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, 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 May 7, 1999
Common Stock (no stated par value) (No.) 16,996,657 Shares
Page 1 of 18 pages
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I - Financial Information. Page
<S> <C>
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.......................................................................18
</TABLE>
2
<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) 1999 1998
(Unaudited) (Note)
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $41,062 $55,024
Interest bearing deposits in banks 1,425 10,777
Federal funds sold 25,500 -
------------- -------------
Total cash and cash equivalents 67,987 65,801
Trading account securities 6,558 21,589
Investment securities available for sale 516,911 523,041
Loans, less allowance for loan losses of $31,400 and
$30,835 in 1999 and 1998 respectively 1,409,936 1,404,972
Other assets 106,359 105,845
------------- -------------
Total Assets 2,107,751 2,121,248
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $225,925 $222,816
Interest bearing deposits
(Includes certificates of deposit $100,000 or greater:
1999 - $140,760; 1998- $145,047) 1,274,926 1,250,486
------------- -------------
Total deposits 1,500,851 1,473,302
Securities sold under repurchase agreements
and federal funds purchased 131,278 159,586
Short-term borrowings 5,287 19,132
Long-term obligations 247,991 248,627
Guaranteed preferred beneficial interests in
Company's subordinated debentures 40,250 40,250
Accrued interest and other liabilities 22,063 21,577
------------- -------------
Total Liabilities 1,947,720 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 - 16,994,605; 1998 - 16,989,622 114,565 114,294
Retained earnings 36,832 34,927
Accumulated other comprehensive income 8,634 9,553
------------- -------------
Total Shareholders' Equity 160,031 158,774
------------- -------------
Total Liabilities and Shareholders' Equity $2,107,751 $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 interests method of accounting.
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
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $31,225 $30,571
Deposits in banks 43 76
Federal funds sold 46 87
Trading account securities 196 -
Investment securities 7,441 5,916
------------- -------------
Total interest income 38,951 36,650
------------- -------------
INTEREST EXPENSE
Deposits 13,304 13,119
Federal funds purchased, borrowed funds and
securities sold under repurchase agreements 6,086 4,444
------------- -------------
Total interest expense 19,390 17,563
------------- -------------
Net interest income 19,561 19,087
Provision for loan losses 1,415 1,400
------------- -------------
Net interest income after provision
for loan losses 18,146 17,687
------------- -------------
OTHER INCOME
Trust income 886 760
Service charges on deposit accounts 1,364 1,215
Net gains on sale of investment securities 2 611
Net gains (losses) on sale of residential mortgages (207) (36)
Trading revenue (48) -
Other 2,514 1,593
------------- -------------
Total other income 4,511 4,143
------------- -------------
OTHER EXPENSES
Salaries, wages and employee benefits 9,286 8,049
Net premises and equipment 2,324 2,270
Other operating 3,722 3,734
------------- -------------
Total other expenses 15,332 14,053
------------- -------------
Income before income taxes 7,325 7,777
Applicable income tax expense 1,309 2,033
------------- -------------
Net income $6,016 $5,744
============= =============
PER SHARE OF COMMON STOCK
Net income per share - basic $0.35 $0.34
Net income per share - diluted 0.35 0.33
Dividends paid in cash 0.19 0.14
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 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 - - - - 6,016 - 6,016
Cash dividends declared - - - - (4,111) -
Shares issued under stock-based
plans 4,983 271 - - - -
Other comprehensive income, net
of reclassification adjustment
and taxes - - - (919) - - (919)
-------------------------------------------------------------------------------------
Total comprehensive income - - - - - - $ 5,097
-------------------------------------------------------------------------------------
Balance at March 31, 1999 16,994,605 $ 114,565 $ - $ 8,634 $36,832 $ -
March 31, 1999
-----------------------------------
Before Tax Net of
tax (expense) tax
amount benefit amount
-----------------------------------
Unrealized gains on securities
Unrealized holding gains arising during period (1,416) 496 (920)
Less: reclassification adjustment for gains realized in net income 2 (1) 1
-----------------------------------
Other comprehensive income, net (1,414) 495 (919)
===================================
THREE MONTHS ENDED MARCH 31, 1998
(Dollars in thousands)
Accumulated
Additional other
Common Stock Paid-in conprehensive Retained Treasury Comprehensive
Shares Par Value Capital income earnings stock income
--------------------------------------------------------------------------------------
Balance at December 31, 1997 17,080,328 25,620 96,657 7,648 22,431 (3,428)
Net income - - - - 5,744 - 5,744
Cash dividends declared - - - - (2,456) -
Shares issued under stock-based
plans - - - - - -
Other comprehensive income, net
of reclassification adjustment
and taxes - - - (1,266) - - (1,266)
--------------------------------------------------------------------------------------
Total comprehensive income - - - - - - $ 4,478
--------------------------------------------------------------------------------------
Par value adjustments related to
pooling transaction - (155) 329 - - -
Effect of treasury stock
transactions (103,520) - (941) - - -2843
--------------------------------------------------------------------------------------
Balance at March 31, 1998 16,976,808 $ 25,465 $ 96,045 $ 6,382 $25,719 $ (6,271)
March 31, 1998
-----------------------------------
Before Tax Net of
tax (expense) tax
amount benefit amount
-----------------------------------
Unrealized gains on securities
Unrealized holding gains arising during period (2,553) 893 (1,660)
Less: reclassification adjustment for gains realized in net income 606 (212) 394
-----------------------------------
Other comprehensive income, net (1,947) 681 (1,266)
===================================
</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)
1999 1998
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $6,016 $5,744
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Provision for loan losses 1,415 1,400
Depreciation and amortization 462 899
Net gains (losses) on sale of securities and mortgages (205) 443
Trading-related assets 15,031 -
Mortgage loans originated for resale (59,494) (16,854)
Sale of mortgage loans originated for resale 59,494 16,854
Other 612 (11,897)
--------------- ---------------
Net cash provided by (used in) operating activities 23,331 (3,411)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities - available for sale 1,058 16,594
Proceeds from maturities of investment securities - available for sale 6,942 5,807
Purchase of investment securities - available for sale (3,272) (68,567)
Proceeds from sales of loans - -
Net increase in loans (6,379) (7,675)
Purchases of premises & equipment (414) (628)
--------------- ---------------
Net cash provided by (used in) investing activities (2,065) (54,469)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in:
Deposits 27,549 25,457
Repurchase agreements, fed funds & short-term borrowings (42,153) (6,716)
Long-term borrowings (636) 54,625
(Increase) decrease in treasury stock - (2,843)
Issuance of common stock under dividend reinvestment plan 271 (767)
Cash dividends (4,111) (2,456)
--------------- ---------------
Net cash provided by (used in) financing activities (19,080) 67,300
Net increase (decrease) in cash and cash equivalents 2,186 9,420
Cash and cash equivalents at January 1 65,801 63,408
--------------- ---------------
Cash and cash equivalents at March 31 $67,987 $72,828
=============== ===============
</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
interest 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 three-month period ended March 31, 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 16,978,668 and 16,992,513 for 1999 and 1998, respectively, and on the
weighted average number of diluted shares outstanding of 17,276,073 and
17,345,002 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 March 4, 1999, the Company's Board of Directors declared a cash dividend
of $.20 per share payable on May 17, 1999, to shareholders of record on April
30, 1999.
6. 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 $10,338,000 at March 31, 1999,
all of which are non-accrual loans. The allowance for loan loss associated with
these impaired loans was $1,309,000 at March 31, 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 decreased to $2.108 billion, a decrease of $13,000 or .6%
over the $2.121 billion at December 31, 1998. This decrease is reflected
primarily in the investment category, including trading account securities,
which was partially offset by increases in loans and cash and cash equivalent
categories.
Total cash and cash equivalents increased $2.2 million or 3.3% at March
31, 1999 when compared to December 31, 1998. The increase in federal funds sold
of $25.5 million was partially offset by decreases in interest bearing deposits
of $9.4 million and cash and due from banks of $14.0 million.
Loans increased to $1.410 billion at March 31, 1999. The increase of
$5.0 million or .4% 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 three months of 1999 amounted to $59.5
million. The Company's credit quality is reflected by the annualized ratio of
net charge-offs to total loans of .2% through the first quarter of 1999 versus
.3% for the year 1998, and the ratio of non-performing assets to total loans of
.93% at March 31, 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 $13.4 million at March 31, 1999 compared to $14.3 million at
December 31, 1998. Of these amounts, non-accrual loans represented $10.3 million
and $11.6 million at March 31, 1999 and December 31, 1998, respectively. Loans
90 days past due and still accruing interest were $2.5 million and $1.8 million
at March 31, 1999 and December 31, 1998, respectively. Other real estate owned
was $631,000 and $922,000 at March 31, 1999 and December 31, 1998, respectively.
The Company had no restructured loans at March 31, 1999 or December 31, 1998.
The allowance for loan losses to non-performing assets was 233.1% and 215.0% at
March 31, 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 March 31, 1999. The Company has no
significant exposure to energy and agricultural-related loans.
Investments, the Company's secondary use of funds, decreased $6.1
million or 1.2% to $516.9 million at March 31, 1999 when compared to December
31, 1998. The decrease is due to investment calls and maturities and the
amortization of mortgage-backed securities.
Trading account securities decreased $15.0 million to $6.6 million at
March 31, 1999 due to the sale of 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 $1.501 billion at
March 31, 1999 increased $27.5 million or 1.9% compared to December 31, 1998.
The increase in deposits during the first three months of 1999 was primarily in
interest bearing deposits which increased $24.4 million while non-interest
bearing deposits increased $3.1 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, long-term debt obligations, and subordinated debentures. In
aggregate, these funds totaled $424.8 million at March 31, 1999, and $467.6
million at December 31, 1998. The decrease of $42.8 million is primarily due to
the decrease in short-term borrowings and securities sold under repurchase
agreements and federal funds purchased, of $42.2 million due to the repayment of
short-term advances, and a decrease in long-term obligations of .6 million.
8
<PAGE>
Shareholders' equity increased $1.3 million through March 31, 1999.
This increase was due to an increase in earnings retained which was partially
offset by a decrease in the valuation adjustment for securities available for
sale. Cash dividends paid during the first three months of 1999 increased
$856,000 or 36.1% compared to the cash dividends paid during the first three
months of 1998. Earnings retained during the first three months of 1999 were
46.3% compared to 58.7% during the first three months of 1998.
RESULTS OF OPERATIONS
For the first three months, net income reached $6.0 million, or 4.7%
more than the $5.7 million reported for the first three 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 $474,000 or
2.5% to $19.6 million during the first quarter of 1999 from $19.1 million in
1997. The increase in interest income is a result of increased investment income
of $1.5 million and increased loan income of $.7 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%. Interest expense during the first three months of 1999
increased $1.8 million or 10.4% compared to the prior year's first three months.
Despite the current rate environment, the cost of attracting and holding
deposited funds is an 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 $15,000 for the three month period ended March 31, 1999 compared to
the same period in 1998. The allowance for loan and lease losses of $31.4
million at March 31, 1999 and $30.8 million at December 31, 1998 as a percentage
of total loans was 2.2% and 2.1%, respectively. The Company's net charge-offs of
$850,000 and $179,000 during the first three 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 $368,000 or 8.9% during the first quarter of
1999, as a result of increased other income of $921,000, increased service
charges on deposit accounts of $149,000, increased trust and investment
management income of $126,000. This was partially offset by a decrease in net
gains on the sale of securities and mortgages totaling $780,000 and decreased
trading revenue of $48,000. Other expenses increased $1.3 million or 9.1% during
the quarter ended March 31, 1999. Of this year-to-date increase, salaries, wages
and benefits increased $1.2 million or 15.4%, and net premises and equipment
increased $54,000 or 2.4%. Other operating expenses decreased $12,000 or .3%.
Income before income taxes decreased $452,000 or 5.8% in the first
quarter of 1999 compared to the same time period in 1998. Income taxes decreased
$724,000 for the quarter ended March 31, 1999 due to higher levels of tax free
income from municipal securities and bank-owned life insurance.
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
9
<PAGE>
agreements, fed funds purchased, and short-term borrowings, decreased $14.6
million from year end 1998. Long-term borrowings decreased $636,000 during the
first three 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
March 31, 1999:
<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 $ 1,425 $ -- $ -- $ --
Investment securities 49,642 50,079 188,507 228,683
Trading account securities 6,558 -- -- --
Loans and leases 393,868 220,028 508,418 287,622
Other assets 25,500 -- -- 147,421
--------- --------- --------- ---------
476,993 270,107 696,925 663,726
--------- --------- --------- ---------
Liabilities and equity
Noninterest-bearing deposits 225,925 -- -- --
Interest-bearing deposits 396,014 274,323 234,661 369,928
Borrowed funds 119,849 30,000 192,500 42,207
Preferred securities -- -- -- 40,250
Other liabilities -- -- -- 22,063
Hedging instruments 100,000 (20,000) (80,000) --
Shareholders' equity -- -- -- 160,031
--------- --------- --------- ---------
841,788 284,323 347,161 634,479
--------- --------- --------- ---------
Interest sensitivity gap (364,795) (14,216) 349,764 29,247
--------- --------- --------- ---------
Cumulative interest rate
sensitivity gap ($364,795) ($379,011) $ (29,247) $ --
========= ========= ========= =========
</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 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, 31.8% of these deposits are
10
<PAGE>
considered repriceable within three months and 68.2% 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 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:
March 31, Dec. 31,
1999 1998
CAPITAL PERFORMANCE
Return on average assets (annualized) 1.15% 1.17%
Return on average equity (annualized) 15.80 15.00
Earnings retained 46.30 55.70
Internal capital growth (annualized) 7.02 8.04
CAPITAL LEVELS
<TABLE>
<CAPTION>
Tier 1 Capital to Tier 1 Capital to Risk- Tier 1 Capital to Risk-
Average Assets Ratio Weighted Assets Ratio Weighted Assets Ratio
Mar. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, Dec. 31,
1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C>
The Company 8.93% 8.77% 12.16% 12.21% 13.61% 13.51%
National Penn Bank 6.83% 6.80% 9.35% 9.52% 6.83% 6.80%
"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
11
<PAGE>
regulators. At March 31, 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. The
initial Awareness and Assessment Phases have been completed. Non-information
technology systems have been assessed and do not present a Year 2000 concern.
The Company has completed the Renovation Phase of mission critical systems. The
Validation and Implementation Phases of renovated mission critical systems were
substantially complete by December 31, 1998. Validation and Implementation
Phases of non-mission critical systems will continue through the first two
quarters of 1999. 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. 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. Furthermore, mission critical third parties
will be included in the Company's contingency plans which the Company
anticipates will be substantially written during the first quarter of 1999. No
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
12
<PAGE>
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.
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 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.
13
<PAGE>
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 and anticipates that the replacement of all remaining non-compliant,
non-critical systems will be accomplished during the first and second quarters
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 mission critical systems was substantially complete by the end of
1998. Non-mission critical systems will be tested in 1999 in descending order of
priority.
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.
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 be completed also.
Initiatives to complete the Validation phase include 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.
14
<PAGE>
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 were written in the first quarter of 1999 for all
mission critical and high priority non-mission critical systems. These plans are
currently being reviewed and edited. An overview of the contingency planning
process was written in August 1998. Upon completion of the Business Resumption
Contingency Plans, they will be tested as prescribed in the contingency planning
overview.
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.
<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 a Vote of Security Holders.
None.
Item 5. Other Information.
During first quarter 1999, the Registrant, together with four of its
subsidiaries, National Penn Bank, Investors Trust Company, Penn Securities, Inc.
and Link Financial Services, Inc., entered into a strategic alliance with
Creative Financial Group, an independent insurance agency ("CFG"), New England
Life Insurance Company, an independent life insurance company, and New England
Securities Corporation, an independent broker-dealer. The purpose of the
strategic alliance is for CFG and its related companies to offer and sell
additional insurance and non-deposit investment products to customers of the
Registrant's subsidiaries, and for the Registrant's subsidiaries to offer and
sell certain banking and trust products to customers of CFG.
During first quarter 1999, the Registrant's banking subsidiary,
National Penn Bank, relocated its Private Banking division to 1100 Berkshire
Boulevard, Suite 210, Wyomissing, Pennsylvania, opened an automated teller
machine ("ATM") in Northampton, Northampton County, Pennsylvania, and closed an
ATM in Gap, Lancaster County, Pennsylvania.
On March 24, 1999, the Registrant's Board of Directors declared a cash
dividend of $.20 per share to be paid on May 17, 1999 to shareholders of record
on April 30, 1999.
Item 6. Exhibits and Reports on Form 8-K.
<TABLE>
<CAPTION>
(a) Exhibits.
<S> <C>
Exhibit 10.1 - Executive Incentive Plan/Amended Schedules.
Exhibit 27.1 - Financial Data Schedule.
Exhibit 27.2 - Restated Financial Data Schedule for year ended December 31, 1998.
Exhibit 27.3 - Restated Financial Data Schedule for year ended December 31, 1997.
Exhibit 27.4 - Restated Financial Data Schedule for year ended December 31, 1996.
Exhibit 27.5 - Restated Financial Data Schedule for period ended March 31, 1998.
Exhibit 27.6 - Restated Financial Data Schedule for period ended June 30, 1998.
16
<PAGE>
Exhibit 27.7 - Restated Financial Data Schedule for period ended June 30, 1997.
Exhibit 27.8 - Restated Financial Data Schedule for period ended September 30, 1998.
Exhibit 27.9 - Restated Financial Data Schedule for period ended September 30, 1997.
</TABLE>
(b) Reports on Form 8-K. The Registrant filed the following Reports on
Form 8-K during the quarterly period ended March 31, 1999.
1. Report on Form 8-K dated January 4, 1999, reporting, under
Item 2, the closing of the Registrant's acquisition of Elverson National Bank
("Elverson").
2. Report on Form 8-K dated February 28, 1999, reporting,
under Items 5 and 7, the combined consolidated financial results of the
Registrant and Elverson from January 1, 1999 through February 28, 1999.
3. Report on Form 8-K/A No. 1 dated March 11, 1999, reporting,
under Items 2 and 7, the historical financial statements of Elverson and pro
forma financial information giving effect to the Registrant's acquisition of
Elverson.
17
<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 14, 1999 By /s/ Wayne R. Weidner
---------------------------
Wayne R. Weidner, President
Dated: May 14, 1999 By /s/ Gary L. Rhoads
---------------------------
Gary L. Rhoads, Principal
Financial Officer
SCHEDULE B
NATIONAL PENN BANCSHARES, INC.
EXECUTIVE INCENTIVE PLAN
1999 PERFORMANCE GOALS
Awards pursuant to the Plan will not be made unless the internal and
external performance goals set forth below are met.
INTERNAL PERFORMANCE GOALS FOR THE 1999 PLAN YEAR
The diluted per share operating income of NPB for 1999 must exceed the diluted
per share operating income of NPB for 1998.
EXTERNAL PERFORMANCE GOALS FOR THE 1999 PLAN YEAR
The net operating income of NPB before securities transactions on realized
return on average common equity for 1999 must exceed the average of the net
operating income before securities transactions on realized return on average
common equity for 1999 for the banks or bank holding companies in the peer group
set forth on Schedule B-2 A.
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