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, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: to
--------------------- ---------------------
Commission file number: 000-10957
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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
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(Address of principal executive offices) (Zip Code)
(610) 367-6001
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(Registrant's telephone number, including area code)
N/A
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(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 8, 2000
Common Stock (no stated par value) (No.) 17,714,236 Shares
Page 1 of 16 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 .................................................. 13
Part II - Other Information.
---------------------------
Item 1. Legal Proceedings ............................................ 14
Item 2. Changes in Securities ........................................ 14
Item 3. Defaults Upon Senior Securities .............................. 14
Item 4. Submission of Matters to a Vote of
Security Holders ............................................. 14
Item 5. Other Information ............................................ 14
Item 6. Exhibits and Reports on Form 8-K ............................. 14
Signature................................................................. 16
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET Sept. 30 Dec. 31
(Dollars in thousands, except per share data) 2000 1999
(Unaudited) (Note)
---------------- ----------------
<S> <C> <C>
ASSETS
Cash and due from banks $64,203 $62,953
Interest bearing deposits in banks 5,110 4,039
Federal funds sold 12,000 -
---------------- ----------------
Total cash and cash equivalents 81,313 66,992
Investment securities available for sale 581,434 516,027
Loans, less allowance for loan losses of $37,571 and
$34,139 in 2000 and 1999 respectively 1,650,482 1,536,404
Other assets 140,668 123,009
---------------- ----------------
Total Assets $2,453,897 $2,242,432
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $228,670 $210,272
Interest bearing deposits
(Includes certificates of deposit in excess of $100,000 or greater:
2000 - $243,069; 1999 - $195,939) 1,531,931 1,382,982
---------------- ----------------
Total Deposits 1,760,601 1,593,254
Securities sold under repurchase agreements
and federal funds purchased 308,814 200,148
Short-term borrowings 10,000 12,448
Long-term obligations 149,062 223,077
Guaranteed preferred beneficial interests in
Company's subordinated debentures 40,250 40,250
Accrued interest and other liabilities 25,455 25,559
---------------- ----------------
Total Liabilities 2,294,182 2,094,736
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
2000 - 17,714,236; 1999 - 17,736,699; net of shares
in Treasury: 2000 - 129,236; 1999 - 108,176 134,796 135,526
Retained earnings 33,850 26,739
Accumulated other comprehensive loss (6,121) (11,616)
Treasury stock at cost (2,810) (2,953)
---------------- ----------------
Total Shareholders' Equity 159,715 147,696
---------------- ----------------
Total Liabilities and Shareholders' Equity $2,453,897 $2,242,432
================ ================
The accompanying notes are an integral part of these condensed financial statements.
Note: The Balance Sheet at Dec. 31, 1999 has been derived from the audited
financial statements at that date.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
(Dollars in thousands, except per share data) September 30 September 30
----------------------------------------------------------------------
2000 1999 2000 1999
--------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans including fees $38,290 $33,528 $108,618 $97,037
Deposits in banks 59 69 221 176
Federal funds sold 78 10 121 170
Trading account securities - - - 196
Investment securities 9,304 8,281 26,356 23,369
--------------- ---------------- ---------------- --------------
Total interest income 47,731 41,888 135,316 120,948
--------------- ---------------- ---------------- --------------
INTEREST EXPENSE
Deposits 18,219 13,945 49,471 41,178
Federal funds purchased, borrowed funds and
securities sold under repurchase agreements 8,017 7,154 22,737 19,250
--------------- ---------------- ---------------- --------------
Total interest expense 26,236 21,099 72,208 60,428
--------------- ---------------- ---------------- --------------
Net interest income 21,495 20,789 63,108 60,520
Provision for loan losses 1,400 1,415 4,400 4,245
--------------- ---------------- ---------------- --------------
Net interest income after provision
for loan losses 20,095 19,374 58,708 56,275
--------------- ---------------- ---------------- --------------
OTHER INCOME
Trust income 1,219 1,019 3,581 2,912
Service charges on deposit accounts 1,845 1,511 4,891 4,201
Net gains (losses) on sale of investment securities 103 - 263 213
Mortgage banking income 286 259 1,305 689
Trading revenue - - - (48)
Other 3,352 2,845 9,447 7,867
--------------- ---------------- ---------------- --------------
Total other income 6,805 5,634 19,487 15,834
--------------- ---------------- ---------------- --------------
OTHER EXPENSES
Salaries, wages and employee benefits 9,517 9,386 29,483 27,937
Net premises and equipment 2,968 2,391 8,175 7,085
Other operating 5,014 4,076 14,017 12,601
--------------- ---------------- ---------------- --------------
Total other expenses 17,499 15,853 51,675 47,623
--------------- ---------------- ---------------- --------------
Income before income taxes 9,401 9,155 26,520 24,486
Applicable income tax expense 1,915 1,945 5,118 4,760
--------------- ---------------- ---------------- --------------
Net income $7,486 $7,210 $21,402 $19,726
=============== ================ ================ ==============
PER SHARE OF COMMON STOCK
Net income per share - basic $0.42 $0.41 $1.21 $1.11
Net income per share - diluted 0.42 0.40 1.20 1.09
Dividends paid in cash 0.20 0.19 0.60 0.56
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000
(Dollars in thousands)
Accumulated
Common Stock other
----------------------------- Retained conprehensive Treasury Comprehensive
Shares Par Value earnings loss stock income
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 17,736,699 $135,526 $26,739 $(11,616) $(2,953)
Net income - - 21,402 - - $21,402
Cash dividends declared - - (14,291) - -
Shares issued under stock-based
plans - - -
Other comprehensive income, net
of reclassification adjustment
and taxes - - - 5,495 - 5,495
-----------------------------------------------------------------------------------------
Total comprehensive income - - - - - $ 26,897
-----------------------------------------------------------------------------------------
Effect of treasury stock transactions (22,463) (730) 143
-----------------------------------------------------------------------------------------
Balance at September 30, 2000 17,714,236 $ 134,796 $ 33,850 $ (6,121) $ (2,810)
September 30, 2000
---------------------------------------------------
Before Tax Net of
tax (expense) tax
amount benefit amount
---------------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during period 7,149 (2,502) 4,647
Less: reclassification adjustment for gains realized in net income 1,305 (457) 848
--------------------------------------------------
Other comprehensive income, net 8,454 (2,959) 5,495
==================================================
NINE MONTHS ENDED SEPTEMBER 30, 1999
(Dollars in thousands)
Accumulated
Common Stock other
----------------------------- Retained conprehensive Treasury Comprehensive
Shares Par Value earnings loss stock income
------------------------------------------------------------------------------------------
Balance at December 31, 1998 16,989,622 $114,294 $34,927 $9,553 $ -
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 $ 43,759 $ (5,754) $ (1,404)
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)
================================================
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(Dollars in thousands)
2000 1999
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $21,402 $19,726
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Provision for loan losses 4,400 4,245
Depreciation and amortization 3,822 3,387
Net (gains) losses on sale of securities and mortgages 263 (143)
Trading-related assets - 21,589
Mortgage loans originated for resale (9,580) (46,658)
Sale of mortgage loans originated for resale 9,580 46,658
Other (8,672) (2,234)
------------------ ------------------
Net cash provided by operating activities 21,215 46,570
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid in excess of cash equivalents for business acquired (1,387) -
Proceeds from sales of investment securities - available for sale 29,058 16,511
Proceeds from maturities of investment securities - available for sale 25,359 43,571
Purchase of investment securities - available for sale (61,851) (124,893)
Proceeds from sales of loans - -
Net increase in loans (80,592) (110,716)
Purchases of premises & equipment (5,379) (2,942)
------------------ ------------------
Net cash provided by (used in) investing activities (94,792) (178,469)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in:
Deposits 66,888 47,168
Repurchase agreements, fed funds & short-term borrowings 106,218 42,606
Repayments of long-term borrowings (74,015) 49,454
(Increase) decrease in treasury stock 143 (1,404)
Issuance of common stock under dividend reinvestment plan - 160
Effect of treasury stock transactions (730) -
Cash dividends (10,606) (10,894)
------------------ ------------------
Net cash provided by financing activities 87,898 127,090
Net increase (decrease) in cash and cash equivalents 14,321 (4,809)
Cash and cash equivalents at January 1 66,992 65,801
------------------ ------------------
Cash and cash equivalents at September 30 $81,313 $60,992
================== ==================
The accompanying notes are an integral part of these condensed financial statements.
</TABLE>
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. 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, 1999.
2. The results of operations for the nine-month period ended September 30, 2000
are not necessarily indicative of the results to be expected for the full year.
3. National Penn Bancshares, Inc. completed the acquisition of Panasia Bank on
July 11, 2000 at a price of $29.00 per share in cash, with an aggregate purchase
price for such shares and related costs totaling approximately $20 million. The
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price was allocated to assets acquired and liabilities
assumed based on the estimated fair market value as of the date of acquisition.
The excess consideration paid over the estimated fair market value of net assets
acquired in the amount of $12.2 million has been recorded as goodwill to be
amortized on the straight-line basis over 20 years. All financial information
presented includes results of Panasia Bank from July 11, 2000 forward. Panasia
Bank is a wholly-owned subsidiary of National Penn Bancshares, Inc.
4. National Penn Bancshares, Inc. entered into a definitive agreement on July
23, 2000 to acquire Community Independent Bank, Inc. in a transaction intended
to be accounted for under the pooling of interests method of accounting.
5. Per share data are based on the weighted average number of shares outstanding
of 17,690,148 and 17,807,914 for 2000 and 1999, respectively, and on the
weighted average number of diluted shares outstanding of 17,905,571 and
18,083,347 for 2000 and 1999, respectively, and are computed after giving
retroactive effect to a 5% stock dividend paid December 22, 1999.
6. On September 27, 2000, the Company's Board of Directors declared a cash
dividend of $.21 per share payable on November 17, 2000, to shareholders of
record on October 31, 2000. On October 25, 2000, the Company's Board of
Directors declared a 5% stock dividend payable on December 20, 2000, to
shareholders of record on December 8, 2000. The financial and per share
information has not been adjusted to reflect the 5% stock dividend.
7. In June 2000, SFAS No. 138 Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment of FASB Statement No. 133, was issued.
SFAS No. 138 amends SFAS No. 133 for the following items: normal purchases and
normal sales exception, hedging the benchmark interest rate, hedging recognized
foreign currency-denominated debt instruments and hedging with intercompany
derivatives. SFAS No. 138 is required to be adopted concurrently with SFAS No.
133. The Company is currently reviewing provisions of SFAS No. 133, as amended
by SFAS No. 137 and SFAS No. 138.
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 $12,835,000 at September 30,
2000, all of which are non-accrual loans. The allowance for loan loss associated
with these impaired loans was $1,160,000 at September 30, 2000. 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 $2.454 billion, an increase of $211.5 million
or 9.4% over the $2.242 billion at December 31, 1999. This increase is reflected
primarily in the loan category, which increased $114.1 million, of which $37.9
million was due to the addition of Panasia Bank in July 2000, and the
investment category, which increased $65.4 million, of which $39.3 million is
related to Panasia.
Total cash and cash equivalents increased $14.3 million or 21.4% at
September 30, 2000 when compared to December 31, 1999. The increase is reflected
primarily in federal funds sold which increased $12.0 million.
Loans increased to $1.650 billion at September 30, 2000. The increase
of $114.1 million or 7.4% compared to December 31, 1999 was primarily the result
of the addition of $37.9 million or 2.5% in loans from the acquisition of
Panasia and the investment of deposits and securities sold under repurchase
agreements. Loans originated for immediate resale during the first nine months
of 2000 amounted to $9.6 million. The Company's credit quality is reflected by
the annualized ratio of net charge-offs to total loans of .19% through the third
quarter of 2000 versus .17% for the year 1999, and the ratio of non-performing
assets to total loans of 1.17% at September 30, 2000 and .93% at December 31
1999. Non-performing assets, including non-accruals, loans 90 days past due and
still accruing and other real estate owned, were $18.3 million at September 30,
2000 compared to $14.6 million at December 31, 1999. Of these amounts,
non-accrual loans represented $12.8 million and $11.1 million at September 30,
2000 and December 31, 1999, respectively. Loans 90 days past due and still
accruing interest were $4.2 million and $2.7 million at September 30, 2000 and
December 31, 1999, respectively. Other real estate owned was $1.3 million and
$.8 million at September 30, 2000 and December 31, 1999, respectively. The
increase in non-performing assets is primarily due to one significant credit
that is fully collateralized. The Company had no restructured loans at September
30, 2000 or December 31, 1999. The allowance for loan losses to non-performing
assets was 204.6% and 234.3% at September 30, 2000 and December 31, 1999,
respectively. The Company has no significant exposure to energy and
agricultural-related loans.
Investments, the Company's secondary use of funds, increased $65.4
million or 12.7% to $581.4 million at September 30, 2000 when compared to
December 31, 1999. The increase is due to the addition of $49.4 million in
investments from the acquisition of Panasia and to investment purchases of $61.9
million, primarily in mortgage-backed securities, which was partially offset by
investment sales, calls and maturities and the amortization of mortgage-backed
securities.
Other assets increased to $140.7 million, an increase of $17.7 million
over the $123.0 million at December 31, 1999. The increase is due primarily to
the $12.2 million in goodwill from the acquisition of Panasia in July 2000,
which is being amortized over a 20 year period.
As the primary source of funds, aggregate deposits of $1.761 billion at
September 30, 2000 increased $167.3 million or 10.5% compared to December 31,
1999. The increase in deposits during the first nine months of 2000 was
primarily in interest-bearing deposits, which increased $148.9 million while
non-interest bearing deposits increased $18.4 million, largely due to the
acquisition of $100.4 million in deposits from Panasia in July 2000.
Certificates of deposit in excess of $100,000 increased $47.1 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 the aggregate, these funds totaled $508.1 million at
September 30, 2000, and $475.9 million at December 31, 1999. The increase of
$32.2 million is primarily due to the increase in securities sold under
repurchase agreements and federal funds purchased of $108.7 million, which was
partially offset due to the repayment of short-term obligations of $2.4 million,
and a decrease in long-term obligations of $74.0 million.
Shareholders' equity increased $12.0 million through September 30, 2000
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 nine months of 2000 increased $.6 million or 5.8%
8
<PAGE>
compared to the cash dividends paid during the first nine months of 1999.
Earnings retained during the first nine months of 2000 were 50.4% compared to
49.2% during the first nine months of 1999.
RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 2000 was $7.5 million,
3.8% more than the $7.2 million for the third quarter of 1999. For the first
nine months, net income reached $21.4 million or 8.5% more than the $19.7
million reported for the first nine months of 1999. 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 for the third quarter
of 2000 was $21.5 million, 3.4% more than the $20.8 million for the third
quarter of 1999. Net interest income increased $2.6 million or 4.3% to $63.1
million during the third quarter of 2000 from $60.5 million in 1999. The
increase in interest income for the first nine months is a result of increased
loan income of $11.6 million and increased investment income of $2.9 million due
to growth in loans outstanding 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. From
November 16, 1999 to February 1, 2000, the prime rate was 8.50%. From February
2, 2000 to March 21, 2000, the prime rate was 8.75%. On March 22, 2000, the
prime rate changed to 9.00%. Interest expense during the first nine months of
2000 increased $11.8 million or 19.5% compared to the prior year's first nine
months. The increase in interest expense for the first nine months is a result
of increased interest on deposits of $8.3 million and increased interest on
federal funds purchased, borrowed funds and securities sold under repurchase
agreements of $3.5 million due to an increase in outstandings and higher rates
on deposits and borrowings. In addition to 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 $155,000 for the nine-month period ended September 30, 2000 compared
to the same period in 1999. The allowance for loan and lease losses of $37.6
million at September 30, 2000 and $34.1 million at December 31, 1999 as a
percentage of total loans was 2.2% for both time periods. The Company's net
charge-offs of $2.4 million and $2.8 million during the first nine months of
2000 and 1999, respectively, continue to be comparable to those of the Company's
peers, as reported in the Bank Holding Company Performance Report.
Other income increased $1.2 million or 20.8% during the third quarter
of 2000, as a result of increased other income of $507,000, increased service
charges on deposit accounts of $334,000, increased trust income of $200,000
million, and increased gains on the sale of investment securities of $103,000.
Year to date, other income increased $3.7 million or 23.1% as a result of
increased other income of $1.6 million, increased service charges on deposit
accounts of 690,000, increased trust income of $669,000 and increased mortgage
banking income of $616,000. The increase in other income is due to increased
income on bank-owned life insurance and increased income on other services
charges and fees. Other expenses increased $1.6 million or 10.4% during the
quarter ended September 30, 2000 and increased $4.1 million or 8.5% for the
nine-month period. Of this year-to-date increase, salaries, wages and benefits
increased $1.5 million or 5.5%, other operating expenses increased $1.4 million
or 11.2%, and net premises and equipment increased $1.1 million or 15.4%.
Income before income taxes increased $246,000 or 2.7% in the third
quarter of 2000 compared to the same time period in 1999. In comparing the first
nine months of 2000 to 1999, income before income taxes increased $2.0 million
or 8.3%. Income taxes remained relatively unchanged for the quarter ended
September 30, 2000 and increased $358,000 for the nine-month period. The
Company's effective tax rate is 19.3% and 19.4% for September 30, 2000 and
September 30, 1999, respectively. This is due to the Company's investments in
tax advantaged municipal securities and bank owned life insurance.
9
<PAGE>
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 $273.6 million from year-end
1999. Long-term borrowings decreased $74.0 million during the first nine months
of 2000. These changes represent a shift from long-term borrowings to short-term
borrowings and a slower growth in deposits compared to loans.
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, 2000:
<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 $ 4,017 $ - - $ - - $ 1,093
Investment securities 39,395 72,350 129,826 339,863
Loans and leases (1) 513,601 242,272 494,355 400,254
Other assets 19,743 - - - - 197,128
--------- --------- --------- ----------
576,756 314,622 624,181 938,338
--------- --------- --------- ----------
Liabilities and equity
Non-interest bearing deposits 228,670 - - - - - -
Interest bearing deposits (2) 305,205 417,841 253,610 555,275
Borrowed funds 189,350 77,500 - - 201,026
Preferred securities - - - - - - 40,250
Other liabilities - - - - - - 24,455
Hedging instruments 70,000 (30,000) (40,000) - -
Shareholders' equity - - - - - - 159,715
--------- --------- --------- ----------
793,225 465,341 213,610 981,721
--------- --------- --------- ----------
Interest sensitivity gap (216,469) (150,719) 410,571 (43,383)
--------- --------- --------- ----------
Cumulative interest rate
sensitivity gap ($216,469) ($367,188) ($ 43,383) $ - -
========= ========= ========= ==========
<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 2000. 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
10
<PAGE>
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, 21.3% of these deposits are considered repriceable
within three months and 78.7% 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 believes interest rate levels have the potential to rise
slightly in the remainder of 2000, with no clear indication of sustainable
rising or falling rates thereafter. Given this assumption, the Company's
asset/liability strategy for 2000 is to achieve a reduced negative gap position
(interest-bearing liabilities subject to repricing greater than interest-earning
assets subject to repricing) for periods up to a year. The impact of a rising
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,
2000 1999
------- -------
CAPITAL PERFORMANCE
Return on average assets (annualized) 1.23% 1.26%
Return on average equity (annualized) 18.90 17.90
Earnings retained 50.40 51.00
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,
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
The Company 7.83% 8.58% 10.33% 11.43% 11.59% 12.73%
National Penn Bank 7.00% 6.83% 9.14% 9.16% 10.40% 10.42%
Panasia Bank 7.37% 9.33% 21.26% 23.46% 22.54% 24.71%
"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, 2000, 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
4.0%. 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
On July 11, 2000, the Company acquired Panasia Bank in a transaction
accounted for under the purchase method of accounting. Panasia Bank is
headquartered in Ft. Lee, New Jersey. Panasia has approximately $100 million in
assets. Panasia Bank is a wholly-owned subsidiary of National Penn Bancshares,
Inc.
On July 23, 2000, the Company entered into a definitive agreement to
acquire Community Independent Bank, Inc. in a transaction intended to be
accounted for as a pooling of interests. Community Independent Bank, Inc. is a
one-bank holding company headquartered in Bernville, Pennsylvania, operating
four community bank offices in Berks County. Community Independent Bank, Inc.
has approximately $110 million in assets. Subject to satisfaction of various
conditions, this transaction is expected to close during the first quarter of
2001.
On July 17, 2000, the Company opened a branch in Wyomissing, Berks
County. During the remainder of 2000, the Company anticipates opening one more
new branch in Philadelphia.
This report contains forward-looking statements concerning earnings,
asset quality, and other future events. Actual results could differ materially
due to, among other things, the risks and uncertainties discussed herein and in
the Company's reports filed from time to time with the Securities and Exchange
Commission, including without limitation the Report on From 8-K dated October
25, 2000, which is incorporated herein by reference. The Company cautions
readers not to place undue reliance on these statements. The Company undertakes
no obligation to publicly release or update any of these statements.
12
<PAGE>
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 1999 annual report on
Form 10-K filed with the SEC.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
--------------------------
None.
Item 2. Changes in Securities.
------------------------------
None.
Item 3. Defaults Upon Senior Securities.
----------------------------------------
None.
Item 4. Submission of Matters to Vote of Security Holders.
----------------------------------------------------------
None.
Item 5. Other Information.
--------------------------
Cash Dividend
-------------
On September 27, 2000, the Board of Directors of National Penn
Bancshares, Inc. ("National Penn") declared a cash dividend of $.21 per share
payable on November 17, 2000, to shareholders of record on October 31, 2000.
Community Independent Bank, Inc. - Pennsylvania Department of Banking
---------------------------------------------------------------------
Approval
--------
As has been previously reported, on July 23, 2000, National Penn and
Community Independent Bank, Inc. ("Community") entered into an Agreement which
provides, among other things, for the merger of Community with and into National
Penn, with National Penn surviving the merger.
On November 7, 2000, the Pennsylvania Department of Banking approved
the National Penn/Community merger, subject to a favorable vote on the merger by
Community's shareholders. A special meeting of Community's shareholders to
consider and vote upon the National Penn/Community merger is scheduled for
November 30, 2000.
Branch/ATM Changes
------------------
During third quarter 2000, National Penn's principal banking
subsidiary, National Penn Bank (the "Bank"), closed a branch on Park Road, and
opened a branch on Berkshire Boulevard, in Wyomissing (Berks County). The Bank
also closed an automated teller machine ("ATM") on Hamilton Boulevard, in
Allentown (Lehigh County), and opened a new ATM in West Chester (Chester
County).
Item 6. Exhibits and Reports on Form 8-K.
-----------------------------------------
(a) Exhibits.
2.2 - Agreement dated July 23, 2000, between National Penn
Bancshares, Inc. and Community Independent Bank, Inc.
(Schedules are omitted pursuant to Regulation S-K, Item
601(b)(2); National Penn agrees to furnish a copy of such
schedules to the Securities and Exchange Commission upon
request.) (Incorporated by reference to Exhibit 2.2 to
National Penn's Report on Form 8-K dated July 11, 2000.)
14
<PAGE>
4.1 - Term Loan Agreement dated July 11, 2000, between National
Penn Bancshares, Inc. and The Northern Trust Company.
(Omitted pursuant to Regulation S-K, Item 601(b)(4)(iii);
National Penn agrees to furnish a copy of such agreement to
the Securities and Exchange Commission upon request.)
27 - Financial Data Schedule.
(b) Reports on Form 8-K.
During the quarter ended September 30, 2000, National Penn filed the
following reports on Form 8-K:
* Report dated July 11, 2000. The Report provided information
under Item 5 on the closing of National Penn's acquisition of
Panasia Bank and the signing of a definitive agreement for
National Penn to acquire Community Independent Bank, Inc. The
Report did not contain any financial statements.
* Report dated September 27, 2000. The report provided
information under Item 5 on certain changes in National Penn's
executive management to take effect on January 1, 2001. The
Report did not contain any financial statements.
15
<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 14, 2000 By /s/ Wayne R. Weidner
----------------------------------------
Wayne R. Weidner, President
Dated: November 14, 2000 By /s/ Gary L. Rhoads
----------------------------------------
Gary L. Rhoads, Principal
Financial Officer
16
