-----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, ARjhHJYHqAsSksqXNcDP7S8gkHMcJY/Ffsk3Z7bezdYznrsGY89MAx/dXNNpdKHU dC0dPo+9fixSf13fmtJn7Q== 0000950159-99-000079.txt : 19990331 0000950159-99-000079.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950159-99-000079 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL PENN BANCSHARES INC CENTRAL INDEX KEY: 0000700733 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232215075 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-71391 FILM NUMBER: 99577647 BUSINESS ADDRESS: STREET 1: PHILADELPHIA AND READING AVE STREET 2: PO 547 CITY: BOYERTOWN STATE: PA ZIP: 19512 BUSINESS PHONE: 2153676001 MAIL ADDRESS: STREET 1: POST OFFICE BOX 547 STREET 2: POST OFFICE BOX 547 CITY: BOYERTOWN STATE: PA ZIP: 19512 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1998, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________ to _______. Commission file number 000-10957 NATIONAL PENN BANCSHARES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-2215075 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Philadelphia and Reading Avenues, Boyertown, Pennsylvania 19512 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 367-6001 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock (without par value) Preferred Stock Purchase Rights Guarantee (9% Preferred Securities of NPB Capital Trust) 9% Junior Subordinated Debentures Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X] The aggregate market value of common shares of the Registrant held by nonaffiliates, based on the closing sale price as of March 12, 1999, was $346,997,376. As of March 12, 1999, the Registrant had 16,978,611 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 27, 1999 -- 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.................................................................... 25 Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................... 33 Item 8. Financial Statements and Supplementary Data........................................ 34 Item 9. Disagreements on Accounting and Financial Disclosure.................................................................... 64 Part III Item 10. Directors and Executive Officers of the Registrant.................................................................... 64 Item 11. Executive Compensation............................................................. 64 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................................... 64 Item 13. Certain Relationships and Related Transactions.................................................................. 64 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 64
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 five wholly-owned, direct or indirect, nonbank subsidiaries engaged in activities related to the business of banking and has, indirectly through one of such subsidiaries, an equity investment in one other bank. At December 31, 1998, the Company and NPB had 637 full- and part-time employees. National Penn Bank NPB is a national bank chartered under the National Bank Act. Prior to August 1, 1993, NPB's name was National Bank of Boyertown. On that date, the bank's name was changed to National Penn Bank. National Penn Bank also operates through its various banking divisions. NPB's banking divisions consist of (1) the Chestnut Hill National Bank Division, established in December 1993 after the Company's acquisition of Chestnut Hill National Bank, (2) the 1st Main Line Bank Division, a de novo division established in April 1995, (3) the National Asian Bank Division, a de novo division established in May 1998, and (4) the Elverson National Bank Division, established in January 1999 after the Company's acquisition of Elverson National Bank. NPB is engaged in the commercial and retail banking business. NPB provides checking and savings accounts, time deposits, personal, business, residential mortgage, educational loans, interbank credit cards, and safe deposit and night depository facilities. Acquisition of Elverson National Bank On January 4, 1999, the Company acquired Elverson National Bank ("Elverson") by its merger with and into NPB. Elverson was a commercial bank headquartered in Elverson, Chester County, Pennsylvania, with eight other branches in Chester, Berks and Lancaster Counties, Pennsylvania. At December 31, 1998, Elverson had assets of $324,654,000, net loans of $184,299,000, deposits of $265,241,000, and shareholders' equity of $28,318,000. The Company issued 3,821,564 shares of the Company's common stock in consummation of the transaction. The transaction is being accounted for under the pooling of interests method of accounting. Nonbank Subsidiaries The Company owns, directly or indirectly, all of the outstanding capital stock of the following nonbank subsidiaries: 1. Investors Trust Company ("ITC") is a Pennsylvania-chartered trust company. ITC opened for business on June 20, 1994. 2. National Penn Investment Company, a Delaware business corporation ("NPIC"), invests in and holds equity investments in other banks and bank holding companies (as discussed below), other equity investments, government and other debt securities, and other investment securities, as permitted by applicable law and regulations. NPIC began operations in January 1985. 3. National Penn Life Insurance Company, an Arizona insurance company, was formed to reinsure credit life and accident and health insurance in connection with loans made by NPB. National Penn Life Insurance Company began operations in January 1985. 1 4. Penn Securities, Inc., a Pennsylvania business corporation ("PSI"), is a registered full service broker-dealer and investment advisory firm. PSI began operations in October 1998. 5. Link Financial Services, Inc., a Pennsylvania business corporation ("Link"), is licensed as an insurance agency by the Pennsylvania Insurance Department. Link is also indirectly engaged in the title insurance business through a joint venture with a title insurance agency. Link began operations in April 1998. Other Bank Investments The Company owns, indirectly through NPIC, 20% of the outstanding capital stock of Pennsylvania State Bank, a Pennsylvania bank headquartered in Camp Hill, Pennsylvania. Pennsylvania State Bank began operations as a bank in May 1989. For financial reporting purposes, the Company accounts for its investment in Pennsylvania State Bank using the "equity" method. Supervision and Regulation Bank holding companies and banks operate in a highly-regulated environment and are regularly examined by Federal and state regulatory authorities. The following discussion concerns certain provisions of Federal and state laws and certain regulations and the potential impact of such provisions and regulations on the Company and its subsidiaries. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory or regulatory provisions themselves. A change in applicable statutes, regulations or regulatory policy may have a material effect on the business of the Company and its subsidiaries. Bank Holding Company Regulation The Company is registered as a bank holding company and is subject to the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve") under the Bank Holding Company Act of 1956 ("BHCA"). Bank holding companies are required to file periodic reports with and are subject to examination by the Federal Reserve. The Federal Reserve has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve, pursuant to such regulations, may require the Company to stand ready to use its resources to provide adequate capital funds to NPB during periods of financial stress or adversity. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (as defined by regulations) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency, up to specified limits. Under the BHCA, the Federal Reserve has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. The BHCA prohibits the Company from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock or substantially all of the assets of any bank or merging or consolidating with another bank holding company without prior approval of the Federal Reserve. Such a transaction 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 2 related to banking" as to be a "proper incident" thereto. The BHCA does not place territorial restrictions on the activities of such nonbanking-related businesses. The Federal Reserve's regulations concerning permissible nonbanking activities provide fourteen categories of functionally related activities that are permissible nonbanking activities. These are: (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 (excluding auction rate issues), a limited amount of cumulative perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and, with certain limited exceptions, all other intangible assets. The remainder ("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, 1998, each qualify as "well capitalized" under these regulatory standards. FDIC Insurance Assessments NPB is subject to FDIC deposit insurance assessments. These assessments fund both the Bank Insurance Fund ("BIF") for banks and the Savings Association Insurance Fund (SAIF") for savings associations and are based on the risk classification of the depository institutions. Under current FDIC practices, NPB will not be required to pay deposit insurance assessments in 1999. In 1996, the SAIF was recapitalized. In connection therewith, both BIF-insured deposits and SAIF-insured deposits are now assessed to fund debt service on the Federal government's FICO bond payments. NPB's current assessment rate is $.0122 per $100 of deposits for its BIF-insured deposits and $.061 per $100 of deposits for its SAIF-insured deposits. 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. 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. 4 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 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. 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" herein. Interstate Banking Legislation The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act") provides for nationwide interstate banking and branching (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) 5 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 In 1998, the U. S. Congress considered, but did not adopt, comprehensive financial sector reform legislation. The U.S. Congress is expected to consider financial sector reform legislation again in 1999. It cannot be predicted whether, or in what form, any proposal will be enacted or the extent to which the business of the Company may be affected thereby. Interest Rate Swaps and Similar Instruments Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," requires that information about the amounts, nature, and terms of interest rate swaps and similar instruments be disclosed. See Note 15 to the Company's Consolidated Financial Statements included at Item 8 hereof. In 1998, the interest rate swaps to which NPB was a party had the effect of increasing the Company's net interest income by $902,000 over what would have been realized had NPB not entered into the swap agreements. Should rates rise in 1999, the Company may recognize lower net interest income for the year than would have been recognized had NPB not entered into the interest rate swap agreements. In 1998, the interest rate floor to which NPB is a party had no effect on the Company's net interest income. Should rates fall in 1999 below a certain point, the Company may recognize higher net interest income for the year than would have been recognized had NPB not entered into the interest rate floor agreement. The Company uses interest rate swap and floor agreements for interest rate risk management. No derivative financial instruments are held for trading purposes. The contract or notional amounts of the swap and floor agreements do not represent exposure to credit loss. Potential credit risk on these contracts arises from the counterparty's inability to meet the terms of the agreement. Management considers the credit risk of these agreements to be minimal and manages this risk through routine review of the counterparty's financial ratings. Year 2000 Computer Matters The following is a Year 2000 Readiness Disclosure within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998. 6 During 1998, the Company continued its Year 2000 compliance project. The Company's Year 2000 initiative began in 1996 with the creation of a "Year 2000 Compliance Project team" comprised of various Company employees, including senior management. The Year 2000 Project was divided into five phases -- Awareness, Assessment, Renovation, Validation, and Implementation. The initial Awareness and Assessment Phases have been completed. Non-information technology systems have been assessed and do not present a Year 2000 concern. The Company has completed the Renovation Phase of mission critical systems. A system is considered mission critical if it is vital to the successful continuation of a core business activity. The Validation and Implementation Phases of renovated mission critical systems were substantially completed by December 31, 1998. Validation and Implementation Phases of non-mission critical systems will continue through the first two quarters of 1999. A business impact analysis has been completed for the systems which support mission critical functions. The Company believes the most likely worst-case scenario to be a total or partial failure to perform of one or more of the Company's material third party business partners, borrowers, vendors, customers, governmental agencies or providers of service, commodity or data, which failure could have a material adverse impact on the Company's operations. In an attempt to mitigate this risk, the Company has included the assessment of these business partners, borrowers, vendors, customers and providers in its Year 2000 Project. However, there can be no guarantee that the systems of these business partners, borrowers, vendors, customers or providers will be timely converted and would not have a materially adverse effect on the Company's systems and operations. Furthermore, mission critical third parties will be included in the Company's contingency plans which the Company anticipates will be substantially written during the first quarter of 1999. Actual costs for 1998 were within the budgeted amount of $300,000, which represented approximately 9% of the total information technology budget for 1998. The amount currently budgeted for 1999 is $200,000, which is approximately 12% of the total information technology budget for 1999. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that may cause these estimates and the impact of the Year 2000 issues to differ materially from those anticipated include, but are not limited to: the availability and cost of personnel trained in this area; the ability to locate and correct all relevant computer codes; uncertainties in the cost of hardware and software; inaccurate or incomplete execution of the Phases; the adequacy and ability to implement contingency plans; ineffective remediation of computer codes; whether the Company's borrowers, vendors, customers, and business partners effectively address their own Year 2000 issues; adequate resolution of Year 2000 issues by governmental agencies; and similar uncertainties. The forward-looking statements made in the foregoing Year 2000 discussion speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. No major information technology projects have been delayed as a result of the Year 2000 Project. In addition, the Company's audit department contracted for an independent consultant to verify and validate the Company's Year 2000 Project. No major recommendations were suggested by the independent consultant to mitigate exposures in the Company's Year 2000 Project. Forward-Looking Statements Certain statements in the Company's Annual Report on Form 10-K for 1998 and in other reports issued by the Company are forward-looking and are identified by the use of forward-looking words or phrases such as "intended," "believes," "expects," "estimates", "anticipates," "forecasts," "is expected," and "is anticipated." These forward-looking statements generally relate to the Company's plans, expectations, goals, and projections, and are subject to numerous assumptions, risks and uncertainties as discussed in Exhibit 99 attached hereto and incorporated herein by reference. 7
Average Balances, Average Rates, and Interest Rate Spread* (Dollars in Thousands) Year Ended December 31 1998 1997 1996 Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate INTEREST EARNING ASSETS: Interest bearing deposits at banks $2,170 $146 6.72% $2,094 $94 4.49% $1,186 $60 5.06% U.S. Treasury 41,315 2,798 6.77 65,285 4,487 6.87 86,751 5,976 6.89 U.S. Government agencies 149,814 9,940 6.63 111,757 7,709 6.90 75,461 5,478 7.26 State and municipal* 166,687 12,706 7.62 70,063 5,341 7.62 52,309 3,760 7.19 Other bonds and securities 35,644 2,161 6.06 16,933 1,008 5.95 22,820 1,302 5.71 ---------- -------- ---------- -------- ---------- -------- Total investments 393,460 27,605 7.02 264,038 18,545 7.02 237,341 16,516 6.96 ---------- -------- ---------- -------- ---------- -------- Federal funds sold 2,500 125 5.00 2,658 143 5.38 3,817 162 4.24 ---------- -------- ---------- -------- ---------- -------- Trading account securities 10,670 851 7.98 --- --- --- --- --- --- ---------- -------- ---------- -------- ---------- -------- Commercial loans and lease financing* 731,911 69,373 9.48 641,324 59,134 9.22 540,140 49,949 9.25 Installment loans 243,269 22,692 9.33 234,596 22,320 9.51 220,292 20,044 9.10 Mortgage loans 195,020 16,071 8.24 213,315 21,127 9.90 221,317 21,624 9.77 ---------- -------- ---------- -------- ---------- -------- Total loans and leases 1,170,200 108,136 9.24 1,089,235 102,581 9.42 981,749 91,617 9.33 ---------- -------- ---------- -------- ---------- -------- Total earning assets 1,579,000 $136,863 8.67% 1,358,025 $121,363 8.94% 1,224,093 $108,355 8.85% -------- -------- -------- Allowance for loan and lease losses (27,194) (24,341) (21,67) Non-interest earning assets 120,102 89,619 84,758 ---------- ---------- ---------- Total assets $1,671,908 $1,423,303 $1,287,180 ========== ========== ========== INTEREST BEARING LIABILITIES: Interest bearing deposits $979,978 $44,309 4.52% $911,752 $40,570 4.45% $820,728 $34,331 4.18% Securities sold under repurchase agreements and federal funds purchased 125,622 5,969 4.75 95,567 4,938 5.17 157,182 8,083 5.14 Short-term borrowings 5,318 296 5.57 4,897 275 5.62 3,863 193 5.00 Long-term borrowings 267,381 16,428 6.14 138,898 8,839 6.36 53,424 3,411 6.38 ---------- -------- ---------- -------- ---------- -------- Total interest bearing liabilities 1,378,299 $67,002 4.86% 1,151,114 $54,622 4.75% 1,035,197 $46,018 4.45% -------- -------- -------- Non-interest bearing deposits 151,711 138,596 128,002 Other non-interest bearing liabilities 16,774 16,458 15,463 ---------- ---------- ---------- Total liabilities 1,546,784 1,306,168 1,178,662 Equity capital 125,124 117,135 108,518 ---------- ---------- ---------- Total liabilities and equity capital $1,671,908 $1,423,303 $1,287,180 ========== ========== ========== INTEREST RATE SPREAD** $69,861 4.42% $66,741 4.91% $62,337 5.09% ======== ======== ========
*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, 1998, 1997, and 1996 follows (in thousands).
1998 1997 1996 --------------------------- -------------------------- ---------------------------- 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 $64,674 $67,993 $90,751 $93,469 $108,569 $111,611 State and municipal 187,511 195,901 99,267 101,702 49,485 49,621 Other bonds --- --- 250 253 1,184 1,198 Mortgage-backed securities 117,491 118,535 104,053 105,417 50,594 51,785 Marketable equity securities and other 38,089 39,309 15,854 20,919 20,216 22,599 ======== ======== ======== ======== ======== ======== Totals $407,765 $421,738 $310,175 $321,760 $230,048 $236,814 ======== ======== ======== ======== ======== ======== 1998 1997 1996 --------------------------- -------------------------- ---------------------------- 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 $ --- $ --- $ --- $ --- $ --- $ --- State and municipal --- --- --- --- --- --- Other bonds --- --- --- --- --- --- Mortgage-backed securities --- --- --- --- --- --- Marketable equity securities and other --- --- --- --- --- --- ======== ======== ======== ======== ======== ======== Totals $ --- $ --- $ --- $ --- $ --- $ --- ======== ======== ======== ======== ======== ========
9 Investment Securities Yield by Maturity The maturity distribution and weighted average yield of the investment portfolio of the Company at December 31, 1998, 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, 1998 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 $202 6.43% $35,460 7.03% $32,331 7.40% $ --- ---% $67,993 7.21% State and municipal bonds 252 13.43% 19,668 7.08% 30,851 8.11% 145,130 7.82% 195,901 7.80% Other bonds --- ---% --- ---% --- ---% --- ---% --- ---% Mortgage-backed securities --- ---% 13,210 7.29% 8,054 6.59% 97,271 6.43% 118,535 6.54% Marketable equity securities and other --- ---% --- ---% --- ---% 39,309 ---% 39,309 ---% ---------------- ----------------- ----------------- ------------------ ----------------- Total $454 10.35% $68,338 7.09% $71,236 7.62% $281,710 6.25% $421,738 6.62% ================ ================= ================= ================== =================
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, 1998, are summarized below:
Remaining Maturity* - At December 31, 1998 After One One Year Year to After or Less Five Years Five Years Total ------------ ------------- ------------ ------------ (In Thousands) Commercial and Industrial Loans $85,335 $58,101 $38,129 $181,565 Loans for Purchasing and Carrying Securities 350 238 157 745 Loans to Financial Institutions --- --- --- --- Real Estate Loans: Construction and Land Development 71,430 --- --- 71,430 ============ ============= ============ ============ $157,115 $58,339 $38,286 $253,740 ============ ============= ============ ============
* 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, 1998, are summarized below:
After One Year After to Five Years Five Years ----------------- --------------- (In Thousands) Predetermined Interest Rate $58,339 $38,286 Floating Interest Rate --- --- ------------ ------------ Total $58,339 $38,286 ============ ============
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, 1998:
December 31, ------------------------------------------------------------------------ 1998 1997 1996 1995 1994 ------------- -------------- ------------- ------------ ------------ (In Thousands) Commercial and Industrial Loans $ 181,565 $ 138,521 $ 126,304 $ 99,765 $ 79,726 Loans for Purchasing and Carrying Securities 745 87 306 478 778 Loans to Financial Institutions --- 333 453 589 821 Real Estate Loans: Construction and Land Development 71,430 57,563 42,468 42,978 31,760 Residential 595,066 563,935 564,748 526,577 472,227 Other 359,445 335,676 302,787 256,956 228,911 Loans to Individuals 39,768 26,669 14,014 11,722 16,389 Lease Financing Receivables --- --- --- --- --- ------------- -------------- ------------- ------------ ------------ Total $1,248,019 $1,122,784 $1,051,080 $939,065 $830,612 ============= ============== ============= ============ ============
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, 1998, 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 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, 1998:
December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ----------- ----------- ---------- ------------ Nonaccrual Loans $ 9,980 $6,810 $ 8,723 $ 7,257 $ 9,328 Loans Past Due 90 or More Days as to Interest or Principal 1,798 2,798 3,650 1,764 2,114 Restructured Loans --- --- --- --- --- Total Nonperforming Loans 11,778 9,608 12,373 9,021 11,442 Other Real Estate Owned 470 375 319 760 2,047 ---------- ----------- ----------- ---------- ------------ Total Nonperforming Assets $12,248 $9,983 $12,692 $ 9,781 $13,489 ========== =========== =========== ========== ============ Gross Amount of Interest That Would Have Been Recorded at Original Rate on Nonaccrual and Restructured Loans $ 959 $ 940 $1,040 $ 961 $ 1,517 Interest Received From Customers on Nonaccrual and Restructured Loans 308 609 834 656 1,031 ---------- ----------- ----------- ---------- ------------ Net Impact on Interest Income of Nonperforming Loans $ 651 $ 331 $ 206 $ 305 $ 486 ========== =========== =========== ========== ============
At December 31, 1998, 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, 1998, 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, 1998, the Company had no loans that are considered highly-leveraged transactions under applicable regulations, although the Company had approximately $610,000 in aggregate loans outstanding that, but for their small individual amount, would be considered such loans. A "highly-leveraged transaction" is a transaction for the purpose of the buyout, acquisition, or recapitalization of a corporation, which involves new debt that doubles the corporation's debt and results in a leverage ratio greater than 50%, produces a leverage ratio greater than 75% where 25% or more results from the buyout, acquisition, or recapitalization, or is designated as such by a syndication agent or regulatory agency. 13 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, 1998, is shown below:
December 31, ------------------------------------------------------------------ 1998 1997 1996 1995 1994 ------------ ------------ ----------- ----------- ------------ Balance at Beginning of Year $25,122 $22,746 $20,366 $19,310 $17,909 Charge-offs: Commercial and Industrial Loans 917 979 289 544 679 Real Estate Loans: Construction and Land Development --- 14 --- 366 125 Residential 621 1,279 1,242 882 941 Other 2,374 564 392 932 435 Loans to Individuals 490 300 422 785 822 Lease Financing Receivables --- --- --- --- --- ------------ ------------ ----------- ----------- ------------ Total Charge-offs $4,402 $3,136 $2,345 $ 3,509 $ 3,002 ------------ ------------ ----------- ----------- ------------ Recoveries: Commercial and Industrial Loans 200 199 110 365 190 Real Estate Loans: Construction and Land Development --- --- 131 148 47 Residential 629 293 182 491 494 Other 553 212 235 124 155 Loans to Individuals 144 233 167 237 313 Lease Financing Receivables --- --- 4 ------------ ------------ ----------- ----------- ------------ Total Recoveries $1,526 $ 937 $ 825 $ 1,365 $ 1,203 ------------ ------------ ----------- ----------- ------------ Net Charge-offs $2,876 $2,199 $1,520 $ 2,144 $ 1,799 ------------ ------------ ----------- ----------- ------------ Provisions Charged to Expense 5,100 4,575 3,900 3,200 3,200 Adjustments: Changes Incident to Mergers and Absorptions, Net --- --- --- --- --- ============ ============ =========== =========== ============ Balance at End of Year $27,346 $25,122 $22,746 $20,366 $19,310 ============ ============ =========== =========== ============ Ratio of Net Charge-offs During the Period to Average Loans Outstanding During the Period 0.25% 0.20% 0.15% 0.24% 0.23% ============ ============ =========== =========== ============
The allowance for loan and lease losses is established through charges to earnings in the form of a provision for loan and lease losses. Loans and leases that are determined to be uncollectible are charged against the allowance, and subsequent recoveries are credited to the allowance. Factors that influence management's judgment in determining the amount of the provision for loan and lease losses charged to operating expense include the following: 1. An ongoing review by management of the quality of the overall loan and lease portfolio. 14 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 1998, the provision was increased due to current loan quality, economic conditions, and net loan charge-offs in 1998. 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 1998 totaled $2,677,000, or 61% of the gross charge-off amount of $4,402,000, as compared to $1,340,000, or 43% of the gross charge-off amount of $3,136,000 in 1997. Partial charge-offs represented .2% and .1% of average total loans for 1998 and 1997, respectively. (This space left intentionally left blank.) 15 The year end 1998, 1997, 1996, 1995, and 1994 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) 1998 1997 1996 1995 1994 % Loan % Loan % Loan % Loan % Loan Type to Type to Type to Type to Type to Total Total Total Total Total Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans Commercial and Industrial loans and leases $5,192 14.6% $ 2,859 12.3% $3,229 12.0% $ 2,547 10.6% $ 1,289 9.6% Loans for purchasing and carrying securities --- ---% --- ---% --- 0.1% --- 0.1% --- 0.1% Loans to financial institutions --- ---% --- ---% --- 0.1% --- 0.1% --- 0.1% Real estate loans: Construction and land development 2,245 5.7% 1,794 5.1% 1,458 4.0% 644 4.5% 2,294 3.8% Residential 3,689 47.7% 5,145 50.2% 4,764 53.7% 4,595 56.1% 3,841 56.8% Other 10,080 28.8% 7,001 29.9% 7,905 28.8% 6,548 27.4% 3,708 27.6% Loans to individuals 2,911 3.2% 4,346 2.5% 2,296 1.3% 2,296 1.2% 1,462 2.0% Unallocated 3,229 N/A 3,977 N/A 3,094 N/A 3,736 N/A 6,716 N/A ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== $27,346 100.0% $25,122 100.0% $22,746 100.0% $20,366 100.0% $19,310 100.0% ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- ----------------------- (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, ------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------- ------------- ------------- ------------- ------------- (In Thousands) Average Total Loans $1,170,200 $1,089,235 $981,749 $882,292 $775,675 Total Loans at Year End 1,248,019 1,122,784 1,051,080 939,065 830,612 Net Charge-offs 2,876 2,199 1,520 2,144 1,799 Allowance for Possible Loan and Lease Losses at Year End 27,346 25,122 22,746 20,366 19,310 December 31, ------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------- ------------- ------------- ------------- ------------- Net Charge-offs to: Average Total Loans 0.25% 0.20% 0.15% 0.24% 0.23% Total Loans at Year End 0.23% 0.20% 0.14% 0.23% 0.22% Allowance for Possible Loan and Lease Losses 10.52% 8.75% 6.68% 10.53% 9.32% Allowance for Possible Loan and Lease Losses to: Average Total Loans 2.34% 2.31% 2.32% 2.31% 2.49% Total Loans at Year End 2.19% 2.24% 2.16% 2.17% 2.32%
(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, 1998:
Year Ended December 31, --------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------ --------------------------- ------------------------- (Dollars in Thousands) Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate ------------ --------- ------------- ----------- ------------- ---------- Noninterest- Bearing Demand Deposits $ 151,711 ---% $ 138,596 ---% $128,002 ---% Savings Deposits 383,640 2.50 336,122 2.08 326,902 1.82 Time Deposits* 596,338 5.79 575,630 5.83 493,826 5.75 ------------ ------------- ------------- Total $1,131,689 3.90% $1,050,348 3.86% $948,730 3.62% ============ ============= =============
* Included are average time deposits, issued in the amount of $100,000 or more, of $127,719,000 in 1998, $110,447,000 in 1997, and $97,115,000 in 1996. The following is a breakdown, by maturities, of the Company's time certificates of deposit of $100,000 or more as of December 31, 1998. The Company has no other time deposits of $100,000 or more as of December 31, 1998. Maturity Amount of Time Certificates of Deposit -------- -------------------------------------- (In Thousands) 3 months or less $35,339 Over 3 through 6 months 23,748 Over 6 through 12 months 43,899 Over 12 months 24,733 =========== Total $127,719 =========== Short-Term Borrowings Information with respect to the Company's short-term borrowings is set forth in Footnote 7 to the Company's Consolidated Financial Statements which are included at Item 8 hereof, Financial Statements and Supplementary Data. (This space left intentionally blank.) 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, ------------------------------------------------------ 1998 1997 1996 ------------------------------------------------------ Earnings Ratios Net Income on: Average Earning Assets 1.30% 1.37% 1.38% Average Total Assets 1.23 1.31 1.31 Average Shareholders' Equity 16.40 15.90 15.90 Net Operating Income Before Securities and Mortgage Transactions: Average Earning Assets 1.22 1.32 1.38 Average Total Assets 1.15 1.26 1.31 Average Shareholders' Equity 15.36 15.27 15.54 Liquidity and Capital Ratios Average Shareholders' Equity to Average Earning Assets 7.92% 8.63% 8.87% Average Shareholders' Equity to Average Total Assets 7.48 8.23 8.43 Dividend Payout Ratio 46.56 44.70 41.50 Tier 1 Leverage Ratio 8.78 9.84 7.83 Tier 1 Risk-Based Ratio 12.03 13.49 10.82 Total Risk-Based Capital Ratio 13.29 14.91 12.09
(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, 1998 and 1997. The information is presented on a taxable equivalent basis, using an effective rate of 35%.
Year Ended December 31, ------------------------------------------------------------------------------ 1998 over 1997 (1) 1997 over 1996 (1) --------------------------------- -------------------------------------- Increase (decrease) in: Volume Rate Total Volume Rate Total --------- ---------- --------- ---------- ------------ ----------- Interest income: Interest bearing deposits at banks $3 $49 $52 $46 ($12) $ 34 Securities: U.S. Treasury and U. S. Government agencies 970 (428) 542 1,047 (305) 742 State and municipal 7,366 (1) 7,365 1,276 305 1,581 Other bonds and securities 1,114 39 1,153 (336) 42 (294) --------- ---------- --------- ---------- ------------ ----------- Total securities 9,450 (390) 9,060 1,987 42 2,029 --------- ---------- --------- ---------- ------------ ----------- Federal funds sold (9) (9) (18) (49) 30 (19) Trading account securities 851 --- 851 --- --- --- Loans: Commercial loans and lease financing 8,353 1,886 10,239 9,357 (172) 9,185 Installment loans 825 (453) 372 1,301 975 2,276 Mortgage loans (1,812) (3,244) (5,056) (782) 285 (497) --------- ---------- --------- ---------- ------------ ----------- Total loans 7,366 (1,811) 5,555 9,876 1,088 10,964 --------- ---------- --------- ---------- ------------ ----------- Total interest income $17,661 ($2,161) $15,500 $11,860 $1,148 $13,008 ========= ========== ========= ========== ============ =========== Interest expense: Interest bearing deposits 3,036 703 3,739 3,808 2,431 6,239 Borrowed funds: Securities sold under repurchase agreements and federal funds purchased 1,553 (522) 1,031 (3,169) 24 (3,145) Short-term borrowings 24 (3) 21 52 30 82 Long-term borrowings 8,176 (587) 7,589 5,457 (29) 5,428 --------- ---------- --------- ---------- ------------ ----------- Total borrowed funds 9,753 (1,112) 8,641 2,340 25 2,365 --------- ---------- --------- ---------- ------------ ----------- Total interest expense $12,789 ($409) $12,380 $6,148 $2,456 $8,604 --------- ---------- --------- ---------- ------------ ----------- Increase (decrease) in net interest income $4,872 ($1,752) $3,120 $5,712 ($1,308) $4,404 ========= ========== ========= ========== ============ ===========
(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, 1998, NPB owns 30 properties in fee and leases 37 other properties. The properties owned in fee, at such date, were not subject to any major liens, encumbrances, or collateral assignments. The principal office of the Company and of NPB is owned in fee and is located at Philadelphia and Reading Avenues, Boyertown, Pennsylvania 19512. The principal office of NPB's Chestnut Hill National Bank Division is leased and is located at 9 West Evergreen Avenue, Chestnut Hill, Philadelphia, Pennsylvania 19118. 20 The principal office of NPB's 1st Main Line Bank Division is leased and is located at 528 East Lancaster Avenue, St. Davids, Pennsylvania 19087. The principal office of NPB's Elverson National Bank Division is owned in fee and is located at 83 West Main Street, Elverson, Pennsylvania 19520. NPB presently has 61 branches located in the following Pennsylvania counties: Berks, Bucks, Chester, Delaware, Lancaster, Lehigh, Montgomery, Northampton, and Philadelphia. In addition to its branches, NPB presently owns or leases 67 automated teller machines located throughout the nine-county area, all of which are located at bank branch locations, except for 21 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. A special meeting of the shareholders of the Company was held on December 14, 1998 to approve the Company's acquisition of Elverson National Bank by the merger of Elverson National Bank with and into National Penn Bank, the Company's banking subsidiary, as described in the Joint Proxy Statement/Prospectus dated as of November 3, 1998 which was provided to shareholders. The acquisition was approved by the Company's shareholders, with 10,270,016 shares voting to approve the acquisition, 53,304 shares voting against the acquisition, 61,255 shares abstaining, and 1,107,041 shares that were broker non-votes. 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. 60 Chairman and Chief Executive Officer of the Company since January 1990, and President of the Company from April 1988 to April 1998. Also, Chairman of NPB. Wayne R. Weidner 56 President of the Company since April 1998 Executive Vice President of the Company from April 1990 to April 1998, and Treasurer of the Company from 1983 to 1990. Also, Chief Executive Officer and President of NPB. Garry D. Koch 44 Executive Vice President of NPB Since September 1997, and Senior Vice President of NPB since 1992. Glenn E. Moyer 48 Executive Vice President of NPB and President of the Elverson Division since January 1999. Sharon L. Weaver 51 Executive Vice President of NPB since April 1998. 21 Principal Business Occupation Name Age During the Past Five Years Sandra L. Spayd 55 Secretary of the Company, and Senior Vice President and Corporate Secretary of NPB. Gary L. Rhoads 43 Treasurer of the Company (Chief Financial Officer), and Executive Vice President, Controller and Cashier of NPB.
Executive officers of the Company are elected by the Board of Directors and serve at the pleasure of the Board. Executive Officers of the Bank are appointed by the Board of Directors of the Bank and serve until they resign, retire, become disqualified, or are removed by such Board. 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 closing sales prices reported for the Common Stock, and the cash dividends declared on the Common Stock, for the periods indicated, after giving retroactive effect to a five-for-four stock split paid on July 31, 1998 and a four-for-three stock split paid on July 31, 1997. MARKET VALUE OF COMMON STOCK 1998 High Low lst Quarter 29.60 23.80 2nd Quarter 28.85 26.40 3rd Quarter 27.20 20.88 4th Quarter 33.50 20.31 1997 High Low lst Quarter 17.25 15.67 2nd Quarter 20.25 16.35 3rd Quarter 27.50 19.95 4th Quarter 27.00 24.80 CASH DIVIDENDS DECLARED ON COMMON STOCK 1998 1997 ------ ------ lst Quarter $0.18 $0.14 2nd Quarter 0.19 0.17 3rd Quarter 0.19 0.17 4th Quarter 0.19 0.17 The Trust Preferred Securities of NPB Capital Trust are reported on Nasdaq's National Market under the symbol "NPBCP". The Preferred dividend is 9%. (This space intentionally left blank.) 23 Item 6. SELECTED FINANCIAL DATA.
FIVE-YEAR STATISTICAL SUMMARY (Dollars in thousands, except per share data) Year Ended 1998 1997 1996 1995 1994 ---------- ---------- ---------- ----------- ---------- STATEMENTS OF CONDITION Total assets $1,811,594 $1,534,378 1,358,013 $1,251,378 $1,137,174 Total deposits 1,208,061 1,115,600 980,808 914,890 864,640 Loans and leases, net 1,220,673 1,097,662 1,028,334 918,699 811,302 Total investments 421,738 321,760 236,814 240,902 238,102 Total shareholders' equity 130,456 123,188 114,721 106,615 84,871 Book value per share* 9.91 9.27 8.59 8.00 6.42 Realized book value per share** 9.22 8.71 8.28 7.53 n/a Percent shareholders' equity to assets 7.20% 8.03% 8.45% 8.52% 7.46% Trust assets 674,729 543,345 411,916 401,532 313,898 EARNINGS Total interest income $131,910 $119,027 $106,558 $99,020 $84,259 Total interest expense 67,002 54,620 46,018 43,836 28,848 ---------- ---------- ---------- ----------- ---------- Net interest income 64,908 64,407 60,540 55,184 55,411 Provision for loan and lease losses 5,100 4,575 3,900 3,200 3,200 ---------- ---------- ---------- ----------- ---------- Net interest income after provision for loan and lease losses 59,808 59,832 56,640 51,984 52,211 Other income 16,997 12,082 9,088 7,608 5,409 Other expenses 51,283 46,147 41,258 37,542 36,914 ---------- ---------- ---------- ----------- ---------- Income before income taxes 25,552 25,767 24,470 22,050 20,706 Income taxes 5,039 7,151 7,548 6,668 6,057 ---------- ---------- ---------- ----------- ---------- Net income $20,483 $18,616 $16,922 $15,382 $14,649 ========== ========== ========== =========== ========== Cash dividends paid $9,536 $8,330 $7,025 $6,263 $5,344 Return on average assets 1.23% 1.31% 1.31% 1.30% 1.41% Return on average shareholders' equity 16.4% 15.9% 15.6% 16.3% 17.3% Return on average realized shareholders' 17.5% 16.3% 16.1% 16.3% n/a equity** PER SHARE DATA* Basic earnings*** $1.55 $1.40 $1.27 $1.16 $1.10 Diluted earnings*** 1.52 1.37 1.25 1.14 1.08 Dividends paid in cash 0.72 0.62 0.53 0.47 0.40 Dividends paid in stock 5-for-4 4 for 3 5% 5% 5% stock split split stock SHAREHOLDERS AND STAFF Average shares outstanding* 13,177,765 13,339,318 13,349,418 13,282,685 13,260,403 Shareholders 2,663 2,704 2,750 2,823 2,787 Staff - Full-time equivalents 637 595 578 517 559
* Restated to reflect a 5-for-4 stock split in 1998, a 4-for-3 stock split in 1997, and 5% stock dividends in 1996, 1995, and 1994. ** Excluding unrealized gain (loss) on securities available for sale. *** In 1997, the Company adopted SFAS 128 which eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share. Prior periods' earnings per share have been restated to reflect the adoption of SFAS 128. The unaudited quarterly results of the Company's operations in 1998 and 1997 are included in Footnote 21 to the Company's Consolidated Financial Statements included herein at Item 8, Financial Statements and Supplementary Data. 24 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 1998 total assets increased to $1.812 billion, an increase of $277.2 million or 18.1% over the $1.534 billion at year-end 1997. Total assets at the end of 1997 increased $176.4 million or 13.0% over the $1.358 billion at year-end 1996. Total cash and cash equivalents increased $9.0 million or 21.9% in 1998 compared to 1997 versus an increase of $900,000 or 2.1% in 1997 compared to 1996. The increase in 1998 is primarily due to cash and due from banks and interest bearing deposits in banks. Net loans and leases increased to $1.221 billion during 1998, an increase of $123.0 million or 11.2% compared to 1997. Net loans increased $69.3 million in 1997 or 6.7% compared to 1996. Loan growth in 1998 was primarily the result of the investment of deposits and long-term borrowings. Residential mortgages originated for immediate resale during 1998 amounted to $41.7 million. The Company's credit quality is reflected by the annualized ratio of net chargeoffs to total loans of .23% for 1998 versus .20% for the year 1997, and the ratio of nonperforming assets to total loans of .98% at December 31, 1998, compared to .89% at December 31, 1997. Nonperforming assets, including nonaccruals, loans 90 days past due, restructured loans and other real estate owned, were $12.2 million at December 31, 1998, compared to $10.0 million at December 31, 1997. Of these amounts, nonaccrual loans represented $9.9 million and $6.8 million at December 31, 1998, and December 31, 1997, respectively. Loans 90 days past due and still accruing interest were $1.8 million and $2.8 million at December 31, 1998, and December 31, 1997, respectively. Other real estate owned was $470,000 and $375,000 at December 31, 1998, and December 31, 1997, respectively. The Company had no restructured loans at December 31, 1998 or December 31, 1997. The allowance for loan losses to nonperforming assets was 233.3% and 251.6% at December 31, 1998, and December 31, 1997, respectively. As is evident from the above amounts relative to nonperforming assets, there have been no significant changes between December 31, 1997, and December 31, 1998. The Company has no significant exposure to energy and agricultural-related loans. Investments, which are the Company's secondary use of funds, increased $99.9 million or 31.1% to $421.7 million at year-end 1998. In 1997, the investment portfolio reflected an increase of $84.9 million or 35.9% compared to 1996. The increase in 1998 was due to investment purchases of $189.4 million, primarily in municipal securities, which were partially offset by calls and maturities of securities, securities sales and payments on mortgage-backed securities. Trading account securities were $21.6 million at December 31, 1998. This represents investment securities that are actively traded by the Company with the goal of generating higher total returns. Investors Trust Company, a subsidiary of the Company, manages this portfolio. Interest income from these securities appears on the consolidated statements of income under "Trading account securities." Trading gains and losses, both realized and unrealized, appear under "Trading revenue" as part of the "Other Income" category. As the primary source of funds, aggregate deposits of $1.208 billion increased $92.5 million or 8.3% compared to 1997. Deposits of $1.116 billion increased $134.8 million in 1997 or 13.7% compared to 1996. 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, long-term borrowings, and subordinated debentures. In the aggregate, these funds totaled $453.7 million at the end of 1998, a $174.6 million or 62.6% increase compared to 1997. The 1997 amount of borrowings and purchased funds of $279.0 million represented an increase of $31.0 million or 12.5% compared to 1996. The increase in 1998 was due to increase in long-term obligations of $93.0 million and an increase in short-term borrowings, primarily securities sold under repurchase agreements and federal funds purchased, of $81.6 million. Shareholders' equity increased by $7.3 million or 5.9% in 1998 to $130.5 million. This increase was due primarily to the retention of earnings and reinvestment 25 of cash dividends under the Company's dividend reinvestment plan. Cash dividends paid in 1998 increased $1,206,000 or 14.5% compared to the cash dividends paid in 1997 which increased $1,306,000 or 18.6% compared to cash dividends paid in 1996. Earnings retained in 1998 were 53.4% compared to 55.3% in 1997. RESULTS OF OPERATIONS Net income for 1998 of $20.5 million was 10.0% more than the $18.6 million reported in 1997. The 1997 amount was 10.0% more than the $16.9 million in 1996. On a per share basis, basic earnings were $1.55, $1.40, and $1.27 for 1998, 1997, and 1996, respectively. Diluted earnings per share were $1.52, $1.37, and $1.25 for 1998, 1997, and 1996, respectively. Net interest income is the difference between interest income on assets and interest expense on liabilities. Net interest income increased $501,000 or .8% to $64.9 million in 1998 from the 1997 amount of $64.4 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. The Company's interest rate spread decreased from 4.91% in 1997 to 4.42% in 1998. The primary reasons for this decrease include the investment in bank owned life insurance from which the income is reported in other income but the cost of funding the investment is included in interest expense, and the increase in the investment portfolio utilizing incremental borrowings that result in a spread that is narrower than historical spreads but ultimately provides increased net interest income. Interest rate risk is a major concern in forecasting the earnings potential. From March 26, 1997 to September 28, 1998, the prime rate was 8.50%. From September 29, 1998 to October 15, 1998, the prime rate was 8.25%. From October 16, 1998 to November 17, 1998, the prime rate was 8.00%. On November 18, 1998, the prime rate changed to 7.75%. The Company's prime rate from January 1, 1997 to March 25, 1997 was 8.25%. On March 26, 1997, the prime rate changed to 8.50%. Net interest income in 1997 increased $3.9 million or 6.4% to $64.4 million from 1996. Interest expense during 1998 increased $12.4 million or 22.7% compared to the prior year due to higher interest rates on deposits and long-term borrowings. Interest expense during 1997 increased $8.6 million or 18.7% compared to 1996. Despite the current rate environment, the cost of attracting and holding deposited funds is an ever-increasing expense in the banking industry. These increases are the real costs of deposit accumulation and retention, including FDIC insurance costs, marketing and branch overhead expenses. Such costs are necessary for continued growth and to maintain and increase market share of available deposits. The provision for loan and lease losses is determined by periodic reviews of loan quality, current economic conditions, loss experience and loan growth. Based on these factors, the provision for loan and lease losses increased $525,000 to $5,100,000 for 1998. The provision for loan and lease losses was $4,575,000 for 1997 and $3,900,000 for 1996. The allowance for loan and lease losses of $27.3 million at year-end 1998 and $25.1 million at year-end 1997 as a percentage of total loans was 2.2% for both 1998 and 1997, respectively. Net loan charge-offs of $2,875,000, $2,199,000, and $1,520,000 during 1998, 1997, and 1996, respectively, continue to be comparable with those of the Company's peers. The increase in other income in 1998 compared to 1997 was $4,915,000 or 40.7% as a result of increased other service charges and fees of $1,946,000, increased bank-owned life insurance income of $1,604,000, increased trading revenue of $739,000, increased trust income of $526,000 and increased service charges on deposit accounts of $265,000. These gains were partially offset by a decrease in equity in undistributed net earnings of affiliates of $93,000 and a decrease in net gains on sale of investment securities and mortgages of $72,000. The increase in other income in 1997 compared to 1996 was $2,994,000 million or 32.9% as a result of increased gains on sale of investment securities and mortgages of $1,069,000, increased other service charges and fees of $928,000, increased service charges on deposit accounts of $595,000, increased trust income of $384,000, and increased equity in undistributed net earnings of affiliates of $18,000. Sales of investment securities in 1998 and 1997 totaled $53.9 million and $12.6 million, respectively. "Total other expenses" increased $5,136,000 or 11.1% in 1998 when compared to 1997. By category, the Company's "other operating" expenses increased $2,330,000, "salaries, wages and employee benefits" increased $2,201,000, "net premises and equipment" increased $460,000, and "FDIC assessment" increased $145,000. "Total other expenses" increased $4,889,000 or 11.8% in 1997 when compared to 1996. By category, the Company's "salaries, wages and employee benefits" increased $3,853,000, "other operating expenses" increased $1,498,000, "net premises and equipment" increased $562,000, while "FDIC assessment" decreased $1,024,000 due to lower FDIC insurance premiums on bank deposits and a one-time rebate of the fourth quarter 1996 assessment. For 1998, 1997, and 1996, 26 there are no individual items of other operating expenses that exceed one percent of the aggregate of total interest income and other income, with the exception of advertising and marketing related expenses. Income before income taxes decreased in 1998 by $245,000 or 1.0% compared to 1997 when income before income taxes increased by $1,297,000 or 5.3% compared to 1996. Income taxes decreased $2,112,000 in 1998 compared to 1997 while income taxes decreased $397,000 compared to 1996. 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 $174.0 million during 1998. Long-term borrowings increased $93.0 million during 1998. The goal of interest rate sensitivity management is to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. Such sensitivity is measured as the difference in the volume of assets and liabilities in the existing portfolio that are subject to repricing in a future time period. The following table shows separately the interest rate sensitivity of each category of interest earning assets and interest bearing liabilities at December 31, 1998:
Repricing Periods ----------------------------------------------------- Three Months Within Through One One Year Three Months Year Through Over Five Years Five Years ------------- -------------- ------------- ------------ Assets (In thousands) Interest bearing deposits at banks $ 3,527 $ -- $ -- $ -- Investment securities 32,715 36,218 135,467 217,338 Trading account securities 21,589 -- -- -- Loans and leases(1) 324,509 179,998 449,592 266,574 Other assets -- -- -- 144,067 ------------- -------------- ------------- ------------ 382,340 216,216 585,059 627,979 ------------- -------------- ------------- ------------ Liabilities and equity Non-interest bearing deposits 175,234 -- -- -- Interest bearing deposits(2) 279,495 257,313 193,874 302,145 Borrowed funds 157,327 -- 222,500 33,573 Preferred securities -- -- -- 40,250 Other liabilities -- -- -- 19,427 Hedging instruments 100,000 (20,000) (80,000) -- Shareholders' equity -- -- -- 130,456 ------------- -------------- ------------- ------------ 712,056 237,313 336,374 525,851 ------------- -------------- ------------- ------------ Interest sensitivity gap (329,716) (21,097) 248,685 102,128 ------------- -------------- ------------- ------------ Cumulative interest rate sensitivity gap ($329,716) ($350,813) ($102,128) $ -- ============= ============== ============= ============
(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 27 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 1998. The table assumes prepayments and scheduled principal amortization of fixed-rate loans and mortgage-backed securities, and assumes that adjustable-rate mortgages will reprice at contractual repricing intervals. There has been no adjustment for the impact of future commitments and loans in process. (2) Savings and NOW deposits are scheduled for repricing based on historical deposit decay rate analyses, as well as historical moving averages of run-off for the Company's deposits in these categories. While generally subject to immediate withdrawal, management considers a portion of these accounts to be core deposits having significantly longer effective maturities based upon the Company's historical retention of such deposits in changing interest rate environments. Specifically, 25.4% of these deposits are considered repriceable within three months and 74.6% 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. Gap analysis is a useful measurement of asset and liability management; however, it is difficult to predict the effect of changing interest rates based solely on this measure. Therefore, the Company supplements gap analysis with the calculation of the Economic Value of Equity. This report forecasts changes in the Company's market value of portfolio equity ("MVPE") under alternative interest rate environments. The MVPE is defined as the net present value of the Company's existing assets, liabilities, and off-balance sheet instruments. The calculated estimates of change in MVPE at December 31, 1998 are as follows:
MVPE Change In Interest Rate Amount % Change - -------------------------- ------------ ---------- (In thousands) +300 Basis Points $171,687 (37)% +200 Basis Points 205,128 (25) +100 Basis Points 239,306 (12) Flat Rate 272,301 -- - -100 Basis Points 293,126 8 - -200 Basis Points 305,102 12 - -300 Basis Points 309,132 14
Management believes that the assumptions utilized in evaluating the vulnerability of the Company's earnings and capital to changes in interest rates approximate actual experience; however, the interest rate sensitivity of the Company's assets and liabilities as well as the estimated effect of changes in interest rates on MVPE could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based. In the event the Company should experience a mismatch in its desired gap ranges or an excessive decline in its MVPE subsequent to an immediate and sustained change in interest rate, it has a number of options which it could utilize to remedy such mismatch. The Company could restructure its investment portfolio through the sale or purchase of 28 securities with more favorable repricing attributes. It could also emphasize loan products with appropriate maturities or repricing attributes, or it could attract deposits or obtain borrowings with desired maturities. The Company anticipates volatile interest rate levels in 1999, with no clear indication of sustainable rising or falling rates. Given this assumption, the Company's asset/liability strategy for 1999 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. The impact of a volatile interest rate environment on net interest income is not expected to be significant to the Company's results of operations. Effective monitoring of these interest sensitivity gaps is the priority of the Company's asset/liability management committee. CAPITAL ADEQUACY The following table sets forth certain capital performance ratios for the Company.
1998 1997 1996 ------------- ------------- ------------- CAPITAL LEVELS Tier 1 leverage ratio 8.78% 9.84% 7.83% Tier 1 risk-based ratio 12.03 13.49 10.82 Total risk-based ratio 13.29 14.91 12.09 CAPITAL PERFORMANCE Return on average assets 1.23 1.31 1.31 Return on average equity 16.37 15.90 15.60 Earnings retained 53.40 55.30 58.50
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, 1998, the Company was required to have minimum Tier 1 and total capital ratios of 4.0% and 8.0%, respectively, and a minimum Tier 1 leverage ratio of 4.0%. In order for the Company to be considered "well capitalized," as defined by banking regulators, the Company must have Tier 1 and total capital ratios of 6.0% and 10.0%, respectively, and a minimum Tier 1 leverage ratio of 5.0%. At December 31, 1998, the Company meets the criteria for a well capitalized institution, and management believes that, under current regulations, the Company will continue to meet its minimum capital requirements in the foreseeable future. The Company does not presently have any commitments for significant capital expenditures. The Company is not under any agreement with regulatory authorities nor is it aware of any current recommendations by the regulatory authorities which, if they were to be implemented, would have a material effect on liquidity, capital resources, or operations of the Company. ACQUISITION OF ELVERSON NATIONAL BANK On January 4, 1999, the Company acquired Elverson National Bank ("Elverson") by its merger with and into National Penn Bank, the Company's banking subsidiary. Elverson had assets of $324,654,000, net loans of $184,299,000, deposits of $265,241,000, and shareholders' equity of $28,318,000 as of December 31, 1998. Under the terms of the merger, each outstanding share of Elverson stock was converted into 1.46875 shares of the Company's common stock, resulting in issuance of 3,821,564 shares of the Company's common stock. Outstanding options for Elverson stock were converted into options for 58,141 shares of the Company's common stock. This transaction will be accounted for under the pooling of interests method of accounting. More information is available in the Company's Current Reports on Form 8-K, which were filed with the Securities and Exchange Commission ("SEC"), dated July 21, 1998, November 13, 1998, January 4, 1999, and February 28, 1999, and in the Company's registration statement on Form S-4, filed with the SEC on October 16, 1998. 29 Merger and consolidation costs relating to the Elverson acquisition may have a negative impact on the Company's 1999 earnings. The Company anticipates that the Elverson acquisition will be accretive to the Company's earnings in 2000. FUTURE OUTLOOK In 1999, the Company anticipates opening three new branches, one in its National Asian Bank Division, one in the Lehigh Valley, and one in Berks County. The following is a Year 2000 readiness statement. The Company's Year 2000 initiative began in 1996 with the creation of a "Year 2000 Compliance Project team" comprised of various Company employees, including senior management. The Year 2000 Project was divided into five phases - -- Awareness, Assessment, Renovation, Validation, and Implementation. The initial Awareness and Assessment Phases have been completed. Non-information technology systems have been assessed and do not present a Year 2000 concern. The Company has completed the Renovation Phase of mission critical systems. The Validation and Implementation Phases of renovated mission critical systems were substantially complete by December 31, 1998. Validation and Implementation Phases of non-mission critical systems will continue through the first two quarters of 1999. Actual costs for 1998 were within the budgeted amount of $300,000, which represented approximately 9% of the total information technology budget for 1998. The amount budgeted for 1999 is $200,000, which is approximately 12% of the total information technology budget for 1999. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that may cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. A business impact analysis has been completed for the systems which support critical functions. The Company believes the most likely worst-case scenario to be a total or partial failure to perform of one or more of the Company's material third-party business partners or providers of service, commodity, or data, which failure could have a material adverse impact on the Company's operations. In an attempt to mitigate this risk, the Company has included the assessment of these partners and providers in its Year 2000 project. However, there can be no guarantee that the systems of other companies on which Company's systems rely will be timely converted and would not have a material adverse effect on the Company's systems and operations. Furthermore, mission critical third parties will be included in the Company's contingency plans which the Company anticipates will be substantially written during the first quarter of 1999. No major information technology projects have been delayed as a result of the Year 2000 Project. In addition, the Company's audit department contracted for an independent consultant to verify and validate the Company's Year 2000 Project. No major recommendations were suggested by the independent consultant to mitigate exposures in the Company's Year 2000 Project plan. The following is a more detailed discussion of the Year 2000 Project: The Year 2000 Project has been in operation at the Company since 1996. During this time the Company has been operating under a project plan reflected in many individual documents such as the Microsoft Project charts, binders for specific project areas, and the inventories which were created. For the purposes of consistency with the guidance of the Company's regulatory agencies, the Company has structured the project in the standard five phases: Awareness, Assessment, Renovation, Validation, and Implementation. None of these phases are purely consecutive chronologically. For example, Awareness, the phase which was begun before the others, will most likely continue well into the first and second quarters of 2000. It is important to note that the Year 2000 Project at the Company includes both the progression from 1999 to 2000 and the identification of February 29, 2000 as a leap year day. The following is a more detailed description of each project phase. 30 Awareness This phase began in 1996 with the assignment of project managers. The first task was to review as much information as possible from user groups, seminars, periodicals, and the written guidance available from regulatory agencies. The project managers created a project plan to address Year 2000 issues. To address individual areas of responsibility in the project plan, a team was formed composed of various representatives of National Penn Bank, Investors Trust Company, and, beginning in 1998, Penn Securities, Inc. The team has been charged with guiding the Year 2000 efforts of the Company through all project phases. The next step in the Awareness phase was to educate the Company's employees on Year 2000 issues. This was accomplished through periodic items in Company memos and through e-mail. Year 2000 training was conducted for all bank officers. In the Spring of 1998, seminars were offered for the Company's business loan customers and lending staff. The seminars were one component of the Company's effort to educate customers. Another was a variety of statement stuffers concerning the Year 2000 issue and specifically providing information on the Company's project plan and status. In September 1998, a Year 2000 update was added to the Company's internet home page. The Company intends to continue to use this variety of channels (statement stuffers, letters, seminars, home page, and printed brochures) to attempt to provide frequent updates on the status of the Year 2000 project at the Company and all of its subsidiary organizations. Assessment The purpose of the Assessment phase is to inventory all potentially affected software, hardware, equipment (including faxes, ATMs, hand held calculators, etc.), interfaces, environmental systems, and third parties. Once this information was gathered, it was organized to provide efficient tracking. Letters were sent and web sites visited to ascertain the compliance status of the individual product or project at the particular organization. The Assessment process went one step further with the investigation of the Year 2000 compliance status of the Company's largest business depositors (funds providers), large commercial loan customers (funds takers), and correspondent banks (capital market counterparties). The depositor investigation was done through a mailed survey to any business account holder with a balance of $100,000 or greater. Commercial loan relationships with an aggregate balance greater than $300,000 were individually assessed by the lender. The status of correspondent banks has been tracked as part of the third-party portion of the project. Year 2000 issues were addressed as part of the acquisition planning with Elverson in 1998. After the acquisition was announced, the teams began to share information by the project leaders participating in the other institution's team meetings, through data sharing, and through joint testing of common applications. In an effort to control the inventory of systems and applications after the assessment was completed, control points were reviewed. A policy was drafted requiring all new software purchases to be certified Year 2000 compliant. All hardware and software purchases will be tested before they are placed into a production environment. As all PC-based hardware and software are installed through the Network Services group and all mainframe applications are supported through Data Processing, two central control points are established. These groups are responsible for the ongoing monitoring of new software and hardware installation. As an additional control, the MIS department must approve all requests for payment of hardware and software purchases. Renovation The Renovation phase involves upgrading or replacing hardware and software as necessary. Core systems have the highest priority. Other mission critical systems follow. Finally, non-mission critical systems are addressed. A Remediation Contingency Plan has been written to address any potential difficulties that may be encountered before December 31, 1999. 31 The Company has completed renovation efforts on mission critical systems and anticipates that the replacement of all remaining non-compliant, non-critical systems will be accomplished during the first and second quarters of 1999. Highlights of the Company's efforts to date include the installation of a new mainframe system in January 1998. In May 1998, a new core banking system was installed. In October and November 1998, all ATM machines were upgraded to compliant releases of software and the memory necessary to process them. In December 1998, the core processing system of Investors Trust Company was replaced, including new hardware, software, and operating system. All have been thoroughly tested by the users' group, as discussed herein in the Validation phase. Validation The Validation phase of the project is guided by a written test plan. Testing of mission critical systems was substantially complete by the end of 1998. Non-mission critical systems will be tested in 1999 in descending order of priority. The project leader and the end users are jointly responsible for the individual tests. The project leader schedules the date and ensures that the testing environment is prepared. He then meets with the end user to develop the testing scripts and scenarios. The project leader is responsible for ensuring that the test adheres to the requirements of the Year 2000 testing plan. The end user is responsible for the data entry and system operation during the test and for reviewing the results to verify that the test was successful. When the test is completed and documented, both the end user and the project leader sign to indicate its completion. When a system is tested, all interfaces and file transmissions will be tested at the same time whenever possible. As appropriate and feasible, testing with third parties will be completed also. Initiatives to complete the Validation phase include the creation of an isolated PC network testing lab, the use of a secondary logical partition for validating mainframe applications and interfaces, user group testing for the core trust applications, and proxy testing by the network vendor for ATMs. Implementation Hardware and software certified to be compliant by the vendor will be thoroughly tested as addressed in the Validation phase. Any product not currently in production must be tested and accepted by the end user before being placed into a production environment. After a system is certified to be compliant, no future releases or updates will be installed unless first tested and confirmed to be compliant through the procedures discussed in the Validation phase. The control points for ensuring the future installation of releases will continue to be the Network Services and Data Processing departments. Additional Project Efforts Throughout the remainder of 1999, a database is being maintained to track the compliance status of third parties with which the Company conducts its affairs. This information will be reported to the project team and forwarded to executive management as necessary. A separate budget for Year 2000 expenses is being maintained for 1999. The status of the budget will be reported periodically to executive management. During the first quarter of 1999, contingency plans will be written for all mission critical and high-priority, non-mission critical systems. An overview of the contingency planning process was written in August 1998. Upon completion of the Business Resumption Contingency Plans, they will be tested as prescribed in the contingency planning overview. Although the Company believes that the program outlined above should be adequate to address the Year 2000 issue, there can be no assurance to that effect. 32 FORWARD-LOOKING STATEMENTS The Company has projected that net income will increase in 1999 over 1998 net income. The Company has also discussed its Year 2000 compliance effort, its planned investments in new and modified technology, and branch locations in this report. These, and any other statements preceded by, followed by or that include the words "believes," "expects," "anticipates," "estimates," or similar expressions are forward-looking statements. Risks and uncertainties could cause actual future results and investments to differ materially from those contemplated in such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: (a) loan growth and/or loan margins may be less than expected, due to competitive pressures in the banking industry and/or changes in the interest rate environment; (b) expected cost savings from the Elverson acquisition may not be fully realized or realized within the expected time frame; (c) revenues following the Elverson acquisition may be lower than expected, or deposit attrition, operating costs, or customer loss and business disruption may be greater than expected; (d) 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; (e) costs of the Company's planned training initiatives, product development, branch expansion and new technology and operating systems, and integration of Elverson's business may exceed expectations; (f) volatility in the Company's market area due to recent mergers may have unanticipated consequences, such as customer turnover; (g) the Year 2000 issue may not be effectively dealt with; and (h) changes in the regulatory environment, securities markets, general business conditions, and inflation may be adverse. These risks and uncertainties are all difficult to predict, and most are beyond the control of the Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Information with respect to quantitative and qualitative disclosures about market risk is included in the information under Management's Discussion and Analysis at Item 7 hereof. 33 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA. NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands, except per share data)
December 31, ------------------------------------ ASSETS 1998 1997 ------------- ------------ Cash and due from banks $ 46,574 $ 40,009 Interest bearing deposits in banks 3,527 1,089 ------------ ------------ Total cash and cash equivalents 50,101 41,098 Trading accounting securities 21,589 - Investment securities available for sale, at market value 421,738 321,760 Loans and leases, less allowance for loan and lease losses of $27,346 and $25,122 in 1998 and 1997, respectively 1,220,673 1,097,662 Premises and equipment, net 19,248 20,606 Accrued interest receivable 12,419 9,937 Investments, at equity 4,728 3,646 Bank-owned life insurance 41,604 20,000 Other assets 19,494 19,669 ------------ ------------ Total assets $ 1,811,594 $ 1,534,378 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest bearing $ 175,234 $ 146,772 Interest bearing 1,032,827 968,828 ------------ ------------ Total deposits 1,208,061 1,115,600 Securities sold under repurchase agreements and federal funds purchased 160,864 77,225 Short-term borrowings 4,058 6,109 Long-term borrowings 248,478 155,460 Guaranteed preferred beneficial interests in Company's subordinated debentures 40,250 40,250 Accrued interest payable and other liabilities 19,427 16,546 ------------ ------------ Total liabilities 1,681,138 1,411,190 ------------ ------------ Shareholders' equity Preferred stock, no stated par value; authorized 1,000,000 shares, none issued - - Common stock, no stated par value; authorized 62,500,000 shares, issued and outstanding 1998 - 13,168,058; 1997 - 13,284,175 with par value of $1.875, net of shares in Treasury: 1998 - 0; 1997 - 104,623 93,360 20,085 Additional paid-in capital - 81,663 Retained earnings 28,013 17,337 Accumulated other comprehensive income 9,083 7,531 Treasury stock, at cost - (3,428) ------------ ------------ Total shareholders' equity 130,456 123,188 ------------ ------------ Total liabilities and shareholders' equity $ 1,811,594 $ 1,534,378 ============ ============
The accompanying notes are an integral part of these statements. 34 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Income (Dollars in thousands, except per share data)
Year ended December 31, -------------------------------------- 1998 1997 1996 ----------- ----------- --------- INTEREST INCOME Loans and leases, including fees $107,504 $102,061 $ 91,098 Investment securities Taxable 14,898 13,204 12,756 Tax-exempt 8,386 3,525 2,482 Federal funds sold 125 143 162 Trading account securities 851 - - Deposits in banks 146 94 60 ----------- ----------- --------- Total interest income 131,910 119,027 106,558 ----------- ----------- --------- INTEREST EXPENSE Deposits 44,309 40,569 34,331 Securities sold under repurchase agreements, and federal funds purchased 5,969 4,938 8,083 Short-term borrowings 296 275 193 Long-term borrowings 16,428 8,838 3,411 ----------- ----------- --------- Total interest expense 67,002 54,620 46,018 ----------- ----------- --------- Net interest income 64,908 64,407 60,540 Provision for loan and lease losses 5,100 4,575 3,900 ----------- ----------- --------- Net interest income after provision for loan and lease losses 59,808 59,832 56,640 ----------- ----------- --------- OTHER INCOME Trust income 3,264 2,738 2,354 Service charges on deposit accounts 4,325 4,060 3,465 Other service charges and fees 5,474 3,529 2,601 Net gains on sale of investment securities 1,871 1,740 591 Net losses on sale of residential mortgages (609) (407) (327) Equity in undistributed net earnings of affiliates 329 422 404 Trading revenue 739 - - Bank-owned life insurance 1,604 - - ----------- ----------- --------- Total other income 16,997 12,082 9,088 ----------- ----------- --------- OTHER EXPENSES Salaries, wages and employee benefits 28,264 26,063 22,210 Net premises and equipment 7,883 7,423 6,861 FDIC assessment 246 101 1,125 Other operating 14,890 12,560 11,062 ----------- ----------- --------- Total other expenses 51,283 46,147 41,258 ----------- ----------- --------- Income before income taxes 25,522 25,767 24,470 Income taxes 5,039 7,151 7,548 ----------- ----------- --------- Net income $ 20,483 $ 18,616 $16,922 =========== =========== ========= PER SHARE OF COMMON STOCK Basic earnings $ 1.55 $ 1.40 $ 1.27 Diluted earnings 1.52 1.37 1.25 Dividends paid in cash 0.72 0.62 0.53
The accompanying notes are an integral part of these statements. 35 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders' Equity and Comprehensive Income (Dollars in thousands)
Accumulated Additional other Common paid-in comprehensive Retained Treasury Comprehensive Shares Par value capital income earnings stock income Balance at January 1, 1996 7,594,474 $ 19,106 $ 74,499 $ 6,579 $ 7,648 $ (1,217) Net income -- -- -- -- 16,922 -- $ 16,922 5% stock dividend 380,357 951 8,986 -- (9,937) -- Cash dividends declared -- -- -- -- (7,276) -- Other comprehensive income, net of reclassification adjustment and taxes -- -- -- (2,181) -- -- (2,181) ---------- Total comprehensive income -- -- -- $ 14,741 ========== 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) Net income -- -- -- -- 18,616 -- $ 18,616 4-for-3 stock split 2,677,497 -- -- -- -- -- Cash dividends declared -- -- -- -- (8,636) -- Other comprehensive income, net of reclassification adjustment and taxes -- -- -- 3,133 -- -- 3,133 ---------- Total comprehensive income -- -- -- -- -- -- $ 21,749 ========== Effect of treasury stock transactions (73,419) -- (2,044) -- -- (2,602) ---------- --------- -------- -------- ----------- -------- Balance at December 31, 1997 10,606,726 20,085 81,663 7,531 17,337 (3,428) Net income -- -- -- -- 20,483 -- $ 20,483 Other comprehensive income, net of reclassification adjustment and taxes -- -- -- 1,552 -- -- 1,552 ---------- Total comprehensive income -- -- -- -- -- -- $ 22,035 ========== Conversion to no par value stock -- 80,113 (80,113) -- -- -- 5-for-4 stock split 2,677,449 -- -- -- -- -- Shares issued under stock-based plans 17,535 833 -- -- -- -- Cash dividends declared -- -- -- -- (9,807) -- Effect of treasury stock transactions (133,652) (7,671) (1,550) -- -- 3,428 ---------- --------- -------- -------- ----------- -------- Balance at December 31, 1998 13,168,058 $ 93,360 $ -- $ 9,083 $ 28,013 $ -- ---------- --------- -------- -------- ----------- --------
The accompanying notes are an integral part of this statement. 36 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in thousands)
Year ended December 31, --------------------------------------- 1998 1997 1996 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $20,483 $18,616 $16,922 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan and lease losses 5,100 4,575 3,900 Depreciation and amortization 3,838 3,616 3,375 Trading account securities (21,589) - - Deferred income tax benefit (627) (1,686) (714) Amortization of premiums and discounts on investment securities, net 1,002 95 26 Investment securities gains, net (1,871) (1,740) (591) Mortgage loans originated for resale (41,690) (22,813) (21,930) Sale of mortgage loans originated for resale 42,299 23,220 22,257 Changes in assets and liabilities (Increase) decrease in accrued interest receivable (2,482) (2,304) 1,234 (Decrease) increase in accrued interest payable (278) 2,513 (1,125) Decrease (increase) in other assets 119 (877) (700) Increase (decrease) in other liabilities 2,888 (720) (43) --------- --------- --------- Net cash provided by operating activities 7,192 22,495 22,611 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of investment securities available for 53,938 12,583 39,210 sale Proceeds from maturities of investment securities available 36,217 21,665 26,619 for sale Purchase of investment securities available for sale (189,404) (113,270) (64,056) Net increase in loans (128,111) (73,903) (113,535) Purchases of premises and equipment (1,796) (3,291) (3,124) Purchase of Bank-owned life insurance (21,604) (20,000) - --------- --------- --------- Net cash used in investing activities (250,760) (176,216) (114,886) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in interest and non-interest bearing demand deposits and savings accounts 103,183 33,595 3,955 Net (decrease) increase in certificates of deposit (10,722) 101,197 61,963 Net increase (decrease) in securities sold under agreements to repurchase and federal funds purchased 83,639 (87,771) 34,436 Net decrease in short-term borrowings (2,051) (822) (5,429) Proceeds from long-term borrowings 105,000 130,350 50,000 Repayments of long-term debt (11,982) (51,000) (45,479) Issuance of subordinated debentures - 40,250 - Issuance of common stock under dividend reinvestment and stock option plans 833 - 152 Effect of treasury stock transactions (5,793) (4,646) 489 Cash dividends (9,536) (8,330) (7,025) --------- --------- --------- Net cash provided by financing activities 252,571 152,823 93,062 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 9,003 (898) 787 Cash and cash equivalents at beginning of year 41,098 41,996 41,209 --------- --------- --------- Cash and cash equivalents at end of year $50,101 $41,098 $41,996 ========= ========= =========
The accompanying notes are an integral part of these statements. 37 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998 and 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies followed by National Penn Bancshares, Inc. (the Company), and its wholly owned subsidiaries, National Penn Bank (the Bank), Investors Trust Company (ITC), National Penn Investment Company, National Penn Life Insurance Company, Link Financial Services, Inc., and Penn Securities, Inc., conform with generally accepted accounting principles and with general practice within the banking industry. In May 1998, the Company formed Penn Securities, Inc. Penn Securities, Inc., is a registered broker dealer with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers. Operations commenced in November 1998. 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 50 branch locations, is a locally managed community bank providing commercial banking products, primarily loans and deposits. Trust services are provided through ITC. The Bank, ITC and Penn Securities encounter vigorous competition for market share in the communities they serve from bank holding companies, other community banks, thrift institutions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies. The Company, the Bank, ITC and Penn Securities, Inc. are subject to regulations of certain state and federal agencies. These regulatory agencies periodically examine the Company and its subsidiaries for adherence to laws and regulations. As a consequence, the cost of doing business may be affected. BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries on a consolidated basis. Investments owned between 20% and 50% are accounted for using the equity method. All material intercompany balances have been eliminated. 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. In 1998, the Company adopted Statement of Financial Accounting Statements (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 redefines how operating segments are determined and requires disclosures of certain financial and descriptive information about the Company's operating segments. Management has determined the Company operates in one business segment, community banking. 38 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued INVESTMENT SECURITIES Investments in securities are classified in one of two categories: available for sale and trading. Investment securities which are held for indefinite periods of time, which management intends to use as part of its asset/liability strategy, or which may be sold in response to changes in interest rates, changes in prepayment risk, increases in capital requirements, or other similar factors are classified as available for sale and are carried at fair value. Net unrealized gains and losses for such securities, net of tax, are required to be recognized as a separate component of shareholders' equity and excluded from determination of net income. Gains or losses on disposition are based on the net proceeds and cost of the securities sold, adjusted for amortization of premiums and accretion of discounts, using the specific identification method. Debt and equity securities held for resale are classified as trading account securities and reported at fair value. Realized and unrealized gains or losses are recorded in non-interest income as trading revenue. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge. The accounting for changes in the fair value of a derivative (gains and losses) depends on the intended use of the derivative and resulting designation. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier application is permitted only as of the beginning of any fiscal quarter. The adoption of SFAS No. 133 is not anticipated to have a material impact on the Company's consolidated financial position or results of operations. LOANS AND LEASES, AND ALLOWANCE FOR LOAN AND LEASE LOSSES Loans and leases that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan and lease losses. Interest on loans is calculated based upon the principal amount outstanding. The allowance for loan and lease losses is established through a provision for loan and lease losses charged as an expense. Loans and leases are charged against the allowance for loan and lease losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans and leases that may become uncollectible based on evaluations of the collectibility of loans and leases, and prior loan and lease loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases, and current economic conditions that may affect the borrower's ability to pay. Accrual of interest is stopped on a loan or lease when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. The Company accounts for its impaired loans in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. This standard requires that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. SFAS No. 114 excludes such homogeneous loans as consumer and mortgage. 39 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued The Company accounts for its transfers and servicing financial assets in accordance with SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, as amended by SFAS No. 127, Deferral of the Effective Date of Certain Provisions of SFAS No. 125. This standard provides accounting guidance on transfers of financial assets, servicing of financial assets, and extinguishment of liabilities. PREMISES AND EQUIPMENT Buildings, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization computed by the straight-line method over the estimated useful lives of the assets. CORE DEPOSIT INTANGIBLES The Company has recognized approximately $776,000 of core deposit intangibles, as a result of a branch acquisition in 1997, which are being amortized on a straight-line basis over 15 years. OTHER ASSETS Financing costs related to the issuance of junior subordinated debentures are being amortized over the life of the instruments and are included in other assets. PENSION PLAN The Company adopted the SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which revises employers' disclosures about pension and other postretirement benefit plans. Prior period disclosures have been restated to reflect the adoption of SFAS No. 132. Net pension expense consists of service cost, interest cost, return on pension assets and amortization of unrecognized initial net assets. The Company accrues pension costs as incurred. INCOME TAXES The Company accounts for income taxes under the liability method of accounting for income taxes specified by SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are allowance for loan and lease losses, deferred loan fees, deferred compensation and securities available for sale. 40 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued EQUITY TRANSACTIONS The Company accounts for stock options under SFAS No. 123, Accounting for Stock-Based Compensation, which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees. Entities that continue to account for stock options using APB Opinion 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The Company's employee stock option plans are accounted for under APB Opinion 25. STATEMENTS OF CASH FLOWS The Company considers cash and due from banks, interest bearing deposits in banks and federal funds sold as cash equivalents for the purposes of reporting cash flows. Cash paid for interest and taxes is as follows (in thousands): Year ended December 31, 1998 1997 1996 Interest $65,328 $52,107 $47,143 Taxes 6,866 9,674 8,947 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 common shares outstanding during the year. All weighted average actual shares or per share information in the financial statements have been adjusted retroactively for the effect of stock dividends and splits. 41 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued The Company calculates earnings per share under the provisions of SFAS No. 128, Earnings Per Share, which eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. ADVERTISING COSTS It is the Company's policy to expense advertising costs in the period in which they are incurred. Advertising expense for the years ended December 31, 1998, 1997 and 1996, was approximately $2,455,000, $1,435,000 and $1,130,000, respectively. COMPREHENSIVE INCOME On January 1, 1998, the Company adopted the provisions of SFAS No. 130, Reporting Comprehensive Income. This new standard establishes standards for reporting comprehensive income, which includes net income as well as certain other items, which results in a change to equity during the period. These financial statements have been reclassified to reflect the provisions of SFAS No. 130.
December 31, 1998 December 31, 1997 December 31, 1996 --------------------------- --------------------------- ---------------------------- Before Tax Net of Before Tax Net of Before Tax Net of tax (expense) tax tax (expense) tax tax (expense) tax amount benefit amount amount benefit amount amount benefit amount -------- -------- ------- -------- --------- ------- -------- --------- --------- Unrealized gains on securities Unrealized holding gains arising during period $ 4,258 $(1,490) $2,768 $6,560 $ (2,296) $4,264 $(2,765) $ 968 $(1,797) Less reclassification adjustment for gains realized in net income 1,871 (655) 1,216 1,740 (609) 1,131 591 (207) 384 -------- -------- ------- -------- --------- ------- -------- --------- --------- Other comprehensive income, net $ 2,387 $ (835) $1,552 $4,820 $ (1,687) $3,133 $(3,356) $ 1,175 $(2,181) ======== ======== ======= ======== ========= ======= ======== ========= =========
42 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 2. ACQUISITION On January 4, 1999, the Company, through the Bank, completed a merger with Elverson National Bank (Elverson). Under the terms of the merger, each share of Elverson was converted into 1.46875 shares of the Company's common stock, resulting in an issuance of 3,821,564 shares of the Company's common stock. In addition, outstanding stock options to purchase Elverson common stock were converted into stock options to purchase 58,141 shares of the Company's common stock, with an exercise price of $12.98 to $15.74 per share. This transaction will be accounted for under the pooling of interests method of accounting. The results of operations for the Bank, Elverson and the combined entity are as follows (in thousands):
1998 1997 1996 Net interest income Company $ 64,908 $ 64,407 $ 60,540 Elverson 12,566 11,850 10,217 ----------- ----------- ----------- Combined $ 77,474 $ 76,257 $ 70,757 =========== =========== =========== Net income Company $ 20,483 $ 18,616 $ 16,922 Elverson 2,435 2,931 2,367 ------------ ------------ ------------ Combined $ 22,918 $ 21,547 $ 19,289 =========== =========== ===========
3. INVESTMENT SECURITIES The amortized cost, gross unrealized gains and losses, and estimated market values of the Company's investment securities at December 31, 1998 and 1997, are summarized as follows (in thousands):
December 31, 1998 Gross Gross Fair Amortized unrealized unrealized market cost gains losses value Investment securities U.S. Treasury and U.S. Government agencies $ 64,674 $ 3,319 $ -- $ 67,993 State and municipal bonds 187,511 8,475 (85) 195,901 Mortgage-backed securities 117,491 1,496 (452) 118,535 Marketable equity securities and other 38,089 3,389 (2,169) 39,309 ----------- ------------ ----------- ----------- Totals $ 407,765 $ 16,679 $ (2,706) $ 421,738 =========== ============ =========== ===========
43 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 3. INVESTMENT SECURITIES - Continued
December 31, 1997 Gross Gross Fair Amortized unrealized unrealized market cost gains losses value Investment securities U.S. Treasury and U.S. Government agencies $ 90,751 $ 2,732 $ (14) $ 93,469 State and municipal bonds 99,267 2,606 (171) 101,702 Other bonds 250 3 - 253 Mortgage-backed securities 104,053 1,403 (39) 105,417 Marketable equity securities and other 15,854 5,065 - 20,919 ---------- ----------- ----------- ---------- Totals $ 310,175 $ 11,809 $ (224) $ 321,760 ========== =========== =========== ==========
The amortized cost and estimated market value of investment securities available for sale, by contractual maturity, at December 31, 1998 (in thousands), are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Fair Amortized market cost value Due in one year or less $ 450 $ 454 Due after one through five years 64,894 68,338 Due after five through ten years 68,757 71,236 Due after ten years 235,575 242,401 Marketable equity securities and other 38,089 39,309 ----------- ----------- $ 407,765 $ 421,738 =========== ===========
Proceeds from the sales of investment securities during 1998, 1997 and 1996, were $53,938,000, $12,583,000 and $39,210,000, respectively. Gross gains realized on those sales were $1,871,000 and $1,740,000 in 1998 and 1997, respectively, and losses were not material in 1998, 1997 and 1996. As of December 31, 1998 and 1997, investment securities with a book value of $143,813,000 and $119,104,000, respectively, were pledged to secure public deposits and for other purposes as provided by law. As of December 31, 1998 and 1997, the Company did not have any investment securities of any one issuer where the carrying value exceeded 10% of shareholders' equity. 44 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 4. LOANS AND LEASES Major classifications of loans and leases are as follows (in thousands):
December 31, 1998 1997 Commercial and industrial loans and leases $ 181,565 $ 138,521 Loans for purchasing and carrying securities 745 87 Loans to financial institutions - 333 Real estate loans Construction and land development 71,430 57,563 Residential 595,066 563,935 Other 359,445 335,676 Loans to individuals 39,768 26,669 ----------- ----------- 1,248,019 1,122,784 Allowance for loan and lease losses (27,346) (25,122) ----------- ----------- Total loans and leases, net $ 1,220,673 $ 1,097,662 =========== ===========
Loans and leases on which the accrual of interest has been discontinued or reduced amounted to approximately $9,980,000 and $6,810,000 at December 31, 1998 and 1997, respectively. If interest on these loans had been accrued, interest income would have increased by approximately $651,000 and $331,000 for 1998 and 1997, 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 $1,798,000 and $2,798,000 at December 31, 1998 and 1997, respectively. The balance of impaired loans was $7,497,000 at December 31, 1998. The Company has identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The impaired loan balance included $7,497,000 of non-accrual loans. The allowance for loan loss associated with the $7,497,000 of impaired loans was $1,212,000 at December 31, 1998. The average impaired loan balance was $6,040,000 in 1998 and the income recognized on impaired loans during 1998 was $289,000. The Company recognizes income on impaired loans under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company will not recognize income on such loans. The balance of impaired loans was $4,263,000 at December 31, 1997. The impaired loan balance included $4,263,000 of non-accrual loans. The allowance for loan loss associated with the $4,263,000 of impaired loans was $501,000 at December 31, 1997. The average impaired loan balance was $3,998,000 and $6,676,000 in 1997 and 1996, respectively, and the income recognized on impaired loans during 1997 and 1996 was $477,000 and $689,000, respectively. 45 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 4. LOANS AND LEASES - Continued Changes in the allowance for loan and lease losses were as follows (in thousands):
Year ended December 31, 1998 1997 1996 Balance, beginning of year $ 25,122 $ 22,746 $ 20,366 Provision charged to operations 5,100 4,575 3,900 Loans and leases charged off (4,402) (3,136) (2,345) Recoveries 1,526 937 825 ----------- ----------- ----------- Balance, end of year $ 27,346 $ 25,122 $ 22,746 =========== =========== ===========
5. PREMISES AND EQUIPMENT Major classifications of premises and equipment are summarized as follows (in thousands):
Estimated December 31, useful lives 1998 1997 Land Indefinite $ 2,080 $ 2,333 Buildings 5 to 40 years 13,160 13,801 Equipment 3 to 10 years 19,568 17,320 Leasehold improvements 2 to 40 years 3,919 3,621 ----------- ----------- 38,727 37,075 Accumulated depreciation and amortization (19,479) (16,469) ----------- ----------- $ 19,248 $ 20,606 =========== ===========
Depreciation and amortization expense amounted to $3,154,000, $2,982,000 and $2,746,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 6. DEPOSITS The aggregate amount of jumbo certificates of deposit, each with a minimum denomination of $100,000, was approximately $127,719,000 and $110,447,000 in 1998 and 1997, respectively. At December 31, 1998, the scheduled maturities of certificates of deposit are as follows (in thousands): 1999 $ 404,390 2000 136,244 2001 26,100 2002 21,687 2003 12,125 Thereafter 4,865 ------------ $ 605,411 ============ 46 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 7. SHORT-TERM BORROWINGS Federal funds purchased and securities sold under agreements to repurchase generally mature within 30 days from the date of the transactions. Short-term borrowings consist of Treasury Tax and Loan Note Options and various other borrowings which generally have maturities of less than one year. The details of these categories are presented below (in thousands):
Year ended December 31, 1998 1997 1996 Securities sold under repurchase agreements and federal funds purchased Balance at year-end $ 160,864 $ 77,225 $ 164,996 Average during the year 125,809 95,567 157,182 Maximum month-end balance 177,585 154,227 218,364 Weighted average rate during the year 4.75% 5.17% 5.14% Rate at December 31 4.34% 5.65% 6.23% Short-term borrowings Balance at year-end $ 4,058 $ 6,109 $ 6,931 Average during the year 5,119 4,897 3,863 Maximum month-end balance 9,930 10,184 25,413 Weighted average rate during the year 5.57% 5.62% 5.00% Rate at December 31 4.25% 5.27% 5.25%
The weighted average rates paid in aggregate on these borrowed funds for 1998, 1997 and 1996 were 4.78%, 5.19% and 5.14%, respectively. 8. LONG-TERM BORROWINGS FHLB ADVANCES At December 31, 1998, advances from the Federal Home Loan Bank (FHLB) totaling $248,478,000 will mature within one to ten years and are reported as long-term borrowings. The advances are collateralized by FHLB stock and certain first mortgage loans and mortgage-backed securities. These advances had a weighted average interest rate of 5.56%. Unused lines of credit at the FHLB were $140,857,000 and $256,593,000 at December 31, 1998 and 1997, respectively. Outstanding borrowings mature as follows (in thousands): 1999 $ 630 2000 - 2001 2,500 2002 140,000 2003 - Thereafter 105,348 -------- $248,478 ======== 47 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 8. LONG-TERM BORROWINGS - Continued SUBORDINATED DEBENTURES In 1997, the Company issued $41,500,000 of 9% junior subordinated deferrable interest debentures (the debentures) to NPB Capital Trust (the Trust), a Delaware business trust, in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. The Trust issued $40,250,000 of preferred securities to investors. The Company's obligations under the debentures and related documents, taken together, constitute a fully and unconditional guarantee by the Company of the Trust's obligations under the preferred securities. The preferred securities are redeemable by the Company on or after June 20, 2002, or earlier in the event the deduction of related interest for federal income taxes is prohibited, treatment as Tier 1 capital is no longer permitted, or certain other contingencies arise. The preferred securities must be redeemed upon maturity of the debentures in 2027. 9. PENSION PLANS The Company has a non-contributory defined benefit pension plan covering substantially all employees. The Company-sponsored pension plan provides retirement benefits under pension trust agreements and under contracts with insurance companies. The benefits are based on years of service and the employee's compensation during the highest five consecutive years during the last 10 years of employment. The Company's policy is to fund pension costs allowable for income tax purposes. The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets (in thousands):
December 31, 1998 1997 Change in benefit obligation Benefit obligation at beginning of year $ 8,778 $ 7,140 Service cost 724 574 Interest cost 587 512 Actual (gain) loss (162) 32 Benefits paid (245) (272) Effect of change in assumptions 263 792 ----------- ---------- Benefits obligation at end of year 9,945 8,778 ----------- ---------- Change in plan assets Fair value of plan assets at beginning of year 9,360 7,990 Actual return on plan assets 705 1,542 Employer contribution 785 100 Benefits paid (245) (272) ----------- ---------- Fair value of plan assets at end of year 10,605 9,360 ----------- ---------- Funded status 660 582 Unrecognized net actuarial gain (212) (376) Unrecognized prior service cost 248 315 ----------- ---------- Prepaid benefit cost $ 696 $ 521 =========== ==========
48 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 9. PENSION PLANS - Continued Net pension cost included the following components (in thousands):
Year ended December 31, 1998 1997 1996 Service cost $ 724 $ 574 $ 507 Interest cost on projected benefit obligation 587 512 464 Actual return on plan assets (705) (1,542) (854) Net amortization and deferral 3 955 410 ----------- ----------- ------------ Net periodic pension cost $ 609 $ 499 $ 527 =========== =========== ============
The assumed discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 6.63% and 4.63%, respectively, in 1998; 6.75% and 4.75%, respectively, in 1997; and 7.25% and 4.75%, respectively, in 1996. The expected long-term rate of return on assets was 8.25% for 1998, 1997 and 1996. 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 $422,000, $441,000 and $307,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 10. INCOME TAXES The components of the income tax expense included in the consolidated statements of income are as follows (in thousands):
Year ended December 31, 1998 1997 1996 Income tax expense Current $ 4,878 $ 6,493 $ 8,262 Deferred federal benefit (475) (683) (714) ----------- ----------- ------------ 4,403 5,810 7,548 Additional paid-in capital from benefit of stock options exercised 636 1,341 -- ----------- ----------- ------------ Applicable income tax expense $ 5,039 $ 7,151 $ 7,548 =========== =========== ===========
49 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 10. INCOME TAXES - Continued 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, 1998 1997 1996 Computed tax expense at statutory rate $ 8,968 $ 9,017 $ 8,565 Decrease in taxes resulting from Tax-exempt loan and investment income (3,578) (1,566) (1,221) Stock options exercised - - (46) Other, net (351) (300) 250 ----------- ----------- ------------ Applicable income tax expense $ 5,039 $ 7,151 $ 7,548 =========== =========== ============
Deferred tax assets and liabilities consist of the following (in thousands):
1998 1997 1996 Deferred tax assets Deferred loan fees $ 491 $ 610 $ 753 Allowance for loan and lease loss 9,070 8,300 7,674 Deferred compensation 783 667 610 Loan sales valuation 120 120 120 ------- ------- ------- 10,464 9,697 9,157 ------- ------- ------- Deferred tax liabilities Pension 315 240 136 Bad debt reserve recapture -- 40 285 Partnership investments 273 221 195 Acquisition adjustments -- 55 55 Mark-to-market accounting 261 -- 28 Securities available for sale 4,890 4,055 2,368 Rehab credit adjustment 44 44 44 ------- ------- ------- 5,783 4,655 3,111 ------- ------- ------- Net deferred tax asset $ 4,681 $ 5,042 $ 6,046 ======= ======= =======
11. SHAREHOLDERS' EQUITY On June 24, 1998, the Company declared a 5-for-4 stock split on its common stock to shareholders of record on July 15, 1998, and payable on July 31, 1998, and amended its Articles of Incorporation whereby the number of authorized shares was increased from 50,000,000 to 62,500,000, both with no par value. In April 1998, the Company amended its Articles of Incorporation whereby the number of authorized common shares was increased from 26,666,667 shares with a par value of $1.875 to 50,000,000 shares with no par value. The additional paid-in capital account has been combined with common stock as presented in the consolidated statement of changes in shareholders' equity and comprehensive income. 50 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 11. SHAREHOLDERS' EQUITY - Continued In August 1997, the Company amended its Articles of Incorporation whereby the number of authorized common shares was increased from 20,000,000 shares with a par value of $2.50 to 26,666,667 shares with a par value of $1.875. In conjunction with this amendment, the Company declared a 4-for-3 stock split where 4 common shares of $1.875 par value stock were exchanged for 3 common shares of $2.50 par value stock. 12. SHAREHOLDER RIGHTS PLAN The Company adopted a Shareholder Rights Plan (the Rights Plan) in 1989 to protect shareholders from attempts to acquire control of the Company at an inadequate price. Under the Rights Plan, the Company distributed a dividend of one right to purchase a unit of preferred stock on each outstanding common share of the Company. The rights are not currently exercisable or transferable, and no separate certificates evidencing such rights will be distributed, unless certain events occur. The rights 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. 13. EARNINGS PER SHARE The Company's calculation of earnings per share in accordance with SFAS No. 128 is as follows (in thousands, except for per share amounts):
Year ended December 31, 1998 Income Shares Per share (numerator) (denominator) amount Basic earnings per share Net income available to common stockholders $ 20,483 13,178 $ 1.55 Effect of dilutive securities Options -- 317 (0.03) ----------- ----------- -------- Diluted earnings per share Net income available to common stockholders plus assumed conversions $ 20,483 13,495 $ 1.52 =========== =========== ========
51 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 13. EARNINGS PER SHARE - Continued Options to purchase 228,818 shares of common stock at $31.00 per share were outstanding during 1998. They were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price.
Year ended December 31, 1997 Income Shares Per share (numerator) (denominator) amount Basic earnings per share Net income available to common stockholders $18,616 13,339 $ 1.40 Effect of dilutive securities Options -- 289 (0.03) ------- ------- -------- Diluted earnings per share Net income available to common stockholders plus assumed conversions $18,616 13,628 $ 1.37 ======= ======= ========
Options to purchase 237,519 shares of common stock at $25.72 per share were outstanding during 1997. They were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price.
Year ended December 31, 1996 Income Shares Per share (numerator) (denominator) amount Basic earnings per share Net income available to common stockholders $16,922 13,349 $ 1.27 Effect of dilutive securities Options -- 137 (0.02) ------- ------- -------- Diluted earnings per share Net income available to common stockholders plus assumed conversions $16,922 13,486 $ 1.25 ======= ======= ========
Options to purchase 988,603 shares of common stock from $15.03 to $20.17 per share were outstanding during 1996. They were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price. 52 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 14. COMMITMENTS AND CONTINGENT LIABILITIES LEASE COMMITMENTS Future minimum payments under non-cancellable operating leases are due as follows (in thousands): Year ending December 31, 1999 $ 1,649 2000 1,385 2001 1,142 2002 882 2003 754 Thereafter 2,126 ------------ $ 7,938 ============ The total rental expense was approximately $1,639,000, $1,651,000 and $1,458,000 in 1998, 1997 and 1996, respectively. In the normal course of business, the Company, the Bank and ITC have been named as defendants in several lawsuits. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management that the resolution of such suits will not have a material adverse effect on the financial position or results of operations of the Company. 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, interest rate swaps, and interest rate floor. Those instruments involve, to varying degrees, elements of credit, interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For interest rate swaps and floors, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of its interest rate swap agreements through credit approvals, limits and monitoring procedures. 53 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued Unless otherwise noted, the Company does not require collateral or other security to support financial instruments with credit risk. The contract or notional amounts as of December 31, 1998 and 1997, are as follows (in thousands):
1998 1997 Financial instruments whose contract amounts represent credit risk Commitments to extend credit $ 316,868 $ 266,049 Standby letters of credit 11,676 12,890 Financial instruments whose notional or contract amounts exceed the amount of credit risk Interest rate swap agreements 100,000 80,000 Interest rate floor 50,000 -
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The extent of collateral held for those commitments at December 31, 1998, varies up to 100%; the average amount collateralized is 79%. 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 1998, the interest rate swaps had the effect of increasing the Company's net interest income by $900,000 over what would have been realized had the Company not entered into the swap agreements. An interest rate floor is a contract that protects the holder against a decline in interest rates below a certain point. The primary risk associated with interest rate floors is exposure to current and possible future movements in interest rates. 54 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 16. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS NO. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. For the bank, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments as defined in SFAS NO. 107. However, many of such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company's general practice and intent to hold its financial instruments to maturity and to not engage in trading or sales activities. Therefore, the Company had to use significant estimations and present value calculations to prepare this disclosure. Changes in assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values. Fair values have been estimated using data that management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument. The estimation methodologies, resulting fair values and recorded carrying amounts at December 31, 1998 and 1997, 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, 1998 December 31, 1997 Carrying Estimated fair Carrying Estimated fair amount value amount value Cash and cash equivalents $ 50,101 $ 50,101 $ 41,098 $ 41,098 Trading account securities 21,589 21,589 - - Investment securities available for sale 421,738 421,738 321,760 321,760
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, 1998 December 31, 1997 Carrying Estimated fair Carrying Estimated fair amount value amount value Deposits with stated maturities $ 605,834 $ 612,344 $ 614,033 $ 616,655 Short-term borrowings 164,922 164,922 83,334 83,334 Long-term borrowings 248,478 249,458 155,460 155,234 Subordinated debentures 40,250 43,873 40,250 42,263
55 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 16. FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued Fair value of financial instrument liabilities with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand), totaling $602,227 for 1998 and $501,567 for 1997. 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, 1998 December 31, 1997 Carrying Estimated fair Carrying Estimated fair amount value amount value Net loans $ 1,220,673 $ 1,270,714 $ 1,097,662 $ 1,198,973
There is no material difference between the carrying amount and estimated fair value of off-balance sheet items which total $478,544,000 and $358,939,000 at year-end 1998 and 1997, 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. 17. 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. 18. STOCK OPTIONS The Company has an employee stock option plan for certain key employees accounted for under APB Opinion 25 and related interpretations. A total of 2,234,950 shares of common stock were made available for options granted through February 24, 1997. The options granted under this plan are subject to a vesting schedule commencing at two years and expire ten years and one month from the date of issue. On April 22, 1997, the Company's shareholders approved the adoption of the Officers' and Key Employees' Stock Compensation Plan as a replacement for the Stock Option Plan upon expiration of its 10-year term. A total of 1,250,000 shares of common stock have been made available for options or restricted stock to be granted through December 17, 2006. The options granted under this plan will vest over a five-year period, in 20% increments on each successive anniversary of the date of grant. The Company also has a non-employee director stock option plan. Under this plan, a total of 275,623 shares of common stock have been made available for options to be granted through January 3, 2004. The options granted under this plan fully vest after two years and expire ten years from the date of issue. Under all plans, the option price per share is equivalent to 100% of the fair market value on the date the options were granted as determined pursuant to the plan. Accordingly, no compensation cost has been recognized for the plans. The number of unoptioned shares available for granting totaled 1,147,564 at the beginning of the year and 896,069 at the end of 1998. 56 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 18. STOCK OPTIONS - Continued Had compensation cost for the plans been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, the Company's net income and earnings per share of common stock would have been reduced to the pro forma amounts indicated below.
1998 1997 1996 Net income As reported $ 20,483 $ 18,616 $ 16,922 Pro forma 19,734 18,335 16,626 Earnings per share of common stock - basic As reported 1.55 1.40 1.27 Pro forma 1.50 1.37 1.25 Earnings per share of common stock - diluted As reported 1.52 1.37 1.25 Pro forma 1.46 1.35 1.23
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 1998, 1997 and 1996, respectively: dividend yield of 2.71%, 2.55% and 3.50% , expected volatility of 24.4%, 31.5% and 13.0%; risk-free interest rates for each plan of 4.68% and 5.74% for 1998 and 6.43% and 5.89% for 1997 and 5.66% and 6.38% for 1996; and expected lives of 6.23 years and 8.98 years for each plan in 1998, 6.95 years and 9.17 years for each plan in 1997, and 9.3 years for 1996. A summary of the status of the Company's fixed option plans as of December 31, 1998, 1997 and 1996 and changes during the years ending on those dates is presented below:
1998 1997 1996 Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price Outstanding, beginning of year 1,470,964 $ 16.55 1,566,741 $ 13.98 1,334,503 $ 13.50 Granted 236,162 30.83 244,865 25.42 265,600 15.94 Exercised (137,810) 12.83 (296,546) 10.40 (18,949) 8.01 Forfeited (2,975) 17.12 (44,096) 15.80 (14,413) 16.41 ---------- ------- ---------- -------- ---------- -------- Outstanding, end of year 1,566,341 $ 19.03 1,470,964 $ 16.55 1,566,741 $ 13.98 ========== ======= ========== ======== ========== ======== Options exercisable at year-end 639,773 448,128 456,537 ========== ========== ========== Weighted average fair value of options granted during the year $ 7.40 $ 9.37 $ 3.29 ======= ======== ========
57 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 18. STOCK OPTIONS - Continued The following table summarizes information about nonqualified options outstanding at December 31, 1998:
Options outstanding Options exercisable Weighted Number average Number outstanding at remaining Weighted outstanding at Weighted Range of December 31, contractual average December 31, average exercise prices 1998 life (years) exercise price 1998 exercise price $ 6.20 - $9.30 $ 54,154 2.5 $ 7.81 $ 54,154 $ 7.81 9.31 - 12.40 129,936 3.3 9.94 129,936 9.94 12.41 - 15.50 502,236 5.9 14.83 230,408 14.43 15.51 - 18.60 219,266 8.0 15.99 28,314 16.00 18.61 - 21.70 187,441 4.7 20.11 137,617 20.11 24.81 - 27.90 244,490 8.6 25.69 59,344 25.70 27.91 - 31.00 228,818 10.0 31.00 - -
19. 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, 1998 1997 Assets Cash $ -- $ 39 Investment in Bank subsidiary, at equity 126,415 108,920 Investment in other subsidiaries, at equity 46,841 54,531 Other assets 1,253 1,260 -------- -------- $174,509 $164,750 ======== ======== Liabilities and shareholders' equity Guaranteed preferred beneficial interests in Company's subordinated debentures $ 41,495 $ 41,495 Other liabilities 2,558 67 Shareholders' equity 130,456 123,188 -------- -------- $174,509 $164,750 ======== ========
58 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 19. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued CONDENSED STATEMENTS OF INCOME
Year ended December 31, 1998 1997 1996 Income Equity in undistributed net earnings of subsidiaries $ 6,587 $ 10,994 $ 9,630 Dividends from subsidiary 16,324 8,640 7,277 Interest and other income 121 766 129 -------- -------- -------- 23,032 20,400 17,036 Expense Interest on subordinated debentures 3,735 2,272 -- Other operating expenses 121 60 106 -------- -------- -------- 3,856 2,332 106 Income before income tax (benefit) expense 19,176 18,068 16,930 Income tax (benefit) expense (1,307) (548) 8 -------- -------- -------- Net income $ 20,483 $ 18,616 $ 16,922 ======== ======== ======== CONDENSED STATEMENTS OF CASH FLOWS Year ended December 31, 1998 1997 1996 Cash flows from operating activities Net income $ 20,483 $ 18,616 $ 16,922 Equity in undistributed net earnings of subsidiaries (6,587) (10,994) (9,630) (Increase) decrease in other assets 7 (1,240) (14) (Decrease) increase in other liabilities 2,491 (79) 85 -------- -------- -------- Net cash provided by operating activities 16,394 6,303 7,363 -------- -------- -------- Cash flows from investing activities Additional investment in subsidiaries, at equity (1,666) (34,506) (744) -------- -------- -------- Net cash used in investing activities (1,666) (34,506) (744) -------- -------- -------- Cash flows from financing activities Proceeds from issuance of long-term debt -- 41,495 -- Proceeds from issuance of stock 833 -- 152 Effect of treasury stock transactions (5,793) (4,646) 489 Cash dividends (9,807) (8,640) (7,277) -------- -------- -------- Net cash provided by (used in) financing activities (14,767) 28,209 (6,636) -------- -------- -------- Net increase (decrease) in cash and cash equivalents (39) 6 (17) Cash and cash equivalents at beginning of year 39 33 50 -------- -------- -------- Cash and cash equivalents at end of year $ -- $ 39 $ 33 ======== ======== ========
59 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 20. REGULATORY MATTERS The Bank is required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those balances for the year ended December 31, 1998, was approximately $4,351,000. 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 1999, the Bank, without prior approval of bank regulators, can declare dividends to the Company totaling $19,431,000 plus additional amounts equal to the net earnings of the Bank for the period January 1, 1999, through the date of declaration less dividends previously paid in 1999. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Bank and the Company to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 1998, that the Bank and Company meet all capital adequacy requirements to which they are subject. As of December 31, 1998, the Bank met all regulatory requirements for classification as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, core risk-based and core leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) As of December 31, 1998 Total capital (to risk-weighted assets) National Penn Bancshares, Inc. $ 171,687 13.29% $ 59,556 8.00% $ -- -- % National Penn Bank 127,872 10.13 100,953 8.00 126,192 10.00
60 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 20. REGULATORY MATTERS - Continued
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tier I capital (to risk-weighted assets) National Penn Bancshares, Inc. $ 155,397 12.03% $ 51,685 4.00% $ -- -- % National Penn Bank 111,955 8.87 50,477 4.00 75,715 6.00 Tier I capital (to average assets) National Penn Bancshares, Inc. 155,397 8.78 70,793 4.00 -- -- National Penn Bank 111,955 6.45 69,423 4.00 86,778 5.00 As of December 31, 1997 Total capital (to risk-weighted assets) National Penn Bancshares, Inc. 162,787 14.91 87,360 8.00 -- -- National Penn Bank 111,450 10.32 86,399 8.00 107,999 10.00 Tier I capital (to risk-weighted assets) National Penn Bancshares, Inc. 147,297 13.49 43,679 4.00 -- -- National Penn Bank 97,807 9.06 43,200 4.00 64,799 6.00 Tier I capital (to average assets) National Penn Bancshares, Inc. 147,297 9.84 59,876 4.00 -- -- National Penn Bank 97,807 6.60 59,263 4.00 74,079 5.00
61 NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 21. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) The following represents summarized quarterly financial data of the Company, which, in the opinion of management, reflects all adjustments (comprising only normal recurring accruals) necessary for a fair presentation. Net income per share of common stock has been restated to retroactively reflect certain stock dividends. (Dollars in thousands, except per share data)
Three months ended 1998 Dec. 31 Sept. 30 June 30 March 31 - --------------------------------------------------------------------------------------------------- Interest income $ 34,364 $ 33,657 $ 32,580 $31,309 ======== ======== ======== ======= Net interest income $ 16,624 $ 16,305 $ 15,938 $16,041 ======== ======== ======== ======= Provision for loan and lease losses $ 1,500 $ 1,200 $ 1,200 $ 1,200 ======== ======== ======== ======= Net gains (losses) on sale of securities and mortgages $ 931 $ (114) $ 1 $ 443 ======== ======== ======== ======= Income before income taxes $ 5,941 $ 6,709 $ 6,115 $ 6,757 ======== ======== ======== ======= Net income $ 5,365 $ 5,290 $ 4,840 $ 4,988 ======== ======== ======== ======= Earnings per share of common stock - basic $ 0.41 $ 0.40 $ 0.37 $ 0.37 ======== ======== ======== ======= Earnings per share of common stock - diluted $ 0.40 $ 0.39 $ 0.36 $ 0.37 ======== ======== ======== ======= Three months ended 1997 Dec. 31 Sept. 30 June 30 March 31 - --------------------------------------------------------------------------------------------------- Interest income $ 31,485 $ 30,511 $ 28,863 $28,168 ======== ======== ======== ======= Net interest income $ 16,433 $ 16,263 $ 16,012 $15,699 ======== ======== ======== ======= Provision for loan and lease losses $ 975 $ 1,200 $ 1,200 $ 1,200 ======== ======== ======== ======= Net gains (losses) on sale of securities and mortgages $ (129) $ 620 $ (74) $ 916 ======== ======== ======== ======= Income before income taxes $ 6,109 $ 6,710 $ 6,372 $ 6,576 ======== ======== ======== ======= Net income $ 4,978 $ 4,719 $ 4,385 $ 4,534 ======== ======== ======== ======= Earnings per share of common stock - basic $ 0.37 $ 0.36 $ 0.33 $ 0.34 ======== ======== ======== ======= Earnings per share of common stock - diluted $ 0.36 $ 0.35 $ 0.32 $ 0.34 ======== ======== ======== =======
(This space intentionally left blank) 62 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, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Grant Thornton LLP Philadelphia, Pennsylvania January 15, 1999 Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information relating to executive officers of the Company is included under Item 4A in Part I hereof. The information required by this item relating to directors of the Company and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to pages 2, 3, 4 and 15 of the Company's definitive Proxy Statement to be used in connection with the Company's 1999 Annual Meeting of Shareholders (the "Proxy Statement"). Item 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated herein by reference to pages 6 through 14 of the Proxy Statement. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated herein by reference to pages 3, 4, 5 and 15 of the Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated herein by reference to page 14 of the Proxy Statement. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. The following consolidated financial statements are included in Part II, Item 8 hereof: National Penn Bancshares, Inc., and Subsidiaries. Consolidated Balance Sheets. Consolidated Statements of Income. Consolidated Statement of Changes in Shareholders' Equity. Consolidated Statements of Cash Flows. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules. Financial statement schedules are omitted because the required information is either not applicable, not required, or is shown in the respective financial statements or in the notes thereto. 64 3. Exhibits. 2 Amended Agreement and Plan of Merger dated as of July 21, 1998, between National Penn Bancshares, Inc., National Penn Bank, and Elverson National Bank. (Incorporated by reference to Exhibit 2.1 to the Company's Registration Statement No. 333-65841 on Form S-4 as filed on October 16, 1998.) 3.1 Articles of Incorporation, as amended, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998.) 3.2 Bylaws, as amended, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 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. Capital Accumulation Plan Amendment 1997 -1.* (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997.) 10.8 National Penn Bancshares, Inc. Capital Accumulation Plan Amendment 1998 - 1.* (Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997.) 10.9 National Penn Bancshares, Inc. Amended and Restated Executive Incentive Plan.* 10.10 National Penn Bancshares, Inc. Executive Incentive Plan/Schedules.* 10.11 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.) 65 10.12 National Penn Bancshares, Inc. Officers' and Key Employees' Stock Compensation Plan.* (Incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 10.13 National Penn Bancshares, Inc. Directors' Fee Plan.* (Incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 10.14 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.) 10.15 National Penn Bancshares, Inc. Amended and Restated Employee Stock Purchase Plan.* 10.16 National Penn Bancshares, Inc. Elverson Substitute Stock Option Plan.* (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement No. 333-71391 on Form S-8 as filed on January 29, 1999.) 10.17 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.) 10.18 Amendatory Agreement dated February 23, 1994, among National Penn Bancshares, Inc., National Penn Bank, and Lawrence T. Jilk, Jr.* (Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.19 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank, and Lawrence T. Jilk, Jr.* (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998.) 10.20 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.) 10.21 Amendatory Agreement dated February 23, 1994, among National Penn Bancshares, Inc., National Penn Bank, and Wayne R. Weidner.* (Incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.22 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank, and Wayne R. Weidner.* (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998.) 10.23 Executive Agreement dated July 23, 1997, among National Penn Bancshares, Inc., National Penn Bank, and Gary L. Rhoads.* (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997.) 66 10.24 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank, and Gary L. Rhoads.* (Incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998.) 10.25 Executive Agreement dated July 23, 1997, among National Penn Bancshares, Inc., National Penn Bank, and Sandra L. Spayd.* (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997.) 10.26 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank, and Sandra L. Spayd.* (Incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998.) 10.27 Executive Agreement dated September 24, 1997, among National Penn Bancshares, Inc., National Penn Bank, and Garry D. Koch.* (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997.) 10.28 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank, and Garry D. Koch.* (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998.) 10.29 Executive Agreement dated as of July 23, 1997, among National Penn Bancshares, Inc., National Penn Bank, and Sharon L. Weaver.* 10.30 Amendatory Agreement dated September 24, 1997, among National Penn Bancshares, Inc., National Penn Bank, and Sharon L. Weaver.* 10.31 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank, and Sharon L. Weaver.* (Incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998.) 10.32 Executive Agreement dated as of January 4, 1999, among National Penn Bancshares, Inc., National Penn Bank, and Glenn E. Moyer.* 10.33 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.) 10.34 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.) 10.35 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.) 21 Subsidiaries of the Registrant. 67 23 Consent of Independent Certified Public Accountants. 27 Financial Data Schedule. 99 Forward-Looking Statements. * Denotes a compensatory plan or arrangement. (b) Reports on Form 8-K. The Registrant filed one Report on Form 8-K during fourth quarter 1998. This report was dated November 13, 1998, and reported under Item 5, Other Events, the definitive exchange ratio for the exchange of stock whereby the Registrant would acquire Elverson National Bank by its merger into National Penn Bank. No financial statements of the Registrant were included in this report. The report included summary unaudited financial information for Elverson National Bank as of September 30, 1998. 68 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 24, 1999 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 24, 1999 - ------------------------------------ John H. Body /s/ J. Ralph Borneman, Jr. Director March 24, 1999 - ------------------------------------ J. Ralph Borneman, Jr. /s/ Frederick H. Gaige Director March 24, 1999 - ------------------------------------ Frederick H. Gaige /s/ John J. Jacobs Director March 24, 1999 - ------------------------------------ John J. Jacobs /s/ Lawrence T. Jilk, Jr. Director, Chairman and Chief March 24, 1999 - ------------------------------------ Executive Officer (Principal Lawrence T. Jilk, Jr. Executive Officer) /s/ Patricia L. Langiotti Director March 24, 1999 - ------------------------------------ Patricia L. Langiotti /s/ Kenneth A. Longacre Director March 24, 1999 - ------------------------------------ Kenneth A. Longacre 69 /s/ Robert E. Rigg Director March 24, 1999 - ------------------------------------ Robert E. Rigg /s/ C. Robert Roth Director March 24, 1999 - ------------------------------------ C. Robert Roth /s/ Harold C. Wegman, D.D.S. Director March 24, 1999 - ------------------------------------ Harold C. Wegman, D.D.S. /s/ Wayne R. Weidner Director and March 24, 1999 - ------------------------------------ President Wayne R. Weidner /s/ Gary L. Rhoads Treasurer (Principal Financial March 24, 1999 - ------------------------------------ and Accounting Officer) Gary L. Rhoads
70 EX-10.9 2 NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN AMENDMENT AND RESTATEMENT - 1998 The National Penn Bancshares, Inc. Executive Incentive Plan is hereby amended and restated in its entirety as follows: Since formation, National Penn Bancshares, Inc. ("NPB"), as a holding company for National Penn Bank (the "Bank"), has maintained in effect the executive incentive plan originally adopted by the Bank on July 26, 1978. NPB now desires to formalize the terms of the plan in a written document as set forth herein. The National Penn Bancshares, Inc. Executive Incentive Plan (the "Plan") is an unfunded deferred compensation arrangement for selected employees. The purpose of the Plan is to motivate executives to meet and exceed established financial goals and to promote a superior level of performance relative to competitive banking institutions. Through payment of incentive compensation beyond a salary, the Plan provides reward for meeting and exceeding the established financial goals as well as recognition of individual achievements for certain employees. 1. Definitions. The following terms have the meanings specified below, unless the context in which they are used otherwise requires: (a) "Affiliate" means any corporation which is included within a "controlled group of corporations" including NPB, as determined under Section 1563 of the Internal Revenue Code of 1986, as amended. (b) "C.E.O." means the Chief Executive Officer of NPB. (c) "Change in Control or Ownership" means: (i) an acquisition by any "person" or "group" (as those terms are defined or used in Section 13(d) of the Securities Exchange Act of 1934) of "beneficial ownership" (within the meaning of Rule 13d-3 under such Act) of securities of NPB representing 24.99% or more of the combined voting power of NPB's securities then outstanding; (ii) a merger, consolidation or other reorganization of Bank, except where the resulting entity is controlled, directly or indirectly, by NPB; (iii) a merger, consolidation or other reorganization of NPB, except where shareholders of NPB immediately prior to consummation of any such transaction 1 continue to hold at least a majority of the voting power of the outstanding voting securities of the legal entity resulting from or existing after any transaction and a majority of the members of the Board of Directors of the legal entity resulting from or existing after any such transaction are former members of NPB's Board of Directors; (iv) a sale, exchange, transfer or other disposition of substantially all of the assets of the Employer to another entity, except to an entity controlled, directly or indirectly, by NPB; (v) a sale, exchange, transfer or other disposition of substantially all of the assets of NPB to another entity, or a corporate division involving NPB; or (vi) a contested proxy solicitation of the shareholders of NPB that results in the contesting party obtaining the ability to cast 25% or more of the votes entitled to be cast in an election of directors of NPB. (d) "Committee" means the Compensation Committee of the Board of Directors of NPB. (e) "Employer" means NPB or the Affiliate which employs the Participant. (f) "Fund" means the pool of funds generated, based on the formula established by the Committee, to be distributed to Plan Participants. (g) "Mandatory Deferral" means twenty-five percent (25%) of the award received by a Type A or Type B Participant under this Plan. (h) "Participant" means an eligible officer or employee of NPB or an Affiliate who is designated by the C.E.O. and approved by the Committee for participation in the Plan for the relevant Plan Year, or a person who was such at the time of his retirement, death, disability or resignation and who retains, or whose beneficiaries obtain, benefits under the Plan in accordance with its terms. (i) "Plan Year" means the calendar year. (j) "Tax Deferral" means that portion of the award received by a Type A or Type B Participant under the Plan which the Participant elects, pursuant to Schedule C attached hereto and made a part hereof, to receive as a deferred payment. 2 2. Plan Participation. (a) To be eligible for an award under this Plan, a Participant must be in the active full-time service of NPB or an Affiliate at the close of the Plan Year. (b) Effective January 1, 1985, prior to January 31 of each Plan Year, the Chairman and CEO shall recommend to the Committee, in writing, those employees who are eligible to participate in the Plan for such Plan Year. The Committee shall meet as soon as practicable thereafter and act upon the recommendations of the Chairman and C.E.O. Those employees approved by the Committee shall be entitled to participate in the Plan for such Plan Year. (c) At the Committee's discretion, the Committee may act upon the recommendation of the Chairman and C.E.O. with respect to participation of an employee whose employment with NPB or an Affiliate commences after January 1 but prior to July 1 of a Plan Year. Upon approval by the Committee, such Participant may participate in the Plan based on his or her earnings for such Plan Year. (d) Each year, the Committee shall classify the Participants into Type A, Type B or Type C, as specified on Schedule A attached to this plan document, and shall specify different award formulae for each category. The Committee also shall specify the method by which the amount to be allocated for the benefit of each Participant from the Fund shall be determined. Participants, as classified into Type A, Type B or Type C, each year will be listed on Schedule A attached to this plan document. This schedule will be revised each year, as appropriate. (e) At the Committee's discretion, the Committee may act upon the recommendation of the Chairman and C.E.O. with respect to participation by a Participant whose classification changes among Type A, Type B or Type C after January 1 but prior to July 1 of a Plan Year. Upon approval by the Committee, such Participant may participate in the Plan in the new classification based on his or her earnings for such Plan Year. 3. Performance Goals. (a) Effective January 1, 1985, performance goals and appropriate financial thresholds shall be established each Plan Year by the Committee prior to January 31 of that Plan Year. The established goals shall relate to the financial performance of NPB or an Affiliate or unit thereof. (b) Each year, the performance goals for the year will be shown on Schedule B attached to this plan document. This schedule shall be revised each year, as appropriate. 3 (c) An award to a Participant may be conditioned on the performance of such Participant, as determined by the Committee. 4. Calculation of Awards. If both the internal and external performance goals set forth in Schedule B are met, the Fund shall be distributed among Participants as follows: (a) 50% of the Fund shall be allocated to the Type A Participants and shall be divided equally between the Chairman and C.E.O. and President of NPB; provided, however, that the amount distributed to any individual shall not exceed 50% of such individual's base salary. To the extent that any amount allocated to the Type A Participants is not distributed to them, such amount shall be added to the amount to be allocated to and divided among the Type B and Type C Participants as provided in subparagraph (2) below. (b) 50% of the Fund shall be allocated to and divided among the Type B and Type C Participants; provided, however, that no Type B Participant shall receive an award in excess of 35% of base salary and no Type C Participant shall receive an award in excess of 25% of base salary. 5. Distribution of Awards. (a) (i) The Committee shall cause an aggregate account to be established on the Employer's books for all of the Type A and Type B Participants (the "Mandatory Deferral Account") and shall credit annually the Mandatory Deferral Account with an amount equal to the Mandatory Deferral of all Type A and Type B Participants. The Mandatory Deferral Account shall be credited, as of the last day of each calendar quarter, with interest calculated at the rate paid on the Investors Trust Company Money Market account for such quarter. (ii) The human resources department of the Employer shall maintain individual accounts which shall reflect the share of each Participant in the Mandatory Deferral Account (each referred to as an "Individual Mandatory Deferral Account"). Interest credited to the Mandatory Deferral Account shall be allocated among the Participants in the respective proportions that the balance in each Participant's Individual Mandatory Deferral Account bears to the total balance in the Mandatory Deferral Account on the date that such interest is credited. (iii) The human resources department of the Employer shall maintain records which shall reflect the amounts in each Participant's Individual Mandatory Deferral Account attributable to each Plan Year, i.e., for each Plan Year for which a Participant receives an award, such records shall show 4 the amount of such award plus the interest earned thereon through the most recent date interest was credited thereon (for each Plan Year, such amount is referred to herein as the "Plan Year Balance"). The sum of all Plan Year Balances shall equal the total balance in a Participant's Individual Mandatory Deferral Account. (iv) If, at the end of the fifth Plan Year following the Plan Year for which a particular award was made to a Participant, such Participant is still employed by NPB or an Affiliate or has retired at age 60 or later or has died on or before the last day of such Plan Year, such Participant's Individual Mandatory Deferral Account shall be credited by the Employer with an additional amount equal to the Plan Year Balance relating to the Plan Year of five years before (the "Matching Contribution"). (v) For purposes of this subparagraph 5(a), a Participant shall be deemed to be still employed by NPB or an Affiliate as of the last day of any Plan Year on which a balance exists in such Participant's Individual Mandatory Deferral Account if such Participant is no longer then performing services on behalf of NPB or such Affiliate as a result of such Participant's disability. (b) (i) Type A and Type B Participants may elect to have the payment of all or a portion of the balance of their awards deferred, i.e., the Tax Deferral amount. Effective January 1, 1985, such election shall be made before the beginning of the relevant Plan Year or, in the case of a new employee or a newly classified Type A or Type B Participant, prior to his or her commencement of employment or new classification as a Type A or Type B Participant, and shall be in the form of Schedule C attached to this plan document. The aggregate amount of the Tax Deferral for the Type A and Type B Participants shall be credited to an account on the Employer's books (the "Tax Deferral Account"). The Tax Deferral Account shall be credited, as of the last day of each calendar quarter, with interest calculated at the rate paid on the Investors Trust Company Money Market account for such quarter. (ii) The human resources department of the Employer shall maintain individual accounts which shall reflect the share of each Participant in the Tax Deferral Account (each referred to as an "Individual Tax Deferral Account"). Interest credited to the Tax Deferral Account shall be allocated among the Participants in the respective proportions that the balance in each Participant's Individual Tax Deferral Account bears to the total balance in the Tax Deferral Account on the date that such interest is credited. (c) Awards to Type A and Type B Participants not deferred pursuant to Subparagraph (b) above and all awards to 5 Type C Participants shall be payable in cash as soon as practicable after the close of the Plan Year. (d) In the event of a Participant's death prior to receipt of his or her award earned hereunder (including amounts allocated to such Participant's Individual Mandatory Deferral Account and Individual Tax Deferral Account), the award shall be paid, within thirty (30) days of the last day of the calendar quarter during which the Participant's death occurred, to the Participant's designated beneficiary under the Employer's group life insurance plan or, in the absence of a valid designation, to the Participant's estate. 6. Manner of Payment of Mandatory and Tax Deferral Amounts. (a) Prior to the end of the fifth Plan Year following the Plan Year for which an award was made to a Type A or Type B Participant, such Participant may elect to have the balance on the last day of such fifth Plan Year in such Participant's Individual Mandatory Deferral Account, after the addition of the Matching Contribution (in the aggregate, the "Total Balance"), transferred and credited to such Participant's Individual Tax Deferral Account, if any, for distribution in accordance with the Participant's irrevocable election pursuant to Schedule C. Such an election shall be in the form of Schedule D attached to this plan document. If the Participant does not elect to transfer the Total Balance to the Participant's Individual Tax Deferral Account, or if the Participant does not have an Individual Tax Deferral Account, the Total Balance shall be paid in cash to the Participant as soon as practicable after the close of the Plan Year. (b) The amount credited to a Participant's Individual Tax Deferral Account, including amounts transferred pursuant to subparagraph (a) immediately above, shall be paid to such Participant in one lump sum or in annual installments. The actual manner of distribution will be in accordance with the Participant's irrevocable election, the form of which is attached hereto as Schedule C; provided, however, that if the Participant selects a distribution in annual installments, such installment will be paid in a manner which complies with any applicable rules, regulations or laws. 7. Funding. (a) Deferred award obligations under the Plan shall be paid from the general assets of NPB or an Affiliate. (b) NPB, or an Affiliate, in its sole discretion, may earmark assets or other means to meet the deferred award obligations provided under the Plan. Any assets which may be earmarked to meet NPB's or an Affiliate's deferred award obligations provided under the Plan shall continue for all 6 purposes to be part of the general funds of NPB or an Affiliate and no person other than NPB or the Affiliate shall by virtue of the provisions of the Plan have any interest in such assets. To the extent a Participant or his beneficiary acquires a right to receive deferred award payments from NPB or an Affiliate under the Plan, such right shall be no greater than the right of any unsecured general creditor of NPB or an Affiliate. (c) Nothing contained in the Plan and no action taken pursuant to the provisions of the Plan shall create or be construed to create a trust of any kind, or a fiduciary relationship between NPB or an Affiliate and a Participant or any other person. 8. Plan Administration. (a) The Committee shall, with respect to the Plan, have full power and authority to construe, interpret and manage, control and administer the Plan, and to pass and decide upon cases in conformity with the objectives of the Plan under such rules as the Board of Directors of NPB may establish. (b) Any decision made or action taken by the Board of Directors of NPB or the Committee arising out of, or in connection with the administration, interpretation, and effect of the Plan shall be at their absolute discretion and shall be conclusive and binding on all parties. (c) The members of the Committee and the members of the Board of Directors of NPB shall not be liable for any act or action, whether of omission or commission, made in connection with the interpretation and administration of the Plan and which results in a loss, damage, expense or depreciation, except when due to their own gross negligence or willful misconduct. 9. Amendment and Termination. NPB reserves the right to amend the Plan from time to time and to terminate the Plan at any time. All amendments, including any amendment to terminate the Plan, shall be adopted by the Board of Directors of NPB. The Committee will give prompt written notice to each Participant of any amendment or termination of the Plan. 10. Change in Control or Ownership. (a) Subject to the further terms and provisions of this Paragraph 10, the Plan shall automatically terminate on the date that a Change in Control or Ownership shall occur, without necessity of any action by the Board of Directors of NPB. (b) If a Change in Control or Ownership shall occur, each Participant's Individual Mandatory Deferral Account shall be 7 credited, as of the day immediately preceding the date on which such Change in Control or Ownership occurred, with additional amounts as follows: An amount equal to each Plan Year Balance shall be credited by the Employer to such Participant's Individual Mandatory Deferral Account (such additional amounts are referred to herein as "Change in Control Matching Contributions"). (c) If a Change in Control or Ownership shall occur, the Employer shall pay each Participant a cash amount equal to the total amounts credited, as of the date such Change in Control or Ownership occurred, to (i) such Participant's Individual Mandatory Deferral Account (including all Change in Control Matching Contributions made pursuant to subparagraph (b) hereof) and (ii) such Participant's Individual Tax Deferral Account, if any. The Employer shall pay such total amounts to the Participants within thirty (30) days of the termination of the Plan (as provided in subparagraph (a) hereof). 11. Effective Date. The initial effective date of the Plan shall be January 1, 1984. 12. Miscellaneous Provisions. (a) The Plan does not constitute a contract of employment, and participation in the Plan shall not give any Participant the right to be retained in the service of NPB or an Affiliate or any right or claim to a benefit under the Plan unless such right or claim has specifically accrued under the terms of this plan document. (b) NPB or an Affiliate reserves the right to withhold from any deferred award payments payable hereunder, any amounts required to be withheld under the federal income tax laws. (c) The captions of the several paragraphs and subparagraphs of this Plan are inserted for convenience of reference only and shall not be considered in the construction hereof. (d) Whenever any word is used herein in the singular form, it shall be construed as though it were used in the plural form, as the context requires, and vice versa. (e) A masculine, feminine or neuter pronoun, whenever used herein, shall be construed to include all genders as the context requires. (f) This plan document may be executed in any number of counterparts, each of which shall be deemed one and the same instrument which may be sufficiently evidenced by any one 8 counterpart. (g) Except to the extent pre-empted by federal law, this plan document shall be construed, administered and enforced in accordance with the domestic internal law of the Commonwealth of Pennsylvania. 9 SCHEDULE A Participants for the ____ Plan Year consist of Types A, B, and C as defined in the Plan document. It is anticipated that the following named persons will meet the eligibility requirements for participation as of December 31, ____. It is expected that there could be additional individuals whose eligibility could be determined later in the year, who would be named a participant as of December 31, ____. Named participants are classified accordingly: CLASS A (2 persons) (name and grade level) [CHAIRMAN AND C.E.O.] [PRESIDENT] CLASS B (__ persons) (name and grade level) [INSERT NAMES AND GRADE LEVELS] CLASS C (__ persons) (name and grade level) [INSERT NAMES AND GRADE LEVELS] 10 SCHEDULE B NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN ____ PERFORMANCE GOALS [SUBJECT TO CHANGE] Awards pursuant to the Plan will not be made unless the internal and external performance goals set forth below are met. INTERNAL PERFORMANCE GOALS FOR THE PLAN YEAR The net operating income of NPB before securities transactions for ____ must exceed the net operating income of NPB before securities transactions for ____. EXTERNAL PERFORMANCE GOALS FOR THE PLAN YEAR The net operating income of NPB before securities transactions on realized return on average common equity for ____ must exceed the average of the net operating income before securities transactions on realized return on average common equity for ____ for the banks or bank holding companies in the peer group set forth on Schedule B-2 A. 11 SCHEDULE B-1 PAY OUT FORMULA 1. Obtaining an operating return on average equity triggers an incentive pay out as follows: 100% of peer group $0 100.1% of peer group .___% of average assets 130% of peer group .___% of average assets Interpolation is required between 100.1% and 130%. 2. Obtaining #1 in return on equity triggers an added pay out of $______. 12 SCHEDULE B-2 The ____ banking companies which form the peer group are: [INSERT PEER GROUP] 13 SCHEDULE C NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN DEFERRAL ELECTION LETTER TO THE COMMITTEE: In accordance with the National Penn Bancshares, Inc. Executive Incentive Plan, as amended and restated in 1998, I hereby request to defer receipt of that portion of any award earned by me (to the extent provided in Paragraph 2 below) for services rendered as an eligible Participant in the Plan during the calendar year specified below and eligible to be received in cash. This election shall be governed by all of the provisions of the Plan. 1. This request shall be effective beginning with calendar year ____. 2. This request shall apply to _____________________of my award. (Expressed as "all" or a designated dollar or percentage limitation.) 3. My deferred award and the interest thereon shall become payable on the January 1 next following the date I retire or otherwise cease to be employed by NPB or an Affiliate of NPB. 4. I irrevocably elect that, when payable, my deferred award and the interest thereon shall be paid to me as indicated below: ( ) In one lump sum. ( ) In a series of five annual installments. ( ) In a series of ten annual installments. I agree that such terms and conditions shall be binding upon my beneficiaries, distributees, and personal representatives. Unless noted below, my beneficiaries shall be the same as 14 designated for my group life insurance. - ------------------------- -------------------------------- Date Signature of Participant Approved By: - ------------------------- -------------------------------- Date Signature of the Chairman of the Committee 15 SCHEDULE D NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN TRANSFER ELECTION LETTER TO THE COMMITTEE: In accordance with the National Penn Bancshares, Inc. Executive Incentive Plan, as amended and restated in 1998, I hereby request to transfer the balance in the Individual Mandatory Deferral Account established in my name for the award earned by me for services rendered as an eligible Participant in the Plan during the calendar year specified below, eligible to be received in cash, to the Individual Tax Deferral Account established in my name for the award earned by me for services rendered as an eligible Participant in the Plan. This election shall be governed by all of the provisions of the Plan. 1. This request shall be for the Individual Mandatory Deferral Account established in my name for the award earned by me for calendar year ____. 2. Payment of the award transferred and deferred pursuant hereto shall be in accordance with the election made for the Tax Deferral amount voluntarily deferred pursuant to deferral election letter dated _______________________. - ------------------------------ ------------------------------ Date Signature of Participant Approved By: - ------------------------------ ------------------------------ Date Signature of Chairman of the Committee 16 EX-10.10 3 SCHEDULE A Participants for the 1999 Plan Year consist of Types A, B, and C as defined in the Plan document. It is anticipated that the following named persons will meet the eligibility requirements for participation as of December 31, 1999. It is expected that there could be additional individuals whose eligibility could be determined later in the year, who would be named a participant as of December 31, 1999. Named participants are classified accordingly: CLASS A (2 persons) (name and grade level) Lawrence T. Jilk, Jr. 999 Wayne R. Weidner 999 CLASS B (25 persons) (name and grade level) Bruce G. Kilroy 999 Todd Alderfer 111 Garry D. Koch 999 Nancy R. Corson 111 Frederick C. Peters II 999 Scott Gruber 111 Glenn Moyer 999 Lloyd Reichenbach 111 Sharon L. Weaver 999 Michael L. Wummer 111 Algot F. Thorell, Jr. 999 Joseph C. Walter, Jr. 999 Sandra Hoffman 110 Larry A. Rush 110 Ronald L. Bashore 113 Sandra L. Spayd 110 Timothy A. Day 113 Linda S. Stark 110 Michael R. Reinhard 113 Bruce L. Ressier 113 Tarrie Miller 109 Gary L. Rhoads 113 Joseph C. Walker 113 Carol Franklin 108 Jack Mikus 112 CLASS C (26 persons) (name and grade level) Paul Kozlowsky 111 Michelle Debkowski 107 Eugene Guinther 107 Brian Appleton 110 John Tucker 107 Harvey Corbett 110 Donna Wentzel 107 Earl Houseknecht 110 Ed Shin 110 Marcia (Borowski) Stark 106 Steve Kunkel 106 Lew Freeman 109 P. Robert Keeley 109 Sandra Massaro 105 Dennis Moyer 109 Mary Lou Dietz 105 Steven Olson 109 Dorothy Schwoyer 109 Patricia Angstadt 104 Dan Tempesco 109 Janice McCracken 104 Teresa Steuer 104 Robin Hitchcock 108 Dale Henne 108 Richard Sutton 108 Jeffrey Tintle 108 SCHEDULE B NATIONAL PENN BANCSHARES, INC. EXECUTIVE INCENTIVE PLAN 1999 PERFORMANCE GOALS Awards pursuant to the Plan will not be made unless the internal and external performance goals set forth below are met. INTERNAL PERFORMANCE GOALS FOR THE 1999 PLAN YEAR The net operating income of NPB before securities transactions for 1999 must exceed the net operating income of NPB before securities transactions for 1998. EXTERNAL PERFORMANCE GOALS FOR THE 1999 PLAN YEAR The net operating income of NPB before securities transactions on realized return on average common equity for 1999 must exceed the average of the net operating income before securities transactions on realized return on average common equity for 1999 for the banks or bank holding companies in the peer group set forth on Schedule B-2 A. SCHEDULE B-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 The nine banking companies which form the peer group are: Univest (Souderton) Fulton Financial Corp. Susquehanna Bancshares Harleysville National Corp. Keystone Financial S&T Bancorp BT Financial Corporation Jeff Banks, Inc. Omega Financial Corp. National Penn Bancshares, Inc. Plan Year 1999, as of December 1998 EX-10.15 4 NATIONAL PENN BANCSHARES, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN (As amended and restated, effective February 24, 1999) 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. - 2 - 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 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 -3- 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 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 and fractional 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 -4- which case a stock certificate will be issued to such participant for such withdrawn shares. (b) 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 full and fractional 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 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 nonparticipation 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 -5- 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 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 -6- 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, 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 -7- 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 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, -8- 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 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-10.29 5 EXECUTIVE AGREEMENT THIS AGREEMENT is made as of this 23rd day of July, 1997, among NATIONAL PENN BANCSHARES, INC., a Pennsylvania business corporation having its principal place of business in Boyertown, Pennsylvania ("NPB"), NATIONAL PENN BANK, a national banking association having its principal place of business in Boyertown, Pennsylvania ("Bank"), and SHARON L. WEAVER, an individual residing in Trappe, Pennsylvania ("Executive"). W I T N E S S E T H : WHEREAS, Executive is employed by [NPB][Bank] as a Senior Vice President; and WHEREAS, the Boards of Directors of NPB and Bank deem it advisable to provide Executive with certain additional benefits in the event of certain changes in control of NPB or Bank so that Executive will continue to attend to the business of NPB and Bank without distraction in the face of the potentially disturbing circumstances arising therefrom. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and promises set forth herein, and each intending to be legally bound, NPB, Bank and Executive agree as follows: 1. Definitions. The following terms have the meanings specified below: a. "Affiliate" means any corporation which is included within a "controlled group of corporations" including NPB, as determined under Code Section 1563. b. "Base Amount" means Executive's average annualized taxable compensation for the five (5) years prior to the year in which a Change in Control occurs, determined in accordance with the provisions of Code Section 280G and regulations promulgated thereunder. c. "Cause" has the meaning set forth in Section 4 hereof. d. "Change in Control" means: i. An acquisition by any "person" or "group" (as those terms are defined or used in Section 13(d) of the Exchange Act) of "beneficial ownership" (within the meaning of Rule 13d-3 under the Exchange Act) of securities of NPB representing 24.99% or more of the 1 combined voting power of NPB's securities then outstanding; ii. A merger, consolidation or other reorganization of Bank, except where the resulting entity is controlled, directly or indirectly, by NPB; iii. A merger, consolidation or other reorganization of NPB, except where shareholders of NPB immediately prior to consummation of any such transaction continue to hold at least a majority of the voting power of the outstanding voting securities of the legal entity resulting from or existing after any transaction and a majority of the members of the Board of Directors of the legal entity resulting from or existing after any such transaction are former members of NPB's Board of Directors; iv. A sale, exchange, transfer or other disposition of substantially all of the assets of the Employer to another entity, except to an entity controlled, directly or indirectly, by NPB; v. A sale, exchange, transfer or other disposition of substantially all of the assets of NPB to another entity, or a corporate division involving NPB; or vi. A contested proxy solicitation of the shareholders of NPB that results in the contesting party obtaining the ability to cast 25% or more of the votes entitled to be cast in an election of directors of NPB. e. "Code" means the Internal Revenue Code of 1986, as amended, and as the same may be amended from time to time. f. "Employer" means Bank, NPB or any Affiliate which employs Executive at any particular time. g. "Employment" means Executive's employment by Bank, NPB or any Affiliate at any particular time. h. "Exchange Act" means the Securities Exchange Act of 1934, as amended. i. "Salary" means the Executive's annual base salary, established either by contract or by the Board of Directors of Employer, prior to any reduction of such salary pursuant to any contribution to a tax-qualified plan under Section 401(k) of the Code. 2. Resignation of Executive. If a Change in Control shall occur and if thereafter, at any time, there shall be: 2 a. Any involuntary termination of Executive's employment (other than for Cause); b. Any reduction in Executive's title, responsibilities or authority, including such title, responsibilities or authority as such may be increased from time to time; c. Any reduction in Executive's Salary in effect immediately prior to a Change in Control, or any failure to provide Executive with benefits at least as favorable as those enjoyed by Executive under any of the pension, life insurance, medical, health and accident, disability or other employee plans of NPB or an Affiliate in which Executive participated immediately prior to a Change in Control, or the taking of any action that would materially reduce any of such compensation or benefits in effect at the time of the Change in Control, unless such reduction relates to a reduction applicable to all employees generally; d. Any reassignment of Executive beyond a thirty (30) minute commute by automobile from Boyertown, Pennsylvania; or e. Any requirement that Executive travel in performance of his duties on behalf of NPB or an Affiliate for a greater period of time during any year than was required of Executive during the year preceding the year in which the Change in Control occurred; then, at the option of Executive, exercisable by Executive within one hundred eighty (180) days of the occurrence of each and every of the foregoing events, the Executive may resign from employment (or, if involuntarily terminated, give notice of intention to collect benefits hereunder) by delivering a notice in writing (the "Notice of Termination") to NPB, and the Continuing Compensation and Benefits' provisions of this Agreement shall apply. 3. Continuing Compensation and Benefits. a. At the time of termination of Executive's employment in accordance with Section 2 hereof, Employer shall make a lump-sum cash payment to Executive no later than thirty (30) days following the date of such termination in an amount equal to 150% of Executive's Base Amount. b. Notwithstanding the foregoing or any other provision of this Agreement to the contrary, in no event shall any payment to Executive pursuant to Subsection 3.a. above be greater than an amount equal to an amount ("X") determined pursuant to the following formula: X = (2.99A - B) x (1 + C)D. 3 For purposes of the foregoing formula: A = Executive's Base Amount (determined pursuant to Internal Revenue Code Section 280G(b)(3)(A)) on the date of the Change in Control; B = The present value of all other amounts which qualify as parachute payments under Code Section 280G(b)(2)(A) or (B) (without regard to the provisions of Code Section 280G(b)(2)(A)(ii)), such present value to be determined pursuant to the provisions of Code Section 280G; C = 120% times 0.5 times the lowest of the semiannual applicable federal rates (determined pursuant to Code Section 1274(d)) in effect on the date of the Change in Control; and D = The number of whole semiannual periods plus any fraction of a semiannual period from the date of the Change in Control to the date of termination of the Executive's employment. c. Executive shall not be required to mitigate the amount of any payment provided for in Subsection 3.a. by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in subsection 3.a. be reduced by any compensation earned by Executive as the result of employment by another employer or by reason of Executive's receipt of or right to receive any retirement or other benefits after the date of termination of employment or otherwise, except as otherwise provided therein. 4. Termination for Cause. The Employer may terminate Executive's Employment for "Cause". For purposes of this Agreement, "Cause" means the occurrence of either of the following: a. Executive's conviction of, or plea of guilty or nolo contendere to, a felony or a crime of falsehood or involving moral turpitude; or b. the willful failure by Executive to substantially perform his duties to the Employer, other than a failure resulting from Executive's incapacity as a result of the Executive's disability, which willful failure results in demonstrable material injury and damage to the Employer. Notwithstanding the foregoing, Executive's Employment shall not be deemed to have been terminated for Cause if such termination took place as a result of: i. questionable judgment on the part of Executive; 4 ii. any act or omission believed by Executive in good faith, to have been in or not opposed to the best interests of the Employer; or iii. any act or omission in respect of which a determination could properly be made that Executive met the applicable standard of conduct prescribed for indemnification or reimbursement or payment of expenses under the By-laws of NPB or the laws of the Commonwealth of Pennsylvania, or the directors and officers' liability insurance of NPB or any Employer, in each case as in effect at the time of such act or omission. If Executive's Employment is terminated for Cause, all rights of Executive under this Agreement shall cease as of the effective date of such termination, except that Executive (i) shall be entitled to receive accrued Salary through the date of such termination and (ii) shall be entitled to receive the payments and benefits to which he is then entitled under the employee benefit plans of the Employer or any affiliate thereof as of the date of such termination. 5. Arbitration. Any dispute or controversy arising out of or relating to this Agreement and any controversy as to a termination for Cause shall be settled exclusively by arbitration, conducted before a panel of three arbitrators, in Reading, Pennsylvania, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrators' award in any court having jurisdiction. 6. Exclusive Benefit. Executive shall have no right to commute, sell, assign, transfer or otherwise convey the right to receive any payments hereunder, which payment and the right thereto are expressly declared to be non-assignable and non-transferrable. In the event of any attempted assignment or transfer, Employer shall have no further liability hereunder. 7. Notices. Any notice required or permitted to be given under this Agreement shall be properly given if in writing and if mailed by registered or certified mail, postage prepaid with return receipt requested, to Executive's residence in the case of any notice to Executive, or to the principal office of Bank, in the case of any notice to the Employer. 8. Entire Agreement. This Agreement contains the entire agreement relating to the subject matter hereof and may not be modified, amended or changed orally but only by an agreement in writing, consented to in writing by NPB, and signed by the party against whom enforcement of any modification, amendment or change is sought. 5 9. Benefits. a. This Agreement shall be binding upon and inure to the benefit of NPB and Bank and their respective successors and assigns. Each of NPB and Bank shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of NPB or Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that NPB or Bank would be required to perform it if no such succession had taken place. Failure to obtain such assumption and agreement prior to the effectiveness of any such succession shall constitute a breach of this Agreement and the provisions of Section 2 of this Agreement shall apply. As used in this Agreement, "NPB" or "Bank" shall mean NPB or Bank as defined previously and any successor to the business and/or assets of NPB or Bank as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. b. This Agreement shall be binding upon and inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees and legatees. 10. Applicable Law. This Agreement shall be governed by and construed in accordance with the domestic internal law (but not the law of conflicts of law) of the Commonwealth of Pennsylvania. 11. Headings. The headings of the sections and subsections hereof are for convenience only and shall not control or affect the meaning or construction or limit the scope or intent of any of the sections or subsections of this Agreement. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 6 IN WITNESS WHEREOF, NPB and Bank have each duly caused this Agreement to be executed on its behalf by its duly authorized officers, and Executive has hereunto set his hand and seal, as of the day and year first above written. NATIONAL PENN BANCSHARES, INC. (SEAL) By: /s/Lawrence T. Jilk, Jr. Title: President and CEO Attest: /s/Sandra L. Spayd Title: Corporate Secretary NATIONAL PENN BANK (SEAL) By: /s/Wayne R. Weidner Title: President and CEO Attest: /s/Sandra L. Spayd Title: Corporate Secretary July 23, 1997 /s/Sharon L. Weaver (SEAL) [Executive] 7 EX-10.30 6 AMENDATORY AGREEMENT AMENDATORY AGREEMENT dated September 24, 1997, between NATIONAL PENN BANCSHARES, INC., a Pennsylvania business corporation ("NPB"), NATIONAL PENN BANK, a national banking association ("Bank"), and SHARON L. WEAVER ("Executive"). BACKGROUND 1. NPB, Bank and Executive entered into a certain Executive Agreement dated as of July 23, 1997 (the "Agreement"). 2. Executive has been assigned increased duties and responsibilities. Therefore, NPB, Bank and Executive desire to amend the Agreement as hereinafter set forth. AGREEMENT NOW, THEREFORE, in consideration of the mutual promises contained herein, and each intending to be legally bound, NPB, Bank and Executive agree as follows: 1. Amendment. The reference to "150% of Executive's Base Amount" contained in Section 3.a of the Agreement is hereby changed to be a reference to "200% of Executive's Base Amount". 2. Ratification. As amended hereby, the Agreement is hereby ratified, confirmed and approved. 3. Governing Law. This Amendatory Agreement shall be governed by and construed in accordance with the domestic internal law of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, the parties hereto have executed this Amendatory Agreement on the date first above written. NATIONAL PENN BANCSHARES, INC. By: /s/Wayne R. Weidner Name: Wayne R. Weidner Title: Executive Vice President NATIONAL PENN BANK By: /s/Wayne R. Weidner Name: Wayne R. Weidner Title: President and CEO Witness: /s/Sandra L. Spayd /s/Sharon L. Weaver Sharon L. Weaver EX-10.32 7 EXECUTIVE AGREEMENT THIS AGREEMENT is made as of this 4th day of January, 1999, among NATIONAL PENN BANCSHARES, INC., a Pennsylvania business corporation having its principal place of business in Boyertown, Pennsylvania ("NPB"), NATIONAL PENN BANK, a national banking association having its principal place of business in Boyertown, Pennsylvania ("Bank"), and GLENN E. MOYER, an individual residing at 331 Limekiln Road, Reading, Pennsylvania ("Executive"). W I T N E S S E T H : WHEREAS, Executive is employed by Bank as an Executive Vice President, as President of the Elverson National Bank Division of Bank, and as President of the Berks County and Montgomery County regions of Bank; and WHEREAS, the Boards of Directors of NPB and Bank deem it advisable to provide Executive with certain additional benefits in the event of certain changes in control of NPB or Bank so that Executive will continue to attend to the business of NPB and Bank without distraction in the face of the potentially disturbing circumstances arising therefrom. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and promises set forth herein, and each intending to be legally bound, NPB, Bank and Executive agree as follows: 1. Definitions. The following terms have the meanings specified below: a. "Affiliate" means any corporation which is included within a "controlled group of corporations" including NPB, as determined under Code Section 1563. b. "Base Amount" means Executive's average annualized taxable compensation for the five (5) years prior to the year in which a Change in Control occurs, determined in accordance with the provisions of Code Section 280G and regulations promulgated thereunder. c. "Cause" has the meaning set forth in Section 4 hereof. d. "Change in Control" means: i. An acquisition by any "person" or "group" (as those terms are defined or used in Section 13(d) of the Exchange Act) of "beneficial ownership" (within the 1 meaning of Rule 13d-3 under the Exchange Act) of securities of NPB representing 24.99% or more of the combined voting power of NPB's securities then outstanding; ii. A merger, consolidation or other reorganization of Bank, except where the resulting entity is controlled, directly or indirectly, by NPB; iii. A merger, consolidation or other reorganization of NPB, except where shareholders of NPB immediately prior to consummation of any such transaction continue to hold at least a majority of the voting power of the outstanding voting securities of the legal entity resulting from or existing after any transaction and a majority of the members of the Board of Directors of the legal entity resulting from or existing after any such transaction are former members of NPB's Board of Directors; iv. A sale, exchange, transfer or other disposition of substantially all of the assets of the Employer to another entity, except to an entity controlled, directly or indirectly, by NPB; v. A sale, exchange, transfer or other disposition of substantially all of the assets of NPB to another entity, or a corporate division involving NPB; or vi. A contested proxy solicitation of the shareholders of NPB that results in the contesting party obtaining the ability to cast 25% or more of the votes entitled to be cast in an election of directors of NPB. e. "Code" means the Internal Revenue Code of 1986, as amended, and as the same may be amended from time to time. f. "Employer" means Bank, NPB or any Affiliate which employs Executive at any particular time. g. "Employment" means Executive's employment by Bank, NPB or any Affiliate at any particular time. h. "Exchange Act" means the Securities Exchange Act of 1934, as amended. i. "Salary" means the Executive's annual base salary, established either by contract or by the Board of Directors of Employer, prior to any reduction of such salary pursuant to any contribution to a tax-qualified plan under Section 401(k) of the Code. 2 2. Resignation of Executive. If a Change in Control shall occur and if thereafter, at any time, there shall be: a. Any involuntary termination of Executive's employment (other than for Cause); b. Any reduction in Executive's title, responsibilities or authority, including such title, responsibilities or authority as such may be increased from time to time; c. Any reduction in Executive's Salary in effect immediately prior to a Change in Control, or any failure to provide Executive with benefits at least as favorable as those enjoyed by Executive under any of the pension, life insurance, medical, health and accident, disability or other employee plans of NPB or an Affiliate in which Executive participated immediately prior to a Change in Control, or the taking of any action that would materially reduce any of such compensation or benefits in effect at the time of the Change in Control, unless such reduction relates to a reduction applicable to all employees generally; d. Any reassignment of Executive beyond a thirty (30) minute commute by automobile from Wyomissing, Pennsylvania; or e. Any requirement that Executive travel in performance of his duties on behalf of NPB or an Affiliate for a greater period of time during any year than was required of Executive during the year preceding the year in which the Change in Control occurred; then, at the option of Executive, exercisable by Executive within one hundred eighty (180) days of the occurrence of any of the foregoing events, the Executive may resign from employment (or, if involuntarily terminated, give notice of intention to collect benefits hereunder) by delivering a notice in writing (the "Notice of Termination") to NPB, and the Continuing Compensation and Benefits' provisions of this Agreement shall apply. 3. Continuing Compensation and Benefits. a. At the time of termination of Executive's employment in accordance with Section 2 hereof, Employer shall make a lump-sum cash payment to Executive no later than thirty (30) days following the date of such termination in an amount equal to 299% of Executive's Base Amount. b. Notwithstanding the foregoing or any other provision of this Agreement to the contrary, in no event shall any payment to Executive pursuant to Subsection 3.a. above be greater than an amount equal to an amount ("X") determined pursuant to the following formula: 3 D X = (2.99A - B) x (1 + C) . For purposes of the foregoing formula: A = Executive's Base Amount (determined pursuant to Internal Revenue Code Section 280G(b)(3)(A)) on the date of the Change in Control; B = The present value of all other amounts which qualify as parachute payments under Code Section 280G(b)(2)(A) or (B) (without regard to the provisions of Code Section 280G(b)(2)(A)(ii)), such present value to be determined pursuant to the provisions of Code Section 280G; C = 120% times 0.5 times the lowest of the semiannual applicable federal rates (determined pursuant to Code Section 1274(d)) in effect on the date of the Change in Control; and D = The number of whole semiannual periods plus any fraction of a semiannual period from the date of the Change in Control to the date of termination of the Executive's employment. c. Executive shall not be required to mitigate the amount of any payment provided for in Subsection 3.a. by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in subsection 3.a. be reduced by any compensation earned by Executive as the result of employment by another employer or by reason of Executive's receipt of or right to receive any retirement or other benefits after the date of termination of employment or otherwise, except as otherwise provided therein. 4. Termination for Cause. The Employer may terminate Executive's Employment for "Cause". For purposes of this Agreement, "Cause" means the occurrence of either of the following: a. Executive's conviction of, or plea of guilty or nolo contendere to, a felony or a crime of falsehood or involving moral turpitude; or b. the willful failure by Executive to substantially perform his duties to the Employer, other than a failure resulting from Executive's incapacity as a result of the Executive's disability, which willful failure results in demonstrable material injury and damage to the Employer. Notwithstanding the foregoing, Executive's Employment shall not be deemed to have been terminated for Cause if such termination took place as a result of: 4 i. questionable judgment on the part of Executive; ii. any act or omission believed by Executive in good faith, to have been in or not opposed to the best interests of the Employer; or iii. any act or omission in respect of which a determination could properly be made that Executive met the applicable standard of conduct prescribed for indemnification or reimbursement or payment of expenses under the By-laws of NPB or the laws of the Commonwealth of Pennsylvania, or the directors and officers' liability insurance of NPB or any Employer, in each case as in effect at the time of such act or omission. If Executive's Employment is terminated for Cause, all rights of Executive under this Agreement shall cease as of the effective date of such termination, except that Executive (i) shall be entitled to receive accrued Salary through the date of such termination and (ii) shall be entitled to receive the payments and benefits to which he is then entitled under the employee benefit plans of the Employer or any affiliate thereof as of the date of such termination. 5. Arbitration. Any dispute or controversy arising out of or relating to this Agreement and any controversy as to a termination for Cause shall be settled exclusively by arbitration, conducted before a panel of three arbitrators, in Reading, Pennsylvania, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrators' award in any court having jurisdiction. 6. Exclusive Benefit. Executive shall have no right to commute, sell, assign, transfer or otherwise convey the right to receive any payments hereunder, which payment and the right thereto are expressly declared to be non-assignable and non-transferrable. In the event of any attempted assignment or transfer, Employer shall have no further liability hereunder. 7. Notices. Any notice required or permitted to be given under this Agreement shall be properly given if in writing and if mailed by registered or certified mail, postage prepaid with return receipt requested, to Executive's residence in the case of any notice to Executive, or to the principal office of Bank, in the case of any notice to the Employer. 8. Entire Agreement. This Agreement contains the entire agreement relating to the subject matter hereof and may not be modified, amended or changed orally but only by an agreement in writing, consented to in writing by NPB, and signed by the party against whom enforcement of any modification, amendment or change is sought. 5 9. Benefits. a. This Agreement shall be binding upon and inure to the benefit of NPB and Bank and their respective successors and assigns. Each of NPB and Bank shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of NPB or Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that NPB or Bank would be required to perform it if no such succession had taken place. Failure to obtain such assumption and agreement prior to the effectiveness of any such succession shall constitute a breach of this Agreement and the provisions of Section 2 of this Agreement shall apply. As used in this Agreement, "NPB" or "Bank" shall mean NPB or Bank as defined previously and any successor to the business and/or assets of NPB or Bank as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. b. This Agreement shall be binding upon and inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees and legatees. 10. Applicable Law. This Agreement shall be governed by and construed in accordance with the domestic internal law (but not the law of conflicts of law) of the Commonwealth of Pennsylvania. 11. Headings. The headings of the sections and subsections hereof are for convenience only and shall not control or affect the meaning or construction or limit the scope or intent of any of the sections or subsections of this Agreement. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 6 12. Termination of Prior Letter. Effective concurrently with the execution and delivery of this Agreement, the letter dated March 1, 1995 to Executive from Elverson National Bank (to which Bank is successor by merger) is withdrawn and all terms and provisions thereof are terminated and are of no further force and effect. IN WITNESS WHEREOF, NPB and Bank have each duly caused this Agreement to be executed on its behalf by its duly authorized officers, and Executive has hereunto set his hand and seal, as of the day and year first above written. NATIONAL PENN BANCSHARES, INC. (SEAL) By: /s/Wayne R. Weidner Title: President Attest: /s/Sandra L. Spayd Title: SVP NATIONAL PENN BANK (SEAL) By: /s/Wayne R. Weidner Title: President Attest: /s/Sandra L. Spayd Title: SVP Witness: /s/Pamela K. Koeshartanto /s/ Glenn E. Moyer (SEAL) Glenn E. Moyer 7 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 Penn Securities, Inc. Pennsylvania Link Financial Services, Inc. Pennsylvania Blue Rock Realty Corp. Pennsylvania Blue Rock Realty Corp. II Pennsylvania Blue Rock Realty Corp. III Pennsylvania Blue Rock Realty Corp. IV Pennsylvania Blue Rock Realty Corp. V Pennsylvania Blue Rock Realty Corp. VI Pennsylvania Blue Rock Realty Corp. VII Pennsylvania EX-23 9 INDEPENDENT AUDITORS' CONSENT We have issued our report dated January 15, 1999 accompanying the consolidated financial statements included in the 1998 Annual Report of National Penn Bancshares, Inc. and Subsidiaries on Form 10-K for the year ended December 31, 1998. We hereby consent to the incorporation by reference of said report in the Registration Statements of National Penn Bancshares, Inc. on Form S-3 (File No. 333-04729, effective May 30, 1996; File No. 33-86094, effective November 7, 1994; File No. 33-47067 effective, April 29, 1992; and File No. 33-02567, effective January 8, 1986), and on Form S-8 (File No. 333-71391, effective January 29, 1999; File No 333-27101, File No. 333-27103, and File No. 333-27059, effective May 14, 1997; File No. 33-91630, effective April 27, 1995; File No. 33-87654, effective December 22, 1994; File No. 33-15696, effective July 9, 1987). /s/ GRANT THORNTON LLP Philadelphia, Pennsylvania March 30, 1999 EX-27 10
9 0000700733 NATIONAL PENN BANCSHARES, INC. 1,000 YEAR DEC-31-1998 DEC-31-1998 46,574 3,527 0 21,589 421,738 0 421,738 1,248,019 27,346 1,811,594 1,208,061 164,922 19,427 288,728 0 0 93,360 37,096 1,811,594 107,504 23,284 1,122 131,910 44,309 67,002 59,808 5,100 1,871 51,283 25,522 25,522 0 0 20,483 1.55 1.52 4.10 9,980 1,799 0 0 25,122 4,402 1,526 27,346 24,722 0 2,624
EX-99 11 EXHIBIT 99 FORWARD-LOOKING STATEMENTS Certain statements in the Company's Annual Report on Form 10-K for 1998 and in other reports issued by the Company are forward- looking and are identified by the use of forward-looking words or phrases such as "intended," "believes," "expects," "estimates", "anticipates," "forecasts," "is expected," and "is anticipated." These forward-looking statements generally relate to the Company's plans, expectations, goals, and projections, and include statements as to the Company's anticipated future earnings, planned investments in new and modified technology and branch locations, as well as Year 2000 computer compliance. These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Risks and uncertainties could cause actual future results and investments to differ materially from those contemplated in such forward-looking statements. These risks and uncertainties include, without limitation, the following: (a) expected cost savings from the merger on January 4, 1999 (the "Merger") of Elverson National Bank ("Elverson") with and into the Company's banking subsidiary, National Penn Bank ("NPB"), including reductions in interest and non-interest expense, may not be fully realized or realized within the expected time-frame; (b) revenues following the Merger may be lower than expected, or deposit attrition, operating costs, customer losses or business disruption following the Merger may be greater than expected; (c) costs, difficulties or delays related to the integration of the businesses or systems of NPB and Elverson may be greater or longer than expected; (d) costs, difficulties or delays related to start-up activities of the Company on various new business lines or products may be greater or longer than expected; (e) general economic or business conditions, either nationally or in the region in which the Company will be doing business, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality or a reduced demand for credit; (f) loan growth and/or loan margins may be less than expected, due to competitive pressures in the financial services industry, changes in the interest rate environment, or otherwise; (g) competitive pressures among banking and non-banking organizations may increase significantly; 1 (h) costs of the Company's planned training initiatives, product development, branch expansion and new technology and operating systems may exceed expectations; (i) volatility in the Company's market area due to recent mergers may have unanticipated consequences, such as customer turnover; (j) legislation, including comprehensive financial sector reform legislation, may adversely affect the businesses in which the Company is engaged or result in a significantly increased competitive environment in the financial services industry; and (k) changes in the regulatory environment, securities markets, general business conditions and inflation may be adverse. In addition, as to Year 2000 computer compliance issues, factors that might cause material differences include, without limitation, the following: (a) the availability and cost of personnel trained in this area; (b) the ability to locate and correct all relevant computer codes; (c) uncertainties in the cost of hardware and software; (d) inaccurate or incomplete execution of the Company's five- phase Year 2000 Project; (e) the adequacy and ability to implement contingency plans; (f) ineffective remediation of computer codes; (g) whether the Company's borrowers, vendors, customers, and business partners effectively address their own Year 2000 issues; (h) adequate resolution of Year 2000 issues by governmental agencies; and (i) similar uncertainties. These risks and uncertainties are all difficult to predict, and most are beyond the control of the Company's management. Readers are cautioned not to place undue reliance on the Company's forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. 2 -----END PRIVACY-ENHANCED MESSAGE-----