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: September 30, 1999
-------------------------------
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: 000-10957
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 November 9, 1999
Common Stock (no stated par value) (No.) 16,886,816 Shares
Page 1 of 17 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 Operation...... 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk...................................... 15
Part II - Other Information.
Item 1. Legal Proceedings................................ 16
Item 2. Changes in Securities............................ 16
Item 3. Defaults Upon Senior Securities.................. 16
Item 4. Submission of Matters to a Vote of
Security Holders................................. 16
Item 5. Other Information................................ 16
Item 6. Exhibits and Reports on Form 8-K................. 16
Signature.......................................................... 17
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
<S> <C> <C>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET Sept. 30 Dec. 31
(Dollars in thousands, except per share data) 1999 1998
(Unaudited) (Note)
----------- -----------
ASSETS
Cash and due from banks $ 59,244 $ 55,024
Interest bearing deposits in banks 1,748 10,777
Federal funds sold -- --
----------- -----------
Total cash and cash equivalents 60,992 65,801
Trading account securities -- 21,589
Investment securities available for sale 564,314 523,041
Loans, less allowance for loan losses of $32,267 and
$30,835 in 1999 and 1998 respectively 1,511,443 1,404,972
Other assets 115,381 105,845
----------- -----------
Total Assets 2,252,130 2,121,248
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $ 225,399 $ 222,816
Interest bearing deposits
(Includes certificates of deposit in excess of $100,000 or greater:
1999 - $156,518; 1998 - $145,047) 1,295,071 1,250,486
----------- -----------
Total Deposits 1,520,470 1,473,302
Securities sold under repurchase agreements
and federal funds purchased 213,735 159,586
Short-term borrowings 7,589 19,132
Long-term obligations 298,081 248,627
Guaranteed preferred beneficial interests in
Company's subordinated debentures 40,250 40,250
Accrued interest and other liabilities 20,950 21,577
----------- -----------
Total Liabilities 2,101,075 1,962,474
Commitments and contingent liabilities -- --
Shareholders' equity
Preferred stock, no stated par value;
authorized 1,000,000 shares, none issued -- --
Common stock, no stated par value;
authorized 62,500,000 shares; issued and outstanding
1999 - 17,773,173; 1998 - 17,839,103; net of shares
in Treasury: 1999 - 67,467; 1998 - 0 114,454 114,294
Retained earnings 43,759 34,927
Accumulated other comprehensive income (5,754) 9,553
Treasury stock at cost (1,404) --
----------- -----------
Total Shareholders' Equity 151,055 158,774
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,252,130 $ 2,121,248
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
Note: The Balance Sheet at Dec. 31, 1998 has been derived from the audited
financial statements of the Company plus additions necessary to reflect
the Company's acquisition of Elverson National Bank which was accounted
for under the pooling of interest method of accounting.
3
<PAGE>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
(Dollars in thousands, except per share data) September 30 September 30
----------------------------------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
INTEREST INCOME
Loans including fees $ 33,528 $ 31,783 $ 97,037 $ 93,437
Deposits in banks 69 175 176 409
Federal funds sold 10 7 170 171
Trading account securities -- 315 196 518
Investment securities 8,281 7,001 23,369 19,578
--------- --------- --------- ---------
Total interest income 41,888 39,281 120,948 114,113
--------- --------- --------- ---------
INTEREST EXPENSE
Deposits 13,945 13,329 41,178 39,777
Federal funds purchased, borrowed funds and
securities sold under repurchase agreements 7,154 6,489 19,250 16,647
--------- --------- --------- ---------
Total interest expense 21,099 19,818 60,428 56,424
--------- --------- --------- ---------
Net interest income 20,789 19,463 60,520 57,689
Provision for loan losses 1,415 1,365 4,245 4,095
--------- --------- --------- ---------
Net interest income after provision
for loan losses 19,374 18,098 56,275 53,594
--------- --------- --------- ---------
OTHER INCOME
Trust income 1,019 828 2,912 2,420
Service charges on deposit accounts 1,511 1,321 4,201 3,803
Net gains (losses) on sale of investment securities -- 64 213 828
Mortgage banking income 259 244 689 571
Trading revenue -- 328 (48) 513
Other 2,845 1,743 7,867 4,855
--------- --------- --------- ---------
Total other income 5,634 4,528 15,834 12,990
--------- --------- --------- ---------
OTHER EXPENSES
Salaries, wages and employee benefits 9,386 8,265 27,937 24,370
Net premises and equipment 2,391 2,395 7,085 6,904
Other operating 4,076 4,046 12,601 12,366
--------- --------- --------- ---------
Total other expenses 15,853 14,706 47,623 43,640
--------- --------- --------- ---------
Income before income taxes 9,155 7,920 24,486 22,944
Applicable income tax expense 1,945 1,710 4,760 5,301
--------- --------- --------- ---------
Net income $ 7,210 $ 6,210 $ 19,726 $ 17,643
========= ========= ========= =========
PER SHARE OF COMMON STOCK
Net income per share - basic $ 0.42 $ 0.35 $ 1.16 $ 0.99
Net income per share - diluted 0.42 0.34 1.15 0.97
Dividends paid in cash 0.19 0.15 0.59 0.42
</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 AND
COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED September 30, 1999
(Dollars in thousands)
Accumulated
Additional other
Common Stock Paid-in conprehensive Retained Treasury Comprehensive
Shares Par Value Capital income earnings stock income
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 16,989,622 114,294 - 9,553 34,927 -
Net income - - - - 19,726 - 19,726
Cash dividends declared - - - - (10,894) -
Shares issued under stock-based
plans 4,676 693 - - - -
Other comprehensive income, net
of reclassification adjustment
and taxes - - - (15,307) - (15,307)
------------------------------------------------------------------------------------------
Total comprehensive income - - - - - - $ 4,419
------------------------------------------------------------------------------------------
Effect of treasury stock transactions (67,467) (533) - - - (1,404)
Balance at September 30, 1999 16,926,831 $114,454 $ - $ (5,754) $43,759 $ (1,404)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
September 30, 1999
----------------------------------------------
Before Tax Net of
tax (expense) tax
amount benefit amount
----------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during period (23,762) 8,317 (15,445)
Less: reclassification adjustment for gains realized in net income 213 (75) 138
----------------------------------------------
Other comprehensive income, net (23,549) 8,242 (15,307)
==============================================
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Dollars in thousands)
Accumulated
Additional other
Common Stock Paid-in conprehensive Retained Treasury Comprehensive
Shares Par Value Capital income earnings stock income
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 17,080,328 25,620 96,657 7,648 22,431 (3,428)
Net income - - - - 17,643 - 17,643
Cash dividends declared - - - - (7,775) -
Shares issued under stock-based
plans 3,721 19 - - - -
Other comprehensive income, net
of reclassification adjustment
and taxes - - - 3,865 - - 3,865
------------------------------------------------------------------------------------------
Total comprehensive income - - - - - - $ 21,508
------------------------------------------------------------------------------------------
Conversion to no par value stock - 95,436 (95,436) - - -
Par value adjustments related to
pooling transaction - (10) 329 - - -
Effect of treasury stock transactions (101,436) (7,671) (1,550) - - 3,428
------------------------------------------------------------------------------------------
Balance at September 30, 1998 16,982,613 $ 113,394 $ - $ 11,513 $32,299 $ -
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
September 30, 1998
----------------------------------------------
Before Tax Net of
tax (expense) tax
amount benefit amount
----------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during period 5,118 (1,791) 3,327
Less: reclassification adjustment for gains realized in net income 828 (290) 538
----------------------------------------------
Other comprehensive income, net 5,946 (2,081) 3,865
==============================================
</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>
<S> <C> <C>
Nine Months Ended September 30,
(Dollars in thousands)
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 19,726 $ 17,643
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Provision for loan and lease losses 4,245 4,095
Depreciation and amortization 3,387 3,072
Net (gains) losses on sale of securities and mortgages (143) (330)
Trading-related assets 21,589 (21,522)
Mortgage loans originated for resale (46,658) (40,083)
Sale of mortgage loans originated for resale 46,658 40,083
Other (2,234) (8,855)
--------- ---------
Net cash provided by (used in) operating activities 46,570 (5,897)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities - available for sale 16,511 49,997
Proceeds from maturities of investment securities - available for sale 43,571 23,618
Purchase of investment securities - available for sale (124,893) (192,949)
Proceeds from sales of loans -- --
Net increase in loans (110,716) (74,394)
Purchases of premises & equipment (2,942) (1,613)
--------- ---------
Net cash provided by (used in) investing activities (178,469) (195,341)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in:
Deposits 47,168 42,951
Repurchase agreements, fed funds & short-term borrowings 42,606 92,289
Long-term borrowings 49,454 92,646
(Increase) decrease in treasury stock (1,404) 3,428
Issuance of common stock under dividend reinvestment plan 160 (8,883)
Cash dividends (10,894) (7,775)
--------- ---------
Net cash provided by (used in) financing activities 127,090 214,656
Net increase (decrease) in cash and cash equivalents (4,809) 13,418
Cash and cash equivalents at January 1 65,801 63,408
--------- ---------
Cash and cash equivalents at September 30 $ 60,992 $ 76,826
========= =========
</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 consolidated 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. The
financial statements include the balances of Elverson National Bank which was
acquired on January 4, 1999 in a transaction accounted for under the pooling of
interests method of accounting (see Note 3). 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, 1998.
2. The results of operations for the nine-month period ended September 30, 1999
are not necessarily indicative of the results to be expected for the full year.
3. The Company's banking subsidiary, National Penn Bank, completed the
acquisition of Elverson National Bank on January 4, 1999 in a transaction
accounted for as a pooling of interests, which accordingly required restatement
of the financial statements. Under the terms of the merger, each share of
Elverson was converted into 1.46875 shares of the Company's common stock,
resulting in an issuance of 3,821,564 shares of the Company's common stock. In
addition, outstanding stock options to purchase Elverson common stock were
converted into stock options to purchase 58,141 shares of the Company's common
stock, with an exercise price of $12.98 to $15.74 per share. All financial
information presented for current and prior periods includes the results of
Elverson National Bank.
4. Per share data are based on the weighted average number of shares outstanding
of 16,959,918 and 16,996,503 for 1999 and 1998, respectively, and on the
weighted average number of diluted shares outstanding of 17,222,235 and
17,337,077 for 1999 and 1998, respectively, and are computed after giving
retroactive effect to a 5-for-4 stock split paid July 31, 1998.
5. On September 22, 1999, the Company's Board of Directors declared a cash
dividend of $.20 per share payable on November 17, 1999, to shareholders of
record on October 29, 1999. On October 27, 1999, the Company's Board of
Directors declared a 5% stock dividend payable on December 22, 1999, to
shareholders of record on December 6, 1999. The financial and per share
information has not been adjusted to reflect the 5% stock dividend.
6. On July 28, 1999, the Company's Board of Directors authorized the repurchase,
from time to time, of up to 850,000 shares of its common stock in the open
market or in negotiated transactions, depending upon market conditions and other
factors. No timetable has been set for the repurchases. Repurchased shares will
be used for general corporate purposes, including the Company's dividend
reinvestment plan, stock option plans, employee stock purchase plan, and other
stock-based benefit plans. As of September 30, 1999, a total of 142,959 shares
have been repurchased at an aggregate cost of $3,230,296.
7. 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 $11,827,000 at September 30,
1999, all of which are non-accrual loans. The allowance for loan loss associated
with these impaired loans was $2,545,000 at September 30, 1999. 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 $2.252 billion, an increase of $130.9 million
or 6.2% over the $2.121 billion at December 31, 1998. This increase is reflected
primarily in the loan and investment categories, 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 decreased $4.8 million or 7.3% at
September 30, 1999 when compared to December 31, 1998. The decrease was
primarily in interest bearing deposits in banks.
Loans increased to $1.511 billion at September 30, 1999. The increase
of $106.5 million or 7.6% compared to December 31, 1998 was primarily the result
of the investment of deposits and long-term borrowings. Loans originated for
immediate resale during the first nine months of 1999 amounted to $46.7 million.
The Company's credit quality is reflected by the annualized ratio of net
charge-offs to total loans of .24% through the third quarter of 1999 versus .30%
for the year 1998, and the ratio of non-performing assets to total loans of .94%
at September 30, 1999 and 1.0% at December 31 1998. Non-performing assets,
including non-accruals, loans 90 days past due and still accruing and other real
estate owned, were $14.4 million at September 30, 1999 compared to $14.3 million
at December 31, 1998. Of these amounts, non-accrual loans represented $11.8
million and $11.6 million at September 30, 1999 and December 31, 1998,
respectively. Loans 90 days past due and still accruing interest were $1.5
million and $1.8 million at September 30, 1999 and December 31, 1998,
respectively. Other real estate owned was $1.1 million and $922,000 at September
30, 1999 and December 31, 1998, respectively. The Company had no restructured
loans at September 30, 1999 or December 31, 1998. The allowance for loan losses
to non-performing assets was 223.6% and 215.0% at September 30, 1999 and
December 31, 1998, respectively. As is evident from the above amounts relative
to non-performing assets, there have been no significant changes between
December 31, 1998 and September 30, 1999. The Company has no significant
exposure to energy and agricultural-related loans.
Investments, the Company's secondary use of funds, increased $41.3
million or 7.9% to $564.3 million at September 30, 1999 when compared to
December 31, 1998. The increase is due to investment purchases of $124.9
million, primarily in municipal securities, which was partially offset by
investment sales and maturities and the amortization of mortgage-backed
securities.
Trading account securities decreased from $21.6 million to zero at
September 30, 1999 due to the sale of all these securities. The Company has
assessed its involvement in trading account activities and decided these
activities do not meet with its strategic goals.
As the primary source of funds, aggregate deposits of $1.520 billion at
September 30, 1999 increased $47.2 million or 3.2% compared to December 31,
1998. The increase in deposits during the first nine months of 1999 was
primarily in interest bearing deposits which increased $44.6 million while
non-interest bearing deposits increased $2.6 million. Certificates of deposit in
excess of $100,000 increased $11.5 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, long-term debt obligations, and subordinated debentures.
In aggregate, these funds totaled $559.7 million at September 30, 1999, and
$467.6 million at December 31, 1998. The increase of $92.1 million represents an
increase in long-term obligations of $49.5 million and an increase in short-term
8
<PAGE>
borrowings, primarily securities sold under repurchase agreements and federal
funds purchased of $42.6 million.
Shareholders' equity decreased $7.7 million through September 30, 1999.
This decrease was principally due to a decrease in earnings retained due to a
higher dividend payout ratio and a decrease in accumulated other comprehensive
income. Cash dividends paid during the first nine months of 1999 increased $2.5
million or 33.5% compared to the cash dividends paid during the first nine
months of 1998. Earnings retained during the first nine months of 1999 were
49.2% compared to 57.6% during the first nine months of 1998.
RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 1999 was $7.2 million,
16.1% more than the $6.2 million reported for the same period in 1998. For the
first nine months, net income reached $19.7 million, or 11.8% more than the
$17.6 million reported for the first nine months of 1998. 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 increased $1.3 million
or 6.8% to $20.8 million during the third quarter of 1999 from $19.5 million in
1998. For the comparative nine month period, net interest income increased $2.8
million or 4.9% to $60.5 million from $57.7 million in 1998. The increase in
interest income for the first nine months is a result of increased investment
income of $3.8 million and increased loan income of $3.6 million due to 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 November 18, 1998,
the prime rate changed to 7.75%. From July 1, 1999 to August 24, 1999, the prime
rate was 8.00%. On August 25, 1999, the prime rate changed to 8.25%. Interest
expense during the first nine months of 1999 increased $4.0 million or 7.1%
compared to the prior year's first nine 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
increased $150,000 for the nine month period ended September 30, 1999 compared
to the same period in 1998. The allowance for loan and lease losses of $32.3
million at September 30, 1999 and $30.8 million at December 31, 1998 as a
percentage of total loans was 2.1% for both time periods. The Company's net
charge-offs of $2,813,000 and $953,000 during the first nine months of 1999 and
1998, respectively, continue to be comparable to those of the Company's peers,
as reported in the Bank Holding Company Performance Report.
Other income increased $1.1 million or 24.4% during the third quarter
of 1999, as a result of increased other income of $1,102,000, which includes the
investment in bank-owned life insurance, increased trust income of $191,000,
increased service charges on deposit accounts of $190,000 and increased mortgage
banking income of $15,000. This was partially offset by a decrease in trading
revenue of $328,000 and a decrease in net gains (losses) in investment
securities of $64,000. Year-to-date, other income increased $2.8 million or
21.9% as a result of increased other income of $3.0 million, increased trust
income of $492,000, increased service charges on deposit accounts of $398,000
and increased mortgage banking income of $118,000. This was partially offset by
decreases in gains on sale of investment securities of $615,000 and trading
revenue of $561,000. Other expenses increased $1.1 million or 7.8% during the
quarter ended September 30, 1999 and increased $4.0 million or 9.1% for the nine
month period. Of this year-to-date increase, salaries, wages and benefits
increased $3.6 million or 14.6%,
9
<PAGE>
other operating expenses increased $235,000 or 1.9% and net premises and
equipment increased $181,000 or 2.6%.
Income before income taxes increased $1.2 million or 15.6% in the third
quarter of 1999 compared to the same time period in 1998. In comparing the first
nine months of 1999 to 1998, income before income taxes increased $1.5 million
or 6.7%. Income taxes increased $235,000 for the quarter ended September 30,
1999 and decreased $541,000 for the nine month period.
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 $89.8 million from year end
1998. Long-term borrowings increased $49.5 million during the first nine months
of 1999.
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
September 30, 1999:
<TABLE>
<CAPTION>
Repricing Periods (1) (2)
---------------------------------
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 $ 1,748 $ -- $ -- $ --
Investment securities 72,855 56,851 183,285 251,323
Trading account securities -- -- -- --
Loans and leases 441,073 226,625 470,393 373,352
Other assets 3,561 -- -- 171,064
--------- --------- --------- ---------
519,237 283,476 653,678 795,739
--------- --------- --------- ---------
Liabilities and equity
Noninterest-bearing deposits 225,399 -- -- --
Interest-bearing deposits 286,738 414,347 201,779 392,207
Borrowed funds 197,334 90,000 167,500 64,571
Preferred securities -- -- -- 40,250
Other liabilities -- -- -- 20,300
Hedging instruments 80,000 (30,000) (50,000) --
Shareholders' equity -- -- -- 151,055
--------- --------- --------- ---------
789,471 474,347 319,279 669,033
--------- --------- --------- ---------
Interest sensitivity gap (270,234) (190,871) 334,399 126,706
--------- --------- --------- ---------
Cumulative interest rate
sensitivity gap ($270,234) ($461,105) ($126,706) $ --
========= ========= ========= =========
10
<PAGE>
<FN>
(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 third calendar quarter of 1999. 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, 29.1% of these deposits are considered repriceable
within three months and 70.9% are considered repriceable in the over five years
category.
</FN>
</TABLE>
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 interest rates will move within a narrow range
for the remainder of 1999, with no clear indication of sustainable rising or
falling rates. Given this assumption, the Company's asset/liability strategy for
1999 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 sustained 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:
Sept. 30, Dec. 31,
1999 1998
--------- --------
CAPITAL PERFORMANCE
Return on average assets (annualized) 1.23% 1.17%
Return on average equity (annualized) 17.10 15.00
Earnings retained 49.20 55.70
Internal capital growth (annualized) 8.15 8.04
11
<PAGE>
CAPITAL LEVELS
<TABLE>
<CAPTION>
Tier 1 Capital to Tier 1 Capital to Risk- Total Capital to Risk-
Average Assets Ratio Weighted Assets Ratio Weighted Assets Ratio
-------------------- --------------------- ---------------------
Sept. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30, Dec. 31,
1999 1998 1999 1998 1999 1998
---- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
The Company 8.66% 8.77% 11.30% 12.21% 12.68% 13.51%
National Penn Bank 6.78% 6.80% 8.89% 9.52% 10.15% 10.78%
"Well Capitalized" institution 5.00% 5.00% 6.00% 6.00% 10.00% 10.00%
(under banking regulations)
</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 September
30, 1999, 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
The following is a Year 2000 readiness statement.
The Company's Year 2000 initiative began in 1996 with the creation of
a "Year 2000 Compliance Project team" comprised of various Company employees,
including senior management. The Year 2000 Project was divided into five phases
- -- Awareness, Assessment, Renovation, Validation, and Implementation. These five
phases have all been completed. All active ATM machines have been renovated and
are now compliant. The company has been actively involved in the joint testing
of electronic payment and transfer systems. Actual costs for 1998 were within
the budgeted amount of $300,000, which represented approximately 9% of the total
information technology budget for 1998. The amount budgeted for 1999 is
$200,000, which is approximately 12% of the total information technology budget
for 1999. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that may cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties. A business impact analysis has been completed for the systems
which support critical functions. The Company believes the most likely
worst-case scenario to be a total or partial failure to perform of one or more
of the Company's material third-party business partners or providers of service,
commodity, or data, which failure could have a material adverse impact on the
Company's operations. In an attempt to mitigate this risk, the Company has
included the assessment of these partners and providers in its Year 2000
project. The assessment of the Year 2000 readiness of third parties upon which
the Company depends for various services has been substantially completed. The
Company will continue to monitor critical third parties throughout the remainder
of 1999. However, there can be no guarantee that the systems of other companies
on which Company's systems rely will be timely converted and would not have a
material adverse effect on the Company's systems and operations. No
12
<PAGE>
major information technology projects have been delayed as a result of the Year
2000 Project. In addition, the Company's audit department contracted for an
independent consultant to verify and validate the Company's Year 2000 Project.
No major recommendations were suggested by the independent consultant to
mitigate exposures in the Company's Year 2000 Project plan.
The following is a more detailed discussion of the Year 2000 Project:
The Year 2000 Project has been in operation at the Company since 1996.
During this time the Company has been operating under a project plan reflected
in many individual documents such as the Microsoft Project charts, binders for
specific project areas, and the inventories which were created.
For the purposes of consistency with the guidance of the Company's
regulatory agencies, the Company has structured the project in the standard five
phases: Awareness, Assessment, Renovation, Validation, and Implementation. None
of these phases are purely consecutive chronologically. For example, Awareness,
the phase which was begun before the others, will most likely continue well into
the first and second quarters of 2000.
It is important to note that the Year 2000 Project at the Company
includes both the progression from 1999 to 2000 and the identification of
February 29, 2000 as a leap year day.
The following is a more detailed description of each project phase.
Awareness
This phase began in 1996 with the assignment of project managers. The
first task was to review as much information as possible from user groups,
seminars, periodicals, and the written guidance available from regulatory
agencies. The project managers created a project plan to address Year 2000
issues.
To address individual areas of responsibility in the project plan, a
team was formed composed of various representatives of National Penn Bank,
Investors Trust Company, and, beginning in 1998, Penn Securities, Inc. The team
has been charged with guiding the Year 2000 efforts of the Company through all
project phases.
The next step in the Awareness phase was to educate the Company's
employees on Year 2000 issues. This was accomplished through periodic items in
Company memos and through e-mail. Year 2000 training was conducted for all bank
officers. In the Spring of 1998, seminars were offered for the Company's
business loan customers and lending staff.
The seminars were one component of the Company's effort to educate
customers. Another was a variety of statement stuffers concerning the Year 2000
issue and specifically providing information on the Company's project plan and
status. In September 1998, a Year 2000 update was added to the Company's
internet home page. In addition, the Company has participated in various
television programs and newspaper articles produced by the local media.
The Company intends to continue to use this variety of channels
(statement stuffers, letters, seminars, home page, and printed brochures) to
attempt to provide frequent updates on the status of the Year 2000 project at
the Company and all of its subsidiary organizations.
Assessment
The purpose of the Assessment phase is to inventory all potentially
affected software, hardware, equipment (including faxes, ATMs, hand held
calculators, etc.), interfaces, environmental systems, and third parties. Once
this information was gathered, it was organized to provide efficient tracking.
Letters
13
<PAGE>
were sent and web sites visited to ascertain the compliance status of the
individual product or project at the particular organization.
The Assessment process went one step further with the investigation of
the Year 2000 compliance status of the Company's largest business depositors
(funds providers), large commercial loan customers (funds takers), and
correspondent banks (capital market counterparties). The depositor investigation
was done through a mailed survey to any business account holder with a balance
of $100,000 or greater. Commercial loan relationships with an aggregate balance
greater than $300,000 were individually assessed by the lender. The status of
correspondent banks has been tracked as part of the third-party portion of the
project.
Year 2000 issues were addressed as part of the acquisition planning
with Elverson in 1998. After the acquisition was announced, the teams began to
share information by the project leaders participating in the other
institution's team meetings, through data sharing, and through joint testing of
common applications.
In an effort to control the inventory of systems and applications after
the assessment was completed, control points were reviewed. A policy was drafted
requiring all new software purchases to be certified Year 2000 compliant. All
hardware and software purchases will be tested before they are placed into a
production environment. As all PC-based hardware and software are installed
through the Network Services group and all mainframe applications are supported
through Data Processing, two central control points are established. These
groups are responsible for the ongoing monitoring of new software and hardware
installation. As an additional control, the MIS department must approve all
requests for payment of hardware and software purchases.
Renovation
The Renovation phase involves upgrading or replacing hardware and
software as necessary. Core systems have the highest priority. Other mission
critical systems follow. Finally, non-mission critical systems are addressed. A
Remediation Contingency Plan has been written to address any potential
difficulties that may be encountered before December 31, 1999.
The Company has completed renovation efforts on mission critical
systems. The Company completed the replacement of the two remaining
non-compliant, non-critical systems during the third quarter of 1999.
Highlights of the Company's efforts to date include the installation of
a new mainframe system in January 1998. In May 1998, a new core banking system
was installed. In October and November 1998, all ATM machines were upgraded to
compliant releases of software and the memory necessary to process them. In
December 1998, the core processing system of Investors Trust Company was
replaced, including new hardware, software, and operating system. All have been
thoroughly tested by the users' group, as discussed herein in the Validation
phase.
Validation
The Validation phase of the project is guided by a written test plan.
Testing of both mission critical and non-mission critical systems has been
completed.
The project leader and the end users are jointly responsible for the
individual tests. The project leader schedules the date and ensures that the
testing environment is prepared. He then meets with the end user to develop the
testing scripts and scenarios. The project leader is responsible for ensuring
that the test adheres to the requirements of the Year 2000 testing plan. The end
user is responsible for the data entry and system operation during the test and
for reviewing the results to verify that the test was successful. When the test
is completed and documented, both the end user and the project leader sign to
indicate its completion.
14
<PAGE>
When a system is tested, all interfaces and file transmissions will be
tested at the same time whenever possible. As appropriate and feasible, testing
with third parties will also be completed.
Initiatives to complete the Validation phase included the creation of
an isolated PC network testing lab, the use of a secondary logical partition for
validating mainframe applications and interfaces, user group testing for the
core trust applications, and proxy testing by the network vendor for ATMs.
Implementation
Hardware and software certified to be compliant by the vendor will be
thoroughly tested as addressed in the Validation phase. Any product not
currently in production must be tested and accepted by the end user before being
placed into a production environment. After a system is certified to be
compliant, no future releases or updates will be installed unless first tested
and confirmed to be compliant through the procedures discussed in the Validation
phase. The control points for ensuring the future installation of releases will
continue to be the Network Services and Data Processing departments.
Additional Project Efforts
Throughout the remainder of 1999, a database is being maintained to
track the compliance status of third parties with which the Company conducts its
affairs. This information will be reported to the project team and forwarded to
executive management as necessary.
A separate budget for Year 2000 expenses is being maintained for 1999.
The status of the budget will be reported periodically to executive management.
Contingency plans have been written for all mission critical and high
priority non-mission critical systems. As the plans are completed, they are
reviewed and edited. Additionally, the testing of these plans has been
completed.
Although the Company believes that the program outlined above should be
adequate to address the Year 2000 issue, there can be no assurance to that
effect.
This report contains forward-looking statements concerning earnings,
asset quality, Year 2000 compliance and other future events. Actual results
could differ materially due to, among other things, the risks and uncertainties
discussed herein and in Exhibit 99 to the Company's Report on Form 10-K for
1998, 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 change in the Company's assessment of its
sensitivity to market risk since its presentation in the 1998 annual report on
Form 10-K filed with the SEC.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
As previously reported in a Report on Form 8-K dated August 21, 1999,
National Penn Bancshares, Inc. (the "Registrant") amended its Shareholder Rights
Plan to extend the term of the Rights (as defined therein) to August 22, 2009.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
None.
Item 5. Other Information.
On September 17, 1999, the Registrant's banking subsidiary, National
Penn Bank (the "Bank"), formed and organized a new wholly-owned subsidiary,
National Penn Mortgage Company ("NPMC"). NPMC is engaged in the mortgage lending
business, including the sub-prime and agency and alternative A residential
mortgage loan business.
On September 22, 1999, the Registrant's Board of Directors declared a
cash dividend of $.20 per share payable on November 17, 1999, to shareholders of
record on October 29, 1999.
On October 27, 1999, the Registrant's Board of Directors declared a 5%
stock dividend payable on December 22, 1999, to shareholders of record as of
December 6, 1999.
In October 1999, the Bank closed two supermarket branches and the
automated teller machines (ATMs) at those locations.
As previously reported in its Report on Form 10-Q for the quarter ended
June 30, 1999, the Registrant's Board of Directors approved, in July 1999, the
repurchase of up to 850,000 shares of its common stock in the open market or in
negotiated transactions. As of September 30, 1999, a total of 142,959 shares
have been repurchased at an aggregate cost of $3,230,296.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K. The Registrant filed a Report on Form 8-K
dated August 21, 1999, reporting under Item 5 the amendment of the Registrant's
Shareholder Rights Plan to extend the term of the Rights (as defined therein) to
August 22, 2009. The Report did not contain any financial statements.
16
<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: November 12, 1999 By /s/ Wayne R. Weidner
-------------------------------------
Wayne R. Weidner, President
Dated: November 12, 1999 By /s/ Gary L. Rhoads
-------------------------------------
Gary L. Rhoads, Principal
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000700733
<NAME> NATIONAL PENN BANCSHARES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 59,244
<INT-BEARING-DEPOSITS> 1,748
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 564,314
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 564,314
<LOANS> 1,543,710
<ALLOWANCE> 32,267
<TOTAL-ASSETS> 2,252,130
<DEPOSITS> 1,520,470
<SHORT-TERM> 221,324
<LIABILITIES-OTHER> 20,950
<LONG-TERM> 338,331
0
0
<COMMON> 114,454
<OTHER-SE> 36,601
<TOTAL-LIABILITIES-AND-EQUITY> 2,252,130
<INTEREST-LOAN> 97,037
<INTEREST-INVEST> 23,369
<INTEREST-OTHER> 542
<INTEREST-TOTAL> 120,948
<INTEREST-DEPOSIT> 41,178
<INTEREST-EXPENSE> 60,428
<INTEREST-INCOME-NET> 60,520
<LOAN-LOSSES> 4,245
<SECURITIES-GAINS> 213
<EXPENSE-OTHER> 47,623
<INCOME-PRETAX> 24,486
<INCOME-PRE-EXTRAORDINARY> 19,726
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,726
<EPS-BASIC> 1.16
<EPS-DILUTED> 1.15
<YIELD-ACTUAL> 4.06
<LOANS-NON> 11,827
<LOANS-PAST> 1,532
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 27,346
<CHARGE-OFFS> 3604
<RECOVERIES> 791
<ALLOWANCE-CLOSE> 32,267
<ALLOWANCE-DOMESTIC> 28,714
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,553
</TABLE>
