10-K 1 npbc10k2014.htm 10-K NPBC 10K 2014
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, 2014
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 #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, 2014, was $1.2 billion.

As of February 23, 2015, the Registrant had 140,055,392 shares of Common Stock outstanding. Portions of the following documents are incorporated by reference: the definitive Proxy Statement of the Registrant relating to the Registrant’s Annual Meeting of Shareholders to be held on April 28, 2015 -- Part III.

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,” 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). Prior to March 1, 2014, we were headquartered in Boyertown, Pennsylvania. 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 affiliates consist of National Penn Wealth Management, N.A., including its National Penn Investors Trust Company (“NPITC”) division; Institutional Advisors, LLC; National Penn Insurance Services Group, Inc., including its Higgins Insurance and Caruso Benefits divisions.
 
At December 31, 2014, National Penn operated 115 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, 2014, National Penn had total assets of $9.8 billion, total loans of $6.1 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.

Recent Developments

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 issued the senior notes with a goal to enhance its strategic flexibility.

On October 24, 2014, the Company completed its acquisition of TF Financial Corporation ("TF Financial") through a stock and cash merger. TF Financial was a savings and loan holding company with 3rd Fed Bank as its wholly-owned subsidiary. Headquartered in Newtown, Pennsylvania, TF Financial operated eighteen branch offices. The acquisition was valued at approximately $136 million, consisting of approximately $58.4 million in cash and the issuance of approximately 8.0 million shares of National Penn common stock valued at approximately $77.3 million. For additional information regarding this transaction, refer to Footnote 2 to the consolidated financial statements within Item 8 of this Report.

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.

1


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 2014, 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, as well as the Cecil County, Maryland area. We added service to three counties in New Jersey with the acquisition of TF Financial Corporation --Burlington, Mercer, and Ocean.

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, 2014, 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.

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, 2014, 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, 2014, our commercial loan portfolio was $4.0 billion, which represents 66% 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.

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.

3



National Penn Wealth Management, N.A., a national trust company headquartered in Pennsylvania and a subsidiary of National Penn Bank, offers investment management and fiduciary services for individuals, corporations, government entities and non-profit institutions throughout our market area. Its division, National Penn Investors Trust Company (“NPITC”), serves the asset management needs of clients. NPITC 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. The wealth management group currently manages $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") and its Higgins Insurance Associates division provide property and casualty insurance services for individuals and businesses. NPISG's Caruso Benefits Group division offers specialized employee benefits consulting services. NPISG and its two divisions currently serve approximately 11,000 customers.

For the year ended December 31, 2014, our efforts in the wealth and insurance businesses produced $40.9 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 Wealth Management 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, 2014, National Penn had approximately $9.8 billion in total assets, and National Penn Bank conducted operations through 127 retail branch offices.  

In 2014, National Penn's net income was $98.7 million, inclusive of the $2.9 million ($2.1 million after-tax) merger related costs related to the acquisition of TF Financial, compared to $53.4 million net income for 2013 which included a $64.9 million ($42.2 million after-tax) charge related to the extinguishment of $400 million of previously restructured FLHB advances. In addition, 2013 included $6.0 million ($3.9 million after-tax) in corporate reorganization expenses and a $2.1 million ($1.4 million after-tax) gain from the redemption of the Company's subordinated debentures accounted for at fair value. Excluding the one-time items in 2014 and 2013, adjusted net income of $101 million, or $0.71 per diluted share, for 2014 compared to $98.1 million, or $0.67 per diluted share, in 2013. The Company's continued strong performance in 2014 was the result of its ability to maintain a strong credit quality profile while continuing to effectively manage its operating expenses and efficiency. The net interest margin of 3.40% for 2014 reflects the Company's issuance of $125 million in unsecured, fixed rate senior notes aimed at providing the Company with enhanced strategic flexibility.


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, 2014 and 2013, our loan portfolio was composed of the following balances: 
 
December 31, 2014
 
December 31, 2013
(dollars in thousands)
 
 
Percentage of
 
 
 
Percentage of
 
 
 
Portfolio
 
 
 
Portfolio
Commercial and industrial
$
2,599,867

 
42.3
%
 
$
2,460,664

 
46.1
%
 
 
 
 
 
 
 
 
CRE - permanent
1,229,318

 
20.0
%
 
994,838

 
18.6
%
CRE - construction
203,542

 
3.3
%
 
198,334

 
3.7
%
Commercial real estate
1,432,860

 
23.3
%
 
1,193,172

 
22.3
%
Commercial
4,032,727

 
65.6
%
 
3,653,836

 
68.4
%
 
 
 
 
 
 
 
 
Residential mortgages
908,357

 
14.8
%
 
652,225

 
12.2
%
Home equity
913,830

 
14.9
%
 
762,608

 
14.3
%
All other consumer
287,365

 
4.6
%
 
264,599

 
5.0
%
Consumer
2,109,552

 
34.3
%
 
1,679,432

 
31.5
%
 
 
 
 
 
 
 
 
Loans
6,142,279

 
99.9
%
 
5,333,268

 
99.9
%
 
 
 
 
 
 
 
 
Loans held-for-sale
4,178

 
0.1
%
 
4,951

 
0.1
%
 
 
 
 
 
 
 
 
Total loans
$
6,146,457

 
100.0
%
 
$
5,338,219

 
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 at 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 2014, and is not expected to have a material effect on such expenditures, earnings or competitive position in 2015.

Employees

At December 31, 2014, National Penn and its subsidiaries had 1,771 full- and part-time employees.  Our full-time equivalent ("FTE") employee count at December 31, 2014 was 1,658 compared to 1,631 at December 31, 2013.

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

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) 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, 2014, National Penn's Tier 1 capital and total (Tier 1 and Tier 2 combined) capital ratios were 13.91% and 15.16%, respectively.

In addition to the risk-based capital guidelines, through December 31, 2014, the Federal Reserve required 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% for those bank holding companies having the highest regulatory examination ratings and not contemplating or experiencing significant growth or expansion.  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, 2014, National Penn's leverage ratio was 10.78%.

The FDIA 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, an insured institution is considered “well capitalized” if it satisfies each of the following requirements:
 
It has a total risk-based capital ratio of 10% or more.
It has a Tier 1 risk-based capital ratio of 6% or more.
It has a leverage ratio of 5% or more.
It is not subject to any order or written directive to meet and maintain a specific capital level.

At December 31, 2014, 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.

Basel III Capital Rules

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 become 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.


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Under the new capital rules, the minimum capital ratios as of January 1, 2015 will be 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 will require National Penn and the Bank to meet a capital conservation buffer requirement. To meet the requirement when it is fully phased in, the 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 be well-capitalized under prompt corrective action provisions will be 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.

Although we continue to evaluate the impact that the new capital rules will have on National Penn and National Penn Bank, we anticipate that National Penn Bank will be well-capitalized under the new capital rules.

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 2014, and expects to be required to pay regular insurance assessments to the FDIC in 2015.

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 Wealth Management, N.A., a direct subsidiary of National Penn Bank, is a limited purpose national trust company regulated by the OCC.  National Penn Bank's other direct non-bank subsidiaries are also 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:

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

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

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

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.

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.

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.

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.

The financial regulatory agencies promulgated the following regulatory actions implementing Dodd-Frank provisions that have significance to the business of National Penn, which became effective during 2014 and through January 2015:

The OCC, Federal Reserve, FDIC, NCUA and CFPB repealed their respective and substantially similar credit practice rules applicable to banks, savings associations, and federal credit unions but issued official guidance to clarify that engaging in the unfair or deceptive practices described in the former credit practices rules may violate the prohibition against unfair or deceptive practices in Section 5 of the FTC Act and other relevant laws, or as the agencies may otherwise determine.

The OCC amended its national bank capital regulations to make them consistent with the Basel III Capital Framework, including clarification of the requirements subordinated debt must meet and the procedures required to issue and redeem subordinated debt.

The CFPB extended to July 2020 the temporary exception permitting insured institutions to provide estimated, instead of exact, disclosures under the Regulation E Remittance Rule and clarified that a remittance transfer provider may determine coverage of the Remittance Rule by the type of account (i.e., personal, family or household vs. business) from which transfers are made.

The CFPB amended Regulation Z (Truth in Lending) to reset the timing and calculation of coverage thresholds for credit card transactions under the Credit Card Accountability Responsibility and Disclosure Act (CARD), high-cost mortgages under the Home Ownership and Equity Protection Act (HOEPA), and qualified mortgages under the Dodd-Frank Act.

The CFPB amended its ability-to-repay (ATR) rule to clarify its coverage of mortgage assumptions and redefine its applicability to nonprofit entities.


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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 were effective April 1, 2014, with an extended effective date of July 2015.

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.

Gramm-Leach-Bliley Act

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

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.  National Penn has, instead, utilized the authority of national banks to create “operating subsidiaries” to expand its business products and services.

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.”

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.


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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.

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 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 National Penn's business.

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

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 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. Issues with respect to the U.S. government’s debt ceiling 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.

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.  


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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 is 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, 2014, $4.0 billion, or 65.6%, 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. We have been able to achieve a relatively stable net interest margin over the last several years; however, 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 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 $41.3 million in capital stock of the Federal Home Loan Bank (“FHLB”) of Pittsburgh as of December 31, 2014. 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.


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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.

The acquisition of other financial services companies or assets, including the recent acquisition of TF Financial, 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 $9.8 billion in assets as of December 31, 2014. Additional growth that results in National Penn Bank having assets of $10 billion or more 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, 2014, National Penn had approximately $302 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 the lack of recovery 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. 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.


19


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

Bank failures over recent years severely depleted the FDIC's insurance fund.  In response, the FDIC took various measures in 2009 and early 2010. The Dodd-Frank Act, adopted in July 21, 2010, requires 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 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.


20


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.


21


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.

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

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 147 million shares were outstanding as of December 31, 2014, 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. 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.


22


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. 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, 2014, 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 2014, the Board of Directors approved a fourth quarter 2014 cash dividend of $0.11 per share, and in January 2015, the Board of Directors approved a first quarter 2015 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.


23


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 TF Financial with and into National Penn, including:

Expected benefits may not materialize in the timeframe expected or at all, or may be more costly to achieve;
Inability to successfully implement integration strategies; and
Diversion of management time on merger-related issues.

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.

24



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.

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 91 properties and leases 72 other properties. National Penn’s other direct and indirect subsidiaries lease 4 properties. The properties owned are not subject to any major liens, encumbrances, or collateral assignments.

Effective March 1, 2014, the principal office of National Penn and National Penn Bank was 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. During 2014, National Penn Bank consolidated 9 retail branch offices, 5 of which, including 4 supermarket branches, were located within 2 miles of other retail branch offices.

National Penn Bank, including all divisions, currently operates 119 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 61 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.


25


Item 4A.  EXECUTIVE OFFICERS OF THE REGISTRANT
 
The principal executive officers of National Penn, as of February 27, 2015, are as follows:
 
Name
 
Age
 
 Principal Business Occupation During the Past Five Years
Scott V. Fainor
 
53
 
President and Chief Executive Officer of National Penn Bancshares, Inc. and National Penn Bank since January 27, 2010. Senior Executive Vice President and Chief Operating Officer of National Penn and President and Chief Executive Officer of National Penn Bank from February 1, 2008 through January 27, 2010.  
Michael J. Hughes
 
58
 
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
 
63
 
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
 
53
 
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. President of Northern Region from February 1, 2008 to March 1, 2010.
Sean P. Kehoe
 
45
 
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.
Tito L. Lima
 
50
 
Executive Vice President, Corporate Controller since October 30, 2013. Senior Vice President-Finance and Chief Accounting Officer, TriState Capital Bank, from February 2009 to August 2013.
Stephen C. Lyons
 
41
 
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. Senior Financial Reporting Accountant, CITCO Fund Services from October 2009 to 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.



26


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, 2014, National Penn had 7,252 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
 
 
2014
 
2013
 
 
High
 
Low
 
High
 
Low
1st Quarter
 
$
11.45

 
$
9.94

 
$
10.84

 
$
9.38

2nd Quarter
 
10.96

 
9.50

 
10.70

 
9.35

3rd Quarter
 
10.93

 
9.71

 
11.40

 
9.87

4th Quarter
 
10.68

 
9.17

 
11.63

 
9.68


Cash Dividends Declared on Common Stock
 
 
2014
 
2013
1st Quarter (a)
 
$
0.10

 
$

2nd Quarter
 
0.10

 
0.10

3rd Quarter
 
0.10

 
0.10

4th Quarter
 
0.11

 
0.10

(a) In lieu of a first quarter 2013 cash dividend, the Company paid an additional dividend of $0.10 per share in the fourth quarter of 2012.

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. 10,462,810 common shares were issued at a purchase price of $6.05 per share (based upon average market prices). 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, the Company repurchased 7 million shares of its common stock from two affiliates of Warburg Pincus. On February 6, 2015, the Company repurchased an additional 7.3 million shares owned by Warburg Pincus. As of February 6, 2015, Warburg Pincus maintained an 8.3% position in National Penn.


27


Stock Repurchases
 
On January 30, 2014, National Penn repurchased 7 million shares of its common stock from two affiliates of Warburg Pincus, at $10.77 per share (the closing price of National Penn common stock on the date the repurchase agreement was executed).

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. On February 6, 2015, the Company completed the repurchase of $75 million of common stock owned by Warburg Pincus. Based on a share price of $10.25, the repurchase aggregated approximately 7.3 million shares or approximately 40% of the outstanding common shares owned by Warburg Pincus.

The table below presents share repurchase activity for the three months ended December 31, 2014.
Period
 
Total No. of
Shares Purchased
 
Weighted-Average
Price Paid Per Share
 
Total No. of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (b)
 
Maximum No. of Shares
That May Yet Be
Purchased Under the
Plans or Programs
October 1, 2014 through October 31, 2014
 

 
$

 

 
289,810

November 1, 2014 through November 30, 2014
 
125,264

 
10.34

 
125,264

 
164,546

December 1, 2014 through December 31, 2014
 
163,891

 
10.15

 
163,891

 
655

Total
 
289,155

 
$
10.23

 
289,155

 
 
 
 
 
 
 
 
 
 
 
(b) On December 20, 2013, the Company announced that its Board of Directors approved a common share repurchase plan of up to 5% of its outstanding shares, or 7,289,810 shares, during 2014. This repurchase plan expired on December 31, 2014.

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.
    



28


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, 2009, 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
 
12/31/2009

 
12/31/2010

 
12/31/2011

 
12/31/2012

 
12/31/2013

 
12/31/2014

National Penn Bancshares, Inc.
 
$
100.00

 
$
139.54

 
$
148.33

 
$
171.43

 
$
214.61

 
$
207.54

NASDAQ Composite
 
100.00

 
118.15

 
117.22

 
138.02

 
193.47

 
222.16

NASDAQ Bank
 
100.00

 
114.16

 
102.17

 
121.26

 
171.86

 
180.31

SNL Bank and Thrift
 
100.00

 
111.64

 
86.81

 
116.57

 
159.61

 
178.18

 
 
 
 
 
 
 
 
 
 
 
 
 
Source: SNL Financial LC, Charlottesville, VA
© 2015


29


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 share and per share data)
As of and for the
 
Year Ended December 31,
BALANCE SHEET
2014
 
2013
 
2012
 
2011
 
2010
Total assets
$
9,750,865

 
$
8,591,848

 
$
8,529,522

 
$
8,486,281

 
$
8,844,620

Total investment securities and other securities
2,519,215

 
2,396,298

 
2,334,739

 
2,314,111

 
2,259,690

Total loans, net
6,055,782

 
5,241,852

 
5,129,927

 
5,061,461

 
5,176,669

Deposits
6,729,745

 
6,072,578

 
5,935,565

 
5,874,819

 
6,059,173

Borrowings
1,720,404

 
1,282,289

 
1,344,324

 
1,370,399

 
1,590,996

Total shareholders’ equity
1,188,639

 
1,131,866

 
1,161,292

 
1,180,687

 
1,137,437

Tangible common equity (d)
877,638

 
866,733

 
892,399

 
906,638

 
708,500

Percent shareholders’ equity to total assets
12.19
%
 
13.17
%
 
13.61
%
 
13.91
%
 
12.86
%
Percent tangible common equity to tangible assets (d)
9.30
%
 
10.41
%
 
10.80
%
 
11.04
%
 
8.27
%
 
 
 
 
 
 
 
 
 
 
Assets under management
$
2,501,015

 
$
2,504,717

 
$
2,256,319

 
$
2,141,737

 
$
2,092,149

 
 
 
 
 
 
 
 
 
 
EARNINGS (c)
 

 
 

 
 

 
 

 
 

Total interest income
$
288,019

 
$
288,279

 
$
316,828

 
$
346,834

 
$
387,249

Total interest expense
30,905

 
36,217

 
62,822

 
86,931

 
116,017

Net interest income
257,114

 
252,062

 
254,006

 
259,903

 
271,232

Provision for loan losses
5,751

 
5,250

 
8,000

 
15,000

 
95,000

Net interest income after provision for loan losses
251,363

 
246,812

 
246,006

 
244,903

 
176,232

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

 
2,111

 
683

 
(2,530
)
 
(10,373
)
Net gains (losses) on sales of investment securities
21

 
54

 
(119
)
 
2,719

 
214

Net impairment losses on investment securities

 

 
(154
)
 

 
(1,390
)
Loss on sale of building

 

 

 
1,000

 

Gain on pension curtailment

 

 

 

 
4,066

Other non-interest income
92,154

 
95,902

 
95,558

 
94,654

 
105,705

Goodwill impairment

 

 

 

 
8,250

Acquisition related expenses
2,878

 

 

 

 

Loss on debt extinguishment

 
64,888

 

 
2,633

 

Corporate reorganization expense

 
6,000

 

 
2,200

 

Other non-interest expense
208,445

 
211,023

 
210,310

 
221,197

 
233,426

Income before income taxes
132,215

 
62,968

 
131,664

 
112,716

 
32,778

Income tax expense
33,509

 
9,581

 
32,754

 
25,172

 
11,441

Net income
98,706

 
53,387

 
98,910

 
87,544

 
21,337

Preferred dividends and accretion of preferred discount

 

 

 
(1,691
)
 
(8,021
)
Accelerated accretion from redemption of preferred stock

 

 

 
(1,452
)
 

Net income available to common shareholders
$
98,706

 
$
53,387

 
$
98,910

 
$
84,401

 
$
13,316

 
 
 
 
 
 
 
 
 
 
Cash dividends - common stock (a)
$
57,962

 
$
43,696

 
$
61,401

 
$
13,651

 
$
5,136

Cash dividends - preferred stock

 

 

 
1,583

 
7,500

Dividend payout ratio - common (a)
58.72
%
 
81.85
%
 
62.08
%
 
16.17
%
 
38.57
%
Return on average assets
1.13
%
 
0.64
%
 
1.17
%
 
1.02
%
 
0.23
%
Return on average total shareholders' equity
8.86
%
 
4.72
%
 
8.25
%
 
7.58
%
 
1.95
%
Return on average common shareholder's equity
8.86
%
 
4.72
%
 
8.25
%
 
7.50
%
 
1.41
%
Return on average tangible common equity (d)
11.72
%
 
6.18
%
 
10.66
%
 
9.95
%
 
2.07
%
 
 
 
 
 
 
 
 
 
 
PER SHARE DATA
 

 
 

 
 

 
 

 
 

Basic earnings available to common shareholders
$
0.70

 
$
0.37

 
$
0.66

 
$
0.56

 
$
0.10

Diluted earnings available to common shareholders
0.70

 
0.37

 
0.66

 
0.56

 
0.10

Dividends paid in cash (a)
0.41

 
0.30

 
0.41

 
0.09

 
0.04

Book value
8.08

 
7.76

 
8.00

 
7.77

 
7.23

Tangible book value (d)
5.96

 
5.94

 
6.15

 
5.97

 
5.18

 
 
 
 
 
 
 
 
 
 
Weighted average shares basic
141,281,690

 
145,602,670

 
150,566,098

 
151,386,614

 
128,118,298

Weighted average shares diluted
141,823,607

 
146,044,058

 
150,859,995

 
151,653,646

 
128,186,651

 
 
 
 
 
 
 
 
 
 
Staff – Full-time equivalents
1,658

 
1,631

 
1,648

 
1,688

 
1,728

 
 
 
 
 
 
 
 
 
 
(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.
(c) Results of operations are included for Christiana Bank and Trust beginning January 4, 2008 through December 3, 2010.
(d) Non-GAAP measures are discussed in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.

30


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 year ended December 31, 2014 and financial condition of the Company as of December 31, 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 year ended December 31, 2014, included in this Report in Item 8.

The Company’s strategic plan is designed to enhance shareholder value by operating a highly profitable financial services company within the markets it serves. Specifically, management is focused on increasing market penetration in selected geographic areas and achieving excellence in both retail and commercial lines of business.  The Company also grows revenue through appropriate and targeted acquisitions, through expanding into new geographical markets, or through further penetrating existing markets or business lines.  

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.

31


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. 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.


32


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.



33


2014 OVERVIEW
 
(dollars in thousands, except per share data)
Year Ended December 31,
 
2014
 
2013
EARNINGS
 
 
 
Total interest income
$
288,019

 
$
288,279

Total interest expense
30,905

 
36,217

Net interest income
257,114

 
252,062

Provision for loan losses
5,751

 
5,250

Net interest income after provision for loan losses
251,363

 
246,812

Net gains from fair value changes of subordinated debentures

 
2,111

Net gains on investment securities
21

 
54

Other non-interest income
92,154

 
95,902

Acquisition related expenses
2,878

 

Loss on debt extinguishment

 
64,888

Corporate reorganization expense

 
6,000

Other non-interest expense
208,445

 
211,023

Income before income taxes
132,215

 
62,968

Income tax expense
33,509

 
9,581

Net income
$
98,706

 
$
53,387

 
 
 
 
Basic earnings per share
$
0.70

 
$
0.37

Diluted earnings per share
0.70

 
0.37

Adjusted diluted earnings (e)
0.71

 
0.67

Dividends per share (a)
0.41

 
0.30

 
 
 
 
Net interest margin
3.40
%
 
3.51
%
Efficiency ratio (e)
57.06
%
 
57.80
%
Return on average assets
1.13
%
 
0.64
%
Adjusted return on average assets (e)
1.16
%
 
1.18
%
 
 
 
 
Asset Quality Metrics
 
 
 

Allowance for loan losses/total originated loans
1.63
%
 
1.81
%
Allowance for loan losses/total loans
1.48
%
 
1.81
%
Non-performing loans/total loans
0.96
%
 
0.99
%
Delinquent loans/total loans
0.36
%
 
0.55
%
Allowance for loan losses/non-performing loans
153
%
 
183
%
Net loan charge-offs to average total loans
0.21
%
 
0.38
%
 
 
 
 
(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.
(e) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 7 and the Non-GAAP reconciliations below.
Net income totaled $98.7 million and $53.4 million for the years ended December 31, 2014 and December 31, 2013, respectively. Adjusted net income was $101 million, or $0.71 per diluted share, for 2014 compared to adjusted net income of $98.1 million, or $0.67 per diluted share, for 2013. The increase in net income is largely driven by an increase in net interest income while operating expenses declined year-over-year.
Net interest income of $257 million for the year ended December 31, 2014 compared to $252 million for the comparable period in 2013, benefiting from ongoing asset/liability management strategies coupled with the impact of the acquisition of TF Financial. Net interest margin of 3.40% for 2014 compared to 3.51% for 2013, as 2014 reflects the continued period of prolonged low interest rates and the impact of the $125 million senior note issuance aimed at enhancing strategic flexibility.
Asset quality continued to improve in 2014 from an already strong base in 2013, as classified loans at December 31, 2014 decreased by 20% from December 31, 2013, excluding the impact of TF Financial. Net charge-offs totaling $11.4 million, or 0.21% of average total loans, for the twelve months ended December 31, 2014 declined from $19.8 million, or 0.38% of average total loans for 2013, despite a modest increase in non-performing loans, which totaled $59.1 million at December 31, 2014 compared to $52.6 million at December 31, 2013.

34


Other non-interest income of $92.2 million for the twelve months ended December 31, 2014 decreased by $3.7 million from the comparable period in 2013 primarily as a result of lower mortgage banking fees resulting from lower refinance activity.
Other non-interest expense of $208 million for the twelve months ended December 31, 2014 decreased by $2.6 million from the comparable period in 2013, despite the impact of TF Financial. Additionally, the efficiency ratio of 57.06% for 2014 decreased compared to 57.80% for 2013, as the Company continued to focus on effectively managing operating expenses and efficiency.

Non-GAAP Reconciliations

Adjusted Net Income and Return on Average Assets (e)    

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,
 
 
2014
 
2013
 
2012
Adjusted net income reconciliation
 
 
 
 
 
 
Net income
 
$
98,706

 
$
53,387

 
$
98,910

     After tax acquisition related expenses
 
2,054

 

 

     After tax loss on debt extinguishment
 

 
42,177

 

     After tax corporate reorganization expense
 

 
3,900

 

     After tax unrealized fair value gain on subordinated debentures
 

 
(1,372
)
 
(444
)
Adjusted net income
 
$
100,760

 
$
98,092

 
$
98,466

 
 
 
 
 
 
 
Adjusted diluted earnings per share
 
 
 
 
 
 
Diluted earnings per share
 
$
0.70

 
$
0.37

 
$
0.66

     After tax acquisition related expenses
 
0.01

 

 

     After tax loss on debt extinguishment
 

 
0.29

 

     After tax corporate reorganization expense
 

 
0.03

 

     After tax unrealized fair value gain on subordinated debentures
 

 
(0.01
)
 

Adjusted diluted earnings per share
 
$
0.71

 
$
0.67

(f) 
$
0.66

 
 
 
 
 
 
 
Average assets
 
$
8,709,629

 
$
8,330,441

 
$
8,424,322

Adjusted return on average assets
 
1.16
%
 
1.18
%
 
1.17
%
 
 
 
 
 
 
 
(e) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 7.
 
 
 
 
(f) Difference in summation of adjusted diluted earnings per share due to rounding.
 
 
 
 

Adjustments to 2014 net income included the following:

Non-interest expense included acquisition related expenses 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.

Adjustments to 2012 net income included the following:

Non-interest income included a $0.7 million, or $0.4 million after tax unrealized fair value gain on subordinated debentures. The adjustment did not impact earnings per diluted share.

35



Efficiency Ratio (e) 
(dollars in thousands)
Year Ended December 31,
 
 
2014
 
2013
 
2012
 
Non-interest expense
$
211,323

 
$
281,911

 
$
210,310

 
Less:
 
 
 
 
 
 
Acquisition related expenses
2,878

 

 

 
Loss on debt extinguishment

 
64,888

 

 
Corporate reorganization expense

 
6,000

 

 
Operating expenses
$
208,445

 
$
211,023

 
$
210,310

 
 
 
 
 
 
 
 
Net interest income (taxable equivalent)
$
273,150

 
$
269,219

 
$
272,622

 
 
 
 
 
 
 
 
Non-interest income
92,175

 
98,067

 
95,968

 
Less:
 

 
 
 
 

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

 
2,111

 
683

 
Net gains (losses) on investment securities
21

 
54

 
(273
)
 
Adjusted revenue
$
365,304

 
$
365,121

 
$
368,180

 
 
 
 
 
 
 
 
Efficiency ratio
57.06
%
 
57.80
%
 
57.12
%
 
 
 
 
 
 
 
 
(e) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 7.
 
 
 
 

Tangible Common Equity/Tangible Assets (e) 
(dollars in thousands, except per share data)
 
As of December 31,
 
 
2014
 
2013
 
2012
Total shareholder's equity
 
$
1,188,639

 
$
1,131,866

 
$
1,161,292

Goodwill and intangibles
 
(311,001
)
 
(265,133
)
 
(268,893
)
Tangible common equity
 
$
877,638

 
$
866,733

 
$
892,399

 
 
 
 
 
 
 
Shares outstanding
 
147,136,084

 
145,798,751

 
145,163,585

Tangible book value per share
 
$
5.96

 
$
5.94

 
$
6.15

 
 
 
 
 
 
 
Total assets
 
$
9,750,865

 
$
8,591,848

 
$
8,529,522

Goodwill and intangibles
 
(311,001
)
 
(265,133
)
 
(268,893
)
Tangible assets
 
$
9,439,864

 
$
8,326,715

 
$
8,260,629

 
 
 
 
 
 
 
Tangible common equity/tangible assets
 
9.30
%
 
10.41
%
 
10.80
%
 
 
 
 
 
 
 
(e) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 7.
 
 
 
 

Return on Average Tangible Common Equity (e) 
(dollars in thousands)
 
Year Ended December 31,
 
 
2014
 
2013
 
2012
Average shareholder's equity
 
$
1,113,535

 
$
1,130,290

 
$
1,198,948

Average goodwill and intangibles
 
(271,684
)
 
(266,851
)
 
(271,384
)
Average tangible common equity
 
$
841,851

 
$
863,439

 
$
927,564

 
 
 
 
 
 
 
Net income
 
$
98,706

 
$
53,387

 
$
98,910

Return on average tangible common equity
 
11.72
%
 
6.18
%
 
10.66
%
 
 
 
 
 
 
 
(e) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 7.
 
 
 
 


36


FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Summary Balance Sheet
(dollars in thousands, except per share data)
As of December 31,
 
2014
 
2013
Total cash and cash equivalents
$
413,839

 
$
283,523

Investment securities and other securities
2,519,215

 
2,396,298

Total loans
6,146,457

 
5,338,219

Total assets
9,750,865

 
8,591,848

Deposits
6,729,745

 
6,072,578

Borrowings
1,720,404

 
1,282,289

Shareholders' equity
1,188,639

 
1,131,866

 
 
 
 
Balances in the table above at December 31, 2014 are impacted by the acquisition of TF Financial.
    
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, in which the Company operates, suggests the following trends:
 
Modest growth in general retail sales, commercial real estate leasing and construction, with moderate growth in automotive retail.

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

Business contacts in most sectors continued to express a positive outlook on the underlying economy, reporting slight increases in wages, home prices and general price levels.

    

37


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, 2014 and 2013:

(dollars in thousands)
 
December 31,
 
 
 
 
 
 
2014
 
2013
 
Increase/(Decrease)
Commercial and industrial
 
$
2,599,867

 
$
2,460,664

 
$
139,203

 
5.7
 %
 
 
 
 
 
 
 
 
 
CRE - permanent
 
1,229,318

 
994,838

 
234,480

 
23.6
 %
CRE - construction
 
203,542

 
198,334

 
5,208

 
2.6
 %
Commercial real estate
 
1,432,860

 
1,193,172

 
239,688

 
20.1
 %
Commercial
 
4,032,727

 
3,653,836

 
378,891

 
10.4
 %
 
 
 
 
 
 
 
 
 
Residential mortgages
 
908,357

 
652,225

 
256,132

 
39.3
 %
Home equity
 
913,830

 
762,608

 
151,222

 
19.8
 %
All other consumer
 
287,365

 
264,599

 
22,766

 
8.6
 %
Consumer
 
2,109,552

 
1,679,432

 
430,120

 
25.6
 %
 
 
 
 
 
 
 
 
 
Loans
 
$
6,142,279

 
$
5,333,268

 
$
809,011

 
15.2
 %
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
90,675

 
96,367

 
(5,692
)
 
(5.9
)%
 
 
 
 
 
 
 
 
 
Loans, net
 
$
6,051,604

 
$
5,236,901

 
$
814,703

 
15.6
 %
 
 
 
 
 
 
 
 
 
Loans held-for-sale
 
$
4,178

 
$
4,951

 
$
(773
)
 
(15.6
)%

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
 
2013
 
2012
 
2011
 
2010
Commercial and industrial
 
$
2,599,867

 
$
2,460,664

 
$
2,495,855

 
$
2,420,027

 
$
2,434,960

CRE - permanent
 
1,229,318

 
994,838

 
907,760

 
855,524

 
768,988

CRE - construction
 
203,542

 
198,334

 
125,878

 
156,064

 
281,056

Residential mortgages
 
908,357

 
652,225

 
671,772

 
710,322

 
752,629

Home equity
 
913,830

 
762,608

 
754,386

 
747,558

 
745,124

All other consumer
 
287,365

 
264,599

 
270,901

 
286,390

 
331,181

Loans
 
6,142,279

 
5,333,268

 
5,226,552

 
5,175,885

 
5,313,938

Loans held-for-sale
 
4,178

 
4,951

 
14,330

 
12,216

 
12,785

Total loans
 
$
6,146,457

 
$
5,338,219

 
$
5,240,882

 
$
5,188,101

 
$
5,326,723

 
Loans increased by $809 million to $6.1 billion at December 31, 2014, inclusive of loans acquired during the fourth quarter of 2014 via the TF Financial acquisition. Acquired loans totaled $580 million at December 31, 2014. Originated loans increased by $229 million, or 4.3%, to $5.6 billion at December 31, 2014. Additionally, originated loan growth was inclusive of a $38.3 million, or 20.0%, decrease to classified loans since December 31, 2013, excluding the impact of the acquisition of TF Financial. Net charge-offs during 2014 totaled $11.4 million compared to $19.8 million for 2013, while the provision for loan losses was $5.8 million for the twelve months ended December 31, 2014, resulting in a decrease to the allowance for loan losses, which totaled $90.7 million at December 31, 2014. The decrease in the allowance for loan losses was the direct result of the continued improvement in asset quality.

    

38


Maturities and sensitivity to changes in interest rates in the Company’s commercial loan portfolio at December 31, 2014 are summarized below:

(dollars in thousands)
 
One Year
 
After One
Year to
 
After Five
 
 
 
 
or Less*
 
Five Years
 
Years
 
Total
Commercial and industrial
 
$
1,275,865

 
$
807,442

 
$
516,560

 
$
2,599,867

CRE - permanent
 
567,109

 
426,631

 
235,578

 
1,229,318

CRE - construction
 
165,060

 
28,113

 
10,369

 
203,542

Total
 
$
2,008,034

 
$
1,262,186

 
$
762,507

 
$
4,032,727

 
 
 
 
 
 
 
 
 
Predetermined interest rate
 
$
146,234

 
$
1,025,820

 
$
746,648

 
$
1,918,702

Floating interest rate
 
1,861,800