-----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, JTmQqahIfBtuqhE8iNVzTVMdjF4HpBAMDf0sz7x57OBTjm2ehUFvCrqCEv1jWYig cj5ObTRGfMmEqjytGlNeXA== 0000950159-96-000042.txt : 19960401 0000950159-96-000042.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950159-96-000042 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL PENN BANCSHARES INC CENTRAL INDEX KEY: 0000700733 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232215075 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-10957 FILM NUMBER: 96541526 BUSINESS ADDRESS: STREET 1: POST OFFICE BOX 547 CITY: BOYERTOWN STATE: PA ZIP: 19512 BUSINESS PHONE: 6103696341 MAIL ADDRESS: STREET 1: POST OFFICE BOX 547 STREET 2: POST OFFICE BOX 547 CITY: BOYERTOWN STATE: PA ZIP: 19512 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [fee required], for the fiscal year ended December 31, 1995, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [no fee required], for the transition period from to . Commission file number 0-10957 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 ($2.50 par value) Preferred Stock Purchase Rights Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of common shares of the Registrant held by nonaffiliates, based on the closing sale price as of March 15, 1996, was $127,746,595. As of March 15, 1996, the Registrant had 7,613,865 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 23, 1996 - - Part III. NATIONAL PENN BANCSHARES, INC. FORM 10-K TABLE OF CONTENTS Page Part I Item 1 Business .................................................1 Item 2 Properties ..............................................22 Item 3 Legal Proceedings .......................................23 Item 4 Submission of Matters to a Vote of Security Holders ................................................23 Item 4A Executive Officers of the Registrant ....................23 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............. ..............24 Item 6. Selected Financial Data .................................25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .............................................26 Item 8. Financial Statements and Supplementary Data .............32 Item 9. Disagreements on Accounting and Financial Disclosure .............................................54 Part III Item 10. Directors and Executive Officers of the Registrant .............................................54 Item 11. Executive Compensation ..................................54 Item 12. Security Ownership of Certain Beneficial Owners and Management ..................................54 Item 13. Certain Relationships and Related Transactions ...........................................54 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................54 Signatures .............................................................58 PART I Item 1. BUSINESS. The Company National Penn Bancshares, Inc. (the "Company") is a Pennsylvania business corporation and bank holding company headquartered at Philadelphia and Reading Avenues, Boyertown, Pennsylvania 19512. The Company owns all of the outstanding capital stock of National Penn Bank, formerly named National Bank of Boyertown ("NPB"). The Company was incorporated in January 1982. In addition, the Company has three wholly-owned nonbank subsidiaries engaged in activities related to the business of banking and has, indirectly through one of such subsidiaries, equity investments in three other banks or banking companies. At December 31, 1995, the Company and NPB had 517 full- and part-time employees. National Penn Bank Prior to August 1, 1993, NPB's name was National Bank of Boyertown. On that date, the bank's name was changed to National Penn Bank. National Penn Bank also operates through Chestnut Hill National Bank ("CHNB Division") and 1st Main Line Bank ("1stMLB Division"), each a banking division of National Penn Bank. The CHNB Division was established in December 1993 after the Company's acquisition of Chestnut Hill National Bank; the 1stMLB Division was started in April 1995. At December 31, 1995, NPB conducted operations through 39 full-service branches and four loan production offices, of which three branches and one loan production office constitute the CHNB Division, and one branch constitutes the 1stMLB Division. NPB is engaged in the commercial and retail banking business. NPB provides checking and savings accounts, time deposits, personal, business, residential mortgage, educational loans, interbank credit cards, and safe deposit and night depository facilities. In fourth quarter 1995, NPB began offering certain non-deposit (non- FDIC insured) investment products through unaffiliated third-party vendors. Nonbank Subsidiaries The Company owns all of the outstanding capital stock of Investors Trust Company ("ITC"), a Pennsylvania-chartered trust company. ITC opened for business on June 20, 1994. The Company also owns all of the outstanding capital stock of National Penn Investment Company, a Delaware business corporation ("NPIC") that invests in and holds certain intangible investments. NPIC began operations in January 1985. The Company also owns all of the outstanding capital stock of National Penn Life Insurance Company, an Arizona insurance company formed to reinsure credit life and accident and health insurance in connection with loans made by NPB. National Penn Life Insurance Company began operations in January 1985. 1 Other Bank Investments The Company has, indirectly through NPIC, the following equity investments in banks or banking companies: 1. 20% of the outstanding capital stock of Penncore Financial Services Corporation, a Pennsylvania bank holding company and parent corporation of Commonwealth State Bank, a Pennsylvania bank headquartered in Newtown, Bucks County, Pennsylvania. Commonwealth State Bank began operations as a bank in April 1987. 2. 20% of the outstanding capital stock of First Capitol Bank, a Pennsylvania bank headquartered in York, Pennsylvania. First Capitol Bank began operations as a bank in November 1988. 3. 20% of the outstanding capital stock 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, the Company accounts for its investment in Penncore Financial Services Corporation, First Capitol Bank, and Pennsylvania State Bank using the "equity" method. Supervision and Regulation Bank Holding Company Regulation The Company is registered as a bank holding company and is subject to the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve") under the Bank Holding Company Act of 1956, as amended ("BHCA"). Bank holding companies are required to file periodic reports with and are subject to examination by the Federal Reserve. The Federal Reserve has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve, pursuant to such regulations, may require the Company to stand ready to use its resources to provide adequate capital funds to NPB during periods of financial stress or adversity. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (as defined by regulations) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency, up to specified limits. Under the BHCA, the Federal Reserve has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. The BHCA prohibits the Company from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock or substantially all of the assets of any bank or merging or consolidating with another bank holding company without prior approval of the Federal Reserve. Such a transaction would also require approval of the Pennsylvania Department of Banking. Pennsylvania law permits 2 Pennsylvania bank holding companies to control an unlimited number of banks. Additionally, the BHCA prohibits the Company from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a nonbanking business unless such business is determined by the Federal Reserve to be so closely related to banking as to be a proper incident thereto. The Federal Reserve can differentiate between nonbanking activities that are initiated by a bank holding company or subsidiary and activities that are acquired as a going concern. The BHCA does not place territorial restrictions on the activities of such nonbanking-related activities. The Company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services. The activities that the Federal Reserve has determined by regulation to be permissible are: (1) making, acquiring, or servicing loans or other extensions of credit for its own account or for the account of others; (2) operating an industrial bank, Morris Plan bank, or industrial loan company, in the manner authorized by state law, so long as the institution is not a bank; (3) operating as a trust company in the manner authorized by federal or state law so long as the institution is not a bank and does not make loans or investments or accept deposits, except as may be permitted by the Federal Reserve; (4) subject to limitations, acting as an investment or financial adviser (i) to a mortgage or real estate investment trust, (ii) to certain registered investment companies, (iii) by providing portfolio investment advice to other persons, (iv) by furnishing general economic information and advice, general economic statistical forecasting services, and industry studies, (v) by providing financial advice to state and local governments, or (vi) by providing financial and transaction advice to corporations, institutions, and certain persons in connection with mergers, acquisitions, and other financial transactions; (5) subject to limitations, leasing real or personal property or acting as agent, broker, or adviser in leasing such property in accordance with prescribed conditions; (6) investing in corporations or projects designed primarily to promote community welfare; (7) providing to others data processing services and data transmission services, data bases, and facilities, within certain limitations; (8) subject to limitations, engaging in certain agency and underwriting activities with respect to credit insurance, and certain other insurance activities as permitted by the Federal Reserve; 3 (9) owning, controlling, or operating a savings association, if the savings association engages only in deposit-taking activities and lending and other activities that are permissible for bank holding companies under Federal Reserve regulations; (10) providing courier services for certain financial documents; (11) subject to limitations, providing management consulting advice to nonaffiliated bank and nonbank depository institutions; (12) retail selling of money orders and similar consumer-type payment instruments having a face value of $1,000 or less, selling U.S. Savings Bonds, and issuing and selling traveler's checks; (13) performing appraisals of real estate and personal property; (14) subject to limitations, acting as intermediary for the financing of commercial or industrial income-producing real estate by arranging for the transfer of the title, control, and risk of such a real estate project to one or more investors; (15) providing certain securities brokerage services; (16) subject to limitations, underwriting and dealing in government obligations and certain other instruments; (17) subject to limitations, providing foreign exchange and transactional services; (18) subject to limitations, acting as a futures commission merchant for nonaffiliated persons; (19) subject to limitations, providing investment advice on financial futures and options to futures; (20) subject to limitations, providing consumer financial counseling; (21) subject to limitations, tax planning and preparation; (22) providing check guaranty services; (23) subject to limitations, operating a collection agency; and (24) operating a credit bureau. Federal Reserve approval may be required before the Company or its nonbank subsidiaries may begin to engage in any such activity and before any such business may be acquired. Dividend Restrictions The Company is a legal entity separate and distinct from NPB and the Company's nonbank subsidiaries. The Company's revenues (on a parent Company only basis) result almost entirely from dividends paid to the Company by its subsidiaries. The right of the Company, and consequently 4 the right of creditors and shareholders of the Company, to participate in any distribution of the assets or earnings of any subsidiary through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the subsidiary (including depositors, in the case of NPB), except to the extent that claims of the Company in its capacity as a creditor may be recognized. Federal and state laws regulate the payment of dividends by the Company's subsidiaries. See "Supervision and Regulation - Regulation of NPB" herein. Further, it is the policy of the Federal Reserve that bank holding companies should pay dividends only out of current earnings. Federal banking regulators also have the authority to prohibit banks and bank holding companies from paying a dividend if they should deem such payment to be an unsafe or unsound practice. Capital Adequacy Bank holding companies are required to comply with the Federal Reserve's risk-based capital guidelines. The required minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half (4%) of the total capital is required to be "Tier 1 capital," consisting principally of common shareholders' equity, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries, less certain intangible assets. The remainder ("Tier 2 capital") may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve requires a bank holding company to maintain a minimum "leverage ratio." This requires a minimum level of Tier 1 capital (as determined under the risk-based capital rules) to average total consolidated assets of 3% for those bank holding companies that have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are expected to maintain a ratio of at least 1% to 2% above the stated minimum. Further, the Federal Reserve has indicated that it will consider a "tangible Tier 1 capital leverage ratio" (deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities. The Federal Reserve has not advised the Company of any specific minimum leverage ratio applicable to the Company. Pursuant to FDICIA, the federal banking agencies have specified, by regulation, the levels at which an insured institution is considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." Under these regulations, an institution is considered "well capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, a leverage ratio of 5% or greater, and is not subject to any order or written directive to meet and maintain a specific capital level. The Company and NPB, at December 31, 1995, qualify as "well capitalized" under these regulatory standards. 5 FDIC Insurance Assessments NPB is subject to FDIC deposit insurance assessments. The FDIC has adopted a risk-related premium assessment system for both the Bank Insurance Fund ("BIF") for banks and the Savings Association Insurance Fund ("SAIF") for savings associations. Under this system, FDIC insurance premiums are assessed based on capital and supervisory measures. Under the risk-related premium assessment system, the FDIC, on a semiannual basis, assigns each institution to one of three capital groups (well capitalized, adequately capitalized, or undercapitalized) and further assigns such institution to one of three subgroups within a capital group corresponding to the FDIC's judgment of its strength based on supervisory evaluations, including examination reports, statistical analysis, and other information relevant to gauging the risk posed by the institution. Only institutions with a total risk-based capital to risk- adjusted assets ratio of 10% or greater, a Tier 1 capital to risk-adjusted assets ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater, are assigned to the well-capitalized group. On August 8, 1995, the FDIC reduced the insurance assessment that BIF-member banks deemed to have the least risk (including NPB) must pay on insured deposits to $.04 per $100 of deposits from the then current rate of $.23 per $100 of deposits, but continued SAIF premiums at the then current level of $.23 per $100 of deposits. Because NPB acquired approximately $225 million of SAIF-insured deposits from savings associations from 1990 to the present, NPB continued to pay insurance assessments on these acquired deposits at $.23 per $100 of deposits. The reduction in rate on BIF-insured deposits to $.04 was retroactive to May 1, 1995. On January 1, 1996, the FDIC reduced the insurance assessment to zero for BIF-member banks in the least risk category. Legislation is pending in the U.S. Congress to recapitalize the SAIF through a one-time assessment of $.85 per $100 of SAIF-insured deposits. Commercial banking companies which purchased SAIF-insured deposits, such as NPB, may be assessed at a 20% lower rate. If NPB is subjected to this one-time assessment, it could result in a total payment of between $1 million and $2 million by NPB. At the date hereof, this issue is part of the unresolved Federal government budget debate. The Company cannot predict if the pending legislation will be enacted as presently proposed, but expects that any legislation recapitalizing SAIF will likely impose additional deposit insurance costs on it attributable to NPB's acquired SAIF-insured deposits. These costs may have a material adverse effect on the Company's earnings when incurred. Regulation of NPB The operations of NPB are subject to federal and state statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System, and to banks whose deposits are insured by the FDIC. NPB's operations are also subject to regulations of the OCC, the Federal Reserve, and the FDIC. The OCC, which has primary supervisory authority over NPB, regularly examines banks in such areas as reserves, loans, investments, management practices, and other aspects of operations. These examinations are designed for the protection of NPB's depositors rather than the Company's 6 shareholders. NPB must furnish annual and quarterly reports to the OCC, which has the authority under the Financial Institutions Supervisory Act to prevent a national bank from engaging in an unsafe or unsound practice in conducting its business. Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, the investments a bank may make, the reserves against deposits a bank must maintain, the types and terms of loans a bank may make and the collateral it may take, the activities of a bank with respect to mergers and consolidations, and the establishment of branches. Pennsylvania law permits statewide branching. Under the National Bank Act, as amended, NPB is required to obtain the prior approval of the OCC for the payment of dividends if the total of all dividends declared by NPB in one year would exceed NPB's net profits (as defined and interpreted by regulation) for the current year plus its retained net profits (as defined and interpreted by regulation) for the two preceding years, less any required transfers to surplus. In addition, NPB may only pay dividends to the extent that its retained net profits (including the portion transferred to surplus) exceed statutory bad debts (as defined by regulation). Under FDICIA, any depository institution, including NPB, is prohibited from paying any dividends, making other distributions or paying any management fees if, after such payment, it would fail to satisfy its minimum capital requirements. A subsidiary bank of a bank holding company, such as NPB, is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries, and on taking such stock or securities as collateral for loans. The Federal Reserve Act and Federal Reserve regulations also place certain limitations and reporting requirements on extensions of credit by a bank to the principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship. NPB, and the banking industry in general, are affected by the monetary and fiscal policies of government agencies, including the Federal Reserve. Through open market securities transactions and changes in its discount rate and reserve requirements, the Board of Governors of the Federal Reserve exerts considerable influence over the cost and availability of funds for lending and investment. Competition The financial services industry in the Company's service area is extremely competitive. The Company's competitors within its service area include multi-bank holding companies, with resources substantially greater than those of the Company. Many competitor financial institutions have legal lending limits substantially higher than NPB's legal lending limit. In addition, NPB competes with savings banks, savings and loan associations, credit unions, money market and other mutual funds, mortgage companies, leasing companies, finance companies, and other financial services companies that offer products and services similar to those offered by NPB on competitive terms. 7 In September 1994, federal legislation was enacted that is expected to have a significant effect in restructuring the banking industry in the United States. See "Interstate Banking Legislation" herein. As a result, the Company expects the operating environment for Pennsylvania-based financial institutions to become increasingly competitive. Additionally, the manner in which banking institutions conduct their operations may change materially as the activities increase in which bank holding companies and their banking and nonbanking subsidiaries are permitted to engage, and funding and investment alternatives continue to broaden, although the long-range effects of these changes cannot be predicted, with reasonable certainty, at this time. These changes most probably will further narrow the differences and intensify competition between and among commercial banks, thrift institutions, and other financial service companies. See "Proposed Legislation and Regulations" herein. Interstate Banking Legislation In September 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act (the "Interstate Banking Act") was enacted. The Interstate Banking Act facilitates the interstate expansion and consolidation of banking organizations (i) by permitting bank holding companies that are adequately capitalized and adequately managed, beginning September 29, 1995, to acquire banks located in states outside their home states regardless of whether such acquisitions are authorized under the law of the host state; (ii) by permitting the interstate merger of banks after June 1, 1997, subject to the right of individual states to "opt in" or "opt out" of this authority before that date; (iii) by permitting banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state; (iv) by permitting, beginning September 29, 1995, a bank to engage in certain agency relationships (i.e., to receive deposits, renew time deposits, close loans (but not including loan approvals or disbursements), service loans, and receive payments on loans and other obligations) as agent for any bank or thrift affiliate, whether the affiliate is located in the same state or a different state than the agent bank; and (v) by permitting foreign banks to establish, with approval of the regulators in the United States, branches outside their "home" states to the same extent that national or state banks located in the home state would be authorized to do so. One effect of this legislation will be to permit the Company to acquire banks and bank holding companies located in any state and to permit qualified banking organizations located in any state to acquire banks and bank holding companies located in Pennsylvania, irrespective of state law. In July 1995, the Pennsylvania Banking Code was amended to authorize full interstate banking and branching under Pennsylvania law. Specifically, the legislation (i) eliminates the "reciprocity" requirement previously applicable to interstate commercial bank acquisitions by bank holding companies, (ii) authorizes interstate bank mergers and reciprocal interstate branching into Pennsylvania by interstate banks, and (iii) permits Pennsylvania institutions to branch into other states with the prior approval of the Pennsylvania Department of Banking. Overall, this federal and state legislation is likely to have the effect of increasing consolidation and competition and promoting geographic diversification in the banking industry. 8 Proposed Legislation and Regulations From time to time, various federal and state legislation is proposed that could result in additional regulation of, and restrictions on, the business of the Company and NPB, or otherwise change the business environment. It cannot be predicted whether any of this legislation, if enacted, will have a material effect on the business of the Company. Interest Rate Swaps 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 be disclosed. See Note 10 to the Company's Consolidated Financial Statements included at Item 8 hereof. In 1995, the interest rate swaps to which NPB was a party had the effect of increasing the Company's net interest income by $1.1 million over what would have been realized had NPB not entered into the swap agreements. Should rates rise in 1996, the Company may recognize lower net interest income for the year than would have been recognized had NPB not entered into the interest rate swap agreements. The Company uses interest rate swap agreements for interest rate risk management. No derivative financial instruments are held for trading purposes. The contract or notional amounts of the swap 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. (This space intentionally left blank.) 9 Average Balances, Average Rates, and Interest Rate Spread* (Dollars in Thousands)
Year Ended December 31 1995 1994 1993 Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate INTEREST EARNING ASSETS: Interest bearing deposits at banks $ 1,239 $ 76 6.13% $ 2,184 $ 77 3.53% $ 4,695 $ 158 3.37% ---------- --------- ---------- ---------- -------- ---------- U.S. Treasury 99,374 7,321 7.37 96,231 7,446 7.74 67,719 6,078 8.98 U.S. Government agencies 71,957 5,136 7.14 47,192 3,530 7.48 42,153 3,752 8.90 State and municipal* 47,735 3,515 7.36 47,081 3,419 7.26 14,227 1,018 7.16 Other bonds and securities 21,100 1,276 6.05 14,464 791 5.47 8,455 299 3.54 ---------- --------- ---------- ---------- -------- ---------- Total investments 240,166 17,248 7.18 204,968 15,186 7.41 132,554 11,147 8.41 ---------- --------- ---------- ---------- -------- ---------- Federal funds sold 1,929 114 5.91 708 27 3.81 4,625 133 2.88 ---------- --------- ---------- ---------- -------- ---------- Commercial loans and lease financing* 463,106 43,197 9.33 391,624 34,916 8.92 311,684 26,974 8.65 Installment loans 212,855 20,280 9.53 186,564 17,075 9.15 162,752 15,210 9.35 Mortgage loans 206,331 19,791 9.59 197,487 18,633 9.44 168,752 18,560 11.00 ---------- --------- ---------- ---------- -------- ---------- Total loans and leases 882,292 83,268 9.44 775,675 70,624 9.10 643,188 60,744 9.44 ---------- --------- ---------- ---------- -------- ---------- Total earning assets 1,125,626 100,706 8.95% 983,535 85,914 8.74% 785,062 72,182 9.19% --------- ---------- ---------- Allowance for loan and lease losses (19,859) (18,503) (14,576) Non-interest earning assets 81,884 76,071 60,727 ------ ------ ------ Total assets $1,187,651 $1,041,103 $831,213 ========== ========== ======== INTEREST BEARING LIABILITIES: Interest bearing deposits $ 781,686 32,738 4.19 $722,657 22,825 3.16 $585,670 20,051 3.42 Securities sold under repurchase agreements and federal funds purchased 94,375 5,613 5.95 55,569 2,531 4.55 17,204 427 2.48 Short-term borrowings 13,944 1,078 7.73 5,338 185 3.47 4,446 125 2.81 Long-term borrowings 75,392 4,406 5.84 56,555 3,308 5.85 49,945 3,238 6.48 ---------- --------- ---------- ---------- -------- ---------- Total interest bearing liabilities 965,397 43,835 4.54% 840,119 28,849 3.43% 657,265 23,841 3.63% --------- ---------- ---------- Demand deposits 113,442 104,609 78,917 Other non-interest bearing liabilities 14,529 11,831 18,393 ------ ------ ------ Total liabilities 1,093,368 956,559 754,575 Equity capital 94,283 84,544 76,638 ------ ------ ------ Total liabilities and equity capital $1,187,651 $1,041,103 $831,213 ========== ========== ======== INTEREST RATE SPREAD** $ 56,871 5.05% $ 57,065 5.80% $48,341 6.16% ========= ========== =======
*Full taxable equivalent basis, using a 35% effective tax rate. **Represents the difference between interest earned and interest paid, divided by total earning assets. Loans outstanding, net of unearned income, include nonaccruing loans Fee income included. 10 Interest Rate Sensitivity Analysis Information with respect to interest rate sensitivity of the Company's assets and liabilities is included in the information under Management's Discussion and Analysis at Item 7 hereof. Investment Portfolio A summary of securities available for sale and securities held to maturity at December 31, 1995, 1994, and 1993 follows (in thousands).
1995 1994 1993 Estimated Estimated Estimated Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value Securities available for sale U.S. Treasury and U.S. Government agencies $102,357 $107,859 $39,055 $37,480 $ --- $ --- State and municipal 45,712 46,836 45,694 41,918 20,640 20,772 Other bonds 2,727 2,751 2,144 2,104 1,566 1,521 Mortgage-backed securities 63,316 65,029 42,527 40,746 10,797 11,156 Marketable equity securities and other 16,667 18,427 15,823 16,625 8,285 7,839 -------- -------- -------- -------- ------- ------- Totals $230,779 $240,902 $145,243 $138,873 $41,288 $41,288 ======== ======== ======== ======== ======= =======
1995 1994 1993 Estimated Estimated Estimated Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value Securities held to maturity U.S. Treasury and U.S. Government agencies $ --- $ --- $76,607 $75,340 $70,475 $75,608 State and municipal --- --- 7,388 7,144 7,722 7,966 Other bonds --- --- 1,018 1,002 6,084 6,307 Mortgage-backed securities --- --- 14,216 13,973 18,919 19,646 Marketable equity securities and other --- --- --- --- --- --- ------- ------- ------- ------- -------- -------- Totals $ --- $ --- $99,229 $97,459 $103,200 $109,527 ======= ======= ======= ======= ======== ========
11 Investment Securities Yield by Maturity The maturity distribution and weighted average yield of the investment portfolio of the Company at December 31, 1995, are presented in the following table. Weighted average yields on tax-exempt obligations have been computed on a fully- taxable equivalent basis assuming a tax rate of 35%. All average yields were calculated on the book value of the related securities. Stocks and other securities having no stated maturity have been included in the "After 10 Years" category. Securities Available for Sale Yield by Maturity at December 31, 1995 Securities available for sale at market value (Dollars in thousands)
After 1 But After 5 But Within 1 Year Within 5 Years Within 10 Years After 10 Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield U.S. Treasury and U.S. Government agencies $ 19,277 8.94% $ 19,428 8.37% $ 69,154 6.99% $ -- ---% $107,859 7.43% State and municipal 781 6.48% 1,257 8.12% 43,886 7.18% 912 7.23% 46,836 7.19% Other bonds 609 6.28% 1,425 6.84% -- ---% 717 ---% 2,751 4.89% Mortgage-backed securities 178 2.26% 1,160 4.73% 9,081 7.95% 54,610 7.31% 65,029 7.34% Marketable equity securities and other -- ---% -- ---% -- ---% 18,427 ---% 18,427 ---% -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- Total $ 20,845 8.71% $ 23,270 8.07% $122,121 7.13% $ 74,666 5.40% $240,902 6.81% ======== ==== ======== ==== ======== ==== ======== ==== ======== ====
12 Loan Maturity and Interest Rate Sensitivity Maturities and sensitivity to changes in interest rates in certain loan categories in the Company's loan portfolio at December 31, 1995, are summarized below: Remaining Maturity* - At December 31, 1995
After One One Year Year to After or Less Five Years Five Years Total (In Thousands) Commercial and Industrial Loans $ 49,882 $ 40,904 $ 8,979 $ 99,765 Loans for Purchasing and Carrying Securities 239 196 43 478 Loans to Financial Institutions 295 241 53 589 Real Estate Loans: Construction and Land Development 42,978 -- -- 42,978 -------- -------- -------- -------- $ 93,394 $ 41,341 $ 9,075 $143,810 ======== ======== ======== ========
* Demand loans, past-due loans, and overdrafts are reported in "One Year or Less." Construction real estate loans are reported maturing in "One Year or Less" because of their short-term maturity or index to Prime Rate. An immaterial amount of loans have no stated schedule of repayments. Segregated in terms of sensitivity to changes in interest rates, the foregoing loan balances at December 31, 1995, are summarized below:
After One Year to After Five Years Five Years (In Thousands) Predetermined Interest Rate $40,928 $ 9,075 Floating Interest Rate 413 -- ------- ------- Total $41,341 $ 9,075 ======= =======
Determinations of maturities included in the loan maturity table are based upon contract terms. In situations where a "rollover" is appropriate, the Company's policy in this regard is to evaluate the credit for collectability consistent with the normal loan evaluation process. This policy is used primarily in evaluating ongoing customers' use of their lines of credit that are at floating interest rates. The Company's outstanding lines of credit to customers are not material. 13 Loan Portfolio The Company's loans are widely diversified by borrower, industry group, and geographical area. The following summary shows the year-end composition of the Company's loan portfolio for each year in the five-year period ended December 31, 1995:
December 31, 1995 1994 1993 1992 1991 (In Thousands) Commercial and Industrial Loans $ 99,765 $ 79,726 $ 68,599 $ 58,936 $ 62,733 Loans for Purchasing and Carrying Securities 478 778 1,008 1,171 2,043 Loans to Financial Institutions 589 821 2,063 2,286 3,365 Real Estate Loans: Construction and Land Development 42,978 31,760 22,690 22,074 23,042 Residential 526,577 472,227 428,540 350,261 273,916 Other 256,956 228,911 191,875 145,995 140,675 Loans to Individuals 11,722 16,389 22,963 22,780 23,106 Lease Financing Receivables -- -- 27 458 2,013 -------- -------- -------- -------- -------- Total $939,065 $830,612 $737,765 $603,961 $530,893 ======== ======== ======== ======== ========
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 is, if payment is considered questionable, 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, 1995, 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. 14 When other real estate owned is included with nonperforming loans, the total is nonperforming assets. Other real estate owned decreased in 1995 due primarily to properties acquired through bank acquisition having substantially been resolved through sales. 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, 1995:
December 31, 1995 1994 1993 1992 1991 Nonaccrual Loans $ 7,257 $ 9,328 $ 8,698 $ 8,848 $ 7,612 Loans Past Due 90 or More Days as to Interest or Principal 1,764 2,114 2,349 2,168 4,129 Restructured Loans -- -- -- -- -- Total Nonperforming Loans 9,021 11,442 11,047 11,016 11,741 Other Real Estate Owned 760 2,047 3,122 2,825 2,199 ------- ------- ------- ------- ------- Total Nonperforming Assets $ 9,781 $13,489 $14,169 $13,841 $13,940 ======= ======= ======= ======= ======= Gross Amount of Interest That Would Have Been Recorded at Original Rate on Nonaccrual and Restructured Loans $ 961 $ 1,517 $ 804 $ 802 $ 632 Interest Received From Customers on Nonaccrual and Restructured Loans 656 1,031 160 336 263 ------- ------- ------- ------- ------- Net Impact on Interest Income of Nonperforming Loans $ 305 $ 486 $ 644 $ 466 $ 369 ======= ======= ======= ======= =======
At December 31, 1995, the Company had no foreign loans and no loan concentrations exceeding 10% of total loans not disclosed in the table on page 14 hereof. "Loan concentrations" are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted 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, 1995, 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. 15 At December 31, 1995, the Company had no loans that are considered highly-leveraged transactions under applicable regulations, although the Company had approximately $1,750,000 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 ratio greater than 50%, produces a leverage ratio greater than 75% where 25% or more results from a buyout, acquisition, or recapitalization, or is designated as such by a syndication agent or regulatory agency. Allowance for Possible Loan and Lease Losses A detailed analysis of the Company's allowance for loan and lease losses for the five years ended December 31, 1995, is shown below:
December 31, 1995 1994 1993 1992 1991 Balance at Beginning of Year $19,310 $17,909 $12,448 $10,593 $ 8,563 Charge-offs: Commercial and Industrial Loans 544 679 478 2,518 1,770 Real Estate Loans: Construction and Land Development 366 125 552 514 286 Residential 882 941 1,055 813 710 Other 932 435 596 914 387 Loans to Individuals 785 822 728 89 105 Lease Financing Receivables -- -- 3 1,146 25 ------- ------- ------- ------- ------- Total Charge-offs $ 3,509 $ 3,002 $ 3,412 $ 5,994 $ 3,283 ======= ======= ======= ======= ======= Recoveries: Commercial and Industrial Loans 365 190 141 643 256 Real Estate Loans: Construction and Land Development 148 47 58 290 -- Residential 491 494 383 166 34 Other 124 155 448 495 105
16 Loans to Individuals 237 313 428 21 34 Lease Financing Receivables -- 4 10 9 67 ------- ------- ------- ------- ------- Total Recoveries $ 1,365 $ 1,203 $ 1,468 $ 1,624 $ 496 ------- ------- ------- ------- ------- Net Charge-offs $ 2,144 $ 1,799 $ 1,944 $ 4,370 $ 2,787 ------- ------- ------- ------- ------- Provisions Charged to Expense 3,200 3,200 5,145 6,225 4,817 Adjustments: Changes Incident to Mergers and Absorptions, Net -- -- 2,260 -- -- ------- ------- ------- ------- ------- Balance at End of Year $20,366 $19,310 $17,909 $12,448 $10,593 ======= ======= ======= ======= ======= Ratio of Net Charge-offs During the Period to Average Loans Outstanding During the Period 0.24% 0.23% 0.30% 0.77% 0.54% ======= ======= ======= ======= =======
The allowance for loan and lease losses is established through charges to earnings in the form of a provision for loan and lease losses. Loans and leases that are determined to be uncollectible are charged against the allowance, and subsequent recoveries are credited to the allowance. Factors that influence management's judgment in determining the amount of the provision for loan and lease losses charged to operating expense include the following: 1. An ongoing review by management of the quality of the overall loan and lease portfolio. 2. Management's continuing evaluation of potential problem and nonperforming loans and leases. 3. Loan and lease classifications and evaluations as a result of periodic examinations by federal supervisory authorities. 4. Management's evaluation of prevailing and anticipated economic conditions and their related effect on the existing loan and lease portfolio. 5. Comments and recommendations by the Company's independent accountants as a result of their regular examination of the Company's financial statements. It is management's practice to review the allowance for loan and lease losses regularly to determine whether additional provision should be made after considering the factors noted above. In 1995, the provision remained the same due to current loan quality, economic conditions, and net loan charge-offs in 1995. 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 1995 totalled $1,383,000, or 39% of the gross charge-off amount of $3,509,000, as compared to $800,000, or 27% of the gross charge-off amount of $3,002,000 in 1994. Partial charge-offs represented .2% and .1% of average total loans for 1995 and 1994, respectively. 17 The year end 1995, 1994, 1993, and 1992 allocation of the allowance for loan and lease losses, and the percent of loans in each category to total loans, is illustrated in the following table (dollars in thousands): Allocation of the Allowance for Loan and Lease Losses (1)
1995 1994 1993 1992 % Loan % Loan % Loan % Loan Type to Type to Type to Type to Total Total Total Total Allowance Loans Allowance Loans Allowance Loans Allowance Loans Commercial and Industrial loans $ 2,547 10.6% $ 1,289 9.6% $ 1,689 9.3% $ 880 9.8% Loans for purchasing and carrying securities -- 0.1% -- 0.1% -- 0.1% -- 0.2% Loans to financial institutions -- 0.1% -- 0.1% -- 0.3% -- 0.4% Real estate loans: Construction and land development 644 4.5% 2,294 3.8% 1,016 3.1% 773 3.7% Residential 4,595 56.1% 3,841 56.8% 3,325 58.1% 3,500 58.0% Other 6,548 27.4% 3,708 27.6% 4,732 26.0% 4,229 24.1% Loans to individuals 2,296 1.2% 1,462 2.0% 1,456 3.1% 616 3.7% Lease financing receivables -- -- -- -- -- 0.0% -- 0.1% Unallocated 3,736 N/A 6,716 N/A 5,691 N/A 2,450 N/A ------- ------- ------- ------- ------- ------- ------- ------- $20,366 100.0% $19,310 100.0% $17,909 100.0% $12,448 100.0% ======= ======= ======= ======= ======= ======= ======= ======= (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. Before 1992, the Company did not allocate the allowance; therefore, no comparable information exists for prior years. 18 Historical Statistics The following table shows historical statistics of the Company relative to the relationship among loans (net of unearned discount), net charge-offs, and the allowance for possible loan and lease losses:
December 31, 1995 1994 1993 1992 1991 (In Thousands) Average Total Loans $ 882,292 $ 775,675 $ 643,188 $ 565,659 $ 514,706 Total Loans at Year End 939,065 830,612 737,765 603,961 530,893 Net Charge-offs 2,144 1,799 1,944 4,370 2,787 Allowance for Possible Loan and Lease Losses at Year End 20,366 19,310 17,909 12,448 10,593
December 31, 1995 1994 1993 1992 1991 (In Thousands) Ratios Net Charge-offs to: Average Total Loans 0.24% 0.23% 0.30% 0.77% 0.54% Total Loans at Year End 0.23 0.22 0.26 0.72 0.52 Allowance for Possible Loan and Lease Losses 10.53 9.32 10.85 35.11 26.31 Allowance for Possible Loan and Lease Losses to: Average Total Loans 2.31 2.49 2.78 2.20 2.06 Total Loans at Year End 2.17 2.32 2.43 2.06 2.00
(This space left intentionally blank) 19 Deposit Structure The following is a distribution of the average amount of, and the average rate paid on, the Company's deposits for each year in the three-year period ended December 31, 1995:
Year Ended December 31, 1995 1994 1993 (Dollars in Thousands) Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate Noninterest- Bearing Demand Deposits $113,442 ---% $104,609 ---% $ 78,917 ---% Savings Deposits 345,176 2.26 394,508 2.01 302,895 2.33 Time Deposits* 436,510 5.71 328,149 4.54 282,775 4.60 -------- -------- -------- Total $895,128 3.66 $827,266 2.76 $664,587 3.02 ======== ======== ======== * Included are average time deposits, issued in the amount of $100,000 or more, of $89,881,000 in 1995, $65,630,000 in 1994, and $36,496,000 in 1993.
The following is a breakdown, by maturities, of the Company's time certificates of deposit of $100,000 or more as of December 31, 1995. The Company has no other time deposits of $100,000 or more as of December 31, 1995. Maturity Amount of Time Certificates of Deposit (In Thousands) 3 months or less $19,271 Over 3 through 6 months 12,224 Over 6 through 12 months 19,022 Over 12 months 39,364 ------- Total $89,881 ======= Short-Term Borrowings Information with respect to the Company's short-term borrowings is set forth in footnote 5 to the Company's Consolidated Financial Statements which are included at Item 8 hereof, Financial Statements and Supplementary Data. (This space left intentionally blank) 20 Financial Ratios The following ratios for the Company are among those commonly used in analyzing financial statements of financial services companies:
Year Ended December 31, 1995 1994 1993 Earnings Ratios Net Income on: Average Earning Assets 1.37% 1.49% 1.70% Average Total Assets 1.30 1.41 1.60 Average Shareholders' Equity 16.30 17.30 17.40 Net Operating Income Before Securities and Mortgage Transactions and Cumulative Effect of a Change in Accounting for Income Taxes on: Average Earning Assets 1.34 1.52 1.63 Average Total Assets 1.27 1.44 1.54 Average Shareholders' Equity 16.05 17.67 16.65 Liquidity and Capital Ratios Average Shareholders' Equity to Average Earning Assets 8.38% 8.60% 9.76% Average Shareholders' Equity to Average Total Assets 7.94 8.12 9.22 Dividend Payout Ratio 40.70 36.50 33.10 Tier 1 Leverage Ratio 7.59 7.35 8.80 Tier 1 Risk-Based Ratio 10.97 10.85 11.76 Total Risk-Based Capital Ratio 12.23 12.11 13.03
(This space left intentionally blank) 21 The following table shows, on a taxable equivalent basis, the changes in the Company's net interest income, by category, due to shifts in volume and rate, for the years ended December 31, 1995 and 1994. The information is presented on a taxable equivalent basis, using an effective rate of 35%.
Year ended December 31, 1995 over 1994 (1) 1994 over 1993 (1) Increase (decrease) in: Volume Rate Total Volume Rate Total Interest income: Interest bearing deposits at banks ($33) $ 32 ($1) ($85) $4 ($81) Securities: U.S. Treasury and U. S. Government agencies 2,138 (657) 1,481 3,002 (1,856) 1,146 State and municipal 47 49 96 2,351 50 2,401 Other bonds and securities 361 124 485 213 278 491 -------- ------- -------- -------- -------- ------- Total securities 2,546 (484) 2,062 5,566 (1,528) 4,038 -------- ------- -------- -------- -------- ------- Federal funds sold 47 40 87 (113) 7 (106) Loans: Commercial loans and lease financing 6,373 1,908 8,281 6,918 1,024 7,942 Installment loans 2,406 799 3,205 2,225 (360) 1,865 Mortgage loans 834 324 1,158 3,160 (3,087) 73 -------- -------- -------- -------- -------- ------- Total loans 9,613 3,031 12,644 12,303 (2,423) 9,880 -------- -------- -------- -------- -------- ------- Total interest income $12,173 $ 2,619 $14,792 $17,671 ($3,940) $13,731 -------- -------- -------- -------- -------- ------- Interest expense: Interest bearing deposits 1,864 8,049 9,913 4,690 (1,916) 2,774 Borrowed funds: Securities sold under repurchase agreements and federal funds purchased 1,767 1,315 3,082 952 1,152 2,104 Short-term borrowings 298 595 893 25 35 60 Long-term borrowings and subordinated capital note 1,100 (2) 1,098 429 (360) 69 -------- -------- -------- -------- -------- ------- Total borrowed funds 3,165 1,908 5,073 1,406 827 2,233 -------- -------- -------- -------- -------- ------- Total interest expense $ 5,029 $ 9,957 $14,986 $ 6,096 ($1,089) $5,007 -------- -------- -------- -------- -------- ------- Increase (decrease) in net interest income $ 7,144 ($7,338) ($194) $11,575 ($2,851) $8,724 ======= ======== ======= ======== ======== ====== (1) Variance not solely due to rate or volume is allocated to the volume variance. The change in interest due to both rate and volume is allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Item 2. PROPERTIES. The Company does not own or lease any property. As of December 31, 1995, NPB owns 33 properties in fee and leases 26 other properties. The properties owned in fee, at such date, were not subject to any major liens, encumbrances, or collateral assignments. The principal office of the Company and of NPB is owned in fee and is located at Philadelphia and Reading Avenues, Boyertown, Pennsylvania 19512. The principal office of NPB's CHNB Division is leased and is located at 9 West Evergreen Avenue, Chestnut Hill, Philadelphia, Pennsylvania 19118. NPB presently has 43 branches located in the following Pennsylvania counties: Berks, Bucks, Chester, Lancaster, Lehigh, Montgomery, Northampton, and Philadelphia. In addition to its branches, NPB presently leases 4 properties at which it operates loan production offices, and owns or leases 30 automated teller machines located throughout the eight-county area, all of which are located at bank branch locations, except for one that is "free-standing" (not located at a branch). 22 Item 3. LEGAL PROCEEDINGS. Various actions and proceedings are presently pending to which NPB is a party. These actions and proceedings arise out of routine operations and, in management's opinion, will have no material adverse effect on the consolidated financial position of the Company and its subsidiaries. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT. The principal executive officers of the Company, as of the date hereof, are as follows: Principal Business Occupation Name Age During the Past Five Years Lawrence T. Jilk, Jr. 57 President and Chief Executive Officer of the Company since January 1990, and President of the Company from April 1988 to January 1990. Also, Chairman of NPB. Wayne R. Weidner 54 Executive Vice President of the Company since April 1990, and Treasurer of the Company from 1983 to 1990. Also, Chief Executive Officer and President of NPB. William H. Sayre 63 Vice Chairman of NPB since April 1995. Executive Vice President of NPB from August 1992 to April 1995. Prior thereto, President of Sayre Associates, Inc. (bank consulting firm) from January 1991 to July 1992, and Executive Vice President and Chief Credit Policy Officer of Fidelity Bank, N.A. from 1988 to December 1990. Sandra L. Spayd 52 Secretary of the Company, and Senior Vice President and Corporate Secretary of NPB. Gary L. Rhoads 41 Treasurer of the Company, and Senior Vice President, Controller and Cashier of NPB. Executive officers of the Company are elected by the Board of Directors and serve at the pleasure of the Board. Executive Officers of the Bank are appointed by the Board of Directors of the Bank and serve until they resign, retire, become disqualified, or are removed by such Board. 23 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock currently trades on the Nasdaq National Market tier of The Nasdaq Stock Market(sm) under the symbol: NPBC. The following table reflects the high and low 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 5% stock dividends paid on October 31, 1995, and on October 31, 1994. MARKET VALUE OF COMMON STOCK 1995 High Low lst Quarter 24 3/4 22 1/8 2nd Quarter 26 23 3/8 3rd Quarter 27 7/8 23 5/8 4th Quarter 28 1/2 24 1/4 1994 High Low lst Quarter 36 1/2 34 2nd Quarter 36 1/4 31 3/4 3rd Quarter 33 1/8 26 1/4 4th Quarter 29 1/2 21 7/8 CASH DIVIDENDS DECLARED ON COMMON STOCK 1995 1994 lst Quarter $.20 $.17 2nd Quarter .21 .19 3rd Quarter .22 .19 4th Quarter .22 .20 (This space left intentionally blank) 24 Item 6. SELECTED FINANCIAL DATA.
FIVE-YEAR STATISTICAL SUMMARY (Dollars in thousands, except per share data) Year Ended 1995 1994 1993 1992 1991 STATEMENTS OF CONDITION Total assets $1,251,378 $1,137,174 $933,736 $775,888 $739,512 Total deposits 914,890 864,640 748,229 631,186 616,617 Loans and leases, net 918,699 811,302 719,856 591,513 520,300 Total investments 240,902 238,102 144,488 129,794 158,061 Total shareholders' equity 106,615 84,871 82,222 70,700 61,609 Book value per share* 14.04 11.32 10.89 9.52 8.35 Percent shareholders' equity to assets 8.52% 7.46% 8.81% 9.11% 8.33% Trust assets 401,532 313,898 286,710 232,658 220,863 EARNINGS Total interest income $99,020 $84,259 $71,272 $69,073 $71,709 Total interest expense 43,836 28,848 23,839 26,699 36,387 ------- ------- ------- ------- ------- Net interest income 55,184 55,411 47,433 42,374 35,322 Provision for loan and lease losses 3,200 3,200 5,145 6,225 4,817 ------- ------- ------- ------- ------- Net interest income after provision for loan and lease losses 51,984 52,211 42,288 36,149 30,505 Other income 7,608 5,409 4,931 4,494 3,906 Other expenses 37,542 36,914 28,629 23,846 19,665 ------- ------- ------- ------- ------- Income before income taxes 22,050 20,706 18,590 16,797 14,746 Income taxes 6,668 6,057 5,782 5,484 4,646 ------- ------- ------- ------- ------- Income before cumulative effect of change in accounting for income taxes 15,382 14,649 12,808 11,313 10,100 Cumulative effect on prior years (to January 1, 1993) of change in accounting for income taxes --- --- 500 --- --- ------- ------- ------- ------- ------- Net income $15,382 $14,649 $13,308 $11,313 $10,100 ======= ======= ======= ======= ======= Cash dividends paid $6,263 $5,344 $4,405 $3,750 $3,392 Return on average assets 1.30% 1.41% 1.60% 1.50% 1.40% Return on average shareholders' equity 16.3% 17.3% 17.4% 17.1% 17.3% PER SHARE DATA* Income per common share before cumulative effect of change in accounting for income taxes $2.04 $1.95 $1.71 $1.53 $1.37 Cumulative effect on prior years to (January 1, 1993) of change in accounting for income taxes --- --- 0.07 --- --- Net income 2.04 1.95 1.78 1.53 1.37 Dividends paid in cash 0.83 0.71 0.59 0.51 0.46 Dividends paid in stock 5% 5% 7% 5% 5% plus 2-for-1 stock split SHAREHOLDERS AND STAFF Average shares outstanding* 7,547,382 7,525,100 7,480,740 7,394,976 7,370,298 Shareholders 2,823 2,787 2,701 2,531 2,375 Staff - Full-time equivalents 517 559 449 368 357 * Restated to reflect 5% stock dividends in 1995 and 1994, a 7% stock dividend in 1993, a 2-for-1 stock split and a 5% stock dividend in 1992, and a 5% stock dividend in 1991.
The unaudited quarterly results of the Company's operations in 1995 and 1994 are included in footnote 18 to the Company's Consolidated Financial Statements included herein at Item 8, Financial Statements and Supplementary Data. (This space left intentionally blank) 25 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis is intended to assist in understanding and evaluating the major changes in the financial condition and earnings performance of the Company with a primary focus on an analysis of operating results. FINANCIAL CONDITION During 1995 total assets increased to $1,251.4 million, an increase of $114.2 million or 10.0% over the $1,137.2 million in 1994. Total assets at the end of 1994 increased $203.5 million or 21.8% over the $933.7 million in 1993. The growth in assets in 1994 was strongly influenced by the acquisition of eight branches of Central Pennsylvania Savings Association (CPSA), Shamokin, Pa on May 6, 1994, providing approximately $125 million in additional assets. Total cash and cash equivalents increased $7.1 million or 20.6% in 1995 compared to 1994 versus an increase of $4.4 million or 14.8% in 1994 compared to 1993. The increase in 1995 is due to an increased number of branch locations requiring vault cash, as well as a higher level of interest bearing deposits in banks. Net loans and leases increased to $918.7 million during 1995, an increase of $107.4 million or 13.2% compared to 1994. Net loans increased $91.4 million in 1994 or 12.7% compared to 1993. Loan growth in 1995 was primarily the result of favorable local economic conditions and the investment of deposits from new branch locations. Loans originated for immediate resale during 1995 amounted to $11.5 million. For 1995 the Company's credit quality is reflected by the ratio of net charge-offs to average loans of .24%, and the level of non-performing loans to total loans of 0.96%. The Company has no significant exposure to energy and agricultural-related loans. Non-performing loans in 1994 were 1.38% of total loans. Investments, which are the Company's secondary use of funds, increased $2.8 million or 1.2% to $240.9 million in 1995. In 1994, the investment portfolio reflected an increase of $93.6 million or 64.8% compared to 1993. The 1994 increase was primarily in U.S. Government securities and tax advantaged municipal securities, and was due primarily to the investment of deposits acquired from CPSA. At year end 1995, the FASB has provided a one-time window of opportunity for reclassifying investments accounted for under Statement of Financial Accounting Standards (SFAS) 115, "Accounting for Certain Investments in Debt and Equity Securities." As a result, the Company has designated its entire investment portfolio as available for sale. Future changes in the market value of these securities will be accounted for, net of tax, as an adjustment to shareholders' equity. The Company may elect to designate new purchases of investment securities as held to maturity in the future, however. Proceeds from the sale of investment securities in 1995 were $6.9 million, on which a gain of $388,000 was recognized. As the primary source of funds, aggregate deposits of $914.9 million increased $50.3 million or 5.8% compared to 1994. Deposits of $864.6 million increased $116.4 million in 1994 or 15.6% compared to 1993. Deposit liabilities assumed in the CPSA transaction in 1994 amounted to $125.0 million. In addition to deposits, growth in earning assets has been 26 funded somewhat through purchased funds and borrowings. These include securities sold under repurchase agreements, federal funds purchased, short-term borrowings, and long-term borrowings. In aggregate, these funds totaled $214.5 million at the end of 1995, a $38.5 million or 21.9% increase compared to 1994. The 1994 amount of borrowings and purchased funds of $176.0 million represented an increase of $82.1 million or 87.4% compared to 1993. The Company used long-term fixed rate borrowings in 1995 primarily to fund long-term mortgage assets and investment securities. Shareholders' equity increased by $21.7 million or 25.6% in 1995 to $106.6 million. This increase was due primarily to net unrealized gains on investment securities available for sale, the retention of earnings, and reinvestment of cash dividends under the Company's dividend reinvestment plan. Cash dividends paid in 1995 increased $919,000 or 17.2% compared to the cash dividends paid in 1994 and increased $939,000 or 21.3% compared to cash dividends paid in 1993. Earnings retained in 1995 were 59.3% compared to 63.5% in 1994. RESULTS OF OPERATIONS Net income for 1995 of $15.4 million was 5.0% more than the $14.6 million reported in 1994. The 1994 amount was 10.1% more than the $13.3 million in 1993. On a per share basis, net income was $2.04, $1.95 and $1.78 for 1995, 1994 and 1993, respectively. There was no material effect on the Company's results of operations for 1994 relating to the acquisition of eight branches of CPSA, on May 6, 1994. Net interest income is the difference between interest income on assets and interest expense on liabilities. Net interest income decreased $227,000 or 0.4% to $55.2 million in 1995 from the 1994 amount of $55.4 million. The decrease was due primarily to a significant increase in the cost of interest bearing liabilities that was only partially offset by a higher yield on total interest earning assets. Interest rate risk is a major concern in forecasting the earnings potential. In 1995, the Company's prime rate was 8.50% through January 31, 1995. From February 1, 1995 through July 6, 1995, the prime rate was 9.00%. From July 7, 1995 to December 20, 1995, the prime rate was 8.75%. On December 21, 1995 the prime rate was 8.50% through year end. In 1994, the Company's prime rate was 6.0% through March 23, 1994. From March 24 to April 18, 1994, the prime rate was 6.25%. From April 19 to May 17, 1994, the prime rate was 6.75%. From May 18 to August 15, 1994, the prime rate was 7.25%. From August 16 to November 14, 1994, the prime rate was 7.75%. On November 15, 1994, the prime rate changed to 8.50%. Net interest income in 1994 increased $8.0 million or 16.8% to $55.4 million from 1993 due primarily to an increase in average loans outstanding and the investment portfolio. Interest expense during 1995 increased $15.0 million or 52.0% compared to the prior year due to higher interest rates on deposits and short-term borrowings. Interest expense during 1994 increased $5.0 million or 21.0% compared to 1993. Despite the current decreasing 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 marketing and branch overhead expenses. Such costs are necessary for continued growth and to maintain and increase market share of available deposits. The provision for loan and lease losses is determined by periodic reviews of loan quality, current economic conditions, loss experience and loan growth. Based on these factors, the provision for loan and lease losses remained the same at $3,200,000 for both 1995 and 1994. The 1994 27 provision decreased $1,945,000 compared to 1993. The allowance for loan and lease losses of $20.4 million in 1995 and $19.3 million in 1994 as a percentage of gross loans was 2.2% and 2.3% in 1995 and 1994, respectively. Net loan charge-offs of $2,144,000, $1,799,000 and $1,944,000 during 1995, 1994 and 1993, respectively, continue to be comparable with those of the Company's peers. The increase in other income in 1995 compared to 1994 was $2.2 million or 40.7% and was due to a gain on the sale of securities and mortgages of $388,000 versus a loss on same of $445,000 in 1994, increased other service charges and fees of $637,000, increased trust income of $389,000, increased service charges on deposit accounts of $188,000, and increased equity in undistributed net earnings of affiliates of $152,000. The increase in other income in 1994 compared to 1993 was $478,000 or 9.7% and was due to increased service charges on deposit accounts of $485,000, increased other service charges and fees of $363,000, and increased trust department income of $172,000. These increases were partially offset by losses on the sale of mortgages of $319,000 and a decrease in income recognized from affiliates of $24,000. Sales of investment securities in 1995 and 1994 totaled $6.9 million and $1.6 million, respectively. "Total other expenses" increased $628,000 or 1.7% in 1995 when compared to 1994. By category, the Company's "salaries, wages and employee benefits" increased $1,231,000; "net premises and equipment" increased $458,000; "FDIC assessment" decreased $86,000; and "other operating" expenses decreased $975,000. "Total other expenses" increased $8,285,000 or 28.9% in 1994 when compared to 1993. By category, the Company's "salaries, wages and employee benefits" increased $4,689,000; "net premises and equipment" increased $2,095,000; "other operating expenses" increased $1,226,000; and the "FDIC assessment" increased $275,000. The primary reasons for increased expenses in 1994 include both one-time and ongoing costs associated with the purchase of eight branches from CPSA and the opening of a trust subsidiary, Investors Trust Company, located in Wyomissing, Berks County. For 1995, there are no individual items of other operating expenses that exceed one percent of the aggregate of total interest income and other income. In 1994, the category "Stationery and Supplies" included in other operating expenses of $930,000 exceeded one percent of the aggregate of total interest income and other income. Income before income taxes and the cumulative effect of a change in accounting for income taxes increased by $1,344,000 or 6.5% compared to 1994 when income increased by $2,116,000 or 11.4% compared to 1993. The increase in income taxes is due to the higher pre-tax income levels. The Company adopted, effective January 1, 1993, SFAS 109, "Accounting for Income Taxes." Under the liability method specified by SFAS 109, deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The change from a previously adopted liability method to the liability method of accounting for income taxes as specified by SFAS 109 increased net earnings for 1993 by $500,000, or $.07 per share, the cumulative effect of the change in accounting related to prior years to 1993 which were not restated. 28 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 $94.9 million during 1995. Long-term liquidity and funding needs decreased in 1995 resulting in a reduction of long-term borrowings in the amount of $6.2 million from the Federal Home Loan Bank. For cash flow information regarding liquidity, please refer to the Company's Consolidated Statement of Cash Flows included herein. 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, 1995:
Repricing Periods (1) One Year Within Through Over One Year Five Years Five Years Assets (In thousands) Interest bearing deposits at banks $ 2,014 $ -- $ -- Investment securities 65,167 65,721 110,014 Loans and leases 399,526 384,395 134,778 Other assets 5,288 -- 84,475 -------- -------- -------- 471,995 450,116 329,267 -------- -------- -------- Liabilities and equity Non-interest bearing deposits 134,968 -- -- Interest bearing deposits 317,205 226,199 236,518 Borrowed funds 198,399 3,610 12,500 Other liabilities -- -- 15,364 Hedging instruments 80,000 (80,000) -- Shareholders' equity -- -- 106,615 -------- -------- -------- 730,572 149,809 370,997 -------- -------- -------- Interest sensitivity gap (258,577) 300,307 (41,730) -------- -------- -------- Cumulative interest rate sensitivity gap ($258,577) $41,730 $ -- ========= ======== ======== (1) 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.
Interest rate sensitivity is a function of the repricing characteristics of the Company's assets and liabilities. These 29 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 one year, 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. The Company anticipates that short-term interest rate levels may fall in 1996. Given this assumption, the Company's asset/liability strategy for 1996 is to remain in a negative gap position (interest-bearing liabilities subject to repricing greater than interest-earning assets subject to repricing) for periods up to a year so that the impact of a falling rate environment will not have a negative impact on net interest income and will not be significant to the Company's results of operations. Effective monitoring of these interest sensitivity gaps is the priority of the Company's asset/liability management committee. CAPITAL ADEQUACY The following table sets forth certain capital performance ratios.
1995 1994 1993 CAPITAL LEVELS Tier 1 leverage ratio 7.59% 7.35% 8.80% Tier 1 risk-based ratio 10.97 10.85 11.76 Total risk-based ratio 12.23 12.11 13.03 CAPITAL PERFORMANCE Return on average assets 1.30 1.41 1.60 Return on average equity 16.30 17.30 17.40 Earnings retained 59.30 63.50 66.90 Internal capital growth 25.60 3.20 16.30
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, 1995, 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 3.0%. 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%. The Company currently meets the criteria for a well capitalized institution, and management believes that, under 30 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 February 1994, the Company's Board of Directors approved the repurchase of up to 200,000 shares of its Common Stock in open market or negotiated transactions. At December 31, 1995, a total of 177,140 shares have been repurchased at an aggregate cost of $5,382,000. FUTURE OUTLOOK Due to several major bank mergers taking place in southeastern Pennsylvania, the Company anticipates a volatile banking market in 1996 in both the consumer and corporate sector of its marketplace. In 1996, the Company will initiate Private Banking to handle the financial and investment needs of the professional market, introduce its debit card, open approximately six new supermarket branches, and install several new remote ATMs. These new initiatives will not start contributing to profits until 1997 and beyond so that 1996 earnings may be somewhat negatively impacted by the initial costs of these new operations. Beginning January 1, 1996 the FDIC reduced the insurance premiums that financial institutions pay on commercial bank deposits to zero from the previous rate of $.04 per hundred in effect since May 1, 1995. The Company must continue to pay $.23 per hundred on approximately $225 million of deposits at branches acquired from Sellersville Savings and Loan Association and CPSA. In order for the rate on these deposits to also be lowered, there is a chance that in 1996 the Company will have to pay a onetime assessment of between $1 million and $2 million to help recapitalize the Savings Association Insurance Fund (SAIF) segment of the FDIC. At the time of this report, this issue is part of the unresolved federal budget debate occurring in Washington, DC. The Company cannot predict if the pending legislation will be enacted as presently proposed, but expects that any legislation recapitalizing SAIF will likely impose additional deposit insurance costs on the Company attributable to its acquired SAIF-insured deposits. These costs may have a material adverse effect on the Company's earnings when incurred. (This space left intentionally blank) 31 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Consolidated Balance Sheets
(Dollars in thousands) December 31, ASSETS 1995 1994 Cash and due from banks $ 39,195 $ 33,195 Interest bearing deposits in banks 2,014 964 Total cash and cash equivalents 41,209 34,159 Securities held to maturity (approximate market value of $97,459 at 1994) -- 99,229 Securities available for sale at market value 240,902 138,873 ----------- ----------- Total investment securities 240,902 238,102 Loans and leases, less allowance for loan and lease losses of $20,36 and $19,310 at 1995 and 1994, respectively 918,699 811,302 Premises and equipment 19,926 17,770 Accrued interest receivable 8,867 8,001 Investments at equity 4,827 4,677 Other assets 16,948 23,163 ----------- ----------- Total assets $ 1,251,378 $ 1,137,174 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest bearing $ 134,968 $ 121,273 Interest-bearing (Includes certificates of deposit in excess of $100: 1995 -$89,881; 1994 -$65,630) 779,922 743,367 ----------- ----------- Total deposits 914,890 864,640 Securities sold under repurchase agreements and federal funds purchased 138,550 50,274 Short-term borrowings 4,370 47,967 Long-term borrowings 71,589 77,777 Accrued interest and other liabilities 15,364 11,645 ----------- ----------- Total liabilities 1,144,763 1,052,303 Shareholders' equity Preferred stock, no stated par value; authorized 1,000,000 shares, none issued -- -- Common stock, par value $2.50 per share; authorized 20,000,000 shares, issued and outstanding 1995 -7,594,474; 1994 - 7,495,080, net of shares in Treasury: 1995 - 47,939; 1994 - 98,779 19,106 18,083 Additional paid-in capital 57,501 57,263 Valuation adjustment for securities available for sale, net of tax 6,579 (4,011) Retained earnings 24,646 16,598 Treasury stock at cost (1,217) (3,062) ----------- ----------- Total shareholders' equity 106,615 84,871 ----------- ----------- Total liabilities and shareholders'equity $ 1,251,378 $ 1,137,174 =========== ===========
The accompanying notes are an integral part of these statements. 32 Consolidated Statements of Income
(Dollars in thousands, except per shara data) Year Ended December 31, 1995 1994 1993 INTEREST INCOME Loans and leases, including fees $ 82,776 $ 70,133 $ 60,181 Investment securities Taxable 13,735 11,766 10,129 Tax-exempt 2,319 2,256 671 Federal funds sold and securities purchased under reverse repurchase agreements 114 27 133 Deposits in banks 76 77 158 -------- -------- -------- Total interest income 99,020 84,259 71,272 -------- -------- -------- INTEREST EXPENSE Deposits 32,739 22,825 20,051 Securities sold under repurchase agreements and federal funds purchased 5,613 2,347 427 Short-term borrowings 1,078 369 124 Long-term borrowings 4,406 3,307 3,237 -------- -------- -------- Total interest expense 43,836 28,848 23,839 -------- -------- -------- Net interest income 55,184 55,411 47,433 Provision for loan and lease losses 3,200 3,200 5,145 -------- -------- -------- Net interest income after provision for loan and lease losses 51,984 52,211 42,288 -------- -------- -------- OTHER INCOME Trust income 1,811 1,422 1,250 Service charges on deposit accounts 2,748 2,560 2,075 Other service charges and fees 2,360 1,723 1,360 Net gains (losses) on sale of mortgages 388 (445) 73 Equity in undistributed net earnings of affiliates 301 149 173 -------- -------- -------- Total other income 7,608 5,409 4,931 -------- -------- -------- OTHER EXPENSES Salaries, wages and employee benefits 20,215 18,984 14,295 Net premises and equipment 6,045 5,587 3,492 FDIC assessment 1,633 1,719 1,444 Other operating 9,649 10,624 9,398 -------- -------- -------- Total other expenses 37,542 36,914 28,629 -------- -------- -------- Income before income taxes and cumulative effect of change in accounting for income taxes 22,050 20,706 18,590 Applicable income tax expense 6,668 6,057 5,782 -------- -------- -------- Income before cumulative effect of change in accounting for income taxes 15,382 14,649 12,808 Cumulative effect on prior years (to January 1, 1993) of change in accounting for income taxes -- -- 500 -------- -------- -------- Net income $ 15,382 $ 14,649 $ 13,308 ======== ======== ======== PER SHARE OF COMMON STOCK Income before cumulative effect of change in accounting for income taxes $ 2.04 $ 1.95 $ 1.71 Cumulative effect on prior years (to January 1, 1993) of change in accounting for income taxes -- -- $ 0.07 Net income $ 2.04 $ 1.95 $ 1.78 Dividends paid in cash $ 0.83 $ 0.71 $ 0.59
The accompanying notes are an integral part of these statements. 33 Consolidated Statement of Changes in Shareholders' Equity
Net Unrealized (Dollars in thousands) Gain (Loss) on Additional Securities Common Stock Paid-in Available Retained Treasury Shares Par Value Capital for Sale Earnings Stock Balance at January 1, 1993 6,286,372 $ 15,741 $ 38,666 ($ 114) $ 16,617 ($ 210) Net income -- -- -- -- 13,308 -- 7% stock dividend 444,533 1,111 15,781 -- (16,892) -- Cash dividends declared -- -- -- -- (4,632) -- Shares issued under dividend reinvestment plan 46,345 116 1,447 -- -- -- Increase in carrying value of marketable equity securities -- -- -- 114 -- -- Shares issued under stock option plan 67,269 168 828 -- -- -- Effect of treasury stock transactions 10,000 -- (37) -- -- 210 --------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1993 6,854,519 17,136 56,685 -- 8,401 -- Net income -- -- -- -- 14,649 -- 5% stock dividend 337,613 844 -- -- (844) -- Cash dividends declared -- -- -- -- (5,608) -- Shares issued under dividend reinvestment plan 13,262 33 481 -- -- -- Net unrealized loss on securities available for sale, net of taxes -- -- -- (4,011) -- -- Shares issued under stock option plan 28,732 70 375 -- -- -- Effect of treasury stock transactions (98,779) -- (278) -- -- (3,062) --------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1994 7,135,347 18,083 57,263 (4,011) 16,598 (3,062) Net income -- -- -- -- 15,382 -- 5% stock dividend 359,733 899 -- -- (899) -- Cash dividends declared -- -- -- -- (6,435) -- Change in unrealized gain (loss) on securities available for sale, net of taxes -- -- -- 10,590 -- -- Shares issued under stock option plan 48,554 124 775 -- -- -- Effect of treasury stock transactions 50,840 -- (537) -- -- 1,845 --------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1995 7,594,474 $ 19,106 $ 57,501 $ 6,579 $ 24,646 ($ 1,217) ========= ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements. (This space intentionally left blank) 34 Consolidated Statements of Cash Flows
(Dollars in thousands) Year Ended December 31, 1995 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 15,382 $ 14,649 $ 13,308 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses 3,200 3,200 5,145 Depreciation and amortization 3,032 2,399 1,173 Deferred income tax benefit (371) (1,047) (996) Amortization of security discounts 512 578 529 Amortization of security premiums (589) (543) (200) Investment securities and mortgage (gains) losses, net (388) 445 (73) Mortgage loans originated for resale (11,460) (18,984) (27,262) Sale of mortgage loans originated for resale 11,460 18,984 27,262 Changes in assets and liabilities, net of effects from business acquired: Increase in accrued interest receivable (866) (1,651) (112) Increase (decrease) in interest payable 3,331 490 (114) Net (increase) decrease in other assets 4,542 (5,335) 3,161 Net increase (decrease) in other liabilities 216 1,527 (4,859) --------- --------- --------- Net cash provided by operating activities 28,001 14,712 16,962 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Cash equivalents received in excess of payments for business acquired -- -- 6,079 Proceeds from sales of investment securities available for sale 6,853 1,635 -- Proceeds from maturities of investment securities held to maturity 13,699 3,971 36,221 Proceeds from maturities of investment securities available for sale 4,014 21,806 -- Purchase of investment securities - available for sale (14,905) (126,923) (36,266) Proceeds from sale of loans -- -- 8,737 Net increase in loans (110,737) (94,646) (98,812) Purchases of premises and equipment (4,560) (6,946) (4,653) --------- --------- --------- Net cash used in investing activities (105,636) (201,103) (88,694) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in interest and non-interest bearing demand deposits and savings accounts (27,750) 16,786 84,746 Net increase (decrease) in certificates of deposit 78,000 99,625 (35,995) Net increase (decrease) in securities sold under agreements to repurchase and federal funds purchased 88,276 20,034 16,505 Net increase (decrease) in short-term borrowings (43,597) 35,375 6,940 Net increase (decrease) in long-term borrowings (6,188) 26,688 9,979 Issuance of common stock under dividend reinvestment and stock option plans 899 959 2,559 Effect of Treasury stock transactions 1,308 (3,340) 173 Cash dividends (6,263) (5,344) (4,405) --------- --------- --------- Net cash provided by financing activities 84,685 190,783 80,502 --------- --------- --------- Net increase in cash and cash equivalents 7,050 4,392 8,770 Cash and cash equivalents at beginning of year 34,159 29,767 20,997 --------- --------- --------- Cash and cash equivalents at end of year $ 41,209 $ 34,159 $ 29,767 ========= ========= =========
The accompanying notes are an integral part of these statements. 35 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies followed by National Penn Bancshares, Inc. (the "Company") and its wholly-owned subsidiaries, National Penn Bank (the "Bank"), Investors Trust Company ("ITC"), National Penn Investment Company and National Penn Life Insurance Company, conform with generally accepted accounting principles and with general practice within the banking industry. The Company, primarily through its Bank subsidiary, has been serving residents and businesses of southeastern Pennsylvania since 1874. The Bank, which has in excess of 40 branch locations, is a locally managed community bank providing commercial banking products, primarily loans and deposits. Trust services are provided through ITC. The Bank and ITC encounter vigorous competition for market share in the communities they serve from bank holding companies, other community banks, thrift institutions and other non-bank financial organizations such as mutual fund companies, insurance companies and brokerage companies. The Company, the Bank, and ITC 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. PRINCIPLES OF CONSOLIDATION The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiaries on a consolidated basis. Investments owned between 20% and 50% are accounted for using the equity method. All material inter-company balances have been eliminated. INVESTMENT SECURITIES Investments in securities are classified in one of two categories: held to maturity and available for sale. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost. As the Company does not engage in security trading, the balance of its debt securities and any equity securities are classified as available for sale. 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. LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES Loans and leases are stated at the amount of unpaid principal, reduced by unearned discount and an allowance for loan and lease losses. Interest on loans is calculated based upon the principal amount outstanding. The allowance for loan and lease losses is established through a provision for loan and lease losses charged as an expense. Loans and leases are charged against the allowance for loan and lease losses when management believes that the collectibility 36 of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans and leases that may become uncollectible, based on evaluations of the collectibility of loans and leases and prior loan and lease loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases, and current economic conditions that may affect the borrower's ability to pay. Accrual of interest is stopped on a loan or lease when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. The Company adopted Statement of Financial Accounting Standards ("SFAS") 114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" on January 1, 1995. This new 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 114 excludes such homogeneous loans as consumer and mortgages. The adoption of SFAS 114 on January 1, 1995 did not have a material impact on the Company's financial consolidated condition or results of operations. 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. The FASB issued a new standard, SFAS 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of", which provides guidance on when to recognize and how to measure impairment losses of long-lived assets and certain identifiable intangibles and how to value long-lived assets to be disposed of. The adoption of this new statement is not expected to have a material impact on the Company's consolidated financial position or results of operations. The Company is required to adopt this new standard for its year ended December 31, 1996. PENSION PLAN 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 annually. INCOME TAXES Under the liability method of accounting for income taxes specified by SFAS 109, 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 which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The 37 principal types of differences between assets and liabilities for financial statement and tax return purposes are allowance for loan losses, deferred loan fees, and securities available for sale. The change from a previously adopted liability method to the liability method, specified by SFAS 109, of accounting for income taxes increased net earnings for 1993 by $500,000, or $.07 per share, by the cumulative effect of the change in accounting related to years prior to 1993 which were not restated. 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 1995 1994 1993 Interest... $40,505 $28,358 $23,953 ======= ======= ======= Taxes ..... $ 7,286 $ 7,244 $ 8,226 ======= ======= ======= Non-cash transfers of investment securities from held to maturity to available for sale amounted to $85,718,000 amortized cost and $87,708,000 fair value. 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. FINANCIAL INSTRUMENTS SFAS 107, "Disclosures About Fair Value of Financial Instruments," requires all entities to disclose the estimated fair value of its assets and liabilities considered to be financial instruments. Financial instruments requiring disclosure consist primarily of investment securities, loans and deposits. EARNINGS PER SHARE Earnings per share are calculated on the basis of the weighted average number of shares outstanding of 7,547,382, 7,525,100 and 7,480,740 for the years ended December 31, 1995, 1994 and 1993, respectively, after giving retroactive effect to 5% stock dividends paid on October 31, 1995 and October 31, 1994, and to a 7% stock dividend paid on October 25, 1993. All per share data included in these financial statements has been restated for the stock dividends. 38 2. INVESTMENT SECURITIES The Company classifies debt and marketable equity securities in two categories: securities available for sale and securities held to maturity. Securities available for sale are measured at fair value, with net unrealized gains and losses reported, net of tax, as a component in equity. Securities held to maturity are carried at amortized cost. The amortized cost, unrealized gains and losses and fair values of the company's securities available for sale and securities held to maturity at December 31, 1995 and 1994 are summarized as follows (in thouands):
December 31, 1995 Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value Securities available for sale U.S. Treasury and U.S. Government agencies $102,357 $ 5,522 $ 20 $107,859 State and municipal bonds 45,712 1,180 56 46,836 Other bonds 2,727 28 4 2,751 Mortgage-backed securities 63,316 1,827 114 65,029 Marketable equity securities and other 16,667 1,760 -- 18,427 -------- -------- -------- -------- Totals $230,779 $ 10,317 $ 194 $240,902 ======== ======== ======== ========
December 31, 1994 Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value Securities available for sale U.S. Treasury and U.S. Government agencies $ 39,055 $ -- $ 1,575 $ 37,480 State and municipal bonds 45,694 11 3,787 41,918 Other bonds 2,144 6 46 2,104 Mortgage-backed securities 42,527 103 1,884 40,746 Marketable equity securities and other 15,823 802 -- 16,625 -------- -------- -------- -------- Totals $145,243 $ 922 $ 7,292 $138,873 ======== ======== ======== ======== Securities held to maturity U.S. Treasury and U.S. Government agencies $ 76,607 $ 790 $ 2,057 $ 75,340 State and municipal bonds 7,388 80 324 7,144 Other bonds 1,018 -- 16 1,002 Mortgage-backed securities 14,216 195 438 13,973 -------- -------- -------- -------- Totals $ 99,229 $ 1,065 $ 2,835 $ 97,459 ======== ======== ======== ========
On November 15, 1995, the FASB issued a special report entitled "A Guide to Implementation of Statement No. 115 on Accounting for Certain Investments in Debt and Equity Securities." This guide allows enterprises to reassess the appropriateness of the classification of all securities held. A one-time reassessment can be made on one day between November 15, 1995 and December 31, 1995. Reclassifications from the held-to-maturity category that result from this one-time reassessment will not call into question the intent of an enterprise to ho other debt and equity securities to maturity in the future. Based on this special report, on December 29, 1995, the Company reclassified certain securities from the held-to-maturity category to the available-for-sale category. The transfer was made at fair value and resulted in an estimated net unrealized gain of $10,123,000 and an increase in retained earnings of $6,579,000 based on current market values. The following table lists the maturities of securities held at December 31, 1995 classified as securities available for sale at market value and securities held to maturity. Expected maturities will differ from contractu maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Market Cost Value Due in one year or less $20,435 $20,667 Due after one year through five years 21,007 22,110 Due after five years 109,354 114,669 -------- -------- 150,796 157,446 Mortgage-backed securities 63,316 65,029 Marketable equity securities and other 16,667 18,427 -------- -------- $230,779 $240,902 ======== ========
Proceeds from the sales of investments in debt securities during 1995, 1994 and 1993 were $6,853,000, $1,635,000 and $0, respectively. Gross gains and losses realized on those sales in 1995, 1994 and 1993 were not material. As of December 31, 1995 and 1994, investment securities with a book value of $78,559,000 and $74,260,000, respectively, were pledged to secure public deposits and for other purposes as provided by law. As of December 31, 1995 and 1994, the Company did not have any marketable equity securities of any one issuer where the book value exceeded 10% of shareholders' equity. 39 3. LOANS AND LEASES Major classifications of loans and leases are as follows (in thousands):
December 31, 1995 1994 Commercial and industrial loans $ 99,765 $ 79,726 Loans for purchasing and carrying securities 478 778 Loans to financial institutions 589 821 Real estate loans: Construction and land development 42,978 31,760 Residential 526,577 472,227 Other 256,956 228,911 Loans to individuals 11,727 16,400 --------- --------- 939,070 830,623 Unearned income (5) (11) --------- --------- Total loans and leases, net of unearned income 939,065 830,612 Allowance for loan and lease losses (20,366) (19,310) --------- --------- Total loans and leases, net $ 918,699 $ 811,302 ========= =========
Loans and leases on which the accrual of interest has been discontinued or reduced amounted to approximately $7,257,000 and $9,328,000 at December 31, 1995 and 1994, respectively. If interest on these loans had been accrued, such income would have approximated $305,000 and $486,000 for 1995 and 1994, respectively. Loan balances past due 90 days or more which are not on a non-accrual status, but which management expects will eventually be paid in full, amounted to $1,764,000 and $2,114,000 at December 31, 1995 and 1994, respectively. The balance of impaired loans was $5,380,000 at December 31, 1995. The Bank 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 $5,380,000 of non-accrual loans. The allowance for loan loss associated with the $5,380,000 of impaired loans was $931,000 at December 31, 1995. The average impaired loan balance was $7,368,000 in 1995 and the income recognized on impaired loans during 1995 was $528,000. The Bank's policy for interest income recognition on impaired loans is to recognize income under the accrual method. The Bank recognizes income on non-accrual 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 Bank. If these factors do not exist, the Bank will not recognize them. Changes in the allowance for loan and lease losses were as follows (in thousands):
1995 1994 1993 Balance, beginning of year $ 19,310 $ 17,909 $ 12,448 Reserves of acquired banks -- -- 2,260 Provision charged to operations 3,200 3,200 5,145 Loans and leases charged off (3,509) (3,002) (3,412) Recoveries 1,365 1,203 1,468 -------- -------- -------- Balance, end of year $ 20,366 $ 19,310 $ 17,909 ======== ======== ========
The FASB issued a new standard, SFAS No. 122, "Accounting for Mortgage Servicing Rights, an Amendment of SFAS No. 65," which requires that a mortgage banking enterprise recognize as a separate asset rights to service mortgage loans for others, however those servicing rights are acquired. In circumstances where mortgage loans are originated, separate asset rights to service mortgage loans are only recorded when the enterprise intends to sell such loans. The adoption of this new statement is not expected to have a material impact on the Company's consolidated financial position or results of operations. The Company will be required to adopt this standard for its year ended December 31, 1996. 40 4. PREMISES AND EQUIPMENT Major classifications of premises and equipment are summarized as follows (in thousnads):
Estimated December 31, Useful Life 1995 1994 Land $ 2,260 $ 2,171 Buildings 5 to 40 years 14,429 13,361 Equipment 3 to 10 years 13,118 10,345 Leasehold improvements 2 to 40 years 1,705 1,075 ------- ------ 31,512 26,952 Accumulated depreciation and amortization (11,586) (9,182) ------- ------ $ 19,926 $ 17,770 ======== ========
Depreciation and amortization expense amounted to $2,404,000, $1,821,000 and $1,173,000 for the years ended December 31, 1995, 1994 and 1993, respectively. 5. SHORT-TERM BORROWINGS Federal funds purchased and securities sold under agreements to repurchase generally mature within thirty 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 as follows (in thousands):
Year Ended December 31, 1995 1994 1993 Securities sold under repurchase agreements and federal funds purchased Balance at year end $138,550 $ 50,274 $ 30,240 Average during the year 89,509 55,569 17,204 Maximum month-end balance 138,550 89,089 30,240 Weighted average rate during the year 5.93% 4.55% 2.48% Rate at December 31 5.56% 5.28% 2.86% Short-term borrowings Balance at year end $ 4,370 $ 47,967 $ 12,592 Average during the year 18,810 5,338 4,446 Maximum month-end balance 10,286 47,967 12,592 Weighted average rate during the year 7.36% 3.47% 2.81% Rate at December 31 5.35% 6.58% 2.71%
The weighted average rates paid in aggregate on these borrowed funds for 1995, 1994 and 1993 were 6.18%, 4.46%, and 2.55%, respectively. 41 6. LONG-TERM BORROWINGS At December 31, 1995, advances from the Federal Home Loan Bank totaling $71,589,000 will mature within one to seven years and are reported as long-term borrowings. These advances had a weighted average interest rate of 6.14%. Principal payments ranging from $631,000 to $45,479,000 are due in years one through five. (This space intentionally left blank.) 42 7. PENSION AND CAPITAL ACCUMULATION 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 ten years of employement. 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, Actuarial present value of benefit obligations: 1995 1994 Accumulated benefit obligation, including vested benefits of $4,084,000 and $3,054,000 at 1995 and 1994, respectively ($4,251) ($3,144) Projected benefit obligation for service rendered to date ($6,461) ($4,912) Plan assets at fair value 5,796 4,898 ------- ------- Plan assets below projected benefit obligation (665) (14) Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions 184 (551) Unrecognized net obligation at January 1, 1987 being recognized over 17 years 872 981 Unrecognized prior service costs (424) (466) ------- ------- Pension liability ($ 33) ($ 50) ======= =======
Year Ended December 31, Net pension cost included the following components: 1995 1994 1993 Service cost - benefits earned during the period $ 332 $ 381 $ 302 Interest cost on projected benefit obligation 400 358 305 Actual return on plan assets (709) 108 (287) Net amortization and deferral 322 (330) 19 ----- ----- ----- Net periodic pension cost $ 345 $ 517 $ 339 ===== ===== =====
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 7.25% and 4.75%, respectively, in 1995, 8.25% and 5.5%, respectively, in 1994; and 6.5% and 4.0%, respectively, in 1993. The expected long-term rate of return on assets was 8.25% for 1995, 8.25% for 1994 and 6.5% for 1993. 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 10% of their annual salary with the Company matching 50% of any contribution between 3% and 7%. Matching contributions to the plan were $303,000, $285,000 and $208,000 for the years ended December 31, 1995, 1994 and 1993, respectively. (This space intentionally left blank) 43 8. 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, Income tax expense 1995 1994 1993 Current $ 7,039 $ 7,104 $ 6,924 Deferred federal benefit (371) (1,047) (1,142) ------- ------- ------- Applicable income tax expense $ 6,668 $ 6,057 $ 5,782 ======= ======= =======
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, 1995 1994 1993 Computed tax expense at statutory rate $ 7,718 $ 7,247 $ 6,475 Increase (decrease) in taxes resulting from: Tax-exempt loan and investment income (1,076) (1,089) (563) Stock options exercised (196) (181) (564) Tax effect of unused temporary differences -- -- 337 Other, net 222 80 97 ------- ------- ------- Applicable income tax expense $ 6,668 $ 6,057 $ 5,782 ======= ======= =======
Deferred tax assets and liabilities at December 31, 1995, 1994 and 1993 consist of the following (in thousands):
1995 1994 1993 Deferred tax assets Deferred loan fees $ 896 $ 1,491 $ 1,158 Loan loss allowance 7,109 6,369 5,873 Deferred compensation 518 439 401 Loan sales valuation 120 210 210 Securities available for sale -- 2,160 -- Other real estate reserves -- -- 118 ------- ------- ------- 8,643 10,669 7,760 ------- ------- ------- Deferred tax liability Pension $ 64 $ 32 $ 61 Bad debt reserve recapture 529 773 1,018 Partnership investments 168 142 116 Acquisition adjustments 81 103 125 Mark-to-market accounting 57 86 114 Securities available for sale 3,543 -- -- Rehab credit adjustment 44 44 44 ------- ------- ------- 4,486 1,180 1,478 ------- ------- ------- Net deferred tax asset $ 4,157 $ 9,489 $ 6,282 ======= ======= =======
44 9. COMMITMENTS AND CONTINGENT LIABILITIES Future minimum payments under non-cancellable operating leases are due as follows (in thousands): Year ending December 31, 1996 $878 1997 769 1998 678 1999 560 2000 480 Remaining terms of the leases 1,564 ----- $4,929 ======
The total rental expense was approximately $1,182,000, $939,000, and $541,000 in 1995, 1994 and 1993, respectively. (This space intentionally left blank) 45 10. 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, and interest rate swaps. Those instruments involve, to varying degrees, elements of credit and 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 nonperformance 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, 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, 1995 and 1994 are as follows (in thousands):
1995 1994 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $105,432 $101,031 Standby letters of credit 9,048 7,793 Financial instruments whose notional or contract amounts exceed the amount of credit risk: Interest rate swap agreements 100,000 100,000
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 46 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, 1995 varies up to 100%; the average amount collateralized is 75%. 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 1995, the interest rate swaps had the effect of increasing the Company's net interest income by $1.1 million over what would have been realized had the Company not entered into the swap agreements. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS 107 requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments as defined in SFAS 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 and resulting fair values, and recorded carrying amounts at December 31, 1995 were as follows (in thousands): Fair value of loans and deposits with floating interest rates is generally presumed to approximate the recorded carrying amounts. Financial instruments actively traded in a secondary market have been valued using quoted available market prices. 47
Estimated Fair Carrying Value Amount At December 31, 1995 Cash and cash equivalents $ 41,209 $ 41,209 Investment securities 240,902 240,902
At December 31, 1994 Cash and cash equivalents $ 34,159 $ 34,159 Investment securities 236,332 238,102
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. Estimated Fair Carrying Value Amount At December 31, 1995 Deposits with stated maturities $459,144 $450,872 Short-term borrowings 142,920 142,920 Long-term borrowings 73,478 71,589 At December 31, 1994 Deposits with stated maturities $372,666 $372,872 Short-term borrowings 98,241 98,241 Long-term borrowings 75,785 77,777 Fair value of financial instrument liabilities with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand), totaling $464,018 for 1995 and $491,768 for 1994. 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. Estimated Fair Carrying Value Amount At December 31, 1995 Net loans $953,962 $918,699 At December 31, 1994 Net Loans $814,056 $811,302 There is no material difference between the carrying amount and estimated fair value of off-balance sheet items which total $216,229,000 and $211,380,000 at year end 1995 and 1994, respectively, which are primarily comprised of interest rate swap agreements and unfunded loan commitments which are generally priced at market at the time of funding. The Company's remaining assets and liabilities are not considered financial instruments. No disclosure of the relationship value of the Company's deposits is required by SFAS 107. 48 12. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK The Company grants commercial and residential loans to customers throughout southeastern Pennsylvania. Although the Company has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economic sector. 13. RELATED PARTY TRANSACTIONS Certain directors and officers of the Company and the Bank, their immediate families, and the companies with which they are associated, were customers of and have had banking transactions with the Bank in the ordinary course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and, in the opinion of management of the Bank, do not involve more than a normal risk of collectibility or present other unfavorable features. The aggregate dollar amount of these loans was $3,893,000 and $4,496,000 at December 31, 1995 and 1994, respectively. During 1995, $787,000 of new loans were made, and repayments totaled $1,390,000. (This space intentionally left blank.) 49 14. EQUITY TRANSACTIONS The Company has an employee stock option plan for certain key employees. A total of 1,277,114 shares of common stock, restated for stock dividends and splits, have been made available for options to be granted through February 24, 1997. The Company also has a non-employee director stock option plan. Under this plan, a total of 157,500 shares of common stock, restated for stock dividends and splits, have been made available for options to be granted through January 3, 2004. Under both plans, the option price per share is equivalent to 100% of the quoted market price on the date the options were granted. These options are exercisable pursuant to vesting schedules, commencing two years and expiring ten years and one month from the date of issue. The number of unoptioned shares available for granting totaled 502,633 at the beginning of the year and 812,785 at the end of the year. At December 31, 1995, 136,882 shares are exercisable.
1995 1994 1993 Outstanding, beginning of year 576,649 450,814 382,836 Effect of stock dividends and splits 33,707 27,944 31,997 Granted 204,900 126,550 113,250 Exercised (50,118) (28,659) (77,269) Cancelled or expired (5,768) -- -- ------------ ------------ ----------- Outstanding, end of year 759,370 576,649 450,814 ============ ============ =========== Option price per share exercised $12.11-18.42 $12.72-18.70 $9.60-19.99 Outstanding, end of year $12.11-35.29 $12.72-36.99 $13.35-38.79
The Company has authorized 1,000,000 shares of preferred stock with no stated par value. Voting powers, preferences, dividend rights, conversion rights, redemption and liquidation rights, if any, may be determined by the Board of Directors in their sole discretion. There are no shares outstanding at December 31, 1995, however, shares may be issued from time to time as a class without series or either in whole or in part in one or more series if so determined by the Board of Directors. The Company has a dividend reinvestment plan available to shareholders who elect to reinvest their dividends in additional shares of the Company's common stock which may be purchased in the open market or from authorized but unissued shares. All purchases to date that have been made from authorized but unissued common shares were at a purchase price equal to the fair market value of such shares. Fair market value, for this purpose, is generally the closing sale price per common share as reported on The Nasdaq Stock Market for the date of the dividend reinvestment. The FASB issued a new standard, 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 earnings per share, as if the fair-value based method of accounting defined in SFAS No. 123 had been applied. The Company has not determined which method it will follow in the future, but anticipates following APB Opinion 25. The Company will be required to adopt the new standard for its year ended December 31, 1996. 50 15. 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 SHEET
December 31 1995 1994 Assets Cash $ 50 $ 77 Investment in Bank subsidiary, at equity 90,993 72,802 Investment in other subsidiaries, at equity 15,627 11,834 Other assets 6 165 -------- -------- $106,676 $ 84,878 ======== ======== Liabilities and shareholders' equity Liabilities $ 61 $ 7 Shareholders' equity 106,615 84,871 -------- -------- $106,676 $ 84,878 ======== ========
CONDENSED STATEMENTS OF INCOME
Year Ended December 31, 1995 1994 1993 Income Equity in undistributed net earnings of subsidiaries $ 8,849 $ 4,691 $ 4,844 Dividends from Bank subsidiary 6,435 8,691 8,610 Dividends from other subsidiaries -- 1,267 -- Interest and other income 278 4 42 -------- -------- -------- 15,562 14,653 13,496 -------- -------- -------- Expenses Other operating expenses 127 4 267 -------- -------- -------- Income before income taxes 15,435 14,649 13,229 Applicable income tax expense (benefit) 53 -- (79) -------- -------- -------- Net income $ 15,382 $ 14,649 $ 13,308 ======== ======== ========
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1995 1994 1993 Cash flows from operating activities Net income $ 15,382 $ 14,649 $ 13,308 Equity in undistributed net earnings of subsidiaries (8,849) (4,691) (4,844) Net (increase) decrease in other assets 159 138 85 Net increase (decrease) in other liabilities (11) 271 (113) -------- -------- -------- Net cash provided by operating activities 6,681 10,367 8,436 -------- -------- -------- Cash flows from investing activities Additional investment in subsidiaries at equity (2,480) (3,699) (6,297) -------- -------- -------- Net cash (used in) investing activities (2,480) (3,699) (6,297) -------- -------- -------- Cash flows from financing activities Proceeds from issuance of stock 899 959 2,559 Effect of Treasury stock transactions 1,308 (3,340) 173 Cash dividends (6,435) (5,344) (4,405) -------- -------- -------- Net cash (used in) financing activities (4,228) (7,725) (1,673) -------- -------- -------- Increase (decrease) in cash and cash equivalents (27) (1,057) 466 Cash and cash equivalents at beginning of year 77 1,134 668 -------- -------- -------- Cash and cash equivalents at end of year $ 50 $ 77 $ 1,134 ======== ======== ========
51 16. REGULATORY RESTRICTIONS The Bank is required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those balances for the year ended December 31, 1995 was approximately $7,148,000. Dividends are paid by the Company from its assets which are mainly provided by dividends from the Bank. However, certain restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. Under the restrictions in 1996, the Bank, without prior approval of bank regulators, can declare dividends to the Company totaling $14,145,000 plus additional amounts equal to the net earnings of the Bank for the period January 1, 1996 through the date of declaration less dividends previously paid in 1996. The Company is required to maintain minimum amounts of Tier 1 and total capital to "risk-weighted" assets and a minimum Tier 1 leverage ratio, as defined by banking regulators. At December 31, 1995, 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 3.0%. In order for the Company to be considered "well capitalized", as defined by banking regulators, the Company must have minimum Tier 1 and total capital ratios of 6.0% and 10.0%, respectively, and a minimum Tier 1 leverage ratio of 5.0%. The Company's actual Tier 1 and total capital ratios at December 31, 1995 were 10.97% and 12.23% respectively and the Company's Tier 1 leverage ratio was 7.59%. The Company's management believes that, under current regulations, the Company will continue to meet its minimum capital requirements in the foreseeable future. 17. 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 expire on August 22, 1999. 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 $.001 per right at any time until the tenth 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 dilative effect, did not affect the Company's reported earnings per share, and was not taxable to the Company or its shareholders. 52 18. QUARTERLY 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. (in thousands, except per share data)
Three Months Ended 1995 Dec. 31 Sept. 30 June 30 March 31 Interest income $ 25,880 $ 25,436 $ 24,454 $ 23,250 ======== ======== ======== ======== Net interest income $ 14,276 $ 13,899 $ 13,549 $ 13,460 ======== ======== ======== ======== Provision for loan and lease losses $ 950 $ 750 $ 750 $ 750 ======== ======== ======== ======== Net gains (losses) on sale of securities & mortgages ($ 40) $ 125 $ 47 $ 256 ======== ======== ======== ======== Income before income taxes $ 5,766 $ 5,579 $ 5,134 $ 5,571 ======== ======== ======== ======== Net income $ 4,012 $ 3,895 $ 3,558 $ 3,917 ======== ======== ======== ======== Net income per share of common stock $ 0.54 $ 0.51 $ 0.47 $ 0.52 ======== ======== ======== ========
Three Months Ended 1995 Dec. 31 Sept. 30 June 30 March 31 Interest income $ 22,672 $ 21,677 $ 20,693 $ 19,217 ======== ======== ======== ======== Net interest income $ 14,068 $ 14,137 $ 14,017 $ 13,189 ======== ======== ======== ======== Provision for loan and lease losses $ 750 $ 750 $ 950 $ 750 ======== ======== ======== ======== Net losses on sale of mortgages ($ 87) ($ 46) ($ 91) ($ 221) ======== ======== ======== ======== Income before income taxes $ 4,866 $ 5,328 $ 4,907 $ 5,605 ======== ======== ======== ======== Net income $ 3,683 $ 3,709 $ 3,454 $ 3,803 ======== ======== ======== ======== Net income per share of common stock $ 0.49 $ 0.49 $ 0.46 $ 0.51 ======== ======== ======== ========
(This space intentionally left blank) 53 Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information relating to executive officers of the Company is included under Item 4A in Part I hereof. The information required by this item relating to directors of the Company and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to pages 4, 5, and 15 of the Company's definitive Proxy Statement to be used in connection with the Company's 1996 Annual Meeting of Shareholders (the "Proxy Statement"). Item 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated herein by reference to pages 10 through 12 and page 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 6, 14, and 15 of the Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated herein by reference to page 14 of the Proxy Statement. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. The following consolidated financial statements are included in Part II, Item 8 hereof: National Penn Bancshares, Inc., and Subsidiaries. Consolidated Balance Sheets. Consolidated Statements of Income. Consolidated Statement of Changes in Shareholders' Equity. Consolidated Statements of Cash Flows. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules. Financial statement schedules are omitted because the required information is either not applicable, not required, or is shown in the respective financial statements or in the notes thereto. 54 3. Exhibits. 2.1 Agreement dated June 25, 1993, between National Penn Bancshares, Inc., and Community Financial Bancorp, Inc. (Incorporated by reference to Exhibit 28.1 to the Company's Current Report on 8-K dated June 25, 1993.) 2.2 Agreement dated December 6, 1993, between National Penn Bancshares, Inc., and Central Pennsylvania Savings Association, F.A. relating to East Central branches. (Incorporated by reference to Exhibit 28.3 to the Company's Current Report on 8-K dated December 1, 1993.) 2.3 Agreement dated December 6, 1993, between National Penn Bancshares, Inc., and Central Pennsylvania Savings Association, F.A. relating to South Eastern branches. (Incorporated by reference to Exhibit 28.4 to the Company's Current Report on 8-K dated December 1, 1993.) 3.1 Articles of incorporation, as amended, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 3.2 Bylaws, as amended, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.1 National Penn Bancshares, Inc., Amended and Restated Dividend Reinvestment Plan. 10.2 National Penn Bancshares, Inc., Pension Plan. *(Incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.) 10.3 Amendment No. 1 to National Penn Bancshares, Inc., Pension Plan.* (Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.) 10.4 National Penn Bancshares, Inc., Capital Accumulation Plan.* (Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.) 10.5 National Penn Bancshares, Inc., Capital Accumulation Plan Amendment 1995-1.* 10.6 National Penn Bancshares, Inc., Capital Accumulation Plan Amendment 1996-1.* 10.7 National Penn Bancshares, Inc., Executive Incentive Plan.* 10.8 National Penn Bancshares, Inc., Executive Incentive Plan/Schedules.* 55 10.9 National Penn Bancshares, Inc., Amended and Restated Stock Option Plan.* (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement No. 33-87654 on Form S-8 as filed on December 22,1995.) 10.10 Non-Employee Directors' Stock Option Plan.* (Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K in the fiscal year ended December 31, 1994.) 10.11 Deferred Compensation Plan for Non-Employee Directors.* (Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K in the fiscal year ended December 31, 1994.) 10.12 Executive Supplemental Benefit Agreement dated December 27, 1989, among National Penn Bancshares, Inc., National Bank of Boyertown, and Lawrence T. Jilk, Jr.* (Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.13 Amendatory Agreement dated February 23, 1995, between National Penn Bancshares, Inc., National Penn Bank, and Lawrence T. Jilk, Jr.* (Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.14 Executive Supplemental Benefit Agreement dated December 27, 1989, among National Penn Bancshares, Inc., National Bank of Boyertown, and Wayne R. Weidner.* (Incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.15 Amendatory Agreement dated February 23, 1995, between National Penn Bank and Wayne R. Weidner.* (Incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.16 Stock Purchase Agreement dated July 25, 1988, between National Penn Bancshares, Inc., and First Capitol Bank. (Incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.17 Stock Purchase Warrant dated November 18, 1988, issued to National Penn Investment Company by First Capitol Bank (14,112 of First Capitol Bank common stock). (Incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.18 Stock Purchase Agreement dated April 20, 1989, between National Penn Bancshares, Inc., and Pennsylvania State Bank. (Incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 56 10.19 Stock Purchase Warrant dated July 3, 1989, issued to National Penn Investment Company by Pennsylvania State Bank.(Incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.20 Rights Agreement dated August 23, 1989, between National Penn Bancshares, Inc., and National Bank of Boyertown, as Rights Agent. (Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement No. 33-87654 on Form S-8 as filed on December 22, 1994.) 10.21 Assignment and Assumption Agreement dated January 31, 1992, between Sellersville Interim Federal Savings and Loan Association and National Bank of Boyertown. (Incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991.) 11 Computation of Earnings per Common Share. 21 Subsidiaries of the Registrant. 23 Consent of Independent Certified Public Accountants. 27 Financial Data Schedule. ____________ * Denotes a compensatory plan or arrangement. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Registrant during the last quarter of 1995. 57 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 27, 1996 By Lawrence T. Jilk, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated: Signatures Title Director March 27, 1996 John H. Body Director March 27, 1996 J. Ralph Borneman, Jr. Director March 27, 1996 John A. Cenerazzo Director March 27, 1996 John J. Dau Director, President, and March 27, 1996 Lawrence T. Jilk, Jr. Chief Executive Officer (Principal Executive Officer) Director March 27, 1996 Patricia L. Langiotti Director March 27, 1996 Kenneth A. Longacre Director March 27, 1996 Randall J. Nester Signatures Title Director March 27, 1996 C. Robert Roth Director March 27, 1996 Harold C. Wegman, D.D.S. Director and Executive March 27, 1996 Wayne R. Weidner Vice President Treasurer (Principal March 27, 1996 Gary L. Rhoads Financial and Accounting Officer) EX-10.1 2 Exhibit 10.1 NATIONAL PENN BANCSHARES, INC. AMENDED AND RESTATED DIVIDEND REINVESTMENT PLAN 1. The purpose of the National Penn Bancshares, Inc. (the "Company") Dividend Reinvestment Plan (the "Plan") is to provide holders of record and beneficial holders of the Company's Common Shares (the "Shares") the opportunity to reinvest their dividends in Shares. 2. Mellon Securities Trust Company (the "Administrator") is hereby appointed as Plan administrator and, by executing this Plan below, the Administrator hereby accepts its appointment as administrator and agrees to the terms and conditions of the Plan set forth herein. The Company may terminate the Administrator's appointment at any time and appoint in its place another corporation or bank to serve as Plan administrator. 3. Holders of record of Shares desiring to participate in the Plan must submit a properly signed Authorization Form to the Administrator in the form required by the Administrator. Beneficial holders of Shares desiring to participate in the Plan must either become shareholders of record by having shares transferred into their own names or arrange with the record holders (e.g., a broker or bank nominee) to participate in the Plan on their behalf. A shareholder of record or a beneficial holder must own fifty (50) or more Shares in order to participate in the Plan. Such Shares may be held (a) in certificate form, (b) in an account established under the Plan, (c) on his behalf by a record holder, or (d) in a combination of the foregoing. 4. An applicant's participation in the Plan will begin on the first dividend record date after the Administrator's receipt of the participant's Authorization Form or after completion of other arrangements by a record holder satisfactory to the Company and the Administrator, if the fifty (50) Shares participation requirement is then met. 5. Pursuant to a participant's authorization, the Company will pay dividends on Shares held of record by the participant and on Shares held by the Administrator under the Plan directly to the Administrator. As agent for the participants, the Administrator will apply such dividends, cash proceeds of fractional Shares resulting from stock dividends, and all voluntary cash payments permitted by Section 14 hereof, to the purchase of whole and fractional Shares from the Company's authorized but unissued Shares for the participants' accounts. The price of Shares purchased from the Company will be equal to the fair market value of such Shares on the dividend payment date. As used herein, "fair market value" of the Shares shall be the closing sale price for such shares as reported on the Nasdaq National Market; if no sale of Shares occurred on the dividend payment date, "fair market value" shall be determined by reference to such closing sale price on the next preceding day on which a sale occurred. No Shares shall be sold under the Plan at less than par value. If a dividend payment date falls on a Saturday, Sunday or holiday, fair market value of the Shares will be based upon quotations as of the close of business on the preceding Friday or business day, as the case may be. 6. The Company reserves the right to direct the Administrator from time to time to purchase Shares under the Plan in the open market. Open market purchases shall be made as soon as practicable on or after the dividend payment date but in no circumstances later than 30 days after such date. The purchase price to participants for Shares purchased in the open market will be the cost (including brokerage commission) to the Administrator of such purchases. Where any Shares are purchased in the open market, no Shares shall be allocated to the participants' accounts until the date on which the Administrator has purchased sufficient Shares from the Company and in the open market to cover the quarterly purchases for all participants in the Plan. In such event, the purchase price to all participants shall be based on the weighted averages of the prices of all Shares purchased from the Company and in the open market. 7. All shares purchased by the Administrator for Plan accounts shall be held in its name or in the name of its nominee. 8. As soon as practicable after the quarterly purchase or purchases are completed, the Administrator shall send each participant (excluding persons participating through arrangements made by record holders on their behalf) a statement confirming the purchases for the participant's account and containing other information, including total Shares held by the Administrator in the account as of the preceding dividend record date, dividends received, voluntary cash payments made (if any), amount invested, additional Shares purchased and the price per Share. No certificate will be issued to a participant for the Shares purchased and held in his account unless such participant so requests in writing or until such participant's account is terminated. Such requests must be submitted to the Administrator in writing after the Shares have been purchased. No certificates for fractional Shares will be issued. 9. Plan participants may deposit certificates for Shares registered in their names with the Administrator for safekeeping. A participant who desires to do so must complete the appropriate box on an Authorization Form and submit the properly signed Form to the Administrator together with the certificates for the Shares and payment of a $10.00 service fee. 10. The Administrator shall charge $3.00 service fee at the time a participant's account is terminated and at the time of each issuance of stock certificates requested by the participant. 11. The Administrator shall forward proxies to participants (excluding persons participating through arrangements made by record holders on their behalf) for Shares held under the Plan and will vote any Shares that it holds for a participant's account in accordance with the participant's written instructions. If a participant does not return a proxy, such Shares will not be voted. 12. At a participant's request and upon receipt of written instructions and documentation satisfactory to the Administrator, the Administrator shall transfer to a person designated by a participant, or sell on a participant's behalf, all or any portion of the whole number of Shares credited to the participant's Plan account. In the event of any such transfer, the Administrator shall send the transferee a certificate issued by the Company for the transferred Shares. Any such sale may be effected by the Administrator in any manner deemed to be reasonable and appropriate by the Administrator. At the Administrator's sole option and discretion, the Administrator may aggregate Shares to be sold on behalf of various Plan participants, sell any such Shares through a broker of its choosing (the Administrator being authorized to effect sales of Shares through brokerage services provided by the Administrator or one of its affiliates) or in a negotiated transaction without a broker (including a sale to the Company), and the Administrator may purchase any such Shares on behalf of other Plan participants. Any sale to the Company or purchase by the Administrator on behalf of Plan accounts shall be made at "fair market value" (as defined in Section 5 hereof) on the date of the transaction. Following any sale on behalf of a participant, the Administrator shall issue to the selling participant a check in an amount equal to his proportionate share of the net proceeds of such sale (after the deduction of brokerage commissions and other sale costs, if any, paid or incurred by or payable by the Administrator). 13. A participant may terminate his participation in the Plan at any time by giving written notice of termination to the Administrator. Dividends corresponding to a record date occurring after the Administrator receives such notice shall be sent directly to the former participant. The Administrator, at the direction of the Company, may terminate a participant's participation in the Plan at any time by mailing or otherwise delivering written notice of termination to the participant. Within two weeks after termination of an account, the Administrator shall send the participant certificates issued by the Company for the whole Shares in such participant's account, unless the former participant shall have requested sale or transfer of such Shares by the Administrator pursuant to and in accordance with the requirements of Section 12 hereof. In every case of termination, the participant's interest in fractional Shares shall be converted to cash at the fair market value of the Shares on the date of termination. If a participant disposes of all Shares registered in such participant's name on the books of the Company, the Administrator shall continue to reinvest the dividends on Shares held in the participant's account (if the fifty (50) Shares participation requirement continues to be met) unless the Company shall direct the Administrator to terminate such participant's account. 14. In order to implement the fifty (50) Shares participation requirement of Section 3 hereof in a fair and equitable manner, shareholders enrolled in the Plan on June 1, 1996 holding fewer than fifty (50) Shares shall not be subject to the fifty (50) Shares participation requirement until June 1, 1997. In order to increase their ownership to at least the fifty (50) Shares level, such participants (and only such participants) may make voluntary cash payments to the Administrator in any amount from $100 to $1,500 maximum (in the aggregate) through the May 1997 dividend payment date, for investment under the Plan. Any such voluntary cash payment will be used to purchase Shares in accordance with Sections 5 and 6 hereof on or after the dividend payment date next following the Administrator's receipt of such payment in collected funds. No interest will be paid on voluntary cash payments regardless of when they are received. This limited voluntary cash payment feature shall terminate on the May 1997 dividend payment date. The Administrator shall terminate any participant's account that does not meet the fifty (50) Shares participation requirement on June 1, 1997. Upon any such termination, the Administrator shall send the participant certificates issued by the Company for the whole Shares in such participant's account, and cash for the fair market value of any fractional Shares in such account, as provided in Section 13 hereof. 15. Any record holder of Shares who holds in the aggregate less than fifty (50) Shares, whether or not he is a participant in the Plan, may have all (but not less than all) his Shares sold on his behalf by the Administrator, pursuant to and in accordance with the requirements of Section 12 hereof. This limited sale feature shall terminate on June 1, 1997. 16. All notices to the Administrator shall be addressed to: Mellon Securities Trust Company c/o Chemical Mellon Securities Transfer Services P.O. Box 750 Pittsburgh, PA 15230 17. Any Shares distributed by the Company on account of stock dividends or splits on Shares held by the Administrator for a participant shall be credited to the participant's account. In the event the Company makes available to its shareholders rights to purchase additional Shares or any other securities, or if any party makes a tender offer for Shares, each participant shall receive directly any such rights or offer. 18. Neither the Administrator nor the Company shall be liable hereunder for any act performed by it in good faith or for any good faith omission to act, including, without limitation, any claims of liability (a) arising out of failure to terminate the participant's account upon the participant's death prior to receipt of notice in writing of such death, or (b) with respect to the prices at which Shares are purchased for the participant's account and the times such purchases are made. 19. The terms and conditions of this Plan shall be governed by the laws of the Commonwealth of Pennsylvania and the rules and regulations of the Securities and Exchange Commission. The Company reserves the right to alter the terms and conditions of this Plan or to terminate this Plan at any time upon written notice thereof sent to each participant. The foregoing Plan was amended and restated by the Board of Directors of National Penn Bancshares, Inc. on February 28, 1996, effective June 1, 1996. ___________________________ Secretary The undersigned hereby accepts its appointment as administrator under the foregoing Plan and agrees to be bound by the terms and conditions thereof. MELLON SECURITIES TRUST COMPANY Date: ______________, 1996 By___________________________ Name: Title: EX-10.5 3 Exhibit 10.5 NATIONAL PENN BANCSHARES, INC. CAPITAL ACCUMULATION PLAN AMENDMENT 1995-1 Effective July 1, 1995 The National Penn Bancshares, Inc. Capital Accumulation Plan (the "Plan") is amended as follows: 1. Section 1.2.60 of the Plan is amended by adding the following to the end thereof: "Effective July 1, 1995, "Valuation Date" means the last day of each consecutive three (3) month period beginning with the first day of the Plan Year and each interim date on which the Plan Administrator determines that a valuation shall be made." 2. Subsection (b) of Section 2.2.2 of the Plan is deleted in its entirety and replaced with the following: "(b) The Plan Administrator shall determine the manner in which a Participant may elect to have Elective Contributions made to the Plan on his behalf. The Plan Administrator shall establish reasonable periods during which the election may be made, modified, or revoked. Effective July 1, 1994, Participants may make and modify their elections each January 1 and July 1 and revoke elections at any time. Effective July 1, 1995, Participants may make and modify their elections each January 1, April 1, July 1, and October 1 and revoke elections at any time. An election by an Employee may not be made retroactively and once made shall remain in effect until modified or terminated." Executed this 25th day of October, 1995. NATIONAL PENN BANCSHARES, INC. By: /s/ Sandra L. Spayd EX-10.6 4 Exhibit 10.6 NATIONAL PENN BANCSHARES, INC. CAPITAL ACCUMULATION PLAN AMENDMENT 1996-1 Effective January 1, 1989 The National Penn Bancshares, Inc., Capital Accumulation Plan (the "Plan") is amended as follows: 1. Section 2.3.3 of the Plan is deleted in its entirety, and Sections 2.3.4, 2.3.5, 2.3.6, and 2.3.7 are redesignated Sections 2.3.3, 2.3.4, 2.3.5, and 2.3.6. 2. The first paragraph of Section 2.4.2 is amended in its entirety to read as follows: "A Participant shall at all times be one hundred percent (100%) vested and have a nonforfeitable interest in his Elective Contribution Account, Qualified Non-Elective Contribution Account, Voluntary Account, Segregated Account, Predecessor Account A, Predecessor Account B, and Predecessor Account C. The vested and nonforfeitable interest of the Participant in his Controlled Account shall be determined by reference to the Account from which the funds were originally transferred. The vested nonforfeitable interest a Participant's Matching Account shall be determined as hereinafter provided. The vested nonforfeitable interest in a Participant's Employer Account attributable to Non-Elective Contributions shall be determined as provided in Section 2.6.1 of the Plan." 3. Subsection (f) of Section 2.4.2 is amended in its entirety to read as follows: "(f) Early Retirement, Resignation, or Discharge. If the employment of a Participant terminating by reason of early retirement, resignation, or discharge prior to his Normal Retirement Age, he shall be vested and have a nonforfeitable interest in a percentage of his Matching Account determined by taking into account all of his Years of Service as of such termination date in accordance with the following schedule: Matching Account
Years of Service Percent Vested Less than 1 0% 1 but less than 2 0% 2 but less than 3 25% 3 but less than 4 50% 4 but less than 5 75% 5 or more 100%"
Executed this 28th day of February, 1996. NATIONAL PENN BANCSHARES, INC. By: /s/ Wayne R. Weidner EX-10.8 5 Exhibit 10.8 NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN Adopted by Board of Directors December 26, 1984 PLAN YEAR 1996 SCHEDULE B NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN 1996 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 1996 PLAN YEAR The net operating income of NPB before securities and mortgage transactions for 1996 must exceed the net operating income of NPB before securities and mortgage transactions for 1995. EXTERNAL PERFORMANCE GOALS FOR THE 1996 PLAN YEAR The net operating income of NPB before securities and mortgage transactions on realized return on average common equity for 1996 must exceed the average of the net operating income before securities and mortgage transactions on realized return on average common equity for 1995 for the banks or bank holding companies in the peer group set forth on Schedule B-2 A. 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: Dauphin Deposit Corporation Univest (Souderton) Keystone Heritage Fulton Financial Corp. Susquehanna Bancshares Harleysville National Corp. Financial Trust Corp. Keystone Financial S & T Bancorp 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 1996. 2. This request shall apply to _____________________of my award. (Expressed as "all" or a designated dollar or percentage limitation.) 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 EX-11 6 EXHIBIT 11 NATIONAL PENN BANCSHARES, INC. COMPUTATION OF EARNINGS PER COMMON SHARE* Year Ended December 31, 1995 1994 1993
Primary (Dollars in Thousands) Net income $15,382 $14,649 $13,308 Shares** Weighted average number of common shares outstanding 7,547,382 7,525,100 7,480,740 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options *** *** *** Weighted average number of common shares outstanding as adjusted 7,547,382 7,525,100 7,480,740 ========= ========= ========= Primary earnings per common share $ 2.04 $ 1.95 $ 1.78 ========= ========= ========= Assuming full dilution Net income $ 15,382 $ 14,649 $ 13,308 ========= ========= ========= Shares** Weighted average number of common shares outstanding 7,547,382 7,525,100 7,480,740 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options *** *** *** Weighted average number of common shares outstanding as adjusted 7,547,382 7,525,100 7,480,740 ========= ========= ========== Earnings per common share assuming full dilution $ 2.04 $ 1.95 $ 1.78 ========= ========= ========== * See notes 1 and 14 to the consolidated financial statements. ** Restated to reflect 5% stock dividends paid in 1995 and 1994 and a 7% stock paid in 1993. *** The stock options are not included because the incremental number of common stock equivalents would have an effect of less than 3% on the reported earnings per share. At December 31, 1995, 1994, and 1993, respectively, options for 136,882, 84,036, and 39,581 shares are exercisable.
EX-21 7 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction of Incorporation Investors Trust Company............Pennsylvania National Penn Bank.................United States of America National Penn Investment Company..........................Delaware National Penn Life Insurance Company..........................Arizona EX-23 8 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 7, 1996, accompanying the consolidated financial statements included in the 1995 Annual Report of National Penn Bancshares, Inc., and Subsidiaries on Form 10-K for the year ended December 31, 1995. We hereby consent to the incorporation by reference of said report in the Registration Statement of National Penn Bancshares, Inc., and Subsidiaries on Form S-8 (File No. 33-91630, effective April 27, 1995; File No. 33-87654, effective December 22, 1994; and File No. 33-15696, effective July 9, 1987) and on Form S-3 (File No 33-86094, effective November 7, 1994; File No. 33-47067, effective April 29, 1992; and File No. 33-02567, effective January 8, 1986). /s/ Grant Thornton, LLP - ------------------------------ Grant Thornton, LLP Philadelphia, Pennsylvania March 29, 1996 EX-27 9
9 0000700733 NATIONAL PENN BANCSHARES, INC. 1,000 YEAR DEC-31-1995 DEC-31-1995 39,195 2,014 0 0 0 230,779 240,902 939,065 20,366 1,251,378 914,890 142,920 15,364 71,589 19,106 0 0 87,509 1,251,378 82,776 16,054 190 99,020 32,739 43,836 55,184 3,200 527 37,542 22,050 15,382 0 0 15,382 2.04 2.04 4.90 7,258 1,765 0 0 19,310 3,509 1,365 20,366 17,058 0 3,308
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