant had 140,708,782 shares of Common Stock outstanding.

1

TABLE OF CONTENTS
 
 
 
 
PART I
 
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
 
 
PART III
 
 
 
 
 
 
PART IV
 
 























i

PART I
 
The information in this Form 10-K includes certain forward-looking statements, including statements relating to National Penn’s financial condition, results of operations, asset quality and trends in its business that involve risks and uncertainties.  National Penn’s actual results may differ materially from the results discussed in these forward-looking statements.  Factors that might cause such a difference include those discussed in Item 1  “Business,” Item 1A  “Risk Factors,” and Item 7  “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as those discussed elsewhere in this Form 10-K.
 
Item 1.  BUSINESS

Overview

National Penn Bancshares, Inc. is a Pennsylvania business corporation and a registered bank holding company headquartered in Allentown, Pennsylvania.  Our address is 645 Hamilton Street, Suite 1100, Allentown, Pennsylvania 18101 (telephone number 800-822-3321). In this report, "National Penn", "Company", "we", "us" and "our" refer to National Penn Bancshares, Inc. and its consolidated subsidiaries, unless the context requires otherwise.

National Penn was incorporated in January 1982.  We provide a diversified range of financial services, principally through our national bank subsidiary, National Penn Bank.

We also conduct business through various other direct or indirect subsidiaries.  These other subsidiaries are engaged in activities related to the business of banking.  National Penn’s financial services divisions and affiliates consist of National Penn Investors Trust Company ("NPITC") division; Institutional Advisors LLC; and National Penn Insurance Services Group, Inc.
 
•
At December 31, 2015, National Penn operated 112 retail branch offices throughout thirteen counties in eastern Pennsylvania, four retail branch offices in Centre County, Pennsylvania, seven retail branch offices in New Jersey and, one retail branch office in Cecil County, Maryland.

•
At December 31, 2015, National Penn had total assets of $9.6 billion, total loans of $6.2 billion, total deposits of $6.7 billion, and total shareholders’ equity of $1.2 billion. Refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8 “Financial Statements and Supplementary Data” of this Report.

Merger with BB&T Corporation

On August 17, 2015, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with BB&T Corporation ("BB&T"). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, National Penn will merge with and into BB&T, with BB&T as the surviving corporation in the merger. On January 21, 2016, National Penn and BB&T announced that the merger is expected to close on or about April 1, 2016. Refer to Footnote 2 for additional information regarding the merger with BB&T.

Other Significant 2015 Transactions

On March 16, 2015, the Company announced that funds affiliated with Warburg Pincus agreed to sell 11,565,072 shares of National Penn’s common stock, which comprised approximately 8.3% of outstanding shares, at $10.56 per share in an underwritten secondary offering pursuant to National Penn's shelf registration statement filed with the Securities and Exchange Commission. The transaction closed on March 20, 2015. Immediately following the completion of the offering, Warburg Pincus no longer owns any shares of National Penn’s common stock. No shares of common stock were sold by National Penn, and Warburg Pincus received all of the proceeds from the offering.

1

On February 6, 2015, National Penn completed the repurchase of 7.3 million shares of its common stock from two affiliates of Warburg Pincus, at $10.25 per share or $75 million. This repurchase was completed under a previously announced plan approved by the Company's Board of Directors on January 22, 2015, to repurchase $125 million of its common stock in 2015. As a result, the ownership of National Penn common stock by Warburg Pincus was reduced to approximately 8.3% of National Penn's outstanding common stock.

Market Area

National Penn is headquartered in Allentown, Lehigh County, Pennsylvania.  This location strategically positions National Penn in the greater Lehigh Valley, as well as near Philadelphia to the southeast, and Reading and Lancaster to the west.

During 2015, we served communities throughout a fourteen-county market area in Pennsylvania --Berks, Bucks, Carbon, Centre, Chester, Delaware, Lancaster, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Philadelphia and Schuylkill, three counties in New Jersey --Burlington, Mercer, and Ocean, as well as the Cecil County, Maryland area.
    
Within this geographic region, there are six distinct market areas:

•
Northern Region - the greater Lehigh Valley area, consisting of Lehigh and Northampton Counties, and Carbon, Monroe and Luzerne Counties in northeast Pennsylvania;

•
Central Region - the Boyertown/Reading/Berks County area, Schuylkill County, and northwestern Montgomery County;

•
Eastern Region - eastern Montgomery County and Bucks County in Pennsylvania, and Burlington County, Mercer County and Ocean County in New Jersey;

•
Southern Region - the greater Philadelphia metropolitan area including Philadelphia, Chester, Delaware and southern Montgomery Counties and Cecil County, MD;

•
Nittany Region - Centre County, consisting of the State College/Bellefonte area; and

•
Lancaster Region - greater Lancaster County.

Competition

The banking and financial services industry is extremely competitive in our market area.  We face vigorous competition for customers, loans and deposits from many companies, including:

•
Commercial banks;
•
Savings and loan associations;
•
Finance companies;
•
Credit unions;
•
Trust companies;
•
Mortgage companies;
•
Money market mutual funds;
•
Insurance companies;
•
Brokerage and investment firms; and
•
Other non-depository institutions who provide electronic and internet-based financial solutions, including electronic payment solutions.

Many of these competitors are significantly larger than National Penn; have greater resources, lending limits and larger branch systems; offer a wider array of financial services; and are also long-established in their geographic markets.  Refer to “General Development of Business” below.  In addition, some of these competitors are subject to a lesser degree of regulation than that imposed on National Penn.

Many of these competitors have elected to become financial holding companies under the Gramm-Leach-Bliley Act of 1999, including many of the largest ones.   See “Gramm-Leach-Bliley Act” below.


2

Business Strategy

Our goal is to generate high-quality customer relationships with profitable revenue growth. We intend to accomplish this goal by combining the robust product offerings and fee-based services of a major regional financial services company with the personal attention, service and responsiveness of a community bank.  We believe this strategy will result in a higher level of customer satisfaction leading to increased business with and retention of current customers, the ability to gain new customers, and the creation of shareholder value. The primary components of our business strategy are commercial banking, consumer banking, and wealth management.

Our business strategy is supported by a strong delivery system that emphasizes customer service.  We have divided our delivery into lines of business and into regions based primarily on geographic considerations.  Each region is managed by a regional president who reports to the Chief Banking Officer.  The executives and professionals in our regions and lines of business coordinate our sales and servicing efforts in order to effectively serve our current customers and gain new customers.  The purpose of this delivery design is to better leverage our centralized marketing and servicing efforts, thereby increasing sales of the wide range of products and services that we offer.  We believe that this cross-functional approach leads to more responsive service for our customers who, in turn, reward us with more of their total financial services business.

Operating Segments

At December 31, 2015, National Penn has one reportable segment, Community Banking, and certain other non-reportable segments, as described in Footnote 21 to the consolidated financial statements included in Item 8 of this Report.  Footnote 21 includes segment information on revenue, assets and income, and is incorporated by reference in this Item 1. Otherwise, the financial data and discussion in this report are presented on a consolidated basis.

Community Banking Segment

Commercial Banking Commercial banking is our primary business focus.  Commercial banking services are provided to small and medium sized businesses with annual gross revenues generally between $1 million and $100 million located primarily in our market areas.  The maximum lending commitment to a single borrower was approximately $59 million as of December 31, 2015, which is well below National Penn’s regulatory lending limit.  Our lending philosophy is to establish high-quality relationships with strict guidelines related to customer creditworthiness and collateral requirements.  We strive to maintain a well diversified loan portfolio by industry and borrower.  In addition, our lending process includes ongoing review, monitoring and management of the loan portfolio.

Many of our customers require us to have a high degree of understanding of their business in order for us to be able to customize solutions to their financial requirements.  We believe this distinguishes us from our competitors.  We offer a wide range of products including short-term loans for seasonal and working capital purposes, term loans secured by real estate and other assets, loans for construction and expansion needs, revolving credit facilities, and a full array of cash management services, including remote deposit capture, disbursement, collection, investment and electronic banking services.  Our customized product offerings are tailored to serve a wide range of customers from small business and middle market clients to municipalities and school districts with a focus on cost effective products designed to improve cash flow and utilization. We also engage in commercial real estate lending, including loans to developers of both residential and commercial projects.  Another important component of our commercial lending practice is our emphasis on small businesses and their unique needs. As of December 31, 2015, our commercial loan portfolio was $4.1 billion, which represents 67% of our total loans outstanding.

Consumer Banking   We offer a full range of deposit accounts, which include demand, NOW, money market, other checking and savings accounts, and certificates of deposit.  We also offer consumer loan products such as installment loans, home equity loans, residential mortgage loans, education loans and credit cards.  In addition, we offer automated teller services, safe deposit and night depository facilities and internet banking services, including on-line bill paying and mobile banking.  We continue to focus our efforts in further development of retail products and services, especially transaction deposit accounts.

An important component of our business strategy is the development of business lines and products to better serve our customers.  We are continually assessing the markets within which we operate in order to identify and capitalize upon opportunities where we believe a market segment is being under-served.  Once identified, we focus on customizing solutions that are beneficial to the user and profitable to us.


3

Other Segment

In addition to generation of fee income through our commercial and consumer banking operations, including mortgage lending, we have a number of specialized investment and insurance businesses to develop fee income and to serve specific markets.

National Penn Investors Trust Company (“NPITC”), a division of National Penn Bank, offers investment management and fiduciary services for individuals, corporations, government entities and non-profit institutions throughout our market area. NPITC serves the asset management needs of clients and works in concert with Institutional Advisors LLC, an affiliated registered investment advisor (“RIA”), to deliver strong investment returns through customized and highly disciplined investment strategies. Together these business units manage $2.5 billion of assets.

Securities brokerage services are also provided by a third party vendor, under the name "National Penn Investment Services."

National Penn Insurance Services Group, Inc. ("NPISG") provides property and casualty insurance services for individuals and businesses and offers specialized employee benefits consulting services. NPISG currently serves approximately 10,600 customers.

For the year ended December 31, 2015, our efforts in the wealth and insurance businesses produced $39.2 million of fee income for the Company.

For those individuals requiring the highest levels of service and convenience when it comes to the management of their personal and business finances, National Penn Bank offers Private Banking.  These relationships are serviced on a one-on-one basis by individual private bankers. Private Banking advantages include: a dedicated banker to navigate the Company's offerings and meet the client’s financial needs, special deposit and lending services, a wide range of investment and insurance services, and a full range of consumer and business banking services. Private Banking customers are high net worth individuals with income of $250,000 or more and investible net worth of $500,000 or more.

General Development of Business

National Penn Bank, then known as National Bank of Boyertown, was originally chartered in 1874.  National Bank of Boyertown converted to a holding company structure in 1982 by forming National Penn Bancshares, Inc. as a parent company to National Penn Bank.  National Bank of Boyertown changed its name to National Penn Bank in 1993 to reflect its growing market territory.

Since 1998, National Penn has grown significantly.  Growth has been generated both internally and through acquisitions and mergers that have either “filled in” or extended our reach into new markets.  At December 31, 1998, National Penn had $1.8 billion in total assets, and National Penn Bank conducted operations through 56 retail branch offices.  At December 31, 2015, National Penn had approximately $9.6 billion in total assets, and National Penn Bank conducted operations through 124 retail branch offices.  

In 2015, National Penn's net income was $111 million, inclusive of the $3.0 million ($2.1 million after-tax) merger costs related to the pending merger with BB&T, compared to net income of $98.7 million for 2014 which included $2.9 million ($2.1 million after-tax) of acquisition costs related to TF Financial. Excluding the 2015 and 2014 merger related costs, adjusted net income of $113 million, or $0.80 per diluted share, in 2015 compared to $101 million, or $0.71 per diluted share, in 2014. The Company's continued strong performance in 2015 was the result of its ability to maintain a strong credit quality profile while continuing to effectively manage its operating expenses, including maximizing the operating leverage provided by the acquisition of TF Financial. The Company's net interest margin continued to be impacted by the prolonged low interest rate environment as the 2015 net interest margin was 3.25% compared to 3.40% in 2014, however, 2015 net interest income increased to $270 million from $257 million in 2014 due to an increase in average earning assets, which was primarily as a result of the TF Financial acquisition.


4

Lending

Underwriting and Credit Administration

The Board of Directors, through the Director’s Enterprise Risk Management Committee, reviews our lending practices and policies.  The Credit Policy Committee approves loan authority for certain officers to be used individually or jointly and approves membership in the Company’s Loan Committee.  All approvals are performed on a joint signature or committee basis. Joint approvals range up to $10 million based upon the type of loan, industry sector and the credit risk rating of the relationship, and all other loans, which is generally a loan of $10 million or more, require approval from the Company's Loan Committee.  The Loan Committee is chaired by the Chief Credit Officer, with other executive and senior officers of the Company making up the balance of the Loan Committee.  

Loan Portfolio

At December 31, 2015 and 2014, our loan portfolio was composed of the following balances: 
 
December 31, 2015
 
December 31, 2014
(dollars in thousands)
 
 
Percentage of
 
 
 
Percentage of
 
Balance
 
Portfolio
 
Balance
 
Portfolio
Commercial and industrial
$
2,695,147

 
43.4
%
 
$
2,599,867

 
42.3
%
 
 
 
 
 
 
 
 
CRE - permanent
1,290,072

 
20.8
%
 
1,229,318

 
20.0
%
CRE - construction
148,533

 
2.4
%
 
203,542

 
3.3
%
Commercial real estate
1,438,605

 
23.2
%
 
1,432,860

 
23.3
%
Commercial
4,133,752

 
66.6
%
 
4,032,727

 
65.6
%
 
 
 
 
 
 
 
 
Residential mortgages
861,364

 
13.9
%
 
908,357

 
14.8
%
Home equity
907,214

 
14.6
%
 
913,830

 
14.9
%
All other consumer
292,869

 
4.7
%
 
287,365

 
4.6
%
Consumer
2,061,447

 
33.2
%
 
2,109,552

 
34.3
%
 
 
 
 
 
 
 
 
Loans
6,195,199

 
99.8
%
 
6,142,279

 
99.9
%
 
 
 
 
 
 
 
 
Loans held-for-sale
10,000

 
0.2
%
 
4,178

 
0.1
%
 
 
 
 
 
 
 
 
Total loans
$
6,205,199

 
100.0
%
 
$
6,146,457

 
100.0
%

Commercial Lending

We have a well diversified loan portfolio comprised of loans to customers across many industries. We originate loans primarily through direct solicitation of the borrower, referral sources, and loan participations with other banks. Secured or unsecured loans are available to qualifying customers to facilitate their working capital needs, real estate development, equipment financing, accounts receivable and inventory expansion. Many of our commercial customers are small businesses to which we offer a variety of products.

Our credit policies govern advance rates for collateral pledged to secure loans.  The majority of collateral consists of real estate, business equipment, eligible accounts receivable, raw materials, and finished inventory. Advance rates on collateral in our credit policies may be changed for individual customers depending upon their financial strength, collateral quality, and/or other loan terms.  For real estate secured loans, our credit policies also govern maximum loan-to-value, cash equity requirements, repayment accelerations, sellout time frames, and overall sponsor credit strength.


5

       Commercial and Industrial Loans

Commercial and industrial (“C&I”) loans typically provide customers with financing for equipment; owner-occupied real estate; and short-term working capital needs, raw materials, finished inventory, and accounts receivable.  C&I loans may be either term loans or credit lines, depending upon each customer’s needs, and are repaid from cash flow from the customer’s business. Term loans can be fixed or floating rate and typically have a five year maximum maturity. Amortization is normally dependent upon the economic life of the pledged asset, which is typically owner-occupied real estate or equipment. Term loans with floating rates are typically indexed to the Prime rate or LIBOR.  Lines of credit are provided to customers with fluctuating cash flow needs allowing them to borrow, repay, and re-borrow funds on an as-needed basis up to a pre-determined limit. Lines of credit are typically committed for one year and renewed annually, but they may be granted for longer if warranted by the financial strength of the borrower and/or the collateral pledged. Repayment of the line of credit is dependent upon the business cash flow and/or the conversion of assets, such as accounts receivable and inventory.  Interest rates for lines of credit are usually floating, typically indexed to the Prime rate or LIBOR.

Commercial Real Estate

Commercial real estate loans are typically made to developers for the construction or purchase of shopping centers, office buildings, mixed-use retail space and residential developments, including surrounding roadways, utilities and other infrastructure to support the project. Repayment of loans for permanent income producing properties is dependent upon the net cash flows received from tenants who lease space from property owners. For residential developments, repayment of the loan is dependent upon the sale of individual properties to consumers or in some cases to other developers. Terms of the loan generally range from one to three years, and interest rates are usually floating and are typically indexed to the Prime rate or LIBOR. We also provide loans to customers for the construction and/or long term financing of greater than five unit residential properties that are for rent.  Loan amortization may extend up to 25 years, depending on the financial strength of the customer. Customers repay these loans from net cash flows received from renting the individual units to tenants. Interest rates for these projects can be either fixed rates (up to ten year maximum terms) or floating rates, typically indexed to the Prime rate or LIBOR.

Consumer Lending

We provide loans directly to consumers within our markets to finance personal residences, automobiles, college tuition, home improvements and other personal needs. We also make indirect loans to customers for the purchase of both new and used vehicles. The majority of residential mortgages are conformed to Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") underwriting criteria and are sold to secondary market investors. Other residential products such as jumbo mortgages are originated and typically held in our loan portfolio. We also provide home equity loans, home equity lines of credit and other consumer loans through our network of retail branch offices and our Private Banking division. The majority of consumer loans are secured by the borrower’s residential real estate in either a first or second lien position.  We require a loan-to-value ratio of not greater than 90% on this portfolio with some exceptions based on the borrower’s financial strength. 

Investment Policies and Strategies

Our investment portfolio consists primarily of U.S. Agency and municipal bonds. The Agency bonds include debentures, mortgage-backed securities, and collateralized mortgage obligations issued by Government National Mortgage Association("GNMA"), FNMA and FHLMC. Agency and municipal bonds carry lower risk-based capital requirements than certain other types of securities. The primary purpose of our investment portfolio is to provide a source of liquidity, and as a result we focus on buying high-quality, highly marketable securities. Additionally, the investment portfolio supports our pledging needs for funding purposes and is an essential tool in interest rate risk management.  The Board of Directors establishes investment management and interest rate risk management guidelines.

Concentrations and Seasonality

None of our businesses or products are dependent on a single or limited number of customers, the loss of which would have a material adverse effect on our business.   Our commercial loan portfolio has a concentration in loans to commercial real estate investors and developers and a significant amount of loans are secured by real estate located in Pennsylvania.  Refer to “Significant Concentrations of Credit Risk” in Footnote 1 to the consolidated financial statements included in Item 8 of this Report.  While our businesses are not seasonal in nature, we experience some fluctuations in revenues and deposits.


6

Environmental Compliance

Our compliance with federal, state and local environmental protection laws had no material effect on capital expenditures, earnings or our competitive position in 2015, and is not expected to have a material effect on such expenditures, earnings or competitive position in 2016.

Employees

At December 31, 2015, National Penn and its subsidiaries had 1,606 full- and part-time employees.  Our full-time equivalent ("FTE") employee count at December 31, 2015 was 1,519 compared to 1,658 at December 31, 2014.

Website Availability of Reports

We maintain a website at: www.nationalpennbancshares.com.  We make our Forms 10-K, 10-Q and 8-K (and amendments to each) and other material information about the Company available on this website free of charge at the same time as those reports are filed with the SEC (or as soon as reasonably practicable following that filing).

Supervision and Regulation

Bank holding companies and banks operate in a highly regulated environment and are regularly examined by federal and state regulatory authorities. The following discussion concerns various federal and state laws and regulations and the potential impact of such laws and regulations on National Penn and its subsidiaries.

To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory or regulatory provisions themselves.  Proposals to change laws and regulations are frequently introduced in Congress, the state legislatures, and before the various bank regulatory agencies.  National Penn cannot determine the likelihood or timing of enactment of any such proposals or legislation or the impact they may have on National Penn and its subsidiaries.  A change in law, regulations or regulatory policy may have a material effect on the business of National Penn and its subsidiaries.

Bank Holding Company Regulation

National Penn is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (“BHCA”), and is subject to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

In general, the BHCA limits the business in which a bank holding company may engage in banking, managing or controlling banks and other activities that the Federal Reserve determines to be appropriately incidental to the business of banking. The Gramm-Leach-Bliley Act of 1999 (“GLBA”) amended the BHCA and established a new kind of bank holding company called a “financial holding company.”  GLBA expanded the permissible activities of a bank holding company that elects to become a financial holding company.  A financial holding company may engage in any type of activity that is financial in nature, or incidental or complementary to a financial activity.   National Penn has not become a “financial holding company.”  See “Gramm-Leach-Bliley Act”, in this item, below.

Bank holding companies are required to file periodic reports with, and are subject to examination by, the Federal Reserve.  Federal Reserve regulations require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks.  Pursuant to these “source of strength” regulations, the Federal Reserve may require National Penn to commit its resources to provide adequate capital funds to National Penn Bank during periods of financial stress or adversity.  This support may be required at times when National Penn is unable to provide such support.  Any capital loans by National Penn to National Penn Bank would be subordinate in right of payment to deposits and certain other indebtedness of the bank.

If any insured depository institution subsidiary of a bank holding company becomes  “undercapitalized” (as defined by regulations) and is required to file a capital restoration plan with its appropriate federal banking agency, the Federal Deposit Insurance Act (“FDIA”) requires a bank holding company to guarantee the depository institution's compliance with its capital restoration plan, up to specified limits.

7

The BHCA gives the Federal Reserve the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

The BHCA prohibits National Penn from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock or substantially all of the assets of any bank, or merging or consolidating with another bank holding company, without prior approval of the Federal Reserve.  Such a transaction may also require approval of the Pennsylvania Department of Banking and Securities.  Pennsylvania law permits Pennsylvania bank holding companies to control an unlimited number of banks.

The BHCA further prohibits National Penn from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a non-banking related business unless such business is determined by the Federal Reserve, by regulation or by order, to be “so closely related to banking” as to be a “proper incident thereto.”  The BHCA does not place territorial restrictions on the activities of such non-banking-related businesses.

The Federal Reserve's regulations concerning permissible non-banking activities for National Penn provide fourteen categories of functionally related activities that are permissible non-banking activities. These are:

•
Extending credit and servicing loans;
•
Certain activities related to extending credit;
•
Leasing personal or real property under certain conditions;
•
Operating non-bank depository institutions, including savings associations;
•
Trust company functions;
•
Certain financial and investment advisory activities;
•
Certain agency transactional services for customer investments, including securities brokerage activities;
•
Certain investment transactions as principal;
•
Management consulting and counseling activities;
•
Certain support services, such as courier and check printing services;
•
Certain insurance agency and underwriting activities;
•
Community development activities;
•
Issuance and sale of money orders, savings bonds, and traveler’s checks; and
•
Certain data processing services.

Depending on the circumstances, Federal Reserve approval may be required before National Penn or its non-bank subsidiaries may begin to engage in any such activity and before any such business may be acquired.

Dividend Restrictions

National Penn is a legal entity separate and distinct from National Penn Bank and National Penn's other direct and indirect bank and non-bank subsidiaries.

National Penn's revenues (on a parent company only basis) result almost entirely from dividends paid to National Penn by its subsidiaries.  The right of National Penn, and consequently the right of creditors and shareholders of National Penn, to participate in any distribution of the assets or earnings of any subsidiary through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the subsidiary (including depositors, in the case of National Penn Bank except to the extent that claims of National Penn in its capacity as a creditor may be recognized).

Federal and state laws regulate the payment of dividends by National Penn's subsidiaries.  See “Supervision and Regulation" and "Regulation of National Penn Bank” in this Item 1 and refer to Footnote 16 to the consolidated financial statements included at Item 8 of this Report.  Federal banking regulators have the authority to prohibit banks and bank holding companies from paying a dividend if the regulators deem such payment to be an unsafe or unsound practice.





8

Capital Adequacy and BASEL III Capital Rules

Bank holding companies are required to comply with the Federal Reserve's risk-based capital guidelines.

    Capital adequacy guidelines involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.  Capital adequacy guidelines are intended to ensure that bank holding companies have adequate capital given the risk levels of its assets and off-balance sheet financial instruments.  The guidelines require that bank holding companies maintain minimum ratios of capital to risk-weighted assets.  For purposes of calculating the ratios, a bank holding company's assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories and its capital is classified in one of three tiers.

The required minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit), under prior and new capital rules discussed below, is 8%.  The Federal Reserve has the power to require higher minimum capital ratios on a case-by-case basis depending on the particular circumstances of a bank holding company. At least half of total capital must be “Tier 1 capital.”  Tier 1 capital consists principally of common shareholders' equity, retained earnings, a limited amount of qualifying perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and certain intangible assets.  The remainder of total capital may consist of mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock and loan loss allowance (“Tier 2 capital”). At December 31, 2015, National Penn's Tier 1 capital and total (Tier 1 and Tier 2 combined) capital ratios were 13.48% and 14.60%, respectively.

In addition to the risk-based capital guidelines, the Federal Reserve requires a bank holding company to maintain a minimum “leverage ratio”.  This required a minimum level of Tier 1 capital (as determined under the risk-based capital rules) to average total consolidated assets of 3% at December 31, 2014 for those bank holding companies having the highest regulatory examination ratings and not contemplating or experiencing significant growth or expansion.   The new capital rules discussed below increased the minimum leverage ratio to 4%. The Federal Reserve historically expected all other bank holding companies to maintain a ratio of at least 1% to 2% above the stated minimum. At December 31, 2015, National Penn's leverage ratio was 10.19%.

The FDIA also requires an insured institution, including National Penn Bank, to take “prompt corrective action” in the event minimum capital requirements are not met.  Pursuant to the “prompt corrective action” provisions of the FDIA, the federal banking agencies have specified, by regulation, the levels at which an insured institution is considered “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, or “critically undercapitalized.”

Under these regulations, at December 31, 2014, an insured institution was considered “well capitalized” if it satisfied each of the following requirements:
 
•
It had a total risk-based capital ratio of 10% or more.
•
It had a Tier 1 risk-based capital ratio of 6% or more.
•
It had a leverage ratio of 5% or more.
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It was not subject to any order or written directive to meet and maintain a specific capital level.

In July 2013, the Federal Reserve, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) published final rules establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. Basel III refers to various documents released by the Basel Committee on Banking Supervision. The new rules became effective for National Penn and National Penn Bank in January 2015, with some rules transitioned into full effectiveness over two to four years. The new capital rules, among other things, introduce a new capital measure called "common equity Tier 1", increase the leverage and Tier 1 capital ratios, change the risk-weightings of certain assets for purposes of risk-based capital ratios, create an additional capital conservation buffer over the required capital ratios, and change what qualifies as capital for purposes of meeting the various capital requirements. The new capital rules most significantly impacted the treatment of the Company's deferred tax assets when calculating capital and the increased risk-weighting of certain nonperforming loans, as well as the new requirement to risk-weight loan commitments with a maturity of less than one year. The adoption of the new capital rules did not have a significant impact on the Company's capital ratios.


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Under the new capital rules, the minimum capital ratios as of January 1, 2015 are as follows:

•4.5% common equity Tier 1 to risk-weighted assets;
•8.0% total capital to risk-weighted assets;
•6.0% Tier 1 capital to risk-weighted assets; and
•4% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the "leverage ratio").

The new capital rules require National Penn and the Bank to meet a capital conservation buffer requirement. To meet the requirement when it is fully phased in, each organization must maintain an amount of common equity Tier 1 capital that exceeds the buffer level of 2.5% above each of the minimum risk-weighted asset ratios. The requirement will be phased in over a four year period, starting January 1, 2016.

With respect to National Penn Bank, effective January 1, 2015 the capital ratios required to qualify as well-capitalized under the prompt corrective action provisions are as follows:

•10% or greater total risk-based capital ratio;
•8.0% or greater Tier 1 risk-based capital ratio;
•6.5% or greater common equity Tier 1 risk-based capital ratio; and
•5% or greater leverage ratio.

At December 31, 2015, National Penn and National Penn Bank were "well-capitalized" under the applicable regulatory capital adequacy guidelines. See Footnote 16 "Regulatory Matters" to the consolidated financial statements in Item 8 within this Report.

FDIC Insurance Assessments

National Penn Bank is subject to deposit insurance assessments by the FDIC.  Beginning April 1, 2011, in accordance with the provisions of the Dodd-Frank Act, the FDIC changed its methodology for determining assessment rates. While, historically, assessments were generally based on domestic deposits coupled with the risk classification of a depository institution, the new rate schedule is based on average consolidated total assets minus average tangible equity (Tier 1) capital. Assessments for depository institutions with total assets of $10 billion or more are subject to a different methodology that reflects the institution's overall risk relative to other large institutions. The FDIC also may impose special assessments at any time it estimates that Deposit Insurance Fund reserves will fall to a level that would adversely affect public confidence. National Penn Bank was required to pay (subject to certain credits) regular FDIC insurance assessments in 2015, and expects to be required to pay regular insurance assessments to the FDIC in 2016.

Regulation of National Penn Bank

The operations of National Penn Bank are subject to various federal and state statutes applicable to banks chartered in the United States, as well as regulations of the OCC.  

The OCC, which has primary supervisory authority over National Penn Bank, regularly examines national banks in such areas as reserves, loans, investments, management practices, trust, and other aspects of operations. These examinations are designed for the protection of depositors rather than shareholders.  National Penn Bank must furnish annual and quarterly reports to the OCC, which has the legal authority to prevent the bank from engaging in an unsafe or unsound practice in conducting its business.

Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, the investments a bank may make, the minimum capital levels and ratios a bank must maintain, the reserves against deposits a bank must maintain with its district Federal Reserve Bank, the types and terms of loans a bank may make and the collateral it may take, the activities of a bank with respect to mergers and consolidations, and the establishment of branches, including community offices. Pennsylvania law permits statewide branching.


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Under the National Bank Act, National Penn Bank is required to obtain the prior approval of the OCC for the payment of dividends if the total of all dividends declared by it in one year would exceed its net profits for the current year plus its retained net profits for the two preceding years, less any required transfers to surplus.  In addition, National Penn Bank may only pay dividends to the extent that its retained net profits (including the portion transferred to surplus) exceed statutory bad debts.  Under the FDIA, National Penn Bank is prohibited from paying any dividends, making other distributions or paying any management fees if, after such payment, it would fail to satisfy its minimum capital requirements.

As a subsidiary bank of a bank holding company, National Penn Bank is subject to certain restrictions imposed by the Federal Reserve Act and Federal Reserve regulations on extensions of credit to its affiliates, including the bank holding company and its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries, and on taking the stock or securities of the bank holding company or its subsidiaries as collateral for loans.

The Federal Reserve Act and Federal Reserve regulations also place certain limitations and reporting requirements on extensions of credit by a bank to its directors, executive officers and principal shareholders, and the directors, executive officers and principal shareholders of its parent holding company, as well as to their related interests.

Regulation of Other Subsidiaries

National Penn Bank's direct non-bank subsidiaries are subject to regulation by the OCC. In addition, Institutional Advisors, LLC, an investment advisory firm, is primarily subject to regulation by the SEC and various state securities regulators.  National Penn Bank's insurance agency subsidiary, National Penn Insurance Services Group, Inc., is primarily subject to regulation by the Pennsylvania Insurance Department.

Monetary and Fiscal Policies

The financial services industry, including National Penn and its subsidiaries, is affected by the monetary and fiscal policies of government agencies, including the Federal Reserve.  Through open market securities transactions and changes in its discount rate and reserve requirements, the Federal Reserve exerts considerable influence over the cost and availability of funds for lending and investment.

Dodd-Frank Act

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the most extensive overhaul of the laws regulating the U.S. financial services industry since the Great Depression, was signed into law. Dodd-Frank creates a new federal oversight function for identifying and managing systemic financial risks, reorganizes the federal bank regulatory structure and imposes new standards and limitations on commercial banking, securities and insurance activities. A number of provisions became effective immediately, but many have delayed effective dates and extended implementation timetables to allow the financial regulatory agencies to promulgate a broad array of new regulations. Although it is not possible to determine the ultimate impact of Dodd-Frank before the extensive rulemaking process is completed, the following provisions are believed to be of greatest significance to National Penn and its subsidiaries:

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Expands the authority of the Federal Reserve Board to examine bank holding companies and their subsidiaries, including insured depository institutions and functionally regulated subsidiaries.

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Requires a bank holding company to be well capitalized and well managed in order to receive approval of an interstate bank acquisition.

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Permits a national bank to establish interstate branches to the same extent as the branch state allows establishment of in-state branches.

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Requires federal banking regulators to make capital regulations countercyclical so that capital requirements increase for banks and bank holding companies in times of economic expansion and capital requirements decrease in times of economic contraction consistent with safety and soundness considerations.

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Creates a new Consumer Financial Protection Bureau (CFPB) with broad rulemaking authority to administer, enforce and implement the federal consumer financial laws.


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As implemented by OCC regulations, alters the federal preemption standard by subjecting national banks to state laws, including consumer financial laws that the OCC determines to be applicable to national banks in accordance with the decision of the U.S. Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson.
 
•
Comprehensively subjects national bank subsidiaries and affiliates to all state laws by eliminating federal preemption authority historically available to them through their national bank affiliation.

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As implemented by OCC regulations, authorizes a state attorney general to file a lawsuit against a national bank to enforce applicable state laws, including applicable consumer financial laws, in accordance with the decision of the U.S. Supreme Court in Cuomo v. Clearing House Assn.

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As implemented by FDIC and banking regulations, permits FDIC-insured banks to pay interest on demand deposits accounts, including business and corporate accounts.

•
As implemented by Federal Reserve regulations, amends the Electronic Fund Transfer Act to require the Federal Reserve to set “reasonable and proportional” limits on interchange fees, including adjustments for fraud prevention, charged to merchants by debit card issuers.

Dodd-Frank imposes more extensive federal regulatory changes on financial institutions with more than $10 billion in assets. Because the assets of National Penn do not exceed $10 billion, Dodd-Frank does not, for example, subject National Penn to examination by the Consumer Financial Protection Bureau, require National Penn to conduct an annual regulatory stress test or limit the debit card interchange fees charged by National Penn Bank. See "Risk Factors - Additional growth will subject National Penn Bank to additional regulation and increased supervision."

Dodd-Frank also permanently raised the current standard maximum deposit insurance amount to $250,000.

Among the Dodd-Frank-based regulatory actions promulgated by the financial regulatory agencies that became effective during 2015 through January 2016, the following had significance to the business of National Penn:

•
The FDIC rescinded its regulations implementing the Temporary Liquidity Guarantee Program and the unlimited deposit insurance coverage for ‘‘noninterest-bearing transaction accounts.”

•
The Federal Reserve amended its Debit Card Interchange Fees and Routing regulations to explain its treatment of transactions-monitoring costs and to clarify its standards for assessing whether interchange transaction fees for electronic debit transactions are reasonable and proportional to the cost incurred by the issuer with respect to the transaction.

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The CFPB amended its regulations under the Real Estate Settlement Procedures Act and the Truth in Lending Act to establish new combined disclosure requirements and forms for consumer credit transactions secured by real property.

Volcker Rule

As mandated by the Dodd-Frank Act, in December 2013, the OCC, Federal Reserve, FDIC, and SEC issued a final rule (the "Final Rules") implementing certain prohibitions and restrictions on the ability of a banking entity and non-bank financial company supervised by the Federal Reserve to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund (the so-called "Volcker Rule"). The Final Rules also require regulated entities to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the Volcker Rule, which must include making regular reports about those activities to regulators. Although the Final Rules provide some tiering of compliance and reporting obligations based on size, the fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including National Penn. The Final Rules began to take effect April 1, 2014 and became fully effective on July 21, 2015, except that, for investments in covered funds predating January 1, 2014, the effective date is extended until July 21, 2017.

Under the Final Rules, financial institutions are prohibited from owning certain covered funds. National Penn has reviewed its securities holdings and does not believe that any of them qualify as impermissible holdings. However, if future regulatory interpretation requires us to divest of any such investments, it could cause us to recognize unexpected gains or losses on the dispositions.


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Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Act of 1999 (“GLBA”):

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Repealed various provisions of the Glass-Steagall Act to permit commercial banks to affiliate with investment banks (securities firms) and insurance-related businesses.

•
Amended the BHCA to permit qualifying bank holding companies to engage in any type of financial activity.

•
Permits subsidiaries of national banks to engage in a broad range of financial activities that are not permitted for national banks themselves.

The result is that banking companies are generally able to offer a wider range of financial products and services and are more readily able to combine with other types of financial companies, such as securities firms and insurance companies.

GLBA created a new kind of bank holding company called a “financial holding company” (a “FHC”) that is authorized to engage in any activity that is “financial in nature or incidental to financial activities” and any activity that the Federal Reserve determines is “complementary to financial activities” and does not pose undue risks to the financial system.  A bank holding company qualifies to become a FHC if it files an election with the Federal Reserve and if each of its depository institution subsidiaries is “well capitalized”, “well managed”, and CRA-rated “satisfactory” or better. National Penn has not become a FHC.

GLBA also authorizes national banks to create “financial subsidiaries.”  This is in addition to the present authority of national banks to create “operating subsidiaries.”  A “financial subsidiary” is a direct subsidiary of a national bank that satisfies the same conditions as a FHC, plus certain other conditions, and is approved in advance by the OCC.  A “financial subsidiary” can engage in most, but not all, of the activities newly authorized for a FHC.  National Penn Bank has not created any “financial subsidiaries.” National Penn has, instead, utilized the authority of national banks to create “operating subsidiaries” to expand its business products and services.

In addition, GLBA includes significant provisions relating to the privacy of consumer and customer information.  These provisions apply to any company “the business of which” is engaging in activities permitted for a FHC, even if it is not itself a FHC.  Thus, they apply to National Penn, National Penn Bank, and their affiliates.  GLBA requires a financial institution to adopt and disclose its privacy policy, give consumers and customers the right to “opt out” of most disclosures to non-affiliated third parties, not disclose any account information to non-affiliated third party marketers and follow regulatory standards to protect the security and confidentiality of consumer and customer information.

National Penn believes GLBA will continue to narrow the differences and intensify competition among commercial banks, investment banks, insurance firms and other financial services companies.

Fair Credit Reporting Act

In 2008, the federal banking agencies issued regulations implementing the affiliate marketing provisions added to the Fair Credit Reporting Act by the Fair and Accurate Credit Transactions (FACT) Act.  The regulations require a financial institution to provide consumers with notice and an opportunity to “opt out” before certain information can be received from, or disclosed to, an affiliate for the purpose of making a marketing solicitation. Implementing Dodd-Frank provisions that amend the FACT Act, the Federal Reserve issued regulations requiring financial institutions to disclose credit scores to consumers if they use credit scores in setting the material terms of credit.
    
    

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USA PATRIOT Act

Combating money laundering and terrorist financing is a major focus of governmental policy covering financial institutions.  The USA PATRIOT Act of 2001 (the “Patriot Act”), which amended the Bank Secrecy Act, gave the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers and increased information-sharing.  It also substantially broadened the scope of federal anti-money laundering laws and regulations by imposing significant new compliance and due diligence policies, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States.  The United States Treasury Department has issued a number of regulations to implement various provisions of the Patriot Act.  These regulations impose obligations on National Penn and National Penn Bank to maintain appropriate policies, procedures and controls to detect, prevent and report potential money laundering and terrorist financing activities and to verify the identity of its customers.   Failure to maintain and implement adequate programs to combat money laundering and terrorist financing or to comply with all of the relevant laws and regulations could have an adverse impact on the business of National Penn and National Penn Bank.

Interest on Reserves

Federal Reserve regulations direct that interest be paid on the required and excess reserve balances held by depository institutions at Federal Reserve Banks.  

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Item 1A.  RISK FACTORS

Risk Factors Related to the Merger
National Penn will be subject to business uncertainties while the merger is pending, which could adversely affect its business.
Uncertainty about the effect of the merger on employees and customers may have an adverse effect on National Penn, and, consequently, the surviving corporation. These uncertainties could cause customers and others that deal with National Penn to seek to change their existing business relationships with National Penn. In addition, the uncertainties may impair National Penn’s ability to attract, retain and motivate key personnel until the merger is consummated and for a period of time thereafter, as employees may experience uncertainty about their roles with the surviving corporation following the merger. Also, the merger agreement restricts National Penn from making certain acquisitions and taking other specified actions without the consent of BB&T, and generally requires National Penn to continue its operations in the ordinary course, until the merger closes. These restrictions may prevent National Penn from pursuing attractive business opportunities that may arise prior to the completion of the merger.
The merger agreement may be terminated in accordance with its terms and the merger may not be completed.
The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the merger. Those conditions include: the approval of the merger proposal by National Penn shareholders, the receipt of all required regulatory approvals and expiration or termination of all statutory waiting periods in respect thereof, the accuracy of representations and warranties under the merger agreement (subject to the materiality standards set forth in the merger agreement), BB&T’s and National Penn’s performance of their respective obligations under the merger agreement in all material respects and each of BB&T’s and National Penn’s receipt of a tax opinion to the effect that the merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Code. While shareholder and regulatory approvals have been obtained, the remaining conditions to the closing of the merger may not be fulfilled in a timely manner or at all, and, accordingly, the merger may be delayed or may not be completed.
In addition, if the merger is not completed by August 17, 2016, either BB&T or National Penn may choose not to proceed with the merger, and the parties can mutually decide to terminate the merger agreement at any time, before or after shareholder approval. In addition, BB&T and National Penn may elect to terminate the merger agreement in certain other circumstances. If the merger agreement is terminated under certain circumstances, National Penn may be required to pay a termination fee of $64.5 million to BB&T.
Failure to complete the merger could negatively impact the stock price and the future business and financial results of National Penn.
If the merger is not completed for any reason, the ongoing business of National Penn may be adversely affected and, without realizing any of the benefits of having completed the merger, National Penn would be subject to a number of risks, including the following:

•
National Penn may experience negative reactions from the financial markets, including negative impacts on its stock price;

•
National Penn may experience negative reactions from its customers, vendors and employees;

•
National Penn will have incurred substantial expenses and will be required to pay certain costs relating to the merger, whether or not the merger is completed;

•
National Penn will have been bound by certain restrictions on the conduct of its businesses prior to completion of the merger. Such restrictions, the waiver of which is subject to the consent of BB&T (not to be unreasonably withheld), may prevent National Penn from making certain acquisitions or taking certain other specified actions during the pendency of the merger; and


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•
National Penn’s management team will have devoted substantial commitments of time and resources to matters relating to the merger (including integration planning), and would otherwise have devoted their time and resources to other opportunities that may have been beneficial to National Penn as an independent company.
In addition to the above risks, if the merger agreement is terminated and National Penn’s board of directors seeks another merger or business combination, National Penn shareholders cannot be certain that National Penn will be able to find a party willing to offer equivalent or more attractive consideration than the consideration BB&T has agreed to provide in the merger. If the merger agreement is terminated under certain circumstances, National Penn may be required to pay a termination fee of $64.5 million to BB&T.

Risk Factors Related to the Operation of National Penn

Difficult conditions in the capital markets and the economy generally may materially adversely affect our business and results of operations, and these conditions may not significantly improve in the near future.

Our business and results of operations are materially affected by conditions in the capital markets and the economy generally. Concerns over the slow economic recovery, the level of national debt, unemployment, the availability and cost of credit, the housing market, inflation levels, the U.S. debt ceiling, the European sovereign debt crisis, energy costs and geopolitical issues have contributed to increased volatility and diminished expectations for the economy and the markets. As a result, the market for fixed income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. Securities that are less liquid are more difficult to value and may be hard to dispose of. Domestic and international equity markets have also experienced periods of heightened volatility and turmoil, with issuers (such as National Penn) that have exposure to the real estate, mortgage, automobile and credit markets particularly affected. These events and other market disturbances may have an adverse effect on us, in part because a portion of our assets are investment securities and also because we are dependent upon customer behavior. Our revenues, including net interest income, and our net interest margin are susceptible to decline in such circumstances, and our profit margins could erode. In addition, in the event of extreme and prolonged market events, such as the global financial crisis, we could incur significant losses. Even in the absence of a market downturn, we are exposed to substantial risk of loss due to market volatility.
Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, and inflation all affect the business and economic environment and, ultimately, the profitability of our business. In an economic climate characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our financial products could be adversely affected. Concerns with respect to the U.S. government’s level of debt and possible resulting fiscal actions and other budgetary and spending matters could contribute to the risk of slower economic growth. The nature and ultimate resolution of these issues, or a failure to achieve a timely and effective resolution, may adversely affect the U.S. economy through possible consequences including further downgrades in the ratings for U.S. Treasury securities, government shutdowns, or substantial spending cuts resulting from sequestration. Adverse changes in the economy could affect earnings negatively and could have a material adverse effect on our business, results of operations and financial condition.

National Penn is subject to pervasive and comprehensive federal and state regulatory requirements and possible regulatory enforcement actions, which may harm its business and financial results, its reputation, and its share price.

National Penn is supervised by the Federal Reserve, and National Penn Bank is supervised by the Office of the Comptroller of the Currency (the “OCC”). Accordingly, National Penn and its subsidiaries are subject to extensive federal and state legislation, regulation, and supervision that govern almost all aspects of business operations, which puts each of them at risk of being the subject of a formal or informal supervisory enforcement action. The expansive regulatory framework is primarily designed to protect consumers, depositors and the government's deposit insurance funds, and to accomplish other governmental policy objectives such as combating terrorism; that framework is not designed to protect shareholders. Areas such as Bank Secrecy Act (“BSA”) compliance (including BSA and related anti-money laundering regulations) and real estate-secured consumer lending (such as Truth-in-Lending regulations, changes in Real Estate Settlement Procedures Act regulations, implementation of licensing and registration requirements for mortgage originators and more recently, heightened regulatory attention to mortgage and foreclosure-related activities and exposures) are being confronted with escalating regulatory expectations and scrutiny. While National Penn has policies and procedures designed to prevent regulatory violations, there is a risk that such violations will occur. Failure by National Penn to comply with these requirements could result in adverse action by regulators, which would negatively affect National Penn's reputation and could adversely affect National Penn's ability to manage its business, and as a result, could adversely affect National Penn's shareholders.

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The impact of legislation, including proposed legislation, and government programs adopted in response to the economic downturn, the U.S. debt ceiling and budget deficit concerns cannot be predicted at this time, and such legislation is subject to change.  

New or changed governmental legislation or regulation and accounting industry pronouncements, including additional regulations and increased supervision resulting from additional growth in assets, could adversely affect National Penn.

Changes in federal and state legislation and regulation, including additional regulations and increased supervision resulting from additional growth in assets, may adversely affect National Penn's operations. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act continues to require significant changes to the U.S. financial system, including among others:

•
Requirements on banking, derivative and investment activities, including: the repeal of the prohibition on the payment of interest on business demand accounts, debit card interchange fee requirements, and compliance with the “Volcker Rule,” which restricts proprietary trading and the sponsorship of, or the acquisition or retention of ownership interests in, private equity funds.

•
The creation of the Bureau of Consumer Financial Protection with supervisory authority, including the power to conduct examinations and take enforcement actions with respect to financial institutions with assets of $10 billion or more.

•
The Bureau of Consumer Financial Protection has issued new regulations that may have a significant impact on compliance requirements for National Penn Bank, including in the area of mortgage lending activities.

•
The creation of a Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk.

•
Stress testing requirements for bank holding companies with assets over $10 billion.

•
Provisions affecting corporate governance and executive compensation of all companies subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended, including the requirement that National Penn submit its executive compensation program to an advisory (non-binding) shareholder vote.

•
A provision that broadens the base for FDIC insurance assessments.

•
A provision that requires bank regulators to set minimum capital levels for bank holding companies that are as strong as those required for their insured depository subsidiaries, subject to a grandfather clause for holding companies with less than $15 billion in assets as of December 31, 2009.
Some of these provisions have yet to be implemented because the issuance of some rules has been delayed and the deadlines for adoption of other rules have not yet been reached.
On July 2, 2013, the Federal Reserve Board unanimously approved its final rule implementing Basel III. The rule was subsequently approved as a final rule by the Office of the Comptroller of the Currency on July 9, 2013 and requires banking organizations, such as National Penn, to calculate their risk-weighted assets under the final rule's standardized approach. The rule was effective January 2015, with some additional transition periods, and requires compliance with the revised definitions of regulatory capital, revised minimum capital ratios, and revised regulatory capital adjustments and deductions, among other issues. National Penn is also subject to changes in accounting rules and interpretations.
The impact of legislation, including proposed legislation, and government programs adopted in response to the economic downturn, the U.S. debt ceiling and budget deficit concerns cannot be predicted at this time, and such legislation is subject to change. National Penn cannot predict what effect any presently contemplated or future changes in financial market regulation or accounting rules and interpretations will have on National Penn. National Penn will have to devote a substantial amount of management and financial resources to ensure compliance with such regulatory changes, including all applicable provisions of the Dodd-Frank Act and its implementing rules as they are finalized and released, which may increase National Penn's costs of operations. In addition, in some cases, National Penn's ability to comply with regulatory changes may be dependent on third party vendors taking timely action to achieve compliance. Any such changes may also negatively affect National Penn's financial performance, the calculation of its capital ratios, its ability to expand its products and services and/or to increase the value of its business and, as a result, could be materially adverse to National Penn's shareholders.

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Our credit quality has been and may continue to be adversely affected by economic conditions.

Economic conditions have adversely impacted National Penn’s business and its results of operations, including the quality of National Penn’s credit portfolio. Beginning in late 2008, we experienced a downturn in the overall credit performance of our loan portfolio. Our loan portfolio has improved in credit quality since the downturn; however, in the aftermath of recessionary conditions, national and regional economic growth has been slow and uneven and many borrowers may continue to have a decreased ability to meet their loan obligations. Delayed improvement or another period of deterioration in the quality of our credit portfolio could significantly increase non-performing loans, require additional increases in loan loss reserves, elevate charge-off levels and have a material adverse effect on our capital, financial condition and results of operations.

Commercial, construction and real estate loans increase our exposure to credit risk.

As of December 31, 2015, $4.1 billion, or 66.6%, of National Penn’s loan portfolio consisted of commercial real estate loans and commercial and industrial loans. Subject to market conditions, we intend to continue to increase our origination of these loans. Commercial real estate loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Commercial real estate loans also typically involve larger loan balances to single borrowers or groups of related borrowers both at origination and at maturity. Commercial business loans expose us to additional risks since they typically are made on the basis of the borrower's ability to make repayments from the cash flow of the borrower's business and are secured by non-real estate collateral that may depreciate over time. In addition, some of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to a greater risk of loss.

Our allowance for loan losses may prove inadequate or we may be required to make further additions to our allowance for loan losses because of credit risk exposure.

We maintain an allowance for possible loan losses. If the economy and/or the real estate market weakens, we may be required to add further provisions to our allowance for loan losses as nonperforming assets could increase or the value of the collateral securing loans may be insufficient to cover any remaining net loan balance, which could have a negative effect on our results of operations.
National Penn reviews the adequacy of its allowance for loan losses, considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and non-performing assets, classified assets and other regulatory requirements. As a result of these considerations, National Penn evaluates the need to increase or decrease its allowance for loan losses. This evaluation is inherently subjective, as it requires numerous estimates and there may be unanticipated adverse changes to the economy caused by recession, inflation, unemployment or other factors beyond National Penn's control. Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary materially from our current estimates. If the credit quality of National Penn's customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the allowance for loan losses is not adequate, National Penn's business, financial condition, liquidity, capital and results of operations could be materially and adversely affected.

National Penn's financial performance is directly affected by interest rates.

Changes in interest rates may reduce profits. Our primary source of income currently is net interest income. Net interest income is the differential, or the net interest spread, between the interest earned on loans, securities and other interest-earning assets, and the interest paid on deposits, borrowings and other interest-bearing liabilities. Net interest margin is affected by changes in market interest rates, because different types of assets and liabilities may react differently, and at different times, to market rate changes. When our interest-bearing liabilities reprice or mature more quickly than interest-earning assets in a period, an increase in market interest rates could reduce our net interest income. Similarly, when interest-earning assets reprice or mature more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. These rates are sensitive to many factors that are beyond National Penn’s control, including general economic conditions, and monetary and fiscal policies of various governmental regulatory agencies, including the Federal Reserve.


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We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity, repricing and balance of the different types of interest-earning assets and interest-bearing liabilities. However, our ability to lower our interest expense is limited at the current lower interest rate levels, while the average yield on our interest-earning assets may continue to decrease. A failure to effectively manage our interest rate risk could materially adversely affect our net interest spread, loan origination volume, asset quality and overall profitability.

Because its operations are concentrated in eastern Pennsylvania, National Penn's performance and financial condition may be adversely affected by regional economic conditions and real estate values.

National Penn's loan activities are largely based in 13 counties in eastern Pennsylvania and, to a lesser extent, National Penn's deposit base is primarily generated from this area. As a result, our consolidated financial performance depends largely upon economic conditions in this region and demand for its products and services. Weak local economic conditions beginning in 2008 caused an increase in loan delinquencies, an increase in the number of borrowers who defaulted on their loans and a reduction in the value of the collateral securing their loans. Delayed improvement or another decline in the regional real estate market could again harm our financial condition and results of operations because of the geographic concentration of loans within this regional area and because a large percentage of its loans are secured by real property. If there is another decline in real estate values, the collateral for National Penn's loans will provide less security. As a result, our ability to recover on defaulted loans by selling the underlying real estate will be diminished, and we will be more likely to suffer losses on defaulted loans.

Declines in asset values may result in impairment charges and adversely impact the value of our investments, financial performance and capital.

National Penn maintains an investment portfolio that includes, but is not limited to, municipal bonds, bank equity securities, and individual trust preferred securities. The market value of investments may be affected by factors other than the underlying performance of the issuer or composition of the bonds themselves, such as ratings downgrades, adverse changes in business climate, volatility in the markets, and lack of liquidity for resales of certain investment securities. We periodically, but not less than quarterly, evaluate investments and other assets for impairment indicators. We may be required to record additional impairment charges if investments suffer a decline in value that is considered other-than-temporary. If we determine that a significant impairment has occurred, we charge against earnings the credit-related portion of the other-than-temporary impairment, which could have a material adverse effect on results of operations in the period in which the write-off occurs.

Our investment portfolio includes approximately $39.9 million in capital stock of the Federal Home Loan Bank (“FHLB”) of Pittsburgh as of December 31, 2015. This stock ownership is required for National Penn to qualify for membership in the FHLB system, which enables it to borrow funds under the FHLB advance program. If the FHLB experiences a capital shortfall, it could suspend its quarterly cash dividend, and possibly require its members, including National Penn, to make additional capital investments in the FHLB. If the FHLB was to cease operations, or if National Penn was required to write-off its investment in the FHLB, National Penn's business, financial condition, liquidity, capital and results of operations may be materially and adversely affected.

If we do not manage our capital position strategically, our return on equity could be lower compared to our competitors as a result of our high level of capital.

If we are unable to use strategically our excess capital, or to successfully continue our capital management programs (such as the stock repurchase program or quarterly dividends to our investors), then our goal of generating a return on average equity that is competitive, by increasing earnings per share and leveraging our capital base, without assuming undue risk, could be delayed or may not be attained. Failure to achieve a competitive return on average equity might decrease investments in our common stock and might cause our common stock to trade at lower prices.


19

National Penn may grow its business by acquiring other financial services companies, and these acquisitions present a number of risks and uncertainties related both to the acquisition transactions themselves and to the integration of the acquired businesses.

Although the acquisition of other financial services companies or assets is not anticipated during the pendency of the merger with BB&T, such acquisitions present risks to National Penn in addition to those presented by the nature of the business acquired. In general, acquisitions may be substantially more expensive to investigate or to complete than expected (including unanticipated costs incurred in connection with the integration of the acquired company, as a result of delays in receipt of regulatory approvals or regulatory approval conditions which may impose additional costs on National Penn or limit National Penn’s revenues). In addition, the anticipated benefits (including anticipated cost savings and strategic gains) may be significantly more difficult or take longer to achieve than expected. In some cases, acquisitions involve our entry into new businesses or new geographic markets, and these situations also present risks in instances where we may be inexperienced in these new areas. As a regulated financial institution, our ability to pursue or complete attractive acquisition opportunities could be negatively impacted by regulatory delays or other regulatory issues. The processes of integrating acquired businesses also pose many additional possible risks which could result in increased costs, liability or other adverse consequences. Finally, if an acquisition is not completed, National Penn may experience negative reactions from the financial markets and from its customers and employees.

Additional growth will subject National Penn Bank to additional regulation and increased supervision.
The Dodd-Frank Act imposes additional regulatory requirements on institutions with $10 billion or more in assets.  National Penn Bank had $9.6 billion in assets as of December 31, 2015. Although additional growth that results in National Penn Bank having assets of $10 billion or more is not anticipated during the pendency of the merger with BB&T, such growth would subject National Penn Bank to the following:
•
Supervision, examination and enforcement by the CFPB with respect to consumer financial protection laws;

•
Regulatory stress testing requirements, whereby National Penn would be required to conduct an annual stress test (using assumptions for baseline, adverse and severely adverse scenarios);

•
A modified methodology for calculating FDIC insurance assessments and potentially higher assessment rates as a result of institutions with $10 billion or more in assets being required to bear a greater portion of the cost of raising the reserve ratio to 1.35% as required by the Dodd-Frank Act;

•
Heightened compliance standards under the Volcker Rule; and

•
Enhanced supervision as a larger financial institution.
The imposition of these regulatory requirements and increased supervision may require additional commitment of financial resources to regulatory compliance and may increase National Penn’s cost of operations. Further, the results of the stress testing process may lead National Penn to retain additional capital or alter the mix of its capital components.

National Penn may incur impairments to goodwill.

At December 31, 2015, National Penn had approximately $303 million recorded as goodwill.  National Penn evaluates its goodwill for impairment at least annually during the second quarter of its fiscal year.  Significant negative industry or economic trends, including a low market price of National Penn's common stock, or reduced estimates of future cash flows or disruptions to National Penn's business could result in impairments to goodwill. National Penn's valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. National Penn operates in competitive environments and projections of future operating results and cash flows may vary significantly from actual results. If National Penn's analysis results in additional impairment to its goodwill, National Penn would be required to record an impairment charge to earnings in its financial statements during the period in which such impairment is determined to exist. Any such change could have a material adverse effect on National Penn's results of operations and stock price.


20

National Penn may be required to pay higher FDIC premiums or special assessments that could adversely affect our earnings.

The Dodd-Frank Act, adopted in July 21, 2010, required the FDIC to increase reserves against future losses, which requires increased assessments that are to be borne primarily by institutions with assets of greater than $10 billion. In addition, the FDIC may issue a special assessment across all FDIC insured institutions. Any future increases in assessments or higher periodic fees could adversely affect National Penn's earnings.

Competition from other financial institutions may adversely affect National Penn's profitability.

National Penn Bank faces substantial competition in originating loans, both commercial and consumer. This competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of National Penn's competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. Intensified competition from these institutions and/or economic conditions could reduce National Penn's net income by decreasing the number and size of loans that National Penn Bank originates and the interest rates it may charge on these loans.
In attracting business and consumer deposits, National Penn Bank faces substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of National Penn's competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than National Penn, which could decrease the deposits that National Penn attracts or require National Penn to increase its rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect National Penn's ability to generate the funds necessary for lending operations. As a result, National Penn may need to seek other sources of funds that may be more expensive to obtain and could increase National Penn's cost of funds.
National Penn Bank and National Penn's non-banking subsidiaries and divisions also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance agencies and governmental organizations which may offer more favorable terms. Some of National Penn's non-bank competitors are subject to less extensive regulations than those governing National Penn's banking operations. Additionally, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. As a result, such non-bank competitors may have advantages over National Penn Bank and its non-banking subsidiaries in providing financial products and services. This competition may reduce or limit National Penn's margins on banking and non-banking services, reduce its market share and adversely affect its earnings and financial condition.

Inability to hire or retain key personnel could adversely affect National Penn's business.

National Penn and its subsidiaries face intense competition from various other financial institutions, as well as from non-bank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance agencies and government organizations, for the attraction and retention of key personnel. As a result, National Penn may not be able to attract or retain talented employees, specifically those who generate and maintain National Penn's customer relationships and serve in other key operation positions in the areas of finance, credit administration, loan functions and information technology. The inability to hire or retain key personnel may result in the loss of potential and/or existing substantial customer relationships and may adversely affect National Penn's ability to compete effectively.


21

A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers, including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.

We depend on our ability to process, record and monitor a large number of customer transactions on a continuous basis. As customer, public, legislative and regulatory expectations regarding operational and information security have increased, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Our business, financial, accounting, data processing systems or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control, including, but not limited to, electrical or telecommunications outages and, as described below, cyber attacks. Although we have business continuity plans and other safeguards in place, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems that support our businesses and customers.

Information security risks for financial institutions have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties, including foreign state-sponsored parties. Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks. Our banking, brokerage and investment advisory businesses rely on our digital technologies, computer and email systems, software, and networks to conduct their operations. Although we believe we have robust information security procedures and controls, our technologies, systems, networks, and our customers’ devices may become the target of cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of National Penn’s or our customers’ confidential, proprietary and other information, or otherwise disrupt National Penn’s or its customers’ or other third parties’ business operations.
Third parties with which we do business or that facilitate our business activities, including exchanges, clearing houses, financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.
To date we have not experienced any material losses relating to cyber attacks or other information security breaches, but there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our plans to continue to implement our Internet banking and mobile banking channel strategies and the outsourcing of some of our business operations. As a result, cybersecurity and the continued development and enhancement of our controls, processes and systems designed to protect our networks, computers, software and data from attack, damage or unauthorized access remain a priority for National Penn. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
Disruptions or failures in the physical infrastructure or operating systems that support our businesses and customers, or cyber attacks or security breaches of the networks, systems or devices that our customers use to access our products and services could result in customer attrition, financial losses, the inability of our customers to transact business with us, violations of applicable privacy and other laws, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.

We rely on third-party vendors to provide key components of our business infrastructure.
We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology, including customer relationship management, internet banking, website, general ledger, investment, deposit, loan servicing and loan origination systems. While we have selected these third-party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of inadequate or interrupted service, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business. Financial or operational difficulties of a third-party vendor could also hurt our operations if those difficulties interfere with the vendor’s ability to serve us, and replacing these third party vendors could result in significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to our business operations as well as reputational risk.


22

If National Penn's information technology is unable to keep pace with its growth or industry developments, National Penn's financial performance may suffer.

Effective and competitive delivery of National Penn's products and services is increasingly dependent upon information technology resources and processes, both those provided internally as well as those provided through third party vendors, such as firms which license their software solutions to National Penn. National Penn's continued success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services to enhance customer convenience, as well as to create additional efficiencies in its operations. Many of National Penn's competitors have greater resources to invest in technological improvements. As technology in the financial services industry changes and evolves, as is occurring in the payments industry, keeping pace becomes increasingly complex and expensive for National Penn. There can be no assurance that National Penn will be able to effectively implement new technology-driven products and services, which could reduce its ability to compete effectively. In addition, the ongoing development and increasing use of "social media" presents challenges and opportunities that can lead to product communication and innovation issues as well as reputation risk.

National Penn's internal control systems are inherently limited.

National Penn's systems of internal controls, disclosure controls and corporate governance policies and procedures are inherently limited. The inherent limitations of National Penn's system of internal controls include the use of judgment in decision-making that can be faulty; breakdowns can occur because of human error or mistakes; and controls can be circumvented by individual acts or by collusion of two or more people. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and may not be detected, which may have an adverse effect on National Penn's business, results of operations or financial condition. Additionally, any plans of remediation for any identified limitations may be ineffective in improving National Penn's internal controls.

Our capital management strategy could dilute tangible book value per share.
Although many capital management initiatives are designed to accrete earnings per share, these initiatives may dilute tangible book value. Under certain circumstances, the repurchase of common stock can be accretive to earnings per share while also dilutive to tangible book value. Likewise, under certain circumstances in an acquisition or merger, including the use of cash as a component of the consideration can have a dilutive effect on tangible book value. Neither stock repurchases nor the acquisition of other companies is anticipated during the pendency of the merger with BB&T.

There may be other dilution of National Penn's shareholders, which may adversely affect the market price of National Penn's common stock.

Except as limited under the merger agreement with BB&T, National Penn is not restricted from issuing additional common shares, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common shares. National Penn is currently authorized to issue up to 250 million common shares, of which approximately 140 million shares were outstanding as of December 31, 2015, and up to one million shares of preferred stock, none of which are outstanding. In addition, National Penn's Board of Directors has made shares available for compensation purposes, including under its Employee Stock Purchase Plan, as well as for purchase under National Penn's Dividend Reinvestment and Stock Purchase Plan. The Employee Stock Purchase Plan allows employee shareholders to purchase shares of National Penn common shares at a 10% discount from market value. In addition, shares are issuable upon the vesting of restricted stock units and/or exercise of stock options that have been, or stock options, stock appreciation rights, stock awards and restricted stock that may be, issued under National Penn's equity compensation plans. Should National Penn experience strong participation in the Employee Stock Purchase Plan or the Dividend Reinvestment and Stock Purchase Plan, the issuance of the required shares of common stock may significantly dilute the ownership of National Penn's shareholders. Except as limited under the merger agreement with BB&T, National Penn's board of directors has authority, without action or vote of the shareholders, to issue all or part of its authorized but unissued shares. Authorized but unissued shares could be issued on terms or in circumstances that could dilute the interests of other shareholders.


23

National Penn relies on dividends it receives from its subsidiaries, may reduce or eliminate cash dividends on its common stock, and is subject to restrictions on its ability to declare or pay cash dividends and repurchase shares of common stock.

As a bank holding company, National Penn's ability to pay dividends depends primarily on its receipt of dividends from its direct and indirect subsidiaries. Its bank subsidiary, National Penn Bank, is National Penn's primary source of dividends. In addition to limits imposed by the merger agreement, dividend payments from National Penn Bank are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by bank regulatory agencies. The ability of National Penn Bank to pay dividends is also subject to profitability, financial condition, regulatory capital requirements, capital expenditures and other cash flow requirements. As of December 31, 2015, National Penn Bank had the ability to pay dividends to National Penn without prior regulatory approval. However, there is no assurance that National Penn Bank, and/or National Penn's other subsidiaries, will be able to pay dividends in the future.

In October 2015, the Board of Directors approved a fourth quarter 2015 cash dividend of $0.11 per share, and in January 2016, the Board of Directors approved a first quarter 2016 cash dividend of $0.11 per share. There can be no assurance that National Penn will pay dividends to its shareholders in the future, or if dividends are paid, that National Penn will maintain or increase the level of its dividends. National Penn's ability to pay dividends to its shareholders is subject to limitations and guidance issued by the Board of Governors of the Federal Reserve System, or the Federal Reserve. For example, under Federal Reserve guidance, bank holding companies generally are advised to consult in advance with the Federal Reserve before declaring dividends, and to strongly consider reducing, deferring or eliminating dividends, in certain situations, such as when declaring or paying a dividend that would exceed earnings for the fiscal quarter for which the dividend is being paid, or when declaring or paying a dividend that could result in a material adverse change to the organization's capital structure. National Penn's failure to pay dividends on its common stock could have a material adverse effect on its business, operations, financial condition, access to funding and the market price of its common stock.

Severe weather and natural disasters may negatively affect National Penn's local economies or disrupt its operations, which could have an adverse effect on our business or results of operations.

National Penn's market area may experience severe weather events or natural disasters, such as hurricanes, blizzards, and other extreme weather conditions. Natural disasters and other severe weather events could negatively impact regional economic conditions; result in a decline in local loan demand and loan originations; cause a decline in the value or destruction of properties securing National Penn's loans and an increase in delinquencies, foreclosures or loan losses; damage its banking facilities and offices; and negatively impact National Penn's growth strategy. National Penn's management cannot calculate the effect of or predict whether or to what extent damage caused by severe weather or natural disasters would affect National Penn's operations. National Penn's business or results of operations may be adversely affected by these and other negative effects of such natural disasters.

National Penn may be a defendant from time to time in a variety of litigation and other actions, which could have a material adverse effect on its financial condition, results of operations and cash flows.

National Penn and its subsidiaries have been and may continue to be involved from time to time in a variety of litigation arising out of its business. An increased number of lawsuits, including purported class action lawsuits and other consumer driven litigation, have been filed and will likely continue to be filed against financial institutions, which may involve substantial compensatory and/or punitive damages. National Penn believes the risk of litigation generally increases during downturns in the national and local economies. National Penn's insurance may not cover all claims that may be asserted against it, and any claims asserted against it, regardless of merit or eventual outcome, may harm National Penn's reputation and may cause it to incur significant expense. Should the ultimate judgments or settlements in any litigation exceed National Penn's insurance coverage, they could have a material adverse effect on National Penn's financial condition, results of operations and cash flows. In addition, National Penn may not be able to obtain appropriate types or levels of insurance in the future, nor may National Penn be able to obtain adequate replacement policies with acceptable terms, if at all.


24

A Warning About Forward-Looking Information

This Report, including information incorporated by reference in this Report, contains forward-looking statements about National Penn and its subsidiaries. In addition, from time to time, National Penn or its representatives may make written or oral forward-looking statements about National Penn and its subsidiaries. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “project,” “plan,” “goal,” “potential,” “pro forma,” “seek,” “target,” “intend” or “anticipate” or the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, rationales, objectives, expectations or consequences of various proposed or announced transactions, and statements about the future performance, operations, products and services of National Penn and its subsidiaries. National Penn cautions its shareholders and other readers not to place undue reliance on such statements.

National Penn's businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the risk factors set forth above, as well as the following:

•
Risks, uncertainties and other factors relating to the merger of National Penn with and into BB&T, including the ability to meet closing conditions to the merger and delay in closing the merger.

•
National Penn's branding and marketing initiatives may not be effective in building name recognition and customer awareness of National Penn's products and services.

•
National Penn may be unable to differentiate itself from its competitors by a higher level of customer service, as intended by its business strategy and other marketing initiatives.

•
Expansion of National Penn's product and service offerings may take longer, and may meet with more effective competitive resistance from others already offering such products and services, than expected. Additionally, new product development by new and existing competitors may be more effective, and take place more quickly, than expected.

•
Growth and profitability of National Penn's non-interest income or fee income may be less than expected, particularly as a result of financial market conditions.

•
General economic or business conditions, either nationally or in the regions in which National Penn does business, may continue to deteriorate or be more prolonged than expected, resulting in, among other things, a deterioration in credit quality, a reduced demand for credit, or a decision by National Penn to reevaluate staffing levels or to divest one or more lines of business.

•
In the current environment of increased investor activism, including hedge fund investment policies and practices, shareholder concerns or actions may require increased management/board attention, efforts and commitments, which could require a shift in focus from business development and operations.

•
Stresses in the financial markets may inhibit National Penn's ability to access the capital markets or obtain financing on favorable terms.

•
Repurchase obligations with respect to real estate mortgages sold in the secondary market could adversely affect National Penn's earnings.

•
Changes in consumer spending and savings habits could adversely affect National Penn's business.

•
Negative publicity with respect to any National Penn product or service, employee, director or other associated individual or entity whether legally justified or not, could adversely affect National Penn's reputation and business.

•
Significant negative industry or economic trends, including declines in the market price of National Penn's common stock, or reduced estimates of future cash flows or disruptions to National Penn's business could result in impairments to goodwill.

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•
National Penn may be unable to successfully manage the foregoing and other risks and to achieve its current short-term and long-term business plans and objectives.

All written or oral forward-looking statements attributable to National Penn or any person acting on its behalf made after the date of this Report are expressly qualified in their entirety by the risk factors and cautionary statements contained in this Report. National Penn does not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.

Item 1B.  UNRESOLVED STAFF COMMENTS
 
None.
 

Item 2.  PROPERTIES
 
National Penn Bancshares, Inc. does not own or lease any property. Currently, National Penn Bank owns 88 properties and leases 71 other properties. National Penn’s other direct and indirect subsidiaries lease 3 properties. The properties owned are not subject to any major liens, encumbrances, or collateral assignments.

The principal office of National Penn and National Penn Bank is leased by National Penn Bank and located at 645 Hamilton Street, Suite 1100, Allentown, Pennsylvania 18101. The lease has a 20 year term, with two renewal options for a total of 9 years and 11 months, and covers approximately 126,000 square feet. National Penn Bank also leases a facility in Spring Township, Berks County, Pennsylvania ("the Reading Area Business Center"), with 48,000 square feet, a lease term of 20 years and two renewal terms for a total of 9 years and 11 months.

National Penn Bank, including all divisions, currently operates 116 retail branch offices located in the following Pennsylvania counties:  Berks, Bucks, Carbon, Centre, Chester, Delaware, Lancaster, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Philadelphia and Schuylkill. National Penn Bank also currently operates 7 retail branch offices located in the following New Jersey counties: Burlington, Mercer, and Ocean, as well as 1 located in Cecil County, Maryland. Of the retail branch offices, 66 are owned and 58 are leased. In addition, National Penn Bank presently owns 134 automated teller machines located throughout these 18 counties, which are primarily located at retail branch office locations.
 
Item 3.  LEGAL PROCEEDINGS
 
Various actions and proceedings are currently pending to which National Penn or one or more of its subsidiaries is a party.  These actions and proceedings arise out of routine operations and, in management’s opinion, are not expected to have a material impact on the Company’s financial position or results of operations.     

Item 4.  MINE SAFETY DISCLOSURES
 
Not applicable.


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Item 4A.  EXECUTIVE OFFICERS OF THE REGISTRANT
 
The principal executive officers of National Penn, as of February 29, 2016, are as follows:
 
Name
 
Age
 
 Principal Business Occupation During the Past Five Years
Scott V. Fainor
 
54
 
President and Chief Executive Officer of National Penn Bancshares, Inc. and National Penn Bank since January 27, 2010.
Michael J. Hughes
 
59
 
Senior Executive Vice President and Chief Financial Officer effective January 1, 2013. Group Executive Vice President and Chief Financial Officer from August 2009 to December 2012.
Sandra L. Bodnyk
 
64
 
Senior Executive Vice President and Chief Risk Officer effective January 1, 2013. Group Executive Vice President & Chief Risk Officer from March 2009 to December 2012.
David B. Kennedy
 
54
 
Senior Executive Vice President and Chief Banking Officer effective January 1, 2013. Group Executive Vice President and head of General Banking from January 2010 to December 2012.
Sean P. Kehoe
 
46
 
Executive Vice President, Chief Legal Officer and Corporate Secretary since April 2014. Partner, Kilpatrick Townsend & Stockton LLP, Financial Institutions Team from May 2008 to April 2014.
Stephen C. Lyons
 
42
 
Senior Vice President and Chief Accounting Officer since October 11, 2013. Senior Vice President and Manager-Accounting Policy from January 2013 to October 2013. Vice President since January 2011.

The Chief Executive Officer of National Penn is elected by National Penn’s Board of Directors and serves until he resigns, retires, becomes disqualified, or is removed by the Board. Other National Penn executive officers are approved by a duly authorized committee of the Board and serve until they resign, retire, or are removed by a duly authorized committee of the Board or the Chief Executive Officer.


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PART II
 
Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
National Penn’s common stock currently trades on the NASDAQ Global Select Market tier of The NASDAQ Stock Market under the symbol: “NPBC”.  As of December 31, 2015, National Penn had 6,854 shareholders of record.

The following table reflects the high and low sale prices reported for National Penn’s common stock, and the cash dividends declared on National Penn’s common stock.

Market Value of Common Stock
 
 
2015
 
2014
 
 
High
 
Low
 
High
 
Low
1st Quarter
 
$
10.95

 
$
9.66

 
$
11.45

 
$
9.94

2nd Quarter
 
11.66

 
10.24

 
10.96

 
9.50

3rd Quarter
 
12.80

 
10.60

 
10.93

 
9.71

4th Quarter
 
12.70

 
11.42

 
10.68

 
9.17


Cash Dividends Declared on Common Stock
 
 
2015
 
2014
1st Quarter
 
$
0.11

 
$
0.10

2nd Quarter
 
0.11

 
0.10

3rd Quarter
 
0.11

 
0.10

4th Quarter
 
0.11

 
0.11


National Penn’s ability to pay cash dividends to its shareholders is dependent upon the liquidity of its holding company, which includes the ability of its subsidiaries to pay cash dividends to National Penn.  Information on regulatory restrictions upon National Penn Bank’s ability to pay cash dividends is set forth in “Supervision and Regulation - Dividend Restrictions” included in Item 1 of this Report, which information is incorporated by reference in this Item 5.

Dividend Reinvestment and Stock Purchase Plan
    
The Company’s Dividend Reinvestment and Stock Purchase Plan (“DRP”) permits participants to make monthly voluntary cash contributions in amounts not to exceed $10,000 each for investment under the DRP on or about the 17th day of the following month, at a purchase price equal to the fair market value of the Company’s common stock on the investment date.

Private Placement

On October 20, 2010, the Company raised $63.3 million in capital as part of a $150 million common equity investment from Warburg Pincus, LLC, a private equity firm, through the issuance of 10,462,810 common shares. The remainder of the investment was completed on January 7, 2011, whereby, Warburg Pincus invested $86.7 million in NPBC common stock, with the purchase of 14,330,579 newly issued common shares. This transaction completed Warburg Pincus’ investment in the Company, and as a result Warburg Pincus owned 16.4% of the Company’s common stock. During the third quarter of 2011, Warburg Pincus purchased 1,088,783 shares on the open market, increasing their ownership to 17.1% of the Company’s common stock. As a result of the Company's common stock repurchases in 2012, the ownership interest of Warburg Pincus increased to 17.8% of the Company's outstanding common stock as of December 31, 2012.

On January 30, 2014 and February 6, 2015, the Company repurchased 7 million shares and 7.3 million shares, respectively, of its common stock from Warburg Pincus.


28

On March 16, 2015, the Company announced that funds affiliated with Warburg Pincus agreed to sell 11,565,072 shares of National Penn’s common stock, which comprised approximately 8.3% of outstanding shares. The transaction closed on March 20, 2015. Immediately following the completion of the offering, Warburg Pincus no longer owned any shares of National Penn’s common stock. National Penn did not buy or sell any shares as a result of this transaction and Warburg Pincus received all of the proceeds from the offering.

Stock Repurchases

On January 22, 2015, the Company announced that the Board of Directors approved a common share repurchase plan of $125 million. The authorization of this repurchase plan superseded all pre-existing share repurchase plans. During the first quarter of 2015, the Company repurchased 7.5 million shares of common stock totaling $76.5 million pursuant to this plan, inclusive of the repurchase of 7.3 million shares of common stock totaling $75.0 million from Warburg Pincus LLC ("Warburg Pincus") at $10.25 per share.

The table below presents share repurchase activity for the three months ended December 31, 2015.
Period
 
Total No. of
Shares Purchased (1)
 
Weighted-Average
Price Paid Per Share
 
Total No. of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (2)
October 1, 2015 through October 31, 2015
 
240

 
$
10.80

 
—

 
$
48,484

November 1, 2015 through November 30, 2015
 
—

 
—

 
—

 
48,484

December 1, 2015 through December 31, 2015
 
70,303

 
10.04

 
—

 
—

Total
 
70,543

 
$
10.04

 
—

 
 

1.
Represents shares of National Penn common stock acquired by National Penn in connection with the satisfaction of tax withholding obligations on vested restricted stock.
2.
National Penn's current stock repurchase program was announced by the Company on January 22, 2015 and was authorized for the remainder of 2015. This repurchase program authorized the repurchase of up to $125 million.

National Penn’s ability to repurchase shares of its common stock is subject to regulatory review and is dependent on the liquidity of National Penn, which includes the ability of its subsidiaries to pay cash dividends to National Penn. Information on dividend restrictions is set forth in “Dividend Restrictions” in Item 1 and should be reviewed in conjunction with Footnote 16 to the consolidated financial statements included in Item 8 of this Report, which information is incorporated by reference in this Item 5.

Under the terms of the Merger Agreement with BB&T, National Penn has agreed not to purchase, without BB&T's prior written consent, any shares of its common stock.

    



29

PERFORMANCE GRAPH
 
The following graph compares the performance of National Penn's common shares to the Nasdaq Stock Market Total Return Index, the Nasdaq Bank Stock Index and the SNL Bank and Thrift Index during the last five years.  The graph shows the value of $100 invested in National Penn common stock and the indices on December 31, 2010, and the change in the value of National Penn's common shares compared to the indices as of the end of each year.  The graph assumes the reinvestment of all dividends. Historical stock price performance is not necessarily indicative of future stock price performance.

 
 NATIONAL PENN BANCSHARES, INC.
 




 
 
Period Ending
Index
 
12/31/2010

 
12/31/2011

 
12/31/2012

 
12/31/2013

 
12/31/2014

 
12/31/2015

National Penn Bancshares, Inc.
 
$
100.00

 
$
106.30

 
$
122.85

 
$
153.80

 
$
148.73

 
$
181.50

NASDAQ Composite
 
100.00

 
99.21

 
116.82

 
163.75

 
188.03

 
201.40

NASDAQ Bank
 
100.00

 
89.50

 
106.23

 
150.55

 
157.95

 
171.92

SNL Bank and Thrift
 
100.00

 
77.76

 
104.42

 
142.97

 
159.60

 
162.83

 
 
 
 
 
 
 
 
 
 
 
 
 
Source: SNL Financial LC, Charlottesville, VA
© 2016


30

Item 6.  SELECTED FINANCIAL DATA
 
The following information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and National Penn's consolidated financial statements included in Item 7 and 8 of this Report.  The selected financial data set forth below has been derived from the Company’s audited consolidated financial statements. 

Five Year Statistical Summary
(dollars in thousands, except per share data)
As of and for the
 
Year Ended December 31,
BALANCE SHEET
2015
 
2014
 
2013
 
2012
 
2011
Total assets
$
9,598,902

 
$
9,750,865

 
$
8,591,848

 
$
8,529,522

 
$
8,486,281

Total investment securities and other securities
2,503,081

 
2,519,215

 
2,396,298

 
2,334,739

 
2,314,111

Total loans, net
6,126,154

 
6,055,782

 
5,241,852

 
5,129,927

 
5,061,461

Deposits
6,704,936

 
6,729,745

 
6,072,578

 
5,935,565

 
5,874,819

Borrowings
1,629,689

 
1,720,404

 
1,282,289

 
1,344,324

 
1,370,399

Total shareholders’ equity
1,161,557

 
1,188,639

 
1,131,866

 
1,161,292

 
1,180,687

Tangible common equity (b)
852,516

 
877,638

 
866,733

 
892,399

 
906,638

Percent shareholders’ equity to total assets
12.10
%
 
12.19
%
 
13.17
%
 
13.61
%
 
13.91
%
Percent tangible common equity to tangible assets (b)
9.18
%
 
9.30
%
 
10.41
%
 
10.80
%
 
11.04
%
 
 
 
 
 
 
 
 
 
 
Assets under management
$
2,532,685

 
$
2,501,015

 
$
2,504,717

 
$
2,256,319

 
$
2,141,737

 
 
 
 
 
 
 
 
 
 
EARNINGS
 

 
 

 
 

 
 

 
 

Total interest income
$
304,468

 
$
288,019

 
$
288,279

 
$
316,828

 
$
346,834

Total interest expense
34,468

 
30,905

 
36,217

 
62,822

 
86,931

Net interest income
270,000

 
257,114

 
252,062

 
254,006

 
259,903

Provision for loan losses
500

 
5,751

 
5,250

 
8,000

 
15,000

Net interest income after provision for loan losses
269,500

 
251,363

 
246,812

 
246,006

 
244,903

Net gains (losses) from fair value changes on subordinated debentures
—

 
—

 
2,111

 
683

 
(2,530
)
Net gains (losses) on sales of investment securities
—

 
21

 
54

 
(119
)
 
2,719

Net impairment losses on investment securities
—

 
—

 
—

 
(154
)
 
—

Loss on sale of building
—

 
—

 
—

 
—

 
1,000

Other non-interest income
95,170

 
92,154

 
95,902

 
95,558

 
94,654

Merger related expenses
2,961

 
2,878

 
—

 
—

 
—

Loss on debt extinguishment
—

 
—

 
64,888

 
—

 
2,633

Corporate reorganization expense
—

 
—

 
6,000

 
—

 
2,200

Other non-interest expense
212,139

 
208,445

 
211,023

 
210,310

 
221,197

Income before income taxes
149,570

 
132,215

 
62,968

 
131,664

 
112,716

Income tax expense
38,879

 
33,509

 
9,581

 
32,754

 
25,172

Net income
110,691

 
98,706

 
53,387

 
98,910

 
87,544

Preferred dividends and accretion of preferred discount
—

 
—

 
—

 
—

 
(1,691
)
Accelerated accretion from redemption of preferred stock
—

 
—

 
—

 
—

 
(1,452
)
Net income available to common shareholders
$
110,691

 
$
98,706

 
$
53,387

 
$
98,910

 
$
84,401

 
 
 
 
 
 
 
 
 
 
Cash dividends - common stock (a)
$
62,488

 
$
57,962

 
$
43,697

 
$
61,401

 
$
13,651

Cash dividends - preferred stock
—

 
—

 
—

 
—

 
1,583

Dividend payout ratio - common (a)
56.45
%
 
58.72
%
 
81.85
%
 
62.08
%
 
16.17
%
Return on average assets
1.16
%
 
1.13
%
 
0.64
%
 
1.17
%
 
1.02
%
Return on average total shareholders' equity
9.68
%
 
8.86
%
 
4.72
%
 
8.25
%
 
7.58
%
Return on average common shareholder's equity
9.68
%
 
8.86
%
 
4.72
%
 
8.25
%
 
7.50
%
Return on average tangible common equity (b)
13.28
%
 
11.72
%
 
6.18
%
 
10.66
%
 
9.95
%
 
 
 
 
 
 
 
 
 
 
PER SHARE DATA
 

 
 

 
 

 
 

 
 

Basic earnings available to common shareholders
$
0.79

 
$
0.70

 
$
0.37

 
$
0.66

 
$
0.56

Diluted earnings available to common shareholders
0.78

 
0.70

 
0.37

 
0.66

 
0.56

Dividends paid in cash (a)
0.44

 
0.41

 
0.30

 
0.41

 
0.09

Book value
8.28

 
8.08

 
7.76

 
8.00

 
7.77

Tangible book value (b)
6.08

 
5.96

 
5.94

 
6.15

 
5.97

 
 
 
 
 
 
 
 
 
 
Weighted average shares basic
140,889,264

 
141,281,690

 
145,602,670

 
150,566,098

 
151,386,614

Weighted average shares diluted
141,549,226

 
141,823,607

 
146,044,058

 
150,859,995

 
151,653,646

 
 
 
 
 
 
 
 
 
 
Staff – Full-time equivalents
1,519

 
1,658

 
1,631

 
1,648

 
1,688

 
 
 
 
 
 
 
 
 
 
(a) In lieu of a 1st quarter 2013 cash dividend, the Company paid an additional dividend of $0.10 per share in the 4th quarter of 2012.
(b) Non-GAAP measures are discussed in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.

31

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis is intended to assist in understanding and evaluating the major changes in the earnings performance of the Company for the years ended December 31, 2015, 2014, and 2013 and financial condition of the Company as of December 31, 2015 and 2014 with a primary focus on an analysis of operating results.  

Current performance does not guarantee and may not be indicative of similar performance in the future.  The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements as of and for the years ended December 31, 2015, 2014, and 2013 included in this Report in Item 8.

The current economic climate and interest rate environment present challenges for financial institutions in achieving their business goals. The Company’s financial performance is substantially affected by external factors beyond its control. Issues such as the uncertainty of the domestic economic climate, counterparty creditworthiness, the functioning and availability of liquidity in capital markets and consumer demand for products and services are all impacted by legislative and regulatory initiatives of the federal government.

In addition to historical information, this Form 10-K contains forward-looking statements. Forward-looking statements in this document are subject to risks and uncertainty.  Forward-looking statements include information concerning possible or assumed future results of operations by the Company.  When we use words such as “believe”, “expect”, “anticipate”, or similar expressions, we are making forward-looking statements.  Additional information concerning forward-looking statements is contained in this Report at Item 1A Risk Factors, which is incorporated by reference into this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Statement Regarding Non-GAAP Financial Measures
    
This Report contains supplemental financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”). National Penn’s management uses these non-GAAP measures in its analysis of National Penn’s performance. These measures should not be considered a substitute for GAAP basis measures nor should they be viewed as a substitute for operating results determined in accordance with GAAP. Management believes the presentation of the following non-GAAP financial measures, which exclude the impact of the specified items, provides useful supplemental information that is essential to a proper understanding of the financial results of National Penn.

•
Tangible common equity excludes goodwill and intangible assets and preferred equity. Banking and financial institution regulators also exclude goodwill and intangible assets from shareholders’ equity when assessing the capital adequacy of a financial institution. Tangible common equity provides a method to assess the Company’s tangible capital trends.

•
Tangible book value expresses tangible common equity on a per-share basis. Tangible book value provides a method to assess the level of tangible net assets on a per-share basis.

•
Adjusted net income and adjusted return on assets excludes the effects of certain gains and losses, adjusted for applicable taxes. Adjusted net income and adjusted return on assets provides a method to assess earnings performance by excluding items that management believes are not comparable among the periods presented.

•
Efficiency ratio expresses operating expenses as a percentage of fully-taxable equivalent net interest income plus non-interest income. Operating expenses exclude items from non-interest expense that management believes are not comparable among the periods presented. Non-interest income is adjusted to also exclude items that management believes are not comparable among the periods presented. Efficiency ratio is used as a method for management to assess its operating expense level and to compare to financial institutions of varying sizes.

Management believes the use of non-GAAP measures will help readers compare National Penn’s current results to those of prior periods as presented in the accompanying discussion.

32

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and predominant practices within the banking industry.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes.  Actual results could differ from those estimates. The discussion below outlines the Company’s critical accounting policies. For additional accounting policies and details refer to Footnote 1 to the consolidated financial statements included in Item 8 of this Report.

Allowance for Loan Losses

The methodology for determining the allowance for loan losses (“the allowance”) is considered by management to be a critical accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the allowance.  The allowance is established through a provision for loan losses (“provision”) charged as an expense in the consolidated statement of income. The Company continually reassesses the allowance and charges off uncollectible loans against the allowance when circumstances do not warrant continuance of the loan, or a portion there of, as a realizable asset. Recoveries of assets previously written off, if any, are credited to the allowance when they are received. The allowance is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb probable loan losses which have been incurred in the period end loan balances. Management’s determination of the adequacy of the allowance is based on its evaluation of the loan portfolio and other relevant factors.  This evaluation is inherently subjective as it requires material estimates, including, among others, expected defaults, estimated loss in event of default, and the amount and timing of expected future cash flows or collateral liquidation values on impaired loans. The process also considers historical loss experience, economic conditions, uncertainties in estimating losses and inherent risks in the loan portfolio.  All of these factors may be susceptible to significant change.  

Goodwill and Other Intangible Assets

Goodwill is recognized for the excess of the purchase price over the estimated fair value of acquired net assets in a business combination. Goodwill is not amortized but is reviewed for potential impairment on at least an annual basis, which the Company performs during the second quarter of each year. The Company has the option of performing a qualitative assessment to determine whether it is more likely than not that the fair value of one of the Company’s identified reporting units is less than its carrying value. If the results of the qualitative assessment indicate the potential for impairment, the Company would perform the two-step goodwill impairment analysis.

In performing the two-step goodwill impairment analysis, if necessary, the estimated fair value of each reporting unit is compared to its carrying value, inclusive of the goodwill assigned to it. If the carrying value of a reporting unit exceeds the estimated fair value, an indicator of goodwill impairment exists and a second step is performed to determine if any goodwill impairment exists. In the second step, the Company calculates the implied value of goodwill by emulating a business combination for each reporting unit. This step subtracts the estimated fair value of net assets in the reporting unit from the step one estimated fair value to determine the implied value of goodwill. If the implied value of goodwill exceeds the carrying value of goodwill allocated to the reporting unit, goodwill is not impaired, but if the implied value of goodwill is less than the carrying value of the goodwill allocated to the reporting unit, an impairment charge is recognized for the difference in the consolidated statement of income with a corresponding reduction to goodwill on the consolidated balance sheet. The Company’s business segments are its reporting units which are community banking and other for purposes of the goodwill impairment analysis.

In performing its analysis of goodwill impairment, the Company makes significant judgments, particularly with respect to estimating the fair value of each reporting unit and if the second step is required, estimating the fair value of net assets. The Company evaluates each reporting unit and estimates a fair value as though it were an acquirer. The estimates utilize historical data, cash flows, and market and industry data specific to each reporting unit. Industry and market data are used to develop material assumptions such as transaction multiples, required rates of return, control premiums, transaction costs and synergies of a transaction, and capitalization.
 
On an interim basis, the Company evaluates whether circumstances are present that could indicate potential impairment of its goodwill. These circumstances include, but are not limited to, prolonged trading value of the Company’s common stock relative to its book value, adverse changes in the business or legal climate, actions by regulators or loss of key personnel. When the Company determines that these or other circumstances are present, the Company tests the carrying value of goodwill for impairment at an interim date.

33


Other intangible assets are specifically identified intangible assets created from a business combination. Core deposit intangibles represent the value of checking, savings and other acquired, low-cost deposits. Core deposit intangibles are amortized over the lesser of the estimated lives of deposit accounts or 10 years on an accelerated basis. Decreases in deposit lives may result in increased amortization and/or an impairment charge. Other intangible assets also include customer lists and covenants not to compete. These assets are amortized over the lesser of their contractual life or estimated economic life on a straight-line basis.
 
Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recorded on the consolidated balance sheet for future tax events that arise from the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates. Changes in tax rates are recognized in the Company’s financial statements during the period they are enacted. When a deferred tax asset or liability, or a change thereto, is recorded on the consolidated balance sheet, deferred tax expense or benefit is recorded within the income tax expense line of the consolidated statement of income for purposes of determining the current period’s net income.

Deferred tax assets are recorded on the consolidated balance sheet at net realizable value. The Company periodically performs an assessment to evaluate the amount of deferred tax asset it is more likely than not to realize. Realization of deferred tax assets is dependent upon the amount of taxable income expected in future periods, as tax benefits require taxable income to be realized. If a valuation allowance is required, the deferred tax asset on the consolidated balance sheet is reduced via a corresponding income tax expense in the consolidated statement of income.

The Company recognizes the benefit of a tax position in the financial statements only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. For these analyses, the Company may engage attorneys to provide opinions related to certain positions. Any interest and penalties related to uncertain tax positions is recognized in income tax expense in the consolidated statement of income.

Other-Than-Temporary Impairment

When the fair value of an investment security is less than the carrying value, the security is considered to be impaired, and as such the Company reviews the security for the presence of other-than-temporary impairment (OTTI). This analysis is performed at least quarterly, and includes the consideration of numerous factors including, but not limited to, the time period for which the fair value has been less than the carrying value, curtailment or suspension of dividends or cash flows, deterioration of financial performance or the creditworthiness of the issuer, performance of any underlying collateral, and negative trends in a particular industry or sector. The conclusion as to whether OTTI exists for an investment security is ultimately based upon the Company’s evaluation of the investment’s recoverability above its carrying value and its timing. In addition, the Company considers whether it plans to sell an investment security and whether it may be required to sell the security prior to recovery of its carrying value.

When the Company concludes an investment security is other-than-temporarily impaired, a loss for the difference between the investment security’s carrying value and the fair value is recognized as a reduction to non-interest income in the consolidated statement of income. For an investment in a debt security, if the Company does not intend to sell the investment security and concludes that it is not more likely than not it will be required to sell the security before recovering the carrying value, which may be maturity, the OTTI charge is separated into the "credit" and "other" components. The "other" component of the OTTI is included in other comprehensive income, net of the tax effect, and the "credit" component of the OTTI is included in the consolidated statement of income as a reduction to non-interest income.



34

2015 OVERVIEW
 
(dollars in thousands, except per share data)
Year Ended December 31,
 
2015
 
2014
EARNINGS
 
 
 
Total interest income
$
304,468

 
$
288,019

Total interest expense
34,468

 
30,905

Net interest income
270,000

 
257,114

Provision for loan losses
500

 
5,751

Net interest income after provision for loan losses
269,500

 
251,363

Net gains on investment securities
—

 
21

Other non-interest income
95,170

 
92,154

Merger related expenses
2,961

 
2,878

Other non-interest expense
212,139

 
208,445

Income before income taxes
149,570

 
132,215

Income tax expense
38,879

 
33,509

Net income
$
110,691

 
$
98,706

 
 
 
 
Basic earnings per share
$
0.79

 
$
0.70

Diluted earnings per share
0.78

 
0.70

Adjusted diluted earnings (c)
0.80

 
0.71

Dividends per share
0.44

 
0.41

 
 
 
 
Net interest margin
3.25
%
 
3.40
%
Efficiency ratio (c)
55.79
%
 
57.06
%
Return on average assets
1.16
%
 
1.13
%
Adjusted return on average assets (c)
1.18
%
 
1.16
%
 
 
 
 
Asset Quality Metrics
 
 
 

Allowance for loan losses/total originated loans
1.38
%
 
1.63
%
Allowance for loan losses/total loans
1.27
%
 
1.48
%
Non-performing loans/total loans
0.68
%
 
0.96
%
Delinquent loans/total loans
0.33
%
 
0.36
%
Allowance for loan losses/non-performing loans
188.5
%
 
153.4
%
Net loan charge-offs to average loans (annualized)
0.20
%
 
0.21
%
 
 
 
 
(c) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 7.
•
Net income totaled $111 million and $98.7 million for the years ended December 31, 2015 and December 31, 2014, respectively. Adjusted net income was $113 million, or $0.80 per diluted share, for 2015 compared to adjusted net income of $101 million, or $0.71 per diluted share, for 2014. The increase in net income is a result of the full year impact of the TF Financial acquisition, and the continued improvement in asset quality and focus on controlling operating expenses.
•
Net interest income was $270 million for the year ended December 31, 2015 compared to $257 million for the comparable period in 2014, benefiting from an increase in average earning assets, primarily as a result of the TF Financial acquisition, and effectively managed cost of deposits at record low levels. Net interest margin was 3.25% for 2015 compared to 3.40% for 2014, as 2015 reflects the continued period of prolonged low interest rates and the full year impact of the $125 million senior notes issued in September 2014.
•
Asset quality continued to improve in 2015 from an already strong base in 2014, as total classified loans at December 31, 2015 decreased by 27.5% from December 31, 2014, and non-performing loans decreased 29.0% to $41.9 million at December 31, 2015 compared to $59.1 million at December 31, 2014 . Net charge-offs totaled $12.1 million, or 0.20% of average total loans, for the year ended December 31, 2015 compared to $11.4 million, or 0.21% of average total loans for 2014. The sustained improvement in asset quality trends combined with the refinement of the Company's process for estimating the allowance for loan losses led to a decrease in the provision for loan losses for 2015 to $0.5 million.
•
Other non-interest income of $95.2 million for the year ended December 31, 2015 increased by $3.0 million from the comparable period in 2014 primarily as a result of increases in bank owned life insurance income and mortgage banking income.

35

•
Other non-interest expense of $212 million for the year ended December 31, 2015, reflects an increase of $3.7 million, or 1.8%, from the comparable period in 2014. The increase is inclusive of the expense base added via the TF Financial acquisition but which was offset by various strategic initiatives implemented throughout 2015 to manage operating expenses. Despite the modest increase in expenses, the 2015 efficiency ratio improved to 55.79% compared to 57.06% for 2014.

Non-GAAP Reconciliations

Adjusted Net Income and Return on Average Assets (c)    

Adjusted net income and return on average assets are non-GAAP measures and exclude certain items which management believes affect the comparability of results between periods. The following table reconciles the non-GAAP measure of adjusted net income to the GAAP measure of net income available to common shareholders and diluted earnings per share and calculates the adjusted return on average assets.
(dollars in thousands, except per share data)
 
Year Ended December 31,
 
 
 
2015
 
2014
 
2013
 
Adjusted net income reconciliation
 
 
 
 
 
 
 
Net income
 
$
110,691

 
$
98,706

 
$
53,387

 
After tax merger related expenses
 
2,079

 
2,054

 
—

 
After tax unrealized fair value gain on subordinated debentures
 
—

 
—

 
(1,372
)
 
After tax loss on debt extinguishment
 
—

 
—

 
42,177

 
After tax corporate reorganization expense
 
—

 
—

 
3,900

 
Adjusted net income
 
$
112,770

 
$
100,760

 
$
98,092

 
 
 
 
 
 
 
 
 
Adjusted diluted earnings per share reconciliation
 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.78

 
$
0.70

 
$
0.37

 
After tax merger related expenses
 
0.02

 
0.01

 
—

 
After tax unrealized fair value gain on subordinated debentures
 
—

 
—

 
(0.01
)
 
After tax loss on debt extinguishment
 
—

 
—

 
0.29

 
After tax corporate reorganization expense
 
—

 
—

 
0.03

 
Adjusted diluted earnings per share
 
$
0.80

 
$
0.71

 
$
0.67

(d) 
 
 
 
 
 
 
 
 
Average assets
 
$
9,552,884

 
$
8,709,629

 
$
8,330,441

 
Adjusted return on average assets
 
1.18
%
 
1.16
%
 
1.18
%
 
 
 
 
 
 
 
 
 
(c) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 7.
 
 
 
 
 
(d) Difference in summation of adjusted diluted earnings per share due to rounding.
 
 
 
 
 

Adjustments to 2015 net income included the following:

•Non-interest expense included expenses related to the pending merger with BB&T of $3.0 million, or $2.1 million after tax ($0.02 per diluted share).

Adjustments to 2014 net income included the following:

•Non-interest expense included expenses related to the acquisition of TF Financial of $2.9 million, or $2.1 million after tax ($0.01 per diluted share).

Adjustments to 2013 net income included the following:

•     Non-interest expense included a loss on debt extinguishment of $64.9 million, or $42.2 million after tax ($0.29 per diluted share) and a $6.0 million, or $3.9 million after tax ($0.03 per diluted share), charge for corporate reorganization expense.

•     Non-interest income excluded a $2.1 million, or $1.4 million after tax ($0.01 per diluted share), gain on the Company’s subordinated debentures accounted for at fair value.


36

Efficiency Ratio (c) 
(dollars in thousands)
Year Ended December 31,
 
 
2015
 
2014
 
2013
 
Non-interest expense
$
215,100

 
$
211,323

 
$
281,911

 
Less:
 
 
 
 
 
 
Merger related expenses
2,961

 
2,878

 
—

 
Loss on debt extinguishment
—

 
—

 
64,888

 
Corporate reorganization expense
—

 
—

 
6,000

 
Operating expenses
$
212,139

 
$
208,445

 
$
211,023

 
 
 
 
 
 
 
 
Net interest income (taxable equivalent)
$
285,064

 
$
273,150

 
$
269,219

 
 
 
 
 
 
 
 
Non-interest income
95,170

 
92,175

 
98,067

 
Less:
 

 
 
 
 

 
Net gains from fair value changes of subordinated debentures
—

 
—

 
2,111

 
Net gains on investment securities
—

 
21

 
54

 
Adjusted revenue
$
380,234

 
$
365,304

 
$
365,121

 
 
 
 
 
 
 
 
Efficiency ratio
55.79
%
 
57.06
%
 
57.80
%
 
 
 
 
 
 
 
 
(c) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 7.
 
 
 
 

Tangible Common Equity/Tangible Assets (c) 
(dollars in thousands, except per share data)
 
As of December 31,
 
 
2015
 
2014
 
2013
Total shareholders' equity
 
$
1,161,557

 
$
1,188,639

 
$
1,131,866

Goodwill and intangibles
 
(309,041
)
 
(311,001
)
 
(265,133
)
Tangible common equity
 
$
852,516

 
$
877,638

 
$
866,733

 
 
 
 
 
 
 
Shares outstanding
 
140,308,640

 
147,136,084

 
145,798,751

Tangible book value per share
 
$
6.08

 
$
5.96

 
$
5.94

 
 
 
 
 
 
 
Total assets
 
$
9,598,902

 
$
9,750,865

 
$
8,591,848

Goodwill and intangibles
 
(309,041
)
 
(311,001
)
 
(265,133
)
Tangible assets
 
$
9,289,861

 
$
9,439,864

 
$
8,326,715

 
 
 
 
 
 
 
Tangible common equity/tangible assets
 
9.18
%
 
9.30
%
 
10.41
%
 
 
 
 
 
 
 
(c) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 7.
 
 
 
 

Return on Average Tangible Common Equity (c) 
(dollars in thousands)
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
Average shareholders' equity
 
$
1,143,792

 
$
1,113,535

 
$
1,130,290

Average goodwill and intangibles
 
(310,176
)
 
(271,684
)
 
(266,851
)
Average tangible common equity
 
$
833,616

 
$
841,851

 
$
863,439

 
 
 
 
 
 
 
Net income
 
$
110,691

 
$
98,706

 
$
53,387

Return on average tangible common equity
 
13.28
%
 
11.72
%
 
6.18
%
 
 
 
 
 
 
 
(c) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 7.
 
 
 
 


37

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Summary Balance Sheet
(dollars in thousands)
As of December 31,
 
2015
 
2014
Total cash and cash equivalents
$
204,096

 
$
413,839

Investment securities and other securities
2,503,081

 
2,519,215

Total loans
6,205,199

 
6,146,457

Total assets
9,598,902

 
9,750,865

Deposits
6,704,936

 
6,729,745

Borrowings
1,629,689

 
1,720,404

Shareholders' equity
1,161,557

 
1,188,639

 
 
 
 
    
Loans and Allowance for Loan Losses
 
Economic conditions impact the Company’s customers. Although the economy and credit environment are inherently uncertain, the Company’s loan portfolio has demonstrated continued asset quality improvement. The Company remains focused on attracting and retaining high-quality commercial and retail customers to support quality loan growth.
 
Federal Reserve economic data regarding the Third District, which consists of eastern Pennsylvania, southern New Jersey and Delaware, suggests the following trends, which may or may not apply to the Company:

•
Aggregate business activity continued to grow at a modest pace.

•
Loan volumes continued to grow at a moderate pace, and credit quality continued to improve.

•
Firms tended to report less ambitious growth expectations than in prior periods, generally stating that the current modest trends would continue.

    
The Company’s loans are diversified by borrower, industry group, and geographical area in the Company’s markets. The following table summarizes the composition of the Company’s loan portfolio at December 31, 2015 and 2014:

(dollars in thousands)
 
December 31,
 
 
 
 
 
 
2015
 
2014
 
Increase/(Decrease)
Commercial and industrial
 
$
2,695,147

 
$
2,599,867

 
$
95,280

 
3.7
 %
 
 
 
 
 
 
 
 
 
CRE - permanent
 
1,290,072

 
1,229,318

 
60,754

 
4.9
 %
CRE - construction
 
148,533

 
203,542

 
(55,009
)
 
(27.0
)%
Commercial real estate
 
1,438,605

 
1,432,860

 
5,745

 
0.4
 %
Commercial
 
4,133,752

 
4,032,727

 
101,025

 
2.5
 %
 
 
 
 
 
 
 
 
 
Residential mortgages
 
861,364

 
908,357

 
(46,993
)
 
(5.2
)%
Home equity
 
907,214

 
913,830

 
(6,616
)
 
(0.7
)%
All other consumer
 
292,869

 
287,365

 
5,504

 
1.9
 %
Consumer
 
2,061,447

 
2,109,552

 
(48,105
)
 
(2.3
)%
 
 
 
 
 
 
 
 
 
Loans
 
6,195,199

 
6,142,279

 
52,920

 
0.9
 %
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
79,045

 
90,675

 
(11,630
)
 
(12.8
)%
 
 
 
 
 
 
 
 
 
Loans, net
 
$
6,116,154

 
$
6,051,604

 
$
64,550

 
1.1
 %
 
 
 
 
 
 
 
 
 
Loans held-for-sale
 
$
10,000

 
$
4,178

 
$
5,822

 
139.3
 %

38

The following table summarizes the composition of the Company’s loan portfolio at each of the past five fiscal year ends:

(dollars in thousands)
 
December 31,
 
 
2014
 
2014
 
2013
 
2012
 
2011
Commercial and industrial
 
$
2,695,147

 
$
2,599,867

 
$
2,460,664

 
$
2,495,855

 
$
2,420,027

CRE - permanent
 
1,290,072

 
1,229,318

 
994,838

 
907,760

 
855,524

CRE - construction
 
148,533

 
203,542

 
198,334

 
125,878

 
156,064

Residential mortgages
 
861,364

 
908,357

 
652,225

 
671,772

 
710,322

Home equity
 
907,214

 
913,830

 
762,608

 
754,386

 
747,558

All other consumer
 
292,869

 
287,365

 
264,599

 
270,901

 
286,390

Loans
 
6,195,199

 
6,142,279

 
5,333,268

 
5,226,552

 
5,175,885

Loans held-for-sale
 
10,000

 
4,178

 
4,951

 
14,330

 
12,216

Total loans
 
$
6,205,199

 
$
6,146,457

 
$
5,338,219

 
$
5,240,882

 
$
5,188,101

 
Loans increased by $52.9 million to $6.2 billion at December 31, 2015. Originated loans totaled $5.7 billion at December 31, 2015, an increase of $175 million, or 3.1%, from December 31, 2014. Acquired loans totaled $458 million at December 31, 2015, compared to $580 million at December 31, 2014. Additionally, originated loan growth was inclusive of a $35.6 million, or 23.3%, decrease to originated classified loans since December 31, 2014. Net charge-offs during 2015 totaled $12.1 million compared to $11.4 million for 2014, while the provision for loan losses was $0.5 million for the year ended December 31, 2015, resulting in a decrease to the allowance for loan losses, which totaled $79.0 million at December 31, 2015. The decrease in the allowance for loan losses was the direct result of the continued improvement in asset quality.

    
Maturities and sensitivity to changes in interest rates in the Company’s commercial loan portfolio at December 31, 2015 are summarized below:

(dollars in thousands)
 
One Year
 
After One
Year to
 
After Five
 
 
 
 
or Less*
 
Five Years
 
Years
 
Total
Commercial and industrial
 
$
1,338,067

 
$
958,743

 
$
398,337

 
$
2,695,147

CRE - permanent
 
590,569

 
412,294

 
287,209

 
1,290,072

CRE - construction
 
139,782

 
8,751

 
—

 
148,533

Total
 
$
2,068,418

 
$
1,379,788

 
$
685,546

 
$
4,133,752

 
 
 
 
 
 
 
 
 
Predetermined interest rate
 
$
146,115

 
$
1,190,167

 
$
656,867

 
$
1,993,149

Floating interest rate
 
1,922,303

 
189,621

 
28,679

 
2,140,603

Total
 
$
2,068,418

 
$
1,379,788

 
$
685,546

 
$
4,133,752

*Demand loans, past-due loans and overdrafts are reported in "One Year or Less."
 
Determinations of maturities included in the loan maturity table are based upon contractual terms and reflect the remaining maturity or next repricing date for floating rate loans. Loans are renewed after an evaluation of the customer’s creditworthiness in accordance with the Company’s credit policy. This policy also provides parameters for use of customer credit lines.

39


The following table demonstrates select asset quality metrics for the past five years:
(dollars in thousands)
December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Non-performing loans
$
41,944

 
$
59,092

 
$
52,591

 
$
53,908

 
$
66,976

Non-performing loans to total loans
0.68
%
 
0.96
%
 
0.99
%
 
1.03
%
 
1.29
%
Delinquent loans
$
20,263

 
$
22,300

 
$
29,435

 
$
24,048

 
$
24,801

Delinquent loans to total loans
0.33
%
 
0.36
%
 
0.55
%
 
0.46
%
 
0.48
%
 
 
 
 
 
 
 
 
 
 
Originated classified loans (e)
$
117,621

 
$
153,255

 
$
191,589

 
$
261,293

 
$
370,439

Acquired classified loans
326

 
9,534

 
—

 
—

 
—

Total classified loans
$
117,947

 
$
162,789

 
$
191,589

 
$
261,293

 
$
370,439

 
 
 
 
 
 
 
 
 
 
Originated classified loans to total originated loans
2.05
%
 
2.75
%
 
3.59
%
 
4.99
%
 
7.14
%
Total classified loans to total loans
1.90
%
 
2.65
%
 
3.59
%
 
4.99
%
 
7.14
%
 
 
 
 
 
 
 
 
 
 
Tier 1 capital and allowance
$
1,026,096

 
$
1,054,304

 
$
1,038,293

 
$
1,093,103

 
$
1,104,942

Total classified loans to Tier 1 capital and allowance
11.49
%
 
15.44
%
 
18.45
%
 
23.90
%
 
33.53
%
 
 
 
 
 
 
 
 
 
 
Originated loans
$
5,737,268

 
$
5,562,087

 
$
5,333,268

 
$
5,226,552

 
$
5,175,885

Loans held-for-sale
10,000

 
4,178

 
4,951

 
14,330

 
12,216

Total originated loans
5,747,268

—

5,566,265

—

5,338,219

—

5,240,882

—

5,188,101

Acquired loans
457,931

 
580,192

 
—

 
—

 
—

Total loans
$
6,205,199

 
$
6,146,457

 
$
5,338,219

 
$
5,240,882

 
$
5,188,101

 
 
 
 
 
 
 
 
 
 
(e) Includes non-performing loans
 
 
 
 
 
 
 
 
 
 


40

The following table summarizes the Company’s non-performing assets for the past five years:

 (dollars in thousands)
December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Non-accrual commercial and industrial
$
5,136

 
$
21,931

 
$
14,935

 
$
24,653

 
$
31,081

 
 
 
 
 
 
 
 
 
 
Non-accrual CRE-permanent
6,041

 
7,915

 
4,258

 
2,984

 
7,403

Non-accrual CRE-construction
5,257

 
8,113

 
12,128

 
5,446

 
12,218

Total non-accrual commercial real estate
11,298

 
16,028

 
16,386

 
8,430

 
19,621

 
 
 
 
 
 
 
 
 
 
Non-accrual residential mortgages
10,360

 
7,706

 
7,037

 
7,066

 
4,504

Non-accrual home equity
4,652

 
3,426

 
4,787

 
3,692

 
3,046

All other non-accrual consumer
1,181

 
1,746

 
1,731

 
1,705

 
3,176

Total non-accrual consumer
16,193

 
12,878

 
13,555

 
12,463

 
10,726

 
 
 
 
 
 
 
 
 
 
Total non-accrual loans
32,627

 
50,837

 
44,876

 
45,546

 
61,428

 
 
 
 
 
 
 
 
 
 
Restructured loans (f)
9,317

 
8,255

 
7,715

 
8,362

 
5,548

Total non-performing loans
41,944

 
59,092

 
52,591

 
53,908

 
66,976

 
 
 
 
 
 
 
 
 
 
Acquired other real estate owned
3,450

 
3,675

 
—

 
—

 
—

Other real estate owned and repossessed assets
1,146

 
1,192

 
1,278

 
3,029

 
7,716

Total non-performing assets
46,540

 
63,959

 
53,869

 
56,937

 
74,692

 
 
 
 
 
 
 
 
 
 
Loans 90+ days past due & still accruing
1,707

 
2,183

 
3,466

 
2,027

 
2,010

Total non-performing assets and loans 90+ days past due
$
48,247

 
$
66,142

 
$
57,335

 
$
58,964

 
$
76,702

 
 
 
 
 
 
 
 
 
 
Total loans
$
6,205,199

 
$
6,146,457

 
$
5,338,219

 
$
5,240,882

 
$
5,188,101

Total originated loans
5,747,268

—

5,566,265

—

5,338,219

—

5,240,882

—

5,188,101

Average total loans
6,154,977

 
5,511,872

 
5,238,606

 
5,193,376

 
5,202,255

Allowance for loan losses
79,045

 
90,675

 
96,367

 
110,955

 
126,640

 
 
 
 
 
 
 
 
 
 
Allowance for loan losses to:
 
 
 

 
 

 
 
 
 
Non-performing assets and loans 90+ days past due (excluding acquired OREO)
176
%
 
145
%
 
168
%
 
188
%
 
165
%
Non-performing loans
188
%
 
153
%
 
183
%
 
206
%
 
189
%
Total originated loans
1.38
%
 
1.63
%
 
1.81
%
 
2.12
%
 
2.44
%
 
 
 
 
 
 
 
 
 
 
(f) Restructured loans at December 31, 2015, included $1.0 million of commercial loans and $8.3 million of consumer loans which were modified for customers who were experiencing financial difficulty and were in jeopardy of losing their homes or businesses to foreclosure.

The following table provides additional information for the Company’s non-accrual loans for the past three fiscal years ended:
(dollars in thousands)
December 31,
 
2015
 
2014
 
2013
Total non-accrual loans
$
32,627

 
$
50,837

 
$
44,876

Non-accrual loans with partial charge-offs
6,076

 
11,630

 
13,671

Life-to-date partial charge-offs on non-accrual loans
7,656

 
13,665

 
20,049

Charge-off rate of non-accrual loans
55.8
%
 
54.0
%
 
59.5
%
Specific reserves on non-accrual loans
$
2,346

 
$
10,576

 
$
5,761


    

41

At December 31, 2015, the Company’s non-accrual loans totaled $32.6 million and included $6.1 million of non-accrual loans which have been partially charged-off by 55.8% or $7.7 million. Non-performing loans totaled 0.68% of total loans at December 31, 2015, compared to 0.96% at December 31, 2014. Additionally, non-performing loans are included in impaired loans and are evaluated individually when determining the allowance. Impaired loans at December 31, 2015 had a specific reserve in the allowance of $4.9 million related to $23.8 million of underlying principal balances compared to $13.1 million and $41.1 million, respectively, at December 31, 2014. See Footnote 1 to the consolidated financial statements included in Item 8 of this Report for a discussion of the Company's policy for placing loans on non-accrual status.

A detailed roll-forward of the Company’s allowance for loan losses for the five years is presented in the following table:

(dollars in thousands)
December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Balance at beginning of year
$
90,675

 
$
96,367

 
$
110,955

 
$
126,640

 
$
150,054

Charge-offs:
 
 
 
 
 
 
 
 
 
Commercial and industrial
9,550

 
5,006

 
14,162

 
12,209

 
21,321

CRE - permanent
797

 
2,448

 
1,739

 
3,664

 
6,129

CRE - construction
323

 
298

 
682

 
3,154

 
5,400

Residential mortgages
1,746

 
3,430

 
2,361

 
2,649

 
4,474

Home equity
2,305

 
2,491

 
2,929

 
3,618

 
5,337

All other consumer
3,691

 
3,348

 
3,120

 
3,204

 
4,874

Total charge-offs
18,412

 
17,021

 
24,993

 
28,498

 
47,535

 
 
 
 
 
 
 
 
 
 
Recoveries:
 
 
 
 
 
 
 
 
 
Commercial and industrial
3,412

 
2,325

 
2,012

 
1,943

 
2,326

CRE - permanent
466

 
109

 
675

 
354

 
341

CRE - construction
442

 
1,027

 
467

 
608

 
2,399

Residential mortgages
160

 
308

 
241

 
31

 
358

Home equity
229

 
240

 
417

 
327

 
322

All other consumer
1,573

 
1,569

 
1,343

 
1,550

 
3,375

Total recoveries
6,282

 
5,578

 
5,155

 
4,813

 
9,121

Net charge-offs
12,130

 
11,443

 
19,838

 
23,685

 
38,414

Provision charged to expense
500

 
5,751

 
5,250

 
8,000

 
15,000

Balance at end of year
$
79,045

 
$
90,675

 
$
96,367

 
$
110,955

 
$
126,640

 
 
 
 
 
 
 
 
 
 
Net charge-offs to:
 
 
 

 
 

 
 

 
 

Total originated loans
0.21
%
 
0.21
%
 
0.37
%
 
0.45
%
 
0.74
%
Total loans
0.20
%
 
0.19
%
 
0.37
%
 
0.45
%
 
0.74
%
Average total loans
0.20
%
 
0.21
%
 
0.38
%
 
0.46
%
 
0.74
%
Allowance for loan losses
15.3
%
 
12.6
%
 
20.6
%
 
21.4
%
 
30.3
%
 
For 2015, net charge-offs totaled $12.1 million, compared to $11.4 million for 2014, an increase of $0.7 million. Net charge-offs as a percentage of average total loans decreased to 0.20% for 2015, compared to 0.21% for 2014. Net charge-offs remained stable as improving credit quality trends were sustained.
    

42

The following table presents a composition of the allowance by loan type:
 
 
December 31,
(dollars in thousands)
2015
 
2014
 
2013
 
2012
 
2011
 
Allowance
 
% Loans to Total Loans
 
Allowance
 
% Loans to Total Loans
 
Allowance
 
% Loans to Total Loans
 
Allowance
 
% Loans to Total Loans
 
Allowance
 
% Loans to Total Loans
Commercial and industrial
$
39,754

 
43.4
%
 
$
39,982

 
42.3
%
 
$
41,288

 
46.1
%
 
$
46,151

 
47.6
%
 
$
55,815

 
46.7
%
CRE - permanent
14,629

 
20.8
%
 
14,638

 
20.0
%
 
15,418

 
18.6
%
 
17,660

 
17.3
%
 
20,990

 
16.5
%
CRE - construction
3,260

 
2.4
%
 
4,058

 
3.3
%
 
7,235

 
3.7
%
 
11,635

 
2.4
%
 
19,732

 
3.0
%
Residential mortgages
6,397

 
14.0
%
 
7,745

 
14.9
%
 
7,639

 
12.3
%
 
8,326

 
13.1
%
 
8,412

 
13.9
%
Home equity
11,422

 
14.6
%
 
9,307

 
14.9
%
 
9,907

 
14.3
%
 
10,334

 
14.4
%
 
6,753

 
14.4
%
All other consumer
3,583

 
4.8
%
 
4,338

 
4.6
%
 
3,932

 
5.0
%
 
4,441

 
5.2
%
 
4,495

 
5.5
%
Unallocated
—

 
—

 
10,607

 
—

 
10,948

 
—

 
12,408

 
—

 
10,443

 
—

Total allowance
$
79,045

 
100.0
%
 
$
90,675

 
100.0
%
 
$
96,367

 
100.0
%
 
$
110,955

 
100.0
%
 
$
126,640

 
100.0
%
 
The following table demonstrates the components of the allowance:
(dollars in thousands)
December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Specific reserves
$
4,934

 
$
13,069

 
$
8,304

 
$
3,110

 
$
8,909

Allocated reserves
74,111

 
66,999

 
77,115

 
95,437

 
107,288

Unallocated reserves
—

 
10,607

 
10,948

 
12,408

 
10,443

Total allowance for loan losses
$
79,045

 
$
90,675

 
$
96,367

 
$
110,955

 
$
126,640

 
Overall, the allowance totaled $79.0 million at December 31, 2015 and represented 1.38% of total originated loans and 188% of non-performing loans, compared to $90.7 million at December 31, 2014, or 1.63% of total originated loans and 153% of non-performing loans. The decrease in the allowance was the result of a continued improvement in the credit quality of the loan portfolio. During the fourth quarter of 2015, the Company refined its process for estimating the allowance for loan losses and as a result all reserves were allocated at December 31, 2015. Net charge-offs of $12.1 million, or 0.20% of average total loans for 2015, compared to $11.4 million, or 0.21% of average total loans for 2014. In addition, originated classified loans, declined $35.6 million from $153 million, or 2.75% of total originated loans, at December 31, 2014 to $118 million, or 2.05% of total originated loans, at December 31, 2015. Non-performing loans decreased to $41.9 million at December 31, 2015, from $59.1 million at December 31, 2014. The ratio of non-performing loans to total loans declined to 0.68% at December 31, 2015, from 0.96% at December 31, 2014, due to the continued improvement in asset quality which was also reflected in the decline of the provision for loan losses which totaled $0.5 million for 2015, compared to $5.8 million for 2014.





43

Investment Portfolio

The Company's investment portfolio is comprised of readily marketable securities which qualify as collateral to meet its pledging requirements, the majority of which are classified as available-for-sale. The Company also holds other securities that are non-marketable consisting of Federal Reserve Bank of Philadelphia stock and Federal Home Loan Bank of Pittsburgh stock. The fair value of investments available-for-sale increased $138 million to $1.7 billion at December 31, 2015, compared to $1.5 billion at December 31, 2014.  The carrying value of investments held-to-maturity decreased $152 million to $769 million at December 31, 2015, compared to $921 million at December 31, 2014. At March 31, 2014, 240 available-for-sale debt securities, with an amortized cost basis of $492 million and a fair value of $488 million, were reclassified as held-to-maturity. For further information, reference Footnote 4, “Investment Securities” to the consolidated financial statements included in Item 8 of this Report.

A summary of investment securities available-for-sale:
 
 
December 31,
 
 
2015
 
2014
 
2013
(dollars in thousands)
 
Amortized
 
Fair
 
Amortized
 
Fair
 
Amortized
 
Fair
 
 
Cost
 
Value
 
Cost
 
Value
 
Cost
 
Value
U.S. Government agencies
 
$
—

 
$
—

 
$
1,000

 
$
1,007

 
$
1,000

 
$
990

State and municipal bonds
 
57,533

 
60,800

 
63,674

 
68,080

 
210,680

 
214,711

Agency mortgage-backed securities/collateralized mortgage obligations (g)
 
1,600,607

 
1,598,224

 
1,442,102

 
1,451,461

 
1,683,092

 
1,659,180

Non-agency collateralized mortgage obligations
 
—

 
—

 
—

 
—

 
4,222

 
4,258

Corporate securities and other
 
3,556

 
3,366

 
4,109

 
4,361

 
9,517

 
9,668

Marketable equity securities
 
3,583

 
6,439

 
3,583

 
5,752

 
3,583

 
5,300

Total
 
$
1,665,279

 
$
1,668,829

 
$
1,514,468

 
$
1,530,661

 
$
1,912,094

 
$
1,894,107

 
 
 
 
 
 
 
 
 
 
 
 
 
(g) Includes U.S. Government sponsored agency securities.

A summary of investment securities held-to-maturity:
 
 
December 31,
 
 
2015
 
2014
 
2013
(dollars in thousands)
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Amortized
 
Fair
 
 
Value (h)
 
Value
 
Value (h)
 
Value
 
Cost
 
Value
U.S. Government agencies
$
3,891

 
$
3,962

 
$
3,869

 
$
3,924

 
$
—

 
$
—

State and municipal bonds
 
473,737

 
492,805

 
551,627

 
576,044

 
403,344

 
415,477

Agency mortgage-backed securities/collateralized mortgage obligations (g)
 
289,993

 
291,880

 
364,100

 
368,504

 
34,843

 
36,467

Corporate securities and other
 
1,013

 
1,006

 
1,446

 
1,463

 
—

 
—

Non-agency collateralized mortgage obligations
 
—

 
—

 
—

 
—

 
258

 
258

Total
 
$
768,634

 
$
789,653

 
$
921,042

 
$
949,935

 
$
438,445

 
$
452,202

 
 
 
 
 
 
 
 
 
 
 
 
 
(g) Includes U.S. Government sponsored agency securities.
(h) For securities which were transferred from the available-for-sale category to held-to maturity, the carrying value of the transferred securities represents their fair value at the date of transfer adjusted for subsequent amortization.  The carrying value of all other held-to-maturity securities represents their amortized cost.
 
The contractual maturity and weighted-average yield of the investment securities of the Company at December 31, 2015, are presented in the following tables. Weighted-average yields on tax-exempt obligations have been computed on a fully taxable equivalent basis assuming a statutory tax rate of 35%. All average yield calculations were based on the book value of the related securities. Marketable equity securities do not have a stated maturity and have been included in the “After 10 Years” category.
 

44

Maturity and Weighted-Average Yield of Investment Securities Available-for-Sale:

(dollars in thousands)
 
Within one year
 
After one but
within five years
 
After five but
within ten years
 
After ten years
 
Total
 
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
State and municipal bonds
 
$
7,373

 
8.07
%
 
$
34,603

 
7.71
%
 
$
16,791

 
6.31
%
 
$
2,033

 
5.47
%
 
$
60,800

 
7.28
%
Agency mortgage-backed securities/collateralized mortgage obligations (g)
 
—

 
—
%
 
17,225

 
4.17
%
 
155,264

 
2.99
%
 
1,425,735

 
2.09
%
 
1,598,224

 
2.19
%
Corporate securities and other
 
—

 
—
%
 
2,140

 
6.25
%
 
—

 
—
%
 
1,226

 
3.19
%
 
3,366

 
4.91
%
Marketable equity securities
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
6,439

 
4.51
%
 
6,439

 
4.51
%
Total
 
$
7,373

 
8.07
%
 
$
53,968

 
6.49
%
 
$
172,055

 
3.31
%
 
$
1,435,433

 
2.10
%
 
$
1,668,829

 
2.38
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(g) Includes U.S. Government sponsored agency securities.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maturity and Weighted-Average Yield of Investment Securities Held-to-Maturity at Fair Value:

(dollars in thousands)
 
Within one year
 
After one but
within five years
 
After five but
within ten years
 
After ten years
 
Total
 
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
U.S. Government agencies
$
—

 
 —%

 
$
3,962

 
2.36
%
 
$
—

 
—
%
 
$
—

 
—%

 
$
3,962

 
2.36
%
State and municipal bonds
 
1,636

 
3.76
%
 
14,902

 
4.45
%
 
259,206

 
6.08
%
 
217,061

 
6.27
%
 
492,805

 
6.10
%
Agency mortgage-backed securities/collateralized mortgage obligations (g)
 
—

 
—
%
 
2,111

 
1.61
%
 
15,426

 
3.47
%
 
274,343

 
2.58
%
 
291,880

 
2.62
%
Corporate securities and other
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
1,006

 
8.12
%
 
1,006

 
8.12
%
Total
 
$
1,636

 
3.76
%
 
$
20,975

 
3.77
%
 
$
274,632

 
5.93
%
 
$
492,410

 
4.22
%
 
$
789,653

 
4.77
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(g) Includes U.S. Government sponsored agency securities.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Goodwill and Other Intangible Assets

Goodwill and intangible assets, on the consolidated balance sheet, decreased by $2.0 million from $311 million at December 31, 2014, to $309 million at December 31, 2015. The decline in goodwill and intangible assets is due to the amortization of core deposit and other intangible assets of $2.7 million, offset by an increase of $0.7 million to goodwill. During the first quarter of 2015, the Company recorded an adjustment of $0.7 million to goodwill based upon further review of the purchased credit-impaired ("PCI") loan portfolio acquired from TF Financial. This entire amount is included in the "Community Banking" reporting unit.

During the second quarter, the Company performed its annual, qualitative assessment of goodwill and determined that it is not more likely than not that the fair value of its reporting units are less than their carrying amounts. Additionally, there were no indicators of impairment subsequent to the annual assessment for which an interim impairment test was required.

The Company’s business segments are its reporting units which are “Community Banking” and “Other” for purposes of the goodwill impairment analysis. As of December 31, 2015, the carrying value of goodwill assigned to the Community Banking segment was $280 million and the carrying value of goodwill assigned to the Other segment was $22.5 million.

Other Assets

Other assets on the consolidated balance sheet at December 31, 2015, increased $5.5 million to $457 million, compared to $451 million at December 31, 2014.  Other assets include premises and equipment, accrued interest receivable, bank owned life insurance, other real estate owned and other repossessed assets, unconsolidated investments and other assets. Bank owned life insurance increased from $172 million at December 31, 2014 to $198 million at December 31, 2015 primarily due to the $25 million purchase of new policies in the first quarter of 2015. Premises and equipment decreased $10.2 million primarily due to the additional accumulated depreciation of $5.4 million and a decrease of $3.5 million in buildings due to the disposal of various bank properties. In addition, other assets declined $9.1 million to $111 million at December 31, 2015 compared to $120 million at December 31, 2014. The decline is due to the decrease of $10.8 million in deferred tax assets, primarily offset by an increase of $1.4 million in prepaid expenses.

45

Liabilities
 
Liabilities at December 31, 2015 totaled $8.4 billion, a decrease of $125 million from December 31, 2014. This decrease is primarily due to the decline in borrowings of $90.7 million from approximately $1.7 billion at December 31, 2014 to $1.6 billion at December 31, 2015. Additionally, total deposits and accrued interest payable and other liabilities declined by $24.8 million and $9.4 million, respectively.

Total deposits of $6.7 billion at December 31, 2015, decreased by $24.8 million from December 31, 2014. As the Company continues to strive to improve the mix of its deposit portfolio and the overall costs of deposits, non-maturity deposits comprised 83.0% of total deposits at December 31, 2015, compared to 81.8% at December 31, 2014.
 
(dollars in thousands)
December 31,
 
 
 
 
 
2015
 
2014
 
Increase/(decrease)
Non-interest bearing deposits
$
1,185,936

 
$
1,085,158

 
$
100,778

 
9.3
 %
NOW accounts
1,939,388

 
1,913,399

 
25,989

 
1.4
 %
Money market accounts
1,718,791

 
1,827,233

 
(108,442
)
 
(5.9
)%
Savings
722,413

 
678,294

 
44,119

 
6.5
 %
Time deposits less than $100
820,616

 
891,964

 
(71,348
)
 
(8.0
)%
Time deposits $100 or greater
317,792

 
333,697

 
(15,905
)
 
(4.8
)%
Total deposits
$
6,704,936

 
$
6,729,745

 
$
(24,809
)
 
(0.4
)%
 
 
 
 
 
 

 
 

Non-time deposits/total deposits
83.0
%
 
81.8
%
 
 
 
1.2
 %
 
The following table is a distribution of the average balance and the average cost of the Company’s deposits in each of the most recent three fiscal years:

(dollars in thousands)
2015
 
2014
 
2013
 
Average
 
Annual
 
Average
 
Annual
 
Average
 
Annual
 
Balance
 
Cost
 
Balance
 
Cost
 
Balance
 
Cost
Non-interest bearing deposits
$
1,149,606

 
—

 
$
1,014,758

 
—

 
$
933,849

 
—

Interest bearing*
4,437,819

 
0.17
%
 
4,069,248

 
0.17
%
 
3,819,058

 
0.19
%
Time deposits
1,183,871

 
0.95
%
 
1,188,923

 
0.98
%
 
1,388,789

 
1.08
%
Total
$
6,771,296

 
0.28
%
 
$
6,272,929

 
0.30
%
 
$
6,141,696

 
0.36
%

*Interest bearing NOW, savings, and money market deposits.
 
Average deposits for the year-ended December 31, 2015 of $6.8 billion increased by $498 million from the comparable period in 2014 primarily due to the increase in NOW, savings, and money market accounts of $168 million, $141 million, and $59.3 million, respectively. As a result of the Company's continued focus on effectively managing the cost of deposits, the average annual cost of total deposits decreased to 0.28% for the year ended December 31, 2015, from 0.30% for the comparable period in 2014.


46

The following table is a breakdown, by maturity, of the Company’s time deposits of $100,000 or greater as of December 31, 2015:

(dollars in thousands)
 
 
3 months or less
 
$
61,626

Over 3 through 6 months
 
37,930

Over 6 through 12 months
 
51,637

Over 12 months
 
166,599

Total
 
$
317,792


Deposit funding is supplemented by additional sources of borrowings which include customer and wholesale repurchase agreements, short-term borrowings, FHLB advances, senior long-term debt, and subordinated debentures. In the aggregate, these funding sources totaled $1.6 billion at December 31, 2015, which was a decrease of $90.7 million from December 31, 2014.
 
(dollars in thousands)
December 31, 2015
 
December 31, 2014
 
Average Balance
 
Annual Cost
 
Average Balance
 
Annual Cost
Customer repurchase agreements
$
561,963

 
0.29
%
 
$
555,954

 
0.29
%
Repurchase agreements
—

 
—
%
 
28,836

 
4.87
%
Federal Home Loan Bank advances and other borrowings
768,725

 
0.85
%
 
531,522

 
1.06
%
Senior long-term debt
125,000

 
4.37
%
 
36,644

 
4.34
%
Subordinated debentures
77,321

 
2.80
%
 
77,321

 
2.75
%
Total borrowings and other debt obligations
$
1,533,009

 
1.03
%
 
$
1,230,277

 
1.01
%

On September 16, 2014, the Company issued $125 million aggregate principal amount of unsecured, fixed rate senior
notes with a maturity date of September 30, 2024. The notes bear an annual fixed interest rate of 4.25%, and are payable, as to
interest, on March 30th and September 30th of each year, commencing March 30, 2015. The remaining unamortized costs related to the issuance of the notes was $1.3 million at December 31, 2015 and will be amortized over the life of the notes.

Customer repurchase agreements are over-night instruments and have investment securities pledged as collateral.  The following table summarizes the Company’s non-FHLB short-term obligations.

(dollars in thousands)
At or For The Year Ended December 31,
 
2015
 
2014
 
2013
Customer repurchase agreements
 
 
 
 
 
Balance at year-end
$
593,540

 
$
607,705

 
$
551,736

Average during the year
561,963

 
555,954

 
529,770

Maximum month-end balance
603,874

 
607,705

 
554,483

Weighted average rate during the year
0.29
%
 
0.29
%
 
0.34
%
Rate at December 31,
0.28
%
 
0.29
%
 
0.26
%
 
 
 
 
 
 
Short-term borrowings
 

 
 

 
 

Balance at year-end
$
—

 
$
—

 
$
—

Average during the year
52

 
101

 
9,680

Maximum month-end balance
—

 
—

 
—

Weighted average rate during the year
0.33
%
 
0.63
%
 
0.42
%
Rate at December 31,
—
%
 
—
%
 
—
%

47

Shareholders' Equity

Shareholders’ equity totaled $1.2 billion at December 31, 2015, a decrease of $27.1 million from December 31, 2014. Activity during 2015 included:

•
Net income of $111 million;

•
Shares issued under share-based plans, net of taxes, of $8.1 million;

•
The repurchase of approximately 7.5 million common shares at a cost of $76.5 million;

•
Cash dividends on common stock of $62.5 million; and

•
An increase in accumulated other comprehensive loss of $6.9 million.

At December 31, 2015, accumulated other comprehensive loss increased by $6.9 million to $17.9 million, compared to accumulated other comprehensive loss of $11.0 million at December 31, 2014, due to:

•
An increase of $8.2 million in accumulated other comprehensive loss related to the decrease in the fair value of investment securities available-for-sale;

•
A decrease of $0.7 million in accumulated other comprehensive loss related to the change in the unfunded portion of the Company’s pension plan obligation; and

•
A decrease of $0.6 million in accumulated other comprehensive loss related to the amortization of the unrealized loss of available-for-sale investment securities which were transferred to the held-to-maturity portfolio in 2014.

48

RESULTS OF OPERATIONS

Net Interest Income
 
The following table presents average balances, average yields, and net interest margin information for the years ended December 31, 2015, 2014 and 2013.  Interest income and yields are presented on a fully taxable equivalent (“FTE”) basis using a statutory tax rate of 35%. Net interest margin is expressed as net interest income (FTE) as a percentage of average total interest earning assets.
 
Average Balances, Average Rates, and Net Interest Margin* 
 
Year Ended December 31,
(dollars in thousands)
2015
 
2014
 
2013
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
Interest Earning Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest earning deposits at banks
$
99,537

 
$
173

 
0.17
%
 
$
86,737

 
$
143

 
0.16
%
 
$
101,603

 
$
203

 
0.20
%
U.S. Government agencies
4,457

 
102

 
2.29
%
 
1,951

 
37

 
1.90
%
 
971

 
33

 
3.40
%
Mortgage-backed securities/collateralized mortgage obligations
1,858,798

 
40,413

 
2.17
%
 
1,740,984

 
40,160

 
2.31
%
 
1,607,834

 
36,761

 
2.29
%
State and municipal*
577,353

 
36,492

 
6.32
%
 
605,550

 
39,497

 
6.52
%
 
656,696

 
43,186

 
6.58
%
Other bonds and securities
73,575

 
4,740

 
6.44
%
 
75,391

 
4,184

 
5.55
%
 
72,523

 
2,702

 
3.73
%
Total investments
2,514,183

 
81,747

 
3.25
%
 
2,423,876

 
83,878

 
3.46
%
 
2,338,024

 
82,682

 
3.54
%
Commercial loans *
4,082,237

 
151,420

 
3.71
%
 
3,739,263

 
145,326

 
3.89
%
 
3,562,006

 
148,728

 
4.18
%
Installment loans
1,192,761

 
48,011

 
4.03
%
 
1,066,763

 
43,314

 
4.06
%
 
1,014,648

 
42,970

 
4.23
%
Mortgage loans
879,979

 
38,181

 
4.34
%
 
705,846

 
31,394

 
4.45
%
 
661,952

 
30,853

 
4.66
%
Total loans
6,154,977

 
237,612

 
3.86
%
 
5,511,872

 
220,034

 
3.99
%
 
5,238,606

 
222,551

 
4.25
%
Total earning assets
8,768,697

 
319,532

 
3.64
%
 
8,022,485

 
304,055

 
3.79
%
 
7,678,233

 
305,436

 
3.98
%
Allowance for loan losses
(88,720
)
 
 

 
 

 
(92,384
)
 
 

 
 

 
(106,437
)
 
 

 
 

Non-interest earning assets
872,907

 
 

 
 

 
779,528

 
 

 
 

 
758,645

 
 

 
 

Total assets
$
9,552,884

 
 

 
 

 
$
8,709,629

 
 

 
 

 
$
8,330,441

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Bearing Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest bearing deposits
$
5,621,690

 
18,649

 
0.33
%
 
$
5,258,171

 
18,543

 
0.35
%
 
$
5,207,847

 
22,379

 
0.43
%
Customer repurchase agreements
561,963

 
1,628

 
0.29
%
 
555,954

 
1,624

 
0.29
%
 
529,770

 
1,805

 
0.34
%
Repurchase agreements
—

 
—

 
—
%
 
28,836

 
1,406

 
4.87
%
 
74,496

 
2,571

 
3.45
%
Federal Home Loan Bank advances and other borrowings
768,725

 
6,562

 
0.85
%
 
531,522

 
5,613

 
1.06
%
 
279,168

 
6,370

 
2.28
%
Senior long-term debt
125,000

 
5,464

 
4.37
%
 
36,644

 
1,592

 
4.34
%
 
—

 
—

 
—
%
Subordinated debentures
77,321

 
2,165

 
2.80
%
 
77,321

 
2,127

 
2.75
%
 
89,128

 
3,092

 
3.47
%
Total interest bearing liabilities
7,154,699

 
34,468

 
0.48
%
 
6,488,448

 
30,905

 
0.48
%
 
6,180,409

 
36,217

 
0.59
%
Non-interest bearing deposits
1,149,606

 
 

 
 

 
1,014,758

 
 

 
 

 
933,849

 
 

 
 

Other non-interest bearing liabilities
104,787

 
 

 
 

 
92,888

 
 

 
 

 
85,893

 
 

 
 

Total liabilities
8,409,092

 
 

 
 

 
7,596,094

 
 

 
 

 
7,200,151

 
 

 
 

Equity
1,143,792

 
 

 
 

 
1,113,535

 
 

 
 

 
1,130,290

 
 

 
 

Total liabilities and equity
$
9,552,884

 
 

 
 

 
$
8,709,629

 
 

 
 

 
$
8,330,441

 
 

 
 

NET INTEREST INCOME/MARGIN (FTE)
 

 
285,064

 
3.25
%
 
 

 
273,150

 
3.40
%
 
 

 
269,219

 
3.51
%
Tax equivalent interest
 

 
15,064

 
 

 
 

 
16,036

 
 

 
 

 
17,157

 
 

Net interest income
 

 
$
270,000

 
 

 
 

 
$
257,114

 
 

 
 

 
$
252,062

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*Fully taxable equivalent basis, using a 35% statutory tax rate.
Average loan balances include non-accruing loans and average net fees and costs.


49

The following table allocates changes in FTE interest income and interest expense based upon volume and rate changes. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately.

(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015 compared to 2014
 
2014 compared to 2013
Increase (decrease) in:
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Interest earning deposits at banks
 
$
22

 
$
8

 
$
30

 
$
(27
)
 
$
(33
)
 
$
(60
)
 
 
 

 
 

 
 
 
 

 
 

 
 

U.S. Government agencies
 
56

 
9

 
65

 
23

 
(19
)
 
4

Mortgage-backed securities/collateralized mortgage obligations
 
2,633

 
(2,380
)
 
253

 
3,069

 
330

 
3,399

State and municipal
 
(1,805
)
 
(1,200
)
 
(3,005
)
 
(3,339
)
 
(350
)
 
(3,689
)
Other bonds and securities
 
(103
)
 
659

 
556

 
111

 
1,371

 
1,482

Total investments
 
781

 
(2,912
)
 
(2,131
)
 
(136
)
 
1,332

 
1,196

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial loans
 
12,924

 
(6,830
)
 
6,094

 
7,187

 
(10,589
)
 
(3,402
)
Installment loans
 
5,075

 
(378
)
 
4,697

 
2,157

 
(1,813
)
 
344

Mortgage loans
 
7,572

 
(785
)
 
6,787

 
1,990

 
(1,449
)
 
541

Total loans
 
25,571

 
(7,993
)
 
17,578

 
11,334

 
(13,851
)
 
(2,517
)
Total interest income
 
$
26,374

 
$
(10,897
)
 
$
15,477

 
$
11,171

 
$
(12,552
)
 
$
(1,381
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense:
 
 

 
 

 
 

 
 

 
 

 
 

Interest bearing deposits
 
$
1,241

 
$
(1,135
)
 
$
106

 
$
214

 
$
(4,050
)
 
$
(3,836
)
Customer repurchase agreements
 
17

 
(13
)
 
4

 
85

 
(266
)
 
(181
)
Repurchase agreements
 
(1,406
)
 
—

 
(1,406
)
 
(1,961
)
 
796

 
(1,165
)
Federal Home Loan Bank advances and other borrowings
 
2,169

 
(1,220
)
 
949

 
3,937

 
(4,694
)
 
(757
)
Senior long-term debt
 
3,862

 
10

 
3,872

 
1,592

 
—

 
1,592

Subordinated debentures
 
—

 
38

 
38

 
(377
)
 
(588
)
 
(965
)
Total borrowed funds
 
4,642

 
(1,185
)
 
3,457

 
3,276

 
(4,752
)
 
(1,476
)
Total interest expense
 
5,883

 
(2,320
)
 
3,563

 
3,490

 
(8,802
)
 
(5,312
)
Increase (decrease) in net interest income (FTE)
 
$
20,491

 
$
(8,577
)
 
$
11,914

 
$
7,681

 
$
(3,750
)
 
$
3,931

 
Results for the year ended December 31, 2015 compared to December 31, 2014

Fully taxable equivalent net interest income for the comparative periods increased by $11.9 million to $285 million for the year ended December 31, 2015. Volume accounted for an increase of $20.5 million, primarily as a result of the acquisition of TF Financial, partially offset by a decrease of $8.6 million related to rate as the Company's net interest margin was 3.25% for 2015 compared to 3.40% for 2014. Despite a prolonged low interest rate environment, the Company continued to effectively manage its net interest margin.

Results for the year ended December 31, 2014 compared to December 31, 2013

Fully taxable equivalent net interest income for the comparative periods increased by $3.9 million to $273 million for the
year ended December 31, 2014. This increase was driven by an increase of $7.7 million related to volume, primarily
as a result of the acquisition of TF Financial, partially offset by a decrease of $3.8 million related to rate as the Company's net
interest margin was 3.40% for 2014 compared to 3.51% for 2013. Despite a prolonged low interest rate environment, the
Company continued to effectively manage its net interest margin and 2014 reflects the impact of a $125 million debt issuance
aimed at enhancing the Company's strategic flexibility.
    

50

Provision for Loan Losses

The provision for loan losses decreased to $0.5 million for 2015, compared to $5.8 million for 2014, and $5.3 million for 2013. The lower level of provision expense in 2015 reflects the continued improvement in asset quality as well as the refinement to the Company's process for estimating the allowance for loan losses. Originated classified loans declined 23.3% to $118 million, or 2.05% of total originated loans at December 31, 2015 from $153 million, or 2.75% of total originated loans at December 31, 2014. The improvement in classified loans and other asset quality measures such as net charge-off levels as a percentage of average loans led to a corresponding decline of the allowance, which totaled $79.0 million at December 31, 2015. The allowance as a percentage of non-performing loans increased to 188% at December 31, 2015 from 153% at December 31, 2014, and the allowance to total originated loans totaled 1.38% at the end of 2015 compared to 1.63% at the end of 2014. For additional analysis of the allowance refer to “Loans and Allowance for Loan Losses.”

Non-Interest Income and Expenses
(dollars in thousands)
 
 
Year Ended December 31,
 
2015 Compared to 2014
 
2014 Compared to 2013
NON-INTEREST INCOME
2015
 
2014
 
2013
 
Increase (Decrease)
 
Increase (Decrease)
Wealth management
$
26,638

 
$
28,067

 
$
27,309

 
$
(1,429
)
 
(5.1)%
 
$
758

 
2.8%
Service charges on deposit accounts
13,518

 
14,469

 
15,234

 
(951
)
 
(6.6)%
 
(765
)
 
(5.0)%
Insurance commissions and fees
12,538

 
12,814

 
12,692

 
(276
)
 
(2.2)%
 
122

 
1.0%
Cash management and electronic banking fees
20,024

 
19,066

 
18,914

 
958

 
5.0%
 
152

 
0.8%
Mortgage banking
5,821

 
3,852

 
6,500

 
1,969

 
51.1%
 
(2,648
)
 
(40.7)%
Bank owned life insurance
7,433

 
4,995

 
5,116

 
2,438

 
48.8%
 
(121
)
 
(2.4)%
Earnings (losses) of unconsolidated investments
(255
)
 
(549
)
 
710

 
294

 
(53.6)%
 
(1,259
)
 
NM
Gain on sale of non-performing loans
—

 
946

 
—

 
(946
)
 
NM
 
946

 
NM
Other operating income
9,453

 
8,494

 
9,427

 
959

 
11.3%
 
(933
)
 
(9.9)%
Net gains from fair value changes on subordinated debentures
—

 
—

 
2,111

 
—

 
NM
 
(2,111
)
 
NM
Net gains (losses) on sales of investment securities
—

 
21

 
54

 
(21
)
 
NM
 
(33
)
 
(61.1)%
Total non-interest income
$
95,170

 
$
92,175

 
$
98,067

 
$
2,995

 
3.2%
 
$
(5,892
)
 
(6.0)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
"NM" - Denotes a value displayed as a percentage change is not meaningful
 
 
 
 
 
 
 
 
 
 
 
Non-interest income for the year ended December 31, 2015 compared to 2014

Non-interest income totaled $95.2 million for 2015, compared to $92.2 million in 2014. The $3.0 million, or 3.2%, increase in non-interest income was primarily due to the following items:

Increases:

•
Mortgage banking income in 2015 totaled $5.8 million, a $2.0 million increase compared to 2014, due to the interest rate environment and resultant purchase and refinance activity.

•
Bank owned life insurance increased $2.4 million primarily due to death benefit proceeds of $1.2 million received in
the third quarter of 2015. The year-over-year increase was also impacted by the bank owned life insurance acquired
via the TF Financial acquisition in the fourth quarter of 2014, as well as the purchase of an additional $25 million of
bank owned life insurance in the first quarter of 2015.

Decreases:

•
Wealth management income decreased $1.4 million, or 5.1%, to $26.6 million for 2015, compared to $28.1 million for 2014 primarily due to a decline in transactional revenue.

•
The Company recognized a $0.9 million gain on the sale of non-performing loans in 2014.




51

Non-interest income for the year ended December 31, 2014 compared to 2013

Non-interest income totaled $92.2 million for 2014, compared to $98.1 million in 2013. The $5.9 million, or 6.0% decrease in non-interest income was primarily due to the following items:

Increases:

•
Wealth management income increased $0.8 million, or 2.8% to $28.1 million for 2014, compared to $27.3 million for 2013.

•
The Company recognized a $0.9 million gain on the sale of non-performing loans in 2014.


Decreases:

•
Mortgage banking income in 2014 totaled $3.9 million, a $2.6 million decrease compared to 2013, as residential mortgage activity declined during 2014 due to lower levels of refinance activity in the marketplace.

•
Earnings on unconsolidated investments decreased $1.3 million to a loss of $0.5 million for 2014, as the timing of the mezzanine debt fund activities and "exits" vary.

•
In 2013, the Company recorded a gain of $2.1 million from the redemption of the Company's subordinated debentures
accounted for at fair value.

•
Other operating income decreased by $0.9 million across various categories.
    
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
2015 Compared to 2014
 
2014 Compared to 2013
NON-INTEREST EXPENSE
2015
 
2014
 
2013
 
Increase (Decrease)
 
Increase (Decrease)
Salaries, wages and employee benefits
$
118,091

 
$
115,579

 
$
117,000

 
$
2,512

 
2.2%
 
$
(1,421
)
 
(1.2)%
Premises and equipment
33,991

 
31,944

 
30,447

 
2,047

 
6.4%
 
1,497

 
4.9%
FDIC insurance
5,271

 
5,001

 
5,467

 
270

 
5.4%
 
(466
)
 
(8.5)%
Other operating expenses
54,786

 
55,921

 
58,109

 
(1,135
)
 
(2.0)%
 
(2,188
)
 
(3.8)%
Merger related expenses
2,961

 
2,878

 
—

 
83

 
2.9%
 
2,878

 
NM
Loss on debt extinguishment
—

 
—

 
64,888

 
—

 
NM
 
(64,888
)
 
NM
Corporate reorganization expense
—

 
—

 
6,000

 
—

 
NM
 
(6,000
)
 
NM
Total non-interest expense
$
215,100

 
$
211,323

 
$
281,911

 
$
3,777

 
1.8%
 
$
(70,588
)
 
(25.0)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses (c)
$
212,139

 
$
208,445

 
$
211,023

 
$
3,694

 
1.8%
 
$
(2,578
)
 
(1.2)%
Adjusted revenue (c)
$
380,234

 
$
365,304

 
$
365,121

 
$
14,930

 
4.1%
 
$
183

 
0.1%
Efficiency Ratio (c)
55.79
%
 
57.06
%
 
57.80
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
"NM" - Denotes a value displayed as a percentage change is not meaningful
 
 
 
 
 
 
 
 
 
 
(c) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 7.
 
 
 
Non-interest expense for the year ended December 31, 2015 compared to 2014
 
Non-interest expense totaled $215 million for the year ended December 31, 2015, compared to $211 million for the comparable period in 2014. This increase is comprised of the following:

•
Operating expenses(c), exclusive of one-time items, of $212 million for 2015 increased by $3.7 million from 2014 as a result of the additional operating expenses related to TF Financial. The efficiency ratio(c) improved to 55.79% for 2015 compared to 57.06% for 2014.


52

•
Non-interest expense for the year ended December 31, 2015 included a $2.5 million increase in salaries, wages and employee benefits. The $2.0 million increase in premises and equipment is primarily the result of the full year expense of property and equipment acquired in the TF Financial acquisition.

Non-interest expense for the year ended December 31, 2014 compared to 2013

Non-interest expense totaled $211 million for the year ended December 31, 2014, compared to $282 million for the comparable period in 2013 This decrease is comprised of the following:

•
Operating expenses(c), exclusive of one-time items, of $208 million for 2014 decreased by $2.6 million from 2013 as a result of the Company's corporate reorganization in 2014 net of additional operating expenses related to TF Financial. The efficiency ratio(c) of 57.06% for 2014 remained relatively consistent with 57.80% for 2013.

•
Non-interest expense for the year ended December 31, 2013 included a $64.9 million million loss on debt extinguishment related to the repayment of $400 million of FHLB advances, coupled with a corporate reorganization expense of $6.0 million. The year ended December 31, 2014 included $2.9 million of merger related expenses.


Income Tax Expense

Income tax expense for 2015 was $38.9 million, compared to $33.5 million for 2014. The effective tax rate of 26.0% in 2015 increased from 25.3% in 2014. The Company’s net deferred tax asset (“DTA”) decreased to $46.7 million at December 31, 2015 from $57.5 million at December 31, 2014, primarily resulting from the decrease in the fair value of the available-for-sale investment portfolio and the utilization of AMT credits.

Income tax expense for 2014 was $33.5 million, compared to $9.6 million for 2013. During 2013, pre-tax income decreased due to the debt extinguishment and restructuring charges, resulting in an effective tax rate of 15.2% compared to 25.3% for 2014 . Exclusive of non-recurring items, the effective tax rates in 2014 and 2013 were comparable. The Company’s net deferred tax asset (“DTA”) decreased to $57.5 million at December 31, 2014 from $76.6 million at December 31, 2013, primarily resulting from an increase in 2014 net income when compared to 2013.

Each quarter, the Company evaluates the realizability of the DTA. As of December 31, 2015, the Company concluded that the DTA was realizable, and a valuation allowance was not required. In reaching this conclusion, management carefully weighed both positive and negative evidence. As of and for the year ended December 31, 2015, the Company has performed in line with management projections and is not in a cumulative pre-tax loss position. Therefore, management believes the DTA is fully realizable.
 
LIQUIDITY, COMMITMENTS, CAPITAL AND INTEREST RATE SENSITIVITY

Liquidity and Contractual Commitments and Obligations

The Company’s Board of Directors establishes general liquidity guidelines to ensure adequate liquidity to fulfill obligations. Obligations for liquidity include depositors who wish to withdraw funds, borrowers who require funds, repayment of maturing borrowings, operating expenditures, and capital expansion.  Sources of liquidity consist of cash flows from operating, investing, and financing activities.  Management continues to actively monitor and manage liquidity and current available funding channels to ensure an appropriate contingency funding plan is in place.

The Company’s largest and primary source of liquidity is deposits from retail, corporate and institutional banking customers. The Company also utilizes a mix of short- and long-term wholesale funding providers when funding demands exceed available funds from normal deposit gathering efforts. Wholesale funding includes correspondent bank borrowings, secured borrowing lines from the FHLB, the Federal Reserve Bank of Philadelphia and, at times, brokered time deposits, or other similar sources. Over the past few years, the Company has reduced its wholesale funding, due to stable and improving deposit funding and managed declines in total assets. At December 31, 2015, the Company had $2.7 billion of liquidity available including unencumbered deposits. Additionally, the Company has the ability to borrow from the Federal Reserve Bank via the discount window. Refer to "Liabilities" within Item 7 of this Report for additional details.


53

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2015:
 
 
 
 
Payments Due by Period:
 
 
 
 
 
 
After One
 
After Three
 
 
(dollars in thousands)
 
 
 
One Year
 
Year to
 
Years to
 
More than
 
 
Total
 
or Less
 
Three Years
 
Five Years
 
Five Years
Loan commitments
 
$
1,942,607

 
$
658,200

 
$
316,689

 
$
176,324

 
$
791,394

Time deposits
 
1,138,408

 
558,202

 
291,356

 
288,608

 
242

Federal Home Loan Bank advances and other borrowings
 
833,828

 
691,106

 
70,360

 
63,218

 
9,144

Senior long-term debt
 
125,000

 
—

 
—

 
—

 
125,000

Subordinated debentures
 
77,321

 
—

 
—

 
—

 
77,321

Letters of credit
 
151,042

 
130,448

 
20,455

 
139

 
—

Minimum annual rentals on non-cancelable operating leases
 
53,634

 
7,019

 
12,118

 
9,761

 
24,736

Total
 
$
4,321,840

 
$
2,044,975

 
$
710,978

 
$
538,050

 
$
1,027,837

    
The Company does not presently have any commitments for significant capital expenditures.

As measured using the consolidated statement of cash flows, the Company's cash position decreased by $210 million for the year ended December 31, 2015, compared to an increase of $130 million for the year ended December 31, 2014. Operating activities generated $122 million of net cash for the year ended December 31, 2015 compared to $112 million for the year ended December 31, 2014. During the year ended December 31, 2015, cash was deployed primarily in the following ways:

Investing activities

•
$475 million of purchases of investment securities
•
$76.3 million net increase in loans

Financing activities

•
$87.3 million net reduction in certificates of deposit
•
$76.5 million for the purchase of treasury stock
•
$76.5 million reduction in FHLB borrowings
•
$62.5 million of cash dividends paid to common shareholders

During the year ended December 31, 2015, cash was generated from the following additional sources:

Investing activities

•
$476 million of proceeds from maturities and repayments of investment securities

Financing activities

•
$62.4 million increase in transaction and savings accounts
    
Interest Rate Risk Management

The Company’s largest business segment is its community banking segment, whose business activities principally include accepting deposits and making loans.  As a result, the Company’s largest source of revenue is net interest income, which subjects it to movements in market interest rates.  Management’s objective for interest rate risk management is to understand the Company’s susceptibility to changes in interest rates and develop and implement strategies to minimize volatility while maximizing net interest income.  The Board of Directors establishes policies that govern interest rate risk management.  This is accomplished via a centralized asset/liability management committee (“ALCO”).  ALCO is comprised of various members of the Company’s business lines who are responsible for managing the components of interest rate risk, which include:

•
Timing differences between contractual maturities and or repricing of assets and liabilities (“gap risk”),

•
Risk that assets will repay or customers withdraw prior to contractual maturity (“option risk”),

54


•
Non-parallel changes in the slope of the yield curve (“yield curve risk”), and

•
Variation in rate movements of different indices (“basis risk”).

ALCO employs various techniques and instruments to implement its developed strategies.  These generally include one or more of the following:

•
Changes to interest rates offered on products,

•
Changes to maturity terms offered on products,

•
Changes to types of products offered,

•
Use of wholesale products such as advances from the FHLB or interest rate swaps,

•
Purchase or sale of investment securities, and/or

•
Other techniques as appropriate.

Interest rate sensitivity is a function of the repricing characteristics of the Company’s assets and liabilities. Minimizing the balance sheet’s maturity and repricing risk is a continual focus in a changing interest rate environment.

The Company uses a simulation model to identify and manage its interest rate risk profile.  The model measures projected net interest income “at-risk” and anticipated changes in net interest income for a rolling twelve month period.  The model is based on expected cash flows and repricing characteristics for all financial instruments at a point in time and incorporates Company-developed, market-based assumptions regarding the impact of changing interest rates on these financial instruments.

The Company also incorporates assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates.  These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income.  While actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies, this model is an important guidance tool for ALCO.

The following table demonstrates the anticipated impact of an interest rate shift on the Company’s net interest income for the subsequent twelve months:
 
 
Change in Net Interest Income
Change in Interest Rates
 
December 31,
(in basis points)
 
2015
 
2014
+300
 
4%
 
3%
+200
 
3%
 
2%
+100
 
1%
 
1%
-100
 
N/A *
 
N/A *

* Certain short-term interest rates are currently below 1%. Therefore, in a scenario where interest rates decline by 100 basis points, short-term interest rates decline to zero, resulting in a non-parallel downward shift. In this interest rate scenario, net interest income is estimated to decline for the subsequent twelve months by 3% and 1% based upon net interest income for the year ended December 31, 2015 and 2014, respectively.

55


The Federal Reserve remains committed to policy accommodation as their actions prove to be patient and supported by economic growth.  On December 17, 2015, the Federal Open Market Committee increased the Federal Funds Target rate by 25 basis points, the first rate increase in nine years.  ALCO forecasts net interest income and evaluates net interest income sensitivity on a continual basis, based on a variety of factors and assumptions.  ALCO believes an interest rate ramp over twelve months is an appropriate rate scenario given the methodical approach the Federal Reserve is taking with monetary policy.  As illustrated in the table above, the Company has positioned itself to have a modest asset sensitivity interest rate risk profile.

The results of the net interest income analyses fall within the compliance guidelines established by ALCO and the Board of Directors.

Capital Adequacy

Information regarding the Company’s capital ratios are set forth in Footnote 16 to the consolidated financial statements included in Item 8 of this Report and is incorporated herein by reference.  Capital performance ratios for the Company can be found in Item 6 of this Report.


Quarterly Consolidated Financial Data (Unaudited)

The following table represents summarized quarterly financial data of the Company, which, in the opinion of management, reflects all adjustments (comprising only normal recurring accruals) necessary for a fair presentation:

(dollars in thousands, except per share data)
 
Three months ended
 
 
December 31
 
September 30
 
June 30
 
March 31
2015
 
 
 
 
 
 
 
 
Interest income
 
$
75,428

 
$
76,529

 
$
75,417

 
$
77,094

Interest expense
 
8,812

 
8,662

 
8,582

 
8,412

Net interest income
 
66,616

 
67,867

 
66,835

 
68,682

Provision for loan losses
 
(2,500
)
 
1,000

 
1,000

 
1,000

Merger related expenses
 
1,121

 
1,840

 
—

 
—

Income before income taxes
 
39,302

 
37,676

 
36,562

 
36,030

Net income
 
28,850

 
27,876

 
27,238

 
26,727

Per Share Data:
 
 

 
 

 
 

 
 

Basic earnings
 
0.21

 
0.20

 
0.19

 
0.19

Diluted earnings
 
0.20

 
0.20

 
0.19

 
0.19

2014
 
 

 
 

 
 

 
 

Interest income
 
$
75,990

 
$
71,368

 
$
70,528

 
$
70,133

Interest expense
 
8,346

 
7,138

 
7,577

 
7,844

Net interest income
 
67,644

 
64,230

 
62,951

 
62,289

Provision for loan losses
 
3,500

 
1,000

 
—

 
1,251

Merger related expenses
 
2,878

 
—

 
—

 
—

Income before income taxes
 
32,860

 
33,943

 
35,233

 
30,179

Net income
 
24,477

 
25,320

 
26,199

 
22,710

Per Share Data:
 
 

 
 

 
 

 
 

Basic earnings
 
0.17

 
0.18

 
0.19

 
0.16

Diluted earnings
 
0.17

 
0.18

 
0.19

 
0.16

 
2014 Quarterly results were impacted by the acquisition of TF Financial Corporation on October 24, 2014.


56

RECENT ACCOUNTING PRONOUNCEMENTS

Information on recent accounting pronouncements are set forth in Footnote 1 to the consolidated financial statements included in Item 8 of this Report and is incorporated herein by reference.

OFF-BALANCE SHEET ARRANGEMENTS
 
The Company is a party to certain financial instruments with off-balance sheet risks.  For more information, refer to Footnote 13 to the consolidated financial statements included in Item 8 of this Report. 

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information with respect to quantitative and qualitative disclosures about market risk can be found under "Liquidity, Commitments, Capital and Interest Rate Sensitivity" in Item 7 of this Report.

57

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
National Penn Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of National Penn Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three‑year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 29, 2016 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 29, 2016



58

Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
National Penn Bancshares, Inc.:
We have audited National Penn Bancshares, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated February 29, 2016 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 29, 2016





59



NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

(dollars in thousands)
 
December 31,
 
 
2015
 
2014
ASSETS
 
 
 
 
Cash and due from banks
 
$
104,407

 
$
110,784

Interest-earning deposits with banks
 
99,689

 
303,055

Total cash and cash equivalents
 
204,096

 
413,839

 
 
 
 
 
Investment securities available-for-sale, at fair value
 
1,668,829

 
1,530,661

Investment securities held-to-maturity
 
 

 
 

(Fair value $789,653 and $949,935 for 2015 and 2014, respectively)
 
768,634

 
921,042

Other securities
 
65,618

 
67,512

Loans held-for-sale
 
10,000

 
4,178

Loans, net of allowance for loan losses of $79,045 and $90,675 for 2015 and 2014, respectively
 
6,116,154

 
6,051,604

Premises and equipment, net
 
106,209

 
116,414

Accrued interest receivable
 
29,030

 
29,491

Bank owned life insurance
 
197,908

 
171,775

Other real estate owned and other repossessed assets
 
4,596

 
4,867

Goodwill
 
302,940

 
302,244

Other intangible assets, net
 
6,101

 
8,757

Unconsolidated investments
 
7,575

 
8,124

Other assets
 
111,212

 
120,357

TOTAL ASSETS
 
$
9,598,902

 
$
9,750,865

 
 
 
 
 
LIABILITIES
 
 

 
 

Non-interest bearing deposits
 
$
1,185,936

 
$
1,085,158

Interest bearing deposits
 
5,519,000

 
5,644,587

Total deposits
 
6,704,936

 
6,729,745

 
 
 
 
 
Customer repurchase agreements
 
593,540

 
607,705

Federal Home Loan Bank advances and other borrowings
 
833,828

 
910,378

Senior long-term debt
 
125,000

 
125,000

Subordinated debentures
 
77,321

 
77,321

Accrued interest payable and other liabilities
 
102,720

 
112,077

TOTAL LIABILITIES
 
8,437,345

 
8,562,226

 
 
 
 
 
SHAREHOLDERS' EQUITY
 
 

 
 

Common stock, no stated par value; authorized 250,000,000 shares, issued 152,267,940 shares
 
1,391,151

 
1,390,130

Accumulated deficit
 
(87,043
)
 
(135,246
)
Accumulated other comprehensive loss
 
(17,891
)
 
(10,991
)
Treasury stock: December 31, 2015 - 11,959,300 shares; December 31, 2014 - 5,131,856 shares
 
(124,660
)
 
(55,254
)
TOTAL SHAREHOLDERS' EQUITY
 
1,161,557

 
1,188,639

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
9,598,902

 
$
9,750,865

 
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 
 

 
 




60

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(dollars in thousands, except per share data)
 
Year Ended December 31,
 
 
 
2015
 
2014
 
2013
 
INTEREST INCOME
 
 
 
 
 
 
 
Loans, including fees
 
$
234,846

 
$
217,447

 
$
220,158

 
Investment securities
 
 

 
 
 
 

 
Taxable
 
46,611

 
45,453

 
40,497

 
Tax-exempt
 
22,838

 
24,976

 
27,421

 
Deposits with banks
 
173

 
143

 
203

 
Total interest income
 
304,468

 
288,019

 
288,279

 
INTEREST EXPENSE
 
 

 
 

 
 

 
Deposits
 
18,649

 
18,543

 
22,379

 
Customer repurchase agreements
 
1,628

 
1,624

 
1,805

 
Repurchase agreements
 
—

 
1,406

 
2,571

 
Federal Home Loan Bank advances and other borrowings
 
6,562

 
5,613

 
6,370

 
Senior long-term debt
 
5,464

 
1,592

 
—

 
Subordinated debentures
 
2,165

 
2,127

 
3,092

 
Total interest expense
 
34,468

 
30,905

 
36,217

 
Net interest income
 
270,000

 
257,114

 
252,062

 
Provision for loan losses
 
500

 
5,751

 
5,250

 
Net interest income after provision for loan losses
 
269,500

 
251,363

 
246,812

 
NON-INTEREST INCOME
 
 

 
 

 
 

 
Wealth management
 
26,638

 
28,067

 
27,309

 
Service charges on deposit accounts
 
13,518

 
14,469

 
15,234

 
Insurance commissions and fees
 
12,538

 
12,814

 
12,692

 
Cash management and electronic banking fees
 
20,024

 
19,066

 
18,914

 
Mortgage banking
 
5,821

 
3,852

 
6,500

 
Bank owned life insurance
 
7,433

 
4,995

 
5,116

 
Earnings (losses) of unconsolidated investments
 
(255
)
 
(549
)
 
710

 
Gain on sale of non-performing loans
 
—

 
946

 
—

 
Other operating income
 
9,453

 
8,494

 
9,427

 
Net gains from fair value changes of subordinated debentures
 
—

 
—

 
2,111

 
Net gains on sales of investment securities
 
—

 
21

 
54

 
Total non-interest income
 
95,170

 
92,175

 
98,067

 
NON-INTEREST EXPENSE
 
 

 
 

 
 

 
Salaries, wages and employee benefits
 
118,091

 
115,579

 
117,000

 
Premises and equipment
 
33,991

 
31,944

 
30,447

 
FDIC insurance
 
5,271

 
5,001

 
5,467

 
Other operating expenses
 
54,786

 
55,921

 
58,109

 
Merger related expenses
 
2,961

 
2,878

 
—

 
Loss on debt extinguishment
 
—

 
—

 
64,888

 
Corporate reorganization expense
 
—

 
—

 
6,000

 
Total non-interest expense
 
215,100

 
211,323

 
281,911

 
Income before income taxes
 
149,570

 
132,215

 
62,968

 
Income tax expense
 
38,879

 
33,509

 
9,581

 
NET INCOME
 
$
110,691

 
$
98,706

 
$
53,387

 
PER SHARE OF COMMON STOCK
 
 

 
 

 
 

 
Basic earnings available to common shareholders
 
$
0.79

 
$
0.70

 
$
0.37

 
Diluted earnings available to common shareholders
 
$
0.78

 
$
0.70

 
$
0.37

 
Dividends paid in cash
 
$
0.44

 
$
0.41

 
$
0.30

(a) 
 
 
 
 
 
 
 
 
(a) In lieu of a 1st quarter 2013 cash dividend, the Company paid an additional dividend of $0.10 per share in the 4th quarter of 2012.
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 
 

 
 

 
 

 

61

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
 
 
Year Ended December 31,
(dollars in thousands)
2015
 
2014
 
2013
 
Before
Tax
Amount
 
Tax
Expense (Benefit)

 
Net of
Tax
Amount
 
Before
Tax
Amount
 
Tax
Expense (Benefit)
 
Net of
Tax
Amount
 
Before
Tax
Amount
 
Tax
Expense (Benefit)
 
Net of
Tax
Amount
Net income
$
149,570

 
$
38,879

 
$
110,691

 
$
132,215

 
$
33,509

 
$
98,706

 
$
62,968

 
$
9,581

 
$
53,387

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding (losses) gains arising during the period
(11,636
)
 
(4,073
)
 
(7,563
)
 
30,677

 
10,736

 
19,941

 
(81,099
)
 
(28,385
)
 
(52,714
)
Less net gains (losses) on sales of investment securities realized in net income
—

 
—

 
—

 
21

 
7

 
14

 
54

 
19

 
35

Unrealized gains (losses) on investment securities
(11,636
)
 
(4,073
)
 
(7,563
)
 
30,656

 
10,729

 
19,927

 
(81,153
)
 
(28,404
)
 
(52,749
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension adjustment
1,020

 
357

 
663

 
(15,016
)
 
(5,255
)
 
(9,761
)
 
11,174

 
3,911

 
7,263

Other comprehensive income (loss)
(10,616
)
 
(3,716
)
 
(6,900
)
 
15,640

 
5,474

 
10,166

 
(69,979
)
 
(24,493
)
 
(45,486
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
$
138,954

 
$
35,163

 
$
103,791

 
$
147,855

 
$
38,983

 
$
108,872

 
$
(7,011
)
 
$
(14,912
)
 
$
7,901

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 
 
 
 
 
 
 
 
 
 
 




62

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders’ Equity
(dollars in thousands)
 
Common
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Treasury Stock
 
 
 
 
Shares
 
Value
 
 
 
 
Total
Balance at December 31, 2012
 
145,163,585

 
$
1,387,644

 
$
(185,680
)
 
$
24,329

 
$
(65,001
)
 
$
1,161,292

 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 

 
 

 
 

 
 

 
 

 
 

Net income
 
 

 
 

 
53,387

 
 

 
 

 
53,387

Other comprehensive loss, net of taxes
 
 
 
 
 
 

 
(45,486
)
 
 

 
(45,486
)
Total comprehensive income
 
 

 
 

 
 

 
 

 
 

 
7,901

Cash dividends declared - common
 
 

 
 

 
(43,697
)
 
 

 
 

 
(43,697
)
Shares issued under share-based plans, net of excess tax benefits
 
635,166

 
322

 
 

 
 

 
6,048

 
6,370

Balance at December 31, 2013
 
145,798,751

 
1,387,966

 
(175,990
)
 
(21,157
)
 
(58,953
)
 
1,131,866

 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 

 
 

 
 

 
 

 
 

 
 

Net income
 
 
 
 
 
98,706

 
 

 
 

 
98,706

Other comprehensive income, net of taxes
 
 

 
 

 
 

 
10,166

 
 

 
10,166

Total comprehensive income
 
 

 
 

 
 

 
 

 
 

 
108,872

Cash dividends declared - common
 
 

 
 

 
(57,962
)
 
 

 
 

 
(57,962
)
Shares issued under share-based plans, net of excess tax benefits
 
595,535

 
1,585

 
 

 
 

 
5,569

 
7,154

Treasury shares purchased
 
(7,289,155
)
 
 
 
 

 
 

 
(78,549
)
 
(78,549
)
Common stock issued, business combination
 
8,030,953

 
579

 
 
 
 
 
76,679

 
77,258

Balance at December 31, 2014
 
147,136,084

 
1,390,130

 
(135,246
)
 
(10,991
)
 
(55,254
)
 
1,188,639

 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
110,691

 
 
 
 
 
110,691

Other comprehensive loss, net of taxes
 
 
 
 
 
 
 
(6,900
)
 
 
 
(6,900
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
103,791

Cash dividends declared - common
 
 
 
 
 
(62,488
)
 
 
 
 
 
(62,488
)
Shares issued under share-based plans, net of excess tax benefits
 
642,610

 
1,021

 
 
 
 
 
7,110

 
8,131

Treasury shares purchased
 
(7,470,054
)
 
 
 
 
 
 
 
(76,516
)
 
(76,516
)
Balance at December 31, 2015
 
140,308,640

 
$
1,391,151

 
$
(87,043
)
 
$
(17,891
)
 
$
(124,660
)
 
$
1,161,557

 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 
 
 
 
 
 
 
 

63

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(dollars in thousands)
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
 
Net income
 
$
110,691

 
$
98,706

 
$
53,387

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Provision for loan losses
 
500

 
5,751

 
5,250

Depreciation and amortization
 
13,014

 
12,096

 
13,000

Amortization of premiums and discounts on investment securities, net
 
1,993

 
646

 
2,622

Gains from sale of investment securities, net
 
—

 
(21
)
 
(54
)
Increase in fair value of subordinated debentures
 
—

 
—

 
(2,111
)
Bank owned life insurance policy income
 
(7,433
)
 
(4,995
)
 
(5,116
)
Share-based compensation expense
 
5,245

 
4,315

 
3,309

Unconsolidated investment distributions, net
 
549

 
589

 
2,634

Loans originated for resale
 
(150,185
)
 
(100,253
)
 
(177,012
)
Proceeds from sale of loans originated for resale
 
148,692

 
103,966

 
191,556

Proceeds from sale of non-performing loans
 
—

 
3,046

 
—

Gains on sale of loans, net
 
(4,330
)
 
(2,939
)
 
(5,165
)
Gains on sale of non-performing loans, net
 
—

 
(946
)
 
—

Losses (gains) on sale of other real estate owned, net
 
221

 
(144
)
 
(332
)
Gains on sale of buildings
 
(495
)
 
(122
)
 
(301
)
Loss on debt extinguishment
 
—

 
—

 
64,888

Changes in assets and liabilities:
 
 
 
 
 
 
Decrease in accrued interest receivable
 
461

 
73

 
1,396

(Decrease) increase in accrued interest payable
 
(56
)
 
390

 
(1,578
)
Decrease (increase) in other assets
 
12,595

 
4,494

 
(13,740
)
(Decrease) increase in other liabilities
 
(8,973
)
 
(12,519
)
 
29,424

Net cash provided by operating activities
 
122,489

 
112,133

 
162,057

CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

 
 

Proceeds from maturities and repayments of investment securities held-to-maturity
 
154,342

 
97,633

 
25,499

Proceeds from maturities and repayments of investment securities available-for-sale
 
321,457

 
279,208

 
433,200

Proceeds from sale of investment securities available-for-sale
 
—

 
39,346

 
3,432

Purchase of investment securities available-for-sale
 
(474,906
)
 
(378,375
)
 
(612,024
)
Purchase of investment securities held-to-maturity
 
(274
)
 
(2,568
)
 
—

Proceeds from (purchases of) sale of other securities
 
1,894

 
(3,766
)
 
4,614

Proceeds from sale of loans previously held-for-investment
 
527

 
3,384

 
3,764

Proceeds from sale of acquired credit impaired loans
 
9,620

 
—

 
—

Increase in loans
 
(76,280
)
 
(233,578
)
 
(131,552
)
Purchases of premises and equipment
 
(1,122
)
 
(22,850
)
 
(9,590
)
Proceeds from sale of other real estate owned
 
1,181

 
1,975

 
3,317

Proceeds from sale of buildings
 
1,599

 
4,183

 
868

Decrease in cash surrender value of bank owned life insurance from claims
 
4,828

 
—

 
—

Purchase of bank owned life insurance
 
(25,000
)
 
—

 
—

Acquisitions, net of cash and cash equivalents
 
—

 
(24,302
)
 
—

Net cash used in investing activities
 
(82,134
)
 
(239,710
)
 
(278,472
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
 
Net increase in transaction and savings accounts
 
62,444

 
190,655

 
321,512

Net decrease in time deposits
 
(87,253
)
 
(191,920
)
 
(184,499
)
Net (decrease) increase in customer repurchase agreements
 
(14,165
)
 
55,969

 
(8,329
)
Decrease in short-term borrowings
 
—

 
—

 
(100,000
)
Decrease in repurchase agreements
 
—

 
(50,000
)
 
(25,000
)
Net (decrease) increase in FHLB advances
 
(76,532
)
 
261,408

 
73,597

Repayment of subordinated debentures
 
—

 
—

 
(65,206
)
Proceeds from senior long-term debt
 
—

 
125,000

 
—

Proceeds from shares issued, share-based plans
 
4,258

 
3,365

 
3,428

Excess tax benefit (expense) on share-based plans
 
154

 
(73
)
 
4

Purchase of treasury stock
 
(76,516
)
 
(78,549
)
 
—

Cash dividends, common
 
(62,488
)
 
(57,962
)
 
(43,697
)
Net cash provided by (used in) financing activities
 
(250,098
)
 
257,893

 
(28,190
)
Net increase (decrease) in cash and cash equivalents
 
(209,743
)
 
130,316

 
(144,605
)
Cash and cash equivalents at beginning of year
 
413,839

 
283,523

 
428,128

Cash and cash equivalents at end of year
 
$
204,096

 
$
413,839

 
$
283,523

 
 
 
 
 
 
 
The accompanying notes are an integral part of these statements.
 
 
 
 
 
 


64

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Supplemental Cash Flow Disclosures

The Company considers cash and due from banks and interest bearing deposits with banks as cash equivalents for the purposes of reporting cash flows.  Cash paid for interest and taxes is as follows:

(dollars in thousands)
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
Interest
 
$
34,523

 
$
29,856

 
$
37,796

Income taxes
 
25,633

 
26,416

 
5,694

 
 
 
 
 
 
 
Acquisitions of noncash assets and liabilities:
 
 
 
 
 
 
Assets acquired
 
$
—

 
$
772,391

 
$
—

Liabilities assumed
 
—

 
709,645

 
—


65
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

National Penn Bancshares, Inc. (the “Company” or “National Penn”), primarily through its national bank subsidiary, National Penn Bank (“NPB”) serves residents and businesses primarily in eastern and central Pennsylvania.  NPB, which has 124 retail branch office locations (116 in Pennsylvania, 7 in New Jersey, and 1 in Cecil County, Maryland), is a locally managed community bank providing commercial banking products, primarily loans and deposits.  

The Company’s financial services units consist of an array of investment, insurance and employee benefit services through its non-bank subsidiaries. National Penn’s financial services divisions and affiliates include its National Penn Investors Trust Company division; Institutional Advisors LLC; and National Penn Insurance Services Group, Inc.

The Company and its operating subsidiaries compete for market share in the communities they serve with other bank holding companies, community banks, thrift institutions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.

The Company and its operating subsidiaries are subject to regulations of certain state and federal agencies.  These regulatory agencies periodically examine the Company and its subsidiaries for adherence to laws and regulations.  As a consequence, the cost of doing business may be affected.

Basis of Financial Statement Presentation

The accounting policies followed by the Company conform with accounting principles generally accepted in the United States of America (“GAAP”) and predominant practice within the banking industry.

The consolidated financial statements include the accounts of the Company and the Company’s direct and indirect wholly owned subsidiaries.  The Company’s unconsolidated subsidiaries, representing investments in joint ventures, and other entities are accounted for using the equity method of accounting.  All material inter-company balances have been eliminated.

Reclassifications

Certain prior year amounts have been reclassified to conform to current period classifications. These reclassifications did not have a material impact on our consolidated financial condition or results of operations.

Use of Estimates

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the balance sheets, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The principal estimates that are susceptible to significant change in the near term relate to the allowance for loan losses, goodwill and intangible assets, income taxes, and other-than-temporary impairment. Management’s practice is to retain supporting files for all accounting entries made, but in particular to organize, support and prepare clarifying memoranda for items in the financial statements requiring significant judgment.

Business Combinations

At the date of acquisition the Company records the net assets of acquired companies on the consolidated balance sheet at their estimated fair value, and goodwill is recognized for the excess of the purchase price over the estimated fair value of acquired net assets. The results of operations for acquired companies are included in the Company’s consolidated statement of income beginning at the acquisition date. Expenses arising from acquisition activities are recorded in the consolidated statement of income during the period incurred.


66
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Revenue Recognition

The Company recognizes revenue in the consolidated statement of income as it is earned and when collectability is reasonably assured. The primary source of revenue is interest income from interest earning assets, which is recognized on the accrual basis of accounting using the effective interest method. The recognition of revenues from interest earning assets is based upon formulas from underlying loan agreements, securities contracts or other similar contracts. Non-interest income is recognized on the accrual basis of accounting as services are provided or as transactions occur. Non-interest income includes fees from wealth management services, deposit accounts, sales of insurance products, cash management and electronic banking services, mortgage banking activities, standby letters of credit and financial guarantees, and other miscellaneous services and transactions.

Advertising Costs

Advertising costs are recorded in the period they are incurred within other operating expenses in non-interest expense in the consolidated statement of income. Advertising expense was $6.2 million, $6.0 million, and $5.5 million for the years ended December 31, 2015, 2014 and 2013, respectively.

Cash and Cash Equivalents

Cash and due from banks and interest bearing deposits with banks comprise “cash and cash equivalents” on the consolidated balance sheet and statement of cash flows.  Cash held on deposit with other financial institutions may exceed FDIC insurance limits.

The Company is required to maintain cash reserves that are considered restrictions on cash and due from banks shown on our consolidated balance sheet. These restrictions consist of required reserves with the Federal Reserve Bank related to our deposit liabilities and cash collateral related to letters of credit and interest rate swaps with financial institution counterparties. Total restricted cash was $88.4 million and $75.3 million as of December 31, 2015 and 2014, respectively.

Investment Securities and Other Investments

Investment securities which are held for indefinite periods of time, which management intends to use as part of its asset/liability strategy, or which may be sold in response to changes in interest rates, changes in prepayment risk, increases in capital requirements, or other similar factors, are classified as available-for-sale and are recorded at their estimated fair value on the consolidated balance sheet. Changes in unrealized gains and losses for such securities, net of tax, are reported in accumulated other comprehensive income as a separate component of shareholders’ equity and are excluded from the determination of net income. Investment securities which have stated maturities for which the Company has the intent and ability to hold until the maturity date are classified as held-to-maturity and are recorded at amortized cost on the consolidated balance sheet.

Transfers of debt securities into the held-to-maturity category from the available-for-sale category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income and in the carrying value of the held-to-maturity securities. Such amounts are amortized over the remaining life of the security. Debt securities originally classified as available-for-sale and which have been subsequently reclassified as held-to-maturity are recorded at carrying value on the consolidated balance sheet. The carrying value of reclassified securities represents their amortized cost as well as any remaining unamortized unrealized holding gain or loss.

Interest from debt securities is recognized in interest income inclusive of adjustments for amortization of purchase premiums and accretion of purchase discounts using the interest method. Dividends from investments in equity securities are accrued in interest income in the consolidated statement of income when they are declared. Gains or losses from the disposition of investment securities are recognized at the trade date as non-interest income in the consolidated statement of income, based on the net proceeds and cost of the securities sold, adjusted for amortization of premiums and accretion of discounts, using the specific identification method.

    

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NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

When the fair value of an investment security is less than the carrying value, the security is considered to be impaired, and as such the Company reviews the security for the presence of other-than-temporary impairment ("OTTI"). This analysis is performed at least quarterly, and includes the consideration of numerous factors including the time period for which the fair
value has been less than the carrying value, curtailment or suspension of dividends or cash flows, deterioration of financial performance or the creditworthiness of the issuer, performance of any underlying collateral, and negative trends in a particular industry or sector. The conclusion as to whether OTTI exists for an investment security is ultimately based upon the Company’s evaluation of the investment’s recoverability above its carrying value and its timing. In addition, the Company considers whether it plans to sell an investment security and whether it may be required to sell the security prior to recovery of its carrying value.

When the Company concludes an investment security is other-than-temporarily impaired, a loss for the difference between the investment security’s carrying value and the fair value is recognized as a reduction to non-interest income in the consolidated statement of income. For an investment in a debt security, if the Company does not intend to sell the investment security and concludes that it is not more likely than not it will be required to sell the security before recovering the carrying value, which may be maturity, the OTTI charge is separated into the "credit" and "other" components. The "other" component of the OTTI is included in other comprehensive income, net of the tax effect, and the "credit" component of the OTTI is included in the consolidated statement of income as a reduction to non-interest income.

Other investments are comprised of Federal Home Loan Bank ("FHLB") of Pittsburgh stock and Federal Reserve Bank stock. Federal Reserve Bank stock is an equity interest in the Philadelphia Federal Reserve Bank that is required of member banks. The required subscription for Federal Reserve Bank stock is equal to 6% of National Penn Bank’s capital and surplus. The stock is not transferable and additional purchases or cancellations of the stock are transacted directly with the Federal Reserve Bank of Philadelphia. FHLB stock is an equity interest that can be sold only to the issuing FHLB at its par value. Because ownership of these securities is restricted, they do not have a readily determinable fair value. As such, the Company’s other investments are recorded at cost or par value and are evaluated for impairment each reporting period by considering the ultimate recoverability of the investment rather than temporary declines in value.  The Company’s evaluation primarily includes an evaluation of liquidity, capitalization, operating performance, commitments, and regulatory or legislative events.

Loans and Leases

Loans that management has the intent to hold for the foreseeable future or until maturity or payoff are considered held for investment and are reported at the amount of unpaid principal, net of unearned income, unamortized deferred fees and origination costs, and commitment fees. The Company also estimates an allowance for loan losses, which is netted from the carrying amount of loans presented on the consolidated balance sheet. Interest on loans is calculated based upon the principal amount outstanding. Net deferred fees on Company originated loans, consisting of origination and commitment fees and direct loan origination costs, are amortized over the contractual life of the related loans using the interest method, which results in an adjustment of the related loan’s yield.

Loans are placed on non-accrual status and accrual of interest is suspended on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of all contractually required payments is no longer probable. When a loan is on non-accrual status, payments are applied in their entirety to principal. If a borrower’s financial condition improves to the point where management believes that collection of the remaining principal and interest is probable, management may restore the loan to accrual status, at which time payments received are applied to both principal and interest and recognition of interest income continues. Generally, loans are placed on non-accrual status when they reach 90 days past due based on the contractual terms of the loan agreement.

Direct financing leases are carried at the aggregate of the lease payments plus the estimated residual value of the leased property, net of unearned income and deferred initial direct costs. Interest income on leases is recognized using the interest method over the lease term, which incorporates amortization of deferred initial direct costs as an adjustment to the lease’s yield. Residual values for leases are reviewed for impairment at least annually based upon historical performance, independent appraisals, and industry data. Valuation adjustments to residual values are included in other operating expenses within non-interest expense in the consolidated statement of income. Gains or losses from the sale of leased assets are also included in other operating income within non-interest income in the statement of income.

68
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Equipment underlying leases to customers for which a sale to the lessee is not implied or imminent is reported on the consolidated balance sheet within premises and equipment and is depreciated over its useful life. In the event that the lessee fails to meet a contractual leasing obligation, the remaining carrying value is considered a non-performing asset, including any underlying equipment which may be repossessed.

Purchased Loans
 
Purchased loans are initially recorded at their acquisition date fair values. Fair values for purchased loans are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, default rates, loss severity, collateral values, discount rates, payment speeds, prepayment risk, and liquidity risk. No allowance for loan losses is recognized at the date of acquisition for purchased loans.
 
Purchased loans which have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are considered to be “purchased credit impaired loans.” Purchased credit impaired (PCI) loans are initially recorded at fair value. The amount of expected cash flows that exceed the initial investment in the loan represent the accretable yield, which is recognized as interest income on a level-yield basis over the life of the loan. The excess of total contractual cash flows over the cash flows expected at acquisition is considered the non-accretable difference and is not recognized as a yield adjustment, loss accrual or valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loans over their remaining lives. Decreases in expected cash flows due to an inability to collect contractual cash flows are recognized as impairment through the provision for loan losses. Any allowance for loan losses on these loans reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received). Any disposals of loans, including sales of loans, payments in full or foreclosures result in the derecognition of the loan at its carrying value with differences in actual results reflected in interest income.
 
Premiums and discounts related to purchased loans which did not have evidence of credit quality deterioration since origination at acquisition are included or netted with the balance of unpaid principal on the consolidated balance sheet and are also deferred and amortized over the contractual life of the loan using the interest method. Subsequent to the acquisition or purchase date, the method used to evaluate the sufficiency of the credit discount is similar to originated loans, and if necessary, additional reserves are recognized in the allowance for loan losses.

Loans Held-For-Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value on the consolidated balance sheet, and these loans are traditionally sold servicing released. The fair value of loans held-for-sale is estimated based upon the contractually agreed upon sales price to investors. Write-downs to fair value, if any, are reflected through a valuation allowance netted from the cost basis of the loans on the consolidated balance sheet and a related expense recorded as a reduction to mortgage banking income in the consolidated statement of income. At disposition, the difference between the net proceeds received and the carrying value of the loan is recorded as a gain or loss within mortgage banking income in the consolidated statement of income. Estimated credit losses, if any, on loans transferred to held-for-sale, which management previously intended to hold for investment, are charged to the allowance at the time of transfer. Non-credit related losses, if any, or subsequent gains or losses upon disposition are recorded in other operating income within non-interest income on the consolidated statement of income. Valuations of non-mortgage loans transferred to held-for-sale are performed on an individual basis.


69
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Non-Performing Assets

Assets which are otherwise considered earning assets may cease to perform according to their original terms and become non-performing assets. The Company’s non-performing assets consist of non-accrual loans, loans defined as troubled debt restructurings, and other real estate owned. On an ongoing basis, the Company monitors economic conditions and reviews borrower financial results, collateral values, and compliance with payment terms and covenant requirements in order to identify problems in loan relationships. All problem loans are reviewed regularly for impairment. When management believes that the collection of all or a portion of principal and interest is no longer probable, the accrual of interest is suspended, and payments for interest are applied to principal until the Company determines that all remaining principal and interest can be recovered. This may occur at any time regardless of delinquency status, however, loans 90 days or more past due are reviewed monthly to determine whether the accrual of interest should continue. Loans for which the accrual of interest has been suspended are categorized as non-accrual loans.

Through negotiations with a borrower, the Company may restructure a loan prior to or at its contractual maturity. Modification of a loan’s terms constitutes a troubled debt restructuring ("TDR") if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession that it would not otherwise consider. The Company restructures loans in an attempt to preserve or improve the economic recovery of principal and/or interest due from a borrower. Not all modifications of loan terms automatically result in a TDR, only modifications which are concessions (terms not otherwise attainable) to a borrower experiencing financial distress constitute TDRs. TDRs are disclosed as "restructured loans". TDRs and non-accrual loans comprise the Company’s impaired loans which are evaluated individually for purposes of determining the allowance for loan losses.

Other real estate owned ("OREO") results from the acquisition of real estate through foreclosure, abandonment, or conveyance of deed in lieu of foreclosure of a loan. OREO is carried on the consolidated balance sheet within OREO and other repossessed assets at the estimated fair value of the real estate less expected costs to sell at the acquisition date. Any loss upon reclassification from loans to OREO is recognized as a charge to the allowance for loan losses. During the holding period, OREO continues to be measured at the lower of its carrying amount or estimated fair value less costs to sell, and any valuation adjustment and gains or losses upon disposition are recognized within other operating income within non-interest income in the consolidated statement of income. OREO is evaluated individually rather than as a group, unless the circumstances render the group measurement to be a more appropriate basis as determined by management.

Significant Concentrations of Credit Risk

Most of the Company’s activities are with customers located throughout eastern and central Pennsylvania. The Company’s commercial portfolio has a concentration in loans to commercial real estate investors and developers as defined by regulation. There are numerous risks associated with commercial loans that could impact the borrower’s ability to repay on a timely basis. They include, but are not limited to: the owner’s business expertise; changes in local, national, and in some cases international economies; competition; governmental regulation; and the general financial stability of the borrowing entity.

The Company attempts to mitigate these risks by completing an analysis of the borrower’s business and industry history, the borrower’s financial position, as well as that of the business owner. The Company will also require the borrower to periodically provide financial information on the operation of the business over the life of the loan. In addition, most commercial loans are secured by assets of the business or those of the business owner, which can be liquidated if the borrower defaults, along with the personal surety of the business owner.

Allowance for Loan Losses

Management conducts an analysis of the loan portfolio to estimate the amount of the allowance for loan losses ("allowance") which is adequate to absorb inherent losses incurred on existing loans. The allowance is established through a provision for loan losses charged as an expense in the consolidated statement of income. Loans are charged-off to the allowance when management believes that the collectability of the principal is less than probable and sufficient information exists to make a reasonable estimate of the loss or a loss event has been confirmed.

    

70
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

The evaluation of the adequacy of the allowance includes an analysis of individual loans and groups of homogeneous loans. Loans in the portfolio are segregated by risk characteristics. This is primarily accomplished by separating loan types as well as loan risk designations including, but not limited to: loans classified as Substandard or Doubtful as defined by regulation; loans criticized internally or designated as Special Mention; and loans specifically identified by management as impaired.
 
The analysis of individual loans and analytical processes performed by management in the calculation of the allowance is ongoing, and adjustments may be made based on the assessment of internal and external influences on credit quality. Those influences include, but are not limited to: unemployment, delinquency and non-accrual rates, trends in loan volume, portfolio growth, portfolio concentrations, Board and loan review oversight, exceptions to policy, competition and other external factors, and/or changes in value of collateral dependent loans.

The Company evaluates economic conditions and reviews borrower financial results, collateral values, and compliance with contractual payment terms and covenant requirements in order to monitor loan relationships. A classified loan is one which is paying as agreed, but based upon management’s analysis is determined to be inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the Company will
sustain some loss if the deficiencies are not corrected. All classified loans are evaluated to determine whether they are non-performing or whether it is probable they will become non-performing, based on facts and circumstances.

When management believes that the collection of all or a portion of principal and interest is no longer probable, the loan is placed on non-performing status, accrual of interest is suspended, and payments for interest are applied to principal until the Company determines that all remaining principal and interest can be recovered. This may occur at any time regardless of delinquency, however, loans 90 days or more past due are reviewed monthly to determine whether the accrual of interest should continue. Because all or a portion of the contractual cash flows are not expected to be collected in accordance with the underlying loan agreements, the loan is considered to be impaired, and the Company estimates and records impairment based upon the present value of the expected cash flows it will be able to collect.

Values of collateral securing customer loans are confirmed through regular updates and reviews, but at a minimum are updated every twelve months for all loans designated as Special Mention or Classified, every six to nine months for land loans. During the period between appraisal order and completion, management makes an estimate of collateral values based on available market information and other recent appraisal results.

Specific Reserves

Specific reserves are an estimation of losses specific to individual impaired loans. All non-performing and restructured loans are evaluated to determine the amount of specific reserve or the required charge-off, if any, to reduce the current carrying value of the individual loan to its net realizable value based on an analysis of the available sources of repayment, including liquidation of collateral. The net realizable value is estimated as the present value of expected future cash flows discounted at the loan’s effective interest rate, the observable market price if the loan is expected to be sold, or, if collateral dependent, the estimated fair value of the collateral less costs to sell based on recent appraisals. A specific reserve may be established instead of a charge-off when sufficient information exists to make a reasonable estimate of the loss but where a loss event has not yet been confirmed. While every impaired loan is individually evaluated, not every impaired loan requires a specific reserve. Specific reserves fluctuate based on changes in the collectability of underlying loans and any previously recorded charge-offs. A confirmed loss event could be a payment delinquency of typically 90 days or greater, bankruptcy, fraud, death, or defunct status of a business, project or development. Impaired loans are excluded from the calculation of allocated reserves as described below.

Charge-offs

Commercial and industrial loans are charged-off in whole or in part when they become 90 or more days delinquent based upon the terms of the underlying loan contract and when full collectability of the principal balance is no longer probable. Because all or a portion of the contractual cash flows are not expected to be collected, the loan is considered to be impaired, and the Company estimates and records impairment based upon the present value of the expected cash flows it will be able to collect. Loans in bankruptcy and loans to defunct businesses are charged-off to the estimated fair value of collateral, less costs to sell.


71
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Commercial real estate loans are charged-off in whole or in part when they become 90 or more days delinquent based upon the terms of the underlying loan contract and when a collateral deficiency exists. Because all or a portion of the contractual cash flows are not expected to be collected, the loan is considered to be impaired, and the Company estimates and records impairment based upon the expected cash flows it will be able to collect, which is generally from the liquidation of the pledged collateral. Loans in bankruptcy and loans to defunct projects or development businesses are charged-off to the estimated fair value of collateral, less costs to sell.

Consumer loans are charged-off when they become non-performing, which is when they become 90 days or more past due. At that time, the amount of the estimated collateral deficiency, if any, is charged-off for loans secured by collateral, all other loans are charged-off in full. Loans in which the borrower is in bankruptcy are charged-off within 60 days of receipt of notification of the bankruptcy filing or within the timeframes specified in policy, whichever is shorter, unless it can be established that repayment is likely to occur. Loans with collateral are charged-down to the estimated fair value of collateral, less costs to sell.

Allocated Reserves

Allocated reserves represent an allowance for groups of homogeneous loans which are similar in nature and as such are not individually evaluated for impairment. Allocated reserves are applied to both the non-criticized and criticized and classified portions of each portfolio. The Company segregates the loan portfolio into strata based upon risk characteristics which reflect the behavior and performance of the underlying loans.

Classified and criticized loans are stratified based upon underlying loan types and characteristics and are separately evaluated to determine the amount of reserve considered adequate. Loss factors are based on the loan type, performance trends, portfolio characteristics, risk, and assigned ratings.
    
For pass-rated loans, an estimate of inherent loss is made by applying portfolio-specific environmental and historical loss factors to the period-end balances of each loan category. Environmental factors are applied in addition to historical loss factors to reflect trends which management believes are not fully incorporated in historical net charge-off ratios. Environmental factors include: unemployment, delinquency and non-accrual rates, trends in loan volume and portfolio growth, portfolio concentrations, Board and loan review oversight, exceptions to policy, experience of management, competition and other external factors, and changes in the fair value of collateral dependent loans. A historical loss factor is generated using actual losses for the preceding twelve quarters from the current quarter end. The loss percentages are weighted to utilize the most relevant and current loss experience.

Unallocated Reserve

The unallocated reserve addresses inherent losses not included elsewhere in the allowance. It represents an element in the adequacy of the allowance given the nature of the calculation and the inherent imprecision and uncertainty as to estimated losses. In the fourth quarter of 2015, the Company refined its process for estimating the allowance for loan losses and allocated the previously unallocated reserve to the various loan portfolio segments.

Premises and Equipment

Land is stated at cost. Buildings, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization which is generally computed on a straight-line basis over the estimated useful life of the asset. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated economic life or the lease term. Depreciation and amortization expense for premises and equipment is included in premises and equipment expense in the consolidated statement of income.

The Company leases certain premises and equipment under non-cancellable operating leases. Certain leases contain renewal options and rent escalation clauses calling for rent increases over the term of the lease. Rental expense for all leases which contain escalation clauses are accounted for on a straight-line basis over the lease term.

Expenses for maintenance and repairs are recorded in premises and equipment expense in the consolidated statement of income as they are incurred.


72
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Accrued Interest Receivable    

The Company records interest income on interest earning assets on the accrual basis which results in the recognition of interest income recorded in the consolidated statement of income before it is received. The consolidated balance sheet includes the amount of interest earned on the accrual basis of accounting but not yet received as of the date presented. The balance is primarily comprised of interest earned on loans to customers and dividends and interest on investment securities.

Bank Owned Life Insurance

The Company invests in bank owned life insurance ("BOLI") policies that provide earnings to help cover the cost of employee benefit plans. The Company is the owner and beneficiary of the life insurance policies it purchased directly on a chosen group of employees or it obtained through acquisitions of other institutions that previously purchased the policies. The policies are carried on the Company’s consolidated balance sheet at their cash surrender value and are subject to regulatory capital requirements. The determination of the cash surrender value includes a full evaluation of the contractual terms of each policy and assumes the surrender of policies on an individual-life by individual-life basis. Additionally, the Company
periodically reviews the creditworthiness of the insurance companies that have underwritten the policies. Earnings accruing to the Company are derived from the general account investments of the insurance companies. Increases in the net cash surrender value of BOLI policies and insurance proceeds received are not taxable and are recorded in non-interest income in the consolidated statement of income.

Goodwill and Other Intangible Assets

Goodwill is recognized for the excess of the purchase price over the estimated fair value of acquired net assets in a business combination. Goodwill is not amortized but is reviewed for potential impairment on at least an annual basis, which the Company performs during the second quarter of each year. The Company has the option of performing a qualitative assessment to determine whether it is more likely than not that the fair value of one of the Company’s identified reporting units is less than its carrying value. If the results of the qualitative assessment indicate the potential for impairment, the Company would perform the two-step goodwill impairment analysis.

In performing the two-step goodwill impairment analysis, if necessary, the estimated fair value of each reporting unit is compared to its carrying value, inclusive of the goodwill assigned to it. If the carrying value of a reporting unit exceeds the estimated fair value, an indicator of goodwill impairment exists and a second step is performed to determine if any goodwill impairment exists. In the second step, the Company calculates the implied value of goodwill by emulating a business combination for each reporting unit. This step subtracts the estimated fair value of net assets in the reporting unit from the step one estimated fair value to determine the implied value of goodwill. If the implied value of goodwill exceeds the carrying value of goodwill allocated to the reporting unit, goodwill is not impaired, but if the implied value of goodwill is less than the carrying value of the goodwill allocated to the reporting unit, an impairment charge is recognized for the difference in the consolidated statement of income with a corresponding reduction to goodwill on the consolidated balance sheet. The Company’s business segments are its reporting units which are "Community Banking" and "Other" for purposes of the goodwill impairment analysis.

In performing its analysis of goodwill impairment, the Company makes significant judgments, particularly with respect to estimating the fair value of each reporting unit and if the second step is required, estimating the fair value of net assets. The Company evaluates each reporting unit and estimates a fair value as though it were an acquirer. The estimates utilize historical data, cash flows, and market and industry data specific to each reporting unit. Industry and market data is used to develop material assumptions such as transaction multiples, required rates of return, control premiums, costs and synergies of a transaction, and capitalization.
 
On an interim basis, the Company evaluates whether circumstances are present that could indicate potential impairment of its goodwill. These circumstances include, but are not limited to, prolonged trading value of the Company’s common stock relative to its book value, adverse changes in the business or legal climate, actions by regulators or loss of key personnel. When the Company determines that these or other circumstances are present, the Company tests the carrying value of goodwill for impairment at an interim date.

    

73
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Other intangible assets are specifically identified intangible assets created from a business combination. Core deposit intangibles represent the value of checking, savings and other acquired, low-cost deposits. Core deposit intangibles are amortized over the lesser of the estimated lives of deposit accounts or ten years on an accelerated basis. Decreases in deposit lives may result in increased amortization and/or an impairment charge. Other intangible assets also include customer lists and covenants not to compete. These assets are amortized over the lesser of their contractual life or estimated economic life on a straight-line basis.

Unconsolidated Investments Under the Equity Method

The Company invests in partnerships and other non-consolidated businesses and, depending upon the nature and/or ownership interest held, may elect to account for these investments using the equity method. The Company’s proportionate share of income or loss on equity method investments is recorded in non-interest income in the consolidated statement of income using the accrual basis of accounting. Cash received by the Company for dividends or distributions on these investments reduces the carrying value of the equity method investment on the consolidated balance sheet. These investments are reviewed at least annually for other-than-temporary declines below the investment’s carrying value. Consideration is given to a number of variables, including any expected tax credits or other similar benefits from each investment. Impairment charges are recorded as a reduction to the investment’s carrying value on the consolidated balance sheet and to non-interest income in the consolidated statement of income.

Repurchase Agreements

The Company’s repurchase agreements are secured borrowing transactions collateralized by investment securities. The Company sells investment securities to counterparties for cash with an agreement to repurchase the exact or substantially the same securities at a specified date. On the trade date, the Company records a liability on the consolidated balance sheet for the amount for which securities will be subsequently reacquired, including accrued interest, based upon the contractual term of the transaction. Interest expense from repurchase agreements is recognized on the accrual basis of accounting in the consolidated statement of income.

The securities underlying repurchase agreements are identified and disclosed as pledged for this purpose in the notes to the financial statements. The investment securities remain on the Company’s consolidated balance sheet and are accounted for consistent with the Company’s other investment securities available-for-sale. Repurchase agreements are satisfied by the payment of cash from the Company to the counterparty at which time the securities identified in the transaction are no longer considered pledged.

Senior Long-term Debt

The Company's senior long-term debt consists of $125 million aggregate principal amount of unsecured, fixed rate senior notes issued on September 16, 2014, with a maturity date of September 30, 2024. The notes bear an annual fixed interest rate of 4.25%, and are payable, as to interest, on March 30th and September 30th of each year. Interest expense related to the notes is recognized on the accrual basis of accounting in the consolidated statement of income.

Issuance costs incurred in relation to the notes is being amortized over the life of the notes as an increase to interest expense in the consolidated statement of income using the interest method. The unamortized portion of the issuance costs is included within other assets on the consolidated balance sheet.

Subordinated Debentures

The Company has four established statutory business Trusts: NPB Capital Trust III, NPB Capital Trust IV, NPB Capital Trust V and NPB Capital Trust VI (“Trusts”). The Company owns all of the common capital securities of the Trusts. The Trusts issued preferred capital securities to investors and invested the proceeds in junior subordinated debentures issued by the Company. These debentures are the sole assets of the Trusts, which are considered variable interest entities. The Company is not the variable interest holder, and as such does not consolidate the Trusts. The liabilities to the Trusts are reflected as subordinated debentures on the Company’s consolidated balance sheet, and the common capital securities are included in other assets. Interest is paid on amounts borrowed from the Trusts and recorded in interest expense in the consolidated statement of income on the accrual basis of accounting.


74
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
    
Costs related to the issuance of subordinated debentures are being amortized over the life of the instruments as an increase to interest expense in the consolidated statement of income using the interest method. The unamortized portion of the issuance costs is included within other assets on the consolidated balance sheet.

The Company’s maximum exposure to the Trusts is $75 million, which is the Company’s liability to the Trusts.

Employee Benefit Plans

The Company accrues for benefits to employees and executive officers resulting from established plans and other contracts which are generally non-contributory. The benefits associated with these arrangements and plans are earned over a service period, and the Company estimates the amount of expense applicable to each plan or contract and includes it in salaries, wages and employee benefits expense in the consolidated statement of income for each period. The estimated obligations for the plans and contracts are reflected as liabilities on the consolidated balance sheet. The determination of each obligation and the related expense is based upon formulas in plan documents or agreements, but also requires judgment on the part of the Company to determine the assumptions applied to each formula. In addition, for the non-contributory pension plan there are amounts included in accumulated other comprehensive income (loss) related to certain costs which require recognition over the course of several reporting periods.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recorded on the consolidated balance sheet for future tax events that arise from the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates. Changes in tax rates are recognized in the Company’s financial statements during the period they are enacted. When a deferred tax asset or liability, or a change thereto, is recorded on the consolidated balance sheet, deferred tax expense or benefit is recorded within the income tax expense line of the consolidated statement of income for purposes of determining the current period’s net income.

Deferred tax assets are recorded on the consolidated balance sheet at net realizable value. The Company periodically performs an assessment to evaluate the amount of deferred tax assets it is more likely than not to realize. The realization of deferred tax assets is dependent upon the amount of taxable income expected in future periods, as tax benefits require taxable income to be realized. If a valuation allowance is required, the deferred tax asset on the consolidated balance sheet is reduced via a corresponding income tax expense in the consolidated statement of income.

The Company recognizes the benefit of a tax position in the financial statements only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. For these analyses, the Company may engage attorneys to provide opinions related to certain positions. Any interest and penalties related to uncertain tax positions, when applicable, is recognized in income tax expense in the consolidated statement of income.

Financial Instruments with Off-Balance-Sheet Risk

The Company 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 and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, forward sale commitments, and interest rate swaps. Certain of those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

    

75
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments and contractual obligations as it does for on-balance-sheet instruments. For interest rate swaps, the contract or notional amounts do not represent exposure to credit loss, but rather the credit risk is consistent with the estimated fair value due from counterparties to these contracts. The Company controls the credit risk of its interest rate swap agreements through credit approvals, limits and monitoring procedures. The Company reflects its estimate of credit risk for these instruments (including unfunded commitments, letters of credit, and interest rate swaps) in other liabilities on the consolidated balance sheet with the corresponding expense recorded in other operating expenses in the consolidated statement of income.

Financial instruments that are derivatives are reported at estimated fair value within other assets or other liabilities on the consolidated balance sheet. An instrument is generally considered a derivative if it is based on one or more underlyings, no (or a minimal) initial net investment is required, and the contract can be net settled. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated or qualifying as hedges, the gain or loss is included in the determination of net income. For derivatives designated and qualifying as hedges, only the ineffective portion is included in the determination of net income, the effective portion is included in the determination of net income consistent with the hedged item.
 
The Company enters into interest rate swaps ("swaps") to facilitate customer transactions and meet their financing needs. These swaps are considered derivatives, but are not designated in hedging relationships. These instruments have interest rate and credit risk associated with them. To mitigate the interest rate risk, the Company enters into offsetting interest rate swaps with counterparties. The counterparty swaps are also considered derivatives and are also not designated in hedging relationships. Interest rate swaps are recorded within other assets or other liabilities on the consolidated balance sheet at their estimated fair value. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the consolidated statement of income.

The Company may enter into interest rate swap contracts in order to hedge its exposure to the variability of cash flows on certain floating-rate obligations. Cash flow hedges are intended to convert liabilities from a floating-rate instrument to a fixed-rate instrument. The Company’s intention is to design cash flow hedges to qualify for hedge accounting, and as such the estimated fair value of the hedge would be recorded either in other assets or other liabilities with an offset, after estimated taxes, recorded in accumulated other comprehensive income (loss). The ineffective portion of the hedging relationship would be recorded in other operating expenses in the consolidated statement of income. Amounts would be reclassified from accumulated other comprehensive income (loss) to interest expense in the consolidated statement of income during the period the hedged item affects earnings. Cash flows associated with the hedges are treated consistently with the cash flows of the hedged item during the period in which they occur.

The Company periodically enters into interest rate lock commitments with its mortgage loan customers whose loans are intended for sale after the loan is closed. These commitments are derivatives and, as such, are reported on the consolidated balance sheet at their estimated fair value. The Company’s methodology for estimating the fair value of these derivatives is based upon the change in pricing of mortgage-backed securities with similar interest rates and duration. To hedge the fair value risk associated with changing interest rates on these commitments, the Company enters into forward commitments to sell the loans. These hedges are economic hedges and are not designated in hedging relationships. The forward sale commitments are also derivatives and are recorded on the consolidated balance sheet at their estimated fair value. The Company’s methodology for valuing these derivatives is based upon the fair value of the closed loans and the change in fair value of the interest rate lock commitments, as previously described. The net change in the estimated fair value of the derivatives for commitments to customers and forward loan sale commitments during each period is recorded in mortgage banking income in the consolidated statement of income.

    

76
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

The Company estimates the fair value of letters of credit as the fees paid by the customer or charged for the arrangement. The fair value is recorded in other liabilities on the consolidated balance sheet, and subsequently, the income is recognized in other operating income within non-interest income in the consolidated statement of income over the contractual life of the instrument. If required to perform on a standby letter of credit, the Company records an amount due from the customer, which is recorded net of any unaccreted liability. Additional amounts estimated to be uncollectible, net of estimated proceeds from collateral, are charged-off against the appropriate allowance on the consolidated balance sheet.

Interest rate swap derivatives with the same counterparty and subject to master netting arrangements are not offset on the consolidated balance sheet. For additional detail refer to Footnote 14 within this section.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) ("AOCI") includes items that are subject to periodic measurement on the consolidated balance sheet but are not included in the determination of net income for the period in the consolidated statement of income. As such, amounts recorded in AOCI are on an after-tax basis and consist primarily of unrealized gains or losses on investment securities available-for-sale, unamortized unrealized gains or losses on investment securities reclassified from available-for-sale to held-to-maturity, and changes in pension obligations.

Share-Based Compensation

The Company has certain share-based employee and director compensation plans. The related share-based employee compensation is included in salaries, wages and employee benefits expense in the consolidated statement of income during the period in which it is earned. Share-based director compensation expense is included in other operating expense in the consolidated statement of income. The compensation cost for share-based compensation arrangements is determined based upon the estimated fair value of the award at the grant date and is recognized as an expense over the service period. Performance criteria for share-based awards are factored into the amount of expense recognized when applicable. The Company records tax benefits of share-based payments as a financing cash inflow and corresponding operating cash outflow in the consolidated statement of cash flows during the period in which they occur.

Option awards are granted with an exercise price at least equal to the market price of the Company’s stock at the date of grant. Option awards vest at such times as are determined by the Compensation Committee of the Board of Directors at the time of grant, but not before one year from the date of grant or later than five years from the date of grant. The options have a maximum term of ten years for incentive stock options or ten years, one month for non-qualified stock options.

The Company utilizes the Black-Scholes option valuation model to estimate the fair value of options granted.  The model is sensitive to changes in assumptions which can materially affect the fair value estimate:

•
The risk-free interest rates used are from published U.S. Treasury zero-coupon rates for bonds approximating the expected term of the option as of the option grant date;

•
The expected dividend yield is computed based on the Company’s current dividend rate; and

•
The Company relies exclusively on historical volatility as an input for determining the estimated fair value of stock options. The Company determines expected volatility based on the expected life of the option.

In determining the expected life of the option grants, the Company observes the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grants.

Share-based payments are also granted in the form of restricted stock awards or units. Restricted stock is granted with service criteria and may also include performance criteria. The fair value of each award is estimated based on the fair value of the Company’s common stock on the date of grant.

Share-based payment plans are further described in Footnote 18 within this section.


77
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Treasury Stock

Shares of the Company’s common stock which are repurchased on the open market are classified as treasury stock on the consolidated balance sheet. Treasury stock is recorded at the cost at which it was obtained in the open market, and at the date of reissuance, treasury stock on the consolidated balance sheet is reduced by the cost for which it was purchased using specific identification, on a first-in, first-out basis.

Earnings Per Share

Earnings per share is calculated on the basis of the weighted-average number of common shares outstanding during the year. All per share information in the financial statements is adjusted retroactively for the effect of stock dividends and splits.

Diluted shares and earnings per share take into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. The dilutive effect of stock options, warrants, and other instruments is calculated using the treasury stock method.

Recent Accounting Pronouncements

Troubled Debt Restructurings by Creditors

In January 2014, the FASB issued guidance to clarify when banks should reclassify mortgage loans collateralized by residential real estate properties from the loan portfolio to other real estate owned. The FASB defined an in-substance repossession or foreclosure to have occurred and a creditor is considered to have taken physical possession of residential real estate collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The effective date is for annual periods, and interim periods within those annual periods, beginning after December 15, 2014, with early adoption permitted. The adoption of this guidance did not have a material effect on the financial condition or results of operations of the Company.

In August 2014, the FASB issued a standard which will require creditors to derecognize certain foreclosed government-guaranteed mortgage loans and to recognize a separate other receivable that is measured at the amount the creditor expects to recover from the guarantor, and to treat the guarantee and the receivable as a single unit of account. The standard was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance did not have a material effect on the financial condition or results of operations of the Company.

Revenue from Contracts with Customers

The amendments in this update replaces the existing revenue recognition guidance, including most industry-specific revenue recognition guidance. The standard creates a single, principle-based revenue recognition framework and will require entities to apply significantly more judgment and expanded disclosures surrounding revenue recognition. The core principle requires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard applies to contracts with customers to provide goods and services, with certain exclusions such as lease contracts, financing arrangements, and financial instruments. The amendments in this standard are effective for fiscal years beginning after December 15, 2017. The amendments can be adopted using either the full retrospective approach or a modified retrospective approach. Early adoption is prohibited. The Company's does not expect this guidance to have a material impact on its financial position or results of operations.

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern

Issued in August 2014, this standard provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This standard is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. As this guidance only impacts disclosures, it will have no effect on the Company's financial position or results of operations.

    

78
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued a standard, which will significantly change the income statement impact of equity investments, and the recognition of changes in fair value of financial liabilities when the fair value option is elected.
The standard is effective for public business entities for interim and annual periods in fiscal years beginning after December 15, 2017.    

2. BUSINESS COMBINATIONS

BB&T Corporation

On August 17, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with BB&T Corporation, a North Carolina corporation (“BB&T”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, National Penn will merge with and into BB&T, with BB&T as the surviving corporation (the "Merger"). Immediately following the Merger, National Penn’s wholly owned bank subsidiary, National Penn Bank, will merge with and into BB&T’s wholly owned bank subsidiary, Branch Banking and Trust Company (the “Bank Merger”), with Branch Banking and Trust Company as the surviving bank in the Bank Merger. The Merger Agreement was unanimously approved by the Board of Directors of each of National Penn and BB&T.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), National Penn shareholders will have the right to receive for each share of National Penn common stock, without par value, at their election (subject to proration in the event cash or stock is oversubscribed) either (i) $13.00 in cash or (ii) 0.3206 of a share (the “Exchange Ratio”) of BB&T common stock, par value $5.00 per share (the “Merger Consideration”). At the closing of the Merger, 30% of the outstanding shares of National Penn common stock (including the National Penn restricted stock, restricted stock units and deferred stock units that have the same election rights as common stock), will be converted into the right to receive the cash consideration, with the remaining 70% converted into the right to receive the stock consideration.

The completion of the Merger is subject to customary conditions, including, (1) the adoption of the Merger Agreement by National Penn’s shareholders, (2) the authorization for listing on the New York Stock Exchange of the shares of BB&T common stock to be issued in the Merger, (3) the effectiveness of the registration statement on Form S-4 for the BB&T common stock to be issued in the Merger, (4) the absence of any order, injunction or other legal restraint preventing the completion of the Merger or the Bank Merger or making the consummation of the Merger or the Bank Merger illegal and (5) the receipt of required regulatory approvals, including the approval of the Federal Reserve Board, the Federal Deposit Insurance Corporation, the North Carolina Office of the Commissioner of Banks and the Pennsylvania Department of Banking. Each party’s obligation to complete the Merger is also subject to the following additional customary conditions: (1) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (2) performance in all material respects by the other party of its obligations under the Merger Agreement and (3) receipt by such party of an opinion from its counsel to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.

The SEC declared the registration statement on Form S-4 effective on October 23, 2015, the merger was approved by National Penn's shareholders on December 16, 2015, and all required regulatory approvals have been received. The merger is expected to close on or about April 1, 2016.

TF Financial Corporation

On October 24, 2014, the Company completed its acquisition of TF Financial Corporation ("TF Financial"), a savings and loan holding company, and its wholly-owned banking subsidiary, 3rd Fed Bank. Headquartered in Newtown, Pennsylvania, TF Financial operated eighteen branch offices in Pennsylvania and New Jersey and had acquisition date estimated fair values of approximately $801 million of assets, which included $595 million of loans, and $658 million of deposits. The assets and liabilities of TF Financial were recorded on National Penn's consolidated balance sheet at their preliminary estimated fair values as of October 24, 2014, the acquisition date, and TF Financial's results of operations have been included in National Penn's consolidated statements of income and comprehensive income since that date.

79
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

2. BUSINESS COMBINATIONS - Continued

The acquisition was valued at approximately $136 million, consisting of $58.4 million in cash and the issuance of 8,030,953 shares of the Company's common stock valued at $77.3 million, in exchange for 1,903,139 shares of TF Financial common stock.

The Company recorded $44.7 million in goodwill and $4.8 million in core deposit intangibles as a result of the acquisition. The amount of goodwill recorded reflects the excess purchase price over the estimated fair value of the net assets acquired. None of the goodwill is deductible for income tax purposes.

3. EARNINGS PER SHARE

The components of the Company’s basic and diluted earnings per share are as follows: 
(dollars in thousands, except per share data)
Year Ended December 31,
 
2015
 
2014
 
2013
Net income
$
110,691

 
$
98,706

 
$
53,387

Calculation of shares
 

 
 

 
 

Weighted average basic shares
140,889,264

 
141,281,690

 
145,602,670

Dilutive effect of share-based compensation
659,962

 
541,917

 
441,388

Weighted average fully diluted shares
141,549,226

 
141,823,607

 
146,044,058

Earnings per share
 

 
 

 
 

Basic
$
0.79

 
$
0.70

 
$
0.37

Diluted
$
0.78

 
$
0.70

 
$
0.37

    
The following stock options were excluded from the computation of earnings per share as they were anti-dilutive:
 
Year Ended December 31,
 
2015
 
2014
 
2013
Stock options
1,306,089

 
1,948,027

 
3,429,793



80
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

4. INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities at December 31, 2015 are summarized as follows:       

(dollars in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-Sale
 
 
 
 
 
 
 
 
State and municipal bonds
 
$
57,533

 
$
3,293

 
$
(26
)
 
$
60,800

Agency mortgage-backed securities/collateralized mortgage obligations (g)
 
1,600,607

 
11,731

 
(14,114
)
 
1,598,224

Corporate securities and other
 
3,556

 
143

 
(333
)
 
3,366

Marketable equity securities
 
3,583

 
2,887

 
(31
)
 
6,439

Total
 
$
1,665,279

 
$
18,054

 
$
(14,504
)
 
$
1,668,829

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying
Value (h)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Held-to-Maturity
 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
3,891

 
$
71

 
$
—

 
$
3,962

State and municipal bonds
 
473,737

 
19,413

 
(345
)
 
492,805

Agency mortgage-backed securities/collateralized mortgage obligations (g)
 
289,993

 
2,760

 
(873
)
 
291,880

Corporate securities and other
 
1,013

 
—

 
(7
)
 
1,006

Total
 
$
768,634

 
$
22,244

 
$
(1,225
)
 
$
789,653

 
 
 
 
 
 
 
 
 
(g) Includes U.S. Government sponsored agency securities.
 
 
 
 
 
 
 
 
(h) For securities which were transferred from the available-for-sale category to held-to maturity, the carrying value of the transferred securities represents their fair value at the date of transfer adjusted for subsequent amortization.  The carrying value of all other held-to-maturity securities represents their amortized cost.


81
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

4. INVESTMENT SECURITIES – Continued

At March 31, 2014, 240 available-for-sale debt securities, with an amortized cost basis of $492 million, a net unrealized loss of $4.1 million and a fair value of $488 million, were reclassified as held-to-maturity. Transfers of debt securities into the held-to-maturity category from the available-for-sale category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income and in the carrying value of the held-to-maturity securities. Such amounts are amortized over the remaining life of the security which will offset the effect on net interest income.

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities at December 31, 2014 are summarized as follows:
(dollars in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-Sale
 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
1,000

 
$
7

 
$
—

 
$
1,007

State and municipal bonds
 
63,674

 
4,488

 
(82
)
 
68,080

Agency mortgage-backed securities/collateralized mortgage obligations (g)
 
1,442,102

 
19,234

 
(9,875
)
 
1,451,461

Corporate securities and other
 
4,109

 
600

 
(348
)
 
4,361

Marketable equity securities
 
3,583

 
2,169

 
—

 
5,752

Total
 
$
1,514,468

 
$
26,498

 
$
(10,305
)
 
$
1,530,661

 
 
 
 
 
 
 
 
 
 
 
Carrying
Value (h)
 
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Fair Value
Held-to-Maturity
 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
3,869

 
$
55

 
$
—

 
$
3,924

State and municipal bonds
 
551,627

 
24,480

 
(63
)
 
576,044

Agency mortgage-backed securities/collateralized mortgage obligations (g)
 
364,100

 
5,098

 
(694
)
 
368,504

Non-agency collateralized mortgage obligations
 
1,446

 
21

 
(4
)
 
1,463

Total
 
$
921,042

 
$
29,654

 
$
(761
)
 
$
949,935

 
 
 
 
 
 
 
 
 
(g) Includes U.S. Government sponsored agency securities.
 
 
 
 
 
 
 
 
(h) For securities which were transferred from the available-for-sale category to held-to maturity, the carrying value of the transferred securities represents their fair value at the date of transfer adjusted for subsequent amortization.  The carrying value of all other held-to-maturity securities represents their amortized cost.

Gains and losses from sales of investment securities are as follows:
(dollars in thousands)
 
For the Year Ended December 31,
 
 
2015
 
2014
 
2013
Gains
 
$
—

 
$
142

 
$
54

Losses
 
—

 
(121
)
 
—

Net gains on sales of investment securities
 
$
—

 
$
21

 
$
54

 

82
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

4. INVESTMENT SECURITIES – Continued

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2015 and December 31, 2014, respectively.
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
(dollars in thousands)
 
No. of Securities
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
 
 
 
 
 
 
 
State and municipal bonds
 
54

 
$
29,606

 
$
(293
)
 
$
9,012

 
$
(78
)
 
$
38,618

 
$
(371
)
Agency mortgage-backed securities/collateralized mortgage obligations (g)
 
260

 
855,983

 
(7,423
)
 
238,924

 
(7,564
)
 
1,094,907

 
(14,987
)
Corporate securities and other
 
3

 
1,006

 
(7
)
 
1,165

 
(333
)
 
2,171

 
(340
)
Total debt securities
 
317

 
886,595

 
(7,723
)
 
249,101

 
(7,975
)
 
1,135,696

 
(15,698
)
Marketable equity securities
 
2

 
415

 
(31
)
 
—

 
—

 
415

 
(31
)
Total
 
319

 
$
887,010

 
$
(7,754
)
 
$
249,101

 
$
(7,975
)
 
$
1,136,111

 
$
(15,729
)
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
(dollars in thousands)
 
No. of Securities
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
 
 
 
 
 
 
 
State and municipal bonds
 
29

 
$
9,166

 
$
(47
)
 
$
10,572

 
$
(98
)
 
$
19,738

 
$
(145
)
Agency mortgage-backed securities/collateralized mortgage obligations (g)
 
123

 
250,975

 
(1,763
)
 
296,419

 
(8,806
)
 
547,394

 
(10,569
)
Corporate securities and other
 
3

 
1,010

 
(4
)
 
1,150

 
(348
)
 
2,160

 
(352
)
Total
 
155

 
$
261,151

 
$
(1,814
)
 
$
308,141

 
$
(9,252
)
 
$
569,292

 
$
(11,066
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(g) Includes U.S. Government sponsored agency securities.
 
 
 
 
 
 
 
 
 
 
 
The fair value of investment securities pledged as collateral are presented below:
(dollars in thousands)
 
December 31,
 
 
2015
 
2014
Deposits
 
$
982,872

 
$
1,043,175

Customer repurchase agreements
 
650,256

 
662,737

Other
 
56,186

 
70,837

Total
 
$
1,689,314

 
$
1,776,749



83
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

4. INVESTMENT SECURITIES – Continued

The specified values of investment securities, by contractual maturity, at December 31, 2015 are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(dollars in thousands)
Available-for-Sale
 
Held-to-Maturity
 
Amortized Cost
 
Fair
Value
 
Carrying Value
 
Fair
Value
Due in one year or less
$
7,196

 
$
7,373

 
$
1,633

 
$
1,636

Due after one through five years
50,593

 
53,968

 
20,609

 
20,975

Due after five through ten years
166,477

 
172,055

 
264,019

 
274,632

Due after ten years
1,437,430

 
1,428,994

 
482,373

 
492,410

Marketable equity securities
3,583

 
6,439

 
—

 
—

Total
$
1,665,279

 
$
1,668,829

 
$
768,634

 
$
789,653


Evaluation of Impairment of Securities

The Company did not record any other-than-temporary impairment ("OTTI") losses for the years ended December 31, 2015, 2014 and 2013.

As of December 31, 2015 and 2014, accumulated other comprehensive income does not include any impairment related charges for the non-credit-related components of OTTI.

The majority of the investment portfolio is comprised of U.S. Government Agency securities (mortgage-backed and collateralized mortgage obligations) and state and municipal bonds. For the investment securities in an unrealized loss position, the Company has concluded, based on its analysis, that the unrealized losses are primarily caused by the movement of interest rates, and the contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment.

At December 31, 2015, gross unrealized losses totaled $15.7 million, and the gross unrealized losses of securities in an unrealized loss position for twelve months or longer totaled $8.0 million, of which $7.6 million is attributable to agency mortgage-backed securities and collateralized mortgage obligations and $0.3 million is attributable to corporate securities and other.  The Company evaluates a variety of factors in concluding whether securities are other-than-temporarily impaired.  These factors include, but are not limited to, the type and purpose of the bond, the underlying rating of the bond issuer, and the presence of credit enhancements (i.e. state guarantees, municipal bond insurance, collateral requirements, etc.). As a result of its review and considering the attributes of the individual securities, the Company concluded that the securities were not other-than-temporarily impaired.

Because the Company does not intend to sell these investments and it is not more likely than not it will be required to sell these investments before a recovery of carrying value, which may be maturity, the Company does not consider the securities in an unrealized loss position for twelve months or longer to be other-than-temporarily impaired.

Other securities on the Company’s consolidated balance sheet totaled $65.6 million and $67.5 million as of December 31, 2015 and December 31, 2014, respectively. The balance includes Federal Loan Home Bank ("FHLB") of Pittsburgh stock and Federal Reserve Bank stock. These securities lack a market, and as such they are carried at par/cost since their fair value is not readily determinable. The Company evaluates, and will continue to evaluate, these securities for impairment each reporting period and has concluded the carrying value of these securities is not impaired. During 2015, the FHLB of Pittsburgh and the Federal Reserve Bank repurchased an additional $1.9 million, net, of capital stock from the Company at par/cost. Also, during 2015 and 2014 the Company received and recorded dividends on its FHLB stock.

84
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

5. LOANS

The following table summarizes loans outstanding, net of unearned income:
December 31, 2015

(dollars in thousands)
Originated Loans
 
Acquired Loans
 
Total
Commercial and industrial
$
2,649,322

 
$
45,825

 
$
2,695,147

 
 
 
 
 
 
CRE - permanent
1,190,577

 
99,495

 
1,290,072

CRE - construction
143,095

 
5,438

 
148,533

Commercial real estate
1,333,672

 
104,933

 
1,438,605

 
 
 
 
 
 
Residential mortgages
655,457

 
205,907

 
861,364

Home equity
806,041

 
101,173

 
907,214

All other consumer
292,776

 
93

 
292,869

Consumer
1,754,274

 
307,173

 
2,061,447

 
 
 
 
 
 
Loans
$
5,737,268

 
$
457,931

 
$
6,195,199



December 31, 2014
 
(dollars in thousands)
Originated Loans
 
Acquired Loans
 
Total
Commercial and industrial
$
2,548,438

 
$
51,429

 
$
2,599,867

 
 
 
 
 
 
CRE - permanent
1,092,006

 
137,312

 
1,229,318

CRE - construction
196,554

 
6,988

 
203,542

Commercial real estate
1,288,560

 
144,300

 
1,432,860

 
 
 
 
 
 
Residential mortgages
654,617

 
253,740

 
908,357

Home equity
783,248

 
130,582

 
913,830

All other consumer
287,224

 
141

 
287,365

Consumer
1,725,089

 
384,463

 
2,109,552

 
 
 
 
 
 
Loans
$
5,562,087

 
$
580,192

 
$
6,142,279


The carrying value of acquired loans is inclusive of a net fair value adjustment of $3.9 million and $5.0 million at December 31, 2015 and December 31, 2014, respectively. The net fair value adjustment is evaluated periodically to assess its adequacy. At December 31, 2015, the net fair value adjustment was determined to be adequate and will continue to be accreted to interest income over the remaining life of the related portfolio.

At December 31, 2014, the carrying value of the Company's purchased credit-impaired ("PCI") loan portfolio was $7.6 million. During 2015, all but one loan from the PCI portfolio was resolved through settlements and/or sales, and at December 31, 2015, the carrying value of the PCI portfolio was $0.2 million, inclusive of $0.2 million fair value adjustment. The Company will continue to evaluate the credit performance of the PCI loan portfolio and its potential resolution.



85
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

5. LOANS - Continued

The following tables present classifications for originated loans:

December 31, 2015
Performing
 
Non-Performing
 
 
(dollars in thousands)
Pass Rated
 
Special Mention
 
Classified
 
 
Total
Commercial and industrial
$
2,571,866

 
$
16,625

 
$
55,690

 
$
5,141

 
$
2,649,322

 
 
 
 
 
 
 
 
 
 
CRE - permanent
1,169,024

 
6,758

 
8,433

 
6,362

 
1,190,577

CRE - construction
135,908

 
244

 
1,686

 
5,257

 
143,095

Commercial real estate
1,304,932

 
7,002

 
10,119

 
11,619

 
1,333,672

 
 
 
 
 
 
 
 
 
 
Residential mortgages
639,341

 
—

 
508

 
15,608

 
655,457

Home equity
799,707

 
—

 
472

 
5,862

 
806,041

All other consumer
287,753

 
—

 
3,756

 
1,267

 
292,776

Consumer
1,726,801

 
—

 
4,736

 
22,737

 
1,754,274

 
 
 
 
 
 
 
 
 
 
Originated loans
$
5,603,599

 
$
23,627

 
$
70,545

 
$
39,497

 
$
5,737,268

 
 
 
 
 
 
 
 
 
 
Percent of originated loans
97.67
%
 
0.41
%
 
1.23
%
 
0.69
%
 
100.00
%
 
 
 
 
 
 
 
 
 
 
December 31, 2014
Performing
 
Non-Performing
 
 

(dollars in thousands)
Pass Rated
 
Special Mention
 
Classified
 
 
Total
Commercial and industrial
$
2,431,251

 
$
24,129

 
$
70,765

 
$
22,293

 
$
2,548,438

 
 
 
 
 
 
 
 
 
 
CRE - permanent
1,065,916

 
4,351

 
13,307

 
8,432

 
1,092,006

CRE - construction
182,554

 
701

 
5,186

 
8,113

 
196,554

Commercial real estate
1,248,470

 
5,052

 
18,493

 
16,545

 
1,288,560

 
 
 
 
 
 
 
 
 
 
Residential mortgages
640,344

 
—

 
314

 
13,959

 
654,617

Home equity
778,611

 
—

 
335

 
4,302

 
783,248

All other consumer
280,975

 
—

 
4,256

 
1,993

 
287,224

Consumer
1,699,930

 
—

 
4,905

 
20,254

 
1,725,089

 
 
 
 
 
 
 
 
 
 
Originated loans
$
5,379,651

 
$
29,181

 
$
94,163

 
$
59,092

 
$
5,562,087

 
 
 
 
 
 
 
 
 
 
Percent of originated loans
96.73
%
 
0.52
%
 
1.69
%
 
1.06
%
 
100.00
%

Loans include overdrafts of $0.8 million at December 31, 2015 and $1.0 million at December 31, 2014.

Unamortized loan origination costs, net of fees, were $9.5 million and $7.2 million at December 31, 2015 and 2014, respectively, and are included in the stated balance of loans on the Company's balance sheets.




86
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

5. LOANS - Continued

The following tables present classifications for acquired loans:

December 31, 2015
Performing
 
 
 
 
 
 
(dollars in thousands)
Pass Rated
 
Special Mention
 
Classified
 
Non-Performing
 
PCI
 
Total
Commercial and industrial
$
42,904

 
$
—

 
$
2,554

 
$
367

 
$
—

 
$
45,825

 
 
 
 
 
 
 
 
 
 
 
 
CRE - permanent
94,800

 
1,438

 
2,711

 
353

 
193

 
99,495

CRE - construction
5,438

 
—

 
—

 
—

 
—

 
5,438

Commercial real estate
100,238

 
1,438

 
2,711

 
353

 
193

 
104,933

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages
204,526

 
—

 
—

 
1,381

 
—

 
205,907

Home equity
100,827

 
—

 
—

 
346

 
—

 
101,173

All other consumer
93

 
—

 
—

 
—

 
—

 
93

Consumer
305,446

 
—

 
—

 
1,727

 
—

 
307,173

 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
$
448,588

 
$
1,438

 
$
5,265

 
$
2,447

 
$
193

 
$
457,931

 
 
 
 
 
 
 
 
 
 
 
 
Percent of acquired loans
97.96
%
 
0.31
%
 
1.15
%
 
0.54
%
 
0.04
%
 
100.00
%

    

December 31, 2014
Performing
 
 
 
 
 
 
(dollars in thousands)
Pass Rated
 
Special Mention
 
Classified
 
Non-Performing
 
PCI
 
Total
Commercial and industrial
$
49,091

 
$
697

 
$
418

 
$
—

 
$
1,223

 
$
51,429

 
 
 
 
 
 
 
 
 
 
 
 
CRE - permanent
122,952

 
7,840

 
1,409

 
—

 
5,111

 
137,312

CRE - construction
6,931

 
—

 
—

 
—

 
57

 
6,988

Commercial real estate
129,883

 
7,840

 
1,409

 
—

 
5,168

 
144,300

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages
252,454

 
—

 
31

 
—

 
1,255

 
253,740

Home equity
130,552

 
—

 
30

 
—

 
—

 
130,582

All other consumer
141

 
—

 
—

 
—

 
—

 
141

Consumer
383,147

 
—

 
61

 
—

 
1,255

 
384,463

 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
$
562,121

 
$
8,537

 
$
1,888

 
$
—

 
$
7,646

 
$
580,192

 
 
 
 
 
 
 
 
 
 
 
 
Percent of acquired loans
96.88
%
 
1.47
%
 
0.33
%
 
—
%
 
1.32
%
 
100.00
%

87
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

5. LOANS - Continued

The following table represents the details for past due loans:
 
December 31, 2015
Past Due and Still Accruing
 
Accruing Current Balances
 
PCI Loans
 
Non-Accrual
Balances (j)
 
Total Balances
(dollars in thousands)
30-59 Days
 
60-89 Days
 
90 Days or
More (i)
 
Total
 
 
 
 
Commercial and industrial
$
754

 
$
477

 
$
—

 
$
1,231

 
$
2,688,780

 
$
—

 
$
5,136

 
$
2,695,147

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE - permanent
226

 
634

 
—

 
860

 
1,282,978

 
193

 
6,041

 
1,290,072

CRE - construction
—

 
—

 
—

 
—

 
143,276

 
—

 
5,257

 
148,533

Commercial real estate
226

 
634

 
—

 
860

 
1,426,254

 
193

 
11,298

 
1,438,605

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages
4,837

 
2,387

 
26

 
7,250

 
843,754

 
—

 
10,360

 
861,364

Home equity
3,758

 
1,350

 
471

 
5,579

 
896,983

 
—

 
4,652

 
907,214

All other consumer
3,281

 
852

 
1,210

 
5,343

 
286,345

 
—

 
1,181

 
292,869

Consumer
11,876

 
4,589

 
1,707

 
18,172

 
2,027,082

 
—

 
16,193

 
2,061,447

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
$
12,856

 
$
5,700

 
$
1,707

 
$
20,263

 
$
6,142,116

 
$
193

 
$
32,627

 
$
6,195,199

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percent of loans
0.21
%
 
0.09
%
 
0.03
%
 
0.33
%
 
 

 
—
%
 
0.53
%
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
Past Due and Still Accruing
 
Accruing Current Balances
 
PCI Loans
 
Non-Accrual
Balances (j)
 
 
(dollars in thousands)
30-59 Days
 
60-89 Days
 
90 Days or More (i)
 
Total
 
 
 
 
Total Balances
Commercial and industrial
$
738

 
$
369

 
$
137

 
$
1,244

 
$
2,575,469

 
$
1,223

 
$
21,931

 
$
2,599,867

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE - permanent
2,052

 
286

 
57

 
2,395

 
1,213,897

 
5,111

 
7,915

 
1,229,318

CRE - construction
425

 
—

 
—

 
425

 
194,947

 
57

 
8,113

 
203,542

Commercial real estate
2,477

 
286

 
57

 
2,820

 
1,408,844

 
5,168

 
16,028

 
1,432,860

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages
6,013

 
1,363

 
304

 
7,680

 
891,716

 
1,255

 
7,706

 
908,357

Home equity
4,596

 
579

 
365

 
5,540

 
904,864

 
—

 
3,426

 
913,830

All other consumer
3,039

 
657

 
1,320

 
5,016

 
280,603

 
—

 
1,746

 
287,365

Consumer
13,648

 
2,599

 
1,989

 
18,236

 
2,077,183

 
1,255

 
12,878

 
2,109,552

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
$
16,863

 
$
3,254

 
$
2,183

 
$
22,300

 
$
6,061,496

 
$
7,646

 
$
50,837

 
$
6,142,279

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percent of loans
0.27
%
 
0.05
%
 
0.04
%
 
0.36
%
 
 

 
0.12
%
 
0.83
%
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(i) Loans 90 days or more past due remain on accrual status if they are well secured and collection of all principal and interest is probable.
(j) At December 31, 2015, non-accrual balances included troubled debt restructurings of $10.1 million of commercial real estate loans, $2.3 million of commercial and industrial loans, and $3.8 million of consumer loans. At December 31, 2014, non-accrual balances included troubled debt restructurings of $14.0 million of commercial real estate loans, $8.2 million of commercial and industrial loans, and $3.4 million of consumer loans.

Changes in the allowance for loan losses are summarized as follows:
(dollars in thousands)
Year Ended December 31,
 
2015
 
2014
 
2013
Beginning allowance
$
90,675

 
$
96,367

 
$
110,955

Provision for loan losses
500

 
5,751

 
5,250

Recoveries
6,282

 
5,578

 
5,155

Charge-offs
(18,412
)
 
(17,021
)
 
(24,993
)
Net Charge-offs
(12,130
)
 
(11,443
)
 
(19,838
)
Ending allowance
$
79,045

 
$
90,675

 
$
96,367


88
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

5. LOANS - Continued

Additional details for changes in the allowance for loan losses by loan portfolio are as follows:
December 31, 2015
 
 
 
 
 

 
 

 
 

(dollars in thousands)
Commercial and Industrial (k)
 
Commercial Real Estate (l)
 
Consumer (m)
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 

 
 

 
 

 
 

Beginning balance
$
39,982

 
$
18,696

 
$
21,390

 
$
10,607

 
$
90,675

Charge-offs
(9,550
)
 
(1,120
)
 
(7,742
)
 
—

 
(18,412
)
Recoveries
3,412

 
908

 
1,962

 
—

 
6,282

Provision
5,910

 
(595
)
 
5,792

 
(10,607
)
 
500

Ending balance
$
39,754

 
$
17,889

 
$
21,402

 
$
—

 
$
79,045

Allowance for loan losses:
 
 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
645

 
$
2,054

 
$
2,235

 
$
—

 
$
4,934

Collectively evaluated for impairment
39,109

 
15,835

 
19,167

 
—

 
74,111

Total allowance for loan losses
$
39,754

 
$
17,889

 
$
21,402

 
$
—

 
$
79,045

Loans:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
5,578

 
$
14,649

 
$
25,058

 
$
—

 
$
45,285

Collectively evaluated for impairment
2,646,665

 
1,322,087

 
1,730,943

 
—

 
5,699,695

Loans
$
2,652,243

 
$
1,336,736

 
$
1,756,001

 
$
—

 
$
5,744,980

 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 

 
 

 
 

(dollars in thousands)
Commercial and Industrial (k)
 
Commercial Real Estate (l)
 
Consumer (m)
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 

 
 

 
 

 
 

Beginning balance
$
41,288

 
$
22,653

 
$
21,478

 
$
10,948

 
$
96,367

Charge-offs
(5,006
)
 
(2,746
)
 
(9,269
)
 
—

 
(17,021
)
Recoveries
2,325

 
1,136

 
2,117

 
—

 
5,578

Provision
1,375

 
(2,347
)
 
7,064

 
(341
)
 
5,751

Ending balance
$
39,982

 
$
18,696

 
$
21,390

 
$
10,607

 
$
90,675

Allowance for loan losses:
 
 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
7,165

 
$
3,906

 
$
1,998

 
$
—

 
$
13,069

Collectively evaluated for impairment
32,817

 
14,790

 
19,392

 
10,607

 
77,606

Total allowance for loan losses
$
39,982

 
$
18,696

 
$
21,390

 
$
10,607

 
$
90,675

Originated loans:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
22,384

 
$
19,295

 
$
20,298

 
$
—

 
$
61,977

Collectively evaluated for impairment
2,526,054

 
1,269,265

 
1,704,791

 
—

 
5,500,110

Originated loans
$
2,548,438

 
$
1,288,560

 
$
1,725,089

 
$
—

 
$
5,562,087

 
 
 
 
 
 
 
 
 
 
(k) Commercial includes all C&I loans, including those secured by real estate.
(l) CRE is defined as loans secured by non-owner occupied real estate which have a primary source of repayment of third-party rental income or the sale of the property securing the loan.
(m) Consumer loans include direct consumer loans, indirect consumer loans, consumer lines of credit, and overdrafts.

During the fourth quarter of 2015, the Company refined its process for estimating the allowance for loan losses and as a result all reserves were allocated to the various loan portfolios at December 31, 2015.

For non-impaired loans, subsequent to the acquisition date the methods utilized to estimate the required allowance for loan losses includes an evaluation of the remaining net fair value adjustment at acquisition and any changes in the loans' credit characteristics. At December 31, 2015, there was $7.7 million of acquired loans that experienced a decline in credit quality since acquisition and which were therefore included together with our originated loans when determining the allowance for loan losses.


89
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

5. LOANS - Continued

     Impaired loan details are as follows and exclude loans acquired with deteriorated credit quality:
December 31, 2015
 
 
 
 
 
 
 
 
Recorded Investment
 
 
 
 
 
 
(dollars in thousands)
With Related Allowance
 
Without Related
Allowance
 
Total
 
Life-to-Date Charge-Offs
 
Total Unpaid Balances
 
Related Allowance
Commercial and industrial
$
2,199

 
$
3,379

 
$
5,578

 
$
5,293

 
$
10,871

 
$
645

 
 
 
 
 
 
 
 
 
 
 
 
CRE - permanent
8,755

 
637

 
9,392

 
441

 
9,833

 
1,596

CRE - construction
4,761

 
496

 
5,257

 
970

 
6,227

 
458

Commercial real estate
13,516

 
1,133

 
14,649

 
1,411

 
16,060

 
2,054

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages
6,524

 
10,946

 
17,470

 
518

 
17,988

 
1,537

Home equity
1,411

 
4,797

 
6,208

 
434

 
6,642

 
657

All other consumer
198

 
1,182

 
1,380

 
—

 
1,380

 
41

Consumer
8,133

 
16,925

 
25,058

 
952

 
26,010

 
2,235

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
23,848

 
$
21,437

 
$
45,285

 
$
7,656

 
$
52,941

 
$
4,934

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 

 
 
 
 

 
 

 
Recorded Investment
 
 
 
 
 
 
(dollars in thousands)
 With Related Allowance
 
 Without Related Allowance
 
Total
 
Life-to-Date Charge-Offs
 
Total Unpaid Balances
 
Related Allowance
Commercial and industrial
$
17,343

 
$
5,041

 
$
22,384

 
$
3,981

 
$
26,365

 
$
7,165

 
 
 
 
 
 
 
 
 
 
 
 
CRE - permanent
9,062

 
2,120

 
11,182

 
7,821

 
19,003

 
2,574

CRE - construction
7,585

 
528

 
8,113

 
970

 
9,083

 
1,332

Commercial real estate
16,647

 
2,648

 
19,295

 
8,791

 
28,086

 
3,906

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages
5,894

 
8,109

 
14,003

 
457

 
14,460

 
1,503

Home equity
850

 
3,452

 
4,302

 
436

 
4,738

 
295

All other consumer
397

 
1,596

 
1,993

 
—

 
1,993

 
200

Consumer
7,141

 
13,157

 
20,298

 
893

 
21,191

 
1,998

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
41,131

 
$
20,846

 
$
61,977

 
$
13,665

 
$
75,642

 
$
13,069


    

90
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

5. LOANS - Continued

Additional impaired loan details are as follow and exclude PCI loans:
 
Year Ended December 31,
(dollars in thousands)
2015
 
2014
 
2013
 
Average Recorded
Investment
 
Interest Income
Recognized (n)
 
Average Recorded
Investment
 
Interest Income
Recognized (n)
 
Average Recorded
Investment
 
Interest Income
Recognized (n)
Commercial and industrial
$
12,918

 
$
19

 
$
12,792

 
$
17

 
$
25,838

 
$
77

 
 
 
 
 
 
 
 
 
 
 
 
CRE - permanent
9,946

 
29

 
7,720

 
24

 
9,584

 
31

CRE - construction
7,951

 
—

 
9,503

 
—

 
7,320

 
70

Commercial real estate
17,897

 
29

 
17,223

 
24

 
16,904

 
101

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages
15,542

 
130

 
13,779

 
131

 
11,267

 
105

Home equity
5,510

 
32

 
4,845

 
14

 
4,994

 
11

All other consumer
1,655

 
8

 
1,877

 
13

 
1,758

 
1

Consumer
22,707

 
170

 
20,501

 
158

 
18,019

 
117

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
53,522

 
$
218

 
$
50,516

 
$
199

 
$
60,761

 
$
295

 
 
 
 
 
 
 
 
 
 
 
 
(n) Interest income recognized for the years ended December 31, 2015, 2014, and 2013, primarily represent amounts earned on accruing TDRs.

The following table presents details of the Company's loans which experienced a troubled debt restructuring and are performing according to the modified terms. The Company's restructured loans are included within non-performing loans and impaired loans in the preceding tables.
(dollars in thousands)
December 31,
 
2015
 
2014
Commercial and industrial
$
372

 
$
362

CRE - permanent
674

 
517

Residential mortgages
6,629

 
6,253

Home equity
1,556

 
876

All other consumer
86

 
247

Total restructured loans
$
9,317

 
$
8,255

 
 
 
 
Undrawn commitments to lend on restructured loans
$
—

 
$
—


The Company modifies loans to consumers with residential mortgages and home equity loans utilizing a program modeled after government assisted programs in order to help customers who are experiencing financial difficulty and are in jeopardy of losing their homes to foreclosure.

Other real estate owned and repossessed assets are as follows:
(dollars in thousands)
December 31,
 
2015
 
2014
Acquired other real estate owned
$
3,450

 
$
3,675

Other real estate owned
558

 
753

Repossessed assets
588

 
439

Total other real estate owned and repossessed assets
$
4,596

 
$
4,867



91
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

6. PREMISES AND EQUIPMENT

Major classifications of premises and equipment are summarized as follows:
 
(dollars in thousands)
 
Estimated
 
Year Ended December 31,
 
 
Useful Lives
 
2015
 
2014
Land
 
Indefinite
 
$
17,209

 
$
17,176

Buildings
 
5 to 40 years
 
101,615

 
105,080

Equipment
 
3 to 10 years
 
123,539

 
122,212

Leasehold improvements
 
2 to 20 years
 
26,903

 
28,064

Equipment leased to customers
 
Economic life
 
1,281

 
2,828

Total premises and equipment
 
 
 
270,547

 
275,360

Accumulated depreciation
 
 
 
(164,338
)
 
(158,946
)
Premises and equipment, net
 
 
 
$
106,209

 
$
116,414


Depreciation expense of $10.2 million, $9.5 million, and $9.1 million was included in premises and equipment expense in the consolidated statements of income for the years ended December 31, 2015, 2014 and 2013, respectively.
 
Lease Commitments

Future minimum payments under non-cancellable operating leases are due as follows:

(dollars in thousands)
 
 
Year Ended December 31,
2016
 
$
7,019

2017
 
6,216

2018
 
5,902

2019
 
5,334

2020
 
4,427

Thereafter
 
24,736

Total
 
$
53,634

 
Lease commitments of $53.6 million reflect a reduction in the future minimum lease payments of $0.8 million related to facilities impacted by the restructuring plan announced in the fourth quarter of 2013.

Total rental expense of $9.2 million, $8.6 million, and $8.5 million was included in premises and equipment expense in the consolidated statement of income for the years ended December 31, 2015, 2014 and 2013, respectively.



92
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

7. GOODWILL AND OTHER INTANGIBLE ASSETS

The table below provides a roll-forward of the components of the Company’s goodwill for the years ended December 31, 2015 and 2014.
(dollars in thousands)
 
December 31,
 
 
 
 
 
 
 
December 31,
 
 
2014
 
Acquired
 
Impairment
 
Disposition
 
2015
Goodwill
 
$
556,233

 
$
696

 
$
—

 
$
—

 
$
556,929

Accumulated impairment
 
(253,989
)
 
—

 
—

 
—

 
(253,989
)
Goodwill, net
 
$
302,244

 
$
696

 
$
—

 
$
—

 
$
302,940

 
(dollars in thousands)
 
December 31,
 
 
 
 
 
 
 
December 31,
 
 
2013
 
Acquired
 
Impairment
 
Disposition
 
2014
Goodwill
 
$
512,268

 
$
43,965

 
$
—

 
$
—

 
$
556,233

Accumulated impairment
 
(253,989
)
 
—

 
—

 
—

 
(253,989
)
Goodwill, net
 
$
258,279

 
$
43,965

 
$
—

 
$
—

 
$
302,244


During the second quarter of 2015, the Company performed its annual qualitative assessment of goodwill and determined that it is not more likely than not that the fair value of its reporting units are less than their carrying amounts. There were no indicators of impairment subsequent to the annual assessment for which an interim impairment test was required.

The Company’s business segments are its reporting units which are “Community Banking” and “Other” for purposes of the goodwill impairment analysis. As of December 31, 2015, the carrying value of goodwill assigned to the Community Banking segment was $280 million and the carrying value of goodwill assigned to the Other segment was $22.5 million. During the first quarter of 2015, the Company recorded an additional $0.7 million of goodwill based upon further review of the purchased credit-impaired ("PCI") loan portfolio acquired from TF Financial. This entire amount is included in the "Community Banking" reporting unit.

Due to the acquisition of TF Financial during the fourth quarter of 2014, the Company recorded a core deposit intangible asset of $4.8 million, which is scheduled to be amortized on an accelerated basis over its estimated useful life of 10 years.

The table below presents the Company’s core deposit intangibles and other intangible assets and the related amortization expense.

(dollars in thousands)
As of and for the Year Ended December 31,
 
2015
 
2014
 
2013
Core deposit and other intangible assets
$
6,101

 
$
8,757

 
$
6,854

Amortization expense
2,656

 
2,856

 
3,761


At December 31, 2015, the Company's core deposit and other intangible assets were scheduled to amortize over the succeeding five fiscal years as follows:
(dollars in thousands)
 
 
2016
 
$
1,967

2017
 
1,380

2018
 
770

2019
 
581

2020
 
494


93
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

8. DEPOSITS
 
As of and for the Year Ended December 31,
(dollars in thousands)
2015
 
2014
 
Balance
 
Interest Expense
 
Balance
 
Interest Expense
NOW accounts
$
1,939,388

 
$
2,764

 
$
1,913,399

 
$
2,561

Money market accounts
1,718,791

 
3,894

 
1,827,233

 
3,716

Savings accounts
722,413

 
744

 
678,294

 
563

Time deposits less than $100
820,616

 
7,746

 
891,964

 
8,361

Time deposits $100 or greater
317,792

 
3,501

 
333,697

 
3,342

Total interest bearing deposits
5,519,000

 
18,649

 
5,644,587

 
18,543

Non-interest bearing deposits
1,185,936

 
—

 
1,085,158

 
—

Total deposits
$
6,704,936

 
$
18,649

 
$
6,729,745

 
$
18,543

 
At December 31, 2015, time deposits were scheduled to mature as follows:
(dollars in thousands)
 
 
2016
 
$
558,202

2017
 
156,142

2018
 
135,214

2019
 
175,264

2020
 
113,344

Thereafter
 
242

Total
 
$
1,138,408



9. BORROWINGS
 
As of December 31,
(dollars in thousands)
2015
 
2014
Customer repurchase agreements
$
593,540

 
$
607,705

Federal Home Loan Bank advances and other borrowings
833,828

 
910,378

Senior long-term debt
125,000

 
125,000

Subordinated debentures
77,321

 
77,321

Total borrowings and other debt obligations
$
1,629,689

 
$
1,720,404

    
The Company's borrowings include short-term and long-term debt in the form of customer repurchase agreements, repurchase agreements, FHLB advances, senior long-term debt and subordinated debentures. Customer repurchase agreements are over-night instruments and have investment securities pledged as collateral. FHLB advances are collateralized by certain first mortgage loans, investment securities and also require the Company to purchase FHLB capital stock, which is included within other securities on the consolidated balance sheet.

94
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

9. BORROWINGS - Continued

FHLB advances mature as follows:
(dollars in thousands)
 
 
 
 
As of December 31, 2015
2016
 
$
691,106

2017
 
64,502

2018
 
5,858

2019
 
38,218

2020
 
25,000

Thereafter
 
9,144

Total
 
$
833,828


On September 16, 2014, the Company issued $125 million aggregate principal amount of unsecured, fixed rate senior
notes with a maturity date of September 30, 2024. The notes bear an annual fixed interest rate of 4.25%, and are payable, as to
interest, on March 30th and September 30th of each year, commencing March 30, 2015. The Company incurred $1.4 million of costs related to the issuance of the notes. At December 31, 2015, the remaining unamortized costs were $1.3 million and will amortize over the remaining life of the notes.

The Company has 4 established statutory business Trusts: NPB Capital Trust III, NPB Capital Trust IV, NPB Capital Trust V and NPB Capital Trust VI (“Trusts”). The Company owns all of the common capital securities of the Trusts. The Trusts issued preferred capital securities to investors and invested the proceeds in junior subordinated debentures issued by the Company. These debentures are the sole assets of the Trusts.

Details of the Company’s obligations to the Trusts as of December 31, 2015 are as follows:
 
Trusts
 
Principal
 
Issued
 
Maturity
 
Interest Rate
NPB Capital Trust III
 
$20.6 Million
 
February 20, 2004
 
April 23, 2034
 
3 mo. LIBOR + 2.75% margin
NPB Capital Trust IV
 
$20.6 Million
 
March 25, 2004
 
April 7, 2034
 
3 mo. LIBOR + 2.75% margin
NPB Capital Trust V
 
$20.6 Million
 
April 7, 2004
 
April 7, 2034
 
3 mo. LIBOR + 2.75% margin
NPB Capital Trust VI
 
$15.4 Million
 
January 19, 2006
 
March 15, 2036
 
3 mo. LIBOR + 1.38% margin

All the foregoing junior subordinated debentures qualify under the risk-based capital guidelines of the Federal Reserve as Tier 1 capital, subject to certain limitations. In each case, the debentures are callable by National Penn, subject to any required regulatory approvals, at par, in whole or in part, at any time after five years from issuance. In each case, the Company's obligations under the junior subordinated debentures and related documents, taken together, constitute a full, irrevocable and unconditional guarantee on a subordinated basis by the Company of the obligations of the Trusts under the preferred securities.

95
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

10. CONTINGENCIES

In the normal course of business, the Company is named as a defendant in various lawsuits.  Accruals are established for legal proceedings when information related to the loss contingencies indicates that a loss settlement is both probable and can be estimated. At December 31, 2015, the Company did not have material amounts accrued for legal proceedings as it is the opinion of management that the resolution of such suits will not have a material effect on the financial position or results of operations of the Company. The outcome of legal proceedings is inherently uncertain and, as a result, the amounts recorded may not represent the Company's ultimate loss upon resolution. Thus, the Company’s exposure and ultimate losses may be higher or lower than amounts accrued or estimated as reasonably possible exposure.

11.  ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive loss was comprised of the following components, after tax:

(dollars in thousands)
December 31,
 
2015
 
2014
 
2013
Unrealized gains (losses) on investment securities
$
673

 
$
8,236

 
$
(11,691
)
Net pension loss not yet recognized in net periodic pension cost
(18,564
)
 
(19,227
)
 
(9,466
)
Total accumulated other comprehensive loss
$
(17,891
)
 
$
(10,991
)
 
$
(21,157
)


12. SHAREHOLDERS’ EQUITY

Treasury Stock

On January 22, 2015, the Company announced that the Board of Directors approved a common share repurchase plan of $125 million. The authorization of this repurchase plan superseded all pre-existing share repurchase plans and expired at December 31, 2015. During the first quarter of 2015, the Company repurchased 7.5 million shares of common stock totaling $76.5 million pursuant to this plan, inclusive of the repurchase of 7.3 million shares of common stock totaling $75.0 million from Warburg Pincus at $10.25 per share. Under the terms of the Merger Agreement with BB&T, National Penn has agreed not to purchase, without BB&T's prior written consent, any shares of its common stock.

In the fourth quarter of 2013, the Board of Directors authorized the repurchase of up to five percent (5%) of the outstanding shares of National Penn common stock during 2014. On January 28, 2014, the Company completed the repurchase of 7 million shares, of the 25.9 million outstanding shares, which Warburg Pincus held in NPBC common stock. In the fourth quarter of 2014, the Company additionally completed a series of repurchases that totaled approximately 0.3 million shares, or $3.0 million, from the open market.

Dividend Reinvestment and Stock Purchase Plan (“DRP”)

The Company has a Dividend Reinvestment and Stock Purchase Plan (“DRP”) which permits participants to make monthly voluntary cash contributions in amounts not to exceed $10,000 each for investment under the DRP on or about the 17th day of the following month, at a purchase price equal to the fair market value of the Company’s common stock on the investment date.



96
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The notional amount of financial instruments whose contract amounts represent credit risk:
(dollars in thousands)
As of December 31,
 
2015
 
2014
Commitments to extend credit
$
1,942,607

 
$
1,960,419

Commitments to fund mortgages
35,125

 
27,599

Commitments to sell mortgages to investors
30,311

 
20,228

Letters of credit
151,042

 
152,714

 
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The Company also obtains collateral, such as real estate or liens on its customer’s assets depending on the customer, for these types of commitments. The credit risk involved in issuing letters of credit is essentially the same as that involved in lending to customers, however, since the Company does not anticipate having to perform on material amounts of standby letters of credit, the risk is estimated to be substantially less than the contractual amount of commitments outstanding.  Fair values of letters of credit were not considered to be material as of December 31, 2015 and 2014.

The Company enters into interest rate lock commitments with its mortgage loan customers, a portion of which are intended for sale in the future. The portion of the commitments that are intended for sale in the future are derivatives and, as such, are reported on the consolidated balance sheet at their estimated fair value. To hedge the fair value risk associated with changing interest rates on these commitments, the Company enters into forward sale commitments to sell the closed loans to investors. These hedges are economic hedges and are not designated in hedging relationships. The forward sale commitments to investors are also derivatives and are recorded on the consolidated balance sheet at their estimated fair value.

Summary information regarding interest rate swap derivative positions which were not designed in hedging relationships are as follows:
(dollars in thousands)
 
 
Notional
 
 
 
 
 
Receive
 
Pay
 
Life
 
Positions
 
Amount
 
Asset
 
Liability
 
Rate
 
Rate
 
(Years)
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Receive fixed - pay floating interest rate swaps
191

 
$
680,171

 
$
25,812

 
$
48

 
4.44
%
 
2.45
%
 
5.69
Pay fixed - receive floating interest rate swaps
191

 
680,171

 
48

 
25,812

 
2.45
%
 
4.44
%
 
5.69
Interest rate swaps
 

 
$
1,360,342

 
$
25,860

 
$
25,860

 
3.45
%
 
3.45
%
 
5.69
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 

 
 

 
 

 
 

 
 

 
 

 
 
Receive fixed - pay floating interest rate swaps
165

 
$
596,252

 
$
24,786

 
$
546

 
4.64
%
 
2.28
%
 
5.89
Pay fixed - receive floating interest rate swaps
165

 
596,252

 
546

 
24,786

 
2.28
%
 
4.64
%
 
5.89
Interest rate swaps
 

 
$
1,192,504

 
$
25,332

 
$
25,332

 
3.46
%
 
3.46
%
 
5.89
 
The Company enters into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. These swaps are considered derivatives but are not designated in hedging relationships. These instruments have interest rate and credit risk associated with them. In response, the Company enters into offsetting interest rate swaps with counterparties for interest rate risk management purposes. The counterparty swaps are also considered derivatives and are also not designated in hedging relationships. Changes in the fair value of the customer and counterparty swaps are recorded net in the consolidated statement of income. Because these amounts offset each other, there was no impact on other operating income in each of 2015, 2014, and 2013. For additional analysis of the fair value on interest rate swaps refer to Footnote 15 within this section.


97
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued

The following summarizes the Company's derivative activity as of and for the year ended December 31, 2015, 2014, and 2013:
 
 
 
 
Income Statement Effect
 
 
Balance Sheet Effect at
 
for the Year Ended
Derivative Instruments
 
December 31, 2015
 
December 31, 2015
 
 
 
 
 
Interest rate swaps
 
Increase to other assets/liabilities of $25.9 million.
 
No net effect on other operating income from offsetting $0.5 million change.
 
 
 
 
 
Other derivatives:
 
 
 
 
Interest rate locks
 
Increase to other liabilities of $0.1 million
 
Decrease to mortgage banking income of $0.1 million
Forward sale commitments
 
Increase to other liabilities of $0.2 million
 
Decrease to mortgage banking income of less than $0.1 million
 
 
 
 
 
 
 
 
 
Income Statement Effect
 
 
Balance Sheet Effect at
 
for the Year Ended
Derivative Instruments
 
December 31, 2014
 
December 31, 2014
 
 
 
 
 
Interest rate swaps
 
Increase to other assets/liabilities of $25.3 million.
 
No net effect on other operating income from offsetting $3.7 million change.
 
 
 
 
 
Other derivatives:
 
 
 
 
Interest rate locks
 
Increase to other assets of less than $0.1 million.
 
Increase to mortgage banking income of $0.1 million.
Forward sale commitments
 
Increase to other liabilities of $0.2 million.
 
Decrease to mortgage banking income of $0.1 million.
 
 
 
 
 
 
 
 
 
Income Statement Effect
 
 
Balance Sheet Effect at
 
for the Year Ended
Derivative Instruments
 
December 31, 2013
 
December 31, 2013
 
 
 
 
 
Interest rate swaps
 
Increase to other assets/liabilities of $21.6 million.
 
No net effect on other operating income from offsetting $6.6 million change.
 
 
 
 
 
Other derivatives:
 
 
 
 
Interest rate locks
 
Increase to other liabilities of less than $0.1 million.
 
Decrease to mortgage banking income of $0.1 million.
Forward sale commitments
 
Increase to other liabilities of $0.1 million.
 
Increase to mortgage banking income of $0.3 million.

The Company evaluates and establishes an estimated reserve for credit and other risks associated with off-balance-sheet positions based upon historical losses, expected performance under these arrangements and current trends in the economy. The Company recognized less than $0.1 million in other operating expenses within non-interest expense in the consolidated statement of income during 2015 for credit losses on off-balance-sheet exposures, as compared to $0.3 million recorded in 2014 and zero in 2013. As of December 31, 2015 and 2014 the reserve for off-balance sheet exposure was $0.8 million and $1.1 million, respectively.


98
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

14. BALANCE SHEET OFFSETTING

Certain financial instrument related assets and liabilities may be eligible for offset on the consolidated balance sheet because they are subject to master netting agreements or similar agreements. However, the Company does not elect to offset such arrangements on the consolidated financial statements.
 
    The Company enters into interest rate swap agreements with customers and financial institution counterparties. For additional detail regarding interest rate swap agreements refer to Footnote 13 within this section. In the event of default on, or termination of, any one contract, both parties have the right to net settle multiple contracts. Also, certain interest rate swap agreements may require the Company to receive or pledge cash collateral based on the contract provisions.
 
The Company also enters into agreements to sell securities subject to an obligation to repurchase the same or similar securities, referred to as repurchase agreements on the consolidated balance sheet. Under these agreements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. The obligation to repurchase the securities is reflected as a liability in the Company’s consolidated balance sheet, while the securities underlying the repurchase agreements remain in the respective investment securities account, therefore there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities.

The following table presents information about financial instruments that are eligible for offset as of December 31, 2015 and December 31, 2014:

December 31, 2015
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
Assets
Gross Amount
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts Presented in the Balance Sheet
Derivatives - Interest Rate Swaps
$
48

 
$
—

 
$
48

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivatives - Interest Rate Swaps
$
25,812

 
$
—

 
$
25,812

 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
Assets
Gross Amount
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts Presented in the Balance Sheet
Derivatives - Interest Rate Swaps
$
546

 
$
—

 
$
546

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivatives - Interest Rate Swaps
$
24,786

 
$
—

 
$
24,786



99
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

14. BALANCE SHEET OFFSETTING - Continued

The following table represents a reconciliation of the net amounts of interest rate swap derivative assets and liabilities presented in the balance sheet to the net amounts that would result in the event of offset, by counterparty, as of December 31, 2015 and December 31, 2014:

December 31, 2015
 
 
 
 
 
 
 
(dollars in thousands)
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
Assets
Net Amounts Presented in the Balance Sheet
 
Financial Instruments (o)
 
Cash Collateral (p)
 
Net Amount
Counterparty A
$
28

 
$
(28
)
 
$
—

 
$
—

Counterparty C
20

 
(20
)
 
—

 
—

Total Assets
$
48

 
$
(48
)
 
$
—

 
$
—

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Counterparty A
$
8,029

 
$
(28
)
 
$
(8,585
)
 
$
(584
)
Counterparty B
8,184

 
—

 
(8,510
)
 
(326
)
Counterparty C
6,996

 
(20
)
 
(7,170
)
 
(194
)
All Other Counterparties
2,603

 
—

 
(2,880
)
 
(277
)
Total Liabilities
$
25,812

 
$
(48
)
 
$
(27,145
)
 
$
(1,381
)
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
(dollars in thousands)
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
Assets
Net Amounts Presented in the Balance Sheet
 
Financial Instruments (o)
 
Cash Collateral (p)
 
Net Amount
Counterparty A
$
536

 
$
(536
)
 
$
—

 
$
—

All Other Counterparties
10

 
(10
)
 
—

 
—

Total Assets
$
546

 
$
(546
)
 
$
—

 
$
—

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Counterparty A
$
10,142

 
$
(536
)
 
$
(9,614
)
 
$
(8
)
Counterparty B
7,378

 
—

 
(7,140
)
 
238

Counterparty C
4,789

 
—

 
(4,590
)
 
199

All Other Counterparties
2,477

 
(10
)
 
(2,481
)
 
(14
)
Total Liabilities
$
24,786

 
$
(546
)
 
$
(23,825
)
 
$
415

 
 
 
 
 
 
 
 
(o) For interest rate swap assets, amounts represent any derivative liability fair values that could be offset in the event of default. For interest rate swap liabilities, amounts represent any derivative asset fair values that could be offset in the event of default.
(p) Amounts represent cash collateral received or posted on interest rate swap transactions with financial institution counterparties.





100
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

15.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
 
In general, fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, which is not adjusted for transaction costs. Accounting guidelines establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted, quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Basis of Fair Value Measurement:

Level 1 - Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The types of instruments whose value is based on quoted market prices in active markets include most U.S. Treasury securities, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.  The Company does not adjust the quoted price for such instruments.

The types of instruments whose value is based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most U.S. Government agency securities, state and municipal bonds, mortgage-backed securities, collateralized mortgage obligations, and corporate securities. Such instruments are generally classified within Level 2 of the fair value hierarchy and their fair values are determined as follows:

•
The markets for U.S. Government agency securities are active, but the exact (cusip) securities owned by the Company are traded thinly or infrequently. Therefore, the price for these securities is determined by reference to transactions in securities with similar yields, maturities and other features (matrix priced).
•
State and municipal bonds owned by the Company are traded thinly or infrequently, and as a result the fair value is estimated in reference to securities with similar yields, credit ratings, maturities, and in consideration of any prepayment assumptions obtained from market data.
•
Collateralized mortgage obligations and mortgage-backed securities are generally unique securities whose fair value is estimated using market information for new issues and adjusting for the features of a particular security by applying assumptions for prepayments, pricing spreads, yields and credit ratings.
•
Certain corporate securities owned by the Company are traded thinly or infrequently. Therefore, the fair value of these securities is determined by reference to transactions in other issues of these securities with similar yields and features.
    

101
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

15.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

Level 3 classification is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.  Management’s best estimate consists of both internal and external support on certain Level 3 investments.  Internal cash flow models using a present value formula along with indicative exit pricing obtained from broker/dealers are used to fair value Level 3 investments.  Management changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. Fair values for securities classified within Level 3 are determined as follows:

•
Certain corporate securities owned by the Company are not traded in active markets and prices for securities with similar features are unavailable. The fair value for each security is estimated in reference to benchmark transactions by security type based upon yields, credit spreads and option features.
•
Certain marketable equity securities which are not subject to ownership restrictions but are traded thinly on exchanges or over-the-counter. As a result, prices are not available on a consistent basis from published sources, and, therefore, additional quotations from brokers may be obtained. Additionally considered indications of pricing include subsequent financing rounds or pending transactions. The reported fair value is based upon the Company’s judgment with respect to the information it is able to reliably obtain.
The Company utilizes a third-party service provider to assist with investment security pricing. Each quarter the Company performs an independent validation of the third-party security pricing by obtaining pricing from other sources and evaluating discrepancies to established tolerances for each security type, including a review of unchanged prices. Additionally, the Company evaluates the third-party service provider's pricing results by periodically reviewing the service provider's practices and procedures.

Interest rate swap agreements are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active.  Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the Level 1 markets.  These markets do however have comparable, observable inputs in which an alternative pricing source values these assets to arrive at a fair value.  These characteristics classify interest rate swap agreements as Level 2 measurements.

The Company has the option to measure eligible financial assets, financial liabilities and Company commitments at fair value (i.e. the fair value option), on an instrument-by-instrument basis. The election to use the fair value option is available when an entity first recognizes a financial asset or liability or upon entering into a Company commitment. Subsequent changes in fair value must be recorded in earnings. The Company has not elected to apply the fair value option to any of its financial instruments at December 31, 2015.

    










102
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

15.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2015 and December 31, 2014, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
December 31, 2015
Total
Fair Value
 
Quoted Prices
in Active Markets for
Identical Assets
 
Significant
Other Observable Inputs
 
Significant Unobservable Inputs
(dollars in thousands)
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
State and municipal bonds
$
60,800

 
$
—

 
$
60,800

 
$
—

Agency mortgage-backed securities/ collateralized mortgage obligations (g)
1,598,224

 
—

 
1,598,224

 
—

Corporate securities and other
3,366

 
61

 
2,140

 
1,165

Marketable equity securities
6,439

 
5,313

 
—

 
1,126

Investment securities, available-for-sale
1,668,829

 
5,374

 
1,661,164

 
2,291

 
 
 
 
 
 
 
 
Interest rate swap agreements
25,860

 
—

 
25,860

 
—

 
 
 
 
 
 
 
 
Total fair value of assets
$
1,694,689

 
$
5,374

 
$
1,687,024

 
$
2,291

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Interest rate swap agreements
$
25,860

 
$
—

 
$
25,860

 
$
—

Forward sale commitments
185

 
—

 
185

 
—

Interest rate locks
70

 
—

 
70

 
—

Total fair value of liabilities
$
26,115

 
$
—

 
$
26,115

 
$
—

 
 
 
 
 
 
 
 
December 31, 2014
Total
Fair Value
 
Quoted Prices
in Active Markets for
Identical Assets
 
Significant
Other Observable Inputs
 
Significant Unobservable Inputs
(dollars in thousands)
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 

 
 

 
 

 
 

U.S. Government agencies
$
1,007

 
$
—

 
$
1,007

 
$
—

State and municipal bonds
68,080

 
—

 
68,080

 
—

Agency mortgage-backed securities/ collateralized mortgage obligations (g)
1,451,461

 
—

 
1,451,461

 
—

Corporate securities and other
4,361

 
65

 
3,146

 
1,150

Marketable equity securities
5,752

 
4,676

 
—

 
1,076

Investment securities, available-for-sale
1,530,661

 
4,741

 
1,523,694

 
2,226

 
 
 
 
 
 
 
 
Interest rate swap agreements
25,332

 
—

 
25,332

 
—

Interest rate locks
30

 
—

 
30

 
—

 
 
 
 
 
 
 
 
Total fair value of assets
$
1,556,023

 
$
4,741

 
$
1,549,056

 
$
2,226

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Interest rate swap agreements
$
25,332

 
$
—

 
$
25,332

 
$
—

Forward sale commitments
158

 
—

 
158

 
—

Total fair value of liabilities
$
25,490

 
$
—

 
$
25,490

 
$
—

 
 
 
 
 
 
 
 
(g) Includes U.S. Government sponsored agency securities.
 
 
 
 
 
 
 





103
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

15.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

The following table presents activity for investment securities measured at fair value on a recurring basis for the year ended December 31, 2015:

(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
January 1, 2015
 
Gains/(Losses)
Included in
Earnings (q)
 
Gains/(Losses)
Included in Other
Comprehensive
Income
 
Purchases
 
Sales
 
Maturities/
Calls/Paydowns
 
Transfers
 
Ending Balance
December 31, 2015
Level 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities and other
$
65

 
$
—

 
$
(4
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
61

Marketable equity securities
4,676

 
—

 
637

 
—

 
—

 
—

 
—

 
5,313

Total level 1
4,741

 
—

 
633

 
—

 
—

 
—

 
—

 
5,374

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
1,007

 
—

 
(7
)
 
—

 
—

 
(1,000
)
 
—

 
—

State and municipal bonds
68,080

 
1,781

 
(1,139
)
 
580

 
—

 
(8,502
)
 
—

 
60,800

Agency mortgage-backed securities/ collateralized mortgage obligations (g)
1,451,461

 
(4,878
)
 
(11,742
)
 
474,326

 
—

 
(310,943
)
 
—

 
1,598,224

Corporate securities and other
3,146

 
459

 
(453
)
 
—

 
—

 
(1,012
)
 
—

 
2,140

Total level 2
1,523,694

 
(2,638
)
 
(13,341
)
 
474,906

 
—

 
(321,457
)
 
—

 
1,661,164

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 3
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities and other
1,150

 
—

 
15

 
—

 
—

 
—

 
—

 
1,165

Marketable equity securities
1,076

 
—

 
50

 
—

 
—

 
—

 
—

 
1,126

Total level 3
2,226

 
—

 
65

 
—

 
—

 
—

 
—

 
2,291

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total available-for-sale securities
$
1,530,661

 
$
(2,638
)
 
$
(12,643
)
 
$
474,906

 
$
—

 
$
(321,457
)
 
$
—

 
$
1,668,829

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(g) Includes U.S. Government sponsored agency securities.
 
 
 
 
 
 
 
 
 
 
(q) Includes amortization/accretion


104
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

15.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
 
The following table sets forth the Company’s financial assets subject to fair value adjustments (impairment) on a non-recurring basis. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
(dollars in thousands)
Quoted Prices
in Active Markets for
Identical Assets
 
Significant
Other Observable Inputs
 
Significant Unobservable Inputs
 
 
December 31, 2015
(Level 1)
 
(Level 2)
 
(Level 3)
 
Balance
Loans held-for-sale
$
—

 
$
10,000

 
$
—

 
$
10,000

Collateral dependent impaired loans, net (r)
—

 
—

 
33,720

 
33,720

OREO and other repossessed assets
—

 
—

 
4,596

 
4,596

 
 
 
 
 
 
 
 
December 31, 2014
 

 
 

 
 

 
 

Loans held-for-sale
$
—

 
$
4,178

 
$
—

 
$
4,178

Collateral dependent impaired loans, net (r)
—

 
—

 
43,377

 
43,377

OREO and other repossessed assets
—

 
—

 
4,867

 
4,867

 
 
 
 
 
 
 
 
(r) Excludes purchased credit impaired loans. For additional information regarding impaired loans, refer to Footnote 5.
 
    
Fair value for loans held-for-sale is estimated based upon available market data for mortgage-backed securities with similar interest rates and maturities.  Lower of cost or estimated fair value write-downs recorded on loans held-for-sale were zero as of December 31, 2015 and December 31, 2014.

The recorded investment in collateral dependent impaired loans totaled $36.6 million with a specific reserve of $2.9 million at December 31, 2015, compared to $54.6 million with a specific reserve of $11.2 million at December 31, 2014. The fair value of collateral dependent impaired loans is based upon the value of collateral securing these loans, less estimated costs to sell.  Appraised values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business.

Fair value for OREO and other repossessed assets is estimated based upon its appraised value less costs to sell. Additional write-downs of $0.2 million were included in the period-ending OREO and other repossessed assets balances at December 31, 2015. There were no additional write-downs included in OREO and other repossessed assets balances at December 31, 2014.

In addition to financial instruments recorded at fair value in the Company’s financial statements, disclosure of the estimated fair value of all of an entity’s assets and liabilities considered to be financial instruments is also required.  For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. However, certain instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.  Also, it is the Company’s general practice and intent to hold its financial instruments to maturity and to not engage in trading or sales activities, other than mortgage loans held-for-sale.  Fair values have been estimated using data that management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument.  
    

105
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

15.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

The estimation methodologies, resulting fair values and recorded carrying amounts are as follows: 
(dollars in thousands)
December 31, 2015
 
December 31, 2014
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
204,096

 
$
204,096

 
$
413,839

 
$
413,839

Investment securities available-for-sale
1,668,829

 
1,668,829

 
1,530,661

 
1,530,661

Investment securities held-to-maturity
768,634

 
789,653

 
921,042

 
949,935

Other securities
65,618

 
65,618

 
67,512

 
67,512

Loans held-for-sale
10,000

 
10,255

 
4,178

 
4,306

Loans, net of allowance for loan losses
6,116,154

 
6,017,669

 
6,051,604

 
5,957,399

OREO and other repossessed assets
4,596

 
4,596

 
4,867

 
4,867

Interest rate swap agreements
25,860

 
25,860

 
25,332

 
25,332

Interest rate locks
—

 
—

 
30

 
30

 
 
 
 
 
 
 
 
LIABILITIES
 

 
 

 
 

 
 

Non-interest bearing deposits
$
1,185,936

 
$
1,185,936

 
$
1,085,158

 
$
1,085,158

Interest bearing deposits, non-maturity
4,380,592

 
4,380,592

 
4,418,926

 
4,418,926

Deposits with stated maturities
1,138,408

 
1,132,944

 
1,225,661

 
1,223,210

Customer repurchase agreements
593,540

 
593,540

 
607,705

 
607,705

Federal Home Loan Bank advances and other borrowings
833,828

 
838,073

 
910,378

 
916,280

Subordinated debentures
77,321

 
77,321

 
77,321

 
77,321

Senior long-term debt
125,000

 
125,375

 
125,000

 
127,250

Interest rate swap agreements
25,860

 
25,860

 
25,332

 
25,332

Forward sale commitments
185

 
185

 
158

 
158

Interest rate locks
70

 
70

 
—

 
—


The fair value of cash and cash equivalents has been estimated to equal the carrying amounts due to the short-term nature of these instruments.  Therefore, cash and cash equivalents are classified within Level 1 of the fair value hierarchy.

The fair value of investment securities held-to-maturity has been estimated in a similar fashion to similar securities categorized as available-for-sale.  Held-to-maturity securities include U.S. government agencies, state and municipal bonds, collateralized mortgage obligations and mortgage-backed securities.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value of other securities has been estimated to equal the carrying amount of the investment. These instruments are classified within Level 1 of the fair value hierarchy.

The fair value of the loan portfolio has been estimated using a discounted cash flow methodology based upon prevailing market interest rates relative to the portfolios’ effective interest rate which includes assumptions concerning prepayment rates and net credit losses, and may not be indicative of an exit price.  The loan portfolio is classified within Level 3 of the fair value hierarchy.

The fair value of non-interest bearing demand deposits has been estimated to equal the carrying amount, which is assumed to be the amount payable on demand at the balance sheet date and therefore are classified within Level 1 of the fair value hierarchy.

The fair value of interest bearing deposits excludes deposits with stated maturities and is based on the assumption that the exit value of the instruments would be funded with like instruments by principal market participants.  These instruments are classified within Level 2 of the fair value hierarchy.

106
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

15.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

The fair value of deposits with stated maturities is estimated at the present value of associated cash flows using contractual maturities and market interest rates.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value of customer repurchase agreements has been estimated at the present value of associated cash flows using contractual maturities and market interest rates for each instrument.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value of FHLB advances is determined based on current market rates for similar borrowings with similar credit ratings, as well as a further calculation for valuing the optionality of the conversion features in certain of the instruments.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value of the Company's senior long-term debt is based upon an unadjusted, quoted price (CUSIP: 637138AC2) and as such is classified within Level 1 of the fair value hierarchy.

The fair value of subordinated debentures is estimated to equal their par amount as these instruments have floating interest rates based upon LIBOR and are callable at any time. These instruments are classified within Level 2 of the fair value hierarchy.


16.  REGULATORY MATTERS

National Penn and National Penn Bank are subject to regulations of certain federal and state agencies, and undergo periodic examinations by such regulatory authorities.

National Penn Bank’s capital amount and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulations to ensure capital adequacy require National Penn Bank and the Company to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 2015, that National Penn Bank and the Company met all capital adequacy requirements to which they are subject.

In July 2013, the Federal Reserve, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) published final rules establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. Basel III refers to various documents released by the Basel Committee on Banking Supervision. The new rules became effective for National Penn and National Penn Bank in January 2015, with some rules transitioned into full effectiveness over two to four years. The new capital rules, among other things, introduce a new capital measure called common equity Tier 1, increase the required leverage and Tier 1 capital ratios, change the risk-weightings of certain assets for purposes of risk-based capital ratios, create an additional capital conservation buffer over the required capital ratios, and change what qualifies as capital for purposes of meeting the various capital requirements. The new capital rules most significantly impacted the treatment of the Company's deferred tax assets when calculating capital and the increased risk-weighting of certain non-performing loans, as well as the new requirement to risk-weight loan commitments with a maturity of less than one year. The adoption of the new capital rules did not have a significant impact on the Company's capital ratios.

National Penn Bank is required to maintain average reserve balances with the Federal Reserve Bank.  The required reserve was $42.3 million at December 31, 2015. The average amount of these balances for the year ended December 31, 2015 was approximately $37.9 million.


107
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

16.  REGULATORY MATTERS - Continued

The following tables summarize National Penn's and National Penn Bank’s regulatory capital.
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Actual
 
For Capital
Adequacy Purposes
 
To be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Common equity Tier 1 capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
National Penn
$
873,262

 
12.43
%
 
$
316,211

 
4.50
%
 
n/a

 
n/a

National Penn Bank
787,856

 
11.24
%
 
315,491

 
4.50
%
 
$
455,709

 
6.50
%
Tier I capital (to risk-weighted assets)
 
 
 

 
 

 
 

 
 

 
 

National Penn
$
947,051

 
13.48
%
 
$
421,615

 
6.00
%
 
n/a

 
n/a

National Penn Bank
787,856

 
11.24
%
 
420,655

 
6.00
%
 
$
560,873

 
8.00
%
Total capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
National Penn
$
1,026,096

 
14.60
%
 
$
562,153

 
8.00
%
 
n/a

 
n/a

National Penn Bank
866,901

 
12.37
%
 
560,873

 
8.00
%
 
$
701,091

 
10.00
%
Tier I capital (to average assets)
 
 
 

 
 

 
 

 
 

 
 

National Penn
$
947,051

 
10.19
%
 
$
371,661

 
4.00
%
 
n/a

 
n/a

National Penn Bank
787,856

 
8.49
%
 
371,222

 
4.00
%
 
$
464,028

 
5.00
%
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Actual
 
For Capital
Adequacy Purposes
 
To be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Tier I capital (to risk-weighted assets)
 
 
 

 
 

 
 

 
 

 
 

National Penn
$
963,629

 
13.91
%
 
$
277,169

 
4.00
%
 
n/a

 
n/a

National Penn Bank
767,993

 
11.18
%
 
274,774

 
4.00
%
 
$
412,161

 
6.00
%
Total capital (to risk-weighted assets)
 
 
 

 
 

 
 

 
 

 
 

National Penn
$
1,050,295

 
15.16
%
 
$
554,339

 
8.00
%
 
n/a

 
n/a

National Penn Bank
853,919

 
12.43
%
 
549,548

 
8.00
%
 
$
686,935

 
10.00
%
Tier I capital (to average assets)
 
 
 

 
 

 
 

 
 

 
 

National Penn
$
963,629

 
10.78
%
 
$
357,615

 
4.00
%
 
n/a

 
n/a

National Penn Bank
767,993

 
8.61
%
 
356,769

 
4.00
%
 
$
445,961

 
5.00
%


108
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

17. BENEFIT PLANS

Capital Accumulation Plan

The Company has a contributory capital accumulation plan under Section 401(k) of the Internal Revenue Code of 1986, as amended.  Under the plan, eligible participants may contribute a minimum of 1% of eligible earnings up to a maximum of the respective annual IRS allowable contribution each year.

Under the Capital Accumulation Plan:

•
Persons become eligible for participation on the first day of the month following 30 days of employment.

•
For newly-eligible employees, enrollment at 3% of base compensation is automatic and increases 1% on January 2nd of each year, until reaching 7% of base compensation, subject to an “opt-out” procedure.

•
There is a discretionary profit sharing account, which utilizes the same performance targets as National Penn’s annual Executive Incentive Plan and Management Incentive Plan. 

•
The Company’s “match” is 50% of the first 7% of an employee’s compensation contributed to the Plan.

Matching contributions to the plan, including discretionary profit sharing, included in salaries, wages and employee benefit expenses were $3.4 million, $3.5 million, and $3.8 million, for the years ended December 31, 2015, 2014, and 2013, respectively.

National Penn Bancshares, Inc. Pension Plan

The Company has a curtailed, non-contributory defined benefit pension plan (National Penn Bancshares, Inc. Employee Pension Plan) covering substantially all employees of the Company and its subsidiaries employed as of January 1, 2009.  The Company-sponsored pension plan provides retirement benefits under pension trust agreements based on years of service. Prior to April 1, 2006, benefits are based on the average of the employee compensation during the highest five consecutive years during the last ten consecutive years of employment. Beginning on April 1, 2006, eligible compensation was limited to $50,000 per year.  The Company did not make a cash contribution to the plan in 2015 because the plan’s funding credit balance was applied toward reducing the contribution requirement.

On February 12, 2010, the Company curtailed its pension plan effective March 31, 2010, whereby no additional service will accumulate for vested participants after March 31, 2010. The following tables present information regarding the benefit obligation, plan asset, funded status, amounts recognized in accumulated other comprehensive income (loss), net periodic benefit cost and other statistical disclosures for National Penn Bancshare's plan.

    

109
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

17. BENEFIT PLANS - Continued

The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheet:
(dollars in thousands)
December 31,
 
2015
 
2014
Change in benefit obligation:
 
 
 
Benefit obligation at beginning of year
$
67,030

 
$
51,847

Interest cost
2,540

 
2,421

Effect of change in assumptions
(3,990
)
 
14,519

Benefits paid
(2,157
)
 
(1,966
)
Effect of change in experience
123

 
209

Benefit obligations at end of year
63,546

 
67,030

Change in plan assets:
 

 
 

Fair value of plan assets at beginning of year
48,887

 
47,584

Adjustment for market value
—

 
(2
)
Actual return on plan assets
(225
)
 
3,508

Benefits paid including assumed expenses
(2,465
)
 
(2,203
)
Fair value of plan assets at end of year
46,197

 
48,887

 
 
 
 
Funded status
$
(17,349
)
 
$
(18,143
)
 
 
 
 
Net loss not yet recognized in net periodic pension cost
$
28,127

 
$
28,968

 
The effect of change in assumptions in the above table was impacted by the increase in the discount rate utilized to calculate benefit obligations, from 3.85% for 2014 to 4.16% for 2015, and an update to the RP-2014 mortality table and improvement scale to reflect MP-2015.    

Net pension cost included the following components:
(dollars in thousands)
Year Ended December 31,
 
2015
 
2014
 
2013
Service cost
$
307

 
$
234

 
$
164

Interest cost
2,540

 
2,421

 
2,235

Expected return on plan assets
(3,458
)
 
(3,372
)
 
(2,931
)
Amortization of unrecognized net actuarial loss
658

 
313

 
634

Net periodic benefit (gain) cost
$
47

 
$
(404
)
 
$
102


Unamortized actuarial gains and losses and prior service costs and credits are recognized in AOCI.  Refer to Footnote 11 in this Report.
 
Weighted-average assumptions used to determine net benefit obligations:
 
As of December 31,
 
2015
 
2014
 
2013
Discount rate
4.16
%
 
3.85
%
 
4.75
%
Rate of compensation increase
N/A

 
N/A

 
N/A


110
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

17. BENEFIT PLANS - Continued

Weighted-average assumptions used to determine net periodic benefit cost:
 
Year Ended December 31,
 
2015
 
2014
 
2013
Discount rate
3.85
%
 
4.75
%
 
4.00
%
Expected long-term return on plan assets
7.25
%
 
7.25
%
 
7.25
%
Rate of compensation increase
N/A

 
N/A

 
N/A


Plan Assets

The financial statements of the Company's pension plan are prepared on the accrual basis of accounting. Interest income is recorded on the accrual basis, and dividends are recorded on the ex-dividend date. The pension plan's investments are stated at fair value, and purchases and sales of securities are recorded on the trade date. To determine the fair value of plan assets, the pension plan utilizes the fair value hierarchy as described in detail in Footnote 15 Fair Value Measurements and Fair Value of Financial Instruments. The fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Investments in interest bearing cash are stated at cost, which approximates fair value. The fair values of money market and mutual funds are based on quoted net asset values of the shares held by the plan on the valuation date. The fair values of common stocks and U.S. Government obligations are valued at the closing price reported in active markets in which the individual securities are traded. Collective investment trust funds are valued by the trustee. The trustee follows written procedures for establishing unit values on a periodic basis which incorporate observable market data; however the collective investment trust fund itself is not traded on an established market and therefore is categorized as a Level 2 hierarchy. The plan does not have any assets in the Company’s stock. Actively traded corporate bonds and notes are valued based on quoted prices. U.S. Government agency obligations are valued based on yields currently available on comparable securities of issuers with similar credit ratings. The plan does not have any Level 3 investments.

The following table sets forth the pension plan’s financial assets at fair value by level within the fair value hierarchy:
December 31, 2015
Quoted
 Prices in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance
as of
December 31,
2015
 
Asset Allocation
(dollars in thousands)
 
 
 
 
Equity securities
$
31,959

 
$
—

 
$
—

 
$
31,959

 
69
%
Debt securities
9,208

 
4,152

 
—

 
13,360

 
29
%
Other
878

 
—

 
—

 
878

 
2
%
Total
$
42,045

 
$
4,152

 
$
—

 
$
46,197

 
100
%
 
 
 
 
 
 
 
 
 
 
December 31, 2014
Quoted
 Prices in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance
as of
December 31,
2014
 
Asset Allocation
(dollars in thousands)
 
 
 
 
Equity securities
$
34,512

 
$
—

 
$
—

 
$
34,512

 
70
%
Debt securities
7,960

 
5,571

 
—

 
13,531

 
28
%
Other
844

 
—

 
—

 
844

 
2
%
Total
$
43,316

 
$
5,571

 
$
—

 
$
48,887

 
100
%


111
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

17. BENEFIT PLANS - Continued

Estimated Future Benefit Payments
(dollars in thousands)
 
2016
$
2,365

2017
2,609

2018
2,814

2019
2,910

2020
3,047

2021-2025
17,125


TF Financial Pension Plan

On October 24, 2014, the Company acquired the 3rd Fed Bank Retirement Plan as part of the acquisition of TF Financial. The plan is a non-contributory defined benefit pension plan which was frozen by TF Financial prior to the acquisition. A number of plan participants were terminated as a result of the acquisition and have since elected to receive lump sum distributions from the plan. Total lump sum distributions paid in 2015 have exceeded the plan's projected interest cost for 2015 and therefore a partial settlement of $0.1 million has been recognized for the year ended December 31, 2015.

The following tables present information regarding the benefit obligation, plan asset, funded status, amounts recognized in accumulated other comprehensive income (loss), net periodic benefit cost and other statistical disclosures for 3rd Fed Bank's plan.

The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheet:
(dollars in thousands)
December 31,
 
2015
 
2014
Change in benefit obligation:
 
 
 
Benefit obligation at beginning of year
$
11,915

 
$
—

Benefit obligation from business combination
—

 
10,837

Interest cost
350

 
87

Effect of change in assumptions
(1,035
)
 
1,093

Benefits paid
(5,084
)
 
(102
)
Effect of change in experience
181

 
—

Benefit obligations at end of year
6,327

 
11,915

Change in plan assets:
 

 
 

Fair value of plan assets at beginning of year
11,346

 
—

Fair value of plan assets from business acquisition
—

 
10,939

Actual return on plan assets
127

 
509

Benefits paid including assumed expenses
(5,111
)
 
(102
)
Fair value of plan assets at end of year
6,362

 
11,346

 
 
 
 
Funded status
$
35

 
$
(569
)
 
 
 
 
Net loss not yet recognized in net periodic pension cost
$
311

 
$
735


The effect of change in assumptions in the above table was impacted by the increase in the discount rate utilized to calculate benefit obligations, from 3.85% for 2014 to 4.24% for 2015, and an update to the RP-2014 mortality table and improvement scale to reflect MP-2015.    


112
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

17. BENEFIT PLANS - Continued

Net pension cost included the following components:
(dollars in thousands)
Year Ended December 31,
 
2015
 
2014
Service cost
$
27

 
$
—

Interest cost
350

 
87

Expected return on plan assets
(611
)
 
(151
)
Settlement loss
54

 
—

Net periodic benefit (gain) cost
$
(180
)
 
$
(64
)

Weighted-average assumptions used to determine net benefit obligations:
 
As of December 31,
 
2015
 
2014
Discount rate
4.24
%
 
3.85
%
Rate of compensation increase
N/A

 
N/A


Weighted-average assumptions used to determine net periodic benefit cost:
 
Year Ended December 31,
 
2015
 
2014
Discount rate
4.32
%
 
4.40
%
Expected long-term return on plan assets
7.25
%
 
7.50
%
Rate of compensation increase
N/A

 
N/A


Plan Assets

For additional information regarding the plan assets of the 3rd Fed Bank plan, refer to the statement on plan assets found within the National Penn Bancshares, Inc. Pension Plan disclosure. The accounting policies and asset classes held by both plans are similar.
    
The following table sets forth the pension plan’s financial assets at fair value by level within the fair value hierarchy:
December 31, 2015
Quoted
 Prices in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance
as of
December 31,
2015
 
Asset Allocation
(dollars in thousands)
 
 
 
 
Equity securities
$
3,836

 
$
—

 
$
—

 
$
3,836

 
60
%
Debt securities
1,254

 
692

 
—

 
1,946

 
31
%
Other
580

 
—

 
—

 
580

 
9
%
Total
$
5,670

 
$
692

 
$
—

 
$
6,362

 
100
%
 
 
 
 
 
 
 
 
 
 
December 31, 2014
Quoted
 Prices in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance
as of
December 31,
2014
 
Asset Allocation
(dollars in thousands)
 
 
 
 
Collective investment trust funds
—

 
$
11,346

 
—

 
$
11,346

 
100
%
Total
$
—

 
$
11,346

 
$
—

 
$
11,346

 
100
%


113
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

17. BENEFIT PLANS - Continued

Estimated Future Benefit Payments
(dollars in thousands)
 
2016
$
241

2017
119

2018
706

2019
136

2020
301

2021-2025
2,281


18. SHARE-BASED COMPENSATION

The Company, through its Compensation Committee of the Board of Directors, offers equity compensation to employees and non-employee directors of National Penn, National Penn Bank and other National Penn subsidiaries in the form of share-based awards.  Stock options, restricted stock awards (“RSAs”), and restricted stock units (“RSUs”) vest over time, upon the satisfaction of established performance criteria, or both.

The Company believes such awards better align the interests of its employees and non-employee directors with those of its shareholders. Option awards are granted with an exercise price at least equal to the market price of the Company’s stock at the date of grant. Option and other share-based awards vest at such times as are determined by the Compensation Committee of the Board of Directors at the time of grant, but not before one year from the date of grant or later than five years from the date of grant.  The options have a maximum term of ten years for incentive stock options or ten years, one month for non-qualified stock options.

The fair value of RSAs and RSUs are estimated based on the price of the Company’s common stock on the date of grant.  Compensation cost is measured ratably over the vesting period of the awards and reversed for awards which are forfeited due to unfulfilled service or performance criteria.

Vesting of share-based awards is immediately accelerated in the event of a change-in-control; in the event the recipient’s service terminates due to death, disability or retirement (including a voluntary termination of employment at age 60 or more); or in the event of an involuntary termination of employment not for cause.

Awards are currently granted under the National Penn Bancshares, Inc. 2014 Long-Term Incentive Compensation Plan, approved by shareholders in April 2014 (“2014 Plan”) and expiring April 22, 2024.  The 2014 Plan replaced the previous plan ("2005 Plan"), which expired November 30, 2014, and includes authorized but unissued common shares under the 2005 Plan. Under the terms of the 2014 Plan, approximately 2.9 million shares are available for issuance as of December 31, 2015.

Prior to the adoption of the 2014 Plan, the Company maintained other employee stock compensation plans ("Previous Company Plans"). A total of 10.4 million shares of common stock were made available for option or restricted stock awards. At December 31, 2015, 1.6 million shares remain outstanding from the Previous Company Plans. In addition to the Previous Company Plans, the Company issued 3,022,185 substitute stock options as a result of acquisitions made in 2008, of which, approximately 0.4 million options were outstanding at December 31, 2015.

The impact of shared-based compensation on the Company’s financial results for the following periods is as follows:
(dollars in thousands)
Year Ended December 31,
 
2015
 
2014
 
2013
Share-based compensation expense
$
5,245

 
$
4,315

 
$
3,309

Income tax benefit
(1,836
)
 
(1,510
)
 
(1,158
)
Reduction to net income
$
3,409

 
$
2,805

 
$
2,151


114
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

18. SHARE-BASED COMPENSATION - Continued

The total unrecognized compensation cost and the weighted-average period over which unrecognized compensation cost is expected to be recognized related to non-vested share-based compensation arrangements at December 31, 2015 is presented below:
 
(dollars in thousands)
Unrecognized Compensation Cost
 
Weighted-Average Period Remaining (Years)
Restricted stock
$
4,081

 
2.2
Stock options
812

 
2.2
Total
$
4,893

 
2.2

Restricted Stock

Information regarding restricted stock for the following periods is summarized below:
 
Year Ended December 31,
 
2015
 
2014
 
2013
Shares granted
448,243

 
395,621

 
411,723

Weighted-average grant date fair value
$
9.89

 
$
11.14

 
$
9.85

Fair value of awards vested (000's)
$
6,633

 
$
3,066

 
$
1,988


A summary of the status of the Company’s non-vested restricted stock as of December 31, 2015, and changes during the year then ended, is presented below:
 
Shares
 
Weighted-
Average
Grant-Date
Fair Value
Non-vested at January 1, 2015
932,818

 
$
9.97

Granted
448,243

 
9.89

Forfeited/Canceled
(25,246
)
 
10.23

Vested
(602,253
)
 
9.75

Non-vested at December 31, 2015
753,562

 
$
10.06


Stock Options

The Company estimated the fair value of each option grant on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions:
 
Year Ended December 31,
 
2015
 
2014
 
2013
Risk-free interest rates
1.45
%
 
1.89
%
 
1.20
%
Expected dividend yield
4.44
%
 
3.59
%
 
4.07
%
Expected volatility
47.15
%
 
53.39
%
 
53.13
%
Expected lives (years)
6.34

 
5.92

 
6.98


115
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

18. SHARE-BASED COMPENSATION - Continued

Information regarding stock options as of December 31, 2015, and changes during the year ended are presented below:
 
 
 
 
 
 
 
(dollars in thousands, except per share data)
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value
 
 
 
 
 
 
Options
 
 
 
Outstanding at January 1, 2015
2,637,889

 
$
13.78

 
3.5
 
$
2,016

Granted
254,500

 
9.90

 
 
 
 

Exercised
(106,451
)
 
7.96

 
 
 
 

Forfeited
(591,360
)
 
17.56

 
 
 
 

Outstanding at December 31, 2015
2,194,578

 
12.60

 
3.9
 
3,974

 
 
 
 
 
 
 
 
Exercisable at December 31, 2015
1,583,513

 
$
13.67

 
2.4
 
$
2,430


The following table summarizes information related to stock options:
(dollars in thousands, except per share data)
Year Ended December 31,
 
2015
 
2014
 
2013
Options granted
254,500

 
246,000

 
247,750

Weighted-average grant date fair value
$
2.95

 
$
4.13

 
$
3.47

Fair value of awards vested
883

 
708

 
675

Proceeds from stock options exercised
847

 
467

 
900

Tax benefit recognized from stock options exercised
133

 
62

 
112

Intrinsic value of stock options exercised
379

 
176

 
321



Employee Stock Purchase Plan

The Company's 1997 shareholder-approved Employee Stock Purchase Plan ("ESPP"), which, as amended, authorized the Company to issue up to 864,723 common shares of the Company to eligible employees at a purchase price of 90% of the fair market value of the shares on the purchase date four times annually, was suspended in connection with the announcement of the proposed merger of NPBC with and into BB&T Corporation. On September 30, 2015, the Company made its final purchase of NPBC common stock under the ESPP. For details regarding the announced merger with BB&T Corporation, refer to Footnote 2.
 
Year Ended December 31,
 
2015
 
2014
 
2013
ESPP shares purchased
44,758

 
60,812

 
65,161

Weighted-average employee purchase price
$
10.13

 
$
9.29

 
$
9.44


116
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

19.  INCOME TAXES

The components of the income tax expense included in the consolidated statements of income are as follows: 
(dollars in thousands)
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
FEDERAL:
 
 
 
 
 
 
Current
 
$
23,377

 
$
21,116

 
$
9,339

Deferred federal expense
 
15,502

 
12,393

 
59

 
 
38,879

 
33,509

 
9,398

STATE:
 
 

 
 

 
 

Current
 
—

 
—

 
183

Income tax expense
 
$
38,879

 
$
33,509

 
$
9,581

 
The differences between income tax expense and the amount computed by applying the statutory federal income tax rate are as follows:
(dollars in thousands)
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
Computed tax expense at statutory rate
 
$
52,350

 
$
46,276

 
$
22,038

State income tax expense, net
 
—

 
—

 
119

Decrease in taxes resulting from:
 
 

 
 

 
 

Tax-exempt loan and investment income
 
(12,440
)
 
(12,141
)
 
(12,927
)
Other, net
 
(1,031
)
 
(626
)
 
351

Income tax expense
 
$
38,879

 
$
33,509

 
$
9,581




117
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

19.  INCOME TAXES - Continued

Deferred tax assets and liabilities are composed of the following: 
(dollars in thousands)
 
December 31,
 
 
2015
 
2014
Deferred tax assets
 
 
 
 
Allowance for loan losses
 
$
27,451

 
$
31,736

Tax credits
 
17,946

 
25,599

Accrued incentives and deferred compensation
 
8,531

 
8,713

Net operating loss
 
117

 
983

Pension
 
6,158

 
5,549

Accrued expenses
 
2,709

 
4,141

Share-based compensation
 
3,190

 
3,475

Write-downs on other real estate
 
660

 
660

Depreciation
 
1,552

 
155

Total deferred tax assets
 
$
68,314

 
$
81,011

Deferred tax liabilities
 
 

 
 

Net unrealized gains on investment securities available-for-sale
 
$
362

 
$
4,435

Core deposit intangibles & acquisition related
 
6,298

 
5,129

Loan costs
 
9,576

 
8,720

Amortization
 
5,367

 
4,740

Mortgage servicing rights
 
—

 
505

Total deferred tax liabilities
 
21,603

 
23,529

Net deferred tax asset (included in other assets)
 
$
46,711

 
$
57,482

    
The Company believes that it is more likely than not that the deferred tax assets will be realized based upon estimates of taxable income and tax planning strategies; as a result, no valuation allowance was recorded as of December 31, 2015 or 2014. The Company has adjusted its beginning and ending deferred tax assets and liabilities for prior acquisitions and reclassifications of tax reserves.

The Company has an alternative minimum tax credit of $16.7 million which has an indefinite life.

The Company records a liability for unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(dollars in thousands)
 
 
 
 
 
 
2015
 
2014
Balance at January 1,
 
$
719

 
$
1,037

Additions based on tax positions related to the current year
 
—

 
75

Additions for tax positions of prior years
 
—

 
28

Reductions for tax positions of prior years
 
(400
)
 
—

Reductions as a result of lapse of applicable statute of limitations
 
(319
)
 
(421
)
Balance at December 31,
 
$
—

 
$
719


The Company is subject to income taxes in the U.S. and various state jurisdictions.  Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply.  The Company is no longer subject to U.S. federal tax examinations by the IRS before 2012, and is generally no longer subject to tax examinations by state and local tax authorities for the years before 2011.


118
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

20. CONDENSED FINANCIAL INFORMATION – PARENT COMPANY ONLY

The following table is a summary of selected financial information of National Penn Bancshares, Inc., parent company only:

(dollars in thousands)
 
 
December 31,
CONDENSED BALANCE SHEETS
2015
 
2014
Assets:
 
 
 
Cash (s)
$
269,122

 
$
96,714

Investment in bank subsidiaries
1,075,357

 
1,066,182

Investment in other subsidiaries
18,715

 
224,570

Other assets
2,451

 
5,453

Total assets
$
1,365,645

 
$
1,392,919

Liabilities and shareholders' equity:
 
 
 

Subordinated debentures
$
77,321

 
$
77,321

Senior long-term debt
125,000

 
125,000

Other liabilities
1,767

 
1,959

Shareholders' equity
1,161,557

 
1,188,639

Total liabilities and shareholders' equity
$
1,365,645

 
$
1,392,919

 
 
 
 
(s) For tax planning purposes, cash was transferred to a subsidiary of the Parent Company totaling $200 million at December 31, 2014. The cash was subsequently transferred back to the Parent Company.

(dollars in thousands)
 
 
Year Ended December 31,
CONDENSED STATEMENTS OF INCOME
2015
 
2014
 
2013
Income:
 
 
 
 
 
Equity in undistributed net (loss) earnings of subsidiaries
$
12,739

 
$
7,237

 
$
(24,961
)
Dividends from subsidiaries
104,000

 
95,000

 
79,900

Interest and other income
66

 
64

 
2,206

Total income
116,805

 
102,301

 
57,145

Expense:
 

 
 

 
 

Interest on senior long-term debt
5,464

 
1,592

 
—

Interest on subordinated debentures
2,165

 
2,127

 
3,092

Other operating expenses
1,742

 
1,777

 
1,502

Total expense
9,371

 
5,496

 
4,594

Income before income taxes
107,434

 
96,805

 
52,551

Income tax benefit
(3,257
)
 
(1,901
)
 
(836
)
Net income
$
110,691

 
$
98,706

 
$
53,387




119
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

20. CONDENSED FINANCIAL INFORMATION – PARENT COMPANY ONLY - Continued
(dollars in thousands)
 
 
Year Ended December 31,
CONDENSED STATEMENTS OF CASH FLOWS
2015
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
 
Net income
$
110,691

 
$
98,706

 
$
53,387

Equity in undistributed net loss (earnings) of subsidiaries (t)
(12,739
)
 
(7,237
)
 
24,961

Decrease (increase) in other assets
3,002

 
(3,311
)
 
(1,185
)
(Decrease) increase in other liabilities
(192
)
 
1,552

 
407

Other, net
—

 
—

 
(2,100
)
Net cash provided by operating activities
100,762

 
89,710

 
75,470

 
 

 
 

 
 

Cash flows from investing activities:
 

 
 

 
 

Capital contributions to subsidiaries (u)
—

 
(200,000
)
 
(115,000
)
Capital received from subsidiaries
202,519

 
115,000

 
151,956

Outlays for business acquisitions
—

 
(58,436
)
 
—

Other
—

 
43,741

 
—

Net cash provided by (used in) investing activities
202,519

 
(99,695
)
 
36,956

 
 

 
 

 
 

Cash flows from financing activities:
 

 
 

 
 

Repayment of advances from subsidiaries
—

 
—

 
(65,206
)
Proceeds from issuance of long-term debt
—

 
125,000

 
—

Common and treasury stock issuances
8,131

 
7,154

 
6,370

Purchase of treasury stock
(76,516
)
 
(78,549
)
 
—

Cash dividends
(62,488
)
 
(57,962
)
 
(43,697
)
Other
—

 
100,000

 
—

Net cash (used in) provided by financing activities
(130,873
)
 
95,643

 
(102,533
)
 
 

 
 

 
 

Net increase in cash and cash equivalents
172,408

 
85,658

 
9,893

 
 

 
 

 
 

Cash and cash equivalents at beginning of year
96,714

 
11,056

 
1,163

 
 

 
 

 
 

Cash and cash equivalents at end of year (u)
$
269,122

 
$
96,714

 
$
11,056

 
 
 
 
 
 
(t)  During 2015 earnings of subsidiaries totaled $117 million and were netted by distributions to the Parent Company of $104 million. In 2014, earnings of subsidiaries totaled $102 million and were netted by distributions to the Parent Company of $95.0 million.
(u) For tax planning purposes, cash was transferred to a subsidiary of the Parent Company totaling $200 million at December 31, 2014 and $115 million at December 31, 2013. The cash was subsequently returned to the Parent Company.

21. SEGMENT INFORMATION

The Company’s operating segments, which are evaluated regularly by the Chief Executive Officer to decide how to allocate and assess resources and performance, are “Community Banking” and “Other.” The Company determines its segments based primarily upon product and service offerings and through the types of income generated.

The Company’s community banking segment consists of commercial and retail banking. The community banking business segment is managed as a single strategic unit, which generates revenue from a variety of products and services it provides. Examples of products and services provided include commercial business loans, commercial real estate loans, residential mortgages and other consumer loans, and deposit and cash management services. Both commercial and retail banking are dependent upon deposits and various borrowings to manage interest rate and credit risk. 

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NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

21. SEGMENT INFORMATION - Continued

The Company has also identified several other operating segments. These non-reportable segments include its National Penn Investors Trust Company division, National Penn Insurance Services Group, Inc., and the parent bank holding company and are included in the “Other” category. These operating segments do not have similar characteristics to the community banking operations and do not individually or in the aggregate meet the quantitative thresholds requiring separate disclosure. The operating segments in the “Other” category earn revenues primarily through the generation of fee income and are also aggregated based on their similar economic characteristics, products and services, type or class of customer, methods used to distribute products and services and/or nature of their regulatory environment. The identified segments reflect the manner in which financial information is currently evaluated by management. The accounting policies, used in this disclosure of operating segments, are the same as those described in the Footnote 1 "Summary of Significant Accounting Policies" within this section.

Reportable segment-specific information and reconciliation to consolidated financial information is as follows:

 (dollars in thousands)
Community Banking
 
 
 
 
December 31, 2015
 
Other
 
Consolidated
Total assets
$
9,562,074

 
$
36,828

 
$
9,598,902

Total deposits
6,704,936

 
—

 
6,704,936

Net interest income (expense)
280,335

 
(10,335
)
 
270,000

Total non-interest income
54,059

 
41,111

 
95,170

Total non-interest expense
181,098

 
34,002

 
215,100

Net income (loss)
111,902

 
(1,211
)
 
110,691

December 31, 2014
 
 
 
 
 
Total assets
9,711,763

 
39,102

 
9,750,865

Total deposits
6,729,745

 
—

 
6,729,745

Net interest income (expense)
260,777

 
(3,663
)
 
257,114

Total non-interest income
49,000

 
43,175

 
92,175

Total non-interest expense
176,418

 
34,905

 
211,323

Net income
96,585

 
2,121

 
98,706

December 31, 2013
 
 
 
 
 
Total assets
8,551,806

 
40,042

 
8,591,848

Total deposits
6,072,578

 
—

 
6,072,578

Net interest income (expense)
255,030

 
(2,968
)
 
252,062

Total non-interest income
52,968

 
45,099

 
98,067

Total non-interest expense
244,906

 
37,005

 
281,911

Net income
50,840

 
2,547

 
53,387



22. SUBSEQUENT EVENTS

On January 21, 2016, National Penn and BB&T announced that National Penn’s previously announced merger with BB&T, pursuant to the Agreement and Plan of Merger, dated as of August 17, 2015, by and between National Penn and BB&T, is expected to close on or about April 1, 2016.

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Item  9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
Item 9A.  CONTROLS AND PROCEDURES
 
Disclosure Controls

National Penn's management is responsible for establishing and maintaining effective disclosure controls and procedures.  Disclosure controls and procedures are defined in Securities and Exchange Commission Rule 13a-15(e) as controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms.  Disclosure controls and procedure include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Under the supervision of National Penn’s Chief Executive Officer and Chief Financial Officer, National Penn's management carried out an evaluation of the effectiveness of National Penn's disclosure controls and procedures as of the end of the period covered by this Report.  Based on that evaluation, National Penn's Chief Executive Officer and the Chief Financial Officer concluded that such disclosure controls and procedures are effective.

Management’s Report on Internal Control Over Financial Reporting

National Penn's management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.  National Penn’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

National Penn’s internal control over financial reporting includes those policies and procedures that:

•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of National Penn’s assets;

•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of National Penn’s management and directors; and

•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of National Penn’s assets that could have a material effect on the financial statements.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within National Penn have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.  Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Management, under the supervision and with the participation of National Penn’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of National Penn's internal control over financial reporting as of December 31, 2015.  In making such assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992).  Based on this assessment, National Penn's management concluded that as of December 31, 2015 National Penn's internal control over financial reporting is effective.
 

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National Penn's independent registered public accounting firm, KPMG LLP, audited National Penn's internal control over financial reporting as of December 31, 2015.  Their report, dated February 29, 2016, expressed an unqualified opinion on National Penn's internal control over financial reporting.  Their report is included in Item 8 within this Report.

Changes in Internal Control Over Financial Reporting

There were no changes in National Penn's internal control over financial reporting during the quarter ended December 31, 2015 that materially affected, or are reasonably likely to materially affect, National Penn's internal control over financial reporting.

There are inherent limitations to the effectiveness of any control system. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Further, the design of a control system is limited by available resources, and the benefits of controls must be considered relative to their costs and their impact on National Penn's business model. National Penn intends to continue improving and refining its internal control over financial reporting.

Item 9B.  OTHER INFORMATION

None.
 
PART III
 
 
Item 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Director Information

The Board is separated into three classes, with the directors in each class serving up to a three-year term. The terms of the Class I directors will expire in 2018, the terms of the Class II directors will expire in 2016 and the terms of the Class III directors will expire in 2017. Ages are as of February 29, 2016.

Class I Directors:

Scott V. Fainor
Director since 2010
Age 54

Mr. Fainor is President and Chief Executive Officer of National Penn (January 2010 to present) and of National Penn Bank (2008 to present). Mr. Fainor was Senior Executive Vice President and Chief Operating Officer of National Penn from February 2008 through January 2010. Mr. Fainor was President and Chief Executive Officer of KNBT Bancorp, Inc. from October 2003 to February 2008. He has been a director of National Penn since January 2010 and a director of National Penn Bank since February 2008. Mr. Fainor’s educational background includes a bachelor of science degree in Marketing and Finance from DeSales University. The Board believes that Mr. Fainor’s career in banking, including executive positions with KNBT, First Colonial Group, Inc./Nazareth National Bank & Trust Co. and Wachovia/First Union, gives him the qualifications and skills to serve as a National Penn director.

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Donna D. Holton
Director since 2008
Age 70

Mrs. Holton is the retired President and Chief Operating Officer of Turn of the Century Solution, Inc., an intellectual property company (1997 to 2006). Mrs. Holton was initially elected as a director on February 1, 2008, in accordance with the merger agreement with KNBT Bancorp, Inc. She previously served as a director of KNBT and its predecessor, Keystone Savings Bank, since 2002. Mrs. Holton’s educational background includes a bachelor of arts degree in Economics from the University of Michigan. The Board believes that Mrs. Holton’s experience in senior executive and managerial positions, along with her experience as a director in the public and private sectors, gives her the qualifications and skills to serve as a National Penn director.

Thomas L. Kennedy, Esq.
Director since 2008
Age 71

Mr. Kennedy is President of the law firm of Kennedy & Lucadamo, P.C., Hazleton, Pennsylvania (2003 to present). Mr. Kennedy was initially elected as director on February 1, 2008, in accordance with the merger agreement with KNBT Bancorp, Inc. He previously served as a director of KNBT since 2005. Mr. Kennedy is an attorney-at-law and concentrates his practice on business and estate planning and related litigation. In 1998, as Chairman of the Board of First Federal Savings and Loan Association of Hazleton (a mutual thrift), a position he had held since 1988, Mr. Kennedy oversaw the company’s initial public offering. Mr. Kennedy’s educational background includes a bachelor of arts degree in English from the University of Scranton and a juris doctorate from the Boston College Law School. The Board believes that Mr. Kennedy’s extensive legal and business experience in the financial services industry gives him the qualifications and skills to serve as a National Penn director.

Class II Directors:

Christian F. Martin IV
Director since 2008
Age 60

Mr. Martin is Chairman and Chief Executive Officer of C. F. Martin & Co., Inc., a guitar manufacturer (1986 to present). Mr. Martin was initially elected as a director on February 1, 2008, in accordance with the merger agreement with KNBT Bancorp, Inc. He previously served as a director of KNBT and its predecessor, Keystone Savings Bank, since 2003. Mr. Martin’s educational background includes a bachelor’s degree from Boston University’s School of Management. The Board believes that Mr. Martin’s financial and business experience gives him the qualifications and skills to serve as a National Penn director.

R. Chadwick Paul Jr.
Director since 2008
Age 62

Mr. Paul is President and Chief Executive Officer of Ben Franklin Technology Partners of Northeastern Pennsylvania, a technology-based economic development company (2002 to present). Mr. Paul was initially elected as a director on February 1, 2008, in accordance with the merger agreement with KNBT Bancorp, Inc. He previously served as a director of KNBT and its predecessor, Keystone Savings Bank, since 1984. Mr. Paul’s educational background includes a bachelor of science degree in Business and Economics and an MBA, both from Lehigh University. The Board believes that Mr. Paul’s entrepreneurial business experience gives him the qualifications and skills to serve as a National Penn director.

C. Robert Roth
Director since 1990
Age 68

Mr. Roth is a Bucks County Magisterial District Judge (1992 to present). Mr. Roth owned and operated a retail business for 19 years. Mr. Roth has been a director of National Penn since 1990. The Board believes that Mr. Roth’s judicial and business experience, coupled with his years of service as a director of National Penn, provide the Board with valuable industry experience and knowledge of National Penn.

124


Wayne R. Weidner
Director since 1985
Age 73

Mr. Weidner has been a director of National Penn since 1985, serving as its Chairman from 2002 until 2009. Mr. Weidner’s entire career was spent with National Penn, where he began in 1962. During his career with National Penn, Mr. Weidner served in various roles including President and CEO of National Penn Bank from 1991 to 2001. He was also President of National Penn from 1998-2001; President and CEO in 2001; Chairman, President and CEO from 2002-2004; Chairman and CEO from 2004 to 2006; and Chairman in 2007. Mr. Weidner is now Vice Chairman of the Board of National Penn. Mr. Weidner served three years on the board of directors of the Federal Reserve Bank of Philadelphia. Mr. Weidner’s service as an executive, Chairman and director of National Penn, and his business and financial expertise, provide the Board with valuable industry experience and knowledge of National Penn.

Class III Directors:

Thomas A. Beaver, CPA
Director since 2005
Age 63

Mr. Beaver is the independent chair of the boards of National Penn and National Penn Bank. He has been a director of National Penn and National Penn Bank since 2005. In February 2008, Mr. Beaver was appointed lead independent director. Mr. Beaver, a certified public accountant (CPA), is a retired partner of Reinsel Kuntz Lesher LLP, a regional accounting, tax and consulting firm (1979 to present). He currently serves as a consultant to the firm in the business consulting group. He was the managing partner and CEO of its predecessor, Reinsel & Company, from 1994 to 2004. Mr. Beaver’s educational background includes a bachelor of science degree in Civil Engineering and an MBA from Lehigh University. The Board believes that Mr. Beaver’s financial, business and accounting experience, including his experience consulting on issues relating to banking and bank financing, gives him the qualifications and skills to serve as a National Penn director.

Jeffrey P. Feather
Director since 2008
Age 73

Mr. Feather is the Managing Partner of Feather Ventures, LLC, a private investment firm (1999 to present), and Vice Chairman of National Penn. Previously, Mr. Feather served as Chairman of SunGard Pentamation, Inc., an administrative software and processing services company (1970 to 2006). Mr. Feather was initially elected as a director on February 1, 2008, in accordance with the merger agreement with KNBT Bancorp, Inc. Mr. Feather previously was a director of KNBT and its predecessor, Keystone Savings Bank, since 1979, where he served as chair since 2000. Mr. Feather’s educational background includes a bachelor of science degree in Industrial Engineering from Lafayette College and graduate work in Management Science at Lehigh University. The Board believes that Mr. Feather’s technology and business expertise, along with his years of experience serving on other boards, gives him the qualifications and skills to serve as a National Penn director.

Patricia L. Langiotti, PMC
Director since 1986
Age 69

Ms. Langiotti, a professional management consultant (PMC), is President of Creative Management Concepts, a management consulting firm (1982 to present). Ms. Langiotti has been a director of National Penn since 1986. In addition to her work with National Penn, Ms. Langiotti is a director of two privately held corporations and various not-for-profit organizations. Ms. Langiotti’s educational background includes a bachelor of business administration degree from the University of Virginia. The Board believes that Ms. Langiotti’s nationally-recognized expertise as a speaker and educator in the areas of corporate governance, risk management and bank audit committee work, along with her years of experience as a director of National Penn and other organizations, gives her the qualifications and skills to serve as a National Penn director.


125

Natalye Paquin, Esq.
Director since 2006
Age 55

Ms. Paquin was appointed Chief Transformation Officer of the Girl Scouts of the USA in November 2015 and leads the Girl Scouts of the USA's National Office of Strategy and Advancement. Ms. Paquin previously served as Chief Executive Officer of the Girl Scouts of Eastern Pennsylvania (GSEP) (2010 to 2015). Ms. Paquin served as Executive Vice President and Chief Operating Officer of The Kimmel Center, Inc., Philadelphia’s premier performing arts center, where she was responsible for overseeing the day-to-day operations of the Kimmel Center, the Merriam Theatre and the historic Academy of Music (2006 to 2010). Ms. Paquin served as Chief Operating Officer and Chief of Staff for the School District of Philadelphia (2002 to 2006). Ms. Paquin has been a director of National Penn since 2006. Ms. Paquin’s educational background includes a bachelor of science degree from Florida A&M University and a juris doctorate from DePaul University College of Law. Ms. Paquin also completed executive education programs from Harvard University’s School of Business and is a distinguished graduate of the Broad Academy for Urban Superintendents. The Board believes that Ms. Paquin’s years in senior management and legal positions gives her the qualifications and skills to serve as a National Penn director.

Information relating to executive officers of National Penn is included under Item 4A in Part I of this Report.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires National Penn’s directors, executive officers and more than10% beneficial shareholders to file reports of ownership and changes in ownership with the Securities and Exchange Commission. These persons are required by Securities and Exchange Commission regulations to furnish National Penn with copies of all such Section 16(a) filings.

Based solely on its review of the Section 16(a) filings furnished to National Penn and/or written representations that no year-end Forms 5 were required to be filed, National Penn believes that its directors, executive officers and more than 10% beneficial shareholders complied with all Section 16(a) filing requirements during 2015.

Code of Conduct

National Penn maintains a written Code of Conduct that applies to National Penn's directors, executive officers, employees and others acting on behalf of National Penn, including our principal executive officer, principal financial officer, principal accounting officer, controller, and any other person performing similar functions. The Code of Conduct may be accessed on National Penn's website, www.nationalpennbancshares.com by selecting "Governance Documents".

Audit Committee

National Penn’s Audit Committee is currently comprised of five directors (Mr. Kennedy, Mr. Beaver, Mrs. Langiotti, Mr. Paul and Mr. Weidner), all of whom are independent as provided under NASDAQ and Securities and Exchange Commission standards.

The Securities and Exchange Commission and NASDAQ also have requirements regarding financial expertise and sophistication of Audit Committee members. The Board has determined that each of the following members of the Audit Committee meets the SEC’s definition of “audit committee financial expert” under NASDAQ-listed company audit committee rules: Chair Thomas L. Kennedy, Esq.; Thomas A. Beaver, CPA; Patricia L. Langiotti, PMC; R. Chadwick Paul Jr.; and Wayne R. Weidner. In addition, the Board has identified other members of the Board who, while not presently members of the Audit Committee, would qualify as “audit committee financial experts” and are independent under NASDAQ rules. They are Jeffrey P. Feather, Christian F. Martin IV, and Natalye Paquin.


126

Item 11.  EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Overview

The following discussion provides a description of National Penn’s 2015 compensation program for National Penn’s Chief Executive Officer, Chief Financial Officer and three other most highly compensated executive officers in 2015. These individuals are collectively referred to as the “named executive officers.” National Penn’s named executive officers for 2015 were:

•Scott V. Fainor, President and Chief Executive Officer
•Michael J. Hughes, Senior Executive Vice President and Chief Financial Officer
•Sandra L. Bodnyk, Senior Executive Vice President and Chief Risk Officer
•David B. Kennedy, Senior Executive Vice President and Chief Banking Officer
•Sean P. Kehoe, Executive Vice President, Chief Legal Officer and Corporate Secretary

Summary of National Penn 2015 Performance

During 2015, we believe management continued to lead National Penn effectively through the challenges and complexities of our economy and the bank regulatory environment. Operationally, National Penn continued its excellent performance, with strong adjusted return on average assets and adjusted return on average tangible common equity on an absolute basis and relative to our peers. In addition, National Penn maintained an "Outstanding" Community Reinvestment Act Rating (CRA) from National Penn Bank's primary regulator. Strategically, as announced on August 17, 2015, National Penn successfully negotiated the merger with BB&T Corporation. The merger is anticipated to close on or about April 1, 2016.

Role of the Committee

The committee operates under a written charter reviewed, updated and approved annually by National Penn’s Board of Directors. The committee’s primary areas of responsibilities and authorities regarding executive compensation are to:

•
Develop an overall executive compensation philosophy and strategy, including determining appropriate levels of executive compensation, the mix between fixed and incentive compensation and the mix between short-term and long-term compensation, without encouraging unnecessary and excessive risk-taking.

•
In its sole discretion, retain or obtain the advice of consultants, outside counsel and other advisors as it determines appropriate to assist it in the full performance of its functions, including any compensation consultant used to assist in the evaluation of director or executive compensation.

•
Appoint, compensate and oversee the work of any consultants, outside counsel and other advisors retained by the committee, and determine appropriate funding required from National Penn for payment of compensation to any such advisors.

•
Assess the independence of consultants, outside counsel and other advisors (whether retained by the committee or management) who provide advice to the committee, prior to selecting or receiving advice from them, in accordance with NASDAQ listing standards.

•
Conduct regular and independent reviews of executive officer compensation; develop executive compensation procedures and programs consistent with the approved compensation philosophy and strategy; and approve any peer group(s) used for the purposes of executive or board compensation.

•
Approve participation, performance measures and performance parameters for awards under the Executive Incentive Plan and the Long-Term Incentive Compensation Plan.

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•
Review and approve corporate goals and objectives relevant to Chief Executive Officer compensation, evaluate our Chief Executive Officer’s performance in light of those goals and objectives and approve our Chief Executive Officer’s compensation level based on this evaluation, without the Chief Executive Officer’s presence during such voting or deliberation by the committee on the Chief Executive Officer’s compensation.

•
Review and approve the compensation of National Penn’s Section 16 reporting executive officers as recommended by National Penn’s Chief Executive Officer (which reviews generally include a review of competitive market data for these individuals and consideration of market conditions).

•
Review and approve employment, severance and/or change-in-control agreements for National Penn’s Section 16 reporting executive officers.

•
Oversee administration of executive incentive plans, long-term incentive compensation plans for employees and directors, employee stock purchase plans, and other executive and director compensation arrangements; approve all officer long-term incentive compensation awards and awards for executive officers under executive incentive plans.

•
Oversee the Company’s compliance with regulatory requirements associated with compensation programs under its purview.

Compensation Consultant

The committee has historically retained a compensation consultant. To assist the committee in carrying out its responsibilities, the committee has engaged Towers Watson as the committee’s independent compensation consultant. Towers Watson provides the committee with peer executive and non-employee director compensation data, as well as expertise and advice on various matters brought before the committee. As described in its written charter, the committee has the sole authority to retain and terminate the independent compensation consultant and approve fees and other engagement terms. In addition, the committee has considered the six “independence” factors listed in the NASDAQ listing requirements and has determined that Towers Watson does not have a conflict of interest.

Peer Group Comparison and Benchmarking

The committee regularly reviews the competitive market to compare executive pay and performance to market norms and to provide guidance for setting total compensation guidelines. The peer group utilized for setting 2015 total compensation guidelines was based on objective criteria and included 19 institutions (with National Penn positioned approximately at the median of total assets, market capitalization and total employees) located in the mid-Atlantic or northeastern United States, of similar asset size and with generally similar business models. While the peer group is reviewed annually and updated based on various economic and business factors as appropriate, the peer group, initially approved by the committee for 2011 remained unchanged through the time 2015 base salaries were determined.

128

The peer group utilized for setting 2015 total compensation guidelines is listed below.
Company Name
City, State
Ticker Symbol
Astoria Financial Corporation
Lake Success, NY
AF
Beneficial Mutual Bancorp, Inc.
Philadelphia, PA
BNCL
Community Bank System, Inc.
De Witt, NY
CBU
F.N.B. Corporation
Pittsburgh, PA
FNB
First Commonwealth Financial Corp.
Indiana, PA
FCF
First Financial Bancorp.
Cincinnati, OH
FFBC
FirstMerit Corporation
Akron, OH
FMER
Fulton Financial Corporation
Lancaster, PA
FULT
Investors Bancorp, Inc.
Short Hills, NJ
ISBC
NBT Bancorp, Inc.
Norwich, NY
NBTB
Northwest Bancshares, Inc.
Warren, PA
NWBI
Park National Corporation
Newark, OH
PRK
Provident Financial Services, Inc.
Jersey City, NJ
PFS
S&T Bancorp, Inc.
Indiana, PA
STBA
Signature Bank
New York, NY
SBNY
Susquehanna Bancshares, Inc.
Lititz, PA
SUSQ
United Bankshares, Inc.
Charleston, WV
UBSI
Valley National Bancorp
Wayne, NJ
VLY
Webster Financial Corporation
Waterbury, CT
WBS

In addition to the peer group, Towers Watson used its own industry survey, the Towers Watson 2014 Financial Services Executive Compensation Database, which reflects data from 70 banks and is size-adjusted for banks approximately our asset size to assist the committee in setting 2015 total compensation guidelines.

Data and competitive perspective were assessed by component (e.g., base salary, annual cash incentives, and long-term equity incentives) and in aggregate to provide a comprehensive review of total compensation. The relationship between pay and performance between National Penn and the peer group was also analyzed. In June 2015, in connection with its regular review of the peer group, the committee removed Susquehanna Bancshares, Inc., which was acquired in 2015, from its list and added MB Financial, Inc., based on its relative financial metrics and geography.

In addition, in the interest of keeping current with emerging market awareness, the committee receives and reviews other available information on executive compensation practices, executive compensation trends, industry trends, pay levels and regulatory updates throughout the year. Sources of such information include but are not limited to available compensation surveys and databases, regular updates from Towers Watson and legal counsel and industry conferences. While benchmarking relative to peers is important to the committee’s analysis of the compensation of our executives, it is based on historical data and may not in all cases represent best practice going forward. Such data, while a helpful resource, are not meant to supplant the committee’s review of National Penn executives’ performance, internal pay equity information and other market information, all of which the committee believes are necessary when making compensation decisions. Thus, the committee retains discretion to set compensation levels that are higher or lower than targeted “market” benchmarks.

Role of Executives in Establishing Compensation

For 2015, our Chief Executive Officer worked with the committee in designing and implementing National Penn’s compensation programs for all executive officers, excluding himself. His role included:

•
Recommending performance targets, goals and objectives;

•
Evaluating executive performance;

•
Advising and consulting with the committee regarding corporate titles, base salaries, annual incentive plan categories, long-term incentive compensation awards, general awards and employment terms for executives; and

•
Providing background information for committee meeting agenda items.

129

In 2015, our Chief Executive Officer generally attended committee meetings, but was not present during executive sessions of the committee when matters related to him were discussed. In addition, National Penn’s Corporate Secretary and Chief Legal Officer generally attended committee meetings to document discussions and provide reports, information and advice about agenda topics.

Philosophy and Strategy of Executive Compensation

Overall Objective

The overall executive compensation philosophy and strategy at National Penn is to provide a total compensation package that is balanced and competitive in the external market and correlates to National Penn’s strategic business plan. The package is also intended to compensate superior individual and corporate performance appropriately based on financial and strategic performance measures that increase longer-term shareholder value, all without encouraging excessive or undue risk-taking. The program aligns the interests of the executive with those of the shareholders of National Penn by providing a proprietary interest in National Penn, the value of which can be significantly enhanced by the appreciation of National Penn common stock.

Benchmark References

As noted above, the committee regularly reviews and considers market and peer data as well as other available best practice information to facilitate their assessment of executive compensation and performance. The committee references several resources, including, but not limited to, peer group information, industry compensation surveys and industry performance data. These resources are used to assist the committee in assessing the competitiveness of current pay levels as well as to set compensation program guidelines.

Total Compensation Positioning and Mix

National Penn generally targets its total compensation package (both individual components and in the aggregate) to be competitive with market (i.e., to approximate the 50th percentile). While targets are set to provide competitive pay for meeting expected performance, actual pay levels (by component and in the aggregate) vary to reflect performance relative to goals and industry performance over both short- and long-term timeframes.

In the aggregate, the objective of National Penn’s total compensation program is to provide an appropriate “mix” and balance of fixed and variable (i.e., incentive/performance) compensation. The target mix of compensation will vary based on the executive’s role, and the actual mix will vary based on actual performance (e.g., in a year when no annual incentive is paid, the percentage of total compensation paid in salary will increase). The focus on mix is to ensure our total compensation program appropriately balances fixed versus variable compensation.

In general, the committee targets the following elements as a percentage of total direct compensation (salary plus target annual cash and long-term equity incentive) for its named executive officers:

•Base salary will comprise between 30% and 55%;
•Target annual cash incentives will comprise between 20% and 40%; and
•Long-term equity incentives will comprise between 20% and 45%.

The result is that approximately 45%-70% of a named executive officer’s total compensation will vary based on the executive’s role and performance.

130

Elements of Executive Compensation
Element
Description & Purpose
Other Features
Base Salary
The purpose of base salary is to provide competitive and fair compensation that reflects the position and the individual’s value to the organization based on National Penn’s business strategy. Base salary reflects fixed compensation that is the foundation for other compensation components (such as incentives and benefits). Executive base salaries at National Penn are to be structured and targeted “at market” or approximately 50th percentile for comparably sized financial services organizations. Actual salaries are set to reflect each executive’s individual role, contribution, experience and performance.
The committee reviews and determines executive salary levels annually.
Annual Cash Incentives
Awards under our Executive Incentive Plan are designed to motivate and compensate executives for the achievement of our annual business plan/objectives. Target award levels are set to be consistent with market practice (with National Penn positioned at the median), but actual award levels will vary from 0% to approximately 150% of target to reflect achievement of performance goals to hold executives accountable for corporate and individual performance. Company performance goals are tied primarily to financial performance measures as determined/approved by the committee and, where appropriate, individual performance goals that reflect each executive’s accountability for driving business success. All performance goals are periodically reviewed by the committee in order to ensure that they do not promote excessive or undue risk taking. Financial objectives may also include a measured comparison of how well National Penn performs versus its peer group. Objectives will have specific assigned levels of achievement for threshold, target and maximum performance.
The committee establishes the specific terms and conditions for the payment of annual cash incentive awards at the beginning of the applicable year. Additionally, the committee has discretion to consider unusual business factors and their resulting effect on corporate performance and adjust (upwards or downwards) in any award(s) granted.
Long-Term Equity Incentives
Awards under our Long-Term Equity Incentive Compensation Plan are intended to compensate executives for sustained long-term performance that is aligned with shareholder interests and to encourage employee retention through vesting schedules. We also expect our executives to own National Penn stock to ensure long-term perspectives and serve as a mitigating factor against any tendency towards excessive or undue risk taking. Long-term equity incentive awards may take a variety of forms, such as stock options and restricted stock grants. Levels and frequency of awards are determined by the committee and designed to reflect the executive’s level of responsibility and performance, competitive parameters and desired compensation philosophy and objectives. While initial grants are targeted to be competitive with market, actual award values will reflect National Penn’s actual long-term performance (through stock price appreciation and achievement of long-term performance goals). Service-based restricted stock awards can also be granted as appropriate to recognize performance and provide an ownership/ retention focus. Long-term incentives have the capacity to be the largest component of executive compensation, if our performance and stock price exceed our expectations.
The committee evaluates and establishes the form, mix and terms of the long-term equity incentive awards annually. Additionally, the committee has discretion to consider unusual business factors and their resulting effect on corporate performance and adjust (upwards or downwards) any award(s) granted.
Executive
Benefits &
Perquisites
National Penn provides executives with a level of executive benefits and perquisites to remain competitive, attract and retain key executives and address contribution caps that may be placed on their participation in several employee benefit programs (e.g., retirement contributions in a 401(k) plan). Perquisites are provided only where appropriate and where they facilitate job performance (e.g., automobile and telephone allowances).
Details on executive benefits and perquisites are included in the footnotes to the Summary Compensation Table.

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Agreements with Executives

An important aspect of overall executive employment relationships are employment and change-in-control agreements. These agreements are designed to promote stability and continuity of senior executives and ensure their interests are aligned with shareholders. Terms of these agreements consider marketplace practices and National Penn’s unique needs, and are tailored to the individual executive with a focus on retention and recruitment. Details on employment agreements and change-in-control agreements are included under “2015 Executive Compensation-Employment, Change-in-Control and Other Agreements.”

Link between Financial Performance and Executive Compensation

National Penn’s executive compensation philosophy and strategy is intended to be competitive and compensate executives commensurate with actual performance. Because a significant portion of our total compensation is performance-based (through annual cash and long-term equity incentives), we expect our compensation will vary on an annual basis, but evolve over the long-term to align with our performance relative to our business strategy, peers and the financial services industry overall. We believe our total compensation program provides an appropriate balance that enables National Penn to ensure proper pay-performance alignment and reduces the potential that our plans might motivate excessive or undue risk taking. Our program balances:

•Short-term and long-term performance;
•Company and individual performance;
•Quantitative/financial performance and qualitative/discretionary performance; and
•Absolute performance (our internal goals) and relative performance (compared to industry).

When corporate performance exceeds National Penn’s objectives and peer performance, total compensation is intended to be above market median. In years where short-term performance goals are not achieved or fall below expectations, total compensation will be below market median. Over a long-term horizon, total compensation should reflect the level of sustained performance achieved by National Penn.

All of the components are balanced, integrated and designed to provide a total compensation environment that will enhance the executives’ relationship with National Penn and support the growth of overall shareholder value.
2015 Executive Compensation Decisions
In this section, we discuss decisions made by the committee over the course of 2015 regarding the compensation of our 2015 named executive officers. When considering various factors relative to the committee’s decisions, no specific formula was applied to determine the weight of each factor. Rather, the committee exercised its discretion and judgment when considering each factor and all factors, taken collectively.
Base Salary
In January 2015, and effective January 1, 2015, the committee approved the following base salary increases for the named executive officers:

•Mr. Fainor - 2.0% increase from $765,001 to $780,302;
•Mr. Hughes - 2.0% increase from $496,802 to $506,740;
•Ms. Bodnyk - 2.0% increase from $419,176 to $427,561;
•Mr. Kennedy - 2.0% increase from $351,901 to $358,939; and
•Mr. Kehoe - 2.0% increase from $275,001 to $280,500.
In making its determinations with respect to base salaries for these named executive officers, the committee considered several factors, including each executive’s job performance during 2014 (including, with respect to Mr. Fainor, the results of the annual evaluation of Mr. Fainor’s performance completed by each of the independent members of the full Board of Directors), recommendations made by the committee’s compensation consultant, recommendations made by Mr. Fainor with respect to named executive officers other than himself, and a review of National Penn’s financial performance relative to its peer group set forth above.

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Executive Incentive Plan
The Executive Incentive Plan provides the opportunity for annual cash incentives to be awarded to executive officers based on annual company and individual performance goals. With input from our Chief Executive Officer, we annually review all components of the plan, including participation, performance measures, award levels and all other administrative features. At the beginning of the year, we approve performance parameters and award schedules for the upcoming year. National Penn’s parameters may be one or more financial or other performance measures established by National Penn and not mandated by the plan.
2015 Plan Year Goals and Results. In January 2015, the committee approved the company performance goals, targets and award schedule for the 2015 plan year. For the 2015 plan year, the Executive Incentive Plan had three categories of participants:

•
Category A included only our Chief Executive Officer, Mr. Fainor, and had the highest award potential;

•
Category AA included our Chief Financial Officer, Mr. Hughes, our Chief Risk Officer, Ms. Bodnyk, and our Chief Banking Officer, Mr. Kennedy; and

•
Category B included our other most senior executive officers with company-wide managerial responsibilities, which included, among others, Mr. Kehoe, our Chief Legal Officer and Corporate Secretary.
Individual performance awards were based on the attainment of specific objectives established at the beginning of the year. For example, the committee established a unique set of individual performance objectives for Mr. Fainor, which relate to his role in driving National Penn’s achievement of certain growth, financial, governance and infrastructure objectives. In addition, a participant must be continuously employed through the award payment date to receive any award, except for death, disability, involuntary termination (not for cause) and retirement, in which case, any provided award will be prorated.
The committee established the following company performance goals:

•
Financial Objectives include ranges of return on average assets and return on average tangible common equity, which are each weighted as 50% of the overall company performance criteria. In addition, for 2015 the committee established a third corporate performance goal tied to loan growth that the committee subsequently eliminated after the announcement of the merger with BB&T Corporation.

•
Strategic Business Objectives include National Penn’s success relative to attainment of six other key strategic business objectives previously established by the Board at the end of 2014 and approved by the Board for the 2015 Strategic Plan. The 2015 Strategic Business Objectives were (i) grow revenue and core earnings power of the franchise; (ii) grow revenue and profit contribution of Wealth Management and Insurance; (iii) sustain a strong and balanced risk management culture; (iv) successfully integrate the TF Financial Corp. acquisition and develop processes and procedures for integration; (v) prepare National Penn to economically and effectively cross $10 billion asset threshold; and (vi) pursue accretive acquisitions and other actions to effectively deploy capital. Although achievement of these strategic business objectives are not weighted for purposes of the overall company performance criteria, the committee considers the achievement of these objectives as an additional parameter for annual incentive awards.

•
In addition, in connection with the pending merger with BB&T Corporation, the committee also recognized the significant additional work, goals and achievements the executive officers accomplished throughout 2015. 
The committee set the target levels for the financial objectives (i.e., return on average assets, return on average tangible common equity) relating to potential 2015 Executive Incentive Plan awards, and concluded that the relationship between the payments generated at the various levels of achievement and the degree of difficulty of the performance goals was significant and reasonable given the business environment, risk and other related factors. In order to account for unforeseen external market factors, the committee also reserved the right to consider one-time non-recurring items when approving awards, to increase or decrease awards based on peer performance and to reduce awards if it determined that the company did not achieve its goals with regard to enterprise risk management for the year.


133

The award schedule for 2015 was based on three factors, the first two comprising the company performance award and the third being the individual performance award:
 
Company Performance Award Criteria
 
Performance Criteria
Threshold
 
Target
 
Maximum
1.
Return on average assets (ROAA) (50% of company portion)
0.95%
 
1.04%
 
1.13%
2.
Return on average tangible common equity (ROATCE) (50% of company portion)
10.72%
 
11.78%
 
12.75%
 
Participant Category
% of Base Pay if Threshold is Achieved
 
% of Base Pay if Target is Achieved
 
% of Base Pay if Maximum is Achieved
 
A
15%
 
50%
 
75%
 
AA
15%
 
45%
 
65%
 
B
15%
 
35%
 
50%
 
 
 
 
 
 
 
 
Individual Award Criteria
3.
Based on the respective objectives established for each participant at the beginning of the plan year. Individual Performance - % of base pay in addition to % of base pay for Company Performance
 
Participant Category
         Award as a % of Base Pay
 
A
 
Range 0% to 10% - Target 5%
 
AA
 
Range 0% to 10% - Target 5%
 
B
 
Range 0% to 10% - Target 5%
For a summary of the estimated possible incentive award payouts for each of the named executive officers see “Executive Compensation-Grants of Plan-Based Awards-2015.”
2015 Award Payouts. In December 2015, the committee reviewed National Penn year-to-date and projected performance results for 2015 and determined that National Penn achieved adjusted return on average assets of 1.18%, which exceeds the maximum performance level return on average assets of 1.13%. Similarly, the committee reviewed National Penn performance results and determined that National Penn achieved adjusted return on average tangible common equity of 13.53%, which exceeds the maximum performance level return on average tangible common equity of 12.75%. Ratios for adjusted return on average assets and adjusted return on average tangible common equity, as determined by the committee, reflect adjusted net income amounts which exclude certain one-time non-recurring expenses. In addition, based on materials provided by management, the committee determined that the six other strategic business objectives, also part of the company performance criteria, except to the extent impacted by the pending merger with BB&T Corporation, were attained. In addition, in connection with the pending merger with BB&T Corporation, the committee also recognized the significant additional work, goals and achievements the executive officers accomplished throughout 2015. Accordingly, the committee approved company performance awards for the named executive officers under the Executive Incentive Plan at an amount equal to the maximum performance levels for all the executive officers. In addition, the committee approved an individual performance award for Mr. Fainor under the Executive Incentive Plan of $663,256, as he completed all of his personal performance goals except to the extent impacted by the pending merger with BB&T Corporation. Each of the other named executive officers received individual awards at the maximum level. In addition, the committee accelerated the payment of the 2015 awards approximately one month to December 2015 to address certain tax implications as a result of the merger with BB&T Corporation.
Long-Term Incentive Compensation Plan
On April 22, 2014, National Penn shareholders approved National Penn’s Long-Term Incentive Compensation Plan (the “Plan”) that provides equity awards generally intended to align the interests of our executives and our shareholders and to encourage executive ownership of our stock. See “Philosophy and Strategy of Executive Compensation-Elements of Executive Compensation.” Awards under the Plan also are made to maintain the level of incentive deemed necessary to retain key employees, maintain employee morale and achieve future business and financial objectives. In granting awards under the 2014 Plan, the committee also considers, among other factors, the value of awards made in prior years and the advice and recommendations of the Chief Executive Officer, where appropriate. See “Role of Executives in Establishing Compensation” above.

134

In January 2015, the committee made long-term incentive compensation awards to various National Penn officers and directors, including each the named executive officers in the form of service-based restricted stock under the 2014 Plan. Mr. Fainor received an award of 96,775 shares; Mr. Hughes received an award of 54,729 shares; Ms. Bodnyk received an award of 48,236 shares; Mr. Kennedy received an award of 34,315 shares and Mr. Kehoe received an award of 15,152 shares. These shares of restricted stock granted to the named executive officers will vest in 25% increments over four years on each anniversary of the date of grant, provided that the grantee performs substantial services for National Penn during such time or if earlier, upon his or her death or disability, or if National Penn experiences a change-in-control event. In making these grants, the committee considered multiple factors, which included, but were not limited to, overall financial performance on both relative and absolute bases, individual performance, compensation pay mix for 2015 and compliance with National Penn’s stock ownership guidelines. In addition, the committee accelerated by approximately one month to December 2015 the vesting of 83,691, 48,026, 41,990, 30,562 and 3,788 shares of restricted stock for Mr. Fainor, Mr. Hughes, Ms. Bodnyk, Mr. Kennedy and Mr. Kehoe, respectively, to address certain tax implications as a result of the merger with BB&T Corporation.
Risk Balancing Features
Since 2011, National Penn’s incentive-based compensation plans feature a “clawback” policy. The clawback policy provides that all incentive-based compensation, other than time-vested equity compensation and discretionary bonuses, that is earned after the effective date of the policy shall be subject to repayment if it is paid to an executive in the three-year period preceding any date on which National Penn is required to disclose a restatement of its financial statements due to material noncompliance with financial reporting requirements under the federal securities laws or as a result of misconduct. Repayment under the clawback policy is limited to the amount of incentive-based compensation that exceeds the amount of such compensation which would have been paid to such executive if the financial statements had been originally filed in their restated form. All violations of the clawback policy must be promptly reported to the committee.
In addition, National Penn’s incentive-based compensation plans work in concert with National Penn’s employee stock ownership guidelines, which seek to reinforce the importance of aligning the financial interests of National Penn’s executive officers with those of its shareholders. Under the minimum stock ownership guidelines, National Penn’s Chief Executive Officer is required to own National Penn equity interests with an aggregate value equal to three times base salary; a Senior or Group Executive Vice President is required to own National Penn equity interests with an aggregate value equal to two times base salary; and other executive officers who are designated as participants within category B of the Executive Incentive Plan are required to own National Penn equity interests with an aggregate value equal to one times base salary. All of National Penn’s named executive officers own more than the required number of shares.
Furthermore, responding to concerns of institutional investors generally, National Penn adopted a pledging policy effective October 22, 2013, introducing limits on the amount that an executive may pledge and excluding pledged shares from those counted toward satisfaction of company stock ownership guidelines. The limits in the policy prohibit executive officers from pledging any National Penn stock in excess of the lesser of (i) 50,000 shares or (ii) 10% of the total shares of stock held by that officer.
Lastly, per National Penn's Code of Conduct, hedging of National Penn stock and similar transactions are not permitted.
Tax Considerations
The committee considers the potential effects of Section 162(m) of the Code on the compensation paid to certain of the National Penn’s executive officers. Section 162(m) disallows a tax deduction for any publicly held corporation for individual compensation exceeding $1,000,000 in any taxable year for certain executive officers, unless such is “qualified performance-based compensation.” Neither the annual cash incentive awards under the Executive Incentive Plan nor the service-based restricted stock awards under the 2014 Plan are considered “qualified performance-based compensation” under Section 162(m) guidelines.
“Say-on-Pay” Vote
At the 2015 annual meeting of shareholders, our shareholders overwhelmingly supported our advisory “say-on-pay” resolution with approximately 96.0% of the votes cast voting to approve the executive compensation disclosed in the 2015 proxy statement. The committee considered the favorable “say-on-pay” vote to be a general endorsement of the current executive compensation program in its deliberations on the executive compensation program, however, the Committee did not consider the favorable "say-on-pay" vote itself to be determinative when making decisions with respect to such program.

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Summary

The committee believes that National Penn’s executive compensation program is well balanced among the several components, with performance measures that support National Penn’s goals, objectives and strategies. The level of awards in the incentive components is competitive in the marketplace, and the other elements of the executive’s compensation relationship with National Penn, such as an employment agreement or change-in-control agreement, are structured to be mutually beneficial to National Penn’s shareholders and to the respective executives.

Executive Compensation

Summary Compensation Table - 2015, 2014, and 2013

The following table summarizes total compensation for National Penn’s named executive officers for 2015.
Name and Principal Position
Year
Salary
($)
Bonus
($)
Stock Awards (1)
($)
Option Awards
($)
Non-Equity Incentive Plan Compensation
($)
Change in Pension Value and Non-Qualified Deferred Compensation Earnings
(2) ($)
All Other Compensation
(4) ($)
Total
($)
Scott V. Fainor
2015
780,302

—

958,073

—

663,256

—

38,350

2,439,981

 
President & Chief Executive Officer
2014
765,001

—

930,166

—

570,873

2,654

36,862

2,305,556

 
2013
750,000

—

849,999

—

547,333

—

36,879

2,184,211

 
 
 
 
 
 
 
 
 
 
 
Michael J. Hughes
2015
506,740

—

541,817

—

380,055

—

29,249

1,457,861

 
Senior Executive Vice President & Chief Financial Officer
2014
496,802

—

526,035

—

331,362

—

29,520

1,383,719

 
2013
480,002

—

485,004

—

318,956

—

29,054

1,313,016

 
 
 
 
 
 
 
 
 
 
Sandra L. Bodnyk
2015
427,561

—

477,536

—

320,670

—

28,236

1,254,003

 
Senior Executive Vice President & Chief Risk Officer
2014
419,176

—

463,628

—

279,586

2,887

29,097

1,194,374

 
2013
405,001

—

429,004

—

269,119

—

28,368

1,131,492

 
 
 
 
 
 
 
 
 
 
David B. Kennedy
2015
358,939

—

339,719

—

269,205

—

25,462

993,325

 
Senior Executive Vice President & Chief Banking Officer
2014
351,901

—

329,828

—

234,714

2,624

26,327

945,394

 
2013
340,000

—

305,001

—

224,905

—

23,766

893,672

 
 
 
 
 
 
 
 
 
 
Sean P. Kehoe (3)
2015
280,500

—

150,005

—

168,300

—

21,395

620,200

 
Executive Vice President, Chief Legal Officer & Secretary
2014
195,674

—

51,850

—

147,879

—

121,065

516,468

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(1)
Amounts reported represent the grant date fair value of restricted stock awards. The fair value of restricted stock awards is based on the closing price of National Penn's common stock on the date of grant.

(2)
Amounts reported represent the actuarial increases in pension value of the executive's accumulated benefit under National Penn's non-contributory, defined benefit pension plan. The value of Mr. Fainor’s, Ms. Bodnyk’s and Mr. Kennedy’s 2015 benefit under the pension plan decreased by ($316), ($178) and ($329), respectively. In accordance with Securities and Exchange Commission rules, aggregate decreases are not reflected in the Summary Compensation Table.

(3)
Salary for Mr. Kehoe in 2014 reflects salary earned from his April 2014 date of hire.

(4)
Amounts reported for each individual are as follows:

136

Name
Year
Company “Match” for 401(k) Plan
($)
Company Profit-Sharing Contribution to 401(k) for
Prior Year
($)
Imputed Value of Life Insurance Benefits
($)
Automobile Allowance
($)
Other
($)
Total
($)
Scott V. Fainor
2015
9,275

15,877

490

12,000

708

38,350

 
2014
9,100

15,000

762

12,000

—

36,862

 
2013
9,175

15,000

704

12,000

—

36,879

Michael J. Hughes
2015
9,275

10,305

918

8,400

351

29,249

 
2014
9,100

9,600

1,425

8,400

995

29,520

 
2013
9,175

9,600

1,316

8,400

563

29,054

Sandra L. Bodnyk
2015
9,275

8,695

1,362

8,400

504

28,236

 
2014
9,100

8,100

2,188

8,400

1,309

29,097

 
2013
9,175

8,100

2,020

8,400

673

28,368

David B. Kennedy
2015
9,275

7,297

490

8,400

—

25,462

 
2014
9,100

6,769

762

8,400

1,296

26,327

 
2013
7,781

6,000

704

8,400

881

23,766

Sean P. Kehoe
2015
9,275

3,385

335

8,400

—

21,395

 
2014
5,923

—

383

5,492

109,267 (a)

121,065

(a) Amount reported represents relocation expenses in the amount of $75,000 and an associated tax gross up for taxable relocation amounts in the amount of $34,267.


Grants of Plan-Based Awards - 2015

The following table shows information regarding grants for 2015 of plan-based awards to the named executive officers for the fiscal year ended December 31, 2015.
Name
Grant Date
Estimated Possible Payouts Under Non-Equity Incentive Plan Awards (1)
All Other Stock Awards: No. of Shares of Stock or Units
(2)
(#)
Grant Date Fair Value Stock and Option Awards ($)
Threshold
($)
Target
($)
Maximum
($)
 
 
117,045

429,166

663,257

 
 
 
Scott V. Fainor
1/20/15
 
 
 
96,775

958,073

 
 
 
76,011

253,370

380,055

 
 
 
Michael J. Hughes
1/20/15
 
 
 
54,729

541,817

 
 
 
64,134

213,780

320,671

 
 
 
Sandra L. Bodnyk
1/20/15
 
 
 
48,236

477,536

 
 
 
53,841

179,470

269,205

 
 
 
David B. Kennedy
1/20/15
 
 
 
34,315

339,719

 
 
 
42,075

112,200

168,300

 
 
 
Sean P. Kehoe
1/20/15
 
 
 
15,152

150,005

 
(1)
Amounts reported represent the potential payouts to each of the named executive officers resulting from the grant of an award pursuant to National Penn’s Executive Incentive Plan, subject to achievement of company and individual performance goals discussed in “Compensation Discussion and Analysis – 2015 Executive Compensation Decisions – Executive Incentive Plan.” Actual amounts earned by the named executive officers are set forth under the “Non-Equity Incentive Plan Compensation” column of the “Summary Compensation Table.” 

(2)
All shares of restricted stock vest 25% per year over a four-year period, subject to the terms of the award agreement. See “Compensation Discussion and Analysis – 2015 Executive Compensation Decisions – Long-Term Incentive Compensation Plan” for additional information on the restricted stock grants.


137


Outstanding Equity Awards at Fiscal Year-End - 2015

The following table shows information on outstanding equity awards held by each of the named executive officers as of December 31, 2015.
 
Option Awards
Stock Awards
Name
Number of Securities Underlying Unexercised Options Exercisable (#)
Number of Securities Underlying Unexercised Options Unexercisable (#)
Option Exercise Price
($)
Option Expiration Date
Number of Shares or Units of Stock That Have Not Vested
(#)
Market Value of Shares or Units of Stock That Have Not Vested (7)
($)
Scott V. Fainor
    15,450

(1)
—

 
16.08
01/23/16
21,595

266,266

(3)
 
    10,300

(1)
—

 
15.92
01/26/17
41,711

514,297

(4)
 
20,000

 
—

 
6.88
03/23/19
72,581

894,924

(5)
Michael J. Hughes
—

 
40,000

(2)
5.60
09/30/19
12,322

151,930

(3)
 
—

 
—

 
—
—
23,589

290,852

(4)
 
—

 
—

 
—
—
41,046

506,097

(5)
Sandra L. Bodnyk
    7,725

(1)
—

 
16.08
01/23/16
10,899

134,385

(3)
 
    5,150

(1)
—

 
15.92
01/26/17
20,790

256,341

(4)
 
8,750

 
—

 
6.88
03/23/19
36,177

446,062

(5)
David B. Kennedy
    7,725

(1)
—

 
16.08
01/23/16
7,749

95,545

(3)
 
    3,090 

(1)
—

 
15.92
01/26/17
14,790

182,361

(4)
 
5,000

 
—

 
6.88
03/23/19
25,736

317,325

(5)
Sean P. Kehoe
—

 
—

 
—
—
3,750

46,238

(6)
 
 
 
 
 
 
 
11,364

140,118

(5)
(1)
These stock options were issued in substitution for outstanding KNBT Bancorp, Inc. stock options in accordance with the merger agreement dated September 6, 2007 between National Penn and KNBT.
 
 
(2)
These stock options vest on August 31, 2016.
 
 
(3)
These shares of restricted stock, representing 25% of the total original grant amount, vest in equal annual installments on January 22, 2017.
 
 
(4)
These shares of restricted stock, representing 50% of the total original grant amount, vest in equal annual installments on January 21, 2017 and 2018.
 
 
(5)
These shares of restricted stock, representing 75% of the total original grant amount, vest in equal annual installments on January 20, 2017, 2018 and 2019.
 
 
(6)
These shares of restricted stock, representing 75% of the total original grant amount, vest in equal annual installments on April 22, 2016, 2017 and 2018.
 
 
(7)
Based on National Penn’s closing stock price of $12.33 on December 31, 2015.

138

Options Exercises and Stock Vested - 2015

The following table shows information on the exercise of stock options and the vesting of restricted stock for the named executive officers during the fiscal year ended December 31, 2015.
 
Option Awards
Stock Awards
Name
Number of Shares Acquired on Exercise
(#)
Value Realized on Exercise
($)
Number of Shares Acquired on Vesting
(#)
 Value Realized on Vesting (1)
($)
Scott V. Fainor
—

—

143,188

1,622,922

Michael J. Hughes
—

—

82,370

933,406

Sandra L. Bodnyk
—

—

71,921

815,110

David B. Kennedy
—

—

54,630

615,527

Sean P. Kehoe
—

—

5,038

59,850

(1)
Represents the total market value of the common shares on the respective dates of vesting.

Pension Benefits - 2015

The following table shows information on pension and supplemental non-qualified retirement benefits for the named executive officers for the fiscal year ended December 31, 2015.
Name
Plan Name (1)
No. of Years Credited Service
(#)
Present Value of Accumulated Benefit
($)
Payments During Last Fiscal Year
($)
Scott V. Fainor
Defined Benefit Pension Plan
1.75

8,396

—

Michael J. Hughes
Defined Benefit Pension Plan
—

—

—

Sandra L. Bodnyk
Defined Benefit Pension Plan
1.75

12,373

—

David B. Kennedy
Defined Benefit Pension Plan
1.75

8,078

—

Sean P. Kehoe
Defined Benefit Pension Plan
—

—

—

(1)
National Penn has a non-contributory, defined benefit pension plan generally covering employees of National Penn and its subsidiaries who have reached 20½ years of age and completed 1,000 hours of service. The plan provides retirement benefits under pension trust agreements. The benefits are based on years of service and the employee’s compensation during the highest five consecutive years during the last ten consecutive years of employment. Effective April 1, 2006, National Penn amended the plan to provide a formula capping the maximum annual participating salary at $50,000. Effective March 31, 2010, National Penn curtailed the plan whereby no additional service will accumulate for vested participants. Unvested participants still could meet the five-year vesting requirement to earn a benefit.

Employment, Change-in-Control and Other Agreements

Scott V. Fainor Employment Agreement. Mr. Fainor, President and Chief Executive Officer and director of National Penn and National Penn Bank, has an employment agreement with National Penn and National Penn Bank, dated as of
January 28, 2008, as amended on January 27, 2010.

Mr. Fainor’s employment agreement provides that Mr. Fainor shall serve in his current executive position through December 31, 2018, with automatic one-year extensions annually on December 31, unless either National Penn or Mr. Fainor elects not to extend the agreement or unless the agreement is terminated. No automatic extensions shall occur that would extend the term of the agreement beyond December 31 of the year in which Mr. Fainor reaches the age of 65.

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As of December 31, 2015, Mr. Fainor’s annual base salary was $780,302. Mr. Fainor is eligible for annual merit salary increases and is entitled to participate in an equitable manner with all other executive officers in discretionary bonuses authorized by the Board of Directors of National Penn or National Penn Bank and in all health insurance and benefit plans, group insurance, pension or profit-sharing plans or other plans providing benefits to National Penn employees generally. Mr. Fainor is also entitled to an automobile allowance of at least $1,000 per month.

Mr. Fainor’s employment agreement also contains a change-in-control benefit that is payable if a change-in-control of National Penn occurs during the term of Mr. Fainor’s employment agreement, followed by one or more “triggering events” (as defined in the agreement - generally, an adverse change in the terms of his employment). This benefit would be a lump sum cash payment equal to 150% of his average taxable income (exclusive of certain earlier payments that relate to the KNBT merger) over the five years preceding the year in which the change-in-control occurs, plus the additional amount, if any, necessary to cover any excise tax payable as a result of these change-in-control payments and any resulting federal and state income taxes. In full satisfaction of National Penn’s obligations to Mr. Fainor under his employment agreement, National Penn will pay Mr. Fainor a lump sum cash payment equal to $2,896,390 upon the effective time of the merger with BB&T Corporation and Mr. Fainor has agreed to waive his right to the excise tax gross-up with respect to taxes imposed by reason of Sections 4999 and 280G of the Code. Mr. Fainor’s employment agreement will terminate at the effective time of the merger with BB&T Corporation.

A change-in-control is deemed to have occurred if:
    
Ÿ
Any person or group acquires ownership of stock of National Penn that constitutes more than 50% of the total fair market value or total voting power of the outstanding stock of National Penn;
 
 
Ÿ
Any person or group acquires ownership of stock of National Penn possessing 30% or more of the total voting power of National Penn’s securities then outstanding;
 
 
Ÿ
A majority of the members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the Board prior to the date of the appointment or election; or
 
 
Ÿ
Any person or group acquires assets from National Penn or National Penn Bank that have a total gross fair market value equal to 40% or more of the total gross fair market value of all of the assets of National Penn or National Penn Bank, as the case may be, immediately prior to such acquisition or acquisitions.

National Penn may terminate Mr. Fainor’s employment agreement at any time with or without cause (as defined in the agreement). The employment agreement may also be terminated by Mr. Fainor at any time or by him for good reason (as defined in the agreement).

The employment agreement will also terminate by its terms upon Mr. Fainor’s disability or death. The employment agreement also contains non-solicitation, non-competition and non-disclosure provisions.

For information on potential payments to, and benefits for, Mr. Fainor upon termination of employment or after a change-in-control of National Penn followed by a triggering event, see “Potential Payments Upon Termination of Employment or After a Change-in-Control.”

Michael J. Hughes Employment Agreement. Mr. Hughes, National Penn’s Senior Executive Vice President and Chief Financial Officer, has an employment agreement with National Penn and National Penn Bank, dated August 12, 2009, as amended on February 8, 2013. Under this agreement, he shall serve in this position through August 30, 2017, with one-year extensions to the full term added one year in advance of the end of such term, unless his employment agreement is terminated. Such automatic extensions will cease in the August that follows Mr. Hughes reaching the age of 63.

As of December 31, 2015, Mr. Hughes’ annual base salary was $506,740. Mr. Hughes is eligible for annual merit salary increases, is entitled to participate in National Penn’s annual Executive Incentive Plan and is eligible for long-term incentive compensation awards. He is entitled to participate in all health insurance and benefit plans, group insurance, pension or profit-sharing plans or other plans providing benefits to National Penn employees generally. Mr. Hughes is also entitled to life insurance coverage and long-term disability coverage paid for by National Penn and the receipt of an automobile allowance.

Mr. Hughes’ employment agreement contains a change-in-control benefit that is payable if a change-in-control of National Penn occurs during the term of Mr. Hughes’ employment agreement, followed by one or more “triggering events” (as

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defined in the agreement - generally, an adverse change in the terms of his employment). This benefit would be a lump sum cash payment equal to 200% of the sum of his base salary in effect immediately prior to the change-in-control event and his average cash bonus over the most recent three years. Events that may constitute a change-in-control are substantially the same as those described above in the discussion of Mr. Fainor’s employment agreement. In full satisfaction of National Penn’s obligations to Mr. Hughes under his employment agreement, National Penn will pay Mr. Hughes a lump sum cash payment equal to $1,720,660 upon, and the employment agreement will terminate at, the effective time of the merger with BB&T Corporation.

National Penn may terminate Mr. Hughes’ employment agreement at any time with or without cause (as defined in the agreement). If Mr. Hughes is terminated without cause, the terms of his employment agreement will remain in effect for two years following the date of such termination, which will result in salary continuation and the continuation of certain health and welfare benefits during such period. Following a voluntary termination of employment by Mr. Hughes, he is subject to a non-competition provision for the remaining term of his employment agreement that was in effect immediately prior to the voluntary termination. Following an involuntary termination without cause, Mr. Hughes may elect to accept a position with another firm and terminate the non-competition provision, in which case the employment agreement and all payments otherwise to be made thereunder shall terminate. Mr. Hughes’ employment agreement also contains non-disclosure and non-solicitation provisions.

For information on potential payments to, and benefits for, Mr. Hughes upon termination of employment or after a change-in-control of National Penn followed by a triggering event, see “Potential Payments Upon Termination of Employment or After a Change-in-Control.”

Sandra L. Bodnyk Employment Agreement. Ms. Bodnyk, National Penn’s Senior Executive Vice President and Chief Risk Officer, has an employment agreement with National Penn and National Penn Bank, dated as of January 28, 2008, which was amended and restated in an agreement dated February 8, 2013. Under this agreement, she shall serve in this position through February 7, 2017.

As of December 31, 2015, Ms. Bodnyk’s base salary was $427,561. Under her employment agreement, her salary is subject to review and is eligible for annual merit salary increases, but not decreases. Ms. Bodnyk is also entitled to participate in National Penn’s annual Executive Incentive Plan and is eligible for long-term incentive compensation awards. She is entitled to participate in all health insurance and benefit plans, group insurance, pension or profit-sharing plans or other plans providing benefits to National Penn employees generally. Ms. Bodnyk is also entitled to life insurance coverage and long-term disability coverage paid for by National Penn and the receipt of an automobile allowance.

Ms. Bodnyk’s employment agreement contains a change-in-control benefit that is payable if a change-in-control of National Penn occurs during the term of Ms. Bodnyk’s employment agreement, followed by one or more “triggering events” (as defined in the agreement - generally, an adverse change in the terms of her employment). This benefit would be a lump sum cash payment equal to 200% of the sum of her base salary in effect immediately prior to the change-in-control event and her average cash bonus over the most recent three years. Events that may constitute a change-in-control are substantially the same as those described above in the discussion of Mr. Fainor's employment agreement. In full satisfaction of National Penn’s obligations to Ms. Bodnyk under her employment agreement, National Penn will pay Ms. Bodnyk a lump sum cash payment equal to $1,451,803 upon, and the employment agreement will terminate at, the effective time of the merger with BB&T Corporation.

National Penn may terminate Ms. Bodnyk’s employment agreement at any time with or without cause (as defined in the agreement). If Ms. Bodnyk is terminated without cause, the terms of her employment agreement will remain in effect for two years following the date of such termination, which will result in salary continuation and the continuation of certain health and welfare benefits during such period. Following a voluntary termination of employment by Ms. Bodnyk, she is subject to a non-competition provision for the remaining term of her employment agreement that was in effect immediately prior to the voluntary termination. Following an involuntary termination without cause, Ms. Bodnyk may elect to accept a position with another firm and terminate the non-competition provision, in which case the employment agreement and all payments otherwise to be made thereunder shall terminate. Ms. Bodnyk's employment agreement also contains non-solicitation, non-competition and non-disclosure provisions.

For information on potential payments to, and benefits for, Ms. Bodnyk upon termination of employment or after a change-in-control of National Penn followed by a triggering event, see “Potential Payments Upon Termination of Employment or After a Change-in-Control.”

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David B. Kennedy Employment Agreement. On February 8, 2015, Mr. Kennedy entered into an employment agreement with National Penn and National Penn Bank. Under this agreement, Mr. Kennedy will serve in his current position through February 7, 2018, with one-year extensions to the full term added one year in advance of the end of such term, unless the agreement is terminated. Such automatic extensions will cease in the February that follows Mr. Kennedy’s 63rd birthday.

As of December 31, 2015, Mr. Kennedy’s base salary was $358,939. Under his employment agreement, his salary is subject to review and is eligible for annual merit salary increases, but not decreases. Mr. Kennedy is also entitled to participate in National Penn’s annual Executive Incentive Plan and is eligible for long-term incentive compensation awards. He is entitled to participate in all health insurance and benefit plans, group insurance, pension or profit-sharing plans or other plans providing benefits to National Penn employees generally. Mr. Kennedy is also entitled to life insurance coverage and long-term disability coverage paid for by National Penn and the receipt of an automobile allowance.

Mr. Kennedy’s employment agreement contains a change-in-control benefit that is payable if a change-in-control (as defined in the employment agreement) of National Penn occurs during the term of Mr. Kennedy’s employment agreement, followed by one or more triggering events (as defined in the agreement - generally, an adverse change in the terms of his employment). This benefit would be a lump sum cash payment equal to 200% of the sum of his base salary in effect immediately prior to the change-in-control event and his average cash bonus over the most recent three years. In full satisfaction of National Penn’s obligations to Mr. Kennedy under his employment agreement, National Penn will pay Mr. Kennedy a lump sum cash payment equal to $1,218,118 upon, and the employment agreement will terminate at, the effective time of the merger with BB&T Corporation.

National Penn may terminate Mr. Kennedy’s employment agreement at any time with or without cause (as defined in the agreement). If Mr. Kennedy is terminated without cause, the terms of his employment agreement will remain in effect for two years following the date of such termination, which will result in salary continuation and the continuation of certain health and welfare benefits during such period. Following a voluntary termination of employment by Mr. Kennedy, he is subject to a non-competition provision for the remaining term of his employment agreement that was in effect immediately prior to the voluntary termination. Following an involuntary termination without cause, Mr. Kennedy may elect to accept a position with another firm and terminate the non-competition provision, in which case the employment agreement and all payments otherwise to be made thereunder shall terminate. Mr. Kennedy's employment agreement also contains non-solicitation, non-competition and non-disclosure provisions.

For information on potential payments to, and benefits for, Mr. Kennedy upon termination of employment or after a change-in-control of National Penn followed by a triggering event, see “Potential Payments Upon Termination of Employment or After a Change-in-Control.”

Sean P. Kehoe Change-in-Control Agreement. Mr. Kehoe, National Penn's Executive Vice President, Chief Legal Officer and Corporate Secretary, has a change-in-control agreement with National Penn and National Penn Bank, dated as of April 17, 2014. The agreement provides that if there is a change-in-control of National Penn during Mr. Kehoe’s employment, followed by one or more “triggering events” (as defined in the agreement - generally, an adverse change in the terms of his employment), Mr. Kehoe may elect to receive a lump sum cash payment equal to 200% of his base salary in effect immediately prior to the effective date of the change-in-control and outplacement services for up to one year, the cost of which is not to exceed $7,500. As of December 31, 2015, Mr. Kehoe’s base salary was $280,500. Events that may constitute a change-in-control are substantially the same as those described above in the discussion of Mr. Fainor’s employment agreement. In full satisfaction of National Penn’s obligations to Mr. Kehoe under his change-in-control agreement, National Penn will pay Mr. Kehoe a lump sum cash payment equal to $572,220 upon, and the change-in-control agreement will terminate at, the effective time of the merger with BB&T Corporation.

For information on potential payments to, and benefits for, Mr. Kehoe upon termination of employment or after a change-in-control of National Penn followed by a triggering event, see “Potential Payments Upon Termination of Employment or After a Change-in-Control.”

Split-Dollar Insurance Plan.  Each of National Penn’s named executive officers participate in the National Penn Bank Split-Dollar Insurance Plan, which provides for a death benefit of $300,000 during employment while the plan is in place. Under the terms of the plan, upon the executive officer attaining age 65 or a change in control, the death benefit will be payable regardless of whether the executive officer is employed at the time of his or her death.


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Potential Payments Upon Termination of Employment or After a Change-in-Control

The following tables present information on the various payments and benefits that each of the named executive officers would have been entitled to receive if his or her last day of employment with National Penn had been December 31, 2015 under the various circumstances presented. Resulting payments and benefits are described below.

Scott V. Fainor

Assuming one of the following events had occurred on December 31, 2015, Mr. Fainor’s payments and benefits had an estimated value as follows:
 
Salary Continuation
Incentive Plan Award for 2015 (4)
Value of Accelerated Vesting of Stock Options
Value of Accelerated Vesting of Restricted Stock
Pension Plan Payments
Long-Term Disability Coverage
Health Insurance Coverage
Paid Life Insurance Coverage
 Other Payments
Change-in-Control Payments
Termination:
$
$
$
$
$
$
$
$
$
$
Voluntary not for “Good Reason”
12,005(1)
—
—
—
8,396(6)
—
—
—
—
—
Voluntary for “Good Reason”
1,572,608(2)
—
—
—
8,396(6)
1,440(8)
29,959(10)
1,584(12)
1,442,892(16)
—
Involuntary Without “Cause”
1,572,608(2)
—
—
1,675,487(5)
8,396(6)
1,440(8)
29,959(10)
1,584(12)
1,442,892(16)
—
Involuntary for “Cause”
12,005(1)
—
—
—
8,396(6)
—
—
—
—
—
Permanent Disability
207,080(3)
—
—
1,675,487(5)
8,396(6)
Up to $20,000 per month (9)
3,745(11)
198(13)
  3,000(17)
—
Death
12,005(1)
—
—
1,675,487(5)
6,652(7)
—
—
1,561,000(14)
—
—
Change-in-Control (with Adverse Employment Action)
12,005(1)
—
—
1,675,487(5)
8,396(6)
—
—
42,073(15)
—
2,896,390(18)
(1)
Payment of base salary for time worked through the termination date, December 31, 2015.
(2)
The amount is: (i) the present value of payment of the highest annual rate of base salary achieved during the term of Mr. Fainor’s employment agreement (i.e., $780,302) for 24 months from the date of termination; and (ii) payment of base salary for time worked through the termination date, December 31, 2015.
(3)
The amount is: (i) payment of base salary in effect on December 31, 2015 through March 31, 2016; and (ii) payment of base salary for time worked through the termination date, December 31, 2015.
(4)
As discussed in Compensation Discussion and Analysis – 2015 Executive Compensation Decisions, the Compensation Committee accelerated the payment of the 2015 incentive plan award ($663,256) approximately one month to December 2015 to address certain tax implications as a result of the merger with BB&T Corporation. As a result, as of the date of this table, December 31, 2015, no 2015 incentive plan award would be made.
(5)
Value of 135,887 shares of restricted stock, all of which would accelerate in their vesting due to the applicable termination event.
(6)
Present value of the defined benefit pension plan’s accumulated benefit obligation to Mr. Fainor at December 31, 2015.
(7)
Death benefit that would have been provided by National Penn’s defined benefit pension plan.
(8)
Premium cost for long-term disability insurance through December 31, 2017.
(9)
Amounts payable after salary continuation payments until age 67 (as provided under National Penn’s group disability insurance policy).

143

(10)
Premium cost of medical and dental insurance through December 31, 2017.
(11)
Premium cost of medical and dental insurance through March 31, 2016.
(12)
Premium cost of group life insurance and split-dollar life insurance through December 31, 2017.
(13)
Premium cost of group life insurance and split-dollar life insurance through March 31, 2016.
(14)
Life insurance payment under National Penn’s life insurance program.
(15)
Present value of the premium that would be payable in respect of the insurance policy under the National Penn Split-Dollar Insurance Plan through the date on which Mr. Fainor attains age 65.
(16)
This amount is: (i) payment in an amount equal to the present value of the payments that Mr. Fainor would have received under any cash bonus or long-term or short-term cash incentive compensation plan maintained by National Penn if he had continued to be employed during the 24 months following his date of termination and had earned in each calendar year that ends during such 24 month period a bonus or incentive award that equals the highest annual bonus or incentive award paid to him during the preceding 36 calendar months; (ii) the present value of matching 401(k) contributions that Mr. Fainor would have received during the 24 month period following his date of termination had he made maximum contributions to the plan during that period; and (iii) up to $75,000 in reimbursements for all reasonable expenses incurred in connection with the search for new employment, such as outplacement agency services and relocation expenses.
(17)
Automobile allowance through March 31, 2016.
(18)
In full satisfaction of National Penn’s obligations to Mr. Fainor under his employment agreement, National Penn will pay Mr. Fainor a lump sum cash payment equal to $2,896,390 upon the effective time of the merger with BB&T Corporation and Mr. Fainor has agreed to waive his right to the excise tax gross-up with respect to taxes imposed by reason of Sections 4999 and 280G of the Code.  Mr. Fainor’s employment agreement will terminate at the effective time of the merger with BB&T Corporation.



144

Michael J. Hughes

Assuming one of the following events had occurred on December 31, 2015, Mr. Hughes’ payments and benefits had an estimated value as follows:
 
Salary Continuation
Incentive Plan Award for 2015 (4)
Value of Accelerated Vesting of Stock Options
Value of Accelerated Vesting of Restricted Stock
Pension Plan Payments
Long-Term Disability Coverage
Health Insurance Coverage
Paid Life Insurance Coverage
 Other Payments
 Change-in-Control Payments
Termination:
$
$
$
$
$
$
$
$
$
$
Voluntary
7,796(1)
—
—
—
—
—
—
—
—
—
Involuntary Without
“Cause”
1,021,276(2)
—
269,200(5)
948,880(6)
—
1,440(7)
—
1,584(10)
16,800(14)
—
Involuntary for “Cause”
7,796(1)
—
—
—
—
—
—
—
—
—
Permanent Disability
261,166(3)
—
269,200(5)
948,880(6)
—
Up to $20,000 per month (8)
7,399(9)
396(11)
 4,200(14)
—
Death
7,796(1)
—
269,200(5)
948,880(6)
—
—
—
1,014,000(12)
—
—
Change-in-Control (with Adverse Employment Action)
7,796(1)
—
269,200(5)
948,880(6)
—
___(15) 
—
50,600(13)(15)
___(15) 
1,720,660(15)
(1)
Payment of base salary for time worked through the termination date, December 31, 2015.
(2)
This amount is: (i) payment of base salary in effect on December 31, 2015 through December 31, 2017; and (ii) payment of base salary for time worked through the termination date, December 31, 2015.
(3)
This amount is: (i) payment of base salary in effect on December 31, 2015 through June 30, 2016; and (ii) payment of base salary for time worked through the termination date, December 31, 2015.
(4)
As discussed in Compensation Discussion and Analysis – 2015 Executive Compensation Decisions, the Compensation Committee accelerated the payment of the 2015 incentive plan award ($380,055) approximately one month to December 2015 to address certain tax implications as a result of the merger with BB&T Corporation. As a result, as of the date of this table, December 31, 2015, no 2015 incentive plan award would be made.
(5)
Represents the aggregate value of the spread (market price of National Penn common stock less the exercise price) of unvested stock options for 40,000 shares, which would accelerate in their vesting due to the applicable termination event.
(6)
Value with respect to 76,957 shares of restricted stock, which would accelerate in their vesting due to the applicable termination event.
(7)
Premium cost for long-term disability insurance through December 31, 2017.
(8)
Amounts payable after salary continuation payments until age 66 years and 4 months (as provided under National Penn’s group disability insurance policy).
(9)
Premium cost of medical insurance through June 30, 2016.
(10)
Premium cost of group life insurance and split-dollar life insurance through December 31, 2017.
(11)
Premium cost of group life insurance and split-dollar life insurance through June 30, 2016.
(12)
Life insurance payment under National Penn’s life insurance program.
(13)
Present value of the premiums that would be payable in respect of the insurance policy under the National Penn Split-Dollar Insurance Plan though the date on which Mr. Hughes attains age 65.
(14)
Automobile allowance through December 31, 2017 for involuntary without cause and through June 30, 2016 for permanent disability.
(15)
In full satisfaction of National Penn’s obligations to Mr. Hughes under his employment agreement, National Penn will pay Mr. Hughes a lump sum cash payment equal to $1,720,660 upon, and the employment agreement will terminate at, the effective time of the merger with BB&T Corporation.



145

Sandra L. Bodnyk

Assuming one of the following events had occurred on December 31, 2015, Ms. Bodnyk’s payments and benefits had an estimated value as follows:
 
Salary Continuation
Incentive Plan Award for 2015 (4)
Value of Accelerated Vesting of Stock Options
Value of Accelerated Vesting of Restricted Stock
Pension Plan Payments
Long-Term Disability Coverage
Health Insurance Coverage
Paid Life Insurance Coverage
Other Payments
Change-in-Control Payments
Termination:
$
$
$
$
$
$
$
$
$
$
Voluntary
6,578(1)
—
—
836,788(5)
12,373(6)
—
—
—
—
—
Involuntary Without “Cause”
861,699(2)
—
—
836,788(5)
12,373(6)
1,440(8)
—
1,356(11)
16,80015)
—
Involuntary for “Cause”
6,578(1)
—
—
—
12,373(6)
—
—
—
—
—
Permanent Disability
220,358(3)
—
—
836,788(5)
12,373(6)
Up to $20,000 per month (9)
___(10) 
339(12)
4,200(15)
—
Death
6,578(1)
—
—
836,788(5)
11,227(7)
—
—
856,000(13)
—
—
Change-in-Control (with Adverse Employment Action)
6,578(1)
—
—
836,788(5)
12,373(6)
___(16) 
—
60,297(14)(16)
___(16) 
1,451,803(16)

(1)
Payment of base salary for time worked through the termination date, December 31, 2015.
(2)
This amount is: (i) payment of base salary in effect on December 31, 2015 through December 31, 2017; and (ii) payment of base salary for time worked through the termination date, December 31, 2015.
(3)
This amount is: (i) payment of base salary in effect on December 31, 2015 through June 30, 2016; and (ii) payment of base salary for time worked through the termination date, December 31, 2015.
(4)
As discussed in Compensation Discussion and Analysis – 2015 Executive Compensation Decisions, the Compensation Committee accelerated the payment of the 2015 incentive plan award ($320,670) approximately one month to December 2015 to address certain tax implications as a result of the merger with BB&T Corporation. As a result, as of the date of this table, December 31, 2015, no 2015 incentive plan award would be made.
(5)
Value with respect to 67,866 shares of restricted stock, which would accelerate in their vesting due to the applicable termination event.
(6)
Present value of the defined benefit pension plan’s accumulated benefit obligation to Ms. Bodnyk at December 31, 2015.
(7)
Death benefit that would have been provided by National Penn’s defined benefit pension plan.
(8)
Premium cost for long-term disability insurance through June 30, 2017.
(9)
Amounts payable after salary continuation payments for 36 months (as provided under National Penn’s group disability insurance policy).
(10)
On December 31, 2015, Ms. Bodnyk was not participating in medical or dental insurance provided by National Penn. Accordingly, she would not have been entitled to any such continued coverage.
(11)
Premium cost of group life insurance and split-dollar life insurance through December 31, 2017.
(12)
Premium cost of group life insurance and split-dollar life insurance through June 30, 2016.
(13)
Life insurance payment under National Penn’s life insurance program.
(14)
Present value of the premiums that would be payable in respect of the insurance policy under the National Penn Split-Dollar Insurance Plan though the date on which Ms.Bodnyk attains age 65.
(15)
Automobile allowance through December 31, 2017, for involuntary without cause and June 30, 2016 for permanent disability.
(16)
In full satisfaction of National Penn’s obligations to Ms. Bodnyk under her employment agreement, National Penn will pay Ms. Bodnyk a lump sum cash payment equal to $1,451,803 upon, and the employment agreement will terminate at, the effective time of the merger with BB&T Corporation.


146

David B. Kennedy

Assuming one of the following events had occurred on December 31, 2015, Mr. Kennedy’s payments and benefits had an estimated value as follows.
 
Salary Continuation
Incentive Plan Award for 2015 (4)
Value of Accelerated Vesting of Stock Options
Value of Accelerated Vesting of Restricted Stock
Pension Plan Payments
Long-Term Disability Coverage
Health Insurance Coverage
Paid Life Insurance Coverage
Other Payments
Change-in-Control Payments
Termination:
$
$
$
$
$
$
$
$
$
$
Voluntary
5,522(1)
—
—
—
8,078(6)
—
—
—
—
—
Involuntary Without "Cause"
723,401(2)
—
—
595,231(5)
8,078(6)
1,292(8)
—
1,137(11)
16,800(15)
—
Involuntary for “Cause”
5,522(1)
—
—
—
8,078(6)
—
—
—
—
—
Permanent Disability
184,992(3)
—
—
595,231(5)
8,078(6)
Up to $17,946 per month (9)
7,490(10)
284(12)
4,200(15)
—
Death
5,522(1)
—
—
595,231(5)
6,300(7)
—
—
718,000(13)
—
—
Change-in-Control (with Adverse Employment Action)
5,522(1)
—
—
595,231(5)
8,078(6)
___(16) 
—
41,815(14)(16)
___(16) 
1,218,118(16)
(1)
Payment of base salary for time worked through the termination date, December 31, 2015.
(2)
This amount is: (i) payment of base salary in effect on December 31, 2015 through December 31, 2017; and (ii) payment of base salary for time worked through the termination date, December 31, 2015.
(3)
This amount is: (i) payment of base salary in effect on December 31, 2015 through June 30, 2016; and (ii) payment of base salary for time worked through the termination date, December 31, 2015.
(4)
As discussed in Compensation Discussion and Analysis – 2015 Executive Compensation Decisions, the Compensation Committee accelerated the payment of the 2015 incentive plan award ($269,205) approximately one month to December 2015 to address certain tax implications as a result of the merger with BB&T Corporation. As a result, as of the date of this table, December 31, 2015, no 2015 incentive plan award would be made.
(5)
Value with respect to 48,275 shares of restricted stock, which would accelerate in their vesting due to the applicable termination event.
(6)
Present value of the defined benefit pension plan’s accumulated benefit obligation to Mr. Kennedy at December 31, 2015.
(7)
Death benefit that would have been provided by National Penn’s defined benefit pension plan.
(8)
Premium cost for long-term disability insurance through June 30, 2017.
(9)
Amounts payable after salary continuation payments until age 67 (as provided under National Penn’s group disability insurance policy).
(10)
Premium cost of medical insurance through June 30, 2016.
(11)
Premium cost of group life insurance and split-dollar life insurance through December 31, 2017.
(12)
Premium cost of group life insurance and split-dollar life insurance through June 30, 2016.
(13)
Life insurance payment under National Penn’s life insurance program.
(14)
Present value of the premiums that would be payable in respect of the insurance policy under the National Penn Split-Dollar Insurance Plan though the date on which Mr. Kennedy attains age 65.
(15)
Automobile allowance through December 31, 2017, for involuntary without cause and June 30, 2016 for permanent disability.
(16)
In full satisfaction of National Penn’s obligations to Mr. Kennedy under his employment agreement, National Penn will pay Mr. Kennedy a lump sum cash payment equal to $1,218,118 upon, and the employment agreement will terminate at, the effective time of the merger with BB&T Corporation.


147

Sean P. Kehoe

Assuming one of the following events had occurred on December 31, 2015, Mr. Kehoe's payments and benefits had an estimated value as follows:
 
Salary Continuation
Incentive Plan Award for 2015 (3)
Value of Accelerated Vesting of Stock Options
Value of Accelerated Vesting of Restricted Stock
Pension Plan Payments
Long-Term Disability Coverage
Health Insurance Coverage
Paid Life Insurance Coverage
Other Payments
Change-in-Control Payments
Termination:
$
$
$
$
$
$
$
$
$
$
Voluntary
4,315(1)
—
—
—
—
—
—
—
—
—
Involuntary Without “Cause”
4,315(1)
—
—
186,356(4)
—
—
—
—
—
—
Involuntary for “Cause”
4,315(1)
—
—
—
—
—
—
—
—
—
Permanent Disability
74,440(2)
—
—
186,356(4)
—
Up to $14,025 per month (5)
3,548(6)
111(7)
—
—
Death
4,315(1)
—
—
186,356(4)
—
—
—
561,000(8)
—
—
Change-in-Control (with Adverse Employment Action)
4,315(1)
—
—
186,356(4)
—
—
—
30,743(9)
___ (10) 
572,220(10)

(1)
Payment of base salary for time worked through the termination date, December 31, 2015.
(2)
This amount is: (i) payment of base salary in effect on December 31, 2015 through March 31, 2016; and (ii) payment of base salary for time worked through the termination date, December 31, 2015.
(3)
As discussed in Compensation Discussion and Analysis – 2015 Executive Compensation Decisions, the Compensation Committee accelerated the payment of the 2015 incentive plan award ($168,300) approximately one month to December 2015 to address certain tax implications as a result of the merger with BB&T Corporation. As a result, as of the date of this table, December 31, 2015, no 2015 incentive plan award would be made.
(4)
Value with respect to the 15,114 shares of restricted stock, which would accelerate in their vesting due to the applicable termination event.
(5)
Amounts payable after salary continuation payments until age 67 (as provided under National Penn’s group disability insurance policy).
(6)
Premium cost of medical and dental insurance through March 31, 2016.
(7)
Premium cost of group life insurance and split-dollar life insurance through March 31, 2016.
(8)
Life insurance payment under National Penn’s life insurance program.
(9)
Present value of the premiums that would be payable in respect of the insurance policy under the National Penn Split-Dollar Insurance Plan though the date on which Mr. Kehoe attains age 65.
(10)
In full satisfaction of National Penn’s obligations to Mr. Kehoe under his change-in-control agreement, National Penn will pay Mr. Kehoe a lump sum cash payment equal to $572,220 upon, and the change-in-control agreement will terminate at, the effective time of the merger with BB&T Corporation.


148

Director Compensation

The following table sets forth information on compensation of National Penn non-employee directors for the fiscal year ended December 31, 2015:
Name

Fees Earned or Paid in Cash
(1)
($)
Restricted Stock Awards
(2)
($)
Option Awards(3)
($)
Non-Equity Incentive Plan Compensation
($)
Change in Pension Value and Non-Qualified Deferred Compensation Earnings
(4)
($)
All Other Compensation
($)
Total
($)
Thomas A. Beaver
121,561

70,003

—

—

32,056

—

223,620

Jeffrey P. Feather
53,565

63,677

—

—

21,899

—

139,141

Donna D. Holton
53,565

63,677

—

—

21,899

—

139,141

Thomas L. Kennedy
56,748

63,677

—

—

21,899

—

142,324

Patricia L. Langiotti
59,933

63,677

—

—

21,899

—

145,509

Christian F. Martin IV
38,707

56,252

—

—

19,592

—

114,551

Natalye Paquin
38,707

56,252

—

—

20,603

—

115,562

R. Chadwick Paul Jr.
41,890

56,252

—

—

19,592

—

117,734

C. Robert Roth
38,707

56,252

—

—

20,103

—

115,062

Wayne R. Weidner
41,890

56,252

—

—

19,621

—

117,763


(1)
Amounts reported are cash retainers and Board special meeting fees. Under the Directors’ Fee Plan, each non-employee director may choose to be paid these fees, in lieu of cash, in (a) shares of National Penn common stock, (b) National Penn common stock units or (c) deferred cash. National Penn common stock units are credited with dividend equivalents (at National Penn’s cash dividend rate) in the form of additional common stock units. All common stock units are converted to actual shares of National Penn common stock and issued to an individual upon his or her termination of service as a director or attaining age 65. Deferred cash is credited with interest at a money market rate and is paid out to an individual upon his or her termination of service as a director or attaining age 65.

(2)
Amounts reported are the grant date fair value for restricted stock unit awards (“RSUs”) made in 2015 for each individual under the Long-Term Incentive Compensation Plan. RSUs, like common stock units under the Directors’ Fee plan, are credited with dividend equivalents (at National Penn’s cash dividend rate) in the form of additional RSUs, and are converted to actual shares of National Penn common stock and issued to an individual at a future date, subject to satisfaction of an award’s service restrictions and other terms and conditions. As of December 31, 2015, each individual has the following aggregate number of RSUs credited to his or her account: Thomas A. Beaver: 74,649; Jeffrey P. Feather: 50,996; Donna D. Holton: 50,996; Thomas L. Kennedy: 50,996; Patricia L. Langiotti: 50,996; Christian F. Martin IV: 45,627; Natalye Paquin: 47,982; R. Chadwick Paul Jr.: 45,627; C. Robert Roth: 46,816; and Wayne R. Weidner: 45,695.

(3)
As of December 31, 2015, each individual has the following aggregate number of option awards outstanding: Thomas A. Beaver: 0; Jeffrey P. Feather: 5,665; Donna D. Holton: 5,665; Thomas L. Kennedy: 5,665; Patricia L. Langiotti: 0; Christian F. Martin IV: 5,665; Natalye Paquin: 0; R. Chadwick Paul Jr.: 5,665; C. Robert Roth: 0; and Wayne R. Weidner: 0.

(4)
Amounts reported are the fair market value of additional common stock units (including RSUs) credited in 2015 on a dividend reinvestment of common stock units (including RSU balance) under the Long-Term Incentive Compensation Plan.

149

The following table summarizes the cash compensation arrangements with non-employee directors (outside directors) for 2015. The Chairman of the Board does not receive retainers for committee service.
Cash Director Fees - 2015
 
 
Outside Directors Only
 
 
Retainers: Board members must attend in person or by phone 75% of meetings (Board and Committee Meetings combined) to be paid retainer. Committees include: Audit, Executive, Compensation, Nominating/Corporate Governance, Directors’ Enterprise Risk Management
 
 
Chairman of Board
$120,000

 
Chairman of National Penn Board Committee (if other than Chairman of the Board)
36,082

 
Other Directors
30,776

 
Special National Penn/National Penn Bank Board Meeting Fees - per meeting attended
1,593

 
National Penn/National Penn Bank Executive Committee Retainer
9,552

 
National Penn/National Penn Bank Audit Committee Retainer
6,368

 
National Penn/National Penn Bank Committee Member Retainer (other than Audit and Executive)
3,185

 
Director Emeritus (none currently) - Retainer
2,000

 

Compensation Committee Interlocks and Insider Participation

The members of the Compensation Committee are directors Holton (Chair), Beaver, Feather, Martin and Roth.  None of these directors is or was formerly an officer or employee of National Penn, nor did any of them engage in any “related party transaction” with National Penn during 2015.  In addition, none of our directors is an executive officer of another entity of which one of National Penn’s executive officers serves on the compensation committee or the board of directors.

Compensation Committee Report

The committee has reviewed and discussed with National Penn management the section of this report captioned “Compensation Discussion and Analysis” and based on this review and discussion has recommended to the Board of Directors that the “Compensation Discussion and Analysis” be included in National Penn’s Annual Report on Form 10-K for the year ended December 31, 2015.
Donna D. Holton, Chair
Thomas A. Beaver
Jeffrey P. Feather
Christian F. Martin IV
C. Robert Roth


150

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Directors and Executive Officers

The following table shows certain information about the ownership of National Penn common shares by the directors, nominees for director and executive officers of National Penn as of February 12, 2016.
Name of
Beneficial Owner
Aggregate Number of Shares of National Penn Common Stock
(1)
Exercisable Options for National Penn Common Stock
(2)
Common Stock Units Held Under National Penn Plans
(3)
Percent of Class
(4)
Directors and Nominees
 
 
Thomas A. Beaver
49,311

(5)
—

 
125,429

*
 
Scott V. Fainor
745,703

(6)
30,300

 
—

*
 
Jeffrey P. Feather
409,669

(7)
3,090

 
56,754

*
 
Donna D. Holton
76,009

(8)
3,090

 
56,754

*
 
Thomas L. Kennedy
173,735

(9)
3,090

 
56,754

*
 
Patricia L. Langiotti
51,911

(10)
—

 
56,754

*
 
Christian F. Martin IV
539,177

(11)
3,090

 
90,706

*
 
Natalye Paquin
14,750

 
—

 
53,068

*
 
R. Chadwick Paul Jr.
59,338

(12)
3,090

 
50,713

*
 
C. Robert Roth
62,467

(13)
—

 
51,902

*
 
Wayne R. Weidner
68,357

(14)
—

 
50,781

*
 
Other Named Executive Officers
 
 
Michael J. Hughes
429,588

(15)
—

 
—

*
 
Sandra L. Bodnyk
245,694

(16)
13,900

 
—

*
 
David B. Kennedy
171,551

(17)
8,090

 
—

*
 
Sean P. Kehoe
35,100

 
—

 
—

*
 
All Directors and Executive Officers as a Group (16 Persons)
3,141,046

 
70,440

 
649,615

2.23
%

*Amount owned does not exceed 1% of the total number of common shares outstanding as of February 12, 2016.
(1)
Unless otherwise indicated, sole voting and investment power is held by the named individual. Excludes Common Stock Units because actual shares are not issuable within 60 days of February 12, 2016.
(2)
Shares which may be acquired within 60 days of February 12, 2016 by exercise of vested options granted under National Penn stock compensation plans or granted in substitution for stock options of acquired companies, as provided in the acquisition agreements.
(3)
Common stock units stock credited under the Directors’ Fee Plan or restricted stock units credited under the Long-Term Incentive Compensation Plan (collectively, “Common Stock Units”). Common Stock Units will be converted to shares of National Penn common stock and paid out to individuals upon their termination of service or attaining age 65, in accordance with the terms of the respective Plans and the terms of the grants.
(4)
Calculation is based on shares held and exercisable options and excludes Common Stock Units (see footnotes 1 and 3).
(5)
Includes 37,829 shares held jointly with spouse.

151

(6)
Includes 311,421 shares held jointly with spouse. Includes 18,357 shares held in the National Penn Capital Accumulation Plan (a 401(k) plan).
(7)
Includes 358,169 shares held jointly with spouse.
(8)
Shares held jointly with spouse.
(9)
Includes 14,872 shares owned by spouse.
(10)
Includes 37 shares held jointly with spouse and 2,518 shares owned by spouse.
(11)
Includes 53,227 shares owned by spouse and 5,146 shares held in custody for daughter. Also includes 62,381 shares held indirectly by a corporation of which Mr. Martin is the majority shareholder; Mr. Martin disclaims beneficial ownership of these shares.
(12)
Includes 28,162 shares held jointly with spouse.
(13)
Includes 31,878 shares held jointly with spouse, 3,391 shares owned by spouse and 8,163 shares held in custody for his grandchildren.
(14)
Includes 3,860 shares held jointly with spouse.
(15)
Includes 10,000 shares held jointly with spouse.
(16)
Includes 17,948 shares held in the National Penn Capital Accumulation Plan (a 401(k) plan).
(17)
Includes 20,376 shares held in the National Penn Capital Accumulation Plan (a 401(k) plan).

Five Percent Shareholders

The following table shows individuals or groups known by National Penn to own more than 5% of its outstanding common shares as of February 12, 2016.

Name and Address of Beneficial Owner
Amount and Nature of Beneficial Ownership
Percent of Common Shares
 
 
 
 
BlackRock, Inc.

13,117,287 (1)
9.33%
 
55 East 52nd Street
 
 
 
New York, NY 10022
 
 
 
 
 
 
 
The Vanguard Group
10,608,445 (2)
7.54%
 
100 Vanguard Blvd.
 
 
 
Malvern, PA 19355
 
 
 

(1)
Based on a Schedule 13G/A (Amendment No. 5) filed with the Securities and Exchange Commission on January 27, 2016 which reported beneficial ownership by BlackRock, Inc., BlackRock Fund Advisors, BlackRock Asset Management Canada Limited, BlackRock Asset Management Schweiz AG, BlackRock Advisors, LLC, BlackRock Institutional Trust Company, N. A., BlackRock Investment Management, LLC, BlackRock Asset Management Ireland Limited, BlackRock Investment Management (UK) Ltd, and BlackRock Investment Management (Australia) Limited.
(2)
Based on a Schedule 13G/A (Amendment No. 1) filed with the Securities Exchange Commission on February 10, 2016, which reported beneficial ownership by The Vanguard Group, Vanguard Fiduciary Trust Company and Vanguard Investments Australia, Ltd.

152

Equity Compensation Plan Table

Plan Category (1)
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)
Weighted-average exercise price of outstanding options, warrants and rights (b)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (c)

Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders

2,794,739 (2)


None

$12.47 (3)


N/A

4,694,856 (4)(5)

N/A
Total
2,794,739 (2)
$12.47 (3)
4,694,856 (4)(5)

(1)
The table includes information on stock options issued by National Penn in substitution for stock options of acquired companies. At December 31, 2015, 362,371 common shares are issuable upon exercise of substitute stock options issued in connection with the acquisition of KNBT Bancorp, Inc. The weighted average exercise price of all substitute stock options issued in the KNBT acquisition and outstanding at December 31, 2015 was $16.00 per share. National Penn cannot grant additional stock options under this substitute stock option plan.
(2)
Includes 89,781 common stock units credited to various non-employee directors’ accounts under the Directors’ Fee Plan and 510,380 common stock units credited (RSUs) to various non-employee directors’ accounts under the Long-Term Incentive Compensation Plan.
(3)
Common stock units, including RSUs, are not taken into account in calculating the weighted-average exercise price.
(4)
Includes 828,540 shares available for future issuance under National Penn’s Employee Stock Purchase Plan. Subject to limitations on participation by individual employees set forth in the Plan and as may be limited by the merger agreement with BB&T Corporation, all shares available for issuance can be issued in the current purchase period (the quarter ending March 31, 2016).
(5)
Includes 854,055 shares available for future issuance under National Penn’s Directors’ Fee Plan. Under the Directors’ Fee Plan, shares or common stock units may be issued or credited at fair market value in lieu of cash for directors’ fees.

153


Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR  INDEPENDENCE

Related Party Transactions and Policies

During 2015, certain directors and officers of National Penn, and companies with which they are associated, conducted banking transactions in the ordinary course of business with National Penn Bank. Similar transactions with National Penn Bank may be expected in the future. All loans and loan commitments involved in such transactions were made under substantially the same terms, including interest rates, collateral and repayment terms, as those prevailing at the time for comparable transactions with other persons not related to National Penn. In the opinion of National Penn’s management, these transactions do not involve more than the normal risk of collectibility, nor do they present other unfavorable features. Each of these transactions was made in compliance with applicable law, including Section 13(k) of the Securities and Exchange Act of 1934, or the Exchange Act, and Federal Reserve Board Regulation O. As of December 31, 2015, outstanding loans to executive officers, directors and their affiliates represented 0.11% of shareholders’ equity in National Penn.

National Penn Bank’s Board of Directors is responsible for ensuring compliance with Regulation O, including its lending, record-keeping and reporting requirements and, to that end, has adopted and maintains a written Regulation O compliance policy. National Penn’s Chief Risk Officer and Chief Legal Officer are responsible for administration of the Regulation O compliance policy. They maintain a list of insiders (directors, executive officers, principal shareholders and their related interests) who are subject to the Regulation O compliance policy. Each year, a Regulation O questionnaire is circulated to all directors and executive officers in order to update related party information and to assist in the identification of potential related party transactions. Depending on the facts and circumstances, any direct or indirect extension of credit to an insider, including related interests, must be approved by the Board or any two of the following officers - President, Chief Credit Officer or Chief Banking Officer. Approval is only granted if the transaction will be made on substantially the same terms, including interest rates, collateral and repayment terms, as those prevailing at that time for comparable transactions with other persons, and if the transaction does not involve more than the normal risk of collection and does not present any other unfavorable features.

National Penn also has a written Related Party Transaction Policy. Under this policy, a “related party transaction” is any transaction (or series of related transactions) in which National Penn or any subsidiary is a participant, involving more than $120,000, and in which a related party has a direct or indirect material interest. Related parties include all directors, nominees for election as directors, executive officers, 5% shareholders and immediate family members of any such persons. The policy generally provides for review, approval or ratification of any related party transaction by the Audit Committee.

On February 4, 2015, National Penn repurchased 7.3 million shares of common stock from Warburg Pincus Private Equity X, L.P. and Warburg Pincus X Partners, L. P. for a total purchase price of $75,000,275. Former National Penn director Michael E. Martin is Managing Director and head of Warburg Pincus' financial services group. This transaction was approved by the Audit Committee pursuant to the Related Party Transaction Policy.

In addition to its Regulation O compliance policy and Related Party Transaction Policy, National Penn has a written Code of Conduct, approved by the Board, addressing, among other things, related party transactions. The Code of Conduct applies to all directors, officers and employees as well as their immediate family members and related business entities, trusts or estates. The Code of Conduct requires all covered persons and entities not to pursue any personal interests that might conflict with, or appear to conflict with, the interests of National Penn, or that might influence, or appear to influence, a person’s judgment in any matter involving National Penn. The Code of Conduct describes the application of the foregoing rule in a variety of circumstances, including the purchase, lease or sale of assets or services to or from National Penn. The Board is responsible for the enforcement of the Code of Conduct.

To identify related persons and entities, National Penn requires directors and executive officers to complete a Directors’ and Officers’ Questionnaire annually. This information is utilized to identify real or potential transactions in which conflicts of interest covered by the Related Party Transaction Policy or the Code of Conduct may arise.

154

Director Independence

The Board has determined, after an initial review and determination by the Nominating/Corporate Governance Committee, that each of directors Beaver, Feather, Holton, Kennedy, Langiotti, Martin, Paquin, Paul, Roth and Weidner is independent as provided under NASDAQ rules. There are no family relationships among the executive officers and directors of National Penn.

Audit Committee

In addition to the above NASDAQ independence requirements, the Securities and Exchange Commission has issued heightened independence standards pursuant to the Sarbanes-Oxley Act of 2002 that apply to audit committee members. These standards provide that a member of a NASDAQ-listed company’s audit committee may not, in his or her capacity as a member of the audit committee, the board of directors or any other board committee:

•
Accept, directly or indirectly, any consulting, advisory or other compensatory fee from National Penn or any subsidiary of National Penn, except for certain retirement benefits; or

•
Be an “affiliated person” of National Penn or any subsidiary of National Penn, as defined by Securities Exchange Commission rules.

The Board has determined that each member of National Penn’s Audit Committee meets these standards.

Compensation Committee

National Penn’s Compensation Committee generally reviews, approves and reports to the Board on compensation and related programs and plans. The Compensation Committee is currently comprised of five directors, all of whom are independent as described under “Director Independence.” NASDAQ has issued heightened independence standards pursuant to The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, that apply to Compensation Committee members. These standards require consideration of any consulting, advisory or other compensatory fees paid by National Penn as well as other compensation received by the director. The Board has determined that each member of the Compensation Committee meets these standards.

Nominating/Corporate Governance Committee

National Penn’s Nominating/Corporate Governance Committee identifies and recommends nominees for election to the Board and oversees matters of corporate governance, including Board performance. The Nominating/Corporate Governance Committee is currently comprised of four directors, all of whom are independent as described under “Director Independence.”

Item 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Committee Report

The Audit Committee of National Penn’s Board of Directors is composed solely of independent directors, as currently defined by the listing standards of The Nasdaq Stock Market, and operates under a written charter adopted by the Board of Directors. The charter is available on National Penn’s Web site at www.nationalpennbancshares.com under “Governance Documents.”

Under its charter, the Audit Committee assists the Board of Directors in its general oversight of National Penn’s financial reporting, internal controls and audit functions.

Management is responsible for National Penn’s financial reporting process, including its system of internal controls, and for the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States (GAAP). National Penn’s independent auditor is responsible for performing independent audits of National Penn’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and to issue reports thereon based on such audits.

155

The Audit Committee’s responsibility is to monitor and oversee these processes. It is not the Audit Committee’s duty or responsibility to conduct auditing or accounting reviews or procedures. The Audit Committee members are not National Penn employees and are not necessarily accountants or auditors by profession or experts in accounting or auditing, and their functions are not intended to duplicate or certify the activities of management or National Penn’s independent auditor. The Audit Committee serves a Board-level oversight role in which it provides advice, counsel and direction to management and National Penn’s independent auditor on the basis of the information it receives, discussions with management and National Penn’s independent auditor and the experience of the Audit Committee’s members in business, finance and accounting matters.

In this context, the Audit Committee has met and held discussions with management and National Penn’s independent auditor. Management has represented to the Audit Committee that National Penn’s consolidated financial statements were prepared with integrity and objectivity and in accordance with GAAP, and National Penn’s independent auditor has represented to the Audit Committee that it has performed its audit of National Penn’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). The Audit Committee has relied upon the representations of management and National Penn’s independent auditor without independent verification. The Audit Committee has reviewed and discussed the consolidated financial statements with management and National Penn’s independent auditor.

The Audit Committee discussed with National Penn’s independent auditor the matters required to be discussed by PCAOB Auditing Standard No. 16, Communications with Audit Committees.

National Penn’s independent auditor also provided to the Audit Committee the written disclosures and the letter required by the applicable requirements of the Public Company Accounting Oversight Board regarding National Penn’s independent auditor’s communications with the Audit Committee concerning independence, and the Audit Committee discussed such independence with National Penn’s independent auditor. The Audit Committee is not aware of any reason why National Penn’s independent auditor is not “independent” under the applicable rules.

Based on the Audit Committee’s review and discussions with management and National Penn’s independent auditor, the representations of management to the Audit Committee, the representations of National Penn’s independent auditor included in its report on National Penn’s consolidated financial statements, the Audit Committee recommended that the Board of Directors include the audited consolidated financial statements in National Penn’s Annual Report on Form 10-K for the year ended December 31, 2015.

Thomas L. Kennedy, Chair
Thomas A. Beaver
Patricia L. Langiotti
R. Chadwick Paul Jr.
Wayne R. Weidner

156

Audit and Non-Audit Fees

The aggregate fees billed to National Penn by its independent registered public accounting firm for the years ended December 31, 2015 and 2014 were as follows:
 
 
2015
 
2014
Audit Fees
 
$
1,128,532

 
$
1,017,993

Audit-Related Fees
 
507,087

 
766,677

Tax Fees
 
185,317

 
145,000

Total
 
$
1,820,936

 
$
1,929,670


Audit Fees

These fees consist of aggregate fees billed for professional services rendered for the audit of National Penn’s consolidated annual financial statements and review of interim consolidated financial statements included in quarterly reports and services that are normally provided by an independent registered public accounting firm in connection with statutory and regulatory filings or engagements, including internal control assessment work, for the fiscal year end.

Audit-Related Fees

These fees consist of aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of National Penn’s consolidated financial statements and not reported under “Audit Fees.” They also include accounting assistance on various matters related to financial accounting and reporting standards and audits of National Penn’s 401(k) plan and student loan portfolio, and other audit work required for statutory or regulatory purposes. In 2014, Audit-Related Fees also include fees related to merger and acquisition services and the senior debt issuance. In 2015, Audit-Related Fees also include fees related to due diligence services and the secondary stock offering.

Tax Fees

These fees consist of aggregate fees billed for professional services for tax compliance, tax advice and tax planning. They also include assistance regarding federal and state tax compliance, tax audit defense, tax refund claims and tax planning.

The Audit Committee considered whether the provision of the above services by KPMG was compatible with its independence and is satisfied that it was independent for the periods pertaining to its audit opinions.

Pre-Approval Requirements

The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by National Penn’s independent registered public accounting firm. These services may be approved on a periodic basis so long as the services do not exceed pre-determined cost levels. If not approved on a periodic basis, such services must otherwise be separately pre-approved by the Audit Committee prior to being performed. In addition, any proposed services that were pre-approved on a periodic basis, but later would exceed the pre-determined cost level, also require separate pre-approval by the Audit Committee. The requirement for Audit Committee pre-approval of an engagement for non-audit services may be waived only if:
    
Ÿ
the aggregate amount of all such non-audit services provided is less than 5% of the total amount paid by National Penn to the independent registered public accounting firm during the fiscal year in which the services are provided;
 
 
Ÿ
the services were not recognized by National Penn at the time of the engagement to be non-audit services; and
 
 
Ÿ
the services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit for the fiscal year in which the non-audit services were provided.

The Audit Committee pre-approved all services provided by KPMG in 2015.

157

PART IV
 
Item 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
(a)           1.           Financial Statements.

The following consolidated financial statements are included in Part II, Item 8, of this Report:

National Penn Bancshares, Inc. and Subsidiaries:

•
Consolidated Balance Sheets as of December 31, 2015 and 2014.
•
Consolidated Statements of Income for fiscal years ended December 31, 2015, 2014, and 2013.
•
Consolidated Statements of Comprehensive Income for the fiscal years ended December 31, 2015, 2014, and 2013.
•
Consolidated Statement of Changes in Shareholders’ Equity for fiscal years ended December 31, 2015, 2014 and 2013.
•
Consolidated Statements of Cash Flows for fiscal years ended December 31, 2015, 2014 and 2013.
•
Notes to Consolidated Financial Statements.

2.           Financial Statement Schedules.

Financial statement schedules are omitted because the required information is either not applicable, not required, or is shown in the financial statements or in their notes.

(b)           Exhibits.
 
2.1

Agreement and Plan of Merger, dated as of August 17, 2015, by and between BB&T Corporation and National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 2.1 in National Penn’s Current Report on Form 8-K, filed August 20, 2015.)
3.1

Articles of Incorporation, as amended and restated, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to National Penn’s Report on Form 8-K dated April 24, 2009, as filed on April 24, 2009.)
3.2

Statement with Respect to Shares, filed by National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to National Penn’s Report on Form 8-K dated October 27, 2009, as filed on November 2, 2009.)

3.3

Statement or Certificate of Change of Registered Office (Incorporated by reference to Exhibit 3.4 to National Penn’s Annual Report on Form 10-K dated March 3, 2014, as filed on March 3, 2014.)

3.4

Bylaws, as amended and restated, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to National Penn’s Report on Form 8-K dated September 25, 2013, as filed on September 30, 2013.)

4.1

Form of Declaration of Trust between National Penn Bancshares, Inc., as sponsor, and Chase Manhattan Bank USA, National Association. (Incorporated by reference to Exhibit 4.1 to National Penn’s Report on Form 8-K dated February 20, 2004, as filed on February 24, 2004.)

4.2

Form of Amended and Restated Trust Agreement among National Penn Bancshares, Inc., as sponsor, Chase Manhattan Bank USA, National Association, as Delaware Trustee, JPMorgan Chase Bank, as Institutional Trustee, and Gary L. Rhoads and Sandra L. Spayd, as Administrators. (Incorporated by reference to Exhibit 4.2 to National Penn’s Report on Form 8-K dated February 20, 2004, as filed on February 24, 2004.)
4.3

Form of Indenture between National Penn Bancshares, Inc. and JPMorgan Chase Bank, as Trustee. (Incorporated by reference to Exhibit 4.3 to National Penn’s Report on Form 8-K dated February 20, 2004, as filed on February 24, 2004.)
4.4

Form of Guarantee Agreement between National Penn Bancshares, Inc., as Guarantor, and JPMorgan Chase Bank, as Guarantee Trustee. (Incorporated by reference to Exhibit 4.4 to National Penn’s Report on Form 8-K dated
February 20, 2004, as filed on February 24, 2004.)
4.5

Form of Declaration of Trust between National Penn Bancshares, Inc., as sponsor, and Wilmington Trust Company. (Incorporated by reference to Exhibit 4.1 to National Penn's Report on Form 8-K dated March 25, 2004, as filed on March 31, 2004.)
4.6

Form of Amended and Restated Trust Agreement among National Penn Bancshares, Inc., as sponsor, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, and Gary L. Rhoads and Sandra L. Spayd, as Administrators. (Incorporated by reference to Exhibit 4.2 to National Penn's Report on Form 8-K dated March 25, 2004, as filed on March 31, 2004.)

158

4.7

Form of Indenture between National Penn Bancshares, Inc. and Wilmington Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.3 to National Penn's Report on Form 8-K dated March 25, 2004, as filed on March 31, 2004.)

4.8

Form of Guarantee Agreement between National Penn Bancshares, Inc., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee. (Incorporated by reference to Exhibit 4.4 to National Penn’s Report on Form 8-K dated March 25, 2004, as filed on March 31, 2004.)
4.9

Form of Declaration of Trust between National Penn Bancshares, Inc., as sponsor, and Wells Fargo Delaware Trust Company. (Incorporated by reference to Exhibit 4.1 to National Penn’s Report on Form 8-K dated April 7, 2004, as filed on April 13, 2004.)
4.10

Form of Amended and Restated Declaration of Trust among National Penn Bancshares, Inc., as sponsor, Wells Fargo Delaware Trust Company, as Delaware Trustee, Wells Fargo Bank, National Association, as Institutional Trustee, and Gary L. Rhoads and Sandra L. Spayd, as Administrators. (Incorporated by reference to Exhibit 4.2 to National Penn’s Report on Form 8-K dated April 7, 2004, as filed on April 13, 2004.)
4.11

Form of Indenture between National Penn Bancshares, Inc. and Wells Fargo Bank, as Institutional Trustee. (Incorporated by reference to Exhibit 4.3 to National Penn’s Report on Form 8-K dated April 7, 2004, as filed on April 13, 2004.)

4.12

Form of Guarantee Agreement between National Penn Bancshares, Inc., as Guarantor, and Wells Fargo Bank, National Association, as Guarantee Trustee. (Incorporated by reference to Exhibit 4.4 to National Penn’s Report on Form 8-K dated April 7, 2004, as filed on April 13, 2004.)

4.13

Form of Declaration of Trust between National Penn Bancshares, Inc., as sponsor, and Christiana Bank & Trust Company. (Incorporated by reference to Exhibit 4.1 to National Penn’s Report on Form 8-K dated January 25, 2006, as filed on January 25, 2006.)

4.14

Form of Amended and Restated Declaration of Trust among National Penn Bancshares, Inc., as sponsor, Christiana Bank & Trust Company, as Delaware Trustee, LaSalle Bank National Association, as Institutional Trustee, and Gary L. Rhoads and Sandra L. Spayd, as Administrators. (Incorporated by reference to Exhibit 4.2 to National Penn’s Report on Form 8-K dated January 25, 2006, as filed on January 25, 2006.)

4.15

Form of Indenture between National Penn Bancshares, Inc., and LaSalle Bank National Association, as Trustee. (Incorporated by reference to Exhibit 4.3 to National Penn’s Report on Form 8-K dated January 25, 2006, as filed on January 25, 2006.)

4.16

Form of Guarantee Agreement between National Penn Bancshares, Inc., as Guarantor, and LaSalle Bank National Association, as Guarantee Trustee. (Incorporated by reference to Exhibit 4.4 to National Penn’s Report on Form 8-K dated January 25, 2006, as filed on January 25, 2006.)

4.17

Senior Debt Securities Indenture, dated as of September 16, 2014 between National Penn Bancshares, Inc. and U.S. Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.1 to National Penn’s Report on Form 8-K dated September 16, 2014, as filed on September 16, 2014.)

4.18

First Supplemental Indenture, dated as of September 16, 2014 between National Penn Bancshares, Inc. and U.S. Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.2 to National Penn’s Report on Form 8-K dated September 16, 2014, as filed on September 16, 2014.)

4.19

Form of 4.25% Senior Note due 2024 (Incorporated by reference to Exhibit 4.3 to National Penn’s Report on Form 8-K dated September 16, 2014, as filed on September 16, 2014.)

10.1

National Penn Bancshares, Inc. Amended and Restated Dividend Reinvestment and Stock Purchase Plan. (Incorporated by reference to Exhibit 4.2 to National Penn’s Registration Statement No. 333-154973 on Form S-3, as filed on November 3, 2008.)

10.2

National Penn Bancshares, Inc. Executive Incentive Plan.* (Amended and Restated Effective January 1, 2011) (Incorporated by reference to Exhibit 10.1 to National Penn’s Report on Form 8-K dated January 24, 2011, as filed on January 27, 2011.)

10.3

National Penn Bancshares, Inc. Amended Officers’ and Key Employees’ Stock Compensation Plan.* (Incorporated by reference to Exhibit 10.1 to National Penn’s Report on Form 8-K dated September 26, 2001, as filed on September 27, 2001.)

10.4

National Penn Bancshares, Inc. Long-Term Incentive Compensation Plan.* (Incorporated by reference to Exhibit 10.1 to National Penn’s Report on Form 8-K dated April 25, 2005, as filed on April 29, 2005.)

10.5

National Penn Bancshares, Inc. Directors’ Fee Plan.* (Incorporated by reference to Exhibit 10.1 to National Penn’s Report on Form 8-K dated December 18, 2009, as filed on December 18, 2009.)

10.6

National Penn Bancshares, Inc. Amended and Restated Employee Stock Purchase Plan.* (Incorporated by reference to Exhibit 10.2 to National Penn’s Report on Form 8-K dated July 22, 2009, as filed on July 22, 2009.)

10.7

National Penn Bancshares, Inc. Capital Accumulation Plan (Incorporated by reference to National Penn’s Registration Statement No. 333-192187 on Form S-8 as filed on November 8, 2013.)


159

10.8

Form of Amended and Restated Director Deferred Fee Agreement between Bernville Bank, N.A. and certain former Bernville Bank, N.A. directors.* (Incorporated by reference to Exhibit 10.20 to National Penn’s Annual Report on Form 10-K for the year ended December 31, 2000.)

10.9

National Penn Bancshares, Inc. KNBT Bancorp, Inc. Consolidated Substitute Stock Option Plan.* (Incorporated by reference to Exhibit 10.46 to National Penn’s Annual Report on Form 10-K for the year ended December 31, 2007.)

10.10

Amended and Restated Employment Agreement, dated as of January 28, 2008, among Keystone Nazareth Bank & Trust Company, KNBT Bancorp, Inc., National Penn Bancshares, Inc., National Penn Bank and Scott V. Fainor.* (Incorporated by reference to Exhibit 10.83 to National Penn’s Annual Report on Form 10-K for the year ended December 31, 2007.)

10.11

Amendment to Employment Agreement dated January 27, 2010, among Keystone Nazareth Bank & Trust Company, KNBT Bancorp, Inc., National Penn Bancshares, Inc., National Penn Bank and Scott V. Fainor.* (Incorporated by reference to Exhibit 10.2 to National Penn’s Report on Form 8-K dated February 1, 2010, as filed on February 1, 2010.)

10.12

Amended and Restated Employment Agreement, dated as of February 8, 2013, among National Penn Bancshares, Inc., National Penn Bank and Sandra L. Bodnyk. * (Incorporated by reference to Exhibit 10.1 to National Penn's Report on Form 8-K dated February 8, 2013, as filed on February 8, 2013.)

10.13

Employment Agreement, dated as of August 12, 2009, among National Penn Bancshares, Inc., National Penn Bank and Michael J. Hughes.* (Incorporated by reference to Exhibit 10.1 to National Penn’s Report on Form 8-K dated August 12, 2009, as filed on August 12, 2009.)

10.14

Amendment to Employment Agreement, dated as of February 8, 2013, among National Penn Bancshares, Inc., National Penn Bank and Michael J. Hughes.* (Incorporated by reference to Exhibit 10.2 to National Penn’s Report on Form 8-K dated February 8, 2013, as filed on February 8, 2013.)

10.15

Form of Restricted Stock Agreement for shares of restricted stock granted to executive officers.* (Incorporated by reference to Exhibit 10.24 to National Penn’s Annual Report on Form 10-K for 2013, as filed on March 3, 2014.)

10.16

Investment Agreement between National Penn Bancshares, Inc. and Warburg Pincus dated October 5, 2010. (Incorporated by reference to Exhibit 10.1 to National Penn’s Report on Form 8-K dated October 6, 2010, as filed on October 6, 2010.)

10.17

Share Repurchase Agreement dated as of January 27, 2014, by and between Warburg Pincus Private Equity X, LP, Warburg Pincus X Partners, LP and National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 99.2 to National Penn’s Current Report on Form 8-K dated January 27, 2014, as filed on January 28, 2014.)

10.18

National Penn Bancshares, Inc. 2014 Long-Term Incentive Plan.* (Incorporated by reference to Exhibit 10.1 to National Penn’s Report on Form 8-K dated April 22, 2014, as filed on April 25, 2014.)

10.19

Executive Agreement dated April 17, 2014, among National Penn Bancshares, Inc., National Penn Bank and Sean P. Kehoe.* (Incorporated by reference to Exhibit 10.21 to National Penn’s Annual Report on Form 10-K for 2014, as filed on February 27, 2015.)

10.20

Share Repurchase Agreement, dated as of February 4, 2015, by and between Warburg Pincus Private Equity X, L.P., Warburg Pincus X Partners, L.P. and National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 99.2 to National Penn’s Current Report on Form 8-K dated February 4, 2015, as filed on February 4, 2015.)
10.21

Employment Agreement, dated as of February 8, 2015, among National Penn Bancshares, Inc., National Penn Bank and David B. Kennedy. * (Incorporated by reference to Exhibit 10.1 to National Penn’s Report on Form 8-K dated February 8, 2015, as filed on February 9, 2015.)
12

21

23

31.1

31.2

32.1

32.2


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101.INS XBRL
Instance Document **
101.SCH XBRL
Taxonomy Extension Schema Document **
101.CAL XBRL
Taxonomy Extension Calculations Linkbase Document **
101.DEF XBRL
Taxonomy Extension Definition Linkbase Document **
101.LAB XBRL
Taxonomy Extension Label Linkbase Document **
101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document **
__________
  
*Denotes a compensatory plan or arrangement. 
**Furnished herewith. 

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
NATIONAL PENN BANCSHARES, INC.
 
 
(Registrant)
 
 
 
 
 
 
February 29, 2016
By
/s/ Scott V. Fainor
 
 
Scott V. Fainor
 
 
President and
 
 
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:

Signatures
 
Title
Date
 
 
 
 
/s/ Thomas A. Beaver
 
Director and Chairman
February 29, 2016
Thomas A. Beaver
 
 
 
 
 
 
 
 
 
 
 
/s/ Scott V. Fainor
 
Director, President and
February 29, 2016
Scott V. Fainor
 
Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
 
 
/s/ Jeffrey P. Feather
 
Director
February 29, 2016
Jeffrey P. Feather
 
 
 
 
 
 
 
 
 
 
 
/s/ Donna D. Holton
 
Director
February 29, 2016
Donna D. Holton
 
 
 
 
 
 
 
 
 
 
 
/s/ Thomas L. Kennedy
 
Director
February 29, 2016
Thomas L. Kennedy
 
 
 
 
 
 
 
 
 
 
 
/s/ Patricia L. Langiotti
 
Director
February 29, 2016
Patricia L. Langiotti
 
 
 
 
 
 
 
 
/s/ Christian F. Martin IV
 
Director
February 29, 2016
Christian F. Martin IV
 
 
 
 
 
 

162

 
 
 
 
/s/ Natalye Paquin
 
Director
February 29, 2016
Natalye Paquin
 
 
 
 
 
 
 
 
 
 
 
/s/ R. Chadwick Paul Jr.
 
Director
February 29, 2016
R. Chadwick Paul Jr.
 
 
 
 
 
 
 
 
 
 
 
/s/ C. Robert Roth
 
Director
February 29, 2016
C. Robert Roth
 
 
 
 
 
 
 
 
 
 
 
/s/ Wayne R. Weidner
 
Director
February 29, 2016
Wayne R. Weidner
 
 
 
 
 
 
 
 
 
 
 
/s/ Michael J. Hughes
 
Senior Executive Vice President and
February 29, 2016
Michael J. Hughes
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)
 
 
 
 
 
/s/ Stephen C. Lyons
 
Senior Vice President and
February 29, 2016
Stephen C. Lyons
 
Chief Accounting Officer
 
 
 
(Principal Accounting Officer)
 




163