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.
<PAGE>
NATIONAL PENN BANCSHARES, INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
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Page
Part I
<S> <C> <C>
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
</TABLE>
<PAGE>
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.
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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
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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.
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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.
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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)
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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.
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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.
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<TABLE>
<CAPTION>
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:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======== ======== ========
</TABLE>
*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
<PAGE>
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).
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- -------------------------- ----------------------------
Estimated Estimated Estimated
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------------- ------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
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 $ --- $ --- $ --- $ --- $ --- $ ---
======== ======== ======== ======== ======== ========
</TABLE>
9
<PAGE>
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)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
================ ================= ================= ================== =================
</TABLE>
10
<PAGE>
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:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
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
============ ============= ============ ============
</TABLE>
* 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:
<TABLE>
<CAPTION>
After One Year After
to Five Years Five Years
----------------- ---------------
(In Thousands)
<S> <C> <C>
Predetermined Interest Rate $58,339 $38,286
Floating Interest Rate --- ---
------------ ------------
Total $58,339 $38,286
============ ============
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(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
============= ============== ============= ============ ============
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
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
========== =========== =========== ========== ============
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
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%
============ ============ =========== =========== ============
</TABLE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
Allocation of the Allowance for Loan and Lease Losses (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- -----------------------
(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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
(This space left intentionally blank.)
17
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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%
============ ============= =============
</TABLE>
* 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
<PAGE>
Financial Ratios
The following ratios for the Company are among those commonly used in
analyzing financial statements of financial services companies:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
</TABLE>
(This space left intentionally blank.)
19
<PAGE>
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%.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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
========= ========== ========= ========== ============ ===========
</TABLE>
(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
<PAGE>
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:
<TABLE>
<CAPTION>
Principal Business Occupation
Name Age During the Past Five Years
<S> <C> <C>
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
<PAGE>
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.
</TABLE>
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
<PAGE>
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
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FIVE-YEAR STATISTICAL SUMMARY
(Dollars in thousands, except per share data)
Year Ended 1998 1997 1996 1995 1994
---------- ---------- ---------- ----------- ----------
STATEMENTS OF CONDITION
<S> <C> <C> <C> <C> <C>
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
</TABLE>
* 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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Repricing Periods
-----------------------------------------------------
Three Months
Within Through One One Year
Three Months Year Through Over
Five Years Five Years
------------- -------------- ------------- ------------
Assets (In thousands)
<S> <C> <C> <C> <C>
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) $ --
============= ============== ============= ============
</TABLE>
(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
<PAGE>
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:
<TABLE>
<CAPTION>
MVPE
Change In Interest Rate Amount % Change
- -------------------------- ------------ ----------
(In thousands)
<S> <C> <C>
+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
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
CAPITAL LEVELS
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
------------------------------------
ASSETS 1998 1997
------------- ------------
<S> <C> <C>
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
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
34
<PAGE>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1998 1997 1996
----------- ----------- ---------
INTEREST INCOME
<S> <C> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of these statements.
35
<PAGE>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity and
Comprehensive Income
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional other
Common paid-in comprehensive Retained Treasury Comprehensive
Shares Par value capital income earnings stock income
<S> <C> <C> <C> <C> <C> <C>
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 $ --
---------- --------- -------- -------- ----------- --------
</TABLE>
The accompanying notes are an integral part of this statement.
36
<PAGE>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
37
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
======== ======== ======= ======== ========= ======= ======== ========= =========
</TABLE>
42
<PAGE>
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):
<TABLE>
<CAPTION>
1998 1997 1996
Net interest income
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
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):
<TABLE>
<CAPTION>
December 31, 1998
Gross Gross Fair
Amortized unrealized unrealized market
cost gains losses value
<S> <C> <C> <C> <C>
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
=========== ============ =========== ===========
</TABLE>
43
<PAGE>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
3. INVESTMENT SECURITIES - Continued
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross Fair
Amortized unrealized unrealized market
cost gains losses value
<S> <C> <C> <C> <C>
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
========== =========== =========== ==========
</TABLE>
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.
<TABLE>
<CAPTION>
Fair
Amortized market
cost value
<S> <C> <C>
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
=========== ===========
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
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
=========== ===========
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
5. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Estimated December 31,
useful lives 1998 1997
<S> <C> <C>
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
=========== ===========
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
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
=========== ==========
</TABLE>
48
<PAGE>
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):
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
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
=========== =========== ============
</TABLE>
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):
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
49
<PAGE>
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):
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
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
=========== =========== ============
</TABLE>
Deferred tax assets and liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
Deferred tax assets
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
Year ended December 31, 1998
Income Shares Per share
(numerator) (denominator) amount
<S> <C> <C> <C>
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
=========== =========== ========
</TABLE>
51
<PAGE>
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.
<TABLE>
<CAPTION>
Year ended December 31, 1997
Income Shares Per share
(numerator) (denominator) amount
<S> <C> <C> <C>
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
======= ======= ========
</TABLE>
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.
<TABLE>
<CAPTION>
Year ended December 31, 1996
Income Shares Per share
(numerator) (denominator) amount
<S> <C> <C> <C>
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
======= ======= ========
</TABLE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
<S> <C> <C>
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 -
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Carrying Estimated fair Carrying Estimated fair
amount value amount value
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Carrying Estimated fair Carrying Estimated fair
amount value amount value
<S> <C> <C> <C> <C>
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
</TABLE>
55
<PAGE>
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.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Carrying Estimated fair Carrying Estimated fair
amount value amount value
<S> <C> <C> <C> <C>
Net loans $ 1,220,673 $ 1,270,714 $ 1,097,662 $ 1,198,973
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1998 1997 1996
Net income
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
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
======= ======== ========
</TABLE>
57
<PAGE>
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:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C>
$ 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 - -
</TABLE>
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):
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31,
1998 1997
Assets
<S> <C> <C>
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
======== ========
</TABLE>
58
<PAGE>
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
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
59
<PAGE>
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.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
60
<PAGE>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
20. REGULATORY MATTERS - Continued
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C>
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
</TABLE>
61
<PAGE>
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)
<TABLE>
<CAPTION>
Three months ended
1998 Dec. 31 Sept. 30 June 30 March 31
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======== ======== ======== =======
</TABLE>
(This space intentionally left blank)
62
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Signatures Title
<S> <C> <C>
/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
<PAGE>
/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
</TABLE>
70
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
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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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
SCHEDULE B-2
The ____ banking companies which form the peer group are:
[INSERT PEER GROUP]
13
<PAGE>
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
<PAGE>
designated for my group life insurance.
- ------------------------- --------------------------------
Date Signature of Participant
Approved By:
- ------------------------- --------------------------------
Date Signature of the Chairman of the
Committee
15
<PAGE>
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
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
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.
<PAGE>
(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.
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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-
<PAGE>
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
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<PAGE>
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-
<PAGE>
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-
<PAGE>
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 -
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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
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
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000700733
<NAME> NATIONAL PENN BANCSHARES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 46,574
<INT-BEARING-DEPOSITS> 3,527
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 21,589
<INVESTMENTS-HELD-FOR-SALE> 421,738
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 421,738
<LOANS> 1,248,019
<ALLOWANCE> 27,346
<TOTAL-ASSETS> 1,811,594
<DEPOSITS> 1,208,061
<SHORT-TERM> 164,922
<LIABILITIES-OTHER> 19,427
<LONG-TERM> 288,728
0
0
<COMMON> 93,360
<OTHER-SE> 37,096
<TOTAL-LIABILITIES-AND-EQUITY> 1,811,594
<INTEREST-LOAN> 107,504
<INTEREST-INVEST> 23,284
<INTEREST-OTHER> 1,122
<INTEREST-TOTAL> 131,910
<INTEREST-DEPOSIT> 44,309
<INTEREST-EXPENSE> 67,002
<INTEREST-INCOME-NET> 59,808
<LOAN-LOSSES> 5,100
<SECURITIES-GAINS> 1,871
<EXPENSE-OTHER> 51,283
<INCOME-PRETAX> 25,522
<INCOME-PRE-EXTRAORDINARY> 25,522
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,483
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.52
<YIELD-ACTUAL> 4.10
<LOANS-NON> 9,980
<LOANS-PAST> 1,799
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 25,122
<CHARGE-OFFS> 4,402
<RECOVERIES> 1,526
<ALLOWANCE-CLOSE> 27,346
<ALLOWANCE-DOMESTIC> 24,722
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,624
</TABLE>
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
<PAGE>
(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
