| NATIONAL PENN BANCSHARES INC Item 1A RISK FACTORS National Penn’s business is subject to interest rate risk and variations in interest rates may negatively affect its financial performance |
| Changes in the interest rate environment may reduce profits |
| The primary source of income for National Penn is the differential or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities |
| As prevailing interest rates change, net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities |
| In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations |
| An increase in the general level of interest rates may also adversely affect the ability of certain borrowers to pay the interest on and principal of their obligations |
| Accordingly, changes in levels of market interest rates could materially adversely affect National Penn’s net interest spread, asset quality, loan origination volume and overall profitability |
| Future governmental regulation and legislation could limit National Penn’s future growth |
| National Penn and its subsidiaries are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of the operations of National Penn and its subsidiaries |
| These laws may change from time to time and are primarily intended for the protection of consumers, depositors and the governments deposit insurance funds |
| Any changes to these laws may negatively affect National Penn’s ability to expand its services and to increase the value of its business |
| While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on National Penn, these changes could be materially adverse to National Penn’s shareholders |
| 21 _________________________________________________________________ National Penn’s ability to pay dividends depends primarily on dividends from its national bank subsidiary, which are subject to regulatory limits |
| National Penn is a bank holding company and its operations are conducted by direct and indirect subsidiaries, each of which is a separate and distinct legal entity |
| Substantially all of National Penn’s assets are held by its direct and indirect subsidiaries |
| National Penn’s ability to pay dividends depends on its receipt of dividends from its direct and indirect subsidiaries |
| Its national bank subsidiary, National Penn Bank, including National Penn Bank’s divisions, the FirstService Bank, HomeTowne Heritage Bank and The Peoples Bank of Oxford Divisions, is National Penn’s primary source of dividends |
| Dividend payments from National Penn Bank are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by bank regulatory agencies |
| The ability of National Penn Bank to pay dividends is also subject to its profitability, financial condition, capital expenditures and other cash flow requirements |
| At December 31, 2005, approximately dlra54cmam498cmam000 was available without the need for regulatory approval for the payment of dividends to National Penn from National Penn Bank |
| There is no assurance that National Penn Bank and/or National Penn’s other subsidiaries will be able to pay dividends in the future or that National Penn will generate adequate cash flow to pay dividends in the future |
| National Penn’s failure to pay dividends on its common stock could have a material adverse effect on the market price of its common stock |
| National Penn’s future acquisitions could dilute ownership of National Penn and may cause National Penn to become more susceptible to adverse economic events |
| National Penn has used its common stock to acquire other companies in the past and intends to acquire or make investments in banks and other complementary businesses with its common stock in the future |
| National Penn may issue additional shares of common stock to pay for those acquisitions, which would dilute the ownership interest of present shareholders in National Penn |
| Future business acquisitions could be material to National Penn, and any failure to integrate these businesses into National Penn could have a material adverse effect on the value of National Penn common stock |
| In addition, any such acquisition could require National Penn to use substantial cash or other liquid assets or to incur debt |
| In those events, National Penn could become more susceptible to economic downturns and competitive pressures |
| Competition from other financial institutions may adversely affect National Penn’s profitability |
| National Penn’s subsidiaries face substantial competition in originating loans, both commercial and consumer |
| This competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders |
| Many of National Penn’s competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs |
| This competition could reduce National Penn’s net income by decreasing the number and size of loans that National Penn’s subsidiaries originate and the interest rates they may charge on these loans |
| In attracting business and consumer deposits, National Penn’s subsidiaries face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds |
| Many of National Penn’s competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns and better brand recognition and more branch locations |
| These competitors may offer higher interest rates than National Penn, which could decrease the deposits that National Penn attracts or require National Penn to increase its rates to retain existing deposits or attract new deposits |
| Increased deposit competition could adversely affect National Penn’s ability to generate the funds necessary for lending operations |
| As a result, National Penn may need to seek other sources of funds that may be more expensive to obtain and could increase National Penn’s cost of funds |
| National Penn’s banking and non-banking subsidiaries also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance agencies and governmental organizations which may offer more favorable terms |
| Some of National Penn’s non-bank competitors are not subject to the same extensive regulations that govern its banking operations |
| As a result, such non-bank competitors may have advantages over National Penn’s banking and non-banking subsidiaries in providing certain products and services |
| This competition may reduce or limit National Penn’s margins on banking and non-banking services, reduce its market share and adversely affect its earnings and financial condition |
| 22 _________________________________________________________________ A Warning About Forward-Looking Information This Annual Report, including information incorporated by reference in this Annual Report, contains forward-looking statements with respect to the financial condition, results of operations and business of National Penn and its subsidiaries |
| In addition, from time to time, National Penn or its representatives may make written or oral forward-looking statements |
| These statements can be identified by the use of forward-looking terminology such as "e believe, "e "e expect, "e "e may, "e "e will, "e "e should, &apos &apos "e project, "e "e plan, &apos &apos "e seek, "e "e intend, &apos &apos or "e anticipate &apos &apos or the negative thereof or comparable terminology, and include discussions of strategy, financial projections and estimates and their underlying assumptions, statements regarding plans, objectives, expectations or consequences of the transactions, and statements about the future performance, operations, products and services of the companies and its subsidiaries |
| National Penn’s businesses and operations, including those acquired on January 26, 2006 in the acquisition of Nittany and its subsidiaries (see “Recent Developments” herein), are and will be subject to a variety of risks, uncertainties and other factors |
| Consequently, their actual results and experience may materially differ from those contained in any forward-looking statements |
| Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the following: • Reputational risk created by the loan fraud incurred by National Penn in 2004 may have an adverse impact on business generation and retention, funding, liquidity and National Penn’s stock price |
| • National Penn’s unified branding campaign and other marketing initiatives may be less effective than expected in building name recognition and greater customer awareness of National Penn’s products and services |
| Use of non-National Penn brands may be counter-productive |
| • National Penn may be unable to differentiate itself from its competitors by a higher level of customer service, as intended by its business strategy |
| • Expansion of National Penn’s products and services offerings may take longer, and may meet with more effective competitive resistance from others already offering such products and services, than expected |
| • New product development by new and existing competitors may be more effective, and take place more quickly, than expected |
| • Competitors with substantially greater resources may enter product market, geographic or other niches currently served by National Penn |
| • Geographic expansion may be more difficult, take longer, and present more operational and management risks and challenges, than expected |
| • Business development in newly entered geographic areas, including those entered by mergers and acquisitions such as the Nittany acquisition, may be more difficult, and take longer, than expected |
| • Competitive pressures may increase significantly and have an adverse effect on National Penn’s pricing, spending, third-party relationships and revenues |
| • Customers may substitute competitors’ products and services for National Penn’s products and services, due to price advantage, technological advantages, or otherwise |
| • National Penn may be less effective in cross-selling its various products and services, and in utilizing alternative delivery systems such as the Internet, than expected |
| 23 _________________________________________________________________ • Projected business increases following new product development, geographic expansion, and productivity and investment initiatives, may be lower than expected, and recovery of associated costs may take longer than expected |
| • National Penn may be unable to retain key executives and other key personnel due to intense competition for such persons or otherwise |
| • Increasing interest rates may increase funding costs and reduce interest margins, and may adversely affect business volumes, including mortgage origination levels |
| • Growth and profitability of National Penn’s non-interest income or fee income may be less than expected, including income from mortgage banking activities |
| • 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 |
| • Expected synergies and cost savings from mergers and acquisitions, including the Nittany acquisition, may not be fully realized or realized as quickly as expected |
| • Revenues and loan growth following mergers and acquisitions, including the Nittany acquisition, may be lower than expected |
| • Loan losses, deposit attrition, operating costs, customer and key employee losses, and business disruption following mergers and acquisitions, including the Nittany acquisition, may be greater than expected |
| • Business opportunities and strategies potentially available to National Penn after mergers and acquisitions, including the Nittany acquisition, may not be successfully or fully acted upon |
| • Costs, difficulties or delays related to the integration of businesses or systems of acquired companies, including Nittany and its subsidiaries, with National Penn’s business or systems may be greater or take longer than expected |
| • Technological changes may be harder to make or more expensive than expected or present unanticipated operational issues |
| • Legislation or regulatory changes, including without limitation, changes in laws or regulations on competition, industry consolidation, development of competing financial products and services, changes in accounting rules and practices, changes in or additional customer privacy and data protection requirements, and intensified regulatory scrutiny of the financial services industry in general, may adversely affect National Penn’s costs and business |
| • Market volatility may continue in the securities markets, with an adverse effect on National Penn’s securities and asset management activities |
| • There may be unanticipated regulatory rulings or developments |
| • Changes in consumer spending and savings habits could adversely affect National Penn’s business |
| • Negative publicity with respect to any National Penn product or service, whether legally justified or not, could adversely affect National Penn’s reputation and business |
| 24 _________________________________________________________________ • Various domestic or international military or terrorist activities or conflicts may have a negative impact on National Penn’s business as well as the foregoing and other risks |
| • National Penn may be unable to successfully manage the foregoing and other risks and to achieve its current short-term and long-term business plans and objectives |
| Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements |
| National Penn cautions shareholders not to place undue reliance on such statements |
| All written or oral forward-looking statements attributable to National Penn or any person acting on its behalf made after the date of this Report are expressly qualified in their entirety by the cautionary statements contained in this Report |
| National Penn does not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events |
| Report at Item 1A Risk Factors, which information is incorporated by reference into this Management’s Discussion and Analysis |
| In September 2003, the Company completed the cash sale of its subsidiary, Panasia Bank, NA (“Panasia”) |
| All financial information in this Management’s Discussion and Analysis for 2003, 2002, and 2001 is restated to exclude Panasia |
| The sale of Panasia is presented as discontinued operations under SFAS Nodtta 144 |
| This presentation is intended to aid comparison of current and prior year results with future results |
| All actual share and per share information is restated to reflect a five-for-four stock split of the Company’s common stock effective September 30, 2005, a five-for-four stock split of the Company’s common stock effective September 30, 2004, and a 5prca stock dividend paid on the Company’s common stock on September 30, 2003 |
| CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America (“GAAP”) and predominant practice within the banking industry |
| The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and the assumptions that affect the amounts reported in the financial statements and the accompanying notes |
| Actual results could differ from those estimates |
| 31 _________________________________________________________________ The Company considers that the determination of the allowance for loan and lease losses involves a higher degree of judgment and complexity than its other significant accounting policies |
| The allowance for loan and lease losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses |
| Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors |
| However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, loss given default, expected commitment usage, the amounts and timing of expected future cash flows or collateral liquidation values on impaired loans, mortgages, and general amounts for historical loss experience |
| The process also considers economic conditions, uncertainties in estimating losses and inherent risks in the loan portfolio |
| All of these factors may be susceptible to significant change |
| To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods |
| Goodwill is subject to impairment testing at least annually to determine whether write-downs of the recorded balances are necessary |
| In this testing, the Company employs general industry practices in accordance with GAAP A fair value is determined for each reporting unit using various market valuation methodologies |
| If the fair values of the reporting units exceed their book values, no write-down of recorded goodwill is necessary |
| If the fair value of a reporting unit is less, an expense may be required on the Company’s books to write down the related goodwill to the proper carrying value |
| The Company tests for impairment of goodwill as of June 30 each year, and again at any quarter-end if any material events occur during a quarter that may affect goodwill |
| Through its annual analysis as of June 30, 2005, the Company has not identified any impairment of its goodwill |
| No events occurred during third or fourth quarter 2005 necessitating a re-test of goodwill impairment |
| No assurance can be given that future goodwill impairment tests will not result in a charge to earnings |
| The Company recognizes deferred tax assets and liabilities for the future tax effects of temporary differences, net operating loss carry-forwards and tax credits |
| Deferred tax assets are subject to management’s judgment based upon available evidence that future realization is more likely than not |
| If management determines that the Company may be unable to realize all or part of net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax asset to the expected realizable amount |
| The Company has not substantially changed any aspect of its overall approach in the application of the foregoing policies |
| There have been no material changes in assumptions or estimation techniques utilized as compared to previous years |
| FINANCIAL CONDITION At December 31, 2005, total assets were dlra4dtta60 billion, an increase of $ 121dtta8 million or 2dtta72prca from the dlra4dtta48 billion at December 31, 2004 |
| The increase in assets in 2005 is reflected primarily in the loan and lease category, the cash and due from banks category and the other assets category, which increased dlra175dtta4 million, dlra31dtta4 million and dlra11dtta0 million, respectively |
| These increases were offset by a dlra98dtta1 million decrease in investments over the prior year |
| Total assets at the end of 2004 increased dlra966dtta0 million or 27dtta5prca to dlra4dtta48 billion over the dlra3dtta51 billion at year-end 2003 |
| The increase in assets in 2004 is reflected primarily in the loan and lease category, the investment category and the goodwill and other intangibles category, which increased dlra595dtta4 million, dlra255dtta4 million and dlra94dtta2 million, respectively |
| The increase in assets as of December 31, 2004 is primarily due to the acquisition of Peoples First on June 10, 2004, which had dlra455dtta9 million in assets at time of acquisition |
| LOAN PORTFOLIO Net loans and leases, including loans held for sale, increased to dlra2dtta99 billion during 2005, an increase of dlra176dtta9 million or 6dtta3prca compared to 2004 |
| Excluding the Peoples First acquisition, core loan growth was 10dtta5prca in 2004 |
| Loans continue to increase at a modest pace as a result of the slowly improving economy and the modestly improved level of capital goods spending by the Company’s business customers |
| Residential mortgages originated for immediate resale during the year ended December 31, 2005 amounted to dlra339dtta4 million |
| The Company had dlra18dtta6 million in loans held for sale at December 31, 2005 |
| 32 _________________________________________________________________ Net loans and leases, including loans held for sale, increased to dlra2dtta82 billion in 2004, an increase of dlra595dtta4 million or 26dtta8prca compared to December 31, 2003 |
| The Company’s loans are widely diversified by borrower, industry group, and geographical area in southeastern Pennsylvania |
| The following summary shows the year-end composition of the Company’s loan portfolio (in thousands) (1): 2005 2004 2003 2002 2001 Commercial and Industrial Loans and Leases $ 708cmam653 $ 625cmam554 $ 482cmam884 $ 355cmam977 $ 343cmam001 Real Estate Loans: Construction and Land Dev |
| 206cmam201 201cmam410 149cmam531 122cmam129 128cmam655 Residential 1cmam078cmam772 1cmam025cmam955 754cmam977 677cmam559 650cmam135 Other (nonfarm, nonresidential) 995cmam596 957cmam677 828cmam843 574cmam443 575cmam747 Loans to Individuals 60cmam586 63cmam843 54cmam466 55cmam299 79cmam280 Total $ 3cmam049cmam808 $ 2cmam874cmam439 $ 2cmam270cmam701 $ 1cmam785cmam407 $ 1cmam776cmam819 (1) The classification of loans in the above table corresponds to defined bank regulatory reporting categories and is presented for analytical purposes |
| Internal classification of loans is described in Item 1, “Lending”, of this Report |
| Maturities and sensitivity to changes in interest rates in certain loan categories in the Company’s loan portfolio at December 31, 2005, are summarized below (in thousands): One year or Less* After One Year to Five Years After Five Years Total Commercial and Industrial Loans and Leases dlra416cmam101 dlra182cmam305 dlra110cmam247 dlra708cmam653 Construction and Land Dev |
| ” 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, 2005, are summarized below (in thousands): After One Year to Five Years After Five Years Predetermined Interest Rate $ 192cmam122 $ 110cmam248 Floating Interest Rate 38cmam971 26cmam719 Total $ 231cmam094 $ 136cmam967 Determinations of maturities included in the loan maturity table are based upon contract terms |
| In situations where a renewal is appropriate, the Company’s policy in this regard is to evaluate the credit for collectibility consistent with the normal loan evaluation process |
| This policy is used primarily in evaluating ongoing customers’ use of their lines of credit that are at floating interest rates |
| As of December 31, 2005, the Company’s outstanding lines of credit to customers total dlra412dtta1 million |
| 33 _________________________________________________________________ RISK ELEMENTS - LOANS A loan is placed in a nonaccrual status at the time when ultimate collectibility of principal or interest, wholly or partially, is in doubt |
| Past due loans are those loans which were contractually past due 90 days or more as to interest or principal payments but are well secured and in the process of collection |
| Restructured loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower |
| Nonperforming Assets (in thousands) December 31, 2005 2004 2003 2002 2001 Nonaccrual Loans $ 11cmam961 $ 11cmam103 $ 13cmam673 $ 14cmam046 $ 14cmam234 Loans Past Due 90 or More Days as to Interest or Principal 183 870 318 928 11cmam582 Total Nonperforming Loans 12cmam144 11cmam973 13cmam991 14cmam974 25cmam816 Other Real Estate Owned - - 735 318 1cmam013 Total Nonperforming Assets $ 12cmam144 $ _11cmam973 $ 14cmam726 $ 15cmam292 $ 26cmam829 Gross Amount of Interest that Would Have Been Recorded at Original Rate on Nonaccrual and Restructured Loans $ 878 $ 492 $ 449 $ 709 $ 1cmam547 Interest Received From Customers on Nonaccrual and Restructured Loans 441 835 613 463 424 Net Impact on Interest Income of Nonperforming Loans $ 437 $ (343 ) $ (164 ) $ 246 $ 1cmam123 Nonperforming assets, including nonaccruals, loans 90 days past due, restructured loans and other real estate owned, were dlra12dtta1 million at December 31, 2005, compared to dlra12dtta0 million at December 31, 2004 |
| Nonaccrual loans represented dlra12dtta0 million and dlra11dtta1 million at December 31, 2005, and December 31, 2004, respectively |
| Loans 90 days past due and still accruing interest were dlra183cmam000 and dlra870cmam000 at December 31, 2005 and December 31, 2004, respectively |
| Additional discussion regarding this issue is set forth in the paragraph of this Item 7 titled “Allowance for Loan and Lease Losses” |
| The Company had no assets classified as other real estate owned at December 31, 2005 and December 31, 2004 |
| The Company had no restructured loans at December 31, 2005 or December 31, 2004 |
| The allowance for loan and lease losses to nonperforming assets was 462prca and 481prca at December 31, 2005 and December 31, 2004, respectively, with the decrease in 2005 due to the decreased level of total allowance for loan and lease losses |
| Another measure of the Company’s credit quality is reflected by the ratio of net chargeoffs to total loans and leases of 0dtta15prca for 2005 versus 0dtta10prca for the year 2004, and the ratio of nonperforming assets to total loans of |
| 40prca at December 31, 2005, compared to |
| 42prca at December 31, 2004 |
| Of the dlra4dtta7 million in net chargeoffs in 2005, dlra2dtta6 million were commercial and industrial loans |
| 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 |
| 34 _________________________________________________________________ INVESTMENT PORTFOLIO The investment portfolio is primarily a secondary source of liquidity, but it also serves as a source of income |
| As such, the investment portfolio consists of shorter-term investments that provide current liquidity and longer-term investments that provide higher income |
| Over the past three years, the Company has worked to shorten the duration of the investment portfolio in response to lower interest rates and to help improve liquidity |
| Regardless of classification as to shorter-term or longer-term, the majority of the Company’s investments are readily marketable securities held as available for sale, and the majority of the Company’s investments qualify as collateral for deposit pledging needs |
| Certain investment securities purchased during the second half of 2004 were classified as held to maturity |
| Due to our pledging requirements, these securities would most likely be held to maturity regardless of classification |
| Investments of both held to maturity and available for sale securities decreased dlra98dtta1 million or 8dtta2prca to dlra1dtta09 billion at December 31, 2005 compared to December 31, 2004 |
| Investment purchases during 2005 were dlra243dtta9 million, primarily US Government Agency and municipal securities |
| This increase was partially offset by investment calls and maturities and the amortization of mortgage backed securities totaling dlra272dtta3 million |
| Also, during 2005, the Company sold approximately dlra46dtta3 million in investment securities available for sale resulting in dlra555cmam000 in net gains |
| A summary of investment securities available for sale at December 31, 2005, 2004 and 2003 follows (in thousands): 2005 2004 2003 Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value US Treasuries and Agencies $ 178cmam412 $ 175cmam650 $ 219cmam285 $ 220cmam744 $ 111cmam183 $ 114cmam792 State and Municipal 232cmam738 243cmam289 261cmam906 279cmam565 259cmam623 277cmam807 Mortgage-backed securities 468cmam758 458cmam460 529cmam033 530cmam221 480cmam803 484cmam746 Marketable equity secs |
| & other 56cmam298 63cmam707 57cmam974 68cmam306 53cmam781 57cmam030 Total $ 936cmam206 $ 941cmam106 $ 1cmam068cmam198 $ 1cmam098cmam836 $ 905cmam390 $ 934cmam375 A summary of investment securities held to maturity at December 31, 2005, 2004 and 2003 follows (in thousands): 2005 2004 2003 Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value State and municipal $ 71cmam396 $ 70cmam820 $ - $ - $ - $ - Mortgage-backed securities 79cmam212 76cmam808 90cmam967 90cmam621 - - Total $ 150cmam608 $ 147cmam628 $ 90cmam967 $ 90cmam621 $ - $ - 35 _________________________________________________________________ The maturity distribution and weighted average yield of the investment securities of the Company at December 31, 2005 are presented in the following tables |
| Weighted average yields on tax-exempt obligations have been computed on a fully taxable equivalent basis assuming a tax rate of 35prca |
| All average yields were calculated on the book value of the related securities |
| Securities Available for Sale - Yield by Maturity (Dollars in thousands) Within 1 Year After 1 But Within 5 Yrs After 5 But Within 10 Yrs After 10 Yrs Total Amt Yld Amt Yld Amt Yld Amt Yld Amt Yld US Treasuries and Agencies $ 16cmam158 5dtta25 % $ 156cmam598 4dtta16 % $ 2cmam894 4dtta79 % $ - - % $ 175cmam650 4dtta26 % State and Municipal 1cmam669 5dtta98 % 28cmam589 6dtta27 % 50cmam764 7dtta51 % 162cmam267 8dtta12 % 243cmam289 7dtta83 % Mortgage-backed securities 20 5dtta58 % 135cmam800 3dtta76 % 107cmam790 3dtta89 % 214cmam850 5dtta12 % 458cmam460 4dtta43 % Marketable equity secs |
| & other - - % 3cmam764 5dtta52 % 526 8dtta18 % 59cmam417 3dtta38 % 63cmam707 3dtta54 % Total $ 17cmam847 5dtta32 % $ 324cmam751 4dtta19 % $ 161cmam974 5dtta05 % $ 436cmam534 6dtta00 % $ 941cmam106 5dtta22 % Securities Held to Maturity at Market Value (Dollars in thousands) Within 1 Year After 1 But Within 5 Yrs After 5 But Within 10 Yrs After 10 Yrs Total Amt Yld Amt Yld Amt Yld Amt Yld Amt Yld State and municipal $ - - $ - - $ - - % $ 70cmam820 6dtta48 % $ 70cmam820 6dtta48 % Mortgage-backed securities - - - - 76cmam808 3dtta96 % - - % 76cmam808 3dtta96 % Total $ - - $ - - $ 76cmam808 3dtta96 % $ 70cmam820 6dtta48 % $ 147cmam628 5dtta17 % OTHER ASSETS Other assets on the balance sheet increased to dlra392dtta7 million, an increase of dlra14dtta4 million compared to the dlra378dtta2 million at December 31, 2004 |
| These assets include net premises and equipment, accrued interest receivable, bank owned life insurance, goodwill and other intangibles, unconsolidated investments and other assets |
| This increase in other assets was due to a deferred tax asset account associated with valuation of the investment portfolio |
| As of December 31, 2004, other assets increased dlra119dtta8 million or 46dtta4prca compared to December 31, 2003 |
| Goodwill and other intangibles accounted for dlra100dtta8 million (net of amortization of intangibles) of the increase, resulting from the Peoples First, Inc, Pennsurance, Inc, and D E Love Associates, Inc |
| acquisitions in 2004 |
| Premises and equipment increased dlra10dtta1 million due to the Peoples First, Inc |
| acquisition and bank owned life insurance increased dlra9dtta6 million due to the acquisitions and the increased cash surrender value of the insurance policies held by the Company |
| 36 _________________________________________________________________ DEPOSITS As the primary source of funds, aggregate deposits of dlra3dtta31 billion at December 31, 2005 increased dlra165dtta9 million or 5dtta3prca compared to 2004 |
| The increase in 2005 is due to aggressively recapturing core deposits, through promotional deposit rates |
| Deposits of dlra3dtta14 billion at December 31, 2004 increased dlra707dtta9 million or 29dtta1prca compared to deposits at December 31, 2003 |
| The increase in 2004 was primarily due to the addition of Peoples First, Inc |
| The deposit growth in 2004 consisted of dlra129dtta3 million in non-interest bearing deposits and dlra578dtta6 million in interest bearing deposits |
| 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, 2005 (dollars in thousands): 2005 2004 2003 Average Amount Average Rate Average Amount Average Rate Average Amount Average Rate Non-interest bearing demand deposits $ 511cmam620 -- % $ 460cmam759 -- % $ 344cmam911 -- % Savings deposits 1cmam570cmam145 1dtta61 % 1cmam551cmam289 1dtta00 % 1cmam185cmam821 0dtta93 % Time deposits 1cmam050cmam061 3dtta38 % 747cmam570 3dtta01 % 713cmam874 3dtta18 % Total $ 3cmam131cmam826 1dtta94 % $ 2cmam759cmam618 1dtta38 % $ 2cmam244cmam606 1dtta63 % The aggregate amount of jumbo certificates of deposits, issued in the amount of dlra100cmam000 or more was dlra480cmam975cmam000 in 2005, dlra246cmam948cmam000 in 2004, and dlra137cmam965cmam000 in 2003 |
| The following is a breakdown, by maturities, of the Company’s time certificates of deposit of dlra100cmam000 or more as of December 31, 2005 |
| The Company has no other time deposits of dlra100cmam000 or more as of December 31, 2005 (dollars in thousands): Maturity 3 months or less $ 107cmam149 Over 3 through 6 months 89cmam689 Over 6 months through 12 months 142cmam734 Over 12 months 141cmam403 Total $ 480cmam975 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 |
| Total securities sold under repurchase agreements declined dlra67dtta0 million, due to the repayment of FHLB repurchase agreements |
| Federal funds purchased also declined dlra18dtta0 million since December 31, 2004 |
| Long-term borrowings increased dlra18dtta5 million as a result of paying down short-term borrowings to lock in lower long-term rates |
| Subordinated debt was classified as “guaranteed preferred beneficial interest in Company’s subordinated debentures” prior to the Company’s adoption of FIN-46(R) as of March 31, 2004 |
| See Footnote 8 to the Consolidated Financial Statements included in this Report at Item 8 |
| 37 _________________________________________________________________ Total borrowings and purchased funds of dlra871dtta0 million at December 31, 2004 exceeded total borrowings and purchased funds at December 31, 2003 by dlra133dtta7 million or 18dtta1prca |
| This was primarily due to increases in subordinated debt from the issuance of various trust preferred securities in the first half of 2004, an increase in long-term debt from the Peoples First, Inc |
| acquisition, and as part of the Company’s interest rate risk management strategy during that time |
| A summary of each category of short-term borrowings for 2005, 2004 and 2003 follows (dollars in thousands): At or for the year ended December 31, 2005 2004 2003 Securities sold under repurchase agreements and federal funds purchased Balance at year-end $ 419cmam976 $ 504cmam051 $ 500cmam038 Average during the year 553cmam872 501cmam781 324cmam492 Maximum month-end balance 736cmam872 635cmam067 500cmam038 Weighted average rate during the year 2dtta44 % 1dtta24 % 1dtta22 % Rate at December 31 2dtta63 % 1dtta79 % 1dtta08 % Short-term borrowings Balance at year-end $ 8cmam795 $ 10cmam000 $ 10cmam000 Average during the year 4cmam936 5cmam077 5cmam179 Maximum month-end balance 10cmam000 10cmam093 10cmam045 Weighted average rate during the year 2dtta88 % 1dtta08 % 0dtta77 % Rate at December 31 4dtta00 % 1dtta87 % 0dtta59 % 38 _________________________________________________________________ The following table presents average balances, average rates and interest rate spread information for the years ended December 31, 2005, 2004 and 2003: Average Balances, Average Rates and Interest Rate Spread* (Dollars in thousands) Year Ended December 31, 2005 2004 2003 Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate INTEREST EARNING ASSETS: Interest bearing deposits at banks $ 7cmam629 $ 174 2dtta28 % $ 6cmam995 $ 83 1dtta19 % $ 4cmam179 $ 60 1dtta44 % US Treasury 10cmam578 270 2dtta55 9cmam721 205 2dtta11 721 50 6dtta93 US Government agencies 792cmam207 31cmam737 4dtta01 660cmam528 27cmam183 4dtta12 430cmam225 19cmam044 4dtta43 State and municipal* 265cmam060 21cmam156 7dtta98 268cmam348 19cmam681 7dtta33 266cmam259 19cmam829 7dtta45 Other bonds and securities 75cmam904 3cmam575 4dtta71 61cmam958 3cmam122 5dtta04 71cmam345 3cmam415 4dtta79 Total investments 1cmam143cmam749 56cmam738 4dtta96 1cmam000cmam555 50cmam191 5dtta02 768cmam550 42cmam338 5dtta51 Federal funds sold 1cmam354 58 4dtta28 7cmam788 84 1dtta08 44cmam320 492 1dtta11 Trading account securities - - - - - - - - - Commercial loans and lease financing* 2cmam351cmam433 157cmam103 6dtta68 2cmam037cmam361 123cmam364 6dtta06 1cmam536cmam739 97cmam782 6dtta36 Installment loans 333cmam216 20cmam871 6dtta26 270cmam628 16cmam490 6dtta09 245cmam451 16cmam677 6dtta79 Mortgage loans 290cmam758 16cmam869 5dtta8 288cmam801 16cmam896 5dtta85 254cmam657 16cmam349 6dtta42 Total loans and leases 2cmam975cmam407 194cmam843 6dtta55 2cmam596cmam790 156cmam750 6dtta04 2cmam036cmam847 130cmam808 6dtta42 Total earning assets 4cmam128cmam139 $ 251cmam813 6dtta10 % 3cmam612cmam128 $ 207cmam108 5dtta73 % 2cmam853cmam896 $ 173cmam698 6dtta09 % Allowance for loan and lease losses (57cmam010 ) (54cmam803 ) (45cmam494 ) Non-interest earning assets 473cmam402 417cmam324 280cmam319 Assets from discontnued operations - - 144cmam427 Total assets $ 4cmam544cmam531 $ 3cmam974cmam649 $ 3cmam233cmam148 INTEREST BEARING LIABILITIES: Interest bearing deposits $ 2cmam620cmam206 $ 60cmam765 2dtta32 % $ 2cmam298cmam859 $ 38cmam140 1dtta66 % $ 1cmam899cmam695 $ 33cmam753 1dtta78 % Securities sold under repurchase agree- ments and federal funds purchased 553cmam872 13cmam496 2dtta44 501cmam781 6cmam246 1dtta24 324cmam492 3cmam964 1dtta22 Short-term borrowings 4cmam936 142 2dtta88 5cmam077 55 1dtta08 5cmam179 40 0dtta77 Long-term borrowings 375cmam124 19cmam534 5dtta21 316cmam659 16cmam053 5dtta07 232cmam169 13cmam342 5dtta75 Total interest bearing liabilities 3cmam554cmam138 $ 93cmam937 2dtta64 % 3cmam122cmam376 $ 60cmam494 1dtta94 % 2cmam461cmam535 $ 51cmam099 2dtta08 % Non-interest bearing deposits 511cmam620 460cmam759 344cmam911 Other non-interest bearing liabilities 42cmam171 29cmam817 28cmam723 Liabilities from discontinued operations - - 130cmam392 Total liabilities 4cmam107cmam929 3cmam612cmam952 2cmam965cmam561 Equity capital 436cmam602 361cmam697 267cmam587 Total liabilities and equity capital $ 4cmam544cmam531 $ 3cmam974cmam649 $ 3cmam233cmam148 INTEREST RATE MARGIN** $ 157cmam876 3dtta82 % $ 146cmam614 4dtta06 % $ 122cmam599 4dtta30 % Tax equivalent interest 9cmam227 0dtta22 % 8cmam333 0dtta23 % 8cmam050 0dtta28 % Net interest income $ 148cmam649 3dtta60 % $ 138cmam281 3dtta83 % $ 114cmam549 4dtta01 % *Full taxable equivalent basis, using a 35prca effective tax rate |
| **Represents the difference between interest earned and interest paid, divided by total earning assets |
| Loan outstandings, net of unearned income, include non-accruing loans |
| 39 _________________________________________________________________ SHAREHOLDERS’ EQUITY Shareholders’ equity increased dlra16dtta8 million from December 31, 2004 through December 31, 2005 to dlra444dtta9 million |
| Retained earnings increased dlra31dtta8 million due to the retention of net income, partially offset by cash dividends declared, in 2005 |
| Accumulated other comprehensive income decreased dlra16dtta7 million due to a decrease in market values of available for sale investment securities |
| Cash dividends paid in 2005 increased dlra2dtta8 million or 11dtta0prca to dlra28dtta0 million compared to the cash dividends paid during 2004 |
| Earnings retained during 2005 were 53dtta2prca compared to 47dtta4prca during 2004 |
| The Company split its common stock five-for-four effective September 30, 2005 |
| RESULTS OF OPERATIONS The Company recorded a 24dtta7prca increase in net income to dlra59dtta8 million in the year ended December 31, 2005, compared to net income of dlra47dtta9 million in the year ended December 31, 2004 |
| Diluted earnings per share increased dlra0dtta21 or 18dtta3prca for the year ended December 31, 2005 to dlra1dtta36 per share from dlra1dtta15 in the year ended December 31, 2004 and dlra1dtta14 in the year ended December 31, 2003 |
| The difference in the percentage increase in net income when compared to the percentage increase in diluted earnings per share is due to the larger number of weighted average common shares outstanding, principally resulting from the issuance of 3cmam893cmam062 shares of common stock for the acquisition of Peoples First, Inc |
| On a per share basis, basic earnings were dlra1dtta38, dlra1dtta17 and dlra1dtta17 for 2005, 2004, and 2003 respectively |
| Also included in 2005 net income are expenses of dlra1dtta2 million, net of taxes, for legal, auditing and other investigation-related services, for a net impact from the fraud of dlra1dtta1 million on 2005 net income |
| Included in net income for 2004 was a special charge of dlra3dtta369 million, net of taxes and related adjustments, for losses attributable to the fraudulent loan and deposit scheme discovered by National Penn in January 2005 |
| Excluding the fourth quarter 2004 special charge, non-GAAP net income and earnings per diluted share for 2004 were dlra51dtta3 million and dlra1dtta23, respectively |
| For additional information on this |