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: June 30, 2002
------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
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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
------------------------------------------------------------
(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 July 22, 2002
----- ----------------------------
Common Stock (no stated par value) (No.) 19,838,413 Shares
Page 1 of 24 pages
TABLE OF CONTENTS
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Part I - Financial Information. Page
- ------------------------------- ----
Item 1. Financial Statements.............................. 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation...... 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk....................................... 20
Part II - Other Information.
- ----------------------------
Item 1. Legal Proceedings ................................ 21
Item 2. Changes in Securities............................. 21
Item 3. Defaults Upon Senior Securities................... 21
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 21
Item 5. Other Information................................. 22
Item 6. Exhibits and Reports on Form 8-K.................. 22
Signatures.......................................................... 24
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET June 30
(Dollars in thousands, except per share data) 2002 Dec. 31
(Unaudited) 2001
----------- -----------
ASSETS
Cash and due from banks $ 75,856 $ 101,796
Interest bearing deposits in banks 1,959 6,002
Federal funds sold 20,000 -
----------- -----------
Total cash and cash equivalents $ 97,815 107,798
Investment securities available for sale , at fair value 756,645 658,581
Loans, less allowance for loan losses of $42,720 and
$42,207 in 2002 and 2001 respectively 1,785,355 1,814,162
Other assets 145,784 146,941
----------- -----------
Total Assets $ 2,785,599 $ 2,727,482
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $ 330,238 $ 344,972
Interest bearing deposits
(Includes certificates of deposit $100,000 or greater:
2002 - $263,514; 2001 - $267,540) 1,744,001 1,731,823
----------- -----------
Total Deposits 2,074,239 2,076,795
Securities sold under repurchase agreements
and federal funds purchased 226,720 238,726
Short-term borrowings 9,931 9,480
Long-term borrowings 197,339 139,974
Guaranteed preferred beneficial interests in
Company's subordinated debentures 40,250 40,250
Accrued interest payable and other liabilities 28,293 26,575
----------- -----------
Total Liabilities 2,576,772 2,531,800
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
2002 - 19,835,666; 2001 - 19,926,863; net of shares
in Treasury: 2002 - 213,069; 2001 - 121,827 164,251 166,138
Retained earnings 38,428 29,333
Accumulated other comprehensive income 11,724 3,119
Treasury stock at cost (5,576) (2,908)
----------- -----------
Total Shareholders' Equity 208,827 195,682
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,785,599 $ 2,727,482
=========== ===========
The accompanying notes are an integral part of these condensed financial statements.
3
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
(Dollars in thousands, except per share data) June 30 June 30
---------------------------------------------------------------
2002 2001 2002 2001
-------- -------- -------- --------
INTEREST INCOME
Loans including fees $ 33,010 $ 38,613 $ 66,627 $ 77,918
Deposits in banks 16 184 46 394
Federal funds sold 55 71 70 123
Investment securities 10,127 8,729 19,931 18,174
-------- -------- -------- --------
Total interest income 43,208 47,597 86,674 96,609
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 11,423 18,932 23,752 39,076
Federal funds purchased, borrowed funds and
securities sold under repurchase agreements 4,407 5,550 8,762 12,213
-------- -------- -------- --------
Total interest expense 15,830 24,482 32,514 51,289
-------- -------- -------- --------
Net interest income 27,378 23,115 54,160 45,320
Provision for loan losses 2,800 1,500 6,750 3,000
-------- -------- -------- --------
Net interest income after provision
for loan losses 24,578 21,615 47,410 42,320
-------- -------- -------- --------
OTHER INCOME
Trust income 1,420 1,300 2,738 2,568
Service charges on deposit accounts 3,079 2,461 6,004 4,501
Net gains (losses) on sale of investment securities - - (250) 31
Mortgage banking income 1,106 1,410 2,024 2,186
Other 3,963 3,376 8,197 6,834
-------- -------- -------- --------
Total other income 9,568 8,547 18,713 16,120
-------- -------- -------- --------
OTHER EXPENSES
Salaries, wages and employee benefits 11,659 11,031 23,740 21,577
Net premises and equipment 3,042 2,934 6,070 6,042
Other operating 7,806 5,787 13,704 10,837
-------- -------- -------- --------
Total other expenses 22,507 19,752 43,514 38,456
-------- -------- -------- --------
Income before income taxes 11,639 10,410 22,609 19,984
Income tax expense 2,601 2,332 4,806 4,334
-------- -------- -------- --------
Net income $ 9,038 $ 8,078 $ 17,803 $ 15,650
======== ======== ======== ========
PER SHARE OF COMMON STOCK
Net income per share - basic $ 0.46 $ 0.40 $ 0.90 $ 0.78
Net income per share - diluted 0.45 0.40 0.89 0.77
Dividends paid in cash 0.22 0.20 0.44 0.40
The accompanying notes are an integral part of these condensed financial statements.
4
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002
(Dollars in thousands)
Accumulated
Common Stock other
------------------------ Retained comprehensive Treasury Comprehensive
Shares Value earnings income stock Total income
---------------------------------------------------------------------------------------------
Balance at December 31, 2001 19,926,863 $ 166,138 $ 29,333 $ 3,119 $ (2,908) 195,682
Net income - - 17,803 - - 17,803 $ 17,803
Cash dividends declared - - (8,708) - - (8,708)
Other comprehensive income, net
of reclassification adjustment
and taxes - - - 8,605 - 8,605 8,605
-----------------------------------------------------------------------------------------
Total comprehensive income - - - - - - $ 26,408
-----------------------------------------------------------------------------------------
Effect of treasury stock transactions (91,197) (1,887) - - (2,668) (4,555)
-----------------------------------------------------------------------------------------
Balance at June 30, 2002 19,835,666 $ 164,251 $ 38,428 $ 11,724 $ (5,576) $ 208,827
June 30, 2002
---------------------------------------
Before Tax Net of
tax (expense) tax
amount benefit amount
---------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during period 13,488 (4,721) 8,767
Less: reclassification adjustment for losses realized in net income (250) 88 (162)
---------------------------------------
Other comprehensive income, net 13,238 (4,633) 8,605
=======================================
SIX MONTHS ENDED JUNE 30, 2001
(Dollars in thousands)
Accumulated
Common Stock other
------------------------ Retained comprehensive Treasury Comprehensive
Shares Value earnings loss stock Total income
---------------------------------------------------------------------------------------------
Balance at December 31, 2000 19,349,942 $ 154,719 $ 26,597 $ 2,753 $ (853) 183,216
Net income - - 15,650 - - 15,650 $ 15,650
Cash dividends declared - - (8,301) - - (8,301)
Shares issued under stock-based
plans - - - - - -
Other comprehensive income, net
of reclassification adjustment
and taxes - - - 3,796 - 3,796 3,796
----------------------------------------------------------------------------------------
Total comprehensive income - - - - - - $ 19,446
----------------------------------------------------------------------------------------
Effect of treasury stock transactions 106,285 221 557 778
----------------------------------------------------------------------------------------
Balance at June 30, 2001 19,456,227 $ 154,940 $ 33,946 $ 6,549 $ (296) 195,139
June 30, 2001
---------------------------------------
Before Tax Net of
tax (expense) tax
amount benefit amount
---------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during period 5,809 (2,033) 3,776
Less: reclassification adjustment for gains realized in net income 31 (11) 20
-------------------------------------
Other comprehensive income, net 5,840 (2,044) 3,796
=====================================
The accompanying notes are an integral part of these statements.
5
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
(Dollars in thousands)
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,803 $ 15,650
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses 6,750 3,000
Depreciation and amortization 2,323 2,885
Net gains on sale of securities and mortgages 340 195
Mortgage loans originated for resale (62,256) (67,181)
Sale of mortgage loans originated for resale 62,256 67,181
Other 8,103 1,621
--------- ---------
Net cash provided by operating activities 35,319 23,351
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities - available for sale 1,750 22,667
Proceeds from maturities of investment securities - available for sale 54,361 81,979
Purchase of investment securities - available for sale (115,203) (60,590)
Net increase in loans (12,943) (29,794)
Purchases of premises & equipment (3,258) (3,110)
--------- ---------
Net cash (used in) provided by investing activities (75,293) 11,152
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in:
Deposits (2,556) 53,599
Repurchase agreements, fed funds & short-term borrowings (11,555) (79,821)
Repayments of long-term borrowings 57,365 (1,322)
(Increase) decrease in treasury stock (2,668) 557
Effect of treasury stock transactions (1,887) 221
Cash dividends (8,708) (8,301)
--------- ---------
Net cash provided by (used in) financing activities 29,991 (35,067)
Net decrease in cash and cash equivalents (9,983) (564)
Cash and cash equivalents at beginning of period 107,798 104,631
--------- ---------
Cash and cash equivalents at end of period $ 97,815 $ 104,067
========= =========
The accompanying notes are an integral part of these condensed financial statements.
6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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 Community
Independent Bank, Inc. which was acquired on January 3, 2001 in a transaction
accounted for under the pooling of interests method of accounting (see Note 2).
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, 2001.
The results of operations for the six-month period ended June 30, 2002 are not
necessarily indicative of the results to be expected for the full year.
2. ACQUISITIONS
National Penn Bancshares, Inc. (the Company) completed the acquisition of
Community Independent Bank, Inc. (CIB) on January 3, 2001 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 CIB
stock was converted into 0.945 shares of the Company's common stock, resulting
in the issuance of 679,022 shares of the Company's common stock. In addition,
outstanding stock options to purchase CIB common stock were converted into stock
options to purchase 19,764 shares of the Company's common stock, with an
exercise price of $8.89 to $12.22 per share.
3. LOANS
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 $20,981,000 at June 30, 2002, all
of which are non-accrual loans. The allowance for loan loss associated with
these impaired loans was $1,868,000 at June 30, 2002. The Company recognizes
income on an impaired loan under the cash basis when the loan is 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.
4. SHAREHOLDERS' EQUITY
On July 25, 2001, the Company's Board of Directors authorized the repurchase,
from time to time, of up to 975,000 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 to fund the Company's dividend reinvestment plan, stock option plans,
employee stock purchase plan, and other stock-based benefit plans. As of June
30, 2002, 835,758 shares have been repurchased at an average price of $23.81. On
June 26, 2002, the Company's Board of Directors authorized the repurchase of up
to one million additional shares of the company's common stock to be used to
fund the Company's dividend reinvestment plan, stock option plans, stock-based
benefit plans and employee stock purchase plan. No timetable has been set for
these repurchases.
On June 26, 2002, the Company's Board of Directors declared a cash dividend of
$.22 per share payable on August 17, 2002, to shareholders of record on July 31,
2002.
7
On December 27, 2001, the Company paid a 3% stock dividend. All share, per share
information has been retroactively restated.
5. EARNINGS PER SHARE
Three Months Ended June 30, 2002
- --------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $ 9,038 19,833 $ 0.46
Effect of dilutive securities
Options --- 291 (0.01)
------- ------ --------
Diluted earnings per share
Net income available to common stockholders
Plus assumed conversions $ 9,038 20,124 $ 0.45
======= ====== ========
Year To Date June 30, 2002
- --------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $17,803 19,833 $ 0.90
Effect of dilutive securities
Options --- 253 (0.01)
------- ------ --------
Diluted earnings per share
Net income available to common stockholders
Plus assumed conversions $17,803 20,086 $ 0.89
======= ====== ========
Options to purchase 244,406 shares of common stock at $27.30 per share were
outstanding for the three and six months ended June 30, 2002. They were not
included in the computation of diluted earnings per share because the option
exercise price was greater that the average market price.
Three Months Ended June 30, 2001
- --------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $ 8,078 19,998 $ 0.40
Effect of dilutive securities
Options --- 238 ---
------- ------ --------
Diluted earnings per share
Net income available to common stockholders
Plus assumed conversions $ 8,078 20,236 $ 0.40
======= ====== ========
Year To Date June 30, 2001
- --------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $15,650 20,009 $ 0.78
Effect of dilutive securities
Options --- 247 (0.01)
------- ------ --------
Diluted earnings per share
Net income available to common stockholders
Plus assumed conversions $15,650 20,256 $ 0.77
======= ====== ========
8
Options to purchase 846,919 shares of common stock at $22.42 to $27.30 per
shares were outstanding for the three and six months ended June 30, 2001. They
were not included in the computation of diluted earnings per share because the
option exercise price was greater than the average market price.
6. GOODWILL
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and
Intangible Assets. These statements modify the Company's accounting for goodwill
and other intangible assets. SFAS No. 142 modifies the accounting for all
purchased goodwill and intangible assets. SFAS No. 142 includes requirements to
test goodwill and indefinite-lived intangible assets for impairment rather than
amortize them. As of January 1, 2002, the Company has discontinued the
amortization of its goodwill. As of June 30, 2002, the Company has completed the
transitional testing of its intangible assets, including goodwill. The Company
did not identify any impairment of its outstanding goodwill.
The following table presents a reconciliation of net income and
earnings-per-share amounts, as reported in the financial statements, to those
amounts adjusted for goodwill and intangible asset amortization determined in
accordance with the provisions of SFAS 142.
Three Month Ended Six Months Ended
----------------- ----------------
June 30, June 30, June 30, June 30,
(in thousands except for earnings-per-share amounts) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income $ 9,038 $ 8,078 $ 17,803 $ 15,650
Add back: goodwill amortization, net of taxes of $46 305 606
---------- ---------- ---------- ----------
Adjusted net income $ 9,038 $ 8,383 $ 17,803 $ 16,256
========== ========== ========== ==========
Basic earnings per share:
Reported basic earnings per share $ 0.46 $ 0.40 $ 0.90 $ 0.78
Goodwill amortization --- 0.01 --- 0.03
---------- ---------- ---------- ----------
Adjusted basic earnings per share $ 0.46 $ 0.41 $ 0.90 $ 0.81
========== ========== ========== ==========
Diluted earnings per share
Reported diluted earnings per share $ 0.45 $ 0.40 $ 0.89 $ 0.77
Goodwill amortization --- 0.01 --- 0.03
---------- ---------- ---------- ----------
Adjusted diluted earnings per share $ 0.45 $ 0.41 $ 0.89 $ 0.80
========== ========== ========== ==========
7. SEGMENT REPORTING
SFAS NO. 131, Segment Reporting, establishes standards for public enterprises to
report information about operating segments in their annual financial statements
and requires that those enterprises report selected information about operating
segments in subsequent interim financial reports issued to shareholders. It also
established standards for related disclosure about products and services,
geographic areas, and major customers. Operating segments are components of an
enterprise, which are evaluated regularly by the chief operating decision maker
in deciding how to allocate and assess resources and performance. The Company's
chief operating decision maker is the President and Chief Executive Officer. The
Company has identified its reportable operating segment as "Community Banking."
The Company's community banking segment consists of commercial and retail
banking. The community banking business segment is managed as a single strategic
unit, which generates revenue from a variety of products and services provided
by National Penn Bank and Panasia Bank N.A. (the "Banks"). For example,
commercial lending is dependent upon the ability of the Banks to fund themselves
with retail
9
deposits and other borrowings and to manage interest rate and credit risk. This
situation is also similar for consumer and residential mortgage lending.
Nonreportable operating segments of the Company's operations which do not have
similar characteristics to the community banking operations and do not meet the
quantitative thresholds requiring disclosure are included in the "Other"
category. These nonreportable segments include Investors Trust Company, Penn
Securities Inc., National Penn Life Insurance Company, NPB Capital Trust and the
Company.
The accounting policies used in this disclosure of business segments are the
same as those described in the summary of significant accounting policies (see
Footnote 1 to the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001). The
consolidating adjustments reflect certain eliminations of intersegment revenues,
cash and investment in subsidiaries. Reportable segment-specific information and
reconciliation to consolidated financial information is as follows:
Community Banking Other Consolidated
----------------- ----- ------------
(in thousands)
As of and for the six months
ended, June 30, 2002
Total Assets $2,742,261 $ 43,338 $2,785,599
Total Deposits 2,074,239 --- 2,074,239
Net interest income (loss) 54,860 (700) 54,160
Total noninterest income 15,664 3,049 18,713
Total noninterest expense 39,236 4,278 43,514
Net income (loss) $ 18,921 $ (1,118) $ 17,803
As of and for the six months
ended June 30, 2001
Total Assets $2,548,027 $ 48,932 $2,596,959
Total Deposits 1,963,190 --- 1,963,190
Net interest income (loss) 49,663 (4,343) 45,320
Total noninterest income 13,108 3,012 16,120
Total noninterest expense 36,210 2,246 38,456
Net income (loss) $ 15,565 $ 85 $ 15,650
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.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
-----------------------------------------------------
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States and general
practices within the financial services industry. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
The Company considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than its other
significant accounting policies. The allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
10
sufficient to absorb estimated credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors. However, this evaluation is inherently subjective as
it requires material estimates, including, among others, expected default
probabilities, loss given default, expected commitment usage, the amounts and
timing of expected future cash flows on impaired loans, value of collateral,
estimated losses on consumer loans and residential mortgages, and general
amounts for historical loss experience. The process also considers economic
conditions, uncertainties in estimating losses and inherent risks in the loan
portfolio. All of these factors may be susceptible to significant change. To the
extent actual outcomes differ from management estimates, additional provisions
for loan losses may be required that would adversely impact earnings in future
periods.
With the adoption of SFAS No. 142 on January 1, 2002, the Company
discontinued the amortization of goodwill resulting from acquisitions. Goodwill
is now subject to impairment testing at least annually to determine whether
write-downs of the recorded balances are necessary. The Company tests for
impairment based on the goodwill maintained at each defined reporting unit. A
fair value is determined for each reporting unit based on at least one of three
various market valuation methodologies. If the fair values of the reporting
units exceed their book values, no write-down of recorded goodwill is necessary.
If the fair value of the reporting unit is less, an expense may be required on
the Company's books to write-down the related goodwill to the proper carrying
value. As of June 30, 2002, the Company determined that no impairment write-offs
were necessary.
The Company recognizes deferred tax assets and liabilities for the future
tax effects of temporary differences, net operating loss carryforwards and tax
credits. The only material temporary difference relates to the allowance for
loan losses. Deferred tax assets are subject to management's judgment based upon
available evidence that future realization is more likely than not. If
management determines that the Company will be unable to realize all or part of
net deferred tax assets in the future, a direct charge to income tax expense may
be required to reduce the recorded value of the net deferred tax asset to the
expected realizable amount.
FINANCIAL CONDITION
-------------------
At June 30, 2002, total assets were $2.786 billion, an increase of $58.1
million or 2.1% from the $2.727 billion at December 31, 2001. This increase is
reflected primarily in investment securities, which increased $98.1 million.
This increase was partially offset by a decrease in loans of $28.8 million and a
decrease in cash and cash equivalents of $10.0 million.
Total cash and cash equivalents decreased $10.0 million or 9.3% at June
30, 2002 when compared to December 31, 2001. The decrease is comprised of a
decrease in cash and due from banks of $25.9 million, and a decrease in interest
bearing deposits in banks of $4.0 million, which was partially offset by an
increase in federal funds sold of $20.0 million.
Net loans decreased to $1.785 billion at June 30, 2002. The decrease of
$28.8 million or 1.6% compared to December 31, 2001 was the result of the
overall lending environment and current economic conditions. Loans originated
for immediate resale during the first six months of 2002 amounted to $62.3
million.
11
The following table shows detailed information and ratios pertaining to
the Company's loans and asset quality (dollars in thousands):
June 30, 2002 December 31, 2001
------------- -----------------
Nonaccrual loans $ 20,981 $ 15,988
Loans past due 90 or more days
as to interest or principal 467 11,794
---------- ----------
Total nonperforming loans 21,448 27,782
Other real estate owned 5,863 1,013
---------- ----------
Total nonperforming assets $ 27,311 $ 28,795
========== ==========
Total Loans $1,828,075 $1,856,369
Average total loans $1,817,351 $1,816,265
Allowance for loan losses $ 42,720 $ 42,207
Net charge-offs $ 6,237 $ 5,826
Net charge-offs to: (annualized)
Total loans .68% .31%
Average total loans .69% .32%
Allowance for loan losses 29.20% 13.80%
Nonperforming assets to:
Total loans 1.49% 1.55%
Allowance for loan losses to:
Nonperforming assets 156.4% 146.6%
Total loans 2.34% 2.27%
Average total loans 2.35% 2.32%
The increase in non-accrual loans is due primarily to two large commercial
real estate relationships that the Company is trying to work out. The decrease
in loans 90 days or more past due is due primarily to the shift of two loans
from 90 days or more past due to nonaccrual. The increase in real estate owned
is due to one large commercial real estate relationship, which the Company
foreclosed on during the first quarter of 2002. Further weakness in the economy
may lead to continued deterioration in credit quality.
The ratio of nonperforming assets to total loans decreased slightly to
1.49% at June 30, 2001 from the 1.55% at December 31, 2001. Total nonperforming
assets remains relatively high at $27.3 million at June 30, 2002, which is down
from the $31.8 million at March 31, 2002 due primarily to one nonaccrual
commercial real estate loan being restored to accrual status. The allowance for
loan loss increased to $42.7 million or 2.34% of total loans outstanding. Based
on the current reserves, the ratio of allowance for loan losses to nonperforming
assets increased to 156.4%. The increase in the ratio of net charge-offs to
allowance for loan losses from 13.8% to 29.2% is due to the increase in the
amount of charge-offs for the first six months due primarily to the partial
charge-off of one large commercial real estate loan during the first quarter.
Investments, the Company's secondary use of funds, increased $98.1 million
or 14.9% to $756.6 million at June 30, 2002 when compared to December 31, 2001.
The increase is due to investment purchases of $115.2 million and the
securitization of approximately $35.0 million of conforming residential loans
through Federal Home Loan Mortgage Corporation during the second quarter. This
resulted in the transfer of these loans from the Company's loan portfolio to the
investment portfolio where they are now held in the form of a mortgage-backed
security. The purpose of this transaction was to provide greater liquidity for
the loans as they are more readily saleable in the form of a security, as well
as to provide
12
collateral for the Company's cash management and municipal deposit programs.
This increase was partially offset by investment sales, calls and maturities and
the amortization of mortgage-backed securities.
Other assets decreased to $145.8 million, a decrease of $1.2 million from
$146.9 million at December 31, 2001. This decrease is due primarily to a
decrease in other assets of $3.4 million, which was partially offset by an
increase in Bank owned life insurance of $1.1 million
As the primary source of funds, aggregate deposits of $2.074 billion at
June 30, 2002 decreased $2.6 million compared to December 31, 2001. The decrease
in deposits during the first six months of 2002 was primarily in non-interest
bearing deposits, which decreased $14.7 million while interest bearing deposits
increased $12.2 million, including certificates of deposit in excess of $100,000
which decreased $4.0 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 $474.2 million at June 30, 2002, and $428.4
million at December 31, 2001. The increase of $45.9 million is due primarily to
an increase in long-term borrowings of $57.4 million that was partially offset
by a decrease in securities sold under repurchase agreements and federal funds
purchased of $12.0 million.
Shareholders' equity increased $13.1 million through June 30, 2002 due
primarily to an increase in retained earnings of $9.1 million and an increase in
the valuation adjustment for securities available for sale of $8.6 million. Cash
dividends paid during the first six months of 2002 increased $587,000 or 7.2%
compared to the cash dividends paid during the first six months of 2001.
Earnings retained during the first six months of 2002 were 50.9% compared to
47.9% during the first six months of 2001.
RESULTS OF OPERATIONS
---------------------
Net income for the quarter ended June 30, 2002 was $9.0 million, 11.9%
more than the $8.1 million for the second quarter of 2001. For the first six
months, net income reached $17.8 million or 13.8% more than the $15.7 million
reported for the first six months of 2001. 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 second quarter
of 2002 was $27.4 million, which increased $4.3 million or 18.4% over the $23.1
million for the second quarter of 2001. Interest income for the second quarter
of 2002 decreased $4.4 million due to a decrease in loan income of $5.6 million
that was partially offset by an increase in investment income of $1.4 million.
Interest expense for second quarter 2002 decreased $8.7 million due to a
decrease in interest on deposits of $7.5 million and a decrease in interest on
federal funds purchased, borrowed funds and securities sold under repurchase
agreements of $1.1 million. Net interest income for the six months ended June
30, 2002 was $54.2 million, which increased $8.8 million or 19.5% over the $45.3
million for the six months ended June 30, 2001. Interest income for the first
six months of 2002 decreased $9.9 million due to a decrease in loan income of
$11.3 million, which was partially offset by an increase in investment income of
$1.8 million. Interest expense for the first six months of 2002 decreased $18.8
million due to decreases in interest on deposits of $15.3 and interest on
federal funds purchased, borrowed funds and securities sold under repurchase
agreements of $3.5 million. The decreases in interest income and expense are
primarily due to the lower interest rate environment during the second quarter
2002 when compared to the second quarter 2001. Despite the current low 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.
During management's quarterly review of the allowance for loan losses, the
Company considers a variety of factors that includes: the continuing economic
uncertainty associated with events of the past year, the recession and the
Company's concern that a slower economy will continue the trend of higher loan
13
losses, the overall concerns of consumer confidence and the current high level
of non-performing loans. Based on these factors, the provision for loan losses
was $6.8 million for the six months ended or an increase of $3.8 million for the
six-month period ended June 30, 2002 compared to the same period in 2001. The
allowance for loan losses of $42.7 million at June 30, 2002 and $42.2 million at
December 31, 2001 as a percentage of total loans was 2.34% at June 30, 2002 and
2.27% at December 31, 2001. The percentage of allowance for loan losses to
nonperforming loans was 156.4% as of June 30, 2002 as compared to 146.6% for
December 31, 2001. The Company's net charge-offs of $6.2 million for the six
months of 2002 are due primarily to one large commercial real estate loan that
the Company charged off during the first quarter. Net charge-offs were $2.6
million during the first six months of 2001.
Other income increased $1.0 million or 12.0% during the second quarter of
2002, as a result of increased service charges on deposit accounts of $618,000,
increased other income of $587,000, increased trust income of $120,000. This was
partially offset by a decrease in mortgage banking income of $304,000. Year to
date, other income increased $2.6 million or 16.1%. This was as a result of
increased service charges on deposit accounts of $1.5 million, increased other
income of $1.4 million, and increased trust income of $170,000. This increase
was partially offset by increased net securities losses of $281,000 and a
decrease in mortgage banking income of $162,000. Increased service charges on
deposit accounts is due primarily to an increase in the collection of overdraft
fees on a larger deposit base, as a result of to our free checking promotional
program first implemented during the second quarter of 2001. Increased other
income is due primarily to an increase in bank-owned life insurance income and
electronic banking fees. The decrease in mortgage banking income is primarily
due to the fact that those able to refinance have already done so during this
extended lower rate environment. Other expenses increased $2.8 million or 14.0%
during the second quarter of 2002. Other operating expenses increased $2.0
million or 34.9%, salaries wages and benefits increased $628,000 or 5.7%, and
net premises and equipment increased $108,000 or 3.7%. Year to date, other
expenses increased $5.1 million or 13.1%. Other operating expenses increased
$2.9 million or 26.5%, salaries wages and benefits increased $2.2 million or
10.0%. Other operating expenses increased largely as a result of the write-down
of a minority ownership interest in a non-banking, non-public financial services
business. At the time of the Company's investment, this business appeared to be
an opportunity for the Company to continue to focus on specialized niche
markets. The business has been unable to accomplish its business plan and the
Company has elected to terminate its investment in this business. Salaries,
wages and benefits increased due to increased staff and increases in benefit
costs.
Income before income taxes increased $1.2 million or 11.8% in the second
quarter of 2002 compared to the same time period in 2001. Income taxes increased
$269,000 or 11.5% for the quarter ended June 30, 2002 due to the higher income
before income taxes. Income before income taxes increased $2.6 million or 13.1%
in the first half of 2002 compared to the same time period in 2001. Income taxes
increased $472,000 or 10.9% for the half year ended June 30, 2002 due to the
higher income before income taxes. The Company's effective tax rate remained
relatively stable at 22.4% for the second quarter of 2002 compared to 22.4% for
2001. The Company's effective tax rate also remained relatively stable at 21.3%
for the first half of 2002 compared to 21.7% for 2001.
GOODWILL AND OTHER INTANGIBLE ASSETS
------------------------------------
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and
Intangible Assets. These statements modify the Company's accounting for goodwill
and other intangible assets. SFAS No. 142 modifies the accounting for all
purchased goodwill and intangible assets. As of January 1, 2002, the Company is
no longer amortizing its goodwill of $19.2 million. Had the Company not been
required to amortize goodwill during the first half of 2001, reported earnings
per share would have been $.03 higher on a diluted basis, or $.80 per share
versus the $.77 per share actually reported through June 30, 2001.
SFAS No. 142 includes requirements to test goodwill and indefinite-lived
intangible assets for impairment rather than amortize them. The Company will be
testing goodwill for impairment at least
14
annually. As of June 30, 2002, the Company has completed the transitional
testing of its intangible assets, including goodwill. The company did not
identify any impairment on its outstanding goodwill.
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, federal funds
purchased, and short-term borrowings, decreased $14.1 million from year-end
2001. Long-term borrowings increased $57.4 million during the first six months
of 2002.
The Company currently does not have any unconsolidated subsidiaries or
off-balance sheet special purpose entities.
The goal of interest rate sensitivity management is to avoid
fluctuating net interest margins, and to enhance consistent growth of net
interest income through periods of changing interest rates. Such sensitivity is
measured as the difference in the volume of assets and liabilities in the
existing portfolio that are subject to repricing in a future time period.
The following table shows separately the interest rate sensitivity of
each category of interest-earning assets and interest-bearing liabilities at
June 30, 2002:
Repricing Periods (1)
-----------------------------------
Three Months One Year
Within Three Through One Through Five Over
Months Year Years Five Years
------------------------------------------------------------------------
(In Thousands)
Assets
Interest bearing deposits
at banks $ 1,959 $ -- $ -- $ --
Investment securities 88,136 150,329 171,380 346,800
Loans (1) 725,497 258,049 658,684 143,125
Other assets 20,000 -- -- 221,640
----------- -------------- ------------- ------------
835,592 408,378 830,064 711,565
----------- -------------- ------------- ------------
Liabilities and equity
Non-interest bearing deposits 330,238 -- -- --
Interest bearing deposits (2) 472,281 352,562 282,831 636,327
Borrowed funds 164,039 -- 60,000 209,951
Preferred securities 40,250 -- -- --
Other liabilities -- -- -- 28,293
Hedging instruments 40,000 -- (40,000) --
Shareholders' equity -- -- -- 208,827
----------- -------------- ------------- ------------
1,046,808 352,562 302,831 1,083,398
----------- -------------- ------------- ------------
Interest sensitivity gap (211,216) 55,816 527,233 (371,833)
----------- -------------- ------------- ------------
Cumulative interest rate
sensitivity gap ($ 211,216) ($ 155,400) $ 371,833 $ --
=========== ============== ============= ============
(1) Adjustable rate loans are included in the period in which interest rates are
next scheduled to adjust rather than in the period in which they are due. Fixed
rate loans are included in the period in which they are scheduled to be repaid
and are adjusted to take into account estimated prepayments based upon
assumptions estimating prepayments in the interest rate environment prevailing
during the second calendar quarter of 2002. The table assumes prepayments and
scheduled principal amortization of fixed-rate loans and
15
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, 21.9% of these deposits are considered repriceable
within three months and 78.1% 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 three months, 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.
At the current level of interest rates, the Company has some exposure to a
movement in rates in either direction due to the optionality of the financial
instruments on both sides of the balance sheet. Optionality exists because
customers have choices regarding their deposit accounts or loans. For example,
if a customer has a fixed rate mortgage, he/she may choose to refinance the
mortgage if interest rates decline. One way to reduce this option risk is to
sell the Company's long-term fixed rate mortgages in the secondary market. Based
on the Company's modeling process, the impact of a rising or falling interest
rate environment on net interest income is not expected to be significant to the
Company's results of operations. Nonetheless, the Company's asset/liability
management committee's priority is to manage this optionality and therefore
limit the level of interest rate risk.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
---------------------------------------------
The following table sets forth contractual obligations and other
commitments representing required and potential cash outflows as of June 30,
2002. The Company had no capital leases at June 30, 2002.
One to Four to After
Less than Three Five Five
(dollars in thousands) Total One Year Years Years Years
----- -------- ----- ----- -----
Minimum annual rentals or noncancellable
operating leases $ 10,366 $ 2,719 $ 4,332 $2,047 $ 1,268
Remaining contractual maturities of time
deposits 869,991 583,808 178,584 62,243 45,356
Loan commitments 581,809 300,049 100,718 6,020 175,022
Long-term borrowed funds 197,339 36,813 22,500 25,000 113,026
Standby letters of credit 34,673 29,418 5,255 --- ---
---------- -------- -------- ------- --------
Total $1,694,178 $952,807 $311,389 $95,310 $334,672
========== ======== ======== ======= ========
16
CAPITAL ADEQUACY
----------------
The following table sets forth certain capital performance ratios:
June 30, Dec. 31,
2002 2001
-------- --------
CAPITAL PERFORMANCE
Return on average assets (annualized) 1.31% 1.25%
Return on average equity (annualized) 17.70 16.80
Earnings retained 50.90 49.50
CAPITAL LEVELS
Tier 1 Capital to Tier 1 Capital to Risk- Total Capital to Risk-
Average Assets Ratio Weighted Assets Ratio Weighted Assets Ratio
-------------------- --------------------- -----------------------
June 30, Dec. 31, June 30, Dec. 31, June 30, Dec. 31,
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
The Company 8.05% 7.99% 10.74% 10.53% 12.02% 11.82%
National Penn Bank 7.09% 7.03% 9.36% 9.16% 10.62% 10.42%
Panasia Bank, N.A. 6.55% 6.64% 12.63% 12.38% 13.89% 13.64%
"Well Capitalized" institution 5.00% 5.00% 6.00% 6.00% 10.00% 10.00%
(under banking regulations)
The Company's capital ratios above compare favorably to the minimum
required amounts of Tier 1 and total capital to "risk-weighted" assets and the
minimum Tier 1 leverage ratio, as defined by banking regulators. At June 30,
2002, 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.
RELATED PARTY TRANSACTIONS
--------------------------
The Company had no material transactions with related parties as defined
in SFAS No. 57 Related Party Disclosures or with any other persons who, because
of a prior relationship with the Company, e.g., former members of senior
management or individuals with former management relationships with the Company,
had the ability to negotiate transactions with the Company on more favorable
terms to themselves than had they not had such prior relationships with the
Company.
FUTURE OUTLOOK
--------------
On July 23, 2002, the Company opened a Panasia Bank community office in
Annandale, VA and on July 29, 2002, opened a National Penn Bank community office
in Chester County, PA.
On June 12, 2002, the Company announced that Panasia Bank N.A. signed an
agreement to purchase the Wilmington Savings Fund Society, FSB's United Asian
Bank Division office in Elkins Park, PA. The Company plans to consolidate this
office of approximately $10 million in deposits and $15 million in loans with
Panasia's Cheltenham community office sometime in the future. The Company
anticipates a September 2002 completion of this transaction.
17
On June 26, 2002, the Company's Board of Directors declared a cash
dividend of $.22 per share to be paid on August 17, 2002, to shareholders of
record on July 31, 2002.
On July 25, 2001, the Company's Board of Directors authorized the
repurchase, from time to time, of up to 975,000 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 to fund the Company's dividend reinvestment plan, stock
option plans, employee stock purchase plan, and other stock-based benefit plans.
As of July 22, 2002, a total of 837,458 shares have been repurchased at a total
cost of approximately $19,939,000.
On July 26, 2002, the Company's Board of Directors authorized the
repurchase of up to one million shares of the company's common stock to be used
to fund the Company's dividend reinvestment plan, stock option plans,
stock-based benefit plans, and employee stock purchase plan. No timetable has
been set for the repurchases.
FORWARD-LOOKING STATEMENTS
--------------------------
From time to time, National Penn or its representatives make written or
oral statements that may include "forward-looking statements" with respect to
its:
* Financial condition.
* Results of operations.
* Asset quality.
* Product, geographical and other business expansion plans and
activities.
* Investments in new subsidiaries and other companies.
* Capital expenditures, including investments in technology.
* Pending or completed mergers with or acquisitions of financial or
non-financial companies or their assets, loans, deposits and
branches, and the revenue enhancements, cost savings and other
benefits anticipated in those transactions.
* Other matters.
Many of these statements can be identified by looking for words such as
"believes," "expects," "anticipates," "estimates", "projects" or similar words
or expressions.
These forward-looking statements involve substantial risks and
uncertainties. There are many factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements. These
factors include, among other things, the following possibilities:
* National Penn's unified branding campaign and other marketing
initiatives may be less effective than expected in building name
recognition and greater customer awareness of National Penn's
products and services.
* Expansion of National Penn's products and services offerings may
meet with more effective competitive resistance from others already
offering such products and services than expected.
18
* New product development by new and existing competitors may be more
effective, and take place more quickly, than expected.
* Competitors with substantially greater resources may enter product
market niches currently served by National Penn.
* Geographical expansion may be more difficult, and take longer, than
expected, and business development in newly entered geographical
areas may be more difficult, and take longer, than expected.
* Competitive pressures may increase significantly and have an adverse
effect on pricing, spending, third-party relationships and revenues.
* National Penn may be less effective in cross-selling its various
products and services, and in utilizing alternative delivery systems
such as the Internet, than expected.
* Projected business increases following new product development,
geographical expansion, and productivity and investment initiatives,
may be lower than expected, and recovery of associated costs may
take longer than expected.
* Increasing interest rates may increase funding costs and reduce
interest margins, and may adversely affect business volumes,
including mortgage origination levels.
* General economic or business conditions, either nationally or in the
regions in which National Penn will be doing business, may be less
favorable than expected, resulting in, among other things, a
deterioration in credit quality or a reduced demand for credit,
including the resultant effect on National Penn's loan portfolio and
allowance for loan losses.
* Expected synergies and cost savings from mergers, including
reductions in interest and non-interest expense, may not be fully
realized or realized as quickly as expected.
* Revenues and loan growth following mergers may be lower than
expected.
* Loan losses, deposit attrition, operating costs, customer and key
employee losses, and business disruption following mergers may be
greater than expected.
* Business opportunities and strategies potentially available to
National Penn, after mergers, may not be successfully or fully acted
upon.
* Costs, difficulties or delays related to the integration of
businesses of acquired companies with National Penn's business may
be greater or take longer than expected.
* Technological changes may be harder to make or more expensive than
expected or present unanticipated operational issues.
* Legislative or regulatory changes may adversely affect National
Penn's business, including changes in accounting rules and
practices, and customer privacy and data protection requirements.
* Market volatility may continue in the securities markets, with an
adverse effect on National Penn's securities and asset management
activities.
* National Penn may be unable to successfully manage the foregoing and
other risks.
19
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
statements. National Penn cautions shareholders not to place undue reliance on
such statements.
All written or oral forward-looking statements attributable to National
Penn or any person acting on its behalf made after the date of this Report are
expressly qualified in their entirety by the cautionary statements contained in
this Report. National Penn does not undertake any obligation to release publicly
any revisions to such forward-looking statements to reflect events or
circumstances after the date of this Report or to reflect the occurrence of
unanticipated events.
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 2001 Annual Report on
Form 10-K filed with the SEC.
20
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.
- ---------------------------
None.
Item 2. Changes in Securities and Use of Proceeds.
- ---------------------------------------------------
None.
Item 3. Defaults Upon Senior Securities.
- -----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
The 2002 annual meeting of the shareholders of National Penn Bancshares,
Inc. was held on April 22, 2002. Notice of the meeting was mailed to
shareholders of record on or about March 22, 2002, together with proxy
solicitation materials prepared in accordance with Section 14(a) of the
Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder.
The annual meeting was held:
* to elect four Class III directors to hold office for three years
from the date of election and until their successors are elected and
qualified, and
* to act upon a proposal to amend National Penn's Articles of
Incorporation to increase the maximum number of directors of
National Penn to 20 persons ("Proposal No. 2").
There was no solicitation in opposition to the nominees of the Board of
Directors for election to the Board of Directors and all such nominees were
elected. The number of votes cast for or withheld, as well as the number of
abstentions and broker non-votes, for each of the nominees for election to the
Board of Directors were as follows:
Abstentions and
Nominee For Withheld Broker Non-votes
------- --- -------- ----------------
Frederick P. Krott 15,314,478 175,488 0
Patricia L. Langiotti 15,307,813 182,153 0
Kenneth A. Longacre 15,354,354 135,612 0
Wayne R. Weidner 15,369,284 120,682 0
There was no solicitation in opposition to Proposal No. 2, and Proposal
No. 2 was approved. The number of votes cast for or against, as well as the
number of abstentions and broker non-votes, for Proposal No. 2 were as follows:
For Against Abstentions Broker Non-votes
--- ------- ----------- ----------------
14,026,223 927,731 415,940 0
21
Item 5. Other Information.
- ---------------------------
Panasia Branch Opening
----------------------
On July 22, 2002, National Penn's principal wholly-owned banking
subsidiary, National Penn Bank ("NP Bank"), opened a de novo branch in
Annandale, Fairfax County, Virginia (the "Branch"). On June 1, 2002, National
Penn's other wholly-owned banking subsidiary, Panasia Bank, N.A. ("Panasia"),
and NP Bank entered into a purchase and assumption agreement providing for the
transfer by NP Bank to Panasia of the Branch, immediately after its opening. The
Branch opened as a Panasia branch on July 23, 2002.
Panasia Branch Acquisition
--------------------------
On June 12, 2002, Panasia and Wilmington Savings Fund Society ("WSFS")
entered into a purchase and assumption agreement providing for Panasia's
purchase of WSFS's United Asian Bank division in Elkins Park, Pennsylvania. The
agreement covers the Elkins Park branch office, including all its assets,
business liabilities and deposits.
The transaction is subject to the approval of the Office of the
Comptroller of the Currency ("OCC"). Subject to receipt of approval from the OCC
and other customary closing conditions, National Penn expects the transaction to
close in September 2002. Upon closing, Panasia will acquire approximately $10
million in deposits and $15 million in consumer and business banking loans.
After closing, Panasia intends to close the Elkins Park branch and to combine it
with Panasia's existing branch in Cheltenham, Pennsylvania, sometime in the
future.
Cash Dividend
-------------
On June 26, 2002, National Penn's Board of Directors declared a cash
dividend of $.22 per share to be paid on August 17, 2002 to shareholders of
record on July 31, 2002.
New Board Member
----------------
On June 10, 2002, NP Bank elected Fred D. Hafer to its board of directors,
effective immediately. Mr. Hafer resides in West Reading, Berks County,
Pennsylvania, and is the retired chairman of FirstEnergy Corporation,
headquartered in Akron, Ohio.
Leasing Company
---------------
On July 25, 2002, National Penn Bank announced the formation of a new
subsidiary, National Penn Leasing Company. This subsidiary is intended to
provide commercial equipment leasing services.
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits.
Exhibit 3.1 - Articles of Incorporation, as amended, of National
Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to
National Penn's Registration Statement No. 333-88536 on Form S-3, as
filed on May 17, 2002)
(b) Reports on Form 8-K. During the quarter ended June 30, 2002,
National Penn filed the following Reports on Form 8-K:
* Report on Form 8-K dated March 27, 2002. The Report provided
information under Item 5 regarding the approval by National Penn's
board of directors of the amended and restated Dividend Reinvestment
and Stock Purchase Plan. The Report did not contain any financial
statements.
22
* Report on Form 8-K dated April 24, 2002. The Report provided
information under Item 5 regarding the amendment of National Penn's
bylaws, the amendment of National Penn's articles of incorporation,
and the amendment of NP Bank's bylaws. The Report did not contain
any financial statements.
* Report on Form 8-K dated June 26, 2002. The Report provided
information under Item 5 regarding National Penn's stock repurchase
program. The Report did not contain any financial statements.
23
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: July 30, 2002 By /s/ Wayne R. Weidner
---------------------------------
Wayne R. Weidner, Chairman,
President and Chief Executive
Officer
Dated: July 30, 2002 By /s/ Gary L. Rhoads
---------------------------------
Gary L. Rhoads, Principal
Financial Officer
24