-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VLZaDOb1lnqMxKqUlbrsgk9DvL9IR/yhhpcvqMWoPGSXrt8dqeRKRsHAOkYQzSt8 felCBdfURoG54pJ8qrmJDQ== 0000950159-00-000119.txt : 20000331 0000950159-00-000119.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950159-00-000119 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL PENN BANCSHARES INC CENTRAL INDEX KEY: 0000700733 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232215075 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-10957 FILM NUMBER: 585686 BUSINESS ADDRESS: STREET 1: PHILADELPHIA AND READING AVE STREET 2: PO 547 CITY: BOYERTOWN STATE: PA ZIP: 19512 BUSINESS PHONE: 2153676001 MAIL ADDRESS: STREET 1: POST OFFICE BOX 547 STREET 2: POST OFFICE BOX 547 CITY: BOYERTOWN STATE: PA ZIP: 19512 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1999, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ____________ to ____________. Commission file number 000-10957 NATIONAL PENN BANCSHARES, INC. ---------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-2215075 - ------------------------------------- --------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Philadelphia and Reading Avenues, Boyertown, Pennsylvania 19512 - ------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 367-6001 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock (without par value) Preferred Stock Purchase Rights Guarantee (9% Preferred Securities of NPB Capital Trust) 9% Junior Subordinated Debentures 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 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] The aggregate market value of common shares of the Registrant held by nonaffiliates, based on the closing sale price as of March 10, 2000, was $278,395,310. As of March 10, 2000, the Registrant had 17,695,942 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 25, 2000 -- Part III. NATIONAL PENN BANCSHARES, INC. FORM 10-K TABLE OF CONTENTS Page Part I Item 1 Business....................................................... 1 Item 2. Properties..................................................... 22 Item 3. Legal Proceedings.............................................. 23 Item 4. Submission of Matters to a Vote of Security Holders................................................... 23 Item 4A. Executive Officers of the Registrant........................... 23 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................... 24 Item 6. Selected Financial Data........................................ 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 26 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 32 Item 8. Financial Statements and Supplementary Data.................... 33 Item 9. Disagreements on Accounting and Financial Disclosure................................................ 63 Part III Item 10. Directors and Executive Officers of the Registrant................................................ 63 Item 11. Executive Compensation......................................... 63 Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 63 Item 13. Certain Relationships and Related Transactions.............................................. 63 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................... 63 PART I ------ Item 1. BUSINESS. - ----------------- The Company - ----------- National Penn Bancshares, Inc. (the "Company") is a Pennsylvania business corporation and bank holding company headquartered at Philadelphia and Reading Avenues, Boyertown, Pennsylvania 19512. The Company owns all of the outstanding capital stock of National Penn Bank ("NPB"). The Company was incorporated in January 1982. In addition, the Company has nine wholly-owned, direct or indirect, nonbank subsidiaries engaged in activities related to the business of banking and has, indirectly through one of such subsidiaries, an equity investment in one other bank. At December 31, 1999, the Company and NPB had 715 full- and part-time employees. National Penn Bank - ------------------ NPB is a national bank chartered under the National Bank Act. Prior to August 1, 1993, NPB's name was National Bank of Boyertown. On that date, the bank's name was changed to National Penn Bank. National Penn Bank also operates through its various banking divisions. NPB's banking divisions consist of (1) the Chestnut Hill National Bank Division, established in December 1993 after the Company's acquisition of Chestnut Hill National Bank, (2) the 1st Main Line Bank Division, a de novo division established in April 1995, (3) the National Asian Bank Division, a de novo division established in May 1998, and (4) the Elverson National Bank Division, established in January 1999 after the Company's acquisition of Elverson National Bank. NPB is engaged in the commercial and retail banking business. NPB provides checking and savings accounts, time deposits, personal, business, residential mortgage, educational loans, interbank credit cards, and safe deposit and night depository facilities. Acquisition of Elverson National Bank - ------------------------------------- On January 4, 1999, the Company acquired Elverson National Bank ("Elverson") by its merger with and into NPB. Elverson was a commercial bank headquartered in Elverson, Chester County, Pennsylvania, with eight other branches in Chester, Berks and Lancaster Counties, Pennsylvania. At December 31, 1998, Elverson had assets of $324,654,000, net loans of $184,299,000, deposits of $265,241,000, and shareholders' equity of $28,318,000. The Company issued 3,821,564 shares of the Company's common stock in consummation of the transaction. The transaction was accounted for under the "pooling of interests" method of accounting. All financial information herein has been restated to include the effects of Elverson. Pending Acquisition of Panasia Bank - ----------------------------------- On February 14, 2000, the Company entered into a definitive agreement to acquire Panasia Bank ("Panasia"). Panasia is a commercial bank headquartered in Ft Lee, New Jersey, with two other branches in Palisades Park and Closter, New Jersey, and a loan production office in Flushing, Queens, New York. At December 31, 1999, Panasia had assets of $100,100,000, net loans of $38,300,000, deposits of $90,800,000, and shareholders' equity of $9,100,000. The Company will pay $29 per share of Panasia common stock and the difference between $29 and the exercise price for each Panasia stock option outstanding for a total cash purchase price of approximately $19,994,000. Subject to receipt of regulatory approvals, approval by the Panasia shareholders and other customary closing conditions, the Company expects the transaction to close in early July 2000. The transaction will be accounted for under the "purchase" method of accounting. Nonbank Subsidiaries - -------------------- The Company owns, directly, all of the outstanding capital stock of the following nonbank subsidiaries: 1 1. Investors Trust Company ("ITC") is a Pennsylvania-chartered trust company. ITC opened for business on June 20, 1994. 2. National Penn Investment Company, a Delaware business corporation ("NPIC"), invests in and holds equity investments in other banks and bank holding companies (as discussed below), other equity investments, government and other debt securities, and other investment securities, as permitted by applicable law and regulations. 3. National Penn Life Insurance Company, an Arizona insurance company, was formed to reinsure credit life and accident and health insurance in connection with loans made by NPB. 4. NPB New Jersey, Inc., a New Jersey business corporation, was formed solely for the purpose of effecting the pending acquisition of Panasia Bank. See "Pending Acquisition of Panasia Bank" above. The Company owns, indirectly through NPB, all of the outstanding capital stock of the following nonbank subsidiaries: 1. Link Financial Services, Inc., a Pennsylvania business corporation ("Link"), is licensed as an insurance agency by the Pennsylvania Insurance Department. Link is also indirectly engaged in the title insurance business through a joint venture with a title insurance agency. Link began operations in April 1998. 2. Penn Securities, Inc., a Pennsylvania business corporation ("PSI"), is a registered full service broker-dealer and investment advisory firm. PSI began operations in October 1998. Prior to March 13, 2000, PSI was a direct subsidiary of the Company. 3. Penn 1st Financial Services, Inc., a Pennsylvania business corporation ("Penn 1st"), is engaged in the mortgage banking business. Penn 1st began operations in September 1999 under the name "National Penn Mortgage Company". 4. NPB Delaware, Inc., a Delaware business corporation ("NPB Delaware"), invests in, holds and manages part of NPB's investment securities portfolio, as permitted by applicable law and regulations. NPB Delaware began operations in October 1999. 5. RBO Funding Inc., a Virginia corporation ("RBO"), is a subprime lender and wholly-owned subsidiary of Penn 1st. The Company acquired RBO in November 1999. 6. 1874 Financial Corp., a Pennsylvania business corporation ("1874"),is a commercial lending company specializing in the subprime commercial lending business. 1874 began business in February 2000. The Company also owns, indirectly through NPB, all of the outstanding capital stock of 3 other nonbank subsidiaries, whose activities are limited solely to holding certain real estate interests. Other Bank Investments - ---------------------- The Company owns, indirectly through NPIC, 20% of the outstanding capital stock of Pennsylvania State Bank, a Pennsylvania bank headquartered in Camp Hill, Pennsylvania. For financial reporting purposes, the Company accounts for its investment in Pennsylvania State Bank using the "equity" method. 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 certain provisions of Federal and state laws and certain regulations and the potential impact of such provisions and regulations on the Company and its subsidiaries. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by 2 reference to the particular statutory or regulatory provisions themselves. A change in applicable statutes, regulations or regulatory policy may have a material effect on the business of the Company and its subsidiaries. Bank Holding Company Regulation ------------------------------- The Company is registered as a bank holding company and is subject to the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve") under the Bank Holding Company Act of 1956 ("BHCA"). Bank holding companies are required to file periodic reports with and are subject to examination by the Federal Reserve. The Federal Reserve has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve, pursuant to such regulations, may require the Company to stand ready to use its resources to provide adequate capital funds to NPB during periods of financial stress or adversity. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (as defined by regulations) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency, up to specified limits. Under the BHCA, the Federal Reserve has 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 the Company 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. Pennsylvania law permits Pennsylvania bank holding companies to control an unlimited number of banks. Additionally, the BHCA prohibits the Company 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 nonbanking 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 nonbanking-related businesses. The Federal Reserve's regulations concerning permissible nonbanking activities provide fourteen categories of functionally related activities that are permissible nonbanking activities. These are: (a) extending credit and servicing loans; (b) certain activities related to extending credit; (c) leasing personal or real property under certain conditions; (d) operating nonbank depository institutions, including savings associations; (e) trust company functions; (f) certain financial and investment advisory activities; (g) certain agency transactional services for customer investments, including securities brokerage activities; (h) certain investment transactions as principal; 3 (i) management consulting and counseling activities; (j) certain support services, such as courier and printing services; (k) certain insurance agency and underwriting activities; (l) community development activities; (m) issuance and sale of money orders, savings bonds, and traveler's checks; and (n) certain data processing services. Depending on the circumstances, Federal Reserve approval may be required before the Company or its nonbank subsidiaries may begin to engage in any such activity and before any such business may be acquired. On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") became law. Among other things, the GLB Act amends the BHCA to permit qualifying bank holding companies to engage in any type of financial activity. See "Gramm-Leach-Bliley Act" herein. Dividend Restrictions --------------------- The Company is a legal entity separate and distinct from NPB and the Company's direct and indirect nonbank subsidiaries. The Company's revenues (on a parent Company only basis) result almost entirely from dividends paid to the Company by its subsidiaries. The right of the Company, and consequently the right of creditors and shareholders of the Company, 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 NPB), except to the extent that claims of the Company in its capacity as a creditor may be recognized. Federal and state laws regulate the payment of dividends by the Company's subsidiaries. See "Supervision and Regulation - Regulation of NPB" herein. Further, it is the policy of the Federal Reserve that bank holding companies should pay dividends only out of current earnings. Federal banking regulators also have the authority to prohibit banks and bank holding companies from paying a dividend if they should deem such payment to be an unsafe or unsound practice. Capital Adequacy ---------------- Bank holding companies are required to comply with the Federal Reserve's risk-based capital guidelines. 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%. At least half (4%) of the total capital is required to be "Tier 1 capital," consisting principally of common shareholders' equity, noncumulative perpetual preferred stock (excluding auction rate issues), a limited amount of cumulative perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and, with certain limited exceptions, all other intangible assets. The remainder may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and a limited amount of the general loan loss allowance ("Tier 2 capital") and market risk capital, which includes qualifying unsecured subordinated debt ("Tier 3 capital"). In addition to the risk-based capital guidelines, the Federal Reserve requires a bank holding company to maintain a minimum "leverage ratio." This requires 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 that have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are expected to maintain a ratio of at least 1% to 2% above the stated minimum. Further, the Federal Reserve has indicated that it will consider a "tangible Tier 1 capital leverage ratio" (deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities. The Federal Reserve has not advised the Company of any specific minimum leverage ratio applicable to the Company. 4 Pursuant to FDICIA, 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 institution is considered "well capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, a leverage ratio of 5% or greater, and is not subject to any order or written directive to meet and maintain a specific capital level. The Company and NPB, at December 31, 1999, each qualify as "well capitalized" under these regulatory standards. FDIC Insurance Assessments -------------------------- NPB is subject to FDIC deposit insurance assessments. These assessments fund both the Bank Insurance Fund ("BIF") for banks and the Savings Association Insurance Fund ("SAIF") for savings associations and are based on the risk classification of the depository institutions. Under current FDIC practices, NPB will not be required to pay deposit insurance assessments in 2000. In 1996, the SAIF was recapitalized. In connection therewith, both BIF-insured deposits and SAIF-insured deposits are now assessed to fund debt service on the Federal government's FICO bond payments. In the fourth quarter of 1999, NPB's assessment rate was $.01184 per $100 of deposits for its BIF-insured deposits and $.05920 per $100 of deposits for its SAIF-insured deposits. Beginning in 2000, BIF-insured deposits and SAIF-insured deposits are to be assessed at the same rate to fund remaining debt service on the FICO bonds. The current rate is $.02080 per $100 of deposits. The FICO bonds mature in 2017. Regulation of NPB ----------------- The operations of NPB are subject to Federal and state statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System, and to banks whose deposits are insured by the FDIC. NPB's operations are also subject to regulations of the Office of the Comptroller of the Currency (the "OCC"), the Federal Reserve, and the FDIC. The OCC, which has primary supervisory authority over NPB, regularly examines banks in such areas as reserves, loans, investments, management practices, and other aspects of operations. These examinations are designed for the protection of NPB's depositors rather than the Company's shareholders. NPB must furnish annual and quarterly reports to the OCC, which has the authority under the Financial Institutions Supervisory Act to prevent a national 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 reserves against deposits a bank must maintain, 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. Pennsylvania law permits statewide branching. Under the National Bank Act, as amended, NPB is required to obtain the prior approval of the OCC for the payment of dividends if the total of all dividends declared by NPB in one year would exceed NPB's net profits (as defined and interpreted by regulation) for the current year plus its retained net profits (as defined and interpreted by regulation) for the two preceding years, less any required transfers to surplus. In addition, NPB may only pay dividends to the extent that its retained net profits (including the portion transferred to surplus) exceed statutory bad debts (as defined by regulation). Under FDICIA, any depository institution, including NPB, 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. A subsidiary bank of a bank holding company, such as NPB, is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries, and on taking such stock or securities 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 the principal shareholders of its parent holding company, 5 among others, and to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship. NPB, and the banking industry in general, are 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 Board of Governors of the Federal Reserve exerts considerable influence over the cost and availability of funds for lending and investment. Competition - ----------- The financial services industry in the Company's service area is extremely competitive. The Company's competitors within its service area include bank holding companies with resources substantially greater than those of the Company. Many competitor financial institutions have legal lending limits substantially higher than NPB's legal lending limit. In addition, NPB competes with savings banks, savings and loan associations, credit unions, money market and other mutual funds, mortgage companies, leasing companies, finance companies, and other financial services companies that offer products and services similar to those offered by NPB on competitive terms. The competitive environment has intensified since adoption of Federal interstate banking legislation in 1994. See "Interstate Banking Act" herein. On November 12, 1999, the GLB Act became law. Among other things, the GLB Act repeals the key provisions of the Glass Steagall Act to permit commercial banks to affiliate with investment banks (securities firms), amends the BHCA to permit qualifying bank holding companies to engage in any type of financial activity, and permits subsidiaries of banks to engage in a broad range of financial activities that are not permitted for banks themselves. Although the long-range effects of the GLB Act cannot be predicted with reasonable certainty, most probably it will further narrow the differences and intensify competition between and among commercial banks, investment banks, insurance firms and other financial services companies. See "Gramm-Leach-Bliley Act" herein. Interstate Banking Act - ---------------------- The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 provides for nationwide interstate banking and branching: (a) by permitting bank holding companies that are adequately capitalized and adequately managed to acquire banks located in states outside their home states regardless of whether such acquisitions are authorized under the law of the host state; (b) by permitting the interstate merger of banks, subject to the right of individual states to "opt in" or "opt out" of this authority, actions that could only be taken before June 1, 1997; (c) by permitting banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state; (d) by permitting a bank to engage in certain agency relationships (i.e., to receive deposits, renew time deposits, close loans (but not including loan approvals or disbursements), service loans, and receive payments on loans and other obligations) as agent for any bank or thrift affiliate, whether the affiliate is located in the same state or a different state than the agent bank; and (e) by permitting foreign banks to establish, with approval of the regulators in the United States, branches outside their "home" states to the same extent that national or state banks located in the home state would be authorized to do so. One effect of this legislation is to permit the Company to acquire banks and bank holding companies located in any state and to permit qualified banking organizations located in any state to acquire banks and bank holding companies located in Pennsylvania, irrespective of state law. 6 The Pennsylvania Banking Code authorizes full interstate banking and branching. It specifically authorizes interstate bank mergers and reciprocal interstate branching into Pennsylvania by interstate banks and permits Pennsylvania institutions to branch into other states with the prior approval of the Pennsylvania Department of Banking. Overall, this Federal and state legislation is having the effect of increasing consolidation and competition and promoting geographic diversification in the banking industry. Gramm-Leach-Bliley Act - ---------------------- On November 12, 1999, the GLB Act was passed into law. The GLB Act does three fundamental things: (a) The GLB Act repeals the key provisions of the Glass Steagall Act to permit commercial banks to affiliate with investment banks (securities firms). (b) The GLB Act amends the BHCA to permit qualifying bank holding companies to engage in any type of financial activity. (c) The GLB Act permits subsidiaries of banks to engage in a broad range of financial activities that are not permitted for banks themselves. The result is that banking companies will generally be able to offer a wider range of financial products and services and will be more readily able to combine with other types of financial companies, such as securities and insurance companies. The GLB Act creates a new kind of bank holding company called a "financial holding company" (an "FHC"). An FHC 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. Among other things, "financial in nature" activities include securities underwriting and dealing, insurance underwriting and sales, and certain merchant banking activities. A bank holding company qualifies to become an FHC if each of its depository institution subsidiaries is "well capitalized," "well managed," and CRA-rated "satisfactory" or better. A qualifying bank holding company becomes an FHC by filing with the Federal Reserve an election to become an FHC. If an FHC at any time fails to remain "well capitalized" or "well managed," the consequences can be severe. Such an FHC must enter into a written agreement with the Federal Reserve to restore compliance. If compliance is not restored within 180 days, the Federal Reserve can require the FHC to cease all its newly authorized activities or even to divest itself of its depository institutions. On the other hand, a failure to maintain a CRA rating of "satisfactory" will not jeopardize any then existing newly authorized activities; rather, the FHC cannot engage in any additional newly authorized activities until a "satisfactory" CRA rating is restored. In addition to activities currently permitted by law and regulation for bank holding companies, an FHC may engage in virtually any other kind of financial activity. Under limited circumstances, an FHC may even be authorized to engage in certain non-financial activities. The most important newly authorized activities are as follows: (a) Securities underwriting and dealing; (b) Insurance underwriting and sales; (c) Merchant banking activities; (d) Activities determined by the Federal Reserve to be "financial in nature" and incidental activities; and (e) "Complementary" financial activities, as determined by the Federal Reserve. 7 Bank holding companies that do not qualify or elect to become FHCs will be limited in their activities to those currently permitted by law and regulation. As of the date of this Report on Form 10-K, the Company has not elected to become a FHC. The GLB Act 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 an 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 newly authorized activities. In addition, the GLB Act also provides significant new protections for the privacy of customer information. These provisions apply to any company "the business of which" is engaging in activities permitted for an FHC, even if it is not itself an FHC. Basically, the GLB Act subjects a financial institution to four new requirements regarding non-public information about a customer. The financial institution must (1) adopt and disclose a privacy policy; (2) give customers the right to "opt out" of disclosures to non-affiliated parties; (3) not disclose any account information to third party marketers; and (4) follow regulatory standards (to be adopted in the future) to protect the security and confidentiality of customer information. Although the long-range effects of the GLB Act cannot be predicted with reasonable certainty, most probably it will further narrow the differences and intensify competition between and among commercial banks, investment banks, insurance firms and other financial service companies. Interest Rate Swaps and Similar Instruments - ------------------------------------------- Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," requires that information about the amounts, nature, and terms of interest rate swaps and similar instruments be disclosed. See Note 17 to the Company's Consolidated Financial Statements included at Item 8 hereof. In 1999, the interest rate swaps to which NPB was a party had the effect of increasing the Company's net interest income by $986,000 over what would have been realized had NPB not entered into the swap agreements. Should rates rise in 2000, the Company may recognize lower net interest income for the year than would have been recognized had NPB not entered into the interest rate swap agreements. In 1999, the interest rate floor to which NPB is a party had no effect on the Company's net interest income. Should rates fall in 2000 below a certain point, the Company may recognize higher net interest income for the year than would have been recognized had NPB not entered into the interest rate floor agreement. The Company uses interest rate swap and floor agreements for interest rate risk management. No derivative financial instruments are held for trading purposes. The contract or notional amounts of the swap and floor agreements do not represent exposure to credit loss. Potential credit risk on these contracts arises from the counterparty's inability to meet the terms of the agreement. Management considers the credit risk of these agreements to be minimal and manages this risk through routine review of the counterparty's financial ratings. Year 2000 Computer Matters - -------------------------- The following is a Year 2000 Readiness Disclosure within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998. As previously reported, the Company assessed its state of readiness for Year 2000, became knowledgeable concerning the risks of non-compliance, implemented and carried out an action plan to achieve Year 2000 compliance, and developed contingency plans, all in an effort to successfully deal with Year 2000 issues. The Company did not suffer any Year 2000 related business interruptions on January 1, 2000 and has not suffered any problems since that date. The Company does not anticipate making any material expenditures for Year 2000 compliance purposes in 2000 or that Year 2000 issues will have any material effect on the Company in 2000 or thereafter. 8 Forward-Looking Statements - -------------------------- Certain statements in this Annual Report on Form 10-K for 1999 and in other reports issued by the Company are forward-looking and are identified by the use of forward-looking words or phrases such as "intended," "believes," "expects," "estimates", "anticipates," "forecasts," "is expected," and "is anticipated." These forward-looking statements generally relate to the Company's plans, expectations, goals, and projections, and include statements as to the Company's anticipated future earnings, planned investments in new and modified technology and branch locations, as well as Year 2000 computer compliance. These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Risks and uncertainties could cause actual future results and investments to differ materially from those contemplated in such forward-looking statements. These risks and uncertainties include, without limitation, the following: (a) loan growth and/or loan margins may be less than expected, due to competitive pressures in the financial services industry, changes in the interest rate environment, or otherwise; (b) general economic or business conditions, either nationally or in the region in which the Company will be doing business, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality or a reduced demand for credit; (c) costs of the Company's planned training initiatives, product development, branch expansion and new technology and operating systems may exceed expectations; (d) volatility in the Company's market area due to recent mergers may have unanticipated consequences, such as customer turnover; and (e) changes in the regulatory environment, securities markets, general business conditions and inflation may be adverse. These risks and uncertainties are all difficult to predict, and most are beyond the control of the Company's management. Readers are cautioned not to place undue reliance on the Company's forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. 9
Average Balances, Average Rates, and Interest Rate Spread* (Dollars in Thousands) - --------------------------------------------------------- Year Ended December 31 ------------------------------------------------------------------------------------------ 1999 1998 1997 ------------------------------- ---------------------------- ---------------------------- Average -------- Average Average --------- Average Average --------- Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ----------- -------- -------- ---------- --------- ------- ---------- --------- -------- INTEREST EARNING ASSETS: Interest bearing deposits at banks $6,742 $239 3.53% $13,777 $544 3.95% $4,912 $249 5.07% ---------- -------- ---------- -------- ---------- -------- U.S. Treasury 36,715 2,419 6.59 42,740 2,884 6.75 71,584 4,858 6.79 U.S. Government agencies 186,520 12,120 6.50 185,637 12,152 6.55 131,426 8,960 6.82 State and municipal* 229,128 17,516 7.64 194,644 14,749 7.58 81,705 6,170 7.55 Other bonds and securities 85,434 5,422 6.35 41,931 2,562 6.11 21,525 1,286 5.97 ---------- -------- ---------- -------- ---------- -------- Total investments 537,797 37,477 6.97 464,952 32,347 6.96 306,240 21,274 6.95 ---------- -------- ---------- -------- ---------- -------- Federal funds sold 9,781 489 5.00 5,054 267 5.28 5,585 163 2.92 ---------- -------- ---------- -------- ---------- -------- Trading account securities 6,836 196 2.87 10,670 851 7.98 - - - ---------- -------- ---------- -------- ---------- -------- Commercial loans and lease financing* 977,303 88,786 9.08 854,727 80,640 9.43 751,442 69,433 9.24 Installment loans 284,334 25,417 8.94 272,749 25,320 9.28 264,542 24,976 9.44 Mortgage loans 228,842 18,527 8.10 237,783 19,989 8.41 269,731 25,990 9.64 ---------- -------- ---------- -------- ---------- -------- Total loans and leases 1,490,479 132,730 8.91 1,365,259 125,949 9.23 1,285,715 120,399 9.36 ---------- -------- ---------- -------- ---------- -------- Total earning assets 2,051,635 $171,131 8.34% 1,859,712 $159,958 8.60% 1,602,452 $142,085 8.87% -------- -------- -------- Allowance for loan and lease losses (32,071) (30,772) (27,741) Non-interest earning assets 156,158 136,985 104,548 ---------- ---------- ---------- Total assets $2,175,722 $1,965,925 $1,679,259 ========== ========== ========== INTEREST BEARING LIABILITIES: Interest bearing deposits $1,306,931 $56,537 4.33% $1,190,760 $53,518 4.49% $1,096,594 $48,658 4.44% Securities sold under repurchase agreements and federal funds purchased 158,669 7,165 4.52 133,380 6,108 4.58 106,131 5,228 4.93 Short-term borrowings 5,608 272 4.85 9,551 553 5.79 4,957 285 5.75 Long-term borrowings 310,707 18,779 6.04 267,531 16,428 6.14 138,958 8,838 6.36 ---------- -------- ---------- -------- ---------- ------- Total interest bearing liabilities 1,781,915 $82,753 4.64% 1,601,222 $76,607 4.78% 1,346,640 $63,009 4.68% Non-interest bearing deposits 220,777 193,652 173,146 Other non-interest bearing liabilities 19,910 18,636 18,065 ---------- ---------- ---------- Total liabilities 2,022,602 1,813,510 1,537,851 Equity capital 153,120 152,415 141,408 ---------- ---------- ---------- Total liabilities and equity capital $2,175,722 $1,965,925 $1,679,259 ========== ========== ========== INTEREST RATE SPREAD** $88,378 4.31% $88,351 4.48% $79,076 4.93% ======== ======== ======= * Full taxable equivalent basis, using a 35% effective tax rate. ** Represents the difference between interest earned and interest paid, divided by total earning assets. Loans outstanding, net of unearned income, include nonaccruing loans. Fee income included.
10 Interest Rate Sensitivity Analysis - ---------------------------------- Information with respect to interest rate sensitivity of the Company's assets and liabilities is included in the information under Management's Discussion and Analysis at Item 7 hereof. Investment Portfolio - -------------------- A summary of securities available for sale and securities held to maturity at December 31, 1999, 1998, and 1997 follows (in thousands).
1999 1998 1997 --------------------------- -------------------------- ---------------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ------------- ------------ ------------ ------------ -------------- ------------ Securities available for sale U.S. Treasury and U.S. Government agencies $103,092 $101,724 $105,537 $109,089 $108,985 $111,751 State and municipal 236,768 221,774 230,260 239,070 109,195 111,713 Mortgage-backed securities 136,684 133,927 126,329 127,369 106,970 108,381 Marketable equity securities and other 57,354 58,602 46,230 47,513 18,312 23,380 ------------ ----------- ------------ ----------- ----------- ----------- Totals $533,898 $516,027 $508,356 $523,041 $343,462 $355,225 ============ =========== ============ =========== =========== =========== 1999 1998 1997 --------------------------- -------------------------- ---------------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ------------- ------------ ------------ ------------ -------------- ------------ Securities held to maturity U.S. Treasury and U.S. Government agencies $ - $ - $ - $ - $4,637 $4,656 State and municipal - - - - 7,589 7,686 Mortgage-backed securities - - - - 2,931 2,928 Marketable equity securities and other - - - - 1,082 1,091 ------------ ----------- ------------ ----------- ----------- ----------- Totals $ - $ - $ - $ - $16,239 $16,361 ============ =========== ============ =========== =========== ===========
11 Investment Securities Yield by Maturity The maturity distribution and weighted average yield of the investment portfolio of the Company at December 31, 1999, are presented in the following table. Weighted average yields on tax-exempt obligations have been computed on a fully- taxable equivalent basis assuming a tax rate of 35%. All average yields were calculated on the book value of the related securities. Stocks and other securities having no stated maturity have been included in the "After 10 Years" category. Securities Available for Sale Yield by Maturity at December 31, 1999 Securities available for sale at market value (Dollars in thousands)
After 1 But After 5 But Within 1 Year Within 5 Years Within 10 Years After 10 Years Total ----------------- --------------- --------------- ---------------- ---------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield --------- ------- ------- ------ ------- ------ -------- ------ -------- ----- U.S. Treasury and U.S. Government agencies $5,002 6.33% $44,042 6.78% $52,061 6.29% $619 6.24% $101,724 6.50% State and municipal bonds 1,602 6.65% 16,580 7.27% 16,115 7.01% 187,477 7.97% 221,774 7.84% Mortgage-backed securities 190 5.32% 12,386 6.58% 4,873 6.50% 116,478 6.77% 133,927 6.74% Marketable equity securities and other 2,074 6.07% 1,077 6.04% 973 6.17% 54,478 -% 58,602 0.43% ----------------- ----------------- ---------------- ----------------- ----------------- Total $8,868 6.31% $74,085 6.85% $74,022 6.46% $359,052 6.37% $516,027 6.45% ================= ================= ================ ================= =================
12 Loan Maturity and Interest Rate Sensitivity - ------------------------------------------- Maturities and sensitivity to changes in interest rates in certain loan categories in the Company's loan portfolio at December 31, 1999, are summarized below: Remaining Maturity* - At December 31, 1999
After One One Year Year to After or Less Five Years Five Years Total ------------ ------------- ------------ ------------ (In Thousands) Commercial and Industrial Loans $123,966 $73,368 $55,658 $252,992 Real Estate Loans: Construction and Land Development 136,105 - - 136,105 ----------- ------------ ----------- ----------- $260,071 $73,368 $55,658 $389,097 =========== ============ =========== =========== - ------------ * Demand loans, past-due loans, and overdrafts are reported in "One Year or Less." Construction real estate loans are reported maturing in "One Year or Less" because of their short-term maturity or index to Prime Rate. An immaterial amount of loans have no stated schedule of repayments. - ------------
Segregated in terms of sensitivity to changes in interest rates, the foregoing loan balances at December 31, 1999, are summarized below: After One Year After to Five Years Five Years ----------------- --------------- (In Thousands) Predetermined Interest Rate $73,368 $55,658 Floating Interest Rate - - ----------- ----------- Total $73,368 $55,658 =========== =========== Determinations of maturities included in the loan maturity table are based upon contract terms. In situations where a "rollover" is appropriate, the Company's policy in this regard is to evaluate the credit for collectability consistent with the normal loan evaluation process. This policy is used primarily in evaluating ongoing customers' use of their lines of credit that are at floating interest rates. The Company's outstanding lines of credit to customers are not material. 13 Loan Portfolio - -------------- The Company's loans are widely diversified by borrower, industry group, and geographical area. The following summary shows the year-end composition of the Company's loan portfolio for each year in the five-year period ended December 31, 1999:
December 31, ----------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (In Thousands) Commercial and Industrial Loans $252,992 $220,192 $179,967 $155,435 $116,715 Loans to Financial Institutions - - 2,232 453 589 Real Estate Loans: Construction and Land Development 136,105 84,520 69,016 51,622 49,742 Residential 649,692 678,889 661,744 670,225 629,338 Other 472,447 404,865 374,281 335,391 285,904 Loans to Individuals 59,307 47,341 33,828 24,716 19,985 ---------- ---------- ---------- ---------- ---------- Total $1,570,543 $1,435,807 $1,321,068 $1,237,842 $1,102,273 ========== ========== ========== ========== ==========
Risk Elements - ------------- The Company's consolidated financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on the loan portfolio. In determining income from loans, including consumer and residential mortgage loans, the Company generally adheres to the policy of not accruing interest on a loan on which default of principal or interest has existed for a period of 90 days or more. A loan past due 90 days or more remains on accrual only if the loan is fully secured and in the process of collection. When a loan reaches nonaccrual status, any interest accrued but unpaid on it, if payment is considered questionable, is reversed and charged against current income. Thereafter, until such time as the loan becomes current, interest is included in income only to the extent it is received in cash. Restructured loans are loans on which the interest rate has been reduced because of a weakened financial position of the borrower. There were no restructured loans at December 31, 1999, and an immaterial amount of such loans at the end of prior years. Nonaccrual loans, loans 90 days or more past due and still on accrual, and restructured loans together constitute nonperforming loans. When other real estate owned is included with nonperforming loans, the total is nonperforming assets. 14 The following table shows the balance at year-end and the effect on interest income of nonperforming assets in the Company's loan portfolio, by category, for each year in the five-year period ended December 31, 1999:
December 31, ------------------------------------------------------------------ 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Nonaccrual Loans $11,055 $11,581 $8,519 $9,493 $8,295 Loans Past Due 90 or More Days as to Interest or Principal 2,674 1,839 3,246 4,212 1,841 Restructured Loans - - - - - Total Nonperforming Loans 13,729 13,420 11,765 13,705 10,136 Other Real Estate Owned 842 922 672 855 1,281 ------- ------- ------- ------- ------- Total Nonperforming Assets $14,571 $14,342 $12,437 $14,560 $11,417 ======= ======= ======= ======= ======= Gross Amount of Interest That Would Have Been Recorded at Original Rate on Nonaccrual and Restructured Loans $859 $940 $778 $1,040 $961 Interest Received From Customers on Nonaccrual and Restructured Loans 439 289 477 834 656 ------- ------- ------- ------- ------- Net Impact on Interest Income of Nonperforming Loans $420 $651 $301 $206 $305 ======= ======= ======= ======= =======
At December 31, 1999, the Company had no foreign loans and no loan concentrations exceeding 10% of total loans not disclosed in the table on page 14 hereof. "Loan concentrations" are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly affected by economic or other conditions. Loans recorded in the category of other real estate owned are valued at the lower of book value of loans outstanding or fair market value. At December 31, 1999, the Company was not aware of any potential problem loans that are not otherwise included in the foregoing table. "Potential problem loans" are loans where information about possible credit problems of borrowers has caused management to have serious doubts about the borrowers' ability to comply with present repayment terms. At December 31, 1999, the Company had no loans that are considered highly-leveraged transactions under applicable regulations. A "highly-leveraged transaction" is a transaction for the purpose of the buyout, acquisition, or recapitalization of a corporation, which involves new debt that doubles the corporation's debt and results in a leverage ratio greater than 50%, produces a leverage ratio greater than 75% where 25% or more results from the buyout, acquisition, or recapitalization, or is designated as such by a syndication agent or regulatory agency. 15 Allowance for Possible Loan and Lease Losses A detailed analysis of the Company's allowance for loan and lease losses for the five years ended December 31, 1999, is shown below:
December 31, ------------------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Balance at Beginning of Year $30,835 $28,467 $25,738 $23,038 $21,519 Charge-offs: Commercial and Industrial Loans 1,770 1,549 1,625 482 676 Real Estate Loans: Construction and Land Development - - 14 - 366 Residential 1,341 679 1,280 1,338 969 Other 1,262 2,374 564 392 932 Loans to Individuals 784 599 398 452 872 ------- ------- ------- ------- ------- Total Charge-offs $5,157 $5,201 $3,881 $2,664 $3,815 ------- ------- ------- ------- ------- Recoveries: Commercial and Industrial Loans 254 244 265 111 391 Real Estate Loans: Construction and Land Development 10 - - 131 148 Residential 555 650 296 186 513 Other 1,571 553 212 235 124 Loans to Individuals 111 162 274 201 258 ------- ------- ------- ------- ------- Total Recoveries $2,501 $1,609 $1,047 $864 $1,434 ------- ------- ------- ------- ------- Net Charge-offs $2,656 $3,592 $2,834 $1,800 $2,381 ------- ------- ------- ------- ------- Provisions Charged to Expense 5,960 5,960 5,563 4,500 3,900 Balance at End of Year $34,139 $30,835 $28,467 $25,738 $23,038 ======= ======= ======= ======= ======= Ratio of Net Charge-offs During the Period to Average Loans Outstanding During the Period 0.18% 0.26% 0.22% 0.16% 0.23% ======= ======= ======= ======= =======
The allowance for loan and lease losses is established through charges to earnings in the form of a provision for loan and lease losses. Loans and leases that are determined to be uncollectible are charged against the allowance, and subsequent recoveries are credited to the allowance. Factors that influence management's judgment in determining the amount of the provision for loan and lease losses charged to operating expense include the following: 1. An ongoing review by management of the quality of the overall loan and lease portfolio. 2. Management's continuing evaluation of potential problem and nonperforming loans and leases. 3. Loan and lease classifications and evaluations as a result of periodic examinations by federal supervisory authorities. 16 4. Management's evaluation of prevailing and anticipated economic conditions and their related effect on the existing loan and lease portfolio. 5. Comments and recommendations by the Company's independent accountants as a result of their regular examination of the Company's financial statements. It is management's practice to review the allowance for loan and lease losses regularly to determine whether additional provision should be made after considering the factors noted above. In 1999, the provision was unchanged due to current loan quality, economic conditions, and net loan charge-offs in 1999. The Company makes partial loan charge-offs when it determines that the underlying collateral is not sufficient to cover a nonperforming loan. Loan loss allowances are maintained at least in amounts sufficient to cover the estimated future loss, if any. Partial charge-offs in 1999 totaled $1,488,000, or 29% of the gross charge-off amount of $5,157,000, as compared to $2,677,000 or 51% of the gross charge-off amount of $5,201,000 in 1998. Partial charge-offs represented .1% and .2% of average total loans for 1999 and 1998, respectively. (This space left intentionally left blank.) 17 The year end 1999, 1998, 1997, 1996, and 1995 allocation of the allowance for loan and lease losses, and the percent of loans in each category to total loans, is illustrated in the following table (dollars in thousands):
Allocation of the Allowance for Loan and Lease Losses (1) --------------------------------------------------------- 1999 1998 1997 1996 1995 ------------------ ----------------- ----------------- ----------------- ------------------ % Loan % Loan % Loan % Loan % Loan Type to Type to Type to Type to Type to Total Total Total Total Total Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans --------- ------- --------- ------- --------- ------- --------- ------ --------- ------- Commercial and Industrial loans and leases $5,878 16.1% $ 5,859 15.3% $ 3,245 13.6% $3,655 12.6% $ 2,880 10.6% Loans to financial institutions - -% - -% - 0.2% - -% - 0.1% Real estate loans: Construction and land development 4,204 8.7% 2,528 5.9% 2,021 5.2% 1,647 4.2% 737 4.5% Residential 4,119 41.3% 4,163 47.3% 5,836 50.0% 5,379 54.1% 5,184 57.1% Other 10,916 30.1% 11,378 28.2% 7,942 28.4% 8,957 27.1% 7,418 25.9% Loans to individuals 4,256 3.8% 3,268 3.3% 4,925 2.6% 2,600 2.0% 2,603 1.8% Unallocated 4,766 N/A 3,639 N/A 4,498 N/A 3,500 N/A 4,216 N/A --------- ------- -------- ------- ------- ------- ------- ------ ------- ------- $34,139 100.0% $30,835 100.0% $28,467 100.0% $25,738 100.0% $23,038 100.0% ========= ======= ======== ======= ======= ======= ======= ====== ======= ======= (1) This allocation is made for analytical purposes. The total allowance is available to absorb losses from any segment of the portfolio. - ------------
The Company regards the allowance as a general allowance which is available to absorb losses from all loans. The allocation of the allowance as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge- offs in future periods will occur in these amounts or in these proportions. 18 Historical Statistics - --------------------- The following table shows historical statistics of the Company relative to the relationship among loans (net of unearned discount), net charge-offs, and the allowance for possible loan and lease losses:
December 31, ------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------- ------------- ------------- ------------- ------------- (In Thousands) Average Total Loans $1,490,479 $1,365,259 $1,285,715 $1,143,689 $1,039,181 Total Loans at Year End 1,570,543 1,435,807 1,321,068 1,237,842 1,102,273 Net Charge-offs 2,656 3,592 2,834 1,800 2,381 Allowance for Possible Loan and Lease Losses at Year End 34,139 30,835 28,467 25,738 23,038
December 31, ------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------- ------------- ------------- ------------- ------------- Net Charge-offs to: Average Total Loans 0.18% 0.26% 0.22% 0.16% 0.23% Total Loans at Year End 0.17% 0.25% 0.21% 0.15% 0.22% Allowance for Possible Loan and Lease Losses 7.78% 11.65% 9.96% 6.99% 10.34% Allowance for Possible Loan and Lease Losses to: Average Total Loans 2.29% 2.26% 2.21% 2.25% 2.22% Total Loans at Year End 2.18% 2.15% 2.15% 2.08% 2.09%
(This space left intentionally blank.) 19 Deposit Structure - ----------------- The following is a distribution of the average amount of, and the average rate paid on, the Company's deposits for each year in the three-year period ended December 31, 1999:
Year Ended December 31, --------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------ --------------------------- ------------------------- (Dollars in Thousands) Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate ------------ --------- ------------- ----------- ------------- ---------- Noninterest- Bearing Demand Deposits $220,777 -% $193,652 -% $173,146 -% Savings Deposits 572,142 2.84% 489,762 2.66% 424,165 2.31% Time Deposits 734,789 5.48% 700,998 5.75% 672,429 5.78% ----------- ------------ ------------ Total $1,527,708 3.70% $1,384,412 3.85% $1,269,740 3.83% =========== ============ ============
The aggregate amount of jumbo certificates of deposit, issued in the amount of $100,000 or more was $195,939,000 in 1999, $145,049,000 in 1998, and $127,823,000 in 1997. The following is a breakdown, by maturities, of the Company's time certificates of deposit of $100,000 or more as of December 31, 1999. The Company has no other time deposits of $100,000 or more as of December 31, 1999. Maturity Amount of Time Certificates of Deposit ---------- -------------------------------------- (In Thousands) 3 months or less $71,251 Over 3 through 6 months 69,162 Over 6 through 12 months 29,157 Over 12 months 26,369 ----------- Total $195,939 =========== Short-Term Borrowings Information with respect to the Company's short-term borrowings is set forth in Footnote 7 to the Company's Consolidated Financial Statements which are included at Item 8 hereof, Financial Statements and Supplementary Data. (This space left intentionally blank.) 20 Financial Ratios The following ratios for the Company are among those commonly used in analyzing financial statements of financial services companies: Year Ended December 31, ------------------------------------------- 1999 1998 1997 ------------------------------------------- Earnings Ratios Net Income on: Average Earning Assets 1.34% 1.23% 1.34% Average Total Assets 1.26 1.17 1.28 Average Shareholders' Equity 17.90 15.00 15.20 Net Operating Income Before Securities and Mortgage Transactions: Average Earning Assets 1.37 1.14 12.34 Average Total Assets 1.28 1.07 1.18 Average Shareholders' Equity 18.17 13.85 13.98 Liquidity and Capital Ratios Average Shareholders' Equity to Average Earning Assets 7.46% 8.20% 8.82% Average Shareholders' Equity to Average Total Assets 7.04 7.75 8.41 Dividend Payout Ratio 48.97 44.29 41.28 Tier 1 Leverage Ratio 8.58 8.77 9.80 Tier 1 Risk-Based Ratio 11.43 12.21 13.44 Total Risk-Based Capital Ratio 12.73 13.51 14.83 (This space left intentionally blank.) 21 The following table shows, on a taxable equivalent basis, the changes in the Company's net interest income, by category, due to shifts in volume and rate, for the years ended December 31, 1999 and 1998. The information is presented on a taxable equivalent basis, using an effective rate of 35%.
Year Ended December 31, ------------------------------------------------------------------------------ 1999 over 1998 (1) 1998 over 1997 (1) --------------------------------- -------------------------------------- Increase (decrease) in: Volume Rate Total Volume Rate Total --------- ---------- --------- ---------- ------------ ----------- Interest income: Interest bearing deposits at banks ($278) ($27) ($305) $449 ($154) $295 Securities: U.S. Treasury and U. S. Government agencies (339) (158) (497) 1,727 (509) 1,218 State and municipal 2,613 154 2,767 8,529 50 8,579 Other bonds and securities 2,658 202 2,860 1,219 57 1,276 -------- --------- -------- --------- ----------- ---------- Total securities 4,932 198 5,130 11,475 (402) 11,073 -------- --------- -------- --------- ----------- ---------- Federal funds sold 250 (28) 222 (15) 119 104 Trading account securities (306) (349) (655) 851 - 851 Loans: Commercial loans and lease financing 11,565 (3,419) 8,146 9,544 1,663 11,207 Installment loans 1,075 (978) 97 775 (431) 344 Mortgage loans (752) (710) (1,462) (3,078) (2,923) (6,001) -------- --------- -------- --------- ----------- ---------- Total loans 11,888 (5,107) 6,781 7,241 (1,691) 5,550 -------- --------- -------- --------- ----------- ---------- Total interest income $16,486 ($5,313) $11,173 $20,001 ($2,128) $17,873 ======== ========= ======== ========= =========== ========== Interest expense: Interest bearing deposits 5,221 (2,202) 3,019 4,178 682 4,860 Borrowed funds: Securities sold under repurchase agreements and federal funds purchased 1,158 (101) 1,057 1,342 (462) 880 Short-term borrowings (228) (53) (281) 264 4 268 Long-term borrowings 2,651 (300) 2,351 8,177 (587) 7,590 -------- --------- -------- --------- ----------- ---------- Total borrowed funds 3,581 (454) 3,127 9,783 (1,045) 8,738 -------- --------- -------- --------- ----------- ---------- Total interest expense $8,802 ($2,656) $6,146 $13,961 ($363) $13,598 ======== ========= ======== ========= =========== ========== Increase (decrease) in net interest income $7,684 ($2,657) $5,027 $6,040 ($1,765) $4,275 ======== ========= ======== ========= =========== ========== - ------------ (1) Variance not solely due to rate or volume is allocated to the volume variance. The change in interest due to both rate and volume is allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Item 2. PROPERTIES. - ------------------- The Company does not own or lease any property. As of December 31, 1999, NPB owns 34 properties in fee and leases 41 other properties. The properties owned in fee, at such date, were not subject to any major liens, encumbrances, or collateral assignments. The principal office of the Company and of NPB is owned in fee and is located at Philadelphia and Reading Avenues, Boyertown, Pennsylvania 19512. The principal office of NPB's Chestnut Hill National Bank Division is leased and is located at 9 West Evergreen Avenue, Chestnut Hill, Philadelphia, Pennsylvania 19118. The principal 22 office of NPB's 1st Main Line Bank Division is leased and is located at 528 East Lancaster Avenue, St. Davids, Pennsylvania 19087. The principal office of NPB's Elverson National Bank Division is owned in fee and is located at 83 West Main Street, Elverson, Pennsylvania 19520. The principal office of NPB's National Asian Bank Division is leased and is located at 1349 West Cheltenham Avenue, Suite 101, Elkins Park, Pennsylvania 19027. NPB presently has 60 branches located in the following Pennsylvania counties: Berks, Bucks, Chester, Delaware, Lancaster, Lehigh, Montgomery, Northampton, and Philadelphia. In addition to its branches, NPB presently owns or leases 70 automated teller machines located throughout the nine-county area, all of which are located at bank branch locations, except for 26 that are ?free-standing? (not located at a branch). Item 3. LEGAL PROCEEDINGS. - -------------------------- Various actions and proceedings are presently pending to which NPB is a party. These actions and proceedings arise out of routine operations and, in management's opinion, will have no material adverse effect on the consolidated financial position of the Company and its subsidiaries. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------ None. Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT. - ---------------------------------------------- The principal executive officers of the Company, as of the date hereof, are as follows:
Principal Business Occupation Name Age During the Past Five Years - ---- --- -------------------------- Lawrence T. Jilk, Jr. 61 Chairman and Chief Executive Officer of the Company since January 1990, and President of the Company from April 1988 to April 1998. Also, Chairman of NPB. Wayne R. Weidner 57 President of the Company since April 1998. Executive Vice President of the Company from April 1990 to April 1998, and Treasurer of the Company from 1983 to 1990. Also, Chief Executive Officer and President of NPB. Garry D. Koch 45 Executive Vice President of NPB since September 1997, and Senior Vice President of NPB from 1992 to September 1997. Glenn E. Moyer 49 Executive Vice President of NPB and President of the Elverson Division since January 1999; President and Chief Executive Officer of Elverson National Bank from March 1995 to January 1999. Sharon L. Weaver 52 Executive Vice President of NPB since April 1998, and Senior Vice President of NPB from 1991 to April 1998. Sandra L. Spayd 56 Secretary of the Company, and Senior Vice President and Corporate Secretary of NPB. Gary L. Rhoads 45 Treasurer of the Company (Chief Financial Officer), and Executive Vice President, Controller and Cashier of NPB.
Executive officers of the Company are elected by the Board of Directors and serve at the pleasure of the Board. Executive Officers of the Bank are appointed by the Board of Directors of the Bank and serve until they resign, retire, become disqualified, or are removed by such Board. 23 PART II ------- Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER - ------- MATTERS. ----------------------------------------------------------------------- The Company's Common Stock currently trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol: "NPBC". The following table reflects the high and low closing sales prices reported for the Common Stock, and the cash dividends declared on the Common Stock, for the periods indicated, after giving retroactive effect to a 5% stock dividend paid on December 22, 1999 and a 5-for-4 stock split paid on July 31, 1998. MARKET VALUE OF COMMON STOCK 1999 -------------------- High Low ------ ----- lst Quarter 25.95 21.19 2nd Quarter 24.29 20.48 3rd Quarter 26.19 20.24 4th Quarter 26.75 24.41 1998 -------------------- High Low ------ ----- lst Quarter 28.19 22.67 2nd Quarter 27.48 25.14 3rd Quarter 25.90 19.88 4th Quarter 31.90 19.35 CASH DIVIDENDS DECLARED ON COMMON STOCK 1999 1998 ------ ----- lst Quarter $0.19 $0.14 2nd Quarter 0.19 0.15 3rd Quarter 0.19 0.15 4th Quarter 0.20 0.18 The Trust Preferred Securities of NPB Capital Trust are reported on Nasdaq's National Market under the symbol "NPBCP". The Preferred dividend is 9%. On November 15, 1999, the Company acquired RBO Funding, Inc. ("RBO"), a subprime residential mortgage broker based in McLean, Virginia. In a merger transaction in which RBO became a wholly-owned subsidiary of the Company, the Company exchanged 62,913 shares of the Company's common stock for all of the outstanding shares of stock of RBO, subject to certain indemnification obligations of the two RBO shareholders. The 62,913 shares were offered and sold solely to the two sole shareholders, who were founders, of RBO in exchange for the transfer of their entire ownership interests in RBO in the merger. The 62,913 shares were offered and sold without registration under the Securities Act of 1933, as amended (the "Securities Act"), in reliance on the exemption afforded by Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act. In relying upon these exemptions, the Company took into account the limited number of only two RBO shareholders; the limitation of the Company's offering to these shareholders; the information regarding the Company and the merger furnished to the RBO shareholders; the representation of RBO and the two RBO shareholders by legal counsel in connection with the transaction; and the representations and warranties made by RBO and the two shareholders to the Company in connection with the transaction. 24 Item 6. SELECTED FINANCIAL DATA. - --------------------------------
FIVE-YEAR STATISTICAL SUMMARY (Dollars in thousands, except per share data) Year Ended 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- STATEMENTS OF CONDITION Total assets $2,242,432 $2,121,248 $1,809,216 $1,604,566 $1,473,888 Total deposits 1,593,254 1,473,302 1,353,523 1,190,976 1,106,884 Loans and leases, net 1,536,404 1,404,972 1,292,601 1,212,104 1,079,235 Total investment securities 516,027 523,041 371,464 278,565 280,817 Total shareholders' equity 147,696 158,774 148,928 137,519 126,897 Book value per share* 8.33 8.90 8.30 7.66 7.09 Realized book value per share** 8.98 8.36 7.88 7.41 6.72 Percent shareholders' equity to assets 6.59% 7.48% 8.23% 8.57% 8.61% Trust assets 834,585 674,729 543,345 411,916 401,532 EARNINGS Total interest income $164,270 $154,081 $139,266 $124,671 $115,446 Total interest expense 82,753 76,607 63,009 53,914 51,410 ---------- ---------- ---------- ---------- ---------- Net interest income 81,517 77,474 76,257 70,757 64,036 Provision for loan and lease losses 5,960 5,960 5,563 4,500 3,900 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan and lease losses 75,557 71,514 70,694 66,257 60,136 Other income 23,338 18,721 13,614 10,153 8,478 Other expenses 65,724 61,232 54,417 48,590 44,331 ---------- ---------- ---------- ---------- ---------- Income before income taxes 33,171 29,003 29,891 27,820 24,283 Income taxes 5,762 6,085 8,344 8,531 7,279 ---------- ---------- ---------- ---------- ---------- Net income $27,409 $22,918 $21,547 $19,289 $17,004 ========== ========== ========== ========== ========== Cash dividends paid $13,421 $10,151 $8,894 $7,413 $6,611 Return on average assets 1.26% 1.17% 1.28% 1.27% 1.21% Return on average shareholders' equity 17.9% 15.0% 15.2% 14.8% 14.9% Return on average realized shareholders' 18.2% 15.9% 15.6% 15.2% 14.9% PER SHARE DATA* Basic earnings $1.54 $1.28 $1.20 $1.08 $0.95 Diluted earnings 1.52 1.26 1.18 1.07 0.94 Dividends paid in cash 0.75 0.57 0.49 0.41 0.37 Dividends paid in stock 5% 5-for-4 4-for-3 5% 5% stock stock split split SHAREHOLDERS AND STAFF Average shares outstanding - basic * 17,792,492 17,836,656 17,970,695 17,940,083 17,819,109 Average shares outstanding - diluted* 18,074,809 18,198,377 18,277,412 18,085,076 18,068,771 Shareholders 3,110 3,208 3,202 3,102 3,133 Staff - Full-time equivalents 715 749 718 681 613 * Restated to reflect the acquisition of Elverson National Bank, a 5% stock dividend in 1999, a 5-for-4 stock split in 1998, a 4-for-3 stock split in 1997, and 5% stock dividends in 1996 and 1995. ** Excluding unrealized gain (loss) on investment securities available for sale.
The unaudited quarterly results of the Company's operations in 1999 and 1998 are included in Footnote 21 to the Company's Consolidated Financial Statements included herein at Item 8, Financial Statements and Supplementary Data. 25 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------- OF OPERATIONS. ----------------------------------------------------------------------- The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and is intended to assist in understanding and evaluating the major changes in the financial condition and earnings results of operations of the Company with a primary focus on the Company's performance. As discussed below, in 1999 the Company acquired Elverson National Bank in a transaction accounted for as a pooling of interests. Accordingly, the Company's financial statements have been restated to reflect the acquisition. FINANCIAL CONDITION ------------------- During 1999 total assets increased to $2.242 billion, an increase of $121.1 million or 5.7% over the $2.121 billion at year-end 1998. Total assets at the end of 1998 increased $312.0 million or 17.2% over the $1.809 billion at year-end 1997. Total cash and cash equivalents increased $1.2 million or 1.8% in 1999 compared to 1998 versus an increase of $2.4 million or 3.8% in 1998 compared to 1997. The increase in 1999 is primarily due to cash and due from banks which was partially offset by a decrease in interest bearing deposits in banks. Net loans and leases increased to $1.536 billion during 1999, an increase of $131.4 million or 9.4% compared to 1998. Net loans increased $112.4 million in 1998 or 8.7% compared to 1997. Loan growth in 1999 was primarily the result of additional growth in the portfolio funded by the investment of deposits, securities sold under repurchase agreements, and federal funds purchased and long-term borrowings. Residential mortgages originated for immediate resale during 1999 amounted to $50.4 million. The Company's credit quality is reflected by the annualized ratio of net chargeoffs to total loans of .17% for 1999 versus .25% for the year 1998, and the ratio of nonperforming assets to total loans of .93% at December 31, 1999, compared to .99% at December 31, 1998. Nonperforming assets, including nonaccruals, loans 90 days past due, restructured loans and other real estate owned, were $14.6 million at December 31, 1999, compared to $14.3 million at December 31, 1998. Of these amounts, nonaccrual loans represented $11.1 million and $11.6 million at December 31, 1999, and December 31, 1998, respectively. Loans 90 days past due and still accruing interest were $2.7 million and $1.8 million at December 31, 1999, and December 31, 1998, respectively. Other real estate owned was $842,000 and $922,000 at December 31, 1999, and December 31, 1998, respectively. The Company had no restructured loans at December 31, 1999 or December 31, 1998. The allowance for loan losses to nonperforming assets was 234.3% and 214.9% at December 31, 1999, and December 31, 1998, respectively. As is evident from the above amounts relative to nonperforming assets, there have been no significant changes between December 31, 1999, and December 31, 1998. The Company has no significant exposure to energy and agricultural-related loans. Investments, which are the Company's secondary use of funds, decreased $7.0 million or 1.3% to $516.0 million at year-end 1999. In 1998, the investment portfolio reflected an increase of $151.6 million or 40.8% compared to 1997. The decrease in 1999 was due to investment purchases of $180.9 million, primarily in municipal securities, which were offset by calls and maturities of securities, investment securities sales and payments on mortgage-backed securities. Trading account securities decreased from $21.6 million to zero at December 31, 1999 due to the sale of all these securities. The Company has assessed its involvement in trading account activities and decided these activities do not meet with its strategic goals. As the primary source of funds, aggregate deposits of $1.593 billion increased $120.0 million or 8.1% compared to 1998. Deposits of $1.473 billion increased $119.8 million in 1998 or 8.8% compared to 1997. In addition to deposits, growth in earning assets has been partially funded through purchased funds and borrowings. These include securities sold under repurchase agreements, federal funds purchased, short-term borrowings, long-term borrowings, and subordinated debentures. In the aggregate, these funds totaled $475.9 million at the end of 1999, a $8.3 million or 1.7% 26 increase compared to 1998. The 1998 amount of borrowings and purchased funds of $467.6 million represented an increase of $179.1 million or 62.1% compared to 1997. The increase in 1999 was due to an increase in short-term borrowings, primarily securities sold under repurchase agreements and federal funds purchased, of $40.6 million, which was partially offset by a decrease in long-term borrowings of $25.6 million. Shareholders' equity decreased by $11.1 million or 7.0% in 1999 to $147.7 million. This decrease was principally due to a decrease in accumulated other comprehensive income, as well as, purchases of treasury stock in accordance with the Company's announced stock repurchase program. Cash dividends paid in 1999 increased $3,269,000 or 32.2% compared to the cash dividends paid in 1998 which increased $1,258,000 or 14.1% compared to cash dividends paid in 1997. Earnings retained in 1999 were 51.0% compared to 55.7% in 1998. RESULTS OF OPERATIONS --------------------- Net income for 1999 of $27.4 million was 19.6% more than the $22.9 million reported in 1998. The 1998 amount was 6.4% more than the $21.5 million in 1997. On a per share basis, basic earnings were $1.54, $1.28, and $1.20 for 1999, 1998, and 1997, respectively. Diluted earnings per share were $1.52, $1.26, and $1.18 for 1999, 1998, and 1997, respectively. Net interest income is the difference between interest income on assets and interest expense on liabilities. Net interest income increased $4.0 million or 5.2% to $81.5 million in 1999 from the 1998 amount of $77.5 million. The increase in interest income is a result of increased investment and loan income due to growth in loan outstandings and higher rates on loans that were partially offset by growth in deposits and higher rates on deposits and borrowings. The Company's interest rate spread decreased from 4.48% in 1998 to 4.31% in 1999. The primary reasons for this decrease include the increased investment in bank owned life insurance from which the income is reported in other income but the cost of funding the investment is included in interest expense, and the increase in the investment portfolio utilizing incremental borrowings that result in a spread that is narrower than historical spreads but ultimately provides increased net interest income. Interest rate risk is a major concern in forecasting the earnings potential. From November 18, 1998 to June 30, 1999, the prime rate was 7.75%. From July 1, 1999 to August 24, 1999, the prime rate was 8.00%. From August 25, 1999 to November 15, 1999, the prime rate was 8.25%. On November 16, 1999, the prime rate changed to 8.50%. From March 26, 1997 to September 28, 1998, the prime rate was 8.50%. From September 29, 1998 to October 15, 1998, the prime rate was 8.25%. From October 16, 1998 to November 17, 1998, the prime rate was 8.00%. On November 18, 1998, the prime rate changed to 7.75%. Interest expense during 1999 increased $6.1 million or 8.0% compared to the prior year due to higher interest rates on deposits and long-term borrowings. Interest expense during 1998 increased $13.6 million or 21.6% compared to 1997. In addition to the current rate environment, the cost of attracting and holding deposited funds is an ever-increasing expense in the banking industry. These increases are the real costs of deposit accumulation and retention, including FDIC insurance costs, marketing and branch overhead expenses. Such costs are necessary for continued growth and to maintain and increase market share of available deposits. The provision for loan and lease losses is determined by periodic reviews of loan quality, current economic conditions, loss experience and loan growth. Based on these factors, the provision for loan and lease losses was $5,960,000 for both the year ended December 31, 1999 and the year ended December 31, 1998. The provision for loan and lease losses was $5,563,000 for 1997. The allowance for loan and lease losses of $34.1 million at year-end 1999 and $30.8 million at year-end 1998 as a percentage of total loans was 2.2% for 1999 and 2.1% for 1998. Net loan chargeoffs of $2,656,000, $3,592,000, and $2,834,000 during 1999, 1998, and 1997, respectively, continue to be comparable with those of the Company's peers. The increase in other income in 1999 compared to 1998 was $4,617,000 or 24.7% as a result of increased other service charges and fees of $2,393,000, increased trading revenue of $1,316,000, an activity that was discontinued by the end of 1999, increased mortgage banking income of $1,033,000, increased trust income of $742,000, increased bank owned life insurance income of $666,000, and increased service charges on deposit accounts of $491,000. These gains were partially offset by a decrease in net gains on sale of investment securities of $1,873,000 and a decrease in equity in undistributed net earnings of affiliates of $151,000. The increase in other income in 1998 compared to 1997 was $5,107,000 or 37.5% as a result of increased other service charges and fees of $2,057,000, increased bank owned life insurance of $1,604,000, increased trading revenue of $739,000, increased trust income of $526,000, increased service charges on deposit accounts of $239,000, and increased net gains on sale of investment securities of $129,000. Sales of 27 investment securities in 1999 and 1998 totaled $45.7 million and $55.4 million, respectively. "Total other expenses" increased $4,492,000 or 7.3% in 1999 when compared to 1998. By category, the Company's "salaries, wages and employee benefits" increased $3,980,000, "net premises and equipment" increased $777,000, and "other operating" decreased $265,000. "Total other expenses" increased $6,815,000 or 12.5% in 1998 when compared to 1997. By category, the Company's "other operating" increase $3,227,000, "salaries, wages and employee benefits" increased $2,868,000, "net premises and equipment" increased $720,000. For 1999, 1998, and 1997, there are no individual items of other operating expenses that exceed one percent of the aggregate of total interest income and other income, with the exception of advertising and marketing related expenses. Income before income taxes increased in 1999 by $4,168,000 or 14.4% compared to 1998 when income before income taxes decreased by $888,000 or 2.9% compared to 1997. Income taxes decreased $323,000 in 1999 compared to 1998 while income taxes decreased $2,259,000 compared to 1997. The decreased income taxes are the result of higher levels of tax advantaged investments. LIQUIDITY AND INTEREST RATE SENSITIVITY --------------------------------------- The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest earning assets and interest bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Funding affecting short-term liquidity, including deposits, repurchase agreements, federal funds purchased, and short-term borrowings increased $153.8 million during 1999. Long-term borrowings decreased $25.5 million during 1998. The goal of interest rate sensitivity management is to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. Such sensitivity is measured as the difference in the volume of assets and liabilities in the existing portfolio that are subject to repricing in a future time period. 28 The following table shows separately the interest rate sensitivity of each category of interest earning assets and interest bearing liabilities at December 31, 1999:
Repricing Periods ----------------------------------------------------- Three Within Months One Year Three Through One Through Over Months Year Five Years Five Years ------------- -------------- ------------- ------------ Assets (In thousands) Interest bearing deposits at banks $4,039 $ - $ - $ - Investment securities 234 58,056 158,396 299,341 Loans and leases(1) 448,633 227,063 524,161 356,547 Other assets - - - 185,962 ------------- -------------- ------------- ------------ 452,906 285,119 682,557 821,850 ------------- -------------- ------------- ------------ Liabilities and equity Non-interest bearing deposits 210,272 - - - Interest bearing deposits(2) 441,661 374,715 178,490 388,116 Borrowed funds 222,985 - 92,500 120,188 Preferred securities - - - 40,250 Other liabilities - - - 25,559 Hedging instruments 100,000 (50,000) (50,000) - Shareholders' equity - - - 147,696 ------------- -------------- ------------- ------------ 947,918 324,715 220,990 721.809 ------------- -------------- ------------- ------------ Interest sensitivity gap (522,012) (39,596) 461,567 100,041 ------------- -------------- ------------- ------------ Cumulative interest rate sensitivity gap ($522,012) ($561,608) ($100,041) $ - ============= ============== ============= ============ - ------------ (1) Adjustable rate loans are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due. Fixed-rate loans are included in the period in which they are scheduled to be repaid and are adjusted to take into account estimated prepayments based upon assumptions estimating the prepayments in the interest rate environment prevailing during the fourth calendar quarter of 1999. The table assumes prepayments and scheduled principal amortization of fixed-rate loans and mortgage-backed securities, and assumes that adjustable-rate mortgages will reprice at contractual repricing intervals. There has been no adjustment for the impact of future commitments and loans in process. (2) Savings and NOW deposits are scheduled for repricing based on historical deposit decay rate analyses, as well as historical moving averages of run-off for the Company's deposits in these categories. While generally subject to immediate withdrawal, management considers a portion of these accounts to be core deposits having significantly longer effective maturities based upon the Company's historical retention of such deposits in changing interest rate environments. Specifically, 29.3% of these deposits are considered repriceable within three months and 70.7% are considered repriceable in the over five years category. - ------------
Interest rate sensitivity is a function of the repricing characteristics of the Company's assets and liabilities. These characteristics include the volume of assets and liabilities repricing, the timing of the repricing, and the relative levels of repricing. Attempting to minimize the interest rate sensitivity gaps is a continual challenge in a changing rate environment. Based on the Company's gap position as reflected in the above table, current accepted theory would indicate that net interest income would increase in a falling interest rate environment and would decrease in a rising interest rate environment. An interest rate gap table does not, however, present a complete picture of the impact of interest rate changes on net interest income. First, changes in the general level of interest rates do not affect all categories of assets and liabilities equally or simultaneously. Second, assets and liabilities which can contractually reprice within the same period may not, in fact, reprice at the same time or to the same extent. Third, the table represents a one-day 29 position; variations occur daily as the Company adjusts its interest sensitivity throughout the year. Fourth, assumptions must be made to construct such a table. For example, non-interest bearing deposits are assigned a repricing interval of within three months, although history indicates a significant amount of these deposits will not move into interest bearing categories regardless of the general level of interest rates. Finally, the repricing distribution of interest sensitive assets may not be indicative of the liquidity of those assets. Gap analysis is a useful measurement of asset and liability management; however, it is difficult to predict the effect of changing interest rates based solely on this measure. Therefore, the Company supplements gap analysis with the calculation of the Economic Value of Equity. This report forecasts changes in the Company's market value of portfolio equity ("MVPE") under alternative interest rate environments. The MVPE is defined as the net present value of the Company's existing assets, liabilities, and off-balance sheet instruments. The calculated estimates of change in MVPE at December 31, 1999 are as follows: MVPE Change In Interest Rate Amount % Change - -------------------------- ------------ --------------- (In thousands) +300 Basis Points $180,434 (40)% +200 Basis Points 218,745 (28) +100 Basis Points 259,704 (14) Flat Rate 301,716 - - -100 Basis Points 340,134 13 - -200 Basis Points 367,696 22 - -300 Basis Points 387,258 28 Management believes that the assumptions utilized in evaluating the vulnerability of the Company's earnings and capital to changes in interest rates approximate actual experience; however, the interest rate sensitivity of the Company's assets and liabilities as well as the estimated effect of changes in interest rates on MVPE could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based. In the event the Company should experience a mismatch in its desired gap ranges or an excessive decline in its MVPE subsequent to an immediate and sustained change in interest rate, it has a number of options which it could utilize to remedy such mismatch. The Company could restructure its investment portfolio through the sale or purchase of securities with more favorable repricing attributes. It could also emphasize loan products with appropriate maturities or repricing attributes, or it could attract deposits or obtain borrowings with desired maturities. The Company anticipates interest rate levels will rise in the first half of 2000, with no clear indication of sustainable rising or falling rates thereafter. Given this assumption, the Company's asset/liability strategy for 2000 is to achieve a reduced negative gap position (interest-bearing liabilities subject to repricing greater than interest-earning assets subject to repricing) for periods up to a year. The impact of a rising interest rate environment on net interest income is not expected to be significant to the Company's results of operations. Effective monitoring of these interest sensitivity gaps is the priority of the Company's asset/liability management committee. CAPITAL ADEQUACY ---------------- The following table sets forth certain capital performance ratios for the Company. 1999 1998 1997 ------------- ------------- ------------- CAPITAL PERFORMANCE Return on average assets 1.26 1.17 1.28 Return on average equity 17.90 15.00 15.20 Earnings retained 51.00 55.70 58.70 30 CAPITAL LEVELS
Tier 1 Capital to Total Capital to Tier 1 Capital to Risk-Weighted Risk-Weighted Average Assets Ratio Assets Ratio Assets Ratio --------------------------------------------------------------------- Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- The Company 8.58% 8.77% 11.43% 12.21% 12.73% 13.51% National Penn Bank 6.83% 6.80% 9.16% 9.52% 10.42% 10.78% "Well Capitalized" institution 5.00% 5.00% 6.00% 6.00% 10.00% 10.00% (under banking regulations)
The Company's capital ratios above compare favorably to the minimum required amounts of Tier 1 and total capital to "risk-weighted" assets and the minimum Tier 1 leverage ratio, as defined by banking regulators. At December 31, 1999, the Company was required to have minimum Tier 1 and total capital ratios of 4.0% and 8.0%, respectively, and a minimum Tier 1 leverage ratio of 4.0%. In order for the Company to be considered "well capitalized," as defined by banking regulators, the Company must have Tier 1 and total capital ratios of 6.0% and 10.0%, respectively, and a minimum Tier 1 leverage ratio of 5.0%. At December 31, 1999, the Company meets the criteria for a well capitalized institution, and management believes that, under current regulations, the Company will continue to meet its minimum capital requirements in the foreseeable future. The Company does not presently have any commitments for significant capital expenditures. The Company is not under any agreement with regulatory authorities nor is it aware of any current recommendations by the regulatory authorities which, if they were to be implemented, would have a material effect on liquidity, capital resources, or operations of the Company. In July 1999, The Company's Board of Directors approved the repurchase of up to 850,000 shares of its common stock to be used for the Company's dividend reinvestment, stock option, employee stock purchase plans, and other stock-based corporate plans. The stock repurchase plan authorizes the Company to make repurchases from time to time in open market or privately negotiated transactions. At December 31, 1999, the Company repurchased a total of 289,874 shares at an aggregate cost of $7,104,148. A prior stock repurchase program ended in June 1998. ACQUISITION OF ELVERSON NATIONAL BANK ------------------------------------- On January 4, 1999, the Company acquired Elverson National Bank ("Elverson") by its merger with and into National Penn Bank, the Company's banking subsidiary. Under the terms of the merger, each outstanding share of Elverson stock was converted into 1.54219 shares of the Company's common stock, resulting in issuance of 4,012,642 shares of the Company's common stock. Outstanding options for Elverson stock were converted into options for 61,048 shares of the Company's common stock. Share information has been restated for a 5% stock dividend paid December 22, 1999. This transaction was accounted for under the pooling of interests method of accounting, and accordingly all historical information for the Company has been restated to include Elverson historical financial information as if the combining companies had been consolidated for all periods presented herein. The Company anticipates that the Elverson acquisition will be accretive to the Company's earnings in 2000. FUTURE OUTLOOK -------------- In 2000, the Company anticipates opening four new branches, one in its 1ST Main Line Bank Division, one in Montgomery County, one in Berks County, and one in Philadelphia. In 1999, National Penn Mortgage Company was incorporated as a subsidiary of National Penn Bank, the Company's banking subsidiary. National Penn Mortgage Company is a mortgage banking company and will provide traditional mortgage services and nonconforming residential mortgages. In 2000, the Company anticipates incurring implementation costs associated with National Penn Mortgage Company, but does not expect these costs to have a material effect on net income. 31 In 1999, National Penn Mortgage Company acquired RBO Funding, Inc. in McClean Virginia. RBO Funding, Inc. is expected to enhance the residential mortgage services of National Penn Mortgage Company, particularly in the sub-prime lending market. The Company anticipates incurring integration costs associated with the acquisition of RBO Funding, Inc., but does not anticipate these costs to have a material effect on 2000 earnings. 1874 Financial Corp. was incorporated at the end of 1999 as a subsidiary of National Penn Bank. 1874 Financial Corp. will specialize in making sub-prime business loans to small and mid-sized companies. Initial costs associated with this initiative are not expected to have a material effect on net income for the year 2000. The following is a Year 2000 readiness statement. As reported in previous filings, the Company assessed its state of readiness for Year 2000, became knowledgeable concerning the risks of non-compliance, implemented and carried out an action plan to achieve Year 2000 compliance, and developed contingency plans, all in an effort to successfully deal with Year 2000 issues. The Company did not suffer any Year 2000 related business interruptions on January 1, 2000 and has not suffered any problems since that date. The Company does not anticipate making any material expenditures for Year 2000 compliance purposes in 2000 or that Year 2000 issues will have any material effect on the Company in 2000 or thereafter. FORWARD-LOOKING STATEMENTS -------------------------- The Company has projected that net income will increase in 2000 over 1999 net income. The Company has also discussed its Year 2000 compliance effort, branch locations, as well as, recent investments in new companies in this report. These, and any other statements preceded by, followed by or that include the words "believes," "expects," "anticipates," "estimates," or similar expressions are forward-looking statements. Risks and uncertainties could cause actual future results and investments to differ materially from those contemplated in such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: (a) loan growth and/or loan margins may be less than expected, due to competitive pressures in the banking industry and/or changes in the interest rate environment; (b) general economic conditions in the Company's market area may be less favorable than expected, resulting in, among other things, a deterioration in credit quality; (c) costs of the Company's planned training initiatives, product development, branch expansion and new technology and operating systems, may exceed expectations; (d) volatility in the Company's market area due to recent mergers may have unanticipated consequences, such as customer turnover; and (e) changes in the regulatory environment, securities markets, general business conditions, and inflation may be adverse. These risks and uncertainties are all difficult to predict, and most are beyond the control of the Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - -------------------------------------------------------------------- Information with respect to quantitative and qualitative disclosures about market risk is included in the information under Management's Discussion and Analysis at Item 7 hereof. 32 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA. - ---------------------------------------------------- NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES ----------------------------------------------- Consolidated Balance Sheets (Dollars in thousands, except per share data) - --------------------------------------------------------------------------------
December 31, ASSETS 1999 1998 ----------- ----------- Cash and due from banks $ 62,953 $ 55,024 Interest bearing deposits in banks 4,039 10,777 ----------- ----------- Total cash and cash equivalents 66,992 65,801 Trading account securities -- 21,589 Investment securities available for sale 516,027 523,041 Loans and leases, less allowance for loan and lease losses of $34,139 and $30,835 in 1999 and 1998, respectively 1,536,404 1,404,972 Premises and equipment, net 23,289 23,607 Accrued interest receivable 13,855 14,592 Bank owned life insurance 48,494 41,604 Investments, at equity 2,147 4,728 Other assets 35,224 21,314 ----------- ----------- Total assets $ 2,242,432 $ 2,121,248 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest bearing $ 210,272 $ 222,816 Interest-bearing 1,382,982 1,250,486 ----------- ----------- Total deposits 1,593,254 1,473,302 Securities sold under repurchase agreements and federal funds purchased 200,148 159,586 Short-term borrowings 12,448 19,132 Long-term borrowings 223,077 248,627 Guaranteed preferred beneficial interests in Company's subordinated debentures 40,250 40,250 Accrued interest payable and other liabilities 25,559 21,577 ----------- ----------- Total liabilities 2,094,736 1,962,474 ----------- ----------- Shareholders' equity Preferred stock, no stated par value; authorized 1,000,000 shares, none issued -- -- Common stock, no stated par value; authorized 62,500,000 shares, issued and outstanding 1999 - 17,736,699; 1998 - 17,839,103, net of shares in Treasury: 1999 - 108,176; 1998 - 0 135,526 114,294 Retained earnings 26,739 34,927 Accumulated other comprehensive (loss) income (11,616) 9,553 Treasury stock, at cost (2,953) -- ----------- ----------- Total shareholders' equity 147,696 158,774 ----------- ----------- Total liabilities and shareholders' equity $ 2,242,432 $ 2,121,248 =========== ===========
The accompanying notes are an integral part of these statements. 33 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Income (Dollars in thousands, except per share data) - --------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997 --------- --------- --------- INTEREST INCOME Loans and leases, including fees $ 131,861 $ 125,152 $ 119,742 Investment securities Taxable 19,961 17,598 15,104 Tax-exempt 11,524 9,669 4,008 Federal funds sold 489 267 163 Trading assets 196 851 -- Deposits in banks 239 544 249 --------- --------- --------- Total interest income 164,270 154,081 139,266 --------- --------- --------- INTEREST EXPENSE Deposits 56,537 53,518 48,658 Securities sold under repurchase agreements, and federal funds purchased 7,165 6,108 5,228 Short-term borrowings 272 553 285 Long-term borrowings 18,779 16,428 8,838 --------- --------- --------- Total interest expense 82,753 76,607 63,009 --------- --------- --------- Net interest income 81,517 77,474 76,257 Provision for loan and lease losses 5,960 5,960 5,563 --------- --------- --------- Net interest income after provision for loan and lease losses 75,557 71,514 70,694 --------- --------- --------- OTHER INCOME Trust income 4,006 3,264 2,738 Service charges on deposit accounts 5,757 5,266 5,027 Bank owned life insurance income 2,270 1,604 -- Other service charges and fees 8,104 5,711 3,654 Net gains on sale of investment securities 15 1,888 1,759 Mortgage banking income (loss) 953 (80) 14 Equity in undistributed net earnings of affiliates 178 329 422 Trading revenue 2,055 739 -- --------- --------- --------- Total other income 23,338 18,721 13,614 --------- --------- --------- OTHER EXPENSES Salaries, wages and employee benefits 37,247 33,267 30,399 Net premises and equipment 10,404 9,627 8,907 Other operating 18,073 18,338 15,111 --------- --------- --------- Total other expenses 65,724 61,232 54,417 --------- --------- --------- Income before income taxes 33,171 29,003 29,891 Income taxes 5,762 6,085 8,344 --------- --------- --------- Net income $ 27,409 $ 22,918 $ 21,547 ========= ========= ========= PER SHARE OF COMMON STOCK Basic earnings $ 1.54 $ 1.28 $ 1.20 Diluted earnings $ 1.52 $ 1.26 $ 1.18 Dividends paid in cash $ 0.75 $ 0.57 $ 0.49
The accompanying notes are an integral part of these statements. 34 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders' Equity (Dollars in thousands) - --------------------------------------------------------------------------------
Accumulated Additional other Common paid-in Retained comprehensive Treasury Comprehensive Shares Par value capital earnings (loss) income stock income ------ --------- ------- -------- ------------- ----- ------ Balance at January 1, 1997 17,107,631 $ 23,133 $ 97,762 $ 12,985 $ 4,465 $ (826) Net income -- -- -- 21,547 -- -- $ 21,547 Cash dividends declared -- -- -- (9,200) -- -- Shares issued under stock-based plans 46,116 2,487 939 (2,901) -- -- Other comprehensive income, net of reclassification adjustment and taxes -- -- -- -- 3,183 -- 3,183 --------- Total comprehensive income $ 24,730 ========= Effect of treasury stock transactions (73,419) -- (2,044) -- -- (2,602) ---------- -------- ------ -------- -------- ------- Balance at December 31, 1997 17,080,328 25,620 96,657 22,431 7,648 (3,428) Net income -- -- -- 22,918 -- -- $ 22,918 Cash dividends declared -- -- -- (10,422) -- -- Shares issued under stock-based plans 42,946 855 -- -- -- -- Other comprehensive income, net of reclassification adjustment and taxes -- -- -- -- 1,905 -- 1,905 --------- Total comprehensive income -- -- -- -- -- -- $ 24,823 ========= Conversion to no par value stock -- 95,490 (95,107) -- -- -- Effect of treasury stock transactions (133,652) (7,671) (1,550) -- -- 3,428 ---------- -------- ------ -------- -------- ------- Balance at December 31, 1998 16,989,622 114,294 -- 34,927 9,553 -- Net income -- -- -- 27,409 -- -- $ 27,409 Cash dividends declared -- -- -- (14,478) -- -- 5% stock dividend 850,577 21,119 -- (21,119) -- -- Shares issued under stock-based plans 4,676 693 -- -- -- -- Other comprehensive (loss), net of reclassification adjustment and taxes -- -- -- -- (21,169) -- (21,169) --------- Total comprehensive income -- -- -- -- -- -- $ 6,240 ========= Effect of treasury stock transactions (108,176) (580) -- -- -- (2,953) ---------- -------- ------ -------- -------- ------- Balance at December 31, 1999 17,736,699 $135,526 $ -- $ 26,739 $(11,616) $(2,953) ========== ======== ====== ======== ======== =======
The accompanying notes are an integral part of this statement. 35 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in thousands) - --------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 27,409 $ 22,918 $ 21,547 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan and lease losses 5,960 5,960 5,563 Depreciation and amortization 4,655 4,283 4,018 Trading account securities 21,589 (21,589) -- Deferred income tax benefit (12,476) (609) (1,755) Amortization of premiums and discounts on investment securities, net 1,875 1,040 61 Investment securities gain, net (15) (1,888) (1,759) Mortgage loans originated for resale (50,437) (70,586) (39,061) Sale of mortgage loans originated for resale 50,870 71,195 39,468 Changes in assets and liabilities (Increase) decrease in accrued interest receivable 737 (3,319) (2,468) (Decrease) increase in accrued interest payable 3,018 185 2,595 Decrease (increase) in other assets (2,547) 122 (826) Increase (decrease) in other liabilities (93) 2,888 (720) --------- --------- --------- Net cash provided by operating activities 50,545 10,600 26,663 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Increase in term funds sold -- (15,000) -- Proceeds from sales of investment securities available for sale 45,661 55,435 16,238 Proceeds from maturities of investment securities held to maturity -- 7,206 6,712 Proceeds from maturities of investment securities available for sale 121,830 51,243 27,125 Purchase of investment securities available for sale (180,925) (264,219) (136,921) Net increase in loans (137,392) (118,331) (86,060) Proceeds from sales of foreclosed real estate -- 28 214 Purchases of premises and equipment (3,657) (2,101) (4,370) Purchase of bank-owned life insurance (6,890) (21,604) (20,000) --------- --------- --------- Net cash used in investing activities (161,373) (307,343) (197,062) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in interest and non-interest bearing demand deposits and savings accounts 20,018 126,975 51,759 Net (decrease) increase in certificates of deposit 99,934 (7,196) 110,788 Net increase (decrease) in securities sold under agreements to repurchase and federal funds purchased 40,562 88,398 (90,659) Net (decrease) increase in short-term borrowings (6,684) 12,647 (428) Proceeds from long-term borrowings 50,100 105,000 130,350 Repayments of long-term borrowings (75,650) (11,982) (51,000) Issuance of subordinated debentures -- -- 40,250 Issuance of common stock under dividend reinvestment and stock option plan 693 1,238 525 Effect of treasury stock transactions (3,533) (5,793) (4,646) Cash dividends (13,421) (10,151) (8,894) --------- --------- --------- Net cash provided by financing activities 112,019 299,136 178,045 --------- --------- --------- Net increase in cash and cash equivalents 1,191 2,393 7,646 Cash and cash equivalents at beginning of year 65,801 63,408 55,762 --------- --------- --------- Cash and cash equivalents at end of year $ 66,992 $ 65,801 $ 63,408 ========= ========= =========
The accompanying notes are an integral part of these statements. 36 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies followed by National Penn Bancshares, Inc. (the Company), and its wholly owned subsidiaries, National Penn Bank (the Bank), Investors Trust Company (ITC), National Penn Investment Company, National Penn Life Insurance Company, and Penn Securities, Inc., conform with generally accepted accounting principles and with general practice within the banking industry. Penn Securities, Inc., is a registered broker dealer with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers. Operations commenced in November 1998. In May 1999, the Bank formed National Penn Mortgage Company. National Penn Mortgage Company is a mortgage banking company and is engaged in the activity of extending credit and servicing loans. In November 1999, National Penn Mortgage Company acquired RBO Funding, Inc. in McClean, Virginia. RBO Funding, Inc. enhances the Company's lending services in the residential mortgage arena, particularly in the sub-prime market. The Company, primarily through its Bank subsidiary, has been serving residents and businesses of southeastern Pennsylvania since 1874. The Bank, which has in excess of 60 branch locations, is a locally managed community bank providing commercial banking products, primarily loans and deposits. Trust services are provided through ITC. The Bank, ITC and Penn Securities encounter vigorous competition for market share in the communities they serve from bank holding companies, other community banks, thrift institutions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies. The Company, the Bank, ITC and Penn Securities, Inc. are subject to regulations of certain state and federal agencies. These regulatory agencies periodically examine the Company and its subsidiaries for adherence to laws and regulations. As a consequence, the cost of doing business may be affected. BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries on a consolidated basis. Investments owned between 20% and 50% are accounted for using the equity method. All material intercompany balances have been eliminated. As a result of the merger with Elverson National Bank as more fully described in note 2 below, the financial statements have been restated to reflect the impact on Elverson Bank. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the balance sheets, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal estimate that is susceptible to significant change in the near term relates to the allowance for loan and lease losses. The evaluation of the adequacy of the allowance for loan losses includes an analysis of the individual loans and overall risk characteristics and size of the different loan portfolios, and takes into consideration current economic and market conditions, the capability of specific borrowers to pay specific loan obligations, as well as current loan collateral values. However, actual losses on specific loans, which also are encompassed in the analysis, may vary from estimated losses. 37 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued In 1998, the Company adopted Statement of Financial Accounting Statements (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 redefines how operating segments are determined and requires disclosures of certain financial and descriptive information about the Company's operating segments. Management has determined the Company operates in one business segment, community banking. INVESTMENT SECURITIES Investments in securities are classified in one of two categories: available for sale and trading. Investment securities which are held for indefinite periods of time, which management intends to use as part of its asset/liability strategy, or which may be sold in response to changes in interest rates, changes in prepayment risk, increases in capital requirements, or other similar factors are classified as available for sale and are carried at fair value. Net unrealized gains and losses for such securities, net of tax, are required to be recognized as a separate component of shareholders' equity and excluded from determination of net income. Gains or losses on disposition are based on the net proceeds and cost of the securities sold, adjusted for amortization of premiums and accretion of discounts, using the specific identification method. Debt and equity securities held for resale are classified as trading account securities and reported at fair value. Realized and unrealized gains or losses are recorded in non-interest income as trading revenue. The Company entered into interest rate swap and floor agreements to manage its sensitivity to interest rate risk. For interest rate risk management swap and floors agreements, interest income or interest expense is accrued over the terms of the agreements and transaction fees are deferred and amortized to interest income or expense over the terms of the agreements. The fair value of interest rate swap and floor agreements used for interest rate risk management are not recognized in the consolidated financial statements. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge. The accounting for changes in the fair value of a derivative (gains and losses) depends on the intended use of the derivative and resulting designation. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier application is permitted only as of the beginning of any fiscal quarter. Subsequent to FAS No. 133, the FASB issued SFAS No. 107 which amended the effective date of SFAS No. 133 to all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 as amended by SFAS No. 137 is not anticipated to have a material impact on the Company's consolidated financial position or results of operations. 38 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued LOANS AND LEASES, AND ALLOWANCE FOR LOAN AND LEASE LOSSES Loans and leases that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan and lease losses. Interest on loans is calculated based upon the principal amount outstanding. The allowance for loan and lease losses is established through a provision for loan and lease losses charged as an expense. Loans and leases are charged against the allowance for loan and lease losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans and leases that may become uncollectible based on evaluations of the collectibility of loans and leases, and prior loan and lease loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases, and current economic conditions that may affect the borrower's ability to pay. Accrual of interest is stopped on a loan or lease when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. The Company accounts for its impaired loans in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. This standard requires that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. SFAS No. 114 excludes such homogeneous loans as consumer and mortgage. The Company accounts for its transfers and servicing financial assets in accordance with SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, as amended by SFAS No. 127, Deferral of the Effective Date of Certain Provisions of SFAS No. 125. This standard provides accounting guidance on transfers of financial assets, servicing of financial assets, and extinguishment of liabilities. PREMISES AND EQUIPMENT Buildings, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization computed by the straight-line method over the estimated useful lives of the assets. CORE DEPOSIT INTANGIBLES The Company has recognized approximately $776,000 of core deposit intangibles, as a result of a branch acquisition in 1997, which are being amortized on a straight-line basis over 15 years. OTHER ASSETS Financing costs related to the issuance of junior subordinated debentures are being amortized over the life of the instruments and are included in other assets. 39 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued PENSION PLAN The Company follows the SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which revises employers' disclosures about pension and other postretirement benefit plans. Net pension expense consists of service cost, interest cost, return on pension assets and amortization of unrecognized initial net assets. The Company accrues pension costs as incurred. INCOME TAXES The Company accounts for income taxes under the liability method of accounting for income taxes specified by SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are allowance for loan and lease losses, deferred loan fees, deferred compensation and securities available for sale. EQUITY TRANSACTIONS The Company accounts for stock options under SFAS No. 123, Accounting for Stock-Based Compensation, which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees. Entities that continue to account for stock options using APB Opinion 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The Company's employee stock option plans are accounted for under APB Opinion 25. STATEMENTS OF CASH FLOWS The Company considers cash and due from banks, interest bearing deposits in banks and federal funds sold as cash equivalents for the purposes of reporting cash flows. Cash paid for interest and taxes is as follows (in thousands): Year ended December 31, ------------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Interest $ 79,832 $ 74,918 $ 60,594 Taxes 7,323 8,288 10,713 LOAN FEES AND RELATED COSTS The Company defers and amortizes certain origination and commitment fees, and certain direct loan origination costs over the contractual life of the related loans. This results in an adjustment of the related loan's yield. 40 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued PROPERTY ACQUIRED THROUGH LOAN FORECLOSURE ACTIONS Foreclosed property is recorded at the lower of cost or estimated fair market value less costs of disposal. When property is acquired, the excess, if any, of the loan balance over fair market value is charged to the allowance for possible loan losses. Periodically thereafter, the asset is reviewed for subsequent declines in the estimated fair market value. Subsequent declines, if any, and holding costs, as well as gains and losses on subsequent sale, are included in the consolidated statements of income. EARNINGS PER SHARE Earnings per share are calculated on the basis of the weighted average number of common shares outstanding during the year. All weighted average, actual shares or per share information in the financial statements have been adjusted retroactively for the effect of stock dividends and splits. The Company calculates earnings per share under the provisions of SFAS No. 128, Earnings Per Share, which eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. ADVERTISING COSTS It is the Company's policy to expense advertising costs in the period in which they are incurred. Advertising expense for the years ended December 31, 1999, 1998 and 1997, was approximately $2,362,000, $2,707,000, and $1,784,000, respectively. COMPREHENSIVE INCOME On January 1, 1998, the Company adopted the provisions of SFAS No. 130, Reporting Comprehensive Income. This new standard establishes standards for reporting comprehensive income, which includes net income as well as certain other items, which results in a change to equity during the period. These financial statements have been reclassified to reflect the provisions of SFAS No. 130.
December 31, 1999 December 31, 1998 December 31, 1997 ----------------------------- ---------------------------- ----------------------------- Before Tax Net of Before Tax Net of Before Tax Net of tax (expense) tax tax (expense) tax tax (expense) tax amount benefit amount amount benefit amount amount benefit amount -------- -------- -------- -------- -------- -------- -------- -------- -------- Unrealized gains (losses) on securities Unrealized holding (losses) gains arising during period $(32,540) $ 11,381 $(21,159) $ 4,819 $ (1,687) $ 3,132 $ 6,656 $ (2,330) $ 4,326 Less reclassification adjustment for gains realized in net income 15 (5) 10 1,888 (661) 1,227 1,759 (616) 1,143 -------- -------- -------- -------- -------- -------- -------- -------- -------- Other comprehensive (loss) income, net $(32,555) $ 11,386 $(21,169) $ 2,931 $ (1,026) $ 1,905 $ 4,897 $ (1,714) $ 3,183 ======== ======== ======== ======== ======== ======== ======== ======== ========
41 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 2. ACQUISITION On February 14, 2000, the Company entered into a definitive agreement to acquire Panasia Bank (Panasia). Consummation of the merger is conditional upon regulatory and shareholder approval. Under terms of the agreement, each share, including outstanding options, of Panasia will be purchased for $29 per share. As of December 31, 1999, there were 664,783 shares of Panasia common stock issued and outstanding and 39,000 options issued and outstanding. This transaction is anticipated to be accounted for under the purchase method of accounting. On January 4, 1999, the Company, through the Bank, completed a merger with Elverson National Bank (Elverson). Under the terms of the merger, each share of Elverson was converted into 1.54219 shares of the Company's common stock, resulting in an issuance of 4,012,642 shares of the Company's common stock. In addition, outstanding stock options to purchase Elverson common stock were converted into stock options to purchase 61,048 shares of the Company's common stock, with an exercise price of $12.36 to $14.99 per share. This transaction was accounted for under the pooling of interests method of accounting. 3. INVESTMENT SECURITIES The amortized cost, gross unrealized gains and losses, and fair values of the Company's investment securities at December 31, 1999 and 1998, are summarized as follows (in thousands):
December 31, 1999 ---------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ----------- ------------ ------------ ----------- U.S. Treasury and U.S. Government agencies $ 103,092 $ 716 $ 2,084 $ 101,724 State and municipal bonds 236,768 293 15,287 221,774 Mortgage-backed securities 136,684 311 3,068 133,927 Marketable equity securities and other 57,354 2,677 1,429 58,602 ----------- ------------ ------------ ----------- Totals $ 533,898 $ 3,997 $ 21,868 $ 516,027 ========== ============ =========== ========== December 31, 1998 ---------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ----------- ------------ ------------ ----------- U.S. Treasury and U.S. Government agencies $ 105,537 $ 3,625$ 73 $ 109,089 State and municipal bonds 230,260 9,050 240 239,070 Mortgage-backed securities 126,329 1,528 488 127,369 Marketable equity securities and other 46,230 3,452 2,169 47,513 ----------- ------------ ------------ ----------- Totals $ 508,356 $ 17,655 $ 2,970 $ 523,041 ========== =========== ============ ==========
42 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 3. INVESTMENT SECURITIES - Continued The amortized cost and fair value of investment securities available for sale, by contractual maturity, at December 31, 1999 (in thousands), are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair cost value ----------- ----------- Due in one year or less $ 6,785 $ 6,794 Due after one through five years 72,479 73,008 Due after five through ten years 75,358 73,049 Due after ten years 321,922 304,574 Marketable equity securities and other 57,354 58,602 ----------- ----------- $ 533,898 $ 516,027 =========== =========== Proceeds from the sales of investment securities during 1999, 1998 and 1997, were $45,661,000, $55,435,000 and $16,238,000, respectively. Gross gains realized on those sales were $324,000, $1,890,000 and $1,788,000 in 1999, 1998 and 1997, respectively, gross losses were $339,000 in 1999 and losses were not material in 1998 and 1997. As of December 31, 1999 and 1998, investment securities with a book value of $270,604,000 and $168,729,000, respectively, were pledged to secure public deposits and for other purposes as provided by law. As of December 31, 1999 and 1998, the Company did not have any investment securities of any one issuer where the carrying value exceeded 10% of shareholders' equity. 4. LOANS AND LEASES Major classifications of loans and leases are as follows (in thousands):
December 31, 1999 1998 ------------ ------------ Commercial and industrial loans and leases $ 252,992 $ 220,192 Real estate loans Construction and land development 136,105 84,520 Residential 649,692 678,889 Other 472,447 404,865 Loans to individuals 59,307 47,341 ------------ ------------ 1,570,543 1,435,807 Allowance for loan and lease losses (34,139) (30,835) ------------ ------------ Total loans and leases, net $ 1,536,404 $ 1,404,972 ============ ============
43 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 4. LOANS AND LEASES - Continued Loans and leases on which the accrual of interest has been discontinued or reduced amounted to approximately $11,055,000 and $11,581,000 at December 31, 1999 and 1998, respectively. If interest on these loans had been accrued, interest income would have increased by approximately $420,000 and $651,000 for 1999 and 1998, respectively. Loan balances past due 90 days or more and still accruing interest, but which management expects will eventually be paid in full, amounted to $2,673,000 and $1,839,000 at December 31, 1999 and 1998, respectively. The balance of impaired loans was $8,823,000 at December 31, 1999. The Company has identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The impaired loan balance included $8,823,000 of non-accrual loans. The allowance for loan loss associated with the $8,823,000 of impaired loans was $2,437,000 at December 31, 1999. The average impaired loan balance was $8,854,000 during 1999 and the income recognized on impaired loans during 1999 was $439,000. The Company recognizes income on impaired loans under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company will not recognize income on such loans. The balance of impaired loans was $8,157,000 at December 31, 1998. The impaired loan balance included $8,157,000 of non-accrual loans. The allowance for loan loss associated with the $8,157,000 of impaired loans was $1,359,000 at December 31, 1998. The average impaired loan balance was $6,828,000 and $4,816,000 in 1998 and 1997, respectively, and the income recognized on impaired loans during 1998 and 1997 was $289,000 and $477,000, respectively. Changes in the allowance for loan and lease losses were as follows (in thousands):
Year ended December 31, ---------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Balance, beginning of year $ 30,835 $ 28,467 $ 25,738 Provision charged to operations 5,960 5,960 5,563 Loans and leases charged off (5,157) (5,201) (3,881) Recoveries 2,501 1,609 1,047 ------------ ------------ ------------ Balance, end of year $ 34,139 $ 30,835 $ 28,467 ============ ============ ============
44 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 5. PREMISES AND EQUIPMENT Major classifications of premises and equipment are summarized as follows (in thousands):
December 31, Estimated ------------------------------ useful lives 1999 1998 --------------- ------------ ------------ Land Indefinite $ 2,766 $ 3,025 Buildings 5 to 40 years 16,178 16,115 Equipment 3 to 10 years 25,115 21,847 Leasehold improvements 2 to 40 years 4,597 3,919 ------------ ------------ 48,656 44,906 Accumulated depreciation and amortization (25,367) (21,299) ------------ ------------ $ 23,289 $ 23,607 ============ ============
Depreciation and amortization expense amounted to $3,976,000, $3,550,000 and $3,340,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 6. DEPOSITS The aggregate amount of jumbo certificates of deposit, each with a minimum denomination of $100,000, was approximately $195,939,000 and $145,049,000 in 1999 and 1998, respectively. At December 31, 1999, the scheduled maturities of certificates of deposit are as follows (in thousands): 2000 $ 625,025 2001 110,739 2002 34,548 2003 21,025 2004 14,632 Thereafter 4,159 ----------- $ 810,128 =========== 7. SHORT-TERM BORROWINGS Federal funds purchased and securities sold under agreements to repurchase generally mature within 30 days from the date of the transactions. Short-term borrowings consist of Treasury Tax and Loan Note Options and various other borrowings which generally have maturities of less than one year. The details of these categories are presented below (in thousands):
Year ended December 31, ----------------------------------------------- 1999 1998 1997 ----------- ----------- ------------ Securities sold under repurchase agreements and federal funds purchased Balance at year-end $ 200,148 $ 159,586 $ 86,188 Average during the year 158,669 133,380 106,131 Maximum month-end balance 213,735 191,307 168,508 Weighted average rate during the year 4.52% 4.76% 5.15% Rate at December 31 4.30% 4.37% 5.58%
45 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 7. SHORT-TERM BORROWINGS - Continued
Year ended December 31, ------------------------------------------------ 1999 1998 1997 ------------ ------------ ------------- Short-term borrowings Balance at year-end $ 12,448 $ 19,132 $ 6,109 Average during the year 5,608 9,551 4,957 Maximum month-end balance 12,448 24,930 10,184 Weighted average rate during the year 4.85% 5.70% 5.67% Rate at December 31 4.04% 5.26% 5.27%
The weighted average rates paid in aggregate on these borrowed funds for 1999, 1998 and 1997 were 4.53%, 4.82% and 5.17%, respectively. 8. LONG-TERM BORROWINGS FHLB ADVANCES At December 31, 1999, advances from the Federal Home Loan Bank (FHLB) totaling $223,077,000 will mature within one to ten years and are reported as long-term borrowings. The advances are collateralized by FHLB stock and certain first mortgage loans and mortgage-backed securities. These advances had a weighted average interest rate of 5.61%. Unused lines of credit at the FHLB were $195,312,000 and $218,585,000 at December 31, 1999 and 1998, respectively. Outstanding borrowings mature as follows (in thousands): 2000 $ 35,000 2001 2,500 2002 65,000 2003 - 2004 - Thereafter 120,577 ---------- $ 223,077 ========== SUBORDINATED DEBENTURES In 1997, the Company issued $41,500,000 of 9% junior subordinated deferrable interest debentures (the debentures) to NPB Capital Trust (the Trust), a Delaware business trust, in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. The Trust issued $40,250,000 of preferred securities to investors. The Company's obligations under the debentures and related documents, taken together, constitute a fully and unconditional guarantee by the Company of the Trust's obligations under the preferred securities. The preferred securities are redeemable by the Company on or after June 20, 2002, or earlier in the event the deduction of related interest for federal income taxes is prohibited, treatment as Tier 1 capital is no longer permitted, or certain other contingencies arise. The preferred securities must be redeemed upon maturity of the debentures in 2027. 46 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 9. PENSION PLANS The Company has a non-contributory defined benefit pension plan covering substantially all employees. The Company-sponsored pension plan provides retirement benefits under pension trust agreements and under contracts with insurance companies. The benefits are based on years of service and the employee's compensation during the highest five consecutive years during the last 10 years of employment. The Company's policy is to fund pension costs allowable for income tax purposes. The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets (in thousands):
December 31, 1999 1998 -------- -------- Change in benefit obligation Benefit obligation at beginning of year $ 9,945 $ 8,778 Service cost 812 724 Interest cost 639 587 Actual (gain) loss 146 (162) Benefits paid (297) (245) Effect of change in assumptions (996) 263 -------- -------- Benefits obligation at end of year 10,249 9,945 -------- -------- Change in plan assets Fair value of plan assets at beginning of year 10,605 9,360 Actual return on plan assets 1,647 705 Employer contribution 880 785 Benefits paid (297) (245) -------- -------- Fair value of plan assets at end of year 12,835 10,605 -------- -------- Funded status 2,586 660 Unrecognized net actuarial gain (1,840) (212) Unrecognized prior service cost 182 248 -------- -------- Prepaid benefit cost $ 928 $ 696 ======== ========
Net pension cost included the following components (in thousands):
Year ended December 31, 1999 1998 1997 ------- ------- ------- Service cost $ 812 $ 724 $ 574 Interest cost on projected benefit obligation 639 587 512 Actual return on plan assets (1,647) (705) (1,542) Net amortization and deferral 845 3 955 ------- ------- ------- Net periodic pension cost $ 649 $ 609 $ 499 ======= ======= =======
47 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 9. PENSION PLANS - Continued The assumed discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 6.75% and 4.50%, respectively, in 1999; 6.63% and 4.63%, respectively, in 1998; and 6.75% and 4.75%, respectively, in 1997. The expected long-term rate of return on assets was 8.25% for 1999, 1998 and 1997. The Company has a capital accumulation and salary reduction plan under Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the plan, all employees are eligible to contribute from 3% to a maximum of 15% of their annual salary, with the Company matching 50% of any contribution between 3% and 7%. Matching contributions to the plan were $594,000, $422,000 and $441,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 10. INCOME TAXES The components of the income tax expense included in the consolidated statements of income are as follows (in thousands):
Year ended December 31, --------------------------------- 1999 1998 1997 ------- ------- ------- Income tax expense Current $ 6,321 $ 5,906 $ 7,755 Deferred federal benefit (1,090) (457) (752) ------- ------- ------- 5,231 5,449 7,003 Additional paid-in capital from benefit of stock options exercised 531 636 1,341 ------- ------- ------- Applicable income tax expense $ 5,762 $ 6,085 $ 8,344 ======= ======= =======
The differences between applicable income tax expense and the amount computed by applying the statutory federal income tax rate of 35% are as follows (in thousands):
Year ended December 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- Computed tax expense at statutory rate $ 11,610 $ 10,152 $ 10,419 Decrease in taxes resulting from Tax-exempt loan and investment income (5,388) (4,027) (1,787) Other, net (460) (40) (288) -------- -------- -------- Applicable income tax expense $ 5,762 $ 6,085 $ 8,344 ======== ======== ========
48 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 10. INCOME TAXES - Continued Deferred tax assets and liabilities consist of the following (in thousands): 1999 1998 ------- ------- Deferred tax assets Deferred loan fees $ 373 $ 491 Allowance for loan and lease loss 11,158 10,002 Deferred compensation 853 783 Loan sales valuation 54 120 Investment securities available for sale 6,254 -- ------- ------- 18,692 11,396 ------- ------- Deferred tax liabilities Pension 475 315 Partnership investments 326 273 Mark-to-market accounting -- 261 Investment securities available for sale -- 5,132 Rehab credit adjustment 44 44 ------- ------- 845 6,025 ------- ------- Net deferred tax asset $17,847 $ 5,371 ======= ======= 11. SHAREHOLDERS' EQUITY On October 27, 1999, the Company declared a 5% stock dividend to shareholders of record on December 6, 1999, and payable on December 22, 1999. On July 28, 1999, the Company approved a stock repurchase plan of 850,000 shares of its common stock. Repurchases can be from time to time and will be used for general corporate purposes including the Company's dividend reinvestment plan, stock options, and other stock based benefit plans. No time limit has been set for the completion of this program. At December 31, 1999, the Company has repurchased 289,874 shares at a cost of $7,000,000. On June 24, 1998, the Company declared a 5-for-4 stock split on its common stock to shareholders of record on July 15, 1998, and payable on July 31, 1998, and amended its Articles of Incorporation whereby the number of authorized shares was increased from 50,000,000 to 62,500,000, both with no par value. In April 1998, the Company amended its Articles of Incorporation whereby the number of authorized common shares was increased from 26,666,667 shares with a par value of $1.875 to 50,000,000 shares with no par value. The additional paid-in capital account has been combined with common stock as presented in the consolidated statement of changes in shareholders' equity and comprehensive income. In August 1997, the Company amended its Articles of Incorporation whereby the number of authorized common shares was increased from 20,000,000 shares with a par value of $2.50 to 26,666,667 shares with a par value of $1.875. In conjunction with this amendment, the Company declared a 4-for-3 stock split where 4 common shares of $1.875 par value stock were exchanged for 3 common shares of $2.50 par value stock. 49 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 12. SHAREHOLDER RIGHTS PLAN The Company adopted a Shareholder Rights Plan (the Rights Plan) in 1989 to protect shareholders from attempts to acquire control of the Company at an inadequate price. Under the Rights Plan, the Company distributed a dividend of one right to purchase a unit of preferred stock on each outstanding common share of the Company. The rights are not currently exercisable or transferable, and no separate certificates evidencing such rights will be distributed, unless certain events occur. The rights were to expire on August 22, 1999. On August 21, 1999, the Plan was amended to extend the expiration date to August 22, 2009. After the rights become exercisable, under certain circumstances, the rights (other than rights held by a 19.9% beneficial owner or an "adverse person") will entitle the holders to purchase either the Company's common shares or the common shares of the potential acquirer at a substantially reduced price. The Company is generally entitled to redeem the rights at $0.001 per right at any time until the 10th business day following a public announcement that a 19.9% position has been acquired. Rights are not redeemable following an "adverse person" determination. The Rights Plan was not adopted in response to any specific effort to acquire control of the Company. The issuance of rights had no dilutive effect, did not affect the Company's reported earnings per share, and was not taxable to the Company or its shareholders. 13. EARNINGS PER SHARE The Company's calculation of earnings per share in accordance with SFAS No. 128 is as follows (in thousands, except for per share amounts):
Year ended December 31, 1999 ----------------------------------- Income Shares Per share (numerator) (denominator) amount ----------- ------------ ------- Basic earnings per share Net income available to common stockholders $27,409 17,792 $ 1.54 Effect of dilutive securities Options -- 283 (0.02) ------- ------- -------- Diluted earnings per share Net income available to common stockholders plus assumed conversions $27,409 18,075 $ 1.52 ======= ======= ========
Options to purchase 775,378 shares of common stock at $24.94 to $29.52 per share were outstanding during 1999. They were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price. 50 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 13. EARNINGS PER SHARE - Continued
Year ended December 31, 1998 ----------------------------------------- Income Shares Per share (numerator) (denominator) amount ----------- ------------- ------- Basic earnings per share Net income available to common stockholders $22,918 17,837 $ 1.28 Effect of dilutive securities Options -- 361 (0.02) ------- ------- -------- Diluted earnings per share Net income available to common stockholders plus assumed conversions $22,918 18,198 $ 1.26 ======= ======= ========
Options to purchase 240,260 shares of common stock at $29.52 per share were outstanding during 1998. They were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price.
Year ended December 31, 1997 ---------------------------------------- Income Shares Per share (numerator) (denominator) amount ----------- ------------- ------- Basic earnings per share Net income available to common stockholders $21,547 17,971 $ 1.20 Effect of dilutive securities Options -- 306 (0.02) ------- ------- -------- Diluted earnings per share Net income available to common stockholders plus assumed conversions $21,547 18,277 $ 1.18 ======= ======= ========
Options to purchase 249,395 shares of common stock at $24.50 per share were outstanding during 1997. They were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price. 51 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 14. COMMITMENTS AND CONTINGENT LIABILITIES LEASE COMMITMENTS Future minimum payments under non-cancellable operating leases are due as follows (in thousands): Year ending December 31, 2000 $ 1,873 2001 1,445 2002 1,212 2003 897 2004 536 Thereafter 1,157 ---------- $ 7,120 ========== The total rental expense was approximately $2,706,000, $2,028,000 and $2,016,000 in 1999, 1998 and 1997, respectively. OTHER In the normal course of business, the Company, the Bank and ITC have been named as defendants in several lawsuits. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management that the resolution of such suits will not have a material adverse effect on the financial position or results of operations of the Company. 15. STOCK OPTIONS The Company has an employee stock option plan for certain key employees accounted for under APB Opinion 25 and related interpretations. A total of 2,346,698 shares of common stock were made available for options granted through February 24, 1997. The options granted under this plan are subject to a vesting schedule commencing at two years and expire ten years and one month from the date of issue. There are 758,990 outstanding options at December 31, 1999. The Company maintains an Officers' and Key Employees' Stock Compensation Plan as a replacement for the Stock Option Plan upon expiration of its 10-year term. A total of 1,312,500 shares of common stock have been made available for options or restricted stock to be granted through December 17, 2006. The options granted under this plan will vest over a five-year period, in 20% increments on each successive anniversary of the date of grant. There are 935,645 outstanding options at December 31, 1999. In addition, the Company has a non-employee director stock option plan. Under this plan, a total of 289,404 shares of common stock have been made available for options to be granted through January 3, 2004. The options granted under this plan fully vest after two years and expire ten years from the date of issue. There are 81,015 outstanding options at December 31, 1999. 52 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 15. STOCK OPTIONS - Continued Under all plans, the option price per share is equivalent to 100% of the fair market value on the date the options were granted as determined pursuant to the plan. Accordingly, no compensation cost has been recognized for the plans. The number of shares available for granting totaled 940,872 at December 31, 1998 and 685,990 at December 31, 1999. Had compensation cost for the plans been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, the Company's net income and earnings per share of common stock would have been reduced to the pro forma amounts indicated below.
1999 1998 1997 --------- --------- --------- Net income As reported $ 27,409 $ 22,918 $ 21,547 Pro forma 26,323 21,804 21,162 Earnings per share of common stock - basic As reported 1.54 1.28 1.20 Pro forma 1.48 1.22 1.18 Earnings per share of common stock - diluted As reported 1.52 1.26 1.18 Pro forma 1.46 1.20 1.16
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield of 3.23%, 2.71% and 2.55%; expected volatility of 17.0%, 24.4% and 31.5%; risk-free interest rates for each plan of 6.50% and 4.79% for 1999 and 4.68% and 5.74% for 1998 and 6.43% and 5.89% for 1997; and expected lives of 6.23 years and 8.98 years for each plan in 1999, 6.23 years and 8.98 years for each plan in 1998, 6.95 years and 9.17 years for each plan in 1997. A summary of the status of the Company's fixed option plans as of December 31, is presented below:
1999 1998 1997 ------------------------ ------------------------- ------------------------ Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price ------ ----- ------ ----- ------ ----- Outstanding, beginning of year 1,705,729 $ 17.97 1,575,138 $ 15.71 1,658,855 $ 13.31 Granted 278,654 25.36 278,421 27.79 273,959 23.53 Exercised (158,656) 11.95 (144,704) 12.22 (311,375) 9.91 Forfeited -- -- (3,126) 16.30 (46,301) 15.05 ----------- ---------- ---------- Outstanding, end of year 1,825,727 $ 19.63 1,705,729 $ 17.97 1,575,138 $ 15.71 =========== ========== ========== Options exercisable at year-end 868,214 732,792 580,973 =========== ========== ========== Weighted average fair value of options granted during the year $ 6.26 $ 7.44 $ 8.67 ========= =========== ===========
53 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 15. STOCK OPTIONS - Continued The following table summarizes information about nonqualified options outstanding at December 31, 1999:
Options outstanding Options exercisable -------------------------------------------------------------------- ------------------------------ Weighted Number average Number outstanding at remaining Weighted outstanding at Weighted Range of December 31, contractual average December 31, average exercise prices 1999 life (years) exercise price 1999 exercise price --------------- ---- ------------ -------------- ---- -------------- $ 5.90 - 8.86 34,055 1.5 $ 7.43 34,055 $ 7.43 8.87 - 11.81 91,643 2.8 9.52 91,643 9.52 11.82 - 14.76 491,328 5.2 14.11 319,089 13.93 14.77 - 17.71 244,262 7.1 15.20 77,359 15.18 17.72 - 20.67 189,061 3.8 19.15 189,061 19.15 23.63 - 26.57 535,117 8.8 24.94 108,958 24.47 26.58 - 29.52 240,261 9.0 29.52 48,049 29.52 ----------- ---------- 1,825,727 868,214 ========== ===========
16. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK The Company grants commercial and residential loans to customers throughout southeastern Pennsylvania. Although the Company has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economic sector. 17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, interest rate swaps, and interest rate floor. Those instruments involve, to varying degrees, elements of credit, interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For interest rate swaps and floors, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of its interest rate swap agreements through credit approvals, limits and monitoring procedures. 54 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued Unless otherwise noted, the Company does not require collateral or other security to support financial instruments with credit risk. The contract or notional amounts as of December 31, 1999 and 1998, are as follows (in thousands):
1999 1998 --------- --------- Financial instruments whose contract amounts represent credit risk Commitments to extend credit $ 472,099 $ 361,865 Standby letters of credit 24,297 14,058 Financial instruments whose notional or contract amounts exceed the amount of credit risk Interest rate swap agreements 100,000 100,000 Interest rate floor 50,000 50,000
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The extent of collateral held for those commitments at December 31, 1999, varies up to 100%; the average amount collateralized is 91%. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. The Company uses swaps as part of its asset and liability management process with the objective of hedging the relationship between money market deposits that are used to fund prime rate loans. Past experience has shown that as the prime interest rate changes, rates on money market deposits do not change with the same volatility. The interest rate swaps have the effect of converting the rates on money market deposit accounts to a more market-driven floating rate typical of prime in order for the Company to recognize a more even interest rate spread on this business segment. This strategy will cause the Company to recognize, in a rising rate environment, a lower overall interest rate spread than it otherwise would have without the swaps in effect. Likewise, in a falling rate environment, the Company will recognize a larger interest rate spread than it otherwise would have without the swaps in effect. In 1999, the interest rate swaps had the effect of increasing the Company's net interest income by $986,000 over what would have been realized had the Company not entered into the swap agreements. An interest rate floor is a contract that protects the holder against a decline in interest rates below a certain point. The primary risk associated with interest rate floors is exposure to current and possible future movements in interest rates. 55 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 18. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. For the bank, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments as defined in SFAS No. 107. However, many of such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company's general practice and intent to hold its financial instruments to maturity and to not engage in trading or sales activities. Therefore, the Company had to use significant estimations and present value calculations to prepare this disclosure. Changes in assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values. Fair values have been estimated using data that management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument. The estimation methodologies, resulting fair values and recorded carrying amounts at December 31, 1999 and 1998, were as follows (in thousands): Fair value of loans and deposits with floating interest rates is generally presumed to approximate the recorded carrying amounts. Financial instruments actively traded in a secondary market have been valued using quoted available market prices.
December 31, 1999 December 31, 1998 ---------------------------- ----------------------------- Carrying Estimated fair Carrying Estimated fair amount value amount value ----------- ----------- ----------- -------------- Cash and cash equivalents $ 66,992 $ 66,992 $ 65,801 $ 65,801 Trading account securities - - 21,589 21,589 Investment securities available for sale 516,027 516,027 523,041 523,041
Fair value of financial instruments with stated maturities has been estimated using present value cash flow, discounted at a rate approximating current market for similar assets and liabilities.
December 31, 1999 December 31, 1998 ---------------------------- ----------------------------- Carrying Estimated fair Carrying Estimated fair amount value amount value ----------- ----------- ----------- -------------- Deposits with stated maturities $ 810,128 $ 814,391 $ 871,075 $ 879,194 Short-term borrowings 212,596 212,596 178,718 178,718 Long-term borrowings 223,077 213,403 248,627 248,627 Subordinated debentures 40,250 38,640 40,250 43,873
Fair value of financial instrument liabilities with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand), totaling $783,126,000 for 1999 and $602,227,000 for 1998. 56 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 18. FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued The fair value of the net loan portfolio has been estimated using present value cash flow, discounted at the treasury rate adjusted for non-interest operating costs and giving consideration to estimated prepayment risk and credit loss factors.
December 31, 1999 December 31, 1998 ---------------------------- ---------------------------- Carrying Estimated fair Carrying Estimated fair amount value amount value ----------- ----------- ----------- ----------- Net loans $ 1,536,404 $ 1,559,240 $ 1,404,972 $ 1,463,172
There is no material difference between the carrying amount and estimated fair value of off-balance sheet items which total $646,396,000 and $478,544,000 at year-end 1999 and 1998, respectively, which are primarily comprised of interest rate swap agreements and unfunded loan commitments which are generally priced at market at the time of funding. The Company's remaining assets and liabilities are not considered financial instruments. 19. REGULATORY MATTERS The Bank is required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those balances for the year ended December 31, 1999, was approximately $7,927,000. Dividends are paid by the Company from its assets which are mainly provided by dividends from the Bank. However, certain restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. Under the restrictions in 2000, the Bank, without prior approval of bank regulators, can declare dividends to the Company totaling $26,765,000 plus additional amounts equal to the net earnings of the Bank for the period January 1, 2000, through the date of declaration less dividends previously paid in 2000. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Bank and the Company to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 1999, that the Bank and Company meet all capital adequacy requirements to which they are subject. 57 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 19. REGULATORY MATTERS - Continued As of December 31, 1999, the Bank met all regulatory requirements for classification as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, core risk-based and core leverage ratios as set forth in the table. There are no conditions or events that management believes have changed the institution's category.
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions --------------------- --------------------- ------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollars in thousands) As of December 31, 1999 Total capital (to risk-weighted assets) National Penn Bancshares, Inc. $ 215,760 12.73% $ 135,600 8.00% $ - - % National Penn Bank 172,044 10.42 132,140 8.00 165,175 10.00 Tier I capital (to risk-weighted assets) National Penn Bancshares, Inc. 193,822 11.43 67,800 4.00 - - National Penn Bank 151,231 9.16 66,070 4.00 99,105 6.00 Tier I capital (to average assets) National Penn Bancshares, Inc. 193,822 8.58 90,367 4.00 - - National Penn Bank 151,231 6.83 88,546 4.00 110,682 5.00 As of December 31, 1998 Total capital (to risk-weighted assets) National Penn Bancshares, Inc. $ 202,703 13.51% $ 120,066 8.00% $ - - % National Penn Bank 158,307 10.78 117,442 8.00 146,802 10.00 Tier I capital (to risk-weighted assets) National Penn Bancshares, Inc. 183,245 12.21 60,033 4.00 - - National Penn Bank 139,803 9.52 58,721 4.00 88,081 6.00 Tier I capital (to average assets) National Penn Bancshares, Inc. 183,245 8.77 83,604 4.00 - - National Penn Bank 139,803 6.80 82,234 4.00 102,792 5.00
58 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 20. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY The following is a summary of selected financial information of National Penn Bancshares, Inc., parent company only (in thousands): CONDENSED BALANCE SHEETS
December 31, --------------------- 1999 1998 -------- -------- Assets Cash $ 1,261 $ -- Investment in Bank subsidiary, at equity 144,573 154,733 Investment in other subsidiaries, at equity 45,815 46,841 Other assets 1,154 1,253 -------- -------- $192,803 $202,827 ======== ======== Liabilities and shareholders' equity Guaranteed preferred beneficial interests in Company's subordinated debentures $ 41,495 $ 41,495 Other liabilities 3,612 2,558 Shareholders' equity 147,696 158,774 -------- -------- $192,803 $202,827 ======== ========
CONDENSED STATEMENTS OF INCOME
Year ended December 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- Income Equity in undistributed net earnings of subsidiaries $ 14,607 $ 8,407 $ 13,361 Dividends from subsidiary 15,198 16,939 9,204 Interest and other income 168 121 766 -------- -------- -------- 29,973 25,467 23,331 Expense Interest on subordinated debentures 3,735 3,735 2,272 Other operating expenses 118 121 60 -------- -------- -------- 3,853 3,856 2,332 Income before income tax benefit 26,120 21,611 20,999 Income tax benefit (1,289) (1,307) (548) -------- -------- -------- Net income $ 27,409 $ 22,918 $ 21,547 ======== ======== ========
59 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 20. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- Cash flows from operating activities Net income $ 27,409 $ 22,918 $ 21,547 Equity in undistributed net earnings of subsidiaries (14,607) (8,407) (13,361) (Increase) decrease in other assets 99 7 (1,240) (Decrease) increase in other liabilities 1,056 2,491 (79) -------- -------- -------- Net cash provided by operating activities 13,957 17,009 6,867 -------- -------- -------- Cash flows from investing activities Additional investment in subsidiaries, at equity 4,631 (1,688) (35,035) -------- -------- -------- Net cash used in investing activities 4,631 (1,688) (35,035) -------- -------- -------- Cash flows from financing activities Proceeds from issuance of long-term debt -- -- 41,495 Proceeds from issuance of stock 693 855 525 Effect of treasury stock transactions (3,542) (5,793) (4,646) Cash dividends (14,478) (10,422) (9,200) -------- -------- -------- Net cash provided by (used in) financing activities (17,327) (15,360) 28,174 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 1,261 (39) 6 Cash and cash equivalents at beginning of year -- 39 33 -------- -------- -------- Cash and cash equivalents at end of year $ 1,261 $ -- $ 39 ======== ======== ========
21. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) The following represents summarized quarterly financial data of the Company, which, in the opinion of management, reflects all adjustments (comprising only normal recurring accruals) necessary for a fair presentation. Net income per share of common stock has been restated to retroactively reflect certain stock dividends. (Dollars in thousands, except per share data)
Three months ended ------------------------------------------------ 1999 Dec. 31 Sept. 30 June 30 March 31 ------------------------------------------------------------------------------------------------- Interest income $ 43,322 $ 41,888 $ 40,109 $ 38,951 ======== ======== ======== ======== Net interest income $ 20,997 $ 20,789 $ 20,170 $ 19,561 ======== ======== ======== ======== Provision for loan and lease losses $ 1,715 $ 1,415 $ 1,415 $ 1,415 ======== ======== ======== ======== Net gains (losses) on sale of investment securities $ (198) $ -- $ 211 $ 2 ======== ======== ======== ======== Income before income taxes $ 8,685 $ 9,155 $ 8,006 $ 7,325 ======== ======== ======== ======== Net income $ 7,683 $ 7,210 $ 6,500 $ 6,016 ======== ======== ======== ======== Earnings per share of common stock - basic $ 0.43 $ 0.40 $ 0.37 $ 0.34 ======== ======== ======== ======== Earnings per share of common stock - diluted $ 0.43 $ 0.40 $ 0.36 $ 0.33 ======== ======== ======== ========
60 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1999 and 1998 - -------------------------------------------------------------------------------- 21. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) - Continued
Three months ended ------------------------------------------- 1998 Dec. 31 Sept. 30 June 30 March 31 -------------------------------------------------------------------------------------------- Interest income $39,968 $39,281 $38,182 $36,650 ======= ======= ======= ======= Net interest income $19,785 $19,463 $19,139 $19,087 ======= ======= ======= ======= Provision for loan and lease losses $ 1,865 $ 1,365 $ 1,330 $ 1,400 ======= ======= ======= ======= Net gains (losses) on sale of investment securities $ 1,060 $ 64 $ 153 $ 611 ======= ======= ======= ======= Income before income taxes $ 6,059 $ 7,920 $ 7,247 $ 7,777 ======= ======= ======= ======= Net income $ 5,275 $ 6,210 $ 5,689 $ 5,744 ======= ======= ======= ======= Earnings per share of common stock - basic $ 0.30 $ 0.35 $ 0.31 $ 0.32 ======= ======= ======= ======= Earnings per share of common stock - diluted $ 0.29 $ 0.34 $ 0.31 $ 0.32 ======= ======= ======= =======
61 Report of Independent Certified Public Accountants Board of Directors National Penn Bancshares, Inc. We have audited the accompanying consolidated balance sheets of National Penn Bancshares, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Penn Bancshares, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ Grant Thornton LLP Philadelphia, Pennsylvania January 17, 2000 (except for note 2, as to which the date is February 14, 2000) 62 Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. - -------------------------------------------------------------- None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------------------------------------------------------------ The information relating to executive officers of the Company is included under Item 4A in Part I hereof. The information required by this item relating to directors of the Company and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to pages 2, 3, 4, 5, 6 and 15 of the Company's definitive Proxy Statement to be used in connection with the Company's 2000 Annual Meeting of Shareholders (the "Proxy Statement"). Item 11. EXECUTIVE COMPENSATION. - -------------------------------- The information required by this item is incorporated herein by reference to pages 6 through 14 of the Proxy Statement. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - ------------------------------------------------------------------------ The information required by this item is incorporated herein by reference to pages 3, 4, 5 and 15 of the Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------------------------------------------------------- The information required by this item is incorporated herein by reference to page 14 of the Proxy Statement. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - -------------------------------------------------------------------------- (a) 1. Financial Statements. -------------------- The following consolidated financial statements are included in Part II, Item 8 hereof: National Penn Bancshares, Inc., and Subsidiaries. Consolidated Balance Sheets. Consolidated Statements of Income. Consolidated Statement of Changes in Shareholders' Equity. Consolidated Statements of Cash Flows. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules. ----------------------------- Financial statement schedules are omitted because the required information is either not applicable, not required, or is shown in the respective financial statements or in the notes thereto. 63 3. Exhibits. -------- 2.1 Amended Agreement and Plan of Merger dated as of July 21, 1998, between National Penn Bancshares, Inc., National Penn Bank, and Elverson National Bank. (Incorporated by reference to Exhibit 2.1 to the Company's Registration Statement No. 333-65841 on Form S-4 as filed on October 16, 1998.) 2.2 Agreement dated February 14, 2000, between National Penn Bancshares, Inc. and Panasia Bank, including exhibits. 3.1 Articles of Incorporation, as amended, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998.) 3.2 Bylaws, as amended, of National Penn Bancshares, Inc. 10.1 National Penn Bancshares, Inc. Amended and Restated Dividend Reinvestment Plan. (Incorporated by reference to Exhibit 99.1 to the Company's Registration Statement No. 333-887549 on Form S-3 as filed on September 22, 1999.) 10.2 National Penn Bancshares, Inc. Pension Plan.* (Incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.) 10.3 Amendment No. 1 to National Penn Bancshares, Inc. Pension Plan.* (Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.) 10.4 Amendment 1999-1 to the National Penn Bancshares, Inc. Pension Plan.* 10.5 Amendment 2000-1 to the National Penn Bancshares, Inc. Pension Plan.* 10.6 National Penn Bancshares, Inc. Capital Accumulation Plan (Amended and Restated Effective January 1, 1997).* (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1999.) 10.7 Amendment No. 2 to National Penn Bancshares, Inc. Capital Accumulation Plan (Amended and Restated Effective January 1, 1997).* 10.8 National Penn Bancshares, Inc. Amended and Restated Executive Incentive Plan.* 10.9 National Penn Bancshares, Inc. Executive Incentive Plan/Schedules.* 10.10 National Penn Bancshares, Inc. Amended and Restated Stock Option Plan.* (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement No. 33-87654 on Form S-8 as filed on December 22, 1995.) 10.11 National Penn Bancshares, Inc. Officers' and Key Employees' Stock Compensation Plan.* (Incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 10.12 National Penn Bancshares, Inc. Directors' Fee Plan.* (Incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 10.13 National Penn Bancshares, Inc. Non-Employee Directors' Stock Option Plan.* (Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.) 64 10.14 National Penn Bancshares, Inc. Amended and Restated Employee Stock Purchase Plan.* (Incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.) 10.15 National Penn Bancshares, Inc. Elverson Substitute Stock Option Plan.* (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement No. 333-71391 on Form S-8 as filed on January 29, 1999.) 10.16 Executive Supplemental Benefit Agreement dated December 27, 1989, among National Penn Bancshares, Inc., National Bank of Boyertown, and Lawrence T. Jilk, Jr.* (Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.17 Amendatory Agreement dated February 23, 1994, among National Penn Bancshares, Inc., National Penn Bank, and Lawrence T. Jilk, Jr.* (Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.18 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank, and Lawrence T. Jilk, Jr.* (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998.) 10.19 Executive Supplemental Benefit Agreement dated December 27, 1989, among National Penn Bancshares, Inc., National Bank of Boyertown, and Wayne R. Weidner.* (Incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.20 Amendatory Agreement dated February 23, 1994, among National Penn Bancshares, Inc., National Penn Bank, and Wayne R. Weidner.* (Incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.21 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank, and Wayne R. Weidner.* (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998.) 10.22 Executive Agreement dated July 23, 1997, among National Penn Bancshares, Inc., National Penn Bank, and Gary L. Rhoads.* (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997.) 10.23 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank, and Gary L. Rhoads.* (Incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998.) 10.24 Executive Agreement dated July 23, 1997, among National Penn Bancshares, Inc., National Penn Bank, and Sandra L. Spayd.* (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997.) 10.25 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank, and Sandra L. Spayd.* (Incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998.) 10.26 Executive Agreement dated September 24, 1997, among National Penn Bancshares, Inc., National Penn Bank, and Garry D. Koch.* (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997.) 65 10.27 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank, and Garry D. Koch.* (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998.) 10.28 Executive Agreement dated as of July 23, 1997, among National Penn Bancshares, Inc., National Penn Bank, and Sharon L. Weaver.* (Incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.) 10.29 Amendatory Agreement dated September 24, 1997, among National Penn Bancshares, Inc., National Penn Bank, and Sharon L. Weaver.* (Incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.) 10.30 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank, and Sharon L. Weaver.* (Incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998.) 10.31 Executive Agreement dated as of January 4, 1999, among National Penn Bancshares, Inc., National Penn Bank, and Glenn E. Moyer.* (Incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.) 10.32 Stock Purchase Agreement dated April 20, 1989, between National Penn Bancshares, Inc. and Pennsylvania State Bank. (Incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.33 Stock Purchase Warrant dated July 3, 1989, issued to National Penn Investment Company by Pennsylvania State Bank. (Incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.34 Rights Agreement dated August 23, 1989, between National Penn Bancshares, Inc. and National Bank of Boyertown, as Rights Agent. (Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement No. 33-87654 on Form S-8 as filed on December 22, 1994.) 10.35 Amendment to Rights Agreement dated as of August 21, 1999, between National Penn Bancshares, Inc. and National Bank of Boyertown, as Rights Agent (including as Exhibit "A" thereto, the Rights Agreement dated as of August 23, 1989, between National Penn Bancshares, Inc. and National Bank of Boyertown, as Rights Agent). (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, dated August 21, 1999, as filed on August 26, 1999.) 21 Subsidiaries of the Registrant. 23 Consent of Independent Certified Public Accountants. 27 Financial Data Schedule. 99 Forward-Looking Statements. * Denotes a compensatory plan or arrangement. (b) Reports on Form 8-K. ------------------- The Registrant did not file any Report on Form 8-K during the fourth quarter 1999. 66 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL PENN BANCSHARES, INC. (Registrant) March 22, 2000 By /s/ Lawrence T. Jilk, Jr. ------------------------- Lawrence T. Jilk, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated: Signatures Title /s/ John H. Body Director March 22, 2000 - ------------------------------ John H. Body /s/ J. Ralph Borneman, Jr. Director March 22, 2000 - ------------------------------ J. Ralph Borneman, Jr. /s/ Frederick H. Gaige Director March 22, 2000 - ------------------------------ Frederick H. Gaige /s/ John J. Jacobs Director March 22, 2000 - ------------------------------- John W. Jacobs /s/ Lawrence T. Jilk, Jr. Director, Chairman and Chief March 22, 2000 - ------------------------------ Executive Officer (Principal Lawrence T. Jilk, Jr. Executive Officer) /s/ Patricia L. Langiotti Director March 22, 2000 - ------------------------------ Patricia L. Langiotti /s/ Kenneth A. Longacre Director March 22, 2000 - ------------------------------ Kenneth A. Longacre 67 /s/ Robert E. Rigg Director March 22, 2000 - ------------------------------ Robert E. Rigg /s/ C. Robert Roth Director March 22, 2000 - ------------------------------ C. Robert Roth /s/ Harold C. Wegman, D.D.S. Director March 22, 2000 - ------------------------------ Harold C. Wegman, D.D.S. /s/ Wayne R. Weidner Director and March 22, 2000 - ------------------------------ President Wayne R. Weidner /s/ Gary L. Rhoads Treasurer (Principal Financial March 22, 2000 - ------------------------------ and Accounting Officer) Gary L. Rhoads 68 EX-2.2 2 AGREEMENT THIS AGREEMENT, dated February 14, 2000 ("Agreement"), is made between NATIONAL PENN BANCSHARES, INC., a Pennsylvania corporation ("NPB"), and PANASIA BANK, a New Jersey state bank ("Panasia"). BACKGROUND 1. NPB has formed NPB New Jersey, Inc., a New Jersey corporation ("NPB/NJ"), and organized it as a wholly-owned subsidiary of NPB. 2. NPB and Panasia desire for NPB/NJ to acquire Panasia as a wholly-owned subsidiary of NPB/NJ, in accordance with the applicable laws of the State of New Jersey and a Plan of Acquisition being executed concurrently by NPB/NJ and Panasia (the "Plan") in the form attached hereto as Exhibit 1 (the "Acquisition"). 3. As a condition and inducement to NPB to enter into this Agreement, the directors and certain officers of Panasia are concurrently executing a Letter Agreement in the form attached hereto as Exhibit 2. 4. Also as a condition and inducement to NPB to enter into this Agreement, Panasia is concurrently granting to NPB an option to acquire up to 24.9% of Panasia's common stock (the "Panasia/NPB Option") pursuant to a Stock Option Agreement which is concurrently being executed between Panasia and NPB, in the form attached hereto as Exhibit 3. 5. NPB and Panasia desire to provide the terms and conditions governing the transactions contemplated herein. AGREEMENT NOW THEREFORE, in consideration of the premises and of the mutual covenants, agreements, representations and warranties herein contained, the parties, intending to be legally bound hereby, agree as follows: ARTICLE I GENERAL 1.01 Definitions. As used in this Agreement, the following terms shall have the indicated meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): Acquisition means the acquisition by NPB/NJ of Panasia as a wholly-owned subsidiary of NPB/NJ, contemplated by this Agreement. Affiliate means, with respect to any corporation, any person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such corporation and, without limiting the generality of the foregoing, includes any executive officer, director or 10% equity owner of such corporation. Agreement means this Agreement, including any amendment or supplement hereto. Applications means the applications for regulatory approval which are required by the transactions contemplated hereby. Closing Date means the date agreed to by the parties as soon as practicable after the last condition precedent provided in this Agreement (other than those conditions which are to be fulfilled at the Closing) has been fulfilled or waived. CRA means the Community Reinvestment Act of 1977, as amended, and the rules and regulations promulgated from time to time thereunder. Dissenting Panasia Shares has the meaning given to that term in the Plan. Effective Date means the date upon which the Plan shall be filed in the NJDBI in accordance with the applicable laws of the State of New Jersey, and shall be the same as the Closing Date or as soon thereafter as is practicable. Environmental Law means any federal, state or local law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any Regulatory Authority relating to (a) the protection, preservation or restoration of the environment, including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other natural resource, and/or (b) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, whether by type or by quantity, including any material containing any such substance as a component. ERISA means the Employee Retirement Income Security Act of 1974, as amended. 2 Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated from time to time thereunder. FDIC means the Federal Deposit Insurance Corporation. FRB means the Federal Reserve Board. IRC means the Internal Revenue Code of 1986, as amended. IRS means the Internal Revenue Service. Knowledge of Panasia means the actual knowledge of Panasia's officers and directors. Knowledge of NPB means the actual knowledge of NPB's officers and directors. Material Adverse Effect means a material adverse effect on (a) the business, financial condition or results of operations of Panasia (when such term is used in Article 2 hereof) or NPB on a consolidated basis (when such term is used in Article 3 hereof) other than, in each case, any change, circumstance or effect relating to (1) the economy or financial markets in general, or (2) the banking industry and not specifically related to Panasia or NPB, or (b) the ability of such party to consummate the transactions contemplated by this Agreement. NAB Division has the meaning given to that term in Section 4.07(c)(6)(i) of this Agreement. NASD means the National Association of Securities Dealers, Inc. NJDBI means the Department of Banking and Insurance of the State of New Jersey. NP Bank means National Penn Bank, a national banking association, all the outstanding capital stock of which is owned by NPB. NPB means National Penn Bancshares, Inc., a Pennsylvania corporation. NPB Common Stock means the shares of common stock, without par value, of NPB. NPB Financials means (a) the audited consolidated financial statements of NPB as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, and (b) the unaudited interim consolidated financial statements of NPB for each 3 calendar quarter after December 31, 1998, including the quarter ending September 30, 1999. NPB/NJ means NPB New Jersey, Inc., a New Jersey corporation, all the outstanding capital stock of which is owned by NPB. OCC means the Office of the Comptroller of the Currency. Panasia means Panasia Bank, a New Jersey state bank. Panasia Benefit Plans has the meaning given to that term in Section 2.12 of this Agreement. Panasia Common Stock has the meaning given to that term in Section 2.02(a) of this Agreement. Panasia Disclosure Schedule means, collectively, the disclosure schedules delivered by Panasia to NPB at or prior to the execution and delivery of this Agreement. Panasia Financials means (a) the audited financial statements of Panasia as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, and (b) the unaudited interim financial statements of Panasia for each calendar quarter after December 31, 1998, including the quarter ending September 30, 1999. Panasia Proxy Statement means the proxy statement, together with any supplements thereto, to be sent to holders of Panasia Common Stock in connection with the transactions contemplated by this Agreement. Panasia Stock Option Plans means the stock option plans maintained by Panasia immediately prior to the Effective Date. Panasia Stock Option has the meaning given to that term in Section 1.02(b)(4) of this Agreement. Panasia Stockholders Meeting means the meeting of the holders of Panasia Common Stock concerning the Acquisition pursuant to the Panasia Proxy Statement. Panasia/NYM Board has the meaning given to that term in Section 4.07(c)(6)(ii) of this Agreement. Panasia/NPB Option means the option granted to NPB to acquire certain shares of Panasia Common Stock referred to in the Background of this Agreement. Panasia/Phila. Board has the meaning given to that term in Section 4.07(c)(6)(ii) of this Agreement. 4 Plan has the meaning given to that term in the Background of this Agreement. The Plan constitutes a "plan of acquisition" within the meaning of N.J. Stat.ss.17:9A-357. Regulatory Agreement has the meaning given to that term in Sections 2.11 and 3.08 of this Agreement. Regulatory Authority means any agency or department of any federal, state or local government or of any self-regulatory organization, including without limitation the SEC, the FDIC, the FRB, the OCC, the NASD, the NJDBI, and the respective staffs thereof. Rights means warrants, options, rights, convertible securities and other capital stock equivalents which obligate an entity to issue its securities. SEC means the Securities and Exchange Commission. Subsidiary means any corporation, 50% or more of the capital stock of which is owned, either directly or indirectly, by another entity, except any corporation the stock of which is held in the ordinary course of the lending activities of a bank. 1.02 The Acquisition. (a) Closing. The closing of the transactions contemplated by this Agreement (the "Closing") will take place on the Closing Date in Boyertown, Pennsylvania, at a time to be agreed upon by NPB and Panasia; provided, in any case, that all conditions to closing set forth in Article V of this Agreement (other than the delivery of certificates, instruments and documents to be delivered at the Closing) have been satisfied or waived at or prior to the Closing Date. (b) The Acquisition. Subject to the terms and conditions of this Agreement and in accordance with the applicable laws of the State of New Jersey and this Agreement and the Plan: (1) Filing of Plan. On or before the Effective Date, NPB and Panasia shall cause the Plan, after approval by the stockholders of Panasia in accordance with the applicable laws of the State of New Jersey, and accompanied by certification of the President of Panasia of such stockholder approval, to be filed in the NJDBI on the Closing Date. (2) Issuance of Panasia Common Stock. On the Effective Date, Panasia shall issue to NPB/NJ 1,000 shares of Panasia Common Stock and become a wholly-owned subsidiary of NPB/NJ. (3) Conversion of Panasia Common Stock. On the Effective Date, except for shares issuable to NPB/NJ and for 5 Dissenting Panasia Shares and treasury stock which shall be governed by the provisions of the Plan with respect thereto, each share of Panasia Common Stock issued and outstanding immediately prior to the Effective Date shall, by reason of the Acquisition and without any action on the part of the holder thereof, cease to be outstanding and be converted into the right to receive Twenty-Nine Dollars ($29.00) in cash. (4) Conversion of Panasia Stock Options. On the Effective Date, each option to purchase one or more shares of Panasia Common Stock issued by Panasia and outstanding on the Effective Date, whether or not such option is exercisable on the Effective Date (each a "Panasia Stock Option"), shall, by reason of the Acquisition and without any action on the part of the holder thereof, cease to be outstanding and be converted into the right to receive in cash an amount equal to the difference between Twenty- Nine Dollars ($29.00) and the per share exercise price of the Panasia Stock Option multiplied by the number of shares of Panasia Common Stock covered by that option. (5) Payment Procedures. As soon as practicable after the Effective Date, NPB shall cause a duly appointed agent ("Agent") to make payment of the cash consideration provided for in this Agreement and the Plan to each person entitled thereto, upon surrender to the Agent of the certificates which immediately prior to the Effective Date represented outstanding shares of Panasia Common Stock held by such person, together with a duly executed letter of transmittal (which the Agent shall mail as soon as practicable after the Effective Date to each holder of record of any such certificate). Neither NPB nor NPB/NJ shall be obligated to deliver or cause to be delivered the consideration to which any person would otherwise be entitled under this Agreement and the Plan until such person surrenders for exchange, as provided in the Plan, the certificates which immediately prior to the Effective Date represented outstanding shares of Panasia Common Stock held by such person or, in lieu thereof, delivers to the Agent such affidavit of loss, indemnity agreement and/or bond as may be reasonably required in each case by NPB. Until surrendered as contemplated herein and in the Plan, each certificate which immediately prior to the Effective Date represented any shares of Panasia Common Stock shall, at and after the Effective Date, represent only the right to receive, upon such surrender, the cash consideration provided for herein and in the Plan. In no event shall the holder of any shares of Panasia Common Stock be entitled to receive interest on any of the funds to be received pursuant to the Acquisition. (c) Incorporation of Plan. The Plan is hereby incorporated by reference into this Agreement as though such Plan were set forth in full herein. 6 ARTICLE II REPRESENTATIONS AND WARRANTIES OF Panasia Panasia hereby represents and warrants to NPB as follows: 2.01 Organization. (a) Panasia is a bank duly organized and validly existing under the laws of the State of New Jersey. Panasia has the corporate power to carry on its business and operations as now being conducted and to own and operate the properties and assets now owned and being operated by it. Panasia is duly licensed, registered or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing, registration or qualification necessary, except where the failure to be so licensed, registered or qualified will not have a Material Adverse Effect, and all such licenses, registrations and qualifications are in full force and effect in all material respects. (b) Panasia is a commercial bank the deposits of which are insured by the Bank Insurance Fund of the FDIC to the extent provided in the Federal Deposit Insurance Act. (c) Except as described on Panasia Disclosure Schedule 2.01(c), Panasia has no Subsidiaries. Such Subsidiaries are only engaged in the businesses described on Panasia Disclosure Schedule 2.01(c), which businesses are collectively immaterial to Panasia. (d) The minute book of Panasia accurately records, in all material respects, all material corporate actions of its stockholders and board of directors, including committees, in each case in accordance with normal business practice of Panasia. (e) Panasia has delivered to NPB true and correct copies of the certificate of incorporation and bylaws of Panasia, each as in effect on the date hereof. 2.02 Capitalization. (a) The authorized capital stock of Panasia consists of 1,000,000 shares of common stock, par value $5 per share ("Panasia Common Stock"), of which at the date hereof 664,783 shares are validly issued and outstanding, fully paid and nonassessable and free of pre-emptive rights, and 43,376 shares are held as treasury stock. Panasia has not issued nor is Panasia bound by any subscription, option, warrant, call, commitment, agreement or other Right of any character relating to the purchase, sale, or issuance of, or right to receive dividends or other distributions on, any shares of Panasia Common Stock or any other security of Panasia or 7 any securities representing the right to vote, purchase or otherwise receive any shares of Panasia Common Stock or any other security of Panasia, except for (1) Panasia Stock Options for 39,000 shares of Panasia Common Stock issued and outstanding under the Panasia Stock Option Plans, (2) the Panasia/NPB Option, and (3) this Agreement and the Plan. (b) Panasia owns all of the capital stock of the Panasia Subsidiaries, free and clear of any lien or encumbrance. Except for Panasia's Subsidiaries, Panasia does not possess, directly or indirectly, any material equity interest in any corporation, except for equity interests in Panasia's investment portfolio, equity interests held by Panasia in a fiduciary capacity, and equity interests held in connection with Panasia's commercial loan activities. 2.03 Authority; No Violation. (a) Panasia has full corporate power and authority to execute and deliver this Agreement and the Plan and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the Plan by Panasia and the consummation by Panasia of the Acquisition have been duly and validly approved by the Board of Directors of Panasia and, except for approval by the stockholders of Panasia as required by the applicable laws of the State of New Jersey, no other corporate proceedings on the part of Panasia are necessary to consummate the Acquisition. This Agreement and the Plan have been duly and validly executed and delivered by Panasia and, subject to approval by the stockholders of Panasia and subject to the required approvals of Regulatory Authorities described in Section 3.03 hereof, constitute the valid and binding obligations of Panasia, enforceable against Panasia in accordance with their respective terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity. (b) (1) Except as described on Panasia Disclosure Schedule 2.03(b), the execution and delivery of this Agreement and the Plan by Panasia, (2) subject to receipt of approvals from the Panasia stockholders and the Regulatory Authorities referred to in Section 3.03 hereof and Panasia's, NPB/NJ's and NPB's compliance with any conditions contained therein, the consummation of the Acquisition, and (3) compliance by Panasia with any of the terms or provisions hereof, do not and will not: (i) conflict with or result in a breach of any provision of the certificate of incorporation or bylaws of Panasia; (ii) violate any statute, rule, regulation, judgment, order, writ, decree or injunction applicable to Panasia or any of its properties or assets; or (iii) violate, conflict with, result in a breach of any provisions of, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of, or 8 acceleration of, the performance required by, or result in a right of termination or acceleration or the creation of any lien, security interest, charge or other encumbrance upon any of the properties or assets of Panasia under, any of the terms or conditions of any note, bond, mortgage, indenture, license, lease, agreement, commitment or other instrument or obligation to which Panasia is a party, or by which it or any of its properties or assets may be bound or affected, excluding from clauses (ii) and (iii) hereof, any items which, in the aggregate, would not have a Material Adverse Effect. 2.04 Consents. Except as described on Panasia Disclosure Schedule 2.04, no consents or approvals of, or filings or registrations with, any public body or authority are necessary, and no consents or approvals of any third parties are necessary, in connection with the execution and delivery of this Agreement or the Plan by Panasia or, subject to the consents, approvals, filings and registrations from or with the Regulatory Authorities referred to in Section 3.03 hereof and compliance with any conditions contained therein and subject to the approval of this Agreement and the Plan by the stockholders of Panasia, the consummation by Panasia of the Acquisition. 2.05 Financial Statements. (a) Panasia has delivered to NPB the Panasia Financials, except those pertaining to quarterly periods commencing after September 30, 1999, which it will deliver to NPB within 45 days after the end of the respective quarter. The delivered Panasia Financials fairly present, in all material respects, the financial position, results of operations and cash flows of Panasia as of and for the periods ended on the dates thereof, in accordance with FFIEC Call Report Instructions, except in each case as noted therein and, in the case of interim period financial statements, subject to normal year-end adjustments and footnotes thereto. (b) To the Knowledge of Panasia, Panasia did not have any liabilities or obligations of any nature, whether absolute, accrued, contingent or otherwise, which are not fully reflected or reserved against in the balance sheets included in the Panasia Financials at the date of such balance sheets which would have been required to be reflected therein in accordance with generally accepted accounting principles consistently applied or disclosed in a footnote thereto, except for liabilities and obligations which were incurred in the ordinary course of business consistent with past practice, and except for liabilities and obligations which are within the subject matter of a specific representation and warranty herein or which otherwise have not had a Material Adverse Effect. 2.06 No Material Adverse Change. Panasia has not suffered any adverse change in its assets, business, financial condition or results of operations since September 30, 1999, which change has 9 had a Material Adverse Effect, it being understood that the expenses incurred by Panasia in connection with this Agreement and the Acquisition, including, without limitation, the engagement of legal and financial advisors, shall not constitute a Material Adverse Effect. 2.07 Taxes. (a) Panasia has filed, and will file, in correct form all federal, state and local tax returns required to be filed by or with respect to Panasia on or prior to the Closing Date except to the extent that any failure to file or any inaccuracies would not, individually or in the aggregate, have a Material Adverse Effect, and has paid or will pay, or made or will make, provisions for the payment of all federal, state and local taxes which are shown on such returns to be due for the periods covered thereby from Panasia to any applicable taxing authority, on or prior to the Closing Date other than taxes which (1) are not delinquent or are being contested in good faith, (2) have not been finally determined, or (3) the failure to pay would not, individually or in the aggregate, have a Material Adverse Effect. (b) To the Knowledge of Panasia, there are no material disputes pending, or claims asserted in writing, for taxes or assessments upon Panasia, nor has Panasia been requested in writing to give any currently effective waivers extending the statutory period of limitation applicable to any federal, state, county or local income tax return for any period. (c) Proper and accurate amounts have been withheld by Panasia from its employees for all prior periods in compliance in all material respects with the tax withholding provisions of applicable federal, state and local laws, except where failure to do so is not reasonably likely to have a Material Adverse Effect. 2.08 Contracts. (a) Except as described on Panasia Disclosure Schedule 2.08(a) or 2.12, Panasia is not a party to or subject to: (1) any employment, consulting, severance, "change-in-control" or termination contract or arrangement with any officer, director, employee, independent contractor, agent or other person, except for "at will" arrangements; (2) any plan, arrangement or contract providing for bonuses, pensions, options, deferred compensation, retirement payments, profit sharing or similar arrangements for or with any officer, director, employee, independent contractor, agent or other person; (3) any collective bargaining agreement with any labor union relating to employees of Panasia; (4) except in the ordinary course of business, any material instrument evidencing or related to indebtedness for borrowed money, whether directly or indirectly, by way of purchase money obligation, conditional sale, lease purchase, guaranty or otherwise, in respect of which Panasia 10 is an obligor to any person, or which contains financial covenants or other restrictions, other than those relating to the payment of principal and interest when due, which would be applicable on or after the Closing Date; (5) any contract, other than this Agreement, which restricts or prohibits Panasia from engaging in any type of business permissible under applicable law; or (6) except in the ordinary course of business, any lease for real property. (b) All the contracts, plans, arrangements and instruments listed on Panasia Disclosure Schedule 2.08(a) are in full force and effect on the date hereof, and neither Panasia nor, to the Knowledge of Panasia, any other party to any such contract, plan, arrangement or instrument, has breached any provision of, or is in default under any term of, any such contract, plan, arrangement or instrument the breach of which or default under which will have a Material Adverse Effect, and no party to any such contract, plan, arrangement or instrument will have the right to terminate any or all of the provisions thereof as a result of the transactions contemplated by this Agreement, the termination of which will have a Material Adverse Effect. Except as otherwise described on Panasia Disclosure Schedule 2.08(a) or 2.12, no plan, employment agreement, termination agreement or similar agreement or arrangement to which Panasia is a party or under which Panasia may be bound (1) contains provisions which permit an employee or an independent contractor to terminate it without cause and continue to accrue future benefits thereunder; (2) provides for acceleration in the vesting of benefits thereunder upon the occurrence of a change in ownership or control or merger or other acquisition of Panasia; or (3) requires Panasia to provide a benefit in the form of Panasia Common Stock or determined by reference to the value of Panasia Common Stock. 2.09 Ownership of Property; Insurance Coverage. (a) Panasia has, and will have as to property acquired after the date hereof, good, and as to real property, marketable, title to all material assets and properties owned by Panasia, whether real or personal, tangible or intangible, including securities, assets and properties reflected in the balance sheets contained in the Panasia Financials or acquired subsequent thereto (except to the extent that such securities are held in any fiduciary or agency capacity and except to the extent that such assets and properties have been disposed of for fair value, in the ordinary course of business, or have been disposed of as obsolete since the date of such balance sheets), subject to no encumbrances, liens, mortgages, security interests or pledges, except (1) statutory liens for amounts not yet delinquent or which are being contested in good faith, (2) liens for current taxes not yet due and payable, (3) such imperfections of title, easements and encumbrances, if any, as are not material in character, amount or extent, and (4) dispositions and encumbrances, liens, mortgages and security 11 interests for adequate consideration in the ordinary course of business. Panasia has the right under leases of material properties used by Panasia in the conduct of its business to occupy and use all such properties in all material respects as presently occupied and used by it. (b) With respect to all agreements pursuant to which Panasia has purchased securities subject to an agreement to resell, if any, Panasia has a valid, perfected first lien or security interest in the securities or other collateral securing the repurchase agreement, and the value of such collateral equals or exceeds the amount of the debt secured thereby, except to the extent that any failure to obtain such a lien or maintain such collateral would not, individually or in the aggregate, have a Material Adverse Effect. (c) Panasia currently maintains insurance in amounts considered by Panasia to be reasonable for its operations, and such insurance is similar in scope and coverage in all material respects to that maintained by other businesses similarly situated. Panasia has not received notice from any insurance carrier that (1) such insurance will be cancelled or that coverage thereunder will be reduced or eliminated, or (2) premium costs with respect to such insurance will be substantially increased except to the extent such cancellation, reduction, elimination or increase would not have a Material Adverse Effect. (d) Panasia currently maintains such fidelity bonds and errors and omissions insurance as may be customary or required under applicable laws or regulations. 2.10 Legal Proceedings. Except as described on Panasia Disclosure Schedule 2.10, Panasia is not a party to any, and there are no pending or, to the Knowledge of Panasia, threatened, legal, administrative, arbitration or other proceedings, claims, actions, customer complaints, or governmental investigations or inquiries of any nature (1) against Panasia, (2) to which the assets of Panasia are subject, (3) challenging the validity or propriety of any of the transactions contemplated by this Agreement, or (4) which could materially adversely affect the ability of Panasia to perform its obligations under this Agreement, except for any proceedings, claims, actions, investigations, or inquiries referred to in clauses (1) or (2) which, individually or in the aggregate, will not have a Material Adverse Effect. 2.11 Compliance with Applicable Law. (a) Panasia holds all licenses, franchises, permits and authorizations necessary for the lawful conduct of its businesses under, and has complied in all material respects with, applicable laws, statutes, orders, rules or regulations of any Regulatory Authority relating to it, other than where such failure to hold or 12 such noncompliance will neither result in a limitation in any material respect on the conduct of its businesses nor otherwise have a Material Adverse Effect. (b) Panasia has filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that it was required to file with any Regulatory Authority, and has filed all other reports and statements required to be filed by it, including without limitation any report or statement required to be filed pursuant to the laws, rules or regulations of the United States, any state or any Regulatory Authority, and has paid all fees and assessments due and payable in connection therewith, except where the failure to file such report, registration or statement or to pay such fees and assessments, either individually or in the aggregate, will not have a Material Adverse Effect. (c) No Regulatory Authority has initiated any proceeding or, to the Knowledge of Panasia, investigation into the business or operations of Panasia, except where any such proceedings or investigations will not, individually or in the aggregate, have a Material Adverse Effect, or such proceedings or investigations have been terminated or otherwise resolved. (d) Panasia has not received any notification or communication from any Regulatory Authority (1) asserting that Panasia has not complied with any of the statutes, regulations or ordinances which such Regulatory Authority enforces, unless such assertion has been waived, withdrawn or otherwise resolved; (2) threatening to revoke any license, franchise, permit or governmental authorization which is material to Panasia; (3) requiring or threatening to require Panasia, or indicating that Panasia may be required, to enter into a cease and desist order, agreement or memorandum of understanding or any other agreement restricting or limiting, or purporting to restrict or limit, in any manner the operations of Panasia; or (4) directing, restricting or limiting, or purporting to direct, restrict or limit, in any manner the operations of Panasia (any such notice, communication, memorandum, agreement or order described in this sentence herein referred to as a "Regulatory Agreement"), in each case except as would not have a Material Adverse Effect. Panasia has not received, consented to, or entered into any Regulatory Agreement which would have, individually or in the aggregate, a Material Adverse Effect. (e) To the Knowledge of Panasia, there is no unresolved violation, criticism, or exception by any Regulatory Authority with respect to any Regulatory Agreement which if resolved in a manner adverse to Panasia would have a Material Adverse Effect. 13 (f) There is no injunction, order, judgment or decree imposed upon Panasia or the assets of Panasia which has had, or, to the Knowledge of Panasia, will have, a Material Adverse Effect. 2.12 ERISA. (a) Panasia has delivered to NPB true and complete copies of any employee pension benefit plans within the meaning of ERISA Section 3(2), profit sharing plans, stock purchase plans, deferred compensation and supplemental income plans, supplemental executive retirement plans, annual incentive plans, group insurance plans, and all other employee welfare benefit plans within the meaning of ERISA Section 3(1) (including vacation pay, sick leave, short-term disability, long-term disability, and medical plans) and all other material employee benefit plans, policies, agreements and arrangements, all of which are set forth on Panasia Disclosure Schedule 2.12, currently maintained or contributed to for the benefit of the employees or former employees (including retired employees) and any beneficiaries thereof or directors or former directors of Panasia (the "Panasia Benefit Plans"), together with (1) the most recent actuarial (if any) and financial reports relating to those Panasia Benefit Plans which constitute "qualified plans" under IRC Section 401(a), (2) the most recent Form 5500 (if any) relating to such Panasia Benefit Plans filed by them, respectively, with the IRS, and (3) the most recent IRS determination letter which pertain to any such Panasia Benefit Plans. Neither Panasia nor any pension plan (within the meaning of ERISA Section 3(2)) maintained by Panasia has incurred any liability to the Pension Benefit Guaranty Corporation or to the IRS with respect to any pension plan qualified under IRC Section 401(a), except liabilities to the Pension Benefit Guaranty Corporation pursuant to ERISA Section 4007, all of which have been fully paid, nor has any reportable event under ERISA Section 4043(b) (with respect to which the 30 day notice requirement has not been waived) occurred with respect to any such pension plan. Panasia has not incurred any liability under ERISA Section 4201 for a complete or partial withdrawal from a multi-employer plan. Each Panasia Benefit Plan has been maintained, operated and administered in compliance in all respects with its terms and related documents or agreements and the applicable provisions of all laws, including ERISA and the IRC, except where any such non-compliance would not have a Material Adverse Effect. As of the date hereof, Panasia is not aware of any existing or contemplated audit of its employee benefit plans by the IRS or the U.S. Department of Labor. (b) With respect to any services which Panasia may provide as a sponsor, fiduciary, trustee or otherwise for any plan, program, or assignment subject to ERISA (other than any Panasia Benefit Plan), Panasia (1) has correctly computed all contributions, payments or other amounts for which it is responsible, (2) has not engaged in any prohibited transactions (as defined in ERISA Section 406 for which an exemption does not exist), and (3) has not 14 incurred any liability to any beneficiary or sponsor of any ERISA plan as a result of any negligence in the performance of its duties except where any such action or inaction would not have a Material Adverse Effect. 2.13 Brokers, Finders and Financial Advisors. Except as described on Panasia Disclosure Schedule 2.13, neither Panasia nor any of its officers, directors, employees, independent contractors or agents, has employed any broker, finder, investment banker or financial advisor, or incurred any liability for any fees or commissions to any such person, in connection with the transactions contemplated by this Agreement. Panasia Disclosure Schedule 2.13 includes a copy of Panasia's engagement letter with its financial advisor. Panasia has received an oral opinion from its financial advisor to the effect that, as of the date hereof, the consideration to be received by Panasia stockholders is fair, from a financial point of view, to such stockholders. 2.14 Environmental Matters. (a) To the Knowledge of Panasia, neither Panasia nor any property owned or operated by Panasia has been or is in violation of or liable under any Environmental Law, except for such violations or liabilities that, individually or in the aggregate, would not have a Material Adverse Effect. There are no actions, suits or proceedings, or demands, claims or written notices, including without limitation written notices, demand letters or written requests for information from any Regulatory Authority, instituted or pending, or to the Knowledge of Panasia, threatened, or any investigation pending, relating to the liability of Panasia with respect to any property owned or operated by Panasia under any Environmental Law, except as to any such actions or other matters which will not result in a Material Adverse Effect. (b) Except as set forth on Panasia Disclosure Schedule 2.14, to the Knowledge of Panasia, no property, now or formerly owned or operated by Panasia or on which Panasia holds or held a mortgage or other security interest or has foreclosed or taken a deed in lieu, has been listed or proposed for listing on the National Priority List under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, on the Comprehensive Environmental Response Compensation and Liabilities Information System, or any similar state list, or which is the subject of federal, state or local enforcement actions or other investigations which may lead to claims against Panasia for response costs, remedial work, investigation, damage to natural resources or for personal injury or property damage claim, including, but not limited to, claims under CERCLA, any of which would have a Material Adverse Effect. 2.15 Business of Panasia. Since September 30, 1999, Panasia has not, in any material respect, (a) increased the wages, 15 salaries, compensation, pension or other employee benefits payable to any executive officer, employee or director except as is permitted in Section 4.01(d), (b) eliminated employee benefits, (c) deferred routine maintenance of real property or leased premises, (d) eliminated a reserve where the liability related to such reserve has remained, (e) failed to depreciate capital assets in accordance with past practice or to eliminate capital assets which are no longer used in the businesses of Panasia, or (f) had extraordinary reduction or deferral of ordinary or necessary expenses. 2.16 CRA Compliance. Panasia is in material compliance with the applicable provisions of the CRA and, as of the date hereof, Panasia has received a CRA rating of "satisfactory" or better from the FDIC. To the Knowledge of Panasia, there is no fact or circumstance or set of facts or circumstances which would cause Panasia to fail to comply with such provisions in a manner which would have a Material Adverse Effect. 2.17 Allowance for Loan Losses. The allowance for loan losses shown, and to be shown, on the balance sheets contained in the Panasia Financials have been, and will be, established in accordance with generally accepted accounting principles and all applicable regulatory criteria. 2.18 Information to be Supplied. The information supplied by Panasia for inclusion in the Panasia Proxy Statement will not, as of the date the Panasia Proxy Statement is mailed to stockholders of Panasia and up to and including the date of the Panasia Stockholders Meeting, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances in which they were made, not misleading. The information supplied by Panasia for inclusion in the Applications will, at the time such documents are filed with any Regulatory Authority and up to and including the dates of any required regulatory approvals or consents, as it may be amended by subsequent filings, be accurate in all material respects. 2.19 Related Party Transactions. Except as disclosed on Panasia Disclosure Schedule 2.19, or as is disclosed in the footnotes to the Panasia Financials, as of the date hereof, Panasia is not a party to any transaction (including any loan or other credit accommodation but excluding deposits in the ordinary course of business) with any Affiliate of Panasia; and all such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons (as defined in Section 13(d) of the Exchange Act, and the rules and regulations thereunder), except with respect to variations in such terms as would not, individually or in the aggregate, have a Material Adverse Effect. Except as set forth on Panasia Disclosure Schedule 16 2.19, as of the date hereof, no loan or credit accommodation to any Affiliate of Panasia is presently in default or, during the three- year period prior to the date of this Agreement, has been in material default or has been restructured, modified or extended in any manner which would have a Material Adverse Effect. To the Knowledge of Panasia, as of the date hereof, principal and interest with respect to any such loan or other credit accommodation will be paid when due and the loan grade classification accorded such loan or credit accommodation is appropriate. 2.20 Loans. Each loan reflected as an asset in the Panasia Financials (a) is evidenced by notes, agreements or other evidences of indebtedness which are true, genuine and correct, and (b) to the extent secured, has been secured by valid liens and security interests which have been perfected, in each case other than loans as to which the failure to satisfy the foregoing standards would not have a Material Adverse Effect. 2.21 Year 2000 Compliance. Panasia is in compliance in all material respects with the Year 2000 compliance guidelines established by the FDIC and the safety and soundness and other guidelines for Year 2000 business risk issued from time to time by the Federal Financial Institutions Examination Council. Panasia has received a rating of "satisfactory" or better from the FDIC in its most recent Year 2000 examination. To the Knowledge of Panasia, there is no fact or circumstance or set of facts or circumstances which would cause Panasia to fail to comply with such provisions in a manner which would have a Material Adverse Effect. All software, hardware, embedded microchips and other processing capabilities utilized by and material to the operations of Panasia are able to interpret, process, manage and manipulate data involving all calendar dates correctly, including single century formulas and multi-century formulas, all leap years, and all dates on or after January 1, 2000, including February 29, 2000. Panasia's computer systems function correctly for purposes of date and time calculations. 2.22 Quality of Representations. No representation made by Panasia in this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances in which they were made, not misleading in any material respect. 17 ARTICLE III REPRESENTATIONS AND WARRANTIES OF NPB NPB hereby represents and warrants to Panasia as follows: 3.01 Organization. (a) NPB is a corporation duly incorporated, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. NPB is a bank holding company duly registered under the Bank Holding Company Act of 1956, as amended. NPB has the corporate power to carry on its businesses and operations as now being conducted and to own and operate the properties and assets now owned and being operated by it. NPB is duly licensed, registered or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing, registration or qualification necessary, except where the failure to be so licensed, registered or qualified will not have a Material Adverse Effect, and all such licenses, registrations and qualifications are in full force and effect in all material respects. (b) NPB/NJ is a corporation duly incorporated, validly existing and in good standing under the laws of the State of New Jersey. 3.02 Authority; No Violation. (a) NPB has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. NPB/NJ has full corporate power and authority to execute and deliver the Plan and to consummate the Acquisition. The execution and delivery of this Agreement by NPB and the consummation by NPB of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of NPB, and no other corporate proceedings on the part of NPB are necessary to consummate the transactions contemplated hereby. The execution and delivery of the Plan by NPB/NJ and the consummation by NPB/NJ of the Acquisition have been duly and validly approved by the Board of Directors of NPB/NJ, and no other corporate proceedings on the part of NPB/NJ are necessary to consummate the transactions contemplated by this Agreement. This Agreement has been duly and validly executed and delivered by NPB and, subject to receipt of the required approvals of Regulatory Authorities described in Section 3.03 hereof, constitutes the valid and binding obligation of NPB, enforceable against NPB in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity. The Plan, upon its execution and delivery by NPB/NJ concurrently with the 18 execution and delivery of this Agreement, will, subject to receipt of the required approvals of Regulatory Authorities described in Section 3.03 hereof, constitute the valid and binding obligation of NPB/NJ, enforceable against NPB/NJ in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity. (b) (1) The execution and delivery of this Agreement by NPB, (2) the execution and delivery of the Plan by NPB/NJ, (3) subject to receipt of approvals from the Regulatory Authorities referred to in Section 3.03 hereof and NPB's, NPB/NJ's and Panasia's compliance with any conditions contained therein, the consummation of the Acquisition, and (4) compliance by NPB or NPB/NJ with any of the terms or provisions hereof, does not and will not: (i) conflict with or result in a breach of any provision of the respective articles or certificate of incorporation or bylaws of NPB or NPB/NJ; (ii) violate any statute, rule, regulation, judgment, order, writ, decree or injunction applicable to NPB or NPB/NJ or any of their respective properties or assets; or (iii) violate, conflict with, result in a breach of any provisions of, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of, or acceleration of the performance required by, or result in a right of termination or acceleration or the creation of any lien, security interest, charge or other encumbrance upon any of the properties or assets of NPB or NPB/NJ under, any of the terms or conditions of any note, bond, mortgage, indenture, license, lease, agreement, commitment or other instrument or obligation to which NPB or NPB/NJ is a party, or by which they or any of their respective properties or assets may be bound or affected, excluding from clauses (ii) and (iii) any such items which, in the aggregate, would not have a Material Adverse Effect. 3.03 Consents. Except for consents and approvals of, or filings with, the FRB and the NJDBI, no consents or approvals of, or filings or registrations with, any public body or authority are necessary in connection with the execution and delivery of this Agreement by NPB or the Plan by NPB/NJ or the consummation of the Acquisition. To the Knowledge of NPB, there are no facts or circumstances which would prohibit NPB from obtaining the approvals required hereunder. 3.04 Financial Statements. (a) NPB has delivered to Panasia the NPB Financials, except those pertaining to quarterly periods commencing after September 30, 1999, which it will deliver to ENB within 45 days after the end of the respective quarter. The delivered NPB Financials fairly present, in all material respects, the consolidated financial position, results of operations and cash flows of NPB as of and for the periods ended on the dates thereof, in accordance with 19 generally accepted accounting principles consistently applied, except in each case as noted therein and, in the case of interim period financial statements, subject to normal year-end adjustments and footnotes thereto. (b) To the Knowledge of NPB, NPB did not have any liabilities or obligations of any nature, whether absolute, accrued, contingent or otherwise, which are not fully reflected or reserved against in the balance sheets included in the NPB Financials at the date of such balance sheets which would have been required to be reflected therein in accordance with generally accepted accounting principles consistently applied or disclosed in a footnote thereto, except for liabilities and obligations which were incurred in the ordinary course of business consistent with past practice, and except for liabilities and obligations which are within the subject matter of a specific representation and warranty herein or which otherwise have not had a Material Adverse Effect. 3.05 No Material Adverse Change. NPB has not suffered any adverse change in its assets, business, financial condition or results of operations since September 30, 1999, which change has had a Material Adverse Effect. 3.06 Financing. At the Effective Date, NPB will have available, and will provide to NPB/NJ, cash sufficient for NPB/NJ to pay the amounts required to be paid to Panasia stockholders and holders of Panasia Stock Options, pursuant to this Agreement and the Plan, upon consummation of the Acquisition. 3.07 Legal Proceedings. Neither NPB nor any NPB Subsidiary is a party to any, and there are no pending or, to the Knowledge of NPB, threatened, legal, administrative, arbitration or other proceedings, claims, actions, customer complaints, or governmental investigations or inquiries of any nature (a) against NPB or any NPB Subsidiary, (b) to which the assets of NPB or any NPB Subsidiary are subject, (c) challenging the validity or propriety of any of the transactions contemplated by this Agreement, or (d) which could materially adversely affect the ability of NPB to perform its obligations under this Agreement, except for any proceedings, claims, actions, investigations, or inquiries referred to in clauses (a) or (b) which, individually or in the aggregate, will not have a Material Adverse Effect. 3.08 Compliance with Applicable Law. (a) NPB and its Subsidiaries hold all licenses, franchises, permits and authorizations necessary for the lawful conduct of their respective businesses under, and have complied in all material respects with, applicable laws, statutes, orders, rules or regulations of any Regulatory Authority relating to them, other than where such failure to hold or such noncompliance will neither result in a limitation in any material respect on the conduct of 20 their respective businesses nor otherwise have a Material Adverse Effect. (b) NPB and its Subsidiaries have filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that they were required to file with any Regulatory Authority, and have filed all other reports and statements required to be filed by them, including without limitation any report or statement required to be filed pursuant to the laws, rules or regulations of the United States, any state or any Regulatory Authority, and have paid all fees and assessments due and payable in connection therewith, except where the failure to file such report, registration or statement or to pay such fees and assessments, either individually or in the aggregate, will not have a Material Adverse Effect. (c) No Regulatory Authority has initiated any proceeding or, to the Knowledge of NPB, investigation into the businesses or operations of NPB or any of its Subsidiaries, except where any such proceedings or investigations will not, individually or in the aggregate, have a Material Adverse Effect, or such proceedings or investigations have been terminated or otherwise resolved. (d) Neither NPB nor any NPB Subsidiary has received any notification or communication from any Regulatory Authority (1) asserting that NPB or any NPB Subsidiary has not complied with any of the statutes, regulations or ordinances which such Regulatory Authority enforces, unless such assertion has been waived, withdrawn or otherwise resolved; (2) threatening to revoke any license, franchise, permit or governmental authorization which is material to NPB or any NPB Subsidiary; (3) requiring or threatening to require NPB or any NPB Subsidiary or indicating that NPB or any NPB Subsidiary may be required, to enter into a cease and desist order, agreement or memorandum of understanding or any other agreement restricting or limiting, or purporting to restrict or limit, in any manner the operations of NPB or any NPB Subsidiary; or (4) directing, restricting or limiting, or purporting to direct, restrict or limit, in any manner the operations of NPB or any NPB Subsidiary (any such notice, communication, memorandum, agreement or order described in this sentence herein referred to as a "Regulatory Agreement") in each case except as would not have a Material Adverse Effect. Neither NPB nor any NPB Subsidiary has received, consented to, or entered into any Regulatory Agreement which would have, individually or in the aggregate, a Material Adverse Effect. (e) To the Knowledge of NPB, there is no unresolved violation, criticism, or exception by any Regulatory Authority with respect to any Regulatory Agreement which if resolved in a manner adverse to NPB would have a Material Adverse Effect. 21 (f) There is no injunction, order, judgment or decree imposed upon NPB or any NPB Subsidiary or the assets of NPB or any NPB Subsidiary which has had, or, to the Knowledge of NPB, will have, a Material Adverse Effect. 3.09 CRA Compliance. NP Bank is in compliance in all material respects with the applicable provisions of the CRA, and, as of the date hereof, NP Bank has received a CRA rating of "satisfactory" or better from the OCC. To the Knowledge of NPB, there is no fact or circumstance or set of facts or circumstances which would cause NP Bank to fail to comply with such provisions in a manner which would have a Material Adverse Effect. 3.10 Information to be Supplied. The information supplied by NPB for inclusion in the Panasia Proxy Statement will not, as of the date the Panasia Proxy Statement is mailed to stockholders of Panasia and up to and including the date of the Panasia Stockholders Meeting to which such Panasia Proxy Statement relates, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances in which they were made, not misleading. The information supplied by NPB for inclusion in the Applications will, at the time such documents are filed with any Regulatory Authority and up to and including the dates of any required regulatory approvals or consents, as it may be amended by subsequent filings, be accurate in all material respects. 3.11 Year 2000 Compliance. NPB and its Subsidiaries are in compliance in all material respects with the Year 2000 compliance guidelines established by the OCC and the safety and soundness and other guidelines for Year 2000 business risk issued from time to time by the Federal Financial Institutions Examination Council. NP Bank received a rating of "satisfactory" or better from the OCC in its most recent Year 2000 examination. To the Knowledge of NPB, there is no fact or circumstance or set of facts or circumstances which would cause NPB to fail to comply with such provisions in a manner which would have a Material Adverse Effect. All software, hardware, embedded microchips and other processing capabilities utilized by and material to the operations of NPB and its Subsidiaries are able to interpret, process, manage and manipulate data involving all calendar dates correctly, including single century formulas and multi-century formulas, all leap years, and all dates on or after January 1, 2000, including February 29, 2000. NPB's and its Subsidiaries' computer systems function correctly for purposes of date and time calculations. 3.12 Securities Documents. NPB has delivered to Panasia copies of its (a) annual reports on SEC Form 10-K for the years ended December 31, 1998 and 1997, (b) quarterly reports on SEC Form 10-Q for the quarters ended March 31, 1999, June 30, 1999, and September 30, 1999, and all other reports filed with the SEC since January 1, 1999, and (c) proxy materials used in connection with 22 its meetings of shareholders held in 1999 and 1998. Such reports and proxy materials complied, in all material respects, and any future SEC reports, filings, and proxy materials will comply, in all material respects, with the rules and regulations of the SEC to the extent applicable thereto, and all such SEC reports, filings and proxy materials did not and will not, at the times of such filings, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading. 3.13 Quality of Representations. No representation made by NPB in this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances in which they were made, not misleading in any material respect. ARTICLE IV COVENANTS OF THE PARTIES 4.01 Conduct of Panasia's Business. Through the Closing Date, Panasia shall in all material respects conduct its businesses and engage in transactions only in the ordinary course and consistent with past practice, except as otherwise required by this Agreement or with the written consent of NPB. Panasia shall use its reasonable good faith efforts to preserve its business organization intact, maintain good relationships with employees, and preserve the good will of customers of Panasia and others with whom business relationships exist. Through the Closing Date, except as otherwise consented to in writing by NPB (such consent shall not be unreasonably withheld) or as permitted by this Agreement, Panasia shall not: (a) change any provision of its certificate of incorporation or bylaws; (b) change the number of authorized or issued shares of its capital stock, repurchase any shares of capital stock, or issue or grant any option, warrant, call, commitment, subscription, Right or agreement of any character relating to its authorized or issued capital stock or any securities convertible into shares of capital stock, or declare, set aside or pay any dividend or other distribution in respect of capital stock, or redeem or otherwise acquire any shares of Panasia capital stock, except that Panasia may issue up to an aggregate of 39,000 shares of Panasia Common Stock upon the valid exercise of any Panasia Stock Options issued and outstanding on the date hereof; (c) grant any severance or termination pay, other than pursuant to policies or agreements of Panasia in effect on the date 23 hereof, to, or enter into or amend any employment, consulting, severance, "change-in-control" or termination contract or arrangement with, any officer, director, employee, independent contractor, agent or other person associated with Panasia; (d) except for (i) routine periodic pay increases, merit pay increases and pay-raises in connection with promotions, all in accordance with past practice, and (ii) retention bonuses granted to Panasia employees in an aggregate amount not exceeding $35,000 (payment of which shall be conditioned on the recipient remaining a Panasia employee through the Closing Date, and thereafter, through the earlier of the date of conversion of Panasia's operating system to that of NP Bank or the date 90 days after Closing), increase the rate of compensation of, or pay any bonus to, any director, officer, employee, independent contractor, agent or other person associated with Panasia; or grant job promotions other than in accordance with past practice; (e) merge or consolidate Panasia with any other corporation; sell or lease all or any substantial portion of the assets or businesses of Panasia; make any acquisition of all or any substantial portion of the business or assets of any other person, firm, association, corporation or business organization; relocate or surrender its certificate of authority to maintain, or file an application for the relocation of, any existing branch office; or file an application for a certificate of authority to establish a new branch office; (f) sell or otherwise dispose of any material asset of Panasia, other than in the ordinary course of business, consistent with past practice; subject any asset of Panasia to a lien, pledge, security interest or other encumbrance, other than in the ordinary course of business consistent with past practice; modify in any material manner the manner in which Panasia has heretofore conducted its business or enter into any new line of business; incur any indebtedness for borrowed money, except in the ordinary course of business, consistent with past practice; (g) take any action which would result in any of the conditions set forth in Article V hereof not being satisfied; (h) change any method, practice or principle of accounting, except as required by changes in generally accepted accounting principles concurred in by its independent certified public accountants; or change any assumption underlying, or any method of calculation of, depreciation of any type of asset or establishment of any reserve; (i) waive, release, grant or transfer any rights of material value or modify or change in any material respect any existing agreement to which Panasia is a party, other than in the ordinary course of business, consistent with past practice; 24 (j) implement any pension, retirement, profit sharing, bonus, welfare benefit or similar plan or arrangement that was not in effect on the date of this Agreement, or amend any existing plan or arrangement except as required by law; (k) amend or otherwise modify the underwriting and other lending guidelines and policies of Panasia in effect as of the date hereof or otherwise fail to conduct its lending activities in the ordinary course of business consistent with past practice; (l) enter into, renew, extend or modify any other transaction with any Affiliate, other than deposit and loan transactions in the ordinary course of business and which are in compliance with the requirements of applicable laws and regulations, except as to any transaction disclosed on Panasia Disclosure Schedule 2.19; (m) enter into any interest rate swap, floor or cap or similar commitment, agreement or arrangement; (n) take any action that would give rise to a right of payment to any individual under any employment agreement except in the ordinary course of business consistent with past practice; (o) purchase any security for its investment portfolio (1) rated less than "AAA" by either Standard & Poor's Corporation or Moody's Investor Services, Inc., or (2) with a remaining maturity more than five (5) years; (p) make any capital expenditure of $50,000 or more; or undertake or enter into any lease, contract or other commitment for its account, other than in the ordinary course of business, involving an unbudgeted expenditure by Panasia of more than $25,000, or extending beyond twelve (12) months from the date hereof; or (r) agree to do any of the foregoing. 4.02 Access; Confidentiality. (a) Through the Closing Date, Panasia shall afford to NPB, including its authorized agents and representatives, reasonable access to its properties, assets, books and records and personnel, at reasonable hours and after reasonable notice; and the officers of Panasia shall furnish NPB, including its authorized agents and representatives, with such financial and operating data and other information with respect to the businesses, properties, assets, books and records and personnel as NPB, or its authorized agents and representatives, shall from time to time reasonably request. (b) NPB agrees that it, and its authorized agents and representatives, will conduct such investigation and discussions hereunder in a confidential manner and otherwise in a manner so as 25 not to interfere unreasonably with Panasia's normal operations and customer and employee relationships. Panasia shall not be required to provide access to or disclose information where such access or disclosure would violate or prejudice the rights of customers, jeopardize attorney-client privilege or similar privilege with respect to such information or contravene any law, rule, regulation, decree, order, fiduciary duty or agreement entered into prior to the date hereof. (c) All information furnished to NPB by Panasia in connection with the transactions contemplated by this Agreement, whether prior to the date of this Agreement or subsequent hereto, shall be held in confidence to the extent required by, and in accordance with, the confidentiality agreement dated December 27, 1999 between NPB and Panasia (the "Confidentiality Agreement"). 4.03 Regulatory Matters. Through the Closing Date: (a) NPB and Panasia shall cooperate with one another in the preparation of the Panasia Proxy Statement and all Applications and the making of all filings for, and shall use their reasonable best efforts to obtain, as promptly as practicable, all necessary permits, consents, approvals, waivers and authorizations of all Regulatory Authorities necessary or advisable to consummate the transactions contemplated by this Agreement. Each of NPB and Panasia shall give the other reasonable time to review any Application to be filed by it prior to the filing of such Application with the relevant Regulatory Authority, and each shall consult one another with respect to the substance and status of such filings. (b) Panasia and NPB shall each promptly furnish the other with copies of written communications to, or received by them from, any Regulatory Authority in respect of the transactions contemplated hereby. (c) Panasia and NPB shall cooperate with each other in the foregoing matters and shall furnish the other with all information concerning itself as may be necessary or advisable in connection with any Application or filing, including the Panasia Proxy Statement and any report filed with the SEC, made by or on behalf of such party to or with any Regulatory Authority in connection with the transactions contemplated by this Agreement, and in each such case, such information shall be accurate and complete in all material respects. In connection therewith, Panasia and NPB shall use their reasonable good faith efforts to provide each other certificates and other documents reasonably requested by the other. 4.04 Taking of Necessary Actions. Through the Closing Date, in addition to the specific agreements contained herein, each party hereto shall use reasonable best efforts to take, or in the case of NPB, cause to be taken by each of its Subsidiaries, all actions, 26 and to do, or in the case of NPB, cause to be done by each of its Subsidiaries, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement including, if necessary, appealing any adverse ruling in respect of any Application. 4.05 No Solicitation. Panasia shall not, nor shall it authorize or permit any of its officers, directors or employees or any investment banker, financial advisor, attorney, accountant or other representative retained by it to, initiate, solicit, encourage (including by way of furnishing information), or take any other action to facilitate, any inquiries or the making of any proposal which constitutes any Acquisition Proposal (as defined herein), or enter into or maintain or continue discussions or negotiate with any person in furtherance of an Acquisition Proposal, or agree to or endorse any Acquisition Proposal, and Panasia shall (unless it believes such notification would violate the Panasia Board of Directors' fiduciary duties) notify NPB as promptly as practicable, in reasonable detail, as to any inquiries and proposals which it or any of its representatives or agents may receive; provided, however, that, notwithstanding anything to the contrary contained in this Agreement, (1) Panasia may furnish or cause to be furnished confidential and non-public information concerning Panasia and its businesses, properties or assets to a third party, (2) Panasia may engage in discussions or negotiations with a third party, (3) following receipt of an Acquisition Proposal, Panasia may take and disclose to its stockholders a position with respect to such Acquisition Proposal, and/or (4) following receipt of an Acquisition Proposal, the Panasia Board of Directors may withdraw or modify its recommendation of the Acquisition, but in respect of the foregoing clause (4) only to the extent that the Panasia Board of Directors shall conclude in good faith after consultation with its legal counsel and financial advisors, and based upon the written advice of its legal counsel, that failure to do so would result in a breach of their fiduciary duties to Panasia's stockholders. As used herein, the term "Acquisition Proposal" means the public announcement of a bona fide proposal (including a written communication that is or becomes the subject of public disclosure) for: (x) any merger, consolidation or acquisition of all or substantially all the assets or liabilities of Panasia or any other business combination involving Panasia; or (y) a transaction involving the transfer of beneficial ownership of securities representing, or the right to acquire beneficial ownership or to vote securities representing, 10% or more of the then outstanding shares of Panasia Common Stock. 4.06 Update of Panasia Disclosure Schedule. Through the Closing Date, Panasia shall update the Panasia Disclosure Schedule as promptly as practicable after the occurrence of any event which, if such event had occurred prior to the date hereof, would have been disclosed on such schedule. 27 4.07 Other Undertakings by NPB and Panasia. (a) Undertakings of NPB and Panasia. (1) Filings and Approvals. NPB and Panasia shall cooperate with each other in the preparation and filing, as soon as practicable, of (i) the Applications, (ii) the Panasia Proxy Statement, and (iii) all other documents necessary to obtain any other approvals and consents required to effect consummation of the transactions contemplated by this Agreement. (2) Public Announcements. NPB and Panasia shall agree upon the form and substance of any press release related to this Agreement and the transactions contemplated hereby, but nothing contained herein shall prohibit either party, following notification to the other party, from making any disclosure which its counsel deems necessary under applicable law. (b) Undertakings of Panasia. (1) Stockholder Approval. Panasia shall submit this Agreement and the Plan to its stockholders for approval at the Panasia Stockholders Meeting, with the recommendation of Panasia's Board of Directors to such stockholders to approve such agreements. The Panasia Stockholders Meeting may, in Panasia's sole discretion, be held after all consents of any Regulatory Authorities have been obtained. If any such consent has not been obtained prior to the date established in the Panasia Proxy Statement for such meeting, such meeting may be postponed or adjourned at the sole discretion of Panasia. The Panasia Stockholders Meeting shall be held not later than 45 days after all consents of Regulatory Authorities have been received and all other conditions have been satisfied or waived (other than those conditions which are to be fulfilled at the Closing). (2) Phase I Environmental Audit. Panasia shall permit NPB, if NPB elects to do so, at its own cost and expense, to cause a "phase I environmental audit" to be performed at any physical location owned or occupied by Panasia. (3) Delivery of Financial Statements. Panasia shall deliver to NPB, as soon as practicable after the end of each month and after the end of each calendar quarter prior to the Effective Date, commencing with the month ended January 31, 2000, an unaudited balance sheet as of such date and related unaudited statements of income and cash flows for the periods then ended, which financial statements shall fairly present, in all material respects, Panasia's financial condition, results of operations and cash flows for the periods then ended in accordance with generally accepted accounting principles, except as noted therein and subject to year-end audit adjustments and footnotes. 28 (4) Reserves and Acquisition-Related Costs. On or before the Effective Date, establish such additional accruals and reserves as may be necessary to conform Panasia's accounting reserve practices and methods (including credit loss practices and methods) to those of NPB and otherwise to reflect Acquisition- related expenses and costs incurred by Panasia (including professional fees and expenses), in each case on a mutually satisfactory basis and in accordance with generally accepted accounting principles and any applicable regulatory requirements, provided, however, that Panasia shall not be required to take such actions until such time as NPB shall acknowledge in writing that all conditions to NPB's and Panasia's respective obligations to consummate the Acquisition (and NPB's and Panasia's respective rights to terminate this Agreement for any reason) have been waived or satisfied, and that in all circumstances Panasia shall take such actions at such time as shall be mutually agreed to by NPB and Panasia but not later than immediately prior to the time the Acquisition becomes effective. No action taken by Panasia in accordance with this Section 4.07(b)(4) shall constitute or be deemed to be a breach or violation of any representation, warranty, covenant, condition or other provision of this Agreement, and NPB agrees to indemnify Panasia's officers, directors and agents with respect to such adjustments. (5) Maintenance of Insurance. Panasia shall maintain insurance in such amounts as Panasia, as the insured, believes are reasonable to cover such risks as are customary in relation to the character and location of its properties and the nature of its businesses. (6) Maintenance of Books and Records. Panasia shall maintain books of account and records on a basis consistent with past practice. (7) Taxes. Panasia shall file all federal, state, and local tax returns required to be filed by it on or before the date such returns are due, including any extensions, and pay all taxes shown to be due on such returns on or before the dates such payments are due, except those being contested in good faith. (8) Outside Service Bureau Contracts. Subject to any applicable legal requirements, through the Effective Date, Panasia shall (i) cooperate with NPB, in the interest of an orderly, cost- effective consolidation of operations, in the termination of any contract or arrangement Panasia may have with an outside service bureau or other vendor of services, and (ii) substitute a contract or arrangement between NPB or NP Bank (as NPB shall elect) and Panasia for the provision of similar services to Panasia on terms and conditions mutually acceptable to Panasia and NPB. (9) In-House Operations. Subject to any applicable legal requirements, through the Effective Date, Panasia shall (i) 29 cooperate with NPB, in the interest of an orderly, cost-effective consolidation of operations, in the termination of any in-house back office, support, processing or other operational activities of Panasia, and (ii) substitute a contract or arrangement between NPB or NP Bank (as NPB shall select) and Panasia for the provision of similar services to Panasia on terms and conditions mutually acceptable to Panasia and NPB. (c) Undertakings of NPB. (1) Delivery of SEC Documents. NPB shall deliver to Panasia copies of all reports filed with the SEC under the Exchange Act promptly upon the filing thereof. (2) Employees, Severance Policy. NPB will endeavor to continue the employment of all current employees of Panasia in positions that will contribute to the successful performance of the combined organization. Where there is a coincidence of responsibilities, NPB will try to reassign the affected individual to a needed position that utilizes the skills and abilities of the individual. If that is impracticable or if NPB elects to eliminate a position, NPB will make severance payments to the displaced employee as set forth herein. NPB will also make severance payments to an employee who declines a position that requires re- location more than 25 miles from his current place of employment. If a Panasia employee accepts a position that requires relocation of more than 25 miles from his current place of employment, NPB will reimburse him for documented relocation expenses, up to a maximum of $5,000. Subject to the following minimum and maximum benefits, NPB will grant an eligible employee one week of severance pay (at his then current pay rate) for each year of an employee's service with Panasia prior to the employment termination date. The minimum benefit shall be four weeks' salary for full-time employees, which will be pro-rated for part-time employees. The maximum severance benefit will be seven weeks' salary. All employees of Panasia on the date hereof will be eligible for these severance benefits, except that no employee of Panasia who shall receive any payments or benefits pursuant to any "change in control" agreement or similar plan or right shall be eligible for any severance benefits. Persons eligible for relocation or severance benefits will remain eligible for such benefits in the event of any relocation or termination of employment other than for "cause" within three months of the Effective Date. Any person whose employment with NPB is terminated by NPB without "cause" after three months from the Effective Date shall receive such severance benefit from NPB as is provided for in NPB's general severance policy for such terminations (with full credit being given for each year of service with Panasia). For purposes of this Section 4.07(c)(2), "cause" shall mean the employer's good faith reasonable belief that the employee committed fraud, theft, embezzlement, falsified corporate records, disseminated confidential information concerning customers, NPB, any NPB 30 Subsidiary or any of its or their employees, had documented unsatisfactory job performance under NPB's dismissal policy, or violated NPB's Code of Conduct. The foregoing definition of "cause" is the definition of "cause" used by NPB and its Subsidiaries in the ordinary course of its business. (3) Employee Benefits. The employee benefits provided to former employees of Panasia after the Effective Date shall be, in the aggregate, at least as favorable as the employee benefits provided by Panasia to its employees prior to the Effective Date. Subject to the foregoing, after the Effective Date, NPB or any NPB Subsidiary may discontinue, amend or convert to an NPB or an NPB Subsidiary plan any particular benefit or welfare plan of Panasia, subject to such plan's provisions and applicable law. (4) Panasia Board of Directors. On the Effective Date, NPB and NPB/NJ shall take all necessary corporate action to cause the following persons to serve as directors of Panasia as of the Effective Date: (i) three persons selected by Panasia's Board of Directors, subject to approval by NPB (which approval will not be unreasonably withheld) (collectively, the "Panasia Designees"); (ii) three persons selected by NPB, in its discretion, from among the senior officers of NPB or NP Bank; and three persons selected by NPB, in its discretion, from among the members of NP Bank's National Asian Bank Divisional Board of Directors. NPB and NPB/NJ shall also take all necessary corporate action to re-elect each Panasia Designee as a Panasia director for each of the three years following the Effective Date, if such person is in office as a Panasia director on the annual election dates. Panasia Designees who are not employees of Panasia shall receive annual director compensation equal to the annual director compensation paid by Panasia as of the date hereof. (5) Panasia Charter. For three years following the Effective Date, NPB and NPB/NJ shall cause Panasia to maintain a bank charter separate from that of NP Bank or any other NPB Subsidiary, provided, however, that this shall not prohibit NPB, in its discretion, from causing the charter of Panasia to be converted from a state to a national bank charter. (6) Combination With National Asian Bank Division. (i) Upon consummation of the Acquisition and subject to compliance with all applicable legal requirements, including approval of Regulatory Authorities, NPB intends to cause NP Bank's National Asian Bank Division (the "NAB Division") to be combined with Panasia (the "NAB/Panasia Combination"). The NAB Division presently consists of two branch banking offices located at 1349 West Cheltenham Avenue, Elkins Park, Montgomery County, Pennsylvania, and 600-636 Washington Avenue, Philadelphia, Pennsylvania, and related assets, loans and deposits. Upon completion of the NAB/Panasia Combination, it is NPB's intent to 31 utilize Panasia in the expansion of NPB's branch banking system into geographical areas with high Asian population not presently served by Panasia or NAB, either by the opening of de novo branches or by the acquisition of deposits and assets. (ii) Upon consummation of the NAB/Panasia Combination, NPB intends to cause Panasia to establish a Panasia (New York Metro) Division and a related Division Board (the "Panasia/NYM Board") and a Panasia (Philadelphia) Division and a related Division Board (the "Panasia/Phila. Board"). The Panasia/NYM Board shall consist of the members of Panasia's Board of Directors at the Effective Date, NPB or NP Bank senior officers selected by NPB, and such other persons as the Panasia/NYM Board shall select from time to time. NPB anticipates that the Panasia/NYM Board and the Panasia/Phila. Board will each emphasize sales, marketing and expansion. Panasia's current non-employee directors who become members of the Panasia/NYM Board shall receive compensation equal to $250 per meeting attended. (iii) Upon consummation of the NAB/Panasia Combination, NPB intends to cause Panasia to make one or more public offerings of shares of its common stock. Such offerings may be made in conjunction with Panasia's expansion of its business into new geographical areas with substantial Korean-Asian population such as the Washington, D.C. area. NPB intends, in any such offering, to permit persons who are then Panasia directors, members of the Panasia/NYM Board or the Panasia/Phila. Board, or Panasia employees, to purchase shares of Panasia stock at a five percent (5%) discount from the price offered to the general public. If Panasia shall set a maximum number of shares that may be purchased by any single purchaser in any such offering, that limit shall apply to all purchasers, including any persons eligible for the purchase price discount. Further, it is not NPB's intent to offer the discount if Panasia's underwriter or financial advisor shall advise that doing so will adversely affect the success of the offering. (7) Limitation of Liability, Insurance. (i) NPB shall cause Panasia to keep in effect the provision in its certificate of incorporation providing for exculpation of director and officer liability, which provision shall not be amended except as required by applicable law. (ii) NPB shall (and Panasia shall cooperate and assist prior to the Effective Date in these efforts), at no expense to the beneficiaries, (1) maintain directors' and officers' liability insurance ("D&O Insurance") for the directors and officers of Panasia (each, an "Insured Party") with respect to matters occurring at or prior to the Effective Date, issued by a carrier or carriers assigned a claims-paying ability rating by A.M. Best & Co. of "A (Excellent)" or higher, or (2) obtain coverage for 32 actions or omissions or alleged actions or omissions occurring at or prior to the Effective Date (including the transactions contemplated by this Agreement) for the Insured Parties under the directors' and officers' liability insurance policy currently maintained by NPB, in either case, providing at least the same coverage as the D&O Insurance currently maintained by Panasia and containing terms and conditions which are no less favorable to the beneficiaries, for a period of at least six (6) years from the Effective Date; provided, that NPB shall not be obligated to make premium payments for such six-year period in respect of the D&O Insurance which exceed, for the portion related to Panasia's directors and officers, 150 percent of the annual premium payments ($16,214 at the date hereof) of Panasia's current policy in effect as of the date of this Agreement (the "Maximum Amount"). If the amount of the premiums necessary to maintain or procure such insurance coverage exceeds the Maximum Amount, NPB shall use its reasonable best efforts to maintain the most advantageous policies of directors' and officers' liability insurance obtainable for a premium equal to the Maximum Amount. (iii) If any claim is made against present or former directors or officers of Panasia, neither NPB nor Panasia shall do anything that would forfeit, jeopardize, restrict or limit the insurance coverage available for that claim until the final disposition thereof. (iv) If NPB or any of its successors or assigns shall consolidate with or merge into any other person and shall not be the continuing or surviving person of such consolidation or merger or shall transfer all or substantially all of its assets to any person, then and in each case, proper provision shall be made so that the successors and assigns of NPB shall assume the obligations set forth in this Section 4.07(c)(7). (v) The provisions of this Section 4.07(c)(7) are intended to be for the benefit of and shall be enforceable by, each Insured Party, his or her heirs and representatives. (vi) NPB shall pay all expenses, including reasonable attorneys' fees, that may be incurred by any Insured Party in enforcing the obligations provided for in this Section 4.07(c)(7). ARTICLE V CONDITIONS 5.01 Conditions to Panasia's Obligations under this Agreement. The obligations of Panasia hereunder shall be subject to satisfaction at or prior to the Closing Date of each of the 33 following conditions, unless waived by Panasia pursuant to Section 7.03 hereof: (a) Corporate Proceedings. All action required to be taken by, or on the part of, NPB and NPB/NJ to authorize the execution, delivery and performance of this Agreement and the Plan and the consummation of the Acquisition, shall have been duly and validly taken by NPB and NPB/NJ; and Panasia shall have received certified copies of the resolutions evidencing such authorizations. (b) Covenants; Representations. The obligations of NPB and NPB/NJ required by this Agreement to be performed by NPB or NPB/NJ at or prior to the Closing Date shall have been duly performed and complied with in all material respects; and the representations and warranties of NPB set forth in this Agreement shall be true and correct in all material respects, as of the date of this Agreement, and as of the Closing Date as though made on and as of the Closing Date, except as to any representation or warranty which specifically relates to an earlier date and except as to any representation or warranty to the extent the breach of such representation or warranty does not have a Material Adverse Effect. (c) Approvals of Regulatory Authorities. Panasia and NPB shall have obtained all requisite approvals and consents of Regulatory Authorities, and the statutory waiting period or periods relating thereto for the Acquisition shall have expired; provided, however, that no such approval or consent shall have imposed any condition or requirement (other than conditions or requirements previously disclosed) which would so materially and adversely impact the economic or business benefits to Panasia or NPB of the transactions contemplated by this Agreement that, had such condition or requirement been known, such party would not, in its reasonable judgment, have entered into this Agreement. (d) No Injunction. There shall not be in effect any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the transactions contemplated by this Agreement. (e) Officer's Certificate. NPB shall have delivered to Panasia a certificate, dated the Closing Date and signed, without personal liability, by its Chairman or President, to the effect that the conditions set forth in subsections (a) through (d) of this Section 5.01 have been satisfied. (f) Approval by Panasia's Stockholders. This Agreement and the Plan shall have been approved by the stockholders of Panasia by such vote as is required under the applicable laws of the State of New Jersey and by the certificate of incorporation and bylaws of Panasia. 34 (g) Employment Agreements. NPB shall have delivered to Panasia its written approval of Panasia's execution and delivery of the employment agreements with Moon S. Yang and Young Jai Lee in the forms attached hereto as Exhibits 4 and 5, respectively. 5.02 Conditions to NPB's Obligations under this Agreement. The obligations of NPB hereunder shall be subject to satisfaction at or prior to the Closing Date of each of the following conditions, unless waived by NPB pursuant to Section 7.03 hereof: (a) Corporate Proceedings. All action required to be taken by, or on the part of, Panasia to authorize the execution, delivery and performance of this Agreement and the Plan and the consummation of the Acquisition, shall have been duly and validly taken by Panasia; and NPB shall have received certified copies of the resolutions evidencing such authorizations. (b) Covenants; Representations. The obligations of Panasia required by this Agreement to be performed by Panasia at or prior to the Closing Date shall have been duly performed and complied with in all material respects; and the representations and warranties of Panasia set forth in this Agreement shall be true and correct in all material respects, as of the date of this Agreement, and as of the Closing Date as though made on and as of the Closing Date, except as to any representation or warranty which specifically relates to an earlier date and except as to any representation or warranty to the extent the breach of such representation or warranty does not have a Material Adverse Effect. (c) Approvals of Regulatory Authorities. Panasia and NPB shall have obtained all requisite approvals and consents of Regulatory Authorities, and the statutory waiting period or periods relating thereto for the Acquisition shall have expired; provided, however, that no such approval or consent shall have imposed any condition or requirement (other than conditions or requirements previously disclosed) which would so materially and adversely impact the economic or business benefits to NPB or Panasia of the transactions contemplated by this Agreement that, had such condition or requirement been known, such party would not, in its reasonable judgment, have entered into this Agreement. (d) No Injunction. There shall not be in effect any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the transactions contemplated by this Agreement. (e) Officer's Certificate. Panasia shall have delivered to NPB a certificate, dated the Closing Date and signed, without personal liability, by its Chairman or President, to the effect that the conditions set forth in subsections (a) through (d) of this Section 5.02 have been satisfied. 35 (f) Approval by Panasia's Stockholders. This Agreement and the Plan shall have been approved by the stockholders of Panasia by such vote as is required under the applicable laws of the State of New Jersey and by the certificate of incorporation and bylaws of Panasia. (g) Phase I Environmental Audit Results. The results of any Phase I environmental audit conducted pursuant to Section 4.07(b)(2) hereof shall not result in a Material Adverse Effect on Panasia. (h) Other Documents. NPB shall have received such other certificates, documents or instruments from Panasia or its officers or others as NPB shall have reasonably requested in connection with accounting or income tax treatment of the Acquisition, or related securities law compliance. ARTICLE VI TERMINATION, WAIVER AND AMENDMENT 6.01 Termination. This Agreement may be terminated on or at any time prior to the Closing Date: (a) By the mutual written consent of the parties hereto; (b) By NPB or Panasia: (1) If there shall have been any breach of any representation, warranty or obligation of the other party hereto (subject to the same standards as set forth in Sections 5.01(b) or 5.02(b), as the case may be) and such breach can not be, or shall not have been, remedied within 30 days after receipt by such party of written notice specifying the nature of such breach and requesting that it be remedied; (2) If the Closing Date shall not have occurred prior to September 30, 2000 (except that if the Closing Date shall not have occurred by such date because of a breach of this Agreement by a party hereto, such breaching party shall not be entitled to terminate this Agreement in accordance with this provision); (3) If any Regulatory Authority whose approval or consent is required for consummation of the Acquisition shall issue a definitive written denial of such approval or consent and the time period for appeals and requests for reconsideration has run; or (4) If the stockholder vote contemplated by this Agreement is not obtained at the Panasia Stockholders Meeting. 36 6.02 Effect of Termination. If this Agreement is terminated pursuant to Section 6.01 hereof or otherwise, this Agreement shall forthwith become void, other than Sections 4.02(c) and 7.01 hereof which shall remain in full force and effect, and there shall be no further liability on the part of NPB or Panasia to the other, except for any liability of NPB or Panasia under such sections of this Agreement and except for any liability arising out of a willful breach of this Agreement giving rise to such termination. ARTICLE VII MISCELLANEOUS 7.01 Expenses. Each party hereto shall bear and pay all costs and expenses incurred by it in connection with the transactions contemplated hereby, including fees and expenses of its own financial consultants, accountants and counsel. 7.02 Non-Survival of Representations and Warranties; Disclosure Schedules. All representations, warranties and, except to the extent specifically provided otherwise herein, agreements and covenants shall terminate on the Closing Date. 7.03 Amendment, Extension and Waiver. Subject to applicable law, at any time prior to the Closing Date, the parties may (a) amend this Agreement, (b) extend the time for the performance of any of the obligations or other acts of either party hereto, (c) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, or (d) to the extent permitted by law, waive compliance with any of the agreements or conditions contained in Articles IV and V hereof or otherwise. This Agreement may not be amended except by an instrument in writing signed, by authorized officers, on behalf of the parties hereto. Any agreement on the part of a party hereto to any extension or waiver shall be valid only if set forth in an instrument in writing signed by a duly authorized officer on behalf of such party, but such waiver or failure to insist on strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. 7.04 Entire Agreement. This Agreement, including the documents referred to herein or delivered pursuant hereto, contains the entire agreement and understanding of the parties with respect to its subject matter. This Agreement supersedes all prior arrangements and understandings between the parties, both written and oral, with respect to its subject matter other than the Confidentiality Agreement. This Agreement shall inure to the benefit of and be binding upon the parties hereto and its successors; provided, however, that nothing in this Agreement, expressed or implied, is intended to confer upon any party, other 37 than the parties hereto and their respective successors, any rights, remedies, obligations or liabilities, and provided, further, that any Insured Party may enforce Section 4.07(c)(7). 7.05 No Assignment. Neither party hereto may assign any of its rights or obligations hereunder to any other person, without the prior written consent of the other party hereto. 7.06 Notices. All notices or other communications hereunder shall be in writing and shall be deemed given upon delivery if delivered personally, two business days after mailing if mailed by prepaid registered or certified mail, return receipt requested, or upon confirmation of good transmission if sent by telecopy, addressed as follows: (a) If to NPB or Bank, to: National Penn Bancshares, Inc. Philadelphia and Reading Avenues P.O.Box 547 Boyertown, Pennsylvania 19512-0547 Attention: Lawrence T. Jilk, Jr., Chairman and CEO Telecopy No.: 610-369-6236 with a copy to: H. Anderson Ellsworth Jay W. Waldman Ellsworth, Carlton & Waldman, P.C. 1105 Berkshire Boulevard Suite 320 Wyomissing, Pennsylvania 19610 Telecopy No.: 610-371-9510 (b) If to Panasia, to: Panasia Bank 183 Main Street Fort Lee, New Jersey 07024 Attention: Moon S. Yang, President and CEO Telecopy No.: 201-947-7560 38 with a copy to: Robert A. Schwartz Jamieson, Moore, Peskin & Spicer 177 Madison Avenue Morristown, New Jersey 07960 Telecopy No.: 973-984-9549 7.07 Panasia Disclosure Schedule. Information contained on the Panasia Disclosure Schedule shall be deemed to cover the express disclosure requirement contained in a representation or warranty of this Agreement and any other representation or warranty of this Agreement of Panasia where it is readily apparent it applies to such provision. The mere inclusion of an item in a Disclosure Schedule as an exception to a representation or warranty shall not be deemed an admission by Panasia that such item [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 39 represents a material exception or fact, event or circumstance or that such item is or could result in a Material Adverse Effect. 7.08 Captions. The captions contained in this Agreement are for reference purposes only and are not part of this Agreement. 7.09 Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 7.10 Severability. If any provision of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 7.11 Governing Law. This Agreement shall be governed by and construed in accordance with the domestic internal law of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written. NATIONAL PENN BANCSHARES, INC. (Corporate Seal) By:/s/ Lawrence T. Jilk, Jr. ------------------------- Lawrence T. Jilk, Jr., Chairman Attest:/s/ Sandra L. Spayd ------------------- Sandra L. Spayd, Secretary PANASIA BANK (Corporate Seal) By:/s/ Moon S. Yang ---------------- Moon S. Yang, President Attest:/s/ Young Lee ------------- Name: Title: Secretary & EVP 40 COMMONWEALTH OF PENNSYLVANIA : :ss. COUNTY OF BERKS : On this 10th day of February, 2000, before me, a notary public for this state and county, personally came LAWRENCE T. JILK, JR., as chairman, and SANDRA L. SPAYD, as secretary, of NATIONAL PENN BANCSHARES, INC., and each, in his/her capacity, acknowledged this instrument to be the act and deed of the corporation and the seal affixed to it to be its seal. WITNESS my official seal and signature this day and year. /s/ Deborah M. Johnson ---------------------- (Seal of Notary) Notary Public My commission expires 07/14/2001 ---------- STATE OF NEW JERSEY : :ss. COUNTY OF BERGEN : ------------------ On this 14th day of February, 2000, before me, a notary public for this state and county, personally came MOON S. YANG, as president, and YOUNG LEE , as secretary , of PANASIA BANK, and each, in his/her capacity, acknowledged this instrument to be the act and deed of the bank and the seal affixed to it to be its seal. WITNESS my official seal and signature this day and year. /s/ Joseph S. Kozay, Jr. ------------------------ (Seal of Notary) Notary Public My commission expires 01/08/04 -------- 41 PANASIA BANK DISCLOSURE SCHEDULES All Panasia Bank disclosure schedules are omitted because none contain information which is material to an investment decision. These disclosure schedules relate to the following sections of the Agreement: 2.01(C) Subsidiaries. 2.03(B) Authority; No Violation. 2.04 Consents. 2.08(A) Contracts. 2.10 Legal Proceedings. 2.12 ERISA. 2.13 Brokers, Finders and Financial Advisors. 2.19 Related Party Transactions. The Registrant agrees to furnish supplementally a copy of any omitted schedule to the Commission upon request. EXHIBIT 1 PLAN OF ACQUISITION THIS PLAN OF ACQUISITION ("Plan") dated February 14, 2000, is between NPB NEW JERSEY, INC., a New Jersey corporation ("NPB/NJ"), and PANASIA BANK, a New Jersey state bank ("Panasia"). BACKGROUND 1. NPB/NJ is a wholly-owned subsidiary of National Penn Bancshares, Inc., a Pennsylvania corporation ("NPB"). The authorized capital stock of NPB/NJ consists of 1,000 shares of common stock, $1 par value per share, of which at the date hereof 100 shares are issued and outstanding and owned by NPB. 2. The authorized capital stock of Panasia consists of 1,000,000 shares of common stock, par value $5 per share ("Panasia Common Stock"), of which at the date hereof 664,783 shares are issued and outstanding. At the date hereof, there are options issued and outstanding providing the holders thereof with the right to purchase 39,000 shares of Panasia Common Stock ("Panasia Stock Options"). 3. The respective Boards of Directors of NPB/NJ and Panasia deem the acquisition by NPB/NJ of Panasia, pursuant to the terms and conditions set forth or referred to herein, to be desirable and in the best interests of the respective companies and their respective shareholders. 4. The respective Boards of Directors of NPB/NJ and Panasia have adopted resolutions approving this Plan. This Plan constitutes a "plan of acquisition" within the meaning of the New Jersey Banking Act of 1948, N.J. Stat.ss.17:9A-357. 5. The respective Boards of Directors of NPB and Panasia have adopted resolutions approving an Agreement dated February 14, 2000 between NPB and Panasia (the "Agreement"), and NPB and Panasia have executed the Agreement. The Agreement provides for the acquisition by NPB/NJ of Panasia as a wholly-owned subsidiary of NPB/NJ, as provided for herein. This Plan is being executed by NPB/NJ and Panasia pursuant to the Agreement. AGREEMENT In consideration of the premises and of the mutual covenants and agreements herein contained, and in accordance with the applicable laws of the State of New Jersey, NPB/NJ and Panasia, intending to be legally bound hereby, agree: 1 ARTICLE I ACQUIRING CORPORATION The name and address of the acquiring corporation is NPB New Jersey, Inc., c/o Jamieson, Moore, Peskin & Spicer, 177 Madison Avenue, Morristown, New Jersey 07960. ARTICLE II PARTICIPATING BANK The name and address of the participating bank is Panasia Bank, 183 Main Street, Fort Lee, New Jersey 07024. ARTICLE III BOARD OF DIRECTORS OF ACQUIRING CORPORATION The names and addresses of the members of the board of directors of the acquiring corporation (NPB/NJ) are: Name Address Lawrence T. Jilk, Jr. 128 Indian Lane Boyertown, PA 19512 Wayne R. Weidner Lupine Lane Box 131 Oley, PA 19547 Algot F. Thorell, Jr. 7322 Bryan Street Philadelphia, PA 19119 Edward Shin 8200 Gladston Road Wyndmoor, PA 19038 ARTICLE IV SHARES OF OTHER BANKS The acquiring corporation (NPB/NJ) does not own any shares of capital stock of any other bank. 2 ARTICLE V TERMS AND CONDITIONS OF THE ACQUISITION 5.1 Issuance of Panasia Common Stock. On the Effective Date, Panasia shall issue to NPB/NJ 1,000 shares of Panasia Common Stock and become a wholly-owned subsidiary of NPB/NJ. 5.2 Conversion of Panasia Common Stock. (a) Subject to Section 5.2(b) and (c) hereof with respect to treasury stock and dissenting shares of Panasia Common Stock, each share of Panasia Common Stock issued and outstanding immediately prior to the Effective Date, shall, on the Effective Date, by reason of the Acquisition and without any action on the part of the holder thereof, cease to be outstanding and be converted into the right to receive Twenty-Nine Dollars ($29.00) in cash. (b) Each share of Panasia Common Stock issued and held in the treasury of Panasia as of the Effective Date, if any, shall be cancelled, and no cash, stock or other property shall be delivered in exchange therefor. (c) If there are holders of Panasia Common Stock who dissent from the Acquisition and exercise and perfect the right to obtain valuation of and payment for their shares ("Dissenting Panasia Shares") pursuant to the New Jersey Banking Act of 1948, N.J. Stat. ss.17:9A-360 et seq., the following provisions will govern payments to be made in respect of Dissenting Panasia Shares: (i) All payments in respect of Dissenting Panasia Shares, if any, will be made by Panasia. (ii) Dissenting Panasia Shares, if any, will be deemed to have been retired and cancelled immediately prior to the Acquisition, with the effect that no conversion thereof will occur pursuant to Section 5.2(a) hereof. 5.3 Panasia Stock Options. On the Effective Date, each option to purchase one or more shares of Panasia Common Stock issued by Panasia and outstanding on the Effective Date, whether or not such option is exercisable on the Effective Date (each a "Panasia Stock Option"), shall, by virtue of the Acquisition, cease to be outstanding and be converted into the right to receive in cash an amount equal to the difference between Twenty-Nine Dollars ($29.00) and the per share exercise price of the Panasia Stock Option multiplied by the number of shares of Panasia Common Stock covered by that option. 5.4 Panasia Stock Certificates. From and after the Effective Date, each certificate which immediately prior thereto represented any shares of Panasia Common Stock subject to Section 5.2(a) hereof 3 shall represent only the right to receive, upon surrender of such certificate for payment as provided in the Agreement, the cash consideration provided for herein. In no event shall the holder of any shares of Panasia Common Stock be entitled to receive interest on any of the funds to be received pursuant to the Acquisition. ARTICLE VI EFFECTIVE DATE OF THE ACQUISITION Subject to Article VII hereof, after approval of this Plan by the stockholders of Panasia in accordance with the applicable laws of the State of New Jersey, Panasia and NPB/NJ shall cause this Plan, accompanied by certification of such stockholder approval by the President of Panasia, to be filed in the Department of Banking and Insurance of the State of New Jersey (the "NJDBI"). Thereupon, the Acquisition shall be effective (the "Effective Date"). ARTICLE VII CONDITIONS PRECEDENT The obligations of NPB/NJ and Panasia to effect the Acquisition shall be subject to satisfaction, unless duly waived by the party permitted to do so, of the conditions precedent set forth in the Agreement. ARTICLE VIII TERMINATION This Plan shall terminate automatically upon any termination of the Agreement in accordance with its terms; provided, however, that any such termination of this Plan shall not relieve any party hereto from liability on account of a breach by such party of any of the terms hereof or thereof. ARTICLE IX AMENDMENT This Plan may be amended at any time prior to consummation of the Acquisition, but only by an instrument in writing signed by duly authorized officers on behalf of the parties hereto. 4 ARTICLE X MISCELLANEOUS 10.1 Extensions; Waivers. Each party, by a written instrument signed by a duly authorized officer, may extend the time for the performance of any of the obligations or other acts of the other party hereto and may waive compliance with any of the covenants, or performance of any of the obligations, of the other party contained in this Plan. 10.2 Notices. Any notice or other communication required or permitted under this Plan shall be given, and shall be effective, in accordance with the provisions of Section 7.06 of the Agreement. 10.3 Captions. The headings of the several Articles herein are intended for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Plan. 10.4 Counterparts. For the convenience of the parties hereto, this Plan may be executed in several counterparts, each of which shall be deemed the original, but all of which together shall constitute one and the same instrument. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 5 10.5 Governing Law. This Plan shall be governed by and construed in accordance with the laws of the State of New Jersey. IN WITNESS WHEREOF, NPB New Jersey, Inc. and Panasia Bank have caused this Plan to be executed by their duly authorized officers and their corporate seals to be hereunto affixed as of the date first written above. NPB NEW JERSEY, INC. (Corporate Seal) By:/s/ Lawrence T. Jilk, Jr. ------------------------- Lawrence T. Jilk, Jr., President and Chief Executive Officer Attest:/s/ Sandra L. Spayd ------------------- Sandra L. Spayd, Secretary PANASIA BANK (Corporate Seal) By:/s/ Moon S. Yang ---------------- Moon S. Yang, President and Chief Executive Officer Attest:/s/ Young Lee ---------------- Name: Title: Secretary & EVP 6 COMMONWEALTH OF PENNSYLVANIA : :ss. COUNTY OF BERKS : On this 10th day of February, 2000, before me, a notary public for this state and county, personally came LAWRENCE T. JILK, JR., as president, and SANDRA L. SPAYD, as secretary, of NPB NEW JERSEY, INC., and each, in his/her capacity, acknowledged this instrument to be the act and deed of the corporation and the seal affixed to it to be its seal. WITNESS my official seal and signature this day and year. /s/ Deborah M. Johnson (Seal of Notary) Notary Public My commission expires 07/14/2001 STATE OF NEW JERSEY : :ss. COUNTY OF BERGEN : On this 14th day of February, 2000, before me, a notary public for this state and county, personally came MOON S. YANG, as president, and YOUNG LEE , as secretary , of PANASIA BANK, and each, in his/her capacity, acknowledged this instrument to be the act and deed of the bank and the seal affixed to it to be its seal. WITNESS my official seal and signature this day and year. /s/Joseph S. Kozay, Jr. (Seal of Notary) Notary Public My commission expires 01/08/04 7 EXHIBIT 2 February 14, 2000 National Penn Bancshares, Inc. Philadelphia and Reading Avenues Boyertown, Pennsylvania 19512 Ladies and Gentlemen: National Penn Bancshares, Inc. ("NPB") and Panasia Bank ("Panasia") are considering execution of an Agreement dated February 14, 2000 (the "Agreement"). Pursuant to the proposed Agreement, and subject to the terms and conditions set forth therein: (a) A wholly-owned subsidiary of NPB will acquire Panasia pursuant to a "plan of acquisition" under New Jersey law; (b) stockholders of Panasia will receive $29 in cash in exchange for each share of Panasia common stock owned on the closing date; and (c) holders of options to acquire shares of common stock of Panasia that remain outstanding on the closing date will receive cash in an amount equal to the difference between $29 and the per share exercise price of their stock options multiplied by the number of shares covered by their options (the foregoing, collectively, the "Acquisition"). NPB has required as a condition to its execution and delivery to Panasia of the Agreement, that the undersigned, being a director of Panasia, execute and deliver to NPB this Letter Agreement. The undersigned, in order to induce NPB to execute the Agreement, and intending to be legally bound hereby, irrevocably agrees and represents as follows: 1. The undersigned agrees to vote or cause to be voted for approval of the Acquisition all shares of Panasia common stock over which the undersigned exercises sole voting power. 2. Through the closing of the Acquisition, the undersigned agrees not to offer, sell, transfer or otherwise dispose of, or to permit the offer, sale, transfer or other disposition of, any shares of Panasia common stock over which the undersigned exercises sole voting power without your prior consent, which will not be unreasonably withheld. 3. The undersigned has sole voting power over the number of shares of Panasia common stock, and holds stock options for the number of shares of Panasia common stock, if any, set forth below National Penn Bancshares, Inc. February 14, 2000 Page 2 opposite the signature line for the undersigned. NPB recognizes that with respect to any such shares which have been pledged to a third party, the undersigned will not be able to control the voting or disposition of such shares in the event of a default. 4. The undersigned hereby waives the right to assert dissenters rights under the New Jersey Banking Act of 1948, N.J. Stat.ss.17:9A-360 et seq., and any other applicable law or regulation. 5. The undersigned agrees that Panasia shall not be bound by any attempted sale of any shares of Panasia common stock in violation of the terms of this Letter Agreement, and Panasia's transfer agent shall be given appropriate stop transfer orders and shall not be required to register any such attempted sale. 6. The undersigned agrees, if he is a holder of options to acquire to shares of Panasia common stock that remain outstanding as of the closing of the Acquisition, to accept in exchange for cancellation of such options an amount of cash equal to the difference between $29 and the per share exercise price of such options multiplied by the number of shares of Panasia common stock covered by such options. 7. The undersigned represents that he has the capacity to enter into this Letter Agreement and that it is a valid and binding obligation enforceable against the undersigned in accordance with its terms, subject to bankruptcy, insolvency and other laws affecting creditors' rights and general equitable principles. The parties hereto acknowledge that this Letter Agreement is being executed by the undersigned in his capacity solely as a stockholder of Panasia, and not in any other capacity (including as a director of Panasia), and nothing herein contained shall derogate from the undersigned's ability to act in such other capacity, including the exercise of fiduciary duty, even if in conflict with the foregoing. This Letter Agreement shall be effective upon acceptance by NPB. This Letter Agreement shall terminate concurrently with, and automatically upon, any termination of the Agreement in accordance with its terms, except that any such termination shall be without National Penn Bancshares, Inc. February 14, 2000 Page 3 prejudice to NPB's rights arising out of any willful breach or any covenant or representation contained herein. Number of Shares, Very truly yours, and Shares Subject to Stock Options, Held: 578 Shares 5,000 Options /s/ Paul W. Choi -------------------- Name: Paul W. Choi Accepted: - -------- NATIONAL PENN BANCSHARES, INC. By: /s/ Lawrence T. Jilk, Jr. -------------------------- Lawrence T. Jilk, Jr. National Penn Bancshares, Inc. February 14, 2000 Page 3 prejudice to NPB's rights arising out of any willful breach or any covenant or representation contained herein. Number of Shares Very truly yours, Held: 35,095 Shares /s/ Morris Goldfarb --------------------- Name: Morris Goldfarb Accepted: NATIONAL PENN BANCSHARES, INC. By: /s/ Lawrence T. Jilk, Jr. -------------------------- Lawrence T. Jilk, Jr. National Penn Bancshares, Inc. February 14, 2000 Page 3 prejudice to NPB's rights arising out of any willful breach or any covenant or representation contained herein. Number of Shares, Very truly yours, and Shares Subject to Stock Options, Held: 2,893 Shares 5,000 Options /s/ Jerome L. Robinson ------------------------ Name: Jerome L. Robinson Accepted: - -------- NATIONAL PENN BANCSHARES, INC. By: /s/ Lawrence T. Jilk, Jr. -------------------------- Lawrence T. Jilk, Jr. National Penn Bancshares, Inc. February 14, 2000 Page 3 prejudice to NPB's rights arising out of any willful breach or any covenant or representation contained herein. Number of Shares, Very truly yours, and Shares Subject to Stock Options, Held: 5,512 Shares 8,000 Options /s/ Young Jai Lee ------------------- Name: Young Jai Lee Accepted: NATIONAL PENN BANCSHARES, INC. By: /s/ Lawrence T. Jilk, Jr. -------------------------- Lawrence T. Jilk, Jr. National Penn Bancshares, Inc. February 14, 2000 Page 3 prejudice to NPB's rights arising out of any willful breach or any covenant or representation contained herein. Number of Shares, Very truly yours, and Shares Subject to Stock Options, Held: 32,152 Shares 10,000 Options /s/ Moon S. Yang ------------------ Name: Moon S. Yang Accepted: NATIONAL PENN BANCSHARES, INC. By: /s/ Lawrence T. Jilk, Jr. -------------------------- Lawrence T. Jilk, Jr. National Penn Bancshares, Inc. February 14, 2000 Page 3 prejudice to NPB's rights arising out of any willful breach or any covenant or representation contained herein. Number of Shares, Very truly yours, and Shares Subject to Stock Options, Held: 21,000 Shares 5,000 Options /s/ Jin Hyoung Seo -------------------- Name: Jin Hyoung Seo Accepted: NATIONAL PENN BANCSHARES, INC. By: /s/ Lawrence T. Jilk, Jr. -------------------------- Lawrence T. Jilk, Jr. EXHIBIT 3 STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT ("Stock Option Agreement") dated February 14, 2000, is between NATIONAL PENN BANCSHARES, INC., a Pennsylvania corporation ("NPB"), and PANASIA BANK, a New Jersey state bank ("Panasia"). BACKGROUND 1. NPB has formed NPB New Jersey, Inc., a New Jersey corporation ("NPB/NJ"), and organized it as a wholly-owned subsidiary of NPB. 2. NPB and Panasia desire to enter into an Agreement dated February 14, 2000 (the "Agreement"), providing, among other things, for the acquisition by NPB/NJ of Panasia as a wholly-owned subsidiary of NPB/NJ (the "Acquisition"). 3. As a condition and inducement to NPB to enter into the Agreement, Panasia is granting to NPB an option to purchase up to that number of shares of common stock, par value $5 per share (the "Common Stock"), of Panasia as shall equal 24.9% of shares of Common Stock of Panasia issued and outstanding as of the date hereof, on the terms and conditions hereinafter set forth. AGREEMENT NOW THEREFORE, in consideration of the premises and of the mutual covenants, agreements and representations herein contained, the parties, intending to be legally bound hereby, agree as follows: 1. Grant of Option. Panasia hereby grants to NPB, on the terms and conditions set forth herein, the option to purchase (the "Option") up to 165,531 shares of Common Stock of Panasia (as adjusted as set forth herein, the "Option Shares") at a price per share (as adjusted as set forth herein, the "Option Price") equal to Twenty Three Dollars ($23.00), provided, however, that in no event shall the number of Option Shares for which the Option is exercisable exceed 24.9% of the issued and outstanding shares of Panasia Common Stock without giving effect to any shares subject to or issued pursuant to the Option. 2. Exercise of Option. (a) Provided that (i) NPB shall not be, on the date of exercise, in material breach of the agreements or covenants contained in the Agreement or this Stock Option Agreement; and (ii) no preliminary or permanent injunction or other order against the delivery of shares covered by the Option issued by any court of 1 competent jurisdiction in the United States shall be in effect on the date of exercise, upon or after the occurrence of a Triggering Event (defined below) NPB may exercise the Option, in whole or in part, at any time or one or more times, from time to time; provided that the Option shall terminate and be of no further force and effect upon the earliest to occur of (A) the Effective Date of the Acquisition, as provided in the Agreement; (B) termination of the Agreement in accordance with the terms thereof prior to the occurrence of a Triggering Event or a Preliminary Triggering Event (defined below), other than a termination of the Agreement pursuant to Section 6.01(b)(1), unless in the case of termination by Panasia pursuant to Section 6.01(b)(1), such termination is as a result of a willful breach of the Agreement by NPB (such a termination is hereinafter referred to as a "Default Termination"); (C) 18 months after the termination of the Agreement by NPB or Panasia pursuant to a Default Termination; and (D) 18 months after termination of the Agreement (other than pursuant to a Default Termination) following the occurrence of a Triggering Event or a Preliminary Triggering Event; and provided, further, that any purchase of shares upon exercise of the Option shall be subject to compliance with applicable securities and banking laws. The rights set forth in Section 3 hereof shall terminate when the right to exercise the Option terminates (other than as a result of a complete exercise of the Option) as set forth above. (b) As used herein, the term "Triggering Event" means the occurrence of either of the following events: (i) a person or group (as those terms are defined or used in Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder), other than NPB or an affiliate of NPB, acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of 25% or more of the then outstanding shares of Common Stock; or (ii) a person or group, other than NPB or an affiliate of NPB, enters into an agreement or letter of intent or memorandum of understanding with Panasia pursuant to which such person or group or any affiliate of such person or group would (A) merge or consolidate, or enter into any similar transaction, with Panasia; (B) acquire all or substantially all of the assets or liabilities of Panasia; or (C) acquire beneficial ownership of securities representing, or the right to acquire beneficial ownership or to vote securities representing, 25% or more of the then outstanding shares of Common Stock, or Panasia shall have authorized, recommended or publicly proposed, or publicly announced an intention to authorize, recommend or propose, such an agreement or letter of intent or memorandum of understanding. (c) As used herein, the term "Preliminary Triggering Event" means the occurrence of any of the following events: 2 (i) a person or group (as those terms are defined or used in Section 13(d) of the Exchange Act and the rules and regulations thereunder), other than NPB or an affiliate of NPB, acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of 10% or more of the then outstanding shares of Common Stock; (ii) a person or group, other than NPB or an affiliate of NPB, publicly announces a bona fide proposal (including a written communication that is or becomes the subject of public disclosure) for (A) any merger, consolidation or acquisition of all or substantially all the assets or liabilities of Panasia, or any business combination involving Panasia; or (B) a transaction involving the transfer of beneficial ownership of securities representing, or the right to acquire beneficial ownership or to vote securities representing, 10% or more of the then outstanding shares of Common Stock (collectively, a "Proposal"), and thereafter, if such Proposal has not been Publicly Withdrawn (defined below) at least 30 days prior to the meeting of stockholders of Panasia called to vote on the Acquisition, Panasia's stockholders fail to approve the Acquisition by the vote required by applicable law at the meeting of stockholders called for such purpose or such meeting has been cancelled; (iii) the Board of Directors of Panasia shall (A) fail to recommend the Acquisition; (B) recommend a Proposal; or (C) have withdrawn or modified in a manner adverse to NPB the recommendation of the Board of Directors of Panasia with respect to the Agreement and thereafter Panasia's stockholders fail to approve the Acquisition by the vote required by applicable law at the meeting of stockholders called for such purpose or such meeting is not scheduled or has been cancelled; or (iv) a person or group, other than NPB or an affiliate of NPB, makes a bona fide Proposal and thereafter, but before such Proposal has been Publicly Withdrawn, Panasia shall have breached any representation, warranty, covenant or obligation contained in the Agreement and such breach would entitle NPB to terminate the Agreement under Section 6.01(b)(1) of the Agreement (without regard to the cure period provided for therein unless such cure is promptly effected without jeopardizing consummation of the Acquisition pursuant to the Agreement). If more than one of the transactions giving rise to a Triggering Event or a Preliminary Triggering Event under this Section 2 is undertaken or effected, then all such transactions shall give rise only to one Triggering Event or Preliminary Triggering Event, as applicable, which Triggering Event or Preliminary Triggering Event shall be deemed continuing for all purposes hereunder until all such transactions are abandoned. 3 For purposes of this Section 2, "Publicly Withdrawn" shall mean an unconditional bona fide withdrawal of the Proposal coupled with a public announcement of no further interest in pursuing such Proposal or in acquiring any controlling influence over Panasia or in soliciting or inducing any other person (other than NPB or an affiliate of NPB) to do so. Notwithstanding the foregoing, the obligation of Panasia to issue Option Shares upon exercise of the Option shall be deferred (but shall not terminate): (i) until the receipt of all required governmental or regulatory approvals or consents necessary for Panasia to issue the Option Shares or NPB to exercise the Option, or until the expiration or termination of any waiting period required by law, or (ii) so long as any injunction or other order, decree or ruling issued by any federal or state court of competent jurisdiction is in effect which prohibits the sale or delivery of the Option Shares, and, in each case, notwithstanding any other provision, the Option shall not expire or otherwise terminate. Panasia shall notify NPB promptly in writing of the occurrence of any Triggering Event or Preliminary Triggering Event known to it, it being understood that the giving of such notice by Panasia shall not be a condition to the right of NPB to exercise the Option. Panasia will not take any action which would have the effect of preventing or disabling Panasia from delivering the Option Shares to NPB upon exercise of the Option or otherwise performing its obligations under this Stock Option Agreement, except to the extent required by applicable securities and banking laws and regulations. In the event NPB wishes to exercise the Option, NPB shall send a written notice to Panasia (the date of which is hereinafter referred to as the "Notice Date") specifying the total number of Option Shares it wishes to purchase and a place and date between two and ten business days inclusive from the Notice Date for the closing of such a purchase (a "Closing"); provided, however, that a Closing shall not occur prior to two days after the later of receipt of any necessary regulatory approvals or the expiration of any legally required notice or waiting period, if any. 3. Repurchase of Option by Panasia. (a) Subject to the last sentence of Section 2(a) and to the second sentence of Section 3(b), at the request of NPB at any time commencing upon the first occurrence of a Repurchase Event (defined below) and ending 18 months immediately thereafter, Panasia shall repurchase from NPB (x) the Option and (y) all shares of Common Stock purchased by NPB pursuant hereto with respect to which NPB then has beneficial ownership. The date on which NPB exercises its rights under this Section 3 is referred to as the "Request Date". Such repurchase shall be at an aggregate price (the "Section 3 Repurchase Consideration") equal to the sum of: 4 (i) the aggregate Option Price paid by NPB for any shares of Common Stock acquired pursuant to the Option with respect to which NPB then has beneficial ownership; (ii) the excess, if any, of (x) the Applicable Price (defined below) for each share of Common Stock over (y) the Option Price (subject to adjustment pursuant to Section 6), multiplied by the number of shares of Common Stock with respect to which the Option has not been exercised; and (iii) the excess, if any, of the Applicable Price over the Option Price (subject to adjustment pursuant to Section 6) paid (or, in the case of Option Shares with respect to which the Option has been exercised, but the Closing has not occurred, payable) by NPB for each share of Common Stock with respect to which the Option has been exercised and with respect to which NPB then has beneficial ownership, multiplied by the number of such shares. (b) If NPB exercises its rights under this Section 3, Panasia shall, within ten (10) business days after the Request Date, pay the Section 3 Repurchase Consideration to NPB in immediately available funds, and contemporaneously with such payment, NPB shall surrender to Panasia the Option and the certificate evidencing the shares of Common Stock purchased under the Option with respect to which NPB then has beneficial ownership, and NPB shall warrant that it has sole record and beneficial ownership of such shares, and that the same are then free and clear of all liens, claims, charges and encumbrances of any kind whatsoever. Notwithstanding the foregoing, to the extent that prior notification to or approval of any banking agency or department of any federal or state government, including without limitation the Federal Deposit Insurance Corporation, the Federal Reserve Board, the New Jersey Department of Banking and Insurance or the respective staffs thereof (each, a "Regulatory Authority"), is required in connection with the payment of all or any portion of the Section 3 Repurchase Consideration, NPB shall have the ongoing option to revoke its request for repurchase pursuant to Section 3, in whole or in part, or to require that Panasia deliver from time to time that portion of the Section 3 Repurchase Consideration that it is not then so prohibited from paying and promptly file the required notice or application for approval and expeditiously process the same (and each party shall cooperate with the other in the filing of any such notice or application and the obtaining of any such approval), in which case the ten (10) business day period of time that would otherwise run pursuant to the preceding sentence for the payment of the portion of the Section 3 Repurchase Consideration shall run instead from the date on which, as the case may be, any required notification period has expired or been terminated or such approval has been obtained and, in either event, any requisite waiting period shall have passed. If any Regulatory Authority disapproves of any part of Panasia's proposed repurchase pursuant to this Section 3, Panasia shall promptly give notice of such fact to NPB. 5 If any Regulatory Authority prohibits the repurchase pursuant to this Section 3, Panasia shall promptly give notice of such fact to NPB. If any Regulatory Authority prohibits the repurchase in part but not in whole, then NPB shall have the right (i) to revoke the repurchase request or (ii) to the extent permitted by such Regulatory Authority, determine whether the repurchase should apply to the Option and/or Option Shares and to what extent to each, and NPB shall thereupon have the right to exercise the Option as to the number of Option Shares for which the Option was exercisable at the Request Date less the sum of the number of shares covered by the Option in respect of which payment has been made pursuant to Section 3(a)(ii) and the number of shares covered by the portion of the Option (if any) that has been repurchased. NPB shall notify Panasia of its determination under the preceding sentence within five (5) business days of receipt of notice of disapproval of the repurchase. (c) For purposes of this Agreement, the "Applicable Price" means the highest of (i) the highest price per share of Common Stock paid for any such share by the person or group described in Section 3(d)(i); (ii) the price per share of Common Stock received by a holder of Common Stock in connection with any merger or other business combination transaction described in Section 3(d)(ii), (iii) or (iv); or (iii) the highest "bid" price per share of Common Stock quoted in the over-the-counter market during the 40 business days preceding the Request Date; provided, however, that in the event of a sale of less than all of Panasia's assets, the Applicable Price shall be the sum of the price paid in such sale for such assets and the current market value of the remaining assets of Panasia as determined by a nationally recognized investment banking firm selected by NPB, divided by the number of shares of Common Stock outstanding at the time of such sale. If the consideration to be offered, paid or received pursuant to either of clauses (i) or (ii) shall be other than in cash, the value of such consideration shall be determined in good faith by an independent nationally-recognized investment banking firm selected by NPB and reasonably acceptable to Panasia, which determination shall be conclusive for all purposes of this Agreement. (d) As used herein, a "Repurchase Event" shall occur if (i) any person or group (as those terms are defined or used in Section 13(d) of the Exchange Act and the rules and regulations thereunder), other than NPB or an affiliate of NPB, acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of, or the right to acquire beneficial ownership of, 25% or more of the then-outstanding shares of Common Stock; (ii) Panasia shall have merged or consolidated with any person, other than NPB or an affiliate of NPB, and shall not be the surviving or continuing corporation of such merger or consolidation; (iii) any person, other than NPB or an affiliate of NPB, shall have merged into Panasia and Panasia shall be the surviving corporation, but, in connection with such merger, the then-outstanding shares of 6 Common Stock have been changed into or exchanged for stock or other securities of Panasia or any other person or cash or any other property or the outstanding shares of Common Stock immediately prior to such merger shall after such merger represent less than 50% of the outstanding shares and share equivalents of the surviving corporation; or (iv) Panasia shall have sold or otherwise transferred more than 25% of its consolidated assets to any person, other than NPB or an affiliate of NPB. 4. Payment and Delivery of Certificates. At any Closing hereunder, (a) NPB will make payment to Panasia of the aggregate price for the Option Shares so purchased by wire transfer of immediately available funds to an account designated by Panasia; (b) Panasia will deliver to NPB a stock certificate or certificates representing the number of Option Shares so purchased, registered in the name of NPB or its designee, in such denominations as were specified by NPB in its notice of exercise; and (c) NPB will pay any transfer or other taxes required by reason of the issuance of the Option Shares so purchased. 5. Public Offering Rights. Upon or after the occurrence of a Triggering Event and upon receipt of a written request from NPB, Panasia shall prepare as soon as practicable an offering circular in accordance with the Statement of Policy adopted by the Federal Deposit Insurance Corporation on August 13, 1996 on any successor policy statement or regulation, covering the Option and such number of Option Shares as NPB shall specify in its request, provided that NPB shall in no event have the right to have more than one such offering circular prepared, and provided further that Panasia shall not be required to prepare any such offering circular in connection with any proposed sale with respect to which counsel to Panasia delivers to Panasia and to NPB its opinion to the effect that no such offering circular is required under applicable laws and regulations with respect to such sale or disposition; provided further, however, that Panasia may delay preparation of any offering circular for Option Shares for a period not exceeding 90 days in the event that Panasia shall in good faith determine that any such offering would adversely affect an offering or contemplated offering of securities by Panasia. NPB shall provide all information reasonably requested by Panasia for inclusion in any offering circular to be prepared hereunder. In connection with any such offering circular, Panasia shall use its reasonable best efforts to cause to be delivered to NPB such certificates, opinions, accountant's letters and other documents as NPB shall reasonably request and as are customarily provided in connection with a securities offering. Panasia shall provide to NPB such number of copies of the final offering circular and any amendments and supplements thereto as NPB may reasonably request. All reasonable expenses incurred by Panasia in complying with the provisions of this Section 5, including without limitation reasonable printing expenses, reasonable fees and disbursements of 7 counsel for Panasia and blue sky fees and expenses, shall be paid by Panasia. Underwriting discounts and commissions to brokers and dealers relating to the Option Shares, fees and disbursements of counsel to NPB and any other expenses incurred by NPB in connection with such offering shall be borne by NPB. In connection with such offering, Panasia shall indemnify and hold NPB harmless against any losses, claims, damages or liabilities, joint or several, to which NPB may become subject, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any offering circular or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and Panasia will reimburse NPB for any legal or other expense reasonably incurred by NPB in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that Panasia will not be liable in any case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such offering circular or such amendment or supplement thereto in reliance upon and in conformity with written information furnished by or on behalf of NPB specifically for use in the preparation of such offering circular or such amendment or supplement thereto. NPB will indemnify and hold harmless Panasia to the same extent as set forth in the immediately preceding sentence but only with reference to written information furnished by or on behalf of NPB for use in the preparation of such offering circular or such amendment or supplement thereto; and NPB will reimburse Panasia for any legal or other expense reasonably incurred by Panasia in connection with investigating or defending any such loss, claim, damage, liability or action. Notwithstanding the foregoing, no indemnifying party shall be liable for any settlement effected without its prior written consent. 6. Adjustment Upon Changes in Capitalization. In the event of any change in the Common Stock by reason of stock dividends, split-ups, recapitalizations, combinations, conversions, divisions, exchanges of shares or the like, then the number and kind of Option Shares and the Option Price shall be appropriately adjusted. 7. Filings and Consents. Each of NPB and Panasia will use its reasonable best efforts to make all filings with, and to obtain consents of, all third parties and governmental authorities necessary to the consummation of the transactions contemplated by this Stock Option Agreement. 8 8. Representations and Warranties of Panasia. Panasia hereby represents and warrants to NPB as follows: (a) Due Authorization. Panasia has full corporate power and authority to execute, deliver and perform this Stock Option Agreement and all corporate action necessary for execution, delivery and performance of this Stock Option Agreement has been duly taken by Panasia. This Stock Option Agreement constitutes a legal, valid and binding obligation of Panasia, enforceable against Panasia in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity. (b) Authorized Shares. Panasia has taken all necessary corporate action to authorize and reserve for issuance all shares of Common Stock that may be issued pursuant to any exercise of the Option. 9. Representations and Warranties of NPB. NPB hereby represents and warrants to Panasia that NPB has full corporate power and authority to execute, deliver and perform this Stock Option Agreement and all corporate action necessary for execution, delivery and performance of this Stock Option Agreement has been duly taken by NPB. This Stock Option Agreement constitutes a legal, valid and binding obligation of NPB, enforceable against NPB in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity. 10. Specific Performance. The parties hereto acknowledge that damages would be an inadequate remedy for a breach of this Stock Option Agreement and that the obligations of the parties hereto shall be specifically enforceable. 11. Entire Agreement. This Stock Option Agreement and the Agreement constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all other prior agreements and understandings, both written and oral, among the parties or any of them with respect to the subject matter hereof. 12. Assignment or Transfer. NPB may not sell, assign or otherwise transfer its rights and obligations hereunder, in whole or in part, to any person or group of persons other than to an NPB subsidiary. NPB represents that it is acquiring the Option for NPB's own account and not with a view to, or for sale in connection with, any distribution of the Option or the Option Shares. 13. Amendment of Stock Option Agreement. By mutual consent of the parties hereto, this Stock Option Agreement may be amended in writing at any time, for the purpose of facilitating performance 9 hereunder or to comply with any applicable regulation of any governmental authority or any applicable order of any court or for any other purpose. 14. Validity. The invalidity or unenforceability of any provision of this Stock Option Agreement shall not affect the validity or enforceability of any other provisions of this Stock Option Agreement, which shall remain in full force and effect. 15. Notices. All notices or other communications hereunder shall be in writing and shall be deemed given upon delivery if delivered personally, two business days after mailing if mailed by prepaid registered or certified mail, return receipt requested, or upon confirmation of good transmission if sent by telecopy, addressed as follows: (a) If to NPB, to: National Penn Bancshares, Inc. Philadelphia and Reading Avenues P.O. Box 547 Boyertown, Pennsylvania 19512-0547 Attention: Lawrence T. Jilk, Jr. Chairman and CEO Telecopy No.: 610-369-6236 with a copy to: H. Anderson Ellsworth Jay W. Waldman Ellsworth, Carlton & Waldman, P.C. 1105 Berkshire Boulevard Suite 320 Wyomissing, Pennsylvania 19610 Telecopy No.: 610-371-9510 (b) If to Panasia, to: Panasia Bank 183 Main Street Fort Lee, New Jersey 07024 Attention: Moon S. Yang, President and CEO Telecopy No.: 201-947-7560 10 with a copy to: Robert A. Schwartz Jamieson, Moore, Peskin & Spicer 177 Madison Avenue Morristown, New Jersey 07960 Telecopy No.: 973-984-9549 16. Governing Law. This Stock Option Agreement shall be governed by and construed in accordance with the domestic internal law (but not the law of conflicts of law) of the Commonwealth of Pennsylvania. 17. Captions. The captions in this Stock Option Agreement are inserted for convenience and reference purposes, and shall not limit or otherwise affect any of the terms or provisions hereof. 18. Waivers and Extensions. The parties hereto may, by mutual consent, extend the time for performance of any of the obligations or acts of either party hereto. Each party may waive (i) compliance with any of the covenants of the other party contained in this Stock Option Agreement and/or (ii) the other party's performance of any of its obligations set forth in this Stock Option Agreement. 19. Parties in Interest. This Stock Option Agreement shall be binding upon and inure solely to the benefit of each party hereto, and, nothing in this Stock Option Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Stock Option Agreement. 20. Counterparts. This Stock Option Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 21. Expenses. Except as otherwise provided herein, all costs and expenses incurred by the parties hereto in connection with the transactions contemplated by this Stock Option Agreement or the Option shall be paid by the party incurring such cost or expense. 22. Defined Terms. Capitalized terms which are used but not defined herein shall have the meanings ascribed to such terms in the Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Stock Option Agreement to be executed by their duly authorized officers 11 and have caused their corporate seal to be affixed hereunto and to be duly attested, all as of the day and year first above written. NATIONAL PENN BANCSHARES, INC. (Corporate Seal) By:/s/ Lawrence T. Jilk, Jr. ------------------------- Lawrence T. Jilk, Jr., Chairman Attest:/s/ Sandra L. Spayd ------------------- Sandra L. Spayd, Secretary PANASIA BANK (Corporate Seal) By:/s/ Moon S. Yang ---------------- Moon S. Yang, President Attest:/s/ Young Lee ------------- Name: Title: EVP & Secretary 12 COMMONWEALTH OF PENNSYLVANIA : :ss. COUNTY OF BERKS : On this 10th day of February, 2000, before me, a notary public for this state and county, personally came LAWRENCE T. JILK, JR., as chairman, and SANDRA L. SPAYD, as secretary, of NATIONAL PENN BANCSHARES, INC., and each, in his/her capacity, acknowledged this instrument to be the act and deed of the corporation and the seal affixed to it to be its seal. WITNESS my official seal and signature this day and year. /s/ Deborah M. Johnson ---------------------- (Seal of Notary) Notary Public My commission expires 07/14/2001 ----------- STATE OF NEW JERSEY : :ss. COUNTY OF BERGEN : ------------------ On this 14th day of February, 2000, before me, a notary public for this state and county, personally came MOON S. YANG, as president, and YOUNG LEE , as secretary , of PANASIA BANK, and each, in his/her capacity, acknowledged this instrument to be the act and deed of the bank and the seal affixed to it to be its seal. WITNESS my official seal and signature this day and year. /s/ Joseph S. Kozay, Jr. ------------------------ (Seal of Notary) Notary Public My commission expires 01/08/04 --------- 13 EXHIBIT 4 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement") dated ___________, 2000, between PANASIA BANK, a New Jersey state bank ("Bank"), and MOON S. YANG ("Officer"). BACKGROUND Bank desires to employ Officer in its commercial banking business, on the terms and conditions set forth herein, and Officer is willing to provide such services, on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the mutual promises contained herein, and each intending to be legally bound, Bank and Officer agree as follows: 1. Position, Duties. During the term of this Agreement, Bank will employ Officer as Bank's Chairman of the Board. Officer accepts such employment, with such powers and duties as may from time to time be determined by Bank's Board of Directors or the Executive Committee of the Board. Officer will report directly to the Chairman of the Executive Committee. Officer's primary responsibility will be to manage the transition of Bank into the financial services organization of Bank's parent company, National Penn Bancshares, Inc. ("NPB"), including introducing Bank and NPB and its subsidiaries and affiliates, and their respective products and services, to Bank's customers and to Officer's personal contacts in the New York metropolitan area. In addition, Officer will develop a marketing strategy and have management oversight responsibility for expanding Bank's business into the New York metropolitan area and other geographic areas as determined by the Board of Directors of Bank. Except as provided in Section 5(f), Officer will assist the Board of Directors of Bank with the management of the resultant expansion. Except as provided in Section 5(f), Officer will devote substantially all his time and attention to, and will use his best energies and abilities in the performance of, his duties and responsibilities as prescribed in this Section 1, and will not engage in consulting work or any trade or business for his own account of for or on behalf of any other person, firm or corporation; provided, however, that Officer may own at any time, either directly or indirectly, up to 4.99% of the stock of any public company that may be a competitor of Bank, NPB or any of NPB's subsidiaries and affiliates. Officer will be entitled to 1 reasonable vacation and sick leave in accordance with Bank policy, as the same may be revised from time to time. 2. Compensation. (a) For all services to be provided by Officer pursuant to Section 1 from the date of this Agreement through ____________, 2001 [First anniversary of date of Agreement], Bank will pay Officer a base salary of One Hundred Sixty-Eight Thousand One Hundred Thirty-Seven Dollars ($168,137.00) per year. (b) For all services to be provided by Officer pursuant to Section 1 from ______________, 2001 through ____________, 2002 [Second anniversary of date of Agreement], Bank will pay Officer a base salary of One Hundred Seventy-Four Thousand Eight Hundred Sixty-Two Dollars ($174,862.00) per year. (c) For all services to be provided by Officer pursuant to Section 1 from ______________, 2002 through ____________, 2003 [Third anniversary of date of Agreement], Bank will pay Officer a base salary of One Hundred Eighty-One Thousand Eight Hundred Fifty- Six Dollars ($181,856.00) per year. (d) Bank will pay all such salary to Officer in approximately equal installments during each year on the customary salary payment dates of Bank, subject to applicable income tax withholding, deductions required by law, and other deductions authorized by Officer. 3. Health Insurance, Benefit Plans, Stock Option Plans, etc. In addition to the compensation payable to Officer pursuant to Section 2, Bank shall permit Officer, during the term of this Agreement, to participate in all health insurance and benefit plans, group insurance, pension plans, or other plan or plans providing benefits applicable generally to employees of Bank which are presently in force or which may hereafter be adopted by Bank. During the term of this Agreement, to the extent that NPB grants stock options in any year to senior management pursuant to NPB's 1997 Officers' and Key Employees' Stock Compensation Plan or any successor or similar stock compensation plan, NPB shall grant Officer options for a minimum of Three Thousand (3,000) shares of NPB common stock in such year. 4. Bonuses, Other Benefits. (a) As additional compensation for services provided hereunder from the date hereof through _________, 2001 [First anniversary of date of Agreement], Bank will pay Officer a cash bonus of Nineteen Thousand Five Hundred Forty-Four Dollars ($19,544.00). 2 (b) As additional compensation for services provided hereunder from __________, 2001 through __________, 2002 [Second anniversary of date of Agreement], Bank will pay Officer a cash bonus of Nineteen Thousand Seven Hundred Forty-Five Dollars ($19,745.00). (c) As additional compensation for services provided hereunder from __________, 2002 through ___________, 2003 [Third anniversary of date of Agreement], Bank will pay Officer a cash bonus of Nineteen Thousand Nine Hundred Fifty-Six Dollars ($19,956.00). (d) Bank will pay the foregoing cash bonuses to Officer within 30 days after the end of the respective year, subject to applicable income tax withholding, deductions required by law, and other deductions authorized by Officer. (e) As additional compensation for services provided hereunder, Officer shall be eligible, during the term of this Agreement, to participate in any bonus plan covering the officers of Bank which is presently in force or which the Bank may hereafter adopt, and to receive any bonus that may be awarded to him thereunder. Such additional compensation shall be determined in the sole discretion of Bank's Board of Directors and shall be based upon the successful integration of Bank into NPB's financial services organization and the growth of assets and new product sales of Bank based upon introductions made by Officer. (f) As additional compensation for services provided hereunder, Bank will, during the term of this Agreement: (i) Pay for, or reimburse Officer for, 100% of Officer's reasonable business expenses, upon receipt of appropriate documentation therefor; and (ii) Pay Officer a Five Hundred Fifty Dollar ($550.00) per month car allowance. (g) Officer shall not be entitled to any additional compensation for services provided as a director of Bank. 5. Term. (a) Except as otherwise set forth herein, this Agreement shall have a term of three years beginning on the date hereof. (b) Bank may terminate Officer's employment at any time if Officer shall be "disabled" for a period of 180 consecutive days. As used herein, "disability" means that, because of injury or sickness, Officer cannot perform each of the material duties of his regular occupation. If Bank terminates Officer's employment because of his "disability" for a period of 180 consecutive days: 3 (i) this Agreement shall remain in effect for the remainder of its three-year term; and (ii) Bank shall continue to pay Officer the compensation set forth in Section 2 for the remainder of the term of this Agreement, at the times set forth in Section 2, and the bonuses set forth in Section 4, at the times set forth in Section 4 (but not the stock options set forth in Section 3). (c) If Officer's employment is terminated because of Officer's death: (i) this Agreement shall terminate at that time; and (ii) within 30 days of the date of death, Bank shall pay Officer's heirs or personal representatives, in one lump sum, an amount equal to the total amount of compensation remaining to be paid to Officer pursuant to Section 2 and the bonuses remaining to be paid to Officer pursuant to Section 4 through what would have been the remaining term of the Agreement but for its termination under subparagraph (i) above. (d) Officer may at any time terminate his employment with Bank. In such event: (i) this Agreement shall terminate at that time; and (ii) Bank shall not be obligated to pay Officer any further compensation pursuant to Section 2, any further options pursuant to Section 3, or any further bonuses pursuant to Section 4, except for Section 2 compensation, if any, accrued and unpaid through the date of termination. (e) Bank may terminate Officer's employment at any time for "cause". As used herein, "cause" means Bank's good faith reasonable belief that Officer (1) committed fraud, theft, or embezzlement, (2) falsified corporate records, (3) disseminated confidential information concerning customers, Bank, NPB or any of its other subsidiaries or affiliates, or any of their employees, (4) had documented unsatisfactory job performance under NPB's corporate dismissal policy, (5) violated NPB's Code of Conduct, or (6) failed to perform his material duties hereunder or to otherwise comply with and observe the material covenants and agreements made by him herein. If Bank terminates Officer's employment for "cause": (i) Bank shall give Officer a written notice of termination effective on the date specified by Bank in said notice, which notice shall contain a full statement of the facts and reasons for such termination; (ii) this Agreement shall terminate at such time; and 4 (iii) Bank shall not be obligated to pay Officer any further compensation pursuant to Section 2, any further options pursuant to Section 3, or any further bonuses pursuant to Section 4, except for Section 2 compensation, if any, accrued and unpaid through the date of termination. (f) Notwithstanding Sections 1 or 5(a), on _______________, 2002 [One day after second anniversary of date of Agreement], Officer may resign as Bank's Chairman of the Board and reduce the amount of time and attention that Officer devotes to the performance of his duties and responsibilities as prescribed in Section 1. If Officer resigns as Chairman of the Board pursuant to this Section 5(f): (i) this Agreement shall remain in effect for the remainder of its three-year term; and (ii) Bank shall continue to pay Officer the compensation set forth in Section 2, at the times set forth in Section 2, and the benefits set forth in Section 3 (but not the stock options set forth in Section 3), and one-half of the bonus set forth in Section 4(c), at the time set forth in Section 4, provided that: (A) At the discretion of Bank, Officer continues to serve as a director of Bank; (B) Officer attends at least 75% of all meetings of the Bank's Board of Directors held thereafter; and (C) Officer consults with management of Bank, and assists with the development of new business for Bank, at least twenty (20) hours per week, thereafter. 6. Non-competition. During the term of this Agreement, Officer shall not, directly or indirectly, acting alone or in conjunction with others: (a) Engage as a director, officer, employee, partner, shareholder, or in any other capacity, in any business in competition with Bank in the counties where Bank's business is then being conducted, any contiguous or bi-contiguous counties and in the New York metropolitan area; (b) Request any customers of Bank to curtail or cancel their business with Bank; (c) Solicit, canvass or accept any business or transaction for any other person, firm or corporation which is similar to the business of Bank; (d) Induce, or attempt to influence, any employee of Bank to terminate employment with Bank or to enter into any employment or 5 other business relationship with any other person (including Officer), firm or corporation; or (e) Act or conduct himself in any manner which he shall have reason to believe is inimical or contrary to the best interests of Bank. As used herein, "business" means any banking or other financial services which Bank, NPB or any of NPB's subsidiaries or affiliates, including third party vendors, provides to customers of Bank. Officer recognizes that immediate and irreparable damage will result to Bank and NPB if Officer breaches any of the terms and conditions of this Section 6 and, accordingly, Officer hereby consents to the entry by any court of competent jurisdiction of an injunction against him to restrain any such breach, in addition to any other remedies or claims for money damages which Bank or NPB may seek. Officer represents and warrants that his experience and capabilities are such that he can obtain employment in business without breaching the terms and conditions of this Section 6, and the enforcement thereof by injunction or otherwise will not prevent him from earning a livelihood. 7. Non-disclosure. During the term of this Agreement and thereafter for a period of five years, Officer shall not, directly or indirectly, acting alone or in conjunction with others, disclose to any person, firm or corporation any of the following information which is not otherwise in the public domain: any trade secret, any details of organization or business affairs, any names of past or present customers, or any other confidential information, of Bank, NPB, or of any of NPB's other subsidiaries or affiliates. Officer recognizes that immediate and irreparable damage will result to Bank and NPB if Officer breaches any of the terms and conditions of this Section 7 and, accordingly, Officer hereby consents to the entry by any court of competent jurisdiction of an injunction against him to restrain any such breach, in addition to any other remedies or claims for money damages which Bank or NPB may seek. 8. Change in Control. (a) If, during the term of this Agreement, (1) a "Change in Control" (as defined in Section 8(d)) shall occur, and (2) thereafter, at any time, there shall be: (i) an involuntary termination of Officer's employment (other than for "cause"); 6 (ii) any reduction in Officer's title, responsibilities or authority, including such title, responsibilities or authority as such may be increased from time to time; (iii) any reduction in Officer's annual base salary in effect immediately prior to a Change in Control, or any failure to provide Officer with benefits at least as favorable as those enjoyed by Officer under any of the pension, life insurance, medical, health and accident, disability or other employee plans of Bank or NPB in which Officer participated immediately prior to a Change in Control, or the taking of any action that would materially reduce any of such compensation or benefits in effect at the time of the Change in Control; (iv) any reassignment of Officer beyond a sixty (60) minute commute by automobile from Fort Lee, New Jersey; or (v) any requirement that Officer travel in performance of his duties on behalf of Bank or NPB for a greater period of time during any year than was required of Officer during the year preceding the year in which the Change in Control occurred; then, at the option of Officer, exercisable by Officer within one hundred eighty (180) days of the occurrence of any of the foregoing events, Officer may resign from employment by delivering a notice in writing to Bank, in which case Bank shall pay Officer, in one lump sum, within 30 days of Officer's delivery of such notice, an amount equal to the total amount of compensation remaining to be paid to Officer pursuant to Section 2 and the bonuses remaining to be paid to Officer pursuant to Section 4 through the remaining original term of this Agreement. (b) Notwithstanding the foregoing or any other provision of this Agreement to the contrary, in no event shall any payment to Officer pursuant to Section 8(a) be greater than an amount equal to an amount ("X") determined pursuant to the following formula: X = (2.99A - B) x (1 + C)D. For purposes of the foregoing formula: A = Officer's "Base Amount" (as defined in subsection 8(e)) (determined pursuant to Internal Revenue Code ("Code") Section 280G(b)(3)(A)) on the date of the Change in Control; B = The present value of all other amounts which qualify as parachute payments under Code Section 280G(b)(2)(A) or (B) (without regard to the provisions of Code Section 280G(b)(2)(A)(ii)), such present value to be determined pursuant to the provisions of Code Section 280G; 7 C = 120% times 0.5 times the lowest of the semiannual applicable federal rates (determined pursuant to Code Section 1274(d)) in effect on the date of the Change in Control; and D = The number of whole semiannual periods plus any fraction of a semiannual period from the date of the Change in Control to the date of termination of the Officer's employment. If the foregoing provision results in a reduction of the payment to be made to Officer, then Officer may determine the allocation of the reduction among his various termination benefits (i.e., cash or non-cash). (c) Officer shall not be required to mitigate the amount of any payment provided for in Section 8(a) by seeking other employment or otherwise. The amount of any payment or benefit provided for in Section 8(a) shall not be reduced by any compensation earned by Officer as the result of employment by another employer or by reason of Officer's receipt of, or right to receive, any retirement or other benefits after the date of termination of employment or otherwise, except as otherwise provided therein. (d) As used herein, "Change in Control" means: (i) an acquisition by any "person" or "group" (as those terms are defined or used in Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) of "beneficial ownership" (within the meaning of Rule 13d-3 under the Exchange Act) of securities of Bank or NPB representing 24.99% or more of the combined voting power of Bank's or NPB's securities then outstanding; (ii) a merger, consolidation or other reorganization of Bank; (iii) a merger, consolidation or other reorganization of NPB, except where shareholders of NPB, immediately prior to consummation of any such transaction, continue to hold at least a majority of the voting power of the outstanding voting securities of the legal entity resulting from or existing after any such transaction and a majority of the members of the Board of Directors of the legal entity resulting from or existing after any such transaction are former members of NPB's Board of Directors; (iv) a sale, exchange, transfer or other disposition of substantially all of the assets of Bank to another entity; 8 (v) a sale, exchange, transfer or other disposition of substantially all of the assets of NPB to another entity, or a corporate division involving NPB; or (vi) a contested proxy solicitation of the shareholders of NPB which results in the contesting party obtaining the ability to cast 25% or more of the votes entitled to be cast in an election of directors of NPB. Notwithstanding the foregoing, the following shall not constitute a "Change in Control" for purposes of this Section 8: (i) NPB's failure to continue to own, directly or indirectly, a majority of the outstanding capital stock of Bank as the result of one or more public offerings by Bank of shares of its capital stock; or (ii) NPB's causing the assets, liabilities and business of the National Asian Bank Division of NPB's wholly-owned banking subsidiary, National Penn Bank, to be transferred to Bank, by a purchase and assumption transaction or otherwise. (e) As used herein, "Base Amount" means Officer's average annualized taxable compensation for the five (5) years prior to the year in which a Change in Control occurs, determined in accordance with the provisions of Code Section 280G and regulations promulgated thereunder. 9. Assignment; Benefits. (a) The benefits of this Agreement are and shall be personal to Officer, and except as otherwise expressly provided herein, none thereof shall inure to the benefit of his heirs, personal representatives, or assigns. The obligations and duties of Officer hereunder shall be personal and not assignable or delegable by him in any manner whatsoever. (b) This Agreement shall be binding upon and inure to the benefit of Bank and it shall be assignable by Bank to any bank, corporation or other entity which may acquire Bank's business or all or substantially all of the assets of Bank, or with or into which Bank may be merged. Bank shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of Bank or NPB to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Bank would be required to perform it if no such succession had taken place. Failure to obtain such assumption and agreement prior to the effectiveness of any such succession shall constitute a breach of this Agreement and the provisions of Section 8 of this Agreement shall apply. As used in Section 8 of this Agreement, "Bank" or "NPB" shall mean Bank or NPB as defined previously and any 9 successor to the business and/or assets of Bank or NPB as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. 10. Notices. All notices or other communications hereunder shall be in writing and shall be deemed given upon delivery if delivered personally or two business days after mailing if mailed by prepaid, registered or certified mail, return receipt requested, addressed as follows: If to Bank, to: Algot F. Thorell, Jr. President and Chief Executive Officer Panasia Bank 183 Main Street Fort Lee, NJ 07024 If to Officer, to: Moon S. Yang ==================== 11. Entire Agreement, Amendment. This Agreement is intended by the parties to constitute and does constitute the entire agreement between Bank and Officer with respect to the employment of Officer by Bank. This Agreement supersedes any and all prior agreements, understandings, negotiations and discussions of the parties, whether oral or written. This Agreement may be amended, modified, waived, discharged or terminated only by an instrument in writing signed by Officer or an authorized officer of Bank, as the case may be, against whom or which enforcement of the amendment, modification, waiver, discharge or termination is sought. 12. Survival. Any termination of this Agreement shall not affect the provisions of Section 7, which shall survive such termination in accordance with its terms. 13. Governing Law. This Agreement shall be governed by and construed in accordance with the domestic internal law of the State of New Jersey. 14. Interpretation of Provisions. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 10 15. Captions. The captions contained in this Agreement are for reference purposes only and are not part of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement on the date first above written. PANASIA BANK By:_____________________________ Name: Title: Witness:______________________ _____________________________ Moon S. Yang Intending to be legally bound, the undersigned hereby guarantees the due performance by Bank of its duties and obligations under this Agreement. NATIONAL PENN BANCSHARES, INC. By:_____________________________ Name: Title: 11 EXHIBIT 5 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement") dated ___________, 2000, between PANASIA BANK, a New Jersey state bank ("Bank"), and YOUNG JAI LEE ("Officer"). BACKGROUND Bank desires to employ Officer in its commercial banking business, on the terms and conditions set forth herein, and Officer is willing to provide such services, on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the mutual promises contained herein, and each intending to be legally bound, Bank and Officer agree as follows: 1. Position, Duties. During the term of this Agreement, Bank will employ Officer as an Executive Vice President and as Bank's Chief Administration Officer. Officer accepts such employment, with such powers and duties as may from time to time be determined by Bank's Board of Directors or Bank's President and Chief Executive Officer or by the Board of Directors of Bank's parent company, National Penn Bancshares, Inc. ("NPB"). Officer's primary responsibilities will include managing Bank's transition into NPB's data processing system and being actively involved in marketing Bank's and NPB's and its subsidiaries' and affiliates' products and services. In addition, Officer will be responsible for management oversight between Bank branch and operation personnel and NPB's and its subsidiaries' and affiliates' administration. Officer will devote substantially all his time and attention to, and will use his best energies and abilities in the performance of, his duties and responsibilities as prescribed in this Section 1, and will not engage in consulting work or any trade or business for his own account of for or on behalf of any other person, firm or corporation; provided, however, that Officer may own at any time, either directly or indirectly, up to 4.99% of the stock of any public company that may be a competitor of Bank, NPB or any of NPB's subsidiaries and affiliates. Officer will be entitled to reasonable vacation and sick leave in accordance with Bank policy, as the same may be revised from time to time. 2. Compensation. (a) For all services to be provided by Officer pursuant to Section 1 from the date of this Agreement through ____________, 2001 [First anniversary of date of Agreement], Bank will pay 1 Officer a base salary of One Hundred Ten Thousand Two Hundred Forty Dollars ($110,240.00) per year. (b) For all services to be provided by Officer pursuant to Section 1 from ______________, 2001 through ____________, 2002 [Second anniversary of date of Agreement], Bank will pay Officer a base salary of One Hundred Fourteen Thousand Six Hundred Fifty Dollars ($114,650.00) per year. (c) For all services to be provided by Officer pursuant to Section 1 from ______________, 2002 through ____________, 2003 [Third anniversary of date of Agreement], Bank will pay Officer a base salary of One Hundred Nineteen Thousand Two Hundred Thirty-Six Dollars ($119,236.00) per year. (d) Bank will pay all such salary to Officer in approximately equal installments during each year on the customary salary payment dates of Bank, subject to applicable income tax withholding, deductions required by law, and other deductions authorized by Officer. 3. Health Insurance, Benefit Plans, Stock Option Plans, etc. In addition to the compensation payable to Officer pursuant to Section 2, Bank shall permit Officer, during the term of this Agreement, to participate in all health insurance and benefit plans, group insurance, pension plans, or other plan or plans providing benefits applicable generally to employees of Bank which are presently in force or which may hereafter be adopted by Bank. During the term of this Agreement, to the extent that NPB grants stock options in any year to senior management pursuant to NPB's 1997 Officers' and Key Employees Stock Compensation Plan or any successor or similar stock compensation plan, NPB shall grant Officer options for a minimum of One Thousand (1,000) shares of NPB common stock in such year. 4. Bonuses, Other Benefits. (a) As additional compensation for services provided hereunder from the date of this Agreement through _________, 2001 [First anniversary of date of Agreement], Bank will pay Officer a cash bonus of Eleven Thousand One Hundred Two Dollars ($11,102.00). (b) As additional compensation for services provided hereunder from __________, 2001 through __________, 2002 [Second anniversary of date of Agreement], Bank will pay Officer a cash bonus of Eleven Thousand One Hundred Forty-Seven Dollars ($11,147.00). (c) As additional compensation for services provided hereunder from __________, 2002 through ___________, 2003 [Third anniversary of date of Agreement], Bank will pay Officer a cash 2 bonus of Eleven Thousand One Hundred Ninety-Two Dollars ($11,192.00). (d) Bank will pay the foregoing cash bonuses to Officer within 30 days after the end of the respective year, subject to applicable income tax withholding, deductions required by law, and other deductions authorized by Officer. (e) As additional compensation for services provided hereunder, Officer shall be eligible, during the term of this Agreement, to participate in any bonus plan covering the officers of Bank which is presently in force or which the Bank may hereafter adopt, and to receive any bonus that may be awarded to him thereunder. Such additional compensation shall be determined in the sole discretion of Bank's Board of Directors and shall be based upon the successful integration of Bank into NPB's financial services organization and the growth of assets and new product sales of Bank based upon introductions made by Officer. (f) As additional compensation for services provided hereunder, Bank will, during the term of this Agreement: (i) Pay for, or reimburse Officer for, 100% of Officer's reasonable business expenses, upon receipt of appropriate documentation therefor; and (ii) Pay Officer a Five Hundred Dollar ($500.00) per month car allowance. 5. Term. (a) This Agreement shall be for a term of three years beginning on the date hereof, subject to earlier termination of Officer's employment because of default by either party or Officer's "disability" for a period of 180 consecutive days. As used herein, "disability" means that, because of injury or sickness, Officer cannot perform each of the material duties of his regular occupation. (b) Officer may at any time terminate his employment with Bank. In such event: (i) this Agreement shall terminate at that time; and (ii) Bank shall not be obligated to pay Officer any further compensation pursuant to Section 2, any further options pursuant to Section 3, or any further bonuses pursuant to Section 4, except for Section 2 compensation, if any, accrued and unpaid through the date of termination. (c) Bank may terminate Officer's employment at any time for "cause". As used herein, "cause" means Bank's good faith 3 reasonable belief that Officer (1) committed fraud, theft, or embezzlement, (2) falsified corporate records, (3) disseminated confidential information concerning customers, Bank, NPB or any of its other subsidiaries or affiliates, or any of their employees, (4) had documented unsatisfactory job performance under NPB's corporate dismissal policy, (5) violated NPB's Code of Conduct, or (6) failed to perform his material duties hereunder or to otherwise comply with and observe the material covenants and agreements made by him herein. If Bank terminates Officer's employment for "cause": (i) Bank shall give Officer a written notice of termination effective on the date specified by Bank in said notice, which notice shall contain a full statement of the facts and reasons for such termination; (ii) this Agreement shall terminate at such time; and (iii) Bank shall not be obligated to pay Officer any further compensation pursuant to Section 2, any further options pursuant to Section 3, or any further bonuses pursuant to Section 4, except for Section 2 compensation, if any, accrued and unpaid through the date of termination. 6. Non-competition. During the term of this Agreement, Officer shall not, directly or indirectly, acting alone or in conjunction with others: (a) Engage as a director, officer, employee, partner, shareholder, or in any other capacity, in any business in competition with Bank in the counties where Bank's business is then being conducted, any contiguous or bi-contiguous counties and in the New York metropolitan area; (b) Request any customers of Bank to curtail or cancel their business with Bank; (c) Solicit, canvass or accept any business or transaction for any other person, firm or corporation or business similar to the business of Bank; (d) Induce, or attempt to influence, any employee of Bank to terminate employment with Bank or to enter into any employment or other business relationship with any other person (including Officer), firm or corporation; or (e) Act or conduct himself in any manner which he shall have reason to believe is inimical or contrary to the best interests of Bank. As used herein, "business" means any banking or other financial services which Bank, NPB or any of NPB's subsidiaries or 4 affiliates, including third party vendors, provides to customers of Bank. Officer recognizes that immediate and irreparable damage will result to Bank and NPB if Officer breaches any of the terms and conditions of this Section 6 and, accordingly, Officer hereby consents to the entry by any court of competent jurisdiction of an injunction against him to restrain any such breach, in addition to any other remedies or claims for money damages which Bank or NPB may seek. Officer represents and warrants that his experience and capabilities are such that he can obtain employment in business without breaching the terms and conditions of this Section 6, and the enforcement thereof by injunction or otherwise will not prevent him from earning a livelihood. 7. Non-disclosure. During the term of this Agreement and thereafter for a period of five years, Officer shall not, directly or indirectly, acting alone or in conjunction with others, disclose to any person, firm or corporation any of the following information which is not otherwise in the public domain: any trade secret, any details of organization or business affairs, any names of past or present customers or any other confidential information, of Bank, NPB or any of NPB's other subsidiaries or affiliates. Officer recognizes that immediate and irreparable damage will result to Bank and NPB if Officer breaches any of the terms and conditions of this Section 7 and, accordingly, Officer hereby consents to the entry by any court of competent jurisdiction of an injunction against him to restrain any such breach, in addition to any other remedies or claims for money damages which Bank or NPB may seek. 8. Change in Control. (a) If, during the term of this Agreement, (1) a "Change in Control" (as defined in Section 8(d)) shall occur, and (2) thereafter, at any time, there shall be: (i) an involuntary termination of Officer's employment (other than for "cause"); (ii) any reduction in Officer's title, responsibilities or authority, including such title, responsibilities or authority as such may be increased from time to time; (iii) any reduction in Officer's annual base salary in effect immediately prior to a Change in Control, or any failure to provide Officer with benefits at least as favorable as those enjoyed by Officer under any of the pension, life insurance, medical, health and accident, disability or other employee plans of Bank or NPB in which Officer participated immediately prior to a Change in Control, or the taking of any action that would 5 materially reduce any of such compensation or benefits in effect at the time of the Change in Control; (iv) any reassignment of Officer beyond a sixty (60) minute commute by automobile from Fort Lee, New Jersey; or (v) any requirement that Officer travel in performance of his duties on behalf of Bank or NPB for a greater period of time during any year than was required of Officer during the year preceding the year in which the Change in Control occurred; then, at the option of Officer, exercisable by Officer within one hundred eighty (180) days of the occurrence of any of the foregoing events, Officer may resign from employment by delivering a notice in writing to Bank, in which case Bank shall pay Officer, in one lump sum, within 30 days of Officer's delivery of such notice, an amount equal to the total amount of compensation remaining to be paid to Officer pursuant to Section 2 and the bonuses remaining to be paid to Officer pursuant to Section 4 through the remaining original term of this Agreement. (b) Notwithstanding the foregoing or any other provision of this Agreement to the contrary, in no event shall any payment to Officer pursuant to Section 8(a) be greater than an amount equal to an amount ("X") determined pursuant to the following formula: X = (2.99A - B) x (1 + C)D. For purposes of the foregoing formula: A = Officer's "Base Amount" (as defined in subsection 8(e)) (determined pursuant to Internal Revenue Code ("Code") Section 280G(b)(3)(A)) on the date of the Change in Control; B = The present value of all other amounts which qualify as parachute payments under Code Section 280G(b)(2)(A) or (B) (without regard to the provisions of Code Section 280G(b)(2)(A)(ii)), such present value to be determined pursuant to the provisions of Code Section 280G; C = 120% times 0.5 times the lowest of the semiannual applicable federal rates (determined pursuant to Code Section 1274(d)) in effect on the date of the Change in Control; and D = The number of whole semiannual periods plus any fraction of a semiannual period from the date of the Change in Control to the date of termination of the Officer's employment. 6 If the foregoing provision results in a reduction of the payment to be made to Officer, then Officer may determine the allocation of the reduction among his various termination benefits (i.e., cash or non-cash). (c) Officer shall not be required to mitigate the amount of any payment provided for in Section 8(a) by seeking other employment or otherwise. The amount of any payment or benefit provided for in Section 8(a) shall not be reduced by any compensation earned by Officer as the result of employment by another employer or by reason of Officer's receipt of, or right to receive, any retirement or other benefits after the date of termination of employment or otherwise, except as otherwise provided therein. (d) As used herein, "Change in Control" means: (i) an acquisition by any "person" or "group" (as those terms are defined or used in Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) of "beneficial ownership" (within the meaning of Rule 13d-3 under the Exchange Act) of securities of Bank or NPB representing 24.99% or more of the combined voting power of Bank's or NPB's securities then outstanding; (ii) a merger, consolidation or other reorganization of Bank; (iii) a merger, consolidation or other reorganization of NPB, except where shareholders of NPB, immediately prior to consummation of any such transaction, continue to hold at least a majority of the voting power of the outstanding voting securities of the legal entity resulting from or existing after any such transaction and a majority of the members of the Board of Directors of the legal entity resulting from or existing after any such transaction are former members of NPB's Board of Directors; (iv) a sale, exchange, transfer or other disposition of substantially all of the assets of Bank to another entity; (v) a sale, exchange, transfer or other disposition of substantially all of the assets of NPB to another entity, or a corporate division involving NPB; or (vi) a contested proxy solicitation of the shareholders of NPB which results in the contesting party obtaining the ability to cast 25% or more of the votes entitled to be cast in an election of directors of NPB. Notwithstanding the foregoing, the following shall not constitute a "Change in Control" for purposes of this Section 8: 7 (i) NPB's failure to continue to own, directly or indirectly, a majority of the outstanding capital stock of Bank as the result of one or more public offerings by Bank of shares of its capital stock; or (ii) NPB's causing the assets, liabilities and business of the National Asian Bank Division of NPB's wholly-owned banking subsidiary, National Penn Bank, to be transferred to Bank, by a purchase and assumption transaction or otherwise. (e) As used herein, "Base Amount" means Officer's average annualized taxable compensation for the five (5) years prior to the year in which a Change in Control occurs, determined in accordance with the provisions of Code Section 280G and regulations promulgated thereunder. 9. Assignment; Benefits. (a) The benefits of this Agreement are and shall be personal to Officer, and except as otherwise expressly provided herein, none thereof shall inure to the benefit of his heirs, personal representatives, or assigns. The obligations and duties of Officer hereunder shall be personal and not assignable or delegable by him in any manner whatsoever. (b) This Agreement shall be binding upon and inure to the benefit of Bank and it shall be assignable by Bank to any bank, corporation or other entity which may acquire Bank's business or all or substantially all of the assets of Bank, or with or into which Bank may be merged. Bank shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of Bank or NPB to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Bank would be required to perform it if no such succession had taken place. Failure to obtain such assumption and agreement prior to the effectiveness of any such succession shall constitute a breach of this Agreement and the provisions of Section 8 of this Agreement shall apply. As used in Section 8 of this Agreement, "Bank" or "NPB" shall mean Bank or NPB as defined previously and any successor to the business and/or assets of Bank or NPB as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. 10. Notices. All notices or other communications hereunder shall be in writing and shall be deemed given upon delivery if delivered personally or two business days after mailing if mailed by prepaid, registered or certified mail, return receipt requested, addressed as follows: 8 If to Bank, to: Algot F. Thorell, Jr. President and Chief Executive Officer Panasia Bank 183 Main Street Fort Lee, NJ 07024 If to Officer, to: Young Jai Lee ==================== 11. Entire Agreement, Amendment. This Agreement is intended by the parties to constitute and does constitute the entire agreement between Bank and Officer with respect to the employment of Officer by Bank. This Agreement supersedes any and all prior agreements, understandings, negotiations and discussions of the parties, whether oral or written. This Agreement may be amended, modified, waived, discharged or terminated only by an instrument in writing signed by Officer or an authorized officer of Bank, as the case may be, against whom or which enforcement of the amendment, modification, waiver, discharge or termination is sought. 12. Survival. Any termination of this Agreement shall not affect the provisions of Section 7, which shall survive such termination in accordance with its terms. 13. Governing Law. This Agreement shall be governed by and construed in accordance with the domestic internal law of the State of New Jersey. 14. Interpretation of Provisions. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 9 15. Captions. The captions contained in this Agreement are for reference purposes only and are not part of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement on the date first above written. PANASIA BANK By:_____________________________ Name: Title: Witness:______________________ _____________________________ Young Jai Lee Intending to be legally bound, the undersigned hereby guarantees the due performance by Bank of its duties and obligations under this Agreement. NATIONAL PENN BANCSHARES, INC. By:_____________________________ Name: Title: 10 EX-3.2 3 Exhibit 3.2 BYLAWS NATIONAL PENN BANCSHARES, INC. (A Pennsylvania Business Corporation) ARTICLE I Meetings of Shareholders Section 1.01. Place of Meeting. Meetings of shareholders of the Corporation shall be held at such place, within the Commonwealth of Pennsylvania or elsewhere, as may be fixed by the Board of Directors. If no place is so fixed, they shall be held at the office of the Corporation at Boyertown, Pennsylvania. Section 1.02. Annual Meeting. The annual meeting of shareholders for the election of directors whose terms are expiring and the transaction of any other business which may be brought properly before the meeting shall be held on such date and at such time as the Board of Directors shall determine from time to time. If for any reason such meeting is not held at the time fixed therefor, such election may be held at a subsequent meeting called for that purpose. Section 1.03. Special Meetings. Special meetings of the shareholders may be called at any time by the Board of Directors or the Chief Executive Officer or by any other person or persons authorized by statute. Such meetings shall be held on such date and time as may be fixed by the Board of Directors or the Secretary or, in the absence of such designation, as fixed by the person or persons calling the meeting. Section 1.04. Notice of Meetings. Notice of all annual meetings of shareholders shall be given by the Secretary. Written notice of the date, place, and time of all meetings of shareholders, and of the general nature of the business to be transacted at special meetings, shall be mailed to each shareholder of record entitled to vote at the meeting at least ten days prior to the day named for the meeting, unless a greater period of notice is by law required in a particular case. -1- Section 1.05. Organization. At every meeting of the shareholders, the Chairman of the Board or, if there is no such Chairman or if he is absent, the senior present Vice Chairman of the Board or, if there is no such Vice Chairman or if he is absent, the President or, in his absence, the senior present Vice President or, in his absence, a chairman chosen by the shareholders, shall act as chairman, and the Secretary or, in his absence, a person appointed by the Chairman, shall act as secretary. Section 1.06. Quorum; Action by Shareholders. The presence, in person or by proxy, of the shareholders entitled to cast a majority of the votes which all shareholders are entitled to cast on a particular matter shall constitute a quorum for the purpose of considering such matter. Unless otherwise provided herein, or in the Articles of Incorporation or by law, any action to be taken by vote of the shareholders shall be authorized upon receiving the affirmative vote of a majority of the votes cast by all shareholders entitled to vote thereon and, if any shareholders are entitled to vote thereon as a class, upon receiving the affirmative vote of a majority of the votes cast by the shareholders entitled to vote as a class. Section 1.07. Procedure for Nomination of Candidates for Director. Nominations for election to the Board of Directors may be made by the Board of Directors and by any holder of any outstanding shares of the Corporation entitled to vote for the election of directors. Nominations, other than those made by the Board of Directors, shall be made in writing and shall be delivered or mailed to the Corporation at its principal office not less than 14 days prior to any meeting of shareholders called for the election of directors whose terms expire at such meeting and shall contain the same information to the extent known to the notifying shareholder as that required to be stated by the Corporation in its proxy statement for the nominees of the Board of Directors; provided, however, that if less than 21 days' notice of the meeting is given to shareholders, such notice of nomination shall be mailed or delivered to the Corporation not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. Nominations not made in accordance with this section in his discretion, be disregarded by the -2- chairman of the meeting, and upon his instructions, the vote tellers may disregard all votes cast for each such nominee. Section 1.08. Financial Statements. Financial statements shall be sent to shareholders annually as prescribed by law, but such statements need not be examined by a certified public accountant or by a firm thereof. ARTICLE II Directors Section 2.01. Number and Term of Office. There shall be such number of directors who shall be divided into such classes and who shall be elected to serve for such terms of office as is provided in the Articles of Incorporation. Section 2.02. Vacancies. Vacancies on the Board of Directors, should they occur for whatever reason, including vacancies resulting from death, resignation, retirement, disqualification, or an increase in the number of directors, shall be filled by a majority vote of the remaining directors though less than a quorum. Each director elected by the Board of Directors pursuant to this Section 2.02 shall hold such office for a term expiring at the annual meeting of shareholders at which the term of the class to which he has been elected expires and until his successor is elected and qualified. Section 2.03. Resignations. Any director may resign at any time by giving written notice to the Board of Directors, the President, or the Secretary. Any such resignation shall take effect at the time of the receipt of such notice or at any later time specified therein. Unless otherwise specified therein, the acceptance of a resignation shall not be necessary to make it effective. Section 2.04. Annual Meeting. Immediately after each annual election of directors, the Board of Directors shall meet for the purpose of organization, election of officers, and the -3- transaction of other business at the place where such election of directors was held. Notice of such meeting need not be given. In the absence of a quorum at said meeting, the same may be held at any other time and place which shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors. Section 2.05. Regular Meetings. Regular meetings of the Board of Directors shall be held at such time and place as shall be designated from time to time by resolution of the Board. Notice of such meetings need not be given. Section 2.06. Special Meetings. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board, if any, a Vice Chairman of the Board, if any, the President or one-third or more of the directors in office. Notice of the date, time, place, and general nature of the business to be transacted at each special meeting shall be given by telephone, telegram, letter or in person, unless such notice is waived, by or at the direction of the person or persons authorized to call such meeting, to each director, at least forty-eight hours in advance of the meeting. Section 2.07. Organization. Every meeting of the Board of Directors shall be presided over by the Chairman of the Board or, if there is no such Chairman or if he is absent, the senior present Vice Chairman of the Board or, if there is no such Vice Chairman or if he is absent, the President or, in his absence, a chairman chosen by a majority of the directors present. The Secretary or, in his absence, a person appointed by the Chairman, shall act as secretary. Section 2.08. Quorum; Action by Board. Except to the extent that a greater number is required by law, a majority of all of the directors in office shall constitute a quorum for the transaction of business at any meeting, and the acts of a majority of the directors present at a meeting at which a quorum is present shall be the acts of the Board of Directors. -4- Section 2.09. Participation in Meetings. One or more directors may participate in a meeting of the Board of Directors or a committee of the Board of Directors by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Section 2.10. Compensation. Fees and expenses payable for services as a director or member of a committee of the Board of Directors shall be in such amounts as shall be determined by the Board of Directors, except that no person who receives a salary from the Corporation as an officer or employee thereof shall receive any compensation as a director or a member of a committee of the Board of Directors. Section 2.11. Directors and Emergency Officers Succession. In the event of an emergency resulting from warlike damage or an attack on the United States or any nuclear disaster of sufficient severity to prevent the conduct and management of the affairs and business of the Corporation under the direction of its directors and officers as contemplated by these Bylaws, the officers and employees of the Corporation shall continue to conduct the affairs of the Corporation under such guidance from the directors as may be available, subject to conformance with any governmental directives during the emergency. The officers shall have authority to execute and carry into effect any and all of the actions, duties, and powers which may be authorized by governmental directives for operations during emergencies, including the power to curtail, limit, suspend, or resume any operation of the Corporation and change the location of any office of the Corporation. The officers at the time of such emergency shall have the broadest powers to perform any and all acts which may be necessary for the purposes set forth in the preceding paragraphs, including power to employ additional officers and employees, to purchase and acquire or contract for the use of any services, real estate, equipment, and other supplies, materials, and resources as they may deem necessary or appropriate for the continued conduct of the operations of the -5- Corporation on such terms and conditions as to them shall seem desirable, and to obligate the Corporation to pay the expenses thereof. In order to provide for automatic succession of authority among the officer personnel of the Corporation in such an emergency, the priorities of seniority and succession of authority may be established and delegated to and among the officers of the Corporation by resolution of the Board of Directors. The officer in authority under the terms of the resolution shall have the power to assign and reassign functions and duties among any of the other officers of the Corporation. Any authority granted to such officers herein shall be subject to the authority otherwise vested in the Board of Directors, but shall not be deemed to be restricted in any way by the inability on the part of the Board of Directors to act. Section 2.12. Age Qualification and Mandatory Retirement of Directors. No person who has attained the age of sixty (60) years and is not then a director shall be qualified for nomination or for election to the Board of Directors. No person who has attained the age of seventy (70) years and was not a director on April 27, 1983, shall be qualified for nomination or election to the Board of Directors. No person who has attained the age of seventy-two (72) years shall be qualified for nomination or for election to the Board of Directors. No person who was a director on April 27, 1983, shall be qualified to serve as a director from and after the date of the annual meeting of shareholders that comes after his seventy-second birthday, and no person who was not a director on April 27, 1983, shall be qualified to serve as a director from and after the date of the annual meeting of shareholders that comes after his seventieth birthday. Accordingly, a director, upon attaining such age, shall retire from the Board of Directors effective on the date of the annual meeting of shareholders that comes after the date upon which he attains such age. The failure of any director to retire as provided in this section shall constitute proper cause for the Board of Directors to declare vacant the office of such director. -6- Section 2.13. Director Emeritus. A director who is ineligible for reelection to the Board because of age shall be eligible to serve as Director Emeritus. Such a Director may be named by the Board annually at its reorganization meeting, but may not serve more than three consecutive terms. A Director Emeritus shall have the privilege of attending all meetings of the Board and shall have the opportunity of sharing his experience with the Board, but shall have none of the responsibilities of a member of the Board, and shall have no vote on matters put before the Board. The terms "Director," "Board," or "Board of Directors" where used in these Bylaws shall not be deemed to apply to or to include a Director Emeritus. ARTICLE III Committees Section 3.01. Executive Committee. There shall be an Executive Committee consisting of such directors as shall from time to time be appointed by the Board of Directors on the recommendation of the Chief Executive Officer. The Board of Directors shall designate the Chairman of the Executive Committee. The Executive Committee shall meet on call of the Chairman of the Executive Committee, the Chairman of the Board, any Vice Chairman of the Board, or the President. During the intervals between the meetings of the Board of Directors, the Executive Committee shall possess and may exercise all the powers of the Board of Directors in the management of the business and affairs of the Corporation conferred by the Bylaws or otherwise, including, without limiting the generality of the foregoing, the power to review and act upon Corporation matters involving employee compensation, donations, insurance, pension and profit sharing, and long-range planning. Except to the extent that a greater number is required by law, a majority of all of the members of the Executive Committee in office shall constitute a quorum for the transaction of business at any meeting, and the acts of a majority of the members present at a meeting at which a quorum is present shall be the acts of the Executive Committee. The Executive Committee shall keep a record of its proceedings and report its actions to the next following meeting of the Board of Directors. -7- Section 3.02. Audit Committee. There shall be an Audit Committee which shall consist entirely of outside Directors to be appointed annually by the Board of Directors on the recommendation of the Chief Executive Officer. The object of the Audit Committee shall be to give additional assurance of the integrity of the financial information used by the management of the Corporation and by the Board in making decisions, and the integrity of the financial information used by the management of the Corporation and by the Board in making decisions, and the integrity of the financial information distributed to the shareholders and the public at large. The Audit Committee shall review the internal audit controls of the Corporation and shall have the authority to cause and supervise such examinations and audits to be made by public accountants of the books and affairs of the Corporation and subsidiary companies as it, in its discretion, deems advisable. The Audit Committee also shall review audit policies, oversee internal audits, review external audits, and review any examination reports. Members of management of the Corporation, or any of its subsidiary companies, whether or not directors of the Corporation, may be invited by the Audit Committee to attend meetings thereof. Section 3.03. Other Committees. The Board of Directors may, at any time and from time to time, appoint such other standing or special committees to perform such duties and make such investigations and reports as the Board of Directors shall by resolution determine. Such committees shall determine their own organization and times and places of meeting, unless otherwise directed by such resolution. ARTICLE IV Officers Section 4.01. Officers. The officers of the Corporation shall be a President, a Secretary, a Treasurer, and may include a Chairman of the Board, one or more Vice Chairmen of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as the Board of Directors may from time to time determine. -8- Section 4.02. Qualifications. The officers shall be natural persons of full age. Section 4.03. Election and Term of Office. The officers of the Corporation shall be elected by the Board of Directors and shall serve at the pleasure of the Board of Directors. Section 4.04. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors, the President, or the Secretary. Any such resignation shall take effect at the time of the receipt of such notice or at any later time specified therein. Unless otherwise specified therein, the acceptance of a resignation shall not be necessary to make it effective. Section 4.05. Chairman of the Board. The Board of Directors may elect one of its members to be Chairman of the Board. He shall preside at all meetings of the Board of Directors. He shall also have such other powers and duties as may be conferred upon or assigned to him by the Board of Directors, as well as any other powers specifically conferred upon him by these Bylaws. Section 4.06. Vice Chairman of the Board. The Board of Directors may elect one or more of its members to be a Vice Chairman of the Board. In the absence of the Chairman, the senior present Vice Chairman shall preside at meetings of the Board of Directors. Each Vice Chairman shall have such other powers and duties as may be conferred upon or assigned to him by the Board of Directors. Section 4.07. President. The President shall, in the absence of the Chairman and the Vice Chairmen, or if no Chairman or Vice Chairmen have been elected, preside at any meeting of the Board of Directors. The President shall have and may exercise any and all other powers and duties pertaining by law, regulation, or practice to the office of President, or imposed by these Bylaws. He shall have such other powers and duties as may be conferred upon or assigned to him by the Board of Directors. -9- Section 4.08. Chief Executive Officer. The Board of Directors may designate the Chairman of the Board, and Vice Chairman of the Board or the President as Chief Executive Officer. The Chief Executive Officer shall have general supervision over the business and operations of the Corporation, subject, however, to the control of the Board of Directors. He, or such persons as shall be designated by him, shall sign, execute, acknowledge, verify, deliver, and accept, in the name of the Corporation, deeds, mortgages, bonds, contracts, and other instruments authorized by the Board of Directors, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation; and, in general, he shall have general executive powers as well as such other powers and duties as may be conferred upon or assigned to him by the Board of Directors. Section 4.09. Vice Presidents. The Board of Directors may elect one or more Executive Vice Presidents and may elect or appoint one or more Senior Vice Presidents and Vice Presidents. Each such person shall have such powers and duties as may be conferred upon or assigned to him by the Board of Directors or the Chief Executive Officer. Section 4.10. Secretary. The Secretary shall attend to the giving of all notices required by these Bylaws to be given. He shall keep accurate minutes of meetings of the Board of Directors and shall serve as Secretary to all shareholder meetings. He shall be custodian of the corporate seal, records, documents, and papers of the Corporation including election returns and proceedings of shareholder meetings. He shall provide for the keeping of proper records of all transactions of the Corporation assigned to him, from time to time, by the Board of Directors or the Chief Executive Officer, and he shall have all other powers and duties pertaining by law, regulation, or practice, to the office of Secretary, or imposed by these Bylaws, or as may from time to time be conferred upon or assigned to him by the Board of Directors or the Chief Executive Officer. Section 4.11. Assistant Secretaries. In the absence or disability of the Secretary or when so directed by the Secretary, any Assistant Secretary may perform all the duties of the Secretary, and, -10- when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Secretary. The Assistant Secretaries shall perform such other duties as from time to time may be conferred upon or assigned to them respectively by the Board of Directors, the Chief Executive Officer, or the Secretary. Section 4.12. The Treasurer. The Treasurer shall have charge of all receipts and disbursements of the Corporation and shall have or provide for the custody of its funds and securities; he shall have full authority to receive and give receipts for all money due and payable to the Corporation, to endorse checks, drafts, and warrants in its name and on its behalf, and to give full discharge for the same; he shall deposit all funds of the Corporation, except such as may be required for current use, in such banks or other places of deposit as the Board of Directors may from time to time designate; and, in general, he shall perform all duties incident to the office of Treasurer and such other duties as may from time to time be conferred upon or assigned to him by the Board of Directors or the Chief Executive Officer. Section 4.13. Assistant Treasurers. In the absence or disability of the Treasurer or when so directed by the Treasurer, any Assistant Treasurer may perform all the duties of the Treasurer, and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Treasurer. The Assistant Treasurers shall perform such other duties as from time to time may be conferred upon or assigned to them respectively by the Board of Directors, the Chief Executive Officer, or the Treasurer. Section 4.14. Compensation of Officers and Others. The compensation of all officers shall be fixed from time to time by the Board of Directors, or any committee or officer authorized by the Board of Directors so to do. -11- ARTICLE V Limitation of Directors' Liability; Indemnification Section 5.01. To the fullest extent permitted by the Directors' Liability Act (42 Pa. C.S. ss.8361 et seq.) and the Business Corporation Law of the Commonwealth of Pennsylvania, a director of the Corporation shall not be personally liable to the Corporation, its shareholders, or others for monetary damages for any action taken or any failure to take any action unless the director has breached or failed to perform the duties of his or her office, as set forth in the Directors' Liability Act, and such breach or failure constitutes self-dealing, willful misconduct, or recklessness. The provisions of this Article Fifth shall not apply with respect to the responsibility or liability of a director under any criminal statute or the liability of a director for the payment of taxes pursuant to local, state, or federal law. Section 5.02. (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative by reason of the fact that such person is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees), amounts paid in settlement, judgments, and fines actually and reasonably incurred by such person in connection with such action, suit, or proceeding; provided, however, that no indemnification shall be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. (b) Expenses (including attorneys' fees) incurred in defending a civil or criminal action, suit, or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit, or proceeding, upon receipt of an undertaking by or on behalf of the director, officer, employee, or agent to repay such amount if it shall be ultimately determined that he or she is not entitled to be indemnified by the Corporation as authorized in this Article Fifth. -12- (c) The indemnification and advancement of expenses provided by this Article Fifth shall not be deemed exclusive of any other right to which persons seeking indemnification and advancement of expenses may be entitled under any agreement, vote of shareholders or disinterested directors, or otherwise, both as to actions in such persons' official capacity and as to their actions in another capacity while holding office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such person. (d) The Corporation may purchase and maintain insurance on behalf of any person, may enter into contracts of indemnification with any person, may create a fund of any nature (which may, but need not be, under the control of a trustee) for the benefit of any person, and may otherwise secure in any manner its obligations with respect to indemnification and advancement of expenses, whether arising under this Article Fifth or otherwise, to or for the benefit of any person, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article Fifth. Section 5.03. The limitation of liability provided in Section 5.01 of this Article Fifth and the right to indemnification provided in Section 5.02 of this Article Fifth shall apply to any action or any failure to take any action occurring on or after January 27, 1987. Section 5.04. Notwithstanding anything herein contained to the contrary, this Article Fifth may not be amended or repealed and a provision inconsistent herewith may not be adopted, except by the affirmative vote of 80% of the members of the entire Board of Directors or by the affirmative vote of shareholders of the Corporation entitled to cast at least 80% of the votes which all shareholders of the Corporation are then entitled to cast, except that if the Business Corporation Law or the Directors' Liability Act is amended or any other statute is enacted so as to decrease the exposure of directors to liability or to increase the indemnification rights available to directors, officers, or others, then this Article Fifth and any other provision of these Bylaws inconsistent with -13- such decreased exposure or increased indemnification rights shall be amended, automatically and without further action on the part of shareholders or directors, to reflect such decreased exposure or to include such increased indemnification rights, unless such legislation expressly requires otherwise. Any repeal or modification of this Article Fifth by the shareholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation or any right to indemnification from the Corporation with respect to any action or any failure to take any action occurring prior to the time of such repeal or modification. Section 5.05. If, for any reason, any provision of this Article Fifth shall be held invalid, such invalidity shall not affect any other provision not held so invalid, and each such other provision shall, to the full extent consistent with law, continue in full force and effect. If any provision of this Article Fifth shall be held invalid in part, such invalidity shall in no way affect the remainder of such provision, and the remainder of such provision, together with all other provisions of this Article Fifth shall, to the full extent consistent with law, continue in full force and effect. Section 5.06. Article Fifth (as in effect on the day prior to the day on which this new Article Fifth is approved by the shareholders of the Corporation), and all provisions of the Bylaws of the Corporation insofar as they are inconsistent with this Article Fifth, are hereby repealed, except that with respect to acts or omissions occurring prior to January 27, 1987, such former Article Fifth and such other provisions of the Bylaws of the Corporation shall remain in full force and effect. ARTICLE VI Share Certificates; Transfer Section 6.01. Share Certificates. Share certificates shall be signed by the manual, facsimile, printed, or engraved signatures of the Chairman of the Board or a Vice Chairman of the Board or the President or a Vice President and the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer of the Corporation, but one of such signatures shall be a manual -14 signature unless the certificates are signed by a transfer agent or a registrar, and shall be sealed with the corporate seal, which may be a facsimile, engraved, or printed seal. In case any officer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer had not ceased to be such at the date of its issue. Section 6.02. Transfer of Shares. Transfer of shares of the Corporation shall be made only on the books of the Corporation by the owner thereof or by his attorney thereunto authorized, upon surrender of the share certificates to the Secretary or a transfer agent of the Corporation accompanied by a duly executed power of attorney. Section 6.03. Transfer Agent and Registrar; Regulations. The Corporation may, if and whenever the Board of Directors so determines, maintain one or more transfer offices or designate one or more transfer agents, where or by which the shares of the Corporation shall be transferable, and also maintain one or more registry offices or designate one or more registrars where or by which the shares shall be registered; and no certificates for shares of the Corporation in respect of which a registrar shall have been designated shall be valid unless countersigned and registered by such registrar. The Board of Directors may also make such additional rules and regulations as it may deem expedient concerning the issue, transfer, and registration of share certificates. Section 6.04. Lost, Destroyed, and Mutilated Certificates. The Board of Directors, by standing resolution or by resolutions with respect to particular cases, may authorize the issue of new share certificates in lieu of share certificates lost, destroyed, or mutilated, upon such terms and conditions, including the posting of an open-penalty bond, as the Board of Directors may direct. -15- ARTICLE VII Miscellaneous Provisions Section 7.01. Notice of Meetings. Any notice required to be given by the Corporation to any shareholder, director, or committee member may be (i) delivered personally, (ii) mailed by first class United States mail, postage prepaid, addressed to the shareholder's, director's, or committee member's address appearing on the books of the Corporation, or supplied by him to the Corporation for the purpose of notice, or (iii) telegraphed or transmitted by a similar mode of communication to the address identified in clause (ii) above. If notice is sent by mail less than ten days prior to any shareholders', directors', or committee meeting, notice shall be deemed to have been given to the person entitled thereto twenty-four hours after deposit in the United States mail; otherwise, notice shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or when deposited with a telegraph or other transmitting office for transmission to such person. Any shareholder, director, or committee member may waive notice of any meeting before or after the meeting, and his attendance at a meeting shall constitute a waiver of notice of such meeting, unless he announces at the meeting that he is attending solely for the purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Section 7.02. Amendments. Bylaws may be adopted, amended, or repealed by the Board of Directors in the manner provided in Section 2.08 or by the shareholders in the manner provided in Section 1.06. - ---------- Bylaws effective October 1, 1982 Amended April 11, 1984 - Sections 2.01; 2.02 Amended April 9, 1986 - Sections 2.02; 2.12; 3.01; 3.02 Amended April 21, 1987 - Article 5 Amended April 24, 1996 - Section 2.13 Amended March 26, 1997 - Section 1.06 Amended February 23, 2000 - Section 1.04 -16- EX-10.4 4 AMENDMENT 1999-1 TO THE NATIONAL PENN BANCSHARES, INC. PENSION PLAN As authorized by Section 10.1 of the National Penn Bancshares, Inc. Pension Plan ("Plan") as amended and restated effective January 1, 1989, the employer, National Penn Banchares, Inc., hereby amends the Plan in the following manner: FIRST: Article I is amended to clarify the coverage of employees of National Penn Mortgage Co. as to whether such individuals will be members of the covered class of employees. As amended, the definition of "Covered Class" in Article I shall contain additional provisions that shall read as follows: (a) Any individual who performs one Hour of Service as an Employee of National Penn Mortgage Co. (or who following a break in service is reemployed as an employee of National Penn Mortgage Co. and performs one Hour of Service) on or after June 1, 1999 shall not be in the Covered Class. (b) Any individual who first performs one Hour of Service as an Employee of National Penn Bancshares, Inc. (or who following a break in service is reemployed as an Employee of National Penn Bancshares, Inc. and performs one Hour of Service) on or after June 1, 1999 and who is subsequently transferred to the employment of National Penn Mortgage Co. shall not be in the Covered Class as of the date of transfer. (c) Any individual who is a Participant in the Plan on or before May 31, 2000, who first performs one Hour of Service as an Employee of National Penn Bancshares, Inc. (or who following a break in service is reemployed as an Employee of National Penn Bancshares, Inc. and performs one Hour of Service) on or before May 31, 1999, and who is then transferred to the employment of National Penn Mortgage Co. on or before May 31, 2000 shall continue to be in the Covered Class and shall continue to accrue benefits under the terms of the Plan. (d) Any individual who is a Participant in the Plan on or before May 31, 2000, who first performs one Hour of Service as an Employee of National Penn Bancshares, Inc. ( or who following a break in service is reemployed as an Employee of National Penn Banchares, Inc. and performs one Hour of Service) on or before May 31, 1999, and who is then transferred to the employment of National Penn Mortgage Co. on or before June 1, 2000 shall cease to be in the Covered Class and shall cease to accrue benefits under the terms of the Plan. The Accrued Benefit of such a Participant shall be calculated as provided in Section 5.6. SECOND: This amendment is made effective as of January 1, 2000. THIRD: All other provisions of the Plan remain in full force and effect. Executed this 23rd day of February, 2000 by the duly authorized agent of National Penn Bancshares, Inc. /s/ Sandra Spayd Title: Corporate Secretary EX-10.5 5 EXHIBIT 10.5 Amendment 2000-1 to the National Penn Bancshares, Inc. Pension Plan As authorized by Section 10.1 of the National Penn Bancshares, Inc. Pension Plan ("Plan") as amended and restated effective January 1, 1989, the employer, National Penn Bancshares, Inc., hereby amends the Plan in the following manner: FIRST: Article I is amended to clarify the coverage of employees of Panasian Bank as to whether such individuals will be members of the covered class of employees. As amended, the definition of "Covered Class" in Article I shall contain additional provisions that shall read as follows: (a) Any individual who is an Employee of Panasian Bank shall not be in the Covered Class, except as described in Sections (b) and (c) below. (b) Any individual who is a Participant in the Plan on or before December 31, 2000, who first performs one Hour of Service as an Employee of National Penn Bancshares, Inc. (or who following a break-in-service is reemployed as an Employee of National Penn Bancshares, Inc. and performs one Hour of Service) on or before December 31, 1999, and who is then transferred to the employment of Panasian Bank on or before December 31, 2000 shall continue to be in the Covered Class and shall continue to accrue benefits under the terms of the Plan. (c) Any individual who is a Participant in the Plan on or before December 31, 2000, who first performs one Hour of Service as an Employee of National Penn Bancshares, Inc. (or who following a break-in-service is reemployed as an Employee of National Penn Bancshares, Inc. and performs one Hour of Service) on or before December 31, 1999, and who is then transferred to the employment of Panasian Bank on or after January 1, 2001 shall cease to be in the Covered Class and shall cease to accrue benefits under the terms of the Plan. The Accrued Benefit of such a Participant shall be calculated as provided in Section 5.6. SECOND: This amendment is made effective as of date of execution. THIRD: All other provisions of the Plan remain in full force and effect. Executed this 23rd day of February, 2000, by the duly authorized agent of National Penn Bancshares, Inc. /s/ Sandra L. Spayd Title: Corporate Secretary EX-10.7 6 NATIONAL PENN BANCSHARES, INC. CAPITAL. ACCUMULATION PLAN (Amended and Restated Effective January 1, 1997) Amendment No. 2 National Penn Bancshares, Inc. (the "Company"), adopted the National Penn Bancshares, Inc. Capital Accumulation Plan, which Plan was last amended and completely restated effective January 1, 1997. The Company hereby further amends the Plan as hereinafter set forth. 1. The first sentence of subsection 4(a) is amended effective January 1, 2000 to delete the words "even multiple of 1.0%" and insert the word "percentage" in place thereof. 2. Subsection 4(d)(i) is amended effective January 1, 1999 to add a sentence at the end thereof to read as hereinafter set forth. "Notwithstanding the foregoing, with respect to a Member who is an Employee on the last day of the Plan Year the amount of the Participating Company contribution shall be adjusted to the extent necessary so that the contribution amount is the amount which would have been contributed if the Member's salary reduction contributions for the Plan Year were made as an equal percentage of Compensation throughout the portion of the Plan Year the Member was eligible (if such results in a greater matching contribution)." Executed this 31st day of December, 1999. ---- Attest: NATIONAL PENN BANCSHARES, INC. /s/ Sandra L. Spayd - ---------------------------- By: /s/ Wayne R. Weidner Secretary --------------------------- (corporate seal) EX-10.8 7 NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN Adopted by Board of Directors December 26, 1984 Plan Document As Amended By Board Dec. 16, 1998 Replaces previous Plan of Feb. 20, 1991 Amended Schedule B as approved by Board on May 10, 1999 NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN AMENDMENT AND RESTATEMENT - 1998 The National Penn Bancshares, Inc. Executive Incentive Plan is hereby amended and restated in its entirety as follows: Since formation, National Penn Bancshares, Inc. ("NPB"), as a holding company for National Penn Bank (the "Bank"), has maintained in effect the executive incentive plan originally adopted by the Bank on July 26, 1978. NPB now desires to formalize the terms of the plan in a written document as set forth herein. The National Penn Bancshares, Inc. Executive Incentive Plan (the "Plan") is an unfunded deferred compensation arrangement for selected employees. The purpose of the Plan is to motivate executives to meet and exceed established financial goals and to promote a superior level of performance relative to competitive banking institutions. Through payment of incentive compensation beyond a salary, the Plan provides reward for meeting and exceeding the established financial goals as well as recognition of individual achievements for certain employees. 1. Definitions. The following terms have the meanings specified below, unless the context in which they are used otherwise requires: (a) "Affiliate" means any corporation which is included within a "controlled group of corporations" including NPB, as determined under Section 1563 of the Internal Revenue Code of 1986, as amended. (b) "C.E.O." means the Chief Executive Officer of NPB. (c) "Change in Control or Ownership" means: (i) an acquisition by any "person" or "group" (as those terms are defined or used in Section 13(d) of the Securities Exchange Act of 1934) of "beneficial ownership" (within the meaning of Rule 13d-3 under such Act) of securities of NPB representing 24.99% or more of the combined voting power of NPB's securities then outstanding; (ii) a merger, consolidation or other reorganization of Bank, except where the resulting entity is controlled, directly or indirectly, by NPB; (iii) a merger, consolidation or other reorganization of NPB, except where shareholders of NPB immediately prior to consummation of any such transaction continue to hold at least a majority of the voting power of the outstanding 1 voting securities of the legal entity resulting from or existing after any transaction and a majority of the members of the Board of Directors of the legal entity resulting from or existing after any such transaction are former members of NPB's Board of Directors; (iv) a sale, exchange, transfer or other disposition of substantially all of the assets of the Employer to another entity, except to an entity controlled, directly or indirectly, by NPB; (v) a sale, exchange, transfer or other disposition of substantially all of the assets of NPB to another entity, or a corporate division involving NPB; or (vi) a contested proxy solicitation of the shareholders of NPB that results in the contesting party obtaining the ability to cast 25% or more of the votes entitled to be cast in an election of directors of NPB. (d) "Committee" means the Compensation Committee of the Board of Directors of NPB. (e) "Employer" means NPB or the Affiliate which employs the Participant. (f) "Fund" means the pool of funds generated, based on the formula established by the Committee, to be distributed to Plan Participants. (g) "Mandatory Deferral" means twenty-five percent (25%) of the award received by a Type A or Type B Participant under this Plan. (h) "Participant" means an eligible officer or employee of NPB or an Affiliate who is designated by the C.E.O. and approved by the Committee for participation in the Plan for the relevant Plan Year, or a person who was such at the time of his retirement, death, disability or resignation and who retains, or whose beneficiaries obtain, benefits under the Plan in accordance with its terms. (i) "Plan Year" means the calendar year. (j) "Tax Deferral" means that portion of the award received by a Type A or Type B Participant under the Plan which the Participant elects, pursuant to Schedule C attached hereto and made a part hereof, to receive as a deferred payment. 2 2. Plan Participation. (a) To be eligible for an award under this Plan, a Participant must be in the active full-time service of NPB or an Affiliate at the close of the Plan Year. (b) Effective January 1, 1985, prior to January 31 of each Plan Year, the Chairman and CEO shall recommend to the Committee, in writing, those employees who are eligible to participate in the Plan for such Plan Year. The Committee shall meet as soon as practicable thereafter and act upon the recommendations of the Chairman and C.E.O. Those employees approved by the Committee shall be entitled to participate in the Plan for such Plan Year. (c) At the Committee's discretion, the Committee may act upon the recommendation of the Chairman and C.E.O. with respect to participation of an employee whose employment with NPB or an Affiliate commences after January 1 but prior to July 1 of a Plan Year. Upon approval by the Committee, such Participant may participate in the Plan based on his or her earnings for such Plan Year. (d) Each year, the Committee shall classify the Participants into Type A, Type B or Type C, as specified on Schedule A attached to this plan document, and shall specify different award formulae for each category. The Committee also shall specify the method by which the amount to be allocated for the benefit of each Participant from the Fund shall be determined. Participants, as classified into Type A, Type B or Type C, each year will be listed on Schedule A attached to this plan document. This schedule will be revised each year, as appropriate. (e) At the Committee's discretion, the Committee may act upon the recommendation of the Chairman and C.E.O. with respect to participation by a Participant whose classification changes among Type A, Type B or Type C after January 1 but prior to July 1 of a Plan Year. Upon approval by the Committee, such Participant may participate in the Plan in the new classification based on his or her earnings for such Plan Year. 3. Performance Goals. (a) Effective January 1, 1985, performance goals and appropriate financial thresholds shall be established each Plan Year by the Committee prior to January 31 of that Plan Year. The established goals shall relate to the financial performance of NPB or an Affiliate or unit thereof. (b) Each year, the performance goals for the year will be shown on Schedule B attached to this plan document. This schedule shall be revised each year, as appropriate. 3 (c) An award to a Participant may be conditioned on the performance of such Participant, as determined by the Committee. 4. Calculation of Awards. If both the internal and external performance goals set forth in Schedule B are met, the Fund shall be distributed among Participants as follows: (a) 50% of the Fund shall be allocated to the Type A Participants and shall be divided equally between the Chairman and C.E.O. and President of NPB; provided, however, that the amount distributed to any individual shall not exceed 50% of such individual's base salary. To the extent that any amount allocated to the Type A Participants is not distributed to them, such amount shall be added to the amount to be allocated to and divided among the Type B and Type C Participants as provided in subparagraph (2) below. (b) 50% of the Fund shall be allocated to and divided among the Type B and Type C Participants; provided, however, that no Type B Participant shall receive an award in excess of 35% of base salary and no Type C Participant shall receive an award in excess of 25% of base salary. 5. Distribution of Awards. (a) (i) The Committee shall cause an aggregate account to be established on the Employer's books for all of the Type A and Type B Participants (the "Mandatory Deferral Account") and shall credit annually the Mandatory Deferral Account with an amount equal to the Mandatory Deferral of all Type A and Type B Participants. The Mandatory Deferral Account shall be credited, as of the last day of each calendar quarter, with interest calculated at the rate paid on the Investors Trust Company Money Market account for such quarter. (ii) The human resources department of the Employer shall maintain individual accounts which shall reflect the share of each Participant in the Mandatory Deferral Account (each referred to as an "Individual Mandatory Deferral Account"). Interest credited to the Mandatory Deferral Account shall be allocated among the Participants in the respective proportions that the balance in each Participant's Individual Mandatory Deferral Account bears to the total balance in the Mandatory Deferral Account on the date that such interest is credited. (iii) The human resources department of the Employer shall maintain records which shall reflect the amounts in each Participant's Individual Mandatory Deferral Account attributable to each Plan Year, i.e., for each Plan Year for which a Participant receives an award, such records shall show the amount of such award plus the interest earned thereon through the 4 most recent date interest was credited thereon (for each Plan Year, such amount is referred to herein as the "Plan Year Balance"). The sum of all Plan Year Balances shall equal the total balance in a Participant's Individual Mandatory Deferral Account. (iv) If, at the end of the fifth Plan Year following the Plan Year for which a particular award was made to a Participant, such Participant is still employed by NPB or an Affiliate or has retired at age 60 or later or has died on or before the last day of such Plan Year, such Participant's Individual Mandatory Deferral Account shall be credited by the Employer with an additional amount equal to the Plan Year Balance relating to the Plan Year of five years before (the "Matching Contribution"). (v) For purposes of this subparagraph 5(a), a Participant shall be deemed to be still employed by NPB or an Affiliate as of the last day of any Plan Year on which a balance exists in such Participant's Individual Mandatory Deferral Account if such Participant is no longer then performing services on behalf of NPB or such Affiliate as a result of such Participant's disability. (b) (i) Type A and Type B Participants may elect to have the payment of all or a portion of the balance of their awards deferred, i.e., the Tax Deferral amount. Effective January 1, 1985, such election shall be made before the beginning of the relevant Plan Year or, in the case of a new employee or a newly classified Type A or Type B Participant, prior to his or her commencement of employment or new classification as a Type A or Type B Participant, and shall be in the form of Schedule C attached to this plan document. The aggregate amount of the Tax Deferral for the Type A and Type B Participants shall be credited to an account on the Employer's books (the "Tax Deferral Account"). The Tax Deferral Account shall be credited, as of the last day of each calendar quarter, with interest calculated at the rate paid on the Investors Trust Company Money Market account for such quarter. (ii) The human resources department of the Employer shall maintain individual accounts which shall reflect the share of each Participant in the Tax Deferral Account (each referred to as an "Individual Tax Deferral Account"). Interest credited to the Tax Deferral Account shall be allocated among the Participants in the respective proportions that the balance in each Participant's Individual Tax Deferral Account bears to the total balance in the Tax Deferral Account on the date that such interest is credited. (c) Awards to Type A and Type B Participants not deferred pursuant to Subparagraph (b) above and all awards to Type C Participants shall be payable in cash as soon as practicable after the close of the Plan Year. 5 (d) In the event of a Participant's death prior to receipt of his or her award earned hereunder (including amounts allocated to such Participant's Individual Mandatory Deferral Account and Individual Tax Deferral Account), the award shall be paid, within thirty (30) days of the last day of the calendar quarter during which the Participant's death occurred, to the Participant's designated beneficiary under the Employer's group life insurance plan or, in the absence of a valid designation, to the Participant's estate. 6. Manner of Payment of Mandatory and Tax Deferral Amounts. (a) Prior to the end of the fifth Plan Year following the Plan Year for which an award was made to a Type A or Type B Participant, such Participant may elect to have the balance on the last day of such fifth Plan Year in such Participant's Individual Mandatory Deferral Account, after the addition of the Matching Contribution (in the aggregate, the "Total Balance"), transferred and credited to such Participant's Individual Tax Deferral Account, if any, for distribution in accordance with the Participant's irrevocable election pursuant to Schedule C. Such an election shall be in the form of Schedule D attached to this plan document. If the Participant does not elect to transfer the Total Balance to the Participant's Individual Tax Deferral Account, or if the Participant does not have an Individual Tax Deferral Account, the Total Balance shall be paid in cash to the Participant as soon as practicable after the close of the Plan Year. (b) The amount credited to a Participant's Individual Tax Deferral Account, including amounts transferred pursuant to subparagraph (a) immediately above, shall be paid to such Participant in one lump sum or in annual installments. The actual manner of distribution will be in accordance with the Participant's irrevocable election, the form of which is attached hereto as Schedule C; provided, however, that if the Participant selects a distribution in annual installments, such installment will be paid in a manner which complies with any applicable rules, regulations or laws. 7. Funding. (a) Deferred award obligations under the Plan shall be paid from the general assets of NPB or an Affiliate. (b) NPB, or an Affiliate, in its sole discretion, may earmark assets or other means to meet the deferred award obligations provided under the Plan. Any assets which may be earmarked to meet NPB's or an Affiliate's deferred award obligations provided under the Plan shall continue for all purposes to be part of the general funds of NPB or an Affiliate and no person other than NPB or the Affiliate shall by virtue of the provisions of the Plan have any interest in such assets. To 6 the extent a Participant or his beneficiary acquires a right to receive deferred award payments from NPB or an Affiliate under the Plan, such right shall be no greater than the right of any unsecured general creditor of NPB or an Affiliate. (c) Nothing contained in the Plan and no action taken pursuant to the provisions of the Plan shall create or be construed to create a trust of any kind, or a fiduciary relationship between NPB or an Affiliate and a Participant or any other person. 8. Plan Administration. (a) The Committee shall, with respect to the Plan, have full power and authority to construe, interpret and manage, control and administer the Plan, and to pass and decide upon cases in conformity with the objectives of the Plan under such rules as the Board of Directors of NPB may establish. (b) Any decision made or action taken by the Board of Directors of NPB or the Committee arising out of, or in connection with the administration, interpretation, and effect of the Plan shall be at their absolute discretion and shall be conclusive and binding on all parties. (c) The members of the Committee and the members of the Board of Directors of NPB shall not be liable for any act or action, whether of omission or commission, made in connection with the interpretation and administration of the Plan and which results in a loss, damage, expense or depreciation, except when due to their own gross negligence or willful misconduct. 9. Amendment and Termination. NPB reserves the right to amend the Plan from time to time and to terminate the Plan at any time. All amendments, including any amendment to terminate the Plan, shall be adopted by the Board of Directors of NPB. The Committee will give prompt written notice to each Participant of any amendment or termination of the Plan. 10. Change in Control or Ownership. (a) Subject to the further terms and provisions of this Paragraph 10, the Plan shall automatically terminate on the date that a Change in Control or Ownership shall occur, without necessity of any action by the Board of Directors of NPB. (b) If a Change in Control or Ownership shall occur, each Participant's Individual Mandatory Deferral Account shall be credited, as of the day immediately preceding the date on which such Change in Control or Ownership occurred, with additional amounts as follows: An amount equal to each Plan Year Balance shall be credited by the Employer to such Participant's Individual 7 Mandatory Deferral Account (such additional amounts are referred to herein as "Change in Control Matching Contributions"). (c) If a Change in Control or Ownership shall occur, the Employer shall pay each Participant a cash amount equal to the total amounts credited, as of the date such Change in Control or Ownership occurred, to (i) such Participant's Individual Mandatory Deferral Account (including all Change in Control Matching Contributions made pursuant to subparagraph (b) hereof) and (ii) such Participant's Individual Tax Deferral Account, if any. The Employer shall pay such total amounts to the Participants within thirty (30) days of the termination of the Plan (as provided in subparagraph (a) hereof). 11. Effective Date. The initial effective date of the Plan shall be January 1, 1984. 12. Miscellaneous Provisions. (a) The Plan does not constitute a contract of employment, and participation in the Plan shall not give any Participant the right to be retained in the service of NPB or an Affiliate or any right or claim to a benefit under the Plan unless such right or claim has specifically accrued under the terms of this plan document. (b) NPB or an Affiliate reserves the right to withhold from any deferred award payments payable hereunder, any amounts required to be withheld under the federal income tax laws. (c) The captions of the several paragraphs and subparagraphs of this Plan are inserted for convenience of reference only and shall not be considered in the construction hereof. (d) Whenever any word is used herein in the singular form, it shall be construed as though it were used in the plural form, as the context requires, and vice versa. (e) A masculine, feminine or neuter pronoun, whenever used herein, shall be construed to include all genders as the context requires. (f) This plan document may be executed in any number of counterparts, each of which shall be deemed one and the same instrument which may be sufficiently evidenced by any one counterpart. (g) Except to the extent pre-empted by federal law, this plan document shall be construed, administered and enforced in accordance with the domestic internal law of the Commonwealth of Pennsylvania. 8 (THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK) 9 SCHEDULE A Participants for the ____ Plan Year consist of Types A, B, and C as defined in the Plan document. It is anticipated that the following named persons will meet the eligibility requirements for participation as of December 31, ____. It is expected that there could be additional individuals whose eligibility could be determined later in the year, who would be named a participant as of December 31, ____. Named participants are classified accordingly: CLASS A (2 persons) (name and grade level) [CHAIRMAN AND C.E.O.] [PRESIDENT] CLASS B (__ persons) (name and grade level) [INSERT NAMES AND GRADE LEVELS] CLASS C (__ persons) (name and grade level) [INSERT NAMES AND GRADE LEVELS] 10 SCHEDULE B NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN ____ PERFORMANCE GOALS [SUBJECT TO CHANGE] Awards pursuant to the Plan will not be made unless the internal and external performance goals set forth below are met. INTERNAL PERFORMANCE GOALS FOR THE ____ PLAN YEAR The diluted per share operating income of NPBC for ____ must exceed the diluted per share operating income for _____. EXTERNAL PERFORMANCE GOALS FOR THE_______ PLAN YEAR The net operating income of NPB before securities transactions on realized return on average common equity for ____ must exceed the average of the net operating income before securities transactions on realized return on average common equity for ____ for the banks or bank holding companies in the peer group set forth on Schedule B-2 A. Internal Performance Goals amended 5/10/99 11 SCHEDULE B-1 PAY OUT FORMULA 1. Obtaining an operating return on average equity triggers an incentive pay out as follows: 100% of peer group $0 100.1% of peer group .___% of average assets 130% of peer group .___% of average assets Interpolation is required between 100.1% and 130%. 2. Obtaining #1 in return on equity triggers an added pay out of $______. 12 SCHEDULE B-2 The ____ banking companies which form the peer group are: [INSERT PEER GROUP] 13 SCHEDULE C NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN DEFERRAL ELECTION LETTER TO THE COMMITTEE: In accordance with the National Penn Bancshares, Inc. Executive Incentive Plan, as amended and restated in 1998, I hereby request to defer receipt of that portion of any award earned by me (to the extent provided in Paragraph 2 below) for services rendered as an eligible Participant in the Plan during the calendar year specified below and eligible to be received in cash. This election shall be governed by all of the provisions of the Plan. 1. This request shall be effective beginning with calendar year ____. 2. This voluntary deferral request shall apply to ________________% of my award. 3. My deferred award and the interest thereon shall become payable on the January 1 next following the date I retire or otherwise cease to be employed by NPB or an Affiliate of NPB. 4. I irrevocably elect that, when payable, my deferred award and the interest thereon shall be paid to me as indicated below: ( ) In one lump sum. ( ) In a series of five annual installments. ( ) In a series of ten annual installments. I agree that such terms and conditions shall be binding upon my beneficiaries, distributees, and personal representatives. Unless noted below, my beneficiaries shall be the same as designated for my group life insurance. 14 - ------------------------- -------------------------------- Date Signature of Participant Approved By: - ------------------------- -------------------------------- Date Signature of the Chairman of the Committee - ------------------------------------------------------------------------------- Name of Participant 15 SCHEDULE D NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN TRANSFER ELECTION LETTER TO THE COMMITTEE: In accordance with the National Penn Bancshares, Inc. Executive Incentive Plan, as amended and restated in 1998, I hereby request to transfer the balance in the Individual Mandatory Deferral Account established in my name for the award earned by me for services rendered as an eligible Participant in the Plan during the calendar year specified below, eligible to be received in cash, to the Individual Tax Deferral Account established in my name for the award earned by me for services rendered as an eligible Participant in the Plan. This election shall be governed by all of the provisions of the Plan. 1. This request shall be for the Individual Mandatory Deferral Account established in my name for the award earned by me for calendar year ____. 2. Payment of the award transferred and deferred pursuant hereto shall be in accordance with the election made for the Tax Deferral amount voluntarily deferred pursuant to deferral election letter dated _________. - ------------------------------ ------------------------------ Date Signature of Participant Approved By: - ------------------------------ ------------------------------ Date Signature of Chairman of the Committee 16 EX-10.9 8 NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN Adopted by Board of Directors December 26, 1984 PLAN YEAR 2000 As Amended By Board Dec. 16, 1998 Replaces previous Plan of Feb. 20, 1991 Amended Schedule B as approved by Board on May 10, 1999 SCHEDULE A Participants for the 2000 Plan Year consist of Types A, B, and C as defined in the Plan document. It is anticipated that the following named persons will meet the eligibility requirements for participation as of December 31, 2000. It is expected that there could be additional individuals whose eligibility could be determined later in the year, who would be named a participant as of December 31, 2000. Named participants are classified accordingly: CLASS A (2 persons) (name and grade level) Lawrence T. Jilk, Jr. 999 Wayne R. Weidner 999 CLASS B (27 persons) (name and grade level) Bruce G. Kilroy 999 Todd Alderfer 111 Garry D. Koch 999 Brian Appleton 111 Frederick C. Peters II 999 Nancy R. Corson 111 Glenn Moyer 999 Lloyd Reichenbach 111 Kathy B. Schauer 999 Michael L. Wummer 111 Algot F. Thorell, Jr. 999 Joseph C. Walter, Jr. 999 Carol Franklin 110 Sharon L. Weaver 999 Sandra Hoffman 110 Tarrie Miller 110 Ronald L. Bashore 113 Larry A. Rush 110 Timothy A. Day 113 Sandra L. Spayd 110 Scott Gruber 113 Michael R. Reinhard 113 Dennis Moyer 109 Bruce L. Ressler 113 Gary L. Rhoads 113 Joseph C. Walker 113 Jack Mikus 112 CLASS C (27 persons) (name and grade level) Earl Houseknecht 110 Michelle Debkowski 107 P. Robert Keeley 110 Rich Gentile 107 Ed Shin 110 Eugene Guinther 107 Linda S. Stark 110 Dick Haddock 107 Robert Latshaw 107 Lew Freeman 109 John Tucker 107 Robin Hitchcock 109 Donna Wentzel 107 Hugh (Skip) Marshall 109 Clarence Martindell 109 Marcia (Borowski) Stark 106 Cindy Rankin 109 Frank Gehringer 106 Dan Tempesco 109 Steve Kunkel 106 Sandra Massaro 106 Richard Sutton 108 Janice McCracken 106 Teresa Steuer 106 Mary Lou Dietz 105 Sharon McMichael 105 Patricia Angstadt 104 OLD PAGE - was amended 5/10/99 see next page for correct Schedule B SCHEDULE B NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN 1999 PERFORMANCE GOALS Awards pursuant to the Plan will not be made unless the internal and external performance goals set forth below are met. INTERNAL PERFORMANCE GOALS FOR THE 1999 PLAN YEAR The net operating income of NPB before securities transactions for 1999 must exceed the net operating income of NPB before securities transactions for 1998. EXTERNAL PERFORMANCE GOALS FOR THE 1999 PLAN YEAR The net operating income of NPB before securities transactions on realized return on average common equity for 1999 must exceed the average of the net operating income before securities transactions on realized return on average common equity for 1999 for the banks or bank holding companies in the peer group set forth on Schedule B-2 A. SCHEDULE B NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN 2000 PERFORMANCE GOALS Awards pursuant to the Plan will not be made unless the internal and external performance goals set forth below are met. INTERNAL PERFORMANCE GOALS FOR THE 2000 PLAN YEAR The diluted per share operating income of NPBC for 2000 must exceed the diluted per share operating income for 1999. EXTERNAL PERFORMANCE GOALS FOR THE 2000 PLAN YEAR The net operating income of NPB before securities transactions on realized return on average common equity for 2000 must exceed the average of the net operating income before securities transactions on realized return on average common equity for 2000 for the banks or bank holding companies in the peer group set forth on Schedule B-2 A. Internal Peformance Goals amended 5/10/99 SCHEDULE B-1 PAY OUT FORMULA 1. Obtaining an operating return on average equity triggers an incentive pay out as follows: 100% of peer group $0 100.1% of peer group .031% of average assets 130% of peer group .11% of average assets Interpolation is required between 100.1% and 130%. 2. Obtaining #1 in return on equity triggers an added pay out of $25,000. SCHEDULE B-2 There is a change in the peer group from last year. The list of the ten banking companies which form the peer group are: Univest (Souderton) Fulton Financial Corp. Susquehanna Bancshares Harleysville National Corp. Keystone Financial S & T Bancorp BT Financial Corporation Omega Financial Corp. F.N.B. Corporation (Hermitage, PA) First Commonwealth Financial Corp. (Indiana, PA) National Penn Bancshares, Inc. Plan Year 2000, as of December 1999 SCHEDULE C NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN DEFERRAL ELECTION LETTER TO THE COMMITTEE: In accordance with National Penn Bancshares, Inc., Executive Incentive Plan, effective January 1, 1984, I hereby request to defer receipt of that portion of any award earned by me (to the extent provided in Paragraph 2 below) for services rendered as an eligible Participant in the Plan during the calendar year specified below and eligible to be received in cash. This election shall be governed by all of the provisions of the Plan. 1. This request shall be effective beginning with calendar year 2000. 2. This voluntary deferral request shall apply to ____________% of my award. 3. My deferred award and the interest thereon shall become payable on the January 1 next following the date I retire or otherwise cease to be employed by NPB or an Affiliate of NPB. 4. I irrevocably elect that, when payable, my deferred award and the interest thereon shall be paid to me as indicated below: ( ) In one lump sum. ( ) In a series of five annual installments. ( ) In a series of ten annual installments. I agree that such terms and conditions shall be binding upon my beneficiaries, distributees, and personal representatives. Unless noted below, my beneficiaries shall be the same as designated for my group life insurance. - ------------------------- -------------------------------- Date Signature of Participant Approved By: - ------------------------- -------------------------------- Date Signature of the Chairman of the Committee - ------------------------- Name of Participant EX-21 9 SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction of Incorporation - ---- ----------------------------- Investors Trust Company Pennsylvania National Penn Bank United States of America Penn Securities, Inc. Pennsylvania Link Financial Services, Inc. Pennsylvania Penn 1st Financial Services, Inc. Pennsylvania RBO Funding, Inc. Virginia 1874 Financial Corp. Pennsylvania NPB Delaware, Inc. Delaware Blue Rock Realty Corp. II Pennsylvania Blue Rock Realty Corp. III Pennsylvania Blue Rock Realty Corp. IV Pennsylvania National Penn Investment Company Delaware National Penn Life Insurance Company Arizona NPB New Jersey, Inc. New Jersey EX-23 10 Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 17, 2000 (except for note 2, as to which the date is February 14, 2000), accompanying the consolidated financial statements included in the 1999 Annual Report of National Penn Bancshares, Inc. and Subsidiaries on Form 10-K for the year ended December 31, 1999. We hereby consent to the incorporation by reference of said report in the Registration Statements of National Penn Bancshares, Inc. on Form S-3 (File No. 333-87549, effective September 22, 1999; File No.333-04729, effective May 30, 1996; File No. 33-86094, effective November 7, 1994; File No. 33-47067 effective, April 29, 1992; and File No. 33-02567, effective January 8, 1986), and on Form S-8 (File No. 333-71391, effective January 29, 1999; File No. 333-27101, File No. 333-27103, and File No. 333-27059, effective May 14, 1997; File No. 33-91630, effective April 27, 1995; File No. 33-87654, effective December 22, 1994; File No.33-15696, effective July 9, 1987). /s/ GRANT THORNTON LLP Philadelphia, Pennsylvania March 30, 1999 EX-27 11
9 0000700733 NATIONAL PENN BANCSHARES, INC. 1,000 YEAR DEC-31-1999 DEC-31-1999 62,953 4,039 0 0 516,027 0 516,027 1,570,543 34,139 2,242,432 1,593,254 212,596 25,559 263,327 0 0 135,526 12,170 2,242,432 131,861 31,485 924 164,270 56,537 82,753 81,517 5,960 15 65,724 33,171 27,409 0 0 27,409 1.54 1.52 5.47 11,055 2,674 0 0 30,835 5,157 2,501 34,139 29,097 0 5,042
EX-99 12 Exhibit 99 Forward-Looking Statements Certain statements in this Annual Report on Form 10-K for 1999 and in other reports issued by the Company are forward-looking and are identified by the use of forward-looking words or phrases such as "intended," "believes," "expects," "estimates", "anticipates," "forecasts," "is expected," and "is anticipated." These forward-looking statements generally relate to the Company's plans, expectations, goals, and projections, and include statements as to the Company's anticipated future earnings, planned investments in new and modified technology and branch locations, as well as Year 2000 computer compliance. These forward- looking statements are subject to numerous assumptions, risks and uncertainties. Risks and uncertainties could cause actual future results and investments to differ materially from those contemplated in such forward-looking statements. These risks and uncertainties include, without limitation, the following: (a) loan growth and/or loan margins may be less than expected, due to competitive pressures in the financial services industry, changes in the interest rate environment, or otherwise; (b) general economic or business conditions, either nationally or in the region in which the Company will be doing business, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality or a reduced demand for credit; (c) costs of the Company's planned training initiatives, product development, branch expansion and new technology and operating systems may exceed expectations; (d) volatility in the Company's market area due to recent mergers may have unanticipated consequences, such as customer turnover; and (e) changes in the regulatory environment, securities markets, general business conditions and inflation may be adverse. These risks and uncertainties are all difficult to predict, and most are beyond the control of the Company's management. Readers are cautioned not to place undue reliance on the Company's forward- looking statements, which speak only as of the date of this report. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. -----END PRIVACY-ENHANCED MESSAGE-----