FORM 10-Q/A No. 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: _________________ to _________________
Commission file number: 0-10957
NATIONAL PENN BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2215075
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Philadelphia and Reading Avenues, Boyertown, PA 19512
(Address of principal executive offices) (Zip Code)
(610) 367-6001
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 7, 1998
Common Stock (no stated par value) (No.) 13,143,086 Shares
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis is intended to assist in
understanding and evaluating the major changes in the financial condition and
earnings performance of the Company with a primary focus on an analysis of
operating results.
FINANCIAL CONDITION
Total assets increased to $1.699 billion, an increase of $165.3 million
or 10.8% over the $1.534 billion at December 31, 1997. This increase is
reflected primarily in the investment category, the result of the investment of
deposits, the Company's primary source of funds, short-term borrowings and
long-term borrowings.
Total cash and cash equivalents increased $3.7 million or 8.9% at June
30, 1998 when compared to December 31, 1997. This increase was primarily in cash
and due from banks.
Loans increased to $1.141 billion at June 30, 1998. The increase of
$43.5 million or 4.0% compared to December 31, 1997 was primarily the result of
the investment of deposits and long-term borrowings. Loans originated for
immediate resale during the first six months of 1998 amounted to $31.9 million.
The Company's credit quality is reflected by the annualized ratio of net
charge-offs to total loans of .06% through the second quarter of 1998 versus
.20% for the year 1997, and the ratio of non-performing assets to total loans of
.69% at June 30, 1998 compared to .89% at December 31 1997. Non-performing
assets, including non-accruals, loans 90 days past due, restructured loans and
other real estate owned, were $8.1 million at June 30, 1998 compared to $10.0
million at December 31, 1997. Of these amounts, non-accrual loans represented
$5.5 million and $6.8 million at June 30, 1998 and December 31, 1997,
respectively. Loans 90 days past due and still accruing interest were $2.3
million and $2.8 million at June 30, 1998 and December 31, 1997, respectively.
Other real estate owned was $270,000 and $375,000 at June 30, 1998 and December
31, 1997, respectively. The Company had no restructured loans at June 30, 1998
or December 31, 1997. The allowance for loan losses to non-performing assets was
336.4% and 251.6% at June 30, 1998 and December 31, 1997, respectively. As is
evident from the above amounts relative to non-performing assets, there have
been no significant changes between December 31, 1997 and June 30, 1998. The
Company has no significant exposure to energy and agricultural-related loans.
Investments, the Company's secondary use of funds, increased $84.5
million or 26.3% to $406.2 million at June 30, 1998 when compared to December
31, 1997. The increase is due to investment purchases of $142.0 million,
primarily in municipal securities, which was partially offset by investment
sales and maturities and the amortization of mortgage-backed securities.
A new line item on the consolidated balance sheet is "Trading account
securities" of $20.4 million at June 30, 1998. This represents investment
securities that are actively traded by the Company with the goal of generating
higher total returns. Investors Trust Company, a subsidiary of the Company,
manages this portfolio. Interest income from these securities appears on the
consolidated statements of income on the line item "Trading assets." Trading
gains and losses, both realized and unrealized, appear on the line item "Trading
revenue" in the "Other Income" category.
As the primary source of funds, aggregate deposits of $1.130 billion at
June 30, 1998 increased $14.0 million or 1.3% compared to December 31, 1997. The
increase in deposits during the first six month of 1998 was primarily in
non-interest bearing deposits which increased $11.9 million while interest
bearing deposits increased $2.1 million. Certificates of deposit in excess of
$100,000 decreased $4.3 million. 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 and long-term debt obligations. In aggregate, these funds totaled
$431.5 million at June 30, 1998, and $279.0 million at December 31, 1997. The
increase of $152.5 million represents an increase in long-term obligations of
$95.0 million and an increase in short-term borrowings, primarily securities
sold under repurchase agreements and federal funds purchased of $53.6 million.
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Shareholders' equity increased slightly through June 30, 1998. This
increase was due to an increase in earnings retained and a slight increase in
the change in valuation adjustment for securities available for sale, which
represents the accounting treatment required under Statement of Financial
Accounting Standards 115, "Accounting for Certain Investments in Debt and Equity
Securities," applied to the increase in market value of the Company's investment
portfolio. Cash dividends paid during the first six months of 1998 increased
$701,000 or 18.2% compared to the cash dividends paid during the first six
months of 1997. Earnings retained during the first six months of 1998 were 53.8%
compared to 56.9% during the first six months of 1997.
RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 1998 was $4.8 million, 10.4%
more than the $4.4 million reported for the same period in 1997. For the first
six months, net income reached $9.8 million, or 10.1% more than the $8.9 million
reported for the first six months of 1997. The Company's performance has been
and will continue to be in part influenced by the strength of the economy and
conditions in the real estate market.
Net interest income is the difference between interest income on assets
and interest expense on liabilities. Net interest income decreased $74,000 or
.5% to $15.9 million during the second quarter of 1998 from $16.0 million in the
second quarter 1997. For the comparative six month period, net interest income
increased $268,000 or .8% to $31.9 million from $31.7 million in 1997. The
increase in interest income is a result of growth in loan outstandings and
higher rates on loans that was partially offset by growth in deposits and higher
rates on deposits and borrowings. Interest rate risk is a major concern in
forecasting earnings potential. On March 26, 1997, the prime rate changed to
8.50%. Interest expense during the first six months of 1998 increased $6.6
million or 26.0% compared to the prior year's first six months. Despite the
current rate environment, the cost of attracting and holding deposited funds is
an ever-increasing expense in the banking industry. These increases are the real
costs of deposit accumulation and retention, including FDIC insurance costs and
branch overhead expenses. Such costs are necessary for continued growth and to
maintain and increase market share of available deposits.
The provision for loan and lease losses is determined by periodic
reviews of loan quality, current economic conditions, loss experience and loan
growth. Based on these factors, the provision for loan and lease losses remained
the same for the six month period ended June 30, 1998 compared to the same
period in 1997. The allowance for loan and lease losses of $27.1 million at June
30, 1998 and $25.1 million at December 31, 1997 as a percentage of total loans
was 2.3% and 2.2%, respectively. The Company's net charge-offs of $379,000 and
$1,140,000 during the first six months of 1998 and 1997, respectively, continue
to be comparable to those of the Company's peers, as reported in the Bank
Holding Company Performance Report.
"Total other income" increased $1.3 million or 49.6% during the second
quarter of 1998, as a result of increased other income of $833,000, trading
revenue of $185,000, increased trust and investment management income of
$145,000, and increased service charges on deposit accounts of $69,000. Year to
date, other income increased $1.8 million or 29.9% when compared to the first
six months of 1997 as a result of increased other income of $1.6 million,
increased trust and investment management income of $269,000, trading revenue of
$185,000, and increased services charges on deposit accounts of $148,000. This
was partially offset by a decrease in net gains (losses) on sale of securities
and mortgages of $398,000. "Total other expenses" increased $1.5 million or
13.5% during the quarter ended June 30, 1998 and increased $2.1 million or 9.5%
for the six month period. Of this year-to-date increase, other operating
expenses increased $1.4 million or 24.8%, salaries, wages and benefits increased
$724,000 or 5.6%, and net premises and equipment decreased $16,000 or .4%.
Income before income taxes decreased by $257,000 or 4.0% compared to
the second quarter of 1997. In comparing the first six months of 1998 to 1997,
income before income taxes increased $76,000 or .6%. Income taxes decreased
$712,000 for the quarter and decreased $985,000 the six month period.
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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, fed funds
purchased, and short-term borrowings, increased $71.5 million from year end
1997. Long-term borrowings increased $95.0 million during the first six months
of 1998.
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
June 30, 1998:
<TABLE>
<CAPTION>
Repricing Periods (1)
Three Months One Year
Within Three Through One Through Five Over
Months Year Years Five Years
(In Thousands)
<S> <C> <C> <C> <C>
Assets
Interest-bearing deposits
at banks $1,567 $ -- $ -- $ --
Investment securities 45,845 45,664 111,984 202,729
Trading account securities 20,388 -- -- --
Loans and leases 335,353 159,631 464,823 181,325
Other assets 4,560 -- -- 125,836
--------- --------- --------- ---------
407,713 205,295 576,807 509,890
--------- --------- --------- ---------
Liabilities and equity
Noninterest-bearing deposits 158,692 -- -- --
Interest-bearing deposits 297,173 243,456 178,075 252,215
Borrowed funds 134,011 631 222,500 34,105
Preferred securities -- -- -- 40,250
Other liabilities -- -- -- 15,084
Hedging instruments 60,000 -- (60,000) --
Shareholders' equity -- -- -- 123,513
--------- --------- --------- ---------
649,876 244,087 340,575 465,167
--------- --------- --------- ---------
Interest sensitivity gap (242,163) (38,792) 236,232 44,723
--------- --------- --------- ---------
Cumulative interest rate
sensitivity gap ($242,163) ($280,955) $(47,723) $ --
========= ========= ========= =========
</TABLE>
(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 prepayments in the interest rate environment prevailing
during the second calendar quarter of 1998. 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.
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<PAGE>
(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, 30.2% of these deposits are considered repriceable
within three months and 69.8% are considered repriceable in the over five years
category.
Interest rate sensitivity is a function of the repricing
characteristics of the Company's assets and liabilities. These characteristics
include the volume of assets and liabilities repricing, the timing of the
repricing, and the relative levels of repricing. Attempting to minimize the
interest rate sensitivity gaps is a continual challenge in a changing rate
environment. Based on the Company's gap position as reflected in the above
table, current accepted theory would indicate that net interest income would
increase in a falling rate environment and would decrease in a rising 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
within one year, 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.
The Company anticipates volatile interest rate levels for the remainder
of 1998, with no clear indication of sustainable rising or falling rates. Given
this assumption, the Company's asset/liability strategy for 1998 is to maintain
a negative gap (interest-bearing liabilities subject to repricing exceed
interest-earning assets subject to repricing) for periods up to a year. The
impact of a volatile interest rate environment on net interest income is not
expected to be significant to the Company's results of operations. Effective
monitoring of these interest sensitivity gaps is the priority of the Company's
asset/liability management committee.
CAPITAL ADEQUACY
The following table sets forth certain capital performance ratios.
June 30, Dec. 31,
1998 1997
CAPITAL LEVELS
Tier 1 leverage ratio 9.56% 9.84%
Tier 1 risk-based ratio 12.43 13.49
Total risk-based ratio 13.83 14.91
CAPITAL PERFORMANCE
Return of average assets (annualized) 1.23 1.31
Return on average equity (annualized) 16.00 15.90
Earnings retained 53.80 55.30
Internal capital growth (annualized) 8.58 8.35
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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 June 30,
1998, 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 3.0%. In
order for the Company to be considered "well capitalized", as defined by banking
regulators, the Company must have Tier 1 and total capital ratios of 6.0% and
10.0%, respectively, and a minimum Tier 1 leverage ratio of 5.0%. The Company
currently meets the criteria for a well capitalized institution, and management
believes that, under current regulations, the Company will continue to meet its
minimum capital requirements in the foreseeable future. At present, the Company
has no commitments for significant capital expenditures.
The Company is not under any agreement with regulatory authorities nor
is the Company aware of any current recommendations by the regulatory
authorities which, if such recommendations were implemented, would have a
material effect on liquidity, capital resources or operations of the Company.
FUTURE OUTLOOK
As previously reported on the Company's Form 8-K dated July 21, 1998,
the Company has entered into an agreement to acquire Elverson National Bank and,
in connection therewith, has rescinded its stock repurchase program.
On June 15, 1998, National Asian Bank, a division of National Penn Bank
(the "Bank") was opened in Elkins Park, Pennsylvania. The Company expects to
open in 1998, a new non-bank subsidiary called Penn Securities, Inc., a
full-service broker/dealer program, offering a wide range of investment
products. Start-up costs for these two operations may have a negative impact on
1998 earnings and beyond.
On July 16, 1998, the Bank announced a unique commitment to its
customers. If the Bank is acquired within the next five years and changes its
name, all new qualifying Bank customers will receive a $1,000 bonus. This offer
is expected to attract new customers to the Bank and may therefore have an
impact on earnings in 1998 and beyond.
The Company expects to spend approximately $300,000 in 1998 to modify
its computer information systems enabling proper processing of transactions
related to the year 2000 and beyond. The Company has evaluated appropriate
courses of corrective action, including replacement of certain systems whose
associated costs would be recorded as assets and amortized. Accordingly, the
Company does not expect the amounts required to be expensed over the next three
years to have a material effect on its financial position or results of
operations. The amount expensed to date in 1998 is immaterial.
The Company converted its mainframe hardware and software to new fully
integrated systems in May 1998. The Company expects that these new systems will
offer improved operating efficiencies and enhanced customer service and
reporting. These new initiatives are not expected to start contributing to
profits until 1999 and beyond, so that 1998 earnings may be somewhat negatively
impacted by the initial costs of these new items.
First Capitol Bank, York, PA, has announced its intent to be acquired
by Susquehanna Bancshares, Inc., Lititz, PA. The Company has a 20% ownership
interest in First Capitol and, at the deal price of $50.02 per share, has an
unrealized gain of approximately $3 million on this transaction. The merger is
expected to be completed in 1998, although no assurance can be given that it
will be completed. The Company has one other remaining 20% ownership interest in
a de novo bank.
This report contains forward-looking statements concerning earnings,
asset quality, and other future events. Actual results could differ materially
due to, among other things, the risks and uncertainties discussed in Exhibit 99
to the Company's Report on Form 10-K for 1997, which is incorporated herein by
reference. Readers are cautioned not to place undue reliance on these
statements. The Company undertakes no obligation to publicly release or update
any of these statements.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has caused this Amendment No. 1 to Report on Form 10-Q
to be signed on its behalf by the undersigned thereunto duly authorized.
NATIONAL PENN BANCSHARES, INC.
(Registrant)
Dated: October 9, 1998 By /s/ Wayne R. Weidner
----------------------
Wayne R. Weidner, President
Dated: October 9, 1998 By /s/ Gary L. Rhoads
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Gary L. Rhoads, Principal
Financial Officer
