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EX-31.2 - EXHIBIT 31.2 - NATIONAL PENN BANCSHARES INCnpbc06302014ex312.htm
EX-32.2 - EXHIBIT 32.2 - NATIONAL PENN BANCSHARES INCnpbc06302014322.htm
EX-31.1 - EXHIBIT 31.1 - NATIONAL PENN BANCSHARES INCnpbc06302014ex311.htm
EX-32.1 - EXHIBIT 32.1 - NATIONAL PENN BANCSHARES INCnpbc06302014ex321.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission File Number: 000-22537-01

NATIONAL PENN BANCSHARES, INC.
(Exact name of registrant as specified in charter)
Pennsylvania
23-2215075
(State or other jurisdiction of incorporation)
IRS Employer Identification No.
645 Hamilton Street, Suite 1100
Allentown, Pennsylvania 18101
(Address of principal executive offices)

(800) 822-3321
Registrant’s telephone number, including area code

(Former name or former address, if changed since last report):  N/A

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 ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        Yes ý No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer ý
 
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý

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 August 4, 2014
Common Stock, no stated par value
 
139,277,767 shares



TABLE OF CONTENTS


2


 PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
Unaudited
 
 
 
June 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Cash and due from banks
$
138,530

 
$
102,241

Interest-earning deposits with banks
73,384

 
181,282

Total cash and cash equivalents
211,914

 
283,523

 
 
 
 
Investment securities available-for-sale, at fair value
1,463,479

 
1,894,107

Investment securities held-to-maturity
 

 
 

(Fair value $918,176 and $452,202 for 2014 and 2013, respectively)
892,536

 
438,445

Other securities
64,494

 
63,746

Loans held-for-sale
2,275

 
4,951

Loans, net of allowance for loan losses of $89,848 and $96,367 for 2014 and 2013, respectively
5,313,908

 
5,236,901

Premises and equipment, net
110,972

 
96,232

Accrued interest receivable
26,953

 
27,130

Bank owned life insurance
150,237

 
147,869

Other real estate owned and other repossessed assets
1,758

 
1,278

Goodwill
258,279

 
258,279

Other intangible assets, net
5,476

 
6,854

Unconsolidated investments
8,205

 
8,713

Other assets
107,887

 
123,820

TOTAL ASSETS
$
8,618,373

 
$
8,591,848

 
 
 
 
LIABILITIES
 

 
 

Non-interest bearing deposits
$
1,031,271

 
$
970,051

Interest bearing deposits
5,077,212

 
5,102,527

Total deposits
6,108,483

 
6,072,578

 
 
 
 
Customer repurchase agreements
587,686

 
551,736

Repurchase agreements
50,000

 
50,000

Federal Home Loan Bank advances
601,246

 
603,232

Subordinated debentures
77,321

 
77,321

Accrued interest payable and other liabilities
92,229

 
105,115

TOTAL LIABILITIES
7,516,965

 
7,459,982

 
 
 
 
SHAREHOLDERS' EQUITY
 

 
 

Common stock, no stated par value; authorized 250,000,000 shares, issued: June 30, 2014 - 152,275,098; December 31, 2013 - 152,310,162
1,387,304

 
1,387,966

Accumulated deficit
(154,909
)
 
(175,990
)
Accumulated other comprehensive loss
(474
)
 
(21,157
)
Treasury stock: June 30, 2014 - 13,034,780 shares; December 31, 2013 - 6,511,411 shares
(130,513
)
 
(58,953
)
TOTAL SHAREHOLDERS' EQUITY
1,101,408

 
1,131,866

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
8,618,373

 
$
8,591,848

 
 
 
 
The accompanying notes are an integral part of these financial statements.
 
 
 

3


NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
INTEREST INCOME
 
 
 
 
 
 
 
 
Loans, including fees
$
52,476

 
$
55,260

 
$
105,058

 
$
110,981

 
Investment securities
 
 
 
 
 
 
 
 
Taxable
11,694

 
9,795

 
22,815

 
19,480

 
Tax-exempt
6,329

 
7,005

 
12,733

 
14,119

 
Deposits with banks
29

 
41

 
55

 
116

 
Total interest income
70,528

 
72,101

 
140,661

 
144,696

 
INTEREST EXPENSE
 

 
 

 
 
 
 
 
Deposits
4,671

 
5,831

 
9,444

 
11,745

 
Customer repurchase agreements
400

 
460

 
793

 
958

 
Repurchase agreements
608

 
623

 
1,209

 
1,342

 
Short-term borrowings
1

 

 
1

 
41

 
Federal Home Loan Bank advances
1,369

 
1,383

 
2,917

 
3,717

 
Subordinated debentures
528

 
550

 
1,057

 
2,015

 
Total interest expense
7,577

 
8,847

 
15,421

 
19,818

 
Net interest income
62,951

 
63,254

 
125,240

 
124,878

 
Provision for loan losses

 
1,500

 
1,251

 
3,000

 
Net interest income after provision for loan losses
62,951

 
61,754

 
123,989

 
121,878

 
NON-INTEREST INCOME
 

 
 

 
 
 
 
 
Wealth management
7,133

 
6,986

 
13,999

 
13,817

 
Service charges on deposit accounts
3,534

 
3,743

 
6,918

 
7,513

 
Insurance commissions and fees
3,209

 
3,326

 
6,806

 
6,593

 
Cash management and electronic banking fees
4,869

 
4,821

 
9,395

 
9,272

 
Mortgage banking
936

 
2,122

 
1,652

 
3,977

 
Bank owned life insurance
1,218

 
1,239

 
2,416

 
2,467

 
Earnings (losses) of unconsolidated investments
(9
)
 
6

 
(486
)
 
(8
)
 
Gains on sale of non-performing loans
946

 

 
946

 

 
Other operating income
2,560

 
2,703

 
4,220

 
4,756

 
Net gains from fair value changes of subordinated debentures

 

 

 
2,111

 
Net gains on sales of investment securities

 
22

 
8

 
47

 
Total non-interest income
24,396

 
24,968

 
45,874

 
50,545

 
NON-INTEREST EXPENSE
 

 
 

 
 
 
 
 
Salaries, wages and employee benefits
28,887

 
29,137

 
58,088

 
58,367

 
Premises and equipment
7,709

 
7,511

 
15,921

 
15,002

 
FDIC insurance
1,200

 
1,494

 
2,517

 
2,707

 
Other operating expenses
14,318

 
15,011

 
27,925

 
29,511

 
Loss on debt extinguishment

 

 

 
64,888

 
Total non-interest expense
52,114

 
53,153

 
104,451

 
170,475

 
Income before income taxes
35,233

 
33,569

 
65,412

 
1,948

 
Income tax expense (benefit)
9,034

 
8,550

 
16,503

 
(5,667
)
 
NET INCOME
$
26,199

 
$
25,019

 
$
48,909

 
$
7,615

 
PER SHARE
 

 
 

 
 
 
 
 
Basic earnings
$
0.19

 
$
0.17

 
$
0.35

 
$
0.05

 
Diluted earnings
$
0.19

 
$
0.17

 
$
0.35

 
$
0.05

 
Dividends paid in cash
$
0.10

 
$
0.10

 
$
0.20

 
$
0.10

(a) 
 
 
 
 
 
 
 
 
 
(a) In lieu of a 1st quarter 2013 cash dividend, the Company paid an additional dividend of $0.10 per share in the 4th quarter of 2012.
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 
 
 
 
 
 
 
 

4


NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
(dollars in thousands)
Before
Tax
Amount
 
Income Tax
Expense (benefit)
 
Net of
Tax
Amount
 
Before
Tax
Amount
 
Income Tax
Expense (benefit)
 
Net of
Tax
Amount
Net income
$
35,233

 
$
9,034

 
$
26,199

 
$
65,412

 
$
16,503

 
$
48,909

 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains arising during the period on investment securities
7,418

 
2,596

 
4,822

 
31,716

 
11,102

 
20,614

Less net gains on sales of investment securities realized in net income

 

 

 
8

 
3

 
5

Unrealized gains on investment securities
7,418

 
2,596

 
4,822

 
31,708

 
11,099

 
20,609

 
 
 
 
 
 
 
 
 
 
 
 
Pension adjustments

 

 

 
114

 
40

 
74

Other comprehensive income
7,418

 
2,596

 
4,822

 
31,822

 
11,139

 
20,683

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
$
42,651

 
$
11,630

 
$
31,021

 
$
97,234

 
$
27,642

 
$
69,592

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2013
 
Six Months Ended June 30, 2013
(dollars in thousands)
Before
Tax
Amount
 
Income Tax
Expense (benefit)
 
Net of
Tax
Amount
 
Before
Tax
Amount
 
Income Tax
Expense (benefit)
 
Net of
Tax
Amount
Net income
$
33,569

 
$
8,550

 
$
25,019

 
$
1,948

 
$
(5,667
)
 
$
7,615

 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding losses arising during the period on investment securities
(51,009
)
 
(17,853
)
 
(33,156
)
 
(63,939
)
 
(22,379
)
 
(41,560
)
Less net gains on sales of investment securities realized in net income
22

 
8

 
14

 
47

 
16

 
31

Unrealized losses on investment securities
(51,031
)
 
(17,861
)
 
(33,170
)
 
(63,986
)
 
(22,395
)
 
(41,591
)
 
 
 
 
 
 
 
 
 
 
 
 
Pension adjustments

 

 

 
113

 
40

 
73

Other comprehensive loss
(51,031
)
 
(17,861
)
 
(33,170
)
 
(63,873
)
 
(22,355
)
 
(41,518
)
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive loss
$
(17,462
)
 
$
(9,311
)
 
$
(8,151
)
 
$
(61,925
)
 
$
(28,022
)
 
$
(33,903
)
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 
 
 
 
 
 




5


NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(dollars in thousands, except share data)
Common
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
 
 
Shares
 
Value
 
 
 
Treasury
Stock
 
Total
Balance at December 31, 2013
145,798,751

 
$
1,387,966

 
$
(175,990
)
 
$
(21,157
)
 
$
(58,953
)
 
$
1,131,866

Comprehensive income:
 

 
 

 
 

 
 
 
 

 
 

Net income
 

 
 

 
48,909

 
 

 
 

 
48,909

Other comprehensive income, net of taxes
 

 
 

 
 

 
20,683

 
 

 
20,683

Total comprehensive income
 

 
 

 
 

 
 

 
 

 
69,592

 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends declared, common
 
 
 
 
(27,828
)
 
 
 
 
 
(27,828
)
Shares issued under share-based plans, net of excess tax benefits
441,567

 
(662
)
 
 

 
 

 
3,830

 
3,168

Common stock repurchases
(7,000,000
)
 
 
 
 
 
 
 
(75,390
)
 
(75,390
)
Balance at June 30, 2014
139,240,318

 
$
1,387,304

 
$
(154,909
)
 
$
(474
)
 
$
(130,513
)
 
$
1,101,408

 
 
 

 
 

 
 

 
 

The accompanying notes are an integral part of these financial statements.
 
 
 
 
 
 
 
 


6


NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Six Months Ended June 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
48,909

 
$
7,615

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Provision for loan losses
1,251

 
3,000

Depreciation and amortization
5,570

 
7,049

Amortization of premiums and discounts on investment securities, net
(32
)
 
1,759

Net gains from sales of investment securities
(8
)
 
(47
)
Decrease in fair value of subordinated debentures

 
(2,111
)
Bank owned life insurance policy income
(2,416
)
 
(2,467
)
Share-based compensation expense
2,138

 
1,633

Unconsolidated investment distributions, net
508

 
2,674

Loans originated for resale
(43,017
)
 
(113,623
)
Proceeds from sale of loans originated for resale
46,963

 
118,858

Proceeds from sale of non-performing loans
3,046

 

Gains on sale of loans, net
(1,270
)
 
(3,193
)
Gains on sale of non-performing loans, net
(946
)
 

Losses (gains) of other real estate owned, net
88

 
(168
)
Gains on sale of buildings

 
(149
)
Loss on debt extinguishment

 
64,888

Changes in assets and liabilities:
 
 
 
Decrease in accrued interest receivable
177

 
73

Decrease in accrued interest payable
(1,763
)
 
(2,204
)
Decrease (increase) in other assets
5,521

 
(11,055
)
(Decrease) increase in other liabilities
(11,009
)
 
3,096

Net cash provided by operating activities
53,710

 
75,628

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Proceeds from maturities and repayments of investment securities held-to-maturity
34,550

 
11,741

Proceeds from maturities and repayments of investment securities available-for-sale
135,381

 
235,240

Proceeds from sale of investment securities available-for-sale
476

 
3,092

Purchase of investment securities available-for-sale
(162,357
)
 
(301,499
)
(Purchases of) proceeds from other securities
(748
)
 
7,108

Proceeds from sale of loans previously held for investment
943

 
1,181

Increase in loans
(83,445
)
 
(33,343
)
Purchases of premises and equipment
(19,184
)
 
(3,092
)
Proceeds from the sale of other real estate owned
629

 
1,584

Proceeds from sale of buildings

 
418

Net cash used in investing activities
(93,755
)
 
(77,570
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Net increase in transaction and savings deposit accounts
135,860

 
168,870

Net decrease in time deposits
(99,955
)
 
(81,972
)
Net increase (decrease) in customer repurchase agreements
35,950

 
(12,329
)
Decrease in short-term borrowings

 
(100,000
)
Decrease in repurchase agreements

 
(25,000
)
Net decrease in FHLB advances
(1,734
)
 
(115,799
)
Repayment of subordinated debentures

 
(65,206
)
Proceeds from shares issued, share-based plans
1,553

 
1,513

Excess tax (expense) benefit on share-based plans
(20
)
 
63

Repurchase of common stock
(75,390
)
 

Cash dividends, common
(27,828
)
 
(14,558
)
Net cash used in financing activities
(31,564
)
 
(244,418
)
Net decrease in cash and cash equivalents
(71,609
)
 
(246,360
)
Cash and cash equivalents at beginning of year
283,523

 
428,128

Cash and cash equivalents at end of period
$
211,914

 
$
181,768

 
 
 
 
The accompanying notes are an integral part of these financial statements.
 
 
 

7


NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CASH FLOW DISCLOSURES
 
The Company considers cash and due from banks and interest earning deposits with banks to be cash equivalents for the purposes of reporting cash flows. Cash paid for interest and income taxes is as follows:
(dollars in thousands)
Six Months Ended June 30,
 
2014
 
2013
Interest
$
13,658

 
$
22,023

Income taxes
9,690

 
1,551

 


8

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements


1.  BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions to Form 10-Q, and therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States ("GAAP"). However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of these financial statements have been included.  These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for National Penn Bancshares, Inc. (the “Company” or “National Penn”) for the year ended December 31, 2013, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “Form 10-K”).  The results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

The Company has prepared its accompanying consolidated financial statements in accordance with GAAP as applicable to the financial services industry.  The consolidated financial statements include the balances of the Company and its wholly owned subsidiary, National Penn Bank.  All material inter-company balances have been eliminated. References to the Company include all the Company’s subsidiaries unless otherwise noted.
 

2.  BUSINESS COMBINATION

On June 3, 2014, the Company entered into an Agreement and Plan of Merger with TF Financial Corporation (“TF Financial”), the parent company of 3rd Fed Bank, pursuant to which TF Financial will merge with and into the Company. As part of the transaction, 3rd Fed Bank will also merge with and into National Penn Bank. TF Financial operates 18 full service retail and commercial banking offices in Bucks and Philadelphia Counties in Pennsylvania, and Burlington, Mercer, and Ocean Counties in New Jersey.

Subject to the terms and conditions of the Agreement and Plan of Merger, upon consummation of the merger, each outstanding share of common stock of TF Financial will be automatically converted into and exchangeable for the right to receive either: (i) $42.00 in cash, or (ii) 4.22 shares of the Company’s common stock, with cash being paid in lieu of fractional shares. The Agreement and Plan of Merger provides that 60% of the outstanding shares of TF Financial common stock will be converted into stock consideration and 40% of the outstanding shares of TF Financial common stock will be converted into cash consideration. Each shareholder of TF Financial will be entitled to elect the number of shares of TF Financial common stock held by such shareholder that will be exchanged for the stock consideration or the cash consideration subject to proration in the event that a selected form of consideration is over-elected.
The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval of the merger by shareholders of TF Financial.

3.  EARNINGS PER SHARE

The components of the Company’s basic and diluted earnings per share are as follows:
(dollars in thousands, except share data)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
26,199

 
$
25,019

 
$
48,909

 
$
7,615

Calculation of shares
 

 
 

 
 
 
 
Weighted average basic shares
139,191,923

 
145,580,155

 
140,270,062

 
145,488,073

Dilutive effect of share-based compensation
528,057

 
416,854

 
522,502

 
412,653

Weighted average fully diluted shares
139,719,980

 
145,997,009

 
140,792,564

 
145,900,726

 
 
 
 
 
 
 
 
Earnings per share
 

 
 

 
 
 
 
Basic
$
0.19

 
$
0.17

 
$
0.35

 
$
0.05

Diluted
$
0.19

 
$
0.17

 
$
0.35

 
$
0.05

    

9

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements

    
The following stock options were excluded from the computation of earnings per share as they were anti-dilutive:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Stock options
2,066,948

 
3,721,383

 
2,075,173

 
3,735,483

Exercise price
 
 
 
 
 
 
 
Low
$
8.69

 
$
7.07

 
$
8.69

 
$
8.69

High
$
21.49

 
$
21.49

 
$
21.49

 
$
21.49



4.  INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities at June 30, 2014 are summarized as follows:
(dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-Sale
 
 
 
 
 
 
 
U.S. Government agencies
$
1,000

 
$
10

 
$

 
$
1,010

State and municipal bonds
73,395

 
5,248

 
(111
)
 
78,532

Agency mortgage-backed securities/collateralized mortgage obligations
1,360,824

 
22,967

 
(12,718
)
 
1,371,073

Non-agency collateralized mortgage obligations
2,953

 
52

 

 
3,005

Corporate securities and other
4,109

 
508

 
(323
)
 
4,294

Marketable equity securities
3,583

 
1,983

 
(1
)
 
5,565

Total
$
1,445,864

 
$
30,768

 
$
(13,153
)
 
$
1,463,479

 
 
 
 
 
 
 
 
 
Carrying
Value
(b)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Held-to-Maturity
 

 
 

 
 

 
 

State and municipal bonds
$
519,333

 
$
23,787

 
$
(110
)
 
$
543,010

Agency mortgage-backed securities/collateralized mortgage obligations
367,419

 
2,880

 
(925
)
 
369,374

Non-agency collateralized mortgage obligations
218

 
4

 

 
222

Corporate securities and other
5,566

 
8

 
(4
)
 
5,570

Total
$
892,536

 
$
26,679

 
$
(1,039
)
 
$
918,176

 
 
 
 
 
 
 
 
(b) For securities which were transferred from the available-for-sale category to held-to maturity, the carrying value of the transferred securities represents their fair value at the date of transfer adjusted for subsequent amortization.  The carrying value of all other held-to-maturity securities represents their amortized cost.
    
At March 31, 2014, 240 available-for-sale debt securities, with an amortized cost basis of $492 million, a net unrealized loss of $4.1 million and a fair value of $488 million, were reclassified as held-to-maturity.  Transfers of debt securities into the held-to-maturity category from the available-for-sale category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income and in the carrying value of the held-to-maturity securities. Such amounts are amortized over the remaining life of the security which will offset the effect on net interest income.

10

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements


The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities at December 31, 2013 are summarized as follows:
(dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-Sale
 

 
 

 
 

 
 

U.S. Government agencies
$
1,000

 
$

 
$
(10
)
 
$
990

State and municipal bonds
210,680

 
7,701

 
(3,670
)
 
214,711

Agency mortgage-backed securities/collateralized mortgage obligations
1,683,092

 
18,040

 
(41,952
)
 
1,659,180

Non-agency collateralized mortgage obligations
4,222

 
44

 
(8
)
 
4,258

Corporate securities and other
9,517

 
646

 
(495
)
 
9,668

Marketable equity securities
3,583

 
1,717

 

 
5,300

Total
$
1,912,094

 
$
28,148

 
$
(46,135
)
 
$
1,894,107

 
 
 
 
 
 
 
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Held-to-Maturity
 

 
 

 
 

 
 

State and municipal bonds
$
403,344

 
$
13,028

 
$
(895
)
 
$
415,477

Agency mortgage-backed securities/collateralized mortgage obligations
34,843

 
1,624

 

 
36,467

Non-agency collateralized mortgage obligations
258

 

 

 
258

Total
$
438,445

 
$
14,652

 
$
(895
)
 
$
452,202



Gains and losses from sales of investment securities are as follows:
(dollars in thousands)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Gains
$

 
$
22

 
$
8

 
$
47

Losses

 

 

 

Net gains (losses) from sales of investment securities
$

 
$
22

 
$
8

 
$
47


    

11

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements


The following tables indicate the length of time individual securities have been in a continuous unrealized loss position at June 30, 2014 and December 31, 2013, respectively.
 
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 
Less than 12 months
 
12 months or longer
 
Total
 
No. of Securities
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
State and municipal bonds
39
 
$
12,089

 
$
(97
)
 
$
11,249

 
$
(124
)
 
$
23,338

 
$
(221
)
Agency mortgage-backed securities/collateralized mortgage obligations
147
 
303,975

 
(2,001
)
 
354,603

 
(11,642
)
 
658,578

 
(13,643
)
Corporate securities and other
4
 
1,011

 
(3
)
 
4,115

 
(324
)
 
5,126

 
(327
)
Total debt securities
190
 
317,075

 
(2,101
)
 
369,967

 
(12,090
)
 
687,042

 
(14,191
)
Marketable equity securities
1
 
50

 
(1
)
 

 

 
50

 
(1
)
Total
191
 
$
317,125

 
$
(2,102
)
 
$
369,967

 
$
(12,090
)
 
$
687,092

 
$
(14,192
)

    
December 31, 2013
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 
Less than 12 months
 
12 months or longer
 
Total
 
No. of Securities
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
U.S. Government agencies
1
 
$
990

 
$
(10
)
 
$

 
$

 
$
990

 
$
(10
)
State and municipal bonds
145
 
76,402

 
(2,282
)
 
20,708

 
(2,283
)
 
97,110

 
(4,565
)
Agency mortgage-backed securities/collateralized mortgage obligations
241
 
953,423

 
(33,990
)
 
115,815

 
(7,962
)
 
1,069,238

 
(41,952
)
Non-agency collateralized mortgage obligations
5
 
820

 
(8
)
 

 

 
820

 
(8
)
Corporate securities and other
5
 
1,966

 
(35
)
 
2,708

 
(460
)
 
4,674

 
(495
)
Total
397
 
$
1,033,601

 
$
(36,325
)
 
$
139,231

 
$
(10,705
)
 
$
1,172,832

 
$
(47,030
)

    
The fair value of investment securities pledged as collateral are presented below:
(dollars in thousands)
June 30, 2014
 
December 31, 2013
Deposits
$
967,407

 
$
966,751

Repurchase agreements
687,021

 
650,627

Other
76,631

 
81,408

Total
$
1,731,059

 
$
1,698,786

    

12

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements


The specified values of investment securities, by contractual maturity, at June 30, 2014 are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Available-for-Sale
 
Held-to-Maturity
(dollars in thousands)
Amortized
Cost
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Due in one year or less
$
5,301

 
$
5,346

 
$

 
$

Due after one through five years
51,495

 
55,590

 
8,356

 
8,512

Due after five through ten years
146,205

 
152,547

 
173,434

 
181,036

Due after ten years
1,239,280

 
1,244,431

 
710,746

 
728,628

Marketable equity securities
3,583

 
5,565

 

 

Total
$
1,445,864

 
$
1,463,479

 
$
892,536

 
$
918,176

 
Evaluation of Impairment of Securities

The Company did not record any other-than-temporary impairment ("OTTI") losses for the three and six months ended June 30, 2014 and 2013.

As of June 30, 2014 and December 31, 2013, accumulated other comprehensive income did not include any impairment related charges for the non-credit-related components of OTTI.     

The majority of the investment portfolio is comprised of U.S. Government Agency securities (mortgage-backed and collateralized mortgage obligations) and state and municipal bonds. For the investment securities in an unrealized loss position, the Company has concluded, based on its analysis, that the unrealized losses are primarily caused by the movement of interest rates, and the contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment.

At June 30, 2014, gross unrealized losses totaled $14.2 million, and the gross unrealized losses of securities in an unrealized loss position for twelve months or longer totaled $12.1 million, of which $11.6 million is attributable to agency mortgage-backed securities and $0.5 million attributable to state and municipal securities and other.  The Company evaluates a variety of factors in concluding whether securities are other-than-temporarily impaired.  These factors include, but are not limited to, the type and purpose of the bond, the underlying rating of the bond issuer, and the presence of credit enhancements (i.e. state guarantees, municipal bond insurance, collateral requirements, etc.). As a result of its review and considering the attributes of the individual securities, the Company concluded that the securities were not other-than-temporarily impaired.

Because the Company does not intend to sell these investments and it is not more likely than not it will be required to sell these investments before a recovery of carrying value, which may be maturity, the Company does not consider the securities in an unrealized loss position for twelve months or longer to be other-than-temporarily impaired.

Other securities on the Company’s consolidated balance sheet totaled $64.5 million and $63.7 million as of June 30, 2014 and December 31, 2013, respectively. The balance includes Federal Loan Home Bank ("FHLB") of Pittsburgh stock and Federal Reserve Bank stock. These securities lack a market, and as such they are carried at par/cost since their fair value is not readily determinable. The Company evaluates, and will continue to evaluate, these securities for impairment each reporting period and has concluded the carrying value of these securities is not impaired. During 2014, the Company purchased an additional $0.7 million, net, of capital stock from the FHLB of Pittsburgh at par/cost. Also, during 2014 and 2013 the Company received and recorded dividends on its FHLB stock.

13

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements


5.  LOANS

The following table presents loan classifications:
June 30, 2014
Performing
 
 
 
 
(dollars in thousands)
Pass Rated
 
Special Mention
 
Classified
 
Non-Performing
 
Total
Commercial and industrial
$
2,337,733

 
$
51,455

 
$
89,930

 
$
9,875

 
$
2,488,993

 
 
 
 
 
 
 
 
 
 
CRE - permanent
1,005,776

 
5,221

 
26,597

 
5,334

 
1,042,928

CRE - construction
163,495

 
2,371

 
6,966

 
9,674

 
182,506

Commercial real estate
1,169,271

 
7,592

 
33,563

 
15,008

 
1,225,434

 
 
 
 
 
 
 
 
 
 
Residential mortgages
644,323

 

 
651

 
12,476

 
657,450

Home equity
759,594

 

 
140

 
4,382

 
764,116

All other consumer
260,178

 

 
5,840

 
1,745

 
267,763

Consumer
1,664,095

 

 
6,631

 
18,603

 
1,689,329

 
 
 
 
 
 
 
 
 
 
Loans
$
5,171,099

 
$
59,047

 
$
130,124

 
$
43,486

 
$
5,403,756

 
 
 
 
 
 
 
 
 
 
Percent of loans
95.70
%
 
1.09
%
 
2.41
%
 
0.80
%
 
100.00
%
 
 
 
 
 
 
 
 
 
 
December 31, 2013
Performing
 
 

 
 

(dollars in thousands)
Pass Rated
 
Special Mention
 
Classified
 
Non-Performing
 
Total
Commercial and industrial
$
2,327,344

 
$
38,873

 
$
79,179

 
$
15,268

 
$
2,460,664

 
 
 
 
 
 
 
 
 
 
CRE - permanent
944,589

 
9,191

 
36,272

 
4,786

 
994,838

CRE - construction
167,710

 
2,962

 
15,534

 
12,128

 
198,334

Commercial real estate
1,112,299

 
12,153

 
51,806

 
16,914

 
1,193,172

 
 
 
 
 
 
 
 
 
 
Residential mortgages
636,829

 

 
2,243

 
13,153

 
652,225

Home equity
757,064

 

 
137

 
5,407

 
762,608

All other consumer
256,957

 
160

 
5,633

 
1,849

 
264,599

Consumer
1,650,850

 
160

 
8,013

 
20,409

 
1,679,432

 
 
 
 
 
 
 
 
 
 
Loans
$
5,090,493

 
$
51,186

 
$
138,998

 
$
52,591

 
$
5,333,268

 
 
 
 
 
 
 
 
 
 
Percent of loans
95.45
%
 
0.96
%
 
2.60
%
 
0.99
%
 
100.00
%
 
 
 
 
 
 
 
 
 
 

14

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements


The following table presents the details for past due loans: 
June 30, 2014
Past Due and Still Accruing
 
Accruing Current Balances
 
Non-Accrual Balances (d)
 
Total Balances
(dollars in thousands)
30-59 Days
 
60-89 Days
 
90 Days or More (c)
 
Total
 
 
 
Commercial and industrial
$
2,018

 
$

 
$

 
$
2,018

 
$
2,477,334

 
$
9,641

 
$
2,488,993

 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE - permanent
671

 
86

 

 
757

 
1,037,360

 
4,811

 
1,042,928

CRE - construction

 
154

 

 
154

 
172,678

 
9,674

 
182,506

Commercial real estate
671

 
240

 

 
911

 
1,210,038

 
14,485

 
1,225,434

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages
3,811

 
1,073

 
607

 
5,491

 
645,694

 
6,265

 
657,450

Home equity
3,408

 
703

 
140

 
4,251

 
756,234

 
3,631

 
764,116

All other consumer
2,426

 
869

 
1,350

 
4,645

 
261,623

 
1,495

 
267,763

Consumer
9,645

 
2,645

 
2,097

 
14,387

 
1,663,551

 
11,391

 
1,689,329

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
$
12,334

 
$
2,885

 
$
2,097

 
$
17,316

 
$
5,350,923

 
$
35,517

 
$
5,403,756

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percent of loans
0.23
%
 
0.05
%
 
0.04
%
 
0.32
%
 
 

 
0.66
%
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
Past Due and Still Accruing
 
Accruing Current Balances
 
Non-Accrual Balances (d)
 
Total Balances
(dollars in thousands)
30-59 Days
 
60-89 Days
 
90 Days or More (c)
 
Total
 
 
 
Commercial and industrial
$
3,362

 
$
1,520

 
$
11

 
$
4,893

 
$
2,440,836

 
$
14,935

 
$
2,460,664

 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE - permanent
6,191

 
181

 

 
6,372

 
984,208

 
4,258

 
994,838

CRE - construction
373

 

 

 
373

 
185,833

 
12,128

 
198,334

Commercial real estate
6,564

 
181

 

 
6,745

 
1,170,041

 
16,386

 
1,193,172

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages
4,509

 
774

 
2,197

 
7,480

 
637,708

 
7,037

 
652,225

Home equity
4,383

 
1,101

 
140

 
5,624

 
752,197

 
4,787

 
762,608

All other consumer
2,761

 
814

 
1,118

 
4,693

 
258,175

 
1,731

 
264,599

Consumer
11,653

 
2,689

 
3,455

 
17,797

 
1,648,080

 
13,555

 
1,679,432

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
$
21,579

 
$
4,390

 
$
3,466

 
$
29,435

 
$
5,258,957

 
$
44,876

 
$
5,333,268

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percent of loans
0.40
%
 
0.08
%
 
0.07
%
 
0.55
%
 
 

 
0.84
%
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(c) Loans 90 days or more past due remain on accrual status if they are well secured and collection of all principal and interest is probable.
(d) At June 30, 2014, non-accrual balances included troubled debt restructurings of $5.4 million commercial real estate, $6.0 million of commercial and industrial, and $3.8 million of consumer loans. At December 31, 2013, non-accrual balances included troubled debt restructurings of $6.5 million of commercial real estate, $7.7 million of commercial and industrial, and $3.0 million of consumer loans.


15

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements


Changes in the allowance for loan losses by loan portfolio are as follows:
June 30, 2014