-----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, FizSMLmh4V54cEutVBd1VrjOS0hzzxjhGxzPO1knxHPlAc6VV8ZZsa843AOV3sb5 FWwqrDHj7sGUyckphZreIQ== 0000950159-97-000088.txt : 19970329 0000950159-97-000088.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950159-97-000088 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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: 97567786 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 for the fiscal year ended December 31, 1996, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ______________ to ______________. Commission file number 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 14, 1997, was $157,688,377. As of March 14, 1997, the Registrant had 8,005,727 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 22, 1997 -- Part III. NATIONAL PENN BANCSHARES, INC. FORM 10-K TABLE OF CONTENTS Page Part I Item 1 Business...................................................... 1 Item 2. Properties....................................................20 Item 3. Legal Proceedings.............................................21 Item 4. Submission of Matters to a Vote of Security Holders.......................................................21 Item 4A. Executive Officers of the Registrant..........................21 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................23 Item 6. Selected Financial Data.......................................24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................26 Item 8. Financial Statements and Supplementary Data...................31 Item 9. Disagreements on Accounting and Financial Disclosure....................................................55 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 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, 1996, the Company and NPB had 578 full- and part-time employees. National Penn Bank NPB is a national bank chartered under the National Bank Act. Prior to August 1, 1993, NPB's name was National Bank of Boyertown. On that date, the bank's name was changed to National Penn Bank. National Penn Bank also operates through 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, 1996, NPB conducted operations through 46 full-service branches and three loan production offices, of which two branches and one loan production office constitute the CHNB Division, and two branches constitute 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 equity investments in other banks and bank holding companies (as discussed below), other equity investments, government and other debt securities, and other investment securities, as permitted by applicable law and regulations. 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. Other Bank Investments The Company has, indirectly through NPIC, the following equity investments in banks or banking companies: 1 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 companies and banks operate in a highly-regulated environment and are regularly examined by Federal and state regulatory authorities. The following discussion concerns certain provisions of Federal and state laws and certain regulations and the potential impact of such provisions and regulations on the Company and its subsidiaries. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory or regulatory provisions themselves. 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 Pennsylvania bank holding companies to control an unlimited number of banks. Additionally, the BHCA prohibits the Company from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a nonbanking business unless such business is determined by the Federal Reserve, by regulation or by order, to be so "closely related to banking" as to be a "proper incident" thereto. The BHCA does not place territorial restrictions on the activities of such nonbanking-related businesses. 2 In February 1997, the Federal Reserve adopted a revised regulation concerning permissible nonbanking activities, effective April 21, 1997. This revised regulation provides fourteen categories of functionally related activities that are permissible nonbanking activities. These are: (1) extending credit and servicing loans; (2) certain activities related to extending credit; (3) leasing personal or real property under certain conditions; (4) operating nonbank depository institutions, including savings associations; (5) trust company functions; (6) certain financial and investment advisory activities; (7) certain agency transactional services for customer investments, including securities brokerage activities; (8) certain investment transactions as principal; (9) management consulting and counseling activities; (10) certain support services, such as courier and printing services; (11) certain insurance agency and underwriting activities; (12) community development activities; (13) issuance and sale of money orders, savings bonds, and traveler's checks; and (14) certain data processing services. Depending on the circumstances, Federal Reserve approval may be required before the Company or its nonbank subsidiaries may begin to engage in any such activity and before any such business may be acquired. 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 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. 3 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, 1996, qualify as "well capitalized" under these regulatory standards. FDIC Insurance Assessments NPB is subject to FDIC deposit insurance assessments. These assessments fund both the Bank Insurance Fund ("BIF") for banks and the Savings Association Insurance Fund ("SAIF") for savings associations and are based on the risk classification of the depository institution. On August 8, 1995, the FDIC reduced the insurance assessment that BIF-member banks deemed to have the least risk (including NPB) had to 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 had 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. On September 30, 1996, the Economic Growth and Regulatory Paperwork Reduction Act of 1996 became effective. This Act recapitalized the SAIF through a one-time special assessment and provides for assessing BIF-insured deposits, as well as SAIF-insured deposits, to fund the Federal goverment's FICO bond payments. As a result, NPB paid a one-time assessment of $1,175,000 to the FDIC on November 30, 1996, and, effective January 1, 1997, NPB's insurance assessment rate for its SAIF-insured deposits became $.0644 per $100 of deposits and $.0129 per $100 of deposits for its BIF-insured deposits. Substantially all of these on-going assessments are to fund debt service on the FICO bonds. Beginning in 2000, BIF-insured deposits and SAIF-insured deposits will be assessed at the same rates to fund remaining debt service on the FICO bonds. The FICO bonds mature in 2017. 4 Regulation of NPB The operations of NPB are subject to Federal and state statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System, and to banks whose deposits are insured by the FDIC. NPB's operations are also subject to regulations of the Office of the Comptroller of the Currency (the "OCC"), the Federal Reserve, and the FDIC. The OCC, which has primary supervisory authority over NPB, regularly examines banks in such areas as reserves, loans, investments, management practices, and other aspects of operations. These examinations are designed for the protection of NPB's depositors rather than the Company's shareholders. NPB must furnish annual and quarterly reports to the OCC, which has the authority under the Financial Institutions Supervisory Act to prevent a national bank from engaging in an unsafe or unsound practice in conducting its business. Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, the investments a bank may make, the reserves against deposits a bank must maintain, the types and terms of loans a bank may make and the collateral it may take, the activities of a bank with respect to mergers and consolidations, and the establishment of branches. Pennsylvania law permits statewide branching. Under the National Bank Act, as amended, NPB is required to obtain the prior approval of the OCC for the payment of dividends if the total of all dividends declared by NPB in one year would exceed NPB's net profits (as defined and interpreted by regulation) for the current year plus its retained net profits (as defined and interpreted by regulation) for the two preceding years, less any required transfers to surplus. In addition, NPB may only pay dividends to the extent that its retained net profits (including the portion transferred to surplus) exceed statutory bad debts (as defined by regulation). Under FDICIA, any depository institution, including NPB, is prohibited from paying any dividends, making other distributions or paying any management fees if, after such payment, it would fail to satisfy its minimum capital requirements. A subsidiary bank of a bank holding company, such as NPB, is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries, and on taking such stock or securities as collateral for loans. The Federal Reserve Act and Federal Reserve regulations also place certain limitations and reporting requirements on extensions of credit by a bank to the principal shareholders of its parent holding company, 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. In September 1994, Federal legislation was enacted that is having a significant effect in restructuring the banking industry in the United States. See "Interstate Banking Legislation" herein. As a result, the operating environment for Pennsylvania-based financial institutions is becoming increasingly competitive. 5 Additionally, the manner in which banking institutions conduct their operations may change materially if the activities in which bank holding companies and their banking and nonbanking subsidiaries are permitted to engage continue to increase, and if funding and investment alternatives continue to broaden, although the long-range effects of such changes cannot be predicted, with reasonable certainty, at this time. If these trends continue, they 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 is to permit the Company to acquire banks and bank holding companies located in any state and to permit qualified banking organizations located in any state to acquire banks and bank holding companies located in Pennsylvania, irrespective of state law. 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 having the effect of increasing consolidation and competition and promoting geographic diversification in the banking industry. Proposed Legislation and Regulations Because of concerns relating to the competitiveness and the safety and soundness of the banking industry, the U.S. Congress continues to consider a number of proposals for changing the structure, regulation, and competitive relationships of the nation's financial insitituions. These include proposals to require thrift institutions to convert to commercial bank charters, to alter the statutory separation of commerical and investment banking, to restrain the OCC from authorizing new business activities for national banks, and to further expand the powers of depository institutions, bank holding companies and their competitors. It cannot be predicted whether or in what form any of these proposals will be enacted or the extent to which the business of the Company may be affected thereby. 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 11 to the Company's Consolidated Financial Statement 6 included at Item 8 hereof. In 1996, the interest rate swaps to which NPB was a party had the effect of increasing the Company's net interest income by $1.5 million over what would have been realized had NPB not entered into the swap agreements. Should rates rise in 1997, 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.) 7 Average Balances, Average Rates, and Interest Rate Spread* (Dollars in Thousands)
Year Ended December 31 1996 1995 1994 Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate INTEREST EARNING ASSETS: Interest bearing deposits at banks $1,186 $60 5.06% $1,239 $76 6.13% $2,184 $77 3.53% --------- ------- --------- ------- ------- ------ U.S. Treasury 86,751 5,976 6.89 99,374 7,321 7.37 96,231 7,446 7.74 U.S. Government agencies 75,461 5,478 7.26 71,957 5,136 7.14 47,192 3,530 7.48 State and municipal* 52,309 3,760 7.19 47,735 3,515 7.36 47,081 3,419 7.26 Other bonds and securities 22,820 1,302 5.71 21,100 1,276 6.05 14,464 791 5.47 --------- ------- --------- ------- ------- ------ Total investments 237,341 16,516 6.96 240,166 17,248 7.18 204,968 15,186 7.41 --------- ------- --------- ------- ------- ------ Federal funds sold 3,817 162 4.24 1,929 114 5.91 708 27 3.81 --------- ------- --------- ------- ------- ------ Commercial loans and lease financing* 540,140 49,949 9.25 463,106 43,197 9.33 391,624 34,916 8.92 Installment loans 220,292 20,044 9.10 212,855 20,280 9.53 186,564 17,075 9.15 Mortgage loans 221,317 21,624 9.77 206,331 19,791 9.59 197,487 18,633 9.44 --------- ------- --------- ------- ------- ------ Total loans and leases 981,749 91,617 9.33 882,292 83,268 9.44 775,675 70,624 9.10 --------- ------- --------- ------- ------- ------ Total earning assets 1,224,093 108,355 8.85% 1,125,626 100,706 8.95% 983,535 85,914 8.74% ------- --------- ------- ------ Allowance for loan and lease losses (21,671) (19,859) (18,503) Non-interest earning assets 84,758 81,884 76,071 ---------- ---------- ---------- Total assets $1,287,180 $1,187,651 $1,041,103 ========== ========== ========== INTEREST BEARING LIABILITIES: Interest bearing deposits $820,728 34,331 4.18 $781,686 32,738 4.19 $722,657 22,825 3.16 Securities sold under repurchase agreements and federal funds purchased 157,182 8,083 5.14 94,375 5,613 5.95 55,569 2,531 4.55 Short-term borrowings 3,863 193 5.00 13,944 1,078 7.73 5,338 185 3.47 Long-term borrowings 53,424 3,411 6.38 75,392 4,406 5.84 56,555 3,308 5.85 --------- ------- --------- ------- ------- ------ Total interest bearing liabilities 1,035,197 46,018 4.45% 965,397 43,835 4.54% 840,119 28,849 3.43% ------- ------- ------ Non-interest bearing deposits 128,002 113,442 104,609 Other non-interest bearing liabilities 15,463 14,529 11,831 ---------- ---------- ---------- Total liabilities 1,178,662 1,093,368 956,559 Equity capital 108,518 94,283 84,544 ---------- ---------- ---------- Total liabilities and equity capital $1,287,180 $1,187,651 $1,041,103 ========== ========== ========== INTEREST RATE SPREAD** 62,337 5.09% $56,871 5.05% $57,065 5.80% ====== ======= ======= * 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.
8 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, 1996, 1995, and 1994 follows (in thousands).
1996 1995 1994 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 $108,569 $111,611 $102,357 $107,859 $ 39,055 $ 37,480 State and municipal 49,485 49,621 45,712 46,836 45,694 41,918 Other bonds 1,184 1,198 2,727 2,751 2,144 2,104 Mortgage-backed securities 50,594 51,785 63,316 65,029 42,527 40,746 Marketable equity securities and other 20,216 22,599 16,667 18,427 15,823 16,625 -------- -------- -------- -------- -------- -------- Totals $230,048 $236,814 $230,779 $240,902 $145,243 $138,873 ======== ======== ======== ======== ======== ========
1996 1995 1994 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 State and municipal -- -- -- -- 7,388 7,144 Other bonds -- -- -- -- 1,018 1,002 Mortgage-backed securities -- -- -- -- 14,216 13,973 Marketable equity securities and other -- -- -- -- -- -- ------- ------- -------- -------- ------- ------- Totals $ -- $ -- $ -- $ -- $99,229 $97,459 ======= ======= ======== ======== ======= =======
9 Investment Securities Yield by Maturity The maturity distribution and weighted average yield of the investment portfolio of the Company at December 31, 1996, 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, 1996
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 $ 7,840 8.94% $39,885 6.85% $63,441 7.24% $444 6.53% $111,610 7.22% State and municipal 501 11.92% 3,347 7.66% 42,203 7.43% 3,571 7.31% 49,622 7.48% Other bonds 943 7.06% 255 7.05% --- ---% --- ---% 1,198 7.06% Mortgage-backed securities --- ---% 5,685 6.95% 8,631 7.70% 37,469 6.98% 51,785 7.10% Marketable equity securities and other --- ---% --- ---% --- --% 18,427 ---% 18,427 --% -------- ---- ------- ---- -------- ---- ------- ---- -------- ---- Total $ 9,284 8.91% $49,172 6.92% $114,275 7.34% $64,083 4.53% $236,814 6.56% ======== ==== ======= ==== ======== ==== ======= ==== ======== ====
10 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, 1996, are summarized below: Remaining Maturity* - At December 31, 1996
After One One Year Year to After or Less Five Years Five Years Total (In Thousands) Commercial and Industrial Loans $ 63,152 $ 48,627 $ 14,525 $126,304 Loans for Purchasing and Carrying Securities 153 118 35 306 Loans to Financial Institutions 227 174 52 453 Real Estate Loans: Construction and Land Development 42,468 -- -- 42,468 -------- -------- -------- -------- $106,000 $ 48,919 $ 14,612 $169,531 ======== ======== ======== ========
* 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, 1996, are summarized below: After One Year to After Five Years Five Years (In Thousands) Predetermined Interest Rate $48,430 $14,612 Floating Interest Rate 489 -- ------- ------- Total $48,919 $14,612 ======= ======= 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. 11 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, 1996:
December 31, 1996 1995 1994 1993 1992 (In Thousands) Commercial and Industrial Loans $ 126,304 $ 99,765 $ 79,726 $ 68,599 $ 58,936 Loans for Purchasing and Carrying Securities 306 478 778 1,008 1,171 Loans to Financial Institutions 453 589 821 2,063 2,286 Real Estate Loans: Construction and Land Development 42,468 42,978 31,760 22,690 22,074 Residential 564,748 526,577 472,227 428,540 350,261 Other 302,787 256,956 228,911 191,875 145,995 Loans to Individuals 14,014 11,722 16,389 22,963 22,780 Lease Financing Receivables -- -- -- 27 458 ---------- ---------- ---------- ---------- ---------- Total $1,051,080 $ 939,065 $ 830,612 $ 737,765 $ 603,961 ========== ========== ========== ========== ==========
Risk Elements The Company's consolidated financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on the loan portfolio. In determining income from loans, including consumer and residential mortgage loans, the Company generally adheres to the policy of not accruing interest on a loan on which default of principal or interest has existed for a period of 90 days or more. A loan past due 90 days or more remains on accrual only if the loan is fully secured and in the process of collection. When a loan reaches nonaccrual status, any interest accrued but unpaid on it, if payment is considered questionable, is reversed and charged against current income. Thereafter, until such time as the loan becomes current, interest is included in income only to the extent it is received in cash. Restructured loans are loans on which the interest rate has been reduced because of a weakened financial position of the borrower. There were no restructured loans at December 31, 1996, and an immaterial amount of such loans at the end of prior years. Nonaccrual loans, loans 90 days or more past due and still on accrual, and restructured loans together constitute nonperforming loans. When other real estate owned is included with nonperforming loans, the total is nonperforming assets. 12 Other real estate owned decreased in 1996 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, 1996:
December 31, 1996 1995 1994 1993 1992 Nonaccrual Loans $ 8,722 $ 7,257 $ 9,328 $ 8,698 $ 8,848 Loans Past Due 90 or More Days as to Interest or Principal 3,649 1,764 2,114 2,349 2,168 Restructured Loans -- -- -- -- Total Nonperforming Loans 12,371 9,021 11,442 11,047 11,016 Other Real Estate Owned 319 760 2,047 3,122 2,825 ------- ------- ------- ------- ------- Total Nonperforming Assets $12,690 $ 9,781 $13,489 $14,169 $13,841 ======= ======= ======= ======= ======= Gross Amount of Interest That Would Have Been Recorded at Original Rate on Nonaccrual and Restructured Loans $ 1,039 $ 961 $ 1,517 $ 804 $ 802 Interest Received From Customers on Nonaccrual and Restructured Loans 834 656 1,031 160 336 ------- ------- ------- ------- ------- Net Impact on Interest Income of Nonperforming Loans $ 205 $ 305 $ 486 $ 644 $ 466 ======= ======= ======= ======= =======
At December 31, 1996, the Company had no foreign loans and no loan concentrations exceeding 10% of total loans not disclosed in the table on page 12 hereof. "Loan concentrations" are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly affected by economic or other conditions. Loans recorded in the category of other real estate owned are valued at the lower of book value of loans outstanding or fair market value. At December 31, 1996, the Company was not aware of any potential problem loans that are not otherwise included in the foregoing table. "Potential problem loans" are loans where information about possible credit problems of borrowers has caused management to have serious doubts about the borrowers' ability to comply with present repayment terms. At December 31, 1996, the Company had no loans that are considered highly-leveraged transactions under applicable regulations, although the Company had approximately $9,948,000 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 13 greater than 75% where 25% or more results from the buyout, acquisition, or recapitalization, or is designated as such by a syndication agent or regulatory agency. 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, 1996, is shown below:
December 31, 1996 1995 1994 1993 1992 Balance at Beginning of Year $20,366 $19,310 $17,909 $12,448 $10,593 Charge-offs: Commercial and Industrial Loans 289 544 679 478 2,518 Real Estate Loans: Construction and Land Development -- 366 125 552 514 Residential 1,242 882 941 1,055 813 Other 392 932 435 596 914 Loans to Individuals 422 785 822 728 89 Lease Financing Receivables -- -- -- 3 1,146 ------- ------- ------- ------- ------- Total Charge-offs $ 2,345 $ 3,509 $ 3,002 $ 3,412 $ 5,994 ------- ------- ------- ------- ------- Recoveries: Commercial and Industrial Loans 110 365 190 141 643 Real Estate Loans: Construction and Land Development 131 148 47 58 290 Residential 182 491 494 383 166 Other 235 124 155 448 495 Loans to Individuals 167 237 313 428 21 Lease Financing Receivables 4 10 9 ------- ------- ------- ------- ------- Total Recoveries $ 825 $ 1,365 $ 1,203 $ 1,468 $ 1,624 ------- ------- ------- ------- ------- Net Charge-offs $ 1,520 $ 2,144 $ 1,799 $ 1,944 $ 4,370 ------- ------- ------- ------- ------- Provisions Charged to Expense 3,900 3,200 3,200 5,145 6,225 Adjustments: 14 Changes Incident to Mergers and Absorptions, Net -- -- -- 2,260 -- ------- ------- ------- ------- ------- Balance at End of Year $22,746 $20,366 $19,310 $17,909 $12,448 ======= ======= ======= ======= ======= Ratio of Net Charge-offs During the Period to Average Loans Outstanding During the Period 0.15% 0.24% 0.23% 0.30% 0.77% ======= ======= ======= ======= =======
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 1996, the provision was increased due to current loan quality, economic conditions, and net loan charge-offs in 1996. 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 1996 totalled $1,349,000, or 58% of the gross charge-off amount of $2,345,000, as compared to $1,383,000, or 39% of the gross charge-off amount of $3,509,000 in 1995. Partial charge-offs represented .1% and .2% of average total loans for 1996 and 1995, respectively 15 The year end 1996, 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)
1996 1995 1994 1993 1992 % Loan % Loan % Loan % Loan % Loan Type to Type to Type to Type to Type to Total Total Total Total Total Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans Commercial and Industrial loans $ 3,229 12.0% $ 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% --- 0.1% --- 0.2% Loans to financial institutions --- 0.1% --- 0.1% --- 0.1% --- 0.3% --- 0.4% Real estate loans: Construction and land development 1,458 4.0% 644 4.5% 2,294 3.8% 1,016 3.1% 773 3.7% Residential 4,764 53.7% 4,595 56.1% 3,841 56.8% 3,325 58.1% 3,500 58.0% Other 7,905 28.8% 6,548 27.4% 3,708 27.6% 4,732 26.0% 4,229 24.1% Loans to individuals 2,296 1.3% 2,296 1.2% 1,462 2.0% 1,456 3.1% 616 3.7% Lease financing receivables --- -- --- ---- ------- --- --- ---- --- 0.1% Unallocated 3,094 N/A 3,736 N/A 6,716 N/A 5,691 N/A 2,450 N/A -------- ----- ------- ---- ------- ----- ------- ---- ------- ----- $ 22,746 100.0% $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. 16 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, 1996 1995 1994 1993 1992 (In Thousands) Average Total Loans $ 981,749 $ 882,292 $ 775,675 $ 643,188 $ 565,659 Total Loans at Year End 1,051,080 939,065 830,612 737,765 603,961 Net Charge-offs 1,520 2,144 1,799 1,944 4,370 Allowance for Possible Loan and Lease Losses at Year End 22,746 20,366 19,310 17,909 12,448
Year Ended December 31, 1996 1995 1994 1993 1992 Ratios Net Charge-offs to: Average Total Loans 0.15% 0.24% 0.23% 0.30% 0.77% Total Loans at Year End 0.14 0.23 0.22 0.26 0.72 Allowance for Possible Loan and Lease Losses 6.68 10.53 9.32 10.85 35.11 Allowance for Possible Loan and Lease Losses to: Average Total Loans 2.32 2.31 2.49 2.78 2.20 Total Loans at Year End 2.16 2.17 2.32 2.43 2.06
(This space left intentionally blank.) 17 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, 1996:
Year Ended December 31, 1996 1995 1994 (Dollars in Thousands) Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate Noninterest- Bearing Demand Deposits $128,002 ---% $113,442 ---% $104,609 ---% Savings Deposits 326,902 1.82 345,176 2.26 394,508 2.01 Time Deposits* 493,826 5.75 436,510 5.71 328,149 4.54 -------- -------- -------- Total $948,730 3.62 $895,128 3.66 $827,266 2.76 ======== ======== ========
* Included are average time deposits, issued in the amount of $100,000 or more, of $97,115,000 in 1996, $89,881,000 in 1995, and $65,630,000 in 1994. The following is a breakdown, by maturities, of the Company's time certificates of deposit of $100,000 or more as of December 31, 1996. The Company has no other time deposits of $100,000 or more as of December 31, 1996. Maturity Amount of Time Certificates of Deposit (In Thousands) 3 months or less $27,960 Over 3 through 6 months 11,130 Over 6 through 12 months 23,766 Over 12 months 34,259 ------- Total $97,115 ======= Short-Term Borrowings Information with respect to the Company's short-term borrowings is set forth in footnote 6 to the Company's Consolidated Financial Statements which are included at Item 8 hereof, Financial Statements and Supplementary Data. (This space left intentionally blank.) 18 Financial Ratios The following ratios for the Company are among those commonly used in analyzing financial statements of financial services companies:
Year Ended December 31, 1996 1995 1994 Earnings Ratios Net Income on: Average Earning Assets 1.38% 1.37% 1.49% Average Total Assets 1.31 1.30 1.41 Average Shareholders' Equity 16.10 16.30 17.30 Net Operating Income Before Securities and Mortgage Transactions and Cumulative Effect of a Change in Accounting for Income Taxes on: Average Earning Assets 1.38 1.34 1.52 Average Total Assets 1.31 1.27 1.44 Average Shareholders' Equity 15.54 16.05 17.67 Liquidity and Capital Ratios Average Shareholders' Equity to Average Earning Assets 8.87% 8.38% 8.60% Average Shareholders' Equity to Average Total Assets 8.43 7.94 8.12 Dividend Payout Ratio 41.50 40.70 36.50 Tier 1 Leverage Ratio 7.83 7.59 7.35 Tier 1 Risk-Based Ratio 10.82 10.97 10.85 Total Risk-Based Capital Ratio 12.09 12.23 12.11
(This space left intentionally blank.) 19 The following table shows, on a taxable equivalent basis, the changes in the Company's net interest income, by category, due to shifts in volume and rate, for the years ended December 31, 1996 and 1995. The information is presented on a taxable equivalent basis, using an effective rate of 35%.
Year Ended December 31, 1996 over 1995 (1) 1995 over 1994 (1) Increase (decrease) in: Volume Rate Total Volume Rate Total Interest income: Interest bearing deposits at banks ($ 3) ($ 13) ($ 16) ($ 33) $ 32 ($ 1) Securities: U.S. Treasury and U. S. Government agencies (663) (340) (1,003) 2,138 (657) 1,481 State and municipal 337 (92) 245 47 49 96 Other bonds and securities 104 (78) 26 361 124 485 -------- -------- -------- -------- -------- -------- Total securities (222) (510) (732) 2,546 (484) 2,062 -------- -------- -------- -------- -------- -------- Federal funds sold 112 (64) 48 47 40 87 Loans: Commercial loans and lease financing 7,185 (433) 6,752 6,373 1,908 8,281 Installment loans 709 (945) (236) 2,406 799 3,205 Mortgage loans 1,437 396 1,833 834 324 1,158 -------- -------- -------- -------- -------- -------- Total loans 9,331 (982) 8,349 9,613 3,031 12,644 -------- -------- -------- -------- -------- -------- Total interest income $ 9,218 ($ 1,569) $ 7,649 $ 12,173 $ 2,619 $ 14,792 ======== ======== ======== ======== ======== ======== Interest expense: Interest bearing deposits 1,635 (42) 1,593 1,864 8,049 9,913 Borrowed funds: Securities sold under repurchase agreements and federal funds purchased 3,735 (1,265) 2,470 1,767 1,315 3,082 Short-term borrowings (779) (106) (885) 298 595 893 Long-term borrowings and subordinated capital note (1,284) 289 (995) 1,100 (2) 1,098 -------- -------- -------- -------- -------- -------- Total borrowed funds 1,672 (1,082) 590 3,165 1,908 5,073 -------- -------- -------- -------- -------- -------- Total interest expense $ 3,307 ($ 1,124) $ 2,183 $ 5,029 $ 9,957 $ 14,986 ======== ======== ======== ======== ======== ======== Increase (decrease) in net interest income $ 5,911 ($ 445) $ 5,466 $ 7,144 ($ 7,338) ($ 194) ======== ======== ======== ======== ======== ======== (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, 1996, NPB owns 37 properties in fee and leases 33 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. The principal office of NPB's 1stMLB Division is leased and is located at 528 East Lancaster Avenue, St. Davids, Pennsylvania 19087. 20 NPB presently has 49 branches located in the following Pennsylvania counties: Berks, Bucks, Chester, Delaware, Lehigh, Montgomery, Northampton, and Philadelphia. In addition to its branches, NPB presently leases three properties at which it operates loan production offices, and owns or leases 42 automated teller machines located throughout the eight-county area, all of which are located at bank branch locations, except for ten that are "free-standing" (not located at a branch). Item 3. LEGAL PROCEEDINGS. Various actions and proceedings are presently pending to which NPB is a party. These actions and proceedings arise out of routine operations and, in management's opinion, will have no material adverse effect on the consolidated financial position of the Company and its subsidiaries. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT. The principal executive officers of the Company, as of the date hereof, are as follows: Principal Business Occupation Name Age During the Past Five Years Lawrence T. Jilk, Jr. 58 President and Chief Executive Officer of the Company since January 1990, and President of the Company from April 1988 to January 990. 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. Russell J. Kunkel 54 Vice Chairman of NPB since April 1996. Prior thereto, Vice Chairman of Meridian Bancorp, Inc., and Meridian Bank from 1985 to 1995, and President and CEO of Meridian Mortgage Corporation from 1992 to 1995. 21 Sandra L. Spayd 53 Secretary of the Company, and Senior Vice President and Corporate Secretary of NPB. Gary L. Rhoads 42 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. (This space intentionally left blank.) 22 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock currently trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol: NPBC. The following table reflects the high and low 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, 1996, and on October 31, 1995. MARKET VALUE OF COMMON STOCK 1996 High Low lst Quarter 24 1/2 22 5/8 2nd Quarter 26 1/4 22 7/8 3rd Quarter 26 1/2 25 4th Quarter 27 1/2 25 1/2 1995 High Low lst Quarter 23 5/8 21 1/8 2nd Quarter 24 3/4 22 1/4 3rd Quarter 26 1/2 22 1/2 4th Quarter 27 1/8 23 1/8 CASH DIVIDENDS DECLARED ON COMMON STOCK 1996 1995 lst Quarter $.22 $.19 2nd Quarter .22 .20 3rd Quarter .23 .21 4th Quarter .24 .21 (This space intentionally left blank.) 23 Item 6. SELECTED FINANCIAL DATA. FIVE-YEAR STATISTICAL SUMMARY (Dollars in thousands, except per share data)
Year Ended 1996 1995 1994 1993 1992 STATEMENTS OF CONDITION Total assets 1,358,013 $1,251,378 $1,137,174 $ 933,736 $ 775,888 Total deposits 980,808 914,890 864,640 748,229 631,186 Loans and leases, net 1,028,334 918,699 811,302 719,856 591,513 Total investments 236,814 240,902 238,102 144,488 129,794 Total shareholders' equity 114,721 106,615 84,871 82,222 70,700 Book value per share* 14.34 13.37 10.78 10.37 9.05 Realized book value per share** 13.79 12.54 n/a n/a n/a Percent shareholders' equity to assets 8.45% 8.52% 7.46% 8.81% 9.11% Trust assets 411,916 401,532 313,898 286,710 232,658 EARNINGS Total interest income $ 106,558 $ 99,020 $ 84,259 $ 71,272 $ 69,073 Total interest expense 46,018 43,836 28,848 23,839 26,699 ---------- ---------- ---------- ---------- ---------- Net interest income 60,540 55,184 55,411 47,433 42,374 Provision for loan and lease losses 3,900 3,200 3,200 5,145 6,225 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan and lease losses 56,640 51,984 52,211 42,288 36,149 Other income 9,088 7,608 5,409 4,931 4,494 Other expenses 41,258 37,542 36,914 28,629 23,846 ---------- ---------- ---------- ---------- ---------- Income before income taxes 24,470 22,050 20,706 18,590 16,797 Income taxes 7,548 6,668 6,057 5,782 5,484 ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of change in accounting for income taxes 16,922 15,382 14,649 12,808 11,313 Cumulative effect on prior years (to January 1, 1993) of change in accounting for income taxes -- -- -- 500 -- ---------- ---------- ---------- ---------- ---------- Net income $ 16,922 $ 15,382 $ 14,649 $ 13,308 $ 11,313 ========== ========== ========== ========== ========== Cash dividends paid $ 7,025 $ 6,263 $ 5,344 $ 4,405 $ 3,750 Return on average assets 1.31% 1.30% 1.41% 1.60% 1.50% Return on average shareholders' equity 15.6% 16.3% 17.3% 17.4% 17.1% Return on average realized shareholders' equity** 16.1% 16.3% n/a n/a n/a PER SHARE DATA* Income per common share before cumulative effect of change in accounting for income taxes $ 2.12 $ 1.94 $ 1.85 $ 1.63 $ 1.45 Cumulative effect on prior years to (January 1, 1993) of change in accounting for income taxes -- -- -- 0.06 -- Net income 2.12 1.94 1.85 1.69 1.45 Dividends paid in cash 0.88 0.79 0.68 0.56 0.48 Dividends paid in stock 5% 5% 5% 7% 5% plus 2-for-1 stock split SHAREHOLDERS AND STAFF Average shares outstanding* 7,994,472 7,927,739 7,905,457 7,861,097 7,775,333 Shareholders 2,750 2,823 2,787 2,701 2,531 Staff - Full-time equivalents 578 517 559 449 368 * Restated to reflect 5% stock dividends in 1996, 1995, and 1994, a 7% stock dividend in 1993, and a 2-for-1 stock split and a 5% stock dividend in 1992. ** Excluding unrealized gain (loss) on securities available for sale.
24 The unaudited quarterly results of the Company's operations in 1996 and 1995 are included in footnote 19 to the Company's Consolidated Financial Statements included herein at Item 8, Financial Statements and Supplementary Data. (This space intentionally left blank.) 25 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and is intended to assist in understanding and evaluating the major changes in the financial condition and earnings results of operations of the Company with a primary focus on the Company's performance. FINANCIAL CONDITION During 1996 total assets increased to $1,358.0 million, an increase of $106.6 million or 8.52% over the $1,251.4 million at year-end 1995. Total assets at the end of 1995 increased $114.2 million or 10.0% over the $1,137.2 million at year-end 1994. Total cash and cash equivalents increased $.8 million or 1.9% in 1996 compared to 1995 versus an increase of $7.1 million or 20.6% in 1995 compared to 1994. 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 $1,028.3 million during 1996, an increase of $109.6 million or 11.9% compared to 1995. Net loans increased $107.4 million in 1995 or 13.2% compared to 1994. Loan growth in 1996 was primarily the result of favorable local economic conditions and the investment of deposits from new branch locations. Residential mortgages originated for immediate resale during 1996 amounted to $21.9 million. For 1996 the Company's credit quality is reflected by the ratio of net charge-offs to average loans of .15%, and the level of non-performing loans to total loans of 0.83%. The Company has no significant exposure to energy and agricultural-related loans. Non-performing loans in 1995 were .96% of total loans. Investments, which are the Company's secondary use of funds, decreased $4.1 million or 1.7% to $236.8 million at year-end 1996. In 1995, the investment portfolio reflected an increase of $2.8 million or 1.2% compared to 1994. The small decrease in 1996 was due to investment purchases of $63.7 million, which were more than offset by calls and maturities of securities, securities sales and payments on mortgage-backed securities. At year-end 1995, the FASB 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 designated its entire investment portfolio as available for sale. Changes in the market value of these securities are accounted for, net of tax, as an adjustment to shareholder's equity. Because SFAS 115 explicitly allows for a held to maturity category for investment securities, reclassifications from the held to maturity category that resulted from the one-time reassessment will not call into question the intent of the Company to hold investment securities to maturity in the future. Proceeds from the sale of investment securities in 1996 were $39.2 million, on which a net gain of $591,000 was recognized. As the primary source of funds, aggregate deposits of $980.8 million increased $65.9 million or 7.2% compared to 1995. Deposits of $914.9 million increased $50.3 million in 1995 or 5.8% compared to 1994. In addition to deposits, growth in earning assets has been 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 the aggregate, these funds totaled $248.0 million at the end of 1996, a $33.5 million or 15.6% increase compared to 1995. The 1995 amount of borrowings and purchased funds of $214.5 million represented an increase of $38.5 million or 21.9% compared to 1994. Shareholders' equity increased by $8.1 million or 7.6% in 1996 to $114.7 million. This increase was due primarily to the retention of earnings and reinvestment of cash dividends under the Company's dividend reinvestment plan. Cash dividends paid in 1996 increased $762,000 or 12.2% compared to the cash dividends paid in 1995 which increased $919,000 or 17.2% compared to cash dividends paid in 1994. Earnings retained in 1996 were 58.5% compared to 59.3% in 1995. 26 RESULTS OF OPERATIONS Net income for 1996 of $16.9 million was 10.0% more than the $15.4 million reported in 1995. The 1995 amount was 5.0% more than the $14.6 million in 1994. On a per share basis, net income was $2.12, $1.94 and $1.85 for 1996, 1995 and 1994, respectively. Net interest income is the difference between interest income on assets and interest expense on liabilities. Net interest income increased $5.4 million or 9.7% to $60.5 million in 1996 from the 1995 amount of $55.2 million. The increase in interest income is a result of growth in average loans outstanding and higher rates on loans that were partially offset by growth in average deposits and higher rates on deposits and borrowings. Interest rate risk is a major concern in forecasting the earnings potential. In 1996, the Company's prime rate was 8.50% through January 31, 1996. On February 1, 1996, the prime rate changed to 8.25%. 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. Net interest income in 1995 decreased $227,000 or 0.4% to $55.2 million from 1994 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 expense during 1996 increased $2.2 million or 5.0% compared to the prior year due to higher interest rates on deposits and short-term borrowings. Interest expense during 1995 increased $15.0 million or 52.0% compared to 1994. Despite the current stable 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 increased $700,000 to $3,900,000 for 1996. The provision for loan and lease losses was $3,200,000 for both 1995 and 1994. The allowance for loan and lease losses of $22.7 million at year-end 1996 and $20.4 million at year-end 1995 as a percentage of total loans was 2.2% for both 1996 and 1995, respectively. Net loan charge-offs of $1,520,000, $2,144,000 and $1,799,000 during 1996, 1995 and 1994, respectively, continue to be comparable with those of the Company's peers. The increase in other income in 1996 compared to 1995 was $1,480,000 or 19.5% and was due to increased service charges on deposit accounts of $717,000, increased trust income of $543,000, increased other service charges and fees of $241,000, and increased equity in undistributed net earnings of affiliates of $103,000. Net gains on sales of investment securities and mortgages decreased $124,000 in 1996 compared to 1995. 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. Sales of investment securities in 1995 and 1994 totaled $39.2 million and $6.9 million, respectively. "Total other expenses" increased $3,716,000 or 9.9% in 1996 when compared to 1995. By category, the Company's "salaries, wages and employee benefits" increased $1,995,000, "other operating" expenses increased $1,413,000, and "net premises and equipment" increased $816,000 while "FDIC assessment" decreased $508,000 due to lower FDIC insurance premiums on all commercial bank deposits partially offset by a one-time FDIC assessment in the amount of $1,175,000 on approximately $225 million of thrift deposits acquired from Sellersville Savings and Loan Association and Central Pennsylvania Savings Association. "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. For 1996 and 1995, there are no individual items of other operating expenses that exceed one percent of the aggregate of total interest income and other income. Income before income taxes increased by $2,420,000 or 11.0% compared to 1995 when income before income taxes increased by $1,344,000 or 6.5% compared to 1994. The increase in income taxes for both years is due to higher pre-tax income levels. 27 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 1996. Long-term liquidity and funding needs were met in 1996 by the use of additional long-term borrowings in the amount of $4.5 million from the Federal Home Loan Bank to fund longer term assets. For cash flow information regarding liquidity, please refer to the Company's Consolidated Statements 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, 1996:
Repricing Periods Within Three Months One Year Three Through Through Over Months One Year Five Years Five Years Assets (In thousands) Interest bearing deposits at banks $ 1,802 $ -- $ -- $ -- Investment securities(1) 25,066 24,041 106,302 81,405 Loans and leases(1) 295,020 143,747 432,173 157,394 Other assets 2,855 -- -- 88,208 --------- --------- --------- --------- 324,743 167,788 538,475 327,007 --------- --------- --------- --------- Liabilities and equity Non-interest bearing deposits 145,107 -- -- -- Interest bearing deposits(2) 233,065 160,923 213,425 228,288 Borrowed funds 208,352 1,000 5,110 33,575 Other liabilities -- -- -- 14,447 Hedging instruments 90,000 (10,000) (80,000) -- Shareholders' equity -- -- -- 114,721 --------- --------- --------- --------- 676,524 151,923 138,535 391,031 --------- --------- --------- --------- Interest sensitivity gap (351,781) 15,865 399,940 (64,024) --------- --------- --------- --------- Cumulative interest rate sensitivity gap ($351,781) ($335,916) $ 64,024 $ -- ========= ========= ========= ========= (1) Adjustable rate loans are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due. Fixed rate loans are included in the period in which they are scheduled to be repaid and are adjusted to take into account estimated prepayments based upon assumptions estimating the prepayments in the interest rate environment prevailing during the fourth calendar quarter of 1996. The table assumes prepayments and scheduled principal amortization of fixed-rate loans and mortgage-backed securities, and assumes that adjustable rate mortgages will reprice at contractual repricing intervals. There has been no adjustment for the impact of future commitments and loans in process. 28 (2) Savings and NOW deposits are scheduled for repricing based on historical deposit decay rate analyses, as well as historical moving averages of run-off for the Company's deposits in these categories. While generally subject to immediate withdrawal, management considers a portion of these accounts to be core deposits having significantly longer effective maturities based upon the Company's historical retention of such deposits in changing interest rate environments. Specifically, 25.2% of these deposits are considered repriceable within three months and 74.2% are considered repriceable in the over five years category.
Interest rate sensitivity is a function of the repricing characteristics of the Company's assets and liabilities. These characteristics include the volume of assets and liabilities repricing, the timing of the repricing, and the relative levels of repricing. Attempting to minimize the interest rate sensitivity gaps is a continual challenge in a changing rate environment. Based on the Company's gap position as reflected in the above table, current accepted theory would indicate that net interest income would increase in a falling interest rate environment and would decrease in a rising interest rate environment. An interest rate gap table does not, however, present a complete picture of the impact of interest rate changes on net interest income. First, changes in the general level of interest rates do not affect all categories of assets and liabilities equally or simultaneously. Second, assets and liabilities which can contractually reprice within the same period may not, in fact, reprice at the same time or to the same extent. Third, the table represents a one-day position; variations occur daily as the Company adjusts its interest sensitivity throughout the year. Fourth, assumptions must be made to construct such a table. For example, non-interest bearing deposits are assigned a repricing interval of within three months, although history indicates a significant amount of these deposits will not move into interest bearing categories regardless of the general level of interest rates. Finally, the repricing distribution of interest sensitive assets may not be indicative of the liquidity of those assets. The Company anticipates that short-term interest rate levels may fall in 1997. Given this assumption, the Company's asset/liability strategy for 1997 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.
1996 1995 1994 CAPITAL LEVELS Tier 1 leverage ratio 7.83% 7.59% 7.35% Tier 1 risk-based ratio 10.82 10.97 10.85 Total risk-based ratio 12.09 12.23 12.11 CAPITAL PERFORMANCE Return on average assets 1.31 1.30 1.41 Return on average equity 15.60 16.30 17.30 Earnings retained 58.50 59.30 63.50 Internal capital growth 7.60 25.60 3.20
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, 1996, 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 current regulations, the Company will continue to meet its minimum capital requirements in the foreseeable future. 29 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 June 1996, the Company's Board of Directors approved the repurchase of up to 380,000 shares of its common stock to be used for general corporate purposes, including the Company's dividend reinvestment and stock option plans. The stock repurchase plan authorizes the Company to make repurchases from time to time in open market or privately negotiated transactions. At December 31, 1996, a total of 38,050 shares have been repurchased at an aggregate cost of $942,000. A prior repurchase program of 200,000 shares authorized in February 1994 was completed in June 1996. FUTURE OUTLOOK For 1997, FDIC insurance premiums have been reduced on approximately $225 million of the Company's deposits at branches acquired from Sellersville Savings and Loan Association and Central Pennsylvania Savings Association to an annual rate of 6.44 cents per hundred dollars of deposits, more comparable to the 1.29 cents per hundred dollars of deposits now charged on commercial bank deposits. This is the result of the FDIC recapitalizing the Savings Association Insurance Fund through one-time assessments on all financial institutions owning thrift deposits. The Company's one-time assessment paid to this fund on November 30, 1996 amounted to $1,175,000, and will result in lower FDIC costs in 1997. In 1997, the Company intends to open up to three new supermarket branches and possibly one new full service banking office. The Company also intends to install up to ten new cash dispenser ATMs at off-site or remote locations throughout its general market area. These new initiatives, if completed, are not expected to start contributing to profits until 1998 and beyond so that 1997 earnings may be somewhat negatively impacted by the initial costs of these new facilities. On the other hand, the Company is projecting increases in excess of 10% in its commercial, real estate, and retail loan portfolios and some of the branches, supermarkets, and other prior years expansion activities are increasingly contributing to the Company's profits. FORWARD-LOOKING STATEMENTS The Company has projected that net income will grow in 1997 at a double digit rate over 1996 net income and that certain of its loan portfolios will increase over 10% during 1997. The Company has also discussed its planned new investments in branch locations, ATMs, and new technology, in this report. These are forward-looking statements. Risks and uncertainties could cause actual future results and investments to differ materially from those contemplated in such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: (a) loan growth and/or loan margins may be less than expected, due to competitive pressures in the banking industry and/or changes in the interest rate environment; (b) general economic conditions in the Company's market area may be less favorable than expected, resulting in, among other things, a deterioration in credit quality; (c) costs of the Company's planned training initiatives, product development, branch expansion and new technology and operating systems may exceed expectations; (d) volatility in the Company's market area due to recent mergers may have unanticipated consequences, such as customer turnover; and (e) changes in the regulatory environment, securities markets, general business conditions and inflation may be adverse. These risks and uncertainties are all difficult to predict, and most are beyond the control of the Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report. 30 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA. NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands)
ASSETS 1996 1995 Cash and due from banks $ 40,194 $ 39,195 Interest bearing deposits in banks 1,802 2,014 ----------- ----------- Total cash and cash equivalents 41,996 41,209 Investment securities available for sale, at market value 236,814 240,902 Loans and leases, less allowance for loan and lease losses of $22,746 and $20,366 in 1996 and 1995, respectively 1,028,334 918,699 Premises and equipment, net 20,303 19,926 Accrued interest receivable 7,633 8,867 Investments, at equity 5,199 4,827 Other assets 17,734 16,948 ----------- ----------- Total assets $ 1,358,013 $ 1,251,378 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest bearing $ 145,107 $ 134,968 Interest bearing (includes certificates of deposit $100,000 or greater: 1996 - $97,115; 1995 - $89,881) 835,701 779,922 ----------- ----------- Total deposits 980,808 914,890 Securities sold under repurchase agreements and federal funds purchased 164,996 138,550 Short-term borrowings 6,931 4,370 Long-term borrowings 76,110 71,589 Accrued interest payable and other liabilities 14,447 15,364 ----------- ----------- Total liabilities 1,243,292 1,144,763 ----------- ----------- 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 1996 - 8,002,648; 1995 - 7,974,831, net of shares in Treasury: 1996 - 31,204; 1995 - 47,939 20,085 19,106 Additional paid-in capital 83,707 74,499 Net unrealized gains on securities available for sale 4,398 6,579 Retained earnings 7,357 7,648 Treasury stock, at cost (826) (1,217) ----------- ----------- Total shareholders' equity 114,721 106,615 ----------- ----------- Total liabilities and shareholders' equity $ 1,358,013 $ 1,251,378 =========== ===========
The accompanying notes are an integral part of these statements. 31 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Income (Dollars in thousands, except per share data)
Year ended December 31, 1996 1995 1994 INTEREST INCOME Loans and leases, including fees $ 91,098 $ 82,776 $ 70,133 Investment securities Taxable 12,756 13,735 11,766 Tax-exempt 2,482 2,319 2,256 Federal funds sold 162 114 27 Deposits in banks 60 76 77 -------- -------- -------- Total interest income 106,558 99,020 84,259 -------- -------- -------- INTEREST EXPENSE Deposits 34,331 32,739 22,825 Securities sold under repurchase agreements and federal funds purchased 8,083 5,613 2,347 Short-term borrowings 193 1,078 369 Long-term borrowings 3,411 4,406 3,307 -------- -------- -------- Total interest expense 46,018 43,836 28,848 -------- -------- -------- Net interest income 60,540 55,184 55,411 Provision for loan and lease losses 3,900 3,200 3,200 -------- -------- -------- Net interest income after provision for loan and lease losses 56,640 51,984 52,211 -------- -------- -------- OTHER INCOME Trust income 2,354 1,811 1,422 Service charges on deposit accounts 3,465 2,748 2,560 Other service charges and fees 2,601 2,360 1,723 Net gains (losses) on sale of investment securities and mortgages 264 388 (445) Equity in undistributed net earnings of affiliates 404 301 149 -------- -------- -------- Total other income 9,088 7,608 5,409 -------- -------- -------- OTHER EXPENSES Salaries, wages and employee benefits 22,210 20,215 18,984 Net premises and equipment 6,861 6,045 5,587 FDIC assessment 1,125 1,633 1,719 Other operating 11,062 9,649 10,624 -------- -------- -------- Total other expenses 41,258 37,542 36,914 -------- -------- -------- Income before income taxes 24,470 22,050 20,706 Income taxes 7,548 6,668 6,057 -------- -------- -------- Net income $ 16,922 $ 15,382 $ 14,649 ======== ======== ======== PER SHARE OF COMMON STOCK Net income $ 2.12 $ 1.94 $ 1.85 Dividends paid in cash 0.88 0.79 0.68
The accompanying notes are an integral part of these statements. 32 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders' Equity (Dollars in thousands)
Net unrealized gain (loss) Additional on securities Common paid-in available Retained Treasury Shares Par value capital for sale earnings stock Balance at January 1, 1994 6,854,519 $ 17,136 $ 56,685 $- $ 8,401 $- Net income -- -- -- -- 14,649 -- 5% stock dividend 337,613 844 8,229 -- (9,073) -- Cash dividends declared -- -- -- -- (5,608) -- Shares issued under dividend reinvestment plan 13,262 33 481 -- -- -- Change in unrealized gain (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 65,492 (4,011) 8,369 (3,062) Net income -- -- -- -- 15,382 -- 5% stock dividend 359,733 899 8,769 -- (9,668) -- 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 74,499 6,579 7,648 (1,217) Net income -- -- -- -- 16,922 -- 5% stock dividend 380,357 951 8,986 -- (9,937) -- Cash dividends declared -- -- -- -- (7,276) -- Change in unrealized gain (loss) on securities available for sale, net of taxes -- -- -- (2,181) -- -- Shares issued under stock option plan 11,082 28 124 -- -- -- Effect of treasury stock transactions 16,735 -- 98 -- -- 391 --------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1996 8,002,648 $ 20,085 $ 83,707 $ 4,398 $ 7,357 $ (826) ========= ========== ========== ========== ========== ==========
The accompanying notes are an integral part of this statement. 33 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in thousands)
Year ended December 31, 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 16,922 $ 15,382 $ 14,649 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan and lease losses 3,900 3,200 3,200 Depreciation and amortization 3,375 3,032 2,399 Deferred income tax benefit (714) (371) (1,047) Amortization of premiums and discounts on investment securities, net 26 (77) 35 Investment securities and mortgage (gains) losses, net (264) (388) 445 Mortgage loans originated for resale (21,930) (11,460) (18,984) Sale of mortgage loans originated for resale 21,930 11,460 18,984 Changes in assets and liabilities Decrease (increase) in accrued interest receivable 1,234 (866) (1,651) (Decrease) increase in accrued interest payable (1,125) 3,331 490 (Increase) decrease in other assets (700) 4,542 (5,335) (Decrease) increase in other liabilities (43) 216 1,527 --------- --------- --------- Net cash provided by operating activities 22,611 28,001 14,712 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of investment securities available for sale 39,210 6,853 1,635 Proceeds from maturities of investment securities held to maturity -- 13,699 3,971 Proceeds from maturities of investment securities available for sale 26,619 4,014 21,806 Purchase of investment securities available for sale (64,056) (14,905) (126,923) Net increase in loans (113,535) (110,737) (94,646) Purchases of premises and equipment (3,124) (4,560) (6,946) --------- --------- --------- Net cash used in investing activities (114,886) (105,636) (201,103) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in interest and non-interest bearing demand deposits and savings accounts 3,955 (27,750) 16,786 Net increase in certificates of deposit 61,963 78,000 99,625 Net increase in securities sold under agreements to repurchase and federal funds purchased 34,436 88,276 20,034 Net (decrease) increase in short-term borrowings (5,429) (43,597) 35,375 Net increase (decrease) in long-term borrowings 4,521 (6,188) 26,688 Issuance of common stock under dividend reinvestment and stock option plans 152 899 959 Effect of treasury stock transactions 489 1,308 (3,340) Cash dividends (7,025) (6,263) (5,344) --------- --------- --------- Net cash provided by financing activities 93,062 84,685 190,783 --------- --------- --------- Net increase in cash and cash equivalents 787 7,050 4,392 Cash and cash equivalents at beginning of year 41,209 34,159 29,767 --------- --------- --------- Cash and cash equivalents at end of year $ 41,996 $ 41,209 $ 34,159 ========= ========= =========
The accompanying notes are an integral part of these statements. 34 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996 and 1995 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. BASIS OF FINANCIAL STATEMENT PRESENTATION AND REPORTING ENTITY The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiaries on a consolidated basis. Investments owned between 20% and 50% are accounted for using the equity method. All material intercompany balances have been eliminated. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the balance sheets, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal estimate that is susceptible to significant change in the near term relates to the allowance for loan and lease losses. The evaluation of the adequacy of the allowance for loan losses includes an analysis of the individual loans and overall risk characteristics and size of the different loan portfolios, and takes into consideration current economic and market conditions, the capability of specific borrowers to pay specific loan obligations, as well as current loan collateral values. However, actual losses on specific loans, which also are encompassed in the analysis, may vary from estimated losses. 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. 35 LOANS AND LEASES, AND ALLOWANCE FOR LOAN AND LEASE LOSSES Loans and leases are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan and lease losses. Interest on loans is calculated based upon the principal amount outstanding. The allowance for loan and lease losses is established through a provision for loan and lease losses charged as an expense. Loans and leases are charged against the allowance for loan and lease losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans and leases that may become uncollectible based on evaluations of the collectibility of loans and leases, and prior loan and lease loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases, and current economic conditions that may affect the borrower's ability to pay. Accrual of interest is stopped on a loan or lease when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. The Company 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 consolidated financial position or results of operations. On January 1, 1996, the Company adopted SFAS 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 SFAS 122 did not have a material impact on the Company's consolidated financial position or results of operations. The Financial Accounting Standards Board ("FASB") issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as amended by SFAS 127, which provides accounting guidance on transfers of financial assets, servicing of financial assets and extinguishment of liabilities. This statement is effective for transfers of financial assets, servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. Adoption of this new statement is not expected to have a material impact on the Company's consolidated financial position 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 Company adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This standard 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 SFAS 121 on January 1, 1996 did not have a material impact on the Company's consolidated financial position or results of operations. 36 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 The Company accounts for income taxes under the liability method of accounting for income taxes specified by SFAS 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are allowance for loan losses, deferred loan fees, deferred compensation and securities available for sale. EQUITY TRANSACTIONS On January 1, 1996, the Company adopted SFAS 123, "Accounting for Stock-Based Compensation," which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS 123 had been applied. The Company's employee stock option plan is accounted for under APB Opinion 25. The Company reclassified retained earnings to additional paid-in capital for the years ended December 31, 1995 and 1994 to charge retained earnings for the stock dividends paid at the fair value of additional shares which were previously recorded at par. 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, 1996 1995 1994 Interest $47,143 $40,505 $28,358 Taxes 8,947 7,286 7,244 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 during the year ended December 31, 1995. 37 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. PROPERTY ACQUIRED THROUGH LOAN FORECLOSURE ACTIONS Foreclosed property is recorded at the lower of cost or estimated fair market value less costs of disposal. When property is acquired, the excess, if any, of the loan balance over fair market value is charged to the allowance for possible loan losses. Periodically thereafter, the asset is reviewed for subsequent declines in the estimated fair market value. Subsequent declines, if any, and holding costs, as well as gains and losses on subsequent sale, are included in the consolidated statements of income. EARNINGS PER SHARE Earnings per share are calculated on the basis of the weighted average number of shares outstanding of 7,994,472, 7,927,739 and 7,905,457 for the years ended December 31, 1996, 1995 and 1994, respectively, after giving retroactive effect to 5% stock dividends paid on October 31, 1996, 1995 and 1994. All per share data included in these financial statements has been restated for the stock dividends. ADVERTISING COSTS It is the Company's policy to expense advertising costs in the period in which they are incurred. Advertising expense for the years ended December 31, 1996, 1995 and 1994 was approximately $1,130,000, $788,000 and $1,338,000, respectively. 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 of equity. Securities held to maturity are carried at amortized cost. The amortized cost, gross unrealized gains and losses, and estimated market values of the Company's securities available for sale and securities held to maturity at December 31, 1996 and 1995 are summarized as follows (in thousands):
December 31, 1996 Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value Investment securities available for sale U.S. Treasury and U.S. Government agencies $108,569 $ 3,120 $ 78 $111,611 State and municipal bonds 49,485 461 325 49,621 Other bonds 1,184 14 -- 1,198 Mortgage-backed securities 50,594 1,280 89 51,785 Marketable equity securities and other 20,216 2,383 -- 22,599 -------- -------- -------- -------- Totals $230,048 $ 7,258 $ 492 $236,814 ======== ======== ======== ========
38
December 31, 1995 Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value Investment 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 ======== ======== ======== ========
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 allowed enterprises to reassess the appropriateness of the classification of all securities held. A one-time reassessment could 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 hold other debt 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 amortized cost and estimated market value of investment securities available for sale, by contractual maturity, at December 31, 1996 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Estimated Amortized market cost value Due in one year or less $ 9,115 $ 9,284 Due after one through five years 48,137 49,172 Due after five through ten years 112,159 114,275 Due after ten years 40,421 41,484 -------- -------- 209,832 214,215 Marketable equity securities and other 20,216 22,599 -------- -------- $230,048 $236,814 ======== ======== Proceeds from the sales of investment securities during 1996, 1995 and 1994 were $39,210,000, $6,853,000 and $1,635,000, respectively. Gross gains and losses realized on those sales in 1996, 1995 and 1994 were not material. As of December 31, 1996 and 1995, investment securities with a book value of $91,204,000 and $78,559,000, respectively, were pledged to secure public deposits and for other purposes as provided by law. As of December 31, 1996 and 1995, the Company did not have any marketable equity securities of any one issuer where the carrying value exceeded 10% of shareholders' equity. 39 3. LOANS AND LEASES Major classifications of loans and leases are as follows (in thousands):
December 31, 1996 1995 Commercial and industrial loans and leases $ 126,304 $ 99,765 Loans for purchasing and carrying securities 306 478 Loans to financial institutions 453 589 Real estate loans Construction and land development 42,468 42,978 Residential 564,748 526,577 Other 302,787 256,956 Loans to individuals 14,016 11,727 ----------- ----------- 1,051,082 939,070 Unearned income (2) (5) ----------- ----------- Total loans and leases, net of unearned income 1,051,080 939,065 Allowance for loan and lease losses (22,746) (20,366) ----------- ----------- Total loans and leases, net $ 1,028,334 $ 918,699 =========== ===========
Loans and leases on which the accrual of interest has been discontinued or reduced amounted to approximately $8,723,000 and $7,257,000 at December 31, 1996 and 1995, respectively. If interest on these loans had been accrued, such income would have approximated $206,000 and $305,000 for 1996 and 1995, respectively. Loan balances past due 90 days or more and still accruing interest, but which management expects will eventually be paid in full, amounted to $3,650,000 and $1,764,000 at December 31, 1996 and 1995, respectively. The balance of impaired loans was $6,859,000 at December 31, 1996. 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 $6,859,000 of non-accrual loans. The allowance for loan loss associated with the $6,859,000 of impaired loans was $1,437,000 at December 31, 1996. The average impaired loan balance was $6,676,000 in 1996 and the income recognized on impaired loans during 1996 was $689,000. The Bank recognizes income on impaired loans under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. If these factors do not exist, the Bank will not recognize income on such loans. The balance of impaired loans was $5,380,000 at December 31, 1995. 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. Changes in the allowance for loan and lease losses were as follows (in thousands):
Year ended December 31, 1996 1995 1994 Balance, beginning of year $ 20,366 $ 19,310 $ 17,909 Provision charged to operations 3,900 3,200 3,200 Loans and leases charged off (2,345) (3,509) (3,002) Recoveries 825 1,365 1,203 -------- -------- -------- Balance, end of year $ 22,746 $ 20,366 $ 19,310 ======== ======== ========
40 4. PREMISES AND EQUIPMENT Major classifications of premises and equipment are summarized as follows (in thousands):
Estimated December 31, useful lives 1996 1995 Land $ 2,196 $ 2,260 Buildings 5 to 40 years 13,457 14,429 Equipment 3 to 10 years 15,293 13,118 Leasehold improvements 2 to 40 years 2,892 1,705 ------------ ------------- 33,838 31,512 Accumulated depreciation and amortization (13,535) (11,586) ----------- ------------ $ 20,303 $ 19,926 =========== ============
Depreciation and amortization expense amounted to $2,746,000, $2,404,000 and $1,821,000 for the years ended December 31, 1996, 1995 and 1994, respectively. 5. DEPOSITS The aggregate amount of jumbo certificates of deposit, each with a minimum denomination of $100,000, was approximately $97,115,000 and $89,881,000 in 1996 and 1995, respectively. At December 31, 1996, the scheduled maturities of certificates of deposit are as follows: 1997 $ 238,209 1998 84,379 1999 31,362 2000 40,677 2001 and thereafter 22,590 ----------- $ 417,217 =========== 6. SHORT-TERM BORROWINGS Federal funds purchased and securities sold under agreements to repurchase generally mature within 30 days from the date of the transactions. Short-term borrowings consist of Treasury Tax and Loan Note Options and various other borrowings which generally have maturities of less than one year. The details of these categories are presented below (in thousands):
Year ended December 31, 1996 1995 1994 Securities sold under repurchase agreements and federal funds purchased Balance at year-end $164,996 $138,550 $ 50,274 Average during the year 157,182 89,509 55,569 Maximum month-end balance 218,364 138,550 89,089 Weighted average rate during the year 5.14% 5.93% 4.55% Rate at December 31 6.23% 5.56% 5.28% Short-term borrowings Balance at year-end $ 6,931 $ 4,370 $ 47,967 Average during the year 3,863 18,810 5,338 Maximum month-end balance 25,413 10,286 47,967 Weighted average rate during the year 5.00% 7.36% 3.47% Rate at December 31 5.25% 5.35% 6.58%
41 The weighted average rates paid in aggregate on these borrowed funds for 1996, 1995 and 1994 were 5.14%, 6.18% and 4.46%, respectively. 7. LONG-TERM BORROWINGS At December 31, 1996, advances from the Federal Home Loan Bank ("FHLB") totaling $76,110,000 will mature within one to six years and are reported as long-term borrowings. The advances are collateralized by FHLB stock and certain first mortgage loans and mortgage-backed securities. These advances had a weighted average interest rate of 5.02%. Unused lines of credit at the FHLB were $216,884 and $239,517 at December 31, 1996 and 1995, respectively. Outstanding borrowings mature as follows (in thousands): 1997 $ 1,000 1998 11,979 1999 631 2000 -- 2001 and thereafter 62,500 ----------- $ 76,110 =========== 8. 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 10 years of employment. The Company's policy is to fund pension costs allowable for income tax purposes. The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets (in thousands):
December 31, 1996 1995 Actuarial present value of benefit obligations Accumulated benefit obligation, including vested benefits of $4,576,000 and $4,084,000 in 1996 and 1995, respectively $(4,749) $(4,251) ======= ======= Projected benefit obligation for service rendered to date $(7,140) $(6,461) Plan assets at fair value 7,989 5,796 ------- ------- Plan assets in excess of (below) projected benefit obligation 849 (665) Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions (311) 184 Unrecognized net obligation at January 1, 1987 being recognized over 17 years 764 872 Unrecognized prior service costs (382) (424) ------- ------- Prepaid (accrued) pension cost $ 920 $ (33) ======= =======
42 Net pension cost included the following components (in thousands):
Year ended December 31, 1996 1995 1994 Service cost - benefits earned during the period $ 507 $ 332 $ 381 Interest cost on projected benefit obligation 464 400 358 Actual return on plan assets (854) (709) 108 Net amortization and deferral 410 322 (330) ----- ----- ----- Net periodic pension cost $ 527 $ 345 $ 517 ===== ===== =====
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 1996; 7.25% and 4.75%, respectively, in 1995; and 8.25% and 5.50%, respectively, in 1994. The expected long-term rate of return on assets was 8.25% for 1996, 1995 and 1994. 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 $307,000, $303,000 and $285,000 for the years ended December 31, 1996, 1995 and 1994, respectively. 9. 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, 1996 1995 1994 Income tax expense Current $ 8,262 $ 7,039 $ 7,104 Deferred federal benefit (714) (371) (1,047) ------- ------- ------- Applicable income tax expense $ 7,548 $ 6,668 $ 6,057 ======= ======= =======
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, 1996 1995 1994 Computed tax expense at statutory rate $ 8,565 $ 7,718 $ 7,247 Decrease in taxes resulting from Tax-exempt loan and investment income (1,221) (1,076) (1,089) Stock options exercised (46) (196) (181) Other, net 250 222 80 ------- ------- ------- Applicable income tax expense $ 7,548 $ 6,668 $ 6,057 ======= ======= =======
43 Deferred tax assets and liabilities consist of the following (in thousands):
1996 1995 1994 Deferred tax assets Deferred loan fees $ 753 $ 896 $ 1,491 Loan loss allowance 7,674 7,109 6,369 Deferred compensation 610 518 439 Loan sales valuation 120 120 210 Securities available for sale -- -- 2,160 ------- ------- ------- 9,157 8,643 10,669 ------- ------- ------- Deferred tax liability Pension 136 64 32 Bad debt reserve recapture 285 529 773 Partnership investments 195 168 142 Acquisition adjustments 55 81 103 Mark-to-market accounting 28 57 86 Securities available for sale 2,368 3,543 -- Rehab credit adjustment 44 44 44 ------- ------- ------- 3,111 4,486 1,180 ------- ------- ------- Net deferred tax asset $ 6,046 $ 4,157 $ 9,489 ======= ======= =======
10. COMMITMENTS AND CONTINGENT LIABILITIES Future minimum payments under non-cancellable operating leases are due as follows (in thousands): Year ending December 31, 1997 $ 1,201 1998 1,126 1999 1,036 2000 955 2001 730 Thereafter 2,202 ----------- $ 7,250 =========== The total rental expense was approximately $1,458,000, $1,182,000 and $939,000 in 1996, 1995 and 1994, respectively. 11. 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 non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For interest rate swaps, 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. 44 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, 1996 and 1995 are as follows (in thousands)
1996 1995 Financial instruments whose contract amounts represent credit risk Commitments to extend credit $138,830 $105,432 Standby letters of credit 10,666 9,048 Financial instruments whose notional or contract amounts exceed the amount of credit risk Interest rate swap agreements 90,000 100,000
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 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, 1996 varies up to 100%; the average amount collateralized is 74%. 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 1996, the interest rate swaps had the effect of increasing the Company's net interest income by $1,500,000 over what would have been realized had the Company not entered into the swap agreements. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. For the 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. 45 Changes in assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values. Fair values have been estimated using data that management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument. The estimation methodologies, resulting fair values and recorded carrying amounts at December 31, 1996 and 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. December 31, 1996 Carrying Estimated fair amount value Cash and cash equivalents $ 41,996 $ 41,996 Investment securities 236,814 236,814 December 31, 1995 Carrying Estimated fair amount value Cash and cash equivalents $ 41,209 $ 41,209 Investment securities 240,902 240,902 Fair value of financial instruments with stated maturities has been estimated using present value cash flow, discounted at a rate approximating current market for similar assets and liabilities. December 31, 1996 Carrying Estimated fair amount value Deposits with stated maturities $512,835 $513,902 Short-term borrowings 171,927 171,927 Long-term borrowings 76,110 77,169 December 31, 1995 Carrying Estimated fair amount value Deposits with stated maturities $450,872 $459,144 Short-term borrowings 142,920 142,920 Long-term borrowings 71,589 73,478 Fair value of financial instrument liabilities with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand), totaling $467,973 for 1996 and $464,018 for 1995. 46 The fair value of the net loan portfolio has been estimated using present value cash flow, discounted at the treasury rate adjusted for non-interest operating costs and giving consideration to estimated prepayment risk and credit loss factors. December 31, 1996 Carrying Estimated fair amount value Net loans $ 1,028,334 $ 1,066,594 December 31, 1995 Carrying Estimated fair amount value Net loans $ 918,699 $ 953,962 There is no material difference between the carrying amount and estimated fair value of off-balance sheet items which total $239,496,000 and $216,229,000 at year-end 1996 and 1995, 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. 13. 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. 14. RELATED PARTY TRANSACTIONS Certain directors and officers of the Company and the Bank, their immediate families, and the companies with which they are associated, 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 $3,962,000 and $3,893,000 at December 31, 1996 and 1995, respectively. During 1996, $1,467,000 of new loans were made and repayments totaled $1,398,000. 15. EQUITY TRANSACTIONS The Company has an employee stock option plan for certain key employees accounted for under APB Opinion 25 and related interpretations. A total of 1,340,970 shares of common stock, restated for stock dividends and splits, have been made available for options to be granted through February 24, 1997. The options granted under this plan are subject to a vesting schedule commencing at two years and expire ten years and one month from the date of issue. The Company also has a non-employee director stock option plan. Under this plan, a total of 165,375 shares of common stock, restated for stock dividends and splits, have been made available for options to be granted through January 3, 2004. The options granted under this plan fully vest after two years and expire ten years from the date of issue. Under both plans, the option price per share is equivalent to 100% of the quoted market price on the date the options were granted. Accordingly, no compensation cost has been recognized for the plans. The number of unoptioned shares available for granting totaled 812,785 at the beginning of the year and 554,941 at the end of 1996. 47 Had compensation cost for the plans been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123, the Company's net income and earnings per share of common stock would have been reduced to the pro forma amounts indicated below.
1996 1995 Net Income As reported $ 16,922 $ 15,382 Pro forma 16,626 15,196 Earnings per share of common stock As reported 2.12 1.94 Pro forma 2.08 1.92
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 3.50% and 2.54%; expected volatility of 13.0% and 8.2%; risk-free interest rates for each plan of 5.66% and 6.38% for 1996 and 7.75% and 6.36% for 1995; and expected lives of 9.3 years for all years. A summary of the status of the Company's fixed option plans as of December 31, 1996, 1995 and 1994 and changes during the years ending on those dates is presented below:
1996 1995 1994 Weighted Weighted average average exercise exercise Shares price Shares price Shares Outstanding, beginning of year 759,370 $ 23.72 576,649 $ 21.74 450,814 Effect of stock dividends and splits 41,321 - 33,707 -- 27,944 Granted 159,359 26.56 204,900 26.75 126,550 Exercised (11,370) 13.35 (50,118) 19.44 (28,659) Forfeited (8,647) 21.88 (5,768) 22.13 - ----------- ------- --------- ------- ---------- Outstanding, end of year 940,033 $ 23.30 759,370 $ 23.72 576,649 ========== ======= ========= ======= ========== Options exercisable at year-end 251,844 136,882 84,036 ========== ========= ========== Weighted average fair value of options granted during the year $ 5.47 $ 6.33 ======= ========
The following information applies to options outstanding at December 31, 1996: Number outstanding 940,033 Range of exercise prices $11.40 - $33.61 Weighted average exercise price $23.30 Weighted average remaining contractual life 7.25 48 16. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY The following is a summary of selected financial information of National Penn Bancshares, Inc., parent company only (in thousands): CONDENSED BALANCE SHEETS
December 31, 1996 1995 Assets Cash $ 33 $ 50 Investment in Bank subsidiary, at equity 97,106 90,993 Investment in other subsidiaries, at equity 17,708 15,627 Other assets 20 6 -------- -------- $114,867 $106,676 ======== ======== Liabilities and shareholders' equity Liabilities $ 146 $ 61 Shareholders' equity 114,721 106,615 -------- -------- $114,867 $106,676 ======== ========
CONDENSED STATEMENTS OF INCOME
Year ended December 31, 1996 1995 1994 Income Equity in undistributed net earnings of subsidiaries $ 9,630 $ 8,849 $ 4,691 Dividends from Bank subsidiary 7,277 6,435 8,691 Dividends from other subsidiaries -- -- 1,267 Interest and other income 129 278 4 ------- ------- ------- 17,036 15,562 14,653 Expenses Other operating 106 127 4 ------- ------- ------- Income before income taxes 16,930 15,435 14,649 Income taxes 8 53 -- ------- ------- ------- Net income $16,922 $15,382 $14,649 ======= ======= =======
49 CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31, 1996 1995 1994 Cash flows from operating activities Net income $ 16,922 $ 15,382 $ 14,649 Equity in undistributed net earnings of subsidiaries (9,630) (8,849) (4,691) (Increase) decrease in other assets (14) 159 138 Increase (decrease) in other liabilities 85 (11) 271 -------- -------- -------- Net cash provided by operating activities 7,363 6,681 10,367 -------- -------- -------- Cash flows from investing activities Additional investment in subsidiaries, at equity (744) (2,480) (3,699) -------- -------- -------- Net cash used in investing activities (744) (2,480) (3,699) -------- -------- -------- Cash flows from financing activities Proceeds from issuance of stock 152 899 959 Effect of treasury stock transactions 489 1,308 (3,340) Cash dividends (7,277) (6,435) (5,344) -------- -------- -------- Net cash used in financing activities (6,636) (4,228) (7,725) -------- -------- -------- Net decrease in cash and cash equivalents (17) (27) (1,057) Cash and cash equivalents at beginning of year 50 77 1,134 -------- -------- -------- Cash and cash equivalents at end of year $ 33 $ 50 $ 77 ======== ======== ========
17. 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, 1996 was approximately $7,553,000. 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 $16,910,000 plus additional amounts equal to the net earnings of the Bank for the period January 1, 1997 through the date of declaration less dividends previously paid in 1997. 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, 1996, the Company was required to have minimum Tier 1 and total capital ratios of 4% and 8%, respectively, and a minimum Tier 1 leverage ratio of 3%. 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% and 10%, respectively, and a minimum Tier 1 leverage ratio of 5%. The Company's actual Tier 1 and total capital ratios at December 31, 1996 were 10.82% and 12.09%, respectively, and the Company's Tier 1 leverage ratio was 7.83%. The Company's management believes that, under current regulations, the Company will continue to meet its minimum capital requirements in the foreseeable future. (This space intentionally left blank.) 50
To be well capitalized under For capital prompt corrective Actual adequacy purpose action provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 1996 Total capital (to risk-weighted assets) National Penn Bancshares, Inc. $ 115,653 12.09% $ 76,551 8.00% $ 95,689 10.00% National Penn Bank 99,539 10.47 76,220 8.00 95,025 10.00 Tier I capital (to risk-weighted assets) National Penn Bancshares, Inc. 103,559 10.82 38,276 4.00 57,413 6.00 National Penn Bank 87,527 9.21 38,010 4.00 57,013 6.00 Tier I capital (to average assets) National Penn Bancshares, Inc. 103,559 7.83 52,883 4.00 66,104 5.00 National Penn Bank 87,527 6.67 52,500 4.00 65,626 5.00 As of December 31, 1995 Total capital (to risk-weighted assets) National Penn Bancshares, Inc. $ 103,323 12.23% $ 67,583 8.00% $ 84,479 10.00% National Penn Bank 88,797 10.59 67,053 8.00 83,816 10.00 Tier I capital (to risk-weighted assets) National Penn Bancshares, Inc. 92,642 10.97 33,792 4.00 50,687 6.00 National Penn Bank 78,198 9.33 33,526 4.00 50,290 6.00 Tier I capital (to average assets) National Penn Bancshares, Inc. 92,642 7.59 48,823 4.00 61,029 5.00 National Penn Bank 78,198 6.45 48,492 4.00 60,616 5.00
18. 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 $0.001 per right at any time until the 10th business day following a public announcement that a 19.9% position has been acquired. Rights are not redeemable following an "adverse person" determination. The Rights Plan was not adopted in response to any specific effort to acquire control of the Company. The issuance of rights had no dilutive effect, did not affect the Company's reported earnings per share, and was not taxable to the Company or its shareholders. 19. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) The following represents summarized quarterly financial data of the Company, which, in the opinion of management, reflects all adjustments (comprising only normal recurring accruals) necessary for a fair presentation. Net income per share of common stock has been restated to retroactively reflect certain stock dividends. 51 (Dollars in thousands, except per share data)
Three months ended 1996 Dec. 31 Sept. 30 June 30 March 31 Interest income $ 27,821 $ 27,151 $ 25,867 $ 25,719 ============== ============== =============== ======== Net interest income $ 15,953 $ 15,424 $ 14,713 $ 14,450 ============== ============== =============== ======== Provision for loan and lease losses $ 975 $ 975 $ 975 $ 975 ============== ============== =============== ======== Net gains (losses) on sale of mortgages $ 336 $ (57) $ 88 $ (103) ============== ============== =============== ======== Income before income taxes $ 6,565 $ 6,158 $ 5,776 $ 5,971 ============== ============== =============== ======== Net income $ 4,528 $ 4,286 $ 3,993 $ 4,115 ============== ============== =============== ======== Net income per share of common stock $ 0.57 $ 0.54 $ 0.50 $ 0.51 ============== ============== =============== ========
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 $ 3,899 $ 13,549 $13,460 ============= ============= =============== ======= Provision for loan and lease losses $ 950 $ 750 $ 750 $ 750 ============= ============= =============== ======= Net gains (losses) on sale of securities and 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 $ 0.51 $ 0.49 $ 0.46 $ 0.50 ============= ============= =============== =======
(This space intentionally left blank) 52 Report of Independent Certified Public Accountants Board of Directors National Penn Bancshares, Inc. We have audited the accompanying consolidated balance sheets of National Penn Bancshares, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Penn Bancshares, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Grant Thornton LLP Philadelphia, Pennsylvania January 17, 1997 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 2, 3, and 24 of the Company's definitive Proxy Statement to be used in connection with the Company's 1997 Annual Meeting of Shareholders (the "Proxy Statement"). Item 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated herein by reference to pages 19 through 21 and page 23 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 4, 23, and 24 of the Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated herein by reference to page 23 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. 10.1 National Penn Bancshares, Inc., Amended and Restated Dividend Reinvestment Plan. (Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.) 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.* (Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.) 10.6 National Penn Bancshares, Inc., Capital Accumulation Plan Amendment 1996-1.* (Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.) 10.7 National Penn Bancshares, Inc., Executive Incentive Plan.* (Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.) 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 National Penn Bancshares, Inc., Officers' and Key Employees' Stock Compensation Plan.* 10.11 National Penn Bancshares, Inc., Directors' Fee Plan.* 10.12 National Penn Bancshares, Inc., Non-Employee Directors' Stock Option Plan.* (Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.) 10.13 National Penn Bancshares, Inc., Employee Stock Purchase Plan.* 10.14 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.) 10.15 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.) 10.16 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.) 10.17 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.) 10.18 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.) 10.19 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.) 10.20 Stock Purchase Agreement dated April 20, 1989, between National Penn Bancshares, Inc., and Pennsylvania State Bank. (Incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.21 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.) 10.22 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.) 56 10.23 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. 99 Forward-Looking Statements. * 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 1996. 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 26, 1997 By /s/ Lawrence T. Jilk, Jr. -------------------------- Lawrence T. Jilk, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated: Signatures Title /s/ John H. Body Director March 26, 1997 John H. Body /s/ J. Ralph Borneman, Jr. Director March 26, 1997 J. Ralph Borneman, Jr. /s/ Frederick H. Gaige Director March 26, 1997 Frederick H. Gaige /s/ John J. Dau Director March 26, 1997 John J. Dau /s/ Lawrence T. Jilk, Jr. Director, President, and Chief March 26, 1997 Lawrence T. Jilk, Jr. Executive Officer (Principal Executive Officer) /s/ Patricia L. Langiotti Director March 26, 1997 Patricia L. Langiotti /s/ Kenneth A. Longacre Director March 26, 1997 Kenneth A. Longacre /s/ Randall J. Nester Director March 26, 1997 Randall J. Nester /s/ C. Robert Roth Director March 26, 1997 C. Robert Roth /s/ Harold C. Wegman, D.D.S. Director March 26, 1997 Harold C. Wegman, D.D.S. /s/ Wayne R. Weidner Director and Executive March 26, 1997 Wayne R. Weidner Vice President /s/ Gary L. Rhoads Treasurer (Principal Financial March 26, 1997 Gary L. Rhoads Accounting Officer) EX-3.2 2 Exhibit 3.2 BYLAWS NATIONAL PENN BANCSHARES, INC. (A Pennsylvania Business Corporation) ARTICLE I Meetings of Shareholders Section 1.01. Place of Meeting. Meetings of shareholders of the Corporation shall be held at such place, within the Commonwealth of Pennsylvania or elsewhere, as may be fixed by the Board of Directors. If no place is so fixed, they shall be held at the office of the Corporation at Boyertown, Pennsylvania. Section 1.02. Annual Meeting. The annual meeting of shareholders for the election of directors whose terms are expiring and the transaction of any other business which may be brought properly before the meeting shall be held on such date and at such time as the Board of Directors shall determine from time to time. If for any reason such meeting is not held at the time fixed therefor, such election may be held at a subsequent meeting called for that purpose. Section 1.03. Special Meetings. Special meetings of the shareholders may be called at any time by the Board of Directors or the Chief Executive Officer or by any other person or persons authorized by statute. Such meetings shall be held on such date and time as may be fixed by the Board of Directors or the Secretary or, in the absence of such designation, as fixed by the person or persons calling the meeting. Section 1.04. Notice of Meetings. Notice of all annual meetings of shareholders shall be given by the Secretary. Written notice of the date, place, and time of all meetings of shareholders, and of the general nature of the business to be transacted at special meetings, shall be mailed by first class mail to each shareholder of record entitled to vote at the meeting at least ten days prior to the day named for the meeting, unless a greater period of notice is by law required in a particular case. -1- Section 1.05. Organization. At every meeting of the shareholders, the Chairman of the Board or, if there is no such Chairman or if he is absent, the senior present Vice Chairman of the Board or, if there is no such Vice Chairman or if he is absent, the President or, in his absence, the senior present Vice President or, in his absence, a chairman chosen by the shareholders, shall act as chairman, and the Secretary or, in his absence, a person appointed by the Chairman, shall act as secretary. Section 1.06. Quorum; Action by Shareholders. The presence, in person or by proxy, of the shareholders entitled to cast a majority of the votes which all shareholders are entitled to cast on a particular matter shall constitute a quorum for the purpose of considering such matter. Unless otherwise provided herein, or in the Articles of Incorporation or by law, any action to be taken by vote of the shareholders shall be authorized upon receiving the affirmative vote of a majority of the votes cast by all shareholders entitled to vote thereon and, if any shareholders are entitled to vote thereon as a class, upon receiving the affirmative vote of a majority of the votes cast by the shareholders entitled to vote as a class. Section 1.07. Procedure for Nomination of Candidates for Director. Nominations for election to the Board of Directors may be made by the Board of Directors and by any holder of any outstanding shares of the Corporation entitled to vote for the election of directors. Nominations, other than those made by the Board of Directors, shall be made in writing and shall be delivered or mailed to the Corporation at its principal office not less than 14 days prior to any meeting of shareholders called for the election of directors whose terms expire at such meeting and shall contain the same information to the extent known to the notifying shareholder as that required to be stated by the Corporation in its proxy statement for the nominees of the Board of Directors; provided, however, that if less than 21 days' notice of the meeting is given to shareholders, such notice of nomination shall be mailed or delivered to the Corporation not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. Nominations not made in accordance with this section in his discretion, be disregarded by the -2- chairman of the meeting, and upon his instructions, the vote tellers may disregard all votes cast for each such nominee. Section 1.08. Financial Statements. Financial statements shall be sent to shareholders annually as prescribed by law, but such statements need not be examined by a certified public accountant or by a firm thereof. ARTICLE II Directors Section 2.01. Number and Term of Office. There shall be such number of directors who shall be divided into such classes and who shall be elected to serve for such terms of office as is provided in the Articles of Incorporation. Section 2.02. Vacancies. Vacancies on the Board of Directors, should they occur for whatever reason, including vacancies resulting from death, resignation, retirement, disqualification, or an increase in the number of directors, shall be filled by a majority vote of the remaining directors though less than a quorum. Each director elected by the Board of Directors pursuant to this Section 2.02 shall hold such office for a term expiring at the annual meeting of shareholders at which the term of the class to which he has been elected expires and until his successor is elected and qualified. Section 2.03. Resignations. Any director may resign at any time by giving written notice to the Board of Directors, the President, or the Secretary. Any such resignation shall take effect at the time of the receipt of such notice or at any later time specified therein. Unless otherwise specified therein, the acceptance of a resignation shall not be necessary to make it effective. Section 2.04. Annual Meeting. Immediately after each annual election of directors, the Board of Directors shall meet for the purpose of organization, election of officers, and the -3- transaction of other business at the place where such election of directors was held. Notice of such meeting need not be given. In the absence of a quorum at said meeting, the same may be held at any other time and place which shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors. Section 2.05. Regular Meetings. Regular meetings of the Board of Directors shall be held at such time and place as shall be designated from time to time by resolution of the Board. Notice of such meetings need not be given. Section 2.06. Special Meetings. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board, if any, a Vice Chairman of the Board, if any, the President or one-third or more of the directors in office. Notice of the date, time, place, and general nature of the business to be transacted at each special meeting shall be given by telephone, telegram, letter or in person, unless such notice is waived, by or at the direction of the person or persons authorized to call such meeting, to each director, at least forty-eight hours in advance of the meeting. Section 2.07. Organization. Every meeting of the Board of Directors shall be presided over by the Chairman of the Board or, if there is no such Chairman or if he is absent, the senior present Vice Chairman of the Board or, if there is no such Vice Chairman or if he is absent, the President or, in his absence, a chairman chosen by a majority of the directors present. The Secretary or, in his absence, a person appointed by the Chairman, shall act as secretary. Section 2.08. Quorum; Action by Board. Except to the extent that a greater number is required by law, a majority of all of the directors in office shall constitute a quorum for the transaction of business at any meeting, and the acts of a majority of the directors present at a meeting at which a quorum is present shall be the acts of the Board of Directors. -4- Section 2.09. Participation in Meetings. One or more directors may participate in a meeting of the Board of Directors or a committee of the Board of Directors by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Section 2.10. Compensation. Fees and expenses payable for services as a director or member of a committee of the Board of Directors shall be in such amounts as shall be determined by the Board of Directors, except that no person who receives a salary from the Corporation as an officer or employee thereof shall receive any compensation as a director or a member of a committee of the Board of Directors. Section 2.11. Directors and Emergency Officers Succession. In the event of an emergency resulting from warlike damage or an attack on the United States or any nuclear disaster of sufficient severity to prevent the conduct and management of the affairs and business of the Corporation under the direction of its directors and officers as contemplated by these Bylaws, the officers and employees of the Corporation shall continue to conduct the affairs of the Corporation under such guidance from the directors as may be available, subject to conformance with any governmental directives during the emergency. The officers shall have authority to execute and carry into effect any and all of the actions, duties, and powers which may be authorized by governmental directives for operations during emergencies, including the power to curtail, limit, suspend, or resume any operation of the Corporation and change the location of any office of the Corporation. The officers at the time of such emergency shall have the broadest powers to perform any and all acts which may be necessary for the purposes set forth in the preceding paragraphs, including power to employ additional officers and employees, to purchase and acquire or contract for the use of any services, real estate, equipment, and other supplies, materials, and resources as they may deem necessary or appropriate for the continued conduct of the operations of the -5- Corporation on such terms and conditions as to them shall seem desirable, and to obligate the Corporation to pay the expenses thereof. In order to provide for automatic succession of authority among the officer personnel of the Corporation in such an emergency, the priorities of seniority and succession of authority may be established and delegated to and among the officers of the Corporation by resolution of the Board of Directors. The officer in authority under the terms of the resolution shall have the power to assign and reassign functions and duties among any of the other officers of the Corporation. Any authority granted to such officers herein shall be subject to the authority otherwise vested in the Board of Directors, but shall not be deemed to be restricted in any way by the inability on the part of the Board of Directors to act. Section 2.12. Age Qualification and Mandatory Retirement of Directors. No person who has attained the age of sixty (60) years and is not then a director shall be qualified for nomination or for election to the Board of Directors. No person who has attained the age of seventy (70) years and was not a director on April 27, 1983, shall be qualified for nomination or election to the Board of Directors. No person who has attained the age of seventy-two (72) years shall be qualified for nomination or for election to the Board of Directors. No person who was a director on April 27, 1983, shall be qualified to serve as a director from and after the date of the annual meeting of shareholders that comes after his seventy-second birthday, and no person who was not a director on April 27, 1983, shall be qualified to serve as a director from and after the date of the annual meeting of shareholders that comes after his seventieth birthday. Accordingly, a director, upon attaining such age, shall retire from the Board of Directors effective on the date of the annual meeting of shareholders that comes after the date upon which he attains such age. The failure of any director to retire as provided in this section shall constitute proper cause for the Board of Directors to declare vacant the office of such director. -6- Section 2.13. Director Emeritus. A director who is ineligible for reelection to the Board because of age shall be eligible to serve as Director Emeritus. Such a Director may be named by the Board annually at its reorganization meeting, but may not serve more than three consecutive terms. A Director Emeritus shall have the privilege of attending all meetings of the Board and shall have the opportunity of sharing his experience with the Board, but shall have none of the responsibilities of a member of the Board, and shall have no vote on matters put before the Board. The terms "Director," "Board," or "Board of Directors" where used in these Bylaws shall not be deemed to apply to or to include a Director Emeritus. ARTICLE III Committees Section 3.01. Executive Committee. There shall be an Executive Committee consisting of such directors as shall from time to time be appointed by the Board of Directors on the recommendation of the Chief Executive Officer. The Board of Directors shall designate the Chairman of the Executive Committee. The Executive Committee shall meet on call of the Chairman of the Executive Committee, the Chairman of the Board, any Vice Chairman of the Board, or the President. During the intervals between the meetings of the Board of Directors, the Executive Committee shall possess and may exercise all the powers of the Board of Directors in the management of the business and affairs of the Corporation conferred by the Bylaws or otherwise, including, without limiting the generality of the foregoing, the power to review and act upon Corporation matters involving employee compensation, donations, insurance, pension and profit sharing, and long-range planning. Except to the extent that a greater number is required by law, a majority of all of the members of the Executive Committee in office shall constitute a quorum for the transaction of business at any meeting, and the acts of a majority of the members present at a meeting at which a quorum is present shall be the acts of the Executive Committee. The Executive Committee shall keep a record of its proceedings and report its actions to the next following meeting of the Board of Directors. -7- Section 3.02. Audit Committee. There shall be an Audit Committee which shall consist entirely of outside Directors to be appointed annually by the Board of Directors on the recommendation of the Chief Executive Officer. The object of the Audit Committee shall be to give additional assurance of the integrity of the financial information used by the management of the Corporation and by the Board in making decisions, and the integrity of the financial information used by the management of the Corporation and by the Board in making decisions, and the integrity of the financial information distributed to the shareholders and the public at large. The Audit Committee shall review the internal audit controls of the Corporation and shall have the authority to cause and supervise such examinations and audits to be made by public accountants of the books and affairs of the Corporation and subsidiary companies as it, in its discretion, deems advisable. The Audit Committee also shall review audit policies, oversee internal audits, review external audits, and review any examination reports. Members of management of the Corporation, or any of its subsidiary companies, whether or not directors of the Corporation, may be invited by the Audit Committee to attend meetings thereof. Section 3.03. Other Committees. The Board of Directors may, at any time and from time to time, appoint such other standing or special committees to perform such duties and make such investigations and reports as the Board of Directors shall by resolution determine. Such committees shall determine their own organization and times and places of meeting, unless otherwise directed by such resolution. ARTICLE IV Officers Section 4.01. Officers. The officers of the Corporation shall be a President, a Secretary, a Treasurer, and may include a Chairman of the Board, one or more Vice Chairmen of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as the Board of Directors may from time to time determine. -8- Section 4.02. Qualifications. The officers shall be natural persons of full age. Section 4.03. Election and Term of Office. The officers of the Corporation shall be elected by the Board of Directors and shall serve at the pleasure of the Board of Directors. Section 4.04. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors, the President, or the Secretary. Any such resignation shall take effect at the time of the receipt of such notice or at any later time specified therein. Unless otherwise specified therein, the acceptance of a resignation shall not be necessary to make it effective. Section 4.05. Chairman of the Board. The Board of Directors may elect one of its members to be Chairman of the Board. He shall preside at all meetings of the Board of Directors. He shall also have such other powers and duties as may be conferred upon or assigned to him by the Board of Directors, as well as any other powers specifically conferred upon him by these Bylaws. Section 4.06. Vice Chairman of the Board. The Board of Directors may elect one or more of its members to be a Vice Chairman of the Board. In the absence of the Chairman, the senior present Vice Chairman shall preside at meetings of the Board of Directors. Each Vice Chairman shall have such other powers and duties as may be conferred upon or assigned to him by the Board of Directors. Section 4.07. President. The President shall, in the absence of the Chairman and the Vice Chairmen, or if no Chairman or Vice Chairmen have been elected, preside at any meeting of the Board of Directors. The President shall have and may exercise any and all other powers and duties pertaining by law, regulation, or practice to the office of President, or imposed by these Bylaws. He shall have such other powers and duties as may be conferred upon or assigned to him by the Board of Directors. -9- Section 4.08. Chief Executive Officer. The Board of Directors may designate the Chairman of the Board, and Vice Chairman of the Board or the President as Chief Executive Officer. The Chief Executive Officer shall have general supervision over the business and operations of the Corporation, subject, however, to the control of the Board of Directors. He, or such persons as shall be designated by him, shall sign, execute, acknowledge, verify, deliver, and accept, in the name of the Corporation, deeds, mortgages, bonds, contracts, and other instruments authorized by the Board of Directors, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation; and, in general, he shall have general executive powers as well as such other powers and duties as may be conferred upon or assigned to him by the Board of Directors. Section 4.09. Vice Presidents. The Board of Directors may elect one or more Executive Vice Presidents and may elect or appoint one or more Senior Vice Presidents and Vice Presidents. Each such person shall have such powers and duties as may be conferred upon or assigned to him by the Board of Directors or the Chief Executive Officer. Section 4.10. Secretary. The Secretary shall attend to the giving of all notices required by these Bylaws to be given. He shall keep accurate minutes of meetings of the Board of Directors and shall serve as Secretary to all shareholder meetings. He shall be custodian of the corporate seal, records, documents, and papers of the Corporation including election returns and proceedings of shareholder meetings. He shall provide for the keeping of proper records of all transactions of the Corporation assigned to him, from time to time, by the Board of Directors or the Chief Executive Officer, and he shall have all other powers and duties pertaining by law, regulation, or practice, to the office of Secretary, or imposed by these Bylaws, or as may from time to time be conferred upon or assigned to him by the Board of Directors or the Chief Executive Officer. Section 4.11. Assistant Secretaries. In the absence or disability of the Secretary or when so directed by the Secretary, any Assistant Secretary may perform all the duties of the Secretary, and, -10- when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Secretary. The Assistant Secretaries shall perform such other duties as from time to time may be conferred upon or assigned to them respectively by the Board of Directors, the Chief Executive Officer, or the Secretary. Section 4.12. The Treasurer. The Treasurer shall have charge of all receipts and disbursements of the Corporation and shall have or provide for the custody of its funds and securities; he shall have full authority to receive and give receipts for all money due and payable to the Corporation, to endorse checks, drafts, and warrants in its name and on its behalf, and to give full discharge for the same; he shall deposit all funds of the Corporation, except such as may be required for current use, in such banks or other places of deposit as the Board of Directors may from time to time designate; and, in general, he shall perform all duties incident to the office of Treasurer and such other duties as may from time to time be conferred upon or assigned to him by the Board of Directors or the Chief Executive Officer. Section 4.13. Assistant Treasurers. In the absence or disability of the Treasurer or when so directed by the Treasurer, any Assistant Treasurer may perform all the duties of the Treasurer, and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Treasurer. The Assistant Treasurers shall perform such other duties as from time to time may be conferred upon or assigned to them respectively by the Board of Directors, the Chief Executive Officer, or the Treasurer. Section 4.14. Compensation of Officers and Others. The compensation of all officers shall be fixed from time to time by the Board of Directors, or any committee or officer authorized by the Board of Directors so to do. -11- ARTICLE V Limitation of Directors' Liability; Indemnification Section 5.01. To the fullest extent permitted by the Directors' Liability Act (42 Pa. C.S. ss.8361 et seq.) and the Business Corporation Law of the Commonwealth of Pennsylvania, a director of the Corporation shall not be personally liable to the Corporation, its shareholders, or others for monetary damages for any action taken or any failure to take any action unless the director has breached or failed to perform the duties of his or her office, as set forth in the Directors' Liability Act, and such breach or failure constitutes self-dealing, willful misconduct, or recklessness. The provisions of this Article Fifth shall not apply with respect to the responsibility or liability of a director under any criminal statute or the liability of a director for the payment of taxes pursuant to local, state, or federal law. Section 5.02. (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative by reason of the fact that such person is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees), amounts paid in settlement, judgments, and fines actually and reasonably incurred by such person in connection with such action, suit, or proceeding; provided, however, that no indemnification shall be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. (b) Expenses (including attorneys' fees) incurred in defending a civil or criminal action, suit, or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit, or proceeding, upon receipt of an undertaking by or on behalf of the director, officer, employee, or agent to repay such amount if it shall be ultimately determined that he or she is not entitled to be indemnified by the Corporation as authorized in this Article Fifth. -12- (c) The indemnification and advancement of expenses provided by this Article Fifth shall not be deemed exclusive of any other right to which persons seeking indemnification and advancement of expenses may be entitled under any agreement, vote of shareholders or disinterested directors, or otherwise, both as to actions in such persons' official capacity and as to their actions in another capacity while holding office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such person. (d) The Corporation may purchase and maintain insurance on behalf of any person, may enter into contracts of indemnification with any person, may create a fund of any nature (which may, but need not be, under the control of a trustee) for the benefit of any person, and may otherwise secure in any manner its obligations with respect to indemnification and advancement of expenses, whether arising under this Article Fifth or otherwise, to or for the benefit of any person, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article Fifth. Section 5.03. The limitation of liability provided in Section 5.01 of this Article Fifth and the right to indemnification provided in Section 5.02 of this Article Fifth shall apply to any action or any failure to take any action occurring on or after January 27, 1987. Section 5.04. Notwithstanding anything herein contained to the contrary, this Article Fifth may not be amended or repealed and a provision inconsistent herewith may not be adopted, except by the affirmative vote of 80% of the members of the entire Board of Directors or by the affirmative vote of shareholders of the Corporation entitled to cast at least 80% of the votes which all shareholders of the Corporation are then entitled to cast, except that if the Business Corporation Law or the Directors' Liability Act is amended or any other statute is enacted so as to decrease the exposure of directors to liability or to increase the indemnification rights available to directors, officers, or others, then this Article Fifth and any other provision of these Bylaws inconsistent with -13- such decreased exposure or increased indemnification rights shall be amended, automatically and without further action on the part of shareholders or directors, to reflect such decreased exposure or to include such increased indemnification rights, unless such legislation expressly requires otherwise. Any repeal or modification of this Article Fifth by the shareholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation or any right to indemnification from the Corporation with respect to any action or any failure to take any action occurring prior to the time of such repeal or modification. Section 5.05. If, for any reason, any provision of this Article Fifth shall be held invalid, such invalidity shall not affect any other provision not held so invalid, and each such other provision shall, to the full extent consistent with law, continue in full force and effect. If any provision of this Article Fifth shall be held invalid in part, such invalidity shall in no way affect the remainder of such provision, and the remainder of such provision, together with all other provisions of this Article Fifth shall, to the full extent consistent with law, continue in full force and effect. Section 5.06. Article Fifth (as in effect on the day prior to the day on which this new Article Fifth is approved by the shareholders of the Corporation), and all provisions of the Bylaws of the Corporation insofar as they are inconsistent with this Article Fifth, are hereby repealed, except that with respect to acts or omissions occurring prior to January 27, 1987, such former Article Fifth and such other provisions of the Bylaws of the Corporation shall remain in full force and effect. ARTICLE VI Share Certificates; Transfer Section 6.01. Share Certificates. Share certificates shall be signed by the manual, facsimile, printed, or engraved signatures of the Chairman of the Board or a Vice Chairman of the Board or the President or a Vice President and the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer of the Corporation, but one of such signatures shall be a manual -14 signature unless the certificates are signed by a transfer agent or a registrar, and shall be sealed with the corporate seal, which may be a facsimile, engraved, or printed seal. In case any officer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer had not ceased to be such at the date of its issue. Section 6.02. Transfer of Shares. Transfer of shares of the Corporation shall be made only on the books of the Corporation by the owner thereof or by his attorney thereunto authorized, upon surrender of the share certificates to the Secretary or a transfer agent of the Corporation accompanied by a duly executed power of attorney. Section 6.03. Transfer Agent and Registrar; Regulations. The Corporation may, if and whenever the Board of Directors so determines, maintain one or more transfer offices or designate one or more transfer agents, where or by which the shares of the Corporation shall be transferable, and also maintain one or more registry offices or designate one or more registrars where or by which the shares shall be registered; and no certificates for shares of the Corporation in respect of which a registrar shall have been designated shall be valid unless countersigned and registered by such registrar. The Board of Directors may also make such additional rules and regulations as it may deem expedient concerning the issue, transfer, and registration of share certificates. Section 6.04. Lost, Destroyed, and Mutilated Certificates. The Board of Directors, by standing resolution or by resolutions with respect to particular cases, may authorize the issue of new share certificates in lieu of share certificates lost, destroyed, or mutilated, upon such terms and conditions, including the posting of an open-penalty bond, as the Board of Directors may direct. -15- ARTICLE VII Miscellaneous Provisions Section 7.01. Notice of Meetings. Any notice required to be given by the Corporation to any shareholder, director, or committee member may be (i) delivered personally, (ii) mailed by first class United States mail, postage prepaid, addressed to the shareholder's, director's, or committee member's address appearing on the books of the Corporation, or supplied by him to the Corporation for the purpose of notice, or (iii) telegraphed or transmitted by a similar mode of communication to the address identified in clause (ii) above. If notice is sent by mail less than ten days prior to any shareholders', directors', or committee meeting, notice shall be deemed to have been given to the person entitled thereto twenty-four hours after deposit in the United States mail; otherwise, notice shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or when deposited with a telegraph or other transmitting office for transmission to such person. Any shareholder, director, or committee member may waive notice of any meeting before or after the meeting, and his attendance at a meeting shall constitute a waiver of notice of such meeting, unless he announces at the meeting that he is attending solely for the purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Section 7.02. Amendments. Bylaws may be adopted, amended, or repealed by the Board of Directors in the manner provided in Section 2.08 or by the shareholders in the manner provided in Section 1.06. - ---------- Bylaws effective October 1, 1982 Amended April 11, 1984 - Sections 2.01; 2.02 Amended April 9, 1986 - Sections 2.02; 2.12; 3.01; 3.02 Amended April 21, 1987 - Article 5 Amended April 24, 1996 - Section 2.13 Amended March 26, 1997 - Section 1.06 -16- EX-10.8 3 Exhibit 10.8 NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN Adopted by Board of Directors December 26, 1984 PLAN YEAR 1997 SCHEDULE B NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN 1997 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 1997 PLAN YEAR The net operating income of NPB before securities transactions for 1997 must exceed the net operating income of NPB before securities transactions for 1996. EXTERNAL PERFORMANCE GOALS FOR THE 1997 PLAN YEAR The net operating income of NPB before securities transactions on realized return on average common equity for 1997 must exceed the average of the net operating income before securities transactions on realized return on average common equity for 1997 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: Univest (Souderton) Keystone Heritage Fulton Financial Corp. Susquehanna Bancshares Harleysville National Corp. Keystone Financial S & T Bancorp National Penn Bancshares, Inc. BT Financial Corporation Omega Financial Corp. Jeff Banks, Inc. EX-10.10 4 Exhibit 10.10 NATIONAL PENN BANCSHARES, INC. OFFICERS' AND KEY EMPLOYEES' STOCK COMPENSATION PLAN 1. PURPOSE The purpose of the Officers' and Key Employees' Stock Compensation Plan (the "Plan") is to advance the interests of National Penn Bancshares, Inc. (the "Corporation") by enhancing the ability of the Corporation and its Subsidiaries to attract and retain officers and other key employees, to reward such individuals for their contributions, and to encourage them to take into account the long-term interests of the Corporation through interests in the Corporation's common stock, $2.50 par value (the "Stock"). This Plan provides for (i) the grant of options to acquire Stock ("Options"), which may be incentive stock options ("ISOs") within the meaning of the Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified stock options, and (ii) awards of Stock subject to certain restrictions and the risk of forfeiture ("Restricted Stock"). Under this Plan, Restricted Stock consists of (i) Stock subject to restrictions, including performance-based restrictions intended to comply with the provisions of Code Section 162(m) ("Performance-Based Restricted Stock"), and (ii) Stock subject to restrictions, not including performance-based restrictions. Grants of Options and awards of Restricted Stock are referred to herein collectively as "Awards". Any officer or key employee selected to receive an Award under this Plan is sometimes referred to as a "participant" herein, and any officer or key employee selected to receive an Option under this Plan is sometimes referred to as an "optionee" herein. 2. ADMINISTRATION This Plan shall be administered by a committee composed of three to six members of the Corporation's Board of Directors (the "Board") who are (i) "non-employee directors" of the Corporation within the meaning of Rule 16b-3(b)(3) under Section 16 of the Securities Exchange Act of 1934 (the "1934 Act"), and (ii) "outside directors" of the Corporation within the meaning of Code Section 162(m) (the "Committee"). The Board may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, howsoever caused, shall be filled by the Board. Subject to the terms, provisions and conditions of this Plan, the Committee shall have exclusive jurisdiction to: (i) make Awards to such participants as the Committee may select; (ii) 1 determine the time or times when Awards shall be granted and the number of shares of Stock subject to each Award; (iii) determine which Options are, and which Options are not, intended to be ISOs; (iv) determine the terms and conditions of each Award; (v) prescribe the form or forms of any instruments evidencing Awards and any other instruments required under this Plan and to change such forms from time to time; (vi) adopt, amend, and rescind rules and regulations for the administration of this Plan; and (vii) interpret this Plan and to decide any questions and settle all controversies and disputes that may arise in connection with this Plan. Such determinations of the Committee shall be conclusive and shall bind all parties. No member of the Committee or of the Board shall be liable for any determination, decision or action made in good faith, and the members shall be entitled to indemnification and reimbursement in the manner provided in the Corporation's Bylaws. 3. ELIGIBILITY Persons eligible to receive Awards under this Plan shall be those officers and key employees who, in the opinion of the Committee, are in a position to make a significant contribution to the success of the Corporation and its Subsidiaries. No person who beneficially owns ten percent or more of the outstanding Stock shall be eligible to participate in this Plan, to exercise an Option previously granted to him, or to take full possession of Restricted Stock previously issued to him. A "Subsidiary" of the Corporation shall mean a corporation in which the Corporation shall own, directly or indirectly, a majority of the capital stock entitled to vote for the election of directors. 4. STOCK SUBJECT TO AWARDS The Stock subject to Awards under this Plan shall be either authorized but unissued shares or treasury shares. Subject to adjustment in accordance with the provisions of Paragraph 5(G) and 6(F) hereof, the total number of shares of such Stock shall be 750,000 shares. If any outstanding Option or Restricted Stock Award under this Plan for any reason expires, is forfeited or is terminated prior to the end of the period during which Awards may be made under this Plan, the shares of Stock allocable to the unexercised portion of such Option or the portion of such Restricted Stock Award that has terminated or been forfeited may again be subject to award under this Plan. Shares of Stock delivered to the Corporation to pay the exercise price of any Option or to satisfy the tax withholding consequences of an Option exercise or the grant or vesting of Restricted Stock shall again be subject to award under this Plan. 5. TERMS AND CONDITIONS APPLICABLE TO ALL OPTIONS 2 Options granted pursuant to this Plan shall be evidenced by agreements in such form as the Committee shall, from time to time, approve, which agreements shall in substance include and comply with and be subject to the following terms and conditions: A. MEDIUM AND TIME OF PAYMENT The exercise price of an Option shall be payable either (i) in United States dollars in cash or by check, bank draft or money order payable to the order of the Corporation, (ii) through the delivery of shares of Stock owned by the optionee with a fair market value equal to the Option's exercise price, or (iii) by a combination of (i) and (ii). Fair market value of Stock so delivered shall be determined as of the date of exercise, as provided in Paragraph 5(C) hereof. Unless the Committee otherwise determines, an optionee may engage in a successive exchange (or series of exchanges) in which Stock such optionee is entitled to receive upon exercise of an Option may be simultaneously utilized as payment for the exercise of an additional Option or Options. To the extent permitted by applicable law and regulations, the Committee may permit payment of the Option exercise price through arrangements with a brokerage firm under which such firm, on behalf of the optionee, will pay to the Corporation the exercise price of the shares being purchased, and the Corporation will promptly deliver to such firm the number of shares of Stock subject to the Option so that the firm may sell such shares, or a portion thereof, for the account of the optionee. In addition, the Committee may permit payment of the Option exercise price by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Corporation sufficient funds to pay the exercise price as soon as the shares subject to the Option, or a portion thereof, are sold on behalf of the optionee. B. NUMBERS OF SHARES The Option shall state the total number of shares to which it pertains. Subject to adjustment as provided in Paragraph 5(G), in any fiscal year of the Corporation, the aggregate number of shares of Stock as to which Options may be granted to any one participant shall not exceed 60,000. C. OPTION PRICE The exercise price of an Option shall not be less than the fair market value of the shares of Stock covered by the Option on the date of grant. As used in this Plan, the "fair market value" of a share of Stock as of any date shall be determined (i) based on the average of the closing sale prices of a share of Stock for the ten (10) day trading period ending on the given date, as reported on the National Association of Securities Dealers Automated Quotation ("Nasdaq") National Market and published in The Wall Street Journal, (ii) if no closing sale prices are reported during such ten (10) day trading period, based on 3 the average of the mean of the bid and asked prices per share of Stock for such ten (10) day trading period, as reported on Nasdaq, (iii) if the Stock is listed on a stock exchange, based on the average of the closing sale prices of a share of Stock for the ten (10) day trading period ending on the given date, as reported in The Wall Street Journal, or (iv) if the Stock is not listed on Nasdaq or on a stock exchange, by the Committee in its sole discretion. D. EXPIRATION OF OPTIONS Each Option granted under this Plan shall expire on a date determined by the Committee, which date, in the case of an ISO, may not be more than ten years from the date the Option is granted, and in the case of a non-qualified Option, may not be more than ten years and one month from the date the Option is granted. E. VESTING OF OPTIONS If and to the extent an Option has become vested, an Option may be exercised in whole at any time, or in part from time to time, during its term. Except as provided in Paragraph 5(F) hereof, an Option may only be exercised at a time when the optionee is employed by the Corporation or one of its Subsidiaries. An optionee shall have a cumulative vested interest in the right to exercise an Option, determined by reference to his continuous employment with the Corporation and/or a Subsidiary following the date of grant of the Option, as follows: Period of Continuous Cumulative Vested Employment Following Grant Percentage Less than 1 year -0- 1 year or more 20.0 2 years or more 40.0 3 years or more 60.0 4 years or more 80.0 5 years or more 100.0 To the extent the application of the above vesting schedule would at any time result in the right to acquire a fractional share, the right to acquire such fractional share shall be deferred to the next vesting period. 4 F. TERMINATION OF SERVICE Except as otherwise provided in this Paragraph 5(F), upon the termination of employment of an optionee for any reason, the unexercised vested portion of any Option held by him shall lapse on the earlier of (i) the expiration of the term of the Option, or (ii) three months from the date of such termination of employment. Upon the termination of employment of an optionee because of retirement at age 60 or later or death, the unexercised vested portion of any Option held by him (including any portion that became vested on account of such retirement or death) shall lapse on the earlier of (i) the expiration of the term of the Option, or (ii) three years from the date of such termination of employment. Upon the termination of employment of an optionee because of permanent and total disability (as defined in Code Section 22(e)(3), referred to herein as "disability"), the unexercised vested portion of any Option held by him (including any portion that became vested on account of such disability) shall lapse on the earlier of (i) the expiration of the term of the Option, or (ii) three years from the date of such termination of employment. In the case of the discharge of an optionee for "cause", the unexercised vested portion of any Option held by him shall lapse immediately. An optionee will be deemed discharged for "cause" if he is discharged by his employer and the ground for such discharge is the employer's good faith and reasonable belief that (i) he has committed fraud or dishonesty toward his employer (or any business affiliated with his employer, or any individual or company doing business with any of them), or (ii) he has committed a felony, not otherwise described in clause (i), which involves a crime of moral turpitude. Any lapse occurring under provisions of this paragraph shall be final, whether or not the optionee is convicted of or admits to the commission of the offense, and no person or corporation shall be liable to the optionee therefor. Upon termination of employment of an optionee for any reason other than retirement at age 60 or later, disability, or death, the nonvested portion of any Option held by him shall lapse immediately. Upon termination of employment of an optionee because of retirement at age 60 or later, disability, or death, the nonvested portion of any Option held by him shall vest immediately. G. ADJUSTMENTS FOR CHANGES IN STOCK The aggregate number of shares of Stock as to which Options may be granted to participants under this Plan, the aggregate number of shares of Stock as to which Options may be granted to any one such participant, the number of shares of Stock covered by each outstanding Option, and the exercise price per share of each outstanding Option, shall be proportionately adjusted by the Committee for any increase or decrease in the number of outstanding shares of Stock resulting from the subdivision or consolidation of shares or other capital adjustments, the payment of a Stock dividend, or any other increase or decrease in such shares effected without 5 receipt of consideration by the Corporation. Any such determination by the Committee shall be conclusive. H. TRANSFERABILITY Except as otherwise provided in this Paragraph 5(H), no Option may be assigned or transferred except by will, by the laws of descent and distribution, or pursuant to a qualified domestic relations order. Unless the Committee determines otherwise in connection with the grant of a non-qualified Option, non-qualified Options granted hereunder shall be transferable, without payment of consideration, by an optionee to a member of the optionee's immediate family, to a trust whose beneficiaries are all members of the optionee's immediate family, or to a partnership whose partners are all members of the optionee's immediate family. In any such case, the Option shall be exercisable only by such transferee. For purposes of this provision, an optionee's "immediate family" shall mean the optionee's spouse, children and grandchildren. So long as non-transferability of ISOs is a requirement of the Code, no Option granted as an ISO may be assigned or transferred except by will, by the laws of descent and distribution, or pursuant to a qualified domestic relations order. I. RIGHTS AS A SHAREHOLDER An optionee shall have no rights as a shareholder with respect to shares covered by an Option until the date the shares are issued and only after such shares are fully paid. No adjustment will be made for dividends or other rights the record date for which is prior to the date of such issuance. J. NO RIGHTS AS AN EMPLOYEE Neither this Plan, the grant of any Option hereunder, nor the execution of any agreement with respect to such an Option, shall confer upon any optionee any right to remain in the employ of the Corporation or any Subsidiary or limit the right of the Corporation or any Subsidiary to terminate the optionee's employment at any time for any reason. 6 K. TAX WITHHOLDING The Committee shall have the right to require that a participant exercising an Option remit to the Corporation an amount sufficient to satisfy any federal, state, or local withholding tax requirements (or make other arrangements satisfactory to the Committee with regard to such taxes) prior to the delivery of any Stock pursuant to the exercise of the Option. If permitted by the Committee, either at the time of the grant of the Option or in connection with its exercise, a participant may elect, at such time and in such manner as the Committee may prescribe, to satisfy such withholding obligation by (i) delivering Stock having a fair market value equal to such withholding obligation, or (ii) requesting that the Corporation withhold from the shares of Stock to be delivered upon the exercise a number of shares of Stock having a fair market value equal to such withholding obligation. In the case of an ISO, the Committee may require as a condition of exercise that the participant exercising the Option agree to inform the Corporation promptly of any disposition (within the meaning of Code Section 424(c) and the regulations thereunder) of Stock received upon exercise. L. CHANGE IN CONTROL Notwithstanding Paragraph 5(E) or any other provision of this Plan, all outstanding Options shall become immediately and fully exercisable, whether or not otherwise exercisable by their terms, in the event of a "Change in Control". For purposes of this Paragraph 5(L), a "Change in Control" shall mean any of the following events: (i) the Corporation acquires actual knowledge that any Person other than the Corporation, a Subsidiary or any employee benefit plan(s) sponsored by the Corporation, has acquired the Beneficial Ownership, directly or indirectly, of securities of the Corporation entitling such Person to 25% or more of the Voting Power of the Corporation; (ii) a Tender Offer is made to acquire securities of the Corporation entitling the holders thereof to 50% or more of the Voting Power of the Corporation; (iii) Voting Shares are first purchased pursuant to any other Tender Offer; or (iv) at any time less than 60% of the members of the Board shall be individuals who were either (A) Directors on the effective date of this Plan or (B) individuals whose election, or nomination for election, was approved by a vote (including a vote approving a merger or other agreement providing for the membership of such individuals on the Board) of at least two-thirds of the Directors then still in office who were Directors on the effective date of this Plan or who were so approved. For purposes of this Paragraph 5(L), the following terms shall have the following meanings: (1) "Affiliate", "Associate", and "Parent" shall have the respective meanings set forth in Rule 12b-2 under the 1934 Act as in effect on the effective date of this Plan. 7 (2) The term "Person" shall be used as that term is used in Sections 13(d) and 14(d) of the 1934 Act. (3) "Beneficial Ownership" shall be determined as provided in Rule 13d-3 under the 1934 Act as in effect on the effective date of this Plan. (4) "Voting Shares" shall mean all securities of a company entitling the holders thereof to vote in an annual election of directors (without consideration of the rights of any class of stock other than common stock to elect directors by a separate class vote); and a specified percentage of "Voting Power" of a company shall mean such number of the Voting Shares as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors (without consideration of the rights of any class of stock other than common stock to elect directors by a separate class vote). (5) "Tender Offer" shall mean a tender offer or exchange offer to acquire securities of the Corporation (other than such an offer made by the Corporation or any Subsidiary), whether or not such offer is approved or opposed by the Board. (6) "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Corporation if each of the corporations other than the last corporation in the unbroken chain owns stock possessing at least fifty percent (50%) or more of the total combined Voting Power of all classes of stock in one of the other corporations in the chain. M. ADDITIONAL RESTRICTIONS AND CONDITIONS The Committee may impose such other restrictions and conditions (in addition to those required by the provisions of this Plan) on any Award of Options hereunder and may waive any such additional restrictions and conditions, so long as (i) any such additional restrictions and conditions are consistent with the terms of this Plan and (ii) such waiver does not waive any restriction or condition required by the provisions of this Plan. 6. TERMS AND CONDITIONS APPLICABLE TO RESTRICTED STOCK AWARDS Awards of Restricted Stock may be Performance-Based Restricted Stock, as described in Paragraph 6(K), or Restricted Stock without performance-based restrictions. The provisions of Paragraphs 6(A) through 6(J) are applicable to all shares of Restricted Stock. A. NUMBER OF SHARES 8 The total number of shares of Restricted Stock that may be awarded under this Plan on a cumulative basis shall not exceed one percent of the Stock outstanding at the date of any such Award. In any fiscal year of the Corporation, the aggregate number of shares of Stock as to which Restricted Stock Awards may be made to any one participant shall not exceed 5,000. Each Restricted Stock Award under this Plan shall be evidenced by a stock certificate of the Corporation, registered in the name of the participant, accompanied by an agreement in such form as the Committee shall prescribe from time to time. Restricted Stock Awards shall comply with the terms and conditions of this Plan and with such other terms and conditions not inconsistent with the terms and conditions of this Plan as the Committee, in its discretion, shall establish. B. RESTRICTED PERIOD; RESTRICTIONS The Committee shall provide that shares of Stock issued to a participant in connection with a Restricted Stock Award may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, for such period as the Committee shall determine, beginning on the date on which the Award is granted (the "Restricted Period"), and that the Restricted Period applicable to such Restricted Stock shall lapse (if at all) only at the end of the Restricted Period if all other terms and conditions of the Restricted Stock Award are then satisfied. Without limiting the generality of the foregoing, the other terms and conditions of the Restricted Stock Award may include the requirement that the participant be continuously employed by the Corporation or a Subsidiary during the Restricted Period. If all terms and conditions of the Restricted Stock Award are not satisfied at the end of the Restricted Period, the Restricted Stock shall be forfeited and transferred to, and reacquired by, the Corporation at no cost to the Corporation. C. STOCK LEGENDS; PROHIBITION ON DISPOSITION Certificates for shares of Restricted Stock shall bear an appropriate legend referring to the restrictions to which they are subject, and any attempt to dispose of any such shares of Stock in contravention of such restrictions shall be null and void and without effect. The certificates representing shares of Restricted Stock shall be held by the Corporation until the restrictions are satisfied. 9 D. TERMINATION OF SERVICE The Committee shall determine the extent to which the restrictions on any Restricted Stock Award shall lapse upon the termination of the participant's service to the Corporation and its Subsidiaries due to death, disability, retirement or for any other reason. If the restrictions on all or any portion of a Restricted Stock Award shall not lapse, the participant, or in the event of his death, his personal representative, shall forthwith deliver to the Secretary of the Corporation such instruments of transfer, if any, as may reasonably be required to transfer the shares back to the Corporation. E. CHANGE IN CONTROL Upon the occurrence of a Change in Control, as determined in Paragraph 5(L) of this Plan, all restrictions then outstanding with respect to shares of Restricted Stock shall automatically expire and be of no further force and effect, and all certificates representing such shares of Stock shall be delivered to the respective participants. F. ADJUSTMENT FOR CHANGES IN STOCK The Committee shall proportionately adjust the aggregate number of shares of Stock as to which Restricted Stock Awards may be granted to participants under this Plan and the aggregate number of shares of Stock as to which Restricted Stock Awards may be granted to any one such participant for any increase or decrease in the number of outstanding shares of Stock resulting from the subdivision or consolidation of shares or other capital adjustments, the payment of a Stock dividend, or any other increase or decrease in such shares effected without receipt of consideration by the Corporation; provided that any factional shares resulting from any such adjustment shall be eliminated. Any such determination by the Committee shall be conclusive. Shares of Stock issued with respect to any outstanding Awards as a result of any of the foregoing events shall be subject to the same restrictions. G. EFFECT OF ATTEMPTED TRANSFER No benefit payable or interest in any Restricted Stock Award shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge and any such attempted action shall be void, and no such interest in any Restricted Stock Award shall be in any manner liable for or subject to debts, contracts, liabilities, engagements or torts of any participant or his beneficiary. If any participant or beneficiary shall become bankrupt or shall attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any benefit payable under or interest in any Restricted Stock Award, then the Committee, in its discretion, may hold or apply such benefit or interest or any part thereof to or for the benefit of such participant or his beneficiary, his spouse, children, blood relatives or other dependents, or any of them, in any such manner and such proportions as the Committee may consider proper. 10 H. PAYMENT OF TAXES The Corporation shall have the right to deduct from any Restricted Stock Award or other payment hereunder any amount that federal, state, or local tax law requires to be withheld with respect to such Award or payment or to require that the participant, prior to or simultaneously with the Corporation incurring any obligation to withhold any such amount, pay such amount to the Corporation in cash or, at the option of the Corporation, shares of Stock (which shall be valued at their fair market value on the date of payment). There is no obligation under this Plan that any participant be advised of the existence of the tax or the amount required to be withheld. Without limiting the generality of the foregoing, in any case where it is determined that tax is required to be withheld in connection with the issuance, transfer or delivery of shares of Stock under this Plan, the Corporation may, pursuant to such rules as the Committee may establish, reduce the number of shares so issued, transferred or delivered by such number of shares as the Corporation may deem appropriate in its sole discretion to comply with such withholding. Notwithstanding any other provision of this Plan, the Committee may impose such conditions on the payment of any withholding obligations as may be required to satisfy applicable regulatory requirements. I. RIGHTS AS A SHAREHOLDER A participant shall have the right to receive dividends on shares of Stock subject to the Restricted Stock Award during the applicable Restricted Period, to vote the Stock subject to the Award and to enjoy all other shareholder rights, except that the participant shall not be entitled to delivery of the stock certificate until the applicable Restricted Period shall have lapsed (if at all). J. NO RIGHTS AS AN EMPLOYEE Neither this Plan, the award of any Restricted Stock hereunder, nor the execution of any agreement with respect to such Restricted Stock, shall confer upon any optionee any right to remain in the employ of the Corporation or any Subsidiary or limit the right of the Corporation or any Subsidiary to terminate the optionee's employment at any time for any reason. 11 K. PERFORMANCE-BASED RESTRICTED STOCK Awards of Performance-Based Restricted Stock are intended to qualify as "performance-based" for purposes of Code Section 162(m). The Committee shall provide that shares of Stock issued to a participant in connection with an Award of Performance-Based Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, during the Restricted Period, and that the Restricted Period applicable to such Restricted Stock shall lapse (if at all) only if certain pre-established objectives are attained. Performance goals may be based on any of the following criteria: (i) earnings or earnings per share, (ii) return on equity, (iii) return on assets, (iv) revenues, (v) expenses, (vi) one or more operating ratios, (vii) stock price, (viii) shareholder return, (ix) market share, (x) charge-offs, (xi) credit quality, (xii) reductions in non-performing assets, (xiii) customer satisfaction measures, and (xiv) the accomplishment of mergers, acquisitions, dispositions or similar extraordinary business transactions. The Committee shall establish one or more objective performance goals for each such Award of Performance-Based Restricted Stock on the date of grant. The performance goals selected in any case need not be applicable across the Corporation, but may be particular to an individual's function or business unit. The Committee shall determine whether such performance goals are attained and such determination shall be final and conclusive. If the performance goals are not met, the Performance-Based Restricted Stock shall be forfeited and transferred to, and reacquired by, the Corporation at no cost to the Corporation. The Committee may impose such other restrictions and conditions (in addition to the performance-based restrictions described above) on any Award of shares of Performance-Based Restricted Stock as the Committee deems appropriate and may waive any such additional restrictions and conditions, so long as such waiver does not waive any restriction described in the previous paragraph. Nothing herein shall limit the Committee's ability to reduce the amount payable under an Award upon the attainment of the performance goal(s), provided, however, that the Committee shall have no right under any circumstance to increase the amount payable under, or waive compliance with, any applicable performance goal(s). 7. AMENDMENT The Committee may at any time amend or suspend this Plan or alter and amend Awards granted hereunder; provided, however, that no such amendment may, without the consent of any participant to whom an Option shall theretofore have been granted or to whom a Restricted Stock Award shall theretofore have been issued, adversely affect the right of such participant under such Award; and provided, further, that no amendment that requires shareholder approval in order for (i) this Plan to continue to be eligible to satisfy the requirements for exemption of the acquisition of securities under this Plan pursuant to Rule 16b-3 under Section 16 of the 1934 Act, or (ii) this Plan to continue to be eligible to comply with Code Section 162(m), or any amendment of or substitute 12 for either of them, shall be effective unless the same shall be approved by the requisite vote of the shareholders of the Corporation. 8. TERMINATION The Board may terminate this Plan at any time, and no Awards shall be made thereafter. Unless previously terminated by the Board, this Plan shall terminate on, and no Awards shall be made after, December 17, 2006. 9. LEGALITY OF GRANT The granting of any Award under this Plan and the issuance or transfer of Options and shares of Stock pursuant hereto are subject to all applicable federal and state laws, rules and regulations and to such approvals by any regulatory or governmental agency (including, without limitation, no-action positions of the Securities and Exchange Commission) which may, in the opinion of counsel for the Corporation, be necessary or advisable in connection therewith. Without limiting the generality of the foregoing, no Awards may be granted under this Plan and no Options or shares shall be issued by the Corporation, nor cash payments made by the Corporation pursuant to or in connection with any such Award unless and until in any such case all legal requirements applicable to the issuance or payment have, in the opinion of counsel for the Corporation, been complied with. In connection with any Option or Stock issuance or transfer, the person acquiring the Option or the shares of Stock shall, if requested by the Corporation, give assurance satisfactory to counsel to the Corporation with respect to such matters as the Corporation may deem desirable to assure compliance with all applicable legal requirements. 10. CAPTIONS; PRONOUNS The captions contained in this Plan are for convenience of reference only, and shall not be considered part of this Plan in its interpretation and construction. The use of any masculine pronoun herein shall be construed to include the corresponding feminine pronoun, as the context requires. 11. EFFECTIVE DATE This Plan was adopted by the Board on December 18, 1996, subject, however, to approval of this Plan by the shareholders of the Corporation at its 1997 Annual Meeting. If so approved, this Plan shall be effective as of December 18, 1996. 13 EX-10.11 5 Exhibit 10.11 DIRECTORS' FEE PLAN NATIONAL PENN BANCSHARES, INC. SECTION I - DEFINITIONS A. Board of Directors: The Board of Directors of the Company. B. Common Stock: The Company's common stock, $2.50 par value. C. Company: National Penn Bancshares, Inc. D. Compensation Committee: The Compensation Committee of the Board of Directors (comprised solely of persons who are "non-employee directors" of the Company, as such term is defined by the Securities and Exchange Commission pursuant to Section 16 of the Securities Exchange Act of 1934). E. Corporate Secretary: The Corporate Secretary of the Company. F. Current Stock Election: An election to receive current payment of Director Fees in shares of Common Stock, without deferral. G. Deferred Cash Compensation Account: A book-entry reserve account maintained in the records of the Company (in the case of its participating Directors) or of a Subsidiary (in the case of its participating Directors) indicating the amount owed to an individual Director as a result of a cash deferral of his Director Fees. H. Deferred Cash Election: An election to defer the receipt of all or a portion of Director Fees and to receive eventual payment of such Director Fees in cash. I. Deferred Stock Compensation Account: A book-entry reserve account maintained in the records of the Company (in the case of its participating Directors) or of a Subsidiary (in the case of its participating Directors) indicating the amount owed to an individual Director as a result of a stock deferral of his Director Fees. J. Deferred Stock Election: An election to defer the receipt of all Director Fees and to receive eventual payment of such Director Fees in shares of Common Stock. 1 K. Director: Any duly elected or appointed director of the Company or of a Subsidiary, other than a director who is also a common law employee of the Company or of a Subsidiary. For purposes of administering and construing this Plan, such a common law employee shall be deemed to be a person who is not a Director. L. Director Fees: Fees which are payable to a Director for services performed by such Director as a member of the Board of Directors, as a member of a Subsidiary's board of directors, or as a member of any committee. M. Election: The election by a Director to receive payment of Director Fees other than currently in cash. N. Fair Market Value: The fair market value of a share of Common Stock, determined pursuant to Section XII hereof. O. Interest Crediting Date: March 31, June 30, September 30 and December 31 of each Plan Year. P. Plan: This Directors' Fee Plan, as adopted by the Company and as it may be amended from time to time. Q. Plan Quarter: A calendar quarter. R. Plan Year: A calendar year. S. Subsidiary: Any corporation, 50% or more of the capital stock of which is owned, directly or indirectly, by the Company. ---------- SECTION II - PURPOSE; RESERVATION OF SHARES The purposes of the Plan are to provide each Director with payment alternatives for Director Fees and to increase the identification of interests between Directors and the shareholders of the Company by providing Directors with the opportunity to elect to receive payment of Director Fees in shares of Common Stock. For each Plan Year, the aggregate number of shares of Common Stock which may be issued under Current Stock Elections or credited to Deferred Stock Compensation Accounts for subsequent issuance under the Plan is limited to 25,000 shares, subject to adjustment and substitution as set forth in Section VII.B. 2 SECTION III - ELIGIBILITY TO PARTICIPATE Except as otherwise provided in Section VI or Section VIII, any Director is eligible to participate in the Plan. SECTION IV - PAYMENT OR DEFERRAL OF DIRECTORS' FEES A. General. Each Director may elect to receive current payment of Director Fees either in cash or in shares of Common Stock, without deferral. Each Director also may elect to defer payment of Director Fees and to receive such deferred payment either in cash or in shares of Common Stock. An Election is made by filing with the Corporate Secretary a "Notice of Election" in the form prescribed by the Company, appropriately completed. Director Fees earned at any time for which an Election is not effective shall be paid in cash on the date when the Director Fees are otherwise payable. Subject to the terms of the Plan, an Election may be changed, modified or terminated by filing with the Corporate Secretary a "Notice of Amendment or Revocation of Election" in the form prescribed by the Company, appropriately completed. Any Election shall terminate on the date a Director ceases to be a Director. Any "Notice of Election" or "Notice of Amendment or Revocation of Election" shall become irrevocable when filed, except by the filing of a new "Notice of Election" or "Notice of Amendment or Revocation of Election" which thereafter becomes effective in accordance with the provisions of this Section IV. B. Current Stock Payment. Any Director desiring to make a Current Stock Election shall file with the Corporate Secretary a "Notice of Election", appropriately completed. A Current Stock Election shall be effective on the date on which the "Notice of Election" is filed. Any Current Stock Election shall remain in effect for each succeeding Plan Year unless and until the Director revokes such Election by filing a "Notice of Amendment or Revocation of Election" with the Corporate Secretary, appropriately completed. Any such revocation shall become effective for the Plan Year immediately following the Plan Year in which such revocation is duly filed. During the period that a Current Stock Election is effective, all Director Fees payable shall be paid by the issuance to the Director of a number of whole shares of Common Stock equal to the Director Fees payable divided by the Fair Market Value of a share of Common Stock on the date on which such Director Fees are payable (as provided in Section XII hereof). Any amount of Director Fees which is not paid in Common Stock because it is less than the Fair Market Value of a whole share shall be accumulated in cash without interest and added to the amount used in computing the number of shares of Common Stock issuable to the Director on the next succeeding date on which Director Fees are payable under the Current Stock Election. Any such accumulated fractional amount remaining as of the effective date of any termination of a Current Stock Election or of the termination of the Plan shall be paid to the Director in cash on the next succeeding date on which Director Fees would have been payable to the Director under the Current Stock Election. 3 The Company shall issue share certificates to the Director for the shares of Common Stock acquired or, if requested in writing by the Director, the shares acquired shall be added to the Director's account under the Company's Dividend Reinvestment Plan. As of the date on which the Director Fees are payable in shares of Common Stock, the Director shall be a shareholder of the Company with respect to such shares. C. Deferred Cash Payment. Any Director desiring to make a Deferred Cash Election shall, no later than December 31 of the Plan Year immediately preceding the Plan Year for which such Deferred Cash Election is to become effective, file with the Corporate Secretary a "Notice of Election", appropriately completed. In the case of a person who is elected or appointed as a Director and who was not a Director on the preceding December 31st, such Deferred Cash Election shall be made prior to the commencement of his term of office. For 1997, a Deferred Cash Election shall be made prior to January 1, 1997. Any Deferred Cash Election shall remain in effect for each succeeding Plan Year unless and until the Director amends or revokes such Election by filing with the Corporate Secretary a "Notice of Amendment or Revocation of Election", appropriately completed. Any such amendment or revocation shall become effective for the Plan Year immediately following the Plan Year in which such amendment or revocation is duly filed, and shall remain effective until similarly changed. D. Deferred Stock Payment. Any Director desiring to make a Deferred Stock Election shall, no later than December 31 of the Plan Year immediately preceding the Plan Year for which such Deferred Stock Election is to become effective, file with the Corporate Secretary a "Notice of Election", appropriately completed. In the case of a person who is elected or appointed as a Director and who was not a Director on the preceding December 31st, such Deferred Stock Election shall be made prior to the commencement of his term of office. For 1997, a Deferred Stock Election shall be made prior to January 1, 1997. Any Deferred Stock Election shall remain in effect for each succeeding Plan Year unless and until the Director revokes such Election by filing with the Corporate Secretary a "Notice of Amendment or Revocation of Election", appropriately completed. Any such revocation shall become effective for the Plan Year immediately following the Plan Year in which such revocation is duly filed. SECTION V - DEFERRED CASH COMPENSATION ACCOUNT A. General. The amount of any Director Fees deferred in accordance with a Cash Deferral Election shall be credited to a Deferred Cash Compensation Account in the name of the Director on the date on which such Director Fees are otherwise payable. B. Interest. On each Interest Crediting Date, each Deferred Cash Compensation Account shall be credited with additional amounts in the nature of interest. The rate of interest that will accrue with respect to a Deferred Cash Compensation Account for a given Plan Year will be equal to the rate of return realized by the Mandatory Deferral Accounts ("Mandatory Deferral Accounts") 4 of the National Penn Bancshares, Inc. Executive Incentive Plan (the "Executive Incentive Plan") during the three-month period ended within such Plan Quarter. Interest on amounts in Deferred Cash Compensation Accounts shall accrue daily and shall be determined by reference to a 365/366-day year; provided, however, that no deferred Director Fee shall commence accruing interest until the first day of the Plan Quarter immediately following the Plan Quarter in which it is earned. Notwithstanding the provisions of the preceding paragraph, if a Deferred Cash Compensation Account is completely liquidated on a date other than an Interest Crediting Date, interest shall be credited to such Account, as of the date of its liquidation, for the period since the last Interest Crediting Date. The interest rate to be used shall be the rate of return realized by the Mandatory Deferral Accounts during the three-month period ended within the last preceding Plan Quarter. Notwithstanding anything herein to the contrary, the Compensation Committee may vary the method of calculating interest on Deferred Cash Compensation Account balances if the Executive Incentive Plan is terminated or amended to materially alter the present nature of calculation of interest on Mandatory Deferral Accounts. The decision of the Compensation Committee as to the use of a substituted method of calculating interest shall be final and binding on all affected Directors. SECTION VI - DISTRIBUTION OF DEFERRED CASH COMPENSATION ACCOUNT BALANCES A. General. No distribution from a Deferred Cash Compensation Account shall be made or commence prior to the occurrence of the event selected by the Director in his Deferred Cash Election as occasioning such distribution. The actual date on which distribution will be made or commence will be determined by the Compensation Committee; provided, however, that such date may be no later than December 31 of the Plan Year in which such event occurs. Distributions from Deferred Cash Compensation Accounts may be made in a lump sum or in annual installments over a period of five or ten years. The amount of any annual installment shall be calculated by dividing the balance in a Director's Deferred Cash Compensation Account at the relevant time by the number of installments remaining to be paid. The actual method of distribution from a Director's Deferred Cash Compensation Account will be determined by the method of distribution selected by the Director in his Deferred Cash Election. The balance of the Deferred Cash Compensation Account shall be appropriately reduced on the date of payment to the Director or the Director's designated beneficiary to reflect the installment payments made hereunder. Amounts held pending distribution pursuant to this Section VI shall continue to be credited with interest on a quarterly basis as described in Section V hereof. 5 Notwithstanding anything herein to the contrary, if an individual becomes a proprietor, officer, partner, employee or otherwise becomes affiliated with any business or governmental agency which is in competition with or has regulatory authority over the Company or a Subsidiary, the Compensation Committee shall be entitled, in its sole discretion, to terminate his participation in the Plan and direct that distribution be made to him in one lump sum at that time. Once made, an election as to the event which shall occasion a distribution and an election as to the method of distribution shall be irrevocable, unless the Compensation Committee consents in writing to a change. In no event shall such consent be granted with respect to a request by an individual after the occurrence of the event selected by him as occasioning a distribution. B. Beneficiary Designation. A Director may designate one or more persons to receive the balance in his Deferred Cash Compensation Account in the event of his death prior to receipt of the total amount therein. No such designation will be valid unless made on a "Beneficiary Designation" form prescribed by the Company, and duly and timely filed with the Corporate Secretary. A Director may at any time, and from time to time, revoke or amend such designation by duly and timely filing a new "Beneficiary Designation" form with the Corporate Secretary. If a Director dies without a completed "Beneficiary Designation" form on file with the Corporate Secretary, payment will be made to his estate. All distributions made as a result of death shall be paid in lump sums. SECTION VII - DEFERRED STOCK COMPENSATION ACCOUNT A. General. The amount of any Director Fees deferred in accordance with a Stock Deferral Election shall be credited to a Deferred Stock Compensation Account in the name of the Director. On each date on which Director Fees are payable to Directors for whom Stock Deferral Elections are in effect, the Director's Deferred Stock Compensation Account shall be credited with a number of shares of Common Stock (including fractional shares) equal to the Director Fees payable divided by the Fair Market Value of a share of Common Stock, on the date on which such Director Fees are payable (as provided in Section XII hereof). If a dividend or distribution is paid on the Common Stock in cash or property other than Common Stock, then, on the date of payment of the dividend or distribution to holders of the Common Stock, each Deferred Stock Compensation Account shall be credited with the number of shares of Common Stock (including fractional shares) equal to the number of shares of Common Stock credited to such Account on the date fixed for determining the shareholders entitled to receive such dividend or distribution times the amount of the dividend or distribution paid per share of Common Stock divided by the Fair Market Value of a share of Common Stock on the date on which the dividend or distribution is paid. If the dividend or distribution is paid in property, the amount of the dividend or distribution shall equal the fair market value of the property on the date on which the dividend or distribution is paid. The Deferred Stock Compensation Account of a Director shall be charged on the date of distribution 6 with any distribution of shares of Common Stock made to the Director from such Account pursuant to Section VIII.A. hereof. B. Adjustment and Substitution. The number of shares of Common Stock credited to each Deferred Stock Compensation Account, and the number of shares of Common Stock available for issuance or crediting under the Plan in each Plan Year in accordance with Section II hereof, shall be proportionately adjusted to reflect any dividend or other distribution on the outstanding Common Stock payable in shares of Common Stock or any split or consolidation of the outstanding shares of Common Stock. If the outstanding Common Stock shall, in whole or in part, be changed into or exchangeable for a different class or classes of securities of the Company or securities of another company or cash or property other than Common Stock, whether through reorganization, reclassification, recapitalization, merger, consolidation or otherwise, the Board of Directors shall adopt such amendments to the Plan as it deems necessary to carry out the purposes of the Plan, including the continuing deferral of any amount of any Deferred Stock Compensation Account. SECTION VIII - DISTRIBUTION OF DEFERRED STOCK COMPENSATION ACCOUNT BALANCES A. General. No distribution from a Deferred Stock Compensation Account shall be made or commence prior to the occurrence of the event selected by the Director in his Deferred Stock Election as occasioning such distribution. The actual date on which distribution will be made or commence will be determined by the Compensation Committee; provided, however, that such date may be no later than December 31 of the Plan Year in which such event occurs. Distributions of Common Stock from Deferred Stock Compensation Accounts may be made in a lump sum or in annual installments over a period of five or ten years. The number of shares of Common Stock distributed in any annual installment shall be calculated by dividing the balance in a Director's Deferred Stock Compensation Account at the relevant time by the number of installments remaining to be paid. The actual method of distribution from a Director's Deferred Stock Compensation Account will be determined by the method of distribution selected by the Director in his Deferred Stock Election. The balance of the number of shares of Common Stock in the Deferred Stock Compensation Account shall be appropriately reduced to reflect the installment payments made hereunder. Shares of Common Stock remaining in a Deferred Stock Compensation Account pending distribution pursuant to this Section shall continue to be credited with respect to dividends or distributions paid on the Common Stock pursuant to Section VII hereof and shall be subject to adjustment or substitution pursuant to Section VII hereof. If a lump sum payment or the final installment payment hereunder would result in the issuance of a fractional share of Common Stock, such fractional share shall not be issued and cash in lieu of such fractional share shall be paid to the 7 Director based on the Fair Market Value of a share of Common Stock on the date immediately preceding the date of such payment. The Company shall issue share certificates to the Director, or the Director's designated beneficiary, for the shares of Common Stock distributed hereunder, or if requested in writing by the Director, the shares to be distributed shall be added to the Director's account under the Company's Dividend Reinvestment Plan. As of the date on which the Director is entitled to receive payment of shares of Common Stock, the Director shall be a shareholder of the Company with respect to such shares. Notwithstanding anything herein to the contrary, if an individual becomes a proprietor, officer, partner, employee or otherwise becomes affiliated with any business or governmental agency which is in competition with or has regulatory authority over the Company or a Subsidiary, the Compensation Committee shall be entitled, in its sole discretion, to terminate his participation in the Plan and direct that distribution of the balance of his Deferred Stock Compensation Account be made to him in one lump sum at that time. Once made, an election as to the event which shall occasion a distribution and an election as to the method of distribution shall be irrevocable, unless the Compensation Committee consents in writing to a change. In no event shall such consent be granted with respect to a request by an individual after the occurrence of the event selected by him as occasioning a distribution. B. Beneficiary Designation. A Director may designate one or more persons to receive the balance in his Deferred Stock Compensation Account in the event of his death prior to receipt of the total amount therein. No such designation will be valid unless made on a "Beneficiary Designation" form prescribed by the Company, and duly and timely filed with the Corporate Secretary. A Director may at any time, and from time to time, revoke or amend such designation by duly and timely filing a new "Beneficiary Designation" form with the Corporate Secretary. If a Director dies without a completed "Beneficiary Designation" form on file with the Corporate Secretary, payment will be made to his estate. All distributions made as a result of death shall be paid in lump sums. SECTION IX - NON-ALIENABILITY OF BENEFITS Neither the Director nor any beneficiary designated by the Director shall have the right, directly or indirectly, to alienate, assign, transfer, pledge, anticipate or encumber (except by reason of death) any amount that is or may be payable hereunder, nor shall any such amount be subject to anticipation, alienation, sale, assignment, transfer, pledge, encumbrance, attachment or garnishment by creditors of the Director or the Director's designated beneficiary or to the debts, contracts, liabilities, engagements or torts of any Director or the Director's designated beneficiary, or transfer 8 by operation of law in the event of bankruptcy or insolvency of the Director or the Director's designated beneficiary, or any legal process. SECTION X - NATURE OF DEFERRED ACCOUNTS Any Deferred Cash Compensation Account or Deferred Stock Compensation Account shall be established and maintained only on the books and records of the Company or the applicable Subsidiary, and no assets or funds of the Company, a Subsidiary or the Plan or shares of Common Stock shall be removed from the claims of the Company's or a Subsidiary's general or judgment creditors or otherwise made available until such amounts are actually payable to Directors or their designated beneficiaries as provided herein. The Plan constitutes a mere promise by the Company or the applicable Subsidiary to make payments in the future. The Directors and their designated beneficiaries shall have the status of, and their rights to receive a payment of cash or shares of Common Stock under the Plan shall be no greater than the rights of, general unsecured creditors of the Company or the applicable Subsidiary. No person shall be entitled to any voting rights with respect to shares credited to a Deferred Stock Compensation Account and not yet payable to a Director or the Director's designated beneficiary. The Company and the Subsidiaries shall not be obligated under any circumstances to fund their respective financial obligations under the Plan and the Plan is intended to constitute an unfunded plan for Federal income tax purposes. SECTION XI - PLAN ADMINISTRATION; HARDSHIP WITHDRAWAL The Compensation Committee shall, with respect to the Plan, have full power and authority to construe, interpret, manage, control and administer this Plan, and to pass and decide upon cases in conformity with the objectives of the Plan under such rules as the Board of Directors and/or the Compensation Committee may establish. If the Compensation Committee deems any person entitled to receive a distribution incapable of receiving or disbursing the same by reason of age, illness or any infirmity or incapacity of any kind, payment may be made directly for the comfort, support and maintenance of such person or to any person selected by the Compensation Committee to disburse the same, whose receipt shall be a complete acquittance therefor. Notwithstanding the terms of a Cash Deferral Election or a Stock Deferral Election made by a Director hereunder, the Compensation Committee may, in its sole discretion, permit the withdrawal of amounts credited to a Deferred Cash Compensation Account or of shares credited to a Deferred Stock Compensation Account with respect to Director Fees previously payable, upon the request of a Director or the Director's representative, if the Compensation Committee determines that the Director or the Director's representative, as the case may be, is confronted with an unforeseeable emergency. For this purpose, an unforeseeable emergency is an unanticipated 9 emergency caused by an event that is beyond the control of the Director or the Director's representative and that would result in severe financial hardship to the Director if an early hardship withdrawal were not permitted. The Director or the Director's representative shall provide to the Compensation Committee such evidence as the Compensation Committee, in its discretion, may require to demonstrate that such emergency exists and financial hardship would occur if the withdrawal were not permitted. The withdrawal shall be limited to the amount or to the number of shares, as the case may be, necessary to meet the emergency. For purposes of the Plan, a hardship shall be considered to constitute an immediate and unforseen financial hardship if the Director has an unexpected need for cash to pay for expenses incurred by him or a member of his immediate family (spouse and/or natural or adopted children) such as those arising from illness, casualty loss, or death. Cash needs arising from foreseeable events, such as the purchase or building of a house or education expenses will not be considered to be the result of an unforeseeable financial emergency. Payment shall be made as soon as practicable after the Compensation Committee approves the payment and determines the amount of the payment or number of shares which shall be withdrawn, in a single lump sum. No Director shall participate in any decision of the Compensation Committee regarding such Director's request for a withdrawal under this Section XI. SECTION XII - PAYMENT DATES; FAIR MARKET VALUE Director Fees payable currently in cash or to be credited to a Deferred Cash Compensation Account shall be paid or credited, as the case may be, on such dates as the Company's or the Subsidiary's management shall determine, but not less frequently than June 30 and December 31 of each Plan Year. Director Fees payable currently in shares of Common Stock or to be credited to a Deferred Stock Compensation Account shall be paid or credited, as the case may be, on June 30 and December 31 of each Plan Year, in each case covering the six-month period ending on such date. "Fair Market Value" of a share of Common Stock on a given date shall be determined (i) based on the average of the closing sale prices of a share of Common Stock for the ten (10) day trading period ending on the given date, as reported on the National Association of Securities Dealers Automated Quotation ("Nasdaq") National Market and published in The Wall Street Journal, (ii) if no closing sale prices are reported during such ten (10) day trading period, based on the average of the mean of the bid and asked prices per share of Common Stock for such ten (10) day trading period, as reported on Nasdaq, (iii) if the Common Stock is listed on a stock exchange, based on the average of the closing sale prices of a share of Common Stock for the ten (10) day trading period ending on the given date, as reported in The Wall Street Journal, or (iv) if the Common Stock is not listed on Nasdaq or on a stock exchange, by the Board of Directors in its sole discretion. SECTION XIII - SECURITIES LAWS; ISSUANCE OF SHARES 10 The obligation of the Company to issue or credit shares of Common Stock under the Plan shall be subject to (i) the effectiveness of a registration statement under the Securities Act of 1933, as amended, with respect to such shares, if deemed necessary or appropriate by counsel for the Company, (ii) the condition that the shares shall have been listed (or authorized for listing upon official notice of issuance) upon Nasdaq or each stock exchange, if any, on which the shares of Common Stock may then be listed and (iii) all other applicable laws, regulations, rules and orders which may then be in effect. If, on the date on which any shares of Common Stock would be issued pursuant to a Current Stock Election or credited to a Deferred Stock Compensation Account, sufficient shares of Common Stock are not available under the Plan or the Company is not obligated to issue shares pursuant to this Section XIII, then no shares of Common Stock shall be issued or credited, but rather, in the case of a Current Stock Election, cash shall be paid in payment of the Director Fees payable, and in the case of a Deferred Stock Compensation Account, Director Fees and dividends which would otherwise have been credited in shares of Common Stock shall be credited in cash to a Deferred Cash Compensation Account in the name of the Director. The Compensation Committee shall adopt appropriate rules and regulations to carry out the intent of the immediately preceding sentence if the need for such rules and regulations arises. SECTION XIV - AMENDMENT, MODIFICATION, SUSPENSION OR TERMINATION The Company reserves the right, by and through the Board of Directors, to amend, suspend or terminate all or any part of the Plan at any time; provided, that no such amendment, suspension or termination shall adversely affect the amounts or shares then credited to any Deferred Cash Compensation Account or to any Deferred Stock Compensation Account. If this Plan is terminated, distributions may be made at such time and in such manner as the Board of Directors determines, regardless of the prior provisions of this Plan and any elections made hereunder. The Compensation Committee will give prompt written notice to each Director of any amendment, suspension or termination, or any material modification of the Plan. SECTION XV - GOVERNING LAW; PRONOUNS Except to the extent pre-empted by Federal law, the provisions of the Plan shall be construed, administered and enforced in accordance with the domestic internal law (but not the law of conflicts of law) of the Commonwealth of Pennsylvania. Each masculine, feminine or neuter pronoun used herein shall be deemed a reference to each other gender, as the content requires. SECTION XVI - RESTATEMENT; EFFECTIVE DATE 11 The Plan is an amendment and restatement of the Company's Deferred Compensation Plan for Non-Employee Directors, originally adopted by the Board of Directors effective January 1, 1995. The amended and restated Plan was adopted by the Board of Directors on December 18, 1996, subject to approval by the shareholders of the Company at its 1997 Annual Meeting. If so approved, the amended and restated Plan shall be effective as of January 1, 1997 and shall continue in effect for a term through December 31, 2006, unless sooner terminated under Section XIV; if not so approved, the Plan shall continue in its form as adopted effective January 1, 1995, and any Deferred Stock Election filed prior to January 1, 1997 shall be treated as a Deferred Cash Election. 12 EX-10.13 6 Exhibit 10.13 NATIONAL PENN BANCSHARES, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN The following constitutes the provisions of the Employee Stock Purchase Plan (the "Plan") of National Penn Bancshares, Inc. (the "Company"). 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Subsidiaries with an opportunity to purchase Common Stock of the Company. It is the Company's intention to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. Accordingly, the provisions of the Plan shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Common Stock" means the Company's common stock, $2.50 par value. (d) "Compensation" means all regular straight-time gross earnings excluding payments for overtime, incentive compensation, incentive payments, bonuses, commissions and other compensation. (e) "Continuous Status as an Employee" means the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of a leave of absence agreed to in writing by the Company, provided that such leave is for a period of not more than 90 days or re-employment upon the expiration of such leave is guaranteed by contract or statute. (f) "Contributions" means all amounts credited to the account of a participant pursuant to the Plan. (g) "Employee" means any person employed by the Company or one of its Subsidiaries, including any officer of the Company or of one of its Subsidiaries. (h) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (i) "Offering Date" means the first business day of each Offering Period of the Plan. (j) "Offering Period" means a period of six (6) months beginning on January 1 or July 1 of each year. (k) "Purchase Date" means the last day of each Offering Period of the Plan. (l) "Subsidiary" means a corporation of which not less than fifty percent (50%) of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. 3. Eligibility. (a) Any person who has been continuously employed as an Employee for at least three (3) months prior to the Offering Date of a given Offering Period shall be eligible to participate in such Offering Period under the Plan, subject to the requirements of Section 5(a) and the limitations imposed by Section 423(b) of the Code. (b) No Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Subsidiary, or (ii) which permits his or her rights to purchase stock under all employee stock purchase plans (described in Section 423 of the Code) of the Company and its Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of fair market value of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by a series of Offering Periods, with a new Offering Period commencing on January 1 and July 1 of each year. The Plan shall continue until terminated in accordance with Section 19 hereof. 5. Participation. An eligible Employee may become a participant in the Plan by completing a subscription agreement on the form provided by the Company and filing it with the Company prior to the applicable Offering Date, unless a later time for filing the subscription agreement is set by the Board for all eligible Employees with respect to a given offering. The subscription agreement shall set forth the percentage of the participant's Compensation (which shall be not less than one percent (1%) and not more than ten percent (10%)) to be paid as Contributions pursuant to the Plan. 6. Method of Payment of Contributions. (a) The participant shall elect to have payroll deductions made on each payday during an Offering Period in an amount not less than one percent (1%) and not more than ten percent (10%) of such participant's Compensation on each such payday; provided that the aggregate of such payroll deductions during an Offering Period shall not exceed ten percent (10%) of the participant's aggregate Compensation during such Offering Period. All payroll deductions made by 2 a participant shall be credited to his or her account under the Plan. A participant may not make any additional payments into such account. (b) Payroll deductions shall commence on the first payroll following the Offering Date and shall end on the last payroll paid on or prior to the Purchase Date of the offering to which the subscription agreement is applicable, unless sooner terminated by the participant as provided in Section 10. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10, or, on one occasion only during an Offering Period, may increase or decrease the rate of his or her Contributions during such Offering Period, without withdrawing from the Plan, by completing and filing with the Company a new subscription agreement within the ten (10) day period immediately preceding the beginning of any month during the Offering Period. The change in rate shall be effective as of the beginning of the month following the date of filing of the new subscription agreement and shall comply with the limits as provided in Section 6(a). (d) To the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's payroll deductions may be decreased to zero percent (0%) at such time, during any Offering Period which is scheduled to end during the current calendar year, that the aggregate of all payroll deductions accumulated with respect to such Offering Period and any other Offering Period ending within the same calendar year equals $25,000. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Offering Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10. 7. Grant of Option. (a) On the Offering Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase, on the Purchase Date of such Offering Period, the number of shares of Common Stock determined by dividing such Employee's Contributions accumulated prior to such Purchase Date and retained in the participant's account as of the Purchase Date by ninety percent (90%) of the fair market value of a share of Common Stock on the Purchase Date; provided, however, that the maximum number of shares an Employee may purchase in any one calendar year shall be determined at the Offering Date by dividing $25,000 by the fair market value of a share of Common Stock on the Offering Date, and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. The fair market value of a share of Common Stock shall be determined as provided in Section 7(b) herein. (b) The option price per share of the shares offered in a given Offering Period shall be ninety percent (90%) of the fair market value of a share of Common Stock on the Purchase Date. The fair market value of a share of Common Stock on a given date shall be determined (i) based on the average of the closing sale prices of a share of Common Stock for the ten (10) day trading period ending on the given date, as reported on the National Association of Securities Dealers 3 Automated Quotation ("Nasdaq") National Market and published in The Wall Street Journal, (ii) if no closing sale prices are reported during such ten (10) day trading period, based on the average of the mean of the bid and asked prices per share of Common Stock for such ten (10) day trading period, as reported on Nasdaq, (iii) if the Common Stock is listed on a stock exchange, based on the average of the closing sale prices of a share of Common Stock for the ten (10) day trading period ending on the given date, as reported in The Wall Street Journal, or (iv) if the Common Stock is not listed on Nasdaq or on a stock exchange, by the Board in its sole discretion. 8. Exercise of Option. Unless a participant withdraws from the Plan as provided in Section 10, his or her option for the purchase of shares will be exercised automatically on the Purchase Date of the Offering Period, and the maximum number of full shares subject to option will be purchased for him or her at the applicable option price with the accumulated Contributions in his or her account. The shares purchased upon exercise of an option hereunder shall be deemed to be transferred to the participant on the Purchase Date. During his or her lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Stock Certificates; Cash Balances; Dividend Reinvestment. (a) Stock certificates will not be issued to participants for shares purchased on the Purchase Date. Shares purchased for a participant on a Purchase Date shall be held in an account for such participant under the Plan, and all rights accruing to an owner of record of such shares (including voting rights) shall belong to the participant for whose account such shares are held. A participant may file a written election with the Company to withdraw some or all of the shares of Common Stock held in his or her account, in which case a stock certificate will be issued to such participant for such withdrawn shares. (b) Any cash balance remaining in a participant's account under the Plan after a purchase by him or her of shares on a Purchase Date, or which is insufficient to purchase a full share of Common Stock, shall be carried over to the next Offering Period, provided that he or she continues to participate in the Plan. If he or she does not continue to participate in the Plan, such cash balance shall be returned to him or her. (c) Each participant in the Plan shall be deemed to have authorized the collection and accumulation of all dividends paid on shares held in his or her account and the application of such dividends to the purchase of additional shares of Common Stock as of the dividend payment date, at its fair market value on such date (without any discount). Fair market value shall be determined as of the dividend payment date, in the manner set forth in Section 7(b) hereof. 10. Withdrawal; Termination of Employment. (a) A participant may withdraw all, but not less than all, of the Contributions credited to his or her account under the Plan at any time prior to the Purchase Date of an Offering Period by giving written notice to the Company. All of such participant's Contributions credited to his or her 4 account will be paid to him or her promptly after receipt of such notice of withdrawal, and his or her option for the current period will be automatically terminated, and no further Contributions for the purchase of shares will be made during the Offering Period. (b) Upon termination of a participant's Continuous Status as an Employee prior to the Purchase Date of an Offering Period for any reason, including retirement or death, the Contributions credited to his or her account prior to the Purchase Date will be returned to him or her or, in the case of his or her death, to the person or persons entitled thereto under Section 14, and his or her option will automatically be terminated. (c) A participant who withdraws from an Offering Period will not be eligible to participate again in the Plan until the first anniversary of the Purchase Date of the Offering Period during which such participant withdrew from the Plan. The Board, or its committee established under Section 13 hereof, may waive the non-participation period in its sole discretion. A participant's withdrawal from an Offering Period will not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company. 11. No Interest. No interest shall accrue on the Contributions of a participant in the Plan. 12. Stock. (a) The maximum number of shares of Common Stock which shall be made available for sale under the Plan shall be 250,000 shares, subject to adjustment upon changes in capitalization of the Company as provided in Section 18. If the total number of shares which would otherwise be subject to options granted pursuant to Section 7(a) hereof on the Offering Date of an Offering Period exceeds the number of shares then available under the Plan (after deduction of all shares for which options have been exercised or are then outstanding), the Company shall make a pro rata allocation of the shares remaining available for option grant in as uniform a manner as shall be practicable and as it shall determine to be equitable. Any amounts remaining in an Employee's account not applied to the purchase of Common Stock pursuant to this Section 12 shall be refunded on or promptly after the Purchase Date. In such event, the Company shall give written notice of such reduction of the number of shares subject to the option to each Employee affected thereby and shall similarly reduce the rate of Contributions, if necessary. (b) No participant will have any interest or voting rights in any shares covered by his or her option until such option has been exercised. 13. Administration. The Board, or a committee named by the Board, shall supervise and administer the Plan and shall have full power to (i) adopt, amend and rescind any rules deemed desirable and appropriate for the administration of the Plan and not inconsistent with the Plan, (ii) construe and interpret the Plan, and (iii) make all other determinations necessary or advisable for 5 the administration of the Plan. The Board, or a committee named by the Board, may engage a firm or entity to administer the Plan, subject to the Board's or committee's control and authority. 14. Designation of Beneficiary. (a) A participant may file with the Company a written designation of a beneficiary who is to receive any shares and/or cash, if any, from the participant's account under the Plan upon such participant's death. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. Upon the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its sole discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. Transferability. Neither Contributions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 14 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 10. 16. Use of Funds. All Contributions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such Contributions. 17. Reports. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees promptly following the Purchase Date, which statements will set forth the amounts of Contributions, the per share purchase price, the number of shares purchased and the remaining cash balance, if any. 18. Adjustments Upon Changes in Capitalization; Corporate Transactions. (a) Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the price per share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, 6 combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock affected without receipt of consideration by the Company. (b) Upon a proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. (c) Upon a sale of all or substantially all of the assets of the Company or the merger of the Company with or into another corporation, each option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, to shorten the Offering Period then in progress by setting a new Purchase Date (the "New Purchase Date"). If the Board shortens the Offering Period then in progress in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify each participant in writing, at least ten (10) days prior to the New Purchase Date, that the Purchase Date for his or her option has been changed to the New Purchase Date and that his or her option will be exercised automatically on the New Purchase Date, unless prior to such date he or she has withdrawn from the Offering Period as provided in Section 10. For purposes of this Section 18, an option granted under the Plan shall be deemed to be assumed if, following the sale of assets or merger, the option confers the right to purchase, for each share of option stock subject to the option immediately prior to the sale of assets or merger, the consideration (whether stock, cash or other securities or property) received in the sale of assets or merger by holders of Common Stock for each share of Common Stock held on the effective date of the transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if such consideration received in the sale of assets or merger was not solely common stock of the successor corporation or its parent (as defined in Section 424(e) of the Code), the Board may, with the consent of the successor corporation and the participant, provide for the consideration to be received upon exercise of the option to be solely common stock of the successor corporation or its parent, equal in fair market value to the per share consideration received by holders of Common Stock in the sale of assets or merger. (d) The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, if the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, or if the Company is consolidated with or merged into any other corporation. 19. Amendment or Termination. (a) The Board may at any time terminate or amend the Plan. Except as provided in Section 18, no such termination may affect options previously granted, nor may an amendment make any change in any option theretofore granted which adversely affects the rights of any 7 participant. In addition, to the extent, if any, necessary to comply with Section 423 of the Code (or any successor provision) or any other applicable law or regulation, the Company shall obtain shareholder approval in such a manner and to such a degree as so required. (b) Without shareholder consent and without regard to whether any participant rights may be considered to have been adversely affected, the Board (or its committee) shall be entitled to permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from such participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 20. Notices. All subscription agreements, designations, notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. Conditions Upon Issuance of Shares. (a) Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of Nasdaq or any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 22. Effective Date; Term of Plan. The Plan was approved by the Board on December 18, 1996. Upon approval by the shareholders of the Company, the Plan will become effective and shall continue in effect for a term through June 30, 2007, unless sooner terminated under Section 19. 23. Section 16. With respect to persons subject to Section 16 of the Exchange Act, this Plan is intended to be a "tax-conditioned plan" within the meaning of Rule 16b-3(c) and to otherwise comply with all applicable conditions of Rule 16b-3 (or any successor rule) under the 8 Exchange Act. Accordingly, the provisions of the Plan shall be construed in a manner consistent with the requirements of Rule 16b-3(c). 24. Captions. All section captions in this Plan are for convenience of reference only. 9 EX-11 7 Exhibit 11 NATIONAL PENN BANCSHARES, INC. COMPUTATION OF EARNINGS PER COMMON SHARE*
Year Ended December 31, 1996 1995 1994 Primary (Dollars in Thousands) Net income $ 16,922 $ 15,382 $ 14,649 Shares** Weighted average number of common shares outstanding 7,994,472 7,927,739 7,905,457 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 7,994,472 7,927,739 7,905,457 =========== ========== ========== Primary earnings per common share $ 2.12 $ 1.94 $ 1.85 =========== ========== ========== Assuming full dilution Net income $ 16.022 $ 15,382 $ 14,649 =========== ========== ========== Shares** Weighted average number of common shares outstanding 7,994,472 7,927,739 7,905,457 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 7,994,472 7,927,739 7,905,457 =========== ========== ========== Earnings per common share assuming full dilution $ 2.12 $ 1.94 $ 1.85 =========== ========== ==========
* See notes 1 and 15 to the consolidated financial statements. ** Restated to reflect 5% stock dividends paid in 1996, 1995 and 1994. *** 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, 1996, 1995, and 1994, respectively, options for 251,844, 136,882, and 84,036 shares are exercisable. EX-21 8 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 9 Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 17, 1997, accompanying the consolidated financial statements included in the Annual Report of National Penn Bancshares, Inc., and Subsidiaries on Form 10-K for the year ended December 31, 1996. We hereby consent to the incorporation by reference of said report in the Registration Statements 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 333-04729, effective May 30, 1996; File No. 33-86094, effective November 7, 1994; File No. 33-47067, effective April 29, 1992; and File No. 33-02567, effective January 8, 1986). /s/ Grant Thornton, LLP Grant Thornton, LLP Philadelphia, Pennsylvania March 26, 1997 EX-27 10
9 0000700733 NATIONAL PENN BANCSHARES, INC. 1,000 YEAR DEC-31-1996 DEC-31-1996 40,194 1,802 0 0 236,814 0 0 1,051,080 22,746 1,358,013 980,808 6,931 14,447 76,110 20,085 0 0 94,636 1,358,013 91,098 15,238 222 106,558 34,331 46,018 60,540 3,900 591 41,258 24,470 16,922 0 0 16,922 2.12 2.12 4.95 8,722 3,649 0 0 20,366 2,345 825 22,746 19,652 0 3,094
EX-99 11 Exhibit 99 FORWARD-LOOKING STATEMENTS The Company has projected that net income will grow in 1997 at a double digit rate over 1996 net income and that certain of its loan portfolios will increase over 10% during 1997. The Company has also discussed its planned new investments in branch locations, ATMs, and new technology, in this report. These are forward-looking statements. Risks and uncertainties could cause actual future results and investments to differ materially from those contemplated in such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: (a) loan growth and/or loan margins may be less than expected, due to competitive pressures in the banking industry and/or changes in the interest rate environment; (b) general economic conditions in the Company's market area may be less favorable than expected, resulting in, among other things, a deterioration in credit quality; (c) costs of the Company's planned training initiatives, product development, branch expansion and new technology and operating systems may exceed expectations; (d) volatility in the Company's market area due to recent mergers may have unanticipated consequences, such as customer turnover, and (e) changes in the regulatory environment, securities markets, general business conditions and inflation may be adverse. These risks and uncertainties are all difficult to predict, and most are beyond the control of the Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report. -----END PRIVACY-ENHANCED MESSAGE-----