-----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, AaAPOr4Ts1QyTyNda1Clu7pqP1K4orFAvnXEUH5Sr9klS6nKxTvw1ddSl6+UzqC1 yVrrvqf0t8uUObXOVM5cmA== 0000950159-01-000185.txt : 20010402 0000950159-01-000185.hdr.sgml : 20010402 ACCESSION NUMBER: 0000950159-01-000185 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 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-K SEC ACT: SEC FILE NUMBER: 000-10957 FILM NUMBER: 1585727 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-K 1 0001.txt 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, 2000, 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. [ ] The aggregate market value of common shares of the Registrant held by nonaffiliates, based on the closing sale price as of March 16, 2001, was $351,835,826. As of March 16, 2001, the Registrant had 19,384,741 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 24, 2001 -- Part III. NATIONAL PENN BANCSHARES, INC. FORM 10-K TABLE OF CONTENTS Page Part I Item 1 Business.......................................................... 1 Item 2. Properties........................................................ 24 Item 3. Legal Proceedings................................................. 25 Item 4. Submission of Matters to a Vote of Security Holders............... 25 Item 4A. Executive Officers of the Registrant.............................. 25 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................. 27 Item 6. Selected Financial Data........................................... 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 38 Item 8. Financial Statements and Supplementary Data....................... 39 Item 9. Disagreements on Accounting and Financial Disclosure.............. 68 Part III Item 10. Directors and Executive Officers of the Registrant................ 68 Item 11. Executive Compensation............................................ 68 Item 12. Security Ownership of Certain Beneficial Owners and Management.... 68 Item 13. Certain Relationships and Related Transactions.................... 68 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 68 PART I ------ Item 1. BUSINESS. - ------------------ The Company - ----------- National Penn Bancshares, Inc. ("National Penn" or the "Company") is a Pennsylvania business corporation and bank holding company registered under the Bank Holding Company Act of 1956. National Penn is headquartered at Philadelphia and Reading Avenues, Boyertown, Pennsylvania 19512 (Telephone number 610-367-6001). National Penn was incorporated in January 1982. National Penn has two wholly-owned banking subsidiaries, National Penn Bank ("NP Bank") and Panasia Bank, N.A. ("Panasia"). In addition, National Penn has various wholly-owned, direct or indirect, nonbank subsidiaries engaged in activities related to the business of banking. At December 31, 2000, National Penn and its subsidiaries had 786 full- and part-time employees. National Penn Bank - ------------------ NP Bank is a national bank chartered under the National Bank Act. Prior to August 1, 1993, its name was National Bank of Boyertown. NP Bank also operates through its five banking divisions. These are: * Chestnut Hill National Bank Division, established in December 1993 after National Penn's acquisition of Chestnut Hill National Bank. * 1st Main Line Bank Division, a de novo division established in April 1995. * National Asian Bank Division, a de novo division established in May 1998. * Elverson National Bank Division, established in January 1999 after National Penn's acquisition of Elverson National Bank. * Berks County Division, established in January 2001 after National Penn's acquisition of Community Independent Bank, Inc. (discussed below). NP Bank is engaged in the commercial and retail banking business. It provides checking and savings accounts, time deposits, personal, business, residential mortgage, educational loans, credit cards, and safe deposit and night depository facilities. Acquisition of Panasia Bank - --------------------------- On July 11, 2000, National Penn acquired Panasia Bank, a New Jersey state-chartered bank. Panasia is headquartered in Ft. Lee, New Jersey. At December 31, 2000, it has branches in Ft. Lee, Palisades Park and Closter, New Jersey, and assets of $128,748,000, net loans of $34,787,000 and deposits of $107,794,000. National Penn paid approximately $20 million in cash to acquire Panasia. The transaction was accounted for under the purchase method of accounting. In September 2000, Panasia Bank filed an application with the Office of the Comptroller of the Currency ("OCC") to convert its charter to a national bank charter. The OCC approved the application, and the charter conversion became effective, on November 3, 2000. Like NP Bank, Panasia is engaged in the commercial and retail banking business. It also provides checking and savings accounts, time deposits, personal, business, residential mortgage, educational loans, credit cards, and safe deposit and night depository facilities. 1 Acquisition of Community Independent Bank, Inc. - ----------------------------------------------- On January 3, 2001, National Penn acquired Community Independent Bank, Inc. ("Community") by its merger into National Penn. Community was the parent company of Bernville Bank, N.A., a commercial bank operating four branches in Berks County, Pennsylvania. At December 31, 2000, Community had consolidated assets of $102,938,000, net loans of $76,689,000 and deposits of $95,338,000. National Penn issued 659,245 shares of National Penn's common stock in consummation of the transaction. The transaction was accounted for under the pooling of interests method of accounting. On January 4, 2001, Bernville Bank, N.A. merged into NP Bank. The assets, branches and operations of Bernville Bank, N.A. were combined with those of NP Bank located in Berks County to create NP Bank's Berks County Division. Nonbank Subsidiaries - -------------------- National Penn has the following, directly owned, nonbank subsidiaries: * Investors Trust Company, a Pennsylvania-chartered trust company, opened for business on June 20, 1994. * National Penn Investment Company, a Delaware business corporation, 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. It began operations in January 1985. * 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 NP Bank. It began operations in January 1985. * NPB Capital Trust, a Delaware business trust, was formed in 1997 and issued $40,250,000 in preferred capital securities to investors. See Note 8 to National Penn's Consolidated Financial Statements included at Item 8 of this Report. National Penn has the following nonbank subsidiaries, directly owned by NP Bank: * Link Financial Services, Inc., a Pennsylvania business corporation, is an insurance agency. It is also indirectly engaged in the title insurance business through a joint venture with a title insurance agency. It began operations in April 1998. * Penn Securities, Inc., a Pennsylvania business corporation, is a registered full service broker-dealer and investment advisory firm. It is also an insurance agency. It began operations in October 1998. * Penn 1st Financial Services, Inc., a Pennsylvania business corporation, is engaged in the mortgage banking business. It began operations in September 1999 under the name National Penn Mortgage Company. * NPB Delaware, Inc., a Delaware business corporation, invests in, holds and manages part of NP Bank's investment securities portfolio, as permitted by applicable law and regulations. It began operations in October 1999. * RBO Funding Inc., a Virginia corporation, is a subprime lender and wholly-owned subsidiary of Penn 1st Financial Services, Inc. National Penn acquired RBO in November 1999. 2 * 1874 Financial Corp., a Pennsylvania business corporation, is a commercial lending company specializing in the subprime commercial lending business. It began business in February 2000. * National Penn Consulting Services, Inc., a Pennsylvania business corporation, provides management consulting, operational advice and other related services for financial institutions. It began business in September 2000. National Penn also owns, indirectly through NP Bank, three other nonbank subsidiaries, whose activities are limited solely to holding certain real estate interests. Panasia has one wholly-owned nonbank subsidiary, Panasia Investment Company, a New Jersey business corporation. It invests in, holds and manages part of Panasia's investment securities portfolio, as permitted by applicable law and regulations. It began operations in December 1999. Other Bank Investments - ---------------------- National Penn owns, indirectly through National Penn Investment Company, 20% of Pennsylvania State Bank, a Pennsylvania bank headquartered in Camp Hill, Pennsylvania. Pennsylvania State Bank began operations as a bank in May 1989. For financial reporting purposes, National Penn 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 National Penn and its subsidiaries. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory or regulatory provisions themselves. A change in applicable statutes, regulations or regulatory policy may have a material effect on the business of National Penn and its subsidiaries. Bank Holding Company Regulation ------------------------------- National Penn is registered as a bank holding company 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"). The Gramm-Leach-Bliley Act of 1999 ("GLBA") established a new kind of bank holding company called a "financial holding company". As of the date of this Report, National Penn has not elected to become a "financial holding company," and National Penn does not anticipate electing such status in the near future. See "Gramm-Leach-Bliley Act." Bank holding companies are required to file periodic reports with and are subject to examination by the Federal Reserve. The Federal Reserve's regulations 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 its "source of strength" regulations, may require National Penn to stand ready to use its resources to provide adequate capital funds to NP Bank or Panasia during periods of financial stress or adversity. Under the Federal Deposit Insurance Act ("FDIA"), 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. 3 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 National Penn from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock or substantially all of the assets of any bank or merging or consolidating with another bank holding company without prior approval of the Federal Reserve. Such a transaction may also require approval of the Pennsylvania Department of Banking. Pennsylvania law permits Pennsylvania bank holding companies to control an unlimited number of banks. Additionally, the BHCA prohibits National Penn from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a 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 for National Penn (a bank holding company that, at present, is not a "financial holding company") provide fourteen categories of functionally related activities that are permissible nonbanking activities. These are: * Extending credit and servicing loans. * Certain activities related to extending credit. * Leasing personal or real property under certain conditions. * Operating nonbank depository institutions, including savings associations. * Trust company functions. * Certain financial and investment advisory activities. * Certain agency transactional services for customer investments, including securities brokerage activities. * Certain investment transactions as principal. * Management consulting and counseling activities. * Certain support services, such as courier and printing services. * Certain insurance agency and underwriting activities. * Community development activities. * Issuance and sale of money orders, savings bonds, and traveler's checks. * Certain data processing services. Depending on the circumstances, Federal Reserve approval may be required before National Penn or its nonbank subsidiaries may begin to engage in any such activity and before any such business may be acquired. 4 A bank holding company that is eligible and makes an effective election under GLBA to be a "financial holding company" may engage in any type of financial activity. See "Gramm-Leach-Bliley Act." Dividend Restrictions --------------------- National Penn is a legal entity separate and distinct from NP Bank, Panasia and National Penn's other direct and indirect nonbank subsidiaries. National Penn's revenues (on a parent company only basis) result almost entirely from dividends paid to National Penn by its subsidiaries. The right of National Penn, and consequently the right of creditors and shareholders of National Penn, to participate in any distribution of the assets or earnings of any subsidiary through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the subsidiary (including depositors, in the case of NP Bank and Panasia), except to the extent that claims of National Penn in its capacity as a creditor may be recognized. Federal and state laws regulate the payment of dividends by National Penn's subsidiaries. See "Supervision and Regulation - Regulation of NP Bank and Panasia." 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 of total capital must be "Tier 1 capital." Tier 1 capital consists principally of common shareholders' equity, retained earnings, a limited amount of qualifying perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and certain intangible assets. The remainder of total capital may consist of mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock and loan loss allowance ("Tier 2 capital"). At December 31, 2000, National Penn's Tier 1 capital and total (Tier 1 and Tier 2 combined) capital ratios were 10.59% and 11.85%, respectively. 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. The Federal Reserve expects all other bank holding companies to maintain a ratio of at least 1% to 2% above the stated minimum. At December 31, 2000, National Penn's leverage ratio was 8.06%. The Federal Reserve has also 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 National Penn of any specific minimum leverage ratio applicable to National Penn. Pursuant to the "prompt corrective action" provisions of the FDIA, the federal banking agencies have specified, by regulation, the levels at which an insured institution is considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Under these regulations, an institution is considered "well capitalized" if it has (1) a total risk-based capital ratio of 10% or more, (2) a Tier 1 risk-based capital ratio of 6% or more, (3) a leverage ratio of 5% or more, and (4) is not subject to any order or written directive to meet and maintain a specific capital level. At December 31, 2000, NP Bank and Panasia 5 each qualify as "well capitalized" under these regulatory standards. See Note 19 to National Penn's Consolidated Financial Statements included at Item 8 of this Report. FDIC Insurance Assessments -------------------------- NP Bank and Panasia are each subject to deposit insurance assessments by the Federal Deposit Insurance Corporation ("FDIC"). These assessments fund both the Bank Insurance Fund ("BIF") for banks and the Savings Association Insurance Fund ("SAIF") for savings associations. They are based on the risk classification of the depository institutions. Neither NP Bank nor Panasia paid regular insurance assessments to the FDIC in 2000. Under current FDIC practices, neither bank is expected to be required to pay regular insurance assessments to the FDIC in 2001. In 1996, the SAIF was recapitalized. As part of the recapitalization, both BIF-insured deposits and SAIF-insured deposits are now assessed to fund debt service on the Federal government's related bond payments. The current annualized rate established by the FDIC for both BIF-insured deposits and SAIF-insured deposits is $.019 per $100 of deposits. These bonds mature in 2017. Regulation of NP Bank and Panasia --------------------------------- The operations of NP Bank and Panasia are each 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. Their operations are also subject to regulations of the OCC, the Federal Reserve, and the FDIC. The OCC, which has primary supervisory authority over NP Bank and Panasia, 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 depositors rather than National Penn's shareholders. Each bank must furnish annual and quarterly reports to the OCC, which has the legal authority 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, NP Bank and Panasia are each required to obtain the prior approval of the OCC for the payment of dividends if the total of all dividends declared by it in one year would exceed its net profits for the current year plus its retained net profits for the two preceding years, less any required transfers to surplus. In addition, each bank may only pay dividends to the extent that its retained net profits (including the portion transferred to surplus) exceed statutory bad debts. Under the FDIA, each bank is prohibited from paying any dividends, making other distributions or paying any management fees if, after such payment, it would fail to satisfy its minimum capital requirements. As subsidiary banks of a bank holding company, NP Bank and Panasia are each subject to certain restrictions imposed by the Federal Reserve Act on 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, 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. 6 Under the "cross-guarantee" provisions of the FDIA, insured depository institutions under common control are required to reimburse the FDIC for any loss suffered by either the BIF or SAIF as a result of the failure of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of failure. NP Bank and Panasia are covered by these provisions. Any such liability could have a material adverse effect on the financial condition of the assessed bank and National Penn. While the FDIC's claim under the cross-guarantee provisions is subordinate to claims of depositors, secured creditors, general creditors and holders of subordinated debt (other than affiliates) of the commonly controlled institution, it is superior to claims of shareholders and affiliates of the commonly controlled institution, such as National Penn. Regulation of Other Subsidiaries -------------------------------- National Penn's direct nonbank subsidiaries are subject to regulation by the Federal Reserve and, in the case of Investors Trust Company, the Pennsylvania Department of Banking. NP Bank's and Panasia's direct nonbank subsidiaries are subject to regulation by the OCC. In addition, Penn Securities, Inc., as a broker-dealer and investment advisory firm, is regulated by the Securities and Exchange Commission, various state securities regulators and the National Association of Securities Dealers, Inc. Penn Securities, Inc. and Link Financial Services, Inc., as insurance agencies, are subject to regulation by the Pennsylvania Insurance Department. Monetary and Fiscal Policies ---------------------------- The banking industry, including National Penn, NP Bank and Panasia, is affected by the monetary and fiscal policies of government agencies, including the Federal Reserve. Through open market securities transactions and changes in its discount rate and reserve requirements, the Federal Reserve exerts considerable influence over the cost and availability of funds for lending and investment. Competition - ----------- The financial services industry in National Penn's service area is extremely competitive. National Penn's competitors within its service area include bank holding companies with substantially greater resources. Many competitor financial institutions have substantially higher legal lending limits. In addition, 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 offer products and services similar to those offered by National Penn and its subsidiaries, on competitive terms. The competitive environment has intensified since adoption of Federal interstate banking legislation in 1994. See "Interstate Banking Act." On November 12, 1999, GLBA became law. Among other things, GLBA (1) repealed various provisions of the Glass Steagall Act to permit commercial banks to affiliate with investment banks (securities firms), (2) amended the BHCA to permit qualifying bank holding companies to engage in any type of financial activity, and (3) permitted subsidiaries of national banks to engage in a broad range of financial activities that are not permitted for national banks themselves. Although the long-range effects of GLBA cannot be predicted, most probably it will further narrow the differences and intensify competition among commercial banks, investment banks, insurance firms and other financial services companies. See "Gramm-Leach-Bliley Act." Interstate Banking Act - ---------------------- The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 provides for nationwide interstate banking and branching. It permits: 7 * 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 laws of the host state. * 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. * Banks to establish new branches on an interstate basis provided that such action is specifically authorized by the laws of the host state. * 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. * 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 National Penn 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. The Pennsylvania Banking Code authorizes full interstate banking and branching. It authorizes interstate bank mergers and reciprocal interstate branching into Pennsylvania by interstate banks. It also permits Pennsylvania institutions to branch into other states with the prior approval of the Pennsylvania Department of Banking, except that this approval requirement does not apply to national banks. 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 - ---------------------- GLBA does three fundamental things: * GLBA repeals various provisions of the Glass Steagall Act to permit commercial banks to affiliate with investment banks (securities firms). * GLBA amends the BHCA to permit qualifying bank holding companies to engage in any type of financial activity. * GLBA permits subsidiaries of national banks to engage in a broad range of financial activities that are not permitted for national banks themselves. The result is that banking companies are generally able to offer a wider range of financial products and services and are more readily able to combine with other types of financial companies, such as securities and insurance companies. GLBA 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. 8 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. 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: * Securities underwriting and dealing. * Insurance underwriting and sales. * Merchant banking activities. * Activities determined by the Federal Reserve to be "financial in nature" and incidental activities. * "Complementary" financial activities, as determined by the Federal Reserve. Bank holding companies that do not qualify or elect to become FHCs are limited in their activities to the activities permitted by law and regulation on March 11, 2000, the effective date of that portion of GLBA. As of the date of this Report, National Penn has not elected to become an FHC. National Penn has, instead, continued to utilize the continuing authority of national banks to create "operating subsidiaries" to expand its business products and services. GLBA also authorizes national banks to create "financial subsidiaries." This is in addition to the present authority of national banks to create "operating subsidiaries." A "financial subsidiary" is a direct subsidiary of a national bank that satisfies the same conditions as 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, GLBA also provides significant new protections for the privacy of consumer and 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, GLBA subjects a financial institution to four new requirements regarding non-public personal financial information about consumers and customers. The financial institution must: (1) adopt and disclose its privacy policy; (2) give consumers and customers the right to "opt out" of disclosures to non-affiliated third parties; (3) not disclose any account information to non-affiliated third party marketers; and (4) follow regulatory standards to protect the security and confidentiality of consumer and customer information. Although the long-range effects of GLBA cannot be predicted, most probably it will further narrow the differences and intensify competition among commercial banks, investment banks, insurance firms and other financial services 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 National Penn's Consolidated Financial Statements 9 included at Item 8 of this Report. In 2000, the interest rate swaps to which NP Bank was a party had the effect of decreasing National Penn's net interest income by $307,000 from what would have been realized had NP Bank not entered into the swap agreements. Should rates rise in 2001, National Penn may recognize lower net interest income for the year than would have been recognized had NP Bank not entered into the interest rate swap agreements. In 2000, the interest rate floor to which NP Bank was a party had no effect on National Penn's net interest income. Should rates fall in 2001 below a certain point, National Penn may recognize higher net interest income for the year than would have been recognized had NP Bank not entered into the interest rate floor agreement. National Penn 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. Forward-Looking Statements - -------------------------- From time to time, National Penn or its representatives make written or oral statements that may include "forward-looking statements" with respect to its: * Financial condition. * Results of operations. * Asset quality. * Capital expenditures, including investments in technology. * Pending or completed mergers with or acquisitions of financial or non-financial companies or their assets, loans, deposits and branches, including the January 2001 merger with Community and the July 2000 acquisition of Panasia, and the revenue enhancements, cost savings and other benefits anticipated in those transactions. * Business expansion plans, including both product and geographical expansion. * Investments in new subsidiaries and other companies. * Other matters. Many of these statements can be identified by looking for words such as "believes," "expects," "anticipates," "estimates," "projects" or similar words or expressions. These forward-looking statements involve substantial risks and uncertainties. There are many factors that may cause actual results to differ materially from those contemplated by such forward-looking statements. These factors include, among other things, the following possibilities: * Expected cost savings from the National Penn/Community merger, including reductions in interest and non-interest expense, may not be fully realized or realized as quickly as expected. * Revenues of National Penn and its subsidiaries following the National Penn/Community merger may be lower than expected, or loan losses, deposit attrition, operating costs, customer losses or business disruption following the National Penn/Community merger may be greater than expected. 10 * Commercial loan growth following the National Penn/Community merger may be lower than expected. * Costs, difficulties or delays related to the integration of Community's business with National Penn's business may be greater or longer than expected. * Expected cost savings from National Penn's acquisition of Panasia may not be fully realized or realized as quickly as expected. * Revenues of Panasia may be lower than expected, or loan losses, deposit attrition, operating costs, customer losses or business disruption at Panasia may be greater than expected. * Commercial loan growth at Panasia may be lower than expected. * Costs, difficulties or delays related to the integration of Panasia's business with National Penn's business may be greater or longer than expected. * Start-up costs of new subsidiaries may be greater, and revenue ramp-up of such subsidiaries may take longer, than expected. * Changes in the interest rate environment may reduce interest margins. * Competitive pressures among depository and other financial institutions may increase significantly. * General economic or business conditions, either nationally or in the regions in which National Penn 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. * Technological changes and systems integration may be harder to make or more expensive than expected. * Legislation or regulatory changes may adversely affect National Penn's business. * Adverse changes may occur in the securities markets. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. National Penn cautions shareholders not to place undue reliance on such statements. All written or oral forward-looking statements attributable to National Penn or any person acting on its behalf made after the date of this Report are expressly qualified in their entirety by the cautionary statements contained in this Report. National Penn does not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events. 11
Average Balances, Average Rates, and Interest Rate Spread* (Dollars in Thousands) - --------------------------------------------------------- Year Ended December 31 ------------------------------------------------------------------------------------------ 2000 1999 1998 ------------------------------- ---------------------------- ---------------------------- Average -------- Average Average --------- Average Average --------- Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ----------- -------- -------- ---------- --------- ------- ---------- --------- -------- INTEREST EARNING ASSETS: Interest bearing deposits at banks $4,431 $296 6.68% $6,742 $239 3.53% $13,777 $544 3.95% U.S. Treasury 37,801 2,563 6.78 36,715 2,419 6.59 42,740 2,884 6.75 U.S. Government agencies 242,397 16,295 6.72 186,520 12,120 6.50 185,637 12,152 6.55 State and municipal* 220,450 18,078 8.20 229,128 17,516 7.64 194,644 14,749 7.58 Other bonds and securities 55,329 4,692 8.48 85,434 5,422 6.35 41,931 2,562 6.11 ---------- -------- ---------- -------- ---------- -------- Total investments 555,977 41,628 7.49 537,797 37,477 6.97 464,952 32,347 6.96 ---------- -------- ---------- -------- ---------- -------- Federal funds sold 8,509 588 6.91 9,781 489 5.00 5,054 267 5.28 Trading account securities - - - 6,836 196 2.87 10,670 851 7.98 Commercial loans* 1,128,823 105,571 9.35 977,303 88,786 9.08 854,727 80,640 9.43 Installment loans 301,201 27,349 9.08 284,334 25,417 8.94 272,749 25,320 9.28 Mortgage loans 207,504 16,455 7.93 228,842 18,527 8.10 237,783 19,989 8.41 ---------- -------- ---------- -------- ---------- -------- Total loans 1,637,528 149,375 9.12 1,490,479 132,730 8.91 1,365,259 125,949 9.23 ---------- -------- ---------- -------- ---------- -------- Total earning assets 2,206,445 $191,887 8.70% 2,051,635 $171,131 8.34% 1,859,712 $159,958 8.60% -------- -------- -------- Allowance for loan losses (36,558) (32,071) (30,772) Non-interest earning assets 183,579 156,158 136,985 ---------- ---------- ---------- Total assets $2,353,466 $2,175,722 $1,965,925 =========== =========== ============ INTEREST BEARING LIABILITIES: Interest bearing deposits $1,440,121 $69,142 4.80% $1,306,931 $56,537 4.33% $1,190,760 $53,518 4.49% Securities sold under repurchase agreements and federal funds purchased 289,257 16,752 5.79 158,669 7,165 4.52 133,380 6,108 4.58 Short-term borrowings 7,338 416 5.67 5,608 272 4.85 9,551 553 5.79 Long-term borrowings 200,102 13,392 6.69 310,707 18,779 6.04 267,531 16,428 6.14 ---------- -------- ---------- -------- ---------- -------- Total interest bearing liabilities 1,936,818 $99,702 5.15% 1,781,915 $82,753 4.64% 1,601,222 $76,607 4.78% -------- -------- -------- Non-interest bearing deposits 237,903 220,777 193,652 Other non-interest bearing liabilities 24,792 19,910 18,636 ---------- ---------- ---------- Total liabilities 2,199,513 2,022,602 1,813,510 Equity capital 153,953 153,120 152,415 ---------- ---------- ---------- Total liabilities and equity capital $2,353,466 $2,175,722 $1,965,925 ========== ========== ========== INTEREST RATE SPREAD** $92,185 4.18% $88,378 4.31% $88,351 4.48% ======== ======== =======
* 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. 12 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 investment securities available for sale at December 31, 2000, 1999 and 1998 follows (in thousands).
2000 1999 1998 --------------------------- -------------------------- ---------------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ------------- ------------ ------------ ------------ -------------- ------------ Securities available for sale U.S. Treasury and U.S. Government agencies $141,574 $142,883 $103,092 $101,724 $105,537 $109,089 State and municipal 230,688 233,085 236,768 221,774 230,260 239,070 Mortgage-backed securities 163,937 165,036 136,684 133,927 126,329 127,369 Marketable equity securities and other 52,964 52,312 57,354 58,602 46,230 47,513 ------------- ------------ ------------ ------------ -------------- ------------ Totals $589,163 $593,316 $533,898 $516,027 $508,356 $523,041 ============= ============ ============ ============ ============== ============
(This space intentionally left blank.) 13 Investment Securities Yield by Maturity The maturity distribution and weighted average yield of the investment portfolio at book value of the Company at December 31, 2000, 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 amortized cost 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, 2000 (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 $26,386 6.63% $66,681 6.29% $29,883 6.51% $19,933 7.33% $142,883 6.54% State and municipal bonds 4,060 6.82% 11,045 7.72% 17,693 7.00% 200,287 7.97% 233,085 7.86% Mortgage-backed securities 1,514 5.57% 4,917 6.98% 2,782 6.84% 155,823 6.89% 165,036 6.88% Marketable equity securities and other - -% - -% - -% 52,312 -% 52,312 -% ----------------- ----------------- ---------------- ----------------- ----------------- Total $31,960 6.60% $82,643 6.52% $50,358 6.70% $428,355 6.57% $593,316 6.58% ================= ================= ================ ================= =================
14 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, 2000, are summarized below:
Remaining Maturity - At December 31, 2000 ----------------------------------------- After One One Year Year to After or Less Five Years Five Years Total -------- -------- -------- -------- (In Thousands) Commercial and Industrial Loans $141,243 $116,868 $57,153 $315,264 Real Estate Loans: Construction and Land Development 67,779 71,767 10,889 $150,435 -------- -------- -------- -------- $209,022 $188,635 $68,042 $465,699 ======== ======== ======== ========
Segregated in terms of sensitivity to changes in interest rates, the foregoing loan balances at December 31, 2000, are summarized below: After One Year After to Five Years Five Years ------------ ------------ (In Thousands) Predetermined Interest Rate $135,856 $56,645 Floating Interest Rate 52,779 11,397 ------------ ------------ Total $188,635 $68,042 ============ ============ 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. 15 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, 2000:
December 31, -------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------- -------------- ------------- ------------ -------------- (In Thousands) Commercial and Industrial Loans $315,264 $252,992 $220,192 $179,967 $155,435 Loans to Financial Institutions - - - 2,232 453 Real Estate Loans: Construction and Land Development 150,435 136,105 84,520 69,016 51,622 Residential 638,981 649,692 678,889 661,744 670,225 Other 542,728 472,447 404,865 374,281 335,391 Loans to Individuals 72,888 59,307 47,341 33,828 24,716 ------------- -------------- ------------- ------------- -------------- Total $1,720,296 $1,570,543 $1,435,807 $1,321,068 $1,237,842 ============= ============== ============= ============= ==============
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, 2000, 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. 16 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, 2000:
December 31, -------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ----------- ----------- ---------- ------------ Nonaccrual Loans $10,898 $11,055 $11,581 $8,519 $9,493 Loans Past Due 90 or More Days as to Interest or Principal 4,519 2,674 1,840 3,246 4,212 Restructured Loans - - - - - ---------- ----------- ----------- ---------- ------------ Total Nonperforming Loans 15,417 13,729 13,421 11,765 13,705 Other Real Estate Owned 988 842 922 672 855 ---------- ----------- ----------- ---------- ------------ Total Nonperforming Assets $16,405 $14,571 $14,343 $12,437 $14,560 ========== =========== =========== ========== ============ Gross Amount of Interest That Would Have Been Recorded at Original Rate on Nonaccrual and Restructured Loans $688 $859 $940 $778 $1,040 Interest Received From Customers on Nonaccrual and Restructured Loans 437 439 289 477 834 ---------- ----------- ----------- ---------- ------------ Net Impact on Interest Income of Nonperforming Loans $251 $420 $651 $301 $206 ========== =========== =========== ========== ============
At December 31, 2000, the Company had no foreign loans and no loan concentrations exceeding 10% of total loans not disclosed in the table on page 16 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, 2000, 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, 2000, the Company had no loans that are considered highly-leveraged transactions under applicable regulations although the Company had approximately $6,469,000 in aggregate loans outstanding that, but for their small individual amount, would be considered such loans. 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 ration greater than 50%, produces a leverage ration 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. 17 Allowance for Loan Losses - ------------------------- A detailed analysis of the Company's allowance for loan losses for the five years ended December 31, 2000, is shown below:
December 31, ------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------ ------------ ----------- ----------- ------------ Balance at Beginning of Year $34,139 $30,835 $28,467 $25,738 $23,038 Charge-offs: Commercial and Industrial Loans 1,895 1,770 1,549 1,625 482 Real Estate Loans: Construction and Land Development - - - 14 - Residential 1,223 1,341 679 1,280 1,338 Other 885 1,262 2,374 564 392 Loans to Individuals 2,092 784 599 398 452 ------------ ------------ ----------- ----------- ------------ Total Charge-offs 6,095 5,157 5,201 3,881 2,664 ------------ ------------ ----------- ----------- ------------ Recoveries: Commercial and Industrial Loans 803 254 244 265 111 Real Estate Loans: Construction and Land Development 44 10 - - 131 Residential 438 555 650 296 186 Other 598 1,571 553 212 235 Loans to Individuals 187 111 162 274 201 ------------ ------------ ----------- ----------- ------------ Total Recoveries 2,070 2,501 1,609 1,047 864 ------------ ------------ ----------- ----------- ------------ Net Charge-offs 4,025 2,656 3,592 2,834 1,800 ------------ ------------ ----------- ----------- ------------ Provisions Charged to Expense 5,600 5,960 5,960 5,563 4,500 Adjustments: Changes Incident to Mergers and absorptions, Net 1,384 - - - - ------------ ------------ ----------- ----------- ------------ Balance at End of Year $37,098 $34,139 $30,835 $28,467 $25,738 ============ ============ =========== =========== ============ Ratio of Net Charge-offs During the Period to Average Loans Outstanding During the Period 0.25% 0.18% 0.26% 0.22% 0.16% ============ ============ =========== =========== ============
The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Loans 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 losses charged to operating expense include the following: 1. An ongoing review by management of the quality of the overall loan portfolio. 2. Management's continuing evaluation of potential problem and nonperforming loans. 18 3. Loan classifications and evaluations as a result of periodic examinations by federal supervisory authorities. 4. Management's evaluation of prevailing and anticipated economic conditions and their related effect on the existing loan 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 losses regularly to determine whether additional provision should be made after considering the factors noted above. In 2000, the provision was unchanged due to current loan quality, economic conditions, and net loan charge-offs in 2000. 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 2000 totaled $1,498,000, or 25% of the gross charge-off amount of $6,095,000, as compared to $1,498,000 or 29% of the gross charge-off amount of $5,157,000 in 1999. Partial charge-offs represented .01% of average total loans for both 2000 and 1999. (This space intentionally left blank.) 19 Allocation of the allowance for loan losses, and the percent of loans in each category to total loans for the five years ended December 31, 2000, is illustrated in the following table (dollars in thousands):
Allocation of the Allowance for Loan and Lease Losses (1) --------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------ ----------------- ----------------- ----------------- ------------------ % 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 $6,006 18.3% $5,878 16.1% $ 5,859 15.3% $ 3,245 13.6% $3,655 12.6% Loans to financial institutions - -% - -% - -% - 0.2% - -% Real estate loans: Construction and land development 6,618 8.8% 4,204 8.7% 2,528 5.9% 2,021 5.2% 1,647 4.2% Residential 3,254 37.1% 4,119 41.3% 4,163 47.3% 5,836 50.0% 5,379 54.1% Other 10,227 31.6% 10,916 30.1% 11,378 28.2% 7,942 28.4% 8,957 27.1% Loans to individuals 6,675 4.2% 4,256 3.8% 3,268 3.3% 4,925 2.6% 2,600 2.0% Unallocated 4,318 N/A 4,766 N/A 3,639 N/A 4,498 N/A 3,500 N/A --------- ------- -------- ------- ------- ------- ------- ------ ------- ------- $37,098 100.0% $34,139 100.0% $30,835 100.0% $28,467 100.0% $25,738 100.0% ========= ======= ======== ======= ======= ======= ======= ====== ======= ======= (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. 20 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 loan losses:
December 31, ------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------- ------------- ------------- ------------- ------------- (In Thousands) Average Total Loans $1,637,528 $1,490,479 $1,365,259 $1,285,715 $1,143,689 Total Loans at Year End 1,720,296 1,570,543 1,435,807 1,321,068 1,237,842 Net Charge-offs 4,025 2,656 3,592 2,834 1,800 Allowance for Loan Losses at Year End 37,098 34,139 30,835 28,467 25,738 December 31, ------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------- ------------- ------------- ------------- ------------- Net Charge-offs to: Average Total Loans 0.25% 0.18% 0.26% 0.22% 0.16% Total Loans at Year End 0.23% 0.17% 0.25% 0.21% 0.15% Allowance for Loan Losses 10.85% 7.78% 11.65% 9.96% 6.99% Allowance for Loan Losses to: Average Total Loans 2.27% 2.29% 2.26% 2.21% 2.25% Total Loans at Year End 2.16% 2.18% 2.15% 2.15% 2.08%
(This space intentionally left blank.) 21 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, 2000:
Year Ended December 31, --------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------ --------------------------- ------------------------- (Dollars in Thousands) Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate ------------ --------- ------------- ----------- ------------- ---------- Noninterest- Bearing Demand Deposits $237,903 -% $220,777 -% $193,652 -% Savings Deposits 631,576 3.29% 572,142 2.84% 489,762 2.66% Time Deposits 808,545 5.98% 734,789 5.48% 700,998 5.75% ------------ ------------- ------------- Total $1,678,024 4.12% $1,527,708 3.70% $1,384,412 3.85% ============ ============= =============
The aggregate amount of jumbo certificates of deposit, issued in the amount of $100,000 or more was $236,263,000 in 2000, $195,939,000 in 1999, and $145,049,000 in 1998. The following is a breakdown, by maturities, of the Company's time certificates of deposit of $100,000 or more as of December 31, 2000. The Company has no other time deposits of $100,000 or more as of December 31, 2000. Maturity Amount of Time Certificates of Deposit ---------- -------------------------------------- (In Thousands) 3 months or less $71,588 Over 3 through 6 months 41,389 Over 6 through 12 months 69,804 Over 12 months 53,482 ----------- Total $236,263 =========== 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 intentionally left blank.) 22 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, ------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------ Earnings Ratios - --------------- Net Income on: Average Earning Assets 1.33% 1.34% 1.23% Average Total Assets 1.24 1.26 1.17 Average Shareholders' Equity 19.00 17.90 15.00 Net Operating Income Before Securities and Mortgage Transactions: Average Earning Assets 1.30 1.37 1.14 Average Total Assets 1.22 1.28 1.07 Average Shareholders' Equity 18.70 18.17 13.85 Liquidity and Capital Ratios - ---------------------------- Average Shareholders' Equity to Average Earning Assets 6.98% 7.46% 8.20% Average Shareholders' Equity to Average Total Assets 6.54 7.04 7.75 Dividend Payout Ratio 49.06 48.97 44.29 Tier 1 Leverage Ratio 8.06 8.58 8.77 Tier 1 Risk-Based Ratio 10.59 11.43 12.21 Total Risk-Based Capital Ratio 11.85 12.73 13.51
(This space intentionally left blank.) 23 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, 2000 and 1999. The information is presented on a taxable equivalent basis, using an effective rate of 35%.
Year Ended December 31, ------------------------------------------------------------------------------ 2000 over 1999 (1) 1999 over 1998 (1) --------------------------------- -------------------------------------- Increase (decrease) in: Volume Rate Total Volume Rate Total --------- ---------- --------- ---------- ------------ ----------- Interest income: Interest bearing deposits at banks ($82) $139 $57 ($278) ($27) ($305) Securities: U.S. Treasury and U. S. Government agencies 3,710 609 4,319 (339) (158) (497) State and municipal (663) 1,225 562 2,613 154 2,767 Other bonds and securities (1,911) 1,181 (730) 2,658 202 2,860 --------- ---------- --------- ---------- ------------ ----------- Total securities 1,136 3,015 4,151 4,932 198 5,130 --------- ---------- --------- ---------- ------------ ----------- Federal funds sold (64) 163 99 250 (28) 222 Trading account securities (196) - (196) (306) (349) (655) Loans: Commercial loans and lease financing 13,765 3,020 16,785 11,565 (3,419) 8,146 Installment loans 1,508 424 1,932 1,075 (978) 97 Mortgage loans (1,728) (344) (2,072) (752) (710) (1,462) --------- ---------- --------- ---------- ------------ ----------- Total loans 13,545 3,100 16,645 11,888 (5,107) 6,781 --------- ---------- --------- ---------- ------------ ----------- Total interest income $14,339 $6,417 $20,756 $16,486 ($5,313) $11,173 ========= ========== ========= ========== ============ =========== Interest expense: Interest bearing deposits 5,762 6,843 12,605 5,221 (2,202) 3,019 Borrowed funds: Securities sold under repurchase agreements and federal funds purchased 5,897 3,690 9,587 1,158 (101) 1,057 Short-term borrowings 84 60 144 (228) (53) (281) Long-term borrowings (6,685) 1,298 (5,387) 2,651 (300) 2,351 --------- ---------- --------- ---------- ------------ ----------- Total borrowed funds (704) 5,048 4,344 3,581 (454) 3,127 --------- ---------- --------- ---------- ------------ ----------- Total interest expense $5,058 $11,891 $16,949 $8,802 ($2,656) $6,146 ========= ========== ========= ========== ============ =========== Increase (decrease) in net interest income $9,281 ($5,474) $3,807 $7,684 ($2,657) $5,027 ========= ========== ========= ========== ============ =========== - ------------ (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. - ------------------- National Penn does not own or lease any property. As of December 31, 2000, NP Bank owns 39 properties in fee and leases 23 other properties; Panasia leases four properties; and National Penn's other direct and indirect subsidiaries lease three properties. The properties owned in fee are not subject to any major liens, encumbrances, or collateral assignments. The principal office of National Penn, NP Bank and NP Bank's Berks County Division is owned in fee and located at Philadelphia and Reading Avenues, Boyertown, Pennsylvania 19512. 24 The principal offices of NP Bank's other divisions are as follows: * Chestnut Hill National Bank Division's principal office is leased and located at 9 West Evergreen Avenue, Chestnut Hill, Philadelphia, Pennsylvania 19118. * 1st Main Line Bank Division's principal office is leased and located at 528 East Lancaster Avenue, St. Davids, Pennsylvania 19087. * Elverson National Bank Division's principal office is owned in fee and located at 83 West Main Street, Elverson, Pennsylvania 19520. * National Asian Bank Division's principal office is leased and located at 1349 West Cheltenham Avenue, Suite 101, Elkins Park, Pennsylvania 19027. NP Bank presently has 61 branches located in the following Pennsylvania counties: Berks, Bucks, Chester, Delaware, Lancaster, Lehigh, Montgomery, Northampton, and Philadelphia. In addition to its branches, NP Bank presently owns or leases 74 automated teller machines located throughout the nine-county area, all of which are located at bank branch locations except for 27 that are "free-standing" (not located at a branch). The principal office of Panasia is leased and located at 183 Main Street, Fort Lee, New Jersey 07024. Panasia presently has three other branches located in Bergen County, New Jersey, and four automated teller machines, all of which are located at bank branch locations. Item 3. LEGAL PROCEEDINGS. - -------------------------- Various actions and proceedings are presently pending to which National Penn or one or more of its subsidiaries is a party. These actions and proceedings arise out of routine operations and, in management's opinion, will not have a material adverse effect on National Penn's consolidated financial position. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------ None. Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT. - ---------------------------------------------- The principal executive officers of National Penn are as follows: Principal Business Occupation Name Age During the Past Five Years Lawrence T. Jilk, Jr. 62 Chairman of National Penn since January 2001. Chief Executive Officer of National Penn from January 1990 to December 2000. Wayne R. Weidner 58 President and Chief Executive Officer of National Penn since January 2001. President of National Penn from April 1998 to December 2000, and Executive Vice President of National Penn from April 1990 to April 1998. Also, Chairman and Chief Executive Officer of NP Bank. 25 Glenn E. Moyer 50 President, Chief Operating Officer and Chief Lending Officer of NP Bank since January 2001. Executive Vice President of NP Bank and President of NP Bank's Elverson National Bank Division from January 1999 to January 2001. Prior thereto, President and Chief Executive Officer of Elverson National Bank. Garry D. Koch 46 Group Executive Vice President and Chief Credit Officer of NP Bank since January 2001. Executive Vice President of NP Bank from September 1997 to January 2001. Senior Vice President of NP Bank from 1992 to September 1997. Sharon L. Weaver 53 Group Executive Vice President, Human Resources/Branch Administration/Retail Banking/Marketing of NP Bank since January 2001. Executive Vice President of NP Bank from April 1998 to January 2001. Senior Vice President of NP Bank from 1991 to April 1998. Sandra L. Spayd 57 Secretary of National Penn, and Senior Vice President and Corporate Secretary of NP Bank. Gary L. Rhoads 46 Treasurer and Chief Financial Officer of National Penn. Group Executive Vice President, Chief Financial Officer and Controller of NP Bank since January 2001. Executive Vice President, Controller and Cashier of NP Bank prior to January 2001. Executive officers of National Penn are elected by the Board of Directors and serve at the pleasure of the Board. Executive Officers of NP Bank are appointed by the Board of Directors of NP Bank and serve until they resign, retire, become disqualified, or are removed by the Board. (This space intentionally left blank.) 26 PART II ------- Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER - -------------------------------------------------------------------------- MATTERS. - -------- National Penn'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, 2000 and a 5% stock dividend paid on December 22, 1999. MARKET VALUE OF COMMON STOCK 2000 -------------------- High Low ---- --- lst Quarter 23.46 18.22 2nd Quarter 21.90 18.10 3rd Quarter 21.55 18.04 4th Quarter 21.43 17.62 1999 -------------------- High Low ---- --- lst Quarter 24.71 20.18 2nd Quarter 23.13 19.50 3rd Quarter 24.94 19.28 4th Quarter 25.48 23.25 CASH DIVIDENDS DECLARED ON COMMON STOCK 2000 1999 ---- ---- lst Quarter $.19 $.17 2nd Quarter .19 .18 3rd Quarter .19 .18 4th Quarter .20 .19 The Trust Preferred Securities of NPB Capital Trust are reported on Nasdaq's National Market under the symbol "NPBCP". The preferred dividend is 9%. 27 Item 6. SELECTED FINANCIAL DATA. - --------------------------------
FIVE-YEAR STATISTICAL SUMMARY (Dollars in thousands, except per share data) Year Ended 2000 1999 1998 1997 1996 ------------- ------------ ------------ ------------- ------------- STATEMENTS OF CONDITION Total assets $2,512,508 $2,242,432 $2,121,248 $1,809,216 $1,604,566 Total deposits 1,814,253 1,593,254 1,473,302 1,353,523 1,190,976 Loans, net 1,683,198 1,536,404 1,404,972 1,292,601 1,212,104 Total investment securities 593,316 516,027 523,041 371,464 278,565 Total shareholders' equity 177,428 147,696 158,774 148,928 137,519 Book value per share* 9.49 7.93 8.48 7.91 7.29 Realized book value per share** 9.35 8.55 7.97 7.50 7.05 Percent shareholders' equity to assets 7.06% 6.59% 7.48% 8.23% 8.57% Trust assets $905,682 $834,585 $674,729 $543,345 $411,916 EARNINGS Total interest income $184,652 $164,270 $154,081 $139,266 $124,671 Total interest expense 99,702 82,753 76,607 63,009 53,914 ------------- ------------ ------------ ------------- ------------- Net interest income 84,950 81,517 77,474 76,257 70,757 Provision for loan losses 5,600 5,960 5,960 5,563 4,500 ------------- ------------ ------------ ------------- ------------- Net interest income after provision for loan losses 79,350 75,557 71,514 70,694 66,257 Other income 27,164 23,338 18,721 13,614 10,153 Other expenses 70,777 65,724 61,232 54,417 48,590 ------------- ------------ ------------ ------------- ------------- Income before income taxes 35,737 33,171 29,003 29,891 27,820 Income taxes 6,500 5,762 6,085 8,344 8,531 ------------- ------------ ------------ ------------- ------------- Net income $29,237 $27,409 $22,918 $21,547 $19,289 ============= ============ ============ ============= ============= Cash dividends paid $14,343 $13,421 $10,151 $8,894 $7,413 Return on average assets 1.24% 1.26% 1.17% 1.28% 1.27% Return on average shareholders' equity 19.0% 17.9% 15.0% 15.2% 14.8% Return on average realized shareholders' 17.8% 18.2% 15.9% 15.6% 15.2% equity** PER SHARE DATA* Basic earnings $1.57 $1.47 $1.22 $1.14 $1.02 Diluted earnings 1.56 1.44 1.20 1.12 1.02 Dividends paid in cash 0.77 0.72 0.54 0.47 0.39 Dividends paid in stock 5% 5% 5-for-4 4-for-3 5% stock split stock split SHAREHOLDERS AND STAFF Average shares outstanding - basic * 18,579,469 18,682,117 18,728,488 18,869,230 18,837,087 Average shares outstanding - diluted* 18,787,365 18,978,549 19,108,296 19,191,283 18,989,330 Shareholders 3,115 3,110 3,208 3,202 3,102 Staff - Full-time equivalents 786 715 749 718 681 * Restated to reflect 5% stock dividends in 2000 and 1999, a 5-for-4 stock split in 1998, a 4-for-3 stock split in 1997, and 5% stock dividends in 1996. ** Excluding unrealized gain (loss) on investment securities available for sale.
The unaudited quarterly results of the Company's operations in 2000 and 1999 are included in Footnote 21 to the Company's Consolidated Financial Statements included herein at Item 8, Financial Statements and Supplementary Data. 28 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. FINANCIAL CONDITION ------------------- During 2000 total assets increased to $2.512 billion, an increase of $270.0 million or 12.0% over the $2.242 billion at year-end 1999. Total assets at the end of 1999 increased $121.1 million or 5.7% over the $2.121 billion at year-end 1998. The increase in 2000 is reflected primarily in the loan category, which increased $146.8 million, of which $37.9 million was due to the acquisition of Panasia Bank in July 2000, and the investment category, which increased $77.3 million, of which $46.9 million is related to Panasia Bank. Total cash and cash equivalents increased $31.6 million or 47.2% in 2000 compared to 1999 versus an increase of $1.2 million or 1.8% in 1999 compared to 1998. The increase in 2000 compared to 1999 is due to increased cash and due from banks of $17.9 million, increased federal funds sold of $7.0 million and increased interest bearing deposits in banks of $6.7 million. Net loans and leases increased to $1.683 billion during 2000, an increase of $146.8 million or 9.6% compared to 1999. Net loans increased $131.4 million in 1999 or 9.4% compared to 1998. Loan growth in 2000 was primarily the result of the addition of $37.9 million in loans from the acquisition of Panasia Bank and the investment of deposits, securities sold under repurchase agreements, and federal funds purchased. Residential mortgages originated for immediate resale during 2000 amounted to $42.2 million. The Company's credit quality is reflected by the annualized ratio of net chargeoffs to total loans of .23% for 2000 versus .17% for the year 1999, and the ratio of nonperforming assets to total loans of .95% at December 31, 2000, compared to .93% at December 31, 1999. Nonperforming assets, including nonaccruals, loans 90 days past due, restructured loans and other real estate owned, were $16.4 million at December 31, 2000, compared to $14.6 million at December 31, 1999. Of these amounts, nonaccrual loans represented $10.9 million and $11.1 million at December 31, 2000, and December 31, 1999, respectively. Loans 90 days past due and still accruing interest were $4.5 million and $2.7 million at December 31, 2000, and December 31, 1999, respectively. Other real estate owned was $988,000 at December 31, 2000 and $842,000 at December 31, 1999, respectively. The Company had no restructured loans at December 31, 2000 or December 31, 1999. The allowance for loan losses to nonperforming assets was 226.1% and 234.3% at December 31, 2000 and December 31, 1999, respectively. The company has no significant exposure to energy and agricultural-related loans. Investments, which are the Company's secondary use of funds, increased $77.3 million or 15.0% to $593.3 million at year-end 2000. In 1999, the investment portfolio reflected a decrease of $7.0 million or 1.3% compared to 1998. The increase in 2000 was due to the addition of $46.9 million in investments from the acquisition of Panasia Bank and investment purchases of $147.3 million, primarily in mortgage-backed securities, which were partially offset by calls and maturities of securities, investment securities sales and payments on mortgage-backed securities. Other assets increased to $137.4 million, an increase of $14.4 million or 11.7% compared to the $123.0 million at December 31, 1999. In 1999, other assets increased $17.2 million or16.2% compared to 1998. The increase in 2000 is due primarily to the $12.2 million in goodwill from the acquisition of Panasia Bank, which is being amortized over a twenty-year period. Goodwill represents the amount paid in excess of the fair value of the assets acquired and, under current accounting guidelines, the amortization of which will appear in the Company's financial statements as an expense over the period indicated. As the primary source of funds, aggregate deposits of $1.814 billion increased $221.0 million or 13.9% compared to 1999. Deposits of $1.593 billion increased $120.0 million in 1999 or 8.1% compared to 1998. The increase in deposits is primarily in interest-bearing deposits, which increased $137.3 million while non-interest bearing deposits increased $83.7 million, largely due to the acquisition of $100.4 million in deposits in the Panasia Bank acquisition in July 2000. In addition to deposits, earning assets are funded to some extent through purchased funds and borrowings. 29 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 $493.7 million at the end of 2000, a $17.2 million or 3.6% increase compared to 1999. The 1999 amount of borrowings and purchased funds of $475.9 million represented an increase of $8.3 million or 1.7% compared to 1998. The increase in 2000 was due to an increase in securities sold under repurchase agreements and federal funds purchased, of $97.3 million, which was partially offset by a decrease in long-term borrowings of $76.6 million. Shareholders' equity increased by $29.7 million or 20.1% in 2000 to $177.4 million. This increase was principally due to an increase in the valuation adjustment for securities available for sale. Cash dividends paid in 2000 increased $922,000 or 6.9% compared to the cash dividends paid in 1999, which increased $3.3 million or 32.2% compared to cash dividends paid in 1998. Earnings retained in 2000 were 50.9% compared to 51.0% in 1999. RESULTS OF OPERATIONS --------------------- Net income for 2000 of $29.2 million was 6.7% more than the $27.4 million reported in 1999. The 1999 amount was 19.6% more than the $22.9 million in 1998. On a per share basis, basic earnings were $1.57, $1.47, and $1.22 for 2000, 1999, and 1998, respectively. Diluted earnings per share were $1.56, $1.44, and $1.20 for 2000, 1999, and 1998, respectively. Net interest income is the difference between interest income on assets and interest expense on liabilities. Net interest income increased $3.4 million or 4.2% to $84.9 million in 2000 from the 1999 amount of $81.5 million. The increase in interest income is a result of increased loan income of $16.4 million and increased investment income of $4.0 million 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 4.31% in 1999 to 4.18% in 2000. The primary reasons for this decrease are (1) 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 (2) 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 16, 1999 to February 1, 2000, the prime rate was 8.50%. From February 2, 2000 to March 21, 2000, the prime rate was 8.75%. From March 22, 2000 to May 15, 2000, the prime rate was 9.00%. On May 16, 2000, the prime rate changed to 9.50%. 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%. Interest expense during 2000 increased $16.9 million or 20.5% compared to the prior year. The increase in interest expense is a result of increased interest on deposits of $12.6 million and increased interest on securities sold under repurchase agreements and federal funds purchased of $9.6 million due to an increase in outstandings and higher rates on deposits and borrowings. This was partially offset by a decrease in interest on long-term borrowings of $5.4 million. Interest expense during 1999 increased $6.1 million or 8.0% compared to 1998. 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 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 losses was $5.6 million for the year ended December 31, 2000 and $5.9 million for both the year ended December 31, 1999 and the year ended December 31, 1998. The allowance for loan losses of $37.1 million at year-end 2000 and $34.1 million at year-end 1999 as a percentage of total loans was 2.2% at both year-end 2000 and year-end 1999. Net loan chargeoffs of $4.0 million, $2.7 million, and $3.6 million during 2000, 1999, and 1998, respectively, continue to be comparable with those of the Company's peers. The Company maintains an allowance for loan losses at a level deemed sufficient to absorb losses, which are inherent in the loan portfolio at each balance sheet date. Management reviews the adequacy of the allowance on at least a quarterly basis to ensure that the provision for loan losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management's assessment of probable estimated losses. 30 The Company's methodology for assessing the appropriateness of the allowance for loan losses consists of several key elements. These elements include a specific reserve for doubtful or high risk loans, an allocated reserve based on historical trends, and an unallocated portion. The Company consistently applies the following comprehensive methodology. The specific reserve for high risk loans is established for specific commercial and industrial loans, real estate development loans, and construction loans which have been identified by bank management as being high risk loan assets. These high risk loans are assigned a doubtful risk rating grade because the loan has not performed according to payment terms and there is reason to believe that repayment of the loan principal in whole or part is unlikely. The specific portion of the allowance is the total amount of potential unconfirmed losses for these individual doubtful loans. The second category of reserves consists of the allocated portion of the allowance. The allocated portion of the allowance is determined by taking pools of loans outstanding and commitments that have similar characteristics and applying historical loss experience for each pool. This estimate represents the potential unconfirmed losses within the portfolio. Individual loan pools are created for commercial loans, real estate development and construction loans, and for the various types of loans to individuals. The historical estimation for each loan pool is then adjusted to account for current conditions, current loan portfolio performance, loan policy or management changes or any other factor which may cause future losses to deviate from historical levels. Before applying the historical loss experience percentages, loan balances are reduced by the portion of the loan balances which are subject to a guarantee by a government agency. (This space intentionally left blank.) 31 The Company also maintains an unallocated allowance. The unallocated allowance is used to cover any factors or conditions, which may cause a potential loan loss but are not specifically identifiable. It is prudent to maintain an unallocated portion of the allowance because no matter how detailed an analysis of potential loan losses is performed these estimates by definition lack precision. Management must make estimates using assumptions and information, which is often subjective and changing rapidly.
Allocation of the Allowance for Loan Losses (1) --------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------ ----------------- ----------------- ----------------- ------------------ % 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 $ 6,006 18.3% $ 5,878 16.1% $ 5,859 15.3% $ 3,245 13.8% $ 3,655 12.6% Real estate loans: Construction and land dev. 6,618 8.8% 4,204 8.7% 2,528 5.9% 2,021 5.2% 1,647 4.2% Residential 3,254 37.1% 4,119 41.3% 4,163 47.3% 5,836 50.0% 5,379 54.1% Other 10,227 31.6% 10,916 30.1% 11,378 28.2% 7,942 28.4% 8,957 27.1% Loans to individuals 6,675 4.2% 4,256 3.8% 3,268 3.3% 4,925 2.6% 2,600 2.0% Unallocated 4,318 N/A 4,766 N/A 3,639 N/A 4,498 N/A 3,500 N/A --------- ------- -------- ------- ------- ------- ------- ------ ------- ------- $37,098 100.0% $34,139 100.0% $30,835 100.0% $28,467 100.0% $25,738 100.0% ========= ======= ======== ======= ======= ======= ======= ====== ======= =======
(1) This allocation is made for analytical purposes. The total allowance is available to absorb losses from any segment of the portfolio 32 Commercial and industrial loans, real estate loans, and construction loans are charged off to the allowance as soon as it is determined that the repayment of all or part of the principal balance is highly unlikely. Loans to individuals are charged off any time repayment is deemed highly unlikely or as soon as the loan becomes 120 days delinquent. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses. A loan is placed in a nonaccrual status at the time when ultimate collectibility of principal or interest, wholly or partially, is in doubt. Past due loans are those loans which were contractually past due 90 days or more as to interest or principal payments but are well secured and in the process of collection. Restructured loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower. NON PERFORMING ASSETS TABLE
December 31, ------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- Nonaccrual Loans $10,898 $11,055 $11,581 $8,519 $9,493 Loans Past Due 90 or More Days as to Interest or Principal 4,519 2,674 1,840 3,246 4,212 ------- ------- ------- ------- ------- Total Nonperforming Loans 15,417 13,729 13,421 11,765 13,705 Other Real Estate Owned 988 842 922 672 855 ------- ------- ------- ------- ------- Total Nonperforming Assets $16,405 $14,571 $14,343 $12,437 $14,560 ======= ======= ======= ======= =======
At December 31, 2000, management believes that the allowance for loan losses and nonperforming loans remained safely within acceptable levels. Other income increased $3.8 million or 16.4% in 2000 compared to 1999, as a result of increased other service charges and fees of $2.0 million, increased mortgage banking income of $1.4 million, increased services charges on deposit accounts of $1.1 million, increased trust income of $849,000, increased bank owned life insurance income of $323,000, and increased net gains on sale of investment securities of $240,000. The increase in other income in 1999 compared to 1998 was $4.6 million or 24.7% as a result of increased other service charges and fees of $2.4 million, increased trading revenue of $1.3 million, an activity that was discontinued by the end of 1999, increased mortgage banking income of $1.0 million, 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 $1.9 million and a decrease in equity in undistributed net earnings of affiliates of $151,000. Sales of investment securities in 2000 and 1999 totaled $45.5 million and $45.7 million, respectively. Other expenses increased $5.1 million or 7.7% in 2000 compared to 1999 as a result of increased salaries, wages and benefits of $2.6 million, increased other operating of $1.8 million and increased net premises and equipment of $675,000. Other expenses increased $4.5 million or 7.3% in 1999 when compared to 1998, as a result of increased salaries, wages and benefits of $4.0 million, increased net premises and equipment of $777,000, which was partially offset by a decrease in other operating of $265,000. For 2000, 1999, and 1998, 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 2000 by $2.6 million or 7.7% compared to 1999 when income before income taxes increased by $4.2 million or 14.4% compared to 1998. Income taxes increased $738,000 in 2000 compared to 1999 while income taxes decreased $323,000 compared to 1998. The Company's effective tax rate is 18.2% for 2000, 17.4% for 1999, and 21.0% for 1998, respectively. This is due to the Company's investments in tax advantaged municipal securities and bank owned life insurance. 33 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 $314.8 million during 2000. Long-term borrowings decreased $76.6 million during 2000. 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. The following table shows separately the interest rate sensitivity of each category of interest earning assets and interest bearing liabilities at December 31, 2000:
Repricing Periods --------------------------------------------------------------- Within Three Months One Year Over Three Through Through Five Months One Year Five Years Years --------- --------- --------- --------- (In Thousands) Assets Interest bearing deposits at banks $10,741 $ -- $ -- $ -- Investment securities 54,765 84,132 137,987 316,432 Loans (1) 493,597 255,541 581,513 352,547 Other assets 11,743 -- -- 213,510 --------- --------- --------- --------- 570,846 339,673 719,500 882,489 --------- --------- --------- --------- Liabilities and equity Non-interest bearing deposits 293,997 -- -- -- Interest bearing deposits (2) 317,157 411,696 303,952 487,451 Borrowed funds 162,254 2,500 75,000 213,087 Preferred securities -- -- -- 40,250 Other liabilities -- -- -- 27,736 Hedging instruments 70,000 (30,000) (40,000) -- Shareholders' equity -- -- -- 177,428 --------- --------- --------- --------- 843,408 384,196 338,952 945,952 --------- --------- --------- --------- Interest sensitivity gap (272,562) (44,523) 380,548 (63,463) --------- --------- --------- --------- Cumulative interest rate sensitivity gap ($272,562) ($317,085) $63,463 $ -- ========= ========= ========= ========= (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 2000. 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 34 significantly longer effective maturities based upon the Company's historical retention of such deposits in changing interest rate environments. Specifically, 31.3% of these deposits are considered repriceable within three months and 68.7% are considered repriceable in the over five-year 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 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, 2000 are as follows: MVPE Change in Interest Rate Amount % Change - ----------------------- ------ -------- (In Thousands) +300 Basis Points $233,899 (35)% +200 Basis Points 275,329 (24) +100 Basis Points 320,333 (11) Flat Rate 361,569 - - -100 Basis Points 374,811 4 - -200 Basis Points 385,704 7 - -300 Basis Points 394,768 9 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. If 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 fall in the first half of 2001, with no clear indication of sustainable rising or falling rates thereafter. Given this assumption, the Company's asset/liability strategy for 2001 is to maintain a 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 falling or constant 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. 35 CAPITAL ADEQUACY - ---------------- The following table sets forth certain capital performance ratios for the Company. 2000 1999 1998 ---- ---- ---- CAPITAL PERFORMANCE Return on average assets 1.24 1.26 1.17 Return on average equity 19.00 17.90 15.00 Earnings retained 50.94 51.00 55.70 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, 2000 1999 2000 1999 2000 1999 ---- ---- ---- ---- ---- ---- The Company 8.06% 8.58% 10.59% 11.43% 11.85% 12.73% National Penn Bank 7.09% 6.83% 9.19% 9.16% 10.45% 10.42% Panasia Bank 7.79% N/A 20.11% N/A 21.39% N/A "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, 2000, 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, 2000, 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. Effective July 23, 2000, the Company rescinded its stock purchase program. The Company repurchased 441,000 shares at a cost of $10,380,000 through that date. ACQUISITION OF PANASIA BANK --------------------------- On July 11, 2000, the Company completed the acquisition of Panasia Bank (Panasia), a community bank with $110 million in assets. Under the terms of the acquisition, the outstanding shares of Panasia stock were purchased for $29 per share, and the outstanding Panasia stock options were cancelled for cash equal to the difference between their exercise prices and $29 per share, at a total cost of $20 million. The Company financed the Panasia acquisition with a four-year loan from an unaffiliated financial institution. This transaction was accounted for under the purchase method of accounting. Under the purchase method of accounting, Panasia's results of operation are included in the Company's consolidated results of operation from and after July 11, 2000. More information is available in the Company's Current Report on Form 8-K dated July 11, 2000, filed with the Securities and Exchange Commission ("SEC"). The Company anticipates that the Panasia acquisition will be accretive to the Company's earnings in 2001. 36 ACQUISITION OF COMMUNITY INDEPENDENT BANK, INC. ----------------------------------------------- On January 3, 2001, the Company acquired Community Independent Bank, Inc. ("Community") by its merger with and into the Company. Community's banking subsidiary, Bernville Bank, N.A., had $100 million in assets as of December 31, 2000. Under the terms of the merger, each outstanding share of Community stock was converted into .945 share of the Company's common stock, resulting in issuance of 659,245 shares of the Company's common stock. Outstanding options for Community stock were converted into options for 19,184 shares of the Company's common stock. The transaction was accounted for under the pooling of interests method of accounting. More information is available in the Company's Current Reports on Form 8-K dated July 11, 2000, October 25, 2000, and December 20, 2000, each filed with the SEC, and in the Company's registration statement on Form S-4, filed with the SEC on September 12, 2000. Merger and consolidation costs relating to the Community acquisition may have a negative impact on the Company's 2001 earnings. The Company anticipates that the Community acquisition will be accretive to the Company's earnings in 2002. FUTURE OUTLOOK -------------- In 2001, the Company anticipates opening two new branches, one in Northampton County, and one in its Elverson National Bank Division. FORWARD-LOOKING STATEMENTS -------------------------- The Company has discussed earnings, asset quality, recent acquisitions, and branch expansion 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: o Expected cost savings from the Community merger, including reductions in interest and non-interest expense, may not be fully realized or realized as quickly as expected. o The Company's revenues following the Community merger may be lower than expected, or loan losses, deposit attrition, operating costs, customer losses or business disruption following the Community merger may be greater than expected. o Commercial loan growth following the Community merger may be lower than expected. o Costs, difficulties or delays related to the integration of Community's business with the Company's business may be greater or longer than expected. o Expected cost savings from the Company's acquisition of Panasia may not be fully realized or realized as quickly as expected. o Revenues of Panasia may be lower than expected, or loan losses, deposit attrition, operating costs, customer losses or business disruption at Panasia may be greater than expected. o Commercial loan growth at Panasia may be lower than expected. o Costs, difficulties or delays related to the integration of Panasia's business with the Company's business may be greater or longer than expected. o Start-up costs of new subsidiaries may be greater, and revenue ramp-up of such subsidiaries may take longer, than expected. o Changes in the interest rate environment may reduce interest margins. o Competitive pressures among depository and other financial institutions may increase significantly. o General economic or business conditions, either nationally or in the regions 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. o Technological changes and systems integration may be harder to make or more expensive than expected. 37 o Legislation or regulatory changes may adversely affect the Company's business. o Adverse changes may occur in the securities markets. 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. (This space intentionally left blank.) 38 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 2000 1999 ------------ ------------ Cash and due from banks $ 80,859 $ 62,953 Interest bearing deposits in banks 10,741 4,039 Federal funds sold 7,000 - ------------ ------------ Total cash and cash equivalents 98,600 66,992 Investment securities available for sale, at fair value 593,316 516,027 Loans, less allowance for loan losses of $37,098 and $34,139 in 2000 and 1999, respectively 1,683,198 1,536,404 Premises and equipment, net 25,439 23,289 Accrued interest receivable 17,066 13,855 Bank owned life insurance 51,088 48,494 Investments, at equity 2,265 2,147 Other assets 41,536 35,224 ------------ ------------ Total assets $ 2,512,508 $ 2,242,432 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest bearing $ 293,997 $ 210,272 Interest-bearing 1,520,256 1,382,982 ------------ ------------ Total deposits 1,814,253 1,593,254 Securities sold under repurchase agreements and federal funds purchased 297,464 200,148 Short-term borrowings 8,945 12,448 Long-term borrowings 146,432 223,077 Guaranteed preferred beneficial interests in Company's subordinated debentures 40,250 40,250 Accrued interest payable and other liabilities 27,736 25,559 ------------ ------------ Total liabilities 2,335,080 2,094,736 ------------ ------------ 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 2000 - 18,690,697; 1999 - 17,736,699, net of shares in Treasury: 2000 - 39,837; 1999 - 108,176 151,043 135,526 Retained earnings 24,538 26,739 Accumulated other comprehensive income (loss) 2,700 (11,616) Treasury stock, at cost (853) (2,953) ------------- ------------ Total shareholders' equity 177,428 147,696 ------------ ------------ Total liabilities and shareholders' equity $ 2,512,508 $ 2,242,432 ============ ============
The accompanying notes are an integral part of these statements. 39
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Income (Dollars in thousands, except per share data) - ----------------------------------------------------------------------------------------------------------------- Year ended December 31, ---------------------------------------- 2000 1999 1998 ----------- ---------- ---------- INTEREST INCOME Loans, including fees $ 148,301 $ 131,861 $ 125,152 Investment securities Taxable 23,550 19,961 17,598 Tax-exempt 11,917 11,524 9,669 Federal funds sold 588 489 267 Trading assets - 196 851 Deposits in banks 296 239 544 ----------- ---------- ---------- Total interest income 184,652 164,270 154,081 ----------- ---------- ---------- INTEREST EXPENSE Deposits 69,142 56,537 53,518 Securities sold under repurchase agreements, and federal funds purchased 16,752 7,165 6,108 Short-term borrowings 416 272 553 Long-term borrowings 13,392 18,779 16,428 ----------- ---------- ---------- Total interest expense 99,702 82,753 76,607 ----------- ---------- ---------- Net interest income 84,950 81,517 77,474 Provision for loan losses 5,600 5,960 5,960 ----------- ---------- ---------- Net interest income after provision for loan losses 79,350 75,557 71,514 ----------- ---------- ---------- OTHER INCOME Trust income 4,855 4,006 3,264 Service charges on deposit accounts 6,839 5,757 5,266 Bank owned life insurance income 2,593 2,270 1,604 Other service charges and fees 10,107 8,104 5,711 Net gains on sale of investment securities 255 15 1,888 Mortgage banking income (loss) 2,398 953 (80) Equity in undistributed net earnings of affiliates 117 178 329 Trading revenue - 2,055 739 ----------- ---------- ---------- Total other income 27,164 23,338 18,721 ----------- ---------- ---------- OTHER EXPENSES Salaries, wages and employee benefits 39,868 37,247 33,267 Net premises and equipment 11,079 10,404 9,627 Other operating 19,830 18,073 18,338 ----------- ---------- ---------- Total other expenses 70,777 65,724 61,232 ----------- ---------- ---------- Income before income taxes 35,737 33,171 29,003 Income taxes 6,500 5,762 6,085 ----------- ---------- ---------- Net income $ 29,237 $ 27,409 $ 22,918 ========== ========= ========= PER SHARE OF COMMON STOCK Basic earnings $ 1.57 $ 1.47 $ 1.22 Diluted earnings $ 1.56 $ 1.44 $ 1.20 Dividends paid $ 0.77 $ 0.72 $ 0.54
The accompanying notes are an integral part of these statements. 40 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders' Equity (Dollars in thousands) - --------------------------------------------------------------------------------
Accumulated other Additional compre- Compre- Common paid-in Retained hensive Treasury hensive Shares Par value capital earnings (loss) income stock Total income ------ --------- ------- -------- ------------- ----- ----- ------ Balance at January 1, 1998 17,080,328 $ 25,620 $ 96,657 $ 22,431 $ 7,648 $(3,428) $ 148,928 Net income - - - 22,918 - - 22,918 $22,918 Cash dividends declared - - - (10,422) - - (10,422) Shares issued under stock-based plans 42,946 855 - - - - 855 Other comprehensive income, net of reclassification adjustment and taxes - - - - 1,905 - 1,905 1,905 Total comprehensive income - - - - - - - $24,823 Conversion to no par value stock - 95,490 (95,107) - - - 383 Effect of treasury stock transactions (133,652) (7,671) (1,550) - - 3,428 (5,793) ---------- -------- -------- --------- -------- ------- --------- Balance at December 31, 1998 16,989,622 114,294 - 34,927 9,553 - 158,774 Net income - - - 27,409 - - 27,409 $27,409 Cash dividends declared - - - (14,478) - - (14,478) 5% stock dividend 850,577 21,119 - (21,119) - - - Shares issued under stock-based plans 4,676 693 - - - - 693 Other comprehensive (loss), net of reclassification adjustment and taxes - - - - (21,169) - (21,169) (21,169) Total comprehensive income - - - - - - $ 6,240 Effect of treasury stock transactions (108,176) (580) - - - (2,953) (3,533) ---------- -------- -------- --------- -------- ------- --------- Balance at December 31, 1999 17,736,699 135,526 - 26,739 (11,616) (2,953) 147,696 Net income - - - 29,237 - - 29,237 $29,237 Cash dividends declared - - - (14,699) - - (14,699) 5% stock dividend 887,062 16,739 - (16,739) - - - Other comprehensive income, net of reclassification adjustment and taxes - - - - 14,316 - 14,316 14,316 Total comprehensive income - - - - - - - $ 43,553 Effect of treasury stock transactions 66,936 (1,222) - - - 2,100 878 ---------- -------- -------- --------- -------- ------- --------- Balance at December 31, 2000 18,690,697 $151,043 $ - $ 24,538 $ 2,700 $ (853) $ 177,428 ========== ======== ======== ========= ======== ======= =========
The accompanying notes are an integral part of this statement. 41
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, -------------------------------------- 2000 1999 1998 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 29,237 $ 27,409 $ 22,918 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan and lease losses 5,600 5,960 5,960 Depreciation and amortization 5,344 4,655 4,283 Trading account securities - 21,589 (21,589) Deferred income tax benefit 6,927 (12,476) (609) Amortization of premiums and discounts on investment securities, net 1,862 1,875 1,040 Investment securities gains, net (255) (15) (1,888) Mortgage loans originated for resale (42,235) (50,437) (70,586) Sale of mortgage loans originated for resale 42,430 50,870 71,195 Changes in assets and liabilities (Increase) decrease in accrued interest receivable (3,211) 737 (3,319) Increase in accrued interest payable 5,561 3,018 185 Decrease (increase) in other assets (14,434) (2,547) 122 Increase (decrease) in other liabilities (3,740) (93) 2,888 --------- -------- -------- Net cash provided by operating activities 33,086 50,545 10,600 --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Increase in term funds sold - - (15,000) Cash paid in excess of cash equivalents for businesses acquired (1,387) - - Proceeds from sales of investment securities available for sale 45,546 45,661 55,435 Proceeds from maturities of investment securities held to maturity - - 7,206 Proceeds from maturities of investment securities available for sale 37,093 121,830 51,243 Purchase of investment securities available for sale (147,337) (180,925) (264,219) Net increase in loans (151,007) (137,392) (118,331) Proceeds from sales of foreclosed real estate - - 28 Purchases of premises and equipment (6,494) (3,657) (2,101) Purchase of bank-owned life insurance (2,594) (6,890) (21,604) --------- -------- -------- Net cash used in investing activities (226,180) (161,373) (307,343) --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in interest and non-interest bearing demand deposits and savings accounts 156,702 20,018 126,975 Net (decrease) increase in certificates of deposit 64,297 99,934 (7,196) Net increase in securities sold under agreements to repurchase and federal funds purchased 97,316 40,562 88,398 Net (decrease) increase in short-term borrowings (3,503) (6,684) 12,647 Proceeds from long-term borrowings 68,376 50,100 105,000 Repayments of long-term borrowings (145,021) (75,650) (11,982) Issuance of common stock under dividend reinvestment and stock option plan - 693 1,238 Effect of treasury stock transactions 878 (3,533) (5,793) Cash dividends (14,343) (13,421) (10,151) --------- -------- -------- Net cash provided by financing activities 224,702 112,019 299,136 --------- -------- -------- Net increase in cash and cash equivalents 31,608 1,191 2,393 Cash and cash equivalents at beginning of year 66,992 65,801 63,408 --------- -------- -------- Cash and cash equivalents at end of year $ 98,600 $ 66,992 $ 65,801 ========= ======== ========
The accompanying notes are an integral part of these statements. 42 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000 and 1999 - ------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES National Penn Bancshares, Inc., primarily through its Bank subsidiaries, National Penn Bank (NPB) and Panasia Bank, N.A. (Panasia) (collectively, the Banks), has been serving residents and businesses of southeastern Pennsylvania since 1874 and northern New Jersey since July 2000. The Banks, which have in excess of 60 branch locations, are locally managed community banks providing commercial banking products, primarily loans and deposits. Trust services are provided through Investors Trust Company (ITC). The Banks, ITC and Penn Securities, Inc. 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. 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. In May 1999, NPB formed Penn 1st Financial Services, Inc. (Penn 1st) (formerly National Penn Mortgage Company). Penn 1st is a mortgage banking company and is engaged in the activity of extending credit and servicing loans. The Company, the Banks, 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 accounting policies followed by the Company conform with accounting principles generally accepted in the United States of America and with predominant practice within the banking industry. The consolidated financial statements include the accounts of the Company and the Company's wholly owned subsidiaries, NPB, Panasia, ITC, National Penn Investment Company, National Penn Life Insurance Company, NPB Capital Trust, and NPB's wholly owned subsidiaries Penn 1st, Penn Securities, Inc., Link Financial Services, Inc., NPB Delaware, Inc., 1874 Financial Corp., and National Penn Consulting Services, Inc. Investments owned between 20% and 50% are accounted for using the equity method. All material intercompany balances have been eliminated. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the balance sheets, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal estimates that are susceptible to significant change in the near term relate to the allowance for loan losses and certain intangible assets, such as goodwill and core deposits. 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. (Continued) 43 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Substantially all outstanding goodwill resulted from the acquisition of Panasia Bank, a northern New Jersey institution concentrating in the Asian community. As the result of Panasia's market penetration in the northern New Jersey, the Company had formulated its own strategy to create such a market role. Accordingly, implicit in the purchase of the Panasia franchise was the acquisition of that role. However, if such benefits, including new business, are not derived or the Company changes its business plan, estimated amortization may increase and/or a charge for impairment may be recognized. Core deposit intangibles are amortized over estimated lives of deposit accounts. However, decreases in deposit lives may result in increased amortization and/or a charge for impairment may be recognized. Statement of Financial Accounting Statements (SFAS) No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also establishes standards for related disclosure about products and services, geographic areas, and major customers. The Company has one reportable segment, "Community Banking." All of the Company's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which addresses certain criteria for revenue recognition. SAB 101, as amended by SAB 101A and SAB 101B, outlines the criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. On June 26, 2000, the SEC issued SAB 101B to defer the effective date of implementation of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 31, 1999. Management believes the Company's revenue recognition policies comply with the guidance contained in SAB 101 and, therefore, the Company's results of operations were not materially affected. INVESTMENT SECURITIES 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 during 1998 were 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 did not have any trading securities as of December 31, 2000 and 1999. (Continued) 44 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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. SFAS No. 133, (SFAS 133) Accounting for Derivative Instruments and Hedging Activities was amended in June, 1999 by SFAS 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, and in June, 2000, by SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, (collectively SFAS 133). SFAS 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS 133 an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized asset or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. SFAS 133 is required for all fiscal quarters or fiscal years beginning after June 15, 2000. The Company adopted SFAS 133 effective January 1, 2001 and the adoption did not have a material impact on the Company's consolidated financial position or results of operations. LOANS AND ALLOWANCE FOR LOAN LOSSES Loans 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 losses is established through a provision for loan losses charged as an expense. Loans are charged against the allowance for loan 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 that may become uncollectible based on evaluations of the collectibility of loans, and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. Accrual of interest is stopped on a loan when management believes, after considering economic and business conditions and collection efforts that the borrower's financial condition is such that collection of 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. (Continued) 45 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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. In September 2000, the Financial Accounting Standards Board has issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which replaces SFAS No.125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, revises the standards for accounting for the securitizations and other transfers of financial assets and collateral. This new standard also requires certain disclosures, but carries over most of the provisions of SFAS 125. SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial statements. 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. GOODWILL AND CORE DEPOSIT INTANGIBLES Substantially all outstanding goodwill resulted from the acquisition of Panasia Bank (Panasia) in 2000 and is being amortized on a straight-line basis over approximately 20 years and is included in other assets. The unamortized balance at December 31, 2000 was $11,895,000. Amortization expense for the year ended December 31, 2000 was $305,000. The Company has recognized core deposit intangibles, as a result of a branch acquisition in 1997, which are being amortized on a straight-line basis over 15 years and are included in other assets. 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. EMPLOYEE BENEFIT PLANS The Company has certain employee benefit plans covering substantially all employees. The Company follows the disclosure provisions of 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. 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 stock option plans are accounted for under APB Opinion 25. (Continued) 46 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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 losses, deferred loan fees, deferred compensation and securities available for sale. 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, --------------------------------------------- 2000 1999 1998 ---------- ----------- ---------- Interest $ 95,997 $ 79,832 $ 74,918 Taxes 9,372 7,323 8,288 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. OTHER REAL ESTATE OWNED Other real estate owned 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. (Continued) 47 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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, 2000, 1999 and 1998, was approximately $2,568,000, $2,362,000 and $2,707,000, respectively. COMPREHENSIVE INCOME SFAS No. 130, Reporting Comprehensive Income requires the reporting of comprehensive income, which includes net income as well as certain other items, which results in a change to equity during the period.
December 31, 2000 December 31, 1999 December 31, 1998 ------------------------------ ------------------------------- --------------------------- 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 $22,279 $(7,798) $14,481 $(32,540) $11,381 $(21,159) $4,819 $(1,687) $3,132 Less reclassification adjustment for gains realized in net income 255 (90) 165 15 (5) 10 1,888 (661) 1,227 Other comprehensive (loss) income, net $22,024 $(7,708) $14,316 $(32,555) $11,386 $(21,169) $2,931 $(1,026) $1,905
2. ACQUISITIONS On January 3, 2001, the Company completed a merger with Community Independent Bank, Inc. (CIB). Under the terms of the merger, each share of CIB stock was converted into 0.945 shares of the Company's common stock, resulting in an issuance of 659,245 shares of the Company's common stock. In addition, outstanding stock options to purchase CIB common stock were converted into stock options to purchase 19,188 shares of the Company's common stock, with an exercise price of $9.33 to $12.83 per share. This transaction was accounted for under the pooling of interests method of accounting. On July 14, 2000, the Company completed the acquisition of Panasia. Under terms of the agreement, each share of Panasia stock was purchased for $29 per share and each outstanding Panasia stock option was cancelled for cash equal to the difference between $29 and its per share exercise price, for a total cost $20,005,000. This transaction was accounted for under the purchase method of accounting and the results of operations of the Company for the year ended December 31, 2000, include only the results of operations of Panasia from the date of acquisition, July 11, 2000, through December 31, 2000. The acquisition resulted in the recording of approximately $12.2 million of goodwill, which is being amortized on a straight-line basis over 20 years. (Continued) 48 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 2. ACQUISITIONS - Continued 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. Accordingly, all prior period amounts have been restated to reflect the acquisition. 3. INVESTMENT SECURITIES The amortized cost, gross unrealized gains and losses, and fair values of the Company's investment securities are summarized as follows (in thousands):
December 31, 2000 ---------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ---------- ---------- ---------- ---------- U.S. Treasury and U.S. Government agencies $ 141,574 $ 1,822 $ (513) $ 142,883 State and municipal bonds 230,688 4,162 (1,765) 233,085 Mortgage-backed securities 163,937 1,762 (663) 165,036 Marketable equity securities and other 52,964 1,681 (2,333) 52,312 ---------- ---------- ----------- ---------- Totals $ 589,163 $ 9,427 $ (5,274) $ 593,316 ========= ========= ========== ========= 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 ========= ========= ========== =========
The amortized cost and fair value of investment securities available for sale, by contractual maturity, at December 31, 2000 (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 $ 31,788 $ 31,960 Due after one through five years 82,145 82,643 Due after five through ten years 49,520 50,358 Due after ten years 372,746 376,043 Marketable equity securities and other 52,964 52,312 ------------ ------------ $ 589,163 $ 593,316 =========== =========== (Continued) 49 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 3. INVESTMENT SECURITIES - Continued Proceeds from the sales of investment securities during 2000, 1999 and 1998, were $45,546,000, $45,661,000 and $55,435,000, respectively. Gross gains realized on those sales were $676,000, $324,000 and $1,890,000 in 2000, 1999 and 1998, respectively, gross losses were $421,000 in 2000 and $339,000 in 1999 and losses were $2,000 in 1998. As of December 31, 2000 and 1999, investment securities with a book value of $349,528,000 and $270,604,000, respectively, were pledged to secure public deposits and for other purposes as provided by law. As of December 31, 2000 and 1999, the Company did not have any investment securities of any one issuer where the carrying value exceeded 10% of shareholders' equity. 4. LOANS Major classifications of loans are as follows (in thousands): December 31, ----------------------------- 2000 1999 ------------ ------------ Commercial and industrial loans $ 315,264 $ 252,992 Real estate loans Construction and land development 150,435 136,105 Residential 638,981 649,692 Other 542,728 472,447 Loans to individuals 72,888 59,307 ------------ ------------ 1,720,296 1,570,543 Allowance for loan losses (37,098) (34,139) ------------- ------------ Total loans, net $ 1,683,198 $ 1,536,404 =========== ========= Loans on which the accrual of interest has been discontinued or reduced amounted to approximately $10,898,000 and $11,055,000 at December 31, 2000 and 1999, respectively. If interest on these loans had been accrued, interest income would have increased by approximately $251,000 and $420,000 for 2000 and 1999, 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 $4,519,000 and $2,673,000 at December 31, 2000 and 1999, respectively. The balance of impaired loans was $5,548,000 at December 31, 2000. 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 $5,548,000 of non-accrual loans. The allowance for loan loss associated with the $5,548,000 of impaired loans was $1,701,000 at December 31, 2000. The average impaired loan balance was $10,234,000 during 2000 and the income recognized on impaired loans during 2000 was $437,000. 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 $8,823,000 at December 31, 1999. 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 and $6,828,000 in 1999 and 1998, respectively, and the income recognized on impaired loans during 1999 and 1998 was $439,000 and $289,000, respectively. (Continued) 50 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 4. LOANS - Continued Changes in the allowance for loan losses are as follows (in thousands): Year ended December 31, ----------------------------------- 2000 1999 1998 --------- --------- --------- Balance, beginning of year $ 34,139 $ 30,835 $ 28,467 Acquisition of Panasia 1,384 - - Provision charged to operations 5,600 5,960 5,960 Loans charged off (6,095) (5,157) (5,201) Recoveries 2,070 2,501 1,609 --------- --------- --------- Balance, end of year $ 37,098 $ 34,139 $ 30,835 ========= ========= ========= 5. PREMISES AND EQUIPMENT Major classifications of premises and equipment are summarized as follows (in thousands):
December 31, Estimated ------------- useful lives 2000 1999 -------------- --------- --------- Land Indefinite $ 2,792 $ 2,766 Buildings 5 to 40 years 17,060 16,178 Equipment 3 to 10 years 29,358 25,115 Leasehold improvements 2 to 40 years 6,353 4,597 --------- --------- 55,563 48,656 Accumulated depreciation and amortization (30,124) (25,367) --------- --------- $ 25,439 $ 23,289 ========= =========
Depreciation and amortization expense amounted to $4,345,000, $3,976,000 and $3,550,000 for the years ended December 31, 2000, 1999 and 1998, respectively. 6. DEPOSITS The aggregate amount of jumbo certificates of deposit, each with a minimum denomination of $100,000, was approximately $236,263,000 and $195,939,000 in 2000 and 1999, respectively. At December 31, 2000, the scheduled maturities of certificates of deposit are as follows (in thousands): 2001 $ 565,213 2002 235,226 2003 33,970 2004 13,247 2005 25,619 Thereafter 1,152 ---------- $ 874,427 ========== 51 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - ------------------------------------------------------------------------------- 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):
At or for the year ended December 31, ------------------------------------------ 2000 1999 1998 ---------- ---------- ---------- Securities sold under repurchase agreements and federal funds purchased Balance at year-end $ 297,464 $ 200,148 $ 159,586 Average during the year 289,257 158,669 133,380 Maximum month-end balance 343,390 213,735 191,307 Weighted average rate during the year 5.79% 4.52% 4.76% Rate at December 31 4.94% 4.30% 4.37% Short-term borrowings Balance at year-end $ 8,945 $ 12,448 $ 19,132 Average during the year 7,338 5,608 9,551 Maximum month-end balance 11,703 12,448 24,930 Weighted average rate during the year 5.67% 4.85% 5.70% Rate at December 31 4.87% 4.04% 5.26%
The weighted average rates paid in aggregate on these borrowed funds for 2000, 1999 and 1998 were 5.79%, 4.53% and 4.82%, respectively. 8. LONG-TERM BORROWINGS FHLB ADVANCES At December 31, 2000, advances from the Federal Home Loan Bank (FHLB) totaling $128,057,000 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 6.04%. Unused lines of credit at the FHLB were $407,660,000 and $195,312,000 at December 31, 2000 and 1999, respectively. OTHER BORROWINGS During 2000, the Company borrowed $21,000,000 with an interest rate of the federal funds rate plus 0.875%. The note matures on June 30, 2004 and requires monthly interest and quarterly principal payments. The balance as of December 31, 2000 is $18,375,000 with an interest rate of 6.285%. Outstanding borrowings mature as follows (in thousands): 2001 $ 2,500 2002 35,000 2003 - 2004 18,375 2005 - Thereafter 90,557 --------- $ 146,432 ========= (Continued) 52 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 8. LONG-TERM BORROWINGS - Continued SUBORDINATED DEBENTURES 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 in 1997. 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. 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, -------------------------- 2000 1999 --------- --------- Change in benefit obligation Benefit obligation at beginning of year $ 10,249 $ 9,945 Service cost 997 812 Interest cost 709 639 Actual gain 438 146 Benefits paid (270) (297) Effect of change in assumptions (534) (996) --------- --------- Benefits obligation at end of year 11,589 10,249 --------- --------- Change in plan assets Fair value of plan assets at beginning of year 12,835 10,605 Actual return on plan assets 2,310 1,647 Employer contribution 1,107 880 Benefits paid (270) (297) --------- --------- Fair value of plan assets at end of year 15,982 12,835 --------- --------- Funded status 4,393 2,586 Unrecognized net actuarial gain (3,151) (1,840) Unrecognized prior service cost 116 182 --------- --------- Prepaid benefit cost (included in other assets) $ 1,358 $ 928 ========= =========
(Continued) 53 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 9. PENSION PLANS - Continued Net pension cost included the following components (in thousands):
Year ended December 31, -------------------------------------------- 2000 1999 1998 --------- --------- --------- Service cost $ 996 $ 812 $ 724 Interest cost on projected benefit obligation 709 639 587 Actual return on plan assets (2,310) (1,647) (705) Net amortization and deferral 1,281 845 3 --------- --------- --------- Net periodic benefit cost $ 676 $ 649 $ 609 ========= ========= =========
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 7.13% and 4.50%, respectively, in 2000; 6.75% and 4.50%, respectively, in 1999; and 6.63% and 4.63%, respectively, in 1998. The expected long-term rate of return on assets was 8.25% for 2000, 1999 and 1998. 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 $671,000, $594,000 and $441,000 for the years ended December 31, 2000, 1999 and 1998, 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, -------------------------------------------- 2000 1999 1998 --------- --------- --------- Income tax expense Current $ 6,980 $ 6,321 $ 5,906 Deferred federal benefit (572) (1,090) (457) --------- --------- --------- 6,408 5,231 5,449 Additional paid-in capital from benefit of stock options exercised 92 531 636 --------- --------- --------- Applicable income tax expense $ 6,500 $ 5,762 $ 6,085 ========= ========= ========= 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, -------------------------------------------- 2000 1999 1998 --------- --------- --------- Computed tax expense at statutory rate $ 12,508 $ 11,610 $ 10,152 Decrease in taxes resulting from Tax-exempt loan and investment income (5,700) (5,388) (4,027) Other, net (308) (460) (40) --------- --------- --------- Applicable income tax expense $ 6,500 $ 5,762 $ 6,085 ========= ========= =========
(Continued) 54 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 10. INCOME TAXES - Continued Deferred tax assets and liabilities consist of the following (in thousands):
2000 1999 --------- --------- Deferred tax assets Deferred loan fees $ 254 $ 373 Allowance for loan and lease loss 12,261 11,158 Deferred compensation 907 853 Loan sales valuation 54 54 Investment securities available for sale - 6,254 --------- --------- 13,476 18,692 --------- --------- Deferred tax liabilities Pension 665 475 Partnership investments 378 326 Cash to accrual 15 - Investment securities available for sale 1,454 - Rehab credit adjustment 44 44 --------- --------- 2,556 845 --------- --------- Net deferred tax asset (included in other assets) $ 10,920 $ 17,847 ========= =========
As a result of the acquisition of Panasia Bank, the Company computed a net deferred tax asset of $209,000 and a deferred tax liability on unrealized holding gains of $160,000, during 2000. 11. SHAREHOLDERS' EQUITY On October 25, 2000, the Company declared a 5% stock dividend to shareholders of record on December 8, 2000, and payable on December 20, 2000. 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. On July 23, 2000, the repurchase plan was terminated. Prior to the termination, the Company has repurchased 441,000 shares at a cost of $10,380,000. 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. 55 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 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
Year ended December 31, 2000 -------------------------------------------- Income Shares Per share (numerator) (denominator) amount --------- ------ ------ Basic earnings per share Net income available to common stockholders $ 29,237 18,579 $ 1.57 Effect of dilutive securities Options - 208 (0.01) --------- ------ ------ Diluted earnings per share Net income available to common stockholders plus assumed conversions $ 29,237 18,787 $ 1.56 ========= ====== ======
Options to purchase 823,263 shares of common stock at $23.75 to $28.12 per share were outstanding during 2000. 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, 1999 -------------------------------------------- Income Shares Per share (numerator) (denominator) amount --------- ------ ------ Basic earnings per share Net income available to common stockholders $ 27,409 18,682 $ 1.47 Effect of dilutive securities Options - 297 (0.03) --------- ------ ------ Diluted earnings per share Net income available to common stockholders plus assumed conversions $ 27,409 18,979 $ 1.44 ========= ====== ======
(Continued) 56 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 13. EARNINGS PER SHARE - Continued Options to purchase 814,155 shares of common stock at $23.75 to $28.12 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.
Year ended December 31, 1998 -------------------------------------------- Income Shares Per share (numerator) (denominator) amount ----------- ------------- --------- Basic earnings per share Net income available to common stockholders $ 22,918 18,728 $ 1.22 Effect of dilutive securities Options - 380 (0.02) --------- ------ ------ Diluted earnings per share Net income available to common stockholders plus assumed conversions $ 22,918 19,108 $ 1.20 ========= ====== ======
Options to purchase 252,273 shares of common stock at $28.11 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. 14. COMMITMENTS AND CONTINGENT LIABILITIES LEASE COMMITMENTS Future minimum payments under non-cancelable operating leases are due as follows (in thousands): Year ending December 31, ------------------------ 2001 $ 2,515 2002 2,286 2003 2,029 2004 1,417 2005 1,000 Thereafter 1,532 --------- $ 10,779 ========= The total rental expense was approximately $2,957,000, $2,706,000 and $2,028,000 in 2000, 1999 and 1998, respectively. OTHER In the normal course of business, the Company, the Banks 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. 57 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - ------------------------------------------------------------------------------- 15. STOCK OPTIONS The Company maintains an Officers' and Key Employees' Stock Compensation Plan (Officers' Plan). A total of 1,378,125 shares of common stock have been made available for options or restricted stock to be granted through December 17, 2006. Options granted under the Officers' Plan will vest over a five-year period, in 20% increments on each successive anniversary of the date of grant. There are 1,076,852 outstanding options under the Officers' Plan at December 31, 2000. Options granted under the Company's prior Stock Option 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 968,896 outstanding options at December 31, 2000. In addition, the Company has a Non-employee Director Stock Option Plan (Directors' Plan). Under the Directors' Plan, a total of 303,874 shares of common stock have been made available for options to be granted through January 3, 2004. The options granted under the Directors' Plan fully vest after two years and expire ten years from the date of issue. There are 65,509 outstanding options under the Directors' Plan at December 31, 2000. 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 720,290 at December 31, 1999 and 424,199 at December 31, 2000. As of December 31, 2000, 52,582 options were outstanding as a result of previous acquisitions. 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.
Year ended December 31, -------------------------------------- 2000 1999 1998 --------- --------- --------- Net income As reported $ 29,237 $ 27,409 $ 22,918 Pro forma 28,250 26,323 21,804 Earnings per share of common stock - basic As reported 1.57 1.47 1.22 Pro forma 1.52 1.41 1.16 Earnings per share of common stock - diluted As reported 1.56 1.44 1.20 Pro forma 1.50 1.39 1.14
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 2000, 1999 and 1998, respectively: dividend yield of 4.25%, 3.23% and 2.71%; expected volatility of 14.0%, 17.0% and 24.4%; risk-free interest rates for each plan of 6.78% and 5.38% for 2000 and 6.50% and 4.79% for 1999 and 4.68% and 5.74% for 1998; and expected lives of 6.63 years and 7.56 years for each plan in 2000, 6.23 years and 8.98 years for each plan in 1999, 6.23 years and 8.98 years for each plan in 1998. (Continued) 58 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 15. STOCK OPTIONS - Continued A summary of the status of the Company's fixed option plans as of December 31, is presented below:
2000 1999 1998 ---------------------- ---------------------- ---------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price ---------- --------- ---------- --------- ---------- --------- Outstanding, beginning of year 1,917,024 $ 18.69 1,791,019 $ 17.12 1,653,891 $ 14.96 Granted 289,009 20.29 292,588 24.16 292,347 26.46 Exercised (42,194) 10.86 (166,583) 11.38 (151,938) 11.64 Forfeited - - - - (3,281) 15.53 ---------- --------- --------- --------- --------- --------- Outstanding, end of year 2,163,839 $ 19.06 1,917,024 $ 18.69 1,791,019 $ 17.12 ========= ========= ========= ========= ========= ========= Options exercisable at year-end 1,210,401 911,602 769,445 ========= ========= ========= Weighted average fair value of options granted during the year $ 2.63 $ 5.96 $ 7.08 ========= ========= =========
The following table summarizes information about nonqualified options outstanding at December 31, 2000:
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 2000 life (years) exercise price 2000 exercise price --------------- ---- ------------ -------------- ---- -------------- $ 5.62 - 8.44 25,743 0.8 $ 7.38 25,743 $ 7.38 8.45 - 11.25 95,441 1.8 9.06 95,441 9.06 11.26 - 14.06 487,106 4.3 13.53 425,350 13.49 14.07 - 16.87 255,233 6.1 14.48 138,402 14.47 16.88 - 19.68 197,152 2.8 18.24 197,152 18.24 19.69 - 22.49 279,901 10.0 20.20 - - 22.50 - 25.31 570,981 7.8 23.74 227,416 23.51 25.32 - 28.12 252,282 8.0 28.12 100,897 28.12 ----------- ------------ 2,163,839 1,210,401 =========== ============
16. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK The Company grants commercial and residential loans to customers throughout southeastern Pennsylvania and northern New Jersey. 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. 59 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 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. 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, 2000 and 1999, are as follows (in thousands):
2000 1999 ----------- ---------- Financial instruments whose contract amounts represent credit risk Commitments to extend credit $ 576,274 $ 472,099 Standby letters of credit 23,760 24,297 Financial instruments whose notional or contract amounts exceed the amount of credit risk Interest rate swap agreements 70,000 100,000 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, 2000, varies up to 100%; the average amount collateralized is 90%. (Continued) 60 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - ------------------------------------------------------------------------------- 17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued 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 2000, the interest rate swaps had the effect of decreasing the Company's net interest income by $307,000 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. 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, 2000 and 1999, were as follows (in thousands):
December 31, 2000 December 31, 1999 ---------------------------- ---------------------------- Carrying Estimated fair Carrying Estimated fair amount value amount value ---------- --------------- ---------- --------------- Cash and cash equivalents $ 98,600 $ 98,600 $ 66,992 $ 66,992 Investment securities available for sale 593,316 593,316 516,027 516,027
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. (Continued) 61 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - -------------------------------------------------------------------------------- 18. FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued 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, 2000 December 31, 1999 ---------------------------- ---------------------------- Carrying Estimated fair Carrying Estimated fair amount value amount value ---------- --------------- ---------- --------------- Deposits with stated maturities $ 874,427 $ 884,555 $ 810,128 $ 814,391 Short-term borrowings 306,409 306,409 212,596 212,596 Long-term borrowings 146,432 141,979 223,077 213,403 Subordinated debentures 40,250 40,451 40,250 38,640
Fair value of financial instrument liabilities with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand), totaling $939,826,000 for 2000 and $783,126,000 for 1999. 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, 2000 December 31, 1999 ----------------------------- ------------------------------ Carrying Estimated fair Carrying Estimated fair amount value amount value ----------- --------------- ------------ --------------- Net loans $ 1,683,198 $ 1,754,607 $ 1,536,404 $ 1,559,240
There is no material difference between the carrying amount and estimated fair value of off-balance sheet items which total $710,054,000 and $646,396,000 at year-end 2000 and 1999, 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. 19. REGULATORY MATTERS The Banks are required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those balances for the year ended December 31, 2000, was approximately $11,015,000. Dividends are paid by the Company from its assets, which are mainly provided by dividends from the Banks. However, certain restrictions exist regarding the ability of the Banks to transfer funds to the Company in the form of cash dividends, loans or advances. Under the restrictions in 2001, the Banks, without prior approval of bank regulators, can declare dividends to the Company totaling $29,439,000 plus additional amounts equal to the net earnings of the Banks for the period January 1, 2001, through the date of declaration less dividends previously paid in 2001. (Continued) 62 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - ------------------------------------------------------------------------------- 19. REGULATORY MATTERS - Continued The Banks are 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 Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks' 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 Banks 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, 2000, that the Banks and Company meet all capital adequacy requirements to which they are subject. As of December 31, 2000, the Banks met all regulatory requirements for classification as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks 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, 2000 Total capital (to risk-weighted assets) National Penn Bancshares, Inc. $ 221,016 11.85% $ 149,205 8.00% N/A N/A National Penn Bank 186,185 10.45 142,533 8.00 $ 178,167 10.00 Panasia Bank 9,214 21.39 3,447 8.00 4,308 10.00 Tier I capital (to risk-weighted assets) National Penn Bancshares, Inc. 197,527 10.59 74,602 4.00 N/A N/A National Penn Bank 163,747 9.19 71,266 4.00 106,900 6.00 Panasia Bank 8,666 20.11 1,723 4.00 2,585 6.00 Tier I capital (to average assets) National Penn Bancshares, Inc. 197,527 8.06 97,978 4.00 N/A N/A National Penn Bank 163,747 7.09 92,386 4.00 115,482 5.00 Panasia Bank 8,666 7.79 4,446 4.00 5,557 5.00
(Continued) 63 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - ------------------------------------------------------------------------------- 19. REGULATORY MATTERS - Continued
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% N/A N/A 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 N/A N/A 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 N/A N/A National Penn Bank 151,231 6.83 88,546 4.00 110,682 5.00
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, ----------------------------- 2000 1999 ------------ ------------ Assets Cash $ 4 $ 1,261 Investment in Bank subsidiaries, at equity 192,593 144,573 Investment in other subsidiaries, at equity 45,798 45,815 Other assets 2,588 1,154 ------------ ------------ $ 240,983 $ 192,803 ============ ============ Liabilities and shareholders' equity Long-term borrowings $ 18,375 $ - Guaranteed preferred beneficial interests in Company's subordinated debentures 41,495 41,495 Other liabilities 3,685 3,612 Shareholders' equity 177,428 147,696 ------------ ------------ $ 240,983 $ 192,803 ============ ============
(Continued) 64 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - ------------------------------------------------------------------------------- 20. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued CONDENSED STATEMENTS OF INCOME
Year ended December 31, ----------------------------------- 2000 1999 1998 --------- --------- --------- Income Equity in undistributed net earnings of subsidiaries $ 14,891 $ 14,607 $ 8,407 Dividends from subsidiary 17,169 15,198 16,939 Interest and other income 218 168 121 --------- --------- --------- 32,278 29,973 25,467 Expense Interest on subordinated debentures 3,735 3,735 3,735 Interest on long-term borrowings 725 - - Other operating expenses 100 118 121 --------- --------- --------- 4,560 3,853 3,856 Income before income tax benefit 27,718 26,120 21,611 Income tax benefit (1,519) (1,289) (1,307) ---------- --------- --------- Net income $ 29,237 $ 27,409 $ 22,918 ========= ========= ========= CONDENSED STATEMENTS OF CASH FLOWS Year ended December 31, ----------------------------------- 2000 1999 1998 --------- --------- --------- Cash flows from operating activities Net income $ 29,237 $ 27,409 $ 22,918 Equity in undistributed net earnings of subsidiaries (14,891) (14,607) (8,407) (Increase) decrease in other assets (1,434) 99 7 (Decrease) increase in other liabilities 73 1,056 2,491 --------- --------- --------- Net cash provided by operating activities 12,985 13,957 17,009 --------- --------- --------- Cash flows from investing activities Cash paid to acquire businesses (20,025) - - Additional investment in subsidiaries, at equity 1,229 4,631 (1,688) --------- --------- --------- Net cash (used in) provided by investing activities (18,796) 4,631 (1,688) ---------- --------- --------- Cash flows from financing activities Proceeds from issuance of long-term debt 21,000 - - Repayment of long-term debt (2,625) - - Proceeds from issuance of stock - 693 855 Effect of treasury stock transactions 878 (3,542) (5,793) Cash dividends (14,699) (14,478) (10,422) ---------- --------- --------- Net cash provided by (used in) financing activities 4,554 (17,327) (15,360) --------- --------- --------- Net increase (decrease) in cash and cash equivalents (1,257) 1,261 (39) Cash and cash equivalents at beginning of year 1,261 - 39 --------- --------- --------- Cash and cash equivalents at end of year $ 4 $ 1,261 $ - ========= ========= =========
65 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 2000 and 1999 - ------------------------------------------------------------------------------- 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 -------------------------------------------------- 2000 Dec. 31 Sept. 30 June 30 March 31 ----------------- -------------------------------------------------- Interest income $ 49,336 $ 47,731 $ 43,727 $ 43,858 Net interest income 21,842 21,495 20,221 21,392 Provision for loan and lease losses 1,200 1,400 1,500 1,500 Net gains (losses) on sale of investment securities (8) 103 38 122 Income before income taxes 9,217 9,401 8,627 8,492 Net income 7,835 7,486 7,062 6,854 Earnings per share of common stock - basic .42 .40 .38 .37 Earnings per share of common stock - diluted .42 .40 .38 .36 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 0.41 0.38 0.36 0.32 Earnings per share of common stock - diluted 0.41 0.38 0.34 0.31
66 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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ Grant Thornton LLP Philadelphia, Pennsylvania January 17, 2001 67 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 National Penn is included under Item 4A in Part I hereof. The information required by this item relating to directors of National Penn and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to pages 2, 3 and 18 of National Penn's definitive Proxy Statement to be used in connection with National Penn's 2001 Annual Meeting of Shareholders (the "Proxy Statement"). Item 11. EXECUTIVE COMPENSATION. - -------------------------------- The information required by this item is incorporated herein by reference to pages 5 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 16 and 17 of the Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------------------------------------------------------- The information required by this item is incorporated herein by reference to pages 17 and 18 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. 68 3. Exhibits. -------- 2.1 Amended Agreement and Plan of Merger dated as of July 21, 1998, among National Penn Bancshares, Inc., National Penn Bank and Elverson National Bank. (Incorporated by reference to Exhibit 2.1 to National Penn'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. (Incorporated by reference to Exhibit 2.2 to National Penn's Annual Report on Form 10-K for the year ended December 31, 1999.) 2.3 Agreement dated July 23, 2000, between National Penn Bancshares, Inc. and Community Independent Bank, Inc. (Schedules are omitted pursuant to Regulation S-K, Item 601(b)(2); National Penn agrees to furnish a copy of such schedules to the Securities and Exchange Commission upon request.) (Incorporated by reference to Exhibit 2.2 to National Penn's Report on Form 8-K dated July 11, 2000.) 3.1 Articles of Incorporation, as amended, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to National Penn's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.) 3.2 Bylaws, as amended, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.2 to National Penn's Annual Report on Form 10-K for the year ended December 31, 1999.) 4.1 Form of Junior Subordinated Indenture between National Penn Bancshares, Inc. and Bankers Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.1 to National Penn's Registration Statement Nos. 333-26585 and 333-26585-01 on Form S-3, as filed on May 6, 1997.) 4.2 Form of Trust Agreement between National Penn Bancshares, Inc. and Bankers Trust (Delaware), as Trustee. (Incorporated by reference to Exhibit 4.2 to National Penn's Registration Statement Nos. 333-26585 and 333-26585-01 on Form S-3, as filed on May 6, 1997.) 4.3 Form of Amended and Restated Trust Agreement among National Penn Bancshares, Inc., Bankers Trust Company, as Property Trustee, and Bankers Trust (Delaware), as Delaware Trustee. (Incorporated by reference to Exhibit 4.3 to National Penn's Registration Statement Nos. 333-26585 and 333-26585-01 on Form S-3, as filed on May 12, 1997.) 4.4 Form of Guarantee Agreement between National Penn Bancshares, Inc. and Bankers Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.4 to National Penn's Registration Statement Nos. 333-26585 and 333-26585-01 on Form S-3, as filed on May 12, 1997.) 4.5 Term Loan Agreement dated July 11, 2000, between National Penn Bancshares, Inc. and the Northern Trust Company. (Omitted pursuant to Regulation S-K, Item 601(b)(4)(iii); National Penn agrees to furnish a copy of such agreement to the Securities and Exchange Commission upon request.) (Incorporated by reference to Exhibit 4.1 to National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.) 10.1 National Penn Bancshares, Inc. Amended and Restated Dividend Reinvestment Plan. (Incorporated by reference to Exhibit 99.1 to National Penn's Registration Statement No. 333-887549 on Form S-3, as filed on September 22, 1999.) 10.2 National Penn Bancshares, Inc. Pension Plan.* 10.3 Amendment No. 1 to National Penn Bancshares, Inc. Pension Plan.* 69 10.4 Amendment 1993-1 to the National Penn Bancshares, Inc. Pension Plan.* 10.5 Amendment 1994-1 to the National Penn Bancshares, Inc. Pension Plan.* 10.6 Amendment 1999-1 to the National Penn Bancshares, Inc. Pension Plan.* (Incorporated by reference to Exhibit 10.4 to National Penn's Annual Report on Form 10-K for the year ended December 31, 1999.) 10.7 Amendment 2000-1 to the National Penn Bancshares, Inc. Pension Plan.* (Incorporated by reference to Exhibit 10.5 to National Penn's Annual Report on Form 10-K for the year ended December 31, 1999.) 10.8 National Penn Bancshares, Inc. Capital Accumulation Plan (Amended and Restated Effective January 1, 1997).* (Incorporated by reference to Exhibit 10.3 to National Penn's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.) 10.9 Amendment No. 2 to National Penn Bancshares, Inc. Capital Accumulation Plan (Amended and Restated Effective January 1, 1997).* (Incorporated by reference to Exhibit 10.7 to National Penn's Annual Report on Form 10-K for the year ended December 31, 1999.) 10.10 National Penn Bancshares, Inc. Amended and Restated Executive Incentive Plan.* (Incorporated by reference to Exhibit 10.1 to National Penn's Report on Form 8-K dated December 20, 2000, as filed on January 4, 2001.) 10.11 National Penn Bancshares, Inc. Executive Incentive Plan/Schedules.* 10.12 National Penn Bancshares, Inc. Amended and Restated Stock Option Plan.* (Incorporated by reference to Exhibit 4.1 to National Penn's Registration Statement No. 33-87654 on Form S-8, as filed on December 22, 1995.) 10.13 National Penn Bancshares, Inc. Amended Officers' and Key Employees' Stock Compensation Plan.* 10.14 National Penn Bancshares, Inc. Directors' Fee Plan.* (Incorporated by reference to Exhibit 10.11 to National Penn's Annual Report on Form 10-K for the year ended December 31, 1996.) 10.15 National Penn Bancshares, Inc. Non-Employee Directors' Stock Option Plan.* (Incorporated by reference to Exhibit 4.1 to National Penn's Registration Statement No. 33-91630 on Form S-8, as filed on April 27, 1995.) 10.16 National Penn Bancshares, Inc. Amended and Restated Employee Stock Purchase Plan.* (Incorporated by reference to Exhibit 10.2 to National Penn's Report on Form 8-K dated December 20, 2000, as filed on January 1, 2001.) 10.17 National Penn Bancshares, Inc. Elverson Substitute Stock Option Plan.* (Incorporated by reference to Exhibit 4.1 to National Penn's Registration Statement No. 333-71391 on Form S-8, as filed on January 29, 1999.) 10.18 National Penn Bancshares, Inc. Community Employee Substitute Stock Option Plan.* (Incorporated by reference to Exhibit 4.1 to National Penn's Registration Statement No. 333-54520 on Form S-8, as filed on January 29, 2001.) 10.19 National Penn Bancshares, Inc. Community Non-Employee Director Substitute Stock Option Plan.* (Incorporated by reference to Exhibit 4.1 to National Penn's Registration Statement No. 333-54556 on Form S-8, as filed on January 29, 2001.) 70 10.20 Form of Amended and Restated Director Deferred Fee Agreement between Bernville Bank, N.A. and certain former Bernville Bank, N.A. directors.* 10.21 Executive Supplemental Benefit Agreement dated December 27, 1989, among National Penn Bancshares, Inc., National Bank of Boyertown and Lawrence T. Jilk, Jr.* 10.22 Amendatory Agreement dated February 23, 1994, among National Penn Bancshares, Inc., National Penn Bank and Lawrence T. Jilk, Jr.* 10.23 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 National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.) 10.24 Executive Supplemental Benefit Agreement dated December 27, 1989, among National Penn Bancshares, Inc., National Bank of Boyertown and Wayne R. Weidner.* 10.25 Amendatory Agreement dated February 23, 1994, among National Penn Bancshares, Inc., National Penn Bank and Wayne R. Weidner.* 10.26 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 National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.) 10.27 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 National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.) 10.28 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 National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.) 10.29 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 National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.) 10.30 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 National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.) 10.31 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 National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.) 10.32 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 National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.) 10.33 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 National Penn's Annual Report on Form 10-K for the year ended December 31, 1998.) 10.34 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 National Penn's Annual Report on Form 10-K for the year ended December 31, 1998.) 71 10.35 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 National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.) 10.36 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 National Penn's Annual Report on Form 10-K for the year ended December 31, 1998.) 10.37 Stock Purchase Agreement dated April 20, 1989, between National Penn Bancshares, Inc. and Pennsylvania State Bank. 10.38 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 National Penn's Registration Statement No. 33-87654 on Form S-8, as filed on December 22, 1994.) 10.39 Amendment to Rights Agreement dated as of August 21, 1999, between National Penn Bancshares, Inc. and National Penn Bank, 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 National Penn's 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. 99 Forward-Looking Statements. * Denotes a compensatory plan or arrangement. (b) Reports on Form 8-K. ------------------- During fourth quarter 2000, National Penn filed a Report on Form 8-K dated October 25, 2000. The Report provided information under Item 5 on: National Penn's 5% stock dividend; the finalized exchange ratio and regulatory approval of the Community Independent Bank, Inc. acquisition; third quarter financial results for Community Independent Bank, Inc.; the charter conversion of Panasia Bank, N.A.; and risk factors concerning National Penn's forward-looking statements. The Report did not contain any financial statements of National Penn. 72 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 28, 2001 By /s/ Wayne R. Weidner. ------------------------------- Wayne R. Weidner 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 28, 2001 - ------------------------------------ John H. Body /s/ J. Ralph Borneman, Jr. Director March 28, 2001 - ------------------------------------ J. Ralph Borneman, Jr. /s/ Frederick H. Gaige Director March 28, 2001 - ------------------------------------ Frederick H. Gaige /s/ John W. Jacobs Director March 28, 2001 - ------------------------------------ John W. Jacobs /s/ Lawrence T. Jilk, Jr. Director and Chairman March 28, 2001 - ------------------------------------ Lawrence T. Jilk, Jr. /s/ Frederick P. Krott Director March 28, 2001 - ------------------------------------ Frederick P. Krott Director - ------------------------------------ Patricia L. Langiotti Director - ------------------------------------ Robert E. Rigg 73 /s/ C. Robert Roth Director March 28, 2001 - ------------------------------------ C. Robert Roth /s/ Wayne R. Weidner Director, President March 28, 2001 - ------------------------------------ and Chief Executive Wayne R. Weidner Officer (Principal Executive Officer) /s/ Gary L. Rhoads Treasurer (Principal Financial March 28, 2001 - ------------------------------------ and Accounting Officer) Gary L. Rhoads
74 EX-10.2 2 0002.txt NATIONAL PENN BANCSHARES, INC. PENSION PLAN AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1989 NATIONAL PENN BANCSHARES,INC. PENSION PLAN TABLE OF CONTENTS Page ARTICLE I. DEFINITIONS 1 ARTICLE II. TRANSITION AND ELIGIBILITY TO PARTICIPATE 10 ARTICLE III. VESTING SERVICE AND CREDITED SERVICE 11 ARTICLE IV. ELIGIBILITY FOR BENEFITS 14 ARTICLE V. CALCULATION OF BENEFITS 14 ARTICLE VI. VESTING 25 ARTICLE VII. PAYMENT OF BENEFITS 28 ARTICLE VIII. THE FUND AND FUNDING 35 ARTICLE IX. ADMINISTRATION 37 ARTICLE X. AMENDMENT AND TERMINATION 39 ARTICLE XI. TOP-HEAVY PROVISIONS 42 ARTICLE XII. GENERAL PROVISIONS 48 SCHEDULE A ACTUARIAL EQUIVALENTS 51 SCHEDULE B MINIMUM DISTRIBUTION INCIDENTAL BENEFIT TABLE 52 NATIONAL PENN BANCSHARES, INC. PENSION PLAN WHEREAS, the National Bank of Boyertown adopted The National Bank of Boyertown Pension Plan for Full-Time Employees, effective January 1, 1974, for certain of its employees; and WHEREAS, The National Bank of Boyertown Pension Plan for Full-Time Employees has been amended from time to time, and was amended in its entirety and restated, effective January 1, 1977, and effective January 1, 1984 when National Penn Bancshares, Inc. assumed sponsorship of the Plan and renamed it the National Penn Bancshares, Inc. Pension Plan; and WHEREAS, the National Penn Bancshares, Inc. and National Bank of Boyertown, desire at this time to amend and restate the National Penn Bancshares, Inc. Pension Plan to comply with the requirements of the Employee Retirement Income Security Act of 1974 and with the Internal Revenue Code of 1986, as amended; NOW, THEREFORE, effective January 1, 1989 (except as otherwise set forth herein), the National Penn Bancshares, Inc. Pension Plan is continued, amended, and restated as hereinafter set forth: ARTICLE I DEFINITIONS Except where otherwise clearly indicated by context, the masculine shall include the feminine and the singular shall include the plural, and vice-versa. Any term used herein without an initial capital letter that is used in a provision of the Code with which this Plan must comply to satisfy section 401(a) of the Code, shall be interpreted as having the meaning used in such provision of the Code, if necessary for the Plan to comply with such provision. "Accrued Benefit" means, for any Participant as of any date, subject to Sections 5.2 and 7.8(c), the amount of benefit earned to such date, payable as a single life annuity beginning at the Participant's Normal Retirement Date (or immediately, if the Participant has passed his Normal Retirement Date and is still an Employee) calculated in accordance with Section 5.1 as if the Participant had continued as an Active Participant until Age 65 (or his attained Age, if he is past Age 65), with Final Average Compensation as of the date of reference, and if the Participant has not attained Age 65, multiplied by a fraction, as follows: (a) the portion of the benefit described in Paragraph (a)(1) of Section 5.1 shall be multiplied by a fraction, no greater than one (1), the numerator of which is the Participant's Years of Credited Service as of the date of reference and the denominator of which is the aggregate number of Years of Credited Service the Participant will have accumulated if he continues as an Active Participant until Age 65, and (b) the portion of the benefit described in Paragraph (a)(2) of Section 5.1 shall be multiplied by a fraction, not greater than (1), the numerator of which is the Participant's Years of Credited Service as of the date of reference, not exceeding 35 years, and the denominator of which is the lesser of (1) 35 or (2) the aggregate number of Years of Credited Service the Participant will have accumulated if he continues as an Active Participant until Age 65. "Active Participant" means a an individual who has become an Active Participant as provided in Article II and has remained an Employee in the Covered Class at all times thereafter. "Actuarial Equivalent or Actuarially Equivalent" means of equal actuarial value on the basis of the assumptions and factors described in Schedule A. "Actuary" means the actuarial firm or individual selected by the Committee from time to time. "Affiliated Company" means, with respect to any Participating Company, (a) any corporation that is a member of the same controlled group of corporations (within the meaning of section 414(b) of the Code) as such Participating Company; (b) any member of an affiliated service group, as determined under section 414(m) of the Code, of which such Participating Company is a member; (c) any trade or business that is under common control with such Participating Company, as determined under section 414(c) of the Code and (d) any other entity which is required to be aggregated with a Participating Company pursuant to regulations under section 414(o) of the Code. "50% Affiliated Company" means an Affiliated Company, but determined with "more than 50%" substituted for the phrase "at least 80%" in section 1563(a) of the Code, when applying sections 414(b) and 414(c) of the Code. 2 "Age" means, for any individual, his age on last birthday, except that an individual attains Age 70-1/2 on the corresponding date in the sixth calendar month following the month in which his 70th birthday falls (or the last day of such sixth month if there is no such corresponding date therein). "Benefit Commencement Date" means, for any Participant, the date as of which his first periodic benefit payment or a single sum payment is due. "Benefit Commencement Date" also means, with respect to a Surviving Spouse or beneficiary, the date on which the benefit under Section 5.9 or 5.10 commences to the Surviving Spouse or beneficiary. "Board of Directors" means the board of directors of the Company "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the individual(s), if any, appointed by the Board of Directors to supervise the administration of the Plan, as provided in Article IX. "Company " means National Penn Bancshares, Inc., and its successors. "Compensation" means, for any Employee: (a) except as otherwise provided below in this definition, the amount of his total taxable income paid by a Participating Company with respect to any Plan Year, plus elective deferrals under section 401(k) or section 125 of the Code made on his behalf under any plan in which the Employee participates, excluding bonuses, taking into account only amounts earned while he is an Active Participant. An Employee's Compensation shall not include amounts that are taxable to him but are not paid to him in cash. (b) for the purposes of Article XI, and Section 5.12, except as otherwise provided therein, his "compensation" as reported on Form W-2 for the applicable period. (c) for the purposes of determining highly compensated employees and former employees under Section 10.3, his "compensation" as reported on Form W-2 for the applicable period, but including amounts that are excluded from gross income under a plan described in section 125, 401(k) or 403(b) of the Code. (d) with respect to any Plan Year, including Plan Years beginning before January 1, 1989, the first $200,000 (or such other amount as may be applicable under Code section 3 401(a)(17)) of the amount otherwise described in Subsections (a) and (b) of this definition, except that this Subsection (d) shall not apply for purposes of Section 5.12. In no event, however, shall this Subsection (d) cause the Accrued Benefit of any Participant to be less than his Accrued Benefit as of December 31, 1988. In determining Compensation for purposes of this limitation, the rules of section 414(q)(6) of the Code shall apply, except that "family members" shall include only the spouse of the Employee and any lineal descendants who have not attained Age 19 before the close of the Plan Year. "Covered Class" means the class consisting of each Employee who (a) is employed by a Participating Company, and (b) is not covered by a collective bargaining agreement, unless such agreement specifically provides for participation hereunder, and (c) is not covered by another qualified defined benefit pension plan to which the Participating Company makes contributions. An Employee who is such solely by reason of being a leased employee shall not be in the Covered Class. "Covered Compensation" means, for any Participant for any Plan Year, the average of the taxable wage bases in effect for each calendar year during the 35-year period ending with the last day of the calendar year in which the Participant attains or will attain his retirement age under the federal Social Security Act determined using the rounded table. In determining a Participant's Covered Compensation for a Plan Year, the taxable wage base for the Plan Year of reference and any subsequent Plan Year shall be assumed to be the same as the taxable wage base in effect as of the beginning of the Plan Year of reference. A Participant's Covered Compensation for any Plan Year commencing after the 35-year period described above is the Participant's Covered Compensation for the Plan Year during which the Participant attained his retirement age under the federal Social Security Act. A Participant's Covered Compensation for a Plan Year commencing prior to the 35-year period described above is the taxable wage base in effect as of the beginning of such Plan Year. For purposes of this Section, "taxable wage base" means the maximum amount of earnings which may be considered wages for Social Security purposes under section 3121(a)(1) of the Code. "Early Retirement Date" means, for any Participant, the first day of the calendar month coincident with or next following the date on which he has a Separation from Service; provided, however, that such date shall not be an Early Retirement Date unless, as of the date of the Participant's Separation from Service, he has attained Age 55 and has to his credit 10 or more Years of Vesting Service. "Effective Date" means (except as otherwise set forth herein) January 1, 1989, the effective date of this amended and restated Plan. 4 "Employee" means an individual who is employed by a Participating Company or an Affiliated Company. An individual who is not otherwise employed by a Participating Company or Affiliated Company shall be deemed to be employed by such Company if he is a leased employee with respect to whose services such Participating Company or Affiliated Company is the recipient within the meaning of Code section 414(n) or 414(o), but to whom Code section 414(n)(5) does not apply. "Employment Commencement Date" means, for any Employee, the date on which he is first entitled to be credited with an "Hour of Service" described in Paragraph (a)(1) of the definition of Hour of Service in this Article. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Final Average Compensation" means, for any Participant, the average of his Compensation for the five full consecutive calendar years in the final 10 (or fewer) full consecutive calendar years of employment as an Active Participant which yield the highest average. For this purpose, nonconsecutive calendar years interrupted by periods in which the Participant is not an Active Participant shall be treated as consecutive. If a Participant does not have five full consecutive calendar years of employment as an Active Participant, his Final Average Compensation shall be the annual amount determined by dividing his Compensation during the period in which he is an Active Participant by the number of years and fractional years thereof (basing fractional years on completed months). Compensation earned by an Active Participant for employment after his Normal Retirement Date shall be taken into account. "Fund" means the fund established for this Plan, administered under the Trust Agreement, out of which benefits payable under this Plan shall be paid. "Hour of Service" means, for any Employee, a credit awarded with respect to: (a) except as provided in (b) or (c), (1) each hour for which he is directly or indirectly paid or entitled to payment by a Participating Company or an Affiliated Company for the performance of employment duties; or (2) each hour for which he is entitled, either by award or agreement, to back pay from a Participating 5 Company or an Affiliated Company, irrespective of mitigation of damages; or (3) each hour for which he is directly or indirectly paid or entitled to payment by a Participating Company or an Affiliated Company on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), jury duty, layoff, leave of absence, or military duty. (b) For any period that includes any hours for which an Hour of Service would otherwise be credited to an Employee under (a), above, the Committee may, in accordance with rules applied in a uniform and non-discriminatory manner, elect instead to credit Hours of Service using one or more of the following equivalencies: Basis Upon Which Records Credit Granted to Individual Are Maintained For Period - ------------------------ ---------------------------- shift actual hours for full shift day 10 Hours of Service week 45 Hours of Service semi-monthly period 95 Hours of Service month 190 Hours of Service (c) Anything to the contrary in Subsection (a) or(b) notwithstanding: (1) No Hours of Service shall be credited to an Employee for any period during which payments are made or due him under a plan maintained solely for the purpose of complying with applicable workers' compensation, unemployment compensation, or disability insurance laws. (2) No more than 501 Hours of Service shall be credited to an Employee under Paragraph (a)(3) of this definition on account of any single continuous period during which no duties are performed by him, except to the extent otherwise provided in the Plan. (3) No Hours of Service shall be credited to an Employee with respect to payments solely to reimburse for medical or medically related expenses. (4) No Hours of Service shall be credited twice. (5) Hours of Service shall be credited at least as liberally as required by the rules set forth in U.S. Department of Labor Reg.ss.2530.200b-2(b) and (c). 6 (6) In the case of an Employee who is such solely by reason of service as a leased employee, Hours of Service shall be credited as if such Employee were employed and paid with respect to such service (or with respect to any related absences or entitlements) by the Participating Company or Affiliated Company that is the recipient thereof. "Late Retirement Date" means, for any Participant, the first day of the calendar month coincident with or next following the date on which he has a Separation from Service, if such Separation from Service occurs after the Participant's Normal Retirement Date. "Limitation Year" means the calendar year. "Month of Service" means a calendar month during which an individual (a) is credited with at least one Hour of Service or (b) is deemed employed. For purposes of this definition, an individual shall be "deemed employed" during any period of 12 consecutive months or less during which the individual fails to complete an Hour of Service, between the last day of the last calendar month in which he is credited with at least one Hour of Service and the earlier of the date he is again credited with an Hour of Service or his Separation from Service. An individual shall also be "deemed employed" for each month during a 12-consecutive-month period measured from the first day of the calendar month coincident with or next following his Separation from Service during which he has not incurred a One-Year Period of Severance. "Normal Retirement Date" means, for any Participant, the first day of the calendar month coincident with or next following the date on which he attains Age 65. "One-Year Period of Severance" means a severance from employment described in Section 3.4. "Participant" means an individual who is an Active Participant, a former Active Participant receiving benefits under the Plan, or a former Active Participant who has a present or future right to receive benefits under the Plan, or an Employee who was once an Active Participant and has been transferred out of the Covered Class. "Participating Company" means the Company, National Bank of Boyertown, and each other organization which is authorized by the Board of Directors to adopt this Plan by action of its board of directors or other governing body. "Period of Severance" means the period of time commencing on an Employee's Separation from Service and ending on the date on which the Employee is again entitled to be credited 7 with an Hour of Service described in Paragraph (a)(1) of the definition of "Hour of Service" in this Article. "Plan" means the National Penn Bancshares, Inc. Pension Plan, as set forth herein (including any Schedules). "Plan Year" means each 12-consecutive month period that begins on January 1 or any anniversary thereof and ends on the next following December 31. "Reemployment Commencement Date" means the first day following a One-Year Period of Severance on which an Employee is entitled to be credited with an Hour of Service described in Paragraph (a)(1) of the definition of "Hour of Service" in this Article. "Required Beginning Date" means, for any Participant: (a) if he attained Age 70-1/2 before January 1, 1988, and is not a 5-percent owner (within the meaning of section 416 of the Code) of a Participating Company at any time within the five-Plan-Year period ending in the calendar year in which he attains Age 70-1/2. or thereafter, April 1 of the calendar year following the later of the calendar year in which he has a Separation from Service or the calendar year in which he attained Age 70-1/2; (b) if he attained Age 70-1/2 before January 1, 1988, and is a 5-percent owner (within the meaning of section 416 of the Code) of a Participating Company at any time within the five-Plan-Year period ending in the calendar year in which he attains Age 70-1/2, or thereafter, the later of (1) December 31, 1987, (2) April 1 of the calendar year following the calendar year in which he attained Age 70-1/2, or (3) April 1 of the calendar year following the calendar year in which he becomes a 5-percent owner; (c) except as provided in Subsection (d) below, if he attains Age 70-1/2 on or after January 1, 1988, April 1 of the calendar year next following the calendar year in which he attains Age 70-1/2; (d) if he attained Age 70-1/2 before January 1, 1989 and after December 31, 1987, is not a 5-percent owner (within the meaning of section 416 of the Code) of a Participating Company, and has not had a Separation from Service before January 1, 1989, April 1, 1990. "Separation from Service" means the date, as recorded on the records of a Participating Company or an Affiliated Company, on which an Employee of such company quits, retires, is discharged, or dies, or, if earlier, the first anniversary of the 8 first day of a period during which the Employee remains absent from service with all Participating Companies and Affiliated Companies (with or without pay) for any other reason, except if the Employee is absent from work beyond the first anniversary of the first day on which he/she is absent by reason of pregnancy, childbirth, or placement in connection with adoption, or for purposes of the care of such Employee's child immediately after birth or placement in connection with adoption, such Employee's Separation from Service, solely for the purpose of determining whether a One-Year Period of Severance under Section 3.4 has occurred, shall be the second anniversary of the first day of such absence. "Social Security Retirement Age" means (a) for any individual born before January 1, 1938, Age 65, (b) for any individual born after December 31, 1937, but before January 1, 1955, Age 66, or (c) for any individual born after December 31, 1954, Age 67. "Spouse" means, with respect to any Participant, the individual to whom such Participant is married as of the date of reference. "Surviving Spouse" means, with respect to any Participant: (a) for purposes of the survivor's benefit described in Section 5.10, the individual, if any, who is such Participant's Spouse the date of the Participant's death; and (b) for purposes of the joint and survivor annuity described in Section 7.2, the individual, if any, who is such Participant's Spouse on the Participant's Benefit Commencement Date. "Trust Agreement" means the agreement and declaration of trust executed for purposes of the Plan. "Trustee" means the corporate trustee or one or more individuals collectively appointed and acting under the Trust Agreement. "Year of Credited Service" means, for any Participant, the number of full and partial years counted with respect to determining a Participant's Accrued Benefit under the Plan, as further described in Article III. "Year of Eligibility Service" means, for any Employee, a credit used to determine his eligibility to become an Active Participant, as further described in Article II. 9 "Year of Vesting Service" shall mean, for any Employee, the number of full and partial years counted with respect to determining a Participant's eligibility for benefits and vested status under the Plan, as further described in Article III. ARTICLE II TRANSITION AND ELIGIBILITY TO PARTICIPATE 2.1 Rights Affected. Except as provided to the contrary herein, any former Employee who has retired or whose employment has terminated prior to the Effective Date who is not in the Covered Class on or after the Effective Date shall have no additional rights as a result of this amended and restated Plan and shall be entitled to benefits under this Plan only if and to the extent such former Employee was entitled to benefits under the terms and conditions of the Plan as in effect on the date of such retirement or termination. Any former Employee who is reemployed as an Employee in the Covered Class on or after the Effective Date shall have the rights and benefits provided hereunder. 2.2 Eligibility to Participate. (a) Each Employee who was an Active Participant immediately prior to the Effective Date and is in the Covered Class on the Effective Date shall continue to be an Active Participant as of the Effective Date. Each other Employee who has completed six Months of Service and has attained Age 20-1/2 shall become an Active Participant on the later of the Effective Date or the January 1st or July 1st coincident with or next following the date on which he completes one Year of Eligibility Service, if he is then in the Covered Class. For purposes of this Subsection, "January 1, 1988" shall be substituted for the "Effective Date" with respect to any Employee who would have been an Active Participant under the provisions of the Plan immediately prior to the Effective Date but for the fact that his Employment Commencement Date occurred within five years of his attainment of Age 65. (b) A Participant (or a former Participant) who has a Separation from Service and who is later reemployed in the Covered Class shall become an Active Participant as of the date on which he first again completes an Hour of Service in the Covered Class; but, if he has had a One-Year Period of Severance, only if he (1) had any nonforfeitable interest in his Accrued Benefit as of his prior Separation from Service or (2) again completes one Hour of Service at a time when his consecutive One-Year Periods of Severance do not equal or exceed the greater 10 of (A) five or (B) the number of Years of Eligibility Service he had to his credit prior to his Period of Severance. (c) If an individual is not in the Covered Class on the date on which he would become an Active Participant (but for the fact that he is not then in the Covered Class), he shall become an Active Participant as of the first date thereafter on which he is in the Covered Class; but, if he has had a One-Year period of Severance, only if he (1) had any nonforfeitable interest in his Accrued Benefit as of his prior Separation from Service or (2) he again completes one Hour of Service at a time when his consecutive One-year Periods of Severance do not equal or exceed the greater of (A) five or (B) the number of Years of Eligibility Service he had to his credit prior to his Period of Severance. 2.3 Year of Eligibility Service. An Employee shall be credited with a Year of Eligibility Service upon his completion of 1,000 Hours of Service within any single computation period irrespective of whether the computation period has ended. An individual's computation period shall be the 12-consecutive-month period beginning on the date he is first credited with an Hour of Service and each Plan Year thereafter. ARTICLE III VESTING SERVICE AND CREDITED SERVICE 3.1 Years of Vesting Service. (a) An Employee shall accrue Years of Vesting Service for all employment with all Participating Companies and any Affiliated Company. Years of Vesting Service shall be calculated from the Employee's Employment Commencement Date or Reemployment Commencement Date to his Separation from Service, subject to the rules set forth herein. (b) Years of Vesting Service shall be calculated on the basis that twelve completed months equal one year and each additional completed month equals one-twelfth (1/12) of a year. For the purposes of this Subsection, a "completed month" shall mean a calendar month in which an Employee is credited with at least one Hour of Service. (c) If a former Employee is reemployed by a Participating Company or an Affiliated Company before he incurs a One-Year Period of Severance and if such Employee's Period of Severance commenced with a quit, discharge, or retirement, the Employee shall be credited with Years of Vesting Service for the Period of Severance. 11 (d) If an Employee severs from service by reason of a quit, discharge, or retirement during an absence from service for 12 months or less for any reason other than a quit, discharge, or retirement, and if he then performs an Hour of Service within 12 months of the date on which he was first absent from service, he shall be credited with Years of Vesting Service for his Period of Severance. 3.2 Years of Credited Service (a) Except as provided in this Article, a Participant shall accrue Years of Credited Service for the period from his Employment Commencement Date or Reemployment Commencement Date to his Separation from Service, disregarding Years of Credited Service during which he is not an Employee in the Covered Class. (b) Years of Credited Service shall be calculated on the basis that twelve completed months equal one year and each additional completed month equals one-twelfth (1/12) of a year. For the purposes of this Subsection, a "completed month" shall mean a calendar month in which an Employee in the Covered Class is credited with at least one Hour of Service. (c) If a Participant is reemployed by a Participating Company or an Affiliated Company before he incurs a One-Year Period of Severance, and if such Participant's Period of Severance commenced with a quit, discharge, or retirement, the Participant shall not be credited with Years of Credited Service for any portion of such Period of Severance. 3.3 Additional Rules. (a) Notwithstanding any provisions of this Plan to the contrary, an Employee shall not be credited with any Years of Credited Service or Years of Vesting Service for service (1) prior to the date on which the vesting rules contained in ERISA and in the Code, as amended by ERISA, became effective with respect to the Plan, or (2) prior to the first day of the first Plan Year beginning on or after January 1, 1985, if such service prior to the effective date of ERISA or prior to the first day of such Plan Year would have been disregarded under the rules of the Plan with regard to breaks in service as in effect on the applicable date. (b) Years of Vesting Service and Years of Credited Service shall be credited with respect to service with First National Bank of Oley and First National Bank of Boyertown. 12 (c) For purposes of determining a Participant's Years of Vesting Service, service prior to his attainment of Age 18 shall be disregarded. 3.4 One-Year Period of Severance. A One-Year Period of Severance means a 12-consecutive-month period beginning on the first day of the calendar month coincident with or next following the Employee's Separation from Service during which the former Employee is credited with no Hours of Service. Solely for the purpose of determining whether an Employee has incurred a One-Year Period of Severance, Hours of Service shall be recognized for an authorized leave of absence. An "authorized leave of absence" means an unpaid, temporary cessation from active employment with the Company or a Participating Company pursuant to an established nondiscriminatory policy, whether occasioned by illness, military service, or any other reason. 3.5 Aggregation of Service. (a) A Participant who has at any time had a vested interest in his Accrued Benefit and who incurs a One-Year Period of Severance shall have his Years of Vesting Service and his Years of Credited Service with all Participating Companies and all Affiliated Companies before and after his Separation from Service aggregated for Plan purposes upon his Reemployment Commencement Date. (b) A Participant who does not have a vested interest under Section 6.1 and who incurs a One-Year Period of Severance shall have his Years of Vesting Service and Years of Credited Service before and after his Separation from Service aggregated, if his Reemployment Commencement Date occurs at a time when the number of his consecutive one-Year Periods of Severance is less than the greater of (1) the number of full Years of Vesting Service he had accrued prior to his Separation from Service or (2) five. If the number of his consecutive One-Year Periods of Severance is equal to or greater than the number of his full Years of Vesting Service before his Separation from Service or five, if greater, he shall receive no credit for his Years of Vesting Service and Years of Credited Service before his Separation from Service and shall be treated as if he were not an Employee (or a Participant) at any time prior to his Separation from Service. 13 ARTICLE IV ELIGIBILITY FOR BENEFITS 4.1 Normal Retirement. A Participant who has a Separation from Service on his Normal Retirement Date shall be entitled to a pension. Such Participant's Benefit Commencement Date shall be his Normal Retirement Date. 4.2 Late Retirement. A Participant who has a Separation from Service after his Normal Retirement Date shall be entitled to a pension. Such Participant's Benefit Commencement Date shall be the earlier of his Late Retirement Date or his Required Beginning Date. 4.3 Early Retirement. A Participant who has an Early Retirement Date shall be entitled to a pension. Such Participant's Benefit Commencement Date shall be his Normal Retirement Date; provided, that he may elect as his Benefit Commencement Date the first day of any month coinciding with or following his Early Retirement Date and not after his Normal Retirement Date. Such election must be made no earlier than 90 days prior to the Benefit Commencement Date elected by the Participant. 4.4 Furnishing Data. Each Employee and beneficiary shall furnish such information as the Committee may consider necessary for the determination of the Employee's rights and benefits under the Plan and shall otherwise cooperate fully with the Committee in the administration of the Plan. Payment of benefits shall be deferred until all of such information is supplied. ARTICLE V CALCULATION OF BENEFITS 5.1 Accrued Benefit at Normal Retirement Date (a) Subject to Sections 5.2 and 7.8(c), a Participant's Accrued Benefit as of any date on or after his Normal Retirement Date shall be equal to the sum (computed to the nearest multiple of twelve dollars) of: (1) one percent (1.0%) of his Final Average Compensation multiplied by his Years of Credited Service; plus (2) Seventy-five hundredths percent (.75%) of his Final Average Compensation in excess of the Participant's 14 integration level as determined under Subsection (b) multiplied by his Years of Credited Service up to a maximum of 35 years; provided, however, that the percentage in this Paragraph (2) shall be .70% with respect to a Participant whose Social Security Retirement Age is Age 66 and .65% with respect to a Participant whose Social Security Retirement Age is Age 67. (b) For purposes of determining a Participant's Accrued Benefit under Subsection (a), his integration level shall be his Covered Compensation. 5.2 Minimum Accrued Benefit. Notwithstanding any provision of the Plan to the contrary, a Participant's Accrued Benefit, determined in any Plan Year that begins on or after January 1, 1989, shall not be less than his accrued benefit, determined as of December 31, 1988, under the terms of the Plan as in effect on December 31, 1988, based on his Years of Credited Service and Final Average Compensation determined on December 31, 1988. 5.3 Normal Retirement. A Participant who is entitled to a pension under Section 4.1 shall receive an annual pension, payable monthly. Subject to Section 5.12, such pension shall be the Actuarial Equivalent, in the form set forth in Article VII, of the Participant's Accrued Benefit as of his Normal Retirement Date. 5.4 Late Retirement. (a) A Participant who is entitled to a pension under Section 4.2 shall receive an annual pension, payable monthly. Subject to Section 5.12, such pension shall be the Actuarial Equivalent, in the form set forth in Article VII, of the greater of (1) the Actuarial Equivalent, in the form of a single life annuity beginning on the earlier of his Late Retirement Date or his Required Beginning Date, of the Participant's Accrued Benefit as of his Normal Retirement Date; or (2) his Accrued Benefit as of the earlier of his Late Retirement Date or his Required Beginning Date. (b) If a Participant's Required Beginning Date, and therefore his Benefit Commencement Date, precedes his Late Retirement Date, the amount of the pension payable to the Participant shall be determined as of his Required Beginning Date and adjusted as of January 1 in each calendar year following his Required Beginning Date, up to and including the January 1 next following his Late Retirement Date. The adjustment shall include any increase (but not any decrease) determined in accordance with Section 5.1 to reflect Years of Credited Service and Compensation earned after the Participant's Benefit Commencement Date. In addition, the Actuarial Equivalent of such adjustment shall be reduced (but not below zero) by the Actuarial Equivalent of any 15 benefits paid to the Participant since his Benefit Commencement Date; provided, however, that the amount, if any, of the benefits paid to the Participant which exceeds the amount the Participant would have received if distribution had been made in the normal form of benefits described in Section 7.2 for such Participant shall be disregarded in determining the Actuarial Equivalent of such benefits. 5.5 Early-Retirement. A Participant who is entitled to a pension under Section 4.3 shall receive an annual pension, payable monthly. Subject to Section 5.12, such pension shall be the Actuarial Equivalent, in the form set forth in Article VII, of the Participant's Accrued Benefit as of his Early Retirement Date, reduced as follows: (a) if the Participant's Social Security Retirement Age is Age 65, (1) 1/180 for-each of the first 60 full calendar months and (2) 1/360 for each of the next 60 full calendar months, by which his Benefit Commencement Date precedes his Normal Retirement Date. (b) if the Participant's Social Security Retirement Age is Age 66, the portion of the Participant's Accrued Benefit described in Paragraph (a)(1) of Section 5.1 shall be reduced as described in Subsection (a) above and the portion described in Paragraph (a)(2) of Section 5.1 shall be reduced by (1) 1/180 for each of the first 48 full calendar months, (2) 1/360 for each of the next 60 full calendar months, and (3) an Actuarial Equivalent reduction for each of the next 12 full calendar months, by which his Benefit Commencement Date precedes his Normal Retirement Date. (c) if the Participant's Social Security Retirement Age is Age 67, the portion of the Participant's Accrued Benefit described in Paragraph (a)(1) of Section 5.1 shall be reduced as described in Subsection (a) above and the portion described in Paragraph (a)(2) of Section 5.1 shall be reduced by (1) 1/180 for each of the first 36 full calendar months, (2) 1/360 for each of the next 60 full calendar months, and (3) by an Actuarial Equivalent reduction for each of the next 24 full calendar months, by which his Benefit Commencement Date precedes his Normal Retirement Date. 5.6 Transfers out of the Plan. The Accrued Benefit of a Participant who has ceased to be in the Covered Class but who is still an Employee shall be calculated on the basis of his Final Average Compensation and the benefit formula in effect under Section 5.1 as of the last date on which he is in the Covered Class. 5.7 Transfers into the Plan. If an Employee transfers into employment in the Covered Class, including a transfer from 16 the employ of an Affiliated Company that is not a Participating Company, his employment with any Participating Company or Affiliated Company while he is not in the Covered Class shall he considered in determining his eligibility to become an Active Participant under Article II and his Years of Vesting Service under Section 3.1, but shall not be considered in determining his Years of Credited Service under Section 3.2. 5.8 Prohibition Against Decrease in Benefits Payable. A Participant's Accrued Benefit as of his Normal Retirement Date shall not be less than the pension, in the form of an immediate single life annuity, that would have been payable to him if he had separated from service and commenced to receive his pension on any earlier retirement date provided under the Plan; provided, however, that this Section shall not apply if the reduction in the amount payable is due solely to an increase in Covered Compensation which takes place prior to the earlier of the Participant's Separation from Service or Benefit Commencement Date. 5.9 Death Before Commencement of Benefits. (a) Upon the death of a Participant prior to his Benefit Commencement Date, the Participant's designated beneficiary shall be paid a death benefit in the form of a single sum equal to: (1) If an Active Participant dies prior to his Early, Normal or Late Retirement Date, the Actuarial Equivalent single-sum value of the Participant's vested Accrued Benefit as of the first day of the calendar month coinciding with or next following the date of his death. (2) If a Participant who has a Normal, Early or Late Retirement Date dies subsequent to such date, the Actuarial Equivalent single-sum value of the benefit the Participant would have received at his Early, Normal or Late Retirement Date. (3) If a former Active Participant dies after his Separation from Service, the Actuarial Equivalent single-sum value of the Participant's vested Accrued Benefit as of the first day of the calendar month coinciding with or next following the date of his death. (b) The death benefit determined in accordance with Subsection (a) of this Section shall be payable to the Participant's designated beneficiary as soon as practicable after the Participant's death. This benefit shall not apply to a Participant with respect to whom the survivor's benefit under Section 5.10 is payable and has not been properly waived. 17 (c) The Committee may require such proper proof of death and such evidence of the right of any individual to receive the death benefit payable as a result of the death of a Participant as the Committee may deem desirable. The Committee' determination of death and the right of any person to receive payment shall be conclusive. (d) In no event shall the death benefit payable to a Surviving Spouse be less than the Actuarial Equivalent of the benefit such Surviving Spouse would have received if the Participant (1) had had a Separation from Service on the date of his death (if he is then an Employee) (2) had survived to the Spouse's Benefit Commencement Date (3) had then begun to receive an immediate retirement benefit in the normal form under Subsection (b) of Section 7.2, and (4) had died on the following day. If the Participant dies before his Benefit Commencement Date but after he has elected an optional form of benefit that is a joint and survivor annuity with the Participant's Spouse that provides for periodic payments after the Participant's death each of which is not less than fifty percent (50%) nor more than one hundred percent (100%) of the periodic payment to the Participant, the survivor's benefit described in the preceding sentence shall be the benefit to which the Spouse is entitled under the optional form elected by the Participant. 5.10 Survivor's Benefit for Surviving Spouse. (a) Subject to Subsection (b) of this Section, if a Participant who has any vested interest in his Accrued Benefit under the Plan, dies before his Benefit Commencement Date leaving a Surviving Spouse, such Surviving Spouse shall receive a survivor's benefit. Such benefit shall commence, as elected in writing by the Surviving Spouse, on the first day of any month following the earliest date on which the Participant could have elected to receive immediate retirement benefits, but not later than the date that would have been the Participant's Normal Retirement Date. If the Participant dies after his Normal Retirement Date, benefits shall commence on the first day of the month following the month of the Participant's death. Subject to Section 5.12, the survivor's benefit shall be a single life annuity with equal monthly installments payable to the Surviving Spouse for her lifetime that is the Actuarial Equivalent of the Participant's vested Accrued Benefit as of the Benefit Commencement Date elected by the Surviving Spouse, except that, if the Participant would have been eligible to receive a benefit under Section 5.3, 5.4 or 5.5 had he not died, the survivor's benefit shall be the Actuarial Equivalent of the benefit the Participant would have been entitled to receive under Section 5.3, 5.4 or 5.5, whichever applies. (b) The survivor's benefit under this Section shall not be payable and the death benefit under Section 5.9 18 shall be payable instead with respect to a Participant who either has established to the satisfaction of the Committee that he has no Spouse, or who elects in accordance with the following rules to waive the survivor's benefit under this Section and to have the death benefit under Section 5.9 be payable instead. Such election may be made at any time during the period that begins on the first day of the Plan Year in which the Participant attains Age 35 (or, in the case of a Participant who has a Separation from Service prior to his attainment of Age 35, with respect to his Accrued Benefit earned prior to such separation, the date of his Separation from Service) and ends on the date of the Participant's death; provided that such election shall be effective only if: (1) (A) the Participant's Spouse (or the Spouse's legal guardian if the Spouse is legally incompetent) executes a written instrument whereby such Spouse either: (i) consents to such election, but only insofar as such election waives the survivor's benefit under this Section and, if applicable, names a specific beneficiary or beneficiaries to receive the death benefit under Section 5.9; or (ii) consents to such election and consents prospectively to any subsequent designation of someone other than the Spouse to receive all or part of the death benefit under Section 5.9 (provided such instrument acknowledges the Spouse's right to limit consent to a specific beneficiary); and (B) such instrument acknowledges the effect of the election to which the Spouse's consent is being given, that the Spouse's consent is irrevocable, and is witnessed by a Plan representative or a notary public; or (2) the Participant establishes to the satisfaction of the Committee that his Spouse cannot be located or furnishes a court order to the Committee establishing that the Participant is legally separated or has been abandoned (within the meaning of local law), unless a qualified domestic relations order pertaining to such Participant provides that the Spouse's consent must be obtained. The consent of a Spouse in accordance with this Subsection (b) shall not be effective with respect to other Spouses of the Participant, and an election to which Paragraph (b)(2) of this Section applies shall become void if the circumstances causing the consent of the Spouse not to be required cease to exist prior to the Participant's Benefit Commencement Date. (c) A Participant may revoke his election to waive the survivor's benefit. Such revocation may be made at any time prior to the Participant's death. 19 (d) The Committee shall provide to each Participant a written explanation of: (1) the terms and conditions of the survivor's benefit under this Section and the death benefit under Section 5.9; (2) the Participant's right to waive the survivor's benefit and the effect of such waiver; (3) the rights of the Participant's Spouse with respect to such waiver; and (4) the Participant's right to revoke a waiver of the survivor's benefit and the effect of such revocation. The written explanation described in this Subsection shall be provided once during either (A) the three-year period that begins on the first day of the Plan Year in which the Participant attains Age 32, or (B) the one-year period that begins on the day he becomes a Participant. With regard to a Participant who has a Separation from Service before attaining Age 35, such written notice shall be provided no earlier than one year before, and no later than one year after, the Participant's Separation from Service. 5.11 Death Benefit After Retirement. If a Participant dies after his Benefit Commencement Date, his beneficiary shall be entitled to receive any amount payable under the form of benefit that is in effect for such Participant or under any annuity contract that has been distributed to the Participant to provide benefits hereunder. 5.12 Maximum Benefit. The provisions of this Section shall be effective for Limitation Years beginning in 1987 and thereafter and shall be construed to comply with section 415 of the Code. (a) (1) Notwithstanding anything in this Article to the contrary, in no event shall the combined annual benefit payable with respect to a Participant on a single life basis, under this and any other defined benefit plan to which a Participating Company or a 50% Affiliated Company contributes, exceed the lesser of (A) $90,000 (or such other dollar limitation as in effect for the Limitation Year under section 415(b)(1)(A) of the Code) or (B) one hundred percent (100%) of the Participant's average Compensation during the three consecutive calendar years as an Active Participant in which such Compensation is the highest. 20 (2) (A) If the benefit is payable with respect to a Participant who has been an Active Participant for fewer than 10 full years at the time that retirement benefits begin, the dollar limitation described in Subparagraph (a)(1)(A) of this Section shall be multiplied by a fraction, the numerator of which is the number of the Participant's years as an Active Participant and the denominator of which is 10. (B) If the benefit is payable with respect to a Participant who has fewer than 10 Years of Vesting Service, the limitations described in Subparagraph (a)(1)(B), Paragraph (a)(4) and Subparagraphs (c)(1)(A) and (c)(1)(B) of this Section shall be multiplied by a fraction, the numerator of which is the number of the Participant's Years of Vesting Service and the denominator of which is 10. (C) The limitations of Subparagraph (a)(2)(A) of this Section shall be applied separately with respect to each change in the benefit structure of any qualified defined benefit plan of a Participating Company or 50% Affiliated Company, to the extent provided by the Secretary of the Treasury. (3) If a Participant's (or beneficiary's) Benefit Commencement Date is not the date on which the Participant attains (or would have attained, if living) his Social Security Retirement Age, the dollar limitation in Subparagraphs (a)(1)(A) and (c)(1)(A) shall be adjusted as follows: (A) If the Participant's (or beneficiary's) Benefit Commencement Date occurs before the Participant attains (or would have attained, if living) his Social Security Retirement Age, but on or after the date he attains (or would have attained, if living) Age 62, the dollar limitation shall be reduced by five-ninths percent (5/9 of 1%) for each of the first 36 months and five-twelfths percent (5/12 of 1%) for each additional month by which the Participant's (or beneficiary's) Benefit Commencement Date precedes the date he attains (or would have attained, if living) his Social Security Retirement Age. (B) If the Participant's (or beneficiary's) Benefit Commencement Date occurs before the Participant attains (or would have attained, if living) his Social Security Retirement Age and before he attains (or would have attained, if living) Age 62, the dollar limitation shall be reduced in accordance with Subparagraph (a)(3)(A) as if retirement benefits were commencing to the Participant at Age 62, and this reduced dollar limitation shall be further reduced to its Actuarial Equivalent beginning at the Participant's (or beneficiary's) Benefit Commencement Date, using an interest rate equal to the greater of five percent (5%) or the rate set forth 21 in Schedule A and the mortality decrement shall be ignored to the extent that a forfeiture does not occur at death; (C) If the Participant's (or beneficiary's) Benefit Commencement Date occurs after the date the Participant attains (or would have attained, if living) his Social Security Retirement Age, the dollar limitation shall be adjusted to its Actuarial Equivalent beginning at the Participant's (or beneficiary's) Benefit Commencement Date, using an interest rate equal to the lesser of five percent (5%) or the rate set forth in Schedule A and the mortality decrement shall be ignored to the extent that a forfeiture does not occur at death. (4) The annual benefit payable with respect to a Participant may exceed 100% of his average Compensation for the highest three consecutive calendar years as an Active Participant (but not in excess of the amount applicable under Subparagraph (a)(1)(A) of this Section), if (A) the annual benefit does not exceed $10,000 for the current Plan Year or for any prior Plan Year, and (B) the Participant has at no time participated in a defined contribution plan maintained by a Participating Company or a 50% Affiliated Company. (b) If a Participant's benefits are otherwise limited by this Section, the benefit payable to the Participant's Surviving Spouse or beneficiary under Section 5.9 or 5.10 or Section 7.2 or Section 7.3 shall be based upon the Participant's benefit determined without regard to this Section, and the limitations of this Section shall apply to the resulting benefit payable to the Surviving Spouse or beneficiary. (c) If in any Limitation Year a Participant is a participant in one or more defined contribution plans sponsored by a Participating Company or a 50% Affiliated Company, the annual benefit referred to in Subsection (a) shall be reduced, if necessary, so that the sum of the fractions described in Paragraphs (1) and (2) of this Subsection does not exceed 1.0 for such Limitation Year. (1) Defined Benefit Fraction - A fraction, the numerator of which is the Participant's projected annual benefit under all defined benefit plans to which a Participating Company or 50% Affiliated Company contributes, determined as of the close of the limitation years of such plans, and the denominator of which is the lesser of: (A) 1.25 x $90,000 (or such other dollar limitation in effect for the Limitation Year under section 415(b)(1)(A) of the Code) or (B) one hundred forty percent (140%) of the Participant's highest average Compensation over any three consecutive calendar years (2) Defined Contribution Fraction - A fraction, the numerator of which is the sum of the annual 22 additions to the Participant's accounts under such defined contribution plans for all limitation years, and the denominator of which is the sum of the lesser of the following amounts, determined for each of such limitation years with a Participating Company or a 50% Affiliated Company: (A) 1.25 x $30,000 (or such dollar limitation as in effect for such Limitation Year under section 415(c)(1)(A) for the Limitation Year) or (B) thirty-five percent (35%) of the Participant's Compensation for such limitation year. (3) Definitions - For the purpose of this Subsection, "projected annual benefit" shall mean the annual benefit to which a Participant would be entitled under the terms of a defined benefit plan if he had continued employment until his normal retirement date under such plan and if his compensation for the purpose of such plan had continued at the same rate. "Annual additions" to a Participant's accounts under any defined contribution plan for any limitation year shall mean the sum of (A) employer contributions; (B) forfeitures; and (C) (i) for Limitation Years beginning on or after January 1, 1987, the Participant's own contributions, if any, and (ii) for Limitation Years beginning before January 1, 1987, the lesser of (I) one-half of the Participant's own contributions, if any, or (II) the Participant's own contributions in excess of six percent (6%) of his compensation for such limitation year. (d) The limitations described in Subsections (a) and (b) shall not reduce any benefit which was accrued by a Participant under the Plan prior to the first day of its Limitation Year beginning in 1987, using the applicable maximum dollar limitations then in effect; provided, however, that this sentence shall not apply to any Participant who was not a Participant as of the first day of the first Limitation Year that began in 1987. For the purpose of this Paragraph (c)(2), no change in the Plan after May 6, 1986 and no cost of living adjustment after May 6, 1986 shall be taken into account. (e) (1) The Committee may elect to apply Paragraph (c)(2) with respect to any Plan Year ending after December 31, 1982 by calculating the denominator under Paragraph (c)(2) using an alternate amount for all Plan Years ending before January 1, 1983. The alternate amount shall be equal to the amount determined for the denominator under Paragraph (c)(2) as in effect for the Plan Year ending in 1982 multiplied by the "transition fraction." (2) The "transition fraction" shall be a fraction determined as follows: (A) The numerator shall consist of the lesser of: (i) $51,875 or (ii) thirty-five percent (35%) of the Participant's compensation for the Plan Year ending in 1981. 23 (B) The denominator shall consist of the lesser of: (i) $41,500 or (ii) twenty-five percent (25%) of the Participant's compensation for the Plan Year ending in 1981. 5.13 Suspension of Benefits on Reemployment. (a) (1) If a Participant is employed after his Normal Retirement Date in "qualified reemployment," (as defined in Subsection (c)), benefits otherwise payable to the Participant shall be suspended for each calendar month before his Required Beginning Date in which he continues his qualified reemployment. In addition, no benefits shall be paid before a Participant's Required Beginning Date during the qualified reemployment of such a Participant who remains an Employee after his Normal Retirement Date. The rules relating to such a suspension of benefits and the subsequent resumption of benefits are described in this Section. (2) The Committee shall notify the Participant by personal delivery or first class mail of the suspension of his benefits during the first month in which such suspension of benefits occurs. (3) Each Participant receiving benefits under the Plan shall be required to give notice to the Committee of any employment relationship which such Participant has with a Participating Company or any Affiliated Company. The Committee shall have the right to use all reasonable efforts to determine whether such employment constitutes qualified reemployment. The Committee shall also have the right to require the Participant to provide information sufficient to prove that such employment is not qualified reemployment. (4) A Participant may ask the Committee in writing to make a determination as to whether specific contemplated employment will be qualified reemployment. The Committee shall respond to such a request in writing within 60 days of its receipt of the request. (5) Benefit payments suspended under this Section shall resume (or commence, in the case of a Participant who continues in service after his Normal Retirement Date) no later than the earlier of (A) the first day of the third calendar month following the month in which the Participant's qualified reemployment ceases or, if later, the first day of the calendar month following receipt by the Committee of the Participant's notice that his qualified reemployment has ceased or (B) the Participant's Required Beginning Date. The initial resumption payment shall include payment for the current month and for any previous calendar months since the cessation of the Participant' qualified reemployment. 24 (6) The resumed benefit payments shall be recalculated on the basis of Compensation earned and Years of Credited Service credited (if any) during such period of reemployment and the provisions of the Plan as then in effect. The resumed benefit payments shall be paid in the form determined pursuant to Section 7.4. Resumed benefits shall be reduced by an amount equal to any benefits which were paid to the Participant with respect to a calendar month in which the Participant was engaged in qualified reemployment. However, the reduction in any monthly benefit, other than the initial resumption payment, shall not exceed twenty-five percent (25%) of such monthly benefit. Any remaining reduction shall be applied to benefits payable in subsequent months. (b) Except as provided in Subsection (d) of this Section, if a Participant is employed or reemployed by a Participating Company or an Affiliated Company under any circumstances other than as described in Subsection (a), the benefits otherwise payable to the Participant shall be continued during such period of reemployment. (c) "Qualified reemployment" shall mean the employment of a Participant by any Participating Company or Affiliated Company in such a capacity that the Participant receives pay for or is entitled to be paid for at least 40 Hours of Service (not including Hours of Service credited as a result of back pay) during a calendar month. (d) If a Participant is reemployed before his Normal Retirement Date as an Employee, benefits otherwise payable to the Participant shall be suspended during his period of reemployment. Upon his subsequent Separation from Service, his pension shall be recalculated on the basis of his current Age, Compensation earned and Years of Credited Service credited (if any) during such period of reemployment, and the provisions of the Plan as then in effect, but shall be reduced by the Actuarial Equivalent of payments previously made prior to his Normal Retirement Date. The resumed benefit payments shall be paid in the form determined pursuant to Section 7.4. ARTICLE VI VESTING 6.1 Nonforfeitable Amounts. (a) A Participant who is credited with one or more Hours of Service as an Employee on or after January 1, 1989 shall have a 100% nonforfeitable interest in his Accrued Benefit 25 when he has to his credit five Years of Vesting Service. A Participant who has fewer than five Years of Vesting Service to his credit shall have no nonforfeitable interest in his Accrued Benefit. (b) Notwithstanding the foregoing, a Participant who is an Employee shall have a 100% nonforfeitable interest in his Accrued Benefit upon the date on which he attains Age 65. 6.2 Treatment of Terminated Vested Participant. (a) A Participant who has a Separation from Service, other than by death or as provided in Article IV, when he has a nonforfeitable interest in his Accrued Benefit under Section 6.1 shall be eligible for a deferred pension. His Benefit Commencement Date shall be his Normal Retirement Date, if he is then living. Subject to Section 5.12, the pension payable under this Section shall be equal to the Participant's vested Accrued Benefit as of the date of his Separation from Service. If the Participant has no nonforfeitable interest in his Accrued Benefit, he shall forfeit his Accrued Benefit. (b) If a Participant who is eligible for a deferred pension under Subsection (a) of this Section has 10 or more Years of Vesting Service to his credit as of the date of his Separation from Service, he may elect as his Benefit Commencement Date (1) the first day of the calendar month coincident with or next following his 55th birthday, or (2) the first day of any month after such birthday and before his Normal Retirement Date. Such election must be made no earlier than 90 days prior to the Benefit Commencement Date elected by the Participant. (c) A Participant who elects a Benefit Commencement Date under Subsection (b) of this Section shall receive the benefit described in Subsection (a) of this Section in an amount reduced under Section 5.5. (d) Notwithstanding any other provision in the Plan, an increase in the Social Security taxable wage base or benefit level shall not reduce the value of the nonforfeitable benefit payable to a Participant who has had a Separation from Service with respect to service prior to his Separation from Service, regardless of whether the Participant returns to employment in the Covered Class. (e) Notwithstanding the above, a Participant described in Section 6.1(a) may elect as his Benefit Commencement Date, the first day of any calendar month following the date he first incurs a One-Year Period of Severance and prior to the date he is otherwise eligible for a distribution under Section 6.1(a) or 6.1(b) above; provided that, at the time of his election, the Actuarial Equivalent single-sum value of his vested Accrued 26 Benefit is $10,000 or less. Such election must be made no earlier than 90 days and not less than 30 days prior to the Benefit Commencement Date elected by the Participant. A Participant who elects a Benefit Commencement Date under this Subsection shall receive the benefit described in Subsection (a) of this Section in the normal form described in Section 7.2 in an amount reduced as described under Section 5.5 for the first 120 full calendar months and by an Actuarial Equivalent reduction for each of the remaining full calendar months by which his Benefit Commencement Date precedes his Normal Retirement Date, unless such Participant elects to receive the optional form of benefit described in Section 7.3(d) in accordance with Section 7.4. 6.3 Form and Payment of Benefit. Deferred vested benefits shall be paid in a form provided for in Article VII. 6.4 Termination of Benefit. The last deferred vested benefit payment hereunder shall be made in accordance with the provisions of Article VII. 6.5 Special Rules for Certain Terminated Participants. (a) Notwithstanding Section 2.1, if a Participant: (1) is eligible for a deferred vested benefit under the Plan, (2) has been credited with at least one Hour of Service on or after September 2, 1974, (3) had a Separation from Service prior to the first day of the first Plan Year beginning after December 31, 1975, (4) has not thereafter been an Employee, and (5) is alive on August 23, 1984 and has not begun to receive benefit payments as of that date, such Participant's retirement benefits shall be paid in accordance with Article VII. However, the consent of the Participant's Spouse to a form of benefit other than the normal form of benefit under Section 7.2(b) shall not be required. (b) Notwithstanding Section 2.1, if a Participant: (1) has at least one Hour of Service after the first day of the Plan Year beginning on or immediately after January 1, 1976, 27 (2) has not been credited with any Hours of Service after August 22, 1984, (3) has at least 10 Years of Vesting Service and a vested right to all or a portion of his Accrued Benefit, and (4) is alive on August 23, 1984 and has not begun to receive benefit payments as of that date, he may elect to be covered by the survivor's benefit described in Section 5.10. ARTICLE VII PAYMENT OF BENEFITS 7.1 Minimum Distribution Requirements. (a) Except as required by Subsection (c) of this Section, a Participant's Benefit Commencement Date shall be no earlier than the date of his Separation from Service. (b) Except as required by Subsection (c) of this Section, unless a Participant elects otherwise, his Benefit Commencement Date shall be no later than the 60th day after the close of the Plan Year in which the Participant attains Age 65 or has a Separation from Service, whichever occurs last. (c) Except as provided in a valid deferral election filed by the Participant with the Committee before January 1, 1984 and not subsequently revoked, a Participant's Benefit Commencement Date shall be no later than his Required Beginning Date. (d) Notwithstanding anything in the Plan to the contrary, if a Participant dies before his Benefit Commencement Date, his entire interest under the Plan, to the extent not forfeited, shall be distributed either: (1) not later than December 31 of the calendar year containing the fifth anniversary of the date of the Participant's death, or (2) over the life or life expectancy of the Participant's beneficiary, commencing no later than (A) December 31 of the calendar year following the year of the Participant's death, or (B) if the beneficiary is the Participant's Spouse, December 31 of the later of (i) the calendar year following the year of the Participant's death or 28 (ii) the calendar year in which the Participant would have attained Age 70 1/2. (e) Notwithstanding anything in the Plan to the contrary, the form and the timing of all distributions under the Plan shall be in accordance with regulations issued by the Department of the Treasury under section 401(a)(9) of the Code, including the incidental death benefit requirements of section 401(a)(9)(G) of the Code; provided, however, that subject to the spouse's right to consent, the restrictions imposed by this Section shall not apply if a Participant has, prior to January 1, 1984, made a written designation to have his retirement benefit paid in an alternate method acceptable under section 401(a) of the Code as in effect prior to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982. (f) This Section shall apply to all Participants, including Participants who had a Separation from Service or ceased to be an Employee in the Covered Class prior to January 1, 1989. 7.2 Normal Form of Benefit. (a) Benefits under the Plan shall be paid in the normal form of benefit described in Subsection (b) or (c), as the case may be, unless the Participant elects an optional form of benefit under Section 7.3. No spousal consent shall be required for payment of benefits in the normal form. (b) The normal form of benefit for a Participant who does not establish to the satisfaction of the Committee that he has no Spouse as of his Benefit Commencement Date shall be a joint and survivor annuity, with monthly installments payable after the death of the retired Participant to his Surviving Spouse, if he leaves one, for the life of such Surviving Spouse in an amount equal to fifty percent (50%) of the benefit paid to the retired Participant. (c) The normal form of benefit for a Participant who establishes to the satisfaction of the Committee that he has no Spouse as of his Benefit Commencement Date shall be a single life annuity with equal monthly installments payable to the retired Participant for his lifetime. 7.3 Optional Form of Benefit. In lieu of the normal form of benefit as determined under Section 7.2, the Participant may elect, subject to the rules of Section 7.4, one of the following optional forms of benefit: (a) a single life annuity with equal monthly installments payable to the retired Participant for his lifetime; or 29 (b) a joint and survivor annuity with any individual designated beneficiary, payable in monthly installments to the Participant for his lifetime and with fifty percent (50%), seventy-five percent (75%) or one hundred percent (100%) of the amount of such monthly installment payable after the death of the Participant to the designated beneficiary of such Participant, if then living, for the life of such designated beneficiary. Notwithstanding the foregoing, the percentage payable to the Participant's beneficiary (unless the beneficiary is the Participant's Spouse) after the Participant's death may not exceed the applicable percentage from the table in Schedule B; or (c) a single life annuity payable in equal monthly installments to the retired Participant for his lifetime, with one hundred and twenty (120) or one hundred and eighty (180) payments guaranteed. If the Participant dies before he has received one hundred and twenty (120) or one hundred and eighty (180) monthly payments, whichever applies, then beginning on the first day of the month in which the Participant's death occurs and continuing until the balance of the guaranteed payments have been made, payments in the amount payable to the Participant shall be made to the Participant's beneficiary. If the Participant's beneficiary dies before the full number of guaranteed monthly payments have been made, the Actuarial Equivalent of any balance of guaranteed payments shall be paid in a single sum to the estate of the last to survive of the Participant or the beneficiary. (d) if the Actuarial Equivalent single-sum value of the Participant's vested Accrued Benefit is $10,000 or less, a single sum payment in lieu of any other benefits under the Plan in complete discharge of all obligations to the Participant under the Plan. 7.4 Rules for Election of Optional Form of Benefit. A Participant may elect an optional form of benefit under Section 7.3 by filing a written notice with the Committee in the form and manner prescribed by the Committee and in no other. The following rules shall be applied in a uniform and nondiscriminatory manner with respect to the election of optional forms of benefit. A Participant may elect an optional form of benefit at any time during the period that begins 90 days prior to the first day of the calendar month in which his Benefit Commencement Date falls and ends on his Benefit Commencement Date. If a Participant's Benefit Commencement Date is less than ninety days after the date on which the Participant notifies the Committee of his intent to begin receiving benefits, the election 30 period shall end 90 days after the date such notice is given, and benefit payments shall begin on the first day of the month coincident with or next following the end of such election period, with benefit payments made retroactively to the Participant's Benefit Commencement Date. (2) Each Participant whose benefits have been suspended during a period of reemployment pursuant to Section 5.13 may make the election described in Paragraph (1) of this Subsection upon the resumption of benefit payments, with respect to his entire Accrued Benefit. For purposes of applying Paragraph (1) to the preceding sentence, the Participant's Benefit Commencement Date shall be the date on which suspended benefits resume. (b) A Participant who does not establish to the satisfaction of the Committee that he has no Spouse on his Benefit Commencement Date may elect to receive an optional form of benefit under Section 7.3 only if: (1) The benefit is a joint and survivor annuity with the Participant's Spouse that provides for periodic payments after the Participant's death each of which is equal to not less than fifty percent (50%) nor more than one hundred percent (100%) of the periodic payment to the Participant; or (2) (A) his Spouse (or the Spouse's legal guardian if the Spouse is legally incompetent) executes a written instrument whereby such Spouse: (i) consents not to receive the normal form of benefit described in Subsection (b) of Section 7.2; (ii) consents to the specific optional form elected by the Participant, or (provided such instrument acknowledges the Spouse's right to limit consent to a specific optional form) to the Participant's right to choose any optional form without any further consent by the Spouse; and (iii) if applicable, consents in writing to either the specific beneficiary or beneficiaries designated by the Participant pursuant to his election or (provided such instrument acknowledges the Spouse's right to limit consent to a specific beneficiary) to the Participant's right to designate any beneficiary or beneficiaries without any further consent by the Spouse; and (B) such instrument acknowledges the effect of the election to which the Spouse's consent is being given, that the Spouse's consent is irrevocable, and is witnessed by a Plan representative or a notary public; or 31 (3) the Participant (A) establishes to the satisfaction of the Committee that his Spouse cannot be located or (B) furnishes a court order to the Committee establishing that the Participant is legally separated or has been abandoned (within the meaning of local law), unless a qualified domestic relations order pertaining to such Participant provides that the Spouse's consent must be obtained, or (C) that he is a Participant described in Section 6.5(a). The consent of a Spouse in accordance with this Subsection (b) shall not be effective with respect to other Spouses of the Participant, and an election to which Paragraph (3) of this Subsection applies shall become void if the circumstances causing the consent of the Spouse not to be required cease to exist prior to the Participant's Benefit Commencement Date. (c) A Participant may revoke an election under Subsection (b) of this Section. Such revocation may be made at any time during the election period in which such election can be made. Such revocation shall not void any prospectively effective consent given by his Spouse in connection with the revoked election. (d) If a Participant's Spouse or other designated beneficiary dies before the Participant's Benefit Commencement Date, but after an election of a joint and survivor annuity has been made hereunder, the election shall be automatically revoked. (e) (1) In the event of the divorce of a Participant prior to his Benefit Commencement Date, but following the Participant's election of a form of benefit, the election shall remain in effect unless the election is revoked by the Participant, the Participant remarries, or a qualified domestic relations order provides otherwise. (2) Notwithstanding Subsection (a), if a Participant who is receiving a joint and survivor annuity with his Spouse is divorced subsequent to his Benefit Commencement Date, the joint and survivor annuity shall remain in effect unless specifically revoked by a qualified domestic relations order. In the event that the joint and survivor benefit is revoked under this Paragraph (e)(2), the Participant's benefit shall be paid in the normal form under Section 7.2, unless the Participant elects an optional form of benefit under Section 7.3. The Participant may elect an optional form of benefit at any time during the 90-day period that commences on the date the Participant is notified that the order revoking the joint and survivor annuity is a qualified domestic relations order. 7.5 Explanations to Participants. The Committee shall provide to each Participant no less than 30 days and no more than 32 90 days before his Benefit Commencement Date a written explanation of: (a) the terms and conditions of the normal form of benefit and each optional form of benefit, including information explaining the relative values of each form of benefit and, if the benefit is immediately distributable within the meaning of section 411(a)(11) of the Code, the Participant's right to defer receipt of his benefit until his Normal Retirement Date; (b) the Participant's right to waive the normal form of benefit and the effect of such waiver; (c) the rights of the Participant's Spouse with respect to such waiver; and (d) the right to revoke an election to receive an optional form of benefit and the effect of such revocation. 7.6 Termination of Benefits. The last benefit payment hereunder with respect to any Participant shall be: (a) in the case of a single life annuity, the payment due on the first day of the month in which occurs the death of the retired Participant; (b) in the case of a surviving Spouse's benefit or a joint and survivor benefit, the payment due on the first day of the month in which occurs the later of the death of the Participant or the death of the Spouse (or, if applicable, the death of the designated beneficiary of such Participant); or (c) in the case of a single life annuity with 120 or 180 monthly payments guaranteed, the later of the payment due on the first day of the month in which the death of the Participant occurs or the 120th or 180th monthly payment, whichever applies; or (d) in the case of a single sum payment, such benefit payment. 7.7 Beneficiary Designation. (a) A Participant's designation of a beneficiary to receive any remainder of a guaranteed number of payments may be made or changed until the earlier of the Participant's death or the expiration of the guaranteed period. (b) Subject to the provisions of Subsection (a) and to the provisions set forth above and in Section 5.10 relating to the rights of Spouses to survivor benefit payments, 33 each Participant may designate or change the previous designation of the beneficiary or beneficiaries who shall receive benefits, if any, after his death. Such designation or change of designation shall be made by executing and filing with the Committee a form prescribed by the Committee and in no other manner. No designation, revocation, or change of beneficiaries shall be valid and effective unless and until filed with the Committee. If no designation is made, or if all of the beneficiaries named in such designation predecease the Participant or cannot be located by the Committee, the interest, if any, of the deceased Participant shall be paid to the Participant's Spouse, if living, or, otherwise, to the Participant's estate. 7.8 Small Benefit Payments and Repayment of Prior Distributions. (a) Notwithstanding any other provision of the Plan, if the Actuarially Equivalent single-sum value of (1) a Participant's vested Accrued Benefit or (2), if the Participant has died, the benefit payable under Section 5.9 or 5.10, is less than $3,500, such benefit shall be paid in a single sum as soon as administratively practicable after the Participant's Separation from Service, or death, if applicable. (b) If the value of the benefit described in Subsection (a) of this Section is zero, the Participant shall be deemed to have received a single-sum distribution under this Section of his entire vested Accrued Benefit as of the date of his Separation from Service. (c) In the event a former Participant who has received a single sum distribution of his entire vested Accrued Benefit under this Section or any other provision of the Plan again becomes an Active Participant, such Participant's Accrued Benefit determined at any time thereafter shall be reduced by the Actuarial Equivalent of such distribution unless the Participant repays the full amount of such distribution, plus interest at the rate described in Section 411(c)(2)(C) of the Code, to the Plan not later than the earlier of (1) the fifth anniversary of the date he again becomes an Active Participant or (2) the first date on which he completes a period of five one-Year Periods of Severance beginning after the distribution. 7.9 Failure to Apply for Pension. Benefit payments shall commence when properly written application for same is received by the Committee. In the event that a Participant fails to apply to the Committee for pension benefits by the earlier of (a) his Normal Retirement Date or by the date on which he has a Separation from Service, if later, or (b) the end of the calendar year in which he attains Age 70-1/2, the Committee shall make diligent efforts to locate such Participant and obtain such 34 application and, in the case of a benefit described in Section 7.8, may file an application for him if it has sufficient information to do so. In the event the Participant fails to make application by his Required Beginning Date, the Committee shall commence distribution as of the Required Beginning Date without such application. No payments shall be made for the period in which benefits would have been payable if the Participant had made timely application therefor. 7.10 Mailing Address. Benefit payments and notifications hereunder shall be deemed made when mailed to the last address furnished to the Committee by the Participant or beneficiary to whom they are due. 7.11 No Reduction for Changes in Social Security. Notwithstanding any other provision of the Plan, an increase in the Social Security taxable wage base or benefit level after a Participant's Separation from Service (or his Benefit Commencement Date, if earlier) shall not reduce the amount of any benefit to which the Participant or his beneficiary was entitled prior to such increase with respect to service prior to the Participant's Separation from Service (or his Benefit Commencement Date, if earlier). Furthermore, if the Participant returns to employment as an Employee in the Covered Class, the amount of any benefit payable to such Participant at his subsequent retirement (or his Required Beginning Date, if earlier) shall not be less than the benefit that the Participant was receiving prior to his return to employment, except as provided in Section 5.13. ARTICLE VIII THE FUND AND FUNDING 8.1 Designation of Trustee. The Company, by appropriate resolution of its Board of Directors, shall name and designate a Trustee and shall enter into a Trust Agreement with such Trustee. The Company shall have the power, by appropriate resolution of its Board of Directors, to amend the Trust Agreement, remove the Trustee, and designate a successor Trustee, all as provided in the Trust Agreement. All of the assets of the Plan shall be held by the Trustee for use in accordance with the Plan. 8.2 Contributions to the Fund. The benefits provided under the Plan shall be financed exclusively by contributions made from time to time to the Trustee by the Participating Companies, and by the Fund created thereby. Subject to the provisions of applicable law, the liability of the Participating Companies under the Plan shall be limited to the contributions 35 determined by the Participating Companies from time to time in accordance with the advice and counsel of the Actuary. The funding policy applicable to the Fund shall be established by the Committee and shall be reviewed from time to time. All contributions are conditioned on their deductibility for Federal income tax purposes. 8.3 Use of Contributions to the Fund. The contributions deposited under the terms of this Plan shall constitute the Fund held for the benefit of Participants and their eligible survivors under and in accordance with this Plan. No part of the corpus or income of the Fund shall be used for or diverted to purposes other than exclusively for the benefit of such Participants and their eligible survivors, and for necessary administrative costs; provided, however, that in the event of the termination of the Plan, and after all fixed and contingent liabilities have been satisfied, and upon compliance with section 4041 of ERISA, any remaining funds attributable to contributions by the Participating Companies shall revert to those companies; and further provided that in the case of a contribution (a) made by a Participating Company as a mistake of fact, or (b) which is conditioned upon the initial qualification of the Plan under section 401(a) of the Code, or (c) for which a tax deduction is disallowed, in whole or in part, by the Internal Revenue Service, the Participating Company shall be entitled to a refund of said contribution within one year after payment of a contribution made as a mistake of fact, or within one year of the date on which the initial qualification of the Plan is denied by the Internal Revenue Service, or within one year after disallowance of the tax deduction, to the extent of such disallowance, as the case may be. 8.4 Trustee. The Trustee shall be the named fiduciary with respect to management and control of Plan assets held by it and shall have exclusive and sole responsibility for the custody and investment thereof in accordance with the Trust Agreement. 8.5 Forfeitures. Forfeitures shall not be applied to increase the benefits of any Participant, but shall reduce the contributions of the Participating Companies hereunder. 8.6 Expenses of Administration. All expenses of administration of this Plan shall be paid from the Fund unless they are paid directly by the Participating Companies. 8.7 Sole Source of Benefits. The Fund shall be the sole source for the provision of benefits under the Plan. Neither the Participating Companies nor any other person shall be liable therefor. 36 ARTICLE IX ADMINISTRATION 9.1 Committee. The Committee shall be the named fiduciary which shall control and manage the operation of the Plan and shall administer the Plan. The Committee members may, but need not, be Employees, and they shall serve at the pleasure of the Company. They shall be entitled to reimbursement of expenses, but those members of the Committee who are also Employees of a Participating Company shall receive no compensation for their service on the Committee. Any reimbursement of expenses of the Committee members shall be paid directly by the Company. The Committee shall be responsible for the general administration of the Plan under the policy guidance of the Company. 9.2 Duties and Powers of Committee. In addition to the duties and powers described elsewhere hereunder, the Committee shall have the following specific duties and powers: (a) to retain such consultants, accountants, attorneys, and Actuaries as may be deemed necessary or desirable to render statements, reports, and advice with respect to the Plan and to assist the Committee in complying with all applicable rules and regulations affecting the Plan; any consultants, accountants, attorneys, and Actuaries may be the same as those retained by the Company; (b) to decide appeals under this Article; (c) to establish a funding policy consistent with the objectives of the Plan; (d) to enact uniform and nondiscriminatory rules and regulations to carry out the provisions of the Plan; (e) to resolve questions or disputes relating to eligibility for benefits or the amount of benefits under the Plan and authorizing the payment of benefits; (f) to construe and interpret the provisions of the Plan, including the supplying of any omissions in accordance with the intent of the Plan; (g) to determine whether any domestic relations order received by the Plan is a qualified domestic relations order as provided in section 414(p) of the Code; (h) to evaluate administrative procedures; 37 (i) to determine the size and type of any insurance contract to be purchased by the Fund from any insurer and to designate the insurer from which such insurance contract shall be purchased. All policies shall be issued on a uniform basis as of each January 1 with respect to all Participants under similar circumstances; and (j) to delegate such duties and powers as the Committee shall determine from time to time to any person or persons. Any determination made by the Committee pursuant to this Article shall be conclusive and binding upon all parties. The expenses incurred by the Committee in connection with the operation of the Plan, including, but not limited to, the expenses incurred by reason of the engagement of professional assistants and consultants, shall be expenses of the Plan and shall be payable from the Fund at the direction of the Committee. The Participating Companies shall have the option, but not the obligation, to pay any such expenses, in whole or in part, and, by so doing, to relieve the Fund from the obligation of bearing such expenses. Payment of any such expenses by a Participating Company on one occasion shall not bind that company to pay any similar expenses on any subsequent occasion. 9.3 Functioning of Committee. The Committee and those persons or entities to whom the Committee has delegated responsibilities shall keep accurate records and minutes of meetings, interpretations, and decisions. The Committee shall act by majority vote of the members, and such action shall be evidenced by a written document. 9.4 Disputes. (a) In the event that the Committee denies, in whole or in part, a claim for benefits by a Participant or his beneficiary, the Committee shall furnish notice of the denial to the claimant, setting forth: (1) the specific reasons for the denial, (2) specific reference to the pertinent Plan provisions on which the denial is based, (3) a description of any additional information necessary for the claimant to perfect the claim and an explanation of why such information is necessary, and (4) appropriate information as to the steps to be taken if the claimant wishes to submit his claim for review. 38 Such notice shall be forwarded to the claimant within 90 days of the Committee's receipt of the claim; provided, however, that in special circumstances the Committee may extend the response period for up to an additional 90 days, in which event it shall notify the claimant in writing of the extension, and shall specify the reason or reasons for the extension. (b) Within 60 days of receipt of a notice of claim denial, a claimant or his duly authorized representative may petition the Committee in writing for a full and fair review of the denial. The claimant or his duly authorized representative shall have the opportunity to review pertinent documents and to submit issues and comments in writing to the Committee. The Committee shall review the denial and shall communicate its decision and the reasons therefor to the claimant in writing within 60 days of receipt of the petition; provided, however, that in special circumstances the Committee may extend the response period for up to an additional 60 days, in which event it shall notify the claimant in writing prior to the commencement of the extension. 9.5 Indemnification. Each member of the Committee, and any other person who is an Employee or director of a Participating Company or an Affiliated Company shall be indemnified and held harmless by the Company against and with respect to all damages, losses, obligations, liabilities, liens deficiencies, costs and expenses, including without limitation, reasonable attorney's fees and other costs incident to any suit action, investigation, claim or proceedings to which he may be party by reason of his performance of administrative functions and duties under the Plan, except in relation to matters as to which he shall be held liable for an act of willful misconduct in the performance of his duties. The foregoing right to indemnification shall be in addition to such other rights as the Committee member, or other person may enjoy as a matter of law or by reason of insurance coverage of any kind. Rights granted hereunder shall be in addition to and not in lieu of any rights to indemnification to which the Committee member, or other person may be entitled pursuant to the by-laws of the Participating Company. ARTICLE X AMENDMENT AND TERMINATION 10.1 Power of Amendment and Termination. (a) It is the intention of each Participating Company that this Plan will be permanent. However, each 39 Participating Company reserves the right to terminate its participation in this Plan at any time by action of its board of directors or other governing body. Furthermore, the Company reserves the power to amend or terminate the Plan at any time by action of the Board of Directors. (b) Each amendment to the Plan shall be binding on each Participating Company if such Participating Company (1) consents to such amendment at any time, or (2) fails to object thereto within thirty days after receiving notice thereof. (c) Any amendment or termination of the Plan shall become effective as of the date designated by the Board of Directors. Except as expressly provided elsewhere in the Plan, prior to the satisfaction of all liabilities with respect to the benefits provided under this Plan, no amendment or termination shall cause any part of the monies contributed hereunder to revert to the Participating Companies or to be diverted to any purpose other than for the exclusive benefit of Participants and their beneficiaries. 10.2 Disposition on Termination. (a) Upon the termination or partial termination of the Plan, each Active Participant with respect to whom the Plan is terminating who would not have a nonforfeitable right to one hundred percent (100%) of his Accrued Benefit if his employment terminated on the date of the termination or partial termination of the Plan shall become fully vested and shall have a nonforfeitable right to his Accrued Benefit. However, in the event of such a termination, each Participant and beneficiary shall have recourse toward satisfaction of his nonforfeitable right to a pension only from Plan assets or from the Pension Benefit Guaranty Corporation, to the extent that it guarantees benefits. (b) The amount of the Fund shall be determined and, after providing for expenses incident to termination and liquidation, the remaining assets thereof shall be allocated for the purpose of paying benefits proportionately among each of the priority groups described below in the following order of precedence: (1) to provide benefits to retired Participants and beneficiaries who began receiving benefits at least three years before the Plan's termination (including those benefits which would have been received for at least three years if the Participant had retired that long ago), based on Plan provisions in effect five years prior to termination during which period such benefit would be the least, provided that the lowest benefit in pay status during a three-year period shall be considered the benefit in pay status for such period; 40 (2) to provide all other Accrued Benefits guaranteed by Federal law (or which would be so guaranteed but for section 4022(b)(5) or 4022B of ERISA); (3) to provide all other vested Accrued Benefits (determined before application of Subsection (a) of this Section); (4) to provide all remaining non-vested Accrued Benefits. (c) If the assets available for allocation under any priority group (other than as provided in priority groups (3) and (4)) are insufficient to satisfy in full the Accrued Benefits of all Participants and beneficiaries, the assets shall be allocated pro rata among such Participants and beneficiaries on the basis of the Actuarial Equivalent single-sum value of their respective benefits (as of the termination date). The foregoing payments, and payments in the event that assets are insufficient to pay the Accrued Benefits provided in priority groups (3) and (4), will be paid in accordance with regulations prescribed by the Pension Benefit Guaranty Corporation. The allocation of assets upon termination of the Plan will be carried out in such a manner as to preserve the qualification of the Plan under section 401(a) of the Code. In the event that all Accrued Benefits described above have been fully funded, any remaining funds shall revert to the Participating Companies in such proportion as the Participating Companies shall determine. 10.3 Limitation on Benefits. (a) In the event of Plan termination, the benefit payable to any highly compensated employee or any highly compensated former employee (as defined in section 414(q) of the Code and regulations thereunder) shall be limited to a benefit that is nondiscriminatory under section 401(a)(4) of the Code. If payment of benefits is restricted in accordance with this Subsection (a), assets in excess of the amount required to provide such restricted benefits shall become a part of the assets available under Section 10-2 for allocation among Participants and their joint annuitants and beneficiaries whose benefits are not restricted under this Subsection (a). (b) The restrictions of this Subsection (b) shall apply prior to termination of the Plan to any Participant who is a highly compensated employee or a highly compensated former employee and who is one of the 25 highest paid employees or former employees of a Participating Company for any Plan Year. The annual payments to any such Participant shall be limited to 41 an amount equal to the payments that would have been made to the Participant under a single life annuity that is the Actuarial Equivalent of the sum of the Participant's Accrued Benefit and any other benefits under the Plan. (c) The restrictions in Subsection (b) shall not apply: (1) if, after the payment of benefits to such Participant, the value of the Plan assets equals or exceeds 110 percent of the value of the current liabilities (within the meaning of section 412(l)(7) of the Code); or (2) if the value of the benefit is less than one percent (1%) of the value of current liabilities. 10.4 Merger, Consolidation, or Transfer. In case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, as provided in the Code, the benefit of any Participant or beneficiary immediately after such merger, consolidation, or transfer (if the Plan had then terminated) shall be at least equal to the benefit such Participant or beneficiary would have received immediately before such merger, consolidation, or transfer (if the Plan had then terminated). ARTICLE XI TOP-HEAVY PROVISIONS 11.1 General. The following provisions shall apply automatically to the Plan and shall supersede any contrary provisions for each Plan Year in which the Plan is a Top-Heavy Plan (as defined below). It is intended that this Article shall be construed in accordance with the provisions of section 416 of the Code. 11.2 Definitions. The following definitions shall supplement those set forth in Article I of the Plan: (a) "Aggregation Group" means, for any Plan Year, (1) each qualified retirement plan (including a frozen plan or a plan which has been terminated during the 60-month period ending on the Determination Date) of Participating Company or an Affiliated Company in which a Key Employee is a participant, (2) each other qualified retirement plan (including a frozen plan or a plan which has been terminated 42 during the 60-month period ending on the Determination Date) of a Participating Company or an Affiliated Company which enables any plan in which a Key Employee participates to meet the requirements of sections 401(a)(4) or 410 of the Code, and (3) any or all other qualified retirement plans (including a frozen plan or a plan which has been terminated during the 60-month period ending on the Determination Date) of a Participating Company or an Affiliated Company if (A) the plans in the Aggregation Group would be Top-Heavy Plans if each such plan were not included in the Aggregation Group but are not Top-Heavy Plans when such plan is included in the Aggregation Group, and (B) the Aggregation Group, including such plan, meets the requirements of sections 401(a)(4) and 410 of the Code. (b) "Determination Date" means, for any Plan Year, the last day of the preceding Plan Year, except that for the first Plan Year it shall mean the last day thereof. (c) "Key Employee" means, with respect to any Plan Year: (1) any Employee or former Employee who at any time during the 60-month period ending on the Determination Date was: (A) an officer of a Participating Company having compensation as defined in section 414(q)(7) of the Code for a Plan Year during such period greater than fifty percent (50%) of the amount in effect under section 415(b)(1)(A) of the Code for the calendar year in which such Plan Year ends; provided, that no more than 50 Employees (or, if less, the greater of three Employees or ten percent (10%) of the greatest number of Employees, including leased employees within the meaning of section 414(n) or 414(o) of the Code, employed by all Participating Companies and all Affiliated Companies during such 60-month period, but excluding Employees described in section 414(q)(8) of the Code) shall be treated as officers; or (B) one of the 10 Employees having compensation as defined in section 414(q)(7) of the Code for a Plan Year during such period greater than the amount described in section 415(c)(1)(A) of the Code for the calendar year in which such Plan Year ends and owning (or considered as owning, within the meaning of section 318 of the Code) the largest interests in any Participating Company or Affiliated Company, provided that such interest exceeds one-half of one percent (0.5%) of the total share ownership of the Participating Company or Affiliated Company, the total number of individuals described in this Subparagraph (B) being limited to 10 for the entire 60-month period; or 43 (C) a five-percent (5%) owner of a Participating Company; or (D) a one-percent (1%) owner of a Participating Company having compensation as defined in section 414(q)(7) of the Code for a Plan Year during such period in excess of $150,000; or (2) a beneficiary of an individual described in Paragraph (1) of this Subsection. For purposes of this Subsection, Compensation shall include elective deferrals under sections 125, 402(a)(8), 402(h), and 403(b) of the Code. Determinations under this Subsection shall be made in accordance with section 416(i) of the Code. (d) "Key Employee Ratio" means, for any For purposes of this Subsection, Compensation shall include elective deferrals under sections 125, 402(a)(8), 402(h) and 403(b) of the Code. Determination Date, the ratio of the amount described in Paragraph (1) of this Subsection to the amount described in Paragraph (2) of this Subsection, after deducting from each such amount any portion thereof described in Paragraph (3) of this Subsection, where: (1) the amount described in this Paragraph is the sum of (A) the present value of all accrued benefits of Key Employees under all qualified defined benefit plans included in the Aggregation Group, (B) the balances in all of the accounts of Key Employees under all qualified defined contribution plans included in the Aggregation Group, and (C) the amounts distributed from all plans in such Aggregation Group to or on behalf of any Key Employee during the period of five Plan Years ending on the Determination Date, except any benefit paid on account of death to the extent it exceeds the accrued benefits or account balances immediately prior to death; (2) the amount described in this Paragraph is the sum of (A) the present value of all accrued benefits of all participants under all qualified defined benefit plans included in the Aggregation Group, (B) the balances in all of the accounts of all participants under all qualified defined contribution plans included in the Aggregation Group, and (C) the amounts distributed from all plans in such Aggregation Group to or on behalf of any participant during the period of five Plan Years ending on the Determination Date; and (3) the amount described in this Paragraph is the sum of (A) all rollover contributions (or fund to fund transfers) to the Plan by an Employee after December 31, 1983 from a plan sponsored by an employer which is not a Participating 44 Company or an Affiliated Company; (B) any amount that is included in Paragraphs (1) and (2) of this Subsection for a person who is a Non-Key Employee as to the Plan Year of reference but who was a Key Employee as to any earlier Plan Year; and (C) for Plan Years beginning after December 31, 1984, any amount that is included in Paragraphs (1) and (2) of this Subsection for a person who has not performed any services for any Participating Company during the five-year period ending on the Determination Date. The present value of accrued benefits under any defined benefit plan shall be determined on the basis of the assumptions described in Schedule A and, effective January 1, 1987, under the method used for accrual purposes for all plans maintained by all Participating Companies and Affiliated Companies if a single method is used by all such plans, or, otherwise, the slowest accrual method permitted under section 411(b)(1)(C) of the Code. (e) "Non-Key Employee" means, for any Plan Year, (1) an Employee or former Employee who is not a Key Employee with respect to such Plan Year; and (2) a beneficiary of an individual described in Paragraph (1) of this Subsection. (f) "Super Top-Heavy Plan" means, for any Plan Year, each plan in the Aggregation Group for such Plan Year if, as of the applicable Determination Date, the Key Employee Ratio exceeds ninety percent (90%). (g) "Top-Heayy Compensation" means, for any Participant for any Plan Year, the average of his annual Compensation over the period of five consecutive Plan Years (or, if shorter, the longest period of consecutive Plan Years during which the Participant was in the employ of any Participating Company) yielding the highest average, disregarding (1) Compensation for Plan Years ending prior to January 1, 1984 and (2) Compensation for Plan Years after the close of the last Plan Year in which the Plan was a Top-Heavy Plan. (h) "Top-Heavy Plan" means, for any Plan Year, each plan in the Aggregation Group for such Plan Year if, as of the applicable Determination Date, the Key Employee Ratio exceeds sixty percent (60%). (i) "Year of Top-Heayy Service" means, for any Participant, a Plan Year in which he completes 1,000 or more Hours of Service, excluding (1) Plan Years commencing prior to January 1, 1984 and (2) Plan Years in which the Plan is not a Top-Heavy Plan. 11.3 Minimum Benefit for Non-Key Employees. (a) If the Plan is a Top-Heavy Plan in any Plan Year, each Participant who is a Non-Key Employee in such Plan 45 Year (other than a Participant who was a Key Employee as to any earlier Plan Year) shall have a minimum Accrued Benefit. Such Accrued Benefit shall be the lesser of: (1) two percent (2%) of the Participant's Top-Heavy Compensation multiplied by the Participant's Years of Top-Heavy Service, or (2) twenty percent (20%) of the Participant's Top-Heavy Compensation. (b) If a Non-Key Employee described in Subsection (a) of this Section participates in both a defined benefit plan and a defined contribution plan described in Paragraphs (a)(1) and (2) of this Section, he shall have the minimum Accrued Benefit described in this Section. 11.4 Vesting. (a) Change in Schedule. Each Participant's vested interest in his Accrued Benefit shall be determined in accordance with the following schedule for any Plan Year in which the Plan is a Top-Heavy Plan unless Section 6.1 provides more rapid vesting for such Participant: Years of Vesting Service Percent Vested Less than two years 0% two years 20% three years 40% four years 60% five years 80% six years 100% (b) Shift Out of Top-Heayy Status. If the Plan ceases to be a Top-Heavy Plan, the vesting schedule set forth in Section 6.1 shall again apply to all Years of Vesting Service. However, a Participant shall maintain the same vested interest in his Accrued Benefit determined under the schedule in Subsection 11.4(a) as of the date on which the Plan ceases to be a Top-Heavy Plan until the Participant's vested percentage under Section 6.1 exceeds the percentage maintained under the schedule in Section 11.4(a). (c) Special Election of Vesting Schedule. Each Participant with at least three Years of Vesting Service at the time that the Plan ceases to be a Top-Heavy Plan may elect to continue to have his vested percentage computed under the Plan in accordance with the vesting schedule set forth in Section 11.4(a). The period during which the election may be made shall commence on the date on which the Participant is informed that 46 the Plan is no longer a Top-Heavy Plan and shall end 60 days thereafter. 11.5 Adjustment to Maximum Benefit Limitation. (a) For each Plan Year in which the Plan is (1) a Super Top-Heavy Plan or (2) a Top-Heavy Plan and the Board of Directors does not make the election to amend the Plan to provide the minimum benefit described in Subsection (c) the 1.25 factor in the defined benefit and defined contribution fractions described in Article V shall be reduced to 1.0. The adjustment described in this Subsection shall not apply to a Participant during any period in which the Participant earns no additional accrued benefit under any defined benefit plan and has no employer contributions, forfeitures, or voluntary nondeductible contributions allocated to his accounts under any defined contribution plan. (b) In the case of any Top-Heavy Plan to which Section 5.12(e) applies, "$41,500" shall be substituted for "$51,875" in the calculation of the numerator of the transition fraction. (c) If, in any Plan Year in which the Plan is a Top-Heavy Plan but not a Super Top-Heavy Plan, the Aggregation Group also includes a defined contribution plan, the Board of Directors may elect to use a factor of 1.25 in computing the denominator of the defined benefit and defined contribution fractions described in Article V. In the event of such election, the minimum benefit described in Section 11.3(a) for each Non-Key Employee who is not covered under a defined contribution plan providing the minimum benefit described in the following sentence shall be increased as follows: (1) "three percent (3%)" shall be substituted for "two percent (2%)" in Section 11.3(a)(1), and (2) Section 12.3(a)(2) shall be deemed to read, "the Participant's Top-Heavy Compensation multiplied by the sum of (A) twenty percent (20%) and (B) one percent (1%) for each Year of Top-Heavy Service, up to a maximum of 10 such Years of Top-Heavy Service." The minimum benefit in the preceding sentence shall not apply to any Non-Key Employee who is covered under a defined contribution plan (as described in Section 11.3(b)) providing a minimum contribution for such Non-Key Employee of seven and one-half percent (7 1/2%) of the Non-Key Employee's annual compensation. 11.6 Suspension of Benefits. Notwithstanding the other provisions of the Plan, the payment of a Participant's benefits 47 shall not be suspended during the Participant's reemployment during any period in which the Plan is a Top-Heavy Plan. ARTICLE XII GENERAL PROVISIONS 12.1 No Employment Rights. Neither the action of the Company in establishing the Plan, nor of any Participating Company in adopting the Plan, nor any provisions of the Plan, nor any action taken by the Company, any Participating Company or the Committee shall be construed as giving to any Employee the right to be retained in the employ of the Company or any Participating Company, or any right to payment except to the extent of the benefits provided in the Plan to be paid from the Fund. 12.2 Governing Law. Except to the extent superseded by ERISA, all questions pertaining to the validity, construction, and operation of the Plan shall be determined in accordance with the laws of the state in which the principal place of business of the Company is located. 12.3 Severability of Provisions. If any provision of this Plan is determined to be void by any court of competent jurisdiction, the Plan shall continue to operate and, for the purposes of the jurisdiction of that court only, shall be deemed not to include the provisions determined to be void. 12.4 No Interest in Fund. No person shall have any interest in, or right to, any part of the principal or income of the Fund, except as and to the extent expressly provided in this Plan and in the Trust Agreement. 12.5 Spendthrift Clause. No benefit payable at any time under this Plan and no interest or expectancy herein shall be anticipated, assigned, or alienated by any Participant or beneficiary, or subject to attachment, garnishment, levy, execution, or other legal or equitable process, except for (1) a Federal tax levy made pursuant to section 6331 of the Code and (2) any benefit payable pursuant to a domestic relations order which is determined to be a qualified domestic relations order as defined in the Code. Any attempt to alienate or assign a benefit hereunder, whether currently or hereafter payable, shall be void. 12.6 Incapacity. If the Committee deems any Participant who is entitled to receive payments hereunder incapable of receiving or disbursing the same by reason of Age, illness, infirmity, or incapacity of any kind, the Committee may direct the Trustee to apply such payments directly for the comfort, support, and maintenance of such Participant, or to pay 48 the same to any responsible person caring for the Participant who is determined by the Committee to be qualified to receive and disburse such payments for the Participant's benefit; and the receipt of such person shall be a complete acquittance for the payment of the benefit. Payments pursuant to this Section shall be complete discharge to the extent thereof of any and all liability of the Participating Companies, the Committee, the Trustee, and the Fund. 12.7 Withholding . The Committee and the Trustee shall have the right to withhold any and all state, local, and Federal taxes which may be withheld in accordance with applicable law. 12.8 Missing Participants. In the event that all, or any portion, of the distribution payable to a Participant or his beneficiary hereunder shall, at the expiration of five (5) years after it shall become payable, remain unpaid solely by reason of the inability of the Committee, after sending a registered letter, return receipt requested, to the last known address, and after further diligent effort, to ascertain the whereabouts of such Participant or his beneficiary, the amount so distributable shall be forfeited and shall be used to reduce the cost of the Plan. In the event a Participant or beneficiary is located subsequent to his benefit being forfeited, such benefit shall be restored. 12.9 Receipt and Release. Subject to the provisions of ERISA and to the extent permitted by ERISA, any final payments or distribution to any Participant, his Spouse or beneficiary or his legal representative in accordance with this Plan shall be in full satisfaction of all claims against the Fund, the Trustee, the Committee and the Participating Companies. The Trustee, the Participating Company, the Committee, or any combination of them may require a Participant, his Spouse or beneficiary, or legal representative to execute a receipt and release of all claims under this Plan upon final payment or distribution or a receipt to the extent of any partial payment or distribution; and the form of any such receipt and release shall be determined by the Trustee, the Participating Company, the Committee or any combination of them. 49 Effective as of January 1, 1989. NATIONAL PENN, BANCSHARES, INC. By:/s/Wayne R. Weidner ------------------------ Executive Vice President SCHEDULE A ACTUARIAL EQUIVALENTS I. The following assumptions will be used for determining Actuarially Equivalent benefits, except as specified to the contrary in the Plan: 7% interest and the 1984 Unisex Pension Mortality Table. Any factors not included herein will be determined by the Committee. II. Notwithstanding the foregoing, effective January 1, 1987, for purposes of determining Actuarially Equivalent single-sum amounts, the applicable interest rate shall be used; provided, however, that the single-sum amount of a Participant's Accrued Benefit determined under this Part II shall not be less than the single-sum amount of a Participant's Accrued Benefit determined as of the date of reference using the interest rate in effect under the Plan on such date. For purposes of this Schedule A, "applicable interest rate" means the interest rate which would be used as of the first day of the Plan Year containing the date of the distribution by the Pension Benefit Guaranty Corporation for purposes of determining the present value of a lump sum distribution on plan termination. 51 SCHEDULE B MINIMUM DISTRIBUTION INCIDENTAL BENEFIT TABLE TABLE I Excess of Age of employee Applicable over Age of beneficiary percentage ----------------------- ---------- 10 years or less.....................................100% 11 ...................................................96% 12 ...................................................93% 13 ...................................................90% 14 ...................................................87% 15 ...................................................84% 16 ...................................................82% 17 ...................................................79% 18 ...................................................77% 19 ...................................................75% 20 ...................................................73% 21 ...................................................72% 22 ...................................................70% 23 ...................................................68% 24 ...................................................67% 25 ...................................................66% 26 ...................................................64% 27 ...................................................63% 28 ...................................................62% 29 ...................................................61% 30 ...................................................60% 31 ...................................................59% 32 ...................................................59% 33 ...................................................58% 34 ...................................................57% 35 ...................................................56% 36 ...................................................56% 37 ...................................................55% 38 ...................................................55% 39 ...................................................54% 40 ...................................................54% 41 ...................................................53% 42 ...................................................53% 43 ...................................................53% 44 and greater........................................52% 52 EX-10.3 3 0003.txt AMENDMENT TO NATIONAL PENN BANCSHARES, INC. PENSION PLAN WHEREAS, the National Bank of Boyertown established a Pension Plan and trust effective January 1, 1974 known as The National Bank of Boyertown Pension Plan for Full-Time Employees; and WHEREAS, the National Bank of Boyertown Pension Plan for Full-Time Employees has since been amended and restated, most recently effective January 1, 1989, as the National Penn Bancshares, Inc. Pension Plan (the "Plan"); and WHEREAS, the Corporation desires to amend the Plan pursuant to Section 10.1; NOW, THEREFORE, effective January 1, 1991, the Corporation hereby amends Section 2.3 and Section 3.3 of the Plan, each in its entirety, to read as follows: "2.3 Year of Eligibility Service. An Employee shall be credited with a Year of Eligibility Service upon his completion of 1,000 Hours of Service within any single computation period irrespective of whether the computation period has ended. An individual's computation period shall be the 12-consecutive-month period beginning on the date he is first credited with an Hour of Service and each Plan Year thereafter. Notwithstanding any Plan provision to the contrary, all periods of employment with Sellersville Savings & Loan Association shall be considered when determining Years of Eligibility Service. 3.3 Additional Rules. (a) Notwithstanding any provisions of this Plan to the contrary, an Employee shall not be credited with any Years of Credited Service or Years of Vesting Service for service (1) prior to the date on which the vesting rules contained in ERISA and in the Code, as amended by ERISA, became effective with respect to the Plan, or (2) prior to the first day of the first Plan Year beginning on or after January 1, 1985, if such service prior to the effective date of ERISA or prior to the first day of such Plan Year would have been disregarded under the rules of the Plan with regard to breaks in service as in effect on the applicable date. (b) Years of Vesting Service and Years of Credited Service shall be credited with respect to service with First National Bank of Oley and First National Bank of Boyertown. (c) For purposes of determining a Participant's Years of Vesting Service, service prior to his attainment of Age 18 shall be disregarded. (d) Notwithstanding any Plan provision to the contrary, Years of Vesting Service shall include all periods of service with Sellersville Savings & Loan Association and Years of Credited Service shall only include periods of service with Sellersville Savings & Loan Association on and after January 1, 1991." Executed this 24th day of April, 1991. National Penn Bancshares, Inc. (as the Corporation) BY: /s/Sandra L.Spayd ------------------ EX-10.4 4 0004.txt EXHIBIT A NATIONAL PENN BANCSHARES, INC. PENSION PLAN AMENDMENT 1993-1 The National Penn Bancshares, Inc. Pension Plan (the "Plan") is amended as follows: 1. Article V of the Plan is amended by deleting Section 5.13 in its entirety and replacing it with the following: 5.13 Suspension of Benefits on Continued Employment or Reemployment. (a) (1) If a Participant continuously remains an Employee after his Normal Retirement Date, no benefits shall be paid during his "qualified employment" (as defined in Subsection (d)) until his Required Beginning Date. The rules relating to such a suspension of benefits and the subsequent resumption of benefits are described in this Section. (2) The Committee shall notify the Participant by personal delivery or first class mail of the suspension of his benefits during the first month in which such suspension of benefits occurs. (3) The Committee shall have the right to use all reasonable efforts to determine whether any employment relationship which such Participant has with a Participating Company or any Affiliated Company constitutes qualified employment. The Committee shall also have the right to require the Participant to provide information sufficient to prove that such employment is not qualified employment. (4) A Participant may ask the Committee in writing to make a determination as to whether specific contemplated employment will be qualified employment. The Committee shall respond to such a request in writing within 60 days of its receipt of the request. (5) Benefit payments suspended under this Section shall commence no later than the earlier of (A) the first day of the third calendar month following the month in which the Participant's qualified employment ceases or, if later, the first day of the calendar month following receipt by the Committee of the Participant's notice that his qualified employment has ceased, or (B) the Participant's Required Beginning Date. The initial payment shall include payment for the current month and for any previous calendar months since the cessation of the Participant's qualified employment. (6) Benefit payments shall be calculated on the basis of Compensation earned and Years of Credited Service credited (if any) during such period of qualified employment and the provisions of the Plan as then in effect. The benefit payments shall be paid in the form determined pursuant to Section 7.4. (b) If a Participant is reemployed before his Normal Retirement Date as an Employee, benefits otherwise payable to the Participant shall be suspended during his period of reemployment. Upon his subsequent Separation from Service, his pension shall be recalculated on the basis of his current Age, Compensation earned and Years of Credited Service credited (if any) during such period of reemployment, and the provisions of the Plan as then in effect, but shall be reduced by the Actuarial Equivalent of payments previously made prior to his Normal Retirement Date. The resumed benefit payments shall be paid in the form determined pursuant to Section 7.4. (c) (1) If a Participant is employed or reemployed by a Participating Company or an Affiliated Company under any circumstances other than as described in Subsection (a) or (b), the benefits otherwise payable to the Participant shall be continued during such period of employment or reemployment, adjusted as of each January 1 up until his subsequent Separation from Service. The adjustment shall include any increase (but not any decrease) determined in accordance with Section 5.1 to reflect Years of Credited Service and Compensation earned during the Participant's reemployment. (2) If a Participant is employed or reemployed by a Participating Company or an Affiliated Company under any circumstances other than as described in Subsection (a) or (b), and the Participant had already received full payment of his benefit from the Plan, his pension shall be calculated upon his subsequent Separation from Service, but shall be reduced by the Actuarial Equivalent of payments previously made. (d) "Qualified employment" shall mean the employment of a Participant by any Participating Company or Affiliated Company in such a capacity that the Participant receives pay for or is entitled to be paid for at least 40 Hours of Service (not including Hours of Service credited as a result of back pay) during a calendar month. 2. Section 7.4 is amended by deleting paragraph (a)(2) in its entirety and replacing it with the following: (2) Each Participant whose benefits have been suspended during a period of reemployment pursuant to Section 5.13 may make the election described in Paragraph (1) of this Subsection upon the commencement or resumption of benefit payments, with respect to his entire Accrued Benefit. For purposes of applying Paragraph (1) to the preceding sentence, the Participant's Benefit Commencement Date shall be the date on which suspended benefits resume or begin. The foregoing amendment shall be effective as of January 1, 1993. NATIONAL PENN BANCSHARES, INC. Dated: June 23, 1993 By:/s/ Sandra L. Spayd ------------------- Secretary EX-10.5 5 0005.txt NATIONAL PENN BANCSHARES, INC. PENSION PLAN AMENDMENT 1994-1 The National Penn Bancshares, Inc. Pension Plan (the "Plan") is amended as follows: 1. Article I of the Plan is amended by deleting paragraph (d) of the definition of "Compensation" and replacing it with the following: "(d) (1) With respect to any Plan Year ending before January 1, 1994, only the first $200,000 (or such other amount as may be applicable under Code section 401(a)(17) for the Plan Year) of the amount otherwise described in Subsections (a) and (b) of this definition shall be taken into account, except that this Subsection (d)(1) shall not apply for purposes of Section 5.12. In applying the $200,000 limit of the preceding sentence, a Participant's Accrued Benefit, determined as of any date prior to January 1, 1994, shall be the greater of (A) the sum of (i) his Accrued Benefit as of December 31, 1988, calculated without regard to the $200,000 limit of the preceding sentence, plus (ii) his Accrued Benefit attributable to participation in the Plan after December 31, 1988 through the date of determination, calculated subject to the $200,000 limit of the preceding sentence, or (B) the greater of (i) his Accrued Benefit as of December 31, 1988 calculated without regard to the $200,000 limit of the preceding sentence, or (ii) his entire Accrued Benefit attributable to all years of participation in the Plan through the date of determination, calculated subject to the $200,000 limit of the preceding sentence. (2) With respect to any Plan Year beginning on or after January 1, 1994, only the first $150,000 (or such other amount as may be applicable under Code Section 401(a)(17) for the Plan Year) of the amount otherwise described in Subsections (a) and (b) of this definition shall be taken into account, except that this Subsection (d)(2) shall not apply for purposes of Section 5.12. In applying the $150,000 limit of the preceding sentence, a Participant's Accrued Benefit, determined as of any date on or after January 1, 1994, shall be the greater of (A) the sum of (i) his Accrued Benefit as of December 31, 1993, calculated without regard to the $150,000 limit of the preceding sentence, plus (ii) his Accrued Benefit attributable to 1 participation in the Plan after December 31, 1993 calculated subject to the $150,000 limit of the preceding sentence, or (B) the greater of (i) his Accrued Benefit as of December 31, 1993, calculated without regard to the $150,000 limit of the preceding sentence, or (ii) his entire Accrued Benefit attributable to all years of participation in the Plan calculated subject to the $150,000 limit of the preceding sentence. (3) In applying the rules of section 414(q)(6) of the Code, the limit of this Subsection (d) shall be allocated among family members in proportion to their compensation as defined in Subsection (a) without regard to this Subsection (d)." 2. Article I of the Plan is amended by deleting the definition of "Covered Compensation" in its entirety and replacing it with the following: "'Covered Compensation' means, for any Participant for any Plan Year, the average of the taxable wage bases in effect for each calendar year during the 35-year period ending with the last day of the calendar year in which the Participant attains or will attain his retirement age under the federal Social Security Act determined using a table rounded in $600 increments. Effective January 1, 1994, the table will be rounded in $3000 increments. In determining a Participant's Covered Compensation for a Plan Year, the taxable wage base for the Plan Year of reference and any subsequent Plan Year shall be assumed to be the same as the taxable wage base in effect as of the beginning of the Plan Year of reference. A Participant's Covered Compensation for any Plan Year commencing after the 35-year period described above is the Participant's Covered Compensation for the Plan Year during which the Participant attained his retirement age under the federal Social Security Act. A Participant's Covered Compensation for a Plan Year commencing prior to the 35-year period described above is the taxable wage base in effect as of the beginning of such Plan Year. For purposes of this Section, "taxable wage base" means the maximum amount of earnings which may be considered wages for Social Security purposes under section 3121(a) (1) of the Code." 3. Article I of the Plan is amended by deleting the definition of "Participating Company" in its entirety and replacing it with the following: 2 "Participating Company' means the Company, National Penn Bank (formerly the National Bank of Boyertown), and each other organization which is authorized by the Board of Directors to adopt this Plan by action of its board of directors or other governing body, and which adopts this Plan, as listed in Schedule B." 4. Article I of the Plan is amended by adding a new definition of "Predecessor Employer" to read as follows: "`Predecessor Employer' means, with respect to any Participating Company or Affiliated Company, any company to which such Participating Company or Affiliated Company is a successor in interest by merger, consolidation, asset acquisition, stock acquisition, or reincorporation, and any other company designated as such for purposes of this Plan by the Board of Directors." 5. Article II of the Plan is amended by deleting Section 2.3 in its entirety and replacing it with the following: "(a) An Employee shall be credited with a Year of Eligibility Service upon completion of 1,000 Hours of Service within any single computation period irrespective of whether the computation period has ended. An individual's computation period shall be the 12-consecutive-month period beginning on the date he is first credited with an Hour of Service and each Plan Year thereafter. (b) Notwithstanding any Plan provision to the contrary, periods of employment with a Predecessor Employer shall be counted in determining Years of Eligibility Service as described in Schedule C." 6. Section 3.3 of the Plan is amended by deleting (d) in its entirety and replacing it with the following: "(d) Notwithstanding any Plan provision to the contrary, Years of Vesting Service and Years of Credited Service shall include periods of service with a Predecessor Employer beginning on the date listed on Schedule C." 7. Article VII is amended by adding a new Section 7.12 to read as follows: 3 "7.12 Transfers. (a) Effective January 1, 1993, if a Participant entitled to receive a distribution under this Article VII (or a spouse or former spouse of a Participant who is entitled to receive a single sum distribution from the Plan pursuant to a qualified domestic relations order) directs the Committee to have the Trustee transfer all or a portion (not less than $500) of the amount to be distributed directly to: (1) an individual retirement account described in section 408(a) of the Code, (2) an individual retirement annuity described in section 408(b) of the Code (other than an endowment contract), (3) a qualified defined contribution retirement plan described in section 401(a) of the Code the terms of which permit the acceptance of rollover contributions, or (4) an annuity plan described in section 403(a), all or a portion (not less than $500) of the amount to be distributed shall be so transferred. (b) In addition, if a Participant's surviving Spouse or former spouse is scheduled to receive a single sum distribution from the Plan, and the spouse directs the Committee to have the Trustee transfer all or a portion (not less than $500) of the amount to be distributed directly to: (1) an individual retirement account described in section 408(a) of the Code, or (2) an individual retirement annuity described in section 408(b) of the Code (other than an endowment contract), all or a portion of the amount to be distributed shall be so transferred. (c) The Participant (or spouse) must specify the name of the plan to which the Participant (or spouse) wishes to have the amount transferred, on a form and in a manner prescribed by the Committee, plus such other information as may be requested by the Committee. 4 (d) Subsections (a) and (b) shall not apply to the following distributions: (1) that portion of any distribution after the Participant's Required Beginning Date that is required to be distributed to the Participant by the minimum distribution rules of section 401(a)(9) of the Code, (2) any distribution that is less than $200, or (3) such other distributions as may be exempted by applicable statute or regulation from the requirements of section 401(a)(31) of the Code." 8. Article X is amended by deleting paragraph (a) of Section 10.1 and replacing it with the following: "(a) It is the intention of each Participating Company that this Plan will be permanent. However, each Participating Company reserves the right to terminate its participation in this Plan at any time by or pursuant to a resolution of its board of directors or other governing body. Furthermore, the Company reserves the power to amend or terminate the Plan at any time by or pursuant to a resolution of the Board of Directors. Action to amend the Plan may be taken either by resolution duly adopted by the Board of Directors, or by an instrument in writing executed by an officer of the Company to whom authority to adopt or approve amendments to the Plan has been delegated pursuant to a resolution duly adopted by the Board of Directors." 9. The Plan is amended by adding Schedule B ("Participating Employers") and Schedule C ("Service with Predecessor Employers"), in the form attached to this amendment, to the end of the Plan. Executed this 28th day of September, 1994. NATIONAL PENN BANCSHARES, INC. By:/s/ Wayne R. Weidner ------------------- 5 SCHEDULE B PARTICIPATING COMPANIES Effective April 21 1991: - ------------------------ Sellersville Savings & Loan Association SCHEDULE C SERVICE WITH PREDECESSOR EMPLOYERS Eligibility Credited and Vesting Service Service ----------- -------- Sellersville Savings & Loan all service January 1, 1991 Association First Lehigh Bank all service July 1, 1993 Chestnut Hill National Bank all service January 1, 1994 Central Penn Savings Association all service July 1, 1994 2 EX-10.11 6 0006.txt NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN Adopted by Board of Directors December 26, 1984 PLAN YEAR 2001 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 As Amended By Compensation Committee And Approved By Board December 20, 2000 Effective January 1, 2001 SCHEDULE A Participants for the 2001 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, 2001. 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, 2001. Named participants are classified accordingly: CLASS A (3 persons) (name and grade level) Lawrence T. Jilk, Jr. 999 Wayne R. Weidner 999 Glenn E. Moyer 999 CLASS B (26 persons) (name and grade level)
Bruce G. Kilroy 999 Todd A. Alderfer 111 Garry D. Koch 999 Brian T. Appleton 111 Frederick C. Peters II 999 Nancy R. Corson 111 Kathy B. Schauer 999 Lloyd H. Reichenbach 111 Algot F. Thorell, Jr. 999 Michael L. Wummer 111 Joseph C. Walter, Jr. 999 Sharon L. Weaver 999 Carol P. Franklin 110 Sandra L. Hoffman 110 Gary L. Rhoads 119 P. Robert Keeley 110 Tarrie L. Miller 110 Ronald L. Bashore 113 Larry A. Rush 110 Timothy A. Day 113 Sandra L. Spayd 110 Scott L. Gruber 113 Michael R. Reinhard 113 Dennis E. Moyer 109 Joseph C. Walker 113 John J. Mikus, Jr. 112 12/4/00 CLASS C (30 persons) (name and grade level) E. Harry McGuirk 111 Rich Gentile 107 W. Scott Labenberg 111 Eugene Guinther 107 John Tucker 111 Dick Haddock 107 Robert Latshaw 107 Earl Houseknecht 110 Cheryl Morris 107 Ed Shin 110 Donna Wentzel 107 Linda S. Stark 110 Roxanne Dittman 106 Lew Freeman 109 Frank Gehringer 106 Robin Hitchcock 109 Steve Kunkel 106 Hugh (Skip) Marshall 109 Sandra Massaro 106 Clarence Martindell 109 Janice McCracken 106 Steve Olson 109 Marcia Stark 106 Cindy Rankin 109 Teresa Steuer 106 Dan Tempesco 109 Sharon McMichael 105 Michelle Debkowski 108 Richard Sutton 108 Patricia Angstadt 104
12/4/00 SCHEDULE B NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN 2001 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 2001 PLAN YEAR - ------------------------------------------------- The diluted per share operating income of NPBC for 2001 must exceed the diluted per share operating income for 2000. EXTERNAL PERFORMANCE GOALS FOR THE 2001 PLAN YEAR - ------------------------------------------------- The net operating income of NPB before securities transactions on realized return on average common equity for 2001 must exceed the average of the net operating income before securities transactions on realized return on average common equity for 2001 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 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 nine banking companies which form the peer group are: Univest (Souderton) Fulton Financial Corp. Susquehanna Bancshares Harleysville National Corp. 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 2001, as of December 2000 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 2001. 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-10.13 7 0007.txt NATIONAL PENN BANCSHARES, INC. ------------------------------ OFFICERS' AND KEY EMPLOYEES' STOCK COMPENSATION PLAN ---------------------------------------------------- (As amended, February 28, 2001) 1. PURPOSE The purpose of the Officers' and Key Employees' Stock Compensation Plan (the "Plan") is to advance the interests of National Penn Bancshares, Inc. (the "Corporation") by enhancing the ability of the Corporation and its Subsidiaries to attract and retain officers and other key employees, to reward such individuals for their contributions, and to encourage them to take into account the long-term interests of the Corporation through interests in the Corporation's common stock (the "Stock"). This Plan provides for (i) the grant of options to acquire Stock ("Options"), which may be incentive stock options ("ISOs") within the meaning of the Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified stock options, and (ii) awards of Stock subject to certain restrictions and the risk of forfeiture ("Restricted Stock"). Under this Plan, Restricted Stock consists of (i) Stock subject to restrictions, including performance-based restrictions intended to comply with the provisions of Code Section 162(m) ("Performance-Based Restricted Stock"), and (ii) Stock subject to restrictions, not including performance-based restrictions. Grants of Options and awards of Restricted Stock are referred to herein collectively as "Awards". Any officer or key employee selected to receive an Award under this Plan is sometimes referred to as a "participant" herein, and any officer or key employee selected to receive an Option under this Plan is sometimes referred to as an "optionee" herein. 2. ADMINISTRATION This Plan shall be administered by a committee composed of three to six members of the Corporation's Board of Directors (the "Board") who are (i) "non-employee directors" of the Corporation within the meaning of Rule 16b-3(b)(3) under Section 16 of the Securities Exchange Act of 1934 (the "1934 Act"), and (ii) "outside directors" of the Corporation within the meaning of Code Section 162(m) (the "Committee"). The Board may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, howsoever caused, shall be filled by the Board. Subject to the terms, provisions and conditions of this Plan, the Committee shall have exclusive jurisdiction to: (i) make 1 Awards to such participants as the Committee may select; (ii) determine the time or times when Awards shall be granted and the number of shares of Stock subject to each Award; (iii) determine which Options are, and which Options are not, intended to be ISOs; (iv) determine the terms and conditions of each Award; (v) prescribe the form or forms of any instruments evidencing Awards and any other instruments required under this Plan and to change such forms from time to time; (vi) adopt, amend, and rescind rules and regulations for the administration of this Plan; and (vii) interpret this Plan and to decide any questions and settle all controversies and disputes that may arise in connection with this Plan. Such determinations of the Committee shall be conclusive and shall bind all parties. No member of the Committee or of the Board shall be liable for any determination, decision or action made in good faith, and the members shall be entitled to indemnification and reimbursement in the manner provided in the Corporation's Bylaws. 3. ELIGIBILITY Persons eligible to receive Awards under this Plan shall be those officers and key employees who, in the opinion of the Committee, are in a position to make a significant contribution to the success of the Corporation and its Subsidiaries. No person who beneficially owns ten percent or more of the outstanding Stock shall be eligible to participate in this Plan, to exercise an Option previously granted to him, or to take full possession of Restricted Stock previously issued to him. A "Subsidiary" of the Corporation shall mean a corporation in which the Corporation shall own, directly or indirectly, a majority of the capital stock entitled to vote for the election of directors. 4. STOCK SUBJECT TO AWARDS The Stock subject to Awards under this Plan shall be either authorized but unissued shares or treasury shares. Subject to adjustment in accordance with the provisions of Paragraph 5(G) and 6(F) hereof, the total number of shares of such Stock shall be 2,378,125 shares. If any outstanding Option or Restricted Stock Award under this Plan for any reason expires, is forfeited or is terminated prior to the end of the period during which Awards may be made under this Plan, the shares of Stock allocable to the unexercised portion of such Option or the portion of such Restricted Stock Award that has terminated or been forfeited may again be subject to award under this Plan. Shares of Stock delivered to the Corporation to pay the exercise price of any Option or to satisfy the tax withholding 2 consequences of an Option exercise or the grant or vesting of Restricted Stock shall again be subject to award under this Plan. 5. TERMS AND CONDITIONS APPLICABLE TO ALL OPTIONS Options granted pursuant to this Plan shall be evidenced by agreements in such form as the Committee shall, from time to time, approve, which agreements shall in substance include and comply with and be subject to the following terms and conditions: A. MEDIUM AND TIME OF PAYMENT The exercise price of an Option shall be payable either (i) in United States dollars in cash or by check, bank draft or money order payable to the order of the Corporation, (ii) through the delivery of shares of Stock owned by the optionee with a fair market value equal to the Option's exercise price, or (iii) by a combination of (i) and (ii). Fair market value of Stock so delivered shall be determined as of the date of exercise, as provided in Paragraph 5(C) hereof. Unless the Committee otherwise determines, an optionee may engage in a successive exchange (or series of exchanges) in which Stock such optionee is entitled to receive upon exercise of an Option may be simultaneously utilized as payment for the exercise of an additional Option or Options. To the extent permitted by applicable law and regulations, the Committee may permit payment of the Option exercise price through arrangements with a brokerage firm under which such firm, on behalf of the optionee, will pay to the Corporation the exercise price of the shares being purchased, and the Corporation will promptly deliver to such firm the number of shares of Stock subject to the Option so that the firm may sell such shares, or a portion thereof, for the account of the optionee. In addition, the Committee may permit payment of the Option exercise price by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Corporation sufficient funds to pay the exercise price as soon as the shares subject to the Option, or a portion thereof, are sold on behalf of the optionee. B. NUMBERS OF SHARES The Option shall state the total number of shares to which it pertains. Subject to adjustment as provided in Paragraph 5(G), in any fiscal year of the Corporation, the aggregate number of shares of Stock as to which Options may be granted to any one participant shall not exceed 60,000. 3 C. OPTION PRICE The exercise price of an Option shall not be less than the fair market value of the shares of Stock covered by the Option on the date of grant. As used in this Plan, the "fair market value" of a share of Stock as of any date shall be determined (i) based on the average of the closing sale prices of a share of Stock for the ten (10) day trading period ending on the given date, as reported on the National Association of Securities Dealers Automated Quotation ("Nasdaq") National Market and published in The Wall Street Journal, (ii) if no closing sale prices are reported during such ten (10) day trading period, based on the average of the mean of the bid and asked prices per share of Stock for such ten (10) day trading period, as reported on Nasdaq, (iii) if the Stock is listed on a stock exchange, based on the average of the closing sale prices of a share of Stock for the ten (10) day trading period ending on the given date, as reported in The Wall Street Journal, or (iv) if the Stock is not listed on Nasdaq or on a stock exchange, by the Committee in its sole discretion. D. EXPIRATION OF OPTIONS Each Option granted under this Plan shall expire on a date determined by the Committee, which date, in the case of an ISO, may not be more than ten years from the date the Option is granted, and in the case of a non-qualified Option, may not be more than ten years and one month from the date the Option is granted. E. VESTING OF OPTIONS If and to the extent an Option has become vested, an Option may be exercised in whole at any time, or in part from time to time, during its term. Except as provided in Paragraph 5(F) hereof, an Option may only be exercised at a time when the optionee is employed by the Corporation or one of its Subsidiaries. An optionee shall have a cumulative vested interest in the right to exercise an Option, determined by reference to his continuous employment with the Corporation and/or a Subsidiary following the date of grant of the Option, as follows: Period of Continuous Cumulative Vested Employment Following Grant Percentage -------------------------- ----------------- Less than 1 year -0- 1 year or more 20.0 2 years or more 40.0 3 years or more 60.0 4 years or more 80.0 5 years or more 100.0 4 To the extent the application of the above vesting schedule would at any time result in the right to acquire a fractional share, the right to acquire such fractional share shall be deferred to the next vesting period. F. TERMINATION OF SERVICE Except as otherwise provided in this Paragraph 5(F), upon the termination of employment of an optionee for any reason, the unexercised vested portion of any Option held by him shall lapse on the earlier of (i) the expiration of the term of the Option, or (ii) three months from the date of such termination of employment. Upon the termination of employment of an optionee because of retirement at age 60 or later or death, the unexercised vested portion of any Option held by him (including any portion that became vested on account of such retirement or death) shall lapse on the earlier of (i) the expiration of the term of the Option, or (ii) three years from the date of such termination of employment. Upon the termination of employment of an optionee because of permanent and total disability (as defined in Code Section 22(e)(3), referred to herein as "disability"), the unexercised vested portion of any Option held by him (including any portion that became vested on account of such disability) shall lapse on the earlier of (i) the expiration of the term of the Option, or (ii) three years from the date of such termination of employment. In the case of the discharge of an optionee for "cause", the unexercised vested portion of any Option held by him shall lapse immediately. An optionee will be deemed discharged for "cause" if he is discharged by his employer and the ground for such discharge is the employer's good faith and reasonable belief that (i) he has committed fraud or dishonesty toward his employer (or any business affiliated with his employer, or any individual or company doing business with any of them), or (ii) he has committed a felony, not otherwise described in clause (i), which involves a crime of moral turpitude. Any lapse occurring under provisions of this paragraph shall be final, whether or not the optionee is convicted of or admits to the commission of the offense, and no person or corporation shall be liable to the optionee therefor. Upon termination of employment of an optionee for any reason other than retirement at age 60 or later, disability, or death, the nonvested portion of any Option held by him shall lapse immediately. Upon termination of employment of an optionee because of retirement at age 60 or later, disability, or death, the nonvested portion of any Option held by him shall vest immediately. 5 G. ADJUSTMENTS FOR CHANGES IN STOCK The aggregate number of shares of Stock as to which Options may be granted to participants under this Plan, the aggregate number of shares of Stock as to which Options may be granted to any one such participant, the number of shares of Stock covered by each outstanding Option, and the exercise price per share of each outstanding Option, shall be proportionately adjusted by the Committee for any increase or decrease in the number of outstanding shares of Stock resulting from the subdivision or consolidation of shares or other capital adjustments, the payment of a Stock dividend, or any other increase or decrease in such shares effected without receipt of consideration by the Corporation. Any such determination by the Committee shall be conclusive. H. TRANSFERABILITY Except as otherwise provided in this Paragraph 5(H), no Option may be assigned or transferred except by will, by the laws of descent and distribution, or pursuant to a qualified domestic relations order. Unless the Committee determines otherwise in connection with the grant of a non-qualified Option, non-qualified Options granted hereunder shall be transferable, without payment of consideration, by an optionee to a member of the optionee's immediate family, to a trust whose beneficiaries are all members of the optionee's immediate family, or to a partnership whose partners are all members of the optionee's immediate family. In any such case, the Option shall be exercisable only by such transferee. For purposes of this provision, an optionee's "immediate family" shall mean the optionee's spouse, children and grandchildren. So long as non-transferability of ISOs is a requirement of the Code, no Option granted as an ISO may be assigned or transferred except by will, by the laws of descent and distribution, or pursuant to a qualified domestic relations order. I. RIGHTS AS A SHAREHOLDER An optionee shall have no rights as a shareholder with respect to shares covered by an Option until the date the shares are issued and only after such shares are fully paid. No adjustment will be made for dividends or other rights the record date for which is prior to the date of such issuance. J. NO RIGHTS AS AN EMPLOYEE Neither this Plan, the grant of any Option hereunder, nor the execution of any agreement with respect to such an Option, shall confer upon any optionee any right to remain in the employ of the Corporation or any Subsidiary or limit the right of the Corporation 6 or any Subsidiary to terminate the optionee's employment at any time for any reason. K. TAX WITHHOLDING The Committee shall have the right to require that a participant exercising an Option remit to the Corporation an amount sufficient to satisfy any federal, state, or local withholding tax requirements (or make other arrangements satisfactory to the Committee with regard to such taxes) prior to the delivery of any Stock pursuant to the exercise of the Option. If permitted by the Committee, either at the time of the grant of the Option or in connection with its exercise, a participant may elect, at such time and in such manner as the Committee may prescribe, to satisfy such withholding obligation by (i) delivering Stock having a fair market value equal to such withholding obligation, or (ii) requesting that the Corporation withhold from the shares of Stock to be delivered upon the exercise a number of shares of Stock having a fair market value equal to such withholding obligation. In the case of an ISO, the Committee may require as a condition of exercise that the participant exercising the Option agree to inform the Corporation promptly of any disposition (within the meaning of Code Section 424(c) and the regulations thereunder) of Stock received upon exercise. L. CHANGE IN CONTROL Notwithstanding Paragraph 5(E) or any other provision of this Plan, all outstanding Options shall become immediately and fully exercisable, whether or not otherwise exercisable by their terms, in the event of a "Change in Control". For purposes of this Paragraph 5(L), a "Change in Control" shall mean any of the following events: (i) the Corporation acquires actual knowledge that any Person other than the Corporation, a Subsidiary or any employee benefit plan(s) sponsored by the Corporation, has acquired the Beneficial Ownership, directly or indirectly, of securities of the Corporation entitling such Person to 25% or more of the Voting Power of the Corporation; (ii) a Tender Offer is made to acquire securities of the Corporation entitling the holders thereof to 50% or more of the Voting Power of the Corporation; (iii) Voting Shares are first purchased pursuant to any other Tender Offer; or (iv) at any time less than 60% of the members of the Board shall be individuals who were either (A) Directors on the effective date of this Plan or (B) individuals whose election, or nomination for election, was approved by a vote (including a vote approving a merger or other agreement providing for the membership of such individuals on the Board) of at least two-thirds of the Directors then still in office who were Directors on the effective date of this Plan or who were so approved. 7 For purposes of this Paragraph 5(L), the following terms shall have the following meanings: (1) "Affiliate", "Associate", and "Parent" shall have the respective meanings set forth in Rule 12b-2 under the 1934 Act as in effect on the effective date of this Plan. (2) The term "Person" shall be used as that term is used in Sections 13(d) and 14(d) of the 1934 Act. (3) "Beneficial Ownership" shall be determined as provided in Rule 13d-3 under the 1934 Act as in effect on the effective date of this Plan. (4) "Voting Shares" shall mean all securities of a company entitling the holders thereof to vote in an annual election of directors (without consideration of the rights of any class of stock other than common stock to elect directors by a separate class vote); and a specified percentage of "Voting Power" of a company shall mean such number of the Voting Shares as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors (without consideration of the rights of any class of stock other than common stock to elect directors by a separate class vote). (5) "Tender Offer" shall mean a tender offer or exchange offer to acquire securities of the Corporation (other than such an offer made by the Corporation or any Subsidiary), whether or not such offer is approved or opposed by the Board. (6) "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Corporation if each of the corporations other than the last corporation in the unbroken chain owns stock possessing at least fifty percent (50%) or more of the total combined Voting Power of all classes of stock in one of the other corporations in the chain. M. ADDITIONAL RESTRICTIONS AND CONDITIONS The Committee may impose such other restrictions and conditions (in addition to those required by the provisions of this Plan) on any Award of Options hereunder and may waive any such additional restrictions and conditions, so long as (i) any such additional restrictions and conditions are consistent with the terms of this Plan and (ii) such waiver does not waive any restriction or condition required by the provisions of this Plan. 6. TERMS AND CONDITIONS APPLICABLE TO RESTRICTED STOCK AWARDS Awards of Restricted Stock may be Performance-Based Restricted Stock, as described in Paragraph 6(K), or Restricted Stock without 8 performance-based restrictions. The provisions of Paragraphs 6(A) through 6(J) are applicable to all shares of Restricted Stock. A. NUMBER OF SHARES The total number of shares of Restricted Stock that may be awarded under this Plan on a cumulative basis shall not exceed one percent of the Stock outstanding at the date of any such Award. In any fiscal year of the Corporation, the aggregate number of shares of Stock as to which Restricted Stock Awards may be made to any one participant shall not exceed 5,000. Each Restricted Stock Award under this Plan shall be evidenced by a stock certificate of the Corporation, registered in the name of the participant, accompanied by an agreement in such form as the Committee shall prescribe from time to time. Restricted Stock Awards shall comply with the terms and conditions of this Plan and with such other terms and conditions not inconsistent with the terms and conditions of this Plan as the Committee, in its discretion, shall establish. B. RESTRICTED PERIOD; RESTRICTIONS The Committee shall provide that shares of Stock issued to a participant in connection with a Restricted Stock Award may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, for such period as the Committee shall determine, beginning on the date on which the Award is granted (the "Restricted Period"), and that the Restricted Period applicable to such Restricted Stock shall lapse (if at all) only at the end of the Restricted Period if all other terms and conditions of the Restricted Stock Award are then satisfied. Without limiting the generality of the foregoing, the other terms and conditions of the Restricted Stock Award may include the requirement that the participant be continuously employed by the Corporation or a Subsidiary during the Restricted Period. If all terms and conditions of the Restricted Stock Award are not satisfied at the end of the Restricted Period, the Restricted Stock shall be forfeited and transferred to, and reacquired by, the Corporation at no cost to the Corporation. C. STOCK LEGENDS; PROHIBITION ON DISPOSITION Certificates for shares of Restricted Stock shall bear an appropriate legend referring to the restrictions to which they are subject, and any attempt to dispose of any such shares of Stock in contravention of such restrictions shall be null and void and without effect. The certificates representing shares of Restricted Stock shall be held by the Corporation until the restrictions are satisfied. 9 D. TERMINATION OF SERVICE The Committee shall determine the extent to which the restrictions on any Restricted Stock Award shall lapse upon the termination of the participant's service to the Corporation and its Subsidiaries due to death, disability, retirement or for any other reason. If the restrictions on all or any portion of a Restricted Stock Award shall not lapse, the participant, or in the event of his death, his personal representative, shall forthwith deliver to the Secretary of the Corporation such instruments of transfer, if any, as may reasonably be required to transfer the shares back to the Corporation. E. CHANGE IN CONTROL Upon the occurrence of a Change in Control, as determined in Paragraph 5(L) of this Plan, all restrictions then outstanding with respect to shares of Restricted Stock shall automatically expire and be of no further force and effect, and all certificates representing such shares of Stock shall be delivered to the respective participants. F. ADJUSTMENT FOR CHANGES IN STOCK The Committee shall proportionately adjust the aggregate number of shares of Stock as to which Restricted Stock Awards may be granted to participants under this Plan and the aggregate number of shares of Stock as to which Restricted Stock Awards may be granted to any one such participant for any increase or decrease in the number of outstanding shares of Stock resulting from the subdivision or consolidation of shares or other capital adjustments, the payment of a Stock dividend, or any other increase or decrease in such shares effected without receipt of consideration by the Corporation; provided that any factional shares resulting from any such adjustment shall be eliminated. Any such determination by the Committee shall be conclusive. Shares of Stock issued with respect to any outstanding Awards as a result of any of the foregoing events shall be subject to the same restrictions. G. EFFECT OF ATTEMPTED TRANSFER No benefit payable or interest in any Restricted Stock Award shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge and any such attempted action shall be void, and no such interest in any Restricted Stock Award shall be in any manner liable for or subject to debts, contracts, liabilities, engagements or torts of any participant or his beneficiary. If any participant or beneficiary shall become bankrupt or shall attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any benefit payable under or interest in any Restricted Stock Award, then the 10 Committee, in its discretion, may hold or apply such benefit or interest or any part thereof to or for the benefit of such participant or his beneficiary, his spouse, children, blood relatives or other dependents, or any of them, in any such manner and such proportions as the Committee may consider proper. H. PAYMENT OF TAXES The Corporation shall have the right to deduct from any Restricted Stock Award or other payment hereunder any amount that federal, state, or local tax law requires to be withheld with respect to such Award or payment or to require that the participant, prior to or simultaneously with the Corporation incurring any obligation to withhold any such amount, pay such amount to the Corporation in cash or, at the option of the Corporation, shares of Stock (which shall be valued at their fair market value on the date of payment). There is no obligation under this Plan that any participant be advised of the existence of the tax or the amount required to be withheld. Without limiting the generality of the foregoing, in any case where it is determined that tax is required to be withheld in connection with the issuance, transfer or delivery of shares of Stock under this Plan, the Corporation may, pursuant to such rules as the Committee may establish, reduce the number of shares so issued, transferred or delivered by such number of shares as the Corporation may deem appropriate in its sole discretion to comply with such withholding. Notwithstanding any other provision of this Plan, the Committee may impose such conditions on the payment of any withholding obligations as may be required to satisfy applicable regulatory requirements. I. RIGHTS AS A SHAREHOLDER A participant shall have the right to receive dividends on shares of Stock subject to the Restricted Stock Award during the applicable Restricted Period, to vote the Stock subject to the Award and to enjoy all other shareholder rights, except that the participant shall not be entitled to delivery of the stock certificate until the applicable Restricted Period shall have lapsed (if at all). J. NO RIGHTS AS AN EMPLOYEE Neither this Plan, the award of any Restricted Stock hereunder, nor the execution of any agreement with respect to such Restricted Stock, shall confer upon any optionee any right to remain in the employ of the Corporation or any Subsidiary or limit the right of the Corporation or any Subsidiary to terminate the optionee's employment at any time for any reason. 11 K. PERFORMANCE-BASED RESTRICTED STOCK Awards of Performance-Based Restricted Stock are intended to qualify as "performance-based" for purposes of Code Section 162(m). The Committee shall provide that shares of Stock issued to a participant in connection with an Award of Performance-Based Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, during the Restricted Period, and that the Restricted Period applicable to such Restricted Stock shall lapse (if at all) only if certain pre-established objectives are attained. Performance goals may be based on any of the following criteria: (i) earnings or earnings per share, (ii) return on equity, (iii) return on assets, (iv) revenues, (v) expenses, (vi) one or more operating ratios, (vii) stock price, (viii) shareholder return, (ix) market share, (x) charge-offs, (xi) credit quality, (xii) reductions in non-performing assets, (xiii) customer satisfaction measures, and (xiv) the accomplishment of mergers, acquisitions, dispositions or similar extraordinary business transactions. The Committee shall establish one or more objective performance goals for each such Award of Performance-Based Restricted Stock on the date of grant. The performance goals selected in any case need not be applicable across the Corporation, but may be particular to an individual's function or business unit. The Committee shall determine whether such performance goals are attained and such determination shall be final and conclusive. If the performance goals are not met, the Performance-Based Restricted Stock shall be forfeited and transferred to, and reacquired by, the Corporation at no cost to the Corporation. The Committee may impose such other restrictions and conditions (in addition to the performance-based restrictions described above) on any Award of shares of Performance-Based Restricted Stock as the Committee deems appropriate and may waive any such additional restrictions and conditions, so long as such waiver does not waive any restriction described in the previous paragraph. Nothing herein shall limit the Committee's ability to reduce the amount payable under an Award upon the attainment of the performance goal(s), provided, however, that the Committee shall have no right under any circumstance to increase the amount payable under, or waive compliance with, any applicable performance goal(s). 7. AMENDMENT The Committee may at any time amend or suspend this Plan or alter and amend Awards granted hereunder; provided, however, that no such amendment may, without the consent of any participant to whom an Option shall theretofore have been granted or to whom a Restricted Stock Award shall theretofore have been issued, adversely affect the right of such participant under such Award; 12 and provided, further, that no amendment that requires shareholder approval in order for (i) this Plan to continue to be eligible to satisfy the requirements for exemption of the acquisition of securities under this Plan pursuant to Rule 16b-3 under Section 16 of the 1934 Act, or (ii) this Plan to continue to be eligible to comply with Code Section 162(m), or any amendment of or substitute for either of them, shall be effective unless the same shall be approved by the requisite vote of the shareholders of the Corporation. 8. TERMINATION The Board may terminate this Plan at any time, and no Awards shall be made thereafter. Unless previously terminated by the Board, this Plan shall terminate on, and no Awards shall be made after, December 17, 2006. 9. LEGALITY OF GRANT The granting of any Award under this Plan and the issuance or transfer of Options and shares of Stock pursuant hereto are subject to all applicable federal and state laws, rules and regulations and to such approvals by any regulatory or governmental agency (including, without limitation, no-action positions of the Securities and Exchange Commission) which may, in the opinion of counsel for the Corporation, be necessary or advisable in connection therewith. Without limiting the generality of the foregoing, no Awards may be granted under this Plan and no Options or shares shall be issued by the Corporation, nor cash payments made by the Corporation pursuant to or in connection with any such Award unless and until in any such case all legal requirements applicable to the issuance or payment have, in the opinion of counsel for the Corporation, been complied with. In connection with any Option or Stock issuance or transfer, the person acquiring the Option or the shares of Stock shall, if requested by the Corporation, give assurance satisfactory to counsel to the Corporation with respect to such matters as the Corporation may deem desirable to assure compliance with all applicable legal requirements. 10. CAPTIONS; PRONOUNS The captions contained in this Plan are for convenience of reference only, and shall not be considered part of this Plan in its interpretation and construction. The use of any masculine pronoun herein shall be construed to include the corresponding feminine pronoun, as the context requires. 13 11. EFFECTIVE DATE This Plan was adopted by the Board on December 18, 1996, subject, however, to approval of this Plan by the shareholders of the Corporation at its 1997 Annual Meeting. If so approved, this Plan shall be effective as of December 18, 1996. 14 EX-10.20 8 0008.txt AMENDED AND RESTATED BERNVILLE BANK, NATIONAL ASSOCIATION DIRECTOR DEFERRED FEE AGREEMENT THIS AMENDED AND RESTATED DIRECTOR DEFERRED FEE AGREEMENT is made this ____ day of _________________, 2000, by and between BERNVILLE BANK, NATIONAL ASSOCIATION, a national banking association located in Bernville, Pennsylvania, and ___________ __________ (the "Director"). INTRODUCTION To encourage the Director to remain a member of the Company's Board of Directors, the Company is willing to provide to the Director a deferred fee opportunity. The Company will pay the benefits from its general assets. AGREEMENT The Director and the Company agree as follows: Article 1 Definitions 1.1 Definitions. Whenever used in this Agreement, the following words and phrases shall have the meanings specified: 1.1.1 "Agreement" means the Original Agreement, as amended by this Amended and Restated Agreement. 1.1.2 "Board of Directors" shall include the Board of Directors and any advisory or regional Board of the Company or the Company's parent company. 1.1.3 "Change of Control" means the transfer of shares of the Company's voting common stock such that one person acquires (or is deemed to acquire under Section 318 of the Code) 51% or more of the Company's outstanding voting common stock followed within twelve (12) months by the termination of the Director's status as a member of the Company's Board of Directors; provided, however, that neither the merger of the Company's parent bank holding company, Community Independent Bank, Inc., with and into National Penn Bancshares, Inc. nor the merger of the Company with and into National Penn Bank shall constitute a "Change of Control" for purposes of this Agreement. 1.1.4 "Code" means the Internal Revenue Code of 1986 as amended. 1.1.5 "Company" means Bernville Bank, N.A. and, upon consummation of the merger of Bernville Bank, N.A with and into National Penn Bank pursuant to that certain Bank Plan of Merger, dated July 23, 2000 by and between National Penn Bank and Bernville Bank, N.A. (the "Plan of Merger"), National Penn Bank. 1.1.6 "Disability" means the Director's inability to perform substantially all normal duties of a director, as determined by the Company's Board of Directors in its sole discretion. As a condition to any benefits, the Company may require the Director to submit to such physical or mental evaluations and tests as the Board of Directors deems appropriate. 1.1.7 "Election Form" means the Form attached as Exhibit A. 1.1.8 "Fees" means the total directors fees payable to the Director. 1.1.9 "Normal Termination Age" means the Director's 65th birthday. 1.1.10 "Normal Termination Date" means the Normal Termination Age, the date of the Director's Termination of Service or the later of the foregoing, as directed on the Director's Election Form. 1.1.11 "Original Agreement" means the Director Deferred Fee Agreement between Bernville Bank, N.A. and the Director dated _____________. 1.1.12 "Termination of Service" means the Director's ceasing to be a member of the Company's Board of Directors for any reason whatsoever. 2 Article 2 Deferral Election 2.1 Initial Election. The Director shall make an initial deferral election under this Agreement by filing with the Company a signed Election Form within fifteen (15) days after the date of this Agreement. The Election Form shall set forth the amount of Fees to be deferred, the Normal Termination Date and the mode of distribution of the Deferral Account. 2.2 Election Changes 2.2.1 Generally. The Director may modify the amount of Fees to be deferred annually by filing a new Election Form with the Company and obtaining written approval by the Board of Directors of the Company. The modified deferral shall not be effective until the calendar year following the year in which the subsequent Election Form is received by the Company. The Director may not change the form of benefit payment initially elected under Section 2.1 without the written approval of the Board of Directors of the Company. 2.2.2 Hardship. If an unforeseeable financial emergency arising from the death of a family member, divorce, sickness, injury, catastrophe or similar event outside the control of the Director occurs, the Director, by written instructions to the Company may reduce future deferrals under this Agreement. Article 3 Deferral Account 3.1 Establishing and Crediting. The Company shall establish a Deferral Account on its books for the Director, and shall credit to the Deferral Account the following amounts: 3.1.1 Original Deferral Account. The Director's Deferral Account balance under the Original Agreement as of the date of this Agreement. 3.1.2 Deferrals. The Fees deferred by the Director as of the time the Fees would have otherwise been paid to the Director. 3 3.1.3 Interest. On each anniversary of the date of the Agreement and through the date of consummation of the Plan of Merger, interest on the account balance since the preceding credit under this Section 3.1.3, if any, equal to a 9% interest rate; thereafter, on the last day of each calendar quarter, interest on the account balance since the preceding credit under this Section 3.1.3 equal to the rate paid on the Deferred Cash Compensation Accounts under the 1997 National Penn Bancshares, Inc. Directors' Fee Plan, which is the rate paid on the Money Market Account (interest paid quarterly) offered by Investors Trust Company, Boyertown, Pennsylvania. 3.2 Statement of Accounts. The Company shall provide to the Director, within one hundred twenty (120) days of the end of each calendar year, a statement setting forth the Deferral Account balance. 3.3 Accounting Device Only. The Deferral Account is solely a device for measuring amounts to be paid under this Agreement. The Deferral Account is not a trust fund of any kind. The Director is a general unsecured creditor of the Company for the payment of benefits. The benefits represent the Company's mere promise to pay such benefits. The Director's rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Director's creditors. Article 4 Distribution of Benefits 4.1 Termination Benefit. Upon the Director's Normal Termination Date the Company shall pay to the Director the benefit described in this Section 4.1. 4.1.1 Amount of Benefit. The benefit under this Section 4.1 is the Deferral Account balance at the Director's Termination of Service. 4.1.2 Payment of Benefit. The Company shall pay the benefit to the Director, or the Director's beneficiary, as appropriate, in a lump sum, in 10 equal annual installments, or in 5 equal annual installments, as directed by the Director on the Election Form, commencing on the first day of the month following the Director's Termination of Service. The Company shall 4 amortize the Deferral Account balance using a reasonable discount rate as determined by the Company in its sole discretion. 4.2 Change in Control Benefit. Upon a Change of Control while the Director is in the active service of the Company, the Company shall pay to the Director the benefit described in this Section 4.2 in lieu of any other benefit under this Agreement. 4.2.1 Amount of Benefit. The benefit under this Section 4.2 is the Deferral Account balance at the date of the Director's Termination of Service. 4.2.2 Payment of Benefit. The Company shall pay the benefit to the Director in a lump sum within 60 days after Termination of Service. 4.3 Hardship Distribution. Upon the Company's determination (following petition by the Director) that the Director has suffered an unforeseeable financial emergency as described in Section 2.2.2, the Company shall distribute to the Director all or a portion of the Deferral Account balance as determined by the Company but in no event shall the distribution be greater than is necessary to relieve the financial hardship. Article 5 Beneficiaries 5.1 Beneficiary Designations. The Director shall designate a beneficiary by filing a written designation with the Company. The Director may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Director and accepted by the Company during the Director's lifetime. The Director's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Director, or if the Director names a spouse as beneficiary and the marriage is subsequently dissolved. If the Director dies without a valid beneficiary designation, all payments shall be made to the Director's estate. 5.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Company may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, 5 incompetent person or incapable person. The Company may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit. Article 6 General Limitations - Termination for Cause Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement that is attributable to the interest earned on such contributions if the Company terminates the Director's service as a director for: 6.1 Gross negligence or gross neglect of duties; 6.2 Commission of a felony or of a gross misdemeanor involving moral turpitude; or 6.3 Fraud, disloyalty, dishonesty or willful violation of any law or significant Company policy committed in connection with the Director's service and resulting in an adverse financial effect on the Company. Article 7 Claims and Review Procedures 7.1 Claims Procedure. The Company shall notify any person or entity that makes a claim under the Agreement (the "Claimant") in writing, within ninety (90) days of Claimant's written application for benefits, of Claimant's eligibility or ineligibility for benefits under the Agreement. If the Company determines that the Claimant is not eligible for benefits or full benefits, the notice shall set forth (1) the specific reasons for such denial, (2) a specific reference to the provisions of the Agreement on which the denial is based, (3) a description of any additional information or material necessary for the Claimant to perfect Claimant's claim, and a description of why it is needed, and (4) an explanation of the Agreement's claims review procedure and other appropriate information as to the steps to be taken if the Claimant wishes to have the claim reviewed. If the Company determines that there are special circumstances requiring additional time to make a decision, the Company shall notify the Claimant of the special 6 circumstances and the date by which a decision is expected to be made, and may extend the time for up to an additional ninety-day period. 7.2 Review Procedure. If the Claimant is determined by the Company not to be eligible for benefits, or if the Claimant believes that he is entitled to greater or different benefits, the Claimant shall have the opportunity to have such claim reviewed by the Company by filing a petition for review with the Company within sixty (60) days after receipt of the notice issued by the Company. Said petition shall state the specific reasons which entitle Claimant to benefits or to greater or different benefits. Within sixty (60) days after receipt by the Company of the petition, the Company shall afford the Claimant (and counsel, if any) an opportunity to present Claimant's position to the Company orally or in writing, and the Claimant (or counsel) shall have the right to review the pertinent documents. The Company shall notify the Claimant of its decision in writing within the sixty-day period, stating specifically the basis of its decision, written in a manner calculated to be understood by the Claimant and the specific provisions of the Agreement on which the decision is based. If, because of the need for a hearing, the sixty-day period is not sufficient, the decision may be deferred for up to another sixty-day period at the election of the Company, but notice of this deferral shall be given to the Claimant. Article 8 Amendments and Termination This Agreement may be amended or terminated by a written agreement signed by the Company and the Director. Article 9 Miscellaneous 9.1 Binding Effect. This Agreement shall bind the Director and the Company, and their beneficiaries, survivors, executors, administrators and transferees. 9.2 No Guarantee of Service. This Agreement is not a contract for services. It does not give the Director the right to remain a director of the Company, nor does it interfere with the shareholders' right to 7 replace the Director. It also does not require the Director to remain a director nor interfere with the Director's right to terminate services at any time. 9.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner. 9.4 Tax Withholding. The Company shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement. 9.5 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the Commonwealth of Pennsylvania, except to the extent preempted by the laws of the United States of America. 9.6 Unfunded Arrangement. The Director and beneficiary are general unsecured creditors of the Company for the payment of benefits under this Agreement. The benefits represent the mere promise by the Company to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. 9.7 Entire Agreement. This Agreement, together with the other documents referenced herein; (a) represents the entire agreement and understanding of the parties; (b) supersedes all prior written or oral representations by the Company concerning the subject matter hereto; and (c) may not be modified subsequently by oral statements of or courses of dealings between the parties. No rights are granted to the Director by virtue of this plan other than those specifically set forth herein. 9.8 Severability. Any provision contained in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be effective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or enforceability in any jurisdiction shall not invalidate or render unenforceable such provisions in any other jurisdiction. 9.9 Headnotes. The headnotes are for matters of reference only and shall not control or affect the interpretation or construction of this Agreement. 8 9.10. Jurisdiction. The parties agree that the Courts of the Commonwealth of Pennsylvania located in Berks County, Pennsylvania, or the United States District Court for the Eastern District of Pennsylvania, shall have jurisdiction of all matters arising out of this Agreement and that service of process in any such proceeding shall be effective if mailed to the parties at the addresses provided herein or as maintained on the books and records of the Company. The parties specifically waive any right they may have to assert the defense of forum non conveniens or to object to such jurisdiction and venue and hereby consent to the jurisdiction and venue of the Courts set forth herein. 9.11 Waiver of Trial by Jury. The parties hereby agree that any suit, action or proceeding, whether claim or counterclaim, brought or instituted by any party hereto or any successor or assign of any party on or with respect to this Agreement or any other document which in any way relates directly or indirectly to this Agreement, or to any transaction or occurrence arising out of or in any way connected with this Agreement, or the dealings of the parties with respect thereto, shall be tried only by a Court and not by a jury. The consent of the parties to this paragraph is based upon the parties agreement that the issues, transactions or occurrences arising under this Agreement are complicated in nature and not easily susceptible to trial by jury. 9.12 Litigation Costs and Expenses. In the event any participant shall seek to dispute the binding effect of this Agreement in any manner or institute any suite or proceeding, whether by litigation or otherwise with respect to this Agreement or any other document which in any way directly or indirectly relates to this Agreement or to any transaction or occurrence arising out of or in any way connected with this Agreement or the dealings of the parties with respect thereto, and such dispute shall not be upheld by a Court of competent jurisdiction, as provided herein, the participant shall be responsible to the Company for any and all costs and expenses incurred in connection with such dispute, including, without limitation, reasonable attorneys' fees. 9.13 Administration. The Company shall have powers which are necessary to administer this Agreement, including but not limited to: 9.13.1 Interpreting the provisions of the Agreement; 9 9.13.2 Establishing and revising the method of accounting for the Agreement; 9.13.3 Maintaining a record of benefit payments; and 9.13.4 Establishing rules and prescribing any forms necessary or desirable to administer the Agreement. 9.14 Restatement. This Agreement is an amendment and restatement of the Original Agreement, which is hereby superseded. IN WITNESS WHEREOF, the Director and a duly authorized Company officer have signed this Agreement. DIRECTOR: COMPANY: BERNVILLE BANK, NATIONAL ASSOCIATION ___________________________ By:__________________________ Title:_________________________ 10 EXHIBIT A BERNVILLE BANK, NATIONAL ASSOCIATION DIRECTOR DEFERRED FEE AGREEMENT Deferral Election 1. I elect to defer my fees received from the Company, as follows: ------------------------------------------------------------ Amount of Deferral ============================================================ [Initial and Complete one] ____ I elect to defer ____% of my fees ____ I elect to defer $____________ ____ I elect not to defer any of my fees ------------------------------------------------------------ 2. I elect my "Normal Termination Date" which shall trigger payment of my benefits under the Agreement as follows: ------------------------------------------------------------ Normal Termination Date ============================================================ [Initial and Complete one] ____ Termination of Service as Director ____ Age 65 ____ Later of the Above ------------------------------------------------------------ 3. I elect to receive my benefits under the Agreement as follows: ------------------------------------------------------------ Distribution Method ============================================================ [Initial and Complete one] ____ Lump Sum ____ Annual Installments Over Five Years ____ Annual Installments Over Ten Years ------------------------------------------------------------ 11 I understand that I may change the amount and duration of my deferrals by filing a new election form with the Company; provided, however, that any subsequent election will not be effective until the calendar year following the year in which the new election is received by the Company. Signature ____________________________ Date _______________________________ Accepted by the Company this _____ day of _____________, 200__. By ______________________ Title __________________ 12 Beneficiary Designation I hereby designate the following as beneficiary of benefits under the Director Deferred Fee Agreement payable following my death: Primary: ______________________________________________________________________ - ----------------------------------------------------------------------------- Contingent:____________________________________________________________________ - ----------------------------------------------------------------------------- Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of ----- the trust agreement I understand that I may change these beneficiary designations by filing a new written designation with the Company. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named by spouse as beneficiary, in the event of the dissolution of our marriage. Signature ________________________ Date ____________________________ Accepted by the Company this _____ day of _____________, 200__. By ______________________ Title __________________ 13 EX-10.21 9 0009.txt EXECUTIVE SUPPLEMENTAL BENEFIT AGREEMENT AGREEMENT made as of this 27th day of December, 1989, among NATIONAL PENN BANCSHARES, INC., a Pennsylvania business corporation having its principal place of business in Boyertown, Pennsylvania ("NPB"), NATIONAL BANK OF BOYERTOWN, a national banking association having its principal place of business in Boyertown, Pennsylvania (the "Bank"), and LAWRENCE T. JILK, JR., an individual residing in Boyertown, Pennsylvania (the "Executive"). W I T N E S S E T H: WHEREAS, the Executive has been employed since April 1977 and is presently employed in the capacities of President of NPB and Chairman and Chief Executive Officer of the Bank; and WHEREAS, the Executive has rendered many years of valuable service to NPB and the Bank and it is the desire of the Boards of Directors of NPB and the Bank that the Executive continue his employment in order that the experience he has gained and the management ability he has demonstrated will continue to be available to NPB and the Bank; and WHEREAS, to induce the Executive to remain employed, the Board of Directors of the Bank, by an Executive Supplemental Benefit Agreement dated October 19, 1984, provided the Executive with supplemental retirement benefits and salary continuation protection for the dependents of the Executive in the event of the Executive's death, which benefits and protection were guaranteed by NPB; and WHEREAS, the Boards of Directors of NPB and the Bank deem it advisable to amend and restate the 1984 Executive supplemental Benefit Agreement to provide the Executive with certain additional benefits in the event of certain changes in control of NPB or the Bank so that the Executive will continue to attend to the business of NPB and the Bank without distraction in the face of the potentially disturbing circumstances arising therefrom. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and promises set forth herein and intending to be legally bound hereby, NPB the Bank and the Executive agree as follows: 1 1. Definitions. The following terms have the meanings specified below: (a) "Affiliate" means any corporation which is included within a "controlled group of corporations" including NPB, as determined under Section 1563 of the Code. (b) "Average Monthly Salary Base" means the total of the Executive's monthly Salary for the sixty (60) months immediately prior to the month in which (i) he attains the age of sixty-five (65), (ii) he elects early retirement, (iii) he voluntarily terminates his Employment prior to attaining the age of sixty (60), or (iv) his employment is terminated by the Employer at any time prior to a Change in Control or Ownership other than for Cause, as the case may be, divided by the number sixty (60). (c) "Bank" means National Bank of Boyertown, a national banking association, or any successor thereto as set forth in Section 13 hereof. (d) "Bank Retirement Plan' means the defined benefit pension plan maintained now or in the future for the employees of the Bank or NPB. (e) "Cause" means as set forth in Section 5 hereof. (f) "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 Exchange Act, as enacted and in force on the date hereof) of "beneficial ownership" (within the meaning of Rule 13d-3 under the Exchange Act, as enacted and in force on the date hereof) 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 the 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 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; 2 (iv) a sale, exchange, transfer or other disposition of substantially all of the assets of the Bank 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 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. (g) "Code" means the Internal Revenue Code of 1986, as amended, and as the same may be amended from time to time. (h) Designated Beneficiary" means the person designated by the Executive as his beneficiary under the Bank Retirement Plan, or in the absence of such a designation, his heirs at law. (i) "Disability" means the Executive's incapacitation by accident, sickness or otherwise which renders the Executive mentally or physically incapable of performing the services required of the Executive for three hundred sixty (360) consecutive days. (j) "Employer" means the Bank, NPB or any Affiliate which employs the Executive at any particular time. (k) "Employment" means the Executive's employment by the Bank, NPB or any Affiliate at any particular time. (1) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "NPB" means National Penn Bancshares, Inc., the Pennsylvania corporation and bank holding company is the parent of the Bank, or any successor thereto as set forth in Section 13 hereof. (n) "Normal Retirement Date" means the first day of the first calendar month following the Executive's 65th birthday. 3 (o) "Salary" means the Executive's base salary established annually by the Board of Directors of the Employer, prior to any reduction of such salary pursuant to any contribution to a tax-qualified plan under Section 401(k) of the Code. (p) "Tax Change" means a change (i) in the ownership or effective control of NPB or (ii) in the ownership of a substantial portion of the assets of NPB, determined pursuant to regulations promulgated under Section 28OG of the Code. Such term also means any similar change with respect to the Bank or an Affiliate, to the extent provided in such regulations. 2. Supplemental Retirement Benefits. (a) Normal Retirement. If the Executive's Employment continues until he attains the age of sixty-five (65) and the Executive retires at age sixty-five (65), then the Employer of the Executive shall pay to the Executive monthly payments, each in an amount equal to sixty-five percent (65%) of the Average Monthly Salary Base, for a period of one hundred twenty (120) months, commencing on the Normal Retirement Date. If the Executive dies before he has received or commenced to receive all of such one hundred twenty (120) monthly payments, then the provisions of subsection 6(a) hereof shall apply, (b) Later Retirement. If the Executive's Employment continues until he attains the age of sixty-five (65) and, at the request of the Board of Directors of the Employer of the Executive, the Executive chooses to continue to perform services thereafter, for such compensation as may be mutually agreed upon at that time or from time to time, and if thereafter the Executive's Employment shall terminate for any reason, other than termination for Cause, then the Employer of the Executive shall pay to the Executive monthly payments, each in an amount equal to sixty-five percent (65%) of the Average Monthly Salary Base, for a period of one hundred twenty (120) months, commencing on the first day of the first calendar month following the Executive's termination of Employment. For purposes of this subsection 2(b) only, the "Average Monthly Salary Base" shall be the greater of (i) the total of the Executive's monthly Salary for the sixty (60) months prior to his attainment of age sixty-five (65) or (ii) the total of the Executive's monthly Salary for the sixty (60) months prior to his termination of Employment, divided by the number sixty (60). If the Executive dies before he has received or commenced to receive all of the payments to which he is entitled pursuant to this subsection 2(b), then the applicable provision of Section 6 hereof shall apply. 4 (c) Early Retirement. If the Executive's Employment continues and the Executive elects to retire early between the ages of sixty (60) and sixty-five (65), then the Employer of the Executive shall pay to the Executive monthly payments, each in an amount equal to sixty-five percent (65%) of the Average Monthly Salary Base, reduced by an amount equal to one-quarter percent (1/4%) thereof for each month by which the date that benefit payments are to commence under this subsection 2(c) precedes the Executive's Normal Retirement Date, for a period of one hundred twenty (120) months, commencing on the first day of the first calendar month following the Executive's early retirement. If the Executive dies before he has received or commenced to receive all of the payments to which he is entitled pursuant to this subsection 2(c), then the applicable provision of section 6 hereof shall apply. (d) Voluntary Termination. If the Executive's Employment continues and prior to the Executive's attaining the age of sixty (60), the Executive voluntarily terminates his Employment or, if at any time prior to a Change in Control or Ownership the Executive is discharged for a reason other than Cause, then the Employer of the Executive shall pay to the Executive monthly payments, each in an amount equal to the Average Monthly Salary Base multiplied by a fraction (the numerator of which is the number of full years of the Executive's Employment from April 1977 to the date of termination of Employment and the denominator of which is the number twenty-six (26)) and multiplied by sixty-five percent (65%), for a period of one hundred twenty (120) months, commencing on the first day of the calendar month selected by the Executive, provided that at such date he shall then be between the ages of fifty-five (55) and sixty-five (65). If the Executive dies before he has received or commenced to receive all of such one hundred twenty (120) monthly payments, then the applicable provision of Section 6 hereof shall apply. 3. Resignation of Executive. If a Change in Control or Ownership shall occur and if thereafter, at any time, there shall be: (i) any involuntary termination of the Executive's employment (other than for Cause or Disability); (ii) any reduction in the Executive's title, responsibilities, including reporting responsibilities, or authority, including such title, responsibilities or authority as such may be increased from time to time; 5 (iii) the assignment to the Executive of duties inconsistent with the Executive's office immediately prior to a Change in Control or Ownership or as the same may be increased from time to time after a Change in Control or Ownership; (iv) any reassignment of the Executive to a location farther than a thirty (30) minute commute by automobile from Boyertown, Pennsylvania; (v) any reduction in the Executive's annual base salary in effect immediately prior to a Change in Control or Ownership or as the same may be increased from time to time after a Change in Control or Ownership; (vi) any failure to continue the Executive's participation, on substantially similar terms, in any of the incentive compensation or bonus plans of NPB or an Affiliate in which the Executive participated at the time of the Change in Control or Ownership or any change or amendment to any of the substantive provisions of any of such plans which would materially decrease the potential benefits to the Executive under any of such plans; (vii) any failure to provide the Executive with benefits at least as favorable as those enjoyed by the Executive under any of the pension, life insurance, medical, health and accident, disability or other employee plans of NPB or an Affiliate in which the Executive participated immediately prior to a Change in Control or Ownership, or the taking of any action that would materially reduce any of such benefits in effect at the time of the Change in Control or Ownership, unless such reduction relates to a reduction in benefits applicable to all employees generally, (viii) any requirement that the Executive travel in performance of his duties on behalf of NPB or an Affiliate for a greater period of time during any year than was required of the Executive during the year preceding the year in which the Change in Control or ownership occurred; (ix) any failure of the Board of Directors of NPB or the Bank, respectively, to nominate the Executive for election as a member of the Board of Directors of NPB or the Bank, as the case may be, at the expiration of the Executive's then existing term; 6 (x) any sustained pattern of interruption or disruption of the Executive for matters substantially unrelated to the Executive's discharge of the Executive's duties on behalf of NPB or an Affiliate; or (xi) any breach of this Agreement of any nature whatsoever on the part of NPB or the Bank; then, at the option of the Executive, exercisable by the Executive within one hundred eighty (180) days of the occurrence of each and every of the forgoing events, the Executive may resign from employment (or, if involuntarily terminated, give notice of intention to collect benefits hereunder) by delivering a notice in writing (the "Notice of Termination) to NPB and the Bank and the provisions of Section 4 of this Agreement shall apply. 4. Continuing Compensation and Benefits. (a) (i) If, at the time of termination of the Executive's employment in accordance with Section 3 hereof, a Tax Change has also occurred, NPB shall make a lump-sum cash payment to the Executive no later than thirty (30) days following the date of such termination in an amount ("X") determined pursuant to the following formula: D X = (2.99A - B) x (1 + C) . For the purpose of the foregoing formula, A = the Executive's base amount (determined pursuant to Code Section 280G(b)(3)(A)) on the date of the Tax Change; B = the present value of all other amounts which qualify as parachute payments under Code Section 28OG(b)(2)(A) or (B) (without regard to the provisions of Code Section 28OG(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 Tax Change; and D = the number of whole semiannual periods plus any fraction of a semiannual period from the later of the date of the Tax Change or the Change in Control or Ownership to the date of termination of the Executive's employment. 7 Notwithstanding the foregoing or any other provision of this Agreement to the contrary, if the amount determined under "B" above equals or exceeds 2.99 times the amount determined under "A" above, no payment shall be made to the Executive under this Section 4. (ii) If. at the time of termination of the Executive's employment in accordance with Section 3 hereof, a Tax Change has not occurred, NPB shall make lump-sum cash payment to the Executive no later than thirty (30) days following the date of such termination in an amount equal to (A) 2.99 times the lesser of (I) the Executive's base amount determined pursuant to the principles set forth in the regulations promulgated under Code Section 28OG(b)(3)(A) and as though a Tax Change had occurred on the date of the Executive's termination of employment and (II) the Executive's base amount so determined but as though a Tax Change will occur in the calendar year following the date of the Executive's termination of employment, minus (B) any other amounts paid or payable within thirty (30) days following the Executive's termination of employment which would constitute (or be presumed to constitute) parachute payments under Code Section 28OG(b)(2)(A) or (B) (without regard to the provisions of Code Section 280G(b)(2)(A)(ii)) if a Tax Change had occurred on the date of such termination of employment. (b) The Executive shall not be required to mitigate the amount of any payment provided for in subsection 4(a) by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in subsection 4(a) be reduced by any compensation earned by the Executive as the result of employment by another employer or by reason of the Executive'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. (c) Upon written request of the Executive, the Employer's obligation to make the payment under this Section 4 shall be secured in total (i) by a stand-by letter of credit obtained by NPB from a recognized financial institution the long-term obligations of which are rated, on the date of such request, investment grade or better by Standard & Poor's Corporation or Moody's Investors Service, Inc. or (ii) by such other security as the Executive shall approve, obtained within ten (10) days of the Executive's written request following a change in Control or Ownership. (d) NPB shall pay all reasonable legal fees and related expenses (including the costs of experts, evidence and counsel and expenses included in connection with an 8 arbitration or in other litigation or appeal) incurred by the Executive as a result of (i) his delivery of a Notice of Termination or (ii) his seeking to obtain or enforce any right or benefit provided by this Agreement. 5. Termination for Cause. The Employer may terminate the Executive's Employment for "Cause." For purposes of this Agreement, "Cause" means the occurrence of either of the following: (a) the Executive's conviction of, or plea of guilty or nolo contendere to, a felony or a crime of falsehood or involving moral turpitude; or (b) the willful failure by the Executive to substantially perform his duties to the Employer, other than a failure resulting from the Executive's incapacity as a result of the Executive's Disability, which willful failure results in demonstrable material injury and damage to the Employer. Notwithstanding the foregoing, the Executive's Employment shall not be deemed to have been terminated for Cause if such termination took place as a result of: (i) questionable judgment on the part of the Executive; (ii) any act or omission believed by the Executive in good faith, to have been in or not opposed to the best interests of the Employer; or (iii) any act or omission in respect of which a determination could properly be made that the Executive met the applicable standard of conduct prescribed for indemnification or reimbursement or payment of expenses under the By-laws of NPB, or the laws of the Commonwealth of Pennsylvania, or the directors and officers' liability insurance of NPB or any Employer, in each case as in effect at the time of such act or omission. If the Executive's Employment is terminated for Cause, all rights of the Executive under this Agreement shall cease as of the effective date of such termination, except that the Executive (i) shall be entitled to receive accrued Salary through the date of such termination and (ii) shall be entitled to receive the payments and benefits to which he is then entitled under the employee benefit plans of the Employer or any Affiliate thereof as of the date of such termination. 9 6. Provisions for Protection of Designated Beneficiary. (a) Continuation of Payments. If the Executive shall become entitled to payments under the provisions of Sections 2 or 4 hereof and shall die before receiving all of the payments that he is entitled to receive, then the remaining payments shall be made to the Executive's Designated Beneficiary. (b) Special Payments. If the Executive shall die while employed by an Employer at a time when he was eligible to have previously retired pursuant to subsection 2(b) or 2(c) hereof or to have previously terminated his Employment voluntarily pursuant to subsection 2(d) hereof, then for purposes of this subsection 6(b), the date of the Executive's death shall be deemed to be the date of an election by the Executive to retire from, or voluntarily terminate his, Employment. In such event, the Employer shall pay to the Designated Beneficiary monthly payments as provided in subsection 2(b), 2(c) or 2(d), as the case may be. 7. Employee Benefits. The Executive will be entitled to participate in all employee benefit programs of the Employer and any Affiliate thereof including, without limitation, the pension and profit-sharing plans, medical insurance programs and group life insurance programs as may from time to time be in effect. The payments to be made under Sections 2 or 6 of this Agreement shall be reduced by any amount concurrently payable to the Executive or to the Designated Beneficiary pursuant to the Bank Retirement Plan. Any payments to be made under this Agreement shall not be deemed Salary or other compensation to the Executive for the purpose of computing benefits to which he may be entitled under any pension plan or other arrangement of the Employer or any Affiliate thereof for the benefit of their employees. 8. Arbitration. Any dispute or controversy arising out of or relating to this Agreement and any controversy as to a termination for Cause shall be settled exclusively by arbitration, conducted before a panel of three arbitrators, in Reading, Pennsylvania, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrators' award in any court having jurisdiction. 9. Exclusive Benefit. Neither the Executive nor his spouse nor any other Designated Beneficiary, shall have the right to commute, sell, assign, transfer or otherwise convey the right to receive any payments hereunder, which payment and the right thereto are expressly declared to be non-assignable and non-transferable. In the event of any attempted assignment or transfer, the Employer shall have no further liability hereunder. 10 The interest of any beneficiary in any benefits hereunder shall not be subject to attachment, execution or sequestration for any debts, contracts, obligations or liabilities of any beneficiary and shall not be subject to pledge, assignment, conveyance or attachment. 10. Unsecured General Creditor. If the Employer shall acquire an insurance policy or any other asset in connection with the liabilities assumed by it hereunder, it is expressly understood and agreed that neither the Executive nor his spouse nor any other Designated Beneficiary shall have any right with respect to, or claimed against, such policy or other asset, and that the Executive shall remain at all times an unsecured general creditor with respect to any amount payable hereunder. The provisions of this Section 10 shall not apply with respect to any security obtained by NPB under subsection 4(c) of this Agreement. 11. Notices. Any notice required or permitted to be given under this Agreement shall be properly given if in writing and if mailed by registered or certified mail, postage prepaid with return receipt requested, to the Executive's residence in the case of any notice to the Executive, or to the principal office of the Bank, in the case of any notice to the Employer. 12. Entire Agreement. This Agreement contains the entire agreement relating to the subject matter hereof and may not be modified, amended or changed orally but only by an agreement in writing, consented to in writing by NPB, and signed by the party against whom enforcement of any modification, amendment or change is sought. 13. Benefits. (a) This Agreement shall be binding upon and inure to the benefit of NPB, the Bank and their respective successors and assigns. Each of NPB and the 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 NPB or the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that NPB or the 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 3 of this Agreement shall apply. As used in this Agreement, "NPB" or "the Bank" shall mean NPB or the Bank as defined previously and any successor to the business and/or assets of NPB or the Bank as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (b) This agreement shall be binding upon and inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. 11 14. Applicable Law. This 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. 15. Headings. The headings of the sections and subsections hereof are for convenience only and shall not control or affect the meaning or construction or limit the scope or intent of any of the sections or subsections of this Agreement. 16. Termination of 1984 Agreement. This Agreement replaces and supersedes in its entirety the Executive Supplemental Benefit Agreement dated October 19, 1984 between the Executive and the Bank. IN WITNESS WHEREOF, NPB and the Bank have each caused this Agreement to be executed on its behalf by its duly authorized officers, and the Executive has hereunto set his hand and seal, as of the day and year first above written. NATIONAL PENN BANCSHARES, INC. (SEAL) By /s/ James K. Boyer ------------------------------- Attest: /s/ Sandra L. Spayd -------------------------- NATIONAL BANK OF BOYERTOWN (SEAL) By /s/ James K. Boyer ------------------------------- Attest: /s/ Sandra L. Spayd -------------------------- Witness: /s/ Sandra L. Spayd /s/ Lawrence T. Jilk, Jr. - ---------------------------------- ----------------------------------(SEAL) Lawrence T. Jilk, Jr. EX-10.22 10 0010.txt AMENDATORY AGREEMENT AMENDATORY AGREEMENT dated February 23, 1994, between NATIONAL PENN BANCSHARES, INC., a Pennsylvania business corporation ("NPB"), NATIONAL PENN BANK, formerly named National Bank of Boyertown, a national banking association ("Bank"), and LAWRENCE T. JILK, JR. ("Executive"). BACKGROUND 1. NPB, Bank and Executive entered into a certain Executive Supplemental Benefit Agreement dated as of December 27, 1989 (the "Agreement"). 2. NPB, Bank and Executive desire to amend the Agreement as hereinafter set forth. AGREEMENT NOW, THEREFORE, in consideration of the mutual promises contained herein, and each intending to be legally bound, NPB, Bank and Executive agree as follows: 1. Amendment. All references to "one hundred twenty (120) months" and to "one hundred twenty (120) monthly payments" contained in Section 2 of the Agreement are hereby changed to be references to "one hundred eighty (180) months" and "one hundred eighty (180) monthly payments", respectively. 2. Ratification. As amended hereby, the Agreement is hereby ratified, confirmed and approved. 3. Governing Law. This Amendatory Agreement shall be governed by and construed in accordance with the domestic internal law of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, the parties hereto have executed this Amendatory Agreement on the date first above written. NATIONAL PENN BANCSHARES, INC. By:/s/John A. Cenerazzo ----------------------------- Name: John A. Cenerazzo Title: Chairman, Compensation Committee NATIONAL PENN BANK By:/s/John A. Cenerazzo ----------------------------- Name: John A. Cenerazzo Title: Chairman, Compensation Committee /s/Lawrence T. Jilk, Jr. ---------------------------- Lawrence T. Jilk, Jr. Witness: /s/Sandra L. Spayd ---------------------- 2 EX-10.24 11 0011.txt EXECUTIVE SUPPLEMENTAL BENEFIT AGREEMENT AGREEMENT made as of this 27th day of December, 1989, among NATIONAL PENN BANCSHARES, INC., a Pennsylvania business corporation having its principal place of business in Boyertown, Pennsylvania ("NPB") NATIONAL BANK OF BOYERTOWN, a national banking association having its principal place of business in Boyertown, Pennsylvania (the "Bank"), and WAYNE R. WEIDNER, an individual residing in Boyertown, Pennsylvania (the "Executive"). W I T N E S S E T H : WHEREAS, the Executive has been employed since July 1962 and is presently employed in the capacities of Treasurer of NPB and President and Chief Operating Officer of the Bank; and WHEREAS, the Executive has rendered many years of valuable service to NPB and the Bank and it is the desire of the Boards of Directors of NPB and the Bank that the Executive continue his employment in order that the experience he has gained and the management ability he has demonstrated will continue to be available to NPB and the Bank; and WHEREAS, to induce the Executive to remain employed, the Board of Directors of the Bank, by an Executive Supplemental Benefit Agreement dated June 24, 1987, provided the Executive with supplemental retirement benefits and salary continuation protection for the dependents of the Executive in the event of the Executive's death, which benefits and protection were guaranteed by NPB; and WHEREAS, the Boards of Directors of NPB and the Bank deem it advisable to amend and restate the 1987 Executive Supplemental Benefit Agreement to provide the Executive with certain additional benefits in the event of certain changes in control of NPB or the Bank so that the Executive will continue to attend to the business of NPB and the Bank without distraction in the face of the potentially disturbing circumstances arising therefrom. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and promises set forth herein and intending to be legally bound hereby, NPB the Bank and the Executive agree as follows: 1. Definitions. The following terms have the meanings specified below: (a) "Affiliate" means any corporation which is included within a "controlled group of corporations" including NPB, as determined under Section 1563 of the Code. 1 (b) "Average Monthly Salary Base" means the total of the Executive's monthly Salary for the sixty (60) months immediately prior to the month in which (i) he attains the age of sixty-five (65), (ii) he elects early retirement, (iii) he voluntarily terminates his Employment prior to attaining the age of sixty (60), or (iv) his employment is terminated by the Employer at any time prior to a Change in Control or Ownership other than for Cause, as the case may be, divided by the number sixty (60). (c) "Bank" means National Bank of Boyertown, a national banking association, or any successor thereto as set forth in Section 13 hereof. (d) "Bank Retirement Plan" means the defined benefit pension plan maintained now or in the future for employees of the Bank or NPB. (e) "Cause" means as set forth in Section 5 hereof. (f) "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 Exchange Act, as enacted and in force on the date hereof) of "beneficial ownership" (within the meaning of Rule 13d-3 under the Exchange Act, as enacted and in force on the date hereof) 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 the 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 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 the Bank to another entity, except to an entity controlled, directly or indirectly, by NPB; 2 (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. (g) "Code" means the Internal Revenue Code of 1986, as amended, and as the same may be amended from time to time. (h) "Designated Beneficiary" means the person designated by the Executive as his beneficiary under the Bank Retirement Plan, or in the absence of such a designation, his heirs at law. (i) "Disability" means the Executive's incapacitation by accident, sickness or otherwise which renders the Executive mentally or physically incapable of performing the services required of the Executive for three hundred sixty (360) consecutive days. (j) "Employer" means the Bank, NPB or any Affiliate which employs the Executive at any particular time. (k) "Employment" means the Executive's employment by the Bank, NPB or any Affiliate at any particular time. (1) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "NPB" means National Penn Bancshares, Inc., the Pennsylvania corporation and bank holding company which is the parent of the Bank, or any successor thereto as set forth in Section 13 hereof. (n) "Normal Retirement Date" means the first day of the first calendar month following the Executive's 65th birthday. (o) "Salary" means the Executive's base salary established annually by the Board of Directors of the Employer, prior to any reduction of such salary pursuant to any contribution to a tax-qualified plan under Section 401(k) of the Code. (p) "Tax Change" means a change (i) in the ownership or effective control of NPB or (ii) in the ownership of a substantial portion of the assets of NPB, 3 determined pursuant to regulations promulgated under Section 28OG of the Code. Such term also means any similar change with respect to the Bank or an Affiliate, to the extent provided in such regulations. 2. Supplemental Retirement Benefits. (a) Normal Retirement. If the Executive's Employment continues until he attains the age of sixty-five (65) and the Executive retires at age sixty-five (65), then the Employer of the Executive shall pay to the Executive monthly payments, each in an amount equal to sixty-five percent (65%) of the Average Monthly Salary Base, for a period of one hundred twenty (120) months, commencing on the Normal Retirement Date. If the Executive dies before he has received or commenced to receive all of such one hundred twenty (120) monthly payments, then the provisions of subsection 6(a) hereof shall apply. (b) Later Retirement. If the Executive's Employment continues until he attains the age of sixty-five (65) and, at the request of the Board of Directors of the Employer of the Executive, the Executive chooses to continue to perform services thereafter, for such compensation as may be mutually agreed upon at that time or from time to time, and if thereafter the Executive's Employment shall terminate for any reason, other than termination for Cause, then the Employer of the Executive shall pay to the Executive monthly payments, each in an amount equal to sixty-five percent (65%) of the Average Monthly Salary Base, for a period of one hundred twenty (120) months, commencing on the first day of the first calendar month following the Executive's termination of Employment. For purposes of this subsection 2(b) only, the "Average Monthly Salary Base" shall be the greater of (i) the total of the Executive's monthly Salary for the sixty (60) months prior to his attainment of age sixty-five (65) or (ii) the total of the Executive's monthly Salary for the sixty (60) months prior to his termination of Employment, divided by the number sixty (60). If the Executive dies before he has received or commenced to receive all of the payments to which he is entitled pursuant to this subsection 2(b), then the applicable provision of Section 6 hereof shall apply. (c) Early Retirement. If the Executive's Employment continues and the Executive elects to retire early between the ages of sixty (60) and sixty-five (65), then the Employer of the Executive shall pay to the Executive monthly payments, each in an amount equal to sixty-five percent (65%) of the Average Monthly Salary Base, reduced by an amount equal to one-quarter percent (1/4%) thereof for each month by which the date that benefit payments are to commence under this subsection 2(c) precedes the Executive's Normal Retirement Date, for a period of one 4 hundred twenty (120) months, commencing on the first day of the first calendar month following the Executive's early retirement. If the Executive dies before he has received or commenced to receive all of the payments to which he is entitled pursuant to this subsection 2(c), then the applicable provision of Section 6 hereof shall apply. (d) Voluntary Termination. If the Executive's Employment continues and prior to the Executive's attaining the age of sixty (60), the Executive voluntarily terminates his Employment or, if at any time prior to a Change in Control or Ownership the Executive is discharged for a reason other than Cause, then the Employer of the Executive shall pay to the Executive monthly payments, each in an amount equal to the Average Monthly Salary Base multiplied by a fraction (the numerator of which is the number of full years of the Executive's Employment from July 1962 to the date of termination of Employment and the denominator of which is the number forty-three (43)) and multiplied by sixty-five percent (65%), for a period of one hundred twenty (120) months, commencing on the first day of the calendar month selected by the Executive, provided that at such date he shall then be between the ages of fifty-five (55) and sixty-five (65). If the Executive dies before he has received or commenced to receive all of such one hundred twenty (120) monthly payments, then the applicable provision of Section 6 hereof shall apply. 3. Resignation of Executive. If a change in control or ownership shall occur and if thereafter, at any time, there shall be: (i) any involuntary termination of the Executive's employment (other than for Cause or Disability); (ii) any reduction in the Executive's title, responsibilities, including reporting responsibilities, or authority, including such title, responsibilities or authority as such may be increased from time to time; (iii) the assignment to the Executive of duties inconsistent with the Executive's office immediately prior to a Change in Control or ownership or as the same may be increased from time to time after a Change in Control or Ownership; (iv) any reassignment of the Executive to a location farther than a thirty (30) minute commute by automobile from Boyertown, Pennsylvania; 5 (v) any reduction in the Executive's annual base salary in effect immediately prior to a Change in Control or Ownership or as the same may be increased from time to time after a Change in Control or Ownership; (vi) any failure to continue the Executive's participation, on substantially similar terms, in any of the incentive compensation or bonus plans of NPB or an Affiliate in which the Executive participated at the time of the Change in Control or Ownership or any change or amendment to any of the substantive provisions of any of such plans which would materially decrease the potential benefits to the Executive under any of such plans; (vii) any failure to provide the Executive with benefits at least as favorable as those enjoyed by the Executive under any of the pension, life insurance, medical, health and accident, disability or other employee plans of NPB or an Affiliate in which the Executive participated immediately prior to a Change in Control or Ownership, or the taking of any action that would materially reduce any of such benefits in effect at the time of the Change in Control or Ownership, unless such reduction relates to a reduction in benefits applicable to all employees generally; (viii) any requirement that the Executive travel in performance of his duties on behalf of NPB or an Affiliate for a greater period of time during any year than was required of the Executive during the year preceding the year in which the Change in Control or Ownership occurred; (ix) any failure of the Board of Directors of NPB or the Bank, respectively, to nominate the Executive for election as a member of the Board of Directors of NPB or the Bank, as the case may be, at the expiration of the Executive's then existing term; (x) any sustained pattern of interruption or disruption of the Executive for matters substantially unrelated to the Executive's discharge of the Executive's duties on behalf of NPB or an Affiliate; or (xi) any breach of this Agreement of any nature whatsoever on the part of NPB or the Bank; then, at the option of the Executive, exercisable by the Executive within one hundred eighty (180) days of the occurrence of each and every of the forgoing events, the Executive nay resign from employment (or, if involuntarily terminated, give notice of intention to collect benefits hereunder) by delivering 6 a notice in writing (the "Notice of Termination") to NPB and the Bank and the provisions of Section 4 of this Agreement shall apply 4. Continuing Compensation and Benefits. (a) (i) If, at the time of termination of the Executive's employment in accordance with Section 3 hereof, a Tax Change has also occurred, NPB shall make a lump-sum cash payment to the Executive no later than thirty (30) days following the date of such termination in an amount ("X") determined pursuant to the following formula: D X = (2.99A - B) x (i + C) . For the purpose of the foregoing formula, A = the Executive's base amount (determined pursuant to Code Section 280G(b)(3)(A)) on the date of the Tax Change; 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 28OG; 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 Tax Change, and D = the number of whole semiannual periods plus any fraction of a semiannual period from the later of the date of the Tax Change or the Change in Control or Ownership to the date of termination of the Executive's employment. Notwithstanding the foregoing or any other provision of this Agreement to the contrary, if the amount determined under "B" above equals or exceeds 2.99 times the amount determined under "A" above, no payment shall be made to the Executive under this Section 4. (ii) If, at the time of termination of the Executive's employment in accordance with Section 3 hereof, a Tax Change has not occurred, NPB shall make a lump-sum cash payment to the Executive no later than thirty (30) days following the date of such termination in an amount equal to (A) 2.99 times the lesser of (I) the Executive's base amount determined pursuant to the principles set forth in the regulations promulgated under Code Section 28OG(b)(3)(A) and as though a Tax 7 Change had occurred on the date of the Executive's termination of employment and (II) the Executive's base amount so determined but as though a Tax Change will occur in the calendar year following the date of the Executive's termination of employment, minus (B) any other amounts paid or payable within thirty (30) days following the Executive's termination of employment which would constitute (or be presumed to constitute) parachute payments under Code Section 280G(b) (2)(A) or (B) (without regard to the provisions of Code Section 280G(b)(2)(A)(ii)) if a Tax Change had occurred on the date of such termination of employment. (b) The Executive shall not be required to mitigate the amount of any payment provided for in subsection 4(a) by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in subsection 4(a) be reduced by any compensation earned by the Executive as the result of employment by another employer or by reason of the Executive'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. (c) Upon written request of the Executive, the Employer's obligation to make the payment under this Section 4 shall be secured in total (i) by a stand-by letter of credit obtained by NPB from a recognized financial institution the long-term obligations of which are rated, on the date of such request, investment grade or better by Standard & Poor's Corporation or Moody's Investors Service, Inc. or (ii) by such other security as the Executive shall approve, obtained within ten (10) days of the Executive's written request following a Change in Control or Ownership. (d) NPB shall pay all reasonable legal fees and related expenses (including the costs of experts, evidence and counsel and expenses included in connection with an arbitration or in other litigation or appeal) incurred by the Executive as a result of (i) his delivery of a Notice of Termination or (ii) his seeking to obtain or enforce any right or benefit provided by this Agreement. 5. Termination for Cause. The Employer may terminate the Executive's Employment for "Cause." For purposes of this Agreement, "Cause" means the occurrence of either of the following: (a) the Executive's conviction of, or plea of guilty or nolo contendere to, a felony or a crime of falsehood or involving moral turpitude; or 8 (b) the willful failure by the Executive to substantially perform his duties to the Employer, other than a failure resulting from the Executive's incapacity as a result of the Executive's Disability, which willful failure results in demonstrable material injury and damage to the Employer. Notwithstanding the foregoing, the Executive's Employment shall not be deemed to have been terminated for Cause if such termination took place as a result of: (i) questionable judgment on the part of the Executive; (ii) any act or omission believed by the Executive in good faith, to have been in or not opposed to the best interests of the Employer; or (iii) any act or omission in respect of which a determination could properly be made that the Executive met the applicable standard of conduct prescribed for indemnification or reimbursement or payment of expenses under the By-laws of NPB, or the laws of the Commonwealth of Pennsylvania, or the directors and officers' liability insurance of NPB or any Employer, in each case as in effect at the time of such act or omission. If the Executive's Employment is terminated for Cause, all rights of the Executive under this Agreement shall cease as of the effective date of such termination, except that the Executive (i) shall be entitled to receive accrued Salary through the date of such termination and (ii) shall be entitled to receive the payments and benefits to which he is then entitled under the employee benefit plans of the Employer or any Affiliate thereof as of the date of such termination. 6. Provisions for Protection of Designated Beneficiary. (a) Continuation of Payments. If the Executive shall become entitled to payments under the provisions of Sections 2 or 4 hereof and shall die before receiving all of the payments that he is entitled to receive, then the remaining payments shall be made to the Executive's Designated Beneficiary. (b) Special Payments. If the Executive shall die while employed by an Employer at a time when he was eligible to have previously retired pursuant to subsection 2(b) or 2(c) hereof or to have previously terminated his Employment voluntarily pursuant to subsection 2(d) hereof, then for purposes of this subsection 6(b), the date of the Executive's death shall be deemed to be the date of an election by the Executive to retire from, or voluntarily terminate his, Employment. In such event, the Employer 9 shall pay to the Designated Beneficiary monthly payments as provided in subsection 2(b), 2(c) or 2(d), as the case may be. 7. Employee Benefits. The Executive will be entitled to participate in all employee benefit programs of the Employer and any Affiliate thereof including, without limitation, the pension and profit-sharing plans, medical insurance programs and group life insurance programs as may from time to time be in effect. The payments to be made under Sections 2 or 6 of this Agreement shall be reduced by any amount concurrently payable to the Executive or to the Designated Beneficiary pursuant to the Bank Retirement Plan. Any payments to be made under this Agreement shall not be deemed Salary or other compensation to the Executive for the purpose of computing benefits to which he may be entitled under any pension plan or other arrangement of the Employer or any Affiliate thereof for the benefit of their employees. 8. Arbitration. Any dispute or controversy arising out of or relating to this Agreement and any controversy as to a termination for Cause shall be settled exclusively by arbitration, conducted before a panel of three arbitrators, in Reading, Pennsylvania, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrators' award in any court having jurisdiction. 9. Exclusive Benefit. Neither the Executive nor his spouse nor any other Designated Beneficiary, shall have the right to commute, sell, assign, transfer or otherwise convey the right to receive any payments hereunder, which payment and the right thereto are expressly declared to be non-assignable and nontransferable. In the event of any attempted assignment or transfer, the Employer shall have no further liability hereunder. The interest of any beneficiary in any benefits hereunder shall not be subject to attachment, execution or sequestration for any debts, contracts, obligations or liabilities of any beneficiary and shall not be subject to pledge, assignment, conveyance or attachment. 10. Unsecured General Creditor. If the Employer shall acquire an insurance policy or any other asset in connection with the liabilities assumed by it hereunder, it is expressly understood and agreed that neither the Executive nor his spouse nor any other Designated Beneficiary shall have any right with respect to, or claimed against, such policy or other asset, and that the Executive shall remain at all times an unsecured general creditor with respect to any amount payable hereunder. The Provisions of this section 10 shall not apply with respect to any security obtained by NPB under subsection 4(c) of this Agreement. 10 11. Notices. Any notice required or permitted to be given under this Agreement shall be properly given if in writing and if mailed by registered or certified mail, postage prepaid with return receipt requested, to the Executive's residence in the case of any notice to the Executive, or to the principal office of the Bank, in the case of any notice to the Employer. 12. Entire Agreement. This Agreement contains the entire agreement relating to the subject matter hereof and may not be modified, amended or changed orally but only by an agreement in writing, consented to in writing by NPB, and signed by the party against whom enforcement of any modification, amendment or change is sought. 13. Benefits. (a) This Agreement shall be binding upon and inure to the benefit of NPB, the Bank and their respective successors and assigns. Each of NPB and the 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 NPB or the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that NPB or the 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 3 of this Agreement shall apply. As used in this Agreement, "NPB" or "the Bank" shall mean NPB or the Bank as defined previously and any successor to the business and/or assets of NPB or the Bank as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (b) This agreement shall be binding upon and inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. 14. Applicable Law. This 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. 15. Headings. The headings of the sections and subsections hereof are for convenience only and shall not control or affect the meaning or construction or limit the scope or intent of any of the sections or subsections of this Agreement. 16. Termination of 1987 Agreement. This Agreement replaces and supersedes in its entirety the Executive 11 Supplemental Benefit Agreement dated June 24, 1987 between the Executive and the Bank. IN WITNESS WHEREOF, NPB and the Bank have each caused this Agreement to be executed on its behalf by its duly authorized officers, and the Executive has hereunto set his hand and seal, as of the day and year first above written. NATIONAL PENN BANCSHARES, INC. (SEAL) By /s/ James K. Boyer ----------------------------- Attest: /s/ Sandra L. Spayd ------------------------ NATIONAL BANK OF BOYERTOWN (SEAL) By /s/ James K. Boyer ----------------------------- Attest: /s/ Sandra L. Spayd ------------------------ Witness: /s/ Sandra L. Spayd /s/ Wayne R. Weidner - --------------------------- --------------------------------- (SEAL) Wayne R. Weidner 12 EX-10.25 12 0012.txt AMENDATORY AGREEMENT AMENDATORY AGREEMENT dated February 23, 1994, between NATIONAL PENN BANCSHARES, INC., a Pennsylvania business corporation ("NPB"), NATIONAL PENN BANK, formerly named National Bank of Boyertown, a national banking association ("Bank"), and WAYNE R. WEIDNER ("Executive"). BACKGROUND 1. NPB, Bank and Executive entered into a certain Executive Supplemental Benefit Agreement dated as of December 27, 1989 (the "Agreement"). 2. NPB, Bank and Executive desire to amend the Agreement as hereinafter set forth. AGREEMENT NOW, THEREFORE, in consideration of the mutual promises contained herein, and each intending to be legally bound, NPB, Bank and Executive agree as follows: 1. Amendment. All references to "one hundred twenty (120) months" and to "one hundred twenty (120) monthly payments" contained in Section 2 of the Agreement are hereby changed to be references to "one hundred eighty (180) months" and "one hundred eighty (180) monthly payments", respectively. 2. Ratification. As amended hereby, the Agreement is hereby ratified, confirmed and approved. 3. Governing Law. This Amendatory Agreement shall be governed by and construed in accordance with the domestic internal law of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, the parties hereto have executed this Amendatory Agreement on the date first above written. NATIONAL PENN BANCSHARES, INC. By:/s/John A. Cenerazzo ----------------------------- Name: John A. Cenerazzo Title: Chairman, Compensation Committee NATIONAL PENN BANK By:/s/John A. Cenerazzo ----------------------------- Name: John A. Cenerazzo Title: Chairman, Compensation Committee /s/Lawrence T. Jilk, Jr. ---------------------------- Lawrence T. Jilk, Jr. Witness: /s/Sandra L. Spayd ---------------------- EX-10.37 13 0013.txt STOCK PURCHASE AGREEMENT AGREEMENT made this 20th day of April, 1989, by and between PENNSYLVANIA STATE BANK ("Bank") and NATIONAL PENN BANCSHARES, INC. ("National Penn"). BACKGROUND A. Bank is a Pennsylvania banking institution being organized to conduct business as a commercial bank under the laws of the Commonwealth of Pennsylvania. B. National Penn is a bank holding company organized under the laws of the Commonwealth of Pennsylvania. C. The Pennsylvania Department of Banking has approved an Application for Permission to Establish a State-Chartered Banking Institution filed by Bank. D. Bank will solicit offers from subscribers for a minimum of 430,000 and a maximum of 750,000 shares of common stock, par value $5 per share, of Bank, at an offering price of $10 per share, or $4,300,000 or $7,500,000 in the aggregate (the "Initial Offering"). E. Subject to the conditions set forth in Section 20 hereof (collectively, the "Conditions"), National Penn will subscribe for a minimum of 81,700 and a maximum of 142,500 shares of common stock of Bank, which amounts constitute 19% of the minimum and maximum number of shares of common stock of Bank being offered by Bank, respectively, in the Initial Offering. By execution of this Agreement and by acceptance of such subscription, Bank agrees (1) to issue, concurrently with the issuance of shares of Bank's common stock to National Penn, stock purchase warrants to National Penn and/or such other parties as may be designated by National Penn with the prior written approval of Bank (which approval shall not be unreasonably withheld), which, in the aggregate, are exercisable for an initial number of shares of Bank's common stock equal sum of (a) 5% of the total number of shares of Bank's common stock issued by Bank in the Initial Offering up to and including 500,000 shares and (b) 12 1/2 % of the number of shares of Bank's common stock issued by the Bank in the Initial Offering in excess of 500,000 shares, all such warrants to be issued on the same terms and conditions, including price, as all other stock purchase warrants being issued by Bank to persons who are organizers or directors of Bank, including without limitation a term of seven years and an exercise price of $10 per share, and (2) that the total amount of stock purchase warrants, options or the like issued or to be issued by Bank, including the warrants issuable to National Penn or its designees pursuant to preceding clause (1), shall not exceed 15% of the total number of shares of Bank's common stock issued in the Initial Offering, as set forth on Exhibit "A" attached hereto and made a part hereof, except as expressly permitted in this Agreement. F. National Penn will deposit $200,000 with the escrow agent for Bank's offering, Hamilton Bank (the "Escrow Agent"), to be applied, subject to the terms of this Agreement, to National Penn's obligation for the aggregate purchase price for the shares of Bank's stock to be purchased by National Penn pursuant to its subscription on and this Agreement. Such deposit will be made by wire transfer on the business day immediately succeeding the date on which this Agreement is executed. The remaining balance of the aggregate purchase price payable by National Penn shall be deposited with the Escrow Agent upon satisfaction of the 2 Conditions. If all of the Conditions are not satisfied on or before July 31, 1989, Bank and the Escrow Agent shall return the $200,000, together with interest thereon, to National Penn, and this Agreement shall be automatically terminated and be of no further force and effect unless on or before July 31, 1989, National Penn shall have given Bank written notice of the extension of this Agreement to a date not later than October 31, 1989, in which case Bank and the Escrow Agent shall return the $200,000, together with interest thereon, to National Penn and this Agreement shall be automatically terminated and be of no further force and effect if the Conditions are not satisfied on or before October 31, 1989. G. On the date of the conclusion by Bank of the Initial Offering, or upon the satisfaction of the Conditions set forth in Paragraph 20, whichever later occurs, Bank will issue to National Penn, in accordance with Paragraphs E and F above (1) the number of shares of Bank's common stock as shall equal not less than 19% of the aggregate number of shares of common stock issued by Bank in the Initial Offering and (2) stock purchase warrants in the amount and on the terms and conditions provided in Paragraph E above. AGREEMENT NOW, THEREFORE, in consideration of the mutual agreements and covenants contained herein, the parties hereto, intending to be legally bound, agree as follows: 1. Incorporation of Background. The "Background" section of this Agreement is hereby incorporated by reference into this Agreement and the parties hereto expressly agree to perform their respective executory obligations therein set forth. 3 2. Grant of Purchase Rights. In the event Bank, at anytime, issues any shares of its common stock, including without any shares which may be issued as a result of the exercise of warrants, implementation of any stock option program or any Bank qualified employee stock ownership plan or trust or for sale to and purchase by any Bank profit-sharing plan and trust or Bank qualified employee pension plan (any such issuance being herein referred to as a "Sale Event"), then National Penn shall have the purchase, on the terms and conditions herein set forth, such number (or any lesser number) of shares of Bank's common stock as, when added to the number of shares of Bank's common stock issued in the Sale Event, constitutes 20% of the total, such percentage to be calculated as set forth in Paragraph 15 below. Nothing contained in this Paragraph 2 or elsewhere herein shall be construed to limit in any manner the right of National Penn to purchase shares of common stock of Bank in the open market from time to time in any amount. 3. Reservation of Shares. Bank shall, at all times, have authorized shares of common stock that are not outstanding duly reserved for issuance or sale to National Penn upon exercise of National Penn's purchase nights provided in Paragraph 2 hereof. Bank shall reserve shares of its common stock for issuance or sale to National Penn hereunder, prior to or simultaneously with any occurrence of a Sale Event or any issuance of options, warrants or rights whose implementation will result in a Sale Event, in such number as shall be necessary for issuance to National Penn pursuant to Paragraph 2 above. Bank's obligations under this Paragraph 3 shall lapse if, and only to the degree that, any such option, warrant or right expires or is terminated without exercise, or upon the termination of this Agreement 4. Purchase Price--Exercise of Warrants. If the Sale Event shall be the issuance of shares of common stock of Bank, upon the 4 exercise of stock purchase warrants or options granted to persons who are organizers or directors of Bank, then the purchase price for each share of common stock of Bank issuable to National Penn pursuant to Paragraph 2 of this Agreement shall be a price per share equal to the fair market value of Bank's common stock at the date of exercise of such warrants or options, determined by a quotation obtained from a member of the National Association of Securities Dealers, Inc. approved in advance by National Penn (the "Warrant Purchase Price"). 5. Purchase Price--Secondary Offering. If the Sale Event shall be the issuance of shares of common stock of Bank pursuant to a public or limited private offering or otherwise under circumstances not governed by Paragraph 4 hereof, then the purchase price for each share of common stock of Bank issuable to National Penn under the provisions of Paragraph 2 of this Agreement shall be the same price per share as is paid by the purchasers in such public or limited private offering or other sale (the "Sale Purchase Price"). 6. Notices to National Penn. (a) If Bank takes any action that could result in National Penn having a right to purchase any shares of common stock of Bank hereunder, Bank shall concurrently give written notice to National Penn of such action and of the reservation of shares for issuance or sale to National Penn hereunder. (b) If Bank issues any shares of common stock of Bank, Bank shall concurrently give written notice to National Penn of such issuance. 5 7. Exercise of Purchase Rights. (a) National Penn may elect to exercise its right to purchase shares of common stock of Bank hereunder by giving written notice of such election, specifying therein the number of shares to be purchased, to Bank at its principal place of business, within fourteen days after National Penn's receipt of a written notice from Bank under Paragraph 6(b) hereof. (b) Upon determination of the Warrant Purchase Price, pursuant to Paragraph 4 hereof, or of the Sale Purchase Price, pursuant to Paragraph 5 hereof (whichever price shall be applicable referred to herein as the "Price"), National Penn shall pay to Bank the aggregate amount of the Price for all shares then being purchased within ten days of such determination. (c) If the Price shall be determined in any instance to be less than the then par value per share of Bank's common stock, then, notwithstanding such determination, National Penn shall pay an amount per share equal to the then par value of the purchased stock. (d) Upon receipt of the aggregate amount of the Price for the number of shares of common stock to be purchased, Bank shall immediately issue to National Penn such shares by delivery to National Penn of a stock certificate registered in the name of National Penn or its nominee representing the shares so purchased. 8. Assignment by National Penn. This Agreement may be assigned by National Penn without consent of Bank (i) to any wholly-owned subsidiary of National Penn, in which case National 6 Penn shall be responsible for such assignee's performance of its obligations hereunder, (ii) to any party or entity which shall purchase from National Penn shares of common stock of Bank in an aggregate amount equal to at least 19% of the then issued and outstanding shares of common stock of Bank, or (iii) to any successor by merger or consolidation to the business of National Penn; provided, however, that prior to any such assignment under subparagraph 8(ii) hereof, Bank shall have the right to purchase such shares at the same price as is agreed to between National Penn and such party or entity within sixty days of written notice of the intent of National Penn to sell or assign such shares or within ten days of receipt of regulatory approval by Bank to purchase such shares, whichever is later. Otherwise, National Penn shall not assign any of its rights hereunder without first obtaining Bank's prior written consent. Written notice of any such assignment shall be given to Bank. All references to "National Penn" in this Agreement shall include any assignee permitted in this Paragraph 8 and any permitted assignee of such assignee; any permitted assignee shall be entitled to all of the rights and subject to all of the duties of National Penn set forth in this Agreement. 9. Additional Classes of Voting Capital Stock. Bank agrees that in the event it amends its Articles of Incorporation to authorize any additional classes of capital stock (including the establishment of the rights of any series or class of preferred stock) possessing the right to vote on matters submitted to a vote of shareholders, whether as a separate class or together with the common stock of Bank, National Penn shall have the right to purchase such number of shares of such stock as are necessary to preserve National Penn's right to maintain its percentage ownership of the outstanding voting capital stock of Bank. The purchase price for each share of such stock to be sold to National Penn under the provisions of this paragraph 9 shall be the same 7 price per share as is paid by the purchasers in any public or limited private offering or other sale of such stock. 10. Formation of Bank Holding Company. If Bank shall at any time propose to merge with an interim bank organized under state law or an interim national banking association or to take any other action in order to form a bank holding company, then Bank shall cause the plan of merger or other applicable plan to require such bank holding company to provide National Penn with rights to purchase shares of capital stock of such bank holding company that are substantially identical to those provided by Bank to National Penn in this Agreement. 11. Future Warrants. Bank will not issue stock purchase warrants, options or the like for shares of Bank's common stock except as expressly permitted in this Agreement, including without limitation Paragraph E of the "Background" Section of this Agreement. If Bank conducts an offering (other than the Initial Offering) of shares of Bank's common stock that is managed and sold exclusively through the efforts of the officers and directors of Bank and without the involvement in any manner of an underwriter or broker, Bank may issue stock purchase warrants with respect to shares of its common stock to such officers and directors, in an aggregate amount not exceeding 10% of the number of shares sold in such offering. Bank may also from time to time issue additional warrants, options or the like with respect to Bank's common stock to officers or employees of Bank in a reasonable amount, but only with the prior approval of National Penn, which approval will not be unreasonably withheld. Any warrants issued by Bank pursuant to the preceding two sentences shall have a term not in excess of seven years, an exercise price per share of not less than the fair market value of Bank's common stock at the time of issuance, and such other terms and conditions as shall be contained in the stock purchase warrants issuable by 8 Bank in connection with the Initial Offering. The provisions of this Paragraph 11 shall expire automatically and this Paragraph 11 shall be of no further force and effect on the tenth anniversary of the date of this Agreement. 12. Governing Law. This Agreement shall be construed in accordance with the internal domestic laws (but not the conflict of laws provisions) of the Commonwealth of Pennsylvania. 13. Binding Agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto, their successors and permitted assigns. 14. Issuance and Exercise Period Limitations. Bank shall use its best efforts to avoid issuing any shares of its common stock between the twentieth day and the last day of March, June, September or December of any year, or issuing any options, warrants or rights whose implementation will result in a Sale Event, which options, warrants or rights are exercisable between the twentieth day and the last day of March, June, September or December of any year. 15. Percentage Ownership Calculations. All calculations of the percentage of ownership of shares of common stock of Bank to be made pursuant to the terms of this Agreement, including without limitation those to be made pursuant to Paragraph 2 of this Agreement, shall be made (a) on the basis of the number of shares of common stock of Bank then issued and outstanding and (b) excluding therefrom any shares of common stock of Bank issuable upon the conversion of any convertible securities or upon the exercise of any options, warrants or other rights or common stock equivalents then outstanding, and specifically excluding therefrom any such securities then held by National Penn such as 9 the stock purchase warrants referred to in Paragraph E in the Background to this Agreement. 16. Time of the Essence. Time shall be of the essence in the performance of this Agreement, and the failure of National Penn to give notice or make payment within the time periods herein prescribed shall cause any option or right arising hereunder to lapse and be void in that instance. 17. Notices. All notices arising hereunder shall be sent by certified mail, return receipt requested, to the principal office of the party intended to receive such notice, and shall be deemed received on the second business day following such deposit in the mail. 18. Captions. The captions included herein are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. 19. Amendment of Agreement. This Agreement may be amended in writing signed by both parties, by their respective duly authorized officers. 20. Conditions Precedent. The obligation of National Penn to consummate the purchase of shares of Bank's common stock provided for in this Agreement is subject to the satisfaction (or waiver by National Penn, except for paragraphs (a) and (b) below) of the following conditions: (a) The Board of Governors of the Federal Reserve System or the Federal Reserve Bank of Philadelphia, acting under delegated authority, shall have approved National Penn's purchase of up to 24.9% of the shares of common stock of Bank issued and outstanding, and such approval shall not contain a determination 10 that National Penn will be in "control" of Bank or that Bank will be a "subsidiary" of National Penn, as such terms are defined in the Federal Reserve's Regulation Y at 12 C.F.R. ss.225, or any condition or requirement deemed burdensome or otherwise objectionable by National Penn. (b) The Department of Banking of the Commonwealth of Pennsylvania shall have approved National Penn's purchase of up to 24.9% of the shares of common stock of Bank issued and outstanding. (c) National Penn shall have received a list of all subscribers, as of the date of this Agreement, for the Bank's common stock in the Initial Offering, and National Penn shall have approved all stock subscription agreements received by Bank, after the date of this Agreement, in the Initial Offering, subject to Bank curing or removing any alleged defect, to the satisfaction of National Penn, in one or more of the subscription agreements received after the date of this Agreement or Bank rejecting in total any subscription agreement; National Penn agrees that its approval of such stock subscription agreements shall not be unreasonably withheld. (d) No changes in the material terms and conditions of Bank's solicitation of offers to purchase shares of common stock of Bank shall have occurred from the terms and conditions disclosed and set forth in the Offering Circular and the three Supplements thereto, all of which are attached hereto and made a part hereof as Exhibit "B," and Bank shall have solicited offers to purchase no more than 750,000 shares of common stock of Bank in the aggregate. (e) On the closing date of the Initial Offering, Bank shall have received a cross-receipt from Legg Mason Wood Walker 11 Incorporated ("Legg Mason") acknowledging receipt from Bank of payment in full of all amounts due Legg Mason pursuant to the provisions of Section 4(c) of the Agency Agreement, dated as of October 3, 1988, as amended on February 18, 1989, between Legg Mason and the Bank; Legg Mason shall not have received or become legally entitled to any selling or other commission on account of any subscription to or purchase of Bank's common stock by National Penn or by any other party whose executed stock subscription agreement, pursuant to the Initial Offering, has been delivered to Bank by National Penn; and Legg Mason shall have received no stock purchase warrants, options or rights issued by Bank, or become legally entitled to the same. (f) Bank shall have received an opinion of its counsel that, to the best of such counsel's knowledge, after due inquiry (which due inquiry shall include inquiries of all persons who are directors of Bank or shareholders who own 5% or more of Bank's common stock outstanding upon conclusion of the Initial Offering, excluding shares subscribed for by National Penn for this purpose), no suits, actions or other legal proceedings are pending or threatened against Bank, including without limitation any relating to the issuance of warrants by Bank, in connection with the Initial Offering, as set forth herein. (g) Bank shall have certified in writing to National Penn that (1) at least $4,000,000 has been paid to the Escrow Agent by subscribers to Bank's common stock in the Initial Offering, (2) organizational and pre-opening expenses (exclusive of Legg Mason's selling commissions, non-accountable expense allowance and financial advisory fee, and general overhead expenses) set forth on Exhibit "C" do not exceed $275,000 and (3) there is no additional expense to be incurred after the date hereof in connection with the proposed relocation of the Bank's 12 permanent facilities from Lemoyne, Pennsylvania to Camp Hill, Pennsylvania. (h) Directors of Bank shall have purchased not less than 150,000 shares of Bank's common stock at an aggregate purchase price of not less than $1,500,000. 21. Open Market Purchase Limitation. Notwithstanding any other provision hereof, National Penn shall not purchase any shares of common stock of Bank in the open market if the effect of such purchase would be to cause National Penn to own more than 24.9% of the shares of common stock of Bank then issued and outstanding, without the prior written approval of Bank and of the Board of Governors of the Federal Reserve System. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have caused this Agreement to be duly executed in their respective names by their authorized representatives the day and year first above written. PENNSYLVANIA STATE BANK BY /s/ William V. Freeman ------------------------------ (SEAL) President Attest /s/ William E. Miller, Jr. -------------------------- Secretary NATIONAL PENN BANCHARES, INC. By /s/ James K. Boyer ----------------------------- Chairman (SEAL) Attest: /s/ Sandra L. Spayd ------------------------- Secretary 13 EXHIBIT A 1 2 3 4 SHARES TOTAL WARRANTS NPIC DIRECTORS - ------ -------------- ---- --------- (15% of 1) (5% + 7 1/2% greater than 500,000) (2 - 3) 430,000 64,500 21,500 + 0 = 21,500 43,000 500,000 75,000 25,000 + 0 = 25,000 50,000 600,000 90,000 30,000 + 7,500 = 37,500 52,500 650,000 97,500 32,500 + 11,250 = 43,750 53,750 700,000 105,000 35,000 + 15,000 = 50,000 55,000 750,000 1l2,5OO 37,500 + 18,750 = 56,250 56,250 EX-21 14 0014.txt 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 National Penn Consulting Services, Inc. Pennsylvania 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 Panasia Bank, N.A. United States of America Panasia Investment Company New Jersey EX-23 15 0015.txt Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 17, 2001 accompanying the consolidated financial statements included in the 2000 Annual Report of National Penn Bancshares, Inc. and Subsidiaries on Form10-K for the year ended December 31, 2000. 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, as amended on September 22, 1999; File No. 33-86094, effective November 7, 1994) and on Form S-8 (File No. 333-54520 and File No. 333-54556, effective on January 29, 2001; 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). /s/ GRANT THORNTON LLP Philadelphia, Pennsylvania March 28, 2001 EX-99 16 0016.txt From time to time, National Penn or its representatives make written or oral statements that may include "forward-looking statements" with respect to its: * Financial condition. * Results of operations. * Asset quality. * Capital expenditures, including investments in technology. * Pending or completed mergers with or acquisitions of financial or non-financial companies or their assets, loans, deposits and branches, including the January 2001 merger with Community Independent Bank, Inc. ("Community") and the July 2000 acquisition of Panasia Bank ("Panasia"), and the revenue enhancements, cost savings and other benefits anticipated in those transactions. * Business expansion plans, including both product and geographical expansion. * Investments in new subsidiaries and other companies. * Other matters. Many of these statements can be identified by looking for words such as "believes," "expects," "anticipates," "estimates", "projects" or similar words or expressions. These forward-looking statements involve substantial risks and uncertainties. There are many factors that may cause actual results to differ materially from those contemplated by such forward-looking statements. These factors include, among other things, the following possibilities: * Expected cost savings from the National Penn/Community merger, including reductions in interest and non-interest expense, may not be fully realized or realized as quickly as expected. * Revenues of National Penn and its subsidiaries following the National Penn/Community merger may be lower than expected, or loan losses, deposit attrition, operating costs, customer losses or business disruption following the National Penn/Community merger may be greater than expected. * Commercial loan growth following the National Penn/Community merger may be lower than expected. * Costs, difficulties or delays related to the integration of Community's business with National Penn's business may be greater or longer than expected. * Expected cost savings from National Penn's acquisition of Panasia may not be fully realized or realized as quickly as expected. * Revenues of Panasia may be lower than expected, or loan losses, deposit attrition, operating costs, customer losses or business disruption at Panasia may be greater than expected. * Commercial loan growth at Panasia may be lower than expected. * Costs, difficulties or delays related to the integration of Panasia's business with National Penn's business may be greater or longer than expected. * Start-up costs of new subsidiaries may be greater, and revenue ramp-up of such subsidiaries may take longer, than expected. * Changes in the interest rate environment may reduce interest margins. * Competitive pressures among depository and other financial institutions may increase significantly. * General economic or business conditions, either nationally or in the regions in which National Penn 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. * Technological changes and systems integration may be harder to make or more expensive than expected. * Legislation or regulatory changes may adversely affect National Penn's business. * Adverse changes may occur in the securities markets. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. National Penn cautions shareholders not to place undue reliance on such statements. All written or oral forward-looking statements attributable to National Penn or any person acting on its behalf made after the date of this Report are expressly qualified in their entirety by the cautionary statements contained in this Report. National Penn does not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events. -----END PRIVACY-ENHANCED MESSAGE-----