FORM 10-Q
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: March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
Commission file number: 0-10957
NATIONAL PENN BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2215075
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Philadelphia and Reading Avenues, Boyertown, 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 May 8, 1998
Common Stock ($1.875 par value) (No.) 10,522,402 Shares
Page 1 of 14 pages
<PAGE>
TABLE OF CONTENTS
Part I - Financial Information. Page
Item 1. Financial Statements.............................. 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .... 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.......................................12
Part II - Other Information.
Item 1. Legal Proceedings ................................13
Item 2. Changes in Securities ............................13
Item 3. Defaults Upon Senior Securities ..................13
Item 4. Submission of Matters to a Vote of
Security Holders .................................13
Item 5. Other Information ................................13
Item 6. Exhibits and Reports on Form 8-K .................13
Signatures ..................................................................14
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET March 31 Dec. 31
(Dollars in thousands, except per share data) 1998 1997
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Cash and due from banks $42,903 $40,009
Interest bearing deposits in banks 1,680 1,089
----------- -----------
Total cash and cash equivalents 44,583 41,098
Investment securities available for sale at market value 361,719 321,760
Loans, less allowance for loan losses of $26,169 and
$25,122 in 1998 and 1997 respectively 1,104,242 1,097,662
Other assets 86,264 73,858
----------- -----------
Total Assets $1,596,808 $1,534,378
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $154,983 $146,772
Interest bearing deposits
(Includes certificates of deposit $100,000 or greater:
1998 - $109,036; 1997- $110,447) 976,217 968,828
----------- -----------
Total deposits 1,131,200 1,115,600
Securities sold under repurchase agreements
and federal funds purchased 69,278 77,225
Short-term borrowings 6,005 6,109
Long-term obligations 210,460 155,460
Guaranteed preferred beneficial interests in
Company's subordinated debentures 40,250 40,250
Accrued interest and other liabilities 18,873 16,546
----------- -----------
Total Liabilities 1,476,066 1,411,190
Commitments and contingent liabilities -- --
Shareholders' equity
Preferred stock, no stated par value;
authorized 1,000,000 shares; none issued -- --
Common stock, par value $1.875 per share;
authorized 26,666,667 shares; issued and outstanding
1998 - 10,506,629; 1997 - 10,606,726, net of shares
in Treasury: 1998 - 202,720; 1997 - 104,623 20,085 20,085
Additional paid-in-capital 80,722 81,663
Retained earnings 20,017 17,337
Net unrealized gains on securities available for sale 6,189 7,531
Treasury stock, at cost (6,271) (3,428)
----------- -----------
Total Shareholders' Equity 120,742 123,188
----------- -----------
Total Liabilities and Shareholders' Equity $1,596,808 $1,534,378
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
Note: The Balance Sheet at Dec. 31, 1997 has been derived from the audited
financial statements at that date.
3
<PAGE>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
(Dollars in thousands, except per share data) March 31
1998 1997
<S> <C> <C>
INTEREST INCOME
Loans, including fees $26,109 $24,384
Deposits in banks 16 17
Federal funds sold 11 18
Investment securities 5,173 3,749
------- -------
Total interest income 31,309 28,168
------- -------
INTEREST EXPENSE
Deposits 10,932 9,193
Federal funds purchased, borrowed funds and
securities sold under repurchase agreements 4,336 3,276
------- -------
Total interest expense 15,268 12,469
------- -------
Net interest income 16,041 15,699
Provision for loan losses 1,200 1,200
------- -------
Net interest income after provision
for loan losses 14,841 14,499
------- -------
OTHER INCOME
Trust and investment management income 760 636
Service charges on deposit accounts 1,033 954
Net gains (losses) on sale of securities and mortgages 443 916
Other 1,525 789
------- -------
Total other income 3,761 3,295
------- -------
OTHER EXPENSES
Salaries, wages and employee benefits 6,786 6,406
Net premises and equipment 1,883 1,940
Other operating 3,176 2,872
------- -------
Total other expenses 11,845 11,218
------- -------
Income before income taxes 6,757 6,576
Applicable income tax expense 1,769 2,042
------- -------
Net income $4,988 $4,534
======= =======
PER SHARE OF COMMON STOCK
Net income per share - basic $0.47 $0.42
Net income per share - diluted 0.46 0.42
Dividends paid in cash 0.21 0.18
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1998
(Dollars in thousands) Net Unrealized
Gain (Loss) on
Additional Securities
Common Stock Paid-in Retained Available Comprehensive Treasury
Shares Par Value Capital Earnings for Sale Income Stock Total
Balance at December 31, 1997 10,606,726 $20,085 $81,663 $17,337 $7,531 -- ($3,428) $123,188
Comprehensive income:
Net income -- -- -- 4,988 -- 4,988 -- $4,988
Unrealized gains(losses) on
securities available for sale,
net of taxes and reclass-
ification adjustment
(see disclosure) -- -- -- -- (1,342) (948) -- ($1,342)
-------
Comprehensive income $4,040
=======
Cash dividends declared -- -- -- (2,308) -- -- ($2,308)
Effect of treasury stock
transactions (100,097) -- (941) -- -- (2,843) ($3,784)
---------- ------- ------- ------- ------ ------- --------
Balance at March 31, 1998 10,506,629 $20,085 $80,722 $20,017 $6,189 ($6,271) $120,742
========== ======= ======= ======= ====== ======= ========
Disclosure of reclassification
amount:
Unrealized holding loss arising
during period ($948)
Less: reclassification adjustment
for gains included in net income (394)
-------
Net unrealized loss on securities ($1,342)
=======
THREE MONTHS ENDED MARCH 31, 1997
(Dollars in thousands) Net Unrealized
Gain (Loss) on
Additional Securities
Common Stock Paid-in Retained Available Comprehensive Treasury
Shares Par Value Capital Earnings for Sale Income Stock Total
Balance at December 31, 1996 8,002,648 $20,085 $83,707 $7,357 $4,398 -- ($826) $114,721
Comprehensive income:
Net income -- -- -- 4,534 -- 4,534 -- $4,534
Unrealized gains(losses) on
securities available for sale,
net of taxes and reclass-
ification adjustment
(see disclosure) -- -- -- -- (2,586) (1,936) -- ($2,586)
-------
Comprehensive income $2,598
=======
Cash dividends declared -- -- -- (1,916) -- -- ($1,916)
Effect of treasury stock
transactions (7,058) -- 11 -- -- (311) ($300)
---------- ------- ------- ------- ------ ------- --------
Balance at March 31, 1997 7,995,590 $20,085 $83,718 $9,975 $1,812 ($1,137) $114,453
========== ======= ======= ======= ====== ======= ========
Disclosure of reclassification
amount:
Unrealized holding loss arising
during period ($1,936)
Less: reclassification adjustment
for gains included in net income (650)
-------
Net unrealized loss on securities ($2,586)
=======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
(Dollars in thousands)
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $4,988 $4,534
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Provision for loan losses 1,200 1,200
Depreciation and amortization 867 827
Net gains (losses) on sale of securities and mortgages 443 916
Mortgage loans originated for resale (16,854) (4,249)
Sale of mortgage loans originated for resale 16,854 4,249
Other (11,625) (71)
-------- --------
Net cash provided by (used in) operating activities (4,127) 7,406
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities - available for sale 16,594 11,655
Proceeds from maturities of investment securities - available for sale 5,278 10,830
Purchase of investment securities - available for sale (62,452) (12,610)
Proceeds from sales of loans -- --
Net increase in loans (7,780) (21,946)
Purchases of premises & equipment (485) (690)
-------- --------
Net cash provided by (used in) investing activities (48,845) (12,761)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in:
Deposits 15,600 50,938
Repurchase agreements, fed funds & short-term borrowings (8,051) (51,263)
Long-term borrowings 55,000 25,000
(Increase) decrease in treasury stock (2,843) (311)
Issuance of common stock under dividend reinvestment plan (941) (11)
Cash dividends (2,308) (1,917)
-------- --------
Net cash provided by (used in) financing activities 56,457 22,436
Net increase (decrease) in cash and cash equivalents 3,485 17,081
Cash and cash equivalents at January 1 41,098 41,996
-------- --------
Cash and cash equivalents at March 31 $44,583 $59,077
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
6
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. The financial information included herein is unaudited;
however, such information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary to a
fair statement of the results for the interim periods. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
2. The results of operations for the three-month period ended March 31, 1998,
are not necessarily indicative of the results to be expected for the full year.
3. Per share data are based on the weighted average number of basic shares
outstanding of 10,519,102 and 10,664,445 for 1998 and 1997, respectively, and on
the weighted average number of diluted shares outstanding of 10,786,359 and
10,809,173 for 1998 and 1997, respectively, and are computed after giving
retroactive effect to a 4-for-3 stock split paid July 31, 1997.
4. On March 25, 1998, the Company's Board of Directors declared a cash dividend
of .22 per share payable on May 17, 1998, to shareholders of record on April 30,
1998.
5. The Company identifies 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 balance of impaired loans was $7,788,000 at March 31, 1998,
all of which are nonaccrual loans. The allowance for loan loss associated with
these impaired loans was $778,000 at March 31, 1998. 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.
7
<PAGE>
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 $1.597 billion, an increase of $62.4 million,
or 4.1% over the $1.534 billion at December 31, 1997. This increase is reflected
primarily in the investment and other asset categories, the result of the
investment of deposits, the Company's primary source of funds, and long-term
borrowings.
Total cash and cash equivalents increased $3.5 million, or 8.5% at
March 31, 1998, when compared to December 31, 1997. This increase was primarily
in cash and due from banks.
Loans increased to $1.104 billion at March 31, 1998. The increase of
$6.6 million, or .60% 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 three months of 1998 amounted to $16.9
million. The Company's credit quality is reflected by the annualized ratio of
net chargeoffs to total loans of .05% through the first quarter of 1998 versus
.20% for the year 1997, and the ratio of nonperforming assets to total loans of
.94% at March 31, 1998, compared to .89% at December 31, 1997. Nonperforming
assets, including nonaccruals, loans 90 days past due, restructured loans and
other real estate owned, were $10.6 million at March 31, 1998, compared to $10.0
million at December 31, 1997. Of these amounts, nonaccrual loans represented
$7.8 million and $6.8 million at March 31, 1998, and December 31, 1997,
respectively. Loans 90 days past due and still accruing interest were $2.2
million and $2.8 million at March 31, 1998, and December 31, 1997, respectively.
Other real estate owned was $663,000 and $375,000 at March 31, 1998, and
December 31, 1997, respectively. The Company had no restructured loans at March
31, 1998, or December 31, 1997. The allowance for loan losses to nonperforming
assets was 246.3% and 251.6% at March 31, 1998, and December 31, 1997,
respectively. As is evident from the above amounts relative to nonperforming
assets, there have been no significant changes between December 31, 1997, and
March 31, 1998. The Company has no significant exposure to energy and
agricultural-related loans.
Investments, the Company's secondary use of funds, increased $39.9
million, or 12.4% to $361.7 million at March 31, 1998, when compared to December
31, 1997. The increase is due to investment purchases of $62.5 million,
primarily in municipal securities, which was partially offset by investment
sales and maturities and the amortization of mortgage-backed securities.
As the primary source of funds, aggregate deposits of $1.131 billion at
March 31, 1998, increased $15.6 million, or 1.4% compared to December 31, 1997.
The increase in deposits during the first three months of 1998 was primarily in
non-interest bearing deposits which increased $8.2 million while
interest-bearing deposits increased $7.4 million. Certificates of deposit in
excess of $100,000 decreased $1.4 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 $325.9 million at March 31, 1998, and $279.0 million at December 31,
1997. The increase of $46.9 million represents an increase in long-term
obligations of $55.0 million which was partially offset by a decrease in
short-term borrowings, primarily securities sold under repurchase agreements and
federal funds purchased.
Shareholders' equity decreased slightly through March 31, 1998. This
decrease was due to a decrease 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 decrease in
market value of the Company's investment portfolio. Cash dividends paid during
the first three months of 1998 increased $306,000, or 15.9%, compared to the
cash dividends paid during the first three months of 1997. Earnings retained
8
<PAGE>
during the first three months of 1998 were 55.4% compared to 57.7% during the
first three months of 1997.
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 1998, was $4.9 million,
10.0% more than the $4.5 million reported for the same period in 1997. On a per
share basis, basic earnings were $.47 and $.42 for the first quarter of 1998 and
1997, respectively. Diluted earnings per share were $.46 and $.42 for the period
ended March 31, 1998 and 1997, respectively. 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 income on assets and
interest expense on liabilities. Net interest income increased $.3 million, or
2.2% to $16.0 million during the first quarter of 1998 from $15.7 million in the
first quarter of 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 three months of 1998
increased $2.8 million, or 22.4% compared to the prior year's first three
months. Despite the current rate environment, the cost of attracting and holding
deposited funds is an every-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 first quarter of 1998 compared to the same period in 1997. The
allowance for loan and lease losses of $26.2 million at March 31, 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 chargeoffs of $153,000 and 606,000 during
the first three 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 $466,000, or 14.1% during the first
quarter of 1998, as a result of increased other income of $736,000, increased
trust and investment management income of $124,000, and increased service
charges on deposit accounts of $79,000. Net gains (losses) on sale of securities
and mortgages decreased $473,000. "Total other expenses" increased $627,000, or
5.6% during the quarter ended March 31, 1998. Of this amount, salaries, wages,
and employee benefits increased $380,000, other operating expenses increased
$304,000, and net premises and equipment decreased $57.000.
Income before income taxes increased by $181,000, or 2.8%, compared to
the first quarter of 1997. Income taxes decreased $273,000 compared to the first
quarter of 1997.
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 $7.5 million from year end 1997.
Long-term borrowings increased $55.0 million during the first three 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.
9
<PAGE>
The following table shows separately the interest rate sensitivity of
each category of interest-earning assets and interest-bearing liabilities at
March 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Repricing Periods (1)
Three Months One Year
Within Three Through One Through Five Over
Months Year Years Five Years
Assets
Interest-bearing deposits at banks $ 1,680 $ -- $ -- $ --
Investment securities 17,012 45,411 141,280 158,016
Loans and leases 331,681 150,031 447,422 175,108
Other assets 5,546 -- -- 123,621
------------- ------------ ------------- ------------
355,919 195,442 588,702 456,745
------------- ------------ ------------- ------------
Liabilities and equity
Noninterest-bearing deposits 154,983 -- -- --
Interest-bearing deposits 249,608 254,373 231,218 241,018
Borrowed funds 61,062 2,610 197,500 24,571
Preferred securities -- -- -- 40,250
Other liabilities -- -- -- 18,873
Hedging instruments 80,000 -- (80,000) --
Shareholders' equity - -- -- 120,742
------------- ------------ ------------- ------------
545,653 256,983 348,718 445,454
-------------- ------------ ------------- ------------
Interest sensitivity gap (189,734) (61,541) 239,984 11,291
-------------- ------------ ------------ ------------
Cumulative interest rate sensitivity gap ($189,734) ($251,275) $ (11,291) $ --
============= ============ ============== ============
</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 first 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.
(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, 32.5% of these deposits are considered repriceable
within three months and 67.5% 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
10
<PAGE>
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, noninterest 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.
<TABLE>
<CAPTION>
<S> <C> <C>
March 31 Dec. 31
1998 1997
CAPITAL LEVELS
Tier 1 leverage ratio 9.46% 9.84%
Tier 1 risk-based ratio 12.83% 13.49%
Total risk-based ratio 14.28% 14.91%
CAPITAL PERFORMANCE
Return of average assets (annualized) 1.29 1.31
Return on average equity (annualized) 16.30 15.90
Earnings retained 55.40 55.30
Internal capital growth (annualized) 8.97 8.35
</TABLE>
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 March 31,
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
In December 1997, the Company's Board of Directors approved the
repurchase of up to 530,000 shares of its common stock to be used for the
Company's dividend reinvestment plan, stock option, employee stock purchase, 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. To date, a total of 85,286 shares have been repurchased
11
<PAGE>
at an aggregate cost of $2.7 million. A prior repurchase program of 380,000
shares authorized in June 1996 was completed in December 1997.
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.
A new product at the Bank is BottomLine Partners, a unique money-saving
program for businesses. This new product is not expected to have a significant
effect 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.
In 1998, the Company intends to open one new supermarket branch.
Additionally, the Company is converting 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, if completed, are not expected to start
contributing to profits until 1999 and beyond, so that 1998 earnings may be
somewhat negatively impacted by the initial costs of these new items.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There has been no material changes in the Company's assessment of its
sensitivity to market risk since its presentation in the 1997 annual report on
Form 10-K filed with the SEC.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
Not applicable.
Item 5. Other Information.
In December 1997, the Registrant's Board of Directors approved the
repurchase of up to 530,000 shares of its common stock to be used for the
Registrant's dividend reinvestment, stock option, employee stock purchase, and
other stock-based corporate plans. The stock repurchase plan authorizes the
Registrant to make repurchases from time to time in open market or privately
negotiated transactions. To date, a total of 85,286 shares have been repurchased
at an aggregate cost of $2.7 million. A prior repurchase program of 380,000
shares was completed in December 1997.
During first quarter 1998, the Registrant's banking subsidiary,
National Penn Bank (the "Bank"), began operating a messenger service branch in
eight southeastern Pennsylvania counties and installed a new automated teller
machine in a convenience store location in Easton (Northampton County).
During second quarter 1998, the Bank closed a supermarket branch in
Exton (Chester County). The Bank anticipates opening a new supermarket branch in
Sinking Spring (Berks County) also in the second quarter.
In April 1998, the Bank formed a wholly-owned subsidiary, Link
Financial Services, Inc. , which, as a limited partner in Link Abstract L.P., is
indirectly engaged in the title insurance agency business. An application is
currently pending with the Office of the Comptroller of the Currency to
authorize Link Financial Services, Inc. to engage directly in business as a life
insurance agency.
On April 29, 1998 Lawrence T. Jilk, Jr. was named Chairman of the
Registrant, and Wayne R. Weidner was named President of the Registrant.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K. The Registrant did not file any Reports on
Form 8-K during the quarterly period ended March 31, 1998.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NATIONAL PENN BANCSHARES, INC.
(Registrant)
Dated: May 13, 1998 By /s/ Wayne R. Weidner
Wayne R. Weidner, President
Dated: May 13, 1998 By /s/ Gary L. Rhoads
Gary L. Rhoads, Principal
Financial Officer
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