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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 2000, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _______ to ________.
Commission file number 000-10957
NATIONAL PENN BANCSHARES, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2215075
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Philadelphia and Reading Avenues, Boyertown, Pennsylvania 19512
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 367-6001
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (without par value)
Preferred Stock Purchase Rights
Guarantee (9% Preferred Securities of NPB Capital Trust)
9% Junior Subordinated Debentures
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of common shares of the Registrant held by
nonaffiliates, based on the closing sale price as of March 16, 2001, was
$351,835,826.
As of March 16, 2001, the Registrant had 19,384,741 shares of Common
Stock outstanding.
Portions of the following documents are incorporated by reference: the
definitive Proxy Statement of the Registrant relating to the Registrant's Annual
Meeting of Shareholders to be held on April 24, 2001 -- Part III.
NATIONAL PENN BANCSHARES, INC.
FORM 10-K
TABLE OF CONTENTS
Page
Part I
Item 1 Business.......................................................... 1
Item 2. Properties........................................................ 24
Item 3. Legal Proceedings................................................. 25
Item 4. Submission of Matters to a Vote of Security Holders............... 25
Item 4A. Executive Officers of the Registrant.............................. 25
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.................................. 27
Item 6. Selected Financial Data........................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 38
Item 8. Financial Statements and Supplementary Data....................... 39
Item 9. Disagreements on Accounting and Financial Disclosure.............. 68
Part III
Item 10. Directors and Executive Officers of the Registrant................ 68
Item 11. Executive Compensation............................................ 68
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 68
Item 13. Certain Relationships and Related Transactions.................... 68
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 68
PART I
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Item 1. BUSINESS.
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The Company
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National Penn Bancshares, Inc. ("National Penn" or the "Company") is a
Pennsylvania business corporation and bank holding company registered under the
Bank Holding Company Act of 1956. National Penn is headquartered at Philadelphia
and Reading Avenues, Boyertown, Pennsylvania 19512 (Telephone number
610-367-6001).
National Penn was incorporated in January 1982. National Penn has two
wholly-owned banking subsidiaries, National Penn Bank ("NP Bank") and Panasia
Bank, N.A. ("Panasia"). In addition, National Penn has various wholly-owned,
direct or indirect, nonbank subsidiaries engaged in activities related to the
business of banking. At December 31, 2000, National Penn and its subsidiaries
had 786 full- and part-time employees.
National Penn Bank
- ------------------
NP Bank is a national bank chartered under the National Bank Act. Prior
to August 1, 1993, its name was National Bank of Boyertown. NP Bank also
operates through its five banking divisions. These are:
* Chestnut Hill National Bank Division, established in December
1993 after National Penn's acquisition of Chestnut Hill National
Bank.
* 1st Main Line Bank Division, a de novo division established in
April 1995.
* National Asian Bank Division, a de novo division established in
May 1998.
* Elverson National Bank Division, established in January 1999
after National Penn's acquisition of Elverson National Bank.
* Berks County Division, established in January 2001 after National
Penn's acquisition of Community Independent Bank, Inc. (discussed
below).
NP Bank is engaged in the commercial and retail banking business. It
provides checking and savings accounts, time deposits, personal, business,
residential mortgage, educational loans, credit cards, and safe deposit and
night depository facilities.
Acquisition of Panasia Bank
- ---------------------------
On July 11, 2000, National Penn acquired Panasia Bank, a New Jersey
state-chartered bank. Panasia is headquartered in Ft. Lee, New Jersey. At
December 31, 2000, it has branches in Ft. Lee, Palisades Park and Closter, New
Jersey, and assets of $128,748,000, net loans of $34,787,000 and deposits of
$107,794,000. National Penn paid approximately $20 million in cash to acquire
Panasia. The transaction was accounted for under the purchase method of
accounting.
In September 2000, Panasia Bank filed an application with the Office of
the Comptroller of the Currency ("OCC") to convert its charter to a national
bank charter. The OCC approved the application, and the charter conversion
became effective, on November 3, 2000.
Like NP Bank, Panasia is engaged in the commercial and retail banking
business. It also provides checking and savings accounts, time deposits,
personal, business, residential mortgage, educational loans, credit cards, and
safe deposit and night depository facilities.
1
Acquisition of Community Independent Bank, Inc.
- -----------------------------------------------
On January 3, 2001, National Penn acquired Community Independent Bank,
Inc. ("Community") by its merger into National Penn. Community was the parent
company of Bernville Bank, N.A., a commercial bank operating four branches in
Berks County, Pennsylvania. At December 31, 2000, Community had consolidated
assets of $102,938,000, net loans of $76,689,000 and deposits of $95,338,000.
National Penn issued 659,245 shares of National Penn's common stock in
consummation of the transaction. The transaction was accounted for under the
pooling of interests method of accounting.
On January 4, 2001, Bernville Bank, N.A. merged into NP Bank. The
assets, branches and operations of Bernville Bank, N.A. were combined with those
of NP Bank located in Berks County to create NP Bank's Berks County Division.
Nonbank Subsidiaries
- --------------------
National Penn has the following, directly owned, nonbank subsidiaries:
* Investors Trust Company, a Pennsylvania-chartered trust company,
opened for business on June 20, 1994.
* National Penn Investment Company, a Delaware business
corporation, invests in and holds equity investments in other
banks and bank holding companies (as discussed below), other
equity investments, government and other debt securities, and
other investment securities, as permitted by applicable law and
regulations. It began operations in January 1985.
* National Penn Life Insurance Company, an Arizona insurance
company, was formed to reinsure credit life and accident and
health insurance in connection with loans made by NP Bank. It
began operations in January 1985.
* NPB Capital Trust, a Delaware business trust, was formed in 1997
and issued $40,250,000 in preferred capital securities to
investors. See Note 8 to National Penn's Consolidated Financial
Statements included at Item 8 of this Report.
National Penn has the following nonbank subsidiaries, directly owned by
NP Bank:
* Link Financial Services, Inc., a Pennsylvania business
corporation, is an insurance agency. It is also indirectly
engaged in the title insurance business through a joint venture
with a title insurance agency. It began operations in April 1998.
* Penn Securities, Inc., a Pennsylvania business corporation, is a
registered full service broker-dealer and investment advisory
firm. It is also an insurance agency. It began operations in
October 1998.
* Penn 1st Financial Services, Inc., a Pennsylvania business
corporation, is engaged in the mortgage banking business. It
began operations in September 1999 under the name National Penn
Mortgage Company.
* NPB Delaware, Inc., a Delaware business corporation, invests in,
holds and manages part of NP Bank's investment securities
portfolio, as permitted by applicable law and regulations. It
began operations in October 1999.
* RBO Funding Inc., a Virginia corporation, is a subprime lender
and wholly-owned subsidiary of Penn 1st Financial Services, Inc.
National Penn acquired RBO in November 1999.
2
* 1874 Financial Corp., a Pennsylvania business corporation, is a
commercial lending company specializing in the subprime
commercial lending business. It began business in February 2000.
* National Penn Consulting Services, Inc., a Pennsylvania business
corporation, provides management consulting, operational advice
and other related services for financial institutions. It began
business in September 2000.
National Penn also owns, indirectly through NP Bank, three other
nonbank subsidiaries, whose activities are limited solely to holding certain
real estate interests.
Panasia has one wholly-owned nonbank subsidiary, Panasia Investment
Company, a New Jersey business corporation. It invests in, holds and manages
part of Panasia's investment securities portfolio, as permitted by applicable
law and regulations. It began operations in December 1999.
Other Bank Investments
- ----------------------
National Penn owns, indirectly through National Penn Investment
Company, 20% of Pennsylvania State Bank, a Pennsylvania bank headquartered in
Camp Hill, Pennsylvania. Pennsylvania State Bank began operations as a bank in
May 1989. For financial reporting purposes, National Penn accounts for its
investment in Pennsylvania State Bank using the equity method.
Supervision and Regulation
- --------------------------
Bank holding companies and banks operate in a highly regulated
environment and are regularly examined by Federal and state regulatory
authorities.
The following discussion concerns certain provisions of Federal and
state laws and certain regulations and the potential impact of such provisions
and regulations on National Penn and its subsidiaries.
To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory or regulatory provisions themselves. A change in applicable
statutes, regulations or regulatory policy may have a material effect on the
business of National Penn and its subsidiaries.
Bank Holding Company Regulation
-------------------------------
National Penn is registered as a bank holding company and is subject to
the regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve") under the Bank Holding Company Act of 1956 ("BHCA").
The Gramm-Leach-Bliley Act of 1999 ("GLBA") established a new kind of
bank holding company called a "financial holding company". As of the date of
this Report, National Penn has not elected to become a "financial holding
company," and National Penn does not anticipate electing such status in the near
future. See "Gramm-Leach-Bliley Act."
Bank holding companies are required to file periodic reports with and
are subject to examination by the Federal Reserve. The Federal Reserve's
regulations require a bank holding company to serve as a source of financial and
managerial strength to its subsidiary banks. As a result, the Federal Reserve,
pursuant to its "source of strength" regulations, may require National Penn to
stand ready to use its resources to provide adequate capital funds to NP Bank or
Panasia during periods of financial stress or adversity.
Under the Federal Deposit Insurance Act ("FDIA"), a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" (as defined by
regulations) with the terms of any capital restoration plan filed by such
subsidiary with its appropriate federal banking agency, up to specified limits.
3
Under the BHCA, the Federal Reserve has the authority to require a bank
holding company to terminate any activity or relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank
holding company.
The BHCA prohibits National Penn from acquiring direct or indirect
control of more than 5% of the outstanding shares of any class of voting stock
or substantially all of the assets of any bank or merging or consolidating with
another bank holding company without prior approval of the Federal Reserve. Such
a transaction may also require approval of the Pennsylvania Department of
Banking. Pennsylvania law permits Pennsylvania bank holding companies to control
an unlimited number of banks.
Additionally, the BHCA prohibits National Penn from engaging in or from
acquiring ownership or control of more than 5% of the outstanding shares of any
class of voting stock of any company engaged in a nonbanking business unless
such business is determined by the Federal Reserve, by regulation or by order,
to be so "closely related to banking" as to be a "proper incident" thereto. The
BHCA does not place territorial restrictions on the activities of such
nonbanking-related businesses.
The Federal Reserve's regulations concerning permissible nonbanking
activities for National Penn (a bank holding company that, at present, is not a
"financial holding company") provide fourteen categories of functionally related
activities that are permissible nonbanking activities. These are:
* Extending credit and servicing loans.
* Certain activities related to extending credit.
* Leasing personal or real property under certain conditions.
* Operating nonbank depository institutions, including savings
associations.
* Trust company functions.
* Certain financial and investment advisory activities.
* Certain agency transactional services for customer investments,
including securities brokerage activities.
* Certain investment transactions as principal.
* Management consulting and counseling activities.
* Certain support services, such as courier and printing services.
* Certain insurance agency and underwriting activities.
* Community development activities.
* Issuance and sale of money orders, savings bonds, and traveler's
checks.
* Certain data processing services.
Depending on the circumstances, Federal Reserve approval may be
required before National Penn or its nonbank subsidiaries may begin to engage in
any such activity and before any such business may be acquired.
4
A bank holding company that is eligible and makes an effective election
under GLBA to be a "financial holding company" may engage in any type of
financial activity. See "Gramm-Leach-Bliley Act."
Dividend Restrictions
---------------------
National Penn is a legal entity separate and distinct from NP Bank,
Panasia and National Penn's other direct and indirect nonbank subsidiaries.
National Penn's revenues (on a parent company only basis) result almost
entirely from dividends paid to National Penn by its subsidiaries. The right of
National Penn, and consequently the right of creditors and shareholders of
National Penn, to participate in any distribution of the assets or earnings of
any subsidiary through the payment of such dividends or otherwise is necessarily
subject to the prior claims of creditors of the subsidiary (including
depositors, in the case of NP Bank and Panasia), except to the extent that
claims of National Penn in its capacity as a creditor may be recognized.
Federal and state laws regulate the payment of dividends by National
Penn's subsidiaries. See "Supervision and Regulation - Regulation of NP Bank and
Panasia."
Further, it is the policy of the Federal Reserve that bank holding
companies should pay dividends only out of current earnings. Federal banking
regulators also have the authority to prohibit banks and bank holding companies
from paying a dividend if they should deem such payment to be an unsafe or
unsound practice.
Capital Adequacy
----------------
Bank holding companies are required to comply with the Federal
Reserve's risk-based capital guidelines.
The required minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit) is 8%. At least half of total capital must be "Tier 1 capital." Tier 1
capital consists principally of common shareholders' equity, retained earnings,
a limited amount of qualifying perpetual preferred stock and minority interests
in the equity accounts of consolidated subsidiaries, less goodwill and certain
intangible assets. The remainder of total capital may consist of mandatory
convertible debt securities and a limited amount of subordinated debt,
qualifying preferred stock and loan loss allowance ("Tier 2 capital"). At
December 31, 2000, National Penn's Tier 1 capital and total (Tier 1 and Tier 2
combined) capital ratios were 10.59% and 11.85%, respectively.
In addition to the risk-based capital guidelines, the Federal Reserve
requires a bank holding company to maintain a minimum "leverage ratio." This
requires a minimum level of Tier 1 capital (as determined under the risk-based
capital rules) to average total consolidated assets of 3% for those bank holding
companies that have the highest regulatory examination ratings and are not
contemplating or experiencing significant growth or expansion. The Federal
Reserve expects all other bank holding companies to maintain a ratio of at least
1% to 2% above the stated minimum. At December 31, 2000, National Penn's
leverage ratio was 8.06%.
The Federal Reserve has also indicated that it will consider a
"tangible Tier 1 capital leverage ratio" (deducting all intangibles) and other
indicia of capital strength in evaluating proposals for expansion or new
activities. The Federal Reserve has not advised National Penn of any specific
minimum leverage ratio applicable to National Penn.
Pursuant to the "prompt corrective action" provisions of the FDIA, the
federal banking agencies have specified, by regulation, the levels at which an
insured institution is considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Under these regulations, an institution is considered "well
capitalized" if it has (1) a total risk-based capital ratio of 10% or more, (2)
a Tier 1 risk-based capital ratio of 6% or more, (3) a leverage ratio of 5% or
more, and (4) is not subject to any order or written directive to meet and
maintain a specific capital level. At December 31, 2000, NP Bank and Panasia
5
each qualify as "well capitalized" under these regulatory standards. See Note 19
to National Penn's Consolidated Financial Statements included at Item 8 of this
Report.
FDIC Insurance Assessments
--------------------------
NP Bank and Panasia are each subject to deposit insurance assessments
by the Federal Deposit Insurance Corporation ("FDIC"). These assessments fund
both the Bank Insurance Fund ("BIF") for banks and the Savings Association
Insurance Fund ("SAIF") for savings associations. They are based on the risk
classification of the depository institutions. Neither NP Bank nor Panasia paid
regular insurance assessments to the FDIC in 2000. Under current FDIC practices,
neither bank is expected to be required to pay regular insurance assessments to
the FDIC in 2001.
In 1996, the SAIF was recapitalized. As part of the recapitalization,
both BIF-insured deposits and SAIF-insured deposits are now assessed to fund
debt service on the Federal government's related bond payments. The current
annualized rate established by the FDIC for both BIF-insured deposits and
SAIF-insured deposits is $.019 per $100 of deposits. These bonds mature in 2017.
Regulation of NP Bank and Panasia
---------------------------------
The operations of NP Bank and Panasia are each subject to Federal and
state statutes applicable to banks chartered under the banking laws of the
United States, to members of the Federal Reserve System, and to banks whose
deposits are insured by the FDIC. Their operations are also subject to
regulations of the OCC, the Federal Reserve, and the FDIC.
The OCC, which has primary supervisory authority over NP Bank and
Panasia, regularly examines banks in such areas as reserves, loans, investments,
management practices and other aspects of operations. These examinations are
designed for the protection of depositors rather than National Penn's
shareholders. Each bank must furnish annual and quarterly reports to the OCC,
which has the legal authority to prevent a national bank from engaging in an
unsafe or unsound practice in conducting its business.
Federal and state banking laws and regulations govern, among other
things, the scope of a bank's business, the investments a bank may make, the
reserves against deposits a bank must maintain, the types and terms of loans a
bank may make and the collateral it may take, the activities of a bank with
respect to mergers and consolidations, and the establishment of branches.
Pennsylvania law permits statewide branching.
Under the National Bank Act, NP Bank and Panasia are each required to
obtain the prior approval of the OCC for the payment of dividends if the total
of all dividends declared by it in one year would exceed its net profits for the
current year plus its retained net profits for the two preceding years, less any
required transfers to surplus. In addition, each bank may only pay dividends to
the extent that its retained net profits (including the portion transferred to
surplus) exceed statutory bad debts. Under the FDIA, each bank is prohibited
from paying any dividends, making other distributions or paying any management
fees if, after such payment, it would fail to satisfy its minimum capital
requirements.
As subsidiary banks of a bank holding company, NP Bank and Panasia are
each subject to certain restrictions imposed by the Federal Reserve Act on
extensions of credit to the bank holding company or its subsidiaries, on
investments in the stock or other securities of the bank holding company or its
subsidiaries, and on taking such stock or securities as collateral for loans.
The Federal Reserve Act and Federal Reserve regulations also place
certain limitations and reporting requirements on extensions of credit by a bank
to the principal shareholders of its parent holding company, among others, and
to related interests of such principal shareholders. In addition, such
legislation and regulations may affect the terms upon which any person becoming
a principal shareholder of a holding company may obtain credit from banks with
which the subsidiary bank maintains a correspondent relationship.
6
Under the "cross-guarantee" provisions of the FDIA, insured depository
institutions under common control are required to reimburse the FDIC for any
loss suffered by either the BIF or SAIF as a result of the failure of a commonly
controlled insured depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution in danger of
failure. NP Bank and Panasia are covered by these provisions. Any such liability
could have a material adverse effect on the financial condition of the assessed
bank and National Penn. While the FDIC's claim under the cross-guarantee
provisions is subordinate to claims of depositors, secured creditors, general
creditors and holders of subordinated debt (other than affiliates) of the
commonly controlled institution, it is superior to claims of shareholders and
affiliates of the commonly controlled institution, such as National Penn.
Regulation of Other Subsidiaries
--------------------------------
National Penn's direct nonbank subsidiaries are subject to regulation
by the Federal Reserve and, in the case of Investors Trust Company, the
Pennsylvania Department of Banking.
NP Bank's and Panasia's direct nonbank subsidiaries are subject to
regulation by the OCC. In addition, Penn Securities, Inc., as a broker-dealer
and investment advisory firm, is regulated by the Securities and Exchange
Commission, various state securities regulators and the National Association of
Securities Dealers, Inc. Penn Securities, Inc. and Link Financial Services,
Inc., as insurance agencies, are subject to regulation by the Pennsylvania
Insurance Department.
Monetary and Fiscal Policies
----------------------------
The banking industry, including National Penn, NP Bank and Panasia, is
affected by the monetary and fiscal policies of government agencies, including
the Federal Reserve. Through open market securities transactions and changes in
its discount rate and reserve requirements, the Federal Reserve exerts
considerable influence over the cost and availability of funds for lending and
investment.
Competition
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The financial services industry in National Penn's service area is
extremely competitive. National Penn's competitors within its service area
include bank holding companies with substantially greater resources. Many
competitor financial institutions have substantially higher legal lending
limits.
In addition, savings banks, savings and loan associations, credit
unions, money market and other mutual funds, mortgage companies, leasing
companies, finance companies, and other financial services companies offer
products and services similar to those offered by National Penn and its
subsidiaries, on competitive terms. The competitive environment has intensified
since adoption of Federal interstate banking legislation in 1994. See
"Interstate Banking Act."
On November 12, 1999, GLBA became law. Among other things, GLBA (1)
repealed various provisions of the Glass Steagall Act to permit commercial banks
to affiliate with investment banks (securities firms), (2) amended the BHCA to
permit qualifying bank holding companies to engage in any type of financial
activity, and (3) permitted subsidiaries of national banks to engage in a broad
range of financial activities that are not permitted for national banks
themselves.
Although the long-range effects of GLBA cannot be predicted, most
probably it will further narrow the differences and intensify competition among
commercial banks, investment banks, insurance firms and other financial services
companies. See "Gramm-Leach-Bliley Act."
Interstate Banking Act
- ----------------------
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
provides for nationwide interstate banking and branching. It permits:
7
* Bank holding companies that are adequately capitalized and
adequately managed to acquire banks located in states outside
their home states regardless of whether such acquisitions are
authorized under the laws of the host state.
* The interstate merger of banks, subject to the right of
individual states to "opt in" or "opt out" of this authority,
actions that could only be taken before June 1, 1997.
* Banks to establish new branches on an interstate basis
provided that such action is specifically authorized by the
laws of the host state.
* A bank to engage in certain agency relationships (i.e., to
receive deposits, renew time deposits, close loans (but not
including loan approvals or disbursements), service loans, and
receive payments on loans and other obligations) as agent for
any bank or thrift affiliate, whether the affiliate is located
in the same state or a different state than the agent bank.
* Foreign banks to establish, with approval of the regulators in
the United States, branches outside their "home" states to the
same extent that national or state banks located in the home
state would be authorized to do so.
One effect of this legislation is to permit National Penn to acquire
banks and bank holding companies located in any state and to permit qualified
banking organizations located in any state to acquire banks and bank holding
companies located in Pennsylvania, irrespective of state law.
The Pennsylvania Banking Code authorizes full interstate banking and
branching. It authorizes interstate bank mergers and reciprocal interstate
branching into Pennsylvania by interstate banks. It also permits Pennsylvania
institutions to branch into other states with the prior approval of the
Pennsylvania Department of Banking, except that this approval requirement does
not apply to national banks.
Overall, this Federal and state legislation is having the effect of
increasing consolidation and competition and promoting geographic
diversification in the banking industry.
Gramm-Leach-Bliley Act
- ----------------------
GLBA does three fundamental things:
* GLBA repeals various provisions of the Glass Steagall Act to
permit commercial banks to affiliate with investment banks
(securities firms).
* GLBA amends the BHCA to permit qualifying bank holding
companies to engage in any type of financial activity.
* GLBA permits subsidiaries of national banks to engage in a
broad range of financial activities that are not permitted for
national banks themselves.
The result is that banking companies are generally able to offer a
wider range of financial products and services and are more readily able to
combine with other types of financial companies, such as securities and
insurance companies.
GLBA creates a new kind of bank holding company called a "financial
holding company" (an "FHC"). An FHC is authorized to engage in any activity that
is "financial in nature or incidental to financial activities" and any activity
that the Federal Reserve determines is "complementary to financial activities"
and does not pose undue risks to the financial system. Among other things,
"financial in nature" activities include securities underwriting and dealing,
insurance underwriting and sales, and certain merchant banking activities.
8
A bank holding company qualifies to become an FHC if each of its
depository institution subsidiaries is "well capitalized," "well managed" and
CRA-rated "satisfactory" or better. A qualifying bank holding company becomes an
FHC by filing with the Federal Reserve an election to become an FHC.
If an FHC at any time fails to remain "well capitalized" or "well
managed," the consequences can be severe. Such an FHC must enter into a written
agreement with the Federal Reserve to restore compliance. If compliance is not
restored within 180 days, the Federal Reserve can require the FHC to cease all
its newly authorized activities or even to divest itself of its depository
institutions. A failure to maintain a CRA rating of "satisfactory" will not
jeopardize any then existing newly authorized activities; rather, the FHC cannot
engage in any additional newly authorized activities until a "satisfactory" CRA
rating is restored.
In addition to activities currently permitted by law and regulation for
bank holding companies, an FHC may engage in virtually any other kind of
financial activity. Under limited circumstances, an FHC may even be authorized
to engage in certain non-financial activities. The most important newly
authorized activities are:
* Securities underwriting and dealing.
* Insurance underwriting and sales.
* Merchant banking activities.
* Activities determined by the Federal Reserve to be "financial in
nature" and incidental activities.
* "Complementary" financial activities, as determined by the
Federal Reserve.
Bank holding companies that do not qualify or elect to become FHCs are
limited in their activities to the activities permitted by law and regulation on
March 11, 2000, the effective date of that portion of GLBA. As of the date of
this Report, National Penn has not elected to become an FHC. National Penn has,
instead, continued to utilize the continuing authority of national banks to
create "operating subsidiaries" to expand its business products and services.
GLBA also authorizes national banks to create "financial subsidiaries."
This is in addition to the present authority of national banks to create
"operating subsidiaries." A "financial subsidiary" is a direct subsidiary of a
national bank that satisfies the same conditions as an FHC, plus certain other
conditions, and is approved in advance by the OCC. A "financial subsidiary" can
engage in most, but not all, of the newly authorized activities.
In addition, GLBA also provides significant new protections for the
privacy of consumer and customer information. These provisions apply to any
company "the business of which" is engaging in activities permitted for an FHC,
even if it is not itself an FHC. Basically, GLBA subjects a financial
institution to four new requirements regarding non-public personal financial
information about consumers and customers. The financial institution must: (1)
adopt and disclose its privacy policy; (2) give consumers and customers the
right to "opt out" of disclosures to non-affiliated third parties; (3) not
disclose any account information to non-affiliated third party marketers; and
(4) follow regulatory standards to protect the security and confidentiality of
consumer and customer information.
Although the long-range effects of GLBA cannot be predicted, most
probably it will further narrow the differences and intensify competition among
commercial banks, investment banks, insurance firms and other financial services
companies.
Interest Rate Swaps and Similar Instruments
- -------------------------------------------
Statement of Financial Accounting Standards No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments,"
requires that information about the amounts, nature, and terms of interest rate
swaps and similar instruments be disclosed. See Note 17 to National Penn's
Consolidated Financial Statements
9
included at Item 8 of this Report. In 2000, the interest rate swaps to which NP
Bank was a party had the effect of decreasing National Penn's net interest
income by $307,000 from what would have been realized had NP Bank not entered
into the swap agreements. Should rates rise in 2001, National Penn may recognize
lower net interest income for the year than would have been recognized had NP
Bank not entered into the interest rate swap agreements.
In 2000, the interest rate floor to which NP Bank was a party had no
effect on National Penn's net interest income. Should rates fall in 2001 below a
certain point, National Penn may recognize higher net interest income for the
year than would have been recognized had NP Bank not entered into the interest
rate floor agreement.
National Penn uses interest rate swap and floor agreements for interest
rate risk management. No derivative financial instruments are held for trading
purposes. The contract or notional amounts of the swap and floor agreements do
not represent exposure to credit loss. Potential credit risk on these contracts
arises from the counterparty's inability to meet the terms of the agreement.
Management considers the credit risk of these agreements to be minimal and
manages this risk through routine review of the counterparty's financial
ratings.
Forward-Looking Statements
- --------------------------
From time to time, National Penn or its representatives make written or
oral statements that may include "forward-looking statements" with respect to
its:
* Financial condition.
* Results of operations.
* Asset quality.
* Capital expenditures, including investments in technology.
* Pending or completed mergers with or acquisitions of financial or
non-financial companies or their assets, loans, deposits and
branches, including the January 2001 merger with Community and
the July 2000 acquisition of Panasia, and the revenue
enhancements, cost savings and other benefits anticipated in
those transactions.
* Business expansion plans, including both product and geographical
expansion.
* Investments in new subsidiaries and other companies.
* Other matters.
Many of these statements can be identified by looking for words such as
"believes," "expects," "anticipates," "estimates," "projects" or similar words
or expressions.
These forward-looking statements involve substantial risks and
uncertainties. There are many factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements. These
factors include, among other things, the following possibilities:
* Expected cost savings from the National Penn/Community merger,
including reductions in interest and non-interest expense, may
not be fully realized or realized as quickly as expected.
* Revenues of National Penn and its subsidiaries following the
National Penn/Community merger may be lower than expected, or
loan losses, deposit attrition, operating costs, customer losses
or business disruption following the National Penn/Community
merger may be greater than expected.
10
* Commercial loan growth following the National Penn/Community
merger may be lower than expected.
* Costs, difficulties or delays related to the integration of
Community's business with National Penn's business may be greater
or longer than expected.
* Expected cost savings from National Penn's acquisition of Panasia
may not be fully realized or realized as quickly as expected.
* Revenues of Panasia may be lower than expected, or loan losses,
deposit attrition, operating costs, customer losses or business
disruption at Panasia may be greater than expected.
* Commercial loan growth at Panasia may be lower than expected.
* Costs, difficulties or delays related to the integration of
Panasia's business with National Penn's business may be greater
or longer than expected.
* Start-up costs of new subsidiaries may be greater, and revenue
ramp-up of such subsidiaries may take longer, than expected.
* Changes in the interest rate environment may reduce interest
margins.
* Competitive pressures among depository and other financial
institutions may increase significantly.
* General economic or business conditions, either nationally or in
the regions in which National Penn will be doing business, may be
less favorable than expected, resulting in, among other things, a
deterioration in credit quality or a reduced demand for credit.
* Technological changes and systems integration may be harder to
make or more expensive than expected.
* Legislation or regulatory changes may adversely affect National
Penn's business.
* Adverse changes may occur in the securities markets.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
statements. National Penn cautions shareholders not to place undue reliance on
such statements.
All written or oral forward-looking statements attributable to National
Penn or any person acting on its behalf made after the date of this Report are
expressly qualified in their entirety by the cautionary statements contained in
this Report. National Penn does not undertake any obligation to release publicly
any revisions to such forward-looking statements to reflect events or
circumstances after the date of this Report or to reflect the occurrence of
unanticipated events.
11
Average Balances, Average Rates, and Interest Rate Spread* (Dollars in Thousands)
- ---------------------------------------------------------
Year Ended December 31
------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ---------------------------- ----------------------------
Average -------- Average Average --------- Average Average --------- Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------- -------- -------- ---------- --------- ------- ---------- --------- --------
INTEREST EARNING ASSETS:
Interest bearing deposits at banks $4,431 $296 6.68% $6,742 $239 3.53% $13,777 $544 3.95%
U.S. Treasury 37,801 2,563 6.78 36,715 2,419 6.59 42,740 2,884 6.75
U.S. Government agencies 242,397 16,295 6.72 186,520 12,120 6.50 185,637 12,152 6.55
State and municipal* 220,450 18,078 8.20 229,128 17,516 7.64 194,644 14,749 7.58
Other bonds and securities 55,329 4,692 8.48 85,434 5,422 6.35 41,931 2,562 6.11
---------- -------- ---------- -------- ---------- --------
Total investments 555,977 41,628 7.49 537,797 37,477 6.97 464,952 32,347 6.96
---------- -------- ---------- -------- ---------- --------
Federal funds sold 8,509 588 6.91 9,781 489 5.00 5,054 267 5.28
Trading account securities - - - 6,836 196 2.87 10,670 851 7.98
Commercial loans* 1,128,823 105,571 9.35 977,303 88,786 9.08 854,727 80,640 9.43
Installment loans 301,201 27,349 9.08 284,334 25,417 8.94 272,749 25,320 9.28
Mortgage loans 207,504 16,455 7.93 228,842 18,527 8.10 237,783 19,989 8.41
---------- -------- ---------- -------- ---------- --------
Total loans 1,637,528 149,375 9.12 1,490,479 132,730 8.91 1,365,259 125,949 9.23
---------- -------- ---------- -------- ---------- --------
Total earning assets 2,206,445 $191,887 8.70% 2,051,635 $171,131 8.34% 1,859,712 $159,958 8.60%
-------- -------- --------
Allowance for loan losses (36,558) (32,071) (30,772)
Non-interest earning assets 183,579 156,158 136,985
---------- ---------- ----------
Total assets $2,353,466 $2,175,722 $1,965,925
=========== =========== ============
INTEREST BEARING LIABILITIES:
Interest bearing deposits $1,440,121 $69,142 4.80% $1,306,931 $56,537 4.33% $1,190,760 $53,518 4.49%
Securities sold under repurchase
agreements and federal funds
purchased 289,257 16,752 5.79 158,669 7,165 4.52 133,380 6,108 4.58
Short-term borrowings 7,338 416 5.67 5,608 272 4.85 9,551 553 5.79
Long-term borrowings 200,102 13,392 6.69 310,707 18,779 6.04 267,531 16,428 6.14
---------- -------- ---------- -------- ---------- --------
Total interest bearing liabilities 1,936,818 $99,702 5.15% 1,781,915 $82,753 4.64% 1,601,222 $76,607 4.78%
-------- -------- --------
Non-interest bearing deposits 237,903 220,777 193,652
Other non-interest bearing liabilities 24,792 19,910 18,636
---------- ---------- ----------
Total liabilities 2,199,513 2,022,602 1,813,510
Equity capital 153,953 153,120 152,415
---------- ---------- ----------
Total liabilities and equity capital $2,353,466 $2,175,722 $1,965,925
========== ========== ==========
INTEREST RATE SPREAD** $92,185 4.18% $88,378 4.31% $88,351 4.48%
======== ======== =======
* Full taxable equivalent basis, using a 35% effective tax rate.
** Represents the difference between interest earned and interest paid,
divided by total earning assets. Loans outstanding, net of unearned income,
include nonaccruing loans. Fee income included.
12
Interest Rate Sensitivity Analysis
- ----------------------------------
Information with respect to interest rate sensitivity of the Company's
assets and liabilities is included in the information under Management's
Discussion and Analysis at Item 7 hereof.
Investment Portfolio
- --------------------
A summary of investment securities available for sale at December 31,
2000, 1999 and 1998 follows (in thousands).
2000 1999 1998
--------------------------- -------------------------- ----------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------------- ------------ ------------ ------------ -------------- ------------
Securities available for sale
U.S. Treasury and U.S.
Government agencies $141,574 $142,883 $103,092 $101,724 $105,537 $109,089
State and municipal 230,688 233,085 236,768 221,774 230,260 239,070
Mortgage-backed securities 163,937 165,036 136,684 133,927 126,329 127,369
Marketable equity securities
and other 52,964 52,312 57,354 58,602 46,230 47,513
------------- ------------ ------------ ------------ -------------- ------------
Totals $589,163 $593,316 $533,898 $516,027 $508,356 $523,041
============= ============ ============ ============ ============== ============
(This space intentionally left blank.)
13
Investment Securities Yield by Maturity
The maturity distribution and weighted average yield of the investment portfolio
at book value of the Company at December 31, 2000, are presented in the
following table. Weighted average yields on tax-exempt obligations have been
computed on a fully- taxable equivalent basis assuming a tax rate of 35%. All
average yields were calculated on the amortized cost of the related securities.
Stocks and other securities having no stated maturity have been included in the
"After 10 Years" category.
Securities Available for Sale Yield by Maturity at December 31, 2000
(Dollars in thousands)
After 1 But After 5 But
Within 1 Year Within 5 Years Within 10 Years After 10 Years Total
----------------- --------------- --------------- ---------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
--------- ------- ------- ------ ------- ------ -------- ------ -------- -----
U.S. Treasury and U.S.
Government agencies $26,386 6.63% $66,681 6.29% $29,883 6.51% $19,933 7.33% $142,883 6.54%
State and municipal bonds 4,060 6.82% 11,045 7.72% 17,693 7.00% 200,287 7.97% 233,085 7.86%
Mortgage-backed securities 1,514 5.57% 4,917 6.98% 2,782 6.84% 155,823 6.89% 165,036 6.88%
Marketable equity securities
and other - -% - -% - -% 52,312 -% 52,312 -%
----------------- ----------------- ---------------- ----------------- -----------------
Total $31,960 6.60% $82,643 6.52% $50,358 6.70% $428,355 6.57% $593,316 6.58%
================= ================= ================ ================= =================
14
Loan Maturity and Interest Rate Sensitivity
- -------------------------------------------
Maturities and sensitivity to changes in interest rates in certain loan
categories in the Company's loan portfolio at December 31, 2000, are summarized
below:
Remaining Maturity - At December 31, 2000
-----------------------------------------
After One
One Year Year to After
or Less Five Years Five Years Total
-------- -------- -------- --------
(In Thousands)
Commercial and Industrial
Loans $141,243 $116,868 $57,153 $315,264
Real Estate Loans:
Construction and Land
Development 67,779 71,767 10,889 $150,435
-------- -------- -------- --------
$209,022 $188,635 $68,042 $465,699
======== ======== ======== ========
Segregated in terms of sensitivity to changes in interest rates, the
foregoing loan balances at December 31, 2000, are summarized below:
After One Year After
to Five Years Five Years
------------ ------------
(In Thousands)
Predetermined Interest Rate $135,856 $56,645
Floating Interest Rate 52,779 11,397
------------ ------------
Total $188,635 $68,042
============ ============
Determinations of maturities included in the loan maturity table are
based upon contract terms. In situations where a "rollover" is appropriate, the
Company's policy in this regard is to evaluate the credit for collectability
consistent with the normal loan evaluation process. This policy is used
primarily in evaluating ongoing customers' use of their lines of credit that are
at floating interest rates. The Company's outstanding lines of credit to
customers are not material.
15
Loan Portfolio
- --------------
The Company's loans are widely diversified by borrower, industry
group, and geographical area. The following summary shows the year-end
composition of the Company's loan portfolio for each year in the five-year
period ended December 31, 2000:
December 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- -------------- ------------- ------------ --------------
(In Thousands)
Commercial and Industrial
Loans $315,264 $252,992 $220,192 $179,967 $155,435
Loans to Financial
Institutions - - - 2,232 453
Real Estate Loans:
Construction and Land
Development 150,435 136,105 84,520 69,016 51,622
Residential 638,981 649,692 678,889 661,744 670,225
Other 542,728 472,447 404,865 374,281 335,391
Loans to Individuals 72,888 59,307 47,341 33,828 24,716
------------- -------------- ------------- ------------- --------------
Total $1,720,296 $1,570,543 $1,435,807 $1,321,068 $1,237,842
============= ============== ============= ============= ==============
Risk Elements
- -------------
The Company's consolidated financial statements are prepared on the
accrual basis of accounting, including the recognition of interest income on the
loan portfolio.
In determining income from loans, including consumer and residential
mortgage loans, the Company generally adheres to the policy of not accruing
interest on a loan on which default of principal or interest has existed for a
period of 90 days or more. A loan past due 90 days or more remains on accrual
only if the loan is fully secured and in the process of collection. When a loan
reaches nonaccrual status, any interest accrued but unpaid on it, if payment is
considered questionable, is reversed and charged against current income.
Thereafter, until such time as the loan becomes current, interest is included in
income only to the extent it is received in cash.
Restructured loans are loans on which the interest rate has been
reduced because of a weakened financial position of the borrower. There were no
restructured loans at December 31, 2000, and an immaterial amount of such loans
at the end of prior years.
Nonaccrual loans, loans 90 days or more past due and still on accrual,
and restructured loans together constitute nonperforming loans. When other real
estate owned is included with nonperforming loans, the total is nonperforming
assets.
16
The following table shows the balance at year-end and the effect on
interest income of nonperforming assets in the Company's loan portfolio, by
category, for each year in the five-year period ended December 31, 2000:
December 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ----------- ----------- ---------- ------------
Nonaccrual Loans $10,898 $11,055 $11,581 $8,519 $9,493
Loans Past Due 90 or
More Days as to
Interest or Principal 4,519 2,674 1,840 3,246 4,212
Restructured Loans - - - - -
---------- ----------- ----------- ---------- ------------
Total Nonperforming Loans 15,417 13,729 13,421 11,765 13,705
Other Real Estate Owned 988 842 922 672 855
---------- ----------- ----------- ---------- ------------
Total Nonperforming Assets $16,405 $14,571 $14,343 $12,437 $14,560
========== =========== =========== ========== ============
Gross Amount of Interest
That Would Have Been
Recorded at Original
Rate on Nonaccrual
and Restructured Loans $688 $859 $940 $778 $1,040
Interest Received From
Customers on Nonaccrual
and Restructured Loans 437 439 289 477 834
---------- ----------- ----------- ---------- ------------
Net Impact on Interest
Income of Nonperforming
Loans $251 $420 $651 $301 $206
========== =========== =========== ========== ============
At December 31, 2000, the Company had no foreign loans and no loan
concentrations exceeding 10% of total loans not disclosed in the table on page
16 hereof. "Loan concentrations" are considered to exist when there are amounts
loaned to a multiple number of borrowers engaged in similar activities that
would cause them to be similarly affected by economic or other conditions. Loans
recorded in the category of other real estate owned are valued at the lower of
book value of loans outstanding or fair market value.
At December 31, 2000, the Company was not aware of any potential
problem loans that are not otherwise included in the foregoing table. "Potential
problem loans" are loans where information about possible credit problems of
borrowers has caused management to have serious doubts about the borrowers'
ability to comply with present repayment terms.
At December 31, 2000, the Company had no loans that are considered
highly-leveraged transactions under applicable regulations although the Company
had approximately $6,469,000 in aggregate loans outstanding that, but for their
small individual amount, would be considered such loans. A "highly-leveraged
transaction" is a transaction for the purpose of the buyout, acquisition, or
recapitalization of a corporation, which involves new debt that doubles the
corporation's debt and results in a leverage ration greater than 50%, produces a
leverage ration greater than 75% where 25% or more results from the buyout,
acquisition, or recapitalization, or is designated as such by a syndication
agent or regulatory agency.
17
Allowance for Loan Losses
- -------------------------
A detailed analysis of the Company's allowance for loan losses for the five
years ended December 31, 2000, is shown below:
December 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ----------- ----------- ------------
Balance at Beginning of Year $34,139 $30,835 $28,467 $25,738 $23,038
Charge-offs:
Commercial and Industrial Loans 1,895 1,770 1,549 1,625 482
Real Estate Loans:
Construction and Land
Development - - - 14 -
Residential 1,223 1,341 679 1,280 1,338
Other 885 1,262 2,374 564 392
Loans to Individuals 2,092 784 599 398 452
------------ ------------ ----------- ----------- ------------
Total Charge-offs 6,095 5,157 5,201 3,881 2,664
------------ ------------ ----------- ----------- ------------
Recoveries:
Commercial and Industrial Loans 803 254 244 265 111
Real Estate Loans:
Construction and Land
Development 44 10 - - 131
Residential 438 555 650 296 186
Other 598 1,571 553 212 235
Loans to Individuals 187 111 162 274 201
------------ ------------ ----------- ----------- ------------
Total Recoveries 2,070 2,501 1,609 1,047 864
------------ ------------ ----------- ----------- ------------
Net Charge-offs 4,025 2,656 3,592 2,834 1,800
------------ ------------ ----------- ----------- ------------
Provisions Charged to Expense 5,600 5,960 5,960 5,563 4,500
Adjustments:
Changes Incident to Mergers
and absorptions, Net 1,384 - - - -
------------ ------------ ----------- ----------- ------------
Balance at End of Year $37,098 $34,139 $30,835 $28,467 $25,738
============ ============ =========== =========== ============
Ratio of Net Charge-offs
During the Period to
Average Loans Outstanding
During the Period 0.25% 0.18% 0.26% 0.22% 0.16%
============ ============ =========== =========== ============
The allowance for loan losses is established through charges to
earnings in the form of a provision for loan losses. Loans that are determined
to be uncollectible are charged against the allowance, and subsequent recoveries
are credited to the allowance. Factors that influence management's judgment in
determining the amount of the provision for loan losses charged to operating
expense include the following:
1. An ongoing review by management of the quality of the overall
loan portfolio.
2. Management's continuing evaluation of potential problem and
nonperforming loans.
18
3. Loan classifications and evaluations as a result of periodic
examinations by federal supervisory authorities.
4. Management's evaluation of prevailing and anticipated economic
conditions and their related effect on the existing loan portfolio.
5. Comments and recommendations by the Company's independent
accountants as a result of their regular examination of the Company's
financial statements.
It is management's practice to review the allowance for loan losses
regularly to determine whether additional provision should be made after
considering the factors noted above. In 2000, the provision was unchanged due to
current loan quality, economic conditions, and net loan charge-offs in 2000.
The Company makes partial loan charge-offs when it determines that the
underlying collateral is not sufficient to cover a nonperforming loan. Loan loss
allowances are maintained at least in amounts sufficient to cover the estimated
future loss, if any. Partial charge-offs in 2000 totaled $1,498,000, or 25% of
the gross charge-off amount of $6,095,000, as compared to $1,498,000 or 29% of
the gross charge-off amount of $5,157,000 in 1999. Partial charge-offs
represented .01% of average total loans for both 2000 and 1999.
(This space intentionally left blank.)
19
Allocation of the allowance for loan losses, and the percent of loans
in each category to total loans for the five years ended December 31, 2000, is
illustrated in the following table (dollars in thousands):
Allocation of the Allowance for Loan and Lease Losses (1)
---------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ----------------- ----------------- ----------------- ------------------
% Loan % Loan % Loan % Loan % Loan
Type to Type to Type to Type to Type to
Total Total Total Total Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
--------- ------- --------- ------- --------- ------- --------- ------ --------- -------
Commercial and Industrial loans $6,006 18.3% $5,878 16.1% $ 5,859 15.3% $ 3,245 13.6% $3,655 12.6%
Loans to financial institutions - -% - -% - -% - 0.2% - -%
Real estate loans:
Construction and land development 6,618 8.8% 4,204 8.7% 2,528 5.9% 2,021 5.2% 1,647 4.2%
Residential 3,254 37.1% 4,119 41.3% 4,163 47.3% 5,836 50.0% 5,379 54.1%
Other 10,227 31.6% 10,916 30.1% 11,378 28.2% 7,942 28.4% 8,957 27.1%
Loans to individuals 6,675 4.2% 4,256 3.8% 3,268 3.3% 4,925 2.6% 2,600 2.0%
Unallocated 4,318 N/A 4,766 N/A 3,639 N/A 4,498 N/A 3,500 N/A
--------- ------- -------- ------- ------- ------- ------- ------ ------- -------
$37,098 100.0% $34,139 100.0% $30,835 100.0% $28,467 100.0% $25,738 100.0%
========= ======= ======== ======= ======= ======= ======= ====== ======= =======
(1) This allocation is made for analytical purposes. The total allowance is
available to absorb losses from any segment of the portfolio.
- ------------
The Company regards the allowance as a general allowance which is
available to absorb losses from all loans. The allocation of the allowance as
shown in the table should neither be interpreted as an indication of future
charge-offs, nor as an indication that charge- offs in future periods will occur
in these amounts or in these proportions.
20
Historical Statistics
The following table shows historical statistics of the Company relative
to the relationship among loans (net of unearned discount), net charge-offs, and
the allowance for loan losses:
December 31,
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
(In Thousands)
Average Total Loans $1,637,528 $1,490,479 $1,365,259 $1,285,715 $1,143,689
Total Loans at Year End 1,720,296 1,570,543 1,435,807 1,321,068 1,237,842
Net Charge-offs 4,025 2,656 3,592 2,834 1,800
Allowance for Loan Losses
at Year End 37,098 34,139 30,835 28,467 25,738
December 31,
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
Net Charge-offs to:
Average Total Loans 0.25% 0.18% 0.26% 0.22% 0.16%
Total Loans at Year End 0.23% 0.17% 0.25% 0.21% 0.15%
Allowance for Loan Losses 10.85% 7.78% 11.65% 9.96% 6.99%
Allowance for Loan Losses to:
Average Total Loans 2.27% 2.29% 2.26% 2.21% 2.25%
Total Loans at Year End 2.16% 2.18% 2.15% 2.15% 2.08%
(This space intentionally left blank.)
21
Deposit Structure
The following is a distribution of the average amount of, and the
average rate paid on, the Company's deposits for each year in the three-year
period ended December 31, 2000:
Year Ended December 31,
---------------------------------------------------------------------------------------
2000 1999 1998
------------------------ --------------------------- -------------------------
(Dollars in Thousands)
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------------ --------- ------------- ----------- ------------- ----------
Noninterest-
Bearing Demand
Deposits $237,903 -% $220,777 -% $193,652 -%
Savings Deposits 631,576 3.29% 572,142 2.84% 489,762 2.66%
Time Deposits 808,545 5.98% 734,789 5.48% 700,998 5.75%
------------ ------------- -------------
Total $1,678,024 4.12% $1,527,708 3.70% $1,384,412 3.85%
============ ============= =============
The aggregate amount of jumbo certificates of deposit, issued in the
amount of $100,000 or more was $236,263,000 in 2000, $195,939,000 in 1999, and
$145,049,000 in 1998.
The following is a breakdown, by maturities, of the Company's time
certificates of deposit of $100,000 or more as of December 31, 2000. The Company
has no other time deposits of $100,000 or more as of December 31, 2000.
Maturity Amount of Time Certificates of Deposit
---------- --------------------------------------
(In Thousands)
3 months or less $71,588
Over 3 through 6 months 41,389
Over 6 through 12 months 69,804
Over 12 months 53,482
-----------
Total $236,263
===========
Short-Term Borrowings
- ---------------------
Information with respect to the Company's short-term borrowings is set
forth in Footnote 7 to the Company's Consolidated Financial Statements which are
included at Item 8 hereof, Financial Statements and Supplementary Data.
(This space intentionally left blank.)
22
Financial Ratios
- ----------------
The following ratios for the Company are among those commonly used in
analyzing financial statements of financial services companies:
Year Ended December 31,
------------------------------------------------------
2000 1999 1998
------------------------------------------------------
Earnings Ratios
- ---------------
Net Income on:
Average Earning Assets 1.33% 1.34% 1.23%
Average Total Assets 1.24 1.26 1.17
Average Shareholders' Equity 19.00 17.90 15.00
Net Operating Income Before
Securities and Mortgage
Transactions:
Average Earning Assets 1.30 1.37 1.14
Average Total Assets 1.22 1.28 1.07
Average Shareholders' Equity 18.70 18.17 13.85
Liquidity and Capital Ratios
- ----------------------------
Average Shareholders' Equity
to Average Earning Assets 6.98% 7.46% 8.20%
Average Shareholders' Equity
to Average Total Assets 6.54 7.04 7.75
Dividend Payout Ratio 49.06 48.97 44.29
Tier 1 Leverage Ratio 8.06 8.58 8.77
Tier 1 Risk-Based Ratio 10.59 11.43 12.21
Total Risk-Based Capital Ratio 11.85 12.73 13.51
(This space intentionally left blank.)
23
The following table shows, on a taxable equivalent basis, the changes
in the Company's net interest income, by category, due to shifts in volume and
rate, for the years ended December 31, 2000 and 1999. The information is
presented on a taxable equivalent basis, using an effective rate of 35%.
Year Ended December 31,
------------------------------------------------------------------------------
2000 over 1999 (1) 1999 over 1998 (1)
--------------------------------- --------------------------------------
Increase (decrease) in: Volume Rate Total Volume Rate Total
--------- ---------- --------- ---------- ------------ -----------
Interest income:
Interest bearing deposits
at banks ($82) $139 $57 ($278) ($27) ($305)
Securities:
U.S. Treasury and
U. S. Government agencies 3,710 609 4,319 (339) (158) (497)
State and municipal (663) 1,225 562 2,613 154 2,767
Other bonds and securities (1,911) 1,181 (730) 2,658 202 2,860
--------- ---------- --------- ---------- ------------ -----------
Total securities 1,136 3,015 4,151 4,932 198 5,130
--------- ---------- --------- ---------- ------------ -----------
Federal funds sold (64) 163 99 250 (28) 222
Trading account securities (196) - (196) (306) (349) (655)
Loans:
Commercial loans and
lease financing 13,765 3,020 16,785 11,565 (3,419) 8,146
Installment loans 1,508 424 1,932 1,075 (978) 97
Mortgage loans (1,728) (344) (2,072) (752) (710) (1,462)
--------- ---------- --------- ---------- ------------ -----------
Total loans 13,545 3,100 16,645 11,888 (5,107) 6,781
--------- ---------- --------- ---------- ------------ -----------
Total interest income $14,339 $6,417 $20,756 $16,486 ($5,313) $11,173
========= ========== ========= ========== ============ ===========
Interest expense:
Interest bearing deposits 5,762 6,843 12,605 5,221 (2,202) 3,019
Borrowed funds:
Securities sold under
repurchase agreements and
federal funds purchased 5,897 3,690 9,587 1,158 (101) 1,057
Short-term borrowings 84 60 144 (228) (53) (281)
Long-term borrowings (6,685) 1,298 (5,387) 2,651 (300) 2,351
--------- ---------- --------- ---------- ------------ -----------
Total borrowed funds (704) 5,048 4,344 3,581 (454) 3,127
--------- ---------- --------- ---------- ------------ -----------
Total interest expense $5,058 $11,891 $16,949 $8,802 ($2,656) $6,146
========= ========== ========= ========== ============ ===========
Increase (decrease) in
net interest income $9,281 ($5,474) $3,807 $7,684 ($2,657) $5,027
========= ========== ========= ========== ============ ===========
- ------------
(1) Variance not solely due to rate or volume is allocated to the volume
variance. The change in interest due to both rate and volume is allocated to
rate and volume changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
Item 2. PROPERTIES.
- -------------------
National Penn does not own or lease any property. As of December 31,
2000, NP Bank owns 39 properties in fee and leases 23 other properties; Panasia
leases four properties; and National Penn's other direct and indirect
subsidiaries lease three properties. The properties owned in fee are not subject
to any major liens, encumbrances, or collateral assignments.
The principal office of National Penn, NP Bank and NP Bank's Berks
County Division is owned in fee and located at Philadelphia and Reading Avenues,
Boyertown, Pennsylvania 19512.
24
The principal offices of NP Bank's other divisions are as follows:
* Chestnut Hill National Bank Division's principal office is leased
and located at 9 West Evergreen Avenue, Chestnut Hill,
Philadelphia, Pennsylvania 19118.
* 1st Main Line Bank Division's principal office is leased and
located at 528 East Lancaster Avenue, St. Davids, Pennsylvania
19087.
* Elverson National Bank Division's principal office is owned in
fee and located at 83 West Main Street, Elverson, Pennsylvania
19520.
* National Asian Bank Division's principal office is leased and
located at 1349 West Cheltenham Avenue, Suite 101, Elkins Park,
Pennsylvania 19027.
NP Bank presently has 61 branches located in the following Pennsylvania
counties: Berks, Bucks, Chester, Delaware, Lancaster, Lehigh, Montgomery,
Northampton, and Philadelphia.
In addition to its branches, NP Bank presently owns or leases 74
automated teller machines located throughout the nine-county area, all of which
are located at bank branch locations except for 27 that are "free-standing" (not
located at a branch).
The principal office of Panasia is leased and located at 183 Main
Street, Fort Lee, New Jersey 07024. Panasia presently has three other branches
located in Bergen County, New Jersey, and four automated teller machines, all of
which are located at bank branch locations.
Item 3. LEGAL PROCEEDINGS.
- --------------------------
Various actions and proceedings are presently pending to which
National Penn or one or more of its subsidiaries is a party. These actions and
proceedings arise out of routine operations and, in management's opinion, will
not have a material adverse effect on National Penn's consolidated financial
position.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
None.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
- ----------------------------------------------
The principal executive officers of National Penn are as follows:
Principal Business Occupation
Name Age During the Past Five Years
Lawrence T. Jilk, Jr. 62 Chairman of National Penn since January 2001.
Chief Executive Officer of National Penn from
January 1990 to December 2000.
Wayne R. Weidner 58 President and Chief Executive Officer of National
Penn since January 2001. President of National
Penn from April 1998 to December 2000, and
Executive Vice President of National Penn from
April 1990 to April 1998. Also, Chairman and Chief
Executive Officer of NP Bank.
25
Glenn E. Moyer 50 President, Chief Operating Officer and Chief
Lending Officer of NP Bank since January 2001.
Executive Vice President of NP Bank and President
of NP Bank's Elverson National Bank Division from
January 1999 to January 2001. Prior thereto,
President and Chief Executive Officer of Elverson
National Bank.
Garry D. Koch 46 Group Executive Vice President and Chief Credit
Officer of NP Bank since January 2001. Executive
Vice President of NP Bank from September 1997 to
January 2001. Senior Vice President of NP Bank
from 1992 to September 1997.
Sharon L. Weaver 53 Group Executive Vice President, Human
Resources/Branch Administration/Retail
Banking/Marketing of NP Bank since January 2001.
Executive Vice President of NP Bank from April
1998 to January 2001. Senior Vice President of NP
Bank from 1991 to April 1998.
Sandra L. Spayd 57 Secretary of National Penn, and Senior Vice
President and Corporate Secretary of NP Bank.
Gary L. Rhoads 46 Treasurer and Chief Financial Officer of National
Penn. Group Executive Vice President, Chief
Financial Officer and Controller of NP Bank since
January 2001. Executive Vice President, Controller
and Cashier of NP Bank prior to January 2001.
Executive officers of National Penn are elected by the Board of
Directors and serve at the pleasure of the Board. Executive Officers of NP Bank
are appointed by the Board of Directors of NP Bank and serve until they resign,
retire, become disqualified, or are removed by the Board.
(This space intentionally left blank.)
26
PART II
-------
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------
MATTERS.
- --------
National Penn's common stock currently trades on the Nasdaq National
Market tier of The Nasdaq Stock Market under the symbol: "NPBC".
The following table reflects the high and low closing sales prices
reported for the common stock, and the cash dividends declared on the common
stock, for the periods indicated, after giving retroactive effect to a 5% stock
dividend paid on December 22, 2000 and a 5% stock dividend paid on December 22,
1999.
MARKET VALUE OF COMMON STOCK
2000
--------------------
High Low
---- ---
lst Quarter 23.46 18.22
2nd Quarter 21.90 18.10
3rd Quarter 21.55 18.04
4th Quarter 21.43 17.62
1999
--------------------
High Low
---- ---
lst Quarter 24.71 20.18
2nd Quarter 23.13 19.50
3rd Quarter 24.94 19.28
4th Quarter 25.48 23.25
CASH DIVIDENDS DECLARED ON COMMON STOCK
2000 1999
---- ----
lst Quarter $.19 $.17
2nd Quarter .19 .18
3rd Quarter .19 .18
4th Quarter .20 .19
The Trust Preferred Securities of NPB Capital Trust are reported on
Nasdaq's National Market under the symbol "NPBCP". The preferred dividend is 9%.
27
Item 6. SELECTED FINANCIAL DATA.
- --------------------------------
FIVE-YEAR STATISTICAL SUMMARY
(Dollars in thousands, except per share data)
Year Ended 2000 1999 1998 1997 1996
------------- ------------ ------------ ------------- -------------
STATEMENTS OF CONDITION
Total assets $2,512,508 $2,242,432 $2,121,248 $1,809,216 $1,604,566
Total deposits 1,814,253 1,593,254 1,473,302 1,353,523 1,190,976
Loans, net 1,683,198 1,536,404 1,404,972 1,292,601 1,212,104
Total investment securities 593,316 516,027 523,041 371,464 278,565
Total shareholders' equity 177,428 147,696 158,774 148,928 137,519
Book value per share* 9.49 7.93 8.48 7.91 7.29
Realized book value per share** 9.35 8.55 7.97 7.50 7.05
Percent shareholders' equity to assets 7.06% 6.59% 7.48% 8.23% 8.57%
Trust assets $905,682 $834,585 $674,729 $543,345 $411,916
EARNINGS
Total interest income $184,652 $164,270 $154,081 $139,266 $124,671
Total interest expense 99,702 82,753 76,607 63,009 53,914
------------- ------------ ------------ ------------- -------------
Net interest income 84,950 81,517 77,474 76,257 70,757
Provision for loan losses 5,600 5,960 5,960 5,563 4,500
------------- ------------ ------------ ------------- -------------
Net interest income after provision
for loan losses 79,350 75,557 71,514 70,694 66,257
Other income 27,164 23,338 18,721 13,614 10,153
Other expenses 70,777 65,724 61,232 54,417 48,590
------------- ------------ ------------ ------------- -------------
Income before income taxes 35,737 33,171 29,003 29,891 27,820
Income taxes 6,500 5,762 6,085 8,344 8,531
------------- ------------ ------------ ------------- -------------
Net income $29,237 $27,409 $22,918 $21,547 $19,289
============= ============ ============ ============= =============
Cash dividends paid $14,343 $13,421 $10,151 $8,894 $7,413
Return on average assets 1.24% 1.26% 1.17% 1.28% 1.27%
Return on average shareholders' equity 19.0% 17.9% 15.0% 15.2% 14.8%
Return on average realized shareholders' 17.8% 18.2% 15.9% 15.6% 15.2%
equity**
PER SHARE DATA*
Basic earnings $1.57 $1.47 $1.22 $1.14 $1.02
Diluted earnings 1.56 1.44 1.20 1.12 1.02
Dividends paid in cash 0.77 0.72 0.54 0.47 0.39
Dividends paid in stock 5% 5% 5-for-4 4-for-3 5%
stock split stock split
SHAREHOLDERS AND STAFF
Average shares outstanding - basic * 18,579,469 18,682,117 18,728,488 18,869,230 18,837,087
Average shares outstanding - diluted* 18,787,365 18,978,549 19,108,296 19,191,283 18,989,330
Shareholders 3,115 3,110 3,208 3,202 3,102
Staff - Full-time equivalents 786 715 749 718 681
* Restated to reflect 5% stock dividends in 2000 and 1999, a 5-for-4
stock split in 1998, a 4-for-3 stock split in 1997, and 5% stock
dividends in 1996.
** Excluding unrealized gain (loss) on investment securities available
for sale.
The unaudited quarterly results of the Company's operations in 2000 and
1999 are included in Footnote 21 to the Company's Consolidated Financial
Statements included herein at Item 8, Financial Statements and Supplementary
Data.
28
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
- --------------
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and is intended to assist
in understanding and evaluating the major changes in the financial condition and
earnings results of operations of the Company with a primary focus on the
Company's performance.
FINANCIAL CONDITION
-------------------
During 2000 total assets increased to $2.512 billion, an increase of
$270.0 million or 12.0% over the $2.242 billion at year-end 1999. Total assets
at the end of 1999 increased $121.1 million or 5.7% over the $2.121 billion at
year-end 1998. The increase in 2000 is reflected primarily in the loan category,
which increased $146.8 million, of which $37.9 million was due to the
acquisition of Panasia Bank in July 2000, and the investment category, which
increased $77.3 million, of which $46.9 million is related to Panasia Bank.
Total cash and cash equivalents increased $31.6 million or 47.2% in
2000 compared to 1999 versus an increase of $1.2 million or 1.8% in 1999
compared to 1998. The increase in 2000 compared to 1999 is due to increased cash
and due from banks of $17.9 million, increased federal funds sold of $7.0
million and increased interest bearing deposits in banks of $6.7 million.
Net loans and leases increased to $1.683 billion during 2000, an
increase of $146.8 million or 9.6% compared to 1999. Net loans increased $131.4
million in 1999 or 9.4% compared to 1998. Loan growth in 2000 was primarily the
result of the addition of $37.9 million in loans from the acquisition of Panasia
Bank and the investment of deposits, securities sold under repurchase
agreements, and federal funds purchased. Residential mortgages originated for
immediate resale during 2000 amounted to $42.2 million. The Company's credit
quality is reflected by the annualized ratio of net chargeoffs to total loans of
.23% for 2000 versus .17% for the year 1999, and the ratio of nonperforming
assets to total loans of .95% at December 31, 2000, compared to .93% at December
31, 1999. Nonperforming assets, including nonaccruals, loans 90 days past due,
restructured loans and other real estate owned, were $16.4 million at December
31, 2000, compared to $14.6 million at December 31, 1999. Of these amounts,
nonaccrual loans represented $10.9 million and $11.1 million at December 31,
2000, and December 31, 1999, respectively. Loans 90 days past due and still
accruing interest were $4.5 million and $2.7 million at December 31, 2000, and
December 31, 1999, respectively. Other real estate owned was $988,000 at
December 31, 2000 and $842,000 at December 31, 1999, respectively. The Company
had no restructured loans at December 31, 2000 or December 31, 1999. The
allowance for loan losses to nonperforming assets was 226.1% and 234.3% at
December 31, 2000 and December 31, 1999, respectively. The company has no
significant exposure to energy and agricultural-related loans.
Investments, which are the Company's secondary use of funds, increased
$77.3 million or 15.0% to $593.3 million at year-end 2000. In 1999, the
investment portfolio reflected a decrease of $7.0 million or 1.3% compared to
1998. The increase in 2000 was due to the addition of $46.9 million in
investments from the acquisition of Panasia Bank and investment purchases of
$147.3 million, primarily in mortgage-backed securities, which were partially
offset by calls and maturities of securities, investment securities sales and
payments on mortgage-backed securities.
Other assets increased to $137.4 million, an increase of $14.4 million
or 11.7% compared to the $123.0 million at December 31, 1999. In 1999, other
assets increased $17.2 million or16.2% compared to 1998. The increase in 2000 is
due primarily to the $12.2 million in goodwill from the acquisition of Panasia
Bank, which is being amortized over a twenty-year period. Goodwill represents
the amount paid in excess of the fair value of the assets acquired and, under
current accounting guidelines, the amortization of which will appear in the
Company's financial statements as an expense over the period indicated.
As the primary source of funds, aggregate deposits of $1.814 billion
increased $221.0 million or 13.9% compared to 1999. Deposits of $1.593 billion
increased $120.0 million in 1999 or 8.1% compared to 1998. The increase in
deposits is primarily in interest-bearing deposits, which increased $137.3
million while non-interest bearing deposits increased $83.7 million, largely due
to the acquisition of $100.4 million in deposits in the Panasia Bank acquisition
in July 2000. In addition to deposits, earning assets are funded to some extent
through purchased funds and borrowings.
29
These include securities sold under repurchase agreements, federal funds
purchased, short-term borrowings, long-term borrowings, and subordinated
debentures. In the aggregate, these funds totaled $493.7 million at the end of
2000, a $17.2 million or 3.6% increase compared to 1999. The 1999 amount of
borrowings and purchased funds of $475.9 million represented an increase of $8.3
million or 1.7% compared to 1998. The increase in 2000 was due to an increase in
securities sold under repurchase agreements and federal funds purchased, of
$97.3 million, which was partially offset by a decrease in long-term borrowings
of $76.6 million.
Shareholders' equity increased by $29.7 million or 20.1% in 2000 to
$177.4 million. This increase was principally due to an increase in the
valuation adjustment for securities available for sale. Cash dividends paid in
2000 increased $922,000 or 6.9% compared to the cash dividends paid in 1999,
which increased $3.3 million or 32.2% compared to cash dividends paid in 1998.
Earnings retained in 2000 were 50.9% compared to 51.0% in 1999.
RESULTS OF OPERATIONS
---------------------
Net income for 2000 of $29.2 million was 6.7% more than the $27.4
million reported in 1999. The 1999 amount was 19.6% more than the $22.9 million
in 1998. On a per share basis, basic earnings were $1.57, $1.47, and $1.22 for
2000, 1999, and 1998, respectively. Diluted earnings per share were $1.56,
$1.44, and $1.20 for 2000, 1999, and 1998, respectively.
Net interest income is the difference between interest income on assets
and interest expense on liabilities. Net interest income increased $3.4 million
or 4.2% to $84.9 million in 2000 from the 1999 amount of $81.5 million. The
increase in interest income is a result of increased loan income of $16.4
million and increased investment income of $4.0 million due to growth in loan
outstandings and higher rates on loans that were partially offset by growth in
deposits and higher rates on deposits and borrowings. The Company's interest
rate spread decreased from 4.31% in 1999 to 4.18% in 2000. The primary reasons
for this decrease are (1) the increased investment in bank owned life insurance
from which the income is reported in other income but the cost of funding the
investment is included in interest expense, and (2) the increase in the
investment portfolio utilizing incremental borrowings that result in a spread
that is narrower than historical spreads but ultimately provides increased net
interest income.
Interest rate risk is a major concern in forecasting the earnings
potential. From November 16, 1999 to February 1, 2000, the prime rate was 8.50%.
From February 2, 2000 to March 21, 2000, the prime rate was 8.75%. From March
22, 2000 to May 15, 2000, the prime rate was 9.00%. On May 16, 2000, the prime
rate changed to 9.50%. From November 18, 1998 to June 30, 1999, the prime rate
was 7.75%. From July 1, 1999 to August 24, 1999, the prime rate was 8.00%. From
August 25, 1999 to November 15, 1999, the prime rate was 8.25%. On November 16,
1999, the prime rate changed to 8.50%. Interest expense during 2000 increased
$16.9 million or 20.5% compared to the prior year. The increase in interest
expense is a result of increased interest on deposits of $12.6 million and
increased interest on securities sold under repurchase agreements and federal
funds purchased of $9.6 million due to an increase in outstandings and higher
rates on deposits and borrowings. This was partially offset by a decrease in
interest on long-term borrowings of $5.4 million. Interest expense during 1999
increased $6.1 million or 8.0% compared to 1998. In addition to the current rate
environment, the cost of attracting and holding deposited funds is an
ever-increasing expense in the banking industry. These increases are the real
costs of deposit accumulation and retention, including FDIC insurance costs,
marketing and branch overhead expenses. Such costs are necessary for continued
growth and to maintain and increase market share of available deposits.
The provision for loan losses is determined by periodic reviews of loan
quality, current economic conditions, loss experience and loan growth. Based on
these factors, the provision for loan losses was $5.6 million for the year ended
December 31, 2000 and $5.9 million for both the year ended December 31, 1999 and
the year ended December 31, 1998. The allowance for loan losses of $37.1 million
at year-end 2000 and $34.1 million at year-end 1999 as a percentage of total
loans was 2.2% at both year-end 2000 and year-end 1999. Net loan chargeoffs of
$4.0 million, $2.7 million, and $3.6 million during 2000, 1999, and 1998,
respectively, continue to be comparable with those of the Company's peers.
The Company maintains an allowance for loan losses at a level deemed
sufficient to absorb losses, which are inherent in the loan portfolio at each
balance sheet date. Management reviews the adequacy of the allowance on at least
a quarterly basis to ensure that the provision for loan losses has been charged
against earnings in an amount necessary to maintain the allowance at a level
that is appropriate based on management's assessment of probable estimated
losses.
30
The Company's methodology for assessing the appropriateness of the allowance for
loan losses consists of several key elements. These elements include a specific
reserve for doubtful or high risk loans, an allocated reserve based on
historical trends, and an unallocated portion. The Company consistently applies
the following comprehensive methodology.
The specific reserve for high risk loans is established for specific
commercial and industrial loans, real estate development loans, and construction
loans which have been identified by bank management as being high risk loan
assets. These high risk loans are assigned a doubtful risk rating grade because
the loan has not performed according to payment terms and there is reason to
believe that repayment of the loan principal in whole or part is unlikely. The
specific portion of the allowance is the total amount of potential unconfirmed
losses for these individual doubtful loans.
The second category of reserves consists of the allocated portion of
the allowance. The allocated portion of the allowance is determined by taking
pools of loans outstanding and commitments that have similar characteristics and
applying historical loss experience for each pool. This estimate represents the
potential unconfirmed losses within the portfolio. Individual loan pools are
created for commercial loans, real estate development and construction loans,
and for the various types of loans to individuals. The historical estimation for
each loan pool is then adjusted to account for current conditions, current loan
portfolio performance, loan policy or management changes or any other factor
which may cause future losses to deviate from historical levels. Before applying
the historical loss experience percentages, loan balances are reduced by the
portion of the loan balances which are subject to a guarantee by a government
agency.
(This space intentionally left blank.)
31
The Company also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions, which may cause a
potential loan loss but are not specifically identifiable. It is prudent to
maintain an unallocated portion of the allowance because no matter how detailed
an analysis of potential loan losses is performed these estimates by definition
lack precision. Management must make estimates using assumptions and
information, which is often subjective and changing rapidly.
Allocation of the Allowance for Loan Losses (1)
---------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ----------------- ----------------- ----------------- ------------------
% Loan % Loan % Loan % Loan % Loan
Type to Type to Type to Type to Type to
Total Total Total Total Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
--------- ------- --------- ------- --------- ------- --------- ------ --------- -------
Commercial and industrial $ 6,006 18.3% $ 5,878 16.1% $ 5,859 15.3% $ 3,245 13.8% $ 3,655 12.6%
Real estate loans:
Construction and land dev. 6,618 8.8% 4,204 8.7% 2,528 5.9% 2,021 5.2% 1,647 4.2%
Residential 3,254 37.1% 4,119 41.3% 4,163 47.3% 5,836 50.0% 5,379 54.1%
Other 10,227 31.6% 10,916 30.1% 11,378 28.2% 7,942 28.4% 8,957 27.1%
Loans to individuals 6,675 4.2% 4,256 3.8% 3,268 3.3% 4,925 2.6% 2,600 2.0%
Unallocated 4,318 N/A 4,766 N/A 3,639 N/A 4,498 N/A 3,500 N/A
--------- ------- -------- ------- ------- ------- ------- ------ ------- -------
$37,098 100.0% $34,139 100.0% $30,835 100.0% $28,467 100.0% $25,738 100.0%
========= ======= ======== ======= ======= ======= ======= ====== ======= =======
(1) This allocation is made for analytical purposes. The total allowance
is available to absorb losses from any segment of the portfolio
32
Commercial and industrial loans, real estate loans, and construction
loans are charged off to the allowance as soon as it is determined that the
repayment of all or part of the principal balance is highly unlikely. Loans to
individuals are charged off any time repayment is deemed highly unlikely or as
soon as the loan becomes 120 days delinquent. Because all identified losses are
immediately charged off, no portion of the allowance for loan losses is
restricted to any individual loan or groups of loans, and the entire allowance
is available to absorb any and all loan losses.
A loan is placed in a nonaccrual status at the time when ultimate
collectibility of principal or interest, wholly or partially, is in doubt. Past
due loans are those loans which were contractually past due 90 days or more as
to interest or principal payments but are well secured and in the process of
collection. Restructured loans are those loans which terms have been
renegotiated to provide a reduction or deferral of principal or interest as a
result of the deteriorating financial position of the borrower.
NON PERFORMING ASSETS TABLE
December 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Nonaccrual Loans $10,898 $11,055 $11,581 $8,519 $9,493
Loans Past Due 90 or
More Days as to
Interest or Principal 4,519 2,674 1,840 3,246 4,212
------- ------- ------- ------- -------
Total Nonperforming Loans
15,417 13,729 13,421 11,765 13,705
Other Real Estate Owned 988 842 922 672 855
------- ------- ------- ------- -------
Total Nonperforming Assets $16,405 $14,571 $14,343 $12,437 $14,560
======= ======= ======= ======= =======
At December 31, 2000, management believes that the allowance for loan
losses and nonperforming loans remained safely within acceptable levels.
Other income increased $3.8 million or 16.4% in 2000 compared to 1999,
as a result of increased other service charges and fees of $2.0 million,
increased mortgage banking income of $1.4 million, increased services charges on
deposit accounts of $1.1 million, increased trust income of $849,000, increased
bank owned life insurance income of $323,000, and increased net gains on sale of
investment securities of $240,000. The increase in other income in 1999 compared
to 1998 was $4.6 million or 24.7% as a result of increased other service charges
and fees of $2.4 million, increased trading revenue of $1.3 million, an activity
that was discontinued by the end of 1999, increased mortgage banking income of
$1.0 million, increased trust income of $742,000, increased bank owned life
insurance income of $666,000, and increased service charges on deposit accounts
of $491,000. These gains were partially offset by a decrease in net gains on
sale of investment securities of $1.9 million and a decrease in equity in
undistributed net earnings of affiliates of $151,000. Sales of investment
securities in 2000 and 1999 totaled $45.5 million and $45.7 million,
respectively. Other expenses increased $5.1 million or 7.7% in 2000 compared to
1999 as a result of increased salaries, wages and benefits of $2.6 million,
increased other operating of $1.8 million and increased net premises and
equipment of $675,000. Other expenses increased $4.5 million or 7.3% in 1999
when compared to 1998, as a result of increased salaries, wages and benefits of
$4.0 million, increased net premises and equipment of $777,000, which was
partially offset by a decrease in other operating of $265,000. For 2000, 1999,
and 1998, there are no individual items of other operating expenses that exceed
one percent of the aggregate of total interest income and other income, with the
exception of advertising and marketing related expenses.
Income before income taxes increased in 2000 by $2.6 million or 7.7%
compared to 1999 when income before income taxes increased by $4.2 million or
14.4% compared to 1998. Income taxes increased $738,000 in 2000 compared to 1999
while income taxes decreased $323,000 compared to 1998. The Company's effective
tax rate is 18.2% for 2000, 17.4% for 1999, and 21.0% for 1998, respectively.
This is due to the Company's investments in tax advantaged municipal securities
and bank owned life insurance.
33
LIQUIDITY AND INTEREST RATE SENSITIVITY
---------------------------------------
The primary functions of asset/liability management are to assure
adequate liquidity and maintain an appropriate balance between interest earning
assets and interest bearing liabilities.
Liquidity management involves the ability to meet the cash flow
requirements of customers who may be either depositors wanting to withdraw funds
or borrowers needing assurance that sufficient funds will be available to meet
their credit needs. Funding affecting short-term liquidity, including deposits,
repurchase agreements, federal funds purchased, and short-term borrowings
increased $314.8 million during 2000. Long-term borrowings decreased $76.6
million during 2000.
The goal of interest rate sensitivity management is to avoid
fluctuating net interest margins and to enhance consistent growth of net
interest income through periods of changing interest rates. Such sensitivity is
measured as the difference in the volume of assets and liabilities in the
existing portfolio that are subject to repricing in a future time period.
The following table shows separately the interest rate sensitivity of
each category of interest earning assets and interest bearing liabilities at
December 31, 2000:
Repricing Periods
---------------------------------------------------------------
Within Three Months One Year Over
Three Through Through Five
Months One Year Five Years Years
--------- --------- --------- ---------
(In Thousands)
Assets
Interest bearing deposits at banks $10,741 $ -- $ -- $ --
Investment securities 54,765 84,132 137,987 316,432
Loans (1) 493,597 255,541 581,513 352,547
Other assets 11,743 -- -- 213,510
--------- --------- --------- ---------
570,846 339,673 719,500 882,489
--------- --------- --------- ---------
Liabilities and equity
Non-interest bearing deposits 293,997 -- -- --
Interest bearing deposits (2) 317,157 411,696 303,952 487,451
Borrowed funds 162,254 2,500 75,000 213,087
Preferred securities -- -- -- 40,250
Other liabilities -- -- -- 27,736
Hedging instruments 70,000 (30,000) (40,000) --
Shareholders' equity -- -- -- 177,428
--------- --------- --------- ---------
843,408 384,196 338,952 945,952
--------- --------- --------- ---------
Interest sensitivity gap (272,562) (44,523) 380,548 (63,463)
--------- --------- --------- ---------
Cumulative interest rate sensitivity gap ($272,562) ($317,085) $63,463 $ --
========= ========= ========= =========
(1) Adjustable rate loans are included in the period in which interest
rates are next scheduled to adjust rather than in the period in which
they are due. Fixed-rate loans are included in the period in which they
are scheduled to be repaid and are adjusted to take into account
estimated prepayments based upon assumptions estimating the prepayments
in the interest rate environment prevailing during the fourth calendar
quarter of 2000. The table assumes prepayments and scheduled principal
amortization of fixed-rate loans and mortgage-backed securities, and
assumes that adjustable-rate mortgages will reprice at contractual
repricing intervals. There has been no adjustment for the impact of
future commitments and loans in process.
(2) Savings and NOW deposits are scheduled for repricing based on
historical deposit decay rate analyses, as well as historical moving
averages of run-off for the Company's deposits in these categories.
While generally subject to immediate withdrawal, management considers a
portion of these accounts to be core deposits having
34
significantly longer effective maturities based upon the Company's
historical retention of such deposits in changing interest rate
environments. Specifically, 31.3% of these deposits are considered
repriceable within three months and 68.7% are considered repriceable in
the over five-year category.
- ------------
Interest rate sensitivity is a function of the repricing
characteristics of the Company's assets and liabilities. These characteristics
include the volume of assets and liabilities repricing, the timing of the
repricing, and the relative levels of repricing. Attempting to minimize the
interest rate sensitivity gaps is a continual challenge in a changing rate
environment. Based on the Company's gap position as reflected in the above
table, current accepted theory would indicate that net interest income would
increase in a falling interest rate environment and would decrease in a rising
interest rate environment. An interest rate gap table does not, however, present
a complete picture of the impact of interest rate changes on net interest
income. First, changes in the general level of interest rates do not affect all
categories of assets and liabilities equally or simultaneously. Second, assets
and liabilities which can contractually reprice within the same period may not,
in fact, reprice at the same time or to the same extent. Third, the table
represents a one-day position; variations occur daily as the Company adjusts its
interest sensitivity throughout the year. Fourth, assumptions must be made to
construct such a table. For example, non-interest bearing deposits are assigned
a repricing interval of within three months, although history indicates a
significant amount of these deposits will not move into interest bearing
categories regardless of the general level of interest rates. Finally, the
repricing distribution of interest sensitive assets may not be indicative of the
liquidity of those assets.
Gap analysis is a useful measurement of asset and liability management;
however, it is difficult to predict the effect of changing interest rates based
solely on this measure. Therefore, the Company supplements gap analysis with the
calculation of the Economic Value of Equity. This report forecasts changes in
the Company's market value of portfolio equity ("MVPE") under alternative
interest rate environments. The MVPE is defined as the net present value of the
Company's existing assets, liabilities, and off-balance sheet instruments. The
calculated estimates of change in MVPE at December 31, 2000 are as follows:
MVPE
Change in Interest Rate Amount % Change
- ----------------------- ------ --------
(In Thousands)
+300 Basis Points $233,899 (35)%
+200 Basis Points 275,329 (24)
+100 Basis Points 320,333 (11)
Flat Rate 361,569 -
- -100 Basis Points 374,811 4
- -200 Basis Points 385,704 7
- -300 Basis Points 394,768 9
Management believes that the assumptions utilized in evaluating the
vulnerability of the Company's earnings and capital to changes in interest rates
approximate actual experience; however, the interest rate sensitivity of the
Company's assets and liabilities as well as the estimated effect of changes in
interest rates on MVPE could vary substantially if different assumptions are
used or actual experience differs from the experience on which the assumptions
were based.
If the Company should experience a mismatch in its desired gap ranges
or an excessive decline in its MVPE subsequent to an immediate and sustained
change in interest rate, it has a number of options which it could utilize to
remedy such mismatch. The Company could restructure its investment portfolio
through the sale or purchase of securities with more favorable repricing
attributes. It could also emphasize loan products with appropriate maturities or
repricing attributes, or it could attract deposits or obtain borrowings with
desired maturities.
The Company anticipates interest rate levels will fall in the first half of
2001, with no clear indication of sustainable rising or falling rates
thereafter. Given this assumption, the Company's asset/liability strategy for
2001 is to maintain a negative gap position (interest-bearing liabilities
subject to repricing greater than interest-earning assets subject to repricing)
for periods up to a year. The impact of a falling or constant interest rate
environment on net interest income is not expected to be significant to the
Company's results of operations. Effective monitoring of these interest
sensitivity gaps is the priority of the Company's asset/liability management
committee.
35
CAPITAL ADEQUACY
- ----------------
The following table sets forth certain capital performance ratios for
the Company.
2000 1999 1998
---- ---- ----
CAPITAL PERFORMANCE
Return on average assets 1.24 1.26 1.17
Return on average equity 19.00 17.90 15.00
Earnings retained 50.94 51.00 55.70
CAPITAL LEVELS
Tier 1 Capital to Total Capital to
Tier 1 Capital to Risk-Weighted Risk-Weighted
Average Assets Ratio Assets Ratio Assets Ratio
---------------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
The Company 8.06% 8.58% 10.59% 11.43% 11.85% 12.73%
National Penn Bank 7.09% 6.83% 9.19% 9.16% 10.45% 10.42%
Panasia Bank 7.79% N/A 20.11% N/A 21.39% N/A
"Well Capitalized" institution 5.00% 5.00% 6.00% 6.00% 10.00% 10.00%
(under banking regulations)
The Company's capital ratios above compare favorably to the minimum
required amounts of Tier 1 and total capital to "risk-weighted" assets and the
minimum Tier 1 leverage ratio, as defined by banking regulators. At December 31,
2000, the Company was required to have minimum Tier 1 and total capital ratios
of 4.0% and 8.0%, respectively, and a minimum Tier 1 leverage ratio of 4.0%. In
order for the Company to be considered "well capitalized," as defined by banking
regulators, the Company must have Tier 1 and total capital ratios of 6.0% and
10.0%, respectively, and a minimum Tier 1 leverage ratio of 5.0%. At December
31, 2000, the Company meets the criteria for a well capitalized institution, and
management believes that, under current regulations, the Company will continue
to meet its minimum capital requirements in the foreseeable future.
The Company does not presently have any commitments for significant
capital expenditures. The Company is not under any agreement with regulatory
authorities nor is it aware of any current recommendations by the regulatory
authorities which, if they were to be implemented, would have a material effect
on liquidity, capital resources, or operations of the Company.
In July 1999, The Company's Board of Directors approved the repurchase
of up to 850,000 shares of its common stock to be used for the Company's
dividend reinvestment, stock option, employee stock purchase plans, and other
stock-based corporate plans. The stock repurchase plan authorizes the Company to
make repurchases from time to time in open market or privately negotiated
transactions. Effective July 23, 2000, the Company rescinded its stock purchase
program. The Company repurchased 441,000 shares at a cost of $10,380,000 through
that date.
ACQUISITION OF PANASIA BANK
---------------------------
On July 11, 2000, the Company completed the acquisition of Panasia Bank
(Panasia), a community bank with $110 million in assets. Under the terms of the
acquisition, the outstanding shares of Panasia stock were purchased for $29 per
share, and the outstanding Panasia stock options were cancelled for cash equal
to the difference between their exercise prices and $29 per share, at a total
cost of $20 million. The Company financed the Panasia acquisition with a
four-year loan from an unaffiliated financial institution. This transaction was
accounted for under the purchase method of accounting. Under the purchase method
of accounting, Panasia's results of operation are included in the Company's
consolidated results of operation from and after July 11, 2000.
More information is available in the Company's Current Report on Form 8-K
dated July 11, 2000, filed with the Securities and Exchange Commission ("SEC").
The Company anticipates that the Panasia acquisition will be accretive to
the Company's earnings in 2001.
36
ACQUISITION OF COMMUNITY INDEPENDENT BANK, INC.
-----------------------------------------------
On January 3, 2001, the Company acquired Community Independent Bank, Inc.
("Community") by its merger with and into the Company. Community's banking
subsidiary, Bernville Bank, N.A., had $100 million in assets as of December 31,
2000. Under the terms of the merger, each outstanding share of Community stock
was converted into .945 share of the Company's common stock, resulting in
issuance of 659,245 shares of the Company's common stock. Outstanding options
for Community stock were converted into options for 19,184 shares of the
Company's common stock. The transaction was accounted for under the pooling of
interests method of accounting.
More information is available in the Company's Current Reports on Form
8-K dated July 11, 2000, October 25, 2000, and December 20, 2000, each filed
with the SEC, and in the Company's registration statement on Form S-4, filed
with the SEC on September 12, 2000.
Merger and consolidation costs relating to the Community acquisition may
have a negative impact on the Company's 2001 earnings. The Company anticipates
that the Community acquisition will be accretive to the Company's earnings in
2002.
FUTURE OUTLOOK
--------------
In 2001, the Company anticipates opening two new branches, one in
Northampton County, and one in its Elverson National Bank Division.
FORWARD-LOOKING STATEMENTS
--------------------------
The Company has discussed earnings, asset quality, recent
acquisitions, and branch expansion in this report. These, and any other
statements preceded by, followed by or that include the words "believes,"
"expects," "anticipates," "estimates," or similar expressions are
forward-looking statements.
Risks and uncertainties could cause actual future results and
investments to differ materially from those contemplated in such forward-looking
statements. These risks and uncertainties include, but are not limited to, the
following:
o Expected cost savings from the Community merger, including reductions
in interest and non-interest expense, may not be fully realized or
realized as quickly as expected.
o The Company's revenues following the Community merger may be lower
than expected, or loan losses, deposit attrition, operating costs,
customer losses or business disruption following the Community merger
may be greater than expected.
o Commercial loan growth following the Community merger may be lower
than expected.
o Costs, difficulties or delays related to the integration of
Community's business with the Company's business may be greater or
longer than expected.
o Expected cost savings from the Company's acquisition of Panasia may
not be fully realized or realized as quickly as expected.
o Revenues of Panasia may be lower than expected, or loan losses,
deposit attrition, operating costs, customer losses or business
disruption at Panasia may be greater than expected.
o Commercial loan growth at Panasia may be lower than expected.
o Costs, difficulties or delays related to the integration of Panasia's
business with the Company's business may be greater or longer than
expected.
o Start-up costs of new subsidiaries may be greater, and revenue ramp-up
of such subsidiaries may take longer, than expected.
o Changes in the interest rate environment may reduce interest margins.
o Competitive pressures among depository and other financial
institutions may increase significantly.
o General economic or business conditions, either nationally or in the
regions which the Company will be doing business, may be less
favorable than expected, resulting in, among other things, a
deterioration in credit quality or a reduced demand for credit.
o Technological changes and systems integration may be harder to make or
more expensive than expected.
37
o Legislation or regulatory changes may adversely affect the Company's
business.
o Adverse changes may occur in the securities markets.
These risks and uncertainties are all difficult to predict, and most
are beyond the control of the Company's management. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this report. The Company undertakes no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- --------------------------------------------------------------------
Information with respect to quantitative and qualitative disclosures
about market risk is included in the information under Management's Discussion
and Analysis at Item 7 hereof.
(This space intentionally left blank.)
38
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
- ----------------------------------------------------
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
ASSETS 2000 1999
------------ ------------
Cash and due from banks $ 80,859 $ 62,953
Interest bearing deposits in banks 10,741 4,039
Federal funds sold 7,000 -
------------ ------------
Total cash and cash equivalents 98,600 66,992
Investment securities available for sale, at fair value 593,316 516,027
Loans, less allowance for loan losses of $37,098 and $34,139
in 2000 and 1999, respectively 1,683,198 1,536,404
Premises and equipment, net 25,439 23,289
Accrued interest receivable 17,066 13,855
Bank owned life insurance 51,088 48,494
Investments, at equity 2,265 2,147
Other assets 41,536 35,224
------------ ------------
Total assets $ 2,512,508 $ 2,242,432
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 293,997 $ 210,272
Interest-bearing 1,520,256 1,382,982
------------ ------------
Total deposits 1,814,253 1,593,254
Securities sold under repurchase agreements and federal funds purchased 297,464 200,148
Short-term borrowings 8,945 12,448
Long-term borrowings 146,432 223,077
Guaranteed preferred beneficial interests in Company's subordinated debentures 40,250 40,250
Accrued interest payable and other liabilities 27,736 25,559
------------ ------------
Total liabilities 2,335,080 2,094,736
------------ ------------
Shareholders' equity
Preferred stock, no stated par value;
authorized 1,000,000 shares, none issued - -
Common stock, no stated par value; authorized 62,500,000 shares,
issued and outstanding 2000 - 18,690,697; 1999 - 17,736,699,
net of shares in Treasury: 2000 - 39,837; 1999 - 108,176 151,043 135,526
Retained earnings 24,538 26,739
Accumulated other comprehensive income (loss) 2,700 (11,616)
Treasury stock, at cost (853) (2,953)
------------- ------------
Total shareholders' equity 177,428 147,696
------------ ------------
Total liabilities and shareholders' equity $ 2,512,508 $ 2,242,432
============ ============
The accompanying notes are an integral part of these statements.
39
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------
Year ended December 31,
----------------------------------------
2000 1999 1998
----------- ---------- ----------
INTEREST INCOME
Loans, including fees $ 148,301 $ 131,861 $ 125,152
Investment securities
Taxable 23,550 19,961 17,598
Tax-exempt 11,917 11,524 9,669
Federal funds sold 588 489 267
Trading assets - 196 851
Deposits in banks 296 239 544
----------- ---------- ----------
Total interest income 184,652 164,270 154,081
----------- ---------- ----------
INTEREST EXPENSE
Deposits 69,142 56,537 53,518
Securities sold under repurchase agreements, and federal funds purchased 16,752 7,165 6,108
Short-term borrowings 416 272 553
Long-term borrowings 13,392 18,779 16,428
----------- ---------- ----------
Total interest expense 99,702 82,753 76,607
----------- ---------- ----------
Net interest income 84,950 81,517 77,474
Provision for loan losses 5,600 5,960 5,960
----------- ---------- ----------
Net interest income after provision for loan losses 79,350 75,557 71,514
----------- ---------- ----------
OTHER INCOME
Trust income 4,855 4,006 3,264
Service charges on deposit accounts 6,839 5,757 5,266
Bank owned life insurance income 2,593 2,270 1,604
Other service charges and fees 10,107 8,104 5,711
Net gains on sale of investment securities 255 15 1,888
Mortgage banking income (loss) 2,398 953 (80)
Equity in undistributed net earnings of affiliates 117 178 329
Trading revenue - 2,055 739
----------- ---------- ----------
Total other income 27,164 23,338 18,721
----------- ---------- ----------
OTHER EXPENSES
Salaries, wages and employee benefits 39,868 37,247 33,267
Net premises and equipment 11,079 10,404 9,627
Other operating 19,830 18,073 18,338
----------- ---------- ----------
Total other expenses 70,777 65,724 61,232
----------- ---------- ----------
Income before income taxes 35,737 33,171 29,003
Income taxes 6,500 5,762 6,085
----------- ---------- ----------
Net income $ 29,237 $ 27,409 $ 22,918
========== ========= =========
PER SHARE OF COMMON STOCK
Basic earnings $ 1.57 $ 1.47 $ 1.22
Diluted earnings $ 1.56 $ 1.44 $ 1.20
Dividends paid $ 0.77 $ 0.72 $ 0.54
The accompanying notes are an integral part of these statements.
40
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(Dollars in thousands)
- --------------------------------------------------------------------------------
Accumulated
other
Additional compre- Compre-
Common paid-in Retained hensive Treasury hensive
Shares Par value capital earnings (loss) income stock Total income
------ --------- ------- -------- ------------- ----- ----- ------
Balance at January 1, 1998 17,080,328 $ 25,620 $ 96,657 $ 22,431 $ 7,648 $(3,428) $ 148,928
Net income - - - 22,918 - - 22,918 $22,918
Cash dividends declared - - - (10,422) - - (10,422)
Shares issued under stock-based plans 42,946 855 - - - - 855
Other comprehensive income, net
of reclassification adjustment
and taxes - - - - 1,905 - 1,905 1,905
Total comprehensive income - - - - - - - $24,823
Conversion to no par value stock - 95,490 (95,107) - - - 383
Effect of treasury stock transactions (133,652) (7,671) (1,550) - - 3,428 (5,793)
---------- -------- -------- --------- -------- ------- ---------
Balance at December 31, 1998 16,989,622 114,294 - 34,927 9,553 - 158,774
Net income - - - 27,409 - - 27,409 $27,409
Cash dividends declared - - - (14,478) - - (14,478)
5% stock dividend 850,577 21,119 - (21,119) - - -
Shares issued under stock-based plans 4,676 693 - - - - 693
Other comprehensive (loss), net
of reclassification adjustment
and taxes - - - - (21,169) - (21,169) (21,169)
Total comprehensive income - - - - - - $ 6,240
Effect of treasury stock transactions (108,176) (580) - - - (2,953) (3,533)
---------- -------- -------- --------- -------- ------- ---------
Balance at December 31, 1999 17,736,699 135,526 - 26,739 (11,616) (2,953) 147,696
Net income - - - 29,237 - - 29,237 $29,237
Cash dividends declared - - - (14,699) - - (14,699)
5% stock dividend 887,062 16,739 - (16,739) - - -
Other comprehensive income, net
of reclassification adjustment
and taxes - - - - 14,316 - 14,316 14,316
Total comprehensive income - - - - - - - $ 43,553
Effect of treasury stock transactions 66,936 (1,222) - - - 2,100 878
---------- -------- -------- --------- -------- ------- ---------
Balance at December 31, 2000 18,690,697 $151,043 $ - $ 24,538 $ 2,700 $ (853) $ 177,428
========== ======== ======== ========= ======== ======= =========
The accompanying notes are an integral part of this statement.
41
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 29,237 $ 27,409 $ 22,918
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan and lease losses 5,600 5,960 5,960
Depreciation and amortization 5,344 4,655 4,283
Trading account securities - 21,589 (21,589)
Deferred income tax benefit 6,927 (12,476) (609)
Amortization of premiums and discounts on investment securities, net 1,862 1,875 1,040
Investment securities gains, net (255) (15) (1,888)
Mortgage loans originated for resale (42,235) (50,437) (70,586)
Sale of mortgage loans originated for resale 42,430 50,870 71,195
Changes in assets and liabilities
(Increase) decrease in accrued interest receivable (3,211) 737 (3,319)
Increase in accrued interest payable 5,561 3,018 185
Decrease (increase) in other assets (14,434) (2,547) 122
Increase (decrease) in other liabilities (3,740) (93) 2,888
--------- -------- --------
Net cash provided by operating activities 33,086 50,545 10,600
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in term funds sold - - (15,000)
Cash paid in excess of cash equivalents for businesses acquired (1,387) - -
Proceeds from sales of investment securities available for sale 45,546 45,661 55,435
Proceeds from maturities of investment securities held to maturity - - 7,206
Proceeds from maturities of investment securities available for sale 37,093 121,830 51,243
Purchase of investment securities available for sale (147,337) (180,925) (264,219)
Net increase in loans (151,007) (137,392) (118,331)
Proceeds from sales of foreclosed real estate - - 28
Purchases of premises and equipment (6,494) (3,657) (2,101)
Purchase of bank-owned life insurance (2,594) (6,890) (21,604)
--------- -------- --------
Net cash used in investing activities (226,180) (161,373) (307,343)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in interest and non-interest bearing demand deposits and savings accounts 156,702 20,018 126,975
Net (decrease) increase in certificates of deposit 64,297 99,934 (7,196)
Net increase in securities sold under agreements to repurchase and federal
funds purchased 97,316 40,562 88,398
Net (decrease) increase in short-term borrowings (3,503) (6,684) 12,647
Proceeds from long-term borrowings 68,376 50,100 105,000
Repayments of long-term borrowings (145,021) (75,650) (11,982)
Issuance of common stock under dividend reinvestment and stock option plan - 693 1,238
Effect of treasury stock transactions 878 (3,533) (5,793)
Cash dividends (14,343) (13,421) (10,151)
--------- -------- --------
Net cash provided by financing activities 224,702 112,019 299,136
--------- -------- --------
Net increase in cash and cash equivalents 31,608 1,191 2,393
Cash and cash equivalents at beginning of year 66,992 65,801 63,408
--------- -------- --------
Cash and cash equivalents at end of year $ 98,600 $ 66,992 $ 65,801
========= ======== ========
The accompanying notes are an integral part of these statements.
42
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
National Penn Bancshares, Inc., primarily through its Bank
subsidiaries, National Penn Bank (NPB) and Panasia Bank, N.A. (Panasia)
(collectively, the Banks), has been serving residents and businesses of
southeastern Pennsylvania since 1874 and northern New Jersey since July
2000. The Banks, which have in excess of 60 branch locations, are locally
managed community banks providing commercial banking products, primarily
loans and deposits. Trust services are provided through Investors Trust
Company (ITC). The Banks, ITC and Penn Securities, Inc. encounter vigorous
competition for market share in the communities they serve from bank
holding companies, other community banks, thrift institutions and other
non-bank financial organizations, such as mutual fund companies, insurance
companies and brokerage companies.
Penn Securities, Inc., is a registered broker dealer with the
Securities and Exchange Commission and is a member of the National
Association of Securities Dealers.
In May 1999, NPB formed Penn 1st Financial Services, Inc. (Penn 1st)
(formerly National Penn Mortgage Company). Penn 1st is a mortgage banking
company and is engaged in the activity of extending credit and servicing
loans.
The Company, the Banks, ITC and Penn Securities, Inc. are subject to
regulations of certain state and federal agencies. These regulatory
agencies periodically examine the Company and its subsidiaries for
adherence to laws and regulations. As a consequence, the cost of doing
business may be affected.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting policies followed by the Company conform with accounting
principles generally accepted in the United States of America and with
predominant practice within the banking industry.
The consolidated financial statements include the accounts of the
Company and the Company's wholly owned subsidiaries, NPB, Panasia, ITC,
National Penn Investment Company, National Penn Life Insurance Company, NPB
Capital Trust, and NPB's wholly owned subsidiaries Penn 1st, Penn
Securities, Inc., Link Financial Services, Inc., NPB Delaware, Inc., 1874
Financial Corp., and National Penn Consulting Services, Inc. Investments
owned between 20% and 50% are accounted for using the equity method. All
material intercompany balances have been eliminated.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the balance sheets, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
The principal estimates that are susceptible to significant change in
the near term relate to the allowance for loan losses and certain
intangible assets, such as goodwill and core deposits. The evaluation of
the adequacy of the allowance for loan losses includes an analysis of the
individual loans and overall risk characteristics and size of the different
loan portfolios, and takes into consideration current economic and market
conditions, the capability of specific borrowers to pay specific loan
obligations, as well as current loan collateral values. However, actual
losses on specific loans, which also are encompassed in the analysis, may
vary from estimated losses.
(Continued)
43
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Substantially all outstanding goodwill resulted from the acquisition of
Panasia Bank, a northern New Jersey institution concentrating in the Asian
community. As the result of Panasia's market penetration in the northern
New Jersey, the Company had formulated its own strategy to create such a
market role. Accordingly, implicit in the purchase of the Panasia franchise
was the acquisition of that role. However, if such benefits, including new
business, are not derived or the Company changes its business plan,
estimated amortization may increase and/or a charge for impairment may be
recognized.
Core deposit intangibles are amortized over estimated lives of deposit
accounts. However, decreases in deposit lives may result in increased
amortization and/or a charge for impairment may be recognized.
Statement of Financial Accounting Statements (SFAS) No. 131 establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
subsequent interim financial reports issued to shareholders. It also
establishes standards for related disclosure about products and services,
geographic areas, and major customers. The Company has one reportable
segment, "Community Banking." All of the Company's activities are
interrelated, and each activity is dependent and assessed based on how each
of the activities of the Company supports the others. For example,
commercial lending is dependent upon the ability of the Bank to fund itself
with retail deposits and other borrowings and to manage interest rate and
credit risk. This situation is also similar for consumer and residential
mortgage lending. Accordingly, all significant operating decisions are
based upon analysis of the Company as one operating segment or unit.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101), which addresses certain criteria for revenue recognition. SAB
101, as amended by SAB 101A and SAB 101B, outlines the criteria that must
be met to recognize revenue and provides guidance for disclosures related
to revenue recognition policies. On June 26, 2000, the SEC issued SAB 101B
to defer the effective date of implementation of SAB 101 until no later
than the fourth fiscal quarter of fiscal years beginning after December 31,
1999. Management believes the Company's revenue recognition policies comply
with the guidance contained in SAB 101 and, therefore, the Company's
results of operations were not materially affected.
INVESTMENT SECURITIES
Investment securities which are held for indefinite periods of time,
which management intends to use as part of its asset/liability strategy, or
which may be sold in response to changes in interest rates, changes in
prepayment risk, increases in capital requirements, or other similar
factors are classified as available for sale and are carried at fair value.
Net unrealized gains and losses for such securities, net of tax, are
required to be recognized as a separate component of shareholders' equity
and excluded from determination of net income. Gains or losses on
disposition are based on the net proceeds and cost of the securities sold,
adjusted for amortization of premiums and accretion of discounts, using the
specific identification method. Debt and equity securities held for resale
during 1998 were classified as trading account securities and reported at
fair value. Realized and unrealized gains or losses are recorded in
non-interest income as trading revenue. The Company did not have any
trading securities as of December 31, 2000 and 1999.
(Continued)
44
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The Company entered into interest rate swap and floor agreements to
manage its sensitivity to interest rate risk. For interest rate risk
management swap and floors agreements, interest income or interest expense
is accrued over the terms of the agreements and transaction fees are
deferred and amortized to interest income or expense over the terms of the
agreements.
SFAS No. 133, (SFAS 133) Accounting for Derivative Instruments and
Hedging Activities was amended in June, 1999 by SFAS 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133, and in June, 2000, by SFAS 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities,
(collectively SFAS 133). SFAS 133 requires that entities recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Under SFAS 133 an
entity may designate a derivative as a hedge of exposure to either changes
in: (a) fair value of a recognized asset or liability or firm commitment,
(b) cash flows of a recognized or forecasted transaction, or (c) foreign
currencies of a net investment in foreign operations, firm commitments,
available-for-sale securities or a forecasted transaction. Depending upon
the effectiveness of the hedge and/or the transaction being hedged, any
changes in the fair value of the derivative instrument is either recognized
in earnings in the current year, deferred to future periods, or recognized
in other comprehensive income. Changes in the fair value of all derivative
instruments not recognized as hedge accounting are recognized in current
year earnings. SFAS 133 is required for all fiscal quarters or fiscal years
beginning after June 15, 2000. The Company adopted SFAS 133 effective
January 1, 2001 and the adoption did not have a material impact on the
Company's consolidated financial position or results of operations.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal, reduced by unearned income and an allowance for loan and
lease losses. Interest on loans is calculated based upon the principal
amount outstanding. The allowance for loan losses is established through a
provision for loan losses charged as an expense. Loans are charged against
the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an amount
that management believes will be adequate to absorb possible losses on
existing loans that may become uncollectible based on evaluations of the
collectibility of loans, and prior loan loss experience. The evaluations
take into consideration such factors as changes in the nature and volume of
the loan portfolio, overall portfolio quality, review of specific problem
loans, and current economic conditions that may affect the borrower's
ability to pay. Accrual of interest is stopped on a loan when management
believes, after considering economic and business conditions and collection
efforts that the borrower's financial condition is such that collection of
interest is doubtful.
The Company accounts for its impaired loans in accordance with SFAS No.
114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS
No. 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures. This standard requires that a creditor measure
impairment based on the present value of expected future cash flows
discounted at the loan's effective interest rate, except that as a
practical expedient, a creditor may measure impairment based on a loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the
creditor determines that foreclosure is probable. SFAS No. 114 excludes
such homogeneous loans as consumer and mortgage.
(Continued)
45
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The Company accounts for its transfers and servicing financial assets
in accordance with SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, as amended. In
September 2000, the Financial Accounting Standards Board has issued SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which replaces SFAS No.125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, revises the standards for accounting for the securitizations
and other transfers of financial assets and collateral. This new standard
also requires certain disclosures, but carries over most of the provisions
of SFAS 125. SFAS 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001.
The adoption of this statement is not expected to have a material impact on
the Company's consolidated financial statements.
PREMISES AND EQUIPMENT
Buildings, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization computed by the straight-line
method over the estimated useful lives of the assets.
GOODWILL AND CORE DEPOSIT INTANGIBLES
Substantially all outstanding goodwill resulted from the acquisition of
Panasia Bank (Panasia) in 2000 and is being amortized on a straight-line
basis over approximately 20 years and is included in other assets. The
unamortized balance at December 31, 2000 was $11,895,000. Amortization
expense for the year ended December 31, 2000 was $305,000.
The Company has recognized core deposit intangibles, as a result of a
branch acquisition in 1997, which are being amortized on a straight-line
basis over 15 years and are included in other assets.
OTHER ASSETS
Financing costs related to the issuance of junior subordinated
debentures are being amortized over the life of the instruments and are
included in other assets.
EMPLOYEE BENEFIT PLANS
The Company has certain employee benefit plans covering substantially
all employees. The Company follows the disclosure provisions of SFAS No.
132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, which revises employers' disclosures about pension and other
postretirement benefit plans. Net pension expense consists of service cost,
interest cost, return on pension assets and amortization of unrecognized
initial net assets. The Company accrues pension costs as incurred.
The Company accounts for stock options under SFAS No. 123, Accounting
for Stock-Based Compensation, which contains a fair value-based method for
valuing stock-based compensation that entities may use, which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, the standard permits entities to
continue accounting for employee stock options and similar equity
instruments under Accounting Principles Board (APB) Opinion 25, Accounting
for Stock Issued to Employees. Entities that continue to account for stock
options using APB Opinion 25 are required to make pro forma disclosures of
net income and earnings per share, as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied. The Company's stock
option plans are accounted for under APB Opinion 25.
(Continued)
46
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
INCOME TAXES
The Company accounts for income taxes under the liability method of
accounting for income taxes specified by SFAS No. 109, Accounting for
Income Taxes. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates that will be in effect
when these differences reverse. Deferred tax expense is the result of
changes in deferred tax assets and liabilities. The principal types of
differences between assets and liabilities for financial statement and tax
return purposes are allowance for loan losses, deferred loan fees, deferred
compensation and securities available for sale.
STATEMENTS OF CASH FLOWS
The Company considers cash and due from banks, interest bearing
deposits in banks and federal funds sold as cash equivalents for the
purposes of reporting cash flows. Cash paid for interest and taxes is as
follows (in thousands):
Year ended December 31,
---------------------------------------------
2000 1999 1998
---------- ----------- ----------
Interest $ 95,997 $ 79,832 $ 74,918
Taxes 9,372 7,323 8,288
LOAN FEES AND RELATED COSTS
The Company defers and amortizes certain origination and commitment
fees, and certain direct loan origination costs over the contractual life
of the related loans. This results in an adjustment of the related loan's
yield.
OTHER REAL ESTATE OWNED
Other real estate owned is recorded at the lower of cost or estimated
fair market value less costs of disposal. When property is acquired, the
excess, if any, of the loan balance over fair market value is charged to
the allowance for possible loan losses. Periodically thereafter, the asset
is reviewed for subsequent declines in the estimated fair market value.
Subsequent declines, if any, and holding costs, as well as gains and losses
on subsequent sale, are included in the consolidated statements of income.
EARNINGS PER SHARE
Earnings per share are calculated on the basis of the weighted average
number of common shares outstanding during the year. All weighted average,
actual shares or per share information in the financial statements have
been adjusted retroactively for the effect of stock dividends and splits.
(Continued)
47
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The Company calculates earnings per share under the provisions of SFAS
No. 128, Earnings Per Share, which eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings
per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common
shareholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised and converted into common stock.
ADVERTISING COSTS
It is the Company's policy to expense advertising costs in the period
in which they are incurred. Advertising expense for the years ended
December 31, 2000, 1999 and 1998, was approximately $2,568,000, $2,362,000
and $2,707,000, respectively.
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income requires the reporting of
comprehensive income, which includes net income as well as certain other
items, which results in a change to equity during the period.
December 31, 2000 December 31, 1999 December 31, 1998
------------------------------ ------------------------------- ---------------------------
Before Tax Net of Before Tax Net of Before Tax Net of
tax (expense) tax tax (expense) tax tax (expense) tax
amount benefit amount amount benefit amount amount benefit amount
------ ------- ------ ------ ------- ------ ------ ------- ------
Unrealized gains (losses)
on securities
Unrealized holding (losses)
gains arising during period $22,279 $(7,798) $14,481 $(32,540) $11,381 $(21,159) $4,819 $(1,687) $3,132
Less reclassification
adjustment for gains
realized in net income 255 (90) 165 15 (5) 10 1,888 (661) 1,227
Other comprehensive
(loss) income, net $22,024 $(7,708) $14,316 $(32,555) $11,386 $(21,169) $2,931 $(1,026) $1,905
2. ACQUISITIONS
On January 3, 2001, the Company completed a merger with Community
Independent Bank, Inc. (CIB). Under the terms of the merger, each share of
CIB stock was converted into 0.945 shares of the Company's common stock,
resulting in an issuance of 659,245 shares of the Company's common stock.
In addition, outstanding stock options to purchase CIB common stock were
converted into stock options to purchase 19,188 shares of the Company's
common stock, with an exercise price of $9.33 to $12.83 per share. This
transaction was accounted for under the pooling of interests method of
accounting.
On July 14, 2000, the Company completed the acquisition of Panasia.
Under terms of the agreement, each share of Panasia stock was purchased for
$29 per share and each outstanding Panasia stock option was cancelled for
cash equal to the difference between $29 and its per share exercise price,
for a total cost $20,005,000. This transaction was accounted for under the
purchase method of accounting and the results of operations of the Company
for the year ended December 31, 2000, include only the results of
operations of Panasia from the date of acquisition, July 11, 2000, through
December 31, 2000. The acquisition resulted in the recording of
approximately $12.2 million of goodwill, which is being amortized on a
straight-line basis over 20 years.
(Continued)
48
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
2. ACQUISITIONS - Continued
On January 4, 1999, the Company, through the Bank, completed a merger
with Elverson National Bank (Elverson). Under the terms of the merger, each
share of Elverson was converted into 1.54219 shares of the Company's common
stock, resulting in an issuance of 4,012,642 shares of the Company's common
stock. In addition, outstanding stock options to purchase Elverson common
stock were converted into stock options to purchase 61,048 shares of the
Company's common stock, with an exercise price of $12.36 to $14.99 per
share. This transaction was accounted for under the pooling of interests
method of accounting. Accordingly, all prior period amounts have been
restated to reflect the acquisition.
3. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair values
of the Company's investment securities are summarized as follows (in
thousands):
December 31, 2000
----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------- ---------- ---------- ----------
U.S. Treasury and U.S. Government
agencies $ 141,574 $ 1,822 $ (513) $ 142,883
State and municipal bonds 230,688 4,162 (1,765) 233,085
Mortgage-backed securities 163,937 1,762 (663) 165,036
Marketable equity securities and other 52,964 1,681 (2,333) 52,312
---------- ---------- ----------- ----------
Totals $ 589,163 $ 9,427 $ (5,274) $ 593,316
========= ========= ========== =========
December 31, 1999
----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------- ---------- ---------- ----------
U.S. Treasury and U.S. Government
agencies $ 103,092 $ 716 $ (2,084) $ 101,724
State and municipal bonds 236,768 293 (15,287) 221,774
Mortgage-backed securities 136,684 311 (3,068) 133,927
Marketable equity securities and other 57,354 2,677 (1,429) 58,602
---------- ---------- ----------- ----------
Totals $ 533,898 $ 3,997 $ (21,868) $ 516,027
========= ========= ========== =========
The amortized cost and fair value of investment securities available
for sale, by contractual maturity, at December 31, 2000 (in thousands), are
shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Amortized Fair
cost value
------------ ------------
Due in one year or less $ 31,788 $ 31,960
Due after one through five years 82,145 82,643
Due after five through ten years 49,520 50,358
Due after ten years 372,746 376,043
Marketable equity securities and other 52,964 52,312
------------ ------------
$ 589,163 $ 593,316
=========== ===========
(Continued)
49
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
3. INVESTMENT SECURITIES - Continued
Proceeds from the sales of investment securities during 2000, 1999 and
1998, were $45,546,000, $45,661,000 and $55,435,000, respectively. Gross
gains realized on those sales were $676,000, $324,000 and $1,890,000 in
2000, 1999 and 1998, respectively, gross losses were $421,000 in 2000 and
$339,000 in 1999 and losses were $2,000 in 1998. As of December 31, 2000
and 1999, investment securities with a book value of $349,528,000 and
$270,604,000, respectively, were pledged to secure public deposits and for
other purposes as provided by law. As of December 31, 2000 and 1999, the
Company did not have any investment securities of any one issuer where the
carrying value exceeded 10% of shareholders' equity.
4. LOANS
Major classifications of loans are as follows (in thousands):
December 31,
-----------------------------
2000 1999
------------ ------------
Commercial and industrial loans $ 315,264 $ 252,992
Real estate loans
Construction and land development 150,435 136,105
Residential 638,981 649,692
Other 542,728 472,447
Loans to individuals 72,888 59,307
------------ ------------
1,720,296 1,570,543
Allowance for loan losses (37,098) (34,139)
------------- ------------
Total loans, net $ 1,683,198 $ 1,536,404
=========== =========
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $10,898,000 and $11,055,000 at December 31, 2000
and 1999, respectively. If interest on these loans had been accrued,
interest income would have increased by approximately $251,000 and $420,000
for 2000 and 1999, respectively. Loan balances past due 90 days or more and
still accruing interest, but which management expects will eventually be
paid in full, amounted to $4,519,000 and $2,673,000 at December 31, 2000
and 1999, respectively.
The balance of impaired loans was $5,548,000 at December 31, 2000. The
Company has identified a loan as impaired when it is probable that interest
and principal will not be collected according to the contractual terms of
the loan agreement. The impaired loan balance included $5,548,000 of
non-accrual loans. The allowance for loan loss associated with the
$5,548,000 of impaired loans was $1,701,000 at December 31, 2000. The
average impaired loan balance was $10,234,000 during 2000 and the income
recognized on impaired loans during 2000 was $437,000. The Company
recognizes income on impaired loans under the cash basis when the loans are
both current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Company. If these factors do not exist, the
Company will not recognize income on such loans.
The balance of impaired loans was $8,823,000 at December 31, 1999. The
impaired loan balance included $8,823,000 of non-accrual loans. The
allowance for loan loss associated with the $8,823,000 of impaired loans
was $2,437,000 at December 31, 1999. The average impaired loan balance was
$8,854,000 and $6,828,000 in 1999 and 1998, respectively, and the income
recognized on impaired loans during 1999 and 1998 was $439,000 and
$289,000, respectively.
(Continued)
50
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
4. LOANS - Continued
Changes in the allowance for loan losses are as follows (in thousands):
Year ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Balance, beginning of year $ 34,139 $ 30,835 $ 28,467
Acquisition of Panasia 1,384 - -
Provision charged to operations 5,600 5,960 5,960
Loans charged off (6,095) (5,157) (5,201)
Recoveries 2,070 2,501 1,609
--------- --------- ---------
Balance, end of year $ 37,098 $ 34,139 $ 30,835
========= ========= =========
5. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as
follows (in thousands):
December 31,
Estimated -------------
useful lives 2000 1999
-------------- --------- ---------
Land Indefinite $ 2,792 $ 2,766
Buildings 5 to 40 years 17,060 16,178
Equipment 3 to 10 years 29,358 25,115
Leasehold improvements 2 to 40 years 6,353 4,597
--------- ---------
55,563 48,656
Accumulated depreciation and amortization (30,124) (25,367)
--------- ---------
$ 25,439 $ 23,289
========= =========
Depreciation and amortization expense amounted to $4,345,000,
$3,976,000 and $3,550,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
6. DEPOSITS
The aggregate amount of jumbo certificates of deposit, each with a
minimum denomination of $100,000, was approximately $236,263,000 and
$195,939,000 in 2000 and 1999, respectively.
At December 31, 2000, the scheduled maturities of certificates of
deposit are as follows (in thousands):
2001 $ 565,213
2002 235,226
2003 33,970
2004 13,247
2005 25,619
Thereafter 1,152
----------
$ 874,427
==========
51
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- -------------------------------------------------------------------------------
7. SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under agreements to
repurchase generally mature within 30 days from the date of the
transactions. Short-term borrowings consist of Treasury Tax and Loan Note
Options and various other borrowings, which generally have maturities of
less than one year. The details of these categories are presented below (in
thousands):
At or for the year ended December 31,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
Securities sold under repurchase agreements
and federal funds purchased
Balance at year-end $ 297,464 $ 200,148 $ 159,586
Average during the year 289,257 158,669 133,380
Maximum month-end balance 343,390 213,735 191,307
Weighted average rate during the year 5.79% 4.52% 4.76%
Rate at December 31 4.94% 4.30% 4.37%
Short-term borrowings
Balance at year-end $ 8,945 $ 12,448 $ 19,132
Average during the year 7,338 5,608 9,551
Maximum month-end balance 11,703 12,448 24,930
Weighted average rate during the year 5.67% 4.85% 5.70%
Rate at December 31 4.87% 4.04% 5.26%
The weighted average rates paid in aggregate on these borrowed funds
for 2000, 1999 and 1998 were 5.79%, 4.53% and 4.82%, respectively.
8. LONG-TERM BORROWINGS
FHLB ADVANCES
At December 31, 2000, advances from the Federal Home Loan Bank (FHLB)
totaling $128,057,000 will mature within one to ten years and are reported
as long-term borrowings. The advances are collateralized by FHLB stock and
certain first mortgage loans and mortgage-backed securities. These advances
had a weighted average interest rate of 6.04%. Unused lines of credit at
the FHLB were $407,660,000 and $195,312,000 at December 31, 2000 and 1999,
respectively.
OTHER BORROWINGS
During 2000, the Company borrowed $21,000,000 with an interest rate of
the federal funds rate plus 0.875%. The note matures on June 30, 2004 and
requires monthly interest and quarterly principal payments. The balance as
of December 31, 2000 is $18,375,000 with an interest rate of 6.285%.
Outstanding borrowings mature as follows (in thousands):
2001 $ 2,500
2002 35,000
2003 -
2004 18,375
2005 -
Thereafter 90,557
---------
$ 146,432
=========
(Continued)
52
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
8. LONG-TERM BORROWINGS - Continued
SUBORDINATED DEBENTURES
The Company issued $41,500,000 of 9% junior subordinated deferrable
interest debentures (the debentures) to NPB Capital Trust (the Trust), a
Delaware business trust, in which the Company owns all of the common
equity. The debentures are the sole asset of the Trust in 1997. The Trust
issued $40,250,000 of preferred securities to investors. The Company's
obligations under the debentures and related documents, taken together,
constitute a fully and unconditional guarantee by the Company of the
Trust's obligations under the preferred securities. The preferred
securities are redeemable by the Company on or after June 20, 2002, or
earlier in the event the deduction of related interest for federal income
taxes is prohibited, treatment as Tier 1 capital is no longer permitted, or
certain other contingencies arise. The preferred securities must be
redeemed upon maturity of the debentures in 2027.
9. PENSION PLANS
The Company has a non-contributory defined benefit pension plan
covering substantially all employees. The Company-sponsored pension plan
provides retirement benefits under pension trust agreements and under
contracts with insurance companies. The benefits are based on years of
service and the employee's compensation during the highest five consecutive
years during the last 10 years of employment. The Company's policy is to
fund pension costs allowable for income tax purposes.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets (in thousands):
December 31,
--------------------------
2000 1999
--------- ---------
Change in benefit obligation
Benefit obligation at beginning of year $ 10,249 $ 9,945
Service cost 997 812
Interest cost 709 639
Actual gain 438 146
Benefits paid (270) (297)
Effect of change in assumptions (534) (996)
--------- ---------
Benefits obligation at end of year 11,589 10,249
--------- ---------
Change in plan assets
Fair value of plan assets at beginning of year 12,835 10,605
Actual return on plan assets 2,310 1,647
Employer contribution 1,107 880
Benefits paid (270) (297)
--------- ---------
Fair value of plan assets at end of year 15,982 12,835
--------- ---------
Funded status 4,393 2,586
Unrecognized net actuarial gain (3,151) (1,840)
Unrecognized prior service cost 116 182
--------- ---------
Prepaid benefit cost (included in other assets) $ 1,358 $ 928
========= =========
(Continued)
53
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
9. PENSION PLANS - Continued
Net pension cost included the following components (in thousands):
Year ended December 31,
--------------------------------------------
2000 1999 1998
--------- --------- ---------
Service cost $ 996 $ 812 $ 724
Interest cost on projected benefit obligation 709 639 587
Actual return on plan assets (2,310) (1,647) (705)
Net amortization and deferral 1,281 845 3
--------- --------- ---------
Net periodic benefit cost $ 676 $ 649 $ 609
========= ========= =========
The assumed discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected
benefit obligation were 7.13% and 4.50%, respectively, in 2000; 6.75% and
4.50%, respectively, in 1999; and 6.63% and 4.63%, respectively, in 1998.
The expected long-term rate of return on assets was 8.25% for 2000, 1999
and 1998.
The Company has a capital accumulation and salary reduction plan under
Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the
plan, all employees are eligible to contribute from 3% to a maximum of 15%
of their annual salary, with the Company matching 50% of any contribution
between 3% and 7%. Matching contributions to the plan were $671,000,
$594,000 and $441,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
10. INCOME TAXES
The components of the income tax expense included in the consolidated
statements of income are as follows (in thousands):
Year ended December 31,
--------------------------------------------
2000 1999 1998
--------- --------- ---------
Income tax expense
Current $ 6,980 $ 6,321 $ 5,906
Deferred federal benefit (572) (1,090) (457)
--------- --------- ---------
6,408 5,231 5,449
Additional paid-in capital from benefit
of stock options exercised 92 531 636
--------- --------- ---------
Applicable income tax expense $ 6,500 $ 5,762 $ 6,085
========= ========= =========
The differences between applicable income tax expense and the amount
computed by applying the statutory federal income tax rate of 35% are as
follows (in thousands):
Year ended December 31,
--------------------------------------------
2000 1999 1998
--------- --------- ---------
Computed tax expense at statutory rate $ 12,508 $ 11,610 $ 10,152
Decrease in taxes resulting from
Tax-exempt loan and investment income (5,700) (5,388) (4,027)
Other, net (308) (460) (40)
--------- --------- ---------
Applicable income tax expense $ 6,500 $ 5,762 $ 6,085
========= ========= =========
(Continued)
54
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
10. INCOME TAXES - Continued
Deferred tax assets and liabilities consist of the following (in
thousands):
2000 1999
--------- ---------
Deferred tax assets
Deferred loan fees $ 254 $ 373
Allowance for loan and lease loss 12,261 11,158
Deferred compensation 907 853
Loan sales valuation 54 54
Investment securities available for sale - 6,254
--------- ---------
13,476 18,692
--------- ---------
Deferred tax liabilities
Pension 665 475
Partnership investments 378 326
Cash to accrual 15 -
Investment securities available for sale 1,454 -
Rehab credit adjustment 44 44
--------- ---------
2,556 845
--------- ---------
Net deferred tax asset (included in other assets) $ 10,920 $ 17,847
========= =========
As a result of the acquisition of Panasia Bank, the Company computed a
net deferred tax asset of $209,000 and a deferred tax liability on
unrealized holding gains of $160,000, during 2000.
11. SHAREHOLDERS' EQUITY
On October 25, 2000, the Company declared a 5% stock dividend to
shareholders of record on December 8, 2000, and payable on December 20,
2000. On October 27, 1999, the Company declared a 5% stock dividend to
shareholders of record on December 6, 1999, and payable on December 22,
1999.
On July 28, 1999, the Company approved a stock repurchase plan of
850,000 shares of its common stock. Repurchases can be from time to time
and will be used for general corporate purposes including the Company's
dividend reinvestment plan, stock options, and other stock based benefit
plans. On July 23, 2000, the repurchase plan was terminated. Prior to the
termination, the Company has repurchased 441,000 shares at a cost of
$10,380,000.
On June 24, 1998, the Company declared a 5-for-4 stock split on its
common stock to shareholders of record on July 15, 1998, and payable on
July 31, 1998, and amended its Articles of Incorporation whereby the number
of authorized shares was increased from 50,000,000 to 62,500,000, both with
no par value.
In April 1998, the Company amended its Articles of Incorporation
whereby the number of authorized common shares was increased from
26,666,667 shares with a par value of $1.875 to 50,000,000 shares with no
par value. The additional paid-in capital account has been combined with
common stock as presented in the consolidated statement of changes in
shareholders' equity.
55
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
12. SHAREHOLDER RIGHTS PLAN
The Company adopted a Shareholder Rights Plan (the Rights Plan) in 1989
to protect shareholders from attempts to acquire control of the Company at
an inadequate price. Under the Rights Plan, the Company distributed a
dividend of one right to purchase a unit of preferred stock on each
outstanding common share of the Company. The rights are not currently
exercisable or transferable, and no separate certificates evidencing such
rights will be distributed, unless certain events occur. The rights were to
expire on August 22, 1999. On August 21, 1999, the Plan was amended to
extend the expiration date to August 22, 2009.
After the rights become exercisable, under certain circumstances, the
rights (other than rights held by a 19.9% beneficial owner or an "adverse
person") will entitle the holders to purchase either the Company's common
shares or the common shares of the potential acquirer at a substantially
reduced price.
The Company is generally entitled to redeem the rights at $0.001 per
right at any time until the 10th business day following a public
announcement that a 19.9% position has been acquired. Rights are not
redeemable following an "adverse person" determination.
The Rights Plan was not adopted in response to any specific effort to
acquire control of the Company. The issuance of rights had no dilutive
effect, did not affect the Company's reported earnings per share, and was
not taxable to the Company or its shareholders.
13. EARNINGS PER SHARE
Year ended December 31, 2000
--------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
--------- ------ ------
Basic earnings per share
Net income available to common stockholders $ 29,237 18,579 $ 1.57
Effect of dilutive securities
Options - 208 (0.01)
--------- ------ ------
Diluted earnings per share
Net income available to common stockholders
plus assumed conversions $ 29,237 18,787 $ 1.56
========= ====== ======
Options to purchase 823,263 shares of common stock at $23.75 to $28.12
per share were outstanding during 2000. They were not included in the
computation of diluted earnings per share because the option exercise price
was greater than the average market price.
Year ended December 31, 1999
--------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
--------- ------ ------
Basic earnings per share
Net income available to common stockholders $ 27,409 18,682 $ 1.47
Effect of dilutive securities
Options - 297 (0.03)
--------- ------ ------
Diluted earnings per share
Net income available to common stockholders
plus assumed conversions $ 27,409 18,979 $ 1.44
========= ====== ======
(Continued)
56
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
13. EARNINGS PER SHARE - Continued
Options to purchase 814,155 shares of common stock at $23.75 to $28.12
per share were outstanding during 1999. They were not included in the
computation of diluted earnings per share because the option exercise price
was greater than the average market price.
Year ended December 31, 1998
--------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic earnings per share
Net income available to common stockholders $ 22,918 18,728 $ 1.22
Effect of dilutive securities
Options - 380 (0.02)
--------- ------ ------
Diluted earnings per share
Net income available to common stockholders
plus assumed conversions $ 22,918 19,108 $ 1.20
========= ====== ======
Options to purchase 252,273 shares of common stock at $28.11 per share
were outstanding during 1998. They were not included in the computation of
diluted earnings per share because the option exercise price was greater
than the average market price.
14. COMMITMENTS AND CONTINGENT LIABILITIES
LEASE COMMITMENTS
Future minimum payments under non-cancelable operating leases are due
as follows (in thousands):
Year ending December 31,
------------------------
2001 $ 2,515
2002 2,286
2003 2,029
2004 1,417
2005 1,000
Thereafter 1,532
---------
$ 10,779
=========
The total rental expense was approximately $2,957,000, $2,706,000 and
$2,028,000 in 2000, 1999 and 1998, respectively.
OTHER
In the normal course of business, the Company, the Banks and ITC have
been named as defendants in several lawsuits. Although the ultimate outcome
of these suits cannot be ascertained at this time, it is the opinion of
management that the resolution of such suits will not have a material
adverse effect on the financial position or results of operations of the
Company.
57
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- -------------------------------------------------------------------------------
15. STOCK OPTIONS
The Company maintains an Officers' and Key Employees' Stock
Compensation Plan (Officers' Plan). A total of 1,378,125 shares of common
stock have been made available for options or restricted stock to be
granted through December 17, 2006. Options granted under the Officers' Plan
will vest over a five-year period, in 20% increments on each successive
anniversary of the date of grant. There are 1,076,852 outstanding options
under the Officers' Plan at December 31, 2000. Options granted under the
Company's prior Stock Option Plan, are subject to a vesting schedule
commencing at two years and expire ten years and one month from the date of
issue. There are 968,896 outstanding options at December 31, 2000.
In addition, the Company has a Non-employee Director Stock Option Plan
(Directors' Plan). Under the Directors' Plan, a total of 303,874 shares of
common stock have been made available for options to be granted through
January 3, 2004. The options granted under the Directors' Plan fully vest
after two years and expire ten years from the date of issue. There are
65,509 outstanding options under the Directors' Plan at December 31, 2000.
Under all plans, the option price per share is equivalent to 100% of
the fair market value on the date the options were granted as determined
pursuant to the plan. Accordingly, no compensation cost has been recognized
for the plans. The number of shares available for granting totaled 720,290
at December 31, 1999 and 424,199 at December 31, 2000. As of December 31,
2000, 52,582 options were outstanding as a result of previous acquisitions.
Had compensation cost for the plans been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS
No. 123, the Company's net income and earnings per share of common stock
would have been reduced to the pro forma amounts indicated below.
Year ended December 31,
--------------------------------------
2000 1999 1998
--------- --------- ---------
Net income As reported $ 29,237 $ 27,409 $ 22,918
Pro forma 28,250 26,323 21,804
Earnings per share of common stock - basic As reported 1.57 1.47 1.22
Pro forma 1.52 1.41 1.16
Earnings per share of common stock - diluted As reported 1.56 1.44 1.20
Pro forma 1.50 1.39 1.14
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used for grants in 2000, 1999 and 1998, respectively:
dividend yield of 4.25%, 3.23% and 2.71%; expected volatility of 14.0%,
17.0% and 24.4%; risk-free interest rates for each plan of 6.78% and 5.38%
for 2000 and 6.50% and 4.79% for 1999 and 4.68% and 5.74% for 1998; and
expected lives of 6.63 years and 7.56 years for each plan in 2000, 6.23
years and 8.98 years for each plan in 1999, 6.23 years and 8.98 years for
each plan in 1998.
(Continued)
58
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
15. STOCK OPTIONS - Continued
A summary of the status of the Company's fixed option plans as of
December 31, is presented below:
2000 1999 1998
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
---------- --------- ---------- --------- ---------- ---------
Outstanding, beginning of year 1,917,024 $ 18.69 1,791,019 $ 17.12 1,653,891 $ 14.96
Granted 289,009 20.29 292,588 24.16 292,347 26.46
Exercised (42,194) 10.86 (166,583) 11.38 (151,938) 11.64
Forfeited - - - - (3,281) 15.53
---------- --------- --------- --------- --------- ---------
Outstanding, end of year 2,163,839 $ 19.06 1,917,024 $ 18.69 1,791,019 $ 17.12
========= ========= ========= ========= ========= =========
Options exercisable at year-end 1,210,401 911,602 769,445
========= ========= =========
Weighted average fair value of
options granted during the year $ 2.63 $ 5.96 $ 7.08
========= ========= =========
The following table summarizes information about nonqualified options
outstanding at December 31, 2000:
Options outstanding Options exercisable
-------------------------------------------------------------------- ------------------------------
Weighted
Number average Number
outstanding at remaining Weighted outstanding at Weighted
Range of December 31, contractual average December 31, average
exercise prices 2000 life (years) exercise price 2000 exercise price
--------------- ---- ------------ -------------- ---- --------------
$ 5.62 - 8.44 25,743 0.8 $ 7.38 25,743 $ 7.38
8.45 - 11.25 95,441 1.8 9.06 95,441 9.06
11.26 - 14.06 487,106 4.3 13.53 425,350 13.49
14.07 - 16.87 255,233 6.1 14.48 138,402 14.47
16.88 - 19.68 197,152 2.8 18.24 197,152 18.24
19.69 - 22.49 279,901 10.0 20.20 - -
22.50 - 25.31 570,981 7.8 23.74 227,416 23.51
25.32 - 28.12 252,282 8.0 28.12 100,897 28.12
----------- ------------
2,163,839 1,210,401
=========== ============
16. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Company grants commercial and residential loans to customers
throughout southeastern Pennsylvania and northern New Jersey. Although the
Company has a diversified loan portfolio, a substantial portion of its
debtors' ability to honor their contracts is dependent upon the economic
sector.
59
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, interest rate swaps, and interest rate floor. Those
instruments involve, to varying degrees, elements of credit, interest rate
risk in excess of the amount recognized in the consolidated balance sheets.
The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance
by the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
notional amount of these instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments. For interest rate swaps and floors, the
contract or notional amounts do not represent exposure to credit loss. The
Company controls the credit risk of its interest rate swap agreements
through credit approvals, limits and monitoring procedures.
Unless otherwise noted, the Company does not require collateral or
other security to support financial instruments with credit risk. The
contract or notional amounts as of December 31, 2000 and 1999, are as
follows (in thousands):
2000 1999
----------- ----------
Financial instruments whose contract amounts represent
credit risk
Commitments to extend credit $ 576,274 $ 472,099
Standby letters of credit 23,760 24,297
Financial instruments whose notional or contract amounts
exceed the amount of credit risk
Interest rate swap agreements 70,000 100,000
Interest rate floor 50,000 50,000
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation. Collateral
held varies but may include personal or commercial real estate, accounts
receivable, inventory and equipment.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The extent of collateral held for those commitments at December
31, 2000, varies up to 100%; the average amount collateralized is 90%.
(Continued)
60
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- -------------------------------------------------------------------------------
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued
Interest rate swap transactions generally involve the exchange of fixed
and floating rate interest payment obligations without the exchange of the
underlying principal amounts. The Company uses swaps as part of its asset
and liability management process with the objective of hedging the
relationship between money market deposits that are used to fund prime rate
loans. Past experience has shown that as the prime interest rate changes,
rates on money market deposits do not change with the same volatility. The
interest rate swaps have the effect of converting the rates on money market
deposit accounts to a more market-driven floating rate typical of prime in
order for the Company to recognize a more even interest rate spread on this
business segment. This strategy will cause the Company to recognize, in a
rising rate environment, a lower overall interest rate spread than it
otherwise would have without the swaps in effect. Likewise, in a falling
rate environment, the Company will recognize a larger interest rate spread
than it otherwise would have without the swaps in effect. In 2000, the
interest rate swaps had the effect of decreasing the Company's net interest
income by $307,000 over what would have been realized had the Company not
entered into the swap agreements.
An interest rate floor is a contract that protects the holder against a
decline in interest rates below a certain point. The primary risk
associated with interest rate floors is exposure to current and possible
future movements in interest rates.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of the estimated fair value of an entity's assets and
liabilities considered to be financial instruments. For the bank, as for
most financial institutions, the majority of its assets and liabilities are
considered to be financial instruments as defined in SFAS No. 107. However,
many of such instruments lack an available trading market as characterized
by a willing buyer and willing seller engaging in an exchange transaction.
Also, it is the Company's general practice and intent to hold its financial
instruments to maturity and to not engage in trading or sales activities.
Therefore, the Company had to use significant estimations and present value
calculations to prepare this disclosure.
Changes in assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, management is concerned
that there may not be reasonable comparability between institutions due to
the wide range of permitted assumptions and methodologies in the absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
Fair values have been estimated using data that management considered
the best available and estimation methodologies deemed suitable for the
pertinent category of financial instrument. The estimation methodologies,
resulting fair values and recorded carrying amounts at December 31, 2000
and 1999, were as follows (in thousands):
December 31, 2000 December 31, 1999
---------------------------- ----------------------------
Carrying Estimated fair Carrying Estimated fair
amount value amount value
---------- --------------- ---------- ---------------
Cash and cash equivalents $ 98,600 $ 98,600 $ 66,992 $ 66,992
Investment securities available for sale 593,316 593,316 516,027 516,027
Fair value of loans and deposits with floating interest rates is
generally presumed to approximate the recorded carrying amounts.
Financial instruments actively traded in a secondary market have been
valued using quoted available market prices.
(Continued)
61
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
18. FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Fair value of financial instruments with stated maturities has been
estimated using present value cash flow, discounted at a rate approximating
current market for similar assets and liabilities.
December 31, 2000 December 31, 1999
---------------------------- ----------------------------
Carrying Estimated fair Carrying Estimated fair
amount value amount value
---------- --------------- ---------- ---------------
Deposits with stated maturities $ 874,427 $ 884,555 $ 810,128 $ 814,391
Short-term borrowings 306,409 306,409 212,596 212,596
Long-term borrowings 146,432 141,979 223,077 213,403
Subordinated debentures 40,250 40,451 40,250 38,640
Fair value of financial instrument liabilities with no stated
maturities has been estimated to equal the carrying amount (the amount
payable on demand), totaling $939,826,000 for 2000 and $783,126,000 for
1999.
The fair value of the net loan portfolio has been estimated using
present value cash flow, discounted at the treasury rate adjusted for
non-interest operating costs and giving consideration to estimated
prepayment risk and credit loss factors.
December 31, 2000 December 31, 1999
----------------------------- ------------------------------
Carrying Estimated fair Carrying Estimated fair
amount value amount value
----------- --------------- ------------ ---------------
Net loans $ 1,683,198 $ 1,754,607 $ 1,536,404 $ 1,559,240
There is no material difference between the carrying amount and
estimated fair value of off-balance sheet items which total $710,054,000
and $646,396,000 at year-end 2000 and 1999, respectively, which are
primarily comprised of interest rate swap agreements and unfunded loan
commitments which are generally priced at market at the time of funding.
19. REGULATORY MATTERS
The Banks are required to maintain average reserve balances with the
Federal Reserve Bank. The average amount of those balances for the year
ended December 31, 2000, was approximately $11,015,000.
Dividends are paid by the Company from its assets, which are mainly
provided by dividends from the Banks. However, certain restrictions exist
regarding the ability of the Banks to transfer funds to the Company in the
form of cash dividends, loans or advances. Under the restrictions in 2001,
the Banks, without prior approval of bank regulators, can declare dividends
to the Company totaling $29,439,000 plus additional amounts equal to the
net earnings of the Banks for the period January 1, 2001, through the date
of declaration less dividends previously paid in 2001.
(Continued)
62
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- -------------------------------------------------------------------------------
19. REGULATORY MATTERS - Continued
The Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possible
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Banks must meet specific capital
guidelines that involve quantitative measures of the Banks' assets,
liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Banks' capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital
adequacy require the Banks and the Company to maintain minimum amounts and
ratios (set forth in the following table) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets, and of Tier 1 capital
to average assets. Management believes, as of December 31, 2000, that the
Banks and Company meet all capital adequacy requirements to which they are
subject.
As of December 31, 2000, the Banks met all regulatory requirements for
classification as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Banks
must maintain minimum total risk-based, core risk-based and core leverage
ratios as set forth in the table. There are no conditions or events that
management believes have changed the institution's category.
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------- -------- ---------- ------- ---------- --------
(Dollars in thousands)
As of December 31, 2000
Total capital (to risk-weighted
assets)
National Penn Bancshares, Inc. $ 221,016 11.85% $ 149,205 8.00% N/A N/A
National Penn Bank 186,185 10.45 142,533 8.00 $ 178,167 10.00
Panasia Bank 9,214 21.39 3,447 8.00 4,308 10.00
Tier I capital (to risk-weighted
assets)
National Penn Bancshares, Inc. 197,527 10.59 74,602 4.00 N/A N/A
National Penn Bank 163,747 9.19 71,266 4.00 106,900 6.00
Panasia Bank 8,666 20.11 1,723 4.00 2,585 6.00
Tier I capital (to average assets)
National Penn Bancshares, Inc. 197,527 8.06 97,978 4.00 N/A N/A
National Penn Bank 163,747 7.09 92,386 4.00 115,482 5.00
Panasia Bank 8,666 7.79 4,446 4.00 5,557 5.00
(Continued)
63
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- -------------------------------------------------------------------------------
19. REGULATORY MATTERS - Continued
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------- -------- ---------- -------- ---------- --------
(Dollars in thousands)
As of December 31, 1999
Total capital (to risk-weighted
assets)
National Penn Bancshares, Inc. $ 215,760 12.73% $ 135,600 8.00% N/A N/A
National Penn Bank 172,044 10.42 132,140 8.00 $ 165,175 10.00
Tier I capital (to risk-weighted
assets)
National Penn Bancshares, Inc. 193,822 11.43 67,800 4.00 N/A N/A
National Penn Bank 151,231 9.16 66,070 4.00 99,105 6.00
Tier I capital (to average assets)
National Penn Bancshares, Inc. 193,822 8.58 90,367 4.00 N/A N/A
National Penn Bank 151,231 6.83 88,546 4.00 110,682 5.00
20. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The following is a summary of selected financial information of
National Penn Bancshares, Inc., parent company only (in thousands):
CONDENSED BALANCE SHEETS
December 31,
-----------------------------
2000 1999
------------ ------------
Assets
Cash $ 4 $ 1,261
Investment in Bank subsidiaries, at equity 192,593 144,573
Investment in other subsidiaries, at equity 45,798 45,815
Other assets 2,588 1,154
------------ ------------
$ 240,983 $ 192,803
============ ============
Liabilities and shareholders' equity
Long-term borrowings $ 18,375 $ -
Guaranteed preferred beneficial interests in Company's
subordinated debentures 41,495 41,495
Other liabilities 3,685 3,612
Shareholders' equity 177,428 147,696
------------ ------------
$ 240,983 $ 192,803
============ ============
(Continued)
64
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- -------------------------------------------------------------------------------
20. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Income
Equity in undistributed net earnings of subsidiaries $ 14,891 $ 14,607 $ 8,407
Dividends from subsidiary 17,169 15,198 16,939
Interest and other income 218 168 121
--------- --------- ---------
32,278 29,973 25,467
Expense
Interest on subordinated debentures 3,735 3,735 3,735
Interest on long-term borrowings 725 - -
Other operating expenses 100 118 121
--------- --------- ---------
4,560 3,853 3,856
Income before income tax benefit 27,718 26,120 21,611
Income tax benefit (1,519) (1,289) (1,307)
---------- --------- ---------
Net income $ 29,237 $ 27,409 $ 22,918
========= ========= =========
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities
Net income $ 29,237 $ 27,409 $ 22,918
Equity in undistributed net earnings of subsidiaries (14,891) (14,607) (8,407)
(Increase) decrease in other assets (1,434) 99 7
(Decrease) increase in other liabilities 73 1,056 2,491
--------- --------- ---------
Net cash provided by operating activities 12,985 13,957 17,009
--------- --------- ---------
Cash flows from investing activities
Cash paid to acquire businesses (20,025) - -
Additional investment in subsidiaries, at equity 1,229 4,631 (1,688)
--------- --------- ---------
Net cash (used in) provided by investing activities (18,796) 4,631 (1,688)
---------- --------- ---------
Cash flows from financing activities
Proceeds from issuance of long-term debt 21,000 - -
Repayment of long-term debt (2,625) - -
Proceeds from issuance of stock - 693 855
Effect of treasury stock transactions 878 (3,542) (5,793)
Cash dividends (14,699) (14,478) (10,422)
---------- --------- ---------
Net cash provided by (used in) financing activities 4,554 (17,327) (15,360)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (1,257) 1,261 (39)
Cash and cash equivalents at beginning of year 1,261 - 39
--------- --------- ---------
Cash and cash equivalents at end of year $ 4 $ 1,261 $ -
========= ========= =========
65
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2000 and 1999
- -------------------------------------------------------------------------------
21. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the
Company, which, in the opinion of management, reflects all adjustments
(comprising only normal recurring accruals) necessary for a fair
presentation. Net income per share of common stock has been restated to
retroactively reflect certain stock dividends.
(Dollars in thousands, except per share data)
Three months ended
--------------------------------------------------
2000 Dec. 31 Sept. 30 June 30 March 31
----------------- --------------------------------------------------
Interest income $ 49,336 $ 47,731 $ 43,727 $ 43,858
Net interest income 21,842 21,495 20,221 21,392
Provision for loan and lease losses 1,200 1,400 1,500 1,500
Net gains (losses) on sale of investment
securities (8) 103 38 122
Income before income taxes 9,217 9,401 8,627 8,492
Net income 7,835 7,486 7,062 6,854
Earnings per share of common stock - basic .42 .40 .38 .37
Earnings per share of common stock - diluted .42 .40 .38 .36
Three months ended
--------------------------------------------------
1999 Dec. 31 Sept. 30 June 30 March 31
----------------- --------------------------------------------------
Interest income $ 43,322 $ 41,888 $ 40,109 $ 38,951
Net interest income 20,997 20,789 20,170 19,561
Provision for loan and lease losses 1,715 1,415 1,415 1,415
Net gains (losses) on sale of investment
securities (198) - 211 2
Income before income taxes 8,685 9,155 8,006 7,325
Net income 7,683 7,210 6,500 6,016
Earnings per share of common stock - basic 0.41 0.38 0.36 0.32
Earnings per share of common stock - diluted 0.41 0.38 0.34 0.31
66
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
National Penn Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of
National Penn Bancshares, Inc. and Subsidiaries as of December 31, 2000 and
1999, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
National Penn Bancshares, Inc. and Subsidiaries as of December 31, 2000 and
1999, and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
January 17, 2001
67
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
- --------------------------------------------------------------
None.
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------------------------------
The information relating to executive officers of National Penn is
included under Item 4A in Part I hereof. The information required by this item
relating to directors of National Penn and compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated herein by reference to pages 2,
3 and 18 of National Penn's definitive Proxy Statement to be used in connection
with National Penn's 2001 Annual Meeting of Shareholders (the "Proxy
Statement").
Item 11. EXECUTIVE COMPENSATION.
- --------------------------------
The information required by this item is incorporated herein by
reference to pages 5 through 14 of the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------
The information required by this item is incorporated herein by
reference to pages 16 and 17 of the Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to pages 17 and 18 of the Proxy Statement.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------
(a) 1. Financial Statements.
--------------------
The following consolidated financial statements are
included in Part II, Item 8 hereof:
National Penn Bancshares, Inc., and Subsidiaries.
Consolidated Balance Sheets.
Consolidated Statements of Income.
Consolidated Statement of Changes in Shareholders' Equity.
Consolidated Statements of Cash Flows.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
-----------------------------
Financial statement schedules are omitted because the required
information is either not applicable, not required, or is
shown in the respective financial statements or in the notes
thereto.
68
3. Exhibits.
--------
2.1 Amended Agreement and Plan of Merger dated as of July 21, 1998, among
National Penn Bancshares, Inc., National Penn Bank and Elverson
National Bank. (Incorporated by reference to Exhibit 2.1 to National
Penn's Registration Statement No. 333-65841 on Form S-4, as filed on
October 16, 1998.)
2.2 Agreement dated February 14, 2000, between National Penn Bancshares,
Inc. and Panasia Bank. (Incorporated by reference to Exhibit 2.2 to
National Penn's Annual Report on Form 10-K for the year ended December
31, 1999.)
2.3 Agreement dated July 23, 2000, between National Penn Bancshares, Inc.
and Community Independent Bank, Inc. (Schedules are omitted pursuant to
Regulation S-K, Item 601(b)(2); National Penn agrees to furnish a copy
of such schedules to the Securities and Exchange Commission upon
request.) (Incorporated by reference to Exhibit 2.2 to National Penn's
Report on Form 8-K dated July 11, 2000.)
3.1 Articles of Incorporation, as amended, of National Penn Bancshares,
Inc. (Incorporated by reference to Exhibit 3.1 to National Penn's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.)
3.2 Bylaws, as amended, of National Penn Bancshares, Inc. (Incorporated by
reference to Exhibit 3.2 to National Penn's Annual Report on Form 10-K
for the year ended December 31, 1999.)
4.1 Form of Junior Subordinated Indenture between National Penn Bancshares,
Inc. and Bankers Trust Company, as Trustee. (Incorporated by reference
to Exhibit 4.1 to National Penn's Registration Statement Nos. 333-26585
and 333-26585-01 on Form S-3, as filed on May 6, 1997.)
4.2 Form of Trust Agreement between National Penn Bancshares, Inc. and
Bankers Trust (Delaware), as Trustee. (Incorporated by reference to
Exhibit 4.2 to National Penn's Registration Statement Nos. 333-26585
and 333-26585-01 on Form S-3, as filed on May 6, 1997.)
4.3 Form of Amended and Restated Trust Agreement among National Penn
Bancshares, Inc., Bankers Trust Company, as Property Trustee, and
Bankers Trust (Delaware), as Delaware Trustee. (Incorporated by
reference to Exhibit 4.3 to National Penn's Registration Statement Nos.
333-26585 and 333-26585-01 on Form S-3, as filed on May 12, 1997.)
4.4 Form of Guarantee Agreement between National Penn Bancshares, Inc. and
Bankers Trust Company, as Trustee. (Incorporated by reference to
Exhibit 4.4 to National Penn's Registration Statement Nos. 333-26585
and 333-26585-01 on Form S-3, as filed on May 12, 1997.)
4.5 Term Loan Agreement dated July 11, 2000, between National Penn
Bancshares, Inc. and the Northern Trust Company. (Omitted pursuant to
Regulation S-K, Item 601(b)(4)(iii); National Penn agrees to furnish a
copy of such agreement to the Securities and Exchange Commission upon
request.) (Incorporated by reference to Exhibit 4.1 to National Penn's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000.)
10.1 National Penn Bancshares, Inc. Amended and Restated Dividend
Reinvestment Plan. (Incorporated by reference to Exhibit 99.1 to
National Penn's Registration Statement No. 333-887549 on Form S-3, as
filed on September 22, 1999.)
10.2 National Penn Bancshares, Inc. Pension Plan.*
10.3 Amendment No. 1 to National Penn Bancshares, Inc. Pension Plan.*
69
10.4 Amendment 1993-1 to the National Penn Bancshares, Inc. Pension Plan.*
10.5 Amendment 1994-1 to the National Penn Bancshares, Inc. Pension Plan.*
10.6 Amendment 1999-1 to the National Penn Bancshares, Inc. Pension Plan.*
(Incorporated by reference to Exhibit 10.4 to National Penn's Annual
Report on Form 10-K for the year ended December 31, 1999.)
10.7 Amendment 2000-1 to the National Penn Bancshares, Inc. Pension Plan.*
(Incorporated by reference to Exhibit 10.5 to National Penn's Annual
Report on Form 10-K for the year ended December 31, 1999.)
10.8 National Penn Bancshares, Inc. Capital Accumulation Plan (Amended and
Restated Effective January 1, 1997).* (Incorporated by reference to
Exhibit 10.3 to National Penn's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.)
10.9 Amendment No. 2 to National Penn Bancshares, Inc. Capital Accumulation
Plan (Amended and Restated Effective January 1, 1997).* (Incorporated
by reference to Exhibit 10.7 to National Penn's Annual Report on Form
10-K for the year ended December 31, 1999.)
10.10 National Penn Bancshares, Inc. Amended and Restated Executive Incentive
Plan.* (Incorporated by reference to Exhibit 10.1 to National Penn's
Report on Form 8-K dated December 20, 2000, as filed on January 4,
2001.)
10.11 National Penn Bancshares, Inc. Executive Incentive Plan/Schedules.*
10.12 National Penn Bancshares, Inc. Amended and Restated Stock Option Plan.*
(Incorporated by reference to Exhibit 4.1 to National Penn's
Registration Statement No. 33-87654 on Form S-8, as filed on December
22, 1995.)
10.13 National Penn Bancshares, Inc. Amended Officers' and Key Employees'
Stock Compensation Plan.*
10.14 National Penn Bancshares, Inc. Directors' Fee Plan.* (Incorporated by
reference to Exhibit 10.11 to National Penn's Annual Report on Form
10-K for the year ended December 31, 1996.)
10.15 National Penn Bancshares, Inc. Non-Employee Directors' Stock Option
Plan.* (Incorporated by reference to Exhibit 4.1 to National Penn's
Registration Statement No. 33-91630 on Form S-8, as filed on April 27,
1995.)
10.16 National Penn Bancshares, Inc. Amended and Restated Employee Stock
Purchase Plan.* (Incorporated by reference to Exhibit 10.2 to National
Penn's Report on Form 8-K dated December 20, 2000, as filed on January
1, 2001.)
10.17 National Penn Bancshares, Inc. Elverson Substitute Stock Option Plan.*
(Incorporated by reference to Exhibit 4.1 to National Penn's
Registration Statement No. 333-71391 on Form S-8, as filed on January
29, 1999.)
10.18 National Penn Bancshares, Inc. Community Employee Substitute Stock
Option Plan.* (Incorporated by reference to Exhibit 4.1 to National
Penn's Registration Statement No. 333-54520 on Form S-8, as filed on
January 29, 2001.)
10.19 National Penn Bancshares, Inc. Community Non-Employee Director
Substitute Stock Option Plan.* (Incorporated by reference to Exhibit
4.1 to National Penn's Registration Statement No. 333-54556 on Form
S-8, as filed on January 29, 2001.)
70
10.20 Form of Amended and Restated Director Deferred Fee Agreement between
Bernville Bank, N.A. and certain former Bernville Bank, N.A.
directors.*
10.21 Executive Supplemental Benefit Agreement dated December 27, 1989, among
National Penn Bancshares, Inc., National Bank of Boyertown and Lawrence
T. Jilk, Jr.*
10.22 Amendatory Agreement dated February 23, 1994, among National Penn
Bancshares, Inc., National Penn Bank and Lawrence T. Jilk, Jr.*
10.23 Amendatory Agreement dated August 26, 1998, among National Penn
Bancshares, Inc., National Penn Bank and Lawrence T. Jilk, Jr.*
(Incorporated by reference to Exhibit 10.1 to National Penn's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.)
10.24 Executive Supplemental Benefit Agreement dated December 27, 1989, among
National Penn Bancshares, Inc., National Bank of Boyertown and Wayne R.
Weidner.*
10.25 Amendatory Agreement dated February 23, 1994, among National Penn
Bancshares, Inc., National Penn Bank and Wayne R. Weidner.*
10.26 Amendatory Agreement dated August 26, 1998, among National Penn
Bancshares, Inc., National Penn Bank and Wayne R. Weidner.*
(Incorporated by reference to Exhibit 10.2 to National Penn's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.)
10.27 Executive Agreement dated July 23, 1997, among National Penn
Bancshares, Inc., National Penn Bank and Gary L. Rhoads.* (Incorporated
by reference to Exhibit 10.1 to National Penn's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.)
10.28 Amendatory Agreement dated August 26, 1998, among National Penn
Bancshares, Inc., National Penn Bank and Gary L. Rhoads.* (Incorporated
by reference to Exhibit 10.4 to National Penn's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.)
10.29 Executive Agreement dated July 23, 1997, among National Penn
Bancshares, Inc., National Penn Bank and Sandra L. Spayd.*
(Incorporated by reference to Exhibit 10.2 to National Penn's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.)
10.30 Amendatory Agreement dated August 26, 1998, among National Penn
Bancshares, Inc., National Penn Bank and Sandra L. Spayd.*
(Incorporated by reference to Exhibit 10.5 to National Penn's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.)
10.31 Executive Agreement dated September 24, 1997, among National Penn
Bancshares, Inc., National Penn Bank and Garry D. Koch.* (Incorporated
by reference to Exhibit 10.3 to National Penn's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.)
10.32 Amendatory Agreement dated August 26, 1998, among National Penn
Bancshares, Inc., National Penn Bank and Garry D. Koch.* (Incorporated
by reference to Exhibit 10.3 to National Penn's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.)
10.33 Executive Agreement dated as of July 23, 1997, among National Penn
Bancshares, Inc., National Penn Bank and Sharon L. Weaver.*
(Incorporated by reference to Exhibit 10.29 to National Penn's Annual
Report on Form 10-K for the year ended December 31, 1998.)
10.34 Amendatory Agreement dated September 24, 1997, among National Penn
Bancshares, Inc., National Penn Bank and Sharon L. Weaver.*
(Incorporated by reference to Exhibit 10.30 to National Penn's Annual
Report on Form 10-K for the year ended December 31, 1998.)
71
10.35 Amendatory Agreement dated August 26, 1998, among National Penn
Bancshares, Inc., National Penn Bank and Sharon L. Weaver.*
(Incorporated by reference to Exhibit 10.6 to National Penn's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.)
10.36 Executive Agreement dated as of January 4, 1999, among National Penn
Bancshares, Inc., National Penn Bank and Glenn E. Moyer.* (Incorporated
by reference to Exhibit 10.32 to National Penn's Annual Report on Form
10-K for the year ended December 31, 1998.)
10.37 Stock Purchase Agreement dated April 20, 1989, between National Penn
Bancshares, Inc. and Pennsylvania State Bank.
10.38 Rights Agreement dated August 23, 1989, between National Penn
Bancshares, Inc. and National Bank of Boyertown, as Rights Agent.
(Incorporated by reference to Exhibit 4.4 to National Penn's
Registration Statement No. 33-87654 on Form S-8, as filed on December
22, 1994.)
10.39 Amendment to Rights Agreement dated as of August 21, 1999, between
National Penn Bancshares, Inc. and National Penn Bank, as Rights Agent
(including as Exhibit "A" thereto, the Rights Agreement dated as of
August 23, 1989, between National Penn Bancshares, Inc. and National
Bank of Boyertown, as Rights Agent). (Incorporated by reference to
Exhibit 4.1 to National Penn's Report on Form 8-K, dated August 21,
1999, as filed on August 26, 1999.)
21 Subsidiaries of the Registrant.
23 Consent of Independent Certified Public Accountants.
99 Forward-Looking Statements.
* Denotes a compensatory plan or arrangement.
(b) Reports on Form 8-K.
-------------------
During fourth quarter 2000, National Penn filed a Report on
Form 8-K dated October 25, 2000. The Report provided information under
Item 5 on: National Penn's 5% stock dividend; the finalized exchange
ratio and regulatory approval of the Community Independent Bank, Inc.
acquisition; third quarter financial results for Community Independent
Bank, Inc.; the charter conversion of Panasia Bank, N.A.; and risk
factors concerning National Penn's forward-looking statements. The
Report did not contain any financial statements of National Penn.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONAL PENN BANCSHARES, INC.
(Registrant)
March 28, 2001 By /s/ Wayne R. Weidner.
-------------------------------
Wayne R. Weidner
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated:
Signatures Title
/s/ John H. Body Director March 28, 2001
- ------------------------------------
John H. Body
/s/ J. Ralph Borneman, Jr. Director March 28, 2001
- ------------------------------------
J. Ralph Borneman, Jr.
/s/ Frederick H. Gaige Director March 28, 2001
- ------------------------------------
Frederick H. Gaige
/s/ John W. Jacobs Director March 28, 2001
- ------------------------------------
John W. Jacobs
/s/ Lawrence T. Jilk, Jr. Director and Chairman March 28, 2001
- ------------------------------------
Lawrence T. Jilk, Jr.
/s/ Frederick P. Krott Director March 28, 2001
- ------------------------------------
Frederick P. Krott
Director
- ------------------------------------
Patricia L. Langiotti
Director
- ------------------------------------
Robert E. Rigg
73
/s/ C. Robert Roth Director March 28, 2001
- ------------------------------------
C. Robert Roth
/s/ Wayne R. Weidner Director, President March 28, 2001
- ------------------------------------ and Chief Executive
Wayne R. Weidner Officer (Principal
Executive Officer)
/s/ Gary L. Rhoads Treasurer (Principal Financial March 28, 2001
- ------------------------------------ and Accounting Officer)
Gary L. Rhoads
74