EXHIBIT 99.1
[Beard & Company Letterhead]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Elverson National Bank
Elverson, Pennsylvania
We have audited the accompanying consolidated balance sheets of
Elverson National Bank and its subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Bank'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 audits
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 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Elverson National Bank and its subsidiaries as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ Beard & Company, Inc.
Reading, Pennsylvania
January 25, 1999
ELVERSON NATIONAL BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
(Dollars In Thousands, Except Per Share Data) 1998 1997
- ----------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 8,450 $ 10,778
Interest-bearing deposits with banks 7,250 6,033
Federal funds sold -- 3,600
Bankers acceptance notes -- 1,899
---------- ----------
Total cash and cash equivalents 15,700 22,310
Term funds sold 15,000 --
Securities available for sale 101,303 33,465
Securities held to maturity, fair value 1998 $ -0-; 1997 $16,361 -- 16,239
Loans receivable, net of allowance for loan losses 1998 $ 3,489;
1997 $3,345 184,299 194,939
Premises and equipment, net 4,359 4,504
Accrued interest receivable 2,173 1,554
Other assets 1,820 1,827
---------- ----------
Total Assets $ 324,654 $ 274,838
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 47,582 $ 41,066
Interest bearing 217,659 196,857
---------- ----------
Total deposits 265,241 237,923
Securities sold under agreements to repurchase 13,722 8,963
Borrowed funds 15,223 525
Accrued interest payable 1,272 1,019
Other liabilities 878 668
---------- ----------
Total Liabilities 296,336 249,098
---------- ----------
Stockholders' Equity
Common stock, par value $1.25 per share; authorized 4,000,000
shares; issued and outstanding shares 1998 2,602,117 shares;
1997 2,584,615 shares 3,253 3,231
Surplus 17,681 17,298
Retained earnings 6,914 5,094
Accumulated other comprehensive income 470 117
---------- ----------
Total Stockholders' Equity 28,318 25,740
---------- ----------
Total Liabilities and Stockholders' Equity $ 324,654 $ 274,838
========== ==========
See Accompanying Notes to Consolidated Financial Statements.
2
ELVERSON NATIONAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
(Dollars In Thousands, Except Per Share Data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
Interest Income:
Loans receivable, including fees $17,648 $17,681 $15,161
Securities:
Taxable 2,766 1,900 2,106
Tax-exempt 1,216 483 446
Other 779 413 400
------- ------- -------
Total interest income 22,409 20,477 18,113
------- ------- -------
Interest Expense:
Deposits 9,209 8,089 7,344
Securities sold under agreements to repurchase 377 528 514
Borrowed funds 257 10 38
------- ------- -------
Total interest expense 9,843 8,627 7,896
------- ------- -------
Net Interest Income 12,566 11,850 10,217
Provision for loan losses 860 988 600
------- ------- -------
Net Interest Income After Provision for Loan Losses 11,706 10,862 9,617
------- ------- -------
Other Income:
Customer service fees 1,010 967 743
Mortgage banking activities 530 421 245
Net realized gains on sales of securities 17 19 --
Other 167 125 77
------- ------- -------
Total other income 1,724 1,532 1,065
------- ------- -------
Other Expenses:
Salaries and employee benefits 5,003 4,336 3,657
Occupancy 917 780 715
Equipment 827 704 671
Merger costs 786 -- --
Other 2,416 2,450 2,289
------- ------- -------
Total other expenses 9,949 8,270 7,332
------- ------- -------
Income Before Income Taxes 3,481 4,124 3,350
Federal income taxes 1,046 1,193 983
------- ------- -------
Net Income $ 2,435 $ 2,931 $ 2,367
======= ======= =======
Basic and Diluted Earnings Per Share $ 0.94 $ 1.14 $ 0.93
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
3
ELVERSON NATIONAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
(Dollars In Thousands, Except Share Data)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other Total
Common Retained Comprehensive Stockholders'
Shares Stock Surplus Earnings Income Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 2,411,952 $ 3,015 $ 13,546 $ 3,648 $ 73 $ 20,282
------------
Comprehensive income:
Net income - - - 2,367 - 2,367
Change in net unrealized gains (losses)
on securities available for sale - - - - (6) (6)
------------
Total comprehensive income 2,361
------------
Cash dividends, $ 0.15 per share - - - (387) - (387)
Issuance of common stock in connection with
dividend reinvestment and stock purchase plan 26,358 33 509 - - 542
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 2,438,310 3,048 14,055 5,628 67 22,798
------------
Comprehensive income:
Net income - - - 2,931 - 2,931
Change in net unrealized gains (losses)
on securities available for sale - - - - 50 50
------------
Total comprehensive income 2,981
------------
Cash dividends, $ 0.22 per share - - - (564) - (564)
Issuance of common stock upon exercise
of stock options 534 1 10 - - 11
Issuance of common stock in connection with
dividend reinvestment and stock purchase plan 22,491 28 486 - - 514
Issuance of common stock in connection
with a 5% stock dividend 123,280 154 2,747 (2,901) - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,584,615 3,231 17,298 5,094 117 25,740
------------
Comprehensive income:
Net income - - - 2,435 - 2,435
Change in net unrealized gains (losses)
on securities available for sale - - - - 353 353
------------
Total comprehensive income 2,788
------------
Cash dividends, $ 0.24 per share - - - (615) - (615)
Issuance of common stock upon
exercise of stock options 4,305 5 88 - - 93
Issuance of common stock in connection with
dividend reinvestment and stock purchase plan 13,197 17 295 - - 312
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 2,602,117 $ 3,253 $ 17,681 $ 6,914 $ 470 $ 28,318
=================================================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
4
ELVERSON NATIONAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
(Dollars In Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,435 $ 2,931 $ 2,367
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and foreclosed real estate losses 860 988 650
Provision for depreciation 445 402 414
Net amortization (accretion) of securities premiums and discounts 38 (34) (19)
Net gains on the sales of securities (17) (19) -
Proceeds from sale of loans 29,288 16,542 11,619
Net gains on sale of loans (392) (294) (120)
Loans originated for sale (28,896) (16,248) (11,499)
Net (gains) losses on sale or disposal of premises and equipment 5 39 (42)
Net (gains) losses on sale of foreclosed real estate (2) 12 7
(Increase) in accrued interest receivable and other assets (837) (164) (101)
Increase in accrued interest payable and other liabilities 463 82 89
(Increase) decrease in deferred income taxes 18 (69) (28)
--------------------------------------------------
Net cash provided by operating activities 3,408 4,168 3,337
--------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in term funds sold (15,000) - -
Proceeds from sales of securities available for sale 1,497 3,655 -
Proceeds from principal payments and maturities of securities:
Held to maturity 7,206 6,712 4,831
Available for sale 15,026 5,460 14,208
Purchases of securities:
Held to maturity - - (10,868)
Available for sale (74,815) (23,651) (9,997)
Loans made to customers, net of principal collected 9,780 (12,157) (24,260)
Proceeds from sales of foreclosed real estate 28 214 664
Purchases of premises and equipment (305) (1,079) (749)
--------------------------------------------------
Net cash used in investing activities (56,583) (20,846) (26,171)
--------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in interest and non-interest bearing demand deposits
and savings accounts 23,792 18,164 15,586
Net increase in certificates of deposit 3,526 9,591 2,588
Net increase (decrease) in securities sold under agreements to 4,759 (2,888) 4,582
repurchase
Net proceeds (repayments) from borrowed funds 14,698 394 (98)
Principal payments on long-term borrowings - - (1,220)
Proceeds from exercise of stock options 93 11 -
Proceeds from dividend reinvestment and stock purchase plan 312 514 542
Dividends paid (615) (564) (387)
--------------------------------------------------
Net cash provided by financing activities 46,565 25,222 21,593
--------------------------------------------------
Increase (decrease) in cash and cash equivalents (6,610) 8,544 (1,241)
Cash and cash equivalents:
January 1 22,310 13,766 15,007
--------------------------------------------------
December 31 $ 15,700 $ 22,310 $ 13,766
==================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 9,590 $ 8,487 $ 7,911
==================================================
Income taxes $ 843 $ 1,422 $ 1,039
==================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Foreclosed real estate acquired in settlement of loans $ 89 $ - $ 426
==================================================
See Accompanying Notes to Consolidated Financial Statements.
5
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Basis of presentation and consolidation: The consolidated financial statements
include the accounts of Elverson National Bank (the Bank) and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
Nature of operations: The Bank operates under a national bank charter and
provides full banking services. As a national bank, the Bank is subject to
regulation of the Office of the Comptroller of the Currency and the Federal
Deposit Insurance Corporation. The area served by the Bank is principally Berks,
Chester and Lancaster Counties in Pennsylvania. The Bank's subsidiaries
primarily hold certain real estate.
Estimates: The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Presentation of cash flows: For the purposes of reporting cash flows, cash and
cash equivalents include cash on hand, cash and due from banks, interest bearing
deposits with banks, federal funds sold and bankers acceptance notes. Generally,
federal funds are purchased and sold for one day periods. Also, bankers
acceptance notes generally have a maturity within 90 days of purchase date.
Term funds sold: Term funds sold consist of funds purchased from National Penn
Bank at 5.64%, purchased on September 22, 1998, maturing January 20, 1999.
Securities: Management determines the appropriate classification of debt
securities at the time of purchase and re-evaluates such designation at each
balance sheet date.
Securities that management has both the positive intent and ability to hold to
maturity are classified as securities held to maturity and are carried at cost,
adjusted for amortization of premium or accretion of discount using the interest
method.
Securities classified as available for sale are those securities that the Bank
intends to hold for an indefinite period of time but not necessarily to
maturity. Securities available for sale are carried at fair value. Unrealized
gains or losses are reported as increases or decreases in other comprehensive
income, net of the related deferred tax effect.
Interest and dividends on securities, including the amortization of premiums and
the accretion of discounts, are reported in interest income on securities using
the interest method. Gains and losses on the sale of securities are recorded on
the trade date and are calculated using the specific identification method.
Loans receivable: Loans receivable are stated at their outstanding unpaid
principal balances, net of an allowance for loan losses and any deferred fees or
costs. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the yield (interest income) of the related loans.
The Bank is generally amortizing these amounts over the contractual life of the
loan.
6
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
Loans receivable (continued): A loan is generally considered impaired when it is
probable the Bank will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement. The
accrual of interest is generally discontinued when the contractual payment of
principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan is currently performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a loan
is placed on nonaccrual status, unpaid interest credited to income in the
current year is reversed and unpaid interest accrued in prior years is charged
against the allowance for loan losses. Interest received on nonaccrual loans
generally is either applied against principal or reported as interest income,
according to management's judgment as to the collectibility of principal.
Generally, loans are restored to accrual status when the obligation is brought
current, has performed in accordance with the contractual terms for a reasonable
period of time and the ultimate collectibility of the total contractual
principal and interest is no longer in doubt.
Allowance for loan losses: The allowance for loan losses is established through
provisions for loan losses charged against income. Loans deemed to be
uncollectible are charged against the allowance for loan losses, and subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses related to impaired loans that are identified for
evaluation is based on discounted cash flows using the loan's initial effective
interest rate or the fair value, less selling costs, of the collateral for
collateral dependent loans. By the time a loan becomes probable of foreclosure,
it has been charged down to fair value, less estimated cost to sell.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors. This evaluation is inherently subjective
as it requires material estimates that may be susceptible to significant change,
including the amounts and timing of future cash flows expected to be received on
impaired loans.
Loan servicing: The cost of mortgage servicing rights is amortized in proportion
to, and over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those rights.
Fair values are estimated using discounted cash flows based on a current market
interest rate.
Foreclosed real estate: Foreclosed real estate, which is recorded in other
assets, is comprised of property acquired through a foreclosure proceeding or
acceptance of a deed-in-lieu of foreclosure and loans classified as in-substance
foreclosure. A loan is classified as in-substance foreclosure when the Bank has
taken possession of the collateral regardless of whether formal foreclosure
proceedings take place.
Foreclosed real estate initially is recorded at fair value, net of estimated
selling costs at the date of foreclosure, establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and the assets
are carried at the lower of cost or fair value, less estimated costs to sell.
Revenues and expenses from operations and changes in the valuation allowance are
included in other expenses.
7
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on the straight-line and
accelerated depreciation methods over the estimated useful lives of the assets.
Advertising costs: The Bank follows the policy of charging the costs of
advertising to expense as incurred.
Income taxes: Deferred income taxes are provided on the liability method whereby
deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment. The Bank and its subsidiaries file a
consolidated federal income tax return.
Off-balance sheet financial instruments: In the ordinary course of business, the
Bank has entered into off-balance sheet financial instruments consisting of
commitments to extend credit and letters of credit. Such financial instruments
are recorded in the consolidated balance sheets when they are funded.
Earnings per common share: Basic earnings per share represents income available
to common stockholders divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may be issued by the
Bank relate solely to outstanding stock options, and are determined using the
treasury stock method. The effect of stock options on diluted earnings per share
for the Bank is immaterial and results in the same amount reported as basic
earnings per share for 1998, 1997 and 1996.
New accounting standard: The Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities", in June 1998. The Bank is required to adopt the Statement on
January 1, 2000. The adoption of the Statement is not expected to have a
significant impact on the financial condition or results of operations of the
Bank.
Segment reporting: The Bank acts as an independent community financial services
provider, and offers traditional banking and related financial services to
individual, business and government customers. Through its branch and automated
teller machine network, the Bank offers a full array of commercial and retail
financial services, including the taking of time, savings and demand deposits;
the making of commercial, consumer and mortgage loans; and the providing of
other financial services.
Management does not separately allocate expenses, including the cost of funding
loan demand, between the commercial, retail and mortgage banking operations of
the Bank. As such, discrete financial information is not available and segment
reporting would not be meaningful.
8
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Restrictions On Cash And Due From Bank Balances
The Bank is required to maintain average reserve balances in vault cash or with
the Federal Reserve Bank. The total of those reserve balances at December 31,
1998 and 1997 was approximately $2,720,000 and $1,799,000, respectively.
Note 3. Securities
The amortized cost and approximate fair value of securities at December 31 were
as follows:
Gross Gross
Securities Available for Sale Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------
December 31, 1998
U.S. Government and agency obligations $ 40,863 $ 306 $ (73) $ 41,096
State and political subdivisions 42,749 575 (155) 43,169
Mortgage-backed securities 8,838 32 (36) 8,834
Other securities 5,763 61 -- 5,824
Equity securities 2,378 2 -- 2,380
-----------------------------------------------------
$ 100,591 $ 976 $ (264) $ 101,303
=====================================================
December 31, 1997
U.S. Treasury securities $ 3,990 $ 4 $ -- $ 3,994
U.S. Government and agency obligations 14,244 48 (4) 14,288
State and political subdivisions 9,928 117 (34) 10,011
Mortgage-backed securities 2,917 53 (6) 2,964
Other securities 566 -- (2) 564
Equity securities 1,642 2 -- 1,644
-----------------------------------------------------
$ 33,287 $ 224 $ (46) $ 33,465
=====================================================
Equity securities are principally comprised of Federal Home Loan Bank and
Federal Reserve Bank stock.
Gross Gross
Securities Held to Maturity Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
December 31, 1997
U.S. Government and agency obligations $ 4,637 $ 24 $ (5) $ 4,656
State and political subdivisions 7,589 98 (1) 7,686
Mortgage-backed securities 2,931 -- (3) 2,928
Other securities 1,082 9 -- 1,091
-----------------------------------------------------
$ 16,239 $ 131 $ (9) $ 16,361
=====================================================
9
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Securities (Continued)
During 1998, the Bank re-evaluated its securities portfolios as a result of the
merger agreement discussed in Note 22 and transferred all of its securities held
to maturity to securities available for sale. The securities, with an amortized
cost of $9,062,000, were transferred at their fair value of $9,240,000 on the
date of transfer. The unrealized gain of $178,000 at the date of transfer, net
of tax, was included in other comprehensive income.
The amortized cost and fair value of securities at December 31, 1998, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because the securities may be called or prepaid with or
without penalties.
Available for Sale
------------------------
Amortized Fair
(In Thousands) Cost Value
- ------------------------------------------------------------------
Due in one year or less $ 3,396 $ 3,412
Due after one year through five years 32,491 32,860
Due after five years through ten years 32,653 32,908
Due after ten years 20,835 20,909
Mortgage-backed securities 8,838 8,834
Equity securities 2,378 2,380
---------------------
$100,591 $101,303
=====================
Securities with an amortized cost of $24,916,000 and $18,696,000 at December 31,
1998 and 1997, respectively, were pledged as collateral on public deposits,
securities sold under agreements to repurchase and for other purposes as
required or permitted by law.
Gross gains of $19,000 and gross losses of $2,000 were realized on sales of
available for sale securities in 1998. Gross gains of $48,000 and gross losses
of $29,000 were realized on sales of available for sale securities in 1997.
There were no sales of securities available for sale in 1996.
Note 4. Loans Receivable and Allowance for Loan Losses
The composition of loans receivable were as follows:
At December 31
(In Thousands) 1998 1997
- -------------------------------------------------------------
Consumer $ 28,894 $ 30,042
Mortgage 38,547 48,650
Commercial 118,196 113,806
Tax-free 2,713 6,518
---------------------
188,350 199,016
Less:
Allowance for loan losses 3,489 3,345
Unearned loan fees 562 732
---------------------
$184,299 $194,939
=====================
10
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans Receivable and Allowance for Loan Losses (Continued)
Changes in the allowance for loan losses were as follows:
Years Ended December 31
(In Thousands) 1998 1997 1996
- ---------------------------------------------------------------------
Balance, January 1 $ 3,345 $ 2,992 $ 2,672
Provision for loan losses 860 988 600
Loans charged off (799) (745) (319)
Recoveries 83 110 39
---------------------------------
Balance, December 31 $ 3,489 $ 3,345 $ 2,992
=================================
The recorded investment in impaired loans, not requiring an allowance for loan
losses, was $364,000 and $431,000 at December 31, 1998 and 1997, respectively.
The recorded investment in impaired loans requiring an allowance for loan losses
was $296,000 and $355,000 at December 31, 1998 and 1997, respectively. At
December 31, 1998 and 1997, the related allowance for loan losses associated
with those loans was $147,000 and $40,000, respectively. For the years ended
December 31, 1998, 1997 and 1996, the average recorded investment in these
impaired loans was $788,000, $818,000 and $310,000, respectively. There was no
interest income recognized on impaired loans in 1998, 1997 and 1996.
Note 5. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others was $82,808,000, $64,092,000 and $53,236,000 at December 31,
1998, 1997 and 1996, respectively. In connection with loans serviced for others,
the Bank held borrower's escrow balances of $253,000 and $176,000 at December
31, 1998 and 1997, respectively. Servicing income, net of mortgage servicing
rights amortization, for the years ended December 31, 1998, 1997 and 1996, was
$121,000, $117,000 and $116,000, respectively.
The Bank capitalized $278,000, $153,000 and $111,000 of mortgage servicing
rights for loans originated and sold in 1998, 1997 and 1996, respectively and
amortized $90,000, $29,000 and $9,000 of those rights for the years ended
December 31, 1998, 1997 and 1996, respectively.
The amortization of purchased and originated mortgage servicing rights is
recorded as a reduction of servicing revenue. Mortgage servicing rights are
included in other assets. The carrying value of mortgage servicing rights
approximate their fair value.
11
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Premises and Equipment
Components of premises and equipment were as follows:
At December 31 Estimated
(In Thousands) Useful Lives 1998 1997
- --------------------------------------------------------------------------------------------------------------
Land - $ 835 $ 840
Land improvements 5 to 40 years 110 117
Buildings and improvements 15 to 40 years 2,955 3,105
Furniture and equipment 3 to 20 years 2,279 2,750
-----------------------------
6,179 6,812
Less accumulated depreciation 1,820 2,308
-----------------------------
$ 4,359 $ 4,504
=============================
Note 7. Deposits
Total deposits are summarized as follows:
At December 31
(In Thousands) 1998 1997
- ----------------------------------------------------------------
Demand, non-interest bearing $ 47,582 $ 41,066
NOW and Super NOW 23,773 21,332
Money market savings 77,797 62,542
Regular savings and club accounts 9,202 9,622
Time, $100,000 and over 17,330 17,376
Time, other 89,557 85,985
---------------------
Total $265,241 $237,923
=====================
At December 31, 1998, the scheduled maturities of certificates of deposit are as
follows (in thousands):
1999 $ 64,253
2000 20,537
2001 6,964
2002 5,550
2003 7,580
Thereafter 2,003
--------
$106,887
========
12
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Borrowed Funds
The Bank maintains a U.S. Treasury tax and loan note option account for the
deposit of withholding taxes, corporate income taxes and certain other payments
to the federal government. Deposits are subject to withdrawal and are evidenced
by an open-ended interest-bearing note. Borrowings under this note option
account were $74,000 and $375,000 at December 31, 1998 and 1997, respectively.
The Bank has a flexible line of credit commitment available from the Federal
Home Loan Bank for borrowings of up to approximately $6,782,000, expiring March
25, 1999. There were no borrowings under this line of credit at December 31,
1998 and 1997. The line of credit interest rate at December 31, 1998 was 5.34%.
Also, included in borrowed funds are advances from the Federal Home Loan Bank of
$15,149,000 and $150,000 at December 31, 1998 and 1997, respectively.
$15,000,000, including interest at 5.54%, is due in January 1999. The remaining
advance is being repaid over a ten-year period with monthly installments of
approximately $1,000, including interest at 6.20%, with a final principal and
interest payment due in July 2007.
The Bank has a maximum borrowing capacity with the Federal Home Loan Bank of
approximately $77,728,000. Advances from the Federal Home Loan Bank are secured
by qualifying assets of the Bank.
Note 9. Securities Sold under Agreements to Repurchase
Securities sold under agreements to repurchase generally mature within one to
four days from the transaction date. Securities sold under these agreements are
retained under the Bank's control at its safekeeping agent.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
At December 31
(In Thousands) 1998 1997
- -------------------------------------------------------------------------
Average balance during the year $ 7,758 $10,564
Average interest rate during the year 4.86% 5.00%
Maximum month-end balance during the year 13,722 14,281
Note 10. Income Taxes
The provision for federal income taxes consisted of the following:
Years Ended December 31
(In Thousands) 1998 1997 1996
- ------------------------------------------------------------------
Current $ 1,028 $ 1,262 $ 1,011
Deferred 18 (69) (28)
--------------------------------
$ 1,046 $ 1,193 $ 983
================================
13
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Income Taxes (Continued)
A reconciliation of the statutory income tax at a rate of 34% to the income tax
expense included in the consolidated statements of income is as follows:
Years Ended December 31
(In Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Federal income tax at statutory rate $ 1,184 $ 1,402 $ 1,139
Tax-exempt interest (449) (221) (167)
Merger costs 200 -- --
Other 111 12 11
-----------------------------------
$ 1,046 $ 1,193 $ 983
==================================
The income tax provision includes $6,000 in 1998 and 1997 and $-0- in 1996 of
income tax expense related to net realized securities gains.
Net deferred tax assets consisted of the following components:
At December 31
(In Thousands) 1998 1997
- ----------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $1,104 $1,055
Loan origination fees and costs -- 37
Other 8 28
------------------
1,112 1,120
------------------
Deferred tax liabilities:
Premises and equipment 180 170
Unrealized appreciation on securities available for sale 242 61
------------------
422 231
------------------
Net deferred tax assets $ 690 $ 889
==================
Note 11. Dividend Reinvestment and Stock Purchase Plan
The Bank had a dividend reinvestment and stock purchase plan available to
stockholders who elected to reinvest their dividends or to make voluntary cash
payments for the purchase of additional shares of the Bank's common stock.
Distributions under the plan were made exclusively from the Bank's authorized
but unissued shares of common stock with the purchase price based on the fair
market value of such shares at the time of issuance. Stockholders purchased
13,197 shares in 1998; 22,491 shares in 1997 and 26,358 shares in 1996 through
the plan.
In December 1998, the Bank's dividend reinvestment and stock purchase plan was
terminated.
14
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Employee Benefits
The Bank has a profit-sharing plan which, during 1996, was amended to include
401(k) provisions. The Plan is for the benefit of all employees who meet the
eligibility requirements set forth in the Plan. The amount of contributions to
the Plan, including 401(k) matching contributions, is at the discretion of the
Bank's Board of Directors. The contributions charged to expense for the years
ended December 31, 1998, 1997 and 1996 were $293,000, $119,000 and $248,000,
respectively.
Effective July 1, 1997, the Bank established a non-contributory Employee Stock
Ownership Plan (ESOP) to acquire shares of the Bank's common stock for the
benefit of all eligible employees of the Bank. Subsequent to the establishment
of the Plan, 34,445 shares of the Bank's common stock were transferred to the
ESOP from the Bank's profit-sharing plan. Contributions to the Plan are
determined by the Bank's Board of Directors. The contributions charged to
expense for the years ended December 31, 1998 and 1997 were $-0- and $113,000,
respectively. The 1997 contributions in the amount of $113,000 were contributed
to the plan in 1998.
The Bank has a Stock Incentive Plan for certain officers and key employees of
the Bank. The Plan is administered by the Board of Directors. Under the Bank's
Articles of Association, an aggregate of 210,000 shares of authorized but
unissued common stock of the Bank were reserved for future issuance under
employee stock option provisions of the Plan, employee stock purchases or
similar employee benefit plans. To date, stock options granted under the Plan
are non-qualified and are exercisable over a three-year period, commencing one
year after the date of grant, on a cumulative basis. Stock options generally
expire ten years after the date of grant. The purchase price for stock options
issued under the Plan must be at least equal to 100% of the fair market value of
the common stock on the date of the grant.
The following summarizes the Bank's stock option activity and related
information for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
-------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------------------------------------------------------------
Outstanding, beginning of
year 21,525 $ 19.74 12,285 $ 19.05 -- $ --
Granted 22,680 23.10 14,490 20.27 12,285 19.05
Exercised (4,305) 21.78 (561) 19.05 -- --
Forfeited (315) 23.10 (4,689) 19.63 -- --
-------------------------------------------------------------------
Outstanding, end of year 39,585 $ 21.42 21,525 $ 19.74 12,285 $19.05
===================================================================
Exercisable at end of year 39,585 $ 21.42 3,185 $ 19.05 $ -- $ --
===================================================================
Stock options outstanding at December 31, 1998 are exercisable at prices ranging
from $19.05 to $23.10 a share. The weighted average remaining contractual life
of those options is 8.75 years.
15
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Employee Benefits (Continued)
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", the Bank elected to follow Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its stock options granted in 1998, 1997 and 1996 and, accordingly, did not
recognize compensation cost. If the Bank had elected to recognize compensation
cost based on the fair value of the options granted at grant date as prescribed
by SFAS No. 123, the effect on net income and earnings per share would not be
materially different from amounts reported.
After consummation of the merger, as discussed in Note 22, the Bank's profit
sharing plan will be merged into the National Penn Bancshares, Inc. (NPB)
Capital Accumulation Plan and the ESOP will be terminated and merged into NPB's
Capital Accumulation Plan. All stock options granted under the Stock Incentive
Plan became fully vested and immediately exercisable as a result of the merger
agreement.
Note 13. Comprehensive Income
The Bank adopted SFAS No. 130, "Reporting Comprehensive Income", as of January
1, 1998. Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes
in net assets and liabilities, such as unrealized gains and losses on available
for sale securities, are reported as a separate component of the equity section
of the balance sheet, such items, along with net income, are components of
comprehensive income. The adoption of SFAS No. 130 had no effect on the Bank's
net income or stockholders' equity.
The components of other comprehensive income and related tax effects are as
follows:
Years Ended December 31
(In Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------
Unrealized holding gains (losses) on available
for sale securities $551 $ 95 $ (9)
Less reclassification adjustment for gains (losses)
included in net income 17 19 --
--------------------------
Net unrealized gains (losses) 534 76 (9)
Tax effect 181 26 (3)
--------------------------
Net of tax amount $353 $ 50 $ (6)
==========================
Note 14. Transactions with Executive Officers and Directors
The Bank has had banking transactions in the ordinary course of business with
its executive officers and directors and their related interests on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. At December 31, 1998 and 1997, these
persons were indebted to the Bank for loans totaling $1,390,000 and $1,249,000,
respectively. During 1998, $413,000 of new loans were made; repayments totaled
$272,000.
16
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Financial Instruments With Off-Balance Sheet Risk
The Bank 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. These
financial instruments include commitments to extend credit and letters of
credit. Those instruments involve, to varying degrees, elements of credit risk
and interest rate risk in excess of the amount recognized in the balance sheets.
The Bank'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 letters
of credit is represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
A summary of the Bank's financial instrument commitments are as follows:
At December 31
(In Thousands) 1998 1997
- -----------------------------------------------------------------------
Commitments to grant loans $ 4,747 $ 4,292
Unfunded commitments under lines of credit 40,250 31,880
Outstanding letters of credit 2,382 3,424
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. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank 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.
Outstanding letters of credit written are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
Note 16. Concentration of Credit Risk
The Bank grants commercial, residential, and consumer loans to customers
primarily located in Berks, Chester, and Lancaster Counties in Pennsylvania. The
concentrations of credit by type of loan are set forth in Note 4. Although the
Bank has a diversified loan portfolio, its debtors' ability to honor their
contracts is influenced by the region's economy.
17
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Lease Commitments
The Bank rents facilities and equipment under operating lease agreements which
expire between 1999 and 2013, and require various minimum annual rentals. The
total minimum rental commitment at December 31, 1998 was approximately
$1,722,000, and is due as follows:
Year
(In Thousands) Future Minimum Lease Payments
------------------------------------
1999 $ 234
2000 219
2001 219
2002 150
2003 90
Later years 810
------------
Total $1,722
============
The total rental expense included in the consolidated statements of income for
the years ended December 31, 1998, 1997 and 1996 was $389,000, $365,000 and
$379,000, respectively.
Note 18. Regulatory Matters and Stockholders' Equity
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth below) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets, and of Tier I capital to average assets. Management believes, as of
December 31, 1998, that the Bank meets all capital adequacy requirements to
which it is subject.
18
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18. Regulatory Matters and Stockholders' Equity (Continued)
As of December 31, 1998, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the Bank's
category. The Bank's actual capital amounts and ratios are also presented below.
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Purposes, Action Provisions,
Must Be Greater Must Be Greater
Actual Than or Equal to Than or Equal to
----------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------
(Dollar Amounts In Thousands)
As of December 31, 1998:
Total capital (to risk weighted assets) $30,435 14.71% $16,557 8.00% $20,696 10.00%
Tier I capital (to risk weighted assets) 27,848 13.46 8,278 4.00 12,418 6.00
Tier I capital (to average assets) 27,848 9.47 11,761 4.00 14,701 5.00
As of December 31, 1997:
Total capital (to risk weighted assets) $28,069 14.34% $15,657 8.00% $19,572 10.00%
Tier I capital (to risk weighted assets) 25,623 13.09 7,829 4.00 11,743 6.00
Tier I capital (to average assets) 25,623 10.01 10,239 4.00 12,799 5.00
Banking laws and regulations limit the amount of dividends that may be paid.
Under current banking laws, the Bank would be limited to approximately
$4,187,000 of dividends in 1999 plus an additional amount equal to the Bank's
net profit for 1999, up to the date of any such dividend declaration.
In February 1998, the Bank declared a 5% stock dividend with a record date of
April 3, 1998, payable April 10, 1998. The stock dividend was recorded at
December 31, 1997. All per share amounts and average shares outstanding in the
accompanying statements have been adjusted to give retroactive effect to this
stock dividend.
Note 19. Earnings Per Common Share
The following table sets forth the computations of basic and diluted earnings
per common share:
Years Ended December 31
(In Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------
Net income applicable to common stock $2,435 $2,931 $2,367
----------------------------
Weighted average common shares outstanding 2,594 2,571 2,544
Effect of dilutive securities, stock options 10 2 --
----------------------------
Weighted average common shares
outstanding used to calculate
diluted earnings per common share 2,604 2,573 2,544
============================
19
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Other Expenses
The following represents the most significant categories of other expenses for
the years ended December 31 (in thousands):
1998 1997 1996
--------------------------------
Advertising $ 211 $ 316 $ 313
Loan expenses 286 318 343
Office supplies and expenses 343 378 351
Professional fees 564 477 466
All other expenses 1,012 961 816
--------------------------------
$2,416 $2,450 $2,289
===============================
Note 21. Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of the Bank's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts the Bank
could have realized in a sales transaction on the dates indicated. The estimated
fair value amounts have been measured as of their respective year ends, and have
not been re-evaluated or updated for purposes of these consolidated financial
statements subsequent to those respective dates. As such, the estimated fair
values of these financial instruments subsequent to the respective reporting
dates may be different than the amounts reported at each year end.
The following information should not be interpreted as an estimate of the fair
value of the entire Bank since a fair value calculation is only provided for a
limited portion of the Bank's assets. Due to a wide range of valuation
techniques and the degree of subjectivity used in making the estimates,
comparisons between the Bank's disclosures and those of other companies may not
be meaningful. The following methods and assumptions were used to estimate the
fair values of the Bank's financial instruments at December 31, 1998 and 1997:
Cash and cash equivalents and term funds sold: The carrying amounts reported in
the balance sheet for cash and cash equivalents and term funds sold approximate
those assets' fair values.
Securities: Fair values for securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable securities.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values for fixed rate loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Accrued interest receivable: The carrying amounts of accrued interest receivable
approximate their fair value.
20
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Fair Value of Financial Instruments (Continued)
Deposit liabilities: The fair value of demand deposits, savings accounts and
certain money market accounts is the amount payable on demand at the reporting
date. The carrying amounts for variable-rate fixed-term money market accounts
and certificates of deposits approximate their fair values at the reporting
date. The fair value of fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered for deposits of similar remaining maturities.
Securities sold under agreements to repurchase: The carrying amounts of
securities sold under agreements to repurchase approximate their fair value.
Borrowed funds: The fair values of the Bank's borrowed funds are estimated using
discounted cash flow analyses, based on the Bank's current incremental borrowing
rates for similar types of borrowing arrangements. The carrying amounts of the
U.S. Treasury tax and loan note approximate its fair value.
Accrued interest payable: The carrying amounts of accrued interest payable
approximate their fair value.
Off-balance sheet instruments: The fair values of the Bank's commitments to
extend credit and outstanding letters of credit are estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing.
The estimated fair value of the Bank's financial instruments were as follows:
1998 1997
--------------------------------------------------
Estimated Estimated
At December 31 Carrying Fair Carrying Fair
(In Thousands) Value Value Value Value
- --------------------------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $ 15,700 $ 15,700 $ 22,310 $ 22,310
Term funds sold 15,000 15,000 -- --
Securities 101,303 101,303 49,704 49,826
Loans receivable, net 184,299 192,458 194,939 199,697
Accrued interest receivable 2,173 2,173 1,554 1,554
Financial Liabilities:
Deposits 265,241 266,850 237,923 238,372
Securities sold under agreements to
repurchase 13,722 13,722 8,963 8,963
Borrowed funds 15,223 15,224 525 612
Accrued interest payable 1,272 1,272 1,019 1,019
Off-Balance Sheet Financial Instruments:
Commitments to extend credit -- -- -- --
Outstanding letters of credit -- -- -- --
21
ELVERSON NATIONAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22. Merger
On July 21, 1998, the Bank entered into an agreement to merge with National Penn
Bancshares, Inc. (NPB), a Pennsylvania corporation, and National Penn Bank, a
national banking association, both of which are headquartered in Boyertown,
Pennsylvania. The merger was approved by stockholders of both institutions on
December 14, 1998 and was consummated on January 4, 1999. Under the terms of the
agreement, each Elverson National Bank stockholder received 1.46875 shares of
NPB's common stock for each Elverson National Bank share and Elverson National
Bank will operate as a division of National Penn Bank. The transaction was
accounted for under the pooling-of-interests method of accounting. Merger costs
of $786,000, consisting primarily of professional fees, have been expensed in
1998 in connection with the merger.
The following table provides a summary of the consolidated operating results and
financial condition on a pro forma basis as of and for the year ended December
31, 1998:
National
Elverson Penn
Year Ended December 31 National Bancshares, Consolidated
(In Thousands) Bank Inc. Pro Forma
- -------------------------------------------------------------------------------
Net interest income $ 12,566 $ 64,908 $ 77,474
Net income 2,435 20,483 22,918
Total assets 324,654 1,811,594 2,136,248
Total stockholders' equity 28,318 130,456 158,774
22