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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: March 31, 2003
------------------------------------------------
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: 0-22537-01
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NATIONAL PENN BANCSHARES, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2215075
- ----------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Philadelphia and Reading Avenues, Boyertown, PA 19512
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(Address of principal executive offices) (Zip Code)
(610) 367-6001
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act.) Yes X No .
------ ---------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 12, 2003
----- ---------------------------
Common Stock (no stated par value) (No.) 23,076,443 Shares
Page 1 of 31 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..... 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk...................................... 23
Item 4. Controls and Procedures.......................... 24
Part II - Other Information.
Item 1. Legal Proceedings ............................... 25
Item 2. Changes in Securities............................ 25
Item 3. Defaults Upon Senior Securities.................. 25
Item 4. Submission of Matters to a Vote of
Security Holders................................. 25
Item 5. Other Information................................ 25
Item 6. Exhibits and Reports on Form 8-K................. 27
Signatures................................................................. 29
Certifications............................................................. 30
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET March 31 Dec. 31
(Dollars in thousands, except per share data) 2003 2002
(Unaudited) (Note)
---------------- ---------------
ASSETS
Cash and due from banks $103,852 $83,831
Interest bearing deposits in banks 3,904 2,616
Federal funds sold 25,317 48,000
---------------- ---------------
Total cash and cash equivalents $133,073 $134,447
Investment securities available for sale, at fair value 858,727 733,774
Loans held for sale 69,864 52,992
Loans and leases, less allowance for loan and lease losses
of $46,680 and $42,587 in 2003 and 2002 respectively 1,994,019 1,789,995
Premises and equipment, net 43,257 30,589
Accrued interest receivable 15,246 15,235
Bank owned life insurance 65,396 58,360
Goodwill and other intangibles 79,849 21,381
Unconsolidated investments under the equity method 2,750 2,702
Other assets 21,233 18,787
---------------- ---------------
Total Assets $3,283,414 $2,858,262
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $415,299 $353,853
Interest bearing deposits 2,001,616 1,758,787
---------------- ---------------
Total deposits 2,416,915 2,112,640
Securities sold under repurchase agreements
and federal funds purchased 308,382 253,325
Short-term borrowings 2,533 10,614
Long-term borrowings 173,467 169,703
Guaranteed preferred beneficial interests in
Company's subordinated debentures 63,250 63,250
Accrued interest payable and other liabilities 29,869 26,370
---------------- ---------------
Total Liabilities 2,994,416 2,635,902
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
2003 - 23,039,782; 2002 - 20,699,782; net of shares
in Treasury: 2003 - 5,100; 2002 - 0 229,926 172,471
Retained earnings 35,676 30,593
Accumulated other comprehensive income 23,535 19,296
Treasury stock at cost (139) 0
---------------- ---------------
Total Shareholders' Equity 288,998 222,360
---------------- ---------------
Total Liabilities and Shareholders' Equity $3,283,414 $2,858,262
================ ===============
The accompanying notes are an integral part of these statements.
3
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three Months Ended
(Dollars in thousands, except per share data) March 31
-------------------------------------
2003 2002
----------- ------------
INTEREST INCOME
Loans and leases, including fees $32,890 $33,617
Investment securities
Taxable 6,180 6,648
Tax-exempt 3,332 3,156
Federal funds sold 200 15
Deposits in banks 16 30
----------- ------------
Total interest income 42,618 43,466
----------- ------------
INTEREST EXPENSE
Deposits 9,171 12,329
Securities sold under repurchase agreements and
federal funds purchased 915 1,170
Short-term borrowings 8 35
Long-term borrowings 3,398 3,150
----------- ------------
Total interest expense 13,492 16,684
----------- ------------
Net interest income 29,126 26,782
Provision for loan and lease losses 2,270 3,950
Net interest income after provision
for loan and lease losses 26,856 22,832
----------- ------------
OTHER INCOME
Trust income 1,299 1,318
Service charges on deposit accounts 3,307 2,925
Bank owned life insurance income 652 920
Other service charges and fees 3,260 3,260
Net gains (losses) on sale of investment securities - (250)
Mortgage banking income 1,493 918
Equity in undistributed net earnings of affiliates 47 54
----------- ------------
Total other income 10,058 9,145
----------- ------------
OTHER EXPENSES
Salaries, wages and employee benefits 13,555 12,081
Net premises and equipment 3,637 3,028
Other operating 6,103 5,898
----------- ------------
Total other expenses 23,295 21,007
----------- ------------
Income before income taxes 13,619 10,970
Income tax expense 3,229 2,205
----------- ------------
Net income $10,390 $8,765
=========== ============
PER SHARE OF COMMON STOCK
Net income per share - basic $0.46 $0.42
Net income per share - diluted 0.45 0.41
Dividends paid in cash 0.23 0.21
The accompanying notes are an integral part of these statements.
4
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2003
(Dollars in thousands)
Accumulated
Common Stock other
----------------------------- Retained conprehensive Treasury Comprehensive
Shares Value earnings income stock Total income
----------------------------------------------------------------------------------------------
Balance at December 31, 2002 20,699,782 $ 172,471 $ 30,593 $ 19,296 $ - 222,360
Net income - - 10,390 - - 10,390 $ 10,390
Cash dividends declared - - (5,307) - - (5,307)
Shares issued under stock-based
plans 795 13 - - - 13
Shares issued for acquisition
of FirstService Bank 2,563,552 61,262 - - 1,924 63,186
Other comprehensive income, net
of reclassification adjustment
and taxes - - - 4,239 - 4,239 4,239
----------------------------------------------------------------------------------------------
Total comprehensive income - - - - - - $ 14,629
----------------------------------------------------------------------------------------------
Effect of treasury stock transactions (224,347) (3,820) - - (2,063) (5,883)
----------------------------------------------------------------------------------------------
Balance at March 31, 2003 23,039,782 $ 229,926 $ 35,676 $ 23,535 $ (139) $ 288,998
March 31, 2003
---------------------------------------------------------------------
Before Tax Net of
tax (expense) tax
amount benefit amount
---------------------------------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during period 36,208 (12,673) 23,535
Less: reclassification adjustment for losses
realized in net income - - -
---------------------------------------------------------------------
Other comprehensive income, net 36,208 (12,673) 23,535
=====================================================================
THREE MONTHS ENDED MARCH 31, 2002
(Dollars in thousands)
Accumulated
Common Stock other
------------------------ Retained conprehensive 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 - - 8,765 - - 8,765 $ 8,765
Cash dividends declared - - (4,341) - - (4,341)
Shares issued under stock-based
plans - - - - - -
Other comprehensive income, net
of reclassification adjustment
and taxes - - - 1,283 - 1,283 1,283
------------------------------------------------------------------------------------------
Total comprehensive income - - - - - - 10,048
------------------------------------------------------------------------------------------
Effect of treasury stock transactions (104,949) (1,572) (2,216) (3,788)
------------------------------------------------------------------------------------------
Balance at March 31, 2002 19,821,914 $ 164,566 $ 33,757 $ 4,402 $ (5,124) 197,601
March 31, 2002
---------------------------------------------------------------------
Before Tax Net of
tax (expense) tax
amount benefit amount
---------------------------------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during period 1,724 (603) 1,121
Less: reclassification adjustment for losses
realized in net income (250) 88 (162)
---------------------------------------------------------------------
Other comprehensive income, net 1,974 (691) 1,283
=====================================================================
The accompanying notes are an integral part of these statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Three Months Ended March 31,
2003 2002
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
-----------------------------------------------------------------------------------------------------------------------
Net income 10,390 8,765
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan and lease losses 2,270 3,950
Depreciation and amortization 1,295 1,085
Deferred tax benefit (972) (691)
Amortization of premiums and discounts on investment
securities, net 70 636
Investment securities (gains), net - 250
Mortgage loans originated for resale (21,516) (27,475)
Sale of mortgage loans originated for resale 22,581 27,691
Changes in assets and liabilities
Decrease in accrued interest receivable 1,275 2,033
(Decrease) in accrued interest payable (1,078) (956)
(Increase) in other assets (1,767) (6,298)
Increase in other liabilities 248 2,315
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Net cash provided by operating activities 12,796 11,305
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CASH FLOWS FROM INVESTING ACTIVITIES
-----------------------------------------------------------------------------------------------------------------------
Cash paid in excess of cash equivalents for business acquired (221) -
Proceeds from sales of investment securities available for sale - 1,750
Proceeds from maturities of investment securities available for sale 67,642 32,672
Purchase of investment securities available for sale (83,954) (59,917)
Net (increase) decrease in loans (5,015) 7,977
Purchases of premises and equipment (2,031) (950)
Purchase of bank-owned life insurance (540) (379)
-----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (24,119) (18,847)
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
-----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in interest and non-interest
bearing demand deposits and savings accounts 65,258 (32,364)
Net (decrease) in certificates of deposit (49,856) (46,384)
Net increase in securities sold under
agreements to repurchase and federal funds purchased 14,502 20,482
Net (decrease) in short-term borrowings (8,081) (3,432)
Proceeds from new long-term borrowings - 45,000
Repayments of long-term borrowings (1,237) (11,317)
Issuance of common stock under dividend
reinvestment and stock option plans 13 -
Effect of Treasury stock transactions (5,883) (3,788)
Cash dividends (4,767) (4,364)
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in ) financing activities 9,949 (36,167)
-----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents (1,374) (43,709)
Cash and cash equivalents at beginning of year 134,447 107,798
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31 133,073 64,089
The accompanying notes are an integral part of these 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. 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, 2002.
The results of operations for the three-month period ended March 31, 2003 are
not necessarily indicative of the results to be expected for the full year.
2. ACQUISITIONS
On April 30, 2003, the Company and its principal banking subsidiary, National
Penn Bank, entered into an agreement and plan of merger with HomeTowne Heritage
Bank which provides, among other things, for the merger of HomeTowne Heritage
Bank into National Penn Bank, with National Penn Bank surviving the merger as a
subsidiary of the Company. The merger agreement provides for the exchange of
$13.697 in cash for each outstanding share of common stock of HomeTowne Heritage
Bank, or total cash consideration of approximately $37.6 million. The
transaction will be accounted in accordance with SFAS No. 141, Business
Combinations, and subject to various regulatory approvals and other closing
conditions, is expected to close in fourth quarter 2003.
On February 25, 2003, the Company completed a merger with FirstService Bank
(FirstService). Under the terms of the merger, 4,304,762 shares of FirstService
stock were each converted into 0.5954 share of the Company's common stock plus
$3.90, resulting in the issuance of 2,563,552 shares of the Company's common
stock and payment of approximately $16.8 million in cash. In addition,
outstanding stock options to purchase FirstService common stock were converted
into stock options to purchase 643,169 shares of the Company's common stock,
with an exercise price of either $6.69 or $13.38 per share. This transaction was
accounted for under the purchase method of accounting and the results of
operations of the Company will include FirstService's results from and after
February 25, 2003. The acquisition resulted in the recording of approximately
$54.0 million of goodwill and other intangible assets. The Company acquired
assets, loans and deposits of $367.1 million, $219.2 million, and $288.9
million, respectively.
On February 10, 2003, the Company, Panasia Bank, N.A., and Woori America Bank, a
New York banking institution, entered into an agreement providing for, among
other things the sale of Panasia to Woori America Bank for $34.5 million in cash
and the subsequent merger of Panasia into Woori America Bank. Subject to various
closing conditions, including receipt of required regulatory approvals, the
Company and Panasia anticipate that the transaction will close in third quarter
2003. No assurance can be given that all required regulatory approvals will be
obtained, that all other closing conditions will be satisfied or waived, or that
the transactions will in fact be consummated.
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 $18,280,000 at March 31, 2003, all
of which are non-accrual loans. The allowance for loan loss associated with
these impaired loans was $3.3 million at March 31, 2003. 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.
7
4. SHAREHOLDERS' EQUITY
On March 26, 2003, the Company's Board of Directors declared a cash dividend of
$.23 per share payable on May 17, 2003, to shareholders of record on April 30,
2003.
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, share and per share information has been
retroactively restated.
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 March 31, 2003, 431,181 shares have been repurchased at an
average price of $25.47 under the 2002 repurchase program.
5. EARNINGS PER SHARE
Year To Date March 31, 2003
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $10,390 22,646 $0.46
Effect of dilutive securities
Options --- 546 (0.01)
------- ------ ------
Diluted earnings per share
Net income available to common stockholders
Plus assumed conversions $10,390 23,192 $0.45
======= ====== =====
Options to purchase 268,756 shares of common stock at $26.00 to $26.39 per share
were outstanding for the three months ended March 31, 2003. They were not
included in the computation of diluted earnings per share because the option
exercise price was greater than the average market price.
Three Months Ended March 31, 2002
Income Shares Per Share
(numerator) (denominator) Amount
Basic earnings per share ----------- ------------- ------
Net income available to common stockholders $8,765 20,815 $0.42
Effect of dilutive securities
Options --- 223 (0.01)
------- ------ ------
Diluted earnings per share
Net income available to common stockholders
Plus assumed conversions $8,765 21,038 $0.41
====== ====== =====
Options to purchase 861,836 shares of common stock at $22.31 to $26.00 per share
were outstanding for the three months ended March 31, 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.
6. SEGMENT REPORTING
SFAS NO. 131, Segment Reporting, identifies operating segments as 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 applied the aggregation criteria set for in SFAS No.
131 for its
8
National Penn Bank and Panasia (the Banks) operating segments to create a
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 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 Leasing Company, FirstService Insurance Agency,
Inc., FirstService Capital Inc., National Penn Life Insurance Company, 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. 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 three months
ended, March 31, 2003
Total Assets $3,231,916 $ 51,498 $3,283,414
Total Deposits 2,416,915 --- 2,416,915
Net interest income (loss) 31,659 (2,533) 29,126
Total noninterest income 7,652 2,406 10,058
Total noninterest expense 21,120 2,175 23,295
Net income (loss) $ 10,594 $(204) $ 10,390
As of, and for the three months
ended, March 31, 2002
Total Assets $2,658,470 $44,452 $2,702,722
Total Deposits 1,998,047 --- 1,998,047
Net interest income (loss) 27,084 (302) 26,782
Total noninterest income 7,090 2,055 9,145
Total noninterest expense 19,340 1,667 21,007
Net income (loss) $ 8,721 $ 44 $ 8,765
7. STOCK BASED COMPENSATION
The Company accounts for stock options under SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, which contains a fair
value-based method of valuing stock-based compensation that entities may use,
which measures compensation cost at the grant date based on the fair value of
the award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, SFAS No. 123 permits entities to
continue accounting for employee stock options and similar equity instruments
under Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued
to Employees. Entities that continue to account for stock options using APB
Opinion 25 are required to make pro forma disclosures of net income and earnings
per share, as if the fair value-based method of accounting defined in SFAS No.
123 had been applied.
9
At March 31, 2003, the Company had two stock-based employee compensation plans.
The Company accounts for these plans under recognition and measurement
principles of APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Stock-based employee compensation costs are not reflected in
net income, as all options granted under the plans had an exercise price equal
to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation (in thousands, except per share amounts).
These results are not indicative of results for the year ended December 31,
2003.
Three Months Ended March 31,
- ----------------------------
2003 2002
---- ----
Net income, as reported $10,390 $8,765
Less: stock based compensation costs determined under fair value-
Based method for all awards (212) (140)
------- ------
Net income, pro forma $10,178 $8,625
======= ======
Earnings per share of common stock - basic As reported 0.46 0.42
Pro forma 0.45 0.41
Earnings per share of common stock - diluted As reported 0.45 0.41
Pro forma 0.44 0.41
The Company granted options during the quarter of 9,846 and 10,940 for 2003 and
2002. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used for grants in 2003 and 2002, respectively: dividend
yield of 2.90% and 3.85%; expected volatility of 25.0% and 35.1%; risk-free
interest rates for each plan of 4.22% and 3.93% for 2003 and 5.50% and 3.93% for
2002; and expected lives of 8.50 years and 6.83 years for each plan in 2003 and
8.50 and 6.83 years for each plan in 2002.
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,
10
additional provisions for loan losses may be required that would
adversely impact earnings in future periods.
Goodwill is 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. Through its annual analysis in 2002, the Company determined that
no impairment write-offs were necessary. No assurance can be given that future
goodwill impairment tests will not result in a charge to earnings.
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 March 31, 2003, total assets were $3.283 billion, an increase of
$425.2 million or 14.9% from the $2.858 billion at December 31, 2002. This
increase is primarily due to the addition of FirstService Bank on February 25,
2003, which had $367.1 million in assets. Loans and leases increased $220.9
million, of which $219.2 million is due to the addition of FirstService Bank.
Investment securities increased $125.0 million, of which $105.0 million is due
to the addition of FirstService.
Total cash and cash equivalents decreased $1.4 million or 1.0% at March
31, 2003 when compared to December 31, 2002. The decrease is comprised of a
decrease in federal funds sold of $22.7 million, which was partially offset by a
increase in cash and due from banks of $20.0 million, of which $16.6 million is
related to the addition of FirstService, and an increase in interest bearing
deposits of $1.3 million.
Net loans and leases, including loans held for sale increased to $2.064
billion at March 31, 2003. The increase of $220.9 million compared to December
31, 2002 was the primarily the result of the addition of $219.2 million in loans
from FirstService. Loans continue to increase at a modest pace as a result of
the overall slow economy and the lack of capital goods spending by the Company's
business customers. Loans originated for immediate resale during the first three
months of 2003 amounted to $21.5 million.
The following table shows detailed information and ratios pertaining to
the Company's loans and asset quality (dollars in thousands):
March 31, 2003 December 31, 2002
-------------- -----------------
Nonaccrual loans $18,280 $14,639
Loans past due 90 or more days
11
as to interest or principal 435 987
------ -------
Total nonperforming loans 18,715 15,626
Other real estate owned 450 318
- ----------------------- ------- ------
Total nonperforming assets $19,165 $15,944
======= =======
Total loans and leases $2,110,563 $1,885,574
Average total loans and leases $1,969,999 $1,857,174
Allowance for loan and lease losses $46,680 $42,587
For 3 months ending 3/31/2003 For 3 months ending 12/31/2002
----------------------------- ------------------------------
Net charge-offs $2,102 $2,486
Net charge-offs to: (annualized)
Total loans and leases .40% .72%
Average total loans and leases .43% .73%
Allowance for loan and lease losses 18.01% 31.98%
Nonperforming assets to:
Total loans and leases .91% .85%
Allowance for loan and lease losses to:
Nonperforming assets 243.6% 267.1%
Total loans and leases 2.21% 2.26%
Average total loans and leases 2.37% 2.29%
The increase in nonperforming assets is due to a $3.6 million increase
in nonaccrual loans, from $14.6 million at December 31, 2002 to $18.2 million at
March 31, 2003. The increase in nonaccrual loans is due primarily to two
factors: a reclassification of a group of manufactured housing loans and the
acquisition of FirstService Bank, which brought an additional $926,000 in
nonaccrual loans.
The investment portfolio is primarily a secondary source of liquidity,
but it also serves as a source of income. As such, the investment portfolio
consists of shorter-term investments that provide current liquidity and
longer-term investments that provide higher income. Over the past two years, the
Company has worked to shorten the duration of the investment portfolio in
response to lower interest rates and to help improve liquidity. Regardless of
classification as to shorter-term or longer-term, the majority of the Company's
investments are readily marketable securities held as available for sale, and
the majority of the Company's investments qualify as collateral for deposit
pledging needs.
Investments increased $125.0 million or 17.0% to $858.7 million at
March 31, 2003 compared to December 31, 2002. The increase is due primarily to
the addition of FirstService with investments of $105.0 million. Investment
purchases during the first quarter of 2003 were $83.9 million, primarily
mortgage-backed securities. This increase was partially offset by investment
calls and maturities and the amortization of mortgage-backed securities totaling
$67.6 million.
Other assets on the balance sheet increased to $227.7 million, an
increase of $80.7 million from the $147.1 million at December 31, 2002. These
assets include net premises and equipment, accrued interest receivable, bank
owned life insurance, goodwill and other intangibles, unconsolidated
investments, and other assets. This increase is due primarily to an increase in
Goodwill and other intangibles of $54.0 million, of which approximately $54
million is attributable to the FirstService acquisition. In addition there was
an increase in premises and equipment of $12.7 million, of which $11.8 million
is related to FirstService. In addition, there was an increase in Bank owned
life insurance of $7.0 million, of which $6.5 million is related to
FirstService, and an increase in other assets of $2.4 million, primarily due to
an increase in prepaid expenses.
12
As the primary source of funds, aggregate deposits of $2.417 billion at
March 31, 2003 increased $304.3 million or 14.4% compared to December 31, 2002.
The increase in deposits during the first three months of 2003 was primarily in
interest bearing deposits, which increased $242.8 million, while non- interest
bearing deposits increased $61.4 million. Deposits increased primarily due to
approximately $288.9 million in deposits acquired in the FirstService merger. 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 $547.6 million at
March 31, 2003, and $496.9 million at December 31, 2002. The increase of $50.7
million is due primarily to an increase in securities sold under repurchase
agreements and federal funds purchased of $55.1 million, of which $40.6 million
is related to FirstService, and increase in long-term borrowings of $3.8 million
that was partially offset by a decrease in short-term borrowings of $8.1
million. The decrease in short-term borrowings is the result of treasury tax and
loan calls made from the Company's note option account through the Federal
Reserve Bank.
Shareholders' equity increased $66.7 million through March 31, 2003.
This was due primarily to the issuance of 2,563,552 shares of common stock in
conjunction with the acquisition of FirstService, which resulted in an increase
of $63.2 million of shareholders' equity. Retained earnings increased $5.1
million due to first quarter 2003 net income, offset by dividends declared.
Accumulated other comprehensive income increased $4.2 million due to an increase
in market value of available for sale securities. Cash dividends paid during the
first three months of 2003 increased $403,000 or 9.2% compared to the cash
dividends paid during the first three months of 2002. Earnings retained during
the first three months of 2003 were 54.1% compared to 50.2% during the first
three months of 2002.
RESULTS OF OPERATIONS
---------------------
Net income for the quarter ended March 31, 2003 was $10.4 million,
18.5% more than the $8.8 million for the first quarter of 2002. 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. The results of
operation of FirstService Bank are included from the date of its acquisition,
February 25, 2003, through March 31, 2003.
Net interest income is the difference between interest income on assets
and interest expense on liabilities. Net interest income for the first quarter
of 2003 was $29.1 million, which increased $2.3 million or 8.8% over the $26.8
million for the first quarter of 2002. Interest income for the first quarter of
2003 decreased $848,000 due to a decrease in loan income of $727,000 and a
decrease in investment income of $292,000 that was partially offset by an
increase in income on federal funds sold of $185,000. Interest expense for first
quarter 2003 decreased $3.2 million due to a decrease in interest on deposits of
$3.2 million and a decrease in interest on federal funds purchased, borrowed
funds and securities sold under repurchase agreements of $34,000. The decreases
in interest income and expense are primarily due to the lower interest rate
environment during first quarter 2003 when compared to first quarter 2002.
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. The addition of net interest margin from FirstService was immaterial
for first quarter 2003 because FirstService's margins were similar to those of
the Company, and FirstService's net interest margin was included in the
Company's results for only one month and three days during the quarter.
During the quarterly review of the allowance for loan losses, the
Company considers a variety of factors that include: the persisting weak
economic conditions and market volatility, the continued concern that a slower
economy will result in operating losses for the Company's commercial customers,
the overall concerns of consumer confidence, including international concerns
and the war in Iraq. Despite these concerns, the reduction in first quarter
charge-offs allowed the Company to reduce its provision for loan and lease
losses while maintaining the allowance for loan and lease losses at a level
believed adequate to absorb
13
probable losses on existing loans. The provision for loan and lease losses was
$2.3 million for the three months ended March 31, 2003. The decrease in the
provision reflects management's analysis of the loan portfolio and the continued
monitoring and maintenance of the loan portfolio. The allowance for loan and
lease losses of $46.7 million at March 31, 2003 and $42.6 million at December
31, 2002 as a percentage of total loans and leases was 2.21% at March 31, 2003
and 2.26% at December 31, 2002. The percentage of allowance for loan and lease
losses to nonperforming loans was 243.6% as of March 31, 2003 as compared to
267.1% for December 31, 2002. The Company's net charge-offs of $2.1 million for
the first three months of 2003 decreased $3.3 million compared to the $5.4
million at March 31, 2002.
Other income increased $913,000 or 10.0% during the first quarter of
2003, as a result of increased mortgage banking income of $575,000, and
increased service charges on deposit accounts of $382,000. This was partially
offset by a decrease in bank owned life insurance income of $268,000 due to
death benefit proceeds collected in 2002. There were no sales of investment
securities during the first quarter of 2003 compared to a $250,000 net loss on
sale on investment securities in the first quarter of 2002. Increased mortgage
banking income is primarily due to increases in mortgage underwriting and
application fees, mortgage documentation preparation and processing fees and
mortgage points. Increased service charges on deposit accounts is due primarily
to an increase in the collection of overdraft fees on a larger deposit base.
Other expenses increased $2.3 million or 10.9% during the first quarter of 2003.
Salaries, wages and benefits increased $1.5 million or 12.2%, net premises and
equipment increased $609,000 or 20.1%, and other expenses increased $205,000 or
3.5%. Salaries, wages and benefits increased due to increased staff and benefit
costs partially associated with the acquisition of FirstService and normal
salary increases. The increase in net premises and equipment expense is also
partially associated with the acquisition of FirstService, which included a
community office network of seven offices. Other expenses increased primarily
due to increased other outside service fees, including consulting and legal
fees.
Income before income taxes increased $2.6 million or 24.1% in the first
quarter of 2003 compared to the same time period in 2002. Income taxes increased
$1.0 million or 46.4% for the quarter ended March 31, 2003 due to higher income
before income taxes. The Company's effective tax rate of 23.7% increased for the
first quarter of 2003 compared to 20.1% for 2002. The increase in the effective
rate for the first three months ended March 31, 2003 is due to the decrease in
tax advantaged income as a percent of taxable income.
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. In the past twelve to twenty-four months, the Company's
liquidity has improved as people have removed money from the declining equity
market. During this time, many customers have preferred the safety of
FDIC-insured deposits compared to the declining equity market, despite
historically low interest rates. This has allowed the Company to grow its core
deposit base and significantly reduce reliance on non-core sources of funds.
The Company's main liquidity concern is when the current environment
reverses course - that is, the economy and consequently the equity markets
strengthen and the Company suffers disintermediation back to the equity market.
The Company is currently preparing for this potential disintermediation by
working to build its share of customers' banking business (on the theory that
even if some funds move back to the equity market, the Company will still retain
a larger share than it had two years ago), growing its government banking unit,
reviewing its deposit product offerings, establishing additional non-core
sources of funding, maintaining a more liquid investment portfolio, and
continuing to develop its capability to securitize assets.
Funding affecting short-term liquidity, including deposits, repurchase
agreements, federal funds purchased, and short-term borrowings, increased $351.3
million from year-end 2002, $329.5 of which was
14
attributable to the acquisition of FirstService. Long-term borrowings increased
$3.8 million during the first three months of 2003, primarily due to the
addition of FirstService's long-term borrowings, offset by repayments.
The Company currently does not have any 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
March 31, 2003:
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 $ 3,904 $ - - $ - - $ - -
Federal funds sold 25,317 - - - - - -
Investment securities 76,614 199,167 358,802 224,144
Loans (1) 873,315 365,295 713,329 111,944
15
Other assets - - - - - - 331,583
--------- ---------- ----------- ---------
979,150 564,462 1,072,131 667,671
--------- ---------- ----------- ---------
Liabilities and equity
Non-interest bearing deposits 415,299 - - - - - -
Interest bearing deposits (2) 803,769 258,021 401,942 537,884
Borrowed funds 171,817 10,000 80,426 222,139
Preferred securities - - - - - - 63,250
Other liabilities - - - - - - 29,869
Hedging instruments 40,000 (20,000) (20,000) - -
Shareholders' equity - - - - - - 288,998
--------- ---------- ----------- ---------
1,430,885 248,021 462,368 1,142,140
--------- ---------- ----------- ---------
Interest sensitivity gap (451,735) 316,441 609,763 ( 474,469)
--------- ---------- ----------- ---------
Cumulative interest rate
sensitivity gap ($451,735) ($135,294) $474,469 $ - -
============ ========== ========= ==========
(1) Adjustable rate loans are included in the period in which interest rates are
next scheduled to adjust rather than in the period in which they are due. Fixed
rate loans are included in the period in which they are scheduled to be repaid
and are adjusted to take into account estimated prepayments based upon
assumptions estimating prepayments in the interest rate environment prevailing
during the first calendar quarter of 2003. 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, 50.0% of these deposits are considered repriceable
within three months and 48.0% 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. 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
16
management committee's priority is to manage this optionality and therefore
limit the level of interest rate risk.
The Company's acquisition of FirstService during the first quarter of
2003 did not have an immediate material impact on the Company's current
liquidity position. FirstService has retained its name and management.
Accordingly, the Company expects no material run-off in deposits over the long
term, and as a result, does not anticipate a negative material impact on the
Company's overall long-term liquidity position.
The Company recently announced an agreement providing for its
acquisition of HomeTowne Heritage Bank for approximately $37.6 million in cash.
The cash to be paid to HomeTowne Heritage shareholders is expected to come
primarily from the Company's previously announced sale of Panasia Bank, N.A. The
Company has other sources of funding available, if necessary. Any further effect
on the liquidity position of the Company is not expected to be material.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
---------------------------------------------
The following table sets forth contractual obligations and other
commitments representing required and potential cash outflows as of March 31,
2003:
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 $ 17,771 $ 3,188 $ 4,691 $ 2,407 $ 7,485
Remaining contractual maturities of time
deposits 810,596 404,520 349,798 52,144 4,134
Loan commitments 682,618 459,415 56,387 6,235 160,581
Long-term borrowed funds 173,467 17,957 55,000 25,426 75,084
Guaranteed preferred beneficial interests in
Company's subordinated debentures 63,250 --- --- --- 63,250
Standby letters of credit 43,707 33,500 9,696 75 436
---------- -------- ------- ------- --------
Total $1,791,409 $918,580 $475,572 $86,287 $310,970
========== ======== ======== ======= ========
The Company had no capital leases at March 31, 2003.
CAPITAL ADEQUACY
----------------
The following table sets forth certain capital performance ratios:
Mar. 31, Dec. 31,
2003 2002
---------- --------
CAPITAL PERFORMANCE
Return on average assets (annualized) 1.38% 1.30%
Return on average equity (annualized) 16.90 17.40
Earnings retained 54.10 51.30
CAPITAL LEVELS
Tier 1 Capital to Tier 1 Capital to Risk- Total Capital to Risk-
Average Assets Ratio Weighted Assets Ratio Weighted Assets Ratio
------------------------------------------------------------------------
17
Mar. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, Dec. 31,
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
The Company 8.51% 8.66% 10.28% 11.81% 11.54% 13.08%
National Penn Bank 7.49% 6.91% 8.96% 9.33% 10.22% 10.59%
Panasia Bank, N.A. 5.88% 5.61% 10.72% 10.10% 11.97% 11.36%
"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 March 31,
2003, 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's acquisition of FirstService Bank during the first quarter
of 2003 had the effect of lowering the Company's three regulatory capital
ratios. As seen in the above table, these three ratios at March 31, 2003 still
remain in excess of regulatory "well capitalized" levels. The Company does not
expect a material impact on its future dividends. The dividend payout ratio is
expected to remain in the historical 45% to 50% range.
Regarding the Company's recent agreement to acquire HomeTowne Heritage
Bank, taken in conjunction with the Company's pending sale of Panasia Bank,
N.A., there is expected to be no further material change in the Company's three
regulatory capital ratios. Because no additional shares of the Company's stock
are to be issued in the HomeTowne Heritage Bank acquisition, there should not be
a negative impact on the Company's dividend payout ratio.
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.
ACQUISITION OF FIRSTSERVICE BANK
--------------------------------
On February 25, 2003, the Company completed a merger with FirstService
Bank (FirstService). This transaction was accounted for under the purchase
method of accounting and the results of operations of the Company include
FirstServices' results from and after February 25, 2003. The acquisition
resulted in the recording of approximately $54 million of goodwill and other
intangibles. The Company believes that
18
the FirstService Bank acquisition will be dilutive to the Company's earnings in
2003, but will be accretive to earnings in 2004.
PENDING SALE OF PANASIA BANK, N.A.
----------------------------------
On February 10, 2003, the Company, Panasia Bank, N.A., and Woori
America Bank, a New York banking institution, entered into an agreement
providing for, among other things, the sale of Panasia to Woori America Bank for
$34.5 million in cash and the subsequent merger of Panasia into Woori America
Bank. Subject to various closing conditions, including receipt of required
regulatory approvals, the Company and Panasia anticipate that the transaction
will close in third quarter 2003. No assurance can be given that all required
regulatory approvals will be obtained, that all other closing conditions will be
satisfied or waived, or that the transactions will in fact be consummated.
PENDING ACQUISITION OF HOMETOWNE HERITAGE BANK
----------------------------------------------
As previously reported, on April 30, 2003, the Company and its
principal banking subsidiary, National Penn Bank, entered into an Agreement and
Plan of Merger with HomeTowne Heritage Bank which provides, among other things,
for the merger of HomeTowne Heritage Bank into National Penn Bank, with National
Penn Bank surviving the merger as a subsidiary of the Company.
The Merger Agreement provides for the exchange of $13.697 in cash for
each outstanding share of common stock of HomeTowne Heritage Bank, or total cash
consideration of approximately $37.6 million.
The merger is subject to a number of conditions, including approval by
the Office of the Comptroller of the Currency, the Pennsylvania Department of
Banking, and the shareholders of HomeTowne Heritage Bank. No assurance can be
given that all required approvals will be obtained, that all other closing
conditions will be satisfied or waived, or that the transaction will in fact be
consummated.
The foregoing description does no purport to be complete and is
qualified in its entirety by reference to the Merger Agreement and related
letter agreements. Additional information is provided in the Company's Report on
Fort 8-K dated April 30, 2003, including copies of the Merger Agreement and the
form of related letter agreement filed as exhibits to the 8-K Report.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
Off Balance Sheet Commitments
- -----------------------------
The Company adopted FIN 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others, on January 1, 2003. FIN 45 requires a guarantor entity, at the inception
of a guarantee covered by the measurement provisions of the interpretation, to
record a liability for the fair value of the obligation undertaken in issuing
the guarantee. The Company issues financial and performance letters of credit.
Financial letters of credit require the Company to make payment if the
customer's financial condition deteriorates, as defined in the agreements.
Performance letters of credit require the Company to make payments if the
customer fails to perform identified non-financial contractual obligations. The
Company previously did not record an initial liability when guaranteeing
obligations unless it became probable that the Company would have to perform
under the guarantee. FIN 45 applies prospectively to guarantees the Company
issues or modifies subsequent to December 31, 2002.
The Company defines the initial fair value of these letters of credit
as the fee received from the customer. The maximum potential undiscounted amount
of future payments on these letters of credit as of March 31, 2003 is $43.7
million and they expire through 2008. The amounts due under these letters of
credit would be reduced by any proceeds that the Company would be able to obtain
in liquidating the
19
collateral for these loans. The adoption of FIN 45 did not
have a material impact on the Company's consolidated financial position or
results of operations.
Variable Interest Entities
- --------------------------
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, for certain
entities that do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company has not acquired
any variable interest entities subsequent to February 1, 2003. The Company is in
the process of determining what impact, if any, the adoption of the provisions
of FIN 46 will have on entities held by the Company prior to the issuance of FIN
46 and the impact on the Company's financial condition or results of operations.
The Company does not anticipate FIN 46 will have a material impact on the
consolidated financial position or results of operations.
FUTURE OUTLOOK
--------------
On March 26, 2003, the Company's Board of Directors declared a cash
dividend of $.23 per share payable on May 17, 2003, to shareholders of record on
April 30, 2003.
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 March 31, 2003, 431,181 shares have been
repurchased at an average price of $25.47.
During second quarter 2003, the Company expects to convert
approximately $40 million of 15 year mortgage loans currently held as available
for sale to a government sponsored agency mortgage-backed security which will be
transferred and held in the Company's investment portfolio. The primary purpose
of this transaction is to improve the liquidity of the assets, as the security
becomes immediately saleable on the bond market. The secondary purpose is to
provide collateral for the Company's cash management program.
In second quarter 2000, the Company ceased originating loans
collateralized by manufactured housing. In April 2003, the Company sold
substantially all its manufactured housing loan portfolio of $17.3 million, some
of which were on non-accrual status. The future impact of this transaction is
not expected to be material to the Company's overall performance.
FORWARD-LOOKING STATEMENTS
--------------------------
From time to time, the Company or its representatives make written or oral
statements that may include "forward-looking statements" with respect to its:
* Financial condition.
* Results of operations.
20
* 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, including the pending National Penn
Bank/HomeTowne Heritage Bank merger, and the revenue
enhancements, cost savings and other benefits anticipated in
those transactions.
* Pending or completed sales of businesses or assets, including
the pending sale of Panasia, and the 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:
* The Company's unified branding campaign and other marketing
initiatives may be less effective than expected in building
name recognition and greater customer awareness of the
Company's products and services. Use of non-Company brands may
be counter-productive.
* The Company may be unable to differentiate itself from its
competitors by a higher level of customer service, as intended
by its business strategy.
* Expansion of the Company 's products and services offerings
may take longer, and 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
the Company.
* 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,
including those entered by mergers and acquisitions, may be
more difficult, and take longer, than expected.
* Competitive pressures may increase significantly and have an
adverse effect on the Company 's pricing, spending,
third-party relationships and revenues.
* Customers may substitute competitors' products and services
for the Company 's products and services, due to price
advantage, technological advantages, or otherwise.
21
* The Company 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.
* The Company 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.
* Growth and profitability of the Company 's non-interest income
or fee income may be less than expected.
* General economic or business conditions, either nationally or
in the regions in which the Company 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 the Company 's
loan portfolio and allowance for loan losses.
* Expected synergies and cost savings from mergers and
acquisitions, 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 and acquisitions,
may be lower than expected.
* Loan losses, deposit attrition, operating costs, customer and
key employee losses, and business disruption following mergers
and acquisitions may be greater than expected.
* Business opportunities and strategies potentially available to
the Company after mergers and acquisitions may not be
successfully or fully acted upon.
* Costs, difficulties or delays related to the integration of
businesses of acquired companies with the Company 's business
may be greater or take longer than expected.
* The Company 's pending sale of Panasia could fail to close due
to lack of one or more required regulatory approvals or
otherwise, resulting in the Company 's indefinite retention of
the Panasia franchise and the need to fund the pending
HomeTowne Heritage Bank merger from sources other than the
redeployment of funds from the pending Panasia sale.
* 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 the Company 's costs
and business.
22
* Market volatility may continue in the securities markets, with
an adverse effect on the Company 's securities and asset
management activities.
* There may be unanticipated regulatory rulings or developments.
* Changes in consumer spending and savings habits could
adversely affect the Company 's business.
* Negative publicity with respect to any of the Company's
products or services, whether legally justified or not, could
adversely affect the Company's reputation and business.
* Various domestic or international military or terrorist
activities or conflicts may have a negative impact on the
Company 's business as well as the foregoing and other risks.
* The Company 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. The Company cautions shareholders not to place undue reliance on
such statements.
All written or oral forward-looking statements attributable to the
Company 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. The Company 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 2002 Annual Report on
Form 10-K filed with the SEC.
Item 4. Controls and Procedures.
The Company's chief executive officer and chief financial officer
evaluated the Company's "disclosure controls and procedures" as of May 12, 2003.
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 the
Company, 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 the Company 's internal
controls, there have been no significant changes in such internal controls or in
other factors that could significantly affect such internal controls
23
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 March 26, 2003, the Board of Directors of the Company declared a
cash dividend of $.23 per share payable on May 17, 2003 to shareholders of
record as of April 30, 2003.
Pending Sale of Panasia Bank, N.A.
----------------------------------
As previously reported, the Company and its subsidiary, Panasia Bank,
N.A., entered into an Agreement on February 10, 2003 with Woori America Bank, a
New York banking institution, providing for, among other things, the sale of
Panasia to Woori America Bank for $34.5 million in cash and the subsequent
merger of Panasia into Woori America Bank.
On March 17, 2003, Woori America Bank and its affiliates filed
applications with various Federal bank regulatory authorities and the Banking
Department of the State of New York for regulatory approvals required for these
transactions.
Subject to various closing conditions, including receipt of required
regulatory approvals, the Company and Panasia anticipate that the transactions
will close in third quarter 2003. No assurance can be given that all required
regulatory approvals will be obtained, that all other closing conditions will be
satisfied or waived, or that the transactions will in fact be consummated.
The foregoing description does not purport to be complete and is
qualified in its entirety by reference to the Agreement and related Guaranty
Agreement. Additional information is provided in the Company 's Report on Form
8-K dated February 10, 2003, including copies of the Agreement and related
Guaranty Agreement filed as exhibits to the 8-K Report.
Effective March 31, 2003, Moon S. Yang resigned as Chairman of Panasia,
and Wayne R. Weidner was appointed acting Chairman of Panasia. In addition,
effective March 25, 2003, Sharon L. Weaver was appointed acting CEO of Panasia.
Pending Acquisition of HomeTowne Heritage Bank
----------------------------------------------
24
As previously reported, on April 30, 2003, the Company and its
principal banking subsidiary, National Penn Bank, entered into an Agreement and
Plan of Merger with HomeTowne Heritage Bank which provides, among other things,
for the merger of HomeTowne Heritage Bank into National Penn Bank, with National
Penn Bank surviving the merger as a subsidiary of the Company.
The Merger Agreement provides for the exchange of $13.697 in cash for
each outstanding share of common stock of HomeTowne Heritage Bank, or total cash
consideration of approximately $37.6 million.
The merger is subject to a number of conditions, including approval by
the Office of the Comptroller of the Currency, the Pennsylvania Department of
Banking, and the shareholders of HomeTowne Heritage Bank. No assurance can be
given that all required approvals will be obtained, that all other closing
conditions will be satisfied or waived, or that the transaction will in fact be
consummated.
The foregoing description does no purport to be complete and is
qualified in its entirety by reference to the Merger Agreement and related
letter agreements. Additional information is provided in the Company's Report on
Fort 8-K dated April 30, 2003, including copies of the Merger Agreement and the
form of related letter agreement filed as exhibits to the 8-K Report.
Election of National Penn Director
----------------------------------
On April 23, 2003, the Company elected Fred D. Hafer to its board of
directors, effective immediately. Mr. Hafer will serve as a Class II director
with a term expiring at the 2004 annual meeting of shareholders. Mr. Hafer has
served as a director of National Penn Bank since June 10, 2002. Mr. Hafer
resides in Wyomissing, Berks County, Pennsylvania, and is the retired chairman
of FirstEnergy Corporation, headquartered in Akron, Ohio.
Wayne Weidner - Exercise of Stock Options
-----------------------------------------
On April 24, 2003, Wayne R. Weidner, Chairman, President and Chief
Executive Officer of the Company, exercised stock options for 19,692 shares of
Company common stock under a plan adopted in February 2003. Under the plan, Mr.
Weidner also intends to exercise stock options for 19,692 Company shares each on
July 24, 2003 and October 17, 2003. The plan was adopted in accordance with SEC
Rule 10b5-1(c), and was approved by the Company's board of directors under its
insider trading policy.
Office and ATM Openings and Closings
------------------------------------
During first quarter 2003, National Penn Bank began construction of a
new community office at 3670 MacArthur Road, Whitehall Township, Lehigh County,
Pennsylvania. The office is expected to open during third quarter 2003.
In April 2003, National Penn Bank closed ten automated teller machines
(ATMs) in various supermarkets located in Berks, Bucks, Lebanon, Montgomery and
Northampton Counties, Pennsylvania.
On May 19, 2003, National Penn Bank expects to open a new community
office at 1660 Cedar Crest Boulevard, Allentown, Lehigh County, Pennsylvania,
and to close a supermarket office located nearby at 1500 Cedar Crest Boulevard.
On June 27, 2003, National Penn Bank expects to consolidate its
community offices located at 1537 North Broad Street, Lansdale and 356 York
Road, Warminster, Bucks County, Pennsylvania, into its FirstService Bank
Division community offices located in Lansdale at 139 South Broad Street and
Warminster at 320 West Street Road.
On July 21, 2003, National Penn Bank expects to close a community
office located at 300 Welsh Road, Horsham, Montgomery County, Pennsylvania.
25
On May 30, 2003, Panasia Bank, N.A. expects to close its loan office
located at 172 Main Street, Fort Lee, New Jersey. Operations at this location
were previously relocated to Panasia's community office in Fort Lee, New Jersey.
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
(a) Exhibits.
2.1 - Agreement dated February 10, 2003, among National Penn
Bancshares, Inc., Panasia Bank, N.A., and Woori America Bank.
(Incorporated by reference to Exhibit 2.1 of National Penn's
Current Report on Form 8-K dated February 10, 2003.)
2.2 - Guaranty Agreement dated February 10, 2003, of Woori Bank in
favor of National Penn Bancshares, Inc. and Panasia Bank, N.A.
(Incorporated by reference to Exhibit 2.2 of National Penn's
Current Report on Form 8-K dated February 10, 2003.)
2.3 - Agreement dated April 30, 2003 between National Penn
Bancshares, Inc., National Penn Bank and HomeTowne Heritage
Bank. (Incorporated by reference to Exhibit 2.1 of National
Penn's Current Report on Form 8-K dated April 30, 2003.)
2.4 - Form of Letter Agreement between HomeTowne Heritage 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 April 30, 2003.)
10.1 - Employment Agreement dated February 4, 2003, among National
Penn Bancshares, Inc., National Penn Bank and Wayne R.
Weidner. (Incorporated by reference to Exhibit 10.1 to
National Penn's Current Report on Form 8-K dated February 4,
2003.)
10.2 - Employment Agreement dated as of September 24, 2002, between
National Penn Bank and John C. Spier. (Incorporated by
reference to Exhibit 10.1 to National Penn's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-101689 on
Form S-4, as filed on December 31, 2002.)
99.1 - Certification of Chairman, President and Chief Executive
Officer of National Penn Bancshares, Inc., filed pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (Furnished, not filed,
pursuant to SEC Release No. 33-8212).
99.2 - Certification of Treasurer and Chief Financial Officer of
National Penn Bancshares, Inc., filed pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (Furnished, not filed, pursuant to
SEC Release No. 33-8212).
(b) Reports on Form 8-K. During the quarter ended March 31, 2003,
National Penn filed the following Reports on Form 8-K:
* Report dated December 18, 2002. The Report provided
information under Item 5 on National Penn's amendment of its
Pension Plan, Capital Accumulation (401(k)) Plan, and
Directors' Fee Plan, and the execution of an employment
agreement with Glenn E. Moyer, Executive Vice President of
National Penn and President and Chief Operating Officer of
National Penn Bank. The Report did not contain any financial
statements.
* Report dated February 4, 2003. The Report provided information
under Item 5 on National Penn's pending acquisition of
FirstService Bank and the execution of an employment agreement
with Wayne R. Weidner, Chairman, President and Chief Executive
Officer of National Penn. The Report did not contain any
financial statements.
* Report dated February 10, 2003. The Report provided
information under Item 5 on National Penn's execution of an
Agreement with Woori America Bank providing for the
26
sale to Woori America Bank of Panasia Bank, N.A., a National
Penn subsidiary, for $34.5 million in cash. The Report did not
contain any financial statements.
* Report dated February 25, 2003. The Report provided
information under Item 5 on National Penn's completion of its
acquisition of FirstService Bank, including the related
appointment of two additional National Penn directors and one
additional executive officer. The Report also provided under
Item 9 the press release issued by National Penn in connection
with the completion of the FirstService Bank acquisition
(which was filed as an exhibit under Item 7). The Report did
not contain any financial statements.
* Report dated February 28, 2003. 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 Annual Report on Form
10-K of National Penn for the year ended December 31, 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.
27
SIGNATURES
----------
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NATIONAL PENN BANCSHARES, INC.
(Registrant)
Dated: May 14, 2003 By /s/ Wayne R. Weidner
--------------------
Wayne R. Weidner, President and
Chief Executive Officer
Dated: May 14, 2003 By /s/ Gary L. Rhoads
-------------------
Gary L. Rhoads, Principal
Financial Officer
28
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 functions):
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: May 14, 2003 /s/ Wayne R. Weidner
--------------------
Wayne R. Weidner
Chairman, President and
Chief Executive Officer
29
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 functions):
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: May 14, 2003 /s/ Gary L. Rhoads
-------------------------
Gary L. Rhoads
Treasurer and
Chief Financial Officer
30