Item 1. BUSINESS. - ------------------
The Company - -----------
National Penn Bancshares, Inc. ("National Penn") is a Pennsylvania business corporation and bank holding company registered under the Bank Holding Company Act of 1956. National Penn is headquartered at Philadelphia and Reading Avenues, Boyertown, Pennsylvania 19512 (Telephone number 610-367-6001).
National Penn was incorporated in January 1982. National Penn conducts business through its two wholly-owned banking subsidiaries, National Penn Bank ("NP Bank") and Panasia Bank, N.A. ("Panasia"). In addition, National Penn conducts business through various wholly-owned, direct or indirect, nonbank subsidiaries. These subsidiaries are engaged in activities related to the business of banking.
At December 31, 2001, National Penn and its subsidiaries had 863 full- and part-time employees.
Operating Segments - ------------------
National Penn has one reportable operating segment, Community Banking (consisting of commercial and retail banking), and other non-reportable operating segments, as described in Note 21 of the Notes to Consolidated Financial Statements included at Item 8 of this Report. Note 21 includes segment information on revenue, assets and income, and is incorporated by reference into this Item 1.
National Penn Bank - ------------------
NP Bank is a national bank chartered under the National Bank Act. Prior to August 1, 1993, its name was National Bank of Boyertown.
NP Bank is engaged in the commercial and retail banking business. It provides checking and savings accounts, time deposits, personal, business, residential mortgage, educational loans, credit cards, safe deposit and night depository facilities, and international banking services.
During 2001, NP Bank also operated through five banking divisions. They were:
o Chestnut Hill National Bank Division, established in December 1993 after National Penn's acquisition of Chestnut Hill National Bank.
o 1st Main Line Bank Division, a de novo division established in April 1995.
o National Asian Bank Division, a de novo division established in May 1998. On June 22, 2001, the assets, liabilities and business of this Division were transferred to Panasia (discussed below).
o Elverson National Bank Division, established in January 1999 after National Penn's acquisition of Elverson National Bank.
o Berks County Division, established in January 2001 after National Penn's acquisition of Community Independent Bank, Inc. (discussed below).
On November 16, 2001, NP Bank acquired certain assets and assumed certain liabilities of the Kutztown, Pennsylvania branch office of PNC Bank, National Association. These assets and liabilities included $11 million in consumer and business banking loans, the real estate, building, furnishings, fixtures, equipment and safe deposit business located at the branch, and deposits of $40.2 million.
At December 31, 2001, NP Bank had 58 banking offices in southeastern Pennsylvania, and assets of $2.5 billion, net loans of $1.72 billion and deposits of $1.93 billion.
In January 2002, NP Bank began a unified brand campaign in which there will be a gradual transition from use of the historical and/or geographical divisional names listed above to use of the name "National Penn Bank" as a unified brand name.
Panasia Bank, N.A. - ------------------
On July 11, 2000, National Penn acquired Panasia Bank, a New Jersey state-chartered bank headquartered in Ft. Lee, New Jersey. On November 3, 2000, National Penn converted Panasia Bank's state charter to a national bank charter.
Like NP Bank, Panasia is engaged in the commercial and retail banking business. It also provides checking and savings accounts, time deposits, personal, business, residential mortgage, educational loans, credit cards, and safe deposit and night depository facilities.
On June 22, 2001, National Penn transferred the assets, liabilities and business of its National Asian Bank Division to Panasia. These assets and liabilities included $33.8 million in consumer and business banking loans, leased real estate, the furnishings, fixtures and equipment located at the branches, and deposits of $18 million.
At December 31, 2001, Panasia had branches in Ft. Lee, Palisades Park and Closter, New Jersey, and Philadelphia and Cheltenham, Pennsylvania, and assets of $168 million, net loans of $77.8 million and deposits of $145.4 million.
Acquisition of Community Independent Bank, Inc. - -----------------------------------------------
On January 3, 2001, National Penn acquired Community Independent Bank, Inc. ("Community") by its merger into National Penn. Community was the parent company of Bernville Bank, N.A., a commercial bank operating four branches in Berks County, Pennsylvania. At December 31, 2000, Community had consolidated assets of $103 million, net loans of $76.7 million and deposits of $95.3 million. National Penn issued 659,245 shares of National Penn's common stock in consummation of the transaction. The transaction was accounted for under the "pooling of interests" method of accounting.
On January 4, 2001, National Penn merged Bernville Bank, N.A. into NP Bank. The assets, liabilities and business of Bernville Bank, N.A. were combined with those of NP Bank located in Berks County, Pennsylvania to create NP Bank's Berks County Division.
Nonbank Subsidiaries - --------------------
National Penn conducts business through the following, directly owned, nonbank subsidiaries:
o Investors Trust Company, a Pennsylvania-chartered trust company, opened for business on June 20, 1994.
o National Penn Investment Company, a Delaware business corporation, invests in and holds equity investments in other banks and bank holding companies (discussed below), other equity investments, government and other debt securities, and other investment securities, as permitted by applicable law and regulations. It began operations in January 1985.
o National Penn Life Insurance Company, an Arizona insurance company, was formed to reinsure credit life and accident and health insurance in connection with loans made by NP Bank. It began operations in January 1985.
o NPB Capital Trust, a Delaware business trust, was formed in 1997 and issued $40,250,000 in preferred capital securities to investors. See Note 8 of the Notes to Consolidated Financial Statements included at Item 8 of this Report.
National Penn also conducts business through the following nonbank subsidiaries, directly owned by NP Bank:
o Link Financial Services, Inc., a Pennsylvania business corporation, is an insurance agency. It is also indirectly engaged in the title insurance business through a joint venture with a title insurance agency. It began operations in April 1998.
o NPB Delaware, Inc., a Delaware business corporation, invests in, holds and manages part of NP Bank's investment securities portfolio, as permitted by applicable law and regulations. It began operations in October 1999.
o Penn Securities, Inc., a Pennsylvania business corporation, is a registered full service broker-dealer and investment advisory firm. It is also an insurance agency. It began operations in October 1998.
o Penn 1st Financial Services, Inc., a Pennsylvania business corporation, is engaged in the mortgage banking business. It began operations in September 1999 under the name National Penn Mortgage Company.
National Penn also owns, indirectly through NP Bank, four other nonbank subsidiaries. Three of these subsidiaries are presently inactive; the activities of the other are limited solely to holding real estate interests.
Panasia has one wholly-owned nonbank subsidiary, Panasia Investment Company, a New Jersey business corporation. It invests in, holds and manages part of Panasia's investment securities portfolio, as permitted by applicable law and regulations. It began operations in December 1999.
Other Bank Investments - ----------------------
National Penn owns, indirectly through National Penn Investment Company, 20% of Pennsylvania State Bank, a Pennsylvania bank headquartered in Camp Hill, Pennsylvania. Pennsylvania State Bank began operations as a bank in May 1989. For financial reporting purposes, National Penn accounts for its investment in Pennsylvania State Bank using the "equity" method.
Supervision and Regulation - --------------------------
Bank holding companies and banks operate in a highly regulated environment and are regularly examined by Federal and state regulatory authorities.
The following discussion concerns certain provisions of Federal and state laws and certain regulations and the potential impact of such provisions and regulations on National Penn and its subsidiaries.
To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory or regulatory provisions themselves. A change in applicable statutes, regulations or regulatory policy may have a material effect on the business of National Penn and its subsidiaries.
Bank Holding Company Regulation -------------------------------
National Penn is registered as a bank holding company and is subject to the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve") under the Bank Holding Company Act of 1956 ("BHCA").
The Gramm-Leach-Bliley Act of 1999 ("GLBA") established a new kind of bank holding company called a "financial holding company". Although National Penn believes that it is eligible to do so, National Penn has not elected to become a "financial holding company", and National Penn does not anticipate electing such status in the near future. See "Gramm-Leach-Bliley Act".
Bank holding companies are required to file periodic reports with and are subject to examination by the Federal Reserve. The Federal Reserve's regulations require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve, pursuant to its "source of strength" regulations, may require National Penn to stand ready to use its resources to provide adequate capital funds to NP Bank or Panasia during periods of financial stress or adversity.
Under the Federal Deposit Insurance Act ("FDIA"), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (as defined by regulations) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency, up to specified limits.
Under the BHCA, the Federal Reserve has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
The BHCA prohibits National Penn from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock or substantially all of the assets of any bank or merging or consolidating with another bank holding company without prior approval of the Federal Reserve. Such a transaction may also require approval of the Pennsylvania Department of Banking. Pennsylvania law permits Pennsylvania bank holding companies to control an unlimited number of banks.
Additionally, the BHCA prohibits National Penn from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a nonbanking business unless such business is determined by the Federal Reserve, by regulation or by order, to be so "closely related to banking" as to be a "proper incident" thereto. The BHCA does not place territorial restrictions on the activities of such nonbanking-related businesses.
The Federal Reserve's regulations concerning permissible nonbanking activities for National Penn (a bank holding company that, at present, is not a "financial holding company") provide fourteen categories of functionally related activities that are permissible nonbanking activities. These are:
o Extending credit and servicing loans.
o Certain activities related to extending credit.
o Leasing personal or real property under certain conditions.
o Operating nonbank depository institutions, including savings associations.
o Trust company functions.
o Certain financial and investment advisory activities.
o Certain agency transactional services for customer investments, including securities brokerage activities.
o Certain investment transactions as principal.
o Management consulting and counseling activities.
o Certain support services, such as courier and printing services.
o Certain insurance agency and underwriting activities.
o Community development activities.
o Issuance and sale of money orders, savings bonds, and traveler's checks.
o Certain data processing services.
Depending on the circumstances, Federal Reserve approval may be required before National Penn or its nonbank subsidiaries may begin to engage in any such activity and before any such business may be acquired.
A bank holding company that is eligible and makes an effective election under GLBA to be a "financial holding company" may engage in any type of financial activity. See "Gramm-Leach-Bliley Act".
Dividend Restrictions ---------------------
National Penn is a legal entity separate and distinct from NP Bank, Panasia and National Penn's other direct and indirect nonbank subsidiaries.
National Penn's revenues (on a parent company only basis) result almost entirely from dividends paid to National Penn by its subsidiaries. The right of National Penn, and consequently the right of creditors and shareholders of National Penn, to participate in any distribution of the assets or earnings of any subsidiary through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the subsidiary (including depositors, in the case of NP Bank and Panasia), except to the extent that claims of National Penn in its capacity as a creditor may be recognized.
Federal and state laws regulate the payment of dividends by National Penn's subsidiaries. See "Supervision and Regulation - Regulation of NP Bank and Panasia".
Further, it is the policy of the Federal Reserve that bank holding companies should pay dividends only out of current earnings. Federal banking regulators also have the authority to prohibit banks and bank holding companies from paying a dividend if they should deem such payment to be an unsafe or unsound practice.
Capital Adequacy ----------------
Bank holding companies are required to comply with the Federal Reserve's risk-based capital guidelines.
The required minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half of total capital must be "Tier 1 capital". Tier 1 capital consists principally of common shareholders' equity, retained earnings, a limited amount of qualifying perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and certain intangible assets. The remainder of total capital may consist of mandatory convertible debt securities and a
limited amount of subordinated debt, qualifying preferred stock and loan loss allowance ("Tier 2 capital"). At December 31, 2001, National Penn's Tier 1 capital and total (Tier 1 and Tier 2 combined) capital ratios were 10.53% and 11.82%, respectively.
In addition to the risk-based capital guidelines, the Federal Reserve requires a bank holding company to maintain a minimum "leverage ratio". This requires a minimum level of Tier 1 capital (as determined under the risk-based capital rules) to average total consolidated assets of 3% for those bank holding companies that have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. The Federal Reserve expects all other bank holding companies to maintain a ratio of at least 1% to 2% above the stated minimum. At December 31, 2001, National Penn's leverage ratio was 7.99%.
The Federal Reserve has also indicated that it will consider a "tangible Tier 1 capital leverage ratio" (deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities. The Federal Reserve has not advised National Penn of any specific minimum leverage ratio applicable to National Penn.
Pursuant to the "prompt corrective action" provisions of the FDIA, the federal banking agencies have specified, by regulation, the levels at which an insured institution is considered "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized", or "critically undercapitalized."
Under these regulations, an institution is considered "well capitalized" if it satisfies each of the following requirements:
o It has a total risk-based capital ratio of 10% or more.
o It has a Tier 1 risk-based capital ratio of 6% or more.
o It has a leverage ratio of 5% or more.
o It is not subject to any order or written directive to meet and maintain a specific capital level.
At December 31, 2001, NP Bank and Panasia each qualify as "well capitalized" under these regulatory standards. See Note 19 of the Notes to Consolidated Financial Statements included at Item 8 of this Report.
FDIC Insurance Assessments --------------------------
NP Bank and Panasia are each subject to deposit insurance assessments by the Federal Deposit Insurance Corporation ("FDIC"). These assessments fund both the Bank Insurance Fund ("BIF") for banks and the Savings Association Insurance Fund ("SAIF") for savings associations. They are based on the risk classification of the depository institutions. Neither NP Bank nor Panasia paid regular insurance assessments to the FDIC in 2001. Under current FDIC practices, National Penn does not expect that either bank will be required to pay regular insurance assessments to the FDIC in 2002.
In 1996, the SAIF was recapitalized. As part of the recapitalization, both BIF-insured deposits and SAIF-insured deposits are now assessed to fund debt service on the Federal government's related bond payments. The current annualized rate established by the FDIC for both BIF-insured deposits and SAIF-insured deposits is $.019 per $100 of deposits. These bonds mature in 2017.
Regulation of NP Bank and Panasia ---------------------------------
The operations of NP Bank and Panasia are each subject to Federal and state statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System, and to banks
whose deposits are insured by the FDIC. Their operations are also subject to regulations of the OCC, the Federal Reserve, and the FDIC.
The OCC, which has primary supervisory authority over NP Bank and Panasia, regularly examines banks in such areas as reserves, loans, investments, management practices and other aspects of operations. These examinations are designed for the protection of depositors rather than National Penn's shareholders. Each bank must furnish annual and quarterly reports to the OCC, which has the legal authority to prevent a national bank from engaging in an unsafe or unsound practice in conducting its business.
Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, the investments a bank may make, the reserves against deposits a bank must maintain, the types and terms of loans a bank may make and the collateral it may take, the activities of a bank with respect to mergers and consolidations, and the establishment of branches. Pennsylvania and New Jersey law each permit statewide branching.
Under the National Bank Act, NP Bank and Panasia are each required to obtain the prior approval of the OCC for the payment of dividends if the total of all dividends declared by it in one year would exceed its net profits for the current year plus its retained net profits for the two preceding years, less any required transfers to surplus. In addition, each bank may only pay dividends to the extent that its retained net profits (including the portion transferred to surplus) exceed statutory bad debts. Under the FDIA, each bank is prohibited from paying any dividends, making other distributions or paying any management fees if, after such payment, it would fail to satisfy its minimum capital requirements.
As subsidiary banks of a bank holding company, NP Bank and Panasia are each subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the bank holding company or its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries, and on taking such stock or securities as collateral for loans.
The Federal Reserve Act and Federal Reserve regulations also place certain limitations and reporting requirements on extensions of credit by a bank to the principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship.
Under the "cross-guarantee" provisions of the FDIA, insured depository institutions under common control are required to reimburse the FDIC for any loss suffered by either the BIF or SAIF as a result of the failure of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of failure. NP Bank and Panasia are covered by these provisions. Any such liability could have a material adverse effect on the financial condition of the assessed bank and National Penn.
While a claim of the FDIC under the cross-guarantee provisions would be subordinate to claims of depositors, secured creditors, general creditors and holders of subordinated debt (other than affiliates) of the commonly controlled institution, it would be superior to claims of shareholders and affiliates of the commonly controlled institution, such as National Penn.
Regulation of Other Subsidiaries --------------------------------
National Penn's direct nonbank subsidiaries are subject to regulation by the Federal Reserve and, in the case of Investors Trust Company, the Pennsylvania Department of Banking.
NP Bank's and Panasia's direct nonbank subsidiaries are subject to regulation by the OCC. In addition, Penn Securities, Inc., as a broker-dealer and investment advisory firm, is regulated by the Securities and Exchange Commission, various state securities regulators and the National Association of Securities Dealers, Inc. Penn
Securities, Inc. and Link Financial Services, Inc., as insurance agencies, are subject to regulation by the Pennsylvania Insurance Department.
Monetary and Fiscal Policies ----------------------------
The banking industry, including National Penn, NP Bank and Panasia, is affected by the monetary and fiscal policies of government agencies, including the Federal Reserve. Through open market securities transactions and changes in its discount rate and reserve requirements, the Federal Reserve exerts considerable influence over the cost and availability of funds for lending and investment.
Competition - -----------
The financial services industry in National Penn's service area is extremely competitive. National Penn's competitors within its service area include bank holding companies with substantially greater resources. Many competitor financial institutions have substantially higher legal lending limits.
In addition, savings banks, savings and loan associations, credit unions, money market and other mutual funds, mortgage companies, leasing companies, finance companies, and other financial services companies offer products and services similar to those offered by National Penn and its subsidiaries, on competitive terms. The competitive environment has intensified since adoption of Federal interstate banking legislation in 1994. See "Interstate Banking Act".
Many bank holding companies have elected to become financial holding companies under GLBA, including many of the very large ones. Although the long-range effects of this development cannot be predicted, most probably it will further narrow the differences and intensify competition among commercial banks, investment banks, insurance firms and other financial services companies. See "Gramm-Leach-Bliley Act".
Interstate Banking Act - ----------------------
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 provides for nationwide interstate banking and branching. It permits:
o Bank holding companies that are adequately capitalized and adequately managed to acquire banks located in states outside their home states regardless of whether such acquisitions are authorized under the laws of the host state.
o The interstate merger of banks, subject to the right of individual states to "opt in" or "opt out" of this authority (actions that could only be taken before June 1, 1997).
o Banks to establish new branches on an interstate basis provided that such action is specifically authorized by the laws of the host state.
o 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.
o Foreign banks to establish, with approval of the regulators in the United States, branches outside their "home" states to the same extent that national or state banks located in the home state would be authorized to do so.
One effect of this legislation is to permit National Penn to acquire banks and bank holding companies located in any state and to permit qualified banking organizations located in any state to acquire banks and bank holding companies located in Pennsylvania, irrespective of state law.
The Pennsylvania Banking Code authorizes full interstate banking and branching. It authorizes interstate bank mergers and reciprocal interstate branching into Pennsylvania by interstate banks. It also permits Pennsylvania institutions to branch into other states with the prior approval of the Pennsylvania Department of Banking, except that this approval requirement does not apply to national banks.
The New Jersey Banking Act of 1948 authorizes limited interstate banking and branching. It authorizes interstate bank mergers and acquisitions of existing branches, but it prohibits de novo branching into New Jersey. This prohibition also has the effect of prohibiting New Jersey institutions from de novo branching into other states whose state laws require reciprocity.
Overall, this Federal and state legislation is having the effect of increasing consolidation and competition and promoting geographic diversification in the banking industry.
Gramm-Leach-Bliley Act - ----------------------
The Gramm-Leach-Bliley Act of 1999 ("GLBA"):
o Repealed various provisions of the Glass Steagall Act to permit commercial banks to affiliate with investment banks (securities firms).
o Amended the BHCA to permit qualifying bank holding companies to engage in any type of financial activity.
o Permits subsidiaries of national banks now to engage in a broad range of financial activities that are not permitted for national banks themselves.
The result is that banking companies are generally able to offer a wider range of financial products and services and are more readily able to combine with other types of financial companies, such as securities and insurance companies.
GLBA created a new kind of bank holding company called a "financial holding company" (an "FHC"). An FHC is authorized to engage in any activity that is "financial in nature or incidental to financial activities" and any activity that the Federal Reserve determines is "complementary to financial activities" and does not pose undue risks to the financial system. Among other things, "financial in nature" activities include securities underwriting and dealing, insurance underwriting and sales, and certain merchant banking activities.
A bank holding company qualifies to become an FHC if each of its depository institution subsidiaries is "well capitalized", "well managed", and CRA-rated "satisfactory" or better. A qualifying bank holding company becomes an FHC by filing with the Federal Reserve an election to become an FHC.
If an FHC at any time fails to remain "well capitalized" or "well managed", the consequences can be severe. Such an FHC must enter into a written agreement with the Federal Reserve to restore compliance. If compliance is not restored within 180 days, the Federal Reserve can require the FHC to cease all its newly authorized activities or even to divest itself of its depository institutions. A failure to maintain a CRA rating of "satisfactory" will not jeopardize any then existing newly authorized activities; rather, the FHC cannot engage in any additional newly authorized activities until a "satisfactory" CRA rating is restored.
In addition to activities currently permitted by law and regulation for bank holding companies, an FHC may engage in virtually any other kind of financial activity. Under limited circumstances, an FHC may even be authorized to engage in certain non-financial activities. The most important newly authorized activities are:
o Securities underwriting and dealing.
o Insurance underwriting and sales.
o Merchant banking activities.
o Activities determined by the Federal Reserve to be "financial in nature" and incidental activities.
o "Complementary" financial activities, as determined by the Federal Reserve.
Bank holding companies that do not qualify or elect to become FHCs are limited in their activities to the activities permitted by law and regulation on March 11, 2000, the effective date of that portion of GLBA. Although National Penn believes that it is eligible to do so, National Penn has not elected to become a "financial holding company", and National Penn does not anticipate electing such status in the near future. National Penn has, instead, continued to utilize the continuing authority of national banks to create "operating subsidiaries" to expand its business products and services.
GLBA also authorizes national banks to create "financial subsidiaries". This is in addition to the present authority of national banks to create "operating subsidiaries". A "financial subsidiary" is a direct subsidiary of a national bank that satisfies the same conditions as an FHC, plus certain other conditions, and is approved in advance by the OCC. A "financial subsidiary" can engage in most, but not all, of the newly authorized activities. Neither NP Bank nor Panasia have created any "financial subsidiaries".
In addition, GLBA includes significant provisions relating to the privacy of consumer and customer information. These provisions apply to any company "the business of which" is engaging in activities permitted for an FHC, even if it is not itself an FHC. Thus, they apply to National Penn. Basically, GLBA requires a financial institution to: adopt and disclose its privacy policy; give consumers and customers the right to "opt out" of disclosures to non-affiliated third parties; not disclose any account information to non-affiliated third party marketers; and follow regulatory standards to protect the security and confidentiality of consumer and customer information.
Although the long-range effects of GLBA cannot be predicted, most probably it will further narrow the differences and intensify competition among commercial banks, investment banks, insurance firms and other financial services companies.
Interest Rate Swaps and Similar Instruments - -------------------------------------------
National Penn uses interest rate swap and floor agreements for interest rate risk management. No derivative financial instruments are held for trading purposes. The contract or notional amounts of the swap and floor agreements do not represent exposure to credit loss. Potential credit risk on these contracts arises from the counterparty's inability to meet the terms of the agreement. Management considers the credit risk of these agreements to be minimal and manages this risk through routine review of the counterparty's financial ratings.
Information about the amounts, nature and terms of interest rate swaps and similar instruments is set forth in Note 17 of the Notes to Consolidated Financial Statements included at Item 8 of this Report. In 2001, interest rate swaps had the effect of increasing National Penn's net interest income by $1,029,000 from what would have been realized had NP Bank not entered into the swap agreements. Should rates rise in 2002, National Penn may recognize lower net interest income for the year than would have been recognized had NP Bank not entered into the interest
rate swap agreements. In 2001, the interest rate floor to which NP Bank was a party expired. No new interest rate floor agreements have been entered into.
Critical Accounting Policies - ----------------------------
The accounting principles followed by National Penn and the methods of applying these principles conform with accounting principles generally accepted in the United States and with general practices followed by the banking industry. Critical accounting policies relate to loans, the allowance for loan losses, and income taxes. These policies, which significantly affect the determination of financial position, results of operations and cash flows, are summarized in Note 1 (Summary of Significant Accounting Policies) of the Notes to Consolidated Financial Statements, and are discussed in Management's Discussion and Analysis, included in Items 7 and 8 of this Report.
Forward-Looking Statements - --------------------------
From time to time, National Penn or its representatives make written or oral statements that may include "forward-looking statements" with respect to its:
o Financial condition.
o Results of operations.
o Asset quality.
o Capital expenditures, including investments in technology.
o Pending or completed mergers with or acquisitions of financial or non-financial companies or their assets, loans, deposits and branches, including the January 2001 merger with Community and the July 2000 acquisition of Panasia, and the revenue enhancements, cost savings and other benefits anticipated in those transactions.
o Business expansion plans, including both product and geographical expansion.
o Investments in new subsidiaries and other companies.
o Other matters.
Many of these statements can be identified by looking for words such as "believes," "expects," "anticipates," "estimates," "projects" or similar words or expressions.
These forward-looking statements involve substantial risks and uncertainties. There are many factors that may cause actual results to differ materially from those contemplated by such forward-looking statements. These factors include, among other things, the following possibilities:
o Expected cost savings from the National Penn/Community merger, including reductions in interest and non-interest expense, may not be fully realized or realized as quickly as expected.
o Revenues of National Penn and its subsidiaries following the National Penn/Community merger may be lower than expected, or loan losses, deposit attrition, operating costs, customer losses or business disruption following the National Penn/Community merger may be greater than expected.
o Commercial loan growth following the National Penn/Community merger may be lower than expected.
o Costs, difficulties or delays related to the integration of Community's business with National Penn's business may be greater or longer than expected.
o Expected cost savings from National Penn's acquisition of Panasia may not be fully realized or realized as quickly as expected.
o Revenues of Panasia may be lower than expected, or loan losses, deposit attrition, operating costs, customer losses or business disruption at Panasia may be greater than expected.
o Commercial loan growth at Panasia may be lower than expected.
o Costs, difficulties or delays related to the integration of Panasia's business with National Penn's business may be greater or longer than expected.
o Start-up costs of new subsidiaries may be greater, and revenue ramp-up of such subsidiaries may take longer, than expected.
o Changes in the interest rate environment may reduce interest margins and the volume of mortgage loan originations.
o Competitive pressures among depository and other financial institutions may increase significantly.
o General economic or business conditions, either nationally or in the regions in which National Penn will be doing business, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality or a reduced demand for credit.
o Technological changes and systems integration may be harder to make or more expensive than expected.
o Legislation or regulatory changes may adversely affect National Penn's business.
o Adverse changes may occur in the securities markets.
Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. National Penn cautions shareholders not to place undue reliance on such statements.
All written or oral forward-looking statements attributable to National Penn or any person acting on its behalf made after the date of this Report are expressly qualified in their entirety by the cautionary statements contained in this Report. National Penn does not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.
Statistical Disclosures - -----------------------
Disclosures In Management's Discussion and Analysis ---------------------------------------------------
The following statistical disclosures are included in Management's Discussion and Analysis, Item 8 hereof, and are incorporated by reference in this Item 1:
o Interest Rate Sensitivity Analysis.
o Interest Income and Expense, Volume and Rate Analysis.
o Investment Portfolio.
o Loan Maturity and Interest Rate Sensitivity.
o Loan Portfolio.
o Allowance for Loan Losses.
o Deposits.
o Short-Term Borrowings.
Risk Elements - Loans ---------------------
The following table shows the balance at year-end and the effect on interest income of nonperforming assets in National Penn's loan portfolio, by category, for each year in the five-year period ended December 31, 2001:
At December 31, 2001, National Penn had no foreign loans and no loan concentrations exceeding 10% of total loans not disclosed in the loan portfolio composition table on page 20 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, 2001, National Penn 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, 2001, National Penn had no loans that are considered highly-leveraged transactions under applicable regulations although National Penn had approximately $29,364,000 in aggregate loans outstanding that, but for their small individual amount, would be considered such loans. A "highly-leveraged transaction" is a transaction for the purpose of the buyout, acquisition, or recapitalization of a corporation, which involves new debt that doubles the corporation's debt and results in a leverage ratio greater than 50%, produces a leverage ratio greater than 75% where 25% or more results from the buyout, acquisition, or recapitalization, or is designated as such by a syndication agent or regulatory agency.
Historical Statistics - Loans -----------------------------
The following table shows historical statistics of National Penn relative to the relationship among loans (net of unearned discount), net charge-offs, and the allowance for loan losses:
Return on Equity and Assets; Dividend Payout Ratio --------------------------------------------------
Item 2.
Item 2. PROPERTIES. - --------------------
National Penn does not own or lease any property. As of December 31, 2001, NP Bank owns 34 properties in fee and leases 37 other properties; Panasia leases five properties; and National Penn's other direct and indirect subsidiaries lease two properties. The properties owned in fee are not subject to any major liens, encumbrances, or collateral assignments.
The principal office of National Penn and NP Bank is owned in fee and located at Philadelphia and Reading Avenues, Boyertown, Pennsylvania 19512.
NP Bank presently has 58 branches located in the following Pennsylvania counties: Berks, Bucks, Chester, Delaware, Lancaster, Lehigh, Montgomery, Northampton, and Philadelphia.
In addition to its branches, NP Bank presently owns or leases 69 automated teller machines located throughout the nine-county area, all of which are located at bank branch locations except for 21 that are "free-standing" (not located at a branch).
The principal office of Panasia is leased and located at 183 Main Street, Fort Lee, New Jersey 07024. Panasia presently has three other branches located in Bergen County, New Jersey. Panasia also has two offices in Pennsylvania: one in Philadelphia and one in Montgomery County. Panasia has six automated teller machines, all of which are located at bank branch locations.
Item 3.
Item 3. LEGAL PROCEEDINGS. - ---------------------------
Various actions and proceedings are presently pending to which National Penn or one or more of its subsidiaries is a party. These actions and proceedings arise out of routine operations and, in management's opinion, will not have a material adverse effect on National Penn's consolidated financial position.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - -------------------------------------------------------------
None.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT. - -----------------------------------------------
The principal executive officers of National Penn are as follows:
Executive officers of National Penn are elected by the Board of Directors and serve at the pleasure of the Board. Executive Officers of NP Bank are appointed by the Board of Directors of NP Bank and serve until they resign, retire, become disqualified, or are removed by the Board.
PART II -------
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER - ------------------------------------------------------------------------- MATTERS. - --------
National Penn's common stock currently trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol: "NPBC".
The following table reflects the high and low closing sale prices reported for National Penn's common stock, and the cash dividends declared on National Penn's common stock, for the periods indicated, after giving retroactive effect to a 3% stock dividend paid on December 27, 2001 and a 5% stock dividend paid on December 20, 2000.
MARKET VALUE OF COMMON STOCK
-------------------- High Low ---- --- lst Quarter 24.88 17.96 2nd Quarter 23.30 18.57 3rd Quarter 23.06 18.45 4th Quarter 24.27 21.50
-------------------- High Low ------------------- lst Quarter 22.78 17.69 2nd Quarter 21.26 17.57 3rd Quarter 20.92 17.51 4th Quarter 20.81 17.11
CASH DIVIDENDS DECLARED ON COMMON STOCK
2001 2000 ---- ---- lst Quarter $.20 $.18 2nd Quarter .21 .18 3rd Quarter .21 .18 4th Quarter .21 .19
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%.
Item 6.
Item 6. Selected Financial Data. - -----------------------------------
Five-Year Statistical Summary (Dollars in thousands, except per share data)
The unaudited quarterly results of National Penn's operations in 2001 and 2000 are included in Footnote 22 to National Penn's Consolidated Financial Statements included herein at Item 8, Financial Statements and Supplementary Data.
Item 7.
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. As discussed below, in 2001 the company acquired Community Independent Bank, Inc. in a transaction accounted for under the pooling of interests method of accounting. Accordingly, the Company's consolidated financial statements have been restated to reflect the acquisition.
FINANCIAL CONDITION -------------------
During 2001 total assets increased to $2.727 billion, an increase of $112.0 million or 4.3% over the $2.615 billion at year-end 2000. Total assets at the end of 2000 increased $263.5 million or 11.2% over the $2.352 billion at year-end 1999. The increase in 2001 is reflected primarily in the loan category, which increased $54.3 million and the investment category, which increased $51.8 million.
Total cash and cash equivalents increased $3.2 million or 3.0% in 2001 compared to 2000 versus an increase of $33.4 million or 47.1% in 2000 compared to 1999. The increase in 2001 compared to 2000 is due to increased cash and due from banks of $18.5 million, which was partially offset by a decrease in federal funds sold of $8.9 million and a decrease in interest bearing deposits in banks of $6.4 million.
LOAN PORTFOLIO --------------
Net loans and leases increased to $1.814 billion during 2001, an increase of $54.3 million or 3.1% compared to 2000. Net loans increased $137.8 million in 2000 or 8.5% compared to 1999. Loan growth in 2001 was as a result of the increase in commercial and industrial loans of $38.6 million and other real estate type loans of $53.9 million, which was offset by the decrease in construction and residential real estate loans totaling $40.2 million. Approximately $11.0 million of the increase in net loans was the result of an acquisition of a branch office from PNC Bank, N.A. in November 2001. Residential mortgages originated for immediate resale during 2001 amounted to $65.3 million. The company has no significant exposure to energy and agricultural-related loans.
The Company's loans are widely diversified by borrower, industry group, and geographical area in southeastern Pennsylvania and northern New Jersey. The following summary shows the year-end composition of the Company's loan portfolio:
Maturities and sensitivity to changes in interest rates in certain loan categories in the Company's loan portfolio at December 31, 2001, are summarized below:
* Demand loans, past-due loan and overdrafts are reported in "One Year or Less." An immaterial amount of loans have no stated schedule of repayments.
Loan balances segregated in terms of sensitivity to changes in interest rates at December 31, 2001, are summarized below:
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 collectibility consistent with the normal loan evaluation process. This policy is used primarily in evaluating ongoing customers' use of their lines of credit that are at floating interest rates. The Company's outstanding lines of credit to customers are not material.
A loan is placed in a nonaccrual status at the time when ultimate collectibility of principal or interest, wholly or partially, is in doubt. Past due loans are those loans which were contractually past due 90 days or more as to interest or principal payments but are well secured and in the process of collection. Restructured loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower.
Nonperforming assets, including nonaccruals, loans 90 days past due, restructured loans and other real estate owned, were $28.8 million at December 31, 2001, compared to $19.0 million at December 31, 2000, with the largest increase in the loans 90 days past due and still accruing category. Nonaccrual loans represented $16.0 million and $13.0 million at December 31, 2001, and December 31, 2000, respectively. Loans 90 days past due and still accruing interest were $11.8 million and $4.6 million at December 31, 2001 and December 31, 2000, respectively. The increase in this category is due primarily to one large commercial real estate relationship that will take some time to work out but for which we anticipate a manageable level of loss relative to total loan loss reserves and other anticipated losses within the overall loan portfolio. Other real estate owned was $1.0 million at December 31, 2001 and $1.5 at December 31, 2000, respectively. The Company had no restructured loans at December 31, 2001 or December 31, 2000. The allowance for loan losses to nonperforming assets was 146.6% and 205.1% at December 31, 2001 and December 31, 2000, respectively, with the decrease in 2001 due to the increased level of nonperforming assets discussed above. Another measure of the Company's credit quality is reflected by the ratio of net chargeoffs to total loans of 0.31% for 2001 versus 0.28% for the year 2000, and the ratio of nonperforming assets to total loans of 1.55% at December 31, 2001, compared to 1.06% at December 31, 2000, the changes for which have been discussed above.
The Company has not engaged in any transactions with entities established and operated by former members of senior management or individuals with former management relationships with the Company.
INVESTMENT PORTFOLIO --------------------
Investments, which are the Company's secondary use of funds, increased $51.8 million or 8.5% to $658.6 million at year-end 2001. The increase in 2001 is due primarily to investment purchases of $265.9 million primarily in mortgage-backed securities and municipals, which was partially offset by investment sales, calls and maturities and the amortization of mortgage-backed securities. In 2000, the investment portfolio reflected an increase of $77.4 million or 14.6% compared to 1999. The increase in 2000 was due to the addition of $46.9 million in investments from the acquisition of Panasia Bank and investment purchases of $150.8 million, primarily in mortgage-backed securities, which were partially offset by calls and maturities of securities, investment securities sales and payments on mortgage-backed securities.
A summary of securities available for sale at December 31, 2001, 2000 and 1999 follows (in thousands):
The maturity distribution and weighted average yield of the investment portfolio of the Company at December 31, 2001 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.
OTHER ASSETS
Other assets, which is comprised of premises and equipment, accrued interest receivable, bank owned life insurance policies and all other assets increased to $146.9 million, an increase of $2.8 million or 1.9% compared to the $144.1 million at December 31, 2000. In 2000, other assets increased $14.8 million or 11.4% compared to 1999.
DEPOSITS
As the primary source of funds, aggregate deposits of $2.077 billion increased $167.2 million or 8.8% compared to 2000. Non-interest bearing deposits increased $41.1 million and interest bearing deposits increased $126.1 million. $40.2 million of the deposit increase in 2001 is the result of the previously mentioned branch acquisition from PNC Bank, N.A. Deposits of $1.910 billion increased $225.7 million in 2000 or 13.4% compared to 1999.
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, 2001 (in thousands):
The aggregate amount of jumbo certificates of deposit, issued in the amount of $100,000 or more was $267,540,000 in 2001, $242,900,000 in 2000 and $201,575,000 in 1999.
The following is a breakdown, by maturities, of the Company's time certificates of deposit of $100,000 or more as of December 31, 2001. The company has no other time deposits of $100,000 or more as of December 31, 2001 (in thousands).
Maturity --------
3 months or less $ 79,706 Over 3 through 6 months 130,377 Over 6 months through 12 months 55,441 Over 12 months 2,016 -------- Total $267,540 ========
In addition to deposits, earning assets are funded to some extent through purchased funds and borrowings. These include securities sold under repurchase agreements, federal funds purchased, short-term borrowings, long-term borrowings, and subordinated debentures. In the aggregate, these funds totaled $428.4 million at the end of 2001, a $65.4 million or 13.2% decrease compared to 2000, primarily due to the higher level of funding from deposits. The 2000 amount of borrowings and purchased funds of $493.8 million represented an increase of $6.7 million or 1.4% compared to 1999. The increase in 2000 was due to a decrease in securities sold under repurchase agreements and federal funds purchased, of $59.3 million, and a decrease in long-term borrowings of $6.5 million.
RESULTS OF OPERATIONS ---------------------
Net income for 2001 of $32.7 million was 17.8% more than the $27.8 million reported in 2000. The 2000 amount was .5% more than the $27.7 million in 1999. On a per share basis, basic earnings were $1.64, $1.40, and $1.39 for 2001, 2000, and 1999, respectively. Diluted earnings per share were $1.62, $1.39, and $1.37 for 2001, 2000, and 1999, respectively.
Net interest income is the difference between interest income on assets and interest expense on liabilities. Net interest income increased $7.6 million or 8.5% to $96.0 million in 2001 from the 2000 amount of $88.4 million. Interest income decreased $6.6 million as a result of decreased loan income of $5.2 million and decreased investment income of $1.4 million. Interest expense decreased $11.5 million or 11.0% to $92.5 million in 2001 from the 2000 amount of $104.0 million due to decrease of $7.4 million in interest on securities sold under repurchase agreements and federal funds purchased and a decrease of $2.5 million in interest on deposits. Despite the current low rate environment, the cost of attracting and holding deposited funds is an ever-increasing expense in the banking industry. These increases are the real costs of deposit accumulation and retention, including FDIC insurance costs, marketing and branch overhead expenses. Such costs are necessary for continued growth and to maintain and increase market share of available deposits. The Company's interest rate spread increased slightly from 4.16% in 2000 to 4.20% in 2001 due to increased outstandings in interest earning assets and from which the income generated on these assets decreased due to lower rates at a slower pace than on the increased level of interest bearing liabilities for which the expense paid on those liabilities decreased, also due to lower rates, at a faster pace than on the assets.
The following table shows, on a taxable equivalent basis, the changes in the Company's net interest income, by category, due to shifts in volume and rate, for the years ended December 31, 2001 and 2000. The information is presented on a taxable equivalent basis, using an effective tax rate of 35%.
(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.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The provision for loan losses is determined by periodic reviews of loan quality, current economic conditions, loss experience and loan growth. Based on these factors, the provision for loan losses was $9.0 million for the year ended December 31, 2001 and $7.3 million and $6.6 million for the years ended December 31, 2000 and 1999, respectively. The allowance for loan losses of $42.2 million at year-end 2001 and $39.0 million at year-end 2000 as a percentage of total loans was 2.27% at year-end 2001 and 2.17% at year-end 2000. Net loan chargeoffs of $5.8 million, $5.0 million, and $2.8 million during 2001, 2000, and 1999, respectively, continue to be comparable with those of the Company's peers.
A detailed analysis of the Company's allowance for loan losses for the five years ended December 31, 2001, is shown below:
Commercial and industrial loans, real estate loans, and construction loans are charged off to the allowance as soon as it is determined that the repayment of all or part of the principal balance is highly unlikely. Loans to individuals are charged off any time repayment is deemed highly unlikely or as soon as the loan becomes 120 days delinquent. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The Company maintains an allowance for loan losses at a level deemed sufficient to absorb losses, which are inherent in the loan portfolio at each balance sheet date. Management reviews the adequacy of the allowance on at least a quarterly basis to ensure that the provision for loan losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management's assessment of probable estimated losses. The Company's methodology for assessing the appropriateness of the allowance for loan losses consists of several key elements. These elements include a specific reserve for doubtful or high risk loans, an allocated reserve based on historical trends, and an unallocated portion. The Company consistently applies the following comprehensive methodology.
The specific reserve for high risk loans is established for specific commercial and industrial loans, real estate development loans, and construction loans which have been identified by bank management as being high risk loan assets. These high risk loans are assigned a doubtful risk rating grade because the loan has not performed according to payment terms and there is reason to believe that repayment of the loan principal in whole or part is unlikely. The specific portion of the allowance is the total amount of potential unconfirmed losses for these individual doubtful loans. To assist in determining the fair value of loan collateral, the Company often utilizes independent third party qualified appraisal firms which in turn employ their own criteria and assumptions that may include occupancy rates, rental rates, and property expenses, among others.
The second category of reserves consists of the allocated portion of the allowance. The allocated portion of the allowance is determined by taking pools of loans outstanding and commitments that have similar characteristics and applying historical loss experience for each pool. This estimate represents the potential unconfirmed losses within the portfolio. Individual loan pools are created for commercial loans, real estate development and construction loans, and for the various types of loans to individuals. The historical estimation for each loan pool is then adjusted to account for current conditions, current loan portfolio performance, loan policy or management changes or any other factor which may cause future losses to deviate from historical levels. Before applying the historical loss experience percentages, loan balances are reduced by the portion of the loan balances which are subject to a guarantee by a government agency.
The Company also maintains an unallocated allowance. The unallocated allowance is used to cover any factors or conditions, which may cause a potential loan loss but are not specifically identifiable. It is prudent to maintain an unallocated portion of the allowance because no matter how detailed an analysis of potential loan losses is performed these estimates by definition lack precision. Management must make estimates using assumptions and information, which is often subjective and changing rapidly. At December 31, 2001, management believes that the allowance for loan losses and nonperforming loans remained safely within acceptable levels.
The following table shows how the allowance for loan losses is allocated among the various types of loans that the Company has outstanding. This allocation is based on management's specific review of the credit risk of the outstanding loans in each category as well as historical trends.
(1) This allocation is made for analytical purposes. The total allowance is available to absorb losses from any segment of the portfolio.
OTHER INCOME AND EXPENSES
Other income increased $6.8 million or 24.7% in 2001 compared to 2000, as a result of increased service charges on deposit accounts of $3.3 million, increased mortgage banking income of $2.2 million, increased other services charges and fees of $882,000, increased trust income of $317,000, and increased net gains on sale of investment securities of $101,000. The increase in deposit fees is due to the increase in the number of accounts and additional products introduced in 2001. Mortgage income increased due to the decrease in rates and the willingness of customers to refinance. The increase in other income in 2000 compared to 1999 was $3.6 million or 15.1% as a result of increased other service charges and fees of $1.8 million, increased mortgage banking income of $1.4 million, increased service charges on deposit accounts of $1.1 million, increased trust income of $849,000, increased bank owned life insurance income of $431,000, and increased net gains on sale of investment securities of $218,000. Sales of investment securities in 2001 and 2000 totaled $25.6 million and $47.0 million, respectively. Other expenses increased $5.4 million or 7.2% in 2001 compared to 2000 as a result of increased salaries, wages and benefits of $3.2 million, increased other operating of $2.2 million. Other expenses increased $5.8 million or 8.4% in 2000 when compared to 1999, as a result of increased salaries, wages and benefits of $2.4 million, increased other expenses of $2.4 million, and increased net premises and equipment of $1.1 million. For 2001, 2000, and 1999, there are no individual items of other operating expenses that exceed one percent of the aggregate of total interest income and other income, with the exception of advertising and marketing related expenses.
Income before income taxes increased in 2001 by $7.3 million or 21.7% compared to 2000 when income before income taxes increased by $11,000 compared to 1999. Income taxes increased $2.3 million in 2001 compared to 2000 while income taxes decreased $126,000 compared to 1999. The Company's effective tax rate is 19.7% for 2001, 17.0% for 2000, and 17.4% for 1999, respectively. The increase from 2000 to 2001 is due to the addition of nondeductible goodwill added as
a result of the Panasia acquisition in July 2000. The effective tax rate is less than the current 35% incremental rate due to the Company's investments in tax advantaged municipal securities and bank owned life insurance. The Company has a net deferred tax asset of $12.3 million. No valuation reserve is deemed necessary in view of anticipated future taxable income.
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 $108.3 million during 2001. Long-term borrowings decreased $6.5 million during 2001.
The Company maintains 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 stand-by letters of credit. At December 31, 2001, the Company had outstanding commitments of $606.7 million. These commitments include $399.1 million that mature or renew within one year, $42.9 million that mature or renew after one year and within three years, $11.7 million that mature or renew after three years and within five years, and $153.0 that mature or renew after five years.
The Company currently does not have any unconsolidated subsidiaries or special purpose entities.
The Company is responsible for payments under operating leases as disclosed in footnote 14 of the Company's financial statements. The Company has no capital leases.
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, 2001:
(1) Adjustable rate loans are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due. Fixed-rate loans are included in the period in which they are scheduled to be repaid and are adjusted to take into account estimated prepayments based upon assumptions estimating the prepayments in the interest rate environment prevailing during the fourth calendar quarter of 2001. 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, 20.0% of these deposits are considered repriceable within three months and 80.0% are considered repriceable in the over five-year category.
(3) Includes federal funds purchased, securities sold under repurchase agreements, and short and long term borrowings.
Interest rate sensitivity is a function of the repricing characteristics of the Company's assets and liabilities. These characteristics include the volume of assets and liabilities repricing, the timing of the repricing, and the relative levels of repricing. Attempting to minimize the interest rate sensitivity gaps is a continual challenge in a changing rate environment. Based on the Company's gap position as reflected in the above table, current accepted theory would indicate that net interest income would decrease in a falling interest rate environment and would increase in a rising interest rate environment. An interest rate gap table does not, however, present a complete picture of the impact of interest rate changes on net interest income. First, changes in the general level of interest rates do not affect all categories of assets and liabilities equally or simultaneously. Second, assets and liabilities which can contractually reprice within the same period may not, in fact, reprice at the same time or to the same extent. Third, the table represents a one-day position; variations occur daily as the Company adjusts its interest sensitivity throughout the year. Fourth, assumptions must be made to construct such a table. For example, non-interest bearing deposits are assigned a repricing interval of within three months, although history indicates a significant amount of these deposits will not move into interest bearing categories regardless of the general level of interest rates. Finally, the repricing distribution of interest sensitive assets may not be indicative of the liquidity of those assets.
Gap analysis is a useful measurement of asset and liability management; however, it is difficult to predict the effect of changing interest rates based solely on this measure. Therefore, the Company supplements gap analysis with the calculation of the Economic Value of Equity. This report forecasts changes in the Company's market value of portfolio equity ("MVPE") under alternative interest rate environments. The MVPE is defined as the net present value of the Company's existing assets, liabilities, and off-balance sheet instruments. The calculated estimates of change in MVPE at December 31, 2001 are as follows:
MVPE Change in Interest Rate Amount % Change ----------------------- ------ -------- (In Thousands) +300 Basis Points $366,686 (9)% +200 Basis Points 384,373 (5) +100 Basis Points 399,848 (1) Flat Rate 404,175 -- -100 Basis Points 390,350 (3) -200 Basis Points 358,663 (11) -300 Basis Points 327,836 (19)
Management believes that the assumptions utilized in evaluating the vulnerability of the Company's earnings and capital to changes in interest rates approximate actual experience; however, the interest rate sensitivity of the Company's assets and liabilities as well as the estimated effect of changes in interest rates on MVPE could vary substantially if different assumptions are used, such as 400 or 500 basis point changes in interest rates, or actual experience differs from the experience on which the assumptions were based.
If the Company should experience a mismatch in its desired gap ranges or an excessive decline in its MVPE subsequent to an immediate and sustained change in interest rate, it has a number of options which it could utilize to remedy such mismatch. The Company could restructure its investment portfolio through the sale or purchase of securities with more favorable repricing attributes. It could also emphasize loan products with appropriate maturities or repricing attributes, or it could emphasize deposits or obtain borrowings with desired maturities.
The Company anticipates interest rate levels will remain stable in the first half of 2002, and will rise in the second half of 2002. Given this assumption, the Company's asset/liability strategy for 2002 is to move toward a reduced negative
gap position (interest-bearing assets subject to repricing less than interest-earning liabilities subject to repricing) for periods up to a year. The impact of changing interest rates on net interest income is not expected to be significant to the Company's results of operations. Effective monitoring of these interest sensitivity gaps is the priority of the Company's asset/liability management committee.
CAPITAL ADEQUACY
Shareholders' equity increased by $12.5 million or 6.8% in 2001 to $195.7 million. This increase was principally due to an increase in the valuation adjustment for securities available for sale. Cash dividends paid in 2001 increased $1.9 million or 13.6% compared to the cash dividends paid in 2000, which increased $943,000 or 6.9% compared to cash dividends paid in 1999. Earnings retained in 2001 were 49.5% compared to 47.7% in 2000.
The following table sets forth certain capital performance ratios for the Company.
CAPITAL PERFORMANCE 2001 2000 1999 ---- ---- ----
Return on average assets 1.25 1.13 1.21 Return on average equity 16.80 17.30 17.20 Earnings retained 49.50 47.70 50.80
The Company's capital ratios above compare favorably to the minimum required amounts of Tier 1 and total capital to "risk-weighted" assets and the minimum Tier 1 leverage ratio, as defined by banking regulators. At December 31, 2000, the Company was required to have minimum Tier 1 and total capital ratios of 4.0% and 8.0%, respectively, and a minimum Tier 1 leverage ratio of 4.0%. In order for the Company to be considered "well capitalized," as defined by banking regulators, the Company must have Tier 1 and total capital ratios of 6.0% and 10.0%, respectively, and a minimum Tier 1 leverage ratio of 5.0%. At December 31, 2001, the Company and the Banks meet the criteria for a well capitalized institution, and management believes that, under current regulations, the Company will continue to meet its minimum capital requirements in the foreseeable future.
The Company does not presently have any commitments for significant capital expenditures. The Company is not under any agreement with regulatory authorities nor is it aware of any current recommendations by the regulatory authorities which, if they were to be implemented, would have a material effect on liquidity, capital resources, or operations of the Company.
In July 2001, the Company's Board of Directors approved the repurchase of up to 975,000 shares of its common stock to be used for the general corporate purposes, including the Company's dividend reinvestment, stock option, employee stock purchase plans, and other stock-based corporate plans. The stock repurchase plan authorizes the Company to make repurchases from time to time in open market or privately negotiated transactions. No timetable has been set for the repurchases. As of December 31, 2001, a total of 322,000 shares have been repurchased at an aggregate cost of approximately $7,517,000.
ACQUISITION OF PANASIA BANK
On July 11, 2000, the Company completed the acquisition of Panasia Bank (Panasia), a community bank with $110 million in assets. Under the terms of the acquisition, the outstanding shares of Panasia stock were purchased for $29 per share, and the outstanding Panasia stock options were cancelled for cash equal to the difference between their exercise prices and $29 per share, at a total cost of $20 million. The Company financed the Panasia acquisition with a four-year loan from an unaffiliated financial institution. This transaction was accounted for under the purchase method of accounting. Under the purchase method of accounting, Panasia's results of operation are included in the Company's consolidated results of operation from and after July 11, 2000.
ACQUISITION OF COMMUNITY INDEPENDENT BANK, INC.
On January 3, 2001, the Company acquired Community Independent Bank, Inc. ("Community") by its merger with and into the Company. Community's banking subsidiary, Bernville Bank, N.A., had $100 million in assets as of December 31, 2000. Under the terms of the merger, each outstanding share of Community stock was converted into .945 share of the Company's common stock, resulting in issuance of 659,245 shares of the Company's common stock. Outstanding options for Community stock were converted into options for 19,184 shares of the Company's common stock. The transaction was accounted for under the pooling of interests method of accounting.
The Company anticipates that the Community acquisition will be accretive to the Company's earnings in 2002.
FUTURE OUTLOOK
In 2002, National Penn Bank anticipates opening one new community office in Chester County, PA and Panasia Bank N.A. anticipates opening one new community office in Annandale, VA.
FORWARD-LOOKING STATEMENTS
The Company has discussed earnings, asset quality, recent acquisitions, and branch expansion in this report. These, and any other statements preceded by, followed by or that include the words "believes," "expects," "anticipates," "estimates," or similar expressions are forward-looking statements.
Risks and uncertainties could cause actual future results and investments to differ materially from those contemplated in such forward-looking statements. These risks and uncertainties include, but are not limited to, the following:
o Expected cost savings from the Community merger, including reductions in interest and non-interest expense, may not be fully realized or realized as quickly as expected.
o The Company's revenues following the Community merger may be lower than expected, or loan losses, deposit attrition, operating costs, customer losses or business disruption following the Community merger may be greater than expected.
o Commercial loan growth following the Community merger may be lower than expected.
o Costs, difficulties or delays related to the integration of Community's business with the Company's business may be greater or longer than expected.
o Expected cost savings from the Company's acquisition of Panasia may not be fully realized or realized as quickly as expected.
o Revenues of Panasia may be lower than expected, or loan losses, deposit attrition, operating costs, customer losses or business disruption at Panasia may be greater than expected.
o Commercial loan growth at Panasia may be lower than expected.
o Costs, difficulties or delays related to the integration of Panasia's business with the Company's business may be greater or longer than expected.
o Start-up costs of new subsidiaries may be greater, and revenue ramp-up of such subsidiaries may take longer, than expected.
o Changes in the interest rate environment may reduce interest margins and the volume of mortgage loan originations.
o Competitive pressures among depository and other financial institutions may increase significantly. o General economic or business conditions, either nationally or in the regions which the Company will be doing business, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality or a reduced demand for credit.
o Technological changes and systems integration may be harder to make or more expensive than expected. o Legislation or regulatory changes may adversely affect the Company's business. o Adverse changes may occur in the securities markets.
These risks and uncertainties are all difficult to predict, and most are beyond the control of the Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report.
Item 7A.
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.
Item 8.
Item 8. FINANCIAL sTATEMENTS AND SUPPLEMENTARY DATA. - ----------------------------------------------------
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of this statement.
The accompanying notes are an integral part of these statements.
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 2001 and 2000 - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
National Penn Bancshares, Inc., primarily through its Bank subsidiaries, National Penn Bank (NPB) and Panasia Bank, N.A. (Panasia) (collectively, the Banks), has been serving residents and businesses of southeastern Pennsylvania since 1874 and northern New Jersey since July 2000. The Banks, which have in excess of 60 branch locations, are locally managed community banks providing commercial banking products, primarily loans and deposits. Trust services are provided through Investors Trust Company (ITC). Penn 1st Financial Services, Inc. (Penn 1st) is a mortgage banking company and is engaged in the activity of extending credit and servicing loans. Penn Securities, Inc., is a registered broker dealer with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers. The Banks, ITC and Penn Securities, Inc. encounter vigorous competition for market share in the communities they serve from bank holding companies, other community banks, thrift institutions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.
The Company, the Banks, ITC and Penn Securities, Inc. are subject to regulations of certain state and federal agencies. These regulatory agencies periodically examine the Company and its subsidiaries for adherence to laws and regulations. As a consequence, the cost of doing business may be affected.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting policies followed by the Company conform with accounting principles generally accepted in the United States of America and with predominant practice within the banking industry.
The consolidated financial statements include the accounts of the Company and the Company's wholly owned subsidiaries, NPB, Panasia, ITC, National Penn Investment Company, National Penn Life Insurance Company, NPB Capital Trust, and NPB's wholly owned subsidiaries Penn 1st, Penn Securities, Inc., Link Financial Services, Inc., NPB Delaware, Inc., and National Penn Consulting Services, Inc. Investments owned between 20% and 50% are accounted for using the equity method. All material intercompany balances have been eliminated.
In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the balance sheets, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The principal estimates that are susceptible to significant change in the near term relate to the allowance for loan losses and certain intangible assets, such as goodwill and core deposits. The evaluation of the adequacy of the allowance for loan losses includes an analysis of the individual loans and overall risk characteristics and size of the different loan portfolios, and takes into consideration current economic and market conditions, the capability of specific borrowers to pay specific loan obligations, as well as current loan collateral values. However, actual losses on specific loans, which also are encompassed in the analysis, may vary from estimated losses.
Substantially all outstanding goodwill resulted from the acquisition of Panasia Bank, a northern New Jersey institution concentrating in the Asian community. As the result of Panasia's market penetration in the northern New Jersey area, the Company had formulated its own strategy to create such a market role. Accordingly, implicit in the purchase of the Panasia franchise was the acquisition of that role. However, if such benefits, including new business, are not derived or the Company changes its business plan an impairment may be recognized.
Core deposit intangibles are amortized over estimated lives of deposit accounts. However, decreases in deposit lives may result in increased amortization and/or a charge for impairment may be recognized.
INVESTMENT SECURITIES
Investment securities which are held for indefinite periods of time, which management intends to use as part of its asset/liability strategy, or which may be sold in response to changes in interest rates, changes in prepayment risk, increases in capital requirements, or other similar factors are classified as available for sale and are carried at fair value. Net unrealized gains and losses for such securities, net of tax, are required to be recognized as a separate
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
component of shareholders' equity and excluded from determination of net income. Gains or losses on disposition are based on the net proceeds and cost of the securities sold, adjusted for amortization of premiums and accretion of discounts, using the specific identification method. Debt and equity securities held for resale during 1998 were classified as trading account securities and reported at fair value. Realized and unrealized gains or losses are recorded in non-interest income as trading revenue. The Company did not have any trading securities as of December 31, 2001 and 2000.
The Company entered into interest rate swap and floor agreements to manage its sensitivity to interest rate risk. For interest rate risk management swap and floors agreements, interest income or interest expense is accrued over the terms of the agreements and transaction fees are deferred and amortized to interest income or expense over the terms of the agreements.
SFAS No. 133, (SFAS No. 133) Accounting for Derivative Instruments and Hedging Activities was amended in June, 1999 by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, and in June, 2000, by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, (collectively SFAS No. 133). SFAS No. 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS No. 133 an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized asset or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available for sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. The Company adopted SFAS No. 133 effective January 1, 2001 and the adoption did not have a material impact on the Company's consolidated financial position or results of operations.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated based upon the principal amount outstanding. The allowance for loan losses is established through a provision for loan losses charged as an expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb probable losses on existing loans that may become uncollectible based on evaluations of the collectibility of loans, and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. Accrual of interest is stopped on a loan when management believes, after considering economic and business conditions and collection efforts that the borrower's financial condition is such that collection of interest is doubtful.
The Company accounts for its impaired loans in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. This standard requires that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. SFAS No. 114 excludes such homogeneous loans as consumer and mortgage.
The Company accounts for its transfers and servicing financial assets in accordance with SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, as amended. In September 2000, the Financial Accounting Standards Board issued SFAS No. 140, Accounting for Transfers and
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Servicing of Financial Assets and Extinguishments of Liabilities, which replaces SFAS No.125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and revises the standards for accounting for the securitizations and other transfers of financial assets and collateral. This new standard also requires certain disclosures, but carries over most of the provisions of SFAS No. 125. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of this statement did not have a material impact on the Company's consolidated financial statements.
On July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues. SAB No. 102 provides guidance on the development, documentation, and application of a systematic methodology for determining the allowance for loans and leases in accordance with US GAAP and is, effective upon issuance. The adoption of SAB No. 102 does not have a material impact on the Company's financial position or results of operations.
PREMISES AND EQUIPMENT
Buildings, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization computed by the straight-line method over the estimated useful lives of the assets.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 retains the existing requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. However, SFAS No. 144 makes changes to the scope and certain measurement requirements of existing accounting guidance. SFAS No. 144 also changes the requirements relating to reporting the effects of a disposal or discontinuation of a segment of a business. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of this statement is not expected to have a significant impact on the financial condition or results of operations of the Company.
GOODWILL AND CORE DEPOSIT INTANGIBLES
Substantially all outstanding goodwill resulted from the acquisition of Panasia Bank (Panasia) in 2000 and is being amortized on a straight-line basis over approximately 20 years and is included in other assets. The unamortized balance at December 31, 2001 and 2000 was $19,202,000 and $17,028,000, respectively. Amortization expense for the year ended December 31, 2001 and 2000 was $1,567,000 and $1,000,000, respectively.
The Company has recognized core deposit intangibles, as a result of a branch acquisitions, which are being amortized on a straight-line basis over 8 years and are included in other assets.
On June 29, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Intangible Assets. These statements are expected to result in significant modifications relative to the Company's accounting for goodwill and other intangible assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 must be accounted for under the purchase method of accounting. SFAS No. 141 was effective upon issuance. SFAS No. 142 modifies the accounting for all purchased goodwill and intangible assets. SFAS No. 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. SFAS No. 142 will be effective for fiscal years beginning after December 31, 2001 and early adoption is not permitted except for business combinations entered into after June 30, 2001. The Company is currently evaluating the provisions of SFAS No. 142, but its preliminary assessment is that this Statement will not have a material impact on the Company's financial position or results of operations.
Upon the adoption of SFAS No. 142 on January 1, 2002, the Company will no longer amortize goodwill, thereby eliminating annual amortization expense of approximately $1,600,000.
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
OTHER ASSETS
Financing costs related to the issuance of junior subordinated debentures are being amortized over the life of the instruments and are included in other assets.
BANK OWNED LIFE INSURANCE
The Company invests in bank owned life insurance (BOLI). BOLI involves the purchasing of life insurance by the Company on a chosen group of employees. The Company is the owner and beneficiary of the policies.
EMPLOYEE BENEFIT PLANS
The Company has certain employee benefit plans covering substantially all employees. The Company follows the disclosure provisions of SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which revises employers' disclosures about pension and other postretirement benefit plans. Net pension expense consists of service cost, interest cost, return on pension assets and amortization of unrecognized initial net assets. The Company accrues pension costs as incurred.
The Company accounts for stock options under SFAS No. 123, Accounting for Stock-Based Compensation, which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees. Entities that continue to account for stock options using APB Opinion 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The Company's stock option plans are accounted for under APB Opinion 25.
INCOME TAXES
The Company accounts for income taxes under the liability method of accounting for income taxes specified by SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are allowance for loan losses, deferred loan fees, deferred compensation and securities available for sale.
STATEMENTS OF CASH FLOWS
The Company considers cash and due from banks, interest bearing deposits in banks and federal funds sold as cash equivalents for the purposes of reporting cash flows. Cash paid for interest and taxes is as follows (in thousands):
Years Ended December 31, ------------------------------------- 2001 2000 1999 ---- ---- ----
Interest $97,109 $95,997 $79,832 Taxes 9,538 9,372 7,323
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.
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
OTHER REAL ESTATE OWNED
Other real estate owned is recorded at the lower of cost or estimated fair market value less costs of disposal. When property is acquired, the excess, if any, of the loan balance over fair market value is charged to the allowance for possible loan losses. Periodically thereafter, the asset is reviewed for subsequent declines in the estimated fair market value. Subsequent declines, if any, and holding costs, as well as gains and losses on subsequent sale, are included in the consolidated statements of income.
EARNINGS PER SHARE
Earnings per share are calculated on the basis of the weighted average number of common shares outstanding during the year. All weighted average, actual shares or per share information in the financial statements have been adjusted retroactively for the effect of stock dividends and splits.
The Company calculates earnings per share under the provisions of SFAS No. 128, Earnings Per Share, which eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
ADVERTISING COSTS
It is the Company's policy to expense advertising costs in the period in which they are incurred. Advertising expense for the years ended December 31, 2001, 2000 and 1999, was approximately $2,728,000, $2,709,000 and $2,453,000, respectively.
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, requires the reporting of comprehensive income, which includes net income as well as certain other items, which results in a change to equity during the period (in thousands).
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
2. ACQUISITIONS
On January 3, 2001, the Company completed a merger with Community Independent Bank, Inc. (CIB). Under the terms of the merger, each share of CIB stock was converted into 0.945 shares of the Company's common stock, resulting in an issuance of 679,022 shares of the Company's common stock. In addition, outstanding stock options to purchase CIB common stock were converted into stock options to purchase 19,764 shares of the Company's common stock, with an exercise price of $8.89 to $12.22 per share. This transaction was accounted for under the pooling of interests method of accounting.
On July 14, 2000, the Company completed the acquisition of Panasia. Under terms of the agreement, each share of Panasia stock was purchased for $29 per share and each outstanding Panasia stock option was cancelled for cash equal to the difference between $29 and its per share exercise price, for a total cost $20,005,000. This transaction was accounted for under the purchase method of accounting and the results of operations of the Company for the year ended December 31, 2000, include only the results of operations of Panasia from the date of acquisition, July 11, 2000, through December 31, 2000. The acquisition resulted in the recording of approximately $12.2 million of goodwill, which is being amortized on a straight-line basis over 20 years.
On January 4, 1999, the Company, through the Bank, completed a merger with Elverson National Bank (Elverson). Under the terms of the merger, each share of Elverson was converted into 1.4973 shares of the Company's common stock, resulting in an issuance of 4,133,021 shares of the Company's common stock. In addition, outstanding stock options to purchase Elverson common stock were converted into stock options to purchase 62,879 shares of the Company's common stock, with an exercise price of $12.00 to $14.55 per share. This transaction was accounted for under the pooling of interests method of accounting. Accordingly, all prior period amounts have been restated to reflect the acquisition.
3. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair values of the Company's investment securities are summarized as follows (in thousands):
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
3. INVESTMENT SECURITIES - Continued
The amortized cost and fair value of investment securities available for sale, by contractual maturity, at December 31, 2001 (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.
Proceeds from the sales of investment securities during 2001, 2000 and 1999, were $25,601,000, $47,043,000 and $45,661,000, respectively. Gross gains realized on those sales were $961,000, $676,000 and $339,000 in 2001, 2000 and 1999, respectively, gross losses were $627,000 in 2001 and $443,000 in 2000 and $324,000 in 1999. As of December 31, 2001 and 2000, investment securities with a book value of $426,406,000 and $362,121,000, respectively, were pledged to secure public deposits and for other purposes as provided by law. As of December 31, 2001 and 2000, the Company did not have any investment securities of any one issuer where the carrying value exceeded 10% of shareholders' equity.
4. LOANS
Major classifications of loans are as follows (in thousands):
Loans on which the accrual of interest has been discontinued or reduced amounted to approximately $15,988,000 and $12,984,000 at December 31, 2001 and 2000, respectively. If interest on these loans had been accrued, interest income would have increased by approximately $215,000, $251,000 and $425,000 for 2001, 2000 and 1999, respectively. Loan balances past due 90 days or more and still accruing interest, but which management expects will eventually be paid in full, amounted to $11,794,000 and $4,559,000 at December 31, 2001 and 2000, respectively.
The balance of impaired loans was $12,667,000 at December 31, 2001. The Company has identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
4. LOANS - Continued
the loan agreement. The impaired loan balance included $12,667,000 of non-accrual loans. The allowance for loan loss associated with the $12,667,000 of impaired loans was $2,458,000 at December 31, 2001. The average impaired loan balance was $19,520,000 during 2001 and the income recognized on impaired loans during 2001 was $863,000. 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 $5,548,000 at December 31, 2000. The Company has identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The impaired loan balance included $5,548,000 of non-accrual loans. The allowance for loan loss associated with the $5,548,000 of impaired loans was $1,701,000 at December 31, 2000. The average impaired loan balance was $10,234,000 and $8,918,000 during 2000 and 1999 and the income recognized on impaired loans during 2000 and 1999 was $437,000 and $439,000. 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.
Changes in the allowance for loan losses are as follows (in thousands):
5. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows (in thousands):
Depreciation and amortization expense amounted to $4,812,000, $4,895,000 and $4,253,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
6. DEPOSITS
The aggregate amount of jumbo certificates of deposit, each with a minimum denomination of $100,000, was approximately $267,540,000 and $242,900,000 in 2001 and 2000, respectively.
At December 31, 2001, the scheduled maturities of certificates of deposit are as follows (in thousands):
2002 $665,821 2003 164,269 2004 55,721 2005 8,182 Thereafter 10,989 -------- $904,982 ========
7. SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under agreements to repurchase generally mature within 30 days from the date of the transactions. Short-term borrowings consist of Treasury Tax and Loan Note Options and various other borrowings, which generally have maturities of less than one year. The details of these categories are presented below (in thousands):
The weighted average rates paid in aggregate on these borrowed funds for 2001, 2000 and 1999 were 3.78%, 5.80% and 4.56%, respectively.
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
8. LONG-TERM BORROWINGS
FHLB ADVANCES
At December 31, 2001, advances from the Federal Home Loan Bank (FHLB) totaling $125,537,000 will mature within one to ten years and are reported as long-term borrowings. The advances are collateralized by FHLB stock and certain first mortgage loans and mortgage-backed securities. These advances had a weighted average interest rate of 6.01%. Unused lines of credit at the FHLB were $444,811,000 and $407,660,000 at December 31, 2001 and 2000, respectively.
Outstanding borrowings mature as follows (in thousands):
2002 $ 35,000 2003 -- 2004 -- 2005 -- 2006 -- Thereafter 90,537 -------- $125,537 ========
OTHER BORROWINGS
During 2000, the Company borrowed $21,000,000 with an interest rate of the federal funds rate plus 0.875%. The note matures on June 30, 2004 and requires monthly interest and quarterly principal payments. The balance as of December 31, 2001 is $14,437,000 with an interest rate of 2.725%.
SUBORDINATED DEBENTURES
The Company issued $41,500,000 of 9% junior subordinated deferrable interest debentures (the debentures) to NPB Capital Trust (the Trust), a Delaware business trust, in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. The Trust issued $40,250,000 of preferred securities to investors. The Company's obligations under the debentures and related documents, taken together, constitute a fully and unconditional guarantee by the Company of the Trust's obligations under the preferred securities. The preferred securities are redeemable by the Company on or after June 20, 2002, or earlier in the event the deduction of related interest for federal income taxes is prohibited, treatment as Tier I capital is no longer permitted, or certain other contingencies arise. The preferred securities must be redeemed upon maturity of the debentures in 2027.
9. PENSION PLANS
NPB and its subsidiaries and ITC has a non-contributory defined benefit pension plan covering substantially all employees. The Company-sponsored pension plan provides retirement benefits under pension trust agreements and under contracts with insurance companies. The benefits are based on years of service and the employee's compensation during the highest five consecutive years during the last 10 years of employment. The Company's policy is to fund pension costs allowable for income tax purposes.
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
9. PENSION PLANS - Continued
The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets (in thousands):
Net pension cost included the following components (in thousands):
The assumed discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.13% and 4.50%, respectively in 2001; 7.13% and 4.50%, respectively, in 2000; and 6.75% and 4.50%, respectively, in 1999. The expected long-term rate of return on assets was 8.25% for 2001, 2000 and 1999.
The Company has a capital accumulation and salary reduction plan under Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the plan, all employees are eligible to contribute from 3% to a maximum of 15% of their annual salary, with the Company matching 50% of any contribution between 3% and 7%. Matching contributions to the plan were $809,000, $671,000 and $594,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
10. INCOME TAXES
The components of the income tax expense included in the consolidated statements of income are as follows (in thousands):
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):
Deferred tax assets and liabilities consist of the following (in thousands):
As a result of the acquisition of Panasia Bank, the Company computed a net deferred tax asset of $209,000 and a deferred tax liability on unrealized holding gains of $160,000, during 2000.
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
11. SHAREHOLDERS' EQUITY
On October 24, 2001, the Company declared a 3% stock dividend to shareholders of record on December 11, 2001 and payable on December 27, 2001.
On July 25, 2001, the Company approved a stock repurchase plan of 975,000 shares of its common stock. Repurchases can be from time to time and will be used for general corporate purposes including the Company's dividend reinvestment plan, stock option plans, employee stock purchase plan, and other stock benefit plans. No timetable has been set for the repurchases. As of December 31, 2001, a total of 322,000 shares have been repurchased at an aggregate cost of approximately $7,517,000.
On October 25, 2000, the Company declared a 5% stock dividend to shareholders of record on December 8, 2000 and payable on December 20, 2000. On October 27, 1999, the Company declared a 5% stock dividend to shareholders of record on December 6, 1999, and payable on December 22, 1999.
On July 28, 1999, the Company approved a stock repurchase plan of 850,000 shares of its common stock. On July 23, 2000, the repurchase plan was terminated. Prior to the termination, the Company has repurchased 441,000 shares at a cost of $10,380,000.
12. SHAREHOLDER RIGHTS PLAN
The Company adopted a Shareholder Rights Plan (the Rights Plan) in 1989 to protect shareholders from attempts to acquire control of the Company at an inadequate price. Under the Rights Plan, the Company distributed a dividend of one right to purchase a unit of preferred stock on each outstanding common share of the Company. The rights are not currently exercisable or transferable, and no separate certificates evidencing such rights will be distributed, unless certain events occur. The rights were to expire on August 22, 1999. On August 21, 1999, the Plan was amended to extend the expiration date to August 22, 2009.
After the rights become exercisable, under certain circumstances, the rights (other than rights held by a 19.9% beneficial owner or an "adverse person") will entitle the holders to purchase either the Company's common shares or the common shares of the potential acquirer at a substantially reduced price.
The Company is generally entitled to redeem the rights at $0.001 per right at any time until the 10th business day following a public announcement that a 19.9% position has been acquired. Rights are not redeemable following an "adverse person" determination.
The Rights Plan was not adopted in response to any specific effort to acquire control of the Company. The issuance of rights had no dilutive effect, did not affect the Company's reported earnings per share, and was not taxable to the Company or its shareholders.
13. EARNINGS PER SHARE
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
Options to purchase 1,096,893 shares of common stock at $23.28 to $27.30 per share were outstanding during 2001. They were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price.
Options to purchase 847,961 shares of common stock at $23.06 to $27.30 per share were outstanding during 2000. They were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price.
Options to purchase 838,580 shares of common stock at $23.06 to $27.30 per share were outstanding during 1999. They were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price.
14. COMMITMENTS AND CONTINGENT LIABILITIES
LEASE COMMITMENTS
Future minimum payments under non-cancelable operating leases are due as follows (in thousands):
Year ending December 31, ------------------------ 2002 $ 2,719 2003 2,352 2004 1,980 2005 1,369 2006 678 Thereafter 1,268 ------- $10,366 =======
The total rental expense was approximately $3,138,000, $3,104,000 and $2,865,000 in 2001, 2000 and 1999, respectively.
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
14. COMMITMENTS AND CONTINGENT LIABILITIES - Continued
OTHER
In the normal course of business, the Company, the Banks and ITC have been named as defendants in several lawsuits. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management that the resolution of such suits will not have a material adverse effect on the financial position or results of operations of the Company.
15. STOCK OPTIONS
The Company maintains an Officers' and Key Employees' Stock Compensation Plan (Officers' Plan). A total of 2,449,469 shares of common stock have been made available for options or restricted stock to be granted through December 17, 2006. Options granted under the Officers' Plan will vest over a five-year period, in 20% increments on each successive anniversary of the date of grant. There are 1,345,097 outstanding options under the Officers' Plan at December 31, 2001. Options granted under the Company's previous stock option plan, are subject to a vesting schedule commencing at two years and expire ten years and one month from the date of issue. There are 714,278 outstanding options at December 31, 2001.
In addition, the Company has a Non-employee Director Stock Option Plan (Directors' Plan). Under the Directors' Plan, a total of 312,990 shares of common stock have been made available for options to be granted through January 3, 2004. The options granted under the Directors' Plan fully vest after two years and expire ten years from the date of issue. There are 60,459 outstanding options under the Directors' Plan at December 31, 2001.
Under all plans, the option price per share is equivalent to 100% of the fair market value on the date the options were granted as determined pursuant to the plan. Accordingly, no compensation cost has been recognized for the plans. The number of shares available for granting totaled 424,199 at December 31, 2000 and 1,164,805 at December 31, 2001. As of December 31, 2001, 62,113 options were outstanding as a result of previous acquisitions.
Had compensation cost for the plans been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, the Company's net income and earnings per share of common stock would have been reduced to the pro forma amounts indicated below.
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 2001, 2000 and 1999, respectively: dividend yield of 3.85%, 4.25% and 3.23%; expected volatility of 14.0%, 14.0% and 17.0%; risk-free interest rates for each plan of 5.23% and 5.04% for 2001 and 6.78% and 5.38% for 2000 and 6.50% and 4.79% for 1999; and expected lives of 8.11 years and 7.02 years for each plan in 2001, 6.63 years and 7.56 years for each plan in 2000 and 6.23 years and 8.98 years for each plan in 1999.
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
15. STOCK OPTIONS - Continued
A summary of the status of the Company's fixed option plans is presented below:
The following table summarizes information about nonqualified options outstanding at December 31, 2001:
16. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Company grants commercial and residential loans to customers throughout southeastern Pennsylvania and northern New Jersey. Although the Company has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economic sector.
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, interest rate swaps, and interest rate floor. Those instruments involve, to varying degrees, elements of credit, interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For interest rate swaps and floors, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of its interest rate swap agreements through credit approvals, limits and monitoring procedures.
Unless otherwise noted, the Company does not require collateral or other security to support financial instruments with credit risk. The contract or notional amounts as of December 31, 2001 and 2000, are as follows (in thousands):
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, 2001, varies up to 100%; the average amount collateralized is 90%.
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
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued
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 2001, the interest rate swaps had the effect of increasing the Company's net interest income by $1,029,000 over what would have been realized had the Company not entered into the swap agreements.
An interest rate floor is a contract that protects the holder against a decline in interest rates below a certain point. The primary risk associated with interest rate floors is exposure to current and possible future movements in interest rates. The interest rate floor expired in 2001.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. For the bank, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments as defined in SFAS No. 107. However, many of such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company's general practice and intent to hold its financial instruments to maturity and to not engage in trading or sales activities. Therefore, the Company had to use significant estimations and present value calculations to prepare this disclosure.
Changes in assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.
Fair values have been estimated using data that management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument. The estimation methodologies, resulting fair values and recorded carrying amounts at December 31, 2001 and 2000, were as follows (in thousands):
Fair value of loans and deposits with floating interest rates is generally presumed to approximate the recorded carrying amounts. Financial instruments actively traded in a secondary market have been valued using quoted available market prices.
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.
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
18. FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Fair value of financial instrument liabilities with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand), totaling $1,171,813,000 for 2001 and $978,567,000 for 2000.
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.
The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments including commitments to extend credit and the fair value of letters of credit are considered immaterial.
The fair value of interest rate swaps and interest rate floors are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties. The aggregate fair value for the interest rate swaps and the interest rate floor are approximately $4.1 million and $442,000.
19. REGULATORY MATTERS
The Banks are required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those balances for the year ended December 31, 2001, was approximately $8,334,000.
Dividends are paid by the Company from its assets, which are mainly provided by dividends from the Banks. However, certain restrictions exist regarding the ability of the Banks to transfer funds to the Company in the form of cash dividends, loans or advances. Under the restrictions in 2002, the Banks, without prior approval of bank regulators, can declare dividends to the Company totaling $29,464,000 plus additional amounts equal to the net earnings of the Banks for the period January 1, 2002, through the date of declaration less dividends previously paid in 2002.
The Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital adequacy require the Banks and the Company to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 2001, that the Banks and Company meet all capital adequacy requirements to which they are subject.
As of December 31, 2001, the Banks met all regulatory requirements for classification as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, core risk-based and core leverage ratios as set forth in the table. There are no conditions or events that management believes have changed the institution's category.
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
19. REGULATORY MATTERS - Continued
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
20. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The following is a summary of selected financial information of National Penn Bancshares, Inc., parent company only (in thousands):
CONDENSED STATEMENTS OF INCOME
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
20. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
CONDENSED STATEMENTS OF CASH FLOWS
21. SEGMENT INFORMATION
SFAS No. 131, Segment Reporting, establishes standards for public business enterprises to report information about operating segments in their annual financial statements and requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also established standards for related disclosure about products and services, geographic areas, and major customers. Operating segments are components of an enterprise, which are evaluated regularly by the chief operating decision maker in deciding how to allocate and assess resources and performance. The Company's chief operating decision maker is the President and Chief Executive Officer. The Company has identified its reportable operating segment as "Community Banking".
The Company's community banking segment consists of commercial and retail banking. The community banking business segment is managed as a single strategic unit which generates revenue from a variety of products and services provided by the Banks. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending.
Nonreportable operating segments of the Company's operations which do not have similar characteristics to the community banking operations and do not meet the quantitative thresholds requiring disclosure are included in the "Other" category. These nonreportable segments include ITC, Penn Securities, National Penn Life Insurance Company, NPB Capital Trust and the Parent.
The accounting policies used in this disclosure of business segments are the same as those described in the summary of significant accounting policies. The consolidating adjustments reflect certain eliminations of intersegment revenues, cash and investment in subsidiaries.
National Penn Bancshares, Inc. Notes to Consolidated Financial Statements - Continued December 31, 2001 and 2000 - --------------------------------------------------------------------------------
21. SEGMENT INFORMATION - Continued
Reportable segment-specific information and reconciliation to consolidated financial information is as follows:
22. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the Company, which, in the opinion of management, reflects all adjustments (comprising only normal recurring accruals) necessary for a fair presentation. Net income per share of common stock has been restated to retroactively reflect certain stock dividends.
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, 2001 and 2000, 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, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Penn Bancshares, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania January 21, 2002
Item 9.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - -------------------------------------------------------------
None.
PART III --------
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - -------------------------------------------------------------
The information relating to executive officers of National Penn is included under Item 4A in Part I hereof. The information required by this item relating to directors of National Penn and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to pages 2, 3, 4 and 21 of National Penn's definitive Proxy Statement to be used in connection with National Penn's 2002 Annual Meeting of Shareholders (the "Proxy Statement").
Item 11.
Item 11. EXECUTIVE COMPENSATION. - ---------------------------------
The information required by this item is incorporated herein by reference to pages 6 through 15 of the Proxy Statement.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - -------------------------------------------------------------------------
The information required by this item is incorporated herein by reference to pages 19 and 20 of the Proxy Statement.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - ---------------------------------------------------------
The information required by this item is incorporated herein by reference to page 21 the Proxy Statement.
PART IV -------
Item 14.
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.
3. Exhibits. ---------
2.1 Agreement dated February 14, 2000, between National Penn Bancshares, Inc. and Panasia Bank. (Incorporated by reference to Exhibit 2.2 to National Penn's Annual Report on Form 10-K for the year ended December 31, 1999.)
2.2 Agreement dated July 23, 2000, between National Penn Bancshares, Inc. and Community Independent Bank, Inc. (Schedules are omitted pursuant to Regulation S-K, Item 601(b)(2); National Penn agrees to furnish a copy of such schedules to the Securities and Exchange Commission upon request.) (Incorporated by reference to Exhibit 2.2 to National Penn's Report on Form 8-K dated July 11, 2000.)
3.1 Articles of Incorporation, as amended, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to National Penn's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.)
3.2 Bylaws, as amended, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.2 to National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.)
4.1 Form of Junior Subordinated Indenture between National Penn Bancshares, Inc. and Bankers Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.1 to National Penn's Registration Statement Nos. 333-26585 and 333-26585-01 on Form S-3, as filed on May 6, 1997.)
4.2 Form of Trust Agreement between National Penn Bancshares, Inc. and Bankers Trust (Delaware), as Trustee. (Incorporated by reference to Exhibit 4.2 to National Penn's Registration Statement Nos. 333-26585 and 333-26585-01 on Form S-3, as filed on May 6, 1997.)
4.3 Form of Amended and Restated Trust Agreement among National Penn Bancshares, Inc., Bankers Trust Company, as Property Trustee, and Bankers Trust (Delaware), as Delaware Trustee. (Incorporated by reference to Exhibit 4.3 to National Penn's Registration Statement Nos. 333-26585 and 333-26585-01 on Form S-3, as filed on May 12, 1997.)
4.4 Form of Guarantee Agreement between National Penn Bancshares, Inc. and Bankers Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.4 to National Penn's Registration Statement Nos. 333-26585 and 333-26585-01 on Form S-3, as filed on May 12, 1997.)
4.5 Term Loan Agreement dated July 11, 2000, between National Penn Bancshares, Inc. and the Northern Trust Company. (Omitted pursuant to Regulation S-K, Item 601(b)(4)(iii); National Penn agrees to furnish a copy of such agreement to the Securities and Exchange Commission upon request.)
10.1 National Penn Bancshares, Inc. Amended and Restated Dividend Reinvestment Plan.
10.2 National Penn Bancshares, Inc. Pension Plan (Amended and Restated Effective January 1, 2001).*
10.3 Bernville Bank, N.A. Employees' Profit Sharing Plan - Plan Compliance and Merger Amendment.* (Incorporated by reference to Exhibit 10.1 to National Penn's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.)
10.4 National Penn Bancshares, Inc. Capital Accumulation Plan (Amended and Restated Effective January 1, 1997) (Revised 2001).* (Incorporated by reference to Exhibit 10.2 to National Penn's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.)
10.5 Amendment No. 1 to National Penn Bancshares, Inc. Capital Accumulation Plan (Amended and Restated Effective January 1, 1997) (Revised 2001).* (Incorporated by reference to Exhibit 4.2 to
National Penn's Registration Statement No. 333-75730 on Form S-8, as filed on December 21, 2001.)
10.6 Amendment No. 2 to National Penn Bancshares, Inc. Capital Accumulation Plan (Amended and Restated Effective January 1, 1997) (Revised 2001).* (Incorporated by reference to Exhibit 4.6 to National Penn's Post-Effective Amendment to Registration Statement No. 333-75730 on Form S-8, as filed on January 7, 2002.)
10.7 National Penn Bancshares, Inc. Amended and Restated Executive Incentive Plan.* (Incorporated by reference to Exhibit 10.1 to National Penn's Report on Form 8-K dated December 20, 2000, as filed on January 4, 2001.)
10.8 National Penn Bancshares, Inc. Executive Incentive Plan/Schedules.*
10.9 National Penn Bancshares, Inc. Amended and Restated Stock Option Plan.*
10.10 National Penn Bancshares, Inc. Amended Officers' and Key Employees' Stock Compensation Plan.* (Incorporated by reference to Exhibit 10.1 to National Penn's Report on Form 8-K dated September 26, 2001, as filed on September 27, 2001.)
10.11 National Penn Bancshares, Inc. Directors' Fee Plan.*
10.12 National Penn Bancshares, Inc. Non-Employee Directors' Stock Option Plan.* (Incorporated by reference to Exhibit 10.2 to National Penn's Report on Form 8-K dated September 26, 2001, as filed on September 27, 2001.)
10.13 National Penn Bancshares, Inc. Amended and Restated Employee Stock Purchase Plan.* (Incorporated by reference to Exhibit 10.2 to National Penn's Report on Form 8-K dated December 20, 2000, as filed on January 1, 2001.)
10.14 National Penn Bancshares, Inc. Elverson Substitute Stock Option Plan.* (Incorporated by reference to Exhibit 4.1 to National Penn's Registration Statement No. 333-71391 on Form S-8, as filed on January 29, 1999.)
10.15 National Penn Bancshares, Inc. Community Employee Substitute Stock Option Plan.* (Incorporated by reference to Exhibit 4.1 to National Penn's Registration Statement No. 333-54520 on Form S-8, as filed on January 29, 2001.)
10.16 National Penn Bancshares, Inc. Community Non-Employee Director Substitute Stock Option Plan.* (Incorporated by reference to Exhibit 4.1 to National Penn's Registration Statement No. 333-54556 on Form S-8, as filed on January 29, 2001.)
10.17 Form of Amended and Restated Director Deferred Fee Agreement between Bernville Bank, N.A. and certain former Bernville Bank, N.A. directors.* (Incorporated by reference to Exhibit 10.18 to National Penn's Annual Report on Form 10-K for the year ended December 31, 2000.)
10.18 Executive Supplemental Benefit Agreement dated December 27, 1989, among National Penn Bancshares, Inc., National Bank of Boyertown and Lawrence T. Jilk, Jr.* (Incorporated by reference to Exhibit 10.19 to National Penn's Annual Report on Form 10-K for the year ended December 31, 2000.)
10.19 Amendatory Agreement dated February 23, 1994, among National Penn Bancshares, Inc., National Penn Bank and Lawrence T. Jilk, Jr.* (Incorporated by reference to Exhibit 10.20 to National Penn's Annual Report on Form 10-K for the year ended December 31, 2000.)
10.20 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank and Lawrence T. Jilk, Jr.* (Incorporated by reference to Exhibit 10.1 to National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.)
10.21 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 10.22 to National Penn's Annual Report on Form 10-K for the year ended December 31, 2000.)
10.22 Amendatory Agreement dated February 23, 1994, among National Penn Bancshares, Inc., National Penn Bank and Wayne R. Weidner.* (Incorporated by reference to Exhibit 10.23 to National Penn's Annual Report on Form 10-K for the year ended December 31, 2000.)
10.23 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank and Wayne R. Weidner.* (Incorporated by reference to Exhibit 10.2 to National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.)
10.24 Executive Agreement dated July 23, 1997, among National Penn Bancshares, Inc., National Penn Bank and Gary L. Rhoads.* (Incorporated by reference to Exhibit 10.1 to National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.)
10.25 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank and Gary L. Rhoads.* (Incorporated by reference to Exhibit 10.4 to National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.)
10.26 Amendatory Agreement dated February 24, 1999, among National Penn Bancshares, Inc., National Penn Bank and Gary L. Rhoads.*
10.27 Executive Agreement dated July 23, 1997, among National Penn Bancshares, Inc., National Penn Bank and Sandra L. Spayd.* (Incorporated by reference to Exhibit 10.2 to National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.)
10.28 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank and Sandra L. Spayd.* (Incorporated by reference to Exhibit 10.5 to National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.)
10.29 Executive Agreement dated September 24, 1997, among National Penn Bancshares, Inc., National Penn Bank and Garry D. Koch.* (Incorporated by reference to Exhibit 10.3 to National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.)
10.30 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank and Garry D. Koch.* (Incorporated by reference to Exhibit 10.3 to National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.)
10.31 Executive Agreement dated as of July 23, 1997, among National Penn Bancshares, Inc., National Penn Bank and Sharon L. Weaver.* (Incorporated by reference to Exhibit 10.29 to National Penn's Annual Report on Form 10-K for the year ended December 31, 1998.)
10.32 Amendatory Agreement dated September 24, 1997, among National Penn Bancshares, Inc., National Penn Bank and Sharon L. Weaver.* (Incorporated by reference to Exhibit 10.30 to National Penn's Annual Report on Form 10-K for the year ended December 31, 1998.)
10.33 Amendatory Agreement dated August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank and Sharon L. Weaver.* (Incorporated by reference to Exhibit 10.6 to National Penn's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.)
10.34 Executive Agreement dated as of January 4, 1999, among National Penn Bancshares, Inc., National Penn Bank and Glenn E. Moyer.* (Incorporated by reference to Exhibit 10.32 to National Penn's Annual Report on Form 10-K for the year ended December 31, 1998.)
10.35 Executive Agreement dated as of August 26, 1998, among National Penn Bancshares, Inc., National Penn Bank and Bruce G. Kilroy.*
10.36 Amendatory Agreement dated August 23, 2000, among National Penn Bancshares, Inc., National Penn Bank and Bruce G. Kilroy.*
10.37 Description of Consulting Arrangement between Lawrence T. Jilk, Jr. and Panasia Bank, N.A.*
10.38 Stock Purchase Agreement dated April 20, 1989, between National Penn Bancshares, Inc. and Pennsylvania State Bank. (Incorporated by reference to Exhibit 10.35 to National Penn's Annual Report on Form 10-K for the year ended December 31, 2000.)
10.39 Amendment to Rights Agreement dated as of August 21, 1999, between National Penn Bancshares, Inc. and National Penn Bank, as Rights Agent (including as Exhibit "A" thereto, the Rights Agreement dated as of August 23, 1989, between National Penn Bancshares, Inc. and National Bank of Boyertown, as Rights Agent). (Incorporated by reference to Exhibit 4.1 to National Penn's Report on Form 8-K, dated August 21, 1999, as filed on August 26, 1999.)
21 Subsidiaries of the Registrant.
23 Consent of Independent Certified Public Accountants.
99 Forward-Looking Statements.
* Denotes a compensatory plan or arrangement.
(b) Reports on Form 8-K.
During fourth quarter 2001, National Penn filed a Report on Form 8-K dated November 16, 2001. The Report provided information under Item 5 on National Penn's closing of its purchase of certain assets and assumption of certain related liabilities of the Kutztown, Pennsylvania branch office of PNC Bank, National Association. The Report did not contain any financial statements of National Penn.
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 27, 2002 By /s/ Wayne R. Weidner ---------------------------------- Wayne R. Weidner Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
Signatures Title - ---------- -----
/s/ John H. Body Director March 27, 2002 - ---------------------------- John H. Body
/s/ J. Ralph Borneman, Jr. Director March 27, 2002 - ---------------------------- J. Ralph Borneman, Jr.
/s/ Frederick H. Gaige Director March 27, 2002 - ---------------------------- Frederick H. Gaige
/s/ John W. Jacobs Director March 27, 2002 - ---------------------------- John W. Jacobs
/s/ Lawrence T. Jilk, Jr. Director March 27, 2002 - ---------------------------- Lawrence T. Jilk, Jr.
/s/ Frederick P. Krott Director March 27, 2002 - ---------------------------- Frederick P. Krott
/s/ Patricia L. Langiotti Director March 27, 2002 - ---------------------------- Patricia L. Langiotti
/s/ Kenneth A. Longacre Director March 27, 2002 - ---------------------------- Kenneth A. Longacre
/s/ Glenn E. Moyer Director March 27, 2002 - ---------------------------- Glenn E. Moyer
/s/ Robert E. Rigg Director March 27, 2002 - ---------------------------- Robert E. Rigg
/s/ C. Robert Roth Director March 27, 2002 - ---------------------------- C. Robert Roth
/s/ Wayne R. Weidner Director, Chairman, President March 27, 2002 - ---------------------------- and Chief Executive Officer Wayne R. Weidner (Principal Executive Officer)
/s/ Gary L. Rhoads Treasurer (Principal Financial March 27, 2002 - ---------------------------- and Accounting Officer) Gary L. Rhoads