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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, 2002
--------------------------------------
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.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2215075
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Philadelphia and Reading Avenues, Boyertown, PA 19512
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(610) 367-6001
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
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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 1, 2002
----- -------------------------------
Common Stock (no stated par value) (No.) 19,717,558 Shares
Page 1 of 28 pages
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 ................ 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.................................................. 22
Item 4. Controls and Procedures...................................... 22
Part II - Other Information.
- ----------------------------
Item 1. Legal Proceedings ........................................... 23
Item 2. Changes in Securities........................................ 23
Item 3. Defaults Upon Senior Securities.............................. 23
Item 4. Submission of Matters to a Vote of
Security Holders............................................. 23
Item 5. Other Information ........................................... 23
Item 6. Exhibits and Reports on Form 8-K............................. 24
Signatures.............................................................. 26
Certifications.......................................................... 27
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET Sept. 30
(Dollars in thousands, except per share data) 2002 Dec. 31
(Unaudited) 2001
----------- -----------
ASSETS
Cash and due from banks $ 83,715 $ 101,796
Interest bearing deposits in banks 3,151 6,002
Federal funds sold 76,000 -
----------- -----------
Total cash and cash equivalents 162,866 107,798
Investment securities available for sale, at fair value 763,103 658,581
Loans, less allowance for loan losses of $42,323 and
$42,207 in 2002 and 2001 respectively 1,826,835 1,814,162
Other assets 142,603 146,941
----------- -----------
Total Assets $ 2,895,407 $ 2,727,482
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $ 335,241 $ 344,972
Interest bearing deposits
(Includes certificates of deposit $100,000 or greater:
2002 - $253,078; 2001 - $267,540) 1,798,939 1,731,823
----------- -----------
Total Deposits 2,134,180 2,076,795
Securities sold under repurchase agreements
and federal funds purchased 231,734 238,726
Short-term borrowings 10,000 9,480
Long-term borrowings 171,021 139,974
Guaranteed preferred beneficial interests in
Company's subordinated debentures 103,500 40,250
Accrued interest payable and other liabilities 24,745 26,575
----------- -----------
Total Liabilities 2,675,180 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 - 19,788,827; 2001 - 19,926,863; net of shares
in Treasury: 2002 - 241,707; 2001 - 121,827 163,037 166,138
Retained earnings 43,086 29,333
Accumulated other comprehensive income 20,611 3,119
Treasury stock at cost (6,507) (2,908)
----------- -----------
Total Shareholders' Equity 220,227 195,682
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,895,407 $ 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 Nine Months Ended
(Dollars in thousands, except per share data) September 30 September 30
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
INTEREST INCOME
Loans including fees $ 32,684 $ 37,338 $ 99,311 $115,256
Deposits in banks 17 112 63 506
Federal funds sold 399 20 469 143
Investment securities 10,154 9,438 30,085 27,612
-------- -------- -------- --------
Total interest income 43,254 46,908 129,928 143,517
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 11,078 16,665 34,830 55,741
Federal funds purchased, borrowed funds and
securities sold under repurchase agreements 5,102 5,249 13,864 17,462
-------- -------- -------- --------
Total interest expense 16,180 21,914 48,694 73,203
-------- -------- -------- --------
Net interest income 27,074 24,994 81,234 70,314
Provision for loan losses 4,500 3,500 11,250 6,500
-------- -------- -------- --------
Net interest income after provision
for loan losses 22,574 21,494 69,984 63,814
-------- -------- -------- --------
OTHER INCOME
Trust income 1,298 1,305 4,036 3,873
Service charges on deposit accounts 3,218 2,780 9,222 7,281
Net gains on sale of investment securities 367 781 117 812
Mortgage banking income 1,603 1,240 3,627 3,426
Other 3,999 3,500 12,196 10,334
-------- -------- -------- --------
Total other income 10,485 9,606 29,198 25,726
-------- -------- -------- --------
OTHER EXPENSES
Salaries, wages and employee benefits 12,243 11,419 35,983 32,996
Net premises and equipment 3,432 2,997 9,502 9,039
Other operating 5,918 5,734 19,622 16,571
-------- -------- -------- --------
Total other expenses 21,593 20,150 65,107 58,606
-------- -------- -------- --------
Income before income taxes 11,466 10,950 34,075 30,934
Income tax expense 2,255 2,468 7,061 6,802
-------- -------- -------- --------
Net income $ 9,211 $ 8,482 $ 27,014 $ 24,132
======== ======== ======== ========
PER SHARE OF COMMON STOCK
Net income per share - basic $ 0.46 $ 0.43 $ 1.36 $ 1.21
Net income per share - diluted 0.46 0.42 1.35 1.19
Dividends paid in cash 0.22 0.21 0.66 0.61
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
NINE MONTHS ENDED SEPTEMBER 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 - - 27,014 - - 27,014 $ 27,014
Cash dividends declared - - (13,261) - - (13,261)
Other comprehensive income, net
of reclassification adjustment
and taxes - - - 17,492 - 17,492 17,492
---------------------------------------------------------------------------------------------
Total comprehensive income - - - - - - $ 44,506
---------------------------------------------------------------------------------------------
Effect of treasury stock transactions (138,036) (3,101) - - (3,599) (6,700)
---------------------------------------------------------------------------------------------
Balance at September 30, 2002 19,788,827 $ 163,037 $ 43,086 $ 20,611 $ (6,507) $ 220,227
September 30, 2002
---------------------------------------
Before Tax Net of
tax (expense) tax
amount benefit amount
---------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during period 26,794 (9,378) 17,416
Less: reclassification adjustment for losses realized in net income 117 (41) 76
---------------------------------------
Other comprehensive income, net 26,911 (9,419) 17,492
=======================================
NINE MONTHS ENDED SEPTEMBER 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 - - 24,132 - - 24,132 $ 24,132
Cash dividends declared - - (12,572) - - (12,572)
Shares issued under stock-based
plans - - - - - -
Other comprehensive income, net
of reclassification adjustment
and taxes - - - 10,734 - 10,734 10,734
---------------------------------------------------------------------------------------------
Total comprehensive income - - - - - - $ 34,866
---------------------------------------------------------------------------------------------
Effect of treasury stock transactions 72,471 (459) (203) (662)
---------------------------------------------------------------------------------------------
Balance at September 30, 2001 19,422,413 $ 154,260 $ 38,157 $ 13,487 $ (1,056) 204,848
September 30, 2001
---------------------------------------
Before Tax Net of
tax (expense) tax
amount benefit amount
---------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during period 15,702 (5,496) 10,206
Less: reclassification adjustment for gains realized in net income 812 (284) 528
---------------------------------------
Other comprehensive income, net 16,514 (5,780) 10,734
=======================================
The accompanying notes are an integral part of these statements.
5
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(Dollars in thousands)
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 27,014 $ 24,132
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses 11,250 6,500
Depreciation and amortization 3,610 4,524
Net (gains) losses on sale of securities and mortgages (1,486) 1,396
Mortgage loans originated for resale (66,923) (114,684)
Sale of mortgage loans originated for resale 66,923 114,684
Other 14,762 5,563
--------- ---------
Net cash provided by operating activities 55,150 42,115
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid in excess of cash equivalents for business acquired (8,624) -
Proceeds from sales of investment securities - available for sale 2,260 23,730
Proceeds from maturities of investment securities - available for sale 64,951 109,491
Purchase of investment securities - available for sale (128,660) (234,452)
Net increase in loans (43,096) (33,405)
Purchases of premises & equipment (4,681) (4,828)
--------- ---------
Net cash (used in) investing activities (117,850) (139,464)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in:
Deposits 49,904 79,662
Repurchase agreements, fed funds & short-term borrowings (6,472) (6,570)
Proceeds from long-term borrowings 70,000 -
Repayments of long-term borrowings (38,953) (2,640)
Cash proceeds from the issuance of subordinated debt 63,250 -
(Increase) decrease in treasury stock (3,599) (203)
Effect of treasury stock transactions (3,101) (459)
Cash dividends (13,261) (12,572)
--------- ---------
Net cash provided by financing activities 117,768 57,218
Net increase (decrease) in cash and cash equivalents 55,068 (40,131)
Cash and cash equivalents at January 1 107,798 104,631
--------- ---------
Cash and cash equivalents at September 30 $ 162,866 $ 64,500
========= =========
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 nine-month period ended September 30, 2002 are
not necessarily indicative of the results to be expected for the full year.
2. ACQUISITIONS
National Penn Bancshares, Inc. (the Company or National Penn) 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 659,245 shares of the Company's common
stock. In addition, outstanding options to purchase CIB common stock were
converted into options to purchase 19,188 shares of the Company's common stock,
with an exercise price of $9.33 to $12.83 per share.
Panasia Bank, N.A. completed the purchase of the United Asian Bank Division
office of Wilmington Savings Fund Society, FSB, on September 27, 2002. The
transaction was accounted for under SFAS No.141, Business Combinations, and SFAS
No.147, Acquisitions of Certain Financial Institutions. Panasia acquired
approximately $10 million in deposits and $15 million in loans.
On September 24, 2002, the Company announced it signed a definitive agreement to
purchase FirstService Bank. FirstService Bank is a $400 million asset financial
institution. This transaction is subject to regulatory approvals and other
closing conditions, and is expected to close in the first quarter of 2003.
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 $19,970,000 at September 30, 2002,
all of which are non-accrual loans. The allowance for loan loss associated with
these impaired loans was $2,007,000 at September 30, 2002. The Company
recognizes income on an impaired loan under the cash basis when the loan is
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 an impaired loan.
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. Repurchased shares will be used to fund the Company's dividend
7
reinvestment plan, stock option plans, employee stock purchase plan, and other
stock-based benefit plans. The Company purchased 652,653 shares at an average
price of $24.43 for the period January 1, 2002 through August 27, 2002, the date
of completion of the 2001 repurchase program.
On June 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 these
repurchases. As of September 30, 2002, 48,519 shares have been repurchased at an
average price of $25.66 under the 2002 repurchase program.
On September 25, 2002, the Company's Board of Directors declared a cash
dividend of $.23 per share payable on November 17, 2002, to shareholders of
record on October 31, 2002. On October 23, 2002, the Company's Board of
Directors declared a 5% stock dividend payable on December 27, 2002, to
shareholders of record on December 6, 2002. All weighted average, actual shares
and per share information has not been adjusted for the 2002 stock dividend.
On December 27, 2001, the Company paid a 3% stock dividend. All weighted
average, share and per share information has been retroactively restated.
5. EARNINGS PER SHARE
Three Months Ended September 30, 2002
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $ 9,211 19,824 $ 0.46
Effect of dilutive securities
Options --- 276 ---
------- ------ --------
Diluted earnings per share
Net income available to common stockholders
Plus assumed conversions $ 9,211 20,100 $ 0.46
======= ====== ========
Year To Date September 30, 2002
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $27,014 19,818 $ 1.36
Effect of dilutive securities
Options --- 262 (0.01)
------- ------ --------
Diluted earnings per share
Net income available to common stockholders
Plus assumed conversions $27,014 20,080 $ 1.35
======= ====== ========
Options to purchase 248,494 shares of common stock at $27.30 per share were
outstanding for the three and nine months ended September 30, 2002. They were
not included in the computation of diluted earnings per share because the option
exercise price was greater than the average market price.
8
Three Months Ended September 30, 2001
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $ 8,482 20,028 $ 0.43
Effect of dilutive securities
Options --- 225 (0.01)
------- ------ --------
Diluted earnings per share
Net income available to common stockholders
Plus assumed conversions $ 8,482 20,253 $ 0.42
======= ====== ========
Year To Date September 30, 2001
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $24,132 19,997 $ 1.21
Effect of dilutive securities
Options --- 239 (0.02)
------- ------ --------
Diluted earnings per share
Net income available to common stockholders
Plus assumed conversions $24,132 20,236 $ 1.19
======= ====== ========
Options to purchase 804,157 shares of common stock at $22.42 to $27.30 per share
were outstanding for the three and nine months ended September 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 is no longer amortizing 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 on its outstanding goodwill.
9
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 Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept 30,
(in thousands except for 2002 2001 2002 2001
---------- ---------- ---------- ----------
earnings-per-share amounts)
Reported net income $ 9,211 $ 8,482 $ 27,014 $ 24,132
Add back: goodwill amortization, net of taxes of $69 --- 303 --- 909
---------- ---------- ---------- ----------
Adjusted net income $ 9,211 $ 8,785 $ 27,014 $ 25,041
========== ========== ========== ==========
Basic earnings per share:
Reported basic earnings per share $ 0.46 $ 0.43 $ 1.36 $ 1.21
Goodwill amortization --- 0.02 --- 0.05
---------- ---------- ---------- ----------
Adjusted basic earnings per share $ 0.46 $ 0.45 $ 1.36 $ 1.26
========== ========== ========== ==========
Diluted earnings per share
Reported diluted earnings per share $ 0.46 $ 0.42 $ 1.35 $ 1.19
Goodwill amortization --- 0.02 --- 0.05
---------- ---------- ---------- ----------
Adjusted diluted earnings per share $ 0.46 $ 0.44 $ 1.35 $ 1.24
========== ========== ========== ==========
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 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, NPB
Capital Trust II 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
Note 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.
10
Reportable segment-specific information and reconciliation to consolidated
financial information is as follows:
Community Banking Other Consolidated
(in thousands)
As of, and for the nine months
ended, September 30, 2002
Total Assets $2,847,073 $ 48,334 $2,895,407
Total Deposits 2,134,180 --- 2,134,180
Net interest income (loss) 82,748 (1,514) 81,234
Total noninterest income 24,758 4,440 29,198
Total noninterest expense 58,969 6,138 65,107
Net income (loss) $ 28,951 $ (1,937) $ 27,014
As of, and for the nine months
Ended, September 30, 2001
Total Assets $2,652,289 $ 49,316 $2,701,605
Total Deposits 1,989,253 --- 1,989,253
Net interest income (loss) 71,357 (1,043) 70,314
Total noninterest income 20,538 5,188 25,726
Total noninterest expense 55,288 3,318 58,606
Net income (loss) $ 23,503 $ 629 $ 24,132
8. ISSUANCE AND REDEMPTION OF SUBORDINATED DEBENTURES
On August 20, 2002, the Company issued $65.2 million of 7.85% junior
subordinated deferrable interest debentures (the debentures) due September 30,
2032 to NPB Capital Trust II (the Trust), a Delaware business trust, which is a
wholly-owned finance subsidiary of the Company. The debentures are the sole
asset of the Trust. The Trust issued 2,530,000 shares of trust preferred
securities, $25 face value, for total proceeds of $63.25 million. The Company's
obligations under the debentures and related documents, taken together,
constitute a full, irrevocable and unconditional guarantee on a subordinated
basis by the Company of the Trust's obligations under the preferred securities.
The preferred securities are redeemable by the Company on or after September 30,
2007, or earlier if the deduction of related interest for federal income taxes
is prohibited, treatment as Tier I capital is no longer permitted, or certain
other contingencies arise. The preferred securities must be redeemed upon
maturity of the debentures in 2032. The ability of the Company's banking
subsidiaries to pay dividends or extend credit to the Company is subject to
legal and regulatory limitations.
On October 31, 2002, the Company used a portion of the net proceeds from the
above transaction to redeem the $40.25 million aggregate amount of 9% trust
preferred securities issued by the Company in May 1997. As a result, the Company
wrote-off the associated unamortized issuance cost of $223,000 after tax, which
amount is included in other operating expense.
9. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued SFAS No. 147,
Acquisitions of Certain Financial Institutions: An Amendment of FASB No. 72 and
144 and FASB Interpretation No. 9, which removes acquisitions of financial
institutions from the scope of SFAS 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions, except for transactions between mutual
enterprises. SFAS No. 147 also requires that the acquisition of a
less-than-whole financial institution, such as a branch, be accounted for as a
business combination if the transferred assets and activities constitute a
business. The provisions of SFAS No. 147 related to unidentifiable intangible
assets and the acquisition of a less-than-whole financial institution are
effective for acquisitions for which the date of acquisition is on or after
11
October 1, 2002. The adoption of SFAS No. 147 did not have a material impact on
the Company's financial position or results of operations.
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 of America 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
sufficient to absorb estimated probable 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. 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 may 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 September 30, 2002, total assets were $2.895 billion, an increase of
$167.9 million or 6.2% from the $2.727 billion at December 31, 2001. This
increase is reflected primarily in investment securities,
12
which increased $104.5 million, cash and cash equivalents, which increased $55.1
million and an increase in loans of $12.7 million. This increase was partially
offset by a decrease in other assets of $4.3 million.
Total cash and cash equivalents increased $55.1 million or 51.1% at
September 30, 2002 when compared to December 31, 2001. The increase is comprised
of an increase in federal funds sold of $76.0 million, which was partially
offset by a decrease in cash and due from banks of $18.1 million and a decrease
in interest bearing deposits of $2.9 million. The increase in federal funds sold
is primarily due to the issuance of $63.25 million of trust preferred
securities.
`
Net loans increased to $1.827 billion at September 30, 2002. The modest
increase of $12.7 million compared to December 31, 2001 was the result of the
overall slow economy and the lack of capital goods spending by the Company's
business customers. The purchase of approximately $15 million in loans in the
acquisition of the United Asian Bank Division of Wilmington Savings Fund
Society, FSB ("WSFS") contributed to growth as well. Loans originated for
immediate resale during the first nine months of 2002 amounted to $66.9 million.
The following table shows detailed information and ratios pertaining to
the Company's loans and asset quality (dollars in thousands):
September 30, 2002 December 31, 2001
------------------ -----------------
Nonaccrual loans $ 19,970 $ 15,988
Loans past due 90 or more days
as to interest or principal 1,902 11,794
---------- ----------
Total nonperforming loans 21,872 27,782
Other real estate owned 5,721 1,013
---------- ----------
Total nonperforming assets $ 27,593 $ 28,795
========== ==========
Total Loans $1,869,158 $1,856,369
Average total loans $1,832,449 $1,816,265
Allowance for loan losses $ 42,323 $ 42,207
Net charge-offs $ 11,134 $ 5,826
Net charge-offs to: (annualized)
Total loans .79% .31%
Average total loans .81% .32%
Allowance for loan losses 35.08% 13.80%
Nonperforming assets to:
Total loans 1.48% 1.55%
Allowance for loan losses to:
Nonperforming assets 153.4% 146.6%
Total loans 2.26% 2.27%
Average total loans 2.31% 2.32%
The increase in nonaccrual loans is due primarily to two large
commercial real estate relationships that the Company continues to try to work
out. The decrease in loans 90 days or more past due is due primarily to the
shift of these 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. The increases in nonaccrual loans and other real estate are viewed
by the Company as isolated situations and not necessarily portfolio trends.
13
The ratio of nonperforming assets to total loans decreased slightly to
1.48% at September 30, 2002 from 1.55% at December 31, 2001. Total nonperforming
assets remain relatively high at $27.6 million at September 30, 2002, which
remained relatively unchanged from the $27.3 million at June 30, 2002 and is
down from the $31.8 million at March 31, 2002. Nonaccrual loans of $20.0 million
decreased slightly from $21.0 million at June 30, 2002 and $24.2 million at
March 31, 2002. Other Real Estate Owned of $5.7 million at September 30, 2002
decreased from the $5.9 million at June 30, 2002 and from the $6.4 million at
March 31, 2002. The reduction in all three areas is a direct result of the
Company's efforts to aggressively reduce nonperforming assets through asset
sales or settlements with problem borrowers. The allowance for loan loss
increased to $42.3 million or 2.26% of total loans outstanding. Based on the
current reserves, the ratio of allowance for loan losses to nonperforming assets
increased to 153.4%. The increase in the ratio of net charge-offs to allowance
for loan losses is due to the increase in the amount of charge-offs for the
first nine 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 $104.5
million or 15.9% to $763.1 million at September 30, 2002 when compared to
December 31, 2001. The increase is due to investment purchases of $128.7 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 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
totaling $67.2 million.
Other assets decreased to $142.6 million, a decrease of $4.3 million
from the $146.9 million at December 31, 2001. This decrease is due primarily to
a decrease in other assets of $7.8 million, which was partially offset by an
increase in Bank owned life insurance ("BOLI") of $1.8 million and net premises
and equipment of $1.5 million. The decrease in other assets is primarily due to
the decrease in the deferred tax asset due to the effects of other comprehensive
income.
As the primary source of funds, aggregate deposits of $2.134 billion at
September 30, 2002 increased $57.4 million or 2.8% compared to December 31,
2001. The increase in deposits during the first nine months of 2002 was
primarily in interest bearing deposits, which increased $67.1 million while non-
interest bearing deposits decreased $9.7 million. Deposits increased in part due
to the purchase of approximately $10 million in deposits from WSFS's United
Asian Division. 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 $516.3 million at September 30, 2002, and $428.4 million at
December 31, 2001. The increase of $87.8 million is due primarily to the
issuance of trust preferred securities of $63.3 million and long-term borrowings
of $31.0 million that was partially offset by a decrease in securities sold
under repurchase agreements and federal funds purchased of $7.0 million.
Shareholders' equity increased $24.5 million through September 30, 2002
due primarily to an increase in the valuation adjustment for securities
available for sale of $17.5 million and an increase in retained earnings of
$13.8 million. Cash dividends paid during the first nine months of 2002
increased $865,000 or 7.1% compared to the cash dividends paid during the first
nine months of 2001. Earnings retained during the first nine months of 2002 were
51.5% compared to 49.3% during the first nine months of 2001.
RESULTS OF OPERATIONS
---------------------
Net income for the quarter ended September 30, 2002 was $9.2 million,
8.6% more than the $8.5 million for the third quarter of 2001. For the first
nine months, net income reached $27.0 million or 11.9%
14
more than the $24.1 million reported for the first nine 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 third quarter
of 2002 was $27.1 million, which increased $2.1 million or 8.3% over the $25.0
million for the third quarter of 2001. Interest income for the third quarter of
2002 decreased $3.7 million due to a decrease in loan income of $4.7 million
that was partially offset by an increase in investment income of $716,000.
Interest expense for third quarter 2002 decreased $5.7 million due to a decrease
in interest on deposits of $5.6 million and a decrease in interest on federal
funds purchased, borrowed funds and securities sold under repurchase agreements
of $147,000. Net interest income for the nine months ended September 30, 2002
was $81.2 million, which increased $10.9 million or 15.5% over the $70.3 million
for the nine months ended September 30, 2001. Interest income for the first nine
months of 2002 decreased $13.6 due to a decrease in loan income of $15.9
million, which was partially offset by an increase in investment income of $2.5
million. Interest expense for the first nine months of 2002 decreased $24.5
million due to decreases in interest on deposits of $20.9 and interest on
federal funds purchased, borrowed funds and securities sold under repurchase
agreements of $3.6 million. The decreases in interest income and expense are
primarily due to the lower interest rate environment during third quarter 2002
when compared to third 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 the quarterly review of the allowance for loan losses, the
Company considers a variety of factors that include: the continuing economic
uncertainty associated with the terrorist events of the past year, the recession
and the Company's concern that a slower economy will continue the trend of
higher loan 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 $11.3 million for the nine months ended September 30, 2002, or
an increase of $4.8 million over the provision in the same period in 2001. The
allowance for loan losses of $42.3 million at September 30, 2002 and $42.2
million at December 31, 2001 as a percentage of total loans was 2.26% at
September 30, 2002 and 2.27% at December 31, 2001. The percentage of allowance
for loan losses to nonperforming loans was 153.4% as of September 30, 2002 as
compared to 146.6% for December 31, 2001. The Company's net charge-offs of $11.1
million for the first nine months of 2002 are due primarily to one large
commercial real estate loan that will take some time to work out. Net
charge-offs were $4.6 million during the first nine months of 2001.
Other income increased $879,000 or 9.2% during the third quarter of
2002, as a result of increased other income of $499,000, increased service
charges on deposit accounts of $438,000 and increased mortgage banking income of
$363,000. This was partially offset by a decrease in net gains on sale of
investment securities of $414,000. Year to date, other income increased $3.5
million or 13.5%. This resulted from increased service charges on deposit
accounts of $1.9 million, increased other income of $1.9 million, increased
mortgage banking income of $201,000 and increased trust income of $163,000,
partially offset by decreased net gains on sale of investment securities of
$695,000. Increased service charges on deposit accounts is due primarily to an
increase in the collection of overdraft fees on a larger deposit base, which
increased due to a free checking promotional program first implemented during
the second quarter of 2001, and will most likely result in a decreased rate of
growth in these fees for the remainder of 2002. Increased other income is due
primarily to an increase in BOLI income, electronic banking fees and standby
letter of credit fees. Other expenses increased $1.4 million or 7.2% during the
third quarter of 2002. Salaries, wages and benefits increased $824,000 or 7.2%,
net premises and equipment increased $435,000 or 14.5%, and other expenses
increased $184,000 or 3.2%. Year to date, other expenses increased $6.5 million
or 11.1%. Other operating expenses increased $3.1 million or 18.4%, salaries
wages and benefits increased $2.9 million or 9.1% and net premises and equipment
increased $463,000 or 5.1%. Other operating expenses increased in part due to
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
15
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 elected to terminate its investment in this
business. The Company has no other material, similar types of investments. The
Company also wrote off the unamortized issuance cost of $343,000 related to the
redemption of the 1997 preferred securities. Salaries, wages and benefits
increased due to increased staff and increases in benefit costs.
Income before income taxes increased $516,000 or 4.7% in the third
quarter of 2002 compared to the same time period in 2001. Income taxes decreased
$213,000 or 8.6% for the quarter ended September 30, 2002. Income before income
taxes increased $3.1 million or 10.2% in the first nine months of 2002 compared
to the same time period in 2001. Income taxes increased $259,000 or 3.8% for the
nine months ended September 30, 2002 due to the higher income before income
taxes. The Company's effective tax rate of 19.7% decreased for the third quarter
of 2002 compared to 22.5% for 2001. The Company's effective tax rate of 20.7%
decreased for the first nine months of 2002 compared to 21.9% for 2001. The
decrease in the effective rate for the three and nine months ended September 30,
2002 is due primarily to the elimination of the non-deductible goodwill expense
as of January 1, 2002.
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. Had the Company not been required
to amortize goodwill during the first nine months of 2001, reported earnings per
share would have been $.045 higher on a diluted basis, or $1.24 per share versus
the $1.19 per share actually reported for the nine months ended September 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 annually. For the testing
completed as of June 30, 2002, the Company had no impairment of goodwill. No
assurance can be given that future goodwill impairment tests will not result in
a charge to earnings.
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, increased $50.9 million from year-end
2001. Long-term borrowings increased $94.3 million during the first nine months
of 2002. $40.25 million of trust preferred securities were redeemed on October
31, 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.
16
The following table shows separately the interest rate sensitivity of
each category of interest-earning assets and interest-bearing liabilities at
September 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 $ 3,151 $ -- $ -- $ --
Federal funds sold 76,000 -- -- --
Investment securities 115,982 167,663 220,763 258,695
Loans (1) 739,760 235,019 727,802 124,254
Other assets -- -- -- 226,318
----------- -------------- ------------- ------------
934,893 402,682 948,565 609,267
----------- -------------- ------------- ------------
Liabilities and equity
Non-interest bearing deposits 335,241 -- -- --
Interest bearing deposits (2) 490,810 311,830 364,899 631,400
Borrowed funds 137,875 --- 60,434 214,446
Preferred securities 40,250 -- -- 63,250
Other liabilities -- -- -- 24,745
Hedging instruments 40,000 (20,000) (20,000) --
Shareholders' equity -- -- -- 220,227
----------- -------------- ------------- ------------
1,044,176 291,830 405,333 1,154,068
----------- -------------- ------------- ------------
Interest sensitivity gap (109,283) 110,852 543,232 (544,801)
----------- -------------- ------------- ------------
Cumulative interest rate
sensitivity gap ($ 109,283) $ 1,569 $ 544,801 $ --
=========== ============== ============= ============
(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 2002. The table assumes prepayments and
scheduled principal amortization of fixed-rate loans and mortgage-backed
securities and assumes that adjustable rate mortgages will reprice at
contractual repricing intervals. There has been no adjustment for the impact of
future commitments and loans in process.
(2) Savings and NOW deposits are scheduled for repricing based on historical
deposit decay rate analyses, as well as historical moving averages of run-off
for the Company's deposits in these categories. While generally subject to
immediate withdrawal, management considers a portion of these accounts to be
core deposits having significantly longer effective maturities based upon the
Company's historical retention of such deposits in changing interest rate
environments. Specifically, 30.3% of these deposits are considered repriceable
within three months and 69.7% 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
17
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. 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 September
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 $ 18,368 $ 2,788 $ 5,148 $ 2,927 $ 7,505
Remaining contractual maturities of time
deposits 833,785 465,411 300,382 64,519 3,473
Loan commitments 575,249 362,627 94,315 5,886 112,421
Long-term borrowed funds 171,021 10,500 22,500 37,934 100,087
Standby letters of credit 41,073 27,648 5,472 7,870 83
---------- ---------- ---------- ---------- ----------
Total $1,631,494 $ 868,905 $ 427,001 $ 118,256 $ 217,332
========== ========== ========== ========== ==========
The Company had no capital leases at September 30, 2002.
CAPITAL ADEQUACY
----------------
The following table sets forth certain capital performance ratios:
Sept. 30, Dec. 31,
2001 2002
--------- --------
CAPITAL PERFORMANCE
Return on average assets (annualized) 1.30% 1.25%
Return on average equity (annualized) 17.50 16.80
Earnings retained 51.50 49.50
18
CAPITAL LEVELS
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,
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
The Company 8.62% 7.99% 11.66% 10.53% 12.94% 11.82%
National Penn Bank 6.97% 7.03% 9.42% 9.16% 10.68% 10.42%
Panasia Bank, N.A 5.74% 6.64% 9.61% 12.38% 10.87% 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 September
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.
On August 20, 2002, the Company, through its subsidiary NPB Capital
Trust II, a Delaware business trust, issued $63.25 million of trust preferred
securities at an interest rate of 7.85%. On October 31, 2002, the Company
retired its $40.25 million of 9% trust preferred securities issued in 1997.
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 has 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, i.e. 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 September 3, 2002, the Company announced that National Penn Bank has
formed an affiliation with A.D. Computer to offer its commercial customers
payroll processing services. A.D. Computer is headquartered in Center Valley,
PA.
On September 24, 2002, the Company announced the signing of a
definitive agreement to purchase FirstService Bank, headquartered in Doylestown,
PA. FirstService Bank is a $400 million asset bank, operating seven community
offices in Bucks and Montgomery counties. Subject to receipt of regulatory
approvals and satisfaction of other closing conditions, the Company anticipates
completion of this transaction during the first quarter of 2003.
19
On September 25, 2002, the Company's Board of Directors declared a cash
dividend of $.23 per share payable on November 17, 2002, to shareholders of
record on October 31, 2002.
On October 23, 2002, the Company's Board of Directors declared a 5%
stock dividend payable December 27, 2002, to shareholders of record on December
6, 2002.
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 these repurchases. As of September 30, 2002, 48,519 shares have
been repurchased at an average price of $25.66.
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, geographic 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. Use of non-National Penn brands
may be counter-productive.
* 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.
* 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, geographic or other niches currently served by
National Penn.
20
* Geographic expansion may be more difficult, take longer, and
present more operational and management risks and challenges,
than expected.
* Business development in newly entered geographic areas may be
more difficult, and take longer, than expected.
* Competitive pressures may increase significantly and have an
adverse effect on National Penn's 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, geographic expansion, and productivity and
investment initiatives, may be lower than expected, and
recovery of associated costs may take longer than expected.
* National Penn may be unable to retain key executives and other
key personnel due to intense competition for such persons or
otherwise.
* 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.
* Recent and proposed legislative or regulatory changes,
including changes in accounting rules and practices, and
customer privacy and data protection requirements, and
intensified regulatory scrutiny of the financial services
industry in general, may adversely affect National Penn's
costs and business.
* 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 and to achieve its current
short-term and long-term business plans and objectives.
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.
21
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.
Item 4. Controls and Procedures.
National Penn's chief executive officer and chief financial officer
evaluated National Penn's "disclosure controls and procedures" as of November 6,
2002. Disclosure controls and procedures are defined in SEC Rule 13a-14(c) as
controls and other procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. For National Penn, these reports are its annual reports on Form 10-K, its
quarterly reports on Form 10-Q (including this report), and its reports on Form
8-K. These officers concluded that such controls and procedures are adequate and
effective.
Since the date of the most recent evaluation of National Penn's
internal controls, there have been no significant changes in such internal
controls or in other factors that could significantly affect such internal
controls.
22
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.
- -------------------------------------------------------------
None.
Item 5. Other Information.
- ---------------------------
Cash Dividend
-------------
On September 25, 2002, the Board of Directors of National Penn declared
a cash dividend of $.23 per share payable on November 17, 2002 to shareholders
of record as of October 31, 2002.
Stock Dividend
--------------
On October 23, 2002, the Board of Directors of National Penn declared a
5% stock dividend, payable on December 27, 2002 to shareholders of record as of
December 6, 2002.
Redemption of 1997 Trust Preferred Securities
---------------------------------------------
As has been previously reported, on August 20, 2002, National Penn
completed a public offering of 7.85% Trust Preferred Securities with an
aggregate offering price of $63.25 million.
On September 25, 2002, National Penn called for redemption all $40.25
million of its 9% Trust Preferred Securities issued in May 1997, at an aggregate
redemption price of $40.25 million plus accrued and unpaid interest to the
redemption date. These securities were redeemed on October 31, 2002.
100 Best Places to Work
-----------------------
During the third quarter 2002, the Pennsylvania Department of Community
and Economic Development named National Penn as one of the 100 Best Places to
Work in Pennsylvania.
Panasia Office Acquisition
--------------------------
As has been previously reported, on June 12, 2002, Panasia Bank, N.A.
("Panasia"), a banking subsidiary of National Penn, entered into an agreement
with Wilmington Savings Fund Society, FSB ("WSFS"), providing for Panasia's
purchase of WSFS's United Asian Bank division in Elkins Park, Pennsylvania. The
agreement covered the Elkins Park office, including all its assets, business
liabilities and deposits. The transaction closed on September 27, 2002. In the
transaction, Panasia acquired approximately $8.5 million in deposits and
approximately $15.8 million in consumer and business banking loans. Panasia
23
then closed the Elkins Park office and combined it with Panasia's existing
community office in Cheltenham, Pennsylvania.
Panasia--Election of New President
----------------------------------
On October 22, 2002, the Board of Directors of Panasia elected Edward
E. Shin as President of Panasia. Prior thereto, Mr. Shin had been serving as
Executive Vice President of Panasia.
Office and ATM Openings and Closings
------------------------------------
In July 2002, National Penn's principal banking subsidiary, National
Penn Bank ("NP Bank"), opened a new community office at Dilworthtown Road and
Route #202 in Chester County, Pennsylvania. In September 2002, NP Bank closed a
community office in Springfield, Delaware County, Pennsylvania.
As previously reported, in July 2002, Panasia acquired from NP Bank a
community office, and opened it as a Panasia community office, in Annandale,
Virginia.
During third quarter 2002, NP Bank closed three free-standing automated
teller machines (ATMs), located in Emmaus and Catasauqua, Lehigh County, and in
Wyomissing, Berks County, Pennsylvania.
Wayne R. Weidner--Exercise of Stock Options
-------------------------------------------
On October 18, 2002, Wayne R. Weidner, Chairman, President and Chief
Executive Officer of National Penn, exercised stock options and acquired 4,969
additional shares of National Penn common stock, increasing his ownership to
approximately 52,981 shares, under a previously reported plan adopted in August
2002 pursuant to SEC Rule 10b5-1(c).
Lawrence T. Jilk, Jr.--Resignation
----------------------------------
On October 23, 2002, Lawrence T. Jilk, Jr., retired chief executive
officer of National Penn, resigned as a director of National Penn and all
National Penn subsidiaries.
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits.
2.1 - Agreement dated September 24, 2002 between National
Penn Bancshares, Inc., National Penn Bank and
FirstService Bank. (Incorporated by reference to
Exhibit 2.1 of National Penn's Current Report on Form
8-K dated September 24, 2002.)
2.2 - Form of Letter Agreement between FirstService Bank
directors and National Penn Bancshares, Inc.
(Incorporated by reference to Exhibit 2.2 of National
Penn's Current Report on Form 8-K dated September 24,
2002.)
4.1 - Form of Trust Agreement between National Penn
Bancshares, Inc. and Christiana Bank & Trust Company,
as Trustee. (Incorporated by reference to Exhibit 4.1
to National Penn's Registration Statement Nos.
333-97361 and 333-97361-01 on Form S-3, as filed on
July 30, 2002.)
4.2 - Form of Amended and Restated Trust Agreement among
National Penn Bancshares, Inc., Christiana Bank &
Trust Company, as Property Trustee, and Christiana
Bank & Trust Company, as Delaware Trustee.
(Incorporated by reference to Exhibit 4.2 to National
Penn's Registration Statement Nos. 333-97361 and
333-97361-01 on Form S-3, as filed on August 6,
2002.)
24
4.3 - Form of Subordinated Debenture Indenture between
National Penn Bancshares, Inc. and Christiana Bank &
Trust Company, as Trustee. (Incorporated by reference
to Exhibit 4.4 to National Penn's Registration
Statement Nos. 333-97361 and 333-97361-01 on Form
S-3, as filed on August 6, 2002.)
4.4 - Form of Preferred Securities Guarantee Agreement
between National Penn Bancshares, Inc. and Christiana
Bank & Trust Company, as Trustee. (Incorporated by
reference to Exhibit 4.6 to National Penn's
Registration Statement Nos. 333-97361 and
333-97361-01 on Form S-3, as filed on August 6,
2002.)
10.1 - Amended and Restated National Penn Bancshares, Inc.
1987 Stock Option Plan. (Incorporated by reference to
Exhibit 10.1 of National Penn's Current Report on
Form 8-K dated July 12, 2002.)
(b) Reports on Form 8-K.
During the quarter ended September 30, 2002, National Penn filed the
following reports on Form 8-K:
* Report dated July 12, 2002. The Report provided information
under Item 5 on the amendment of National Penn's 1987 Stock
Option Plan to permit payment of a stock option's exercise
price and related withholding taxes by the delivery of
already-owned stock method, and to delete various restrictions
on use of the withholding of stock method to pay related
withholding taxes. The Report did not contain any financial
statements
* Report dated August 9, 2002. The Report provided information
under Item 5 on National Penn's adoption of a pre-determined
stock repurchase plan pursuant to SEC Rule 10b5-1; the
adoption by Wayne R. Weidner, National Penn's Chairman,
President and Chief Executive Officer, of a plan to increase
his ownership of National Penn common stock through the
exercise of stock options, pursuant to SEC Rule 10b5-1; and
the completion of a public offering of 2,530,000 shares of
7.85% Trust Preferred Securities with an aggregate offering
price of $63,250,000. The Report did not contain any financial
statements.
* Report dated August 19, 2002. The Report provided information
under Item 9 on the filing by Wayne R. Weidner, National
Penn's Chairman, President and Chief Executive Officer, and by
Gary L. Rhoads, National Penn's Treasurer and Chief Financial
Officer, of certifications with the Securities and Exchange
Commission relating to the Quarterly Report on Form 10-Q of
National Penn for the quarter ended June 30, 2002. These
certifications were filed pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. The Report did not contain any financial statements.
* Report dated September 24, 2002. The Report provided
information under Item 5 on National Penn's execution of a
definitive agreement to acquire FirstService Bank, by merger
of FirstService Bank with and into National Penn's principal
banking subsidiary, National Penn Bank; and information on the
acquisition of shares of National Penn common stock by Wayne
R. Weidner, National Penn's Chairman, President and Chief
Executive Officer, pursuant to his SEC Rule 10b5-1 plan
adopted in August 2002. The Report also provided under Item 9
the press release issued by National Penn in connection with
the signing of the FirstService Bank acquisition agreement
(which was filed as an exhibit under Item 7). The Report did
not contain any financial statements.
25
SIGNATURES
----------
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NATIONAL PENN BANCSHARES, INC.
(Registrant)
Dated: November 12, 2002 By /s/ Wayne R. Weidner
---------------------------------
Wayne R. Weidner, President and
Chief Executive Officer
Dated: November 12, 2002 By /s/ Gary L. Rhoads
---------------------------------
Gary L. Rhoads, Principal
Financial Officer
26
CERTIFICATIONS
--------------
I, Wayne R. Weidner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Penn
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/Wayne R. Weidner
-------------------------------
Wayne R. Weidner
Chairman, President and
Chief Executive Officer
27
I, Gary L. Rhoads, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Penn
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/Gary L. Rhoads
-------------------------------
Gary L. Rhoads
Treasurer and
Chief Financial Officer
28