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, 1997, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _______________ to
_______________.
Commission file number 0-10957
NATIONAL PENN BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2215075
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
Philadelphia and Reading Avenues, Boyertown, Pennsylvania 19512
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 367-6001
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($1.875 par value)
Preferred Stock Purchase Rights
Guarantee (9% Preferred Securities of NPB Capital Trust)
9% Junior Subordinated Debentures
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common shares of the Registrant held by
nonaffiliates, based on the closing sale price as of March 13, 1998, was
$272,685,280.
As of March 13, 1998, the Registrant had 10,508,249 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 28, 1998 -- Part III.
NATIONAL PENN BANCSHARES, INC.
FORM 10-K
TABLE OF CONTENTS
Page
Part I
Item 1 Business.................................................. 1
Item 2. Properties................................................ 20
Item 3. Legal Proceedings......................................... 21
Item 4. Submission of Matters to a Vote of Security
Holders.............................................. 21
Item 4A. Executive Officers of the Registrant...................... 21
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.......................... 22
Item 6. Selected Financial Data................................... 23
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................... 24
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk ......................................... 29
Item 8. Financial Statements and Supplementary Data............... 30
Item 9. Disagreements on Accounting and Financial
Disclosure........................................... 61
Part III
Item 10. Directors and Executive Officers of the
Registrant........................................... 61
Item 11. Executive Compensation.................................... 61
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................ 61
Item 13. Certain Relationships and Related
Transactions......................................... 61
Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.............................. 61
PART I
Item 1. BUSINESS.
The Company
National Penn Bancshares, Inc. (the "Company") is a Pennsylvania
business corporation and bank holding company headquartered at Philadelphia and
Reading Avenues, Boyertown, Pennsylvania 19512. The Company owns all of the
outstanding capital stock of National Penn Bank, formerly named National Bank of
Boyertown ("NPB"). The Company was incorporated in January 1982. In addition,
the Company has three wholly-owned nonbank subsidiaries engaged in activities
related to the business of banking and has, indirectly through one of such
subsidiaries, equity investments in two other banks. At December 31, 1997, the
Company and NPB had 595 full- and part-time employees.
National Penn Bank
NPB is a national bank chartered under the National Bank Act. Prior to
August 1, 1993, NPB's name was National Bank of Boyertown. On that date, the
bank's name was changed to National Penn Bank. National Penn Bank also operates
through Chestnut Hill National Bank ("CHNB Division") and 1st Main Line Bank
("1stMLB Division"), each a banking division of National Penn Bank. The CHNB
Division was established in December 1993 after the Company's acquisition of
Chestnut Hill National Bank; the 1stMLB Division was started in April 1995.
At December 31, 1997, NPB conducted operations through 49 full-service
branches and 3 loan production offices, of which 2 branches and 1 loan
production office constitute the CHNB Division, and 4 branches constitute the
1stMLB Division.
NPB is engaged in the commercial and retail banking business. NPB
provides checking and savings accounts, time deposits, personal, business,
residential mortgage, educational loans, interbank credit cards, and safe
deposit and night depository facilities.
In fourth quarter 1995, NPB began offering certain non-deposit
(non-FDIC insured) investment products through unaffiliated third-party vendors.
Nonbank Subsidiaries
The Company owns all of the outstanding capital stock of Investors
Trust Company ("ITC"), a Pennsylvania-chartered trust company. ITC opened for
business on June 20, 1994.
The Company also owns all of the outstanding capital stock of National
Penn Investment Company, a Delaware business corporation ("NPIC") that invests
in and holds equity investments in other banks and bank holding companies (as
discussed below), other equity investments, government and other debt
securities, and other investment securities, as permitted by applicable law and
regulations. NPIC began operations in January 1985. The Company also owns all of
the outstanding capital stock of National Penn Life Insurance Company, an
Arizona insurance company formed to reinsure credit life and accident and health
insurance in connection with loans made by NPB. National Penn Life Insurance
Company began operations in January 1985.
Other Bank Investments
The Company has, indirectly through NPIC, the following equity
investments in other banks:
1. 20% of the outstanding capital stock of First Capitol Bank, a
Pennsylvania bank headquartered in York, Pennsylvania. First Capitol Bank began
operations as a bank in November 1988.
1
2. 20% of the outstanding capital stock of Pennsylvania State Bank, a
Pennsylvania bank headquartered in Camp Hill, Pennsylvania. Pennsylvania State
Bank began operations as a bank in May 1989.
For financial reporting purposes, the Company accounts for its
investment in First Capitol Bank and Pennsylvania State Bank using the "equity"
method.
Supervision and Regulation
Bank holding companies and banks operate in a highly-regulated
environment and are regularly examined by Federal and state regulatory
authorities. The following discussion concerns certain provisions of Federal and
state laws and certain regulations and the potential impact of such provisions
and regulations on the Company and its subsidiaries. To the extent that the
following information describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular statutory or regulatory
provisions themselves. A change in applicable statutes, regulations or
regulatory policy may have a material effect on the business of the Company and
its subsidiaries.
Bank Holding Company Regulation
The Company is registered as a bank holding company and is subject to
the regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve") under the Bank Holding Company Act of 1956, as amended
("BHCA"). Bank holding companies are required to file periodic reports with and
are subject to examination by the Federal Reserve. The Federal Reserve has
issued regulations under the BHCA that require a bank holding company to serve
as a source of financial and managerial strength to its subsidiary banks. As a
result, the Federal Reserve, pursuant to such regulations, may require the
Company to stand ready to use its resources to provide adequate capital funds to
NPB during periods of financial stress or adversity.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), a bank holding company is required to guarantee the compliance of
any insured depository institution subsidiary that may become "undercapitalized"
(as defined by regulations) with the terms of any capital restoration plan filed
by such subsidiary with its appropriate federal banking agency, up to specified
limits.
Under the BHCA, the Federal Reserve has the authority to require a bank
holding company to terminate any activity or relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank
holding company.
The BHCA prohibits the Company from acquiring direct or indirect
control of more than 5% of the outstanding shares of any class of voting stock
or substantially all of the assets of any bank or merging or consolidating with
another bank holding company without prior approval of the Federal Reserve. Such
a transaction would also require approval of the Pennsylvania Department of
Banking. Pennsylvania law permits Pennsylvania bank holding companies to control
an unlimited number of banks.
Additionally, the BHCA prohibits the Company from engaging in or from
acquiring ownership or control of more than 5% of the outstanding shares of any
class of voting stock of any company engaged in a nonbanking business unless
such business is determined by the Federal Reserve, by regulation or by order,
to be so "closely related to banking" as to be a "proper incident" thereto. The
BHCA does not place territorial restrictions on the activities of such
nonbanking-related businesses.
In February 1997, the Federal Reserve adopted a revised regulation
concerning permissible nonbanking activities, effective April 21, 1997. This
revised regulation provides fourteen categories of functionally related
activities that are permissible nonbanking activities. These are:
(1) extending credit and servicing loans;
2
(2) certain activities related to extending credit;
(3) leasing personal or real property under certain conditions;
(4) operating nonbank depository institutions, including savings
associations;
(5) trust company functions;
(6) certain financial and investment advisory activities;
(7) certain agency transactional services for customer
investments, including securities brokerage activities;
(8) certain investment transactions as principal;
(9) management consulting and counseling activities;
(10) certain support services, such as courier and printing
services;
(11) certain insurance agency and underwriting activities;
(12) community development activities;
(13) issuance and sale of money orders, savings bonds, and
traveler's checks; and
(14) certain data processing services.
Depending on the circumstances, Federal Reserve approval may be
required before the Company or its nonbank subsidiaries may begin to engage in
any such activity and before any such business may be acquired.
Dividend Restrictions
The Company is a legal entity separate and distinct from NPB and the
Company's nonbank subsidiaries. The Company's revenues (on a parent Company only
basis) result almost entirely from dividends paid to the Company by its
subsidiaries. The right of the Company, and consequently the right of creditors
and shareholders of the Company, to participate in any distribution of the
assets or earnings of any subsidiary through the payment of such dividends or
otherwise is necessarily subject to the prior claims of creditors of the
subsidiary (including depositors, in the case of NPB), except to the extent that
claims of the Company in its capacity as a creditor may be recognized.
Federal and state laws regulate the payment of dividends by the
Company's subsidiaries. See "Supervision and Regulation - Regulation of NPB"
herein.
Further, it is the policy of the Federal Reserve that bank holding
companies should pay dividends only out of current earnings. Federal banking
regulators also have the authority to prohibit banks and bank holding companies
from paying a dividend if they should deem such payment to be an unsafe or
unsound practice.
3
Capital Adequacy
Bank holding companies are required to comply with the Federal
Reserve's risk-based capital guidelines. The required minimum ratio of total
capital to risk-weighted assets (including certain off-balance sheet activities,
such as standby letters of credit) is 8%. At least half (4%) of the total
capital is required to be "Tier 1 capital," consisting principally of common
shareholders' equity, noncumulative perpetual preferred stock, a limited amount
of cumulative perpetual preferred stock, and minority interests in the equity
accounts of consolidated subsidiaries, less certain intangible assets. The
remainder ("Tier 2 capital") may consist of a limited amount of subordinated
debt and intermediate-term preferred stock, certain hybrid capital instruments
and other debt securities, perpetual preferred stock, and a limited amount of
the general loan loss allowance. In addition to the risk-based capital
guidelines, the Federal Reserve requires a bank holding company to maintain a
minimum "leverage ratio." This requires a minimum level of Tier 1 capital (as
determined under the risk-based capital rules) to average total consolidated
assets of 3% for those bank holding companies that have the highest regulatory
examination ratings and are not contemplating or experiencing significant growth
or expansion. All other bank holding companies are expected to maintain a ratio
of at least 1% to 2% above the stated minimum. Further, the Federal Reserve has
indicated that it will consider a "tangible Tier 1 capital leverage ratio"
(deducting all intangibles) and other indicia of capital strength in evaluating
proposals for expansion or new activities. The Federal Reserve has not advised
the Company of any specific minimum leverage ratio applicable to the Company.
Pursuant to FDICIA, the federal banking agencies have specified, by
regulation, the levels at which an insured institution is considered "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized." Under these regulations, an
institution is considered "well capitalized" if it has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater, a leverage ratio of 5% or greater, and is not subject to any order or
written directive to meet and maintain a specific capital level. The Company and
NPB, at December 31, 1997, qualify as "well capitalized" under these regulatory
standards.
FDIC Insurance Assessments
NPB is subject to FDIC deposit insurance assessments. These assessments
fund both the Bank Insurance Fund ("BIF") for banks and the Savings Association
Insurance Fund ("SAIF") for savings associations and are based on the risk
classification of the depository institution.
On August 8, 1995, the FDIC reduced the insurance assessment that
BIF-member banks deemed to have the least risk (including NPB) had to pay on
insured deposits to $.04 per $100 of deposits from the then current rate of $.23
per $100 of deposits, but continued SAIF premiums at the then current level of
$.23 per $100 of deposits. Because NPB had acquired approximately $225 million
of SAIF-insured deposits from savings associations from 1990 to the present, NPB
continued to pay insurance assessments on these acquired deposits at $.23 per
$100 of deposits. The reduction in rate on BIF-insured deposits to $.04 was
retroactive to May 1, 1995. On January 1, 1996, the FDIC reduced the insurance
assessment to zero for BIF-member banks in the least risk category.
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 became effective. This Act recapitalized the SAIF through
a one-time special assessment and provides for assessing BIF-insured deposits,
as well as SAIF-insured deposits, to fund the Federal government's FICO bond
payments. As a result, NPB paid a one-time assessment of $1,175,000 to the FDIC
on November 30, 1996, and, effective January 1, 1997, NPB's insurance assessment
rate for its SAIF-insured deposits became $.0622 per $100 of deposits and $.0124
per $100 of deposits for its BIF-insured deposits. Substantially all of these
on-going assessments are to fund debt service on the FICO bonds. Beginning in
2000, BIF-insured deposits and SAIF-insured deposits will be assessed at the
same rates to fund remaining debt service on the FICO bonds. The FICO bonds
mature in 2017.
4
Regulation of NPB
The operations of NPB are subject to Federal and state statutes
applicable to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System, and to banks whose deposits are insured
by the FDIC. NPB's operations are also subject to regulations of the Office of
the Comptroller of the Currency (the "OCC"), the Federal Reserve, and the FDIC.
The OCC, which has primary supervisory authority over NPB, regularly
examines banks in such areas as reserves, loans, investments, management
practices, and other aspects of operations. These examinations are designed for
the protection of NPB's depositors rather than the Company's shareholders. NPB
must furnish annual and quarterly reports to the OCC, which has the authority
under the Financial Institutions Supervisory Act to prevent a national bank from
engaging in an unsafe or unsound practice in conducting its business.
Federal and state banking laws and regulations govern, among other
things, the scope of a bank's business, the investments a bank may make, the
reserves against deposits a bank must maintain, the types and terms of loans a
bank may make and the collateral it may take, the activities of a bank with
respect to mergers and consolidations, and the establishment of branches.
Pennsylvania law permits statewide branching.
Under the National Bank Act, as amended, NPB is required to obtain the
prior approval of the OCC for the payment of dividends if the total of all
dividends declared by NPB in one year would exceed NPB's net profits (as defined
and interpreted by regulation) for the current year plus its retained net
profits (as defined and interpreted by regulation) for the two preceding years,
less any required transfers to surplus. In addition, NPB may only pay dividends
to the extent that its retained net profits (including the portion transferred
to surplus) exceed statutory bad debts (as defined by regulation). Under FDICIA,
any depository institution, including NPB, is prohibited from paying any
dividends, making other distributions or paying any management fees if, after
such payment, it would fail to satisfy its minimum capital requirements.
A subsidiary bank of a bank holding company, such as NPB, is subject to
certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the bank holding company or its subsidiaries, on investments in the
stock or other securities of the bank holding company or its subsidiaries, and
on taking such stock or securities as collateral for loans. The Federal Reserve
Act and Federal Reserve regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to the principal shareholders of
its parent holding company, among others, and to related interests of such
principal shareholders. In addition, such legislation and regulations may affect
the terms upon which any person becoming a principal shareholder of a holding
company may obtain credit from banks with which the subsidiary bank maintains a
correspondent relationship.
NPB, and the banking industry in general, are affected by the monetary
and fiscal policies of government agencies, including the Federal Reserve.
Through open market securities transactions and changes in its discount rate and
reserve requirements, the Board of Governors of the Federal Reserve exerts
considerable influence over the cost and availability of funds for lending and
investment.
Competition
The financial services industry in the Company's service area is
extremely competitive. The Company's competitors within its service area include
bank holding companies with resources substantially greater than those of the
Company. Many competitor financial institutions have legal lending limits
substantially higher than NPB's legal lending limit. In addition, NPB competes
with savings banks, savings and loan associations, credit unions, money market
and other mutual funds, mortgage companies, leasing companies, finance
companies, and other financial services companies that offer products and
services similar to those offered by NPB on competitive terms.
In September 1994, Federal legislation was enacted that is having a
significant effect in restructuring the banking industry in the United States.
See "Interstate Banking Legislation" herein. As a result, the operating
environment for Pennsylvania-based financial institutions is becoming
increasingly competitive.
5
Additionally, the manner in which banking institutions conduct their
operations may change materially if the activities in which bank holding
companies and their banking and nonbanking subsidiaries are permitted to engage
continue to increase, and if funding and investment alternatives continue to
broaden, although the long-range effects of such changes cannot be predicted,
with reasonable certainty, at this time. If these trends continue, they most
probably will further narrow the differences and intensify competition between
and among commercial banks, thrift institutions, and other financial service
companies. See "Proposed Legislation and Regulations" herein.
Interstate Banking Legislation
In September 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act (the "Interstate Banking Act") was enacted. The Interstate
Banking Act facilitates the interstate expansion and consolidation of banking
organizations (i) by permitting bank holding companies that are adequately
capitalized and adequately managed, beginning September 29, 1995, to acquire
banks located in states outside their home states regardless of whether such
acquisitions are authorized under the law of the host state; (ii) by permitting
the interstate merger of banks after June 1, 1997, subject to the right of
individual states to "opt in" or "opt out" of this authority before that date;
(iii) by permitting banks to establish new branches on an interstate basis
provided that such action is specifically authorized by the law of the host
state; (iv) by permitting, beginning September 29, 1995, a bank to engage in
certain agency relationships (i.e., to receive deposits, renew time deposits,
close loans (but not including loan approvals or disbursements), service loans,
and receive payments on loans and other obligations) as agent for any bank or
thrift affiliate, whether the affiliate is located in the same state or a
different state than the agent bank; and (v) by permitting foreign banks to
establish, with approval of the regulators in the United States, branches
outside their "home" states to the same extent that national or state banks
located in the home state would be authorized to do so. One effect of this
legislation is to permit the Company to acquire banks and bank holding companies
located in any state and to permit qualified banking organizations located in
any state to acquire banks and bank holding companies located in Pennsylvania,
irrespective of state law.
In July 1995, the Pennsylvania Banking Code was amended to authorize
full interstate banking and branching under Pennsylvania law. Specifically, the
legislation (i) eliminates the "reciprocity" requirement previously applicable
to interstate commercial bank acquisitions by bank holding companies, (ii)
authorizes interstate bank mergers and reciprocal interstate branching into
Pennsylvania by interstate banks, and (iii) permits Pennsylvania institutions to
branch into other states with the prior approval of the Pennsylvania Department
of Banking.
Overall, this Federal and state legislation is having the effect of
increasing consolidation and competition and promoting geographic
diversification in the banking industry.
Proposed Legislation and Regulations
Because of concerns relating to the competitiveness and the safety and
soundness of the banking industry, the U.S. Congress continues to consider a
number of proposals for changing the structure, regulation, and competitive
relationships of the nation's financial institutions. These include proposals to
require thrift institutions to convert to commercial bank charters, to alter the
statutory separation of commercial and investment banking, to restrain the OCC
from authorizing new business activities for national banks, and to further
expand the powers of depository institutions, bank holding companies and their
competitors. It cannot be predicted whether or in what form any of these
proposals will be enacted or the extent to which the business of the Company may
be affected thereby.
Interest Rate Swaps
Statement of Financial Accounting Standards No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments,"
requires that information about the amounts, nature, and terms of interest rate
swaps be disclosed. See Note 13 to the Company's Consolidated Financial
Statement included at Item 8 hereof. In 1997, the interest rate swaps to which
NPB was a party had the effect of increasing the Company's net interest income
by $983,000 over what would have been realized had NPB not entered into the swap
agreements. Should
6
rates rise in 1998, the Company may recognize lower net interest income for the
year than would have been recognized had NPB not entered into the interest rate
swap agreements.
The Company uses interest rate swap agreements for interest rate risk
management. No derivative financial instruments are held for trading purposes.
The contract or notional amounts of the swap agreements do not represent
exposure to credit loss. Potential credit risk on these contracts arises from
the counterparty's inability to meet the terms of the agreement. Management
considers the credit risk of these agreements to be minimal and manages this
risk through routine review of the counterparty's financial ratings.
Year 2000 Computer Matters
The Company's Year 2000 initiative began in 1996 with the creation of a
"Year 2000 Compliance Project team" comprised of various Company employees,
including senior management. The Year 2000 project was divided into five phases
- -- awareness, assessment, renovation, validation and implementation. The first
two phases of the project have been completed by pinpointing all areas that
could be affected by incorrect dates and by inventorying all systems and
assessing where corrections need to be made.
The Company is currently engaged in the renovation phase which consists
of upgrading non-compliant and mission -critical systems. At the same time, the
Company has also begun the fourth phase (validation) of the project for all
systems which the Company deems to be mission-critical. The Company expects to
complete the upgrading of its system and to be Year 2000 compliant by December
1998, with finalized testing being completed prior to December 31, 1999.
The Company recognizes that the failure of any portion of its system to
function properly after December 31, 1999 could jeopardize the Company's
stability. As a result, the Company is in the process of developing a detailed
contingency plan to ensure that if a mission-critical application should fail at
the turn of the century, the plan could be activated to maintain operations
while additional renovations to such application are undertaken.
Based on a preliminary study, the Company expects to spend
approximately $300,000 in 1998 to modify its system in order to make its system
Year 2000 compliant. The Company does not expect the amounts required to be
expensed over the next three years to have a material effect on its financial
position or results of operations.
Factors that might cause material differences include, but are not
limited to, the availability and cost of personnel trained in this area; the
ability to locate and correct all relevant computer codes; the Year 2000
compliance status of software of third party suppliers upon which the Company's
information systems rely; and similar uncertainties.
(This space intentionally left blank.)
7
Average Balances, Average Rates, and Interest Rate Spread*
(Dollars in Thousands)
Year Ended December 31
1997 1996 1995
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
INTEREST EARNING ASSETS:
Interest bearing deposits at banks $2,094 $94 4.49% $1,186 $60 5.06% $1,239 $76 6.13%
---------- ------- ---------- ------- ---------- -------
U.S. Treasury 65,285 4,487 6.87 86,751 5,976 6.89 99,374 7,321 7.37
U.S. Government agencies 111,757 7,709 6.90 75,461 5,478 7.26 71,957 5,136 7.14
State and municipal* 70,063 5,341 7.62 52,309 3,760 7.19 47,735 3,515 7.36
Other bonds and securities 16,933 1,008 5.95 22,820 1,302 5.71 21,100 1,276 6.05
---------- ------- ---------- ------- ---------- -------
Total investments 264,038 18,545 7.02 237,341 16,516 6.96 240,166 17,248 7.18
---------- ------- ---------- ------- ---------- -------
Federal funds sold 2,658 143 5.38 3,817 162 4.24 1,929 114 5.91
---------- ------- ---------- ------- ---------- -------
Commercial loans and lease financing* 641,324 59,134 9.22 540,140 49,949 9.25 463,106 43,197 9.33
Installment loans 234,596 22,320 9.51 220,292 20,044 9.10 212,855 20,280 9.53
Mortgage loans 213,315 21,127 9.90 221,317 21,624 9.77 206,331 19,791 9.59
---------- ------- ---------- ------- ---------- -------
Total loans and leases 1,089,235 102,581 9.42 981,749 91,617 9.33 882,292 83,268 9.44
---------- ------- ---------- ------- ---------- -------
Total earning assets 1,358,025 121,363 8.94% 1,224,093 108,355 8.85% 1,125,626 100,706 8.95%
------- ------- -------
Allowance for loan and lease losses (24,341) (21,671) (19,859)
Non-interest earning assets 89,619 84,758 81,884
---------- ---------- ----------
Total assets $1,423,303 $1,287,180 $1,187,651
========== ========== ==========
INTEREST BEARING LIABILITIES:
Interest bearing deposits $911,752 40,570 4.45 $820,728 34,331 4.18 $781,686 32,738 4.19
Securities sold under repurchase
agreements and federal funds
purchased 95,567 4,938 5.17 157,182 8,083 5.14 94,375 5,613 5.95
Short-term borrowings 4,897 275 5.62 3,863 193 5.00 13,944 1,078 7.73
Long-term borrowings 138,898 8,839 6.36 53,424 3,411 6.38 75,392 4,406 5.84
---------- ------- ---------- ------- ---------- -------
Total interest bearing liabilities 1,151,114 54,622 4.75% 1,035,197 46,018 4.45% 965,397 43,835 4.54%
------- ------- -------
Non-interest bearing deposits 138,596 128,002 113,442
Other non-interest bearing liabilities 16,458 15,463 14,529
---------- ---------- ----------
Total liabilities 1,306,168 1,178,662 1,093,368
Equity capital 117,135 108,518 94,283
---------- ---------- ----------
Total liabilities and equity capital $1,423,303 $1,287,180 $1,187,651
========== ========== ==========
INTEREST RATE SPREAD** $66,741 4.91% $62,337 5.09% $56,871 5.05%
======= ======= =======
<FN>
*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.
</FN>
8
Interest Rate Sensitivity Analysis
Information with respect to interest rate sensitivity of the Company's
assets and liabilities is included in the information under Management's
Discussion and Analysis at Item 7 hereof.
Investment Portfolio
A summary of securities available for sale and securities held to
maturity at December 31, 1997, 1996, and 1995 follows (in thousands).
1997 1996 1995
Estimated Estimated Estimated
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
Securities available for sale
U.S. Treasury and U.S.
Government agencies $90,751 $93,469 $108,569 $111,611 $102,357 $107,859
State and municipal 99,267 101,702 49,485 49,621 45,712 46,836
Other bonds 250 253 1,184 1,198 2,727 2,751
Mortgage-backed securities 104,053 105,417 50,594 51,785 63,316 65,029
Marketable equity securities
and other 15,854 20,919 20,216 22,599 16,667 18,427
-------- -------- -------- -------- -------- --------
Totals $310,175 $321,760 $230,048 $236,814 $230,779 $240,902
======== ======== ======== ======== ======== ========
1997 1996 1995
Estimated Estimated Estimated
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
Securities held to maturity
U.S. Treasury and U.S.
Government agencies $ --- $ --- $ --- $ --- $ --- $ ---
State and municipal --- --- --- --- --- ---
Other bonds --- --- --- --- --- ---
Mortgage-backed securities --- --- --- --- --- ---
Marketable equity securities
and other --- --- --- --- --- ---
------ ------ ------ ------ ------- -------
Totals $ --- $ --- $ --- $ --- $ --- $ ---
====== ====== ====== ====== ======= =======
9
Investment Securities Yield by Maturity
The maturity distribution and weighted average yield of the investment portfolio
of the Company at December 31, 1997, are presented in the following table.
Weighted average yields on tax-exempt obligations have been computed on a fully-
taxable equivalent basis assuming a tax rate of 35%. All average yields were
calculated on the book value of the related securities. Stocks and other
securities having no stated maturity have been included in the "After 10 Years"
category.
Securities Available for Sale Yield by Maturity at December 31, 1997
Securities available for sale at market value
(Dollars in thousands)
After 1 But After 5 But
Within 1 Year Within 5 Years Within 10 Years After 10 Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Treasury and U.S.
Government agencies $10,147 8.16% $40,402 6.53% 42,920 7.41%$ --- ---% $93,469 7.11%
State and municipal bonds 449 6.51% 9,554 7.11% 40,226 7.40% 51,473 8.51% 101,702 7.93%
Other bonds 253 7.11% --- ---% --- ---% --- ---% 253 7.11%
Mortgage-backed securities 164 4.88% 17,734 6.90% 9,900 7.70% 77,619 6.79% 105,417 6.89%
Marketable equity securities
and other --- ---% --- ---% --- ---% 20,919 ---% 20,919 ---%
--------------- -------------- --------------- ---------------- ---------------
Total $11,013 8.02% $67,690 6.71% $93,046 7.44% $150,011 6.43% $321,760 6.84%
=============== ============== =============== ================ ===============
10
Loan Maturity and Interest Rate Sensitivity
Maturities and sensitivity to changes in interest rates in certain loan
categories in the Company's loan portfolio at December 31, 1997, are summarized
below:
Remaining Maturity* - At December 31, 1997
After One
One Year Year to After
or Less Five Years Five Years Total
(In Thousands)
Commercial and Industrial
Loans $70,646 $51,253 $16,622 $138,521
Loans for Purchasing and
Carrying Securities 45 32 10 87
Loans to Financial
Institutions 170 123 40 333
Real Estate Loans:
Construction and Land
Development 57,563 -- -- 57,563
-------- ------- ------- --------
$128,424 $51,408 $16,672 $196,504
======== ======= ======= ========
* Demand loans, past-due loans, and overdrafts are reported in "One Year or
Less." Construction real estate loans are reported maturing in "One Year or
Less" because of their short-term maturity or index to Prime Rate. An
immaterial amount of loans have no stated schedule of repayments.
Segregated in terms of sensitivity to changes in interest rates, the
foregoing loan balances at December 31, 1997, are summarized below:
After One
Year to After
Five Years Five Years
(In Thousands)
Predetermined Interest Rate $51,408 $16,672
Floating Interest Rate -- --
Total $51,408 $16,672
======= =======
Determinations of maturities included in the loan maturity table are
based upon contract terms. In situations where a "rollover" is appropriate, the
Company's policy in this regard is to evaluate the credit for collectability
consistent with the normal loan evaluation process. This policy is used
primarily in evaluating ongoing customers' use of their lines of credit that are
at floating interest rates. The Company's outstanding lines of credit to
customers are not material.
11
Loan Portfolio
The Company's loans are widely diversified by borrower, industry
group, and geographical area. The following summary shows the year-end
composition of the Company's loan portfolio for each year in the five-year
period ended December 31, 1997:
December 31,
1997 1996 1995 1994 1993
(In Thousands)
Commercial and Industrial
Loans $ 138,521 $ 126,304 $ 99,765 $ 79,726 $ 68,599
Loans for Purchasing and
Carrying Securities 87 306 478 778 1,008
Loans to Financial
Institutions 333 453 589 821 2,063
Real Estate Loans:
Construction and Land
Development 57,563 42,468 42,978 31,760 22,690
Residential 563,935 564,748 526,577 472,227 428,540
Other 335,676 302,787 256,956 228,911 191,875
Loans to Individuals 26,669 14,014 11,722 16,389 22,963
Lease Financing
Receivables --- --- --- --- 27
---------- ---------- -------- -------- --------
Total $1,122,784 $1,051,080 $939,065 $830,612 $737,765
========== ========== ======== ======== ========
Risk Elements
The Company's consolidated financial statements are prepared on the
accrual basis of accounting, including the recognition of interest income on the
loan portfolio.
In determining income from loans, including consumer and residential
mortgage loans, the Company generally adheres to the policy of not accruing
interest on a loan on which default of principal or interest has existed for a
period of 90 days or more. A loan past due 90 days or more remains on accrual
only if the loan is fully secured and in the process of collection. When a loan
reaches nonaccrual status, any interest accrued but unpaid on it, if payment is
considered questionable, is reversed and charged against current income.
Thereafter, until such time as the loan becomes current, interest is included in
income only to the extent it is received in cash.
Restructured loans are loans on which the interest rate has been
reduced because of a weakened financial position of the borrower. There were no
restructured loans at December 31, 1997, and an immaterial amount of such loans
at the end of prior years.
Nonaccrual loans, loans 90 days or more past due and still on accrual,
and restructured loans together constitute nonperforming loans. When other real
estate owned is included with nonperforming loans, the total is nonperforming
assets.
12
Other real estate owned decreased in 1997 due primarily to properties
acquired through bank acquisition having substantially been resolved through
sales.
The following table shows the balance at year-end and the effect on
interest income of nonperforming assets in the Company's loan portfolio, by
category, for each year in the five-year period ended December 31, 1997:
December 31,
1997 1996 1995 1994 1993
Nonaccrual Loans $6,810 $ 8,723 $ 7,257 $ 9,328 $ 8,698
Loans Past Due 90 or
More Days as to
Interest or Principal 2,798 3,650 1,764 2,114 2,349
Restructured Loans --- --- --- --- ---
Total Nonperforming
Loans 9,608 12,373 9,021 11,442 11,047
Other Real Estate Owned 375 319 760 2,047 3,122
---------- ---------- ------- ------- -------
Total Nonperforming
Assets $9,983 $12,692 $ 9,781 $13,489 $14,169
========== ========== ======= ======= =======
Gross Amount of Interest
That Would Have Been
Recorded at Original
Rate on Nonaccrual
and Restructured Loans $ 940 $ 1,040 $ 961 $ 1,517 $ 804
Interest Received From
Customers on Nonaccrual
and Restructured Loans 609 834 656 1,031 160
---------- ---------- ------- ------- -------
Net Impact on Interest
Income of Nonperforming
Loans $ 331 $ 206 $ 305 $ 486 $ 644
========== ========== ======= ======= =======
At December 31, 1997, the Company had no foreign loans and no loan
concentrations exceeding 10% of total loans not disclosed in the table on page
12 hereof. "Loan concentrations" are considered to exist when there are amounts
loaned to a multiple number of borrowers engaged in similar activities that
would cause them to be similarly affected by economic or other conditions. Loans
recorded in the category of other real estate owned are valued at the lower of
book value of loans outstanding or fair market value.
At December 31, 1997, the Company was not aware of any potential
problem loans that are not otherwise included in the foregoing table. "Potential
problem loans" are loans where information about possible credit problems of
borrowers has caused management to have serious doubts about the borrowers'
ability to comply with present repayment terms.
At December 31, 1997, the Company had no loans that are considered
highly-leveraged transactions under applicable regulations, although the Company
had approximately $10,120,000 in aggregate loans outstanding that, but for their
small individual amount, would be considered such loans. A "highly-leveraged
transaction" is a transaction for the purpose of the buyout, acquisition, or
recapitalization of a corporation, which involves new debt that doubles the
corporation's debt and results in a leverage ratio greater than 50%, produces a
leverage ratio greater
13
than 75% where 25% or more results from the buyout, acquisition, or
recapitalization, or is designated as such by a syndication agent or regulatory
agency.
Allowance for Possible Loan and Lease Losses
A detailed analysis of the Company's allowance for loan and lease
losses for the five years ended December 31, 1997, is shown below:
December 31,
1997 1996 1995 1994 1993
Balance at Beginning of Year $22,746 $20,366 $19,310 $17,909 $12,448
Charge-offs:
Commercial and Industrial Loans 979 289 544 679 478
Real Estate Loans:
Construction and Land
Development 14 --- 366 125 552
Residential 1,279 1,242 882 941 1,055
Other 564 392 932 435 596
Loans to Individuals 300 422 785 822 728
Lease Financing Receivables --- --- --- --- 3
------- ------- ------- ------- -------
Total Charge-offs $3,136 $2,345 $ 3,509 $ 3,002 $ 3,412
------- ------- ------- ------- -------
Recoveries:
Commercial and Industrial Loans 199 110 365 190 141
Real Estate Loans:
Construction and Land
Development --- 131 148 47 58
Residential 293 182 491 494 383
Other 212 235 124 155 448
Loans to Individuals 233 167 237 313 428
Lease Financing Receivables --- 4 10
------- ------- ------- ------- -------
Total Recoveries $ 937 $ 825 $ 1,365 $ 1,203 $ 1,468
------- ------- ------- ------- -------
Net Charge-offs $2,199 $1,520 $ 2,144 $ 1,799 $ 1,944
------- ------- ------- ------- -------
Provisions Charged to Expense 4,575 3,900 3,200 3,200 5,145
Adjustments:
Changes Incident to Mergers
and Absorptions, Net --- --- --- --- 2,260
------- ------- ------- ------- -------
Balance at End of Year $25,122 $22,746 $20,366 $19,310 $17,909
======= ======= ======= ======= =======
Ratio of Net Charge-offs
During the Period to
Average Loans Outstanding
During the Period .20% 0.15% 0.24% 0.23% 0.30%
======= ======= ======= ======= =======
The allowance for loan and lease losses is established through charges
to earnings in the form of a provision for loan and lease losses. Loans and
leases that are determined to be uncollectible are charged against the
allowance, and subsequent recoveries are credited to the allowance. Factors that
influence management's judgment in determining the amount of the provision for
loan and lease losses charged to operating expense include the following:
1. An ongoing review by management of the quality of the overall
loan and lease portfolio.
14
2. Management's continuing evaluation of potential problem and
nonperforming loans and leases.
3. Loan and lease classifications and evaluations as a result of
periodic examinations by federal supervisory authorities.
4. Management's evaluation of prevailing and anticipated economic
conditions and their related effect on the existing loan and lease portfolio.
5. Comments and recommendations by the Company's independent
accountants as a result of their regular examination of the Company's financial
statements.
It is management's practice to review the allowance for loan and lease
losses regularly to determine whether additional provision should be made after
considering the factors noted above. In 1997, the provision was increased due to
current loan quality, economic conditions, and net loan charge-offs in 1997.
The Company makes partial loan charge-offs when it determines that the
underlying collateral is not sufficient to cover a nonperforming loan. Loan loss
allowances are maintained at least in amounts sufficient to cover the estimated
future loss, if any. Partial charge-offs in 1997 totaled $1,340,000, or 43% of
the gross charge-off amount of $3,136,000, as compared to $1,349,000, or 58% of
the gross charge-off amount of $2,345,000 in 1996. Partial charge-offs
represented .1% and .1% of average total loans for 1997 and 1996, respectively.
15
The year end 1997, 1996, 1995, 1994, and 1993 allocation of the
allowance for loan and lease losses, and the percent of loans in each category
to total loans, is illustrated in the following table (dollars in thousands):
Allocation of the Allowance for Loan and Lease Losses (1)
1997 1996 1995 1994 1993
% Loan % Loan % Loan % Loan % Loan
Type to Type to Type to Type to Type to
Total Total Total Total Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
Commercial and Industrial loans and
leases $ 2,859 12.3% $ 3,229 12.0% $ 2,547 10.6% $ 1,289 9.6% $1,689 9.3%
Loans for purchasing and carrying
securities --- --% --- 0.1% --- 0.1% --- 0.1% --- 0.1%
Loans to financial institutions --- --% --- 0.1% --- 0.1% --- 0.1% --- 0.3%
Real estate loans:
Construction and land development 1,794 5.1% 1,458 4.0% 644 4.5% 2,294 3.8% 1,016 3.1%
Residential 5,145 50.2% 4,764 53.7% 4,595 56.1% 3,841 56.8% 3,325 58.1%
Other 7,001 29.9% 7,905 28.8% 6,548 27.4% 3,708 27.6% 4,732 26.0%
Loans to individuals 4,346 2.5% 2,296 1.3% 2,296 1.2% 1,462 2.0% 1,456 3.1%
Unallocated 3,977 N/A 3,094 N/A 3,736 N/A 6,716 N/A 5,691 N/A
------- ----- -------- ----- ------- ------ ------- ----- ------- -----
$25,122 100.0% $22,746 100.0% $20,366 100.0% $19,310 100.0% $17,909 100.0%
======= ===== ======== ===== ======= ====== ======= ===== ======= =====
<FN>
(1) This allocation is made for analytical purposes. The total allowance is
available to absorb losses from any segment of the portfolio.
</FN>
The Company regards the allowance as a general allowance which is
available to absorb losses from all loans. The allocation of the allowance as
shown in the table should neither be interpreted as an indication of future
charge-offs, nor as an indication that charge- offs in future periods will occur
in these amounts or in these proportions.
16
Historical Statistics
The following table shows historical statistics of the Company relative
to the relationship among loans (net of unearned discount), net charge-offs, and
the allowance for possible loan and lease losses:
December 31,
1997 1996 1995 1994 1993
(In Thousands)
Average Total Loans $1,089,235 $981,749 $882,292 $775,675 $643,188
Total Loans at Year End 1,122,784 1,051,080 939,065 830,612 737,765
Net Charge-offs 2,199 1,520 2,144 1,799 1,944
Allowance for Possible
Loan and Lease Losses
at Year End 25,122 22,746 20,366 19,310 17,909
Year Ended December 31,
1997 1996 1995 1994 1993
Ratios
Net Charge-offs to:
Average Total Loans 0.20% 0.15% 0.24% 0.23% 0.30%
Total Loans at Year End 0.20 0.14 0.23 0.22 0.26
Allowance for Possible
Loan and Lease Losses 8.75 6.68 10.53 9.32 10.85
Allowance for Possible
Loan and Lease Losses to:
Average Total Loans 2.31 2.32 2.31 2.49 2.78
Total Loans at Year End 2.24 2.16 2.17 2.32 2.43
(This space left intentionally blank.)
17
Deposit Structure
The following is a distribution of the average amount of, and the
average rate paid on, the Company's deposits for each year in the three-year
period ended December 31, 1997:
Year Ended December 31,
1997 1996 1995
(Dollars in Thousands)
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
Noninterest-
Bearing Demand
Deposits 138,596 ---% $128,002 ---% $113,442 ---%
Savings Deposits 336,122 2.08 326,902 1.82 345,176 2.26
Time Deposits* 575,630 5.83 493,826 5.75 436,510 5.71
---------- -------- ---------
Total $1,050,348 3.86 $948,730 3.62 $895,128 3.66
========== ===== ======== ========
<FN>
* Included are average time deposits, issued in the amount of $100,000 or
more, of $110,447,000 in 1997, $97,115,000 in 1996, and $89,881,000 in
1995.
</FN>
The following is a breakdown, by maturities, of the Company's time
certificates of deposit of $100,000 or more as of December 31, 1997. The Company
has no other time deposits of $100,000 or more as of December 31, 1997.
Maturity Amount of Time Certificates of Deposit
(In Thousands)
3 months or less $ 34,013
Over 3 through 6 months 11,082
Over 6 through 12 months 24,219
Over 12 months 41,133
---------
Total $110,447
=========
Short-Term Borrowings
Information with respect to the Company's short-term borrowings is set
forth in footnote 6 to the Company's Consolidated Financial Statements which are
included at Item 8 hereof, Financial Statements and Supplementary Data.
(This space left intentionally blank.)
18
Financial Ratios
The following ratios for the Company are among those commonly used in
analyzing financial statements of financial services companies:
Year Ended December 31,
1997 1996 1995
Earnings Ratios
Net Income on:
Average Earning Assets 1.37% 1.38% 1.37%
Average Total Assets 1.31 1.31 1.30
Average Shareholders' Equity 15.90 15.90 16.30
Net Operating Income Before
Securities and Mortgage
Transactions and Cumulative
Effect of a Change in
Accounting for Income Taxes on:
Average Earning Assets 1.32 1.38 1.34
Average Total Assets 1.26 1.31 1.27
Average Shareholders' Equity 15.27 15.54 16.05
Liquidity and Capital Ratios
Average Shareholders' Equity
to Average Earning Assets 8.63% 8.87% 8.38%
Average Shareholders' Equity
to Average Total Assets 8.23 8.43 7.94
Dividend Payout Ratio 44.70 41.50 40.70
Tier 1 Leverage Ratio 9.84 7.83 7.59
Tier 1 Risk-Based Ratio 13.49 10.82 10.97
Total Risk-Based Capital Ratio 14.91 12.09 12.23
(This space left intentionally blank.)
19
The following table shows, on a taxable equivalent basis, the changes
in the Company's net interest income, by category, due to shifts in volume and
rate, for the years ended December 31, 1997 and 1996. The information is
presented on a taxable equivalent basis, using an effective rate of 35%.
Year Ended December 31,
1997 over 1996 (1) 1996 over 1995 (1)
Increase (decrease) in: Volume Rate Total Volume Rate Total
Interest income:
Interest bearing deposits
at banks $ 46 ($ 12) $ 34 ($ 3) ($ 13) ($ 16)
Securities:
U.S. Treasury and
U. S. Government agencies 1,047 (305) 742 (663) (340) (1,003)
State and municipal 1,276 305 1,581 337 (92) 245
Other bonds and securities (336) 42 (294) 104 (78) 26
-------- -------- -------- -------- -------- --------
Total securities 1,987 42 2,029 (222) (510) (732)
-------- -------- -------- -------- -------- --------
Federal funds sold (49) 30 (19) 112 (64) 48
Loans:
Commercial loans and
lease financing 9,357 (172) 9,185 7,185 (433) 6,752
Installment loans 1,301 975 2,276 709 (945) (236)
Mortgage loans (782) 285 (497) 1,437 396 1,833
-------- -------- -------- -------- -------- --------
Total loans 9,876 1,088 10,964 9,331 (982) 8,349
-------- -------- -------- -------- -------- --------
Total interest income $ 11,860 $ 1,148 $ 13,008 $ 9,218 ($ 1,569) $ 7,649
======== ======== ======== ======== ======== ========
Interest expense:
Interest bearing deposits 3,808 2,431 6,239 1,635 (42) 1,593
Borrowed funds:
Securities sold under
repurchase agreements and
federal funds purchased (3,169) 24 (3,145) 3,735 (1,265) 2,470
Short-term borrowings 52 30 82 (779) (106) (885)
Long-term borrowings and
subordinated capital note 5,457 (29) 5,428 (1,284) 289 (995)
-------- -------- -------- -------- -------- --------
Total borrowed funds 2,340 25 2,365 1,672 (1,082) 590
-------- -------- -------- -------- -------- --------
Total interest expense $ 6,148 $ 2,456 $ 8,604 $ 3,307 ($ 1,124) $ 2,183
======== ======== ======== ======== ======== ========
Increase (decrease) in
net interest income $ 5,712 ($ 1,308) $ 4,404 $ 5,911 ($ 445) $ 5,466
======== ======== ======== ======== ======== ========
<FN>
(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.
</FN>
Item 2. PROPERTIES.
The Company does not own or lease any property. As of December 31,
1997, NPB owns 31 properties in fee and leases 33 other properties. The
properties owned in fee, at such date, were not subject to any major liens,
encumbrances, or collateral assignments.
The principal office of the Company and of NPB is owned in fee and is
located at Philadelphia and Reading Avenues, Boyertown, Pennsylvania 19512. The
principal office of NPB's CHNB Division is leased and is located at 9 West
Evergreen Avenue, Chestnut Hill, Philadelphia, Pennsylvania 19118. The principal
office of NPB's 1stMLB Division is leased and is located at 528 East Lancaster
Avenue, St. Davids, Pennsylvania 19087.
20
NPB presently has 52 branches located in the following Pennsylvania
counties: Berks, Bucks, Chester, Delaware, Lehigh, Montgomery, Northampton, and
Philadelphia.
In addition to its branches, NPB presently leases 7 properties at
which it operates loan production offices, and owns or leases 60 automated
teller machines located throughout the eight-county area, all of which are
located at bank branch locations, except for 25 that are "free-standing" (not
located at a branch).
Item 3. LEGAL PROCEEDINGS.
Various actions and proceedings are presently pending to which NPB is
a party. These actions and proceedings arise out of routine operations and, in
management's opinion, will have no material adverse effect on the consolidated
financial position of the Company and its subsidiaries.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The principal executive officers of the Company, as of the date
hereof, are as follows:
Principal Business Occupation
Name Age During the Past Five Years
Lawrence T. Jilk, Jr. 59 President and Chief Executive Officer of the
Company since January 1990, and President of the
Company from April 1988 to January 1990. Also,
Chairman of NPB.
Wayne R. Weidner 55 Executive Vice President of the Company since
April 1990, and Treasurer of the Company from
1983 to 1990. Also, Chief Executive Officer and
President of NPB.
Garry D. Koch 43 Executive Vice President of NPB Since September
1997, and Senior Vice President of NPB since
1992.
Sandra L. Spayd 54 Secretary of the Company, and Senior Vice
President and Corporate Secretary of NPB.
Gary L. Rhoads 43 Treasurer of the Company, and Senior Vice
President, Controller and Cashier of NPB.
Executive officers of the Company are elected by the Board of
Directors and serve at the pleasure of the Board. Executive Officers of the Bank
are appointed by the Board of Directors of the Bank and serve until they resign,
retire, become disqualified, or are removed by such Board.
21
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock currently trades on the Nasdaq National
Market tier of The Nasdaq Stock Market under the symbol: "NPBC".
The following table reflects the high and low closing sales prices
reported for the Common Stock, and the cash dividends declared on the Common
Stock, for the periods indicated, after giving retroactive effect to a
four-for-three stock split paid on July 31, 1997 and a 5% stock dividend paid on
October 31, 1996.
MARKET VALUE OF COMMON STOCK
1997
High Low
lst Quarter 21.56 19.59
2nd Quarter 25.31 20.44
3rd Quarter 34.38 24.94
4th Quarter 33.75 31.00
1996
High Low
lst Quarter 18.39 16.96
2nd Quarter 19.64 17.14
3rd Quarter 19.88 18.75
4th Quarter 20.63 19.13
CASH DIVIDENDS DECLARED ON COMMON STOCK
1997 1996
lst Quarter $.18 $.17
2nd Quarter .21 .17
3rd Quarter .21 .17
4th Quarter .21 .18
The Trust Preferred Securities of NPB Capital Trust are reported on
Nasdaq's National Market under the symbol "NPBCP". The Securities have a par
value of $25 and the preferred dividend is 9%.
(This space intentionally left blank.)
22
Item 6. SELECTED FINANCIAL DATA.
FIVE-YEAR STATISTICAL SUMMARY
(Dollars in thousands, except per share data)
Year Ended 1997 1996 1995 1994 1993
STATEMENTS OF CONDITION
Total assets $ 1,534,378 1,358,013 $ 1,251,378 $ 1,137,174 $ 933,736
Total deposits 1,115,600 980,808 914,890 864,640 748,229
Loans and leases, net 1,097,662 1,028,334 918,699 811,302 719,856
Total investments 321,760 236,814 240,902 238,102 144,488
Total shareholders' equity 123,188 114,721 106,615 84,871 82,222
Book value per share* 11.61 10.75 10.02 8.05 7.76
Realized book value per share** 13.79 12.54 n/a n/a n/a
Percent shareholders' equity to assets 8.03% 8.45% 8.52% 7.46% 8.81%
Trust assets 543,345 411,916 401,532 313,898 286,710
EARNINGS
Total interest income $ 119,027 $ 106,558 $ 99,020 $ 84,259 $ 71,272
Total interest expense 54,620 46,018 43,836 28,848 23,839
----------- ----------- ----------- ----------- -----------
Net interest income 64,407 60,540 55,184 55,411 47,433
Provision for loan and lease losses 4,575 3,900 3,200 3,200 5,145
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan and lease losses 59,832 56,640 51,984 52,211 42,288
Other income 12,082 9,088 7,608 5,409 4,931
Other expenses 46,147 41,258 37,542 36,914 28,629
----------- ----------- ----------- ----------- -----------
Income before income taxes 25,767 24,470 22,050 20,706 18,590
Income taxes 7,151 7,548 6,668 6,057 5,782
----------- ----------- ----------- ----------- -----------
Income before cumulative effect of
change in accounting for income taxes 18,616 16,922 15,382 14,649 12,808
Cumulative effect on prior years
(to January 1, 1993) of change in
accounting for income taxes -- -- -- -- 500
----------- ----------- ----------- ----------- -----------
Net income $ 18,616 $ 16,922 $ 15,382 $ 14,649 $ 13,308
=========== =========== =========== =========== ===========
Cash dividends paid $ 8,330 $ 7,025 $ 6,263 $ 5,344 $ 4,405
Return on average assets 1.31% 1.31% 1.30% 1.41% 1.60%
Return on average shareholders' equity 15.9% 15.6% 16.3% 17.3% 17.4%
Return on average realized shareholders' equity** 16.3% 16.1% 16.3% n/a n/a
PER SHARE DATA*
Basic earnings*** $ 1.75 $ 1.59 $ 1.45 $ 1.38 $ 1.26
Diluted earnings*** 1.71 1.57 1.42 1.36 1.24
Dividends paid in cash 0.78 0.66 0.59 0.50 0.42
Dividends paid in stock 4 for 3 Stock Split 5% 5% 5% 7%
SHAREHOLDERS AND STAFF
Average shares outstanding* 10,661,869 10,671,969 10,605,236 10,582,954 10,538,594
Shareholders 2,704 2,750 2,823 2,787 2,701
Staff - Full-time equivalents 595 578 517 559 449
<FN>
* Restated to reflect a 4-for-3 stock split in 1997 and 5% stock dividends in
1996, 1995, and 1994, and a 7% stock dividend in 1993.
** Excluding unrealized gain (loss) on securities available for sale.
*** In 1997, the Company adopted SFAS 128 which eliminates primary and fully
diluted earnings per share and requires presentation of basic and diluted
earnings per share. Prior periods' earnings per share have been restated to
reflect the adoption of SFAS 128.
</FN>
The unaudited quarterly results of the Company's operations in 1997 and 1996 are
included in footnote 21 to the Company's Consolidated Financial Statements
included herein at Item 8, Financial Statements and Supplementary Data.
23
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 1997 total assets increased to $1.534 billion, an increase of
$176.4 million or 13.0% over the $1.358 billion at year-end 1996. Total assets
at the end of 1996 increased $106.6 million or 8.52% over the $1.251 billion at
year-end 1995.
Total cash and cash equivalents decreased $.9 million or 2.1% in 1997
compared to 1996 versus an increase of $.8 million or 1.9% in 1996 compared to
1995. The decrease in 1997 is due to the maintenance of vault cash in branch
locations, as well as a decrease in the level of interest bearing deposits in
banks.
Net loans and leases increased to $1.098 billion during 1997, an
increase of $69.3 million or 6.7% compared to 1996. Net loans increased $109.6
million in 1996 or 11.9% compared to 1995. Loan growth in 1997 was primarily the
result of the investment of deposits and long-term borrowings. Residential
mortgages originated for immediate resale during 1997 amounted to $22.8 million.
The Company's credit quality is reflected by the annualized ratio of net
chargeoffs to total loans of .20% for 1997 versus .14% for the year 1996, and
the ratio of nonperforming assets to total loans of .89% at December 31, 1997,
compared to 1.21% at December 31, 1996. Nonperforming assets, including
nonaccruals, loans 90 days past due, restructured loans and other real estate
owned, were $10.0 million at December 31, 1997, compared to $12.7 million at
December 31, 1996. Of these amounts, nonaccrual loans represented $6.8 million
and $8.7 million at December 31, 1997, and December 31, 1996, respectively.
Loans 90 days past due and still accruing interest were $2.8 million and $3.7
million at December 31, 1997, and December 31, 1996, respectively. Other real
estate owned was $375,000 and $319,000 at December 31, 1997, and December 31,
1996, respectively. The Company had no restructured loans at December 31, 1997
or December 31, 1996. The allowance for loan losses to nonperforming assets was
251.6% and 179.2% at December 31, 1997, and December 31, 1996, respectively. As
is evident from the above amounts relative to nonperforming assets, there have
been no significant changes between December 31, 1996, and December 31, 1997.
The Company has no significant exposure to energy and agricultural-related
loans.
Investments, which are the Company's secondary use of funds, increased
$84.9 million or 35.9% to $321.8 million at year-end 1997. In 1996, the
investment portfolio reflected a decrease of $4.1 million or 1.7% compared to
1995. The increase in 1997 was due to investment purchases of $113.3 million,
primarily in municipal securities, which were partially offset by calls and
maturities of securities, securities sales and payments on mortgage-backed
securities. At year-end 1995, the FASB provided a one-time window of opportunity
for reclassifying investments accounted for under Statement of Financial
Accounting Standards (SFAS) 115, "Accounting for Certain Investments in Debt and
Equity Securities." As a result, the Company designated its entire investment
portfolio as available for sale. Changes in the market value of these securities
are accounted for, net of tax, as an adjustment to shareholder's equity. Because
SFAS 115 explicitly allows for a held to maturity category for investment
securities, reclassifications from the held to maturity category that resulted
from the one-time reassessment will not call into question the intent of the
Company to hold investment securities to maturity in the future. Proceeds from
the sale of investment securities in 1997 were $12.6 million, on which a net
gain of $1.7 million was recognized.
As the primary source of funds, aggregate deposits of $1.116 billion
increased $134.8 million or 13.7% compared to 1996. Deposits of $980.8 million
increased $65.9 million in 1996 or 7.2% compared to 1995. In addition to
deposits, growth in earning assets has been funded somewhat through purchased
funds and borrowings. These include securities sold under repurchase agreements,
federal funds purchased, short-term borrowings, and long-term borrowings. In the
aggregate, these funds totaled $279.0 million at the end of 1997, a $31.0
million or 12.5% increase compared to 1996. The 1996 amount of borrowings and
purchased funds of $248.0 million represented an increase of $33.5 million or
15.6% compared to 1995. The increase in 1997, was due to the issuance of $40.25
million in junior subordinated deferrable interest debentures and an increase in
long-term obligations of $79.4 million which was
24
partially offset by a decrease in short-term borrowings, primarily securities
sold under repurchase agreements and federal funds purchased.
Shareholders' equity increased by $8.5 million or 7.4% in 1997 to
$123.2 million. This increase was due primarily to the retention of earnings and
reinvestment of cash dividends under the Company's dividend reinvestment plan.
Cash dividends paid in 1997 increased $1,306,000 or 18.6% compared to the cash
dividends paid in 1996 which increased $762,000 or 12.2% compared to cash
dividends paid in 1995. Earnings retained in 1997 were 55.3% compared to 58.5%
in 1996.
RESULTS OF OPERATIONS
Net income for 1997 of $18.6 million was 10.0% more than the $16.9
million reported in 1996. The 1996 amount was 10.0% more than the $15.4 million
in 1995. On a per share basis, basic earnings were $1.75, $1.59 and $1.45 for
1997, 1996 and 1995, respectively. Diluted earnings per share were $1.71, $1.57
and $1.42 for 1997, 1996 and 1995 respectively.
Net interest income is the difference between interest income on assets
and interest expense on liabilities. Net interest income increased $3.9 million
or 6.4% to $64.4 million in 1997 from the 1996 amount of $60.5 million. The
increase in interest income is a result of growth in average loans outstanding
and higher rates on loans that were partially offset by growth in average
deposits and higher rates on deposits and borrowings. Interest rate risk is a
major concern in forecasting the earnings potential. The Company's prime rate
from January 1, 1997 to March 25, 1997 was 8.25%. On March 26, 1997, the prime
rate changed to 8.50%. In 1996, the Company's prime rate was 8.50% through
January 31, 1996. On February 1, 1996 the prime rate changed to 8.25%. Net
interest income in 1996 increased $5.4 million or 9.7% to $60.5 million from
1995. Interest expense during 1997 increased $8.6 million or 18.7% compared to
the prior year due to higher interest rates on deposits and long-term
borrowings. Interest expense during 1996 increased $2.2 million or 5.0% compared
to 1995. Despite the current rate environment, the cost of attracting and
holding deposited funds is an ever-increasing expense in the banking industry.
These increases are the real costs of deposit accumulation and retention,
including FDIC insurance costs, marketing and branch overhead expenses. Such
costs are necessary for continued growth and to maintain and increase market
share of available deposits.
The provision for loan and lease losses is determined by periodic
reviews of loan quality, current economic conditions, loss experience and loan
growth. Based on these factors, the provision for loan and lease losses
increased $675,000 to $4,575,000 for 1997. The provision for loan and lease
losses was $3,900,000 for 1996 and $3,200,000 for 1995. The allowance for loan
and lease losses of $25.1 million at year-end 1997 and $22.7 million at year-end
1996 as a percentage of total loans was 2.2% for both 1997 and 1996,
respectively. Net loan charge-offs of $2,199,000, $1,520,000 and $2,144,000
during 1997, 1996 and 1995, respectively, continue to be comparable with those
of the Company's peers.
The increase in other income in 1997 compared to 1996 was $2,994,000 or
32.9% as a result of increased gains on sale of investment securities and
mortgages of $1,069,000, increased other service charges and fees of $928,000,
increased service charges on deposit accounts of $595,000, increased trust
income of $384,000 and increased equity in undistributed net earnings of
affiliates of $18,000. The increase in other income in 1996 compared to 1995 was
$1,480,000 million or 19.5% and was due to increased service charges on deposit
accounts of $717,000, increased trust income of $543,000, increased other
service charges and fees of $241,000, and increased equity in undistributed net
earnings of affiliates of $103,000. Net gains on sales of investment securities
and mortgages decreased $124,000 in 1996 compared to 1995. Sales of investment
securities in 1997 and 1996 totaled $12.6 million and $39.2 million,
respectively. "Total other expenses" increased $4,889,000 or 11.8% in 1997 when
compared to 1996. By category, the Company's "salaries, wages and employee
benefits" increased $3,853,000, "other operating expenses" increased $1,498,000,
"net premises and equipment" increased $562,000 while "FDIC assessment"
decreased $1,024,000 due to lower FDIC insurance premiums on bank deposits and a
one-time rebate of the fourth quarter 1996 assessment. "Total other expenses"
increased $3,716,000 or 9.9% in 1996 when compared to 1995. By category, the
Company's "salaries, wages and employee benefits" increased $1,995,000, "other
operating" expenses increased $1,413,000, and "net premises and equipment"
increased $816,000 while "FDIC assessment" decreased $508,000 due to lower FDIC
insurance premiums on all commercial bank deposits partially offset by a
one-time FDIC assessment in the amount of $1,175,000 on approximately $225
million of thrift deposits acquired from Sellersville Savings and Loan
Association and Central Pennsylvania Savings Association. For 1997, 1996 and
1995, there are no individual items of other
25
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 1997 by $1,297,000 or 5.3%
compared to 1996 when income before income taxes increased by $2,420,000 or
11.0% compared to 1995. Income taxes decreased $397,000 in 1997 compared to 1996
when income taxes increased $880,000 compared to 1995.
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 $46.2 million during 1997. Long-term borrowings increased $119.6
million during 1997. As described in footnote 7 to the financial statements,
cash flow was increased by a $40.25 million debt offering on May 22, 1997.
The goal of interest rate sensitivity management is to avoid
fluctuating net interest margins, and to enhance consistent growth of net
interest income through periods of changing interest rates. Such sensitivity is
measured as the difference in the volume of assets and liabilities in the
existing portfolio that are subject to repricing in a future time period.
The following table shows separately the interest rate sensitivity of
each category of interest-earning assets and interest-bearing liabilities at
December 31, 1997:
Repricing Periods
Within Three Months One Year
Three Through Through Over
Months One Year Five Years Five Years
Assets (In thousands)
Interest bearing deposits
at banks $ 1,089 $-- $-- $--
Investment securities(1) 24,480 29,192 148,382 119,706
Loans and leases(1) 328,116 160,149 440,636 168,761
Other assets 3,102 -- -- 110,765
--------- --------- --------- ---------
356,787 189,341 589,018 399,232
--------- --------- --------- ---------
Liabilities and equity
Non-interest bearing deposits 146,772 -- -- --
Interest bearing deposits(2) 235,853 219,197 281,814 231,964
Borrowed funds 136,412 11,979 68,131 62,522
Other liabilities -- -- -- 16,546
Hedging instruments 80,000 -- (80,000) --
Shareholders' equity -- -- -- 123,188
--------- --------- --------- ---------
599,037 231,176 269,945 434,220
--------- --------- --------- ---------
Interest sensitivity gap (242,250) (41,835) 319,073 (34,988)
--------- --------- --------- ---------
Cumulative interest rate
sensitivity gap ($242,250) ($284,085) $ 34,988 $ --
========= ========= ========= =========
<FN>
(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
26
estimating the prepayments in the interest rate environment prevailing
during the fourth calendar quarter of 1997. The table assumes
prepayments and scheduled principal amortization of fixed-rate loans
and mortgage-backed securities, and assumes that adjustable rate
mortgages will reprice at contractual repricing intervals. There has
been no adjustment for the impact of future commitments and loans in
process.
(2) Savings and NOW deposits are scheduled for repricing based on
historical deposit decay rate analyses, as well as historical moving
averages of run-off for the Company's deposits in these categories.
While generally subject to immediate withdrawal, management considers a
portion of these accounts to be core deposits having significantly
longer effective maturities based upon the Company's historical
retention of such deposits in changing interest rate environments.
Specifically, 25.2% of these deposits are considered repriceable within
three months and 74.2% are considered repriceable in the over five
years category.
</FN>
Interest rate sensitivity is a function of the repricing
characteristics of the Company's assets and liabilities. These characteristics
include the volume of assets and liabilities repricing, the timing of the
repricing, and the relative levels of repricing. Attempting to minimize the
interest rate sensitivity gaps is a continual challenge in a changing rate
environment. Based on the Company's gap position as reflected in the above
table, current accepted theory would indicate that net interest income would
increase in a falling interest rate environment and would decrease in a rising
interest rate environment. An interest rate gap table does not, however, present
a complete picture of the impact of interest rate changes on net interest
income. First, changes in the general level of interest rates do not affect all
categories of assets and liabilities equally or simultaneously. Second, assets
and liabilities which can contractually reprice within the same period may not,
in fact, reprice at the same time or to the same extent. Third, the table
represents a one-day position; variations occur daily as the Company adjusts its
interest sensitivity throughout the year. Fourth, assumptions must be made to
construct such a table. For example, non-interest bearing deposits are assigned
a repricing interval of within three months, although history indicates a
significant amount of these deposits will not move into interest bearing
categories regardless of the general level of interest rates. Finally, the
repricing distribution of interest sensitive assets may not be indicative of the
liquidity of those assets.
Gap analysis is a useful measurement of asset and liability management,
however, it is difficult to predict the effect of changing interest rates based
solely on this measure. Therefore, the Company supplements gap analysis with the
calculation of the Economic Value of Equity. This report forecasts changes in
the Company's market value of portfolio equity ("MVPE") under alternative
interest rate environments. The MVPE is defined as the net present value of the
Company's existing assets, liabilities and off-balance sheet instruments. The
calculated estimates of change in MVPE at December 31, 1997 are as follows:
MVPE
Change In Interest Rate Amount % Change
(In thousands)
+300 Basis Points $183,763 (25)%
+200 Basis Points 204,102 (16)
+100 Basis Points 224,761 ( 8)
Flat Rate 243,622 ---
- -100 Basis Points 251,640 3
- -200 Basis Points 253,499 4
- -300 Basis Points 250,508 3
Management believes that the assumptions utilized in evaluating the
vulnerability of the Company's earnings and capital to changes in interest rates
approximate actual experience; however, the interest rate sensitivity of the
Company's assets and liabilities as well as the estimated effect of changes in
interest rates on MVPE could vary substantially if different assumptions are
used or actual experience differs from the experience on which the assumptions
were based.
In the event the Company should experience a mismatch in its desired
gap ranges or an excessive decline in its MVPE subsequent to an immediate and
sustained change in interest rate, it has a number of options which it could
utilize to remedy such mismatch. The Company could restructure its investment
portfolio through the sale or purchase
27
of securities with more favorable repricing attributes. It could also emphasize
loan products with appropriate maturities or repricing attributes, or it could
attract deposits or obtain borrowings with desired maturities.
The Company anticipates volatile interest rate levels in 1998. Given
this assumption, the Company's asset/liability strategy for 1998 is to remain in
a negative gap position (interest-bearing liabilities subject to repricing
greater than interest-earning assets subject to repricing) for periods up to a
year. The impact of a volatile interest rate environment on net interest income
is not expected to be significant to the Company's results of operations.
Effective monitoring of these interest sensitivity gaps is the priority of the
Company's asset/liability management committee.
CAPITAL ADEQUACY
The following table sets forth certain capital performance ratios for
the Company.
1997 1996 1995
CAPITAL LEVELS
Tier 1 leverage ratio 9.84% 7.83% 7.59%
Tier 1 risk-based ratio 13.49 10.82 10.97
Total risk-based ratio 14.91 12.09 12.23
CAPITAL PERFORMANCE
Return on average assets 1.31 1.31 1.30
Return on average equity 15.90 15.60 16.30
Earnings retained 55.30 58.50 59.30
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,
1997, 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%. The Company
currently meets the criteria for a well capitalized institution, and management
believes that, under current regulations, the Company will continue to meet its
minimum capital requirements in the foreseeable future.
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 December 1997, the Company's Board of Directors approved the
repurchase of up to 530,000 shares of its common stock to be used for the
Company's dividend reinvestment, stock option, employee stock purchase plans,
and other stock based corporate plans. The stock repurchase plan authorizes the
Company to make repurchases from time to time in open market or privately
negotiated transactions. At December 31, 1997, a total of 770 shares have been
repurchased at an aggregate cost of $24,000. A prior repurchase program of
380,000 shares authorized in June 1996 was completed in December 1997.
FUTURE OUTLOOK
Based on a preliminary study, the Company expects to spend
approximately $300,000 in 1998 to modify its computer information systems
enabling proper processing of transactions relating to the year 2000 and beyond.
The Company has evaluated appropriate courses of corrective action, including
replacement of certain systems whose associated costs would be recorded as
assets and amortized. Accordingly, the Company does not expect the amounts
required to be expensed over the next three years to have a material effect on
its financial position or results of operations. The amount expensed in 1997 was
immaterial.
In 1998, the Company intends to open up to one new supermarket branch
and will possibly close one supermarket branch. Additionally, the Company is
converting its mainframe hardware and software systems to new
28
fully integrated systems in May 1998. These new systems will offer improved
operating efficiencies and enhanced customer service and reporting. These new
initiatives, if completed, are not expected to start contributing to profits
until 1999 and beyond so that 1998 earnings may be somewhat negatively impacted
by the initial costs of these new items.
FORWARD-LOOKING STATEMENTS
The Company has discussed its planned investments in new and modified
technology and branch locations, as well as Year 2000 computer compliance, in
this report. These are forward-looking statements.
Risks and uncertainties could cause actual future results and
investments to differ materially from those contemplated in such forward-looking
statements. These risks and uncertainties include, but are not limited to, the
following: (a) loan growth and/or loan margins may be less than expected, due to
competitive pressures in the banking industry and/or changes in the interest
rate environment; (b) general economic conditions in the Company's market area
may be less favorable than expected, resulting in, among other things, a
deterioration in credit quality; (c) costs of the Company's planned training
initiatives, product development, branch expansion and new technology and
operating systems may exceed expectations; (d) volatility in the Company's
market area due to recent mergers may have unanticipated consequences, such as
customer turnover; and (e) changes in the regulatory environment, securities
markets, general business conditions and inflation may be adverse. In addition,
as to Year 2000 compliance issues, factors that might cause material differences
include, but are not limited to, the following: (a) the availability and cost of
personnel trained in this area; (b) the ability to locate and correct all
relevant computer codes; (c) the Year 2000 compliance status of software of
third party suppliers upon which the Company's information systems rely; and (d)
similar uncertainties.
These risks and uncertainties are all difficult to predict, and most
are beyond the control of the Company's management.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. The
Company undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information with respect to quantitative and qualitative disclosures
about market risk is included in the information under Management's Discussion
and Analysis at Item 7 hereof.
29
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
ASSETS 1997 1996
Cash and due from banks $ 40,009 $ 40,194
Interest bearing deposits in banks 1,089 1,802
----------- -----------
Total cash and cash equivalents 41,098 41,996
Investment securities available for sale, at market value 321,760 236,814
Loans and leases, less allowance for loan and lease losses of
$25,122 and $22,746 in 1997 and 1996, respectively 1,097,662 1,028,334
Premises and equipment, net 20,606 20,303
Accrued interest receivable 9,937 7,633
Investments, at equity 3,646 5,199
Other assets 39,669 17,734
----------- -----------
Total assets $ 1,534,378 $ 1,358,013
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 146,772 $ 145,107
Interest bearing
(includes certificates of deposit $100,000 or greater:
1997 - $110,447; 1996 - $97,115) 968,828 835,701
----------- -----------
Total deposits 1,115,600 980,808
Securities sold under repurchase agreements and
federal funds purchased 77,225 164,996
Short-term borrowings 6,109 6,931
Long-term borrowings 155,460 76,110
Guaranteed preferred beneficial interests in Company's subordinated
debentures 40,250 --
Accrued interest payable and other liabilities 16,546 14,447
----------- -----------
Total liabilities 1,411,190 1,243,292
----------- -----------
Shareholders' equity
Preferred stock, no stated par value;
authorized 1,000,000 shares, none issued -- --
Common stock, par value $1.875 per share;
authorized 26,666,667 shares, issued and outstanding
1997 - 10,606,726; 1996 - 10,680,145, net of shares
in Treasury: 1997 - 104,623; 1996 - 31,204 20,085 20,085
Additional paid-in capital 81,663 83,707
Net unrealized gains on securities available for sale 7,531 4,398
Retained earnings 17,337 7,357
Treasury stock, at cost (3,428) (826)
----------- -----------
Total shareholders' equity 123,188 114,721
----------- -----------
Total liabilities and shareholders' equity $ 1,534,378 $ 1,358,013
=========== ===========
The accompanying notes are an integral part of these statements.
30
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Year ended December 31,
1997 1996 1995
INTEREST INCOME
Loans and leases, including fees $102,061 $ 91,098 $ 82,776
Investment securities
Taxable 13,204 12,756 13,735
Tax-exempt 3,525 2,482 2,319
Federal funds sold 143 162 114
Deposits in banks 94 60 76
-------- -------- --------
Total interest income 119,027 106,558 99,020
-------- -------- --------
INTEREST EXPENSE
Deposits 40,569 34,331 32,739
Securities sold under repurchase agreements,
and federal funds purchased 4,938 8,083 5,613
Short-term borrowings 275 193 1,078
Long-term borrowings 8,838 3,411 4,406
-------- -------- --------
Total interest expense 54,620 46,018 43,836
-------- -------- --------
Net interest income 64,407 60,540 55,184
Provision for loan and lease losses 4,575 3,900 3,200
-------- -------- --------
Net interest income after provision
for loan and lease losses 59,832 56,640 51,984
-------- -------- --------
OTHER INCOME
Trust income 2,738 2,354 1,811
Service charges on deposit accounts 4,060 3,465 2,748
Other service charges and fees 3,529 2,601 2,360
Net gains on sale of investment securities and mortgages 1,333 264 388
Equity in undistributed net earnings of affiliates 422 404 301
-------- -------- --------
Total other income 12,082 9,088 7,608
-------- -------- --------
OTHER EXPENSES
Salaries, wages and employee benefits 26,063 22,210 20,215
Net premises and equipment 7,423 6,861 6,045
FDIC assessment 101 1,125 1,633
Other operating 12,560 11,062 9,649
-------- -------- --------
Total other expenses 46,147 41,258 37,542
-------- -------- --------
Income before income taxes 25,767 24,470 22,050
Income taxes 7,151 7,548 6,668
-------- -------- --------
Net income $ 18,616 $ 16,922 $ 15,382
======== ======== ========
PER SHARE OF COMMON STOCK
Basic earnings $ 1.75 $ 1.59 $ 1.45
Diluted earnings 1.71 1.57 1.42
Dividends paid in cash 0.78 0.66 0.59
The accompanying notes are an integral part of these statements.
31
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(Dollars in thousands)
Net unrealized
gain (loss)
Additional on securities
Common paid-in available Retained Treasury
Shares Par value capital for sale earnings stock
Balance at January 1, 1995 7,135,347 $ 18,083 $ 65,492 $ (4,011) $ 8,369 $ (3,062)
Net income -- -- -- -- 15,382 --
5% stock dividend 359,733 899 8,769 -- (9,668) --
Cash dividends declared -- -- -- -- (6,435) --
Change in unrealized gain (loss) on securities
available for sale, net of taxes -- -- -- 10,590 -- --
Shares issued under stock option plan 48,554 124 775 -- -- --
Effect of treasury stock transactions 50,840 -- (537) -- -- 1,845
---------- ---------- ---------- ----------- ----------- -----------
Balance at December 31, 1995 7,594,474 19,106 74,499 6,579 7,648 (1,217)
Net income -- -- -- -- 16,922 --
5% stock dividend 380,357 951 8,986 -- (9,937) --
Cash dividends declared -- -- -- -- (7,276) --
Change in unrealized gain (loss) on securities
available for sale, net of taxes -- -- -- (2,181) -- --
Shares issued under stock option plan 11,082 28 124 -- -- --
Effect of treasury stock transactions 16,735 -- 98 -- -- 391
---------- ---------- ---------- ----------- ----------- -----------
Balance at December 31, 1996 8,002,648 20,085 83,707 4,398 7,357 (826)
Net income -- -- -- -- 18,616 --
4 for 3 stock split 2,677,497 -- -- -- -- --
Cash dividends declared -- -- -- -- (8,636) --
Change in unrealized gain (loss) on securities
available for sale, net of taxes -- -- -- 3,133 -- --
Effect of Treasury stock transaction (73,419) -- (2,044) -- -- (2,602)
---------- ---------- ---------- ----------- ----------- -----------
Balance at December 31, 1997 10,606,726 $ 20,085 $ 81,663 $ 7,531 $ 17,337 $ (3,428)
========== ========== ========== =========== =========== ===========
The accompanying notes are an integral part of this statement.
32
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year ended December 31,
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 18,616 $ 16,922 $ 15,382
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan and lease losses 4,575 3,900 3,200
Depreciation and amortization 3,616 3,375 3,032
Deferred income tax benefit (1,686) (714) (371)
Amortization of premiums and discounts on investment
securities, net 95 26 (77)
Investment securities and mortgage gains, net (1,333) (264) (388)
Mortgage loans originated for resale (22,813) (21,930) (11,460)
Sale of mortgage loans originated for resale 22,813 21,930 11,460
Changes in assets and liabilities
(Increase) decrease in accrued interest receivable (2,304) 1,234 (866)
Increase (decrease) in accrued interest payable 2,513 (1,125) 3,331
(Increase) decrease in other assets (20,877) (700) 4,542
(Increase) decrease in other liabilities (720) (43) 216
--------- --------- ---------
Net cash provided by operating activities 2,495 22,611 28,001
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 12,583 39,210 6,853
Proceeds from maturities of investment securities held to maturity -- -- 13,699
Proceeds from maturities of investment securities available for sale 21,665 26,619 4,014
Purchase of investment securities available for sale (113,270) (64,056) (14,905)
Net increase in loans (73,903) (113,535) (110,737)
Purchases of premises and equipment (3,291) (3,124) (4,560)
--------- --------- ---------
Net cash used in investing activities (156,216) (114,886) (105,636)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in interest and non-interest bearing demand
deposits and savings accounts 33,595 3,955 (27,750)
Net increase in certificates of deposit 101,197 61,963 78,000
Net (increase) decrease in securities sold under agreements to repurchase
and federal funds purchased (87,771) 34,436 88,276
Net decrease in short-term borrowings (822) (5,429) (43,597)
Net increase (decrease) in long-term borrowings 79,350 4,521 (6,188)
Issuance of subordinated debentures 40,250 -- --
Issuance of common stock under dividend reinvestment and
stock option plans -- 152 899
Effect of Treasury stock transactions (4,646) 489 1,308
Cash dividends (8,330) (7,025) (6,263)
--------- --------- ---------
Net cash provided by financing activities 152,823 93,062 84,685
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (898) 787 7,050
Cash and cash equivalents at beginning of year 41,996 41,209 34,159
--------- --------- ---------
Cash and cash equivalents at end of year $ 41,098 $ 41,996 $ 41,209
========= ========= =========
The accompanying notes are an integral part of these statements.
33
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by National Penn Bancshares, Inc. (the
"Company") and its wholly-owned subsidiaries, National Penn Bank (the
"Bank"), Investors Trust Company ("ITC"), National Penn Investment Company
and National Penn Life Insurance Company, conform with generally accepted
accounting principles and with general practice within the banking industry.
The Company, primarily through its Bank subsidiary, has been serving
residents and businesses of southeastern Pennsylvania since 1874. The Bank,
which has in excess of 50 branch locations, is a locally managed community
bank providing commercial banking products, primarily loans and deposits.
Trust services are provided through ITC. The Bank and ITC encounter vigorous
competition for market share in the communities they serve from bank holding
companies, other community banks, thrift institutions and other non-bank
financial organizations such as mutual fund companies, insurance companies
and brokerage companies.
The Company, the Bank and ITC are subject to regulations of certain state
and federal agencies. These regulatory agencies periodically examine the
Company and its subsidiaries for adherence to laws and regulations. As a
consequence, the cost of doing business may be affected.
BASIS OF FINANCIAL STATEMENT PRESENTATION AND REPORTING ENTITY
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries on a consolidated basis. Investments owned
between 20% and 50% are accounted for using the equity method.
All material intercompany balances have been eliminated.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the balance sheets, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The principal estimate that is susceptible to significant change in the
near term relates to the allowance for loan and lease losses. The evaluation
of the adequacy of the allowance for loan losses includes an analysis of the
individual loans and overall risk characteristics and size of the different
loan portfolios, and takes into consideration current economic and market
conditions, the capability of specific borrowers to pay specific loan
obligations, as well as current loan collateral values. However, actual
losses on specific loans, which also are encompassed in the analysis, may
vary from estimated losses.
34
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
INVESTMENT SECURITIES
Investments in securities are classified in one of two categories: held to
maturity and available for sale. Debt securities that the Company has the
positive intent and ability to hold to maturity are classified as held to
maturity and are reported at amortized cost. As the Company does not engage
in security trading, the balance of its debt securities and any equity
securities are classified as available for sale. Net unrealized gains and
losses for such securities, net of tax, are required to be recognized as a
separate component of shareholders' equity and excluded from determination
of net income. Gains or losses on disposition are based on the net proceeds
and cost of the securities sold, adjusted for amortization of premiums and
accretion of discounts, using the specific identification method.
LOANS AND LEASES, AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Loans and leases are stated at the amount of unpaid principal, reduced by
unearned income and an allowance for loan and lease losses. Interest on
loans is calculated based upon the principal amount outstanding. The
allowance for loan and lease losses is established through a provision for
loan and lease losses charged as an expense. Loans and leases are charged
against the allowance for loan and lease losses when management believes
that the collectibility of the principal is unlikely. The allowance is an
amount that management believes will be adequate to absorb possible losses
on existing loans and leases that may become uncollectible based on
evaluations of the collectibility of loans and leases, and prior loan and
lease loss experience. The evaluations take into consideration such factors
as changes in the nature and volume of the loan and lease portfolio, overall
portfolio quality, review of specific problem loans and leases, and current
economic conditions that may affect the borrower's ability to pay. Accrual
of interest is stopped on a loan or lease when management believes, after
considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest is
doubtful.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures," on January 1, 1995. This new standard requires that a
creditor measure impairment based on the present value of expected future
cash flows discounted at the loan's effective interest rate, except that as
a practical expedient, a creditor may measure impairment based on a loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the
creditor determines that foreclosure is probable. SFAS 114 excludes such
homogeneous loans as consumer and mortgages. The adoption of SFAS 114 on
January 1, 1995 did not have a material impact on the Company's consolidated
financial position or results of operations.
35
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The Company adopted SFAS 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by SFAS
127, "Deferral of the Effective Date of Certain Provisions of SFAS 125."
SFAS 125 applies a control-oriented, financial components approach to
financial asset transfer transactions whereby the Company: (1) recognizes
the financial and servicing assets it controls and the liabilities it has
incurred; (2) derecognizes financial assets when control has been
surrendered; and (3) derecognizes liabilities once they are extinguished.
Under SFAS 125, control is considered to have been surrendered only if: (i)
the transferred assets have been isolated from the transferor and its
creditors, even in bankruptcy or other receivership; (ii) the transferee has
the right to pledge or exchange the transferred assets or is a qualifying
special-purpose entity, and the holders of beneficial interests in that
entity have the right to pledge or exchange those interests; and (iii) the
transferor does not maintain effective control over the transferred assets
through an agreement which both entitles and obligates it to repurchase or
redeem those assets prior to maturity, or through an agreement which both
entitles it to repurchase or redeem those assets if they were not readily
obtainable elsewhere. If any of these conditions are not met, the Company
accounts for the transfer as a secured borrowing. The adoption of this
statement did not have a material impact on the Company's consolidated
financial position or results of operations.
PREMISES AND EQUIPMENT
Buildings, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization computed by the straight-line
method over the estimated useful lives of the assets.
The Company adopted SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This standard provides
guidance on when to recognize and how to measure impairment losses of
long-lived assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of. The adoption of SFAS 121 on January 1,
1996 did not have a material impact on the Company's consolidated financial
position or results of operations.
CORE DEPOSIT INTANGIBLES
As a result of a branch acquisition in 1997, the Company has recognized
approximately $776,000 of core deposit intangibles which are being amortized
on a straight-line basis over 15 years.
OTHER ASSETS
Financing costs related to the issuance of junior subordinated debentures
are being amortized over the life of the instruments and are included in
other assets.
PENSION PLAN
Net pension expense consists of service cost, interest cost, return on
pension assets and amortization of unrecognized initial net assets. The
Company accrues pension costs annually.
36
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
INCOME TAXES
The Company accounts for income taxes under the liability method of
accounting for income taxes specified by SFAS 109, "Accounting for Income
Taxes." Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense is the result of
changes in deferred tax assets and liabilities. The principal types of
differences between assets and liabilities for financial statement and tax
return purposes are allowance for loan losses, deferred loan fees, deferred
compensation and securities available for sale.
EQUITY TRANSACTIONS
On January 1, 1996, the Company adopted SFAS 123, "Accounting for
Stock-Based Compensation," which contains a fair value-based method for
valuing stock-based compensation that entities may use, which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, the standard permits entities to continue
accounting for employee stock options and similar equity instruments under
Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued
to Employees." Entities that continue to account for stock options using APB
Opinion 25 are required to make pro forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined
in SFAS 123 had been applied. The Company's employee stock option plans are
accounted for under APB Opinion 25.
STATEMENTS OF CASH FLOWS
The Company considers cash and due from banks, interest bearing deposits
in banks and federal funds sold as cash equivalents for the purposes of
reporting cash flows. Cash paid for interest and taxes is as follows (in
thousands):
Year ended December 31,
1997 1996 1995
Interest $ 52,107 $ 47,143 $ 40,505
Taxes 9,674 8,947 7,286
Non-cash transfers of investment securities from held to maturity to
available for sale amounted to $85,718,000 amortized cost and $87,708,000
fair value during the year ended December 31, 1995.
LOAN FEES AND RELATED COSTS
The Company defers and amortizes certain origination and commitment fees,
and certain direct loan origination costs over the contractual life of the
related loans. This results in an adjustment of the related loan's yield.
37
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
PROPERTY ACQUIRED THROUGH LOAN FORECLOSURE ACTIONS
Foreclosed property is recorded at the lower of cost or estimated fair
market value less costs of disposal. When property is acquired, the excess,
if any, of the loan balance over fair market value is charged to the
allowance for possible loan losses. Periodically thereafter, the asset is
reviewed for subsequent declines in the estimated fair market value.
Subsequent declines, if any, and holding costs, as well as gains and losses
on subsequent sale, are included in the consolidated statements of income.
EARNINGS PER SHARE
Earnings per share are calculated on the basis of the weighted average
number of common shares outstanding during the year. All weighted average
actual shares or per share information in the financial statements have been
adjusted retroactively for the effect of stock dividends and splits.
During 1997, the Company adopted the provisions of SFAS 128, "Earnings Per
Share," which eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share in conjunction
with the disclosure of the methodology used in computing such earnings per
share. Basic earnings per share excludes dilution and is computed by
dividing income available to common shareholders by the weighted average
common shares outstanding during the period. Diluted earnings per share
takes into account the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into
common stock. Prior periods' earnings per share calculations have been
restated to reflect the adoption of SFAS 128.
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, 1997, 1996 and 1995 was approximately $1,435,000, $1,130,000 and
$788,000, respectively.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued SFAS 130,
"Reporting Comprehensive Income," which is effective for years beginning
after December 15, 1997. This new standard requires entities presenting a
complete set of financial statements to include details of comprehensive
income. Comprehensive income consists of net income or loss for the current
period and income, expenses, gains, and losses that bypass the income
statement and are reported directly in a separate component of equity. The
adoption of SFAS 130 will not have a material effect on the presentation of
the Company's financial position or results of operations.
The FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information," which is effective for all periods beginning after
December 15, 1997. SFAS 131 requires that public business enterprises report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of
interim periods issued to shareholders. It also requires that public
business enterprises report certain information about their products and
services, the geographic areas in which they operate, and their major
customers. The adoption of SFAS 131 will not have a material effect on the
presentation of the Company's financial position or results of operations.
38
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
2. INVESTMENT SECURITIES
The Company classifies debt and marketable equity securities as securities
available for sale. Securities available for sale are measured at fair
value, with net unrealized gains and losses reported net of tax, as a
component of equity.
The amortized cost, gross unrealized gains and losses, and estimated
market values of the Company's investment securities available for sale at
December 31, 1997 and 1996 are summarized as follows (in thousands):
December 31, 1997
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
Investment securities available for sale
U.S. Treasury and U.S. Government
agencies $ 90,751 $ 2,732 $ 14 $ 93,469
State and municipal bonds 99,267 2,606 171 101,702
Other bonds 250 3 -- 253
Mortgage-backed securities 104,053 1,403 39 105,417
Marketable equity securities and other 15,854 5,065 -- 20,919
-------- -------- -------- --------
Totals $310,175 $ 11,809 $ 224 $321,760
======== ======== ======== ========
December 31, 1996
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
Investment securities available for sale
U.S. Treasury and U.S. Government
agencies $108,569 $ 3,120 $ 78 $111,611
State and municipal bonds 49,485 461 325 49,621
Other bonds 1,184 14 -- 1,198
Mortgage-backed securities 50,594 1,280 89 51,785
Marketable equity securities and other 20,216 2,383 -- 22,599
-------- -------- -------- --------
Totals $230,048 $ 7,258 $ 492 $236,814
======== ======== ======== ========
39
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
2. INVESTMENT SECURITIES - Continued
On November 15, 1995, the FASB issued a special report entitled "A Guide
to Implementation of Statement No. 115 on Accounting for Certain Investments
in Debt and Equity Securities." This guide allowed enterprises to reassess
the appropriateness of the classification of all securities held. A one-time
reassessment could be made on one day between November 15, 1995 and December
31, 1995. Reclassifications from the held-to-maturity category that result
from this one-time reassessment will not call into question the intent of an
enterprise to hold other debt securities to maturity in the future.
Based on this special report, on December 29, 1995, the Company
reclassified certain securities from the held-to-maturity category to the
available-for-sale category. The transfer was made at fair value and
resulted in an estimated net unrealized gain of $10,123,000 and an increase
in retained earnings of $6,579,000 based on current market values.
The amortized cost and estimated market value of investment securities
available for sale, by contractual maturity, at December 31, 1997 (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.
Estimated
Amortized market
cost value
Due in one year or less $ 10,868 $ 11,013
Due after one through five years 66,161 67,690
Due after five through ten years 90,786 93,046
Due after ten years 126,506 129,092
-------- --------
294,321 300,841
Marketable equity securities and other 15,854 20,919
-------- --------
$310,175 $321,760
======== ========
Proceeds from the sales of investment securities during 1997, 1996 and
1995 were $12,583,000, $39,210,000 and $6,853,000, respectively. Gross gains
realized on those sales in 1997 were $1,740,000 and losses were not material
in 1996 and 1995.
As of December 31, 1997 and 1996, investment securities with a book value
of $119,104,000 and $91,204,000, respectively, were pledged to secure public
deposits and for other purposes as provided by law. As of December 31, 1997
and 1996, the Company did not have any marketable equity securities of any
one issuer where the carrying value exceeded 10% of shareholders' equity.
40
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
3. LOANS AND LEASES
Major classifications of loans and leases are as follows (in thousands):
December 31,
1997 1996
Commercial and industrial loans and leases $ 138,521 $ 126,304
Loans for purchasing and carrying securities 87 306
Loans to financial institutions 333 453
Real estate loans
Construction and land development 57,563 42,468
Residential 563,935 564,748
Other 335,676 302,787
Loans to individuals 26,670 14,016
----------- -----------
1,122,785 1,051,082
Unearned income (1) (2)
----------- -----------
Total loans and leases, net of unearned income 1,122,784 1,051,080
Allowance for loan and lease losses (25,122) (22,746)
----------- -----------
Total loans and leases, net $ 1,097,662 $ 1,028,334
=========== ===========
Loans and leases on which the accrual of interest has been discontinued or
reduced amounted to approximately $6,810,000 and $8,723,000 at December 31,
1997 and 1996, respectively. If interest on these loans had been accrued,
interest income would have increased by approximately $331,000 and $206,000
for 1997 and 1996, 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 $2,798,000 and $3,650,000 at December 31, 1997 and
1996, respectively.
The balance of impaired loans was $4,263,000 at December 31, 1997. The
Company has identified a loan as impaired when it is probable that interest
and principal will not be collected according to the contractual terms of
the loan agreement. The impaired loan balance included $4,263,000 of
non-accrual loans. The allowance for loan loss associated with the
$4,263,000 of impaired loans was $501,000 at December 31, 1997. The average
impaired loan balance was $3,998,000 in 1997 and the income recognized on
impaired loans during 1997 was $477,000. The Company recognizes income on
impaired loans under the cash basis when the loans are both current and the
collateral on the loan is sufficient to cover the outstanding obligation to
the Company. If these factors do not exist, the Company will not recognize
income on such loans.
The balance of impaired loans was $6,859,000 at December 31, 1996. The
impaired loan balance included $6,859,000 of non-accrual loans. The
allowance for loan loss associated with the $6,859,000 of impaired loans was
$1,437,000 at December 31, 1996. The average impaired loan balance was
$6,676,000 and $7,368,000 in 1996 and 1995, respectively, and the income
recognized on impaired loans during 1996 and 1995 was $689,000 and $528,000,
respectively.
41
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
3. LOANS AND LEASES - Continued
Changes in the allowance for loan and lease losses were as follows (in
thousands):
Year ended December 31,
1997 1996 1995
Balance, beginning of year $ 22,746 $ 20,366 $ 19,310
Provision charged to operations 4,575 3,900 3,200
Loans and leases charged off (3,136) (2,345) (3,509)
Recoveries 937 825 1,365
-------- -------- --------
Balance, end of year $ 25,122 $ 22,746 $ 20,366
======== ======== ========
4. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows
(in thousands):
Estimated December 31,
useful lives 1997 1996
Land $ 2,333 $ 2,196
Buildings 5 to 40 years 13,801 13,457
Equipment 3 to 10 years 17,320 15,293
Leasehold improvements 2 to 40 years 3,621 2,892
--------- ----------
37,075 33,838
Accumulated depreciation and amortization (16,469) (13,535)
--------- ----------
$ 20,606 $ 20,303
========= ==========
Depreciation and amortization expense amounted to $2,982,000, $2,746,000
and $2,404,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
5. DEPOSITS
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was approximately $110,447,000 and $97,115,000 in
1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit
are as follows (in thousands):
1998 $ 249,072
1999 159,236
2000 51,568
2001 21,624
2002 and thereafter 24,151
-----------
$ 505,651
===========
42
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
6. SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under agreements to repurchase
generally mature within 30 days from the date of the transactions.
Short-term borrowings consist of Treasury Tax and Loan Note Options and
various other borrowings which generally have maturities of less than one
year. The details of these categories are presented below (in thousands):
Year ended December 31,
1997 1996 1995
Securities sold under repurchase agreements
and federal funds purchased
Balance at year-end $ 77,225 $164,996 $138,550
Average during the year 95,567 157,182 89,509
Maximum month-end balance 154,227 218,364 138,550
Weighted average rate during the year 5.17% 5.14% 5.93%
Rate at December 31 5.65% 6.23% 5.56%
Short-term borrowings
Balance at year-end 6,109 6,931 4,370
Average during the year 4,897 3,863 18,810
Maximum month-end balance 10,184 25,413 10,286
Weighted average rate during the year 5.62% 5.00% 7.36%
Rate at December 31 5.27% 5.25% 5.35%
The weighted average rates paid in aggregate on these borrowed funds for
1997, 1996 and 1995 were 5.19%, 5.14% and 6.18%, respectively.
7. LONG-TERM BORROWINGS
FHLB ADVANCES
At December 31, 1997, advances from the Federal Home Loan Bank ("FHLB")
totaling $155,460,000 will mature within one to six years and are reported
as long-term borrowings. The advances are collateralized by FHLB stock and
certain first mortgage loans and mortgage-backed securities. These advances
had a weighted average interest rate of 5.5%. Unused lines of credit at the
FHLB were $256,593 and $216,884 at December 31, 1997 and 1996, respectively.
Outstanding borrowings mature as follows (in thousands):
1998 $ 11,979
1999 631
2000 --
2001 2,500
2002 and thereafter 140,350
----------
$ 155,460
==========
43
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
7. LONG-TERM BORROWINGS - Continued
SUBORDINATED DEBENTURES
On May 22, 1997, the Company issued $41,500,000 of 9% junior subordinated
deferrable interest debentures (the "debentures") to NPB Capital Trust (the
"Trust"), a Delaware business trust, in which the Company owns all of the
common equity. The debentures are the sole asset of the Trust. The Trust
issued $40,250,000 of preferred securities to investors. The Company's
obligations under the debentures and related documents, taken together,
constitute a fully and unconditional guarantee by the Company of the Trust's
obligations under the preferred securities. Although the debentures will be
treated as debt of the Company, they currently qualify for Tier 1 capital
treatment in an amount up to 25% of total Tier 1 capital, subject to the 25%
limitation under risk-based capital guidelines of the Federal Reserve. The
preferred securities are redeemable by the Company on or after June 20,
2002, or earlier in the event the deduction of related interest for federal
income taxes is prohibited, treatment as Tier 1 capital is no longer
permitted, or certain other contingencies arise. The preferred securities
must be redeemed upon maturity of the debentures in 2027.
8. PENSION AND CAPITAL ACCUMULATION PLANS
The Company has a non-contributory defined benefit pension plan covering
substantially all employees. The Company-sponsored pension plan provides
retirement benefits under pension trust agreements and under contracts with
insurance companies. The benefits are based on years of service and the
employee's compensation during the highest five consecutive years during the
last 10 years of employment. The Company's policy is to fund pension costs
allowable for income tax purposes.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets (in thousands):
December 31,
1997 1996
Actuarial present value of benefit obligations
Accumulated benefit obligation, including vested benefits of
$5,765,000 and $4,576,000 in 1997 and 1996, respectively $(6,010) $(4,749)
======= =======
Projected benefit obligation for service rendered to date $(8,778) $(7,140)
Plan assets at fair value 9,360 7,989
------- -------
Plan assets in excess of projected benefit obligation 582 849
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions (377) (311)
Unrecognized net obligation at January 1, 1987 being recognized
over 17 years 656 764
Unrecognized prior service costs (340) (382)
------- -------
Prepaid pension cost $ 521 $ 920
======= =======
44
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
8. PENSION AND CAPITAL ACCUMULATION PLANS - Continued
Net pension cost included the following components (in thousands):
Year ended December 31,
1997 1996 1995
Service cost - benefits earned during the period $ 574 $ 507 $ 332
Interest cost on projected benefit obligation 512 464 400
Actual return on plan assets (1,542) (854) (709)
Net amortization and deferral 955 410 322
------- ------- -------
Net periodic pension cost $ 499 $ 527 $ 345
======= ======= =======
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 6.75% and 4.75%, respectively, in 1997; 7.25% and
4.75%, respectively, in 1996; and 7.25% and 4.75%, respectively, in 1995.
The expected long-term rate of return on assets was 8.25% for 1997, 1996 and
1995.
The Company has a capital accumulation and salary reduction plan under
Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the
plan, all employees are eligible to contribute from 3% to a maximum of 10%
of their annual salary, with the Company matching 50% of any contribution
between 3% and 7%. Matching contributions to the plan were $441,000,
$307,000 and $303,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
9. INCOME TAXES
The components of the income tax expense included in the consolidated
statements of income are as follows (in thousands):
Year ended December 31,
1997 1996 1995
Income tax expense
Current $ 6,493 $ 8,262 $ 7,039
Deferred federal benefit (683) (714) (371)
------- ------- -------
5,810 7,548 6,668
Additional paid-in capital from benefit
of stock options exercised 1,341 -- --
------- ------- -------
Applicable income tax expense $ 7,151 $ 7,548 $ 6,668
======= ======= =======
45
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
9. 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,
1997 1996 1995
Computed tax expense at statutory rate $ 9,017 $ 8,565 $ 7,718
Decrease in taxes resulting from
Tax-exempt loan and investment income (1,566) (1,221) (1,076)
Stock options exercised -- (46) (196)
Other, net (300) 250 222
------- ------- -------
Applicable income tax expense $ 7,151 $ 7,548 $ 6,668
======= ======= =======
Deferred tax assets and liabilities consist of the following (in
thousands):
1997 1996 1995
Deferred tax assets
Deferred loan fees $ 610 $ 753 $ 896
Loan loss allowance 8,300 7,674 7,109
Deferred compensation 667 610 518
Loan sales valuation 120 120 120
------ ------ ------
9,697 9,157 8,643
------ ------ ------
Deferred tax liability
Pension 240 136 64
Bad debt reserve recapture 40 285 529
Partnership investments 221 195 168
Acquisition adjustments 55 55 81
Mark-to-market accounting -- 28 57
Securities available for sale 4,055 2,368 3,543
Rehab credit adjustment 44 44 44
------ ------ ------
4,655 3,111 4,486
------ ------ ------
Net deferred tax asset $5,042 $6,046 $4,157
====== ====== ======
10. SHAREHOLDERS' EQUITY
In August 1997, the Company amended its Articles of Incorporation whereby
the number of authorized common shares was increased from 20,000,000 shares
with a par value of $2.50 to 26,666,667 shares with a par value of $1.875.
In conjunction with this amendment, the Company declared a 4 for 3 stock
split where 4 common shares of $1.875 par value stock were received in
exchange for 3 common shares of $2.50 par value stock.
40
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
11. EARNINGS PER SHARE
The Company's calculation of earnings per share in accordance with SFAS
128 is as follows (in thousands, except for per share amounts):
Year ended December 31, 1997
Income Shares Per share
(numerator) (denominator) amount
Basic earnings per share
Net income available to common stockholders $18,616 10,662 $ 1.75
Effect of dilutive securities
Options -- 231 --
------- ------- --------
Diluted earnings per share
Net income available to common stockholders
plus assumed conversions $18,616 10,893 $ 1.71
======= ======= ========
Options to purchase 190,015 shares of common stock at $32.150 per share
were outstanding during 1997. They were not included in the computation of
diluted earnings per share because the option exercise price was greater
than the average market price.
Year ended December 31, 1996
Income Shares Per share
(numerator) (denominator) amount
Basic earnings per share
Net income available to common stockholders $16,922 10,671 $ 1.59
Effect of dilutive securities
Options -- 110 --
------- ------- --------
Diluted earnings per share
Net income available to common stockholders
plus assumed conversions $16,922 10,781 $ 1.57
======= ======= ========
Options to purchase 790,882 shares of common stock from $18.79 to $25.21
per share were outstanding during 1996. They were not included in the
computation of diluted earnings per share because the option exercise price
was greater than the average market price.
47
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
11. EARNINGS PER SHARE - Continued
Year ended December 31, 1995
Income Shares Per share
(numerator) (denominator) amount
Basic earnings per share
Net income available to common stockholders $15,382 10,605 $ 1.45
Effect of dilutive securities
Options -- 190 --
------- ------- --------
Diluted earnings per share
Net income available to common stockholders
plus assumed conversions $15,382 10,795 $ 1.42
======= ======= ========
12. COMMITMENTS AND CONTINGENT LIABILITIES
LEASE COMMITMENTS
Future minimum payments under non-cancelable operating leases are due as
follows (in thousands):
Year ending December 31,
1998 $ 1,386
1999 1,352
2000 1,260
2001 1,072
2002 780
Thereafter 2,169
-----------
$ 8,019
===========
The total rental expense was approximately $1,651,000, $1,458,000 and
$1,182,000 in 1997, 1996 and 1995, respectively.
OTHER
In the normal course of business, the Company, the Bank and ITC have been
named as defendants in several lawsuits. Although the ultimate outcome of
these suits cannot be ascertained at this time, it is the opinion of
management that the resolution of such suits will not have a material
adverse effect on the financial position or results of operations of the
Company.
48
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit and interest rate swaps. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The contract or
notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of these instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance-sheet instruments. For interest rate swaps, the contract or
notional amounts do not represent exposure to credit loss. The Company
controls the credit risk of its interest rate swap agreements through credit
approvals, limits and monitoring procedures.
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, 1997 and 1996 are as follows (in
thousands):
1997 1996
Financial instruments whose contract amounts represent
credit risk
Commitments to extend credit $ 266,049 $ 138,830
Standby letters of credit 12,890 10,666
Financial instruments whose notional or contract amounts
exceed the amount of credit risk
Interest rate swap agreements 80,000 90,000
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, 1997 varies up to 100%; the average amount collateralized is 74%.
49
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
13. 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 1997, the
interest rate swaps had the effect of increasing the Company's net interest
income by $983,000 over what would have been realized had the Company not
entered into the swap agreements.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the estimated fair value of an entity's assets and
liabilities considered to be financial instruments. For the bank, as for
most financial institutions, the majority of its assets and liabilities are
considered to be financial instruments as defined in SFAS 107. However, many
of such instruments lack an available trading market as characterized by a
willing buyer and willing seller engaging in an exchange transaction. Also,
it is the Company's general practice and intent to hold its financial
instruments to maturity and to not engage in trading or sales activities.
Therefore, the Company had to use significant estimations and present value
calculations to prepare this disclosure.
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, 1997 and
1996 were as follows (in thousands):
Fair value of loans and deposits with floating interest rates is generally
presumed to approximate the recorded carrying amounts.
50
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
14. FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Financial instruments actively traded in a secondary market have been
valued using quoted available market prices.
December 31, 1997
Carrying Estimated fair
amount value
Cash and cash equivalents $ 41,098 $ 41,098
Investment securities 321,760 321,760
December 31, 1996
Carrying Estimated fair
amount value
Cash and cash equivalents $ 41,996 $ 41,996
Investment securities 236,814 236,814
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, 1997
Carrying Estimated fair
amount value
Deposits with stated maturities $ 614,033 $ 616,655
Short-term borrowings 83,334 83,334
Long-term borrowings 155,460 155,234
Subordinated debentures 40,250 42,263
December 31, 1996
Carrying Estimated fair
amount value
Deposits with stated maturities $ 512,835 $ 513,902
Short-term borrowings 171,927 171,927
Long-term borrowings 76,110 77,169
Fair value of financial instrument liabilities with no stated maturities
has been estimated to equal the carrying amount (the amount payable on
demand), totaling $501,567,000 for 1997 and $467,973,000 for 1996.
51
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
14. FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
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, 1997
Carrying Estimated fair
amount value
Net loans $ 1,097,662 $ 1,198,973
December 31, 1996
Carrying Estimated fair
amount value
Net loans $ 1,028,334 $ 1,066,594
There is no material difference between the carrying amount and estimated
fair value of off-balance sheet items which total $358,939,000 and
$239,496,000 at year-end 1997 and 1996, respectively, which are primarily
comprised of interest rate swap agreements and unfunded loan commitments
which are generally priced at market at the time of funding.
The Company's remaining assets and liabilities are not considered
financial instruments.
15. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Company grants commercial and residential loans to customers
throughout southeastern Pennsylvania. Although the Company has a diversified
loan portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the economic sector.
16. RELATED PARTY TRANSACTIONS
Certain directors and officers of the Company and the Bank, their
immediate families, and the companies with which they are associated, have
had banking transactions with the Bank in the ordinary course of business.
All loans and commitments included in such transactions were made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons
and, in the opinion of management of the Company, do not involve more than a
normal risk of collectibility or present other unfavorable features. The
aggregate dollar amount of these loans was $3,904,000 and $3,962,000 at
December 31, 1997 and 1996, respectively. During 1997, $4,194,000 of new
loans were made and repayments totaled $4,252,000.
52
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
17. EQUITY TRANSACTIONS
The Company has an employee stock option plan for certain key employees
accounted for under APB Opinion 25 and related interpretations. A total of
1,787,960 shares of common stock were made available for options granted
through February 24, 1997. The options granted under this plan are subject
to a vesting schedule commencing at two years and expire ten years and one
month from the date of issue. On April 22, 1997, the Company's shareholders
approved the adoption of the Officers' and Key Employees' Stock Compensation
Plan as a replacement for the Stock Option Plan upon expiration of its
10-year term. A total of 1,000,000 shares of common stock have been made
available for options or restricted stock to be granted through December 17,
2006. The options granted under this plan will vest over a five-year period,
in 20% increments on each successive anniversary of the date of grant. The
Company also has a non-employee director stock option plan. Under this plan,
a total of 220,498 shares of common stock have been made available for
options to be granted through January 3, 2004. The options granted under
this plan fully vest after two years and expire ten years from the date of
issue. Under all plans, the option price per share is equivalent to 100% of
the fair market value on the date the options were granted as determined
pursuant to the plan. Accordingly, no compensation cost has been recognized
for the plans. The number of unoptioned shares available for granting
totaled 739,921 at the beginning of the year and 918,051 at the end of 1997.
Had compensation cost for the plans been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS
123, the Company's net income and earnings per share of common stock would
have been reduced to the pro forma amounts indicated below.
1997 1996 1995
Net income As reported $ 18,616 $ 16,922 $ 15,382
Pro forma 18,335 16,626 15,196
Earnings per share of common stock - basic As reported 1.75 1.59 1.45
Pro forma 1.72 1.56 1.43
Earnings per share of common stock - diluted As reported 1.71 1.57 1.42
Pro forma 1.68 1.54 1.40
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 1997, 1996 and 1995, respectively:
dividend yield of 2.55%, 3.50% and 2.54%; expected volatility of 31.5%,
13.0% and 8.2%; risk-free interest rates for each plan of 6.43% and 5.89%
for 1997, 5.66% and 6.38% for 1996 and 7.75% and 6.36% for 1995; and
expected lives of 6.95 years and 9.17 years for each plan in 1997, and 9.3
years for 1996 and 1995.
53
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
17. EQUITY TRANSACTIONS - Continued
A summary of the status of the Company's fixed option plans as of December
31, 1997, 1996 and 1995 and changes during the years ending on those dates
is presented below:
1997 1996 1995
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding, beginning of year 1,253,383 $ 17.48 1,067,597 $ 16.87 576,649 $ 21.74
Effect of stock dividends
and splits* -- -- -- -- 341,934 --
Granted 195,887 31.78 212,475 19.92 204,900 26.75
Exercised (237,238) 13.00 (15,159) 10.01 (50,118) 19.44
Forfeited (35,278) 19.75 (11,530) 16.41 (5,768) 22.13
---------- --------- ---------- --------- ---------- ---------
Outstanding, end of year 1,176,754 $ 20.69 1,253,383 $ 17.48 1,067,597 $ 16.87
========== ========= ========== ========= ========== =========
Options exercisable at year-end 358,502 365,208 136,882
========== ========== ==========
Weighted average fair value of
options granted during the year $ 11.70 $ 4.11 $ 6.33
========= ========= =========
<FN>
* The 1997 and 1996 balances have been restated to include the effects of
stock dividends and splits; therefore, separate disclosure is not required.
</FN>
The following table summarizes information about nonqualified options
outstanding at December 31, 1997:
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 1997 life (years) exercise price 1997 exercise price
$ 6.43 - $ 9.64 20,126 2.3 $ 8.92 20,126 $ 8.92
9.65 - 12.85 173,007 4.1 11.58 137,922 11.35
16.06 - 19.28 440,328 7.0 18.54 125,346 17.58
19.29 - 22.49 190,475 9.0 19.99 734 20.53
22.50 - 25.70 162,803 5.7 25.13 74,374 25.13
28.91 - 32.13 190,015 10.0 32.13 -- --
54
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
18. 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,
1997 1996
Assets
Cash $ 39 $ 33
Investment in Company subsidiary, at equity 108,920 97,106
Investment in other subsidiaries, at equity 54,531 17,708
Other assets 1,260 20
-------- --------
$164,750 $114,867
======== ========
Liabilities and Shareholders' Equity
Guaranteed preferred beneficial interests in Company's
subordinated debentures $ 41,495 $ 146
Other liabilities 67 --
Shareholders' equity 123,188 114,721
-------- --------
$164,750 $114,867
======== ========
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
1997 1996 1995
Income
Equity in undistributed net earnings of subsidiaries $ 10,994 $ 9,630 $ 8,849
Dividends from Company subsidiary 8,640 7,277 6,435
Interest and other income 766 129 278
-------- -------- --------
20,400 17,036 15,562
Expenses
Other operating 2,332 106 127
-------- -------- --------
Income before income tax (benefit) expense 18,068 16,930 15,435
Income tax (benefit) expense (548) 8 53
-------- -------- --------
Net income $ 18,616 $ 16,922 $ 15,382
======== ======== ========
55
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
18. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
1997 1996 1995
Cash flows from operating activities
Net income $ 18,616 $ 16,922 $ 15,382
Equity in undistributed net earnings of subsidiaries (10,994) (9,630) (8,849)
(Increase) decrease in other assets (1,240) (14) 159
(Decrease) increase in other liabilities (79) 85 (11)
-------- -------- --------
Net cash provided by operating activities 6,303 7,363 6,681
-------- -------- --------
Cash flows from investing activities
Additional investment in subsidiaries, at equity (34,506) (744) (2,480)
-------- -------- --------
Net cash used in investing activities (34,506) (744) (2,480)
-------- -------- --------
Cash flows from financing activities
Proceeds from issuance of long-term debt 41,495 -- --
Proceeds from issuance of stock -- 152 899
Effect of treasury stock transactions (4,646) 489 1,308
Cash dividends (8,640) (7,277) (6,435)
-------- -------- --------
Net cash provided by (used in) financing activities 28,209 (6,636) (4,228)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 6 (17) (27)
Cash and cash equivalents at beginning of year 33 50 77
-------- -------- --------
Cash and cash equivalents at end of year $ 39 $ 33 $ 50
======== ======== ========
19. REGULATORY RESTRICTIONS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of those balances for the year ended
December 31, 1997 was approximately $3,772,000.
Dividends are paid by the Company from its assets which are mainly
provided by dividends from the Bank. However, certain restrictions exist
regarding the ability of the Bank to transfer funds to the Company in the
form of cash dividends, loans or advances. Under the restrictions in 1998,
the Bank, without prior approval of bank regulators, can declare dividends
to the Company totaling $17,740,000 plus additional amounts equal to the net
earnings of the Bank for the period January 1, 1998 through the date of
declaration less dividends previously paid in 1998.
56
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
19. REGULATORY RESTRICTIONS - Continued
The Company is required to maintain minimum amounts of Tier 1 and total
capital to "risk-weighted" assets and a minimum Tier 1 leverage ratio, as
defined by banking regulators. At December 31, 1997, the Company was
required to have minimum Tier 1 and total capital ratios of 4% and 8%,
respectively, and a minimum Tier 1 leverage ratio of 4%. In order for the
Company to be considered "well capitalized," as defined by banking
regulators, the bank must have minimum Tier 1 and total capital ratios of 6%
and 10%, respectively, and a minimum Tier 1 leverage ratio of 5%. The bank's
actual Tier 1 and total capital ratios at December 31, 1997 were 13.49% and
14.91%, respectively, and the bank's Tier 1 leverage ratio was 9.84%. The
Company's management believes that, under current regulations, the bank will
continue to meet its minimum capital requirements in the foreseeable future.
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, 1997
Total capital (to risk-weighted
assets)
National Penn Bancshares,
Inc. $ 162,787 14.91% $ 87,360 8.00% $ -- --%
National Penn Bank 111,450 10.32 86,399 8.00 107,999 10.00
Tier I capital (to risk-weighted
assets)
National Penn Bancshares,
Inc. 147,297 13.49 43,679 4.00 -- --
National Penn Bank 97,807 9.06 43,200 4.00 64,799 6.00
Tier I capital (to average assets)
National Penn Bancshares,
Inc. 147,297 9.84 59,876 4.00 -- --
National Penn Bank 97,807 6.60 59,263 4.00 74,079 5.00
57
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
19. REGULATORY RESTRICTIONS - Continued
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996
Total capital (to risk-weighted
assets)
National Penn Bancshares,
Inc. $ 115,653 12.09% $ 76,551 8.00% $ -- --%
National Penn Bank 99,539 10.47 76,220 8.00 95,025 10.00
Tier I capital (to risk-weighted
assets)
National Penn Bancshares,
Inc. 103,559 10.82 38,276 4.00 -- --
National Penn Bank 87,527 9.21 38,010 4.00 57,013 6.00
Tier I capital (to average assets)
National Penn Bancshares,
Inc. 103,559 7.83 52,883 4.00 -- --
National Penn Bank 87,527 6.67 52,500 4.00 65,626 5.00
20. SHAREHOLDER RIGHTS PLAN
The Company adopted a Shareholder Rights Plan (the "Rights Plan") in 1989
to protect shareholders from attempts to acquire control of the Company at
an inadequate price. Under the Rights Plan, the Company distributed a
dividend of one right to purchase a unit of preferred stock on each
outstanding common share of the Company. The rights are not currently
exercisable or transferable, and no separate certificates evidencing such
rights will be distributed, unless certain events occur. The rights expire
on August 22, 1999.
After the rights become exercisable, under certain circumstances, the
rights (other than rights held by a 19.9% beneficial owner or an "adverse
person") will entitle the holders to purchase either the Company's common
shares or the common shares of the potential acquirer at a substantially
reduced price.
The Company is generally entitled to redeem the rights at $0.001 per right
at any time until the 10th business day following a public announcement that
a 19.9% position has been acquired. Rights are not redeemable following an
"adverse person" determination.
The Rights Plan was not adopted in response to any specific effort to
acquire control of the Company. The issuance of rights had no dilutive
effect, did not affect the Company's reported earnings per share, and was
not taxable to the Company or its shareholders.
58
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1997 and 1996
21. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the
Company, which, in the opinion of management, reflects all adjustments
(comprising only normal recurring accruals) necessary for a fair
presentation. Net income per share of common stock has been restated to
retroactively reflect certain stock dividends.
(Dollars in thousands, except per share data)
Three months ended
1997 Dec. 31 Sept. 30 June 30 March 31
Interest income $ 31,485 $ 30,511 $ 28,863 $28,168
============== ============= =============== =======
Net interest income $ 16,433 $ 16,263 $ 16,012 $15,699
============== ============= =============== =======
Provision for loan and lease losses $ 975 $ 1,200 $ 1,200 $ 1,200
============== ============= =============== =======
Net gains (losses) on sale of securities and
mortgages $ (129) $ 620 $ (74) $ 916
============== ============= =============== =======
Income before income taxes $ 6,109 $ 6,710 $ 6,372 $ 6,576
============== ============= =============== =======
Net income $ 4,978 $ 4,719 $ 4,385 $ 4,534
============== ============= =============== =======
Earnings per share of common stock - basic $ 0.47 $ 0.45 $ 0.41 $ 0.42
============== ============= =============== =======
Earnings per share of common stock - diluted $ 0.45 $ 0.44 $ 0.40 $ 0.42
============== ============= =============== =======
Three months ended
1996 Dec. 31 Sept. 30 June 30 March 31
Interest income $ 27,821 $ 27,151 $ 25,867 $ 25,719
============== ============== =============== ========
Net interest income $ 15,953 $ 15,424 $ 14,713 $ 14,450
============== ============== =============== ========
Provision for loan and lease losses $ 975 $ 975 $ 975 $ 975
============== ============== =============== ========
Net gains (losses) on sale of securities and
mortgages $ 336 $ (57) $ 88 $ (103)
============== ============== =============== ========
Income before income taxes $ 6,565 $ 6,158 $ 5,776 $ 5,971
============== ============== =============== ========
Net income $ 4,528 $ 4,286 $ 3,993 $ 4,115
============== ============== =============== ========
Earnings per share of common stock - basic $ 0.42 $ 0.40 $ 0.38 $ 0.39
============== ============== =============== ========
Earnings per share of common stock - diluted $ 0.42 $ 0.40 $ 0.37 $ 0.38
============== ============== =============== ========
(This space intentionally left blank)
59
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, 1997 and 1996, 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, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of National Penn
Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
January 16, 1998
60
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to executive officers of the Company is
included under Item 4A in Part I hereof. The information required by this item
relating to directors of the Company and compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated herein by reference to pages 2,
3, and 16 of the Company's definitive Proxy Statement to be used in connection
with the Company's 1998 Annual Meeting of Shareholders (the "Proxy Statement").
Item 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference to pages 8 through 15 of the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by
reference to pages 3, 4, 15 and 16 of the Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by
reference to page 15 of the Proxy Statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The following consolidated financial statements are included
in Part II, Item 8 hereof:
National Penn Bancshares, Inc., and Subsidiaries.
Consolidated Balance Sheets.
Consolidated Statements of Income.
Consolidated Statement of Changes in Shareholders' Equity.
Consolidated Statements of Cash Flows.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
Financial statement schedules are omitted because the
required information is either not applicable, not
required, or is shown in the respective financial
statements or in the notes thereto.
61
3. Exhibits.
2.1 Agreement dated June 25, 1993, between National Penn
Bancshares, Inc., and Community Financial Bancorp, Inc.
(Incorporated by reference to Exhibit 28.1 to the Company's
Current Report on 8-K dated June 25, 1993.)
2.2 Agreement dated December 6, 1993, between National Penn
Bancshares, Inc., and Central Pennsylvania Savings
Association, F.A. relating to East Central branches.
(Incorporated by reference to Exhibit 28.3 to the Company's
Current Report on 8-K dated December 1, 1993.)
2.3 Agreement dated December 6, 1993, between National Penn
Bancshares, Inc., and Central Pennsylvania Savings
Association, F.A. relating to South Eastern branches.
(Incorporated by reference to Exhibit 28.4 to the Company's
Current Report on 8-K dated December 1, 1993.)
3.1 Articles of incorporation, as amended, of National Penn
Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1997.)
3.2 Bylaws, as amended, of National Penn Bancshares, Inc.
(Incorporated by reference to Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996.)
10.1 National Penn Bancshares, Inc. Amended and Restated Dividend
Reinvestment Plan. (Incorporated by reference to Exhibit 10.1
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.)
10.2 National Penn Bancshares, Inc. Pension Plan. *(Incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992.)
10.3 Amendment No. 1 to National Penn Bancshares, Inc. Pension
Plan.* (Incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992.)
10.4 National Penn Bancshares, Inc. Capital Accumulation Plan.*
(Incorporated by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1992.)
10.5 National Penn Bancshares, Inc. Capital Accumulation Plan
Amendment 1995-1.* (Incorporated by reference to Exhibit 10.5
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.)
10.6 National Penn Bancshares, Inc. Capital Accumulation Plan
Amendment 1996-1.* (Incorporated by reference to Exhibit 10.6
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.)
10.7 National Penn Bancshares, Inc. Capital Accumulation Plan
Amendment 1997 -1.* (Incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1997.)
10.8 National Penn Bancshares, Inc. Capital Accumulation Plan
Amendment 1998 - 1.*
62
10.9 National Penn Bancshares, Inc. Amended and Restated Executive
Incentive Plan.*
10.10 National Penn Bancshares, Inc. Executive Incentive
Plan/Schedules.*
10.11 National Penn Bancshares, Inc. Amended and Restated Stock
Option Plan.* (Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement No. 33-87654 on Form S-8 as
filed on December 22, 1995.)
10.12 National Penn Bancshares, Inc. Officers' and Key Employees'
Stock Compensation Plan.* (Incorporated by reference to
Exhibit 10.10 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.)
10.13 National Penn Bancshares, Inc. Directors' Fee Plan.*
(Incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996.)
10.14 National Penn Bancshares, Inc. Non-Employee Directors' Stock
Option Plan.* (Incorporated by reference to Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.)
10.15 National Penn Bancshares, Inc. Employee Stock Purchase Plan.*
(Incorporated by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996.)
10.16 Executive Supplemental Benefit Agreement dated December 27,
1989, among National Penn Bancshares, Inc., National Bank of
Boyertown, and Lawrence T. Jilk, Jr.* (Incorporated by
reference to Exhibit 10.7 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.)
10.17 Amendatory Agreement dated February 23, 1994, between National
Penn Bancshares, Inc., National Penn Bank, and Lawrence T.
Jilk, Jr.* (Incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.)
10.18 Executive Supplemental Benefit Agreement dated December 27,
1989, among National Penn Bancshares, Inc., National Bank of
Boyertown, and Wayne R. Weidner.* (Incorporated by reference
to Exhibit 10.9 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993.)
10.19 Amendatory Agreement dated February 23, 1994, among National
Penn Bancshares, Inc., National Penn Bank and Wayne R.
Weidner.* (Incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.)
10.20 Executive Agreement dated July 23, 1997, among National Penn
Bancshares, Inc., National Penn Bank, and Gary L. Rhoads.*
(Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1997.)
10.21 Executive Agreement dated July 23, 1997, among National Penn
Bancshares, Inc., National Penn Bank, and Sandra L. Spayd.*
(Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1997.)
63
10.22 Executive Agreement dated September 24, 1997, among National
Penn Bancshares, Inc., National Penn Bank, and Garry D. Koch.*
(Incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1997.)
10.23 Stock Purchase Agreement dated July 25, 1988, between National
Penn Bancshares, Inc., and First Capitol Bank. (Incorporated
by reference to Exhibit 10.16 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993.)
10.24 Stock Purchase Warrant dated November 18, 1988, issued to
National Penn Investment Company by First Capitol Bank.
(Incorporated by reference to Exhibit 10.17 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1993.)
10.25 Stock Purchase Agreement dated April 20, 1989, between
National Penn Bancshares, Inc. and Pennsylvania State Bank.
(Incorporated by reference to Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1993.)
10.26 Stock Purchase Warrant dated July 3, 1989, issued to National
Penn Investment Company by Pennsylvania State
Bank.(Incorporated by reference to Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.)
10.27 Rights Agreement dated August 23, 1989, between National Penn
Bancshares, Inc. and National Bank of Boyertown, as Rights
Agent. (Incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement No. 33-87654 on Form S-8 as
filed on December 22, 1994.)
10.28 Assignment and Assumption Agreement dated January 31, 1992,
between Sellersville Interim Federal Savings and Loan
Association and National Bank of Boyertown. (Incorporated by
reference to Exhibit 10.26 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.)
21 Subsidiaries of the Registrant.
23 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule.
27.1 Restated Financial Data Schedule (December 31, 1996)
27.2 Restated Financial Data Schedule (December 31, 1995)
27.3 Restated Financial Data Schedule (March 31, 1997)
27.4 Restated Financial Data Schedule (June 30, 1997)
27.5 Restated Financial Data Schedule (September 30, 1997)
27.6 Restated Financial Data Schedule (March 31, 1996)
27.7 Restated Financial Data Schedule (June 30, 1996)
27.8 Restated Financial Data Schedule (September 30, 1996)
99 Forward-Looking Statements.
64
* Denotes a compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Registrant filed one Report on Form 8-K during
fourth quarter 1997. This report was dated November
21, 1997, and reported under Item 5, Other Events,
the closing of a branch purchase and assumption
transaction. No financial statements were included in
this report.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONAL PENN BANCSHARES, INC.
(Registrant)
March 25, 1998 By /s/ Lawrence T. Jilk, Jr.
-------------------------
Lawrence T. Jilk, Jr.
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated:
Signatures Title
/s/ John H. Body Director March 25, 1998
- -----------------------------
John H. Body
Director
- -----------------------------
J. Ralph Borneman, Jr.
/s/ Frederick H. Gaige Director March 25, 1998
- -----------------------------
Frederick H. Gaige
/s/ John J. Dau Director March 25, 1998
- -----------------------------
John J. Dau
/s/ Lawrence T. Jilk, Jr.
- ------------------------------ Director, President, and Chief March 25, 1998
Lawrence T. Jilk, Jr. Executive Officer (Principal
Executive Officer)
/s/ Patricia L. Langiotti Director March 25, 1998
- -----------------------------
Patricia L. Langiotti
/s/ Kenneth A. Longacre Director March 25, 1998
- -----------------------------
Kenneth A. Longacre
66
/s/ C. Robert Roth Director March 25, 1998
- -----------------------------
C. Robert Roth
/s/ Harold C. Wegman, D.D.S. Director March 25, 1998
- -----------------------------
Harold C. Wegman, D.D.S.
/s/ Wayne R. Weidner
- ----------------------------- Director and Executive March 25, 1998
Wayne R. Weidner Vice President
/s/ Gary L. Rhoads
- ------------------------------ Treasurer (Principal Financial March 25, 1998
Gary L. Rhoads Accounting Officer)
67