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, 2002, 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.
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(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 Identification No.)
incorporation or organization)
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 (7.85% Preferred Securities of NPB Capital Trust II)
7.85% Junior Subordinated Debentures
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ----- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
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The aggregate market value of the voting and non-voting common equity of
the Registrant held by non-affiliates, based on the closing sale price as of
February 25, 2003, was $537,315,000.
As of February 25, 2003, the Registrant had 23,190,994 shares of Common
Stock outstanding.
Portions of the following documents are incorporated by reference: the
definitive Proxy Statement of the Registrant relating to the Registrant's Annual
Meeting of Shareholders to be held on April 22, 2003 -- Part III.
NATIONAL PENN BANCSHARES, INC.
FORM 10-K
TABLE OF CONTENTS
Page
Part I
Item 1 Business........................................................................... 1
Item 2. Properties......................................................................... 15
Item 3. Legal Proceedings.................................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................................ 15
Item 4A. Executive Officers of the Registrant............................................... 15
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................................... 17
Item 6. Selected Financial Data............................................................ 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................... 37
Item 8. Financial Statements and Supplementary Data........................................ 38
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure................ 72
Part III
Item 10. Directors and Executive Officers of the Registrant................................. 72
Item 11. Executive Compensation............................................................. 72
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters........................................................... 73
Item 13. Certain Relationships and Related Transactions..................................... 73
Item 14. Controls and Procedures............................................................ 73
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................... 74
Signatures............................................................................................. 80
Certifications......................................................................................... 82
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") 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 provides a
diversified range of financial services, principally through its banking
subsidiaries, National Penn Bank ("NP Bank") and Panasia Bank, N.A. ("Panasia").
In addition, National Penn conducts business through various direct or indirect,
nonbank subsidiaries. These subsidiaries are engaged in activities related to
the business of banking. National Penn's business strategy is to develop its
community banking market "niche," to foster a relationship-driven sales culture,
to diversify its revenue streams (increasing fee income as compared to income on
the "spread" between loans and deposits) and to maintain superior asset quality.
NP Bank has earned a reputation and market presence for providing consumers and
business customers with the sophisticated products and services of a regional
bank combined with the personal service and responsiveness of a community bank.
At December 31, 2002, National Penn had total assets of $2.858 billion,
total net loans of $1.843 billion, total deposits of $2.113 billion, and total
shareholders' equity of $222.4 million.
National Penn maintains a website at: www.nationalpennbancshares.com.
National Penn makes its Forms 10-K, 10-Q and 8-K (and amendments to each)
available on its website free of charge at the same time as those reports are
filed with the SEC (or as soon as reasonably practicable following that filing.)
Operating Segments
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National Penn has one reportable segment, Community Banking (consisting of
National Penn Bank and Panasia Bank), and other non-reportable segments, as
described in Note 21 of the Notes to Consolidated Financial Statements included
at Item 8 of this Report. Note 21 includes segment information on revenue,
assets and income, and is incorporated by reference in this Item 1.
National Penn Bank
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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 is
headquartered in Boyertown, Pennsylvania. It is one of the largest commercial
banks headquartered in southeastern Pennsylvania.
NP Bank is engaged in the commercial and retail banking business. It
provides checking and savings accounts, time deposits, credit cards, safe
deposit and night depository facilities, and international banking services. NP
Bank offers a full range of personal and business loans, including industrial,
construction, land development and residential mortgage loans.
At year-end 2001, NP Bank also operated through four banking divisions,
using historical and/or geographical divisional names. In January 2002, NP Bank
began a unified brand campaign under which it has been gradually moving from use
of the divisional names to use of the name "National Penn Bank" as a unified
brand name.
During 2002, NP Bank continued its strategy of developing "niche" business.
This included an emphasis on service to specialized business models, using
dedicated service teams to assist customers in finding real, effective solutions
for their needs. Part of this effort, NP Bank's Manufacturing Group's
"value-added," relationship-driven approach led to significant loan growth with
a very high retention rate. International trade services of NP Bank expanded
significantly with over 100 worldwide correspondent banks. In SBA lending, NP
Bank was named an "SBA Preferred/Express Lender" and ranked as the 88th largest
SBA lender in the United States in the Coleman Report's
1
listing of the top 100 SBA 7(a) lenders for the year ended September 30, 2002.
NP Bank's Private Banking department offers customers customized personal
banking services designed to provide customers prompt access to all other areas
of NP Bank and other services offered by National Penn subsidiaries. In November
2002, NP Bank entered the commercial equipment leasing business through the
opening of its subsidiary, National Penn Leasing Company, headed by a team of
experienced leasing professionals.
During 2002, increasing fee income at NP Bank also remained a priority.
Revenues at NP Bank's mortgage banking subsidiary, Penn 1st Financial Services,
Inc., increased significantly during 2002, as did income from service charges on
deposit accounts. As of December 31, 2002, asset quality improved at NP Bank.
Notwithstanding the fact that overall asset quality improved, net loan
charge-offs remained somewhat higher than NP Bank's historical levels. For
further information, see Item 7 of this Report, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
At December 31, 2002, NP Bank operated 58 community offices throughout nine
counties in southeastern Pennsylvania. At December 31, 2002, NP Bank had assets
of $2.602 billion, net loans of $1.744 billion, deposits of $1.93 billion, and
shareholders' equity of $206.4 million, and goodwill and other intangibles of
$8.9 million.
Panasia Bank, N.A.
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Panasia is a national bank chartered under the National Bank Act. Panasia
is headquartered in Fort Lee, New Jersey. Panasia primarily serves the
Asian-American market. Like NP Bank, Panasia is engaged in the commercial and
retail banking business. It provides checking and savings accounts, time
deposits, personal, business, residential mortgage and educational loans, credit
cards, and safe deposit and night depository facilities.
On July 23, 2002, Panasia expanded its operations into the Washington, D.C.
metropolitan area through a new full-service community office opened in
Annandale, Virginia. On September 27, 2002, Panasia acquired the United Asian
Bank division of Wilmington Savings Fund Society, FSB located in Elkins Park,
Pennsylvania. In the transaction, Panasia acquired approximately $9.6 million in
deposits and approximately $15.8 million in consumer and business banking loans,
along with related fixed assets and safe deposit business. Panasia then combined
the Elkins Park office with its existing office in Cheltenham, Pennsylvania.
At December 31, 2002, Panasia had community offices in Ft. Lee, Palisades
Park and Closter, New Jersey, Philadelphia and Cheltenham, Pennsylvania, and
Annandale, Virginia. At that date, Panasia had assets of $214.6 million, loans
of $98.2 million, deposits of $186.7 million, shareholders' equity of $24.3
million, and goodwill and other intangibles of $12.4 million.
Pending Sale of Panasia Bank, N.A.
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On February 10, 2003, National Penn, Panasia and Woori America Bank, a New
York banking institution, entered into an Agreement providing for, among other
things, the sale of Panasia to Woori America Bank for $34.5 million in cash and
the subsequent merger of Panasia into Woori America Bank, as previously reported
on National Penn's Form 8-K dated February 10, 2003 filed with the SEC and
available on National Penn's website. Subject to various closing conditions,
including receipt of required regulatory approvals, National Penn and Panasia
anticipate that the transactions will close in third quarter 2003. No assurance
can been given that all required regulatory approvals will be obtained, that all
other closing conditions will be satisfied or waived, or that the transactions
will in fact be consummated. Additional information is provided in National
Penn's 8-K dated February 10, 2003.
Acquisition of FirstService Bank
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On February 25, 2003, National Penn acquired FirstService Bank
("FirstService") by its merger into NP Bank. FirstService is a commercial bank
offering a broad range of personal and commercial banking services,
headquartered in Doylestown, Bucks County, Pennsylvania, with six other
community offices in Bucks and Montgomery Counties, Pennsylvania, and an
additional office under construction in Souderton, Pennsylvania. Through its
subsidiaries, FirstService also offers casualty insurance, asset management
services and non-deposit investment products. FirstService also has a
proprietary interest in a title insurance agency.
2
At December 31, 2002, FirstService had assets of $399.6 million, net loans
of $221.4 million, deposits of $291.7 million, shareholders' equity of $31.5
million, and goodwill of $4.6 million.
Upon closing of the acquisition, NP Bank established the FirstService Bank
Division. NP Bank's existing offices in Doylestown and Sellersville, Bucks
County, and Horsham, Montgomery County, became offices of the newly established
FirstService Bank Division.
National Penn issued 2.563 million shares of National Penn common stock,
and paid $16.8 million in cash, to complete this acquisition. It is being
accounted for as a "purchase." FirstService's results of operations will be
included in National Penn's results of operations from and after the date of
acquisition. Note 2 of the Notes to Consolidated Financial Statements included
at Item 8 of this Report includes additional information on the FirstService
Bank acquisition, and is incorporated by reference in this Item 1.
Nonbank Subsidiaries
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At December 31, 2002, National Penn also conducted business through the
following directly owned, nonbank subsidiaries:
o Investors Trust Company, a Pennsylvania-chartered trust company,
opened for business on June 20, 1994. It provides services as trustee,
executor, administrator, guardian, managing agent, custodian, asset
manager, and investment advisor and performs other fiduciary
activities authorized by law.
o National Penn Investment Company, a Delaware business corporation,
invests in and holds equity investments in other banks and bank
holding companies (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.
o 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.
o NPB Capital Trust II, a Delaware business trust, was formed in August
2002 and issued $63.25 million in preferred capital securities to
investors. See Note 8 of the Notes to Consolidated Financial
Statements included at Item 8 of this Report.
At December 31, 2002, National Penn also conducted business through the
following nonbank subsidiaries, directly owned by NP Bank:
o 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. It currently does business in Pennsylvania, New Jersey,
Delaware, Maryland, Virginia and Washington, D.C.
o 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.
o National Penn Leasing Company, a Pennsylvania business corporation, is
engaged in the commercial equipment leasing business. It began
operations in November 2002. It currently does business in
Pennsylvania, New Jersey and Delaware.
o 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.
3
o 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.
National Penn also owns, indirectly through NP Bank, four other nonbank
subsidiaries. Three of these subsidiaries are presently inactive; the activities
of the other are limited solely to holding 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.
Products and Services with Reputation Risk
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National Penn and its subsidiaries offer a diverse range of financial and
banking products and services. In the event one or more customers and/or
governmental agencies become dissatisfied or object to any product or service
offered by National Penn or any of its subsidiaries, negative publicity with
respect to any such product or service, whether legally justified or not, could
have a negative impact on National Penn's reputation. The discontinuance of any
product or service, whether or not any customer or governmental agency has
challenged any such product or service, could have a negative impact on National
Penn's reputation.
Other Bank Investments
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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 of accounting.
Trust Preferred Securities
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On August 20, 2002, National Penn completed a public offering of $63.25
million of 7.85% Trust Preferred Securities. These securities were issued by NPB
Capital Trust II, a Delaware business trust subsidiary of National Penn.
Proceeds of the offering were invested in National Penn through National Penn's
issuance of subordinated debentures to NPB Capital Trust II, expanding National
Penn's capital base.
On October 31, 2002, National Penn redeemed all $40.25 million of its 9%
Trust Preferred Securities issued in May 1997, at an aggregate redemption price
of $40.25 million plus accrued and unpaid interest to October 31, 2002.
National Penn intends to use the balance of the funds from the 2002 Trust
Preferred Securities offering for general corporate purposes, including capital
contributions to its banking subsidiaries, for working capital and repurchases
of common stock, and to fund future acquisitions. See "Acquisition of
FirstService Bank" for information on cash expended to acquire FirstService Bank
on February 25, 2003.
Note 8 of the Notes to Consolidated Financial Statements included at Item 8
of this Report includes additional information on the issuance and redemption of
National Penn's Trust Preferred Securities, and is incorporated by reference in
this Item 1.
Future Acquisitions
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National Penn's acquisition strategy consists of identifying financial
institutions with business philosophies that are similar to those of National
Penn, which operate in strong markets that are geographically compatible with
National Penn's operations, and which can be acquired at an acceptable cost. In
evaluating acquisition opportunities, National Penn generally considers
potential revenue enhancements and operating efficiencies, asset quality,
interest rate risk, and management capabilities. National Penn currently has no
formal commitments with respect to future acquisitions although discussions with
acquisition candidates take place frequently.
4
Concentrations, Seasonality
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National Penn and its subsidiaries do not have any portion of their
businesses dependent on a single or limited number of customers, the loss of
which would have a material adverse effect on their businesses. No substantial
portion of their loans or investments are concentrated within a single industry
or group of related industries, although a significant amount of loans are
secured by real estate located in southeastern Pennsylvania. The businesses of
National Penn and its subsidiaries are not seasonal in nature.
Environmental Compliance
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National Penn's and its subsidiaries' compliance with federal, state and
local environmental protection laws had no material effect on capital
expenditures, earnings or their competitive position in 2002, and is not
expected to have a material effect on such expenditures, earnings or competitive
position in 2003.
Employees
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At December 31, 2002, National Penn and its subsidiaries had 952 full- and
part-time employees.
Supervision and Regulation
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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 various Federal and state laws and
regulations and the potential impact of such laws 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. Proposals to change
laws and regulations are frequently introduced in Congress, the state
legislatures, and before the various bank regulatory agencies. National Penn
cannot determine the likelihood or timing of any such proposals or legislation
or the impact they may have on National Penn and its subsidiaries. A change in
law, regulations or regulatory policy may have a material effect on the business
of National Penn and its subsidiaries.
Bank Holding Company Regulation
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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". Although National Penn
believes that it is eligible to do so, 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 commit its
resources to provide adequate capital funds to NP Bank or Panasia during periods
of financial stress or adversity. This support may be required at times when
National Penn is unable to provide such support.
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
5
regulations) with the terms of any capital restoration plan filed by such
subsidiary with its appropriate federal banking agency, up to specified limits.
Under the BHCA, the Federal Reserve has the authority to require a bank
holding company to terminate any activity or relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank
holding company.
The BHCA prohibits 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:
o Extending credit and servicing loans.
o Certain activities related to extending credit.
o Leasing personal or real property under certain conditions.
o Operating nonbank depository institutions, including savings
associations.
o Trust company functions.
o Certain financial and investment advisory activities.
o Certain agency transactional services for customer investments,
including securities brokerage activities.
o Certain investment transactions as principal.
o Management consulting and counseling activities.
o Certain support services, such as courier and printing services.
o Certain insurance agency and underwriting activities.
o Community development activities.
o Issuance and sale of money orders, savings bonds, and traveler's
checks.
o 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.
6
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, 2002, National Penn's Tier 1 capital and total (Tier 1 and Tier 2
combined) capital ratios were 11.81% and 13.08%, 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, 2002, National Penn's
leverage ratio was 8.66%.
The Federal Reserve has also indicated that it will consider a "tangible
Tier 1 capital leverage ratio" (deducting all intangibles) and other indicators
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 satisfies each of the following requirements:
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o It has a total risk-based capital ratio of 10% or more.
o It has a Tier 1 risk-based capital ratio of 6% or more.
o It has a leverage ratio of 5% or more.
o It is not subject to any order or written directive to meet and
maintain a specific capital level.
At December 31, 2002, NP Bank and Panasia each qualify as "well
capitalized" under these regulatory standards. See Note 19 of the Notes to
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 2002. Under current FDIC practices,
National Penn does not expect that either bank will be required to pay regular
insurance assessments to the FDIC in 2003.
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 $.017 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 and
New Jersey law each permit 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.
8
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.
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 a claim of the FDIC under the cross-guarantee provisions would be
subordinate to claims of depositors, secured creditors, general creditors and
holders of subordinated debt (other than affiliates) of the commonly controlled
institution, it would be 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 each subject to regulation by the Pennsylvania
Insurance Department. In the FirstService Bank acquisition, NP Bank acquired
FirstService Capital, Inc., an investment advisory firm, and FirstService
Insurance Agency, Inc., an insurance agency. In addition to regulation by the
OCC, FirstService Capital, Inc. is subject to regulation by the SEC, various
state securities regulators, and the NASD. FirstService Insurance Agency, Inc.
is subject to regulation by the Pennsylvania Department of Insurance in addition
to the OCC.
Monetary and Fiscal Policies
----------------------------
The financial services 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
- -----------
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
highly competitive terms.
The competitive environment has intensified since adoption of Federal
interstate banking legislation in 1994. This legislation generally authorizes
bank holding companies to acquire banks located in any state, possibly subject
to certain state-imposed age and deposit concentration limits, and also
generally authorizes interstate mergers and to lesser degree, interstate
branching.
9
Many bank holding companies have also elected to become financial holding
companies under the Gramm-Leach-Bliley Act of 1999, including many of the very
large ones. Although the long-range effects of this development 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".
National Penn's ability to maintain its history of strong financial
performance will depend in part on its ability to expand the scope of products
and services, allowing it to meet the changing needs of its customers, in the
face of intense competition.
Gramm-Leach-Bliley Act
- ----------------------
The Gramm-Leach-Bliley Act of 1999 ("GLBA"):
o Repealed various provisions of the Glass Steagall Act to permit
commercial banks to affiliate with investment banks (securities
firms).
o Amended the BHCA to permit qualifying bank holding companies to engage
in any type of financial activity.
o Permits subsidiaries of national banks now 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 created 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.
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 otherwise 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. These include:
o Securities underwriting and dealing.
o Insurance underwriting and sales.
o Merchant banking activities.
10
o Activities determined by the Federal Reserve to be "financial in
nature" and incidental activities.
o "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. Although National
Penn believes that it is eligible to do so, National Penn has not elected to
become a "financial holding company", and National Penn does not anticipate
electing such status in the near future. 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. Neither NP Bank
nor Panasia have created any "financial subsidiaries".
In addition, GLBA includes significant provisions relating to 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. Thus, they apply to National Penn. Basically, GLBA requires a
financial institution to: adopt and disclose its privacy policy; give consumers
and customers the right to "opt out" of disclosures to non-affiliated third
parties; not disclose any account information to non-affiliated third party
marketers; and 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
- -------------------
National Penn uses interest rate swap agreements for interest rate risk
management. No derivative financial instruments are held for trading purposes.
The contract or notional amounts of the swap agreements do not represent
exposure to credit loss. Potential credit risk on these contracts arises from
the counterparty's inability to meet the terms of the agreement. Management
considers the credit risk of these agreements to be minimal and manages this
risk through routine review of the counterparty's financial ratings.
Information about the amounts of interest rate swaps is set forth in Notes
1 and 17 of the Notes to Consolidated Financial Statements included at Item 8 of
this Report. In 2002, interest rate swaps had the effect of increasing National
Penn's net interest income by $1.71 million from what would have been realized
had NP Bank not entered into the swap agreements. Should rates rise
significantly in 2003, 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.
Critical Accounting Policies, Judgments and Estimates
- -----------------------------------------------------
The accounting and reporting policies of National Penn conform with
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. Critical accounting
policies, judgments and estimates relate to loans, the allowance for loan losses
and goodwill and intangibles. These policies significantly affect the
determination of National Penn's financial position, results of operations and
cash flows, and are summarized in Note 1 (Summary of Significant Accounting
Policies) of the Notes to Consolidated Financial Statements and discussed in the
section captioned "Critical Accounting Policies, Judgments and Estimates" of
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included in Items 7 and 8 of this Report, each of which is
incorporated herein by reference.
11
Recent Accounting Pronouncement
- -------------------------------
The Financial Accounting Standards Board (FASB) issued SFAS No. 147,
Acquisitions of Certain Financial Institutions: An amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No 9, which removes acquisitions of
financial institutions from the scope of SFAS 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions. The provisions of the SFAS No.
147 related to unidentifiable intangible assets and the acquisition of a
less-than-whole financial institution are effective for acquisitions for which
the date of acquisition is on or after October 1, 2002. The adoption of SFAS No.
147 did not have a material impact on the Company's financial position or
results of operations.
In December 2002, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure," to be effective for fiscal years ending after December 15, 2002.
SFAS No. 148 amends the disclosure and certain transition provisions of
Statement 123, Accounting for Stock-Based Compensation. SFAS No. 148 requires
all entities with stock-based employee compensation arrangements to provide
additional disclosures in their summary of significant accounting policies note.
For entities that use the intrinsic value method under APB No. 25, Accounting
for Stock Issued to Employees, to account for employee stock compensation for
any period presented, their accounting policies note should include certain
disclosures. The expanded annual disclosure requirements and the transition
provisions are effective for fiscal years ending after December 15, 2002. The
new interim period disclosures are required in financial statements for interim
periods beginning after December 15, 2002.
Under the provisions of SFAS No. 123 that remain unaffected by SFAS No.
148, companies may either recognize compensation expense on a fair value method
in the income statement or continue to use the intrinsic value method, which
requires disclosures of the pro forma effects of the fair value method in the
footnotes to the financial statements. National Penn accounts for its stock
options under the intrinsic value method and, accordingly, has provided the
appropriate pro forma disclosures. See Note 15 of the Notes to Consolidated
Financial Statements included at Item 8 of this Report.
The FASB indicated that it may reconsider its 1995 decision permitting
companies to disclose the pro forma effects of the "fair value" based method
rather than requiring all companies to recognize the "fair value" of employee
stock options as an expense in the income statement. National Penn is unable to
predict the likelihood of the FASB's taking any such action.
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:
o Financial condition.
o Results of operations.
o Asset quality.
o Product, geographic and other business expansion plans and activities.
o Investments in new subsidiaries and other companies.
o Capital expenditures, including investments in technology.
o Pending or completed mergers with or acquisitions of financial or
non-financial companies or their assets, loans, deposits and branches,
and the revenue enhancements, cost savings and other benefits
anticipated in those transactions.
o Other matters.
12
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:
o National Penn's unified branding campaign and other marketing
initiatives may be less effective than expected in building name
recognition and greater customer awareness of National Penn's products
and services. Use of non-National Penn brands may be
counter-productive.
o Expansion of National Penn's products and services offerings may meet
with more effective competitive resistance from others already
offering such products and services than expected.
o New product development by new and existing competitors may be more
effective, and take place more quickly, than expected.
o Competitors with substantially greater resources may enter product
market, geographic or other niches currently served by National Penn.
o Geographic expansion may be more difficult, take longer, and present
more operational and management risks and challenges, than expected.
o Business development in newly entered geographic areas may be more
difficult, and take longer, than expected.
o Competitive pressures may increase significantly and have an adverse
effect on National Penn's pricing, spending, third-party relationships
and revenues.
o National Penn may be less effective in cross-selling its various
products and services, and in utilizing alternative delivery systems
such as the Internet, than expected.
o Projected business increases following new product development,
geographic expansion, and productivity and investment initiatives, may
be lower than expected, and recovery of associated costs may take
longer than expected.
o National Penn may be unable to retain key executives and other key
personnel due to intense competition for such persons or otherwise.
o Increasing interest rates may increase funding costs and reduce
interest margins, and may adversely affect business volumes, including
mortgage origination levels.
o 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,
including the resultant effect on National Penn's loan portfolio and
allowance for loan losses.
o Expected synergies and cost savings from mergers, including reductions
in interest and non-interest expense, may not be fully realized or
realized as quickly as expected.
o Revenues and loan growth following mergers may be lower than expected.
o Loan losses, deposit attrition, operating costs, customer and key
employee losses, and business disruption following mergers may be
greater than expected.
13
o Business opportunities and strategies potentially available to
National Penn, after mergers, may not be successfully or fully acted
upon.
o Costs, difficulties or delays related to the integration of businesses
of acquired companies with National Penn's business may be greater or
take longer than expected.
o Technological changes may be harder to make or more expensive than
expected or present unanticipated operational issues.
o Recent and proposed legislative or regulatory changes, including
changes in accounting rules and practices, and customer privacy and
data protection requirements, and intensified regulatory scrutiny of
the financial services industry in general, may adversely affect
National Penn's costs and business.
o Market volatility may continue in the securities markets, with an
adverse effect on National Penn's securities and asset management
activities.
o National Penn may be unable to successfully manage the foregoing and
other risks and to achieve its current short-term and long-term
business plans and objectives.
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.
Statistical Disclosures - Management's Discussion and Analysis
- --------------------------------------------------------------
The following statistical disclosures are included in Item 7 of this
Report, Management's Discussion and Analysis of Financial Condition and Results
of Operations, and are incorporated by reference in this Item 1:
o Interest Rate Sensitivity Analysis.
o Interest Income and Expense, Volume and Rate Analysis.
o Average Balances, Average Rates, and Interest Rate Spread.
o Investment Portfolio.
o Loan Maturity and Interest Rate Sensitivity.
o Loan Portfolio.
o Risk Elements - Loans.
o Allowance for Loan Losses.
o Deposits.
o Short-Term Borrowings.
o Return on Equity and Assets; Dividend Payout Ratio.
14
Item 2. PROPERTIES.
- -------------------
National Penn does not own or lease any property. As of December 31, 2002,
NP Bank owns 35 properties in fee and leases 39 other properties; Panasia leases
7 properties; and National Penn's other direct and indirect subsidiaries lease 3
properties. The properties owned in fee are not subject to any major liens,
encumbrances, or collateral assignments.
The principal office of National Penn and NP Bank is owned in fee and
located at Philadelphia and Reading Avenues, Boyertown, Pennsylvania 19512.
NP Bank presently has 58 community offices located in the following
Pennsylvania counties: Berks, Bucks, Chester, Delaware, Lancaster, Lehigh,
Montgomery, Northampton, and Philadelphia. In addition to these offices, NP Bank
presently owns or leases 48 automated teller machines located throughout the
nine-county area, all of which are located at bank office locations except for
18 that are "free-standing" (not located at an office).
The principal office of Panasia is leased and located at 183 Main Street,
Fort Lee, New Jersey 07024. Panasia presently has three other community offices
located in Bergen County, New Jersey. Panasia also has two community offices in
Pennsylvania - one in Philadelphia and one in Montgomery County - and a
community office in Annandale, Virginia. Panasia has 6 automated teller
machines, all of which are located at bank office 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
- ---- --- --------------------------
Wayne R. Weidner 60 Chairman, President and Chief Executive Officer of National Penn
since January 2002. President and Chief Executive Officer of
National Penn in 2001, President of National Penn from April 1998 through December
2000, and Executive Vice President of National Penn from April 1990 to April 1998.
Also, Chairman and Chief Executive Officer of NP Bank.
Glenn E. Moyer 52 Executive Vice President of National Penn since April 2001. President and Chief
Operating Officer of NP Bank since January 2001. Executive Vice President of NP Bank
and President of NP Bank's Elverson Division from January 1999 to January 2001. Prior
thereto, President, Chief Executive Officer and a director of Elverson National Bank.
15
John C. Spier 52 Group Executive Vice President for Corporate Planning of NP Bank, and Chairman and
Chief Executive Officer of the FirstService Division of NP Bank, since February 25,
2003. Prior thereto, President and Chief Executive Officer and a director of
FirstService Bank.
Bruce G. Kilroy 53 Group Executive Vice President and Chief Delivery Officer of NP
Bank since January 2001. President of NP Bank's Lehigh Valley
Division from February 1997 to January 2001.
Garry D. Koch 48 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.
Paul W. McGloin 55 Group Executive Vice President and Chief Lending Officer of NP Bank since January
2002. Executive Vice President of NP Bank from March 2001 to January 2002. President
- of NP Bank's Main Line/Chestnut Hill/Philadelphia Division since March 2001. Prior
thereto, Managing Director, Capital Markets, of First Union National Bank.
Sharon L. Weaver 55 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 59 Secretary and Corporate Governance Officer of National Penn. Executive Vice President
and Corporate Secretary of NP Bank since January 2002. Senior Vice President and
Corporate Secretary of NP Bank prior to January 2002.
Gary L. Rhoads 48 Treasurer and Chief Financial Officer of National Penn. Group Executive Vice
President and Chief Financial Officer of NP Bank since January 2001. Executive Vice
President, Controller and Cashier of NP Bank prior to January 2001.
Michael R. Reinhard 45 Executive Vice President of NP Bank since January 2002. Senior Vice President of NP
Bank prior to January 2002.
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.
16
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 sale prices reported
for National Penn's common stock, and the cash dividends declared on National
Penn's common stock, for the periods indicated, after giving retroactive effect
to a 5% stock dividend paid on December 27, 2002 and a 3% stock dividend paid on
December 27, 2001.
MARKET VALUE OF COMMON STOCK
2002
----------------------
High Low
---- ---
lst Quarter $23.40 $21.10
2nd Quarter 26.67 23.14
3rd Quarter 27.30 22.05
4th Quarter 27.32 21.80
2001
----------------------
High Low
---- ---
lst Quarter $23.70 $17.10
2nd Quarter 22.19 17.69
3rd Quarter 21.96 17.57
4th Quarter 23.11 20.48
CASH DIVIDENDS DECLARED ON COMMON STOCK
2002 2001
---- ----
1st Quarter $.21 $.19
2nd Quarter .21 .19
3rd Quarter .21 .20
4th Quarter .22 .21
The Trust Preferred Securities of NPB Capital Trust II are reported on
Nasdaq's National Market under the symbol "NPBCO". These securities have a par
value of $25 and the preferred dividend is 7.85%.
17
Item 6. SELECTED FINANCIAL DATA
FIVE-YEAR STATISTICAL SUMMARY
(Dollars in thousands, except per share data)
Year Ended 2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ---------------- ---------------
STATEMENTS OF CONDITION
Total assets $2,858,262 $2,727,482 $2,615,447 $2,351,968 $2,222,970
Total deposits 2,112,640 2,076,795 1,909,591 1,683,850 1,558,745
Loans and leases, net** 1,842,987 1,814,162 1,759,887 1,622,140 1,485,346
Total investment securities 733,774 658,581 606,778 529,411 535,917
Total shareholders'equity 222,360 195,682 183,216 154,938 166,133
Book value per share* 10.74 9.35 8.75 7.43 7.92
Percent shareholders' equity to assets 7.78% 7.17% 7.01% 6.59% 7.47%
Trust assets 778,246 843,755 905,682 834,585 674,729
EARNINGS
Total interest income $173,010 $188,497 $192,403 $172,223 $161,271
Total interest expense 63,446 92,512 103,977 86,765 80,203
---------------- ---------------- ---------------- ---------------- ---------------
Net interest income 109,564 95,985 88,426 85,458 81,068
Provision for loan and lease losses 14,000 9,000 7,325 6,570 6,200
---------------- ---------------- ---------------- ---------------- ---------------
Net interest income after provision
for loan and lease losses 95,564 86,985 81,101 78,888 74,868
Other income 39,847 34,502 27,659 24,037 19,406
Other expenses 89,831 80,723 75,282 69,458 64,508
---------------- ---------------- ---------------- ---------------- ---------------
Income before income taxes 45,580 40,764 33,478 33,467 29,766
Income taxes 9,346 8,030 5,690 5,816 6,304
---------------- ---------------- ---------------- ---------------- ---------------
Net income $36,234 $32,734 $27,788 $27,651 $23,462
================ ================ ================ ================ ===============
Cash dividends paid $17,664 $16,519 $14,538 $13,595 $10,318
Return on average assets 1.30% 1.25% 1.13% 1.21% 1.14%
Return on average shareholders' equity 17.4% 16.8% 17.3% 17.2% 14.7%
PER SHARE DATA*
Basic earnings $1.74 $1.56 $1.34 $1.32 $1.12
Diluted earnings $1.72 $1.54 $1.32 $1.30 $1.10
Dividends paid in cash
0.85 0.79 0.70 0.65 0.49
Dividends paid in stock 5% 3% 5% 5% 5-for-4
stock split
Average shares outstanding - basic* 20,777,811 20,984,403 20,809,050 20,917,295 20,966,885
Average shares outstanding - diluted* 21,050,447 21,234,120 21,033,889 21,240,063 21,380,552
*Restated to reflect a 5% stock dividend in 2002, 3% stock dividend in 2001,
5% stock dividends in 2000 and 1999, and a 5-for4 stock split in 1998.
**Includes loans held for sale
The unaudited quarterly results of National Penn's operations in 2002 and
2001 are included in Footnote 22 to National Penn's Consolidated Financial
Statements included herein at Item 8 of this Report, Financial Statements and
Supplementary Data.
18
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 2002 total assets increased to $ 2.858 billion, an increase of $
130.8 million or 4.8% over the $2.727 billion at year-end 2001. Total assets at
the end of 2001 increased $112.0 million or 4.3% over the $2.615 billion at
year-end 2000. The increase in 2002 is reflected primarily in the loan category,
the investment category and the cash and cash equivalent category, which
increased $28.8 million, $75.2 million and $26.6 million, respectively.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
-----------------------------------------------------
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and the
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
The Company considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than its other
significant accounting policies. The allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors. However, this evaluation is inherently subjective as
it requires material estimates, including, among others, expected default
probabilities, loss given default, expected commitment usage, the amounts and
timing of expected future cash flows on impaired loans, mortgages, and general
amounts for historical loss experience. The process also considers economic
conditions, uncertainties in estimating losses and inherent risks in the loan
portfolio. All of these factors may be susceptible to significant change. To the
extent actual outcomes differ from management estimates, additional provisions
for loan losses may be required that would adversely impact earnings in future
periods.
With the adoption of SFAS No. 142 on January 1, 2002, the Company
discontinued the amortization of goodwill resulting from acquisitions. Goodwill
is now subject to impairment testing at least annually to determine whether
write-downs of the recorded balances are necessary. The Company tests for
impairment based on the goodwill maintained at each defined reporting unit. A
fair value is determined for each reporting unit based on at least one of three
various market valuation methodologies. If the fair values of the reporting
units exceed their book values, no write-down of recorded goodwill is necessary.
If the fair value of a reporting unit is less, an expense may be required on the
Company's books to write down the related goodwill to the proper carrying value.
As of June 30, 2002, the Company completed its transitional testing which
determined that no impairment write-offs were necessary. No assurance can be
given that future goodwill impairment tests will not result in a charge to
earnings.
The Company recognizes deferred tax assets and liabilities for the future
tax effects of temporary differences, net operating loss carryforwards and tax
credits. Deferred tax assets are subject to management's judgment based upon
available evidence that future realization is more likely than not. If
management determines that the Company may be unable to realize all or part of
net deferred tax assets in the future, a direct charge to income tax expense may
be required to reduce the recorded value of the net deferred tax asset to the
expected realizable amount.
19
LOAN PORTFOLIO
--------------
Net loans and leases including loans held for sale increased to $1.843
billion during 2002, an increase of $28.8 million or 1.6% compared to 2001. Net
loans increased $54.3 million in 2001 or 3.1% compared to 2000. Loan growth in
2002 was as a result of the increase in commercial and industrial loans and
leases, and loans to financial institutions of $18.9 million and residential and
other real estate type loans of $43.1 million, which was offset by the decrease
in non real estate loans to individuals of $26.3 million and construction loans
totaling $6.5 million. Approximately $15.8 million of the increase in net loans
was the result of an acquisition of a branch office from Wilmington Savings Fund
Society, in September 2002. Residential mortgages originated for immediate
resale during 2002 amounted to $109.9 million. The Company has $53.0 million in
loans held for sale at December 31, 2002. The Company has no significant
exposure to energy and agricultural-related loans.
The Company's loans are widely diversified by borrower, industry group, and
geographical area in southeastern Pennsylvania, New Jersey and Virginia. The
following summary shows the year-end composition of the Company's loan
portfolio:
December 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands)
Commercial and Industrial Loans and $376,634 $357,706 $319,074 $275,815 $236,193
Leases
Real Estate Loans:
Construction and Land Dev. 122,129 128,655 151,364 136,227 84,694
Residential 701,593 672,329 689,784 698,403 728,473
Other 628,115 614,289 560,356 482,018 415,015
Loans to Individuals 57,103 83,390 78,342 65,028 52,526
---------- ---------- ---------- ---------- ----------
Total $1,885,574 $1,856,369 $1,798,920 $1,657,491 $1,516,901
========== ========== ========== ========== ==========
Maturities and sensitivity to changes in interest rates in certain loan
categories in the Company's loan portfolio at December 31, 2002, are summarized
below:
After One Year to
One year or Less* Five Years After Five Years Total
------------------- ----------------- ---------------- --------
(In thousands)
Commercial and Industrial Loans and
Leases $218,291 $99,766 $58,577 $376,634
Construction and Land Dev. 59,445 56,044 6,640 122,129
-------- -------- -------- --------
$277,736 $155,810 $65,217 $498,763
======== ======== ======= ========
*Demand loans, past-due loan and overdrafts are reported in "One Year or Less."
An immaterial amount of loans have no stated schedule of repayments.
Loan balances segregated in terms of sensitivity to changes in interest
rates at December 31, 2002, are summarized below:
After One Year to Five Years After Five Years
---------------------------- ----------------
(In thousands)
Predetermined Interest Rate $150,371 $65,217
Floating Interest Rate 2,439 ---
-------- -------
Total $152,810 $65,217
======== =======
Determinations of maturities included in the loan maturity table are based
upon contract terms. In situations where a renewal is appropriate, the Company's
policy in this regard is to evaluate the credit for collectibility 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 total
$319.3 million.
20
RISK ELEMENTS - LOANS
---------------------
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.
December 31,
--------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Nonaccrual Loans $14,639 $15,988 $12,984 $13,505 $11,674
Loans Past Due 90 or More Days
as to Interest or Principal 987 11,794 4,559 3,258 2,042
------- ------- ------- ------ ------
Total Nonperforming Loans 15,626 27,782 17,543 16,763 13,716
Other Real Estate Owned 318 1,013 1,485 890 970
------- ------- ------- ------ ------
Total Nonperforming Assets $15,944 $28,795 $19,028 $17,653 $14,686
======= ======= ======= ======= =======
Gross Amount of Interest That
Would Have Been Recorded at
Original Rate on Nonaccrual and
Restructured Loans $1,023 $1,078 $688 $864 $948
------- ------ ------- ------- -------
Interest Received From
Customers on Nonaccrual and
Restructured Loans 498 863 437 439 289
------- ------ ------- ------- -------
Net Impact on Interest
Income of Nonperforming Loans
$525 $215 $251 $425 $659
======= ======= ======= ======= =======
Nonperforming assets, including nonaccruals, loans 90 days past due,
restructured loans and other real estate owned, were $15.9 million at December
31, 2002, compared to $28.8 million at December 31, 2001, with a substantial
decrease in the loans 90 days past due and still accruing category. Nonaccrual
loans represented $14.6 million and $16.0 million at December 31, 2002, and
December 31, 2001, respectively. Loans 90 days past due and still accruing
interest were $987,000 and $11.8 million at December 31, 2002 and December 31,
2001, respectively. The decrease in the loans past due 90 days or more category
is due primarily to two large commercial real estate relationships that were
resolved in 2002. Additional discussion regarding this issue is set forth in the
paragraph of this Item 7 titled "Allowance for Loan Losses" on page 27.
Other real estate owned was $318,000 at December 31, 2002 and $1.0 million
at December 31, 2001, respectively. The Company had no restructured loans at
December 31, 2002 or December 31, 2001. The allowance for loan losses to
nonperforming assets was 267.1% and 146.6% at December 31, 2002 and December 31,
2001, respectively, with the increase in 2002 due to the decreased level of
nonperforming assets discussed above. Another measure of the Company's credit
quality is reflected by the ratio of net chargeoffs to total loans of 0.74% for
2002 versus 0.31% for the year 2001, and the ratio of nonperforming assets to
total loans of .85% at December 31, 2002, compared to 1.55% at December 31,
2001, the reasons for which have been discussed above. Net loan chargeoffs of
$13.6 million during 2002 was high compared to historical Company results and
peer averages. Of the $13.6 million in net chargeoffs, $7.1 million was a direct
result of two large commercial real estate transactions, discussed in the Loan
Portfolio section. One of these transactions, after moving to Other Real Estate,
was completely liquidated. The second
21
has been charged down to the value of the remaining collateral. Based upon
management's current information and analysis, it appears that no additional
losses are expected on this loan.
The Company has not engaged in any transactions with entities established
and operated by former members of senior management or individuals with former
management relationships with the Company.
INVESTMENT PORTFOLIO
--------------------
Investments, which are the Company's secondary use of funds, increased
$75.2 million or 11.4% to $733.8 million at year-end 2002. The increase in 2002
is due primarily to investment purchases of $168.8 million primarily in
mortgage-backed securities and municipals, and the securitization of
approximately $35.0 million of conforming residential loans through Federal Home
Loan Mortgage Corporation during the second quarter. This resulted in the
transfer of these loans from the Company's loan portfolio to the investment
portfolio where they are now held in the form of a mortgage-backed security. The
purpose of this transaction was to provide greater liquidity for the loans as
they are more readily saleable in the form of a security, as well as to provide
collateral for the Company's cash management and municipal deposit programs.
This increase was partially offset by investment sales, calls and maturities of
$107.6 and the amortization of mortgage-backed securities. In 2001, the
investment portfolio reflected an increase of $51.8 million or 8.5% compared to
2000. The increase in 2001 was due to the addition of $265.9 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.
A summary of investment securities available for sale at December 31, 2002, 2001
and 2000 follows (in thousands):
2002 2001 2000
------------------------ ------------------------ ------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- ---------- ---------- ---------- ---------- ----------
US Treasuries and Agencies $47,379 $51,496 $52,989 $55,711 $153,010 $154,400
State and Municipal 255,510 266,536 251,245 249,130 231,366 233,769
Mortgage-backed securities 356,483 366,274 307,838 311,007 163,937 165,036
Marketable equity secs. & other 48,961 41,711 42,733 54,230 53,573 49,468
------ ------ ------ ------ ------ ------
Total $708,333 $733,774 $653,783 $658,581 $602,543 $606,778
======== ======== ======== ======== ======== ========
The maturity distribution and weighted average yield of the investment
portfolio of the Company at December 31, 2002 are presented in the following
table. Weighted average yields on tax-exempt obligations have been computed on a
fully taxable equivalent basis assuming a tax rate of 35%. All average yields
were calculated on the book value of the related securities. Stocks and other
securities having no stated maturity have been included in the "After 10 Years"
category.
After 1 But After 5 But
(Dollars in thousands) Within 1 Year Within 5 Yrs Within 10 Yrs After 10 Yrs Total
- ---------------------- ------------- ------------ ------------- ------------ -----
Amt Yld Amt Yld Amt Yld Amt Yld Amt Yld
--- --- --- --- --- --- --- --- --- ---
US Treasury and Agencies $7,046 7.14% $19,330 4.96% $20,950 6.67% $4,170 3.34% $51,496 5.82%
State and Municipal 1,621 7.81% 12,748 6.56% 36,671 6.57% 215,496 7.97% 266,536 7.71%
Mortgage-backed securities -- --% 46,722 4.12% 83,661 5.05% 235,891 5.26% 366,274 5.07%
Marketable equity secs.
and other -- --% 311 --% --- --% 49,157 --% 49,468 --%
------- ------- -------- -------- --------
Total $8,667 7.26% $79,111 4.70% $141,282 5.68% $504,714 5.89% $733,774 5.74%
======= ===== ======= ===== ======== ===== ======== ===== ======== =====
OTHER ASSETS
Other assets, which is comprised of premises and equipment, accrued
interest receivable, bank owned life insurance policies and all other assets
increased to $147.0 million, an increase of $113,000 compared to the $146.9
million at December 31, 2001. In 2001, other assets increased $2.8 million or
1.9% compared to 2000 .
22
DEPOSITS
As the primary source of funds, aggregate deposits of $2.113 billion
increased $35.8 million or 1.7% compared to 2001. Non-interest bearing deposits
increased $8.9 million and interest bearing deposits increased $27.0 million. Of
the deposit increase, $9.6 million resulted from the previously mentioned branch
acquisition from Wilmington Savings Fund Society. Deposits of $2.077 billion
increased $167.2 million in 2001 or 8.8% compared to 2000.
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, 2002 (in thousands):
Year Ended December 31,
-----------------------------------------------------------------------------------
2002 2001 2000
----------------------- ----------------------- ----------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Non-interest bearing demand
deposits $320,740 --% $287,421 --% $247,418 --%
Savings deposits 898,151 1.18% 726,853 2.28% 662,043 3.28%
Time deposits 854,491 4.00% 944,848 5.71% 858,533 5.97%
---------- ---- ---------- ---- ---------- ----
Total $2,073,382 2.16% $1,959,122 3.60% $1,767,994 4.13%
========== ==== ========== ==== ========== ====
The aggregate amount of jumbo certificates of deposits, issued in the
amount of $100,000 or more was $203,202,000 in 2002, $267,540,000 in 2001 and
$242,900,000 in 2000.
The following is a breakdown, by maturities, of the Company's time
certificates of deposit of $100,000 or more as of December 31, 2002. The company
has no other time deposits of $100,000 or more as of December 31, 2002 (in
thousands).
Maturity
--------
3 months or less $62,624
Over 3 through 6 months 62,254
Over 6 months through 12 months 64,068
Over 12 months 14,256
------
Total $203,202
========
In addition to deposits, earning assets are funded to some extent through
purchased funds and borrowings. These include securities sold under repurchase
agreements, federal funds purchased, short-term borrowings, long-term
borrowings, and subordinated debentures. In the aggregate, these funds totaled
$496.9 million at the end of 2002, a $68.5 million or 16.0% increase compared to
2001, primarily due to the decreased level of funding from time deposits. The
2001 amount of borrowings and purchased funds of $428.4 million represented a
decrease of $65.4 million or 13.2% compared to 2000. The decrease in 2001 was
due to higher level of funding from deposits.
At or for the year ended December 31,
----------------------------------------------------
2002 2001 2000
---- ---- ----
Securities sold under repurchase agreements and federal
funds purchased
Balance at year-end $253,325 $238,726 $298,049
Average during the year 238,259 251,781 290,015
Maximum month-end balance 272,322 300,532 344,125
Weighted average during the year 1.84% 3.78% 5.81%
Rate at December 31 1.25% 2.02% 4.94%
Short-term borrowings
Balance at year-end $10,614 $9,480 $9,041
Average during the year 7,146 7,235 13,942
Maximum month-end balance 10,614 10,012 26,170
Weighted average rate during the year 1.46% 3.65% 5.46%
Rate at December 31 .78% 1.52% 4.87%
23
RESULTS OF OPERATIONS
---------------------
Net income for 2002 of $36.2 million was 10.7% more than the $32.7 million
reported in 2001. The 2001 amount was 17.8% more than the $27.8 million in 2000.
On a per share basis, basic earnings were $1.74, $1.56, and $1.34 for 2002,
2001, and 2000, respectively. Diluted earnings per share were $1.72, $1.54, and
$1.32 for 2002, 2001, and 2000, respectively.
(This space intentionally left blank)
24
Average Balances, Average Rates, and Interest Rate Spread*(Dollars in Thousands)
Year Ended December 31,
-------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
INTEREST EARNING ASSETS
Interest bearing deposits at banks $3,361 $72 2.14% $9,266 $559 6.03% $4,512 $301 6.67%
U. S. Treasury 10,992 915 8.32 26,694 1,821 6.82 39,513 2,670 6.76
U.S. Government Agencies 406,319 22,960 5.65 316,031 20,044 6.34 252,166 16,854 6.68
State and Municipal* 258,318 19,201 7.43 242,404 18,197 7.51 221,165 18,109 8.19
Other Bonds and Securities 46,870 3,079 6.57 48,601 3,844 7.91 56,583 4,779 8.45
---------- ---------- ---------- ---------- ---------- ----------
Total Investments 722,499 46,155 6.39 633,730 43,906 6.93 569,427 42,412 7.45
---------- ---------- ---------- ---------- ---------- ----------
Federal Funds Sold 53,178 822 1.55 5,466 177 3.24 8,713 601 6.90
---------- ---------- ---------- ---------- ---------- ----------
Commercial Loans and Lease Financing* 1,345,389 96,467 7.17 1,285,001 107,666 8.38 1,160,078 108,456 9.35
Installment Loans 277,892 21,836 7.86 318,802 26,982 8.46 325,401 29,390 9.03
Mortgage Loans 216,635 15,412 7.11 212,462 16,664 7.84 235,941 18,598 7.88
---------- ---------- ---------- ---------- ---------- ----------
Total Loans and Leases 1,839,916 133,715 7.27 1,816,265 151,312 8.33 1,721,420 156,444 9.09
---------- ---------- ---------- ---------- ---------- ----------
Total Earning Assets 2,618,954 $180,764 6.90% 2,464,727 $195,954 7.95% 2,304,072 $199,758 8.67%
---------- ---------- ---------- ---------- ---------- ----------
Allowance for Loan and Lease Losses (43,028) (40,061) (37,715)
Non-Interest Earning Assets 216,130 199,603 192,383
---------- ----------- ----------
Total Assets $2,792,056 $2,624,269 $2,458,740
=========== =========== ===========
INTEREST BEARING LIABILITIES
Interest Bearing Deposits $1,752,642 $44,783 2.56% 1,671,701 $70,498 4.22% 1,520,576 $72,960 4.80%
Securities Sold Under Repurchase
Agreements and Federal Funds Purchased 238,259 4,387 1.84 251,781 9,509 3.78 290,015 16,864 5.81
Short-Term Borrowings 7,146 104 1.46 7,235 264 3.65 13,942 761 5.46
Long-Term Borrowings 238,439 14,172 5.94 184,418 12,241 6.64 200,102 13,392 6.69
---------- ---------- ---------- ---------- ---------- ----------
Total Interest Bearing Liabilities 2,236,486 $63,446 2.84% 2,115,135 $92,512 4.37% 2,024,635 $103,977 5.14%
---------- ---------- ---------- ---------- ---------- ----------
Non-Interest Bearing Deposits 320,740 287,421 247,418
Other Non-Interest Bearing Liabilities 26,128 26,496 25,632
---------- ----------- ----------
Total Liabilities 2,583,354 2,429,052 2,297,685
Equity Capital 208,702 195,217 161,055
---------- ----------- ----------
Total Liabilities and Equity Capital $2,792,056 $2,624,269 $2,458,740
=========== =========== ===========
INTEREST RATE MARGIN** $117,318 4.48% $103,442 4.20% $95,781 4.16%
=========== =========== ==========
* Full taxable equivalent basis, using a 35% effective tax rate.
** Represents the difference between interest earned and interest paid, divided
by total earning assets. Loans outstanding, net of unearned income, include
nonaccruing loans. Fee income included.
25
Net interest income is the difference between interest income on assets and
interest expense on liabilities. Net interest income increased $13.6 million or
14.2% to $109.6 million in 2002 from the 2001 amount of $96.0 million. Interest
income decreased $15.5 million as a result of decreased loan income of $17.5
million offset by an increase in investment income of $1.9 million. Interest
expense decreased $29.1 million or 31.4% to $63.4 million in 2002 from the 2001
amount of $92.5 million due to a decrease of $25.7 million in interest on
deposits and a decrease of $3.4 million in borrowed funds. Despite the current
low 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
Company's interest rate margin increased slightly from 4.20% in 2001 to 4.48% in
2002 due to increased outstandings in interest earning assets and from which the
income generated on these assets decreased due to lower rates at a slower pace
than on the increased level of interest bearing liabilities for which the
expense paid on those liabilities decreased, also due to lower rates, at a
faster pace than on the assets.
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, 2002 and 2001. The information is
presented on a taxable equivalent basis, using an effective tax rate of 35% (in
thousands).
Year Ended December 31,
-----------------------------------------------------------------------------
2002 over 2001 (1) 2001 over 2000 (1)
-------------------------- ---------------------------
Increase (decrease) in: Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest income:
Interest bearing deposits at banks ($356) ($131) ($487) $317 ($59) $258
Securities:
US Treasury and Agencies 4,758 (2,748) 2,010 3,417 (1,076) 2,341
State and municipal 1,195 (191) 1,004 1,739 (1,651) 88
Other bonds and securities (137) (628) (765) (674) (261) (935)
-------- -------- -------- -------- -------- --------
Total investment securities 5,816 (3,567) 2,249 4,482 (2,988) 1,494
-------- -------- -------- -------- -------- --------
Federal funds sold 1,545 (900) 645 (224) (200) (424)
Loans:
Comml loans and lease financing 5,060 (16,259) (11,199) 11,679 (12,469) (790)
Installment loans (3,462) (1,684) (5,146) (596) (1,812) (2,408)
Mortgage loans 327 (1,579) (1,252) (1,851) (83) (1,934)
-------- -------- -------- -------- -------- --------
Total loans 1,925 (19,522) (17,597) 9,232 (14,364) (5,132)
-------- -------- -------- -------- -------- --------
Total interest income $8,930 ($24,120) ($15,190) $13,807 ($17,611) ($3,804)
======== ======== ======== ======== ======== ========
Interest expense:
Interest bearing deposits 3,413 (29,128) (25,715) 7,251 (9,713) (2,462)
Securities sold under repurchase
agreements and federal funds
purchased
(511) (4,611) (5,122) (2,214) (5,141) (7,355)
Short-term borrowings (3) (157) (160) (331) (166) (497)
Long-term borrowings 3,586 (1,655) 1,931 (1,050) (101) (1,151)
-------- -------- -------- -------- -------- --------
Total borrowed funds 3,072 (6,423) (3,351) (3,595) (5,408) (9,003)
-------- -------- -------- -------- -------- --------
Total interest expense $6,485 ($35,551) ($29,066) $3,656 ($15,121) ($11,465)
======== ======== ======== ======== ======== ========
Increase (decrease) in net interest
income $2,445 $11,431 $13,876 $10,151 ($2,490) $7,661
======== ======== ======== ======== ======== ========
- -------------------------------
(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.
26
ALLOWANCE FOR LOAN LOSSES
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 $14.0 million for the year
ended December 31, 2002 and $9.0 million and $7.3 million for the years ended
December 31, 2001 and 2000, respectively. The allowance for loan losses of $42.6
million at year-end 2002 and $42.2 million at year-end 2001 as a percentage of
total loans was 2.26% at year-end 2002 and 2.27% at year-end 2001.
Net loan chargeoffs of $13.6 million in 2002 were high compared to
historical Company results of $5.8 million and $5.0 million during 2001 and
2000, respectively, and high also compared to peer averages. Of the $13.6
million in net chargeoffs, $7.1 million was a direct result of two large
commercial real estate transactions, discussed in the Loan Portfolio section.
The increase in loan chargeoffs in 2002 compared to NP Bank's prior experience
was the direct result of two large commercial real estate loans involving the
borrowers misrepresentation of their loan information to the bank. To strengthen
NP Bank's credit administration process, NP Bank has enhanced its lending
policies, and allocated additional resources to oversee its underwriting
procedures. Management continues to believe its loan loss allowance is adequate
to cover future losses.
A detailed analysis of the Company's allowance for loan losses for the five
years ended December 31, 2002, is shown below:
December 31,
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance at beginning of year $42,207 $39,033 $35,351 $31,555 $29,007
Charge-offs:
Commercial and industrial loans 2,905 2,018 2,596 1,858 1,549
Real estate loans:
Construction and land development 7,393 1,708 -- -- --
Residential 2,679 1,854 1,423 1,381 719
Other 617 569 969 1,262 2,374
Loans to individuals 2,192 2,025 2,121 800 627
----------- ----------- ----------- ----------- ------------
Total Charge-offs 15,786 $8,174 $7,109 $5,301 $5,269
----------- ----------- ----------- ----------- ------------
Recoveries:
Commercial and industrial 281 1,423 814 278 245
Real estate loans:
Construction and land development 7 56 44 10 --
Residential 794 339 438 555 653
Other 297 328 598 1,571 553
Loans to individuals 787 202 188 113 166
----------- ----------- ----------- ----------- ------------
Total Recoveries $2,166 $2,348 $2,082 $2,527 $1,617
----------- ----------- ----------- ----------- ------------
Net charge-offs $13,620 $5,826 $5,027 $2,774 $3,652
----------- ----------- ----------- ----------- ------------
Provision charged to expense 14,000 9,000 7,325 6,570 6,200
Adjustments:
Changes incident to mergers and absorptions, net -- -- 1,384 -- --
Balance at end of year $42,587 $42,207 $39,033 $35,351 $31,555
----------- ----------- ----------- ----------- ------------
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.74% 0.31% 0.28% 0.18% 0.25%
=========== =========== =========== =========== ============
27
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.
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. 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. To assist in determining the fair
value of loan collateral, the Company often utilizes independent third party
qualified appraisal firms which in turn employ their own criteria and
assumptions that may include occupancy rates, rental rates, and property
expenses, among others.
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.
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. At December 31,
2002, management believes that the allowance for loan losses and nonperforming
loans remained safely within acceptable levels
The following table shows how the allowance for loan losses is allocated
among the various types of loans that the Company has outstanding. This
allocation is based on management's specific review of the credit risk of the
outstanding loans in each category as well as historical trends.
28
Allocation of the Allowance for Loan Losses (1)
-----------------------------------------------
2002 2001 2000 1999 1998
------------------ ----------------- ------------------ ------------------ ------------------
% Loan % Loan % Loan % Loan % Loan
Type Type Type Type Type
to to to to to
Total Total Total Total Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
------------------ ----------------- ------------------ ------------------ ------------------
Commercial and
industrial $8,142 20.0% $ 5,182 19.3% $ 6,323 17.7% $ 6,080 16.7% $ 5,995 15.6%
Real estate loans:
Construction and 2,640 6.5% 11,279 6.9% 6,948 8.4% 4,348 8.2% 2,588 5.6%
land dev.
Residential 15,168 37.2% 3,393 36.2% 3,435 38.4% 4,278 42.1% 4,260 48.0%
Other 13,579 33.3% 8,824 33.1% 10,773 31.1% 11,312 29.1% 11,644 27.3%
Loans to individuals 1,234 3.0% 5,878 4.5% 7,026 4.4% 4,384 3.9% 3,345 3.5%
Unallocated 1,824 N/A 7,651 N/A 4,528 N/A 4,949 N/A 3,723 N/A
------------------ ----------------- ------------------ ------------------ ------------------
$42,587 100.0% $42,207 100.0% $ 39,033 100.0% $ 35,351 100.0% $ 31,555 100.0%
================== ================= ================== ================== ==================
(1) This allocation is made for analytical purposes. The total allowance is
available to absorb losses from any segment of the portfolio.
OTHER INCOME AND EXPENSES
Other income increased $5.3 million or 15.5% in 2002 compared to 2001, as a
result of increased service charges on deposit accounts of $2.3 million,
increased mortgage banking income of $1.1 million, increased Bank Owned Life
Insurance Income of $962,000, increased other services charges and fees of
$824,000, and increased trust income of $142,000. The increase in deposit fees
is due to the increase in the number of accounts and additional products
introduced in 2002. Mortgage income increased due to the decrease in rates and
the willingness of customers to refinance. The increase in other income in 2001
compared to 2000 was $6.8 million or 24.7% as a result of increased service
charges on deposits accounts of $3.3 million, and increased mortgage banking
income of $2.2 million, increased other service charges and fees of $882,000,
increased trust income of $317,000, and increased net gains on sale of
investment securities of $101,000. Sales of investment securities in 2002 and
2001 totaled $20.5 million and $25.6 million, respectively. Other expenses
increased $9.1 million or 11.3% in 2002 compared to 2001 as a result of
increased salaries, wages and benefits of $4.3 million and increased other
operating expenses of $4.8 million. Other operating expenses increased in part
due to the write-down of a minority ownership interest in a non-banking,
non-public financial services business. At the time of the Company's investment,
this business appeared to be an opportunity for the Company to continue to focus
on specialized niche markets. The business has been unable to accomplish its
business plan and the Company elected to terminate its investment in this
business. The Company has no other material, similar types of investments. The
Company also wrote off the unamortized issuance costs of $822,000 related to the
redemption of the 1997 preferred securities. Salaries, wages and benefits
increased due to increased staff and increases in benefit costs. Other expenses
increased $5.4 million or 7.2% in 2001 when compared to 2000, as a result of
increased salaries, wages and benefits of $3.2 million, increased other expenses
of $2.2 million. For 2002, 2001, and 2000, 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 2002 by $4.8 million or 11.8%
compared to 2001, when income before income taxes increased by $7.3 million
compared to 2000. Income taxes increased $1.3 million in 2002 compared to 2001
while income taxes increased $2.3 million compared to 2000. The Company's
effective tax rate is 20.5% for 2002, 19.7% for 2001, and 17.0% for 2000,
respectively. The increase from 2001 to 2002 is due to the decrease in tax
advantaged income as a percent of taxable income. The effective tax rate is less
than the current 35% incremental rate due to the Company's investments in tax
advantaged municipal securities and bank owned life insurance.
On January 1, 2002, the Company adopted SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Intangible Assets. These statements
modify the Company's accounting for goodwill and other intangible assets. SFAS
No. 142 modifies the accounting for all purchased goodwill and intangible
assets. As of January 1, 2002, the Company is no longer amortizing its goodwill.
Had the Company not been required to amortize goodwill, reported
29
earnings per share would have been $0.06 higher on a diluted basis or $1.60 per
share versus the $1.54 per share actually reported for the twelve months ended
December 31, 2001.
SFAS No. 142 includes requirements to test goodwill and indefinite lived
intangible assets for impairment rather than amortize them. The Company will be
testing goodwill for impairment at least annually. For the testing completed as
of June 30, 2002, the Company had no impairment of goodwill. No assurance can be
given that future goodwill impairment tests will not result in a charge to
earnings.
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 $51.6 million during 2002. Long-term borrowings increased $52.7
million during 2002.
The Company currently does not have any unconsolidated subsidiaries or
off-balance sheet special purpose entities.
The goal of interest rate sensitivity management is 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, 2002:
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 $ 2,616 $ --- $ --- $ ---
Federal Funds Sold 48,000
Investment securities 103,692 167,492 232,527 230,063
Loans and Leases(1) 775,425 230,562 712,413 124,587
Other assets --- --- --- 230,885
-------------- ---------------- ---------------- ---------------
929,733 398,054 944,940 585,535
-------------- ---------------- ---------------- ---------------
Liabilities and equity
Non-interest bearing deposits 353,853 --- --- ---
Interest bearing deposits (2) 501,625 238,952 353,768 664,442
Borrowed funds (3) 149,844 --- 60,430 223,368
Preferred securities --- --- --- 63,250
Other liabilities --- --- --- 26,370
Hedging instruments 60,000 (20,000) (40,000) ---
Shareholders' equity --- --- --- 222,360
-------------- ---------------- ---------------- ---------------
1,065,322 218,952 374,198 1,199,790
-------------- ---------------- ---------------- ---------------
Interest sensitivity gap (135,589) 179,102 570,742 (614,255)
-------------- ---------------- ---------------- ---------------
Cumulative interest rate sensitivity gap (135,589) 43,513 614,255 $ ---
============== ================ ================ ===============
- -------------------------------------------------
30
(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
2002. The table assumes prepayments and scheduled principal amortization of
fixed-rate loans and mortgage-backed securities, and assumes that
adjustable-rate mortgages will reprice at contractual repricing intervals.
There has been no adjustment for the impact of future commitments and loans
in process.
(2) Savings and NOW deposits are scheduled for repricing based on historical
deposit decay rate analyses, as well as historical moving averages of
run-off for the Company's deposits in these categories. While generally
subject to immediate withdrawal, management considers a portion of these
accounts to be core deposits having significantly longer effective
maturities based upon the Company's historical retention of such deposits
in changing interest rate environments. Specifically, 29.0% of these
deposits are considered repriceable within three months and 71.0% are
considered repriceable in the over five-year category.
(3) Includes federal funds purchased, securities sold under repurchase
agreements, and short and long term borrowings.
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 decrease in a falling
interest rate environment and would increase 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, 2002 are as follows:
MVPE
Change in Interest Rate Amount % Change
- ----------------------- ------ --------
( In Thousands)
+300 Basis Points 347,588 12.35
+200 Basis Points 358,363 15.84
+100 Basis Points 354,241 14.51
Flat Rate 309,367 ----
- -100 Basis Points 297,039 -3.99
- -200 Basis Points 255,976 -17.26
- -300 Basis Points 232,725 -24.77
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, such as 400 or 500 basis point changes in interest rates, or actual
experience differs from the experience on which the assumptions were based.
31
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 emphasize deposits or obtain borrowings with desired
maturities.
The Company anticipates interest rate levels will remain stable in the
first half of 2003, and will rise in the second half of 2003. Given this
assumption, the Company's asset/liability strategy for 2003 is to maintain the
positive gap position (interest-bearing assets subject to repricing more than
interest-earning liabilities subject to repricing) for periods up to a year. The
impact of changing interest rates 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.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
---------------------------------------------
The following table sets forth contractual obligations and other
commitments representing required and potential cash outflows as of December 31,
2002:
One to Four to After
Less than Three Five Five
(dollars in thousands) Total One Year Years Years Years
----- -------- ----- ----- -----
Minimum annual rentals on noncancellable
Operating leases $ 17,627 $ 2,948 $ 4,488 $ 2,422 $ 7,769
Remaining contractual maturities of time
deposits 765,418 407,628 286,881 66,887 4,022
Loan commitments 598,950 430,071 34,924 5,895 128,060
Long-term borrowed funds 169,703 9,187 22,500 37,929 100,087
Guaranteed preferred beneficial interests in
Company's subordinated debentures 63,250 --- --- --- 63,250
Standby letters of credit 42,389 33,810 8,377
------ ------ ------ ------- --------
84 118
Total $1,657,337 $883,644 $357,170 $113,217 $303,306
========== ======== ======== ======== ========
The Company had no capital leases at December 31, 2002.
CAPITAL ADEQUACY
----------------
Shareholders' equity increased by $26.7 million or 13.6% in 2002 to $222.4
million. This increase was principally due to an increase in the valuation
adjustment for securities available for sale, as well as the increase in
retained earnings from 2002 net income, less cash dividends paid in 2002. Cash
dividends paid in 2002 increased $1.1 million or 6.9% compared to the cash
dividends paid in 2001, which increased $1.9 million or 13.6% compared to cash
dividends paid in 2000. Earnings retained in 2002 were 51.3% compared to 49.5%
in 2001.
The following table sets forth certain capital performance ratios for the
Company.
2002 2001 2000
---- ---- ----
CAPITAL PERFORMANCE
Return on average assets 1.30% 1.25% 1.13%
Return on average equity 17.40% 16.80% 17.30%
Dividend payout ratio 48.75% 50.46% 52.32%
Earnings retained 51.30% 49.50% 47.70%
32
CAPITAL LEVELS
Tier 1 Capital to Tier 1 Capital to Risk- Total Capital to Risk-
Average Assets Ratio Weighted Assets Ratio Weighted Assets Ratio
------------------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec., 31 Dec., 31
2002 2001 2002 2001 2002 2001
-------- -------- --------- -------- --------- --------
The Company 8.66% 7.99% 11.81% 10.53% 13.08% 11.82%
National Penn Bank 6.91% 7.03% 9.33% 9.16% 10.59% 10.42%
Panasia Bank, N.A. 5.61% 6.64% 10.10% 12.38% 11.36% 13.64%
"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,
2001, 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, 2002, National Penn Bank and Panasia Bank, N.A., each meet 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 2001, the Company's Board of Directors approved the repurchase of
up to 975,000 shares of its common stock to be used for the general corporate
purposes, including 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. The Company purchased 652,653
shares at an aggregate cost of approximately $15,942,000 for the period January
1, 2002 through August 27, 2002, the date of the completion of the 2001
repurchase program.
On June 26, 2002, the Company's Board of Directors approved a stock
repurchase plan of up to 1,000,000 shares of its common stock. Repurchases can
be from time to time in the open market or privately negotiated transaction, and
may be used for general purposes including the Company's dividend reinvestment
plan, stock option plans, employee stock purchase plan, and other stock benefit
plans. As of December 31, 2002, a total of 173,529 shares have been repurchased
at an aggregate cost of approximately $4,429,000.
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 Report on Form 8-K dated
July 11, 2000, filed with the Securities and Exchange Commission ("SEC").
33
PENDING SALE OF PANASIA BANK, N.A
---------------------------------
On February 10, 2003, National Penn, Panasia and Woori America Bank, a New
York banking institution, entered into an Agreement providing for, among other
things, the sale of Panasia to Woori America Bank for $34.5 million in cash and
the subsequent merger of Panasia into Woori America Bank, as previously reported
on National Penn's Report on Form 8-K dated February 10, 2003 filed with the SEC
and available at National Penn's website. Subject to various closing conditions,
including receipt of required regulatory approvals, National Penn and Panasia
anticipate that the transactions will close in third quarter 2003. No assurance
can be given that all required regulator approvals will be obtained, that all
other closing conditions will be satisfied or waived, or that the transactions
will in fact be consummated. Additional information is provided in National
Penn's 8-K dated February 10, 2003.
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.
ACQUISITION OF FIRSTSERVICE BANK
--------------------------------
On February 25, 2003, the Company acquired FirstService Bank
("FirstService") by its merger into National Penn Bank. FirstService Bank is a
commercial bank offering a broad range of personal and commercial banking
services, headquartered in Doylestown, Bucks County, Pennsylvania, with six
other community offices in Bucks and Montgomery Counties, Pennsylvania, and an
additional office under construction in Souderton, Pennsylvania. Through its
subsidiaries, FirstService Bank also offers casualty insurance, asset management
services and non-deposit investment products. FirstService also has a
proprietary interest in a title insurance agency.
At December 31, 2002, FirstService Bank had assets of $399.6 million. Under
the terms of the merger, each outstanding share of FirstService Bank common
stock was converted into .5954 share of the Company's common stock, plus $3.90,
resulting in issuance of 2,563,552 shares of the Company's common stock.
Outstanding options for 860,489 shares of FirstService Bank stock were converted
into options for shares of the Company's common stock. The transaction was
accounted for under the purchase method of accounting.
The Company believes that the FirstService Bank acquisition will be
dilutive to the Company's earnings in 2003, but will be accretive to earnings in
2004.
More information is available in the Company's Reports on Form 8-K dated
September 24, 2002 and February 4, 2003, each filed with the SEC and in the
Company's registration statement on Form S-4, filed with the SEC on December 6,
2002, and amended on December 31, 2002.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
The Financial Accounting Standards Board (FASB) issued SFAS No. 147,
Acquisitions of Certain Financial Institutions: an amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No 9, which removes acquisitions of
financial institutions from the scope of SFAS 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions. The adoption of SFAS No. 147 did
not have a material impact on the Company's financial position or results of
operations.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS 148 amends SFAS 123 "Accounting
for Stock-Based Compensation," to provide alternative
34
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS 148 is effective for fiscal years beginning after December 15,
2002. The expanded annual disclosure requirements and the transition provisions
are effective for fiscal years ending after December 15, 2002 and has been
included in the Company's consolidated financial statements. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. Management
does not expect the adoption of SFAS 148 to have a material effect on the
Company's financial position, results of operations, or cash flows.
FUTURE OUTLOOK
--------------
In 2003, the Company anticipates opening one new community office in Lehigh
County, PA, in addition to a community office that will operate under the
FirstService division.
FORWARD-LOOKING STATEMENTS
--------------------------
From time to time, the Company 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.
* Product, geographic and other business expansion plans and activities.
* Investments in new subsidiaries and other companies.
* 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,
and the revenue enhancements, cost savings and other benefits
anticipated in those transactions.
* 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:
* The Company's unified branding campaign and other marketing
initiatives may be less effective than expected in building name
recognition and greater customer awareness of the Company's products
and services. Use of non-Company brands may be counter-productive.
* Expansion of the Company's products and services offerings may meet
with more effective competitive resistance from others already
offering such products and services than expected.
* New product development by new and existing competitors may be more
effective, and take place more quickly, than expected.
35
* Competitors with substantially greater resources may enter product
market, geographic or other niches currently served by the Company.
* Geographic expansion may be more difficult, take longer, and present
more operational and management risks and challenges, than expected.
* Business development in newly entered geographic areas may be more
difficult, and take longer, than expected.
* Competitive pressures may increase significantly and have an adverse
effect on the Company's pricing, spending, third-party relationships
and revenues.
* The Company may be less effective in cross-selling its various
products and services, and in utilizing alternative delivery systems
such as the Internet, than expected.
* Projected business increases following new product development,
geographic expansion, and productivity and investment initiatives, may
be lower than expected, and recovery of associated costs may take
longer than expected.
* The Company may be unable to retain key executives and other key
personnel due to intense competition for such persons or otherwise.
* Increasing interest rates may increase funding costs and reduce
interest margins, and may adversely affect business volumes, including
mortgage origination levels.
* General economic or business conditions, either nationally or in the
regions in which the Company will be doing business, may be less
favorable than expected, resulting in, among other things, a
deterioration in credit quality or a reduced demand for credit,
including the resultant effect on the Company's loan portfolio and
allowance for loan losses.
* Expected synergies and cost savings from mergers, including reductions
in interest and non-interest expense, may not be fully realized or
realized as quickly as expected.
* Revenues and loan growth following mergers may be lower than expected.
* Loan losses, deposit attrition, operating costs, customer and key
employee losses, and business disruption following mergers may be
greater than expected.
* Business opportunities and strategies potentially available to the
Company, after mergers, may not be successfully or fully acted upon.
* Costs, difficulties or delays related to the integration of businesses
of acquired companies with the Company's business may be greater or
take longer than expected.
* Technological changes may be harder to make or more expensive than
expected or present unanticipated operational issues.
* Recent and proposed legislative or regulatory changes, including
changes in accounting rules and practices, and customer privacy and
data protection requirements, and intensified regulatory scrutiny of
the financial services industry in general, may adversely affect the
Company's costs and business.
* Market volatility may continue in the securities markets, with an
adverse effect on the Company's securities and asset management
activities.
* The Company may be unable to successfully manage the foregoing and
other risks and to achieve its current short-term and long-term
business plans and objectives.
36
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
statements. The Company cautions shareholders not to place undue reliance on
such statements.
All written or oral forward-looking statements attributable to the Company
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. The Company 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.
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.
37
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
- ------------------------------------------------------------------------------
December 31,
-----------------------------
2002 2001
------------ ------------
ASSETS
Cash and due from banks $ 83,831 $ 101,796
Interest bearing deposits in banks 2,616 6,002
Federal funds sold 48,000 -
--------- ---------
Total cash and cash equivalents 134,447 107,798
Investment securities available for sale, at fair value 733,774 658,581
Loans held for sale 52,992 6,489
Loans, less allowance for loan losses of $42,587
and $42,207 in 2002 and 2001, respectively 1,789,995 1,807,673
Premises and equipment, net 30,589 29,125
Accrued interest receivable 15,235 15,332
Bank owned life insurance 58,360 55,723
Unconsolidated investments under the equity method 2,702 2,434
Other assets 40,168 44,327
---------- ---------
Total assets $ 2,858,262 $ 2,727,482
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 353,853 $ 344,972
Interest-bearing 1,758,787 1,731,823
--------- ---------
Total deposits 2,112,640 2,076,795
Securities sold under repurchase agreements and federal funds purchased 253,325 238,726
Short-term borrowings 10,614 9,480
Long-term borrowings 169,703 139,974
Guaranteed preferred beneficial interests in Company's subordinated debentures 63,250 40,250
Accrued interest payable and other liabilities 26,370 26,575
--------- ---------
Total liabilities 2,635,902 2,531,800
--------- ---------
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 2002 - 20,699,782; 2001 - 20,923,206,
net of shares in Treasury: 2002 - -0-; 2001 - 121,827 172,471 166,138
Retained earnings 30,593 29,333
Accumulated other comprehensive income 19,296 3,119
Treasury stock, at cost - (2,908)
--------- ---------
Total shareholders' equity 222,360 195,682
--------- ---------
Total liabilities and shareholders' equity $ 2,858,262 $ 2,727,482
========== ==========
The accompanying notes are an integral part of these statements.
38
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
---------------------------------------------
2002 2001 2000
---------- ----------- ----------
INTEREST INCOME
Loans, including fees $ 132,544 $ 150,079 $ 155,250
Investment securities
Taxable 26,954 25,709 24,303
Tax-exempt 12,618 11,973 11,948
Federal funds sold 822 177 601
Deposits in banks 72 559 301
-------- --------- --------
Total interest income 173,010 188,497 192,403
-------- --------- --------
INTEREST EXPENSE
Deposits 44,783 70,498 72,960
Securities sold under repurchase agreements and federal
funds purchased 4,387 9,509 16,864
Short-term borrowings 104 264 761
Long-term borrowings 14,172 12,241 13,392
-------- --------- --------
Total interest expense 63,446 92,512 103,977
-------- --------- --------
Net interest income 109,564 95,985 88,426
Provision for loan losses 14,000 9,000 7,325
-------- --------- --------
Net interest income after provision for loan losses 95,564 86,985 81,101
-------- --------- --------
OTHER INCOME
Trust income 5,314 5,172 4,855
Service charges on deposit accounts 12,656 10,343 7,074
Bank owned life insurance income 3,716 2,754 2,701
Other service charges and fees 12,000 11,176 10,294
Net gains on sale of investment securities 214 334 233
Mortgage banking income 5,679 4,553 2,385
Equity in undistributed net earnings of affiliates 268 170 117
-------- --------- --------
Total other income 39,847 34,502 27,659
-------- --------- --------
OTHER EXPENSES
Salaries, wages and employee benefits 49,132 44,831 41,589
Net premises and equipment 13,818 12,147 12,189
Other operating 26,881 23,745 21,504
-------- --------- --------
Total other expenses 89,831 80,723 75,282
-------- --------- --------
Income before income taxes 45,580 40,764 33,478
Income taxes 9,346 8,030 5,690
-------- --------- -------
Net income $ 36,234 $ 32,734 $ 27,788
======== ========= ========
PER SHARE OF COMMON STOCK
Basic earnings $ 1.74 $ 1.56 $ 1.34
Diluted earnings $ 1.72 $ 1.54 $ 1.32
Dividends paid $ 0.85 $ 0.79 $ 0.70
The accompanying notes are an integral part of these statements.
39
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common other Compre-
---------------------- Retained comprehensive Treasury hensive
Shares Amount earnings (loss) income stock Total income
------ ------ -------- ------------- ----- ----- -------
Balance at January 1, 2000 18,396,911 $ 139,173 $ 30,441 $(11,723) $(2,953) $ 154,938
Net income - - 27,788 - - 27,788 $ 27,788
Cash dividends declared - - (14,893) - - (14,893)
5% stock dividend 887,062 16,739 (16,739) - - -
Shares issued under stock-based
plans 2,539 29 - - - 29
Other comprehensive income, net
of reclassification adjustment
and taxes - - - 14,476 - 14,476 14,476
-----------
Total comprehensive income - - - - - - $ 42,264
===========
Effect of treasury stock
transactions 66,936 (1,222) - - 2,100 878
----------- ---------- -------- ----------- ---------- -----------
Balance at December 31, 2000 19,353,448 154,719 26,597 2,753 (853) 183,216
Net income - - 32,734 - - 32,734 $ 32,734
Cash dividends declared - - (16,974) - - (16,974)
3% stock dividend 581,979 13,024 (13,024) - - -
Other comprehensive income, net
of reclassification adjustment
and taxes - - - 366 - 366 366
-----------
Total comprehensive income - - - - - - $ 33,100
===========
Effect of treasury stock
transactions (8,564) (1,605) - - (2,055) (3,660)
----------- ---------- -------- ----------- ---------- -----------
Balance at December 31, 2001 19,926,863 166,138 29,333 3,119 (2,908) 195,682
Net income - - 36,234 - - 36,234 36,234
Cash dividends declared - - (18,040) - - (18,040)
5% stock dividend 673,764 8,757 (16,934) - 8,177 -
Other comprehensive income, net
of reclassification adjustment
and taxes - - - 16,177 - 16,177 16,177
-----------
Total comprehensive income - - - - - - $ 52,411
===========
Effect of treasury stock
transactions 99,155 (2,424) - - (5,269) (7,693)
----------- ---------- -------- ----------- ---------- -----------
Balance at December 31, 2002 20,699,782 $ 172,471 30,593 $ 19,296 $ - $ 222,360
=========== ========== ======== =========== ========== ===========
The accompanying notes are an integral part of this statement.
40
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Year ended December 31,
---------------------------------------------
2002 2001 2000
---------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 36,234 $ 32,734 $ 27,788
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan and lease losses 14,000 9,000 7,325
Depreciation and amortization 4,907 6,379 5,894
Deferred income tax benefit 7,148 (47) 7,767
Amortization of premiums and discounts on investment
securities, net 2,132 2,014 1,862
Investment securities gains, net (214) (334) (277)
Mortgage loans originated for resale (109,946) (65,329) (42,235)
Sale of mortgage loans originated for resale 112,372 66,272 42,483
Changes in assets and liabilities
(Increase) decrease in accrued interest receivable 97 2,283 (3,182)
Increase (decrease) in accrued interest payable (3,736) (5,101) 5,716
Increase in other assets (5,565) (3,293) (16,330)
Increase (decrease) in other liabilities 3,155 2,353 (3,329)
-------- --------- --------
Net cash provided by operating activities 60,584 46,931 33,482
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid in excess of cash equivalents for businesses acquired (8,624) - (1,387)
Proceeds from sales of investment securities available for sale 20,458 25,601 47,043
Proceeds from maturities of investment securities available
for sale 87,111 187,041 39,178
Purchase of investment securities available for sale (168,771) (265,928) (150,800)
Net increase in loans (26,998) (63,275) (143,685)
Purchases of premises and equipment (5,943) (6,136) (6,577)
Purchase of bank owned life insurance (2,637) (2,750) (2,594)
-------- --------- --------
Net cash used in investing activities (105,404) (125,447) (218,822)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in interest and non-interest
bearing demand deposits and savings accounts 169,673 193,247 151,280
Net (decrease) increase in certificates of deposit (141,309) (26,043) 74,461
Net (decrease) increase in securities sold under
agreements to repurchase and federal funds purchased 14,599 (59,323) 97,240
Net (decrease) increase in short-term borrowings 1,135 439 (13,878)
Proceeds from long-term borrowings 70,000 - 68,376
Repayments of long-term borrowings (40,272) (6,458) (145,021)
Issuance of subordinated debentures 63,250 - -
Redemption of subordinated debentures (40,250) - -
Issuance of common stock under dividend reinvestment and stock
option plan - - 29
Effect of treasury stock transactions (7,693) (3,660) 878
Cash dividends (17,664) (16,519) (14,538)
-------- --------- --------
Net cash provided by financing activities 71,469 81,683 218,827
-------- --------- --------
Net increase in cash and cash equivalents 26,649 3,167 33,487
Cash and cash equivalents at beginning of year 107,798 104,631 71,144
-------- --------- --------
Cash and cash equivalents at end of year $ 134,447 $ 107,798 $ 104,631
========= ========== =========
The accompanying notes are an integral part of these statements.
41
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
National Penn Bancshares, Inc. (the Company), 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 New Jersey since
July 2000. In 2002, Panasia opened a branch in Annandale, Virginia to
service the Washington D.C. area. The Banks, which have in excess of 58
branch locations, are locally managed community banks providing commercial
banking products, primarily loans and deposits. Trust services are provided
through Investors Trust Company (ITC). Penn 1st Financial Services, Inc.
(Penn 1st) is a mortgage banking company and is engaged in the activity of
extending credit and servicing loans. Penn Securities, Inc., (Penn
Securities) is a registered broker dealer with the Securities and Exchange
Commission and is a member of the National Association of Securities
Dealers. National Penn Leasing Company (NP Leasing) commenced operations in
November 2002 and provides commercial equipment leases. The Banks, ITC and
Penn Securities encounter vigorous competition for market share in the
communities they serve from bank holding companies, other community banks,
thrift institutions and other non-bank financial organizations, such as
mutual fund companies, insurance companies and brokerage companies.
The Company, the 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 II, and NPB's wholly owned subsidiaries Penn 1st, Penn
Securities, NP Leasing, Link Financial Services, Inc., NPB Delaware, Inc.,
and National Penn Consulting Services, Inc. The Company's investment in
unconsolidated subsidiaries that range between 20% and 50% are accounted
for using the equity method of accounting. 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)
42
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Substantially all outstanding goodwill resulted from the acquisition of
Panasia Bank, a New Jersey institution concentrating in the Asian-American
community. As the result of Panasia's market penetration in the New Jersey
area, the Company had expanded its market role. However, if such benefits,
including new business, are not derived, an 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.
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.
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
losses. Interest on loans is calculated based upon the principal amount
outstanding. 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. 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 probable 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.
Loans originated and intended for sale in the secondary market are
carried at lower cost or estimated fair value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income. At December 31, 2002, cost approximated fair value.
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
(Continued)
43
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
The Company accounts for its transfers and servicing financial assets
in accordance with SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS No. 140 revises
the standards for accounting for the securitizations and other transfers of
financial assets and collateral.
On July 6, 2001, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues. SAB No. 102 provides guidance on the
development, documentation, and application of a systematic methodology for
determining the allowance for loans and leases in accordance with US GAAP
and is effective upon issuance. The adoption of SAB No. 102 did not have a
material impact on the Company's financial position or results of
operations.
PREMISES AND EQUIPMENT
Buildings, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization computed by the straight-line
method over the estimated useful lives of the assets.
The Company adopted SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets on January 1, 2002. SFAS No. 144 retains the
existing requirements to recognize and measure the impairment of long-lived
assets to be held and used or to be disposed of by sale. SFAS No. 144
changes the requirements relating to reporting the effects of a disposal or
discontinuation of a segment of a business. The adoption of this statement
did not have a material impact on the financial condition or results of
operations of the Company.
GOODWILL AND INTANGIBLE ASSETS
The Company has recognized core deposit intangibles, as a result of a
branch acquisitions, which are being amortized on a straight-line basis
over eight years and are included in other assets.
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, 2002 and 2001 was $21,381,000 and
$19,202,000, respectively. Amortization expense for the year ended December
31, 2001 and 2000 was $1,567,000 and $1,000,000, respectively. As a result
of the adoption of SFAS No. 142 on January 1, 2002, the Company no longer
amortizes goodwill.
The Company adopted SFAS No. 142, Goodwill and Intangible Assets on
January 1, 2002. SFAS No. 142 modifies the accounting for all purchased
goodwill and intangible assets. SFAS No. 142 includes requirements to test
goodwill and indefinite lived intangible assets for impairment rather than
amortize them. The Company has completed the transitional testing of its
goodwill. The Company did not identify any impairment on its outstanding
goodwill and its identifiable intangible assets from its transitional
testing or as a result of the anticipated sale of Panasia.
(Continued)
44
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The following table presents a reconciliation of net income and
earnings-per-share amounts, as reported in the financial statements, to
those amounts adjusted for goodwill and intangible asset amortization
determined in accordance with the provisions of SFAS No. 142.
For the year ended December 31,
---------------------------------------------
2002 2001 2000
---------- ----------- ----------
(in thousands except for
earnings-per-share amounts)
Reported net income $ 36,234 $ 32,734 $ 27,788
Add back goodwill amortization, net of taxes - 1,203 898
-------- --------- --------
Adjusted net income $ 36,234 $ 33,937 $ 28,686
========= ========== =========
Basic earnings per share
Reported basic earnings per shares $ 1.74 $ 1.56 $ 1.34
Goodwill amortization - 0.06 0.04
-------- --------- --------
Adjusted basic earnings per share $ 1.74 $ 1.62 $ 1.38
========= ========== =========
Diluted earnings per share
Reported diluted earnings per shares $ 1.72 $ 1.54 $ 1.32
Goodwill amortization - 0.06 0.04
-------- --------- --------
Adjusted diluted earnings per share $ 1.72 $ 1.60 $ 1.36
========= ========== =========
The Financial Accounting Standards Board (FASB) issued SFAS No. 147,
Acquisitions of Certain Financial Institutions: An amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No 9, which removes
acquisitions of financial institutions from the scope of SFAS 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions. SFAS
No. 147 also requires that the acquisition of a less-than-whole financial
institution, such as a branch, be accounted for as a business combination
if the transferred assets and activities constitute a business. The
adoption of SFAS No. 147 did not have a material impact on the Company's
financial position or results of operations.
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.
BANK OWNED LIFE INSURANCE
The Company invests in bank owned life insurance (BOLI). BOLI involves
the purchasing of life insurance by the Company on a chosen group of
employees. The Company is the owner and beneficiary of the policies.
(Continued)
45
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
STOCK-BASED COMPENSATION
The Company accounts for stock options under SFAS No. 123, Accounting
for Stock-Based Compensation, as amended by SFAS No. 148, 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, SFAS No. 123
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.
At December 31, 2002, the Company had two stock-based employee
compensation plans, which are more fully described in note 15. The Company
accounts for these plans under the recognition and measurement principles
of APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Stock-based employee compensation costs are not reflected
in net income, as all options granted under the plans had an exercise price
equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, to stock-based employee compensation (in
thousands, except per share amounts).
Year ended December 31,
--------------------------------------
2002 2001 2000
--------- --------- ---------
Net income, as reported $ 36,234 $ 32,734 $ 27,788
Less: stock-based compensation costs
determined under fair value based
method for all awards 558 552 987
------- ------- -------
Net income, pro forma $ 35,676 $ 32,182 $ 26,801
======== ======== ========
Earnings per share of common stock - basic As reported 1.74 1.56 1.34
Pro forma 1.72 1.53 1.29
Earnings per share of common stock - diluted As reported 1.72 1.54 1.32
Pro forma 1.69 1.52 1.27
(Continued)
46
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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 2002, 2001 and 2000, respectively:
dividend yield of 3.28%, 3.85% and 4.25%; expected volatility of 35.1%,
14.0% and 14.0%; risk-free interest rates for each plan of 5.50% and 3.93%
for 2002 and 5.23% and 5.04% for 2001 and 6.78% and 5.38% for 2000; and
expected lives of 8.50 years and 6.83 years for each plan in 2002 and 8.11
years and 7.02 years for each plan in 2001, 6.63 years and 7.56 years for
each plan in 2000.
INCOME TAXES
The Company accounts for income taxes under the liability method of
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 investment 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,
---------------------------------------------
2002 2001 2000
---------- ----------- ----------
Interest $ 67,234 $ 97,109 $ 95,997
Taxes 10,917 9,538 9,372
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, 2002 and 2001
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The Company calculates earnings per share under the provisions of SFAS
No. 128, 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, 2002, 2001 and 2000, was approximately $3,448,000, $2,728,000
and $2,709,000, respectively.
DERIVATIVES
The Company adopted the provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS No. 133), as amended,
as of January 1, 2001. The statement requires the Company to recognize all
derivative instruments at fair value as either assets or liabilities.
Financial derivatives are reported at fair value in other assets or other
liabilities. The accounting for changes in the fair value of a derivative
instrument depends on whether it has been designated and qualifies as part
of a hedging relationship. For derivatives not designated as hedges, the
gain or loss is recognized in current earnings.
The Company enters into interest rate swap contracts to modify the
interest rate characteristics from variable to fixed in order to reduce the
impact of interest rate changes on future interest expense. Net amounts
payable or receivable from this contract are accrued as an adjustment to
interest expense. The fair value of these derivatives is reported in other
assets or other liabilities and offset in accumulated other comprehensive
income for the effective portion of the derivatives. Amounts reclassed into
earnings, when the hedged transaction culminates, are included in interest
expense. Ineffectiveness of the strategy, as defined under SFAS No. 133, if
any, is reported in interest expense. The Company performs an assessment,
both at the inception of the hedge and quarterly thereafter, to determine
whether these derivatives are highly effective in offsetting changes in the
value of the hedged items. The change in fair value of the swaps attributed
to hedge ineffectiveness was not material for the years ended December 31,
2002 and 2001.
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 (in
thousands).
(Continued)
48
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31, 2002 December 31, 2001 December 31, 2000
-------------------------- ----------------------------- ---------------------------------
Before Tax Net of Before Tax Net of Before Tax Net of
tax (expense) tax tax (expense) tax tax (expense tax
amount benefit amount amount benefit amount amount benefit amount
------- --------- --------- --------- -------- --------- --------- --------- --------
Unrealized gains on investment
securities
Unrealized holding gains
arising during period $20,858 $ (7,301) $ 13,557 $897 $ (314) $ 583 $ 22,503$ (7,876) $ 14,627
Less reclassification
adjustment for gains
realized in net income 214 (75) 139 334 (117) 217 233 (82) 151
-------- -------- -------- --------- -------- -------- -------- -------- --------
Unrealized gains on investment
securities 20,644 (7,226) 13,418 563 (197) 366 22,270 (7,794) 14,476
-------- -------- -------- --------- -------- -------- -------- -------- --------
Unrealized gains on derivatives 2,759 - 2,759 - - - - - -
-------- -------- -------- --------- -------- -------- -------- -------- --------
Other comprehensive income
(loss), net $23,403 $ (7,226) $ 16,177 $563 $(197) $ 366 $ 22,270 $(7,794) $ 14,476
======== =========== ======== ========= ======== ========= ========= ======== =========
2. ACQUISITIONS
On February 25, 2003, the Company completed a merger with FirstService
Bank (FirstService). Under the terms of the merger, 4,304,762 shares of
FirstService stock converted into 0.5954 shares of the Company's common
stock plus $3.90 per share, resulting in an issuance of 2,563,552 shares of
the Company's common stock and approximately $16.8 million in cash. In
addition, outstanding stock options to purchase FirstService common stock
were converted into stock options to purchase 643,169 shares of the
Company's common stock, with an exercise price of either $6.69 or $13.38
per share. This transaction was accounted for under the purchase method of
accounting and the results of operations of the Company will include
FirstServices' results from and after February 25, 2003. The acquisition
resulted in the recording of approximately $52 million of goodwill and
other intangibles.
On February 10, 2003, the Company signed a definitive agreement to sell
its subsidiary, Panasia Bank N.A. Under the terms of the agreement, the
Company will receive $34.5 million. The completion of this transaction is
subject to regulatory approval and other conditions within the agreement.
On September 27, 2002, the Company, through its subsidiary Panasia,
acquired the United Asian Bank division of Wilmington Savings Fund Society,
FSB. The Company acquired $15.8 million of loans and $9.6 million of
deposits. This acquisition resulted in the recording of approximately $1.2
million in core deposit intangibles and goodwill.
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 0.90 shares of the Company's common stock,
resulting in an issuance of 712,973 shares of the Company's common stock.
In addition, outstanding stock options to purchase CIB common stock were
converted into stock options to purchase 20,752 shares of the Company's
common stock, with an exercise price of $8.47 to $11.64 per share. This
transaction was accounted for under the pooling of interests method of
accounting.
In July 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 of $20,005,000. This transaction was accounted for under the
purchase method of accounting and the results of operations of the
(Continued)
49
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
2. ACQUISITIONS - Continued
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.
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, 2002
----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------- ---------- ---------- ----------
U.S. Treasury and U.S. Government
agencies $ 47,379 $ 4,128 $ (11) $ 51,496
State and municipal bonds 255,510 11,073 (47) 266,536
Mortgage-backed securities 356,483 9,822 (31) 366,274
Marketable equity securities and other 48,961 2,528 (2,021) 49,468
-------- -------- -------- --------
Totals $ 708,333 $ 27,551 $ (2,110) $ 733,774
========= ========= ========= =========
December 31, 2001
----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------- ---------- ---------- ----------
U.S. Treasury and U.S. Government
agencies $ 52,989 $ 2,734 $ (12) $ 55,711
State and municipal bonds 251,245 2,544 (4,659) 249,130
Mortgage-backed securities 307,838 4,127 (958) 311,007
Marketable equity securities and other 41,711 2,305 (1,283) 42,733
---------- ---------- ---------- ----------
Totals $ 653,783 $ 11,710 $ (6,912) $ 658,581
========= ========= ========= =========
The amortized cost and fair value of investment securities available
for sale, by contractual maturity, at December 31, 2002 (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 $ 8,592 $ 8,667
Due after one through five years 76,495 78,800
Due after five through ten years 134,808 141,282
Due after ten years 439,477 455,557
Marketable equity securities and other 48,961 49,468
---------- ----------
$ 708,333 $ 733,774
=========== ===========
(Continued)
50
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
3. INVESTMENT SECURITIES - Continued
Proceeds from the sales of investment securities during 2002, 2001 and
2000, were 20,458,000, $25,601,000 and $47,043,000, respectively. Gross
gains realized on those sales were $464,000, $961,000 and $676,000 in 2002,
2001 and 2000, respectively, gross losses were $250,000 in 2002 and
$627,000 in 2001 and $443,000 in 2000. As of December 31, 2002 and 2001,
investment securities with a book value of $518,036,000 and $426,406,000,
respectively, were pledged to secure public deposits and for other purposes
as provided by law. As of December 31, 2002 and 2001, 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,
-----------------------------
2002 2001
------------ ------------
Commercial and industrial loans and leases $ 376,634 $ 357,706
Real estate loans
Construction and land development 122,129 128,655
Residential, including $52,992 and $6,489 in loans held for sale 701,593 672,329
Other 628,115 614,289
Loans to individuals 57,103 83,390
---------- ----------
1,885,574 1,856,369
Allowance for loan losses (42,587) (42,207)
---------- ----------
Total loans, net $ 1,842,987 $ 1,814,162
=========== ===========
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $14,639,000 and $15,988,000 at December 31, 2002
and 2001, respectively. If interest on these loans had been accrued,
interest income would have increased by approximately $525,000, $215,000
and $251,000 for 2002, 2001 and 2000, 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 $987,000 and $11,794,000 at
December 31, 2002 and 2001, respectively.
The balance of impaired loans was $11,101,000 at December 31, 2002. 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 allowance for loan loss associated with the
$11,101,000 of impaired loans was $1,332,000 at December 31, 2002. The
average impaired loan balance was $19,958,000 during 2002 and the income
recognized on impaired loans during 2002 was $498,000. 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.
(Continued)
51
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
4. LOANS - Continued
The balance of impaired loans was $12,667,000 at December 31, 2001. 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 allowance for loan loss associated with the
$12,667,000 of impaired loans was $2,458,000 at December 31, 2001. The
average impaired loan balance was $19,520,000 and $10,234,000 during 2001
and 2000, respectively, and the income recognized on impaired loans during
2001 and 2000 was $863,000 and $437,000, respectively. 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.
Changes in the allowance for loan losses are as follows (in thousands):
Year ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Balance, beginning of year $ 42,207 $ 39,033 $ 35,351
Acquisition of Panasia - - 1,384
Provision charged to operations 14,000 9,000 7,325
Loans charged off (15,786) (8,174) (7,109)
Recoveries 2,166 2,348 2,082
------- ------- -------
Balance, end of year $ 42,587 $ 42,207 $ 39,033
======== ======== ========
5. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as
follows (in thousands):
December 31,
Estimated -------------------
useful lives 2002 2001
------------- ------ ------
Land Indefinite $ 3,356 $ 3,171
Buildings 5 to 40 years 22,469 20,978
Equipment 3 to 10 years 38,751 35,416
Leasehold improvements 2 to 40 years 7,312 6,673
------- -------
71,888 66,238
Accumulated depreciation and amortization (41,299) (37,113)
------- -------
$ 30,589 $ 29,125
======== ========
Depreciation and amortization expense amounted to $4,757,000,
$4,812,000 and $4,895,000 for the years ended December 31, 2002, 2001 and
2000, respectively.
52
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
6. DEPOSITS
The aggregate amount of jumbo certificates of deposit, each with a
minimum denomination of $100,000, was approximately $203,202,000 and
$267,540,000 in 2002 and 2001, respectively.
At December 31, 2002, the scheduled maturities of certificates of
deposit are as follows (in thousands):
2003 $ 407,628
2004 140,514
2005 146,367
2006 20,563
2007 50,346
--------
$ 765,418
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,
------------------------------------------
2002 2001 2000
---------- ---------- ----------
Securities sold under repurchase agreements
and federal funds purchased
Balance at year-end $ 253,325 $ 238,726 $ 298,049
Average during the year 238,259 251,781 290,015
Maximum month-end balance 272,322 300,532 344,125
Weighted average rate during the year 1.84% 3.78% 5.81%
Rate at December 31 1.25% 2.02% 4.94%
Short-term borrowings
Balance at year-end $ 10,614 $ 9,480 $ 9,041
Average during the year 7,146 7,235 13,942
Maximum month-end balance 10,614 10,012 26,170
Weighted average rate during the year 1.46% 3.65% 5.46%
Rate at December 31 0.78% 1.52% 4.87%
The weighted average rates paid in aggregate on these borrowed funds
for 2002, 2001 and 2000 were 1.83%, 3.78% and 5.80%, respectively.
53
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
8. LONG-TERM BORROWINGS
FHLB ADVANCES
At December 31, 2002, advances from the Federal Home Loan Bank (FHLB)
totaling $160,515,000 will mature within one to eight years and are
reported as long-term borrowings. The advances are collateralized by FHLB
stock and certain first mortgage loans and mortgage-backed securities.
These advances had a weighted average interest rate of 5.20%. Unused lines
of credit at the FHLB were $539,306,000 and $444,811,000 at December 31,
2002 and 2001, respectively.
Outstanding borrowings mature as follows (in thousands):
2003 $ -
2004 10,000
2005 12,500
2006 25,000
2007 12,629
Thereafter 100,386
--------
$ 160,515
========
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, 2002 is $9,188,000 with an interest rate of 2.075%.
SUBORDINATED DEBENTURES
On August 20, 2002, the Company issued $65.21 million of 7.85% junior
subordinated debentures (the Debentures) due September 30, 2032 to NPB
Capital Trust II (the Trust), a Delaware business trust, which is a
wholly-owned subsidiary of the Company. The 2002 Debentures are the sole
asset of the Trust. The Trust issued 2,530,000 shares of trust preferred
securities, $25 face value, for total proceeds of $63.25 million. The
Company's obligations under the debentures and related documents, taken
together, constitute a full, irrevocable and unconditional guarantee on a
subordinated basis by the Company of the Trust's obligations under the
preferred securities. The preferred securities are redeemable by the
Company on or after September 30, 2007, or earlier if the deduction of
related interest for federal income taxes is prohibited, treatment as Tier
I capital is no longer permitted, or certain other contingencies arise. The
preferred securities must be redeemed upon maturity of the debentures in
2032. The ability of the Company's banking subsidiaries to pay dividends or
extend credit to the Company is subject to legal and regulatory
limitations.
On October 31, 2002, the Company used a portion of the net proceeds
from the 2002 Debenture transaction to redeem the $40.25 million aggregate
amount of 9% trust preferred securities issued by the Company in May 1997.
As a result, the Company wrote-off the associated unamortized issuance cost
of $822,000 which is included in other operating expense.
(Continued)
54
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
8. LONG-TERM BORROWINGS - Continued
In May 1997, the Company issued $41.50 million of 9% junior
subordinated deferrable interest debentures (the debentures) to NPB Capital
Trust (the Trust), a Delaware business trust, in which the Company owns all
of the common equity. The debentures are the sole asset of the Trust. The
Trust issued $40.25 million 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.
9. BENEFIT PLANS
PENSION PLAN
NPB and its subsidiaries and ITC 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,
--------------------------
2002 2001
--------- ---------
Change in benefit obligation
Benefit obligation at beginning of year $ 14,080 $ 11,589
Service cost 1,274 1,089
Interest cost 977 832
Actual gain (163) 289
Benefits paid (306) (333)
Effect of change in assumptions 99 614
------- -------
Benefits obligation at end of year 15,961 14,080
------- -------
Change in plan assets
Fair value of plan assets at beginning of year 15,565 15,982
Actual return on plan assets (523) (1,305)
Employer contribution 884 1,221
Benefits paid (306) (333)
------- -------
Fair value of plan assets at end of year 15,620 15,565
------- -------
Funded status (341) 1,485
Unrecognized net actuarial gain 2,226 490
Unrecognized prior service cost (17) 49
------- -------
Prepaid benefit cost (included in other assets) $ 1,868 $ 2,024
======== ========
(Continued)
55
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
9. PENSION PLAN - Continued
Net pension cost included the following components (in thousands):
Year ended December 31,
--------------------------------------------
2002 2001 2000
--------- --------- ---------
Service cost $ 1,274 $ 1,089 $ 997
Interest cost on projected benefit obligation 977 832 709
Actual return on plan assets 523 1,305 (2,310)
Net amortization and deferral (1,734) (2,670) 1,281
------- ------- -------
Net periodic benefit cost $ 1,040 $ 556 $ 677
======== ======== ========
The assumed discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected
benefit obligation were 6.88% and 4.25% in 2002, 7.13% and 4.50%,
respectively in 2001; 7.13% and 4.50%, respectively, in 2000. The expected
long-term rate of return on assets was 8.25% for 2002, 2001 and 2000.
CAPITAL ACCUMULATION PLAN
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 $823,000,
$809,000 and $671,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
DEFERRED COMPENSATION ARRANGEMENTS
The Company has established deferred compensation arrangements for
certain executives. The deferred compensation plans provide for annual
payments for fifteen years following retirement. The Company's liabilities
under these arrangements are being accrued from the commencement of the
plans over the participant's remaining periods of service.
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,
--------------------------------------------
2002 2001 2000
--------- --------- ---------
Income tax expense
Current $ 8,122 $ 7,404 $ 7,252
Deferred federal benefit (78) (217) (1,654)
------- ------- -------
8,044 7,187 5,598
Additional paid-in capital from benefit
of stock options exercised 1,302 843 92
------- ------- -------
Applicable income tax expense $ 9,346 $ 8,030 $ 5,690
======== ======== ========
(Continued)
56
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
10. INCOME TAXES - Continued
The differences between applicable income tax expense and the amount
computed by applying the statutory federal income tax rate of 35% are as
follows (in thousands):
Year ended December 31,
--------------------------------------------
2002 2001 2000
--------- --------- ---------
Computed tax expense at statutory rate $ 15,953 $ 14,268 $ 11,717
Decrease in taxes resulting from
Tax-exempt loan and investment income (6,592) (5,939) (5,711)
Other, net (15) (299) (316)
------- ------- -------
Applicable income tax expense $ 9,346 $ 8,030 $ 5,690
======== ======== ========
Deferred tax assets and liabilities consist of the following (in
thousands):
2002 2001
--------- ---------
Deferred tax assets
Deferred loan fees $ 16 $ 135
Allowance for loan loss 13,637 13,978
Deferred compensation 1,827 1,176
Loan sales valuation 54 54
------- -------
15,534 15,343
------- -------
Deferred tax liabilities
Pension 949 898
Partnership investments 518 448
Cash to accrual - 8
Investment securities available for sale 8,904 1,678
Rehab credit adjustment 44 44
------- -------
10,415 3,076
------- -------
Net deferred tax asset (included in other assets) $ 5,119 $ 12,267
======== ========
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 23, 2002, the Company's Board of Directors declared a 5%
stock dividend to shareholders of record on December 6, 2002 and which was
paid on December 27, 2002.
(Continued)
57
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
11. SHAREHOLDERS' EQUITY - Continued
On June 26, 2002, the Company's Board of Directors authorized the
repurchase of up to one million shares of the company's common stock to be
used to fund the Company's dividend reinvestment plan, stock option plans,
stock-based benefit plans and employee stock purchase plan. No timetable
has been set for these repurchases. As of December 31, 2002, 173,529 shares
of common stock have been repurchased at an average price of $ 25.52 under
the 2002 repurchase program.
On October 24, 2001, the Company declared a 3% stock dividend to
shareholders of record on December 11, 2001 which was paid on December 27,
2001.
On July 25, 2001, the Company approved stock a stock repurchase plan
(2001 repurchase plan) of 975,000 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 option plans,
employee stock purchase plan, and other stock benefit plans. The Company
completed the 2001 repurchase plan on August 27, 2002 with an average price
of $24.43.
On October 25, 2000, the Company declared a 5% stock dividend to
shareholders of record on December 8, 2000 and which was paid on December
20, 2000.
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.
58
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
13. EARNINGS PER SHARE
Year ended December 31, 2002
--------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $ 36,234 20,778 $ 1.74
Effect of dilutive securities
Options - 272 (0.02)
------- ------- -----
Diluted earnings per share
Net income available to common stockholders
plus assumed conversions $ 36,234 21,050 $ 1.72
======== ======= =====
Options to purchase 553,356 shares of common stock at $25.46 to $26.00
per share were outstanding during 2002. 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, 2001
--------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
Basic earnings per share ----------- ------------- ------
Net income available to common stockholders $ 32,734 20,984 $ 1.56
Effect of dilutive securities
Options - 250 (0.02)
--------- --------- -----
Diluted earnings per share
Net income available to common stockholders
plus assumed conversions $ 32,734 21,234 $ 1.54
======== ========= =====
Options to purchase 1,151,738 shares of common stock at $22.17 to
$26.00 per share were outstanding during 2001. 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, 2000
--------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
Basic earnings per share ----------- ------------- ------
Net income available to common stockholders $ 27,788 20,809 $ 1.34
Effect of dilutive securities
Options - 225 (0.02)
------- ------- -----
Diluted earnings per share
Net income available to common stockholders
plus assumed conversions $ 27,788 21,034 $ 1.32
======== ========= =====
Options to purchase 890,359 shares of common stock at $21.96 to $26.00
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.
59
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
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,
------------------------
2003 $ 2,948
2004 2,585
2005 1,903
2006 1,379
2007 1,043
Thereafter 7,769
-------
$ 17,627
=======
The total rental expense was approximately $3,613,000, $3,138,000 and
$3,104,000 in 2002, 2001 and 2000, 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.
15. STOCK-BASED COMPENSATION
The Company maintains an Officers' and Key Employees' Stock
Compensation Plan (Officers' Plan). A total of 2,571,942 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 1,479,501 outstanding options
under the Officers' Plan at December 31, 2002. Options granted under the
Company's previous 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. Under the prior plan, there are 476,829 outstanding options at
December 31, 2002.
In addition, the Company has a Non-employee Directors' Stock Option
Plan (Directors' Plan). Under the Directors' Plan, a total of 328,640
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 53,790 outstanding options under the Directors' Plan at December
31, 2002.
The number of shares available for granting totaled 919,659 at December
31, 2002. As of December 31, 2002, 63,215 options were outstanding as a
result of previous acquisitions.
(Continued)
60
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
15. STOCK-BASED COMPENSATION - Continued
A summary of the status of the Company's fixed option plans is
presented below:
2002 2001 2000
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
---------- --------- ---------- --------- ---------- ---------
Outstanding, beginning of year 2,302,873 $ 18.95 2,348,169 $ 17.54 2,071,520 $ 17.24
Granted 303,369 25.31 315,043 22.49 322,281 18.46
Exercised (518,300) 16.78 (317,829) 11.75 (45,632) 10.02
Forfeited - - (42,510) 21.46 - -
---------- ---------- ----------
Outstanding, end of year 2,087,942 $ 19.87 2,302,873 $ 18.95 2,348,169 $ 17.54
========== ========== ==========
Options exercisable at year-end 1,287,855 1,536,049 1,340,329
========== ========== ==========
Weighted average fair value of
options granted during the year $ 7.57 $ 3.02 $ 2.43
======== ======== ========
The following table summarizes information about nonqualified options
outstanding at December 31, 2002:
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 2002 life (years) exercise price 2002 exercise price
---------------- ---------- ------------------ ----------------- -------------- --------------------
$ 7.92 - 10.56 10,896 4.6 $ 9.07 10,896 $ 9.07
10.57 - 13.19 281,739 2.4 12.48 281,739 12.48
13.20 - 15.83 145,051 3.5 13.41 145,051 13.41
15.84 - 18.47 133,559 1.2 16.95 125,901 16.86
18.48 - 21.11 234,818 8.0 18.68 92,127 18.68
21.12 - 23.75 728,523 6.9 22.19 408,801 21.97
23.76 - 26.39 553,356 7.6 25.71 223,340 26.00
----------- ------------
2,087,942 1,287,855
=========== ============
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.
61
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
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 and interest rate swaps. 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, 2002 and 2001, are as
follows (in thousands):
2002 2001
----------- ----------
Financial instruments whose contract amounts represent
credit risk
Commitments to extend credit $ 598,950 $ 583,016
Standby letters of credit 42,389 23,644
Financial instruments whose notional or contract amounts
exceed the amount of credit risk
Interest rate swap agreements 60,000 40,000
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, 2002, varies up to 100%; the average amount collateralized is 90%.
62
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 2002, 2001 and
2000, the interest rate swaps had the effect of increasing the Company's
net interest income by $1,713,000, $1,029,000 and $307,000, respectively,
over what would have been realized had the Company not entered into the
swap agreements.
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, 2002
and 2001, were as follows (in thousands):
December 31, 2002 December 31, 2001
---------------------------- ----------------------------
Carrying Estimated fair Carrying Estimated fair
amount value amount value
---------- --------------- ---------- ---------------
Cash and cash equivalents $ 134,447 $ 134,447 $ 107,798 $ 107,798
Investment securities available for sale 733,744 733,744 658,581 658,581
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)
63
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
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, 2002 December 31, 2001
---------------------------- ----------------------------
Carrying Estimated fair Carrying Estimated fair
amount value amount value
---------- --------------- ---------- ---------------
(in thousands)
Deposits with stated maturities $ 765,418 $ 786,920 $ 904,982 $ 918,149
Repurchase agreements, federal funds
purchased and short-term borrowings 263,939 263,939 248,206 248,206
Long-term borrowings 169,703 184,968 139,974 142,795
Subordinated debentures 63,250 86,593 40,250 42,065
Fair value of financial instrument liabilities with no stated
maturities has been estimated to equal the carrying amount (the amount
payable on demand), totaling $1.34 billion for 2002 and $1.17 billion for
2001.
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, 2002 December 31, 2001
----------------------------- ------------------------------
Carrying Estimated fair Carrying Estimated fair
amount value amount value
------------ --------------- ------------ --------------
(in thousands)
Net loans $ 1,842,987 $ 1,934,278 $ 1,814,162 $ 1,887,862
The fair value of commitments to extend credit is estimated based on
the amount of unamortized deferred loan commitment fees. The fair value of
letters of credit is based on the amount of unearned fees plus the
estimated cost to terminate the letters of credit. Fair values of
unrecognized financial instruments including commitments to extend credit
and the fair value of letters of credit are considered immaterial.
The fair value of interest rate swaps are based upon the estimated
amount the Company would receive or pay to terminate the contracts or
agreements, taking into account current interest rates and, when
appropriate, the current creditworthiness of the counterparties. Fair value
approximates book value.
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, 2002, was approximately $7,258,000.
(Continued)
64
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
19. REGULATORY MATTERS - Continued
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 2002,
the Banks, without prior approval of bank regulators, can declare dividends
to the Company totaling $16,464,000 plus additional amounts equal to the
net earnings of the Banks for the period January 1, 2003, through the date
of declaration less dividends previously paid in 2003.
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 I capital (as
defined in the regulations) to risk-weighted assets, and of Tier I capital
to average assets. Management believes, as of December 31, 2002, that the
Banks and Company meet all capital adequacy requirements to which they are
subject.
As of December 31, 2002, 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, 2002
Total capital (to risk-weighted assets)
National Penn Bancshares, Inc. $ 271,184 13.08% $ 165,855 8.00% N/A N/A
National Penn Bank 203,455 10.59 153,667 8.00 $ 192,084 10.00%
Panasia Bank, N.A. 12,320 11.36 8,679 8.00 10,848 10.00
Tier I capital (to risk-weighted assets)
National Penn Bancshares, Inc. 244,932 11.81 82,928 4.00 N/A N/A
National Penn Bank 179,240 9.33 76,834 4.00 115,250 6.00
Panasia Bank, N.A. 10,956 10.10 4,339 4.00 6,509 6.00
Tier I capital (to average assets)
National Penn Bancshares, Inc. 244,932 8.66 113,181 4.00 N/A N/A
National Penn Bank 179,240 6.91 103,725 4.00 129,456 5.00
Panasia Bank, N.A. 10,956 5.61 7,819 4.00 9,773 5.00
65
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
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, 2001
Total capital (to risk-weighted assets)
National Penn Bancshares, Inc. $ 238,304 11.82% $ 161,289 8.00% N/A N/A
National Penn Bank 197,195 10.42 151,358 8.00 $ 189,189 10.00%
Panasia Bank, N.A. 11,068 13.64 6,490 8.00 8,113 10.00
Tier I capital (to risk-weighted assets)
National Penn Bancshares, Inc. 212,427 10.53 80,694 4.00 N/A N/A
National Penn Bank 173,338 9.16 75,679 4.00 113,519 6.00
Panasia Bank, N.A. 10,045 12.38 3,245 4.00 4,868 6.00
Tier I capital (to average assets)
National Penn Bancshares, Inc. 212,427 7.99 106,346 4.00 N/A N/A
National Penn Bank 173,338 7.03 98,691 4.00 123,364 5.00
Panasia Bank, N.A. 10,045 6.64 6,047 4.00 7,558 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,
-----------------------------
2002 2001
------------ ------------
Assets
Cash $ - $ 2,601
Investment in Bank subsidiaries, at equity 230,684 206,226
Investment in other subsidiaries, at equity 63,952 46,649
Other assets 6,894 914
---------- ----------
$ 301,530 $ 256,390
=========== ===========
Liabilities and shareholders' equity
Long-term borrowings $ 9,188 $ 14,437
Guaranteed preferred beneficial interests in Company's
subordinated debentures 65,206 41,495
Other liabilities 4,776 4,776
Shareholders' equity 222,360 195,682
---------- ----------
$ 301,530 $ 256,390
=========== ===========
(Continued)
66
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
20. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Income
Equity in undistributed net earnings of subsidiaries $ 8,372 $ 10,892 $ 13,246
Dividends from subsidiary 31,789 24,441 17,365
Interest and other income 253 483 218
------- ------- -------
40,414 35,816 30,829
Expense
Interest on subordinated debentures 4,983 3,735 3,735
Interest on long-term borrowings 288 837 725
Other operating expenses 1,024 115 100
------- ------- -------
6,295 4,687 4,560
Income before income tax benefit 34,119 31,129 26,269
Income tax benefit (2,115) (1,605) (1,519)
------- ------- -------
Net income $ 36,234 $ 32,734 $ 27,788
======== ======== ========
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities
Net income $ 36,234 $ 32,734 $ 27,788
Equity in undistributed net earnings of subsidiaries (8,372) (10,892) (13,246)
(Increase) decrease in other assets (5,980) 1,674 (1,434)
(Decrease) increase in other liabilities - 1,091 73
-------- -------- -------
Net cash provided by operating activities 21,882 24,607 13,181
-------- -------- -------
Cash flows from investing activities
Cash paid to acquire businesses - - (20,025)
Additional investment in subsidiaries, at equity (17,212) 2,562 1,198
-------- -------- -------
Net cash (used in) provided by investing activities (17,212) 2,562 (18,827)
-------- -------- -------
Cash flows from financing activities
Proceeds from issuance of long-term debt - - 21,000
Repayment of long-term debt (5,249) (3,938) (2,625)
Proceeds from issuance of subordinated debt 65,206 - -
Repayment of subordinated debt (41,495) - -
Proceeds from issuance of stock - - 29
Effect of treasury stock transactions (7,693) (3,660) 878
Cash dividends (18,040) (16,974) (14,893)
-------- -------- -------
Net cash provided by (used in) financing activities (7,271) (24,572) 4,389
-------- -------- -------
Net (decrease) increase in cash and cash equivalents (2,601) 2,597 (1,257)
Cash and cash equivalents at beginning of year 2,601 4 1,261
-------- -------- -------
Cash and cash equivalents at end of year $ - $ 2,601 $ 4
========= ========= ========
67
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
21. SEGMENT INFORMATION
SFAS No. 131, Segment Reporting, establishes standards for public
business enterprises to report information about operating segments in
their annual financial statements and requires that those enterprises
report selected information about operating segments in subsequent interim
financial reports issued to shareholders. It also established standards for
related disclosure about products and services, geographic areas, and major
customers. Operating segments are components of an enterprise, which are
evaluated regularly by the chief operating decision maker in deciding how
to allocate and assess resources and performance. The Company's chief
operating decision maker is the President and Chief Executive Officer. The
Company has applied the aggregation criteria set forth in SFAS No. 131 for
its National Penn and Panasia operating segments to create one reportable
segment, "Community Banking."
The Company's community banking segment consists of commercial and
retail banking. The community banking business segment is managed as a
single strategic unit which generates revenue from a variety of products
and services provided by the Banks. 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.
The Company has also identified several operating segments. These
operating segments within the Company's operations do not have similar
characteristics to the community banking operations and do not meet the
quantitative thresholds requiring separate disclosure. These nonreportable
segments include ITC, Penn Securities, National Penn Life Insurance
Company, NPB Capital Trust, NP Leasing and the Parent are included in the
"Other" category.
The accounting policies used in this disclosure of business segments
are the same as those described in the summary of significant accounting
policies. The consolidating adjustments reflect certain eliminations of
intersegment revenues, cash and investment in subsidiaries.
Reportable segment-specific information and reconciliation to
consolidated financial information is as follows:
Community
Banking Other Consolidated
-------------- ------------ ---------------
(in thousands)
December 31, 2002
Total assets $ 2,808,295 $ 49,967 $ 2,858,262
Total deposits 2,112,640 - 2,112,640
Net interest income (loss) 111,995 (2,431) 109,564
Total noninterest income 31,689 8,158 39,847
Total noninterest expense 80,201 9,630 89,831
Net income (loss) $ 38,574 $ (2,340) $ 36,234
(Continued)
68
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
21. SEGMENT INFORMATION - Continued
Community
Banking Other Consolidated
-------------- ------------ ---------------
(in thousands)
December 31, 2001
Total assets $ 2,721,923 $ 5,559 $ 2,727,482
Total deposits 2,076,795 - 2,076,795
Net interest income (loss) 100,212 (4,227) 95,985
Total noninterest income 28,013 6,489 34,502
Total noninterest expense 75,521 5,202 80,723
Net income (loss) $ 34,512 $ (1,778) $ 32,734
December 31, 2000
Total assets $ 2,609,386 $ 6,061 $ 2,615,447
Total deposits 1,909,591 - 1,909,591
Net interest income (loss) 92,572 (4,146) 88,426
Total noninterest income 20,839 6,820 27,659
Total noninterest expense 69,646 5,636 75,282
Net income (loss) $ 29,713 $ (1,925) $ 27,788
22. 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
----------------------------------------------------
2002 Dec. 31 Sept. 30 June 30 March 31
---------------- ----------------------------------------------------
Interest income $ 43,082 $ 43,254 $ 43,208 $ 43,466
Net interest income 28,330 27,074 27,378 26,782
Provision for loan losses 2,750 4,500 2,800 3,950
Net gains (losses) on sale of investment
securities 97 367 - (250)
Income before income taxes 11,505 11,466 11,639 10,970
Net income 9,220 9,211 9,038 8,765
Earnings per share of common stock - basic 0.44 0.44 0.44 0.42
Earnings per share of common stock - diluted 0.44 0.44 0.43 0.41
(Continued)
69
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
22. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) - Continued
Three months ended
----------------------------------------------------
2001 Dec. 31 Sept. 30 June 30 March 31
---------------- ----------------------------------------------------
Interest income $ 44,980 $ 46,908 $ 47,597 $ 49,012
Net interest income 25,671 24,994 23,115 22,205
Provision for loan losses 2,500 3,500 1,500 1,500
Net gains (losses) on sale of investment
securities (478) 781 - 31
Income before income taxes 9,830 10,950 10,410 9,574
Net income 8,602 8,482 8,078 7,572
Earnings per share of common stock - basic 0.41 0.40 0.39 0.36
Earnings per share of common stock - diluted 0.41 0.40 0.38 0.35
70
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, 2002 and 2001, 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, 2002.
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, 2002 and 2001, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standard No. 142 Goodwill and
Other Intangible Assets on January 1, 2002.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
January 20, 2003 (except for note 2, as to which the
date is February 10,2003 and February 25, 2003)
71
Item 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ----------------------------------------------------------------------------
None.
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------------------------------
Information relating to executive officers of National Penn is included
under Item 4A in Part I of this Report. Information relating to directors of
National Penn and compliance with Section 16(a) of the Securities Exchange Act
of 1934 is incorporated by reference to the section captioned "Election of
Directors" and the subsection captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" of National Penn's definitive Proxy Statement to be used
in connection with National Penn's 2003 Annual Meeting of Shareholders (the
"Proxy Statement").
National Penn maintains in effect a written Code of Ethics that applies to
National Penn's principal executive officer, principal financial officer,
principal accounting officer, controller, and any other person performing
similar functions. A copy of the Code of Ethics is filed in this Report as
Exhibit 14.1.
Item 11. EXECUTIVE COMPENSATION.
- --------------------------------
Information required by this item is incorporated by reference to the
subsection captioned "Director Compensation" and the section captioned
"Execution Compensation" of the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- ---------------------------------------------------------------------------
RELATED MATTERS.
----------------
The following table provides information as of December 31, 2002, with
respect to shares of National Penn's common stock that may be issued under
National Penn's existing equity compensation plans:
(a) (b) (c)
Plan category(1) Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation plans
(excluding securities
reflected in column (a))
Equity compensation plans
approved by security
holders............ 2,024,727 $20.68 1,372,745 (2)(3)
Equity compensation plans
not approved by security
holders(4).......... None N/A N/A
Total............... 2,024,727 $20.68 1,372,745
_________________________________________
(1) The table does not include information on stock options assumed by National
Penn through acquisitions. At December 31, 2002, 63,215 shares of common stock
are issuable upon exercise of substitute stock options issued in connection with
acquisitions. Of this total, 51,305 shares are issuable upon exercise of
substitute stock options issued in the acquisition of Elverson National Bank,
and 11,910 shares are issuable upon exercise of substitute stock
72
options issued in the acquisition of Community Independent Bank, Inc. The
weighted average exercise price of all substitute stock options issued in
acquisitions and outstanding at December 31, 2002 was $11.61 per share. The
table also does not reflect substitute stock options for 640,591 shares of
common stock (with a weighted average exercise price of $11.31 per share) issued
on February 25, 2003 in the acquisition of FirstService Bank. National Penn
cannot grant additional stock options under any of these substitute stock option
plans.
(2) Includes 425,391 shares available for future issuance under National Penn's
Employee Stock Purchase Plan.
(3) Includes 27,693 shares available for future issuance under National Penn's
Directors' Fee Plan. Under the Fee Plan, shares or phantom stock units may be
issued at fair market value in lieu of cash for directors' fees.
(4) National Penn does not maintain equity compensation plans that have not been
approved by its shareholders.
_____________________________
Other information required by this item is incorporated by reference to the
section captioned "Stock Ownership" of the Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------
Information required by this item is incorporated by reference to the
subsection captioned "Related Party and Similar Transactions" of the Proxy
Statement.
Item 14. CONTROLS AND PROCEDURES.
- ----------------------------------
National Penn's chief executive officer and chief financial officer
evaluated National Penn's "disclosure controls and procedures" as of February
26, 2003. Disclosure controls and procedures are defined in SEC Rule 13a-14(c)
as controls and other procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. For National Penn, these reports are its annual reports on Form 10-K, its
quarterly reports on Form 10-Q, and its reports on Form 8-K. These officers
concluded that such controls and procedures are adequate and effective.
Since the date of the most recent evaluation of National Penn's internal
controls, there have been no significant changes in such internal controls or in
other factors that could significantly affect such internal controls.
73
PART IV
-------
Item 15. 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, of this Report:
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 financial
statements or in their notes.
3. Exhibits.
---------
2.1 Agreement dated September 24, 2002 between National Penn Bancshares, Inc.,
National Penn Bank and FirstService Bank. (Incorporated by reference to
Exhibit 2.1 of National Penn's Current Report on Form 8-K dated September
24, 2002.)
2.2 Form of Letter Agreement between FirstService Bank directors and National
Penn Bancshares, Inc. (Incorporated by reference to Exhibit 2.2 of National
Penn's Current Report on Form 8-K dated September 24, 2002.)
2.3 Agreement dated February 10, 2003 among National Penn Bancshares, Inc.,
Panasia Bank, N.A., and Woori America Bank. (Incorporated by reference to
Exhibit 2.1 to National Penn's Report on Form 8-K dated February 10, 2003,
as filed on February 14, 2003.)
2.4 Guaranty Agreement dated February 10, 2003 of Woori Bank in favor of
National Penn Bancshares, Inc. and Panasia Bank, N.A. (Incorporated by
reference to Exhibit 2.2 to National Penn's Report on Form 8-K dated
February 10, 2003, as filed on February 14, 2003.)
3.1 Articles of Incorporation, as amended, of National Penn Bancshares, Inc.
(Incorporated by reference to Exhibit 3.1 to National Penn's Registration
Statement No. 333-88536 on Form S-3, as filed on May 17, 2002.)
3.2 Bylaws, as amended, of National Penn Bancshares, Inc. (Incorporated by
reference to Exhibit 3.1 to National Penn's Report on Form 8-K dated April
24, 2002, as filed on April 29, 2002.)
4.1 Form of Trust Agreement between National Penn Bancshares, Inc. and
Christiana Bank & Trust Company, as Trustee. (Incorporated by reference to
Exhibit 4.1 to National Penn's Registration Statement Nos. 333-97361 and
333-97361-01 on Form S-3, as filed on July 30, 2002.)
4.2 Form of Amended and Restated Trust Agreement among National Penn
Bancshares, Inc., Christiana Bank & Trust Company, as Property Trustee, and
Christiana Bank & Trust Company, as Delaware Trustee. (Incorporated by
reference to Exhibit 4.2 to National Penn's Registration Statement Nos.
333-97361 and 333-97361-01 on Form S-3, as filed on August 6, 2002.)
74
4.3 Form of Subordinated Debenture Indenture between National Penn Bancshares,
Inc. and Christiana Bank & Trust Company, as Trustee. (Incorporated by
reference to Exhibit 4.4 to National Penn's Registration Statement Nos.
333-97361 and 333-97361-01 on Form S-3, as filed on August 6, 2002.)
4.4 Form of Preferred Securities Guarantee Agreement between National Penn
Bancshares, Inc. and Christiana Bank & Trust Company, as Trustee.
(Incorporated by reference to Exhibit 4.6 to National Penn's Registration
Statement Nos. 333-97361 and 333-97361-01 on Form S-3, as filed on August
6, 2002.)
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.)
10.1 National Penn Bancshares, Inc. Amended and Restated Dividend Reinvestment
Plan. (Incorporated by reference to Exhibit 10.1 to National Penn's Report
on Form 8-K dated March 27, 2002, as filed on April 8, 2002.)
10.2 National Penn Bancshares, Inc. Pension Plan (Amended and Restated Effective
January 1, 2001).* (Incorporated by reference to Exhibit 10.2 to National
Penn's Annual Report on Form 10-K for the year ended December 31, 2001.)
10. 3 Bernville Bank, N.A. Employees' Profit Sharing Plan - Plan Compliance and
Merger Amendment.* (Incorporated by reference to Exhibit 10.1 to National
Penn's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.)
10.4 Amendment No. 1 to National Penn Bancshares, Inc. Pension Plan (Amended and
Restated Effective January 1, 2001).* (Incorporated by reference to Exhibit
10.1 to National Penn's Report on Form 8-K dated December 18, 2002, as
filed on January 9, 2003.)
10.5 National Penn Bancshares, Inc. Capital Accumulation Plan (Amended and
Restated Effective January 1, 1997) (Revised 2001).* (Incorporated by
reference to Exhibit 10.2 to National Penn's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001.)
10.6 Amendment No. 1 to National Penn Bancshares, Inc. Capital Accumulation Plan
(Amended and Restated Effective January 1, 1997) (Revised 2001).*
(Incorporated by reference to Exhibit 4.2 to National Penn's Registration
Statement No. 333-75730 on Form S-8, as filed on December 21, 2001.)
10.7 Amendment No. 2 to National Penn Bancshares, Inc. Capital Accumulation Plan
(Amended and Restated Effective January 1, 1997) (Revised 2001).*
(Incorporated by reference to Exhibit 4.6 to National Penn's Post-Effective
Amendment to Registration Statement No. 333-75730 on Form S-8, as filed on
January 7, 2002.)
10.8 Amendment No. 3 to National Penn Bancshares, Inc. Capital Accumulation Plan
(Amended and Restated Effective January 1, 1997) (Revised 2001).*
(Incorporated by reference to Exhibit 10.2 to National Penn's Report on
Form 8-K dated December 18, 2002, as filed on January 9, 2003.)
10.9 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.)
10.10 National Penn Bancshares, Inc. Executive Incentive Plan/Schedules.*
75
10.11 National Penn Bancshares, Inc. Amended and Restated Stock Option Plan.*
(Incorporated by reference to Exhibit 10.1 to National Penn's Report on
Form 8-K dated July 12, 2002, as filed on July 16, 2002.)
10.12 National Penn Bancshares, Inc. Amended Officers' and Key Employees' Stock
Compensation Plan.* (Incorporated by reference to Exhibit 10.1 to National
Penn's Report on Form 8-K dated September 26, 2001, as filed on September
27, 2001.)
10.13 National Penn Bancshares, Inc. Directors' Fee Plan.* (Incorporated by
reference to Exhibit 10.3 to National Penn's Report on Form 8-K dated
December 18, 2002, as filed on January 9, 2003.)
10.14 National Penn Bancshares, Inc. Non-Employee Directors' Stock Option Plan.*
(Incorporated by reference to Exhibit 10.2 to National Penn's Report on
Form 8-K dated September 26, 2001, as filed on September 27, 2001.)
10.15 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.)
10.16 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.)
10.17 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.)
10.18 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.)
10.19 Form of Amended and Restated Director Deferred Fee Agreement between
Bernville Bank, N.A. and certain former Bernville Bank, N.A. directors.*
(Incorporated by reference to Exhibit 10.18 to National Penn's Annual
Report on Form 10-K for the year ended December 31, 2000.)
10.20 National Penn Bancshares, Inc. FirstService Substitute Incentive Stock
Option Plan.*
10.21 National Penn Bancshares, Inc. FirstService Non-Employee Directors
Substitute Stock Option Plan.*
10.22 Executive Supplemental Benefit Agreement dated December 27, 1989, among
National Penn Bancshares, Inc., National Bank of Boyertown and Lawrence T.
Jilk, Jr.* (Incorporated by reference to Exhibit 10.19 to National Penn's
Annual Report on Form 10-K for the year ended December 31, 2000.)
10.23 Amendatory Agreement dated February 23, 1994, among National Penn
Bancshares, Inc., National Penn Bank and Lawrence T. Jilk, Jr.*
(Incorporated by reference to Exhibit 10.20 to National Penn's Annual
Report on Form 10-K for the year ended December 31, 2000.)
10.24 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.)
10.25 Employment Agreement dated February 4, 2003, among National Penn
Bancshares, Inc., National Penn Bank and Wayne R. Weidner.* (Incorporated
by reference to Exhibit 10.1 to National Penn's Report on Form 8-K dated
February 4, 2003, as filed on February 4, 2003.)
76
10.26 Employment Agreement dated December 18, 2002, among National Penn
Bancshares, Inc., National Penn Bank and Glenn E. Moyer.* (Incorporated by
reference to Exhibit 10.4 to National Penn's Report on Form 8-K dated
December 18, 2002, as filed on January 9, 2003.)
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 Amendatory Agreement dated February 24, 1999, among National Penn
Bancshares, Inc., National Penn Bank and Gary L. Rhoads.* (Incorporated by
reference to Exhibit 10.26 to National Penn's Annual Report on Form 10-K
for the year ended December 31, 2001.)
10.30 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.)
10.31 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.)
10.32 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.)
10.33 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.)
10.34 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.)
10.35 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.)
10.36 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.)
10.37 Executive Agreement dated as of August 26, 1998, among National Penn
Bancshares, Inc., National Penn Bank and Bruce G. Kilroy.* (Incorporated by
reference to Exhibit 10.35 to National Penn's Annual Report on Form 10-K
for the year ended December 31, 2001.)
10.38 Amendatory Agreement dated August 23, 2000, among National Penn
Bancshares, Inc., National Penn Bank and Bruce G. Kilroy.* (Incorporated by
reference to Exhibit 10.36 to National Penn's Annual Report on Form 10-K
for the year ended December 31, 2001.)
10.39Executive Agreement dated June 22, 2001, among National Penn Bancshares,
Inc., National Penn Bank and Paul W. McGloin.* (Incorporated by reference
to Exhibit 10.1 to National Penn's Report on Form 8-K dated April 24, 2002,
as filed on April 29, 2002.)
77
10.40Amendatory Agreement dated January 27, 2002, among National Penn
Bancshares, Inc., National Penn Bank and Paul W. McGloin.* (Incorporated by
reference to Exhibit 10.2 to National Penn's Report on Form 8-K dated April
24, 2002, as filed on April 29, 2002.)
10.41 Executive Agreement dated July 23, 1997, among National Penn Bancshares,
Inc., National Penn Bank and Michael R. Reinhard.*
10.42 Amendatory Agreement dated August 26, 1998, among National Penn
Bancshares, Inc., National Penn Bank and Michael R. Reinhard.*
10.43 Employment Agreement dated as of September 24, 2002, between National Penn
Bank and John C. Spier.* (Incorporated by reference to Exhibit 10.1 to
National Penn's Pre-Effective Amendment No. 1 to Registration Statement No.
333-101689 on Form S-4, as filed on December 31, 2002.)
10.44 Description of Consulting Arrangement between Lawrence T. Jilk, Jr. and
Panasia Bank, N.A.* (Incorporated by reference to Exhibit 10.37 to National
Penn's Annual Report on Form 10-K for the year ended December 31. 2001.)
10.45 Stock Purchase Agreement dated April 20, 1989, between National Penn
Bancshares, Inc. and Pennsylvania State Bank. (Incorporated by reference to
Exhibit 10.35 to National Penn's Annual Report on Form 10-K for the year
ended December 31, 2000.)
10.46Amendment 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.)
14.1 National Penn Bancshares, Inc. Code of Ethics.
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 2002, National Penn filed the following Reports on
Form 8-K:
o Report dated November 12, 2002. The Report provided information under
Item 9 on the filing by Wayne R. Weidner, National Penn's Chairman,
President and Chief Executive Officer, and by Gary L. Rhoads, National
Penn's Treasurer and Chief Financial Officer, of certifications with
the Securities and Exchange Commission relating to the Quarterly
Report on Form 10-Q of National Penn for the quarter ended September
30, 2002. These certifications were filed pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. The Report did not contain any financial statements.
o Report dated December 5, 2002. The Report provided under Item 5 the
press release issued by National Penn in connection with its
engagement of Sandler O'Neill & Partners, L.P. as National Penn's
financial advisor regarding a possible sale of Panasia Bank, N.A. or
an alternative strategic transaction involving Panasia. The Report did
not contain any financial statements.
78
o Report dated December 18, 2002. The Report provided information under
Item 5 on amendments to National Penn's pension plan, capital
accumulation plan (401(k) plan) and directors' fee plan, as well as
the employment agreement dated December 18, 2002 among National Penn,
National Penn Bank and Glenn E. Moyer. The Report did not contain any
financial statements.
79
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)
February 26, 2003 By /s/ Wayne R. Weidner
-------------------------
Wayne R. Weidner
Chairman, 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 February 26, 2003
- --------------------------------
John H. Body
- --------------------------------
J. Ralph Borneman, Jr.
/s/ Frederick H. Gaige Director February 26, 2003
- --------------------------------
Frederick H. Gaige
/s/ John W. Jacobs Director February 26, 2003
- --------------------------------
John W. Jacobs
/s/ Frederick P. Krott Director February 26, 2003
- --------------------------------
Frederick P. Krott
/s/ Patricia L. Langiotti Director February 26, 2003
- --------------------------------
Patricia L. Langiotti
/s/ Kenneth A. Longacre Director February 26, 2003
- --------------------------------
Kenneth A. Longacre
/s/ Glenn E. Moyer Director February 26, 2003
- --------------------------------
Glenn E. Moyer
80
/s/ Alexander Rankin Director February 26, 2003
- --------------------------------
Alexander Rankin
/s/ Robert E. Rigg Director February 26, 2003
- --------------------------------
Robert E. Rigg
/s/ C. Robert Roth Director February 26, 2003
- --------------------------------
C. Robert Roth
/s/ John C. Spier Director February 26, 2003
- --------------------------------
John C. Spier
/s/ Wayne R. Weidner
- -------------------------------- Director, Chairman, February 26, 2003
Wayne R. Weidner President and Chief
Executive Officer
(Principal Executive Officer)
/s/ Gary L. Rhoads
- -------------------------------- Treasurer (Principal February 26, 2003
Gary L. Rhoads Financial and
Accounting Officer)
81
CERTIFICATIONS
--------------
I, Wayne R. Weidner, certify that:
1. I have reviewed this annual report on Form 10-K of National Penn
Bancshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Wayne R. Weidner
Date: February 26, 2003 ________________________________
Wayne R. Weidner
Chairman, President and
Chief Executive Officer
82
I, Gary L. Rhoads, certify that:
1. I have reviewed this annual report on Form 10-K of National Penn
Bancshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Gary L. Rhoads
Date: February 26, 2003 _______________________________
Gary L. Rhoads
Treasurer and
Chief Financial Officer