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EX-31.2 - EXHIBIT 31.2 - NATIONAL PENN BANCSHARES INCnpbc09302014ex312.htm
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EX-32.1 - EXHIBIT 32.1 - NATIONAL PENN BANCSHARES INCnpbc09302014ex321.htm
EX-31.1 - EXHIBIT 31.1 - NATIONAL PENN BANCSHARES INCnpbc09302014ex311.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 September 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) (Zip Code)

(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 October 31, 2014
Common Stock, no stated par value
 
147,356,365



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
 
 
 
September 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Cash and due from banks
$
96,856

 
$
102,241

Interest-earning deposits with banks
98,512

 
181,282

Total cash and cash equivalents
195,368

 
283,523

 
 
 
 
Investment securities available-for-sale, at fair value
1,461,586

 
1,894,107

Investment securities held-to-maturity
 

 
 

(Fair value $889,438 and $452,202 for 2014 and 2013, respectively)
864,234

 
438,445

Other securities
55,931

 
63,746

Loans held-for-sale
3,890

 
4,951

Loans, net of allowance for loan losses of $88,927 and $96,367 for 2014 and 2013, respectively
5,377,025

 
5,236,901

Premises and equipment, net
110,392

 
96,232

Accrued interest receivable
27,839

 
27,130

Bank owned life insurance
151,443

 
147,869

Other real estate owned and other repossessed assets
1,561

 
1,278

Goodwill
258,279

 
258,279

Other intangible assets, net
4,803

 
6,854

Unconsolidated investments
8,167

 
8,713

Other assets
112,482

 
123,820

TOTAL ASSETS
$
8,633,000

 
$
8,591,848

 
 
 
 
LIABILITIES
 

 
 

Non-interest bearing deposits
$
990,438

 
$
970,051

Interest bearing deposits
5,297,498

 
5,102,527

Total deposits
6,287,936

 
6,072,578

 
 
 
 
Customer repurchase agreements
580,290

 
551,736

Repurchase agreements

 
50,000

Federal Home Loan Bank advances
359,155

 
603,232

Senior long-term debt
125,000

 

Subordinated debentures
77,321

 
77,321

Accrued interest payable and other liabilities
96,114

 
105,115

TOTAL LIABILITIES
7,525,816

 
7,459,982

 
 
 
 
SHAREHOLDERS' EQUITY
 

 
 

Common stock, no stated par value; authorized 250,000,000 shares, issued: September 30, 2014 - 152,267,940; December 31, 2013 - 152,310,162
1,388,513

 
1,387,966

Accumulated deficit
(143,514
)
 
(175,990
)
Accumulated other comprehensive loss
(7,922
)
 
(21,157
)
Treasury stock: September 30, 2014 - 12,962,823 shares; December 31, 2013 - 6,511,411 shares
(129,893
)
 
(58,953
)
TOTAL SHAREHOLDERS' EQUITY
1,107,184

 
1,131,866

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
8,633,000

 
$
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 September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
INTEREST INCOME
 
 
 
 
 
 
 
 
Loans, including fees
$
53,857

 
$
54,577

 
$
158,915

 
$
165,558

 
Investment securities
 
 
 
 
 
 
 
 
Taxable
11,365

 
10,105

 
34,180

 
29,585

 
Tax-exempt
6,114

 
6,768

 
18,847

 
20,887

 
Deposits with banks
32

 
48

 
87

 
164

 
Total interest income
71,368

 
71,498

 
212,029

 
216,194

 
INTEREST EXPENSE
 

 
 

 
 
 
 
 
Deposits
4,483

 
5,468

 
13,927

 
17,213

 
Customer repurchase agreements
399

 
440

 
1,192

 
1,398

 
Repurchase agreements
197

 
614

 
1,406

 
1,956

 
Short-term borrowings

 

 
1

 
41

 
Federal Home Loan Bank advances
1,297

 
1,325

 
4,214

 
5,042

 
Senior long-term debt
227

 

 
227

 

 
Subordinated debentures
535

 
539

 
1,592

 
2,554

 
Total interest expense
7,138

 
8,386

 
22,559

 
28,204

 
Net interest income
64,230

 
63,112

 
189,470

 
187,990

 
Provision for loan losses
1,000

 
1,250

 
2,251

 
4,250

 
Net interest income after provision for loan losses
63,230

 
61,862

 
187,219

 
183,740

 
NON-INTEREST INCOME
 

 
 

 
 
 
 
 
Wealth management
6,945

 
6,883

 
20,944

 
20,700

 
Service charges on deposit accounts
3,826

 
3,894

 
10,744

 
11,407

 
Insurance commissions and fees
3,029

 
3,071

 
9,835

 
9,664

 
Cash management and electronic banking fees
4,720

 
4,860

 
14,115

 
14,132

 
Mortgage banking
987

 
1,621

 
2,639

 
5,598

 
Bank owned life insurance
1,238

 
1,260

 
3,654

 
3,727

 
Earnings (losses) of unconsolidated investments
(20
)
 
661

 
(506
)
 
653

 
Gains on sale of non-performing loans

 

 
946

 

 
Other operating income
2,146

 
2,551

 
6,366

 
7,307

 
Net gains from fair value changes of subordinated debentures

 

 

 
2,111

 
Net gains on sales of investment securities

 
7

 
8

 
54

 
Total non-interest income
22,871

 
24,808

 
68,745

 
75,353

 
NON-INTEREST EXPENSE
 

 
 

 
 
 
 
 
Salaries, wages and employee benefits
29,655

 
29,598

 
87,743

 
87,965

 
Premises and equipment
7,769

 
7,724

 
23,690

 
22,726

 
FDIC insurance
1,140

 
1,404

 
3,657

 
4,111

 
Other operating expenses
13,594

 
14,877

 
41,519

 
44,388

 
Loss on debt extinguishment

 

 

 
64,888

 
Total non-interest expense
52,158

 
53,603

 
156,609

 
224,078

 
Income before income taxes
33,943

 
33,067

 
99,355

 
35,015

 
Income tax expense
8,623

 
8,507

 
25,126

 
2,840

 
NET INCOME
$
25,320

 
$
24,560

 
$
74,229

 
$
32,175

 
PER SHARE
 

 
 

 
 
 
 
 
Basic earnings
$
0.18

 
$
0.17

 
$
0.53

 
$
0.22

 
Diluted earnings
$
0.18

 
$
0.17

 
$
0.53

 
$
0.22

 
Dividends paid in cash
$
0.10

 
$
0.10

 
$
0.30

 
$
0.20

(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 September 30, 2014
 
Nine Months Ended September 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
$
33,943

 
$
8,623

 
$
25,320

 
$
99,355

 
$
25,126

 
$
74,229

 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period on investment securities
(7,069
)
 
(2,474
)
 
(4,595
)
 
24,646

 
8,626

 
16,020

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

 

 

 
8

 
3

 
5

Unrealized gains (losses) on investment securities
(7,069
)
 
(2,474
)
 
(4,595
)
 
24,638

 
8,623

 
16,015

 
 
 
 
 
 
 
 
 
 
 
 
Pension adjustments
(4,391
)
 
(1,537
)
 
(2,854
)
 
(4,277
)
 
(1,497
)
 
(2,780
)
Other comprehensive income (loss)
(11,460
)
 
(4,011
)
 
(7,449
)
 
20,361

 
7,126

 
13,235

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
$
22,483

 
$
4,612

 
$
17,871

 
$
119,716

 
$
32,252

 
$
87,464

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 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
$
33,067

 
$
8,507

 
$
24,560

 
$
35,015

 
$
2,840

 
$
32,175

 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period on investment securities
2,750

 
962

 
1,788

 
(61,190
)
 
(21,416
)
 
(39,774
)
Less net gains on sales of investment securities realized in net income
7

 
2

 
5

 
54

 
19

 
35

Unrealized gains (losses) on investment securities
2,743

 
960

 
1,783

 
(61,244
)
 
(21,435
)
 
(39,809
)
 
 
 
 
 
 
 
 
 
 
 
 
Pension adjustments
2,928

 
1,025

 
1,903

 
3,041

 
1,065

 
1,976

Other comprehensive income (loss)
5,671

 
1,985

 
3,686

 
(58,203
)
 
(20,370
)
 
(37,833
)
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
$
38,738

 
$
10,492

 
$
28,246

 
$
(23,188
)
 
$
(17,530
)
 
$
(5,658
)
 
 
 
 
 
 
 
 
 
 
 
 
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
 

 
 

 
74,229

 
 

 
 

 
74,229

Other comprehensive income, net of taxes
 

 
 

 
 

 
13,235

 
 

 
13,235

Total comprehensive income
 

 
 

 
 

 
 

 
 

 
87,464

 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends declared, common
 
 
 
 
(41,753
)
 
 
 
 
 
(41,753
)
Shares issued under share-based plans, net of excess tax benefits
506,366

 
547

 
 

 
 

 
4,450

 
4,997

Common stock repurchases
(7,000,000
)
 
 
 
 
 
 
 
(75,390
)
 
(75,390
)
Balance at September 30, 2014
139,305,117

 
$
1,388,513

 
$
(143,514
)
 
$
(7,922
)
 
$
(129,893
)
 
$
1,107,184

 
 
 

 
 

 
 

 
 

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)
Nine Months Ended September 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
74,229

 
$
32,175

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

 
 

Provision for loan losses
2,251

 
4,250

Depreciation and amortization
8,743

 
9,951

Amortization of premiums and discounts on investment securities, net
(132
)
 
2,376

Net gains from sales of investment securities
(8
)
 
(54
)
Decrease in fair value of subordinated debentures

 
(2,111
)
Bank owned life insurance policy income
(3,654
)
 
(3,727
)
Share-based compensation expense
3,210

 
2,442

Unconsolidated investment distributions, net
546

 
2,170

Loans originated for resale
(70,641
)
 
(159,095
)
Proceeds from sale of loans originated for resale
73,742

 
175,187

Proceeds from sale of non-performing loans
3,046

 

Gains on sale of loans, net
(2,040
)
 
(4,513
)
Gains on sale of non-performing loans, net
(946
)
 

Losses (gains) of other real estate owned, net
232

 
(200
)
Gains on sale of buildings

 
(301
)
Loss on debt extinguishment

 
64,888

Changes in assets and liabilities:
 
 
 
(Increase) decrease in accrued interest receivable
(709
)
 
695

Decrease in accrued interest payable
(2,068
)
 
(3,041
)
Decrease (increase) in other assets
2,362

 
(10,419
)
(Decrease) increase in other liabilities
(11,210
)
 
14,055

Net cash provided by operating activities
76,953

 
124,728

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Proceeds from maturities and repayments of investment securities held-to-maturity
66,049

 
19,070

Proceeds from maturities and repayments of investment securities available-for-sale
209,227

 
348,493

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

 
3,432

Purchase of investment securities available-for-sale
(242,008
)
 
(488,757
)
Proceeds from other securities
7,815

 
24,253

Proceeds from sale of loans previously held for investment
943

 
1,181

Increase in loans
(148,202
)
 
(69,460
)
Purchases of premises and equipment
(21,109
)
 
(4,829
)
Proceeds from the sale of other real estate owned
1,323

 
2,110

Proceeds from sale of buildings

 
868

Net cash used in investing activities
(125,486
)
 
(163,639
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Net increase in transaction and savings deposit accounts
353,400

 
642,376

Net decrease in time deposits
(138,042
)
 
(142,485
)
Net increase (decrease) in customer repurchase agreements
28,554

 
(38,286
)
Decrease in short-term borrowings

 
(100,000
)
Decrease in repurchase agreements
(50,000
)
 
(25,000
)
Net decrease in FHLB advances
(243,821
)
 
(417,382
)
Repayment of subordinated debentures

 
(65,206
)
Proceeds from senior debt issuance
125,000

 

Proceeds from shares issued, share-based plans
2,371

 
2,542

Excess tax benefit on share-based plans
59

 
37

Repurchase of common stock
(75,390
)
 

Cash dividends, common
(41,753
)
 
(29,123
)
Net cash used in financing activities
(39,622
)
 
(172,527
)
Net decrease in cash and cash equivalents
(88,155
)
 
(211,438
)
Cash and cash equivalents at beginning of year
283,523

 
428,128

Cash and cash equivalents at end of period
$
195,368

 
$
216,690

 
 
 
 
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)
Nine Months Ended September 30,
 
2014
 
2013
Interest
$
24,627

 
$
31,246

Income taxes
18,218

 
1,576

 


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 October 24, 2014, the Company completed its acquisition of TF Financial Corporation ("TF Financial") through a stock and cash merger. TF Financial was a savings and loan holding company with 3rd Fed Bank as its wholly-owned subsidiary. Headquartered in Newtown, Pennsylvania, TF Financial operated eighteen branch offices and as of June 30, 2014, TF Financial had approximately $840 million of assets, which included $610 million of loans, and $686 million of deposits. This acquisition will be accounted for under the acquisition method of accounting. Accordingly, the Company is in the process of performing assessments of net assets acquired and determining fair values of these identifiable assets acquired and liabilities assumed as of October 24, 2014. TF Financial's results of operations have been included in the Company's consolidated statements of income and comprehensive income since October 24, 2014. The operations of TF Financial are not included in the accompanying financial statements dated September 30, 2014.

The acquisition was valued at approximately $136 million, consisting of approximately $58.4 million in cash and the issuance of approximately 8.0 million shares of National Penn common stock valued at approximately $77.3 million.


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 September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
25,320

 
$
24,560

 
$
74,229

 
$
32,175

Calculation of shares
 

 
 

 
 
 
 
Weighted average basic shares
139,275,683

 
145,669,300

 
139,934,960

 
145,549,146

Dilutive effect of share-based compensation
549,451

 
455,521

 
531,477

 
427,375

Weighted average fully diluted shares
139,825,134

 
146,124,821

 
140,466,437

 
145,976,521

 
 
 
 
 
 
 
 
Earnings per share
 

 
 

 
 
 
 
Basic
$
0.18

 
$
0.17

 
$
0.53

 
$
0.22

Diluted
$
0.18

 
$
0.17

 
$
0.53

 
$
0.22

    

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 September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Stock options
2,014,419

 
3,351,751

 
2,018,705

 
3,522,366

Exercise price
 
 
 
 
 
 
 
Low
$
8.69

 
$
8.69

 
$
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 September 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

 
$
7

 
$

 
$
1,007

State and municipal bonds
67,298

 
5,031

 
(120
)
 
72,209

Agency mortgage-backed securities/collateralized mortgage obligations
1,372,417

 
17,969

 
(14,662
)
 
1,375,724

Non-agency collateralized mortgage obligations
2,732

 
61

 

 
2,793

Corporate securities and other
4,109

 
546

 
(323
)
 
4,332

Marketable equity securities
3,583

 
1,938

 

 
5,521

Total
$
1,451,139

 
$
25,552

 
$
(15,105
)
 
$
1,461,586

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

 
 

 
 

 
 

State and municipal bonds
$
509,146

 
$
24,570

 
$
(105
)
 
$
533,611

Agency mortgage-backed securities/collateralized mortgage obligations
352,447

 
2,315

 
(1,592
)
 
353,170

Non-agency collateralized mortgage obligations
199

 
3

 

 
202

Corporate securities and other
2,442

 
17

 
(4
)
 
2,455

Total
$
864,234

 
$
26,905

 
$
(1,701
)
 
$
889,438

 
 
 
 
 
 
 
 
(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 September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Gains
$

 
$
7

 
$
8

 
$
54

Losses

 

 

 

Net gains (losses) from sales of investment securities
$

 
$
7

 
$
8

 
$
54


    

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 September 30, 2014 and December 31, 2013, respectively.
 
September 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
40
 
$
15,237

 
$
(76
)
 
$
12,216

 
$
(149
)
 
$
27,453

 
$
(225
)
Agency mortgage-backed securities/collateralized mortgage obligations
190
 
514,165

 
(4,551
)
 
320,489

 
(11,703
)
 
834,654

 
(16,254
)
Corporate securities and other
3
 
1,010

 
(4
)
 
1,175

 
(323
)
 
2,185

 
(327
)
Total debt securities
233
 
530,412

 
(4,631
)
 
333,880

 
(12,175
)
 
864,292

 
(16,806
)
Marketable equity securities
1
 
50

 

 

 

 
50

 

Total
234
 
$
530,462

 
$
(4,631
)
 
$
333,880

 
$
(12,175
)
 
$
864,342

 
$
(16,806
)

    
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)
September 30, 2014
 
December 31, 2013
Deposits
$
1,275,633

 
$
966,751

Repurchase agreements
627,404

 
650,627

Other
78,471

 
81,408

Total
$
1,981,508

 
$
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 September 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
$
4,063

 
$
4,132

 
$

 
$

Due after one through five years
58,208

 
62,608

 
8,863

 
9,000

Due after five through ten years
157,993

 
163,868

 
192,305

 
200,618

Due after ten years
1,227,292

 
1,225,457

 
663,066

 
679,820

Marketable equity securities
3,583

 
5,521

 

 

Total
$
1,451,139

 
$
1,461,586

 
$
864,234

 
$
889,438

 
Evaluation of Impairment of Securities

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

As of September 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 September 30, 2014, gross unrealized losses totaled $16.8 million, and the gross unrealized losses of securities in an unrealized loss position for twelve months or longer totaled $12.2 million, of which $11.7 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 $55.9 million and $63.7 million as of September 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 FHLB of Pittsburgh repurchased an additional $7.8 million, net, of capital stock from the Company 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:
September 30, 2014
Performing
 
 
 
 
(dollars in thousands)
Pass Rated
 
Special Mention
 
Classified
 
Non-Performing
 
Total
Commercial and industrial
$
2,317,690

 
$
35,606

 
$
93,241

 
$
11,333

 
$
2,457,870

 
 
 
 
 
 
 
 
 
 
CRE - permanent
1,052,618

 
9,982

 
20,340

 
3,406

 
1,086,346

CRE - construction
191,305

 
1,912

 
6,964

 
8,547

 
208,728

Commercial real estate
1,243,923

 
11,894

 
27,304

 
11,953

 
1,295,074

 
 
 
 
 
 
 
 
 
 
Residential mortgages
647,224

 

 
680

 
13,019

 
660,923

Home equity
771,109

 

 
533

 
4,844

 
776,486

All other consumer
268,716

 

 
5,166

 
1,717

 
275,599

Consumer
1,687,049

 

 
6,379

 
19,580

 
1,713,008

 
 
 
 
 
 
 
 
 
 
Loans
$
5,248,662

 
$
47,500

 
$
126,924

 
$
42,866

 
$
5,465,952

 
 
 
 
 
 
 
 
 
 
Percent of loans
96.03
%
 
0.87
%
 
2.32
%
 
0.78
%
 
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: 
September 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
$
645

 
$
514

 
$
10

 
$
1,169

 
$
2,445,496

 
$
11,205

 
$
2,457,870

 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE - permanent
1,513

 
450

 

 
1,963

 
1,081,496

 
2,887

 
1,086,346

CRE - construction

 
370

 

 
370

 
199,811

 
8,547

 
208,728

Commercial real estate
1,513

 
820

 

 
2,333

 
1,281,307

 
11,434

 
1,295,074

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages
3,569

 
1,949

 
637

 
6,155

 
647,965

 
6,803

 
660,923

Home equity
3,195

 
802

 
533

 
4,530

 
767,995

 
3,961

 
776,486

All other consumer
3,308

 
895

 
1,781

 
5,984

 
268,148

 
1,467

 
275,599

Consumer
10,072

 
3,646

 
2,951

 
16,669

 
1,684,108

 
12,231

 
1,713,008

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
$
12,230

 
$
4,980

 
$
2,961

 
$
20,171

 
$
5,410,911

 
$
34,870

 
$
5,465,952

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percent of loans
0.22
%
 
0.09
%
 
0.05
%
 
0.37
%
 
 

 
0.64
%
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 September 30, 2014, non-accrual balances included troubled debt restructurings of $9.4 million commercial real estate, $9.3 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:
September 30, 2014
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 

 
 

 
 

 
 

Three Months Ended
Commercial and Industrial
 
Commercial Real Estate
 
Consumer
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 

 
 

 
 

 
 

Beginning balance
$
38,078

 
$
18,563

 
$
21,570

 
$
11,637

 
$
89,848

Charge-offs
(513
)
 
(1,100
)
 
(1,484
)
 

 
(3,097
)
Recoveries
494

 
249

 
433

 

 
1,176

Provision
368

 
234

 
835

 
(437
)
 
1,000

Ending balance
$
38,427

 
$
17,946

 
$
21,354

 
$
11,200

 
$
88,927

 
 
 
 
 
 
 
 
 
 
Nine Months Ended
Commercial and Industrial
 
Commercial Real Estate
 
Consumer
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 

 
 

 
 

 
 

Beginning balance
$
41,288

 
$
22,653

 
$
21,478

 
$
10,948

 
$
96,367

Charge-offs
(4,740
)
 
(2,427
)
 
(6,073
)
 

 
(13,240
)
Recoveries
1,522

 
434

 
1,593

 

 
3,549

Provision
357

 
(2,714
)
 
4,356

 
252

 
2,251

Ending balance
$
38,427

 
$
17,946

 
$
21,354

 
$
11,200

 
$
88,927

Allowance for loan losses:
 
 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,869

 
$
1,332

 
$
1,864

 
$

 
$
5,065

Collectively evaluated for impairment
36,558

 
16,614

 
19,490

 
11,200

 
83,862

Total allowance for loan losses
$
38,427

 
$
17,946

 
$
21,354

 
$
11,200

 
$
88,927

Loans:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
11,429

 
$
14,722

 
$
19,622

 
$

 
$
45,773

Collectively evaluated for impairment
2,446,441

 
1,280,352

 
1,693,386

 

 
5,420,179

Loans
$
2,457,870

 
$
1,295,074

 
$
1,713,008

 
$

 
$
5,465,952























    

16

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:
September 30, 2013
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Three Months Ended
Commercial and Industrial
 
Commercial Real Estate
 
Consumer
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 

 
 

 
 

 
 

Beginning balance
$
47,286

 
$
24,471

 
$
22,436

 
$
10,340

 
$
104,533

Charge-offs
(3,335
)
 
(936
)
 
(1,503
)
 

 
(5,774
)
Recoveries
276

 
56

 
422

 

 
754

Provision
173

 
(543
)
 
1,654

 
(34
)
 
1,250

Ending balance
$
44,400

 
$
23,048

 
$
23,009

 
$
10,306

 
$
100,763

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
Commercial and Industrial
 
Commercial Real Estate
 
Consumer
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 

 
 

 
 

 
 

Beginning balance
$
46,151

 
$
29,295

 
$
23,101

 
$
12,408

 
$
110,955

Charge-offs
(8,084
)
 
(2,402
)
 
(6,984
)
 

 
(17,470
)
Recoveries
1,091

 
433

 
1,504

 

 
3,028

Provision
5,242

 
(4,278
)
 
5,388

 
(2,102
)
 
4,250

Ending balance
$
44,400

 
$
23,048

 
$
23,009

 
$
10,306

 
$
100,763

Allowance for loan losses:
 
 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
5,882

 
$
432

 
$
1,657

 
$

 
$
7,971

Collectively evaluated for impairment
38,518

 
22,616

 
21,352

 
10,306

 
92,792

Total allowance for loan losses
$
44,400

 
$
23,048

 
$
23,009

 
$
10,306

 
$
100,763

Loans:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
29,568

 
$
16,107

 
$
18,872

 
$

 
$
64,547

Collectively evaluated for impairment
2,431,333

 
1,130,086

 
1,653,973

 

 
5,215,392

Loans
$
2,460,901

 
$
1,146,193

 
$
1,672,845

 
$

 
$
5,279,939


The Company did not have any loans acquired with deteriorated credit quality.

17

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


Impaired loan details are as follows:
September 30, 2014
Recorded Investment
 
 
 
 
 
 
(dollars in thousands)
With Related Allowance
 
Without Related Allowance
 
Total
 
Life-to-date Charge-offs
 
Total Unpaid Balances
 
Related Allowance
Commercial and industrial
$
5,729

 
$
5,700

 
$
11,429

 
$
7,359

 
$
18,788

 
$
1,869

 
 
 
 
 
 
 
 
 
 
 
 
CRE - permanent
3,586

 
2,589

 
6,175

 
7,781

 
13,956

 
456

CRE - construction
7,084

 
1,463

 
8,547

 
2,634

 
11,181

 
876

Commercial real estate
10,670

 
4,052

 
14,722

 
10,415

 
25,137

 
1,332

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages
5,852

 
7,209

 
13,061

 
419

 
13,480

 
1,513

Home equity
855

 
3,989

 
4,844

 
396

 
5,240

 
300

All other consumer
249

 
1,468

 
1,717

 
61

 
1,778

 
51

Consumer
6,956

 
12,666

 
19,622

 
876

 
20,498

 
1,864

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
23,355

 
$
22,418

 
$
45,773

 
$
18,650

 
$
64,423

 
$
5,065

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
Recorded Investment
 
 
 
 

 
 

(dollars in thousands)
With Related Allowance
 
Without Related Allowance
 
Total
 
Life-to-date Charge-offs
 
Total Unpaid Balances
 
Related Allowance
Commercial and industrial
$
8,457

 
$
6,811

 
$
15,268

 
$
5,599

 
$
20,867

 
$
3,997

 
 
 
 
 
 
 
 
 
 
 
 
CRE - permanent
5,995

 
3,872

 
9,867

 
6,441

 
16,308

 
1,073

CRE - construction
9,729

 
2,399

 
12,128

 
6,633

 
18,761

 
1,414

Commercial real estate
15,724

 
6,271

 
21,995

 
13,074

 
35,069

 
2,487

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages
6,088

 
7,109

 
13,197

 
800

 
13,997

 
1,589

Home equity
609

 
4,798

 
5,407

 
515

 
5,922

 
203

All other consumer
118

 
1,731

 
1,849

 
61

 
1,910

 
28

Consumer
6,815

 
13,638

 
20,453

 
1,376

 
21,829

 
1,820

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
30,996

 
$
26,720

 
$
57,716

 
$
20,049

 
$
77,765

 
$
8,304

 
 
 
 
 
 
 
 
 
 
 
 
 



18

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


The following table presents additional details related to the Company's impaired loans. Interest income recognized for the three and nine months ended September 30, 2014 and 2013 primarily represents amounts earned on restructured loans which are performing according to their modified terms.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
(dollars in thousands)
Average Recorded
Investment
 
Interest Income
Recognized
 
Average Recorded
Investment
 
Interest Income
Recognized
 
Average Recorded
Investment
 
Interest Income
Recognized
 
Average Recorded
Investment
 
Interest Income
Recognized
Commercial and industrial
$
9,809

 
$
2

 
$
28,818

 
$
24

 
$
12,053

 
$
14

 
$
27,239

 
$
63

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE - permanent
7,361

 
5

 
9,581

 
2

 
7,681

 
17

 
9,626

 
25

CRE - construction
8,998

 

 
6,816

 
22

 
9,827

 

 
7,067

 
59

Commercial real estate
16,359

 
5

 
16,397

 
24

 
17,508

 
17

 
16,693

 
84

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages
13,070

 
32

 
11,787

 
29

 
13,351

 
100

 
10,719

 
73

Home equity
4,647

 
4

 
4,998

 
3

 
4,840

 
10

 
4,885

 
8

All other consumer
1,736

 
4

 
1,746

 

 
1,842

 
9

 
1,751

 

Consumer
19,453

 
40

 
18,531

 
32

 
20,033

 
119

 
17,355

 
81

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
45,621

 
$
47

 
$
63,746

 
$
80

 
$
49,594

 
$
150

 
$
61,287

 
$
228

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
The following table presents details of the Company’s loans which experienced a troubled debt restructuring and are performing according to the modified terms. The Company’s restructured loans are included within non-performing loans and impaired loans in the preceding tables.
(dollars in thousands)
September 30,
2014
 
December 31,
2013
Commercial and industrial
$
128

 
$
333

CRE - permanent
519

 
528

Residential mortgages
6,216

 
6,116

Home equity
883

 
620

All other consumer
250

 
118

Total restructured loans
$
7,996

 
$
7,715

 
 
 
 
Undrawn commitments to lend on restructured loans
$

 
$


The Company modifies loans to consumers secured by residential mortgages and home equity loans utilizing a program modeled after government assisted programs in order to help customers who are experiencing financial difficulty and are in jeopardy of losing their homes to foreclosure.


19

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


6.  DEPOSITS
(dollars in thousands)
September 30, 2014
 
December 31, 2013
NOW accounts
$
1,981,608

 
$
1,655,425

Money market accounts
1,658,815

 
1,670,035

Savings accounts
544,625

 
526,576

Time deposits less than $100
797,535

 
896,700

Time deposits $100 or greater
314,915

 
353,791

Total interest bearing deposits
5,297,498

 
5,102,527

Non-interest bearing deposits
990,438

 
970,051

Total deposits
$
6,287,936

 
$
6,072,578

 
 
At September 30, 2014, time deposits were scheduled to mature as follows:
(dollars in thousands)
2014
 
$
254,951

 
 
2015
 
465,258

 
 
2016
 
146,519

 
 
2017
 
90,561

 
 
2018
 
42,250

 
 
Thereafter
 
112,911

 
 
Total
 
$
1,112,450

 

7. BORROWINGS

(dollars in thousands)
September 30, 2014
 
December 31, 2013
Customer repurchase agreements
$
580,290

 
$
551,736

Repurchase agreements

 
50,000

Federal Home Loan Bank advances
359,155

 
603,232

Senior long-term debt
125,000

 

Subordinated debentures
$
77,321

 
$
77,321

     Total borrowings
1,141,766

 
1,282,289


On September 16, 2014, the Company issued $125 million aggregate principal amount of unsecured, fixed rate senior notes with a maturity date of September 30, 2024. The notes bear an annual fixed interest rate of 4.25%, and are payable, as to interest, on March 30th and September 30th of each year, commencing March 30, 2015. The costs related to the issuance of the notes were $1.4 million and will be amortized over the life of the notes.     


8.  CONTINGENCIES

In the normal course of business, the Company is named as a defendant in various lawsuits.  Accruals are established for legal proceedings when information related to the loss contingencies indicates that a loss settlement is both probable and can be estimated. At September 30, 2014, the Company did not have material amounts accrued for legal proceedings as it is the opinion of management that the resolution of such suits will not have a material effect on the financial position or results of operations of the Company. The outcome of legal proceedings is inherently uncertain, and as a result, the amounts recorded may not represent the Company's ultimate loss upon resolution. Thus, the Company’s exposure and ultimate losses may be higher or lower than amounts accrued or estimated as the reasonably possible exposure.




20

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


9.  ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income (loss) was comprised of the following components, after tax:
(dollars in thousands)
September 30, 2014
 
December 31, 2013
Unrealized gains (losses) on investment securities
$
4,324

 
$
(11,691
)
Pension
(12,246
)
 
(9,466
)
Total accumulated other comprehensive loss
$
(7,922
)
 
$
(21,157
)

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. The remaining net accumulated other comprehensive after-tax loss related to the transferred securities at September 30, 2014 was $2.5 million and will be amortized over the remaining life of the securities.
 

10.  EQUITY

In the first quarter of 2014, the Company declared a cash dividend of $0.10 per share, or $13.9 million, which was paid on February 14, 2014, to shareholders of record as of February 1, 2014.

In the second quarter of 2014, the Company declared a cash dividend of $0.10 per share, or $13.9 million, which was paid on May 16, 2014, to shareholders of record as of May 3, 2014.

In the third quarter of 2014, the Company declared a cash dividend of $0.10 per share, or $13.9 million, which was paid on August 15, 2014, to shareholders of record as of August 4, 2014.

On October 22, 2014, the Company announced a fourth quarter cash dividend of $0.11 per share to be paid on November 17, 2014, to shareholders of record as of November 3, 2014.

In the fourth quarter of 2013, the Board of Directors authorized the repurchase of up to five percent (5%) of the outstanding shares of National Penn common stock during 2014. On January 30, 2014, National Penn completed the repurchase of 7 million shares of its common stock from two affiliates of Warburg Pincus, at $10.77 per share (the closing price of National Penn common stock on the date the repurchase agreement was entered into).
    

21

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


11.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The notional amount of financial instruments whose contract amounts represent credit risk:
(dollars in thousands)
September 30, 2014
 
December 31, 2013
Commitments to extend credit
$
1,897,474

 
$
1,769,135

Commitments to fund mortgages
26,957

 
22,242

Commitments to sell mortgages to investors
17,830

 
15,349

Letters of credit
142,393

 
142,246


Summary information regarding interest rate swap derivative positions which were not designated in hedging relationships are as follows:
September 30, 2014
 
(dollars in thousands)
Positions
 
Notional Amount
 
Asset
 
Liability
 
Receive Rate
 
Pay Rate
 
Life (Years)
Receive fixed - pay floating interest rate swaps
161
 
$
562,141

 
$
21,238

 
$
2,442

 
4.68
%
 
2.29
%
 
5.53
Pay fixed - receive floating interest rate swaps
161
 
562,141

 
2,442

 
21,238

 
2.29
%
 
4.68
%
 
5.53
Interest rate swaps
 
 
$
1,124,282

 
$
23,680

 
$
23,680

 
3.49
%
 
3.49
%
 
5.53
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 

 
 

 
 

 
 

 
 

 
 
(dollars in thousands)
Positions
 
Notional Amount
 
Asset
 
Liability
 
Receive Rate
 
Pay Rate
 
Life (Years)
Receive fixed - pay floating interest rate swaps
148
 
$
502,833

 
$
15,906

 
$
5,718

 
4.58
%
 
2.31
%
 
5.96
Pay fixed - receive floating interest rate swaps
148
 
502,833

 
5,718

 
15,906

 
2.31
%
 
4.58
%
 
5.96
Interest rate swaps
 
 
$
1,005,666

 
$
21,624

 
$
21,624

 
3.45
%
 
3.45
%
 
5.96

The Company enters into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. These swaps are considered derivatives but are not designated in hedging relationships. These instruments have interest rate and credit risk associated with them. In response, the Company enters into offsetting interest rate swaps with counterparties for interest rate risk management purposes. The counterparty swaps are also considered derivatives and are also not designated in hedging relationships. Changes in the fair value of the customer and counterparty swaps are recorded net in the consolidated statement of income. Because these amounts offset each other, there was no impact on other operating income for the three and nine months ended September 30, 2014. For additional analysis of the fair value of interest rate swaps refer to Footnote 13 within this section.
    

22

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

    
The following summarizes the Company’s derivative activity:
 
 
 
 
Income Statement Effect
 
Income Statement Effect
 
 
Balance Sheet Effect at
 
for the Three Months Ended
 
Nine Months Ended
Derivative Instruments
 
September 30, 2014
 
September 30, 2014
 
September 30, 2014
 
 
 
 
 
 
 
Interest rate swaps
 
Increase to other assets/liabilities of $23.7 million.
 
No net effect on other operating income from offsetting $2.9 million change.
 
No net effect on other operating income from offsetting $2.1 million change.
 
 
 
 
 
 
 
Other derivatives:
 
 
 
 
 
 
Interest rate locks
 
Increase to other liabilities of $0.1 million.
 
Decrease to mortgage banking income of $0.1 million.
 
Decrease to mortgage banking income of less than $0.1 million.
Forward sale commitments
 
Increase to other liabilities of less than $0.1 million.
 
Increase to mortgage banking income of $0.1 million.
 
Increase to mortgage banking income of less than $0.1 million.
 
 
 
 
 
 
 
 
 
 
 
Income Statement Effect
 
Income Statement Effect
 
 
Balance Sheet Effect at
 
for the Three Months Ended
 
Nine Months Ended
Derivative Instruments
 
December 31, 2013
 
September 30, 2013
 
September 30, 2013
 
 
 
 
 
 
 
Interest rate swaps
 
Increase to other assets/liabilities of $21.6 million.
 
No net effect on other operating income from offsetting $0.5 million change.
 
No net effect on other operating income from offsetting $7.5 million change.
 
 
 
 
 
 
 
Other derivatives:
 
 
 
 
 
 
Interest rate locks
 
Increase to other liabilities of less than $0.1 million.
 
Increase to mortgage banking income of $0.6 million.
 
Increase to mortgage banking income of $0.2 million.
Forward sale commitments
 
Increase to other liabilities of $0.1 million.
 
Decrease to mortgage banking income of $0.4 million.
 
Increase to mortgage banking income of less than $0.1 million.


23

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


12. BALANCE SHEET OFFSETTING

Certain financial instrument related assets and liabilities may be eligible for offset on the consolidated balance sheet because they are subject to master netting agreements or similar agreements. However, the Company does not elect to offset such arrangements on the consolidated financial statements.
 
    The Company enters into interest rate swap agreements with customers and financial institution counterparties. For additional detail regarding interest rate swap agreements refer to Footnote 11 within this section. In the event of default on, or termination of, any one contract, both parties have the right to net settle multiple contracts. Also, certain interest rate swap agreements may require the Company to receive or pledge cash collateral based on the contract provisions.
 
The Company also enters into agreements to sell securities subject to an obligation to repurchase the same or similar securities, referred to as repurchase agreements on the consolidated balance sheet. Under these agreements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. The obligation to repurchase the securities is reflected as a liability in the Company’s consolidated balance sheet, while the securities underlying the repurchase agreements remain in the respective investment securities account, therefore there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities.    

The following table presents information about financial instruments that are eligible for offset:
September 30, 2014
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
Assets
Gross Amount
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts Presented in the Balance Sheet
Derivatives - Interest Rate Swaps
$
2,442

 
$

 
$
2,442

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivatives - Interest Rate Swaps
$
21,238

 
$

 
$
21,238

 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
Assets
Gross Amount
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts Presented in the Balance Sheet
Derivatives - Interest Rate Swaps
$
5,718

 
$

 
$
5,718

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivatives - Interest Rate Swaps
$
15,906

 
$

 
$
15,906

Repurchase Agreements
50,000

 

 
50,000

Total Liabilities
$
65,906

 
$

 
$
65,906


24

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


The following table represents a reconciliation of the net amounts of interest rate swap derivative assets and liabilities presented in the balance sheet to the net amounts that would result in the event of offset, by counterparty:
September 30, 2014
 
 
 
 
 
 
 
(dollars in thousands)
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
Assets
Net Amounts Presented in the Balance Sheet
 
Financial Instruments (e)
 
Cash Collateral (f)
 
Net Amount
Counterparty A
$
2,209

 
$
(2,209
)
 
$

 
$

All Other Counterparties
233

 
(143
)
 

 
90

Total Assets
$
2,442

 
$
(2,352
)
 
$

 
$
90

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Counterparty A
$
10,544

 
$
(2,209
)
 
$
(8,785
)
 
$
(450
)
All Other Counterparties
10,694

 
(143
)
 
(10,350
)
 
201

Total Liabilities
$
21,238

 
$
(2,352
)
 
$
(19,135
)
 
$
(249
)
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
(dollars in thousands)
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
Assets
Net Amounts Presented in the Balance Sheet
 
Financial Instruments (e)
 
Cash Collateral (f)
 
Net Amount
Counterparty A
$
4,996

 
$
(4,996
)
 
$

 
$

All Other Counterparties
722

 
(328
)
 
(300
)
 
94

Total Assets
$
5,718

 
$
(5,324
)
 
$
(300
)
 
$
94

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Counterparty A
$
13,111

 
$
(4,996
)
 
$
(8,545
)
 
$
(430
)
All Other Counterparties
2,795

 
(328
)
 
(1,960
)
 
507

Total Liabilities
$
15,906

 
$
(5,324
)
 
$
(10,505
)
 
$
77

 
 
 
 
 
 
 
 
(e) For interest rate swap assets, amounts represent any derivative liability fair values that could be offset in the event of default. For interest rate swap liabilities, amounts represent any derivative asset fair values that could be offset in the event of default.
(f) Amounts represent cash collateral received or posted on interest rate swap transactions with financial institution counterparties.

13.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
 
In general, fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, which is not adjusted for transaction costs. Accounting guidelines establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted, quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Basis of Fair Value Measurement:

Level 1 - Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

25

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


The types of instruments whose value is based on quoted market prices in active markets include most U.S. Treasury securities, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.  The Company does not adjust the quoted price for such instruments.

The types of instruments whose value is based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most U.S. Government agency securities, state and municipal bonds, mortgage-backed securities, collateralized mortgage obligations, and corporate securities. Such instruments are generally classified within Level 2 of the fair value hierarchy and their fair values are determined as follows:

The markets for U.S. Government agency securities are active, but the exact (cusip) securities owned by the Company are traded thinly or infrequently. Therefore, the price for these securities is determined by reference to transactions in securities with similar yields, maturities and other features (matrix priced).
State and municipal bonds owned by the Company are traded thinly or infrequently, and as a result the fair value is estimated in reference to securities with similar yields, credit ratings, maturities, and in consideration of any prepayment assumptions obtained from market data.
Collateralized mortgage obligations and mortgage-backed securities are generally unique securities whose fair value is estimated using market information for new issues and adjusting for the features of a particular security by applying assumptions for prepayments, pricing spreads, yields and credit ratings.
Certain corporate securities owned by the Company are traded thinly or infrequently. Therefore, the fair value of these securities is determined by reference to transactions in other issues of these securities with similar yields and features.

Level 3 classification is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.  Management’s best estimate consists of both internal and external support on certain Level 3 investments.  Internal cash flow models using a present value formula along with indicative exit pricing obtained from broker/dealers are used to fair value Level 3 investments.  Management changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. Fair values for securities classified within Level 3 are determined as follows:

Certain corporate securities owned by the Company are not traded in active markets and prices for securities with similar features are unavailable. The fair value for each security is estimated in reference to benchmark transactions by security type based upon yields, credit spreads and option features.
Certain marketable equity securities which are not subject to ownership restrictions but are traded thinly on exchanges or over-the-counter. As a result, prices are not available on a consistent basis from published sources, and, therefore, additional quotations from brokers may be obtained. Additionally considered indications of pricing include subsequent financing rounds or pending transactions. The reported fair value is based upon the Company’s judgment with respect to the information it is able to reliably obtain.

The Company utilizes a third-party service provider to assist with investment security pricing. Each quarter the Company performs an independent validation of the third-party security pricing by obtaining pricing from other sources and evaluating discrepancies to established tolerances for each security type, including a review of unchanged prices. Additionally, the Company evaluates the third-party service provider's pricing results by periodically reviewing the service provider's practices and procedures.

Interest rate swap agreements are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active.  Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the Level 1 markets.  These markets do however have comparable, observable inputs in which an alternative pricing source values these assets to arrive at a fair value.  These characteristics classify interest rate swap agreements as Level 2 measurements.

    


26

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


The Company has the option to measure eligible financial assets, financial liabilities and Company commitments at fair value (i.e. the fair value option), on an instrument-by-instrument basis. The election to use the fair value option is available when an entity first recognizes a financial asset or liability or upon entering into a Company commitment. Subsequent changes in fair value must be recorded in earnings. The Company has not elected to apply the fair value option to any of its financial instruments at September 30, 2014.

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
September 30, 2014
Total
Fair Value
 
Quoted Prices
in Active Markets for
Identical Assets
 
Significant
Other Observable Inputs
 
Significant Unobservable Inputs
(dollars in thousands)
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
U.S. Government agencies
$
1,007

 
$

 
$
1,007

 
$

State and municipal bonds
72,209

 

 
72,209

 

Agency mortgage-backed securities/ collateralized mortgage obligations
1,375,724

 

 
1,375,724

 

Non-agency collateralized mortgage obligations
2,793

 

 
2,793

 

Corporate securities and other
4,332

 
64

 
3,093

 
1,175

Marketable equity securities
5,521

 
4,453

 

 
1,068

Investment securities, available-for-sale
$
1,461,586

 
$
4,517

 
$
1,454,826

 
$
2,243

 
 
 
 
 
 
 
 
Interest rate swap agreements
$
23,680

 
$

 
$
23,680

 
$

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Interest rate swap agreements
$
23,680

 
$

 
$
23,680

 
$

Forward sale commitments
44

 

 
44

 

Interest rate locks
57

 

 
57

 

 
 
 
 
 
 
 
 
December 31, 2013
Total
Fair Value
 
Quoted Prices
in Active Markets for
Identical Assets
 
Significant
Other Observable Inputs
 
Significant Unobservable Inputs
(dollars in thousands)
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 

 
 

 
 

 
 

U.S. Government agencies
$
990

 
$

 
$
990

 
$

State and municipal bonds
214,711

 

 
214,711

 

Agency mortgage-backed securities/ collateralized mortgage obligations
1,659,180

 

 
1,659,180

 

Non-agency collateralized mortgage obligations
4,258

 

 
4,258

 

Corporate securities and other
9,668

 
61

 
4,922

 
4,685

Marketable equity securities
5,300

 
4,241

 

 
1,059

Investment securities, available-for-sale
$
1,894,107

 
$
4,302

 
$
1,884,061

 
$
5,744

 
 
 
 
 
 
 
 
Interest rate swap agreements
$
21,624

 
$

 
$
21,624

 
$

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Interest rate swap agreements
$
21,624

 
$

 
$
21,624

 
$

Forward sale commitments
84

 

 
84

 

Interest rate locks
42

 

 
42

 


27

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

    
The following table presents activity for investment securities measured at fair value on a recurring basis for the nine months ended September 30, 2014:
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1
Beginning Balance
January 1, 2014
 
Gains/(losses)
included in
earnings
(g)
 
Gains/(losses)
included in other
comprehensive
income
 
Purchases
 
Sales
 
Maturities/
Calls/Paydowns
 
Reclassified
Securities (h)
 
Transfers
 
Ending Balance
September 30, 2014
Corporate securities and other
$
61

 
$

 
$
3

 
$

 
$

 
$

 
$

 
$

 
$
64

Marketable equity securities
4,241

 

 
212

 

 

 

 

 

 
4,453

Total level 1
4,302

 

 
215

 

 

 

 

 

 
4,517

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
990

 

 
17

 

 

 

 

 

 
1,007

State and municipal bonds
214,711

 
1,958

 
3,975

 

 

 
(16,554
)
 
(131,881
)
 

 
72,209

Agency mortgage-backed securities/ collateralized mortgage obligations
1,659,180

 
(3,013
)
 
19,839

 
242,008

 

 
(191,650
)
 
(350,640
)
 

 
1,375,724

Non-agency collateralized mortgage obligations
4,258

 
9

 
25

 

 
(476
)
 
(1,023
)
 

 

 
2,793

Corporate securities and other
4,922

 

 
182

 

 

 

 
(2,011
)
 

 
3,093

Total level 2
1,884,061

 
(1,046
)
 
24,038

 
242,008

 
(476
)
 
(209,227
)
 
(484,532
)
 

 
1,454,826

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 3
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities and other
4,685

 
3

 
40

 

 

 

 
(3,553
)
 

 
1,175

Marketable equity securities
1,059

 

 
9

 

 

 

 

 

 
1,068

Total level 3
5,744

 
3

 
49

 

 

 

 
(3,553
)
 

 
2,243

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total available-for-sale securities
$
1,894,107

 
$
(1,043
)
 
$
24,302

 
$
242,008

 
$
(476
)
 
$
(209,227
)
 
$
(488,085
)
 
$

 
$
1,461,586

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(g) Includes amortization/accretion
 
 
 
 
 
 
 
 
 
 
 
 
(h) Securities reclassified from available-for-sale to held-to-maturity at March 31, 2014. Refer to Footnote 4 for further details.
    
    

28

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

    
The following table sets forth the Company’s financial assets subject to fair value adjustments (impairment) on a non-recurring basis. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
(dollars in thousands)
 
 
Quoted Prices
in Active Markets for
Identical Assets
 
Significant
Other Observable Inputs
 
Significant Unobservable Inputs
September 30, 2014
Balance
 
(Level 1)
 
(Level 2)
 
(Level 3)
Loans held-for-sale
$
3,890

 
$

 
$
3,890

 
$

Impaired loans, net
40,708

 

 

 
40,708

OREO and other repossessed assets
1,561

 

 

 
1,561

 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

Loans held-for-sale
$
4,951

 
$

 
$
4,951

 
$

Impaired loans, net
49,412

 

 

 
49,412

OREO and other repossessed assets
1,278

 

 

 
1,278

 
    
Fair value for loans held-for-sale is estimated based upon available market data for mortgage-backed securities with similar interest rates and maturities.  Lower of cost or estimated fair value write-downs recorded on loans held-for-sale were zero as of September 30, 2014 and December 31, 2013.

The recorded investment in impaired loans totaled $45.8 million with a specific reserve of $5.1 million at September 30, 2014, compared to $57.7 million with a specific reserve of $8.3 million at December 31, 2013. Fair value for impaired loans is measured primarily on the value of the collateral securing these loans, less estimated costs to sell, or the present value of estimated cash flows discounted at the loan’s original effective interest rate.  Appraised values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business.

Fair value for OREO and other repossessed assets is estimated based upon its appraised value less costs to sell. There were no additional write-downs included in the OREO and other repossessed assets balances at September 30, 2014, compared to $0.1 million at December 31, 2013.

In addition to financial instruments recorded at fair value in the Company’s financial statements, disclosure of the estimated fair value of all of an entity’s assets and liabilities considered to be financial instruments is also required.  For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. However, certain instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.  Also, it is the Company’s general practice and intent to hold its financial instruments to maturity and to not engage in trading or sales activities, other than mortgage loans held-for-sale.  Fair values have been estimated using data that management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument.  
    
    

29

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

    
The estimation methodologies, resulting fair values and recorded carrying amounts are as follows:
 
September 30, 2014
 
December 31, 2013
(dollars in thousands)
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
195,368

 
$
195,368

 
$
283,523

 
$
283,523

Investment securities available-for-sale
1,461,586

 
1,461,586

 
1,894,107

 
1,894,107

Investment securities held-to-maturity
864,234

 
889,438

 
438,445

 
452,202

Loans held-for-sale
3,890

 
3,991

 
4,951

 
5,077

Loans, net of allowance for loan losses
5,377,025

 
5,231,308

 
5,236,901

 
5,168,470

OREO and other repossessed assets
1,561

 
1,561

 
1,278

 
1,278

Interest rate swap agreements
23,680

 
23,680

 
21,624

 
21,624

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Non-interest bearing deposits
$
990,438

 
$
990,438

 
$
970,051

 
$
970,051

Interest bearing deposits, non-maturity
4,185,048

 
4,185,048

 
3,852,036

 
3,852,036

Deposits with stated maturities
1,112,450

 
1,111,560

 
1,250,491

 
1,253,920

Customer repurchase agreements
580,290

 
580,290

 
551,736

 
551,736

Repurchase agreements

 

 
50,000

 
51,332

Federal Home Loan Bank advances
359,155

 
365,089

 
603,232

 
611,890

Senior long-term debt
125,000

 
125,312

 

 

Subordinated debentures
77,321

 
77,321

 
77,321

 
77,321

Interest rate swap agreements
23,680

 
23,680

 
21,624

 
21,624

Forward sale commitments
44

 
44

 
84

 
84

Interest rate locks
57

 
57

 
42

 
42


The fair value of cash and cash equivalents have been estimated to equal the carrying amounts due to the short-term nature of these instruments.  Therefore, cash and cash equivalents are classified within Level 1 of the fair value hierarchy.

The fair value of investment securities held-to-maturity has been estimated in a similar fashion to similar securities categorized as available-for-sale.  Held-to-maturity securities include state and municipal bonds, collateralized mortgage obligations and mortgage-backed securities.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value of the loan portfolio has been estimated using a discounted cash flow methodology based upon prevailing market interest rates relative to the portfolios’ effective interest rate which includes assumptions concerning prepayment rates and net credit losses.  The loan portfolio is classified within Level 3 of the fair value hierarchy.

The fair value of non-interest bearing demand deposits has been estimated to equal the carrying amount, which is assumed to be the amount payable on demand at the balance sheet date and therefore are classified within Level 1 of the fair value hierarchy.

The fair value of interest bearing deposits excludes deposits with stated maturities and is based on the assumption that the exit value of the instruments would be funded with like instruments by principal market participants.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value of deposits with stated maturities is estimated at the present value of associated cash flows using contractual maturities and market interest rates.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value of customer repurchase agreements has been estimated at the present value of associated cash flows using contractual maturities and market interest rates for each instrument.  These instruments are classified within Level 2 of the fair value hierarchy.

    

30

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



The fair value of repurchase agreements is determined based on current market rates for similar borrowings, as well as a further calculation for valuing the optionality of the conversion features in certain of the instruments.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value of FHLB advances is determined based on current market rates for similar borrowings with similar credit ratings, as well as a further calculation for valuing the optionality of the conversion features in certain of the instruments.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value of the Company's senior long-term debt is based upon an unadjusted, quoted price (CUSIP: 637138AC2) and as such is classified within Level 1 of the fair value hierarchy.

The fair value of subordinated debentures is estimated to equal their par amount as these instruments have floating interest rates based upon LIBOR and are callable at any time. These instruments are classified within Level 2 of the fair value hierarchy.
 
14.  PENSION PLAN

The Company has a curtailed, non-contributory defined benefit pension plan (National Penn Bancshares, Inc. Employee Pension Plan) covering substantially all employees of the Company and its subsidiaries employed as of January 1, 2009.  The Company-sponsored pension plan provides retirement benefits under pension trust agreements based on years of service. Prior to April 1, 2006, benefits are based on the average of the employee compensation during the highest five consecutive years during the last ten consecutive years of employment. Beginning on April 1, 2006, eligible compensation was limited to $50,000 per year. The Company does not expect to make a contribution in 2014 because the plan’s funding credit balance will be applied toward reducing the contribution requirement. The Company’s expected long-term rate of return on plan assets is 7.25%.

On February 12, 2010, the Company curtailed its pension plan effective March 31, 2010, whereby no additional service will accumulate for vested participants after March 31, 2010. Unvested participants still have the opportunity to meet the five year vesting requirement to earn a benefit.

Net periodic benefit cost includes the following components:
(dollars in thousands)
Nine Months Ended September 30,
 
2014
 
2013
Service cost
$
175

 
$
123

Interest cost
1,816

 
1,676

Expected return on plan assets
(2,226
)
 
(2,203
)
Amortization of unrecognized net actuarial loss
235

 
473

Net periodic benefit cost
$

 
$
69


15.  SHARE-BASED COMPENSATION

Share-based compensation awards are currently granted under the National Penn Bancshares, Inc. 2014 Long-Term Incentive Compensation Plan ("2014 Plan"), approved by shareholders in April 2014 and expiring on April 22, 2024. The 2014 Plan replaced the expired Long-Term Incentive Compensation Plan ("2005 Plan") and includes authorized but unissued common shares under the 2005 Plan. Under the terms of the 2014 Plan, 3.3 million shares are available for issuance as of September 30, 2014. The Company has 0.6 million awards expiring during the twelve months ending September 30, 2015.

As of September 30, 2014, there was approximately $1.3 million of total unrecognized compensation cost related to unvested stock options and approximately $5.3 million of unrecognized compensation cost for other share-based awards that is expected to be recognized within approximately 3 years.

31

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


The table below summarizes activity related to share-based plans:
(dollars in thousands)
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Share-based compensation expense
$
1,072

 
$
809

 
$
3,210

 
$
2,442

Proceeds from stock options exercised
103

 
289

 
422

 
756

Intrinsic value of stock options exercised
57

 
151

 
159

 
325


16.  SEGMENT REPORTING

The Company’s operating segments, which are evaluated regularly by the Chief Executive Officer to decide how to allocate and assess resources and performance, are “Community Banking” and “Other.” The Company determines its segments based primarily upon product and service offerings and through the types of income generated.

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 it provides. Examples of products and services provided include commercial business loans, commercial real estate loans, residential mortgages and other consumer loans, and deposit and cash management services. Both commercial and retail banking are dependent upon deposits and various borrowings to manage interest rate and credit risk. 

The Company has also identified several other operating segments. These non-reportable segments include National Penn Wealth Management, N.A., National Penn Insurance Services Group, Inc., and the parent bank holding company and are included in the “Other” category. These operating segments do not have similar characteristics to the community banking operations and do not individually or in the aggregate meet the quantitative thresholds requiring separate disclosure. The operating segments in the “Other” category earn revenues primarily through the generation of fee income and are also aggregated based on their similar economic characteristics, products and services, type or class of customer, methods used to distribute products and services and/or nature of their regulatory environment. The identified segments reflect the manner in which financial information is currently evaluated by management. The accounting policies, used in this disclosure of operating segments, are the same as those described in the summary of significant accounting policies in the Company’s most recent Annual Report on Form 10-K.    
    
Reportable segment-specific information and reconciliation to consolidated financial information is as follows:
 
As of and for the
Three Months Ended September 30, 2014
 (dollars in thousands)
Community Banking
 
Other
 
Consolidated
Total assets
$
8,589,143

 
$
43,857

 
$
8,633,000

Total deposits
6,287,936

 

 
6,287,936

Net interest income (expense)
64,985

 
(755
)
 
64,230

Total non-interest income
12,305

 
10,566

 
22,871

Total non-interest expense
43,429

 
8,729

 
52,158

Net income
24,835

 
485

 
25,320

 
 
 
 
 
 
 
For the
Nine Months Ended September 30, 2014
 (dollars in thousands)
Community Banking
 
Other
 
Consolidated
Net interest income (expense)
$
191,258

 
$
(1,788
)
 
$
189,470

Total non-interest income
36,185

 
32,560

 
68,745

Total non-interest expense
130,002

 
26,607

 
156,609

Net income
72,162

 
2,067

 
74,229


32

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

 
As of and for the
Three Months Ended September 30, 2013
 (dollars in thousands)
Community Banking
 
Other
 
Consolidated
Total assets
$
8,383,872

 
$
40,751

 
$
8,424,623

Total deposits
6,435,456

 

 
6,435,456

Net interest income (expense)
63,946

 
(834
)
 
63,112

Total non-interest income
14,234

 
10,574

 
24,808

Total non-interest expense
44,372

 
9,231

 
53,603

Net income
24,243

 
317

 
24,560

 
 
 
 
 
 
 
For the
Nine Months Ended September 30, 2013
 (dollars in thousands)
Community Banking
 
Other
 
Consolidated
Net interest income (expense)
$
190,436

 
$
(2,446
)
 
$
187,990

Total non-interest income
40,709

 
34,644

 
75,353

Total non-interest expense
195,917

 
28,161

 
224,078

Net income
30,121

 
2,054

 
32,175


33


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 earnings performance and financial condition of the Company as of and for the three and nine months ended September 30, 2014, with a primary focus on an analysis of operating results.  Current performance does not guarantee, and may not be indicative of similar performance in the future.  The Company’s consolidated financial statements included in this Report are unaudited, and as such, are subject to year-end examination.

Statement Regarding Non-GAAP Financial Measures:

This Report contains supplemental financial information determined by methods other than in accordance with Accounting Principles Generally Accepted in the United States of America (“GAAP”). National Penn’s management uses these non-GAAP measures in its analysis of National Penn’s performance. These measures should not be considered a substitute for GAAP basis measures nor should they be viewed as a substitute for operating results determined in accordance with GAAP. Management believes the presentation of the following non-GAAP financial measures, which exclude the impact of the specified items, provides useful supplemental information that is essential to a proper understanding of the financial results of National Penn.
Tangible common equity excludes goodwill and intangible assets and preferred equity. Banking and financial institution regulators also exclude goodwill and intangible assets from shareholders’ equity when assessing the capital adequacy of a financial institution. Tangible common equity provides a method to assess the Company’s tangible capital trends.
Tangible book value expresses tangible common equity on a per-share basis. Tangible book value provides a method to assess the level of tangible net assets on a per-share basis.
Adjusted net income and adjusted return on assets excludes the effects of certain gains and losses, adjusted for applicable taxes. Adjusted net income and adjusted return on assets provides a method to assess earnings performance by excluding items that management believes are not comparable among the periods presented.
Efficiency ratio expresses operating expenses as a percentage of fully-taxable equivalent net interest income plus non-interest income. Operating expenses exclude items from non-interest expense that management believes are not comparable among the periods presented. Non-interest income is adjusted to also exclude items that management believes are not comparable among the periods presented. Efficiency ratio is used as a method for management to assess its operating expense level and to compare to financial institutions of varying sizes.

Management believes the use of non-GAAP measures will help readers compare National Penn’s current results to those of prior periods as presented in the accompanying discussion.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The accounting and reporting policies of the Company conform to GAAP and predominant practice within the financial services industry.  The preparation of financial statements in conformity with GAAP 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 following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results:
 
allowance for loan losses;
goodwill and other intangible assets;
income taxes; and
other-than-temporary impairment.

There have been no material changes in the Company’s critical accounting policies, judgments and estimates, including assumptions or estimation techniques utilized, as compared to the Company's most recent Annual Report on Form 10-K.


34


FINANCIAL HIGHLIGHTS

Business and Industry

National Penn Bancshares, Inc. is a Pennsylvania business corporation and a registered bank holding company headquartered in Allentown, Pennsylvania. National Penn operates as an independent community banking company that offers a diversified range of financial products principally through its bank subsidiary, National Penn Bank, as well as an array of investment, insurance and employee benefit services through its non-bank subsidiaries. National Penn’s financial services affiliates consist of National Penn Wealth Management, N.A., including its National Penn Investors Trust Company division; Institutional Advisors, LLC; and National Penn Insurance Services Group, Inc., including its Higgins Insurance and Caruso Benefits divisions.

The Company’s primary business is accepting deposits from customers through its retail branch offices, and investing those deposits, together with funds generated from operations and borrowings, in loans, including commercial business loans, commercial real estate loans, residential mortgages, home equity loans, other consumer loans, and investment securities.

The Company’s strategic plan is designed to enhance shareholder value by operating a highly profitable financial services company within the markets it serves. Specifically, management is focused on increasing market penetration in selected geographic areas and achieving excellence in both retail and commercial lines of business.  The Company also intends to grow revenue through appropriate and targeted acquisitions, through expanding into new geographical markets, or through further penetrating existing markets or business lines.

At September 30, 2014, National Penn Bank operated 111 retail branch offices, of which 110 are located in Pennsylvania and one is located in Maryland. As part of a restructuring plan announced during the fourth quarter of 2013, the Company closed 8 branches during the second quarter of 2014.

The Company’s results of operations are affected by five major elements: (1) net interest income, or the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowed funds; (2) the provision for loan losses, or the amount added to the allowance for loan losses to provide reserves for inherent losses on loans and leases; (3) non-interest income, which is made up primarily of banking fees, wealth management income, insurance income, change in fair value measurements, gains and losses from the sale of securities, and other transactions; (4) non-interest expense, which consists primarily of salaries, employee benefits and other operating expenses; and (5) income taxes. Results of operations are also significantly affected by general economic and competitive conditions, as well as changes in market interest rates, government policies and actions of regulatory authorities.

Merger with TF Financial Corporation

On October 24, 2014, the Company completed its acquisition of TF Financial Corporation ("TF Financial") through a stock and cash merger. TF Financial was a savings and loan holding company with 3rd Fed Bank as its wholly-owned subsidiary. Headquartered in Newtown, Pennsylvania, TF Financial operated eighteen branch offices and as of June 30, 2014, TF Financial had approximately $840 million of assets, which included $610 million of loans, and $686 million of deposits. This acquisition will be accounted for under the acquisition method of accounting. Accordingly, the Company is in the process of performing assessments of net assets acquired and determining fair values of these identifiable assets acquired and liabilities assumed as of October 24, 2014. TF Financial's results of operations have been included in the Company's consolidated statements of income and comprehensive income since October 24, 2014. The operations of TF Financial are not included in the accompanying financial statements dated September 30, 2014.
The acquisition was valued at approximately $136 million, consisting of approximately $58.4 million in cash and the issuance of approximately 8.0 million shares of National Penn common stock valued at approximately $77.3 million.

35


Overview
 
Three Months Ended
 
Nine Months Ended
 
(dollars in thousands, except per share data)
September 30,
2014
 
June 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
 
EARNINGS
 
 
 
 
 
 
 
 
 
 
Total interest income
$
71,368

 
$
70,528

 
$
71,498

 
$
212,029

 
$
216,194

 
Total interest expense
7,138

 
7,577

 
8,386

 
22,559

 
28,204

 
Net interest income
64,230

 
62,951

 
63,112

 
189,470

 
187,990

 
Provision for loan losses
1,000

 

 
1,250

 
2,251

 
4,250

 
Net interest income after provision for loan losses
63,230

 
62,951

 
61,862

 
187,219

 
183,740

 
Net gains from fair value changes of subordinated debentures

 

 

 

 
2,111

 
Net gains on investment securities

 

 
7

 
8

 
54

 
Other non-interest income
22,871

 
24,396

 
24,801

 
68,737

 
73,188

 
Loss on debt extinguishment

 

 

 

 
64,888

 
Other non-interest expense
52,158

 
52,114

 
53,603

 
156,609

 
159,190

 
Income before income taxes
33,943

 
35,233

 
33,067

 
99,355

 
35,015

 
Income tax expense
8,623

 
9,034

 
8,507

 
25,126

 
2,840

 
Net income
$
25,320

 
$
26,199

 
$
24,560

 
$
74,229

 
$
32,175

 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.18

 
$
0.19

 
$
0.17

 
$
0.53

 
$
0.22

 
Diluted earnings per share
0.18

 
0.19

 
0.17

 
0.53

 
0.22

 
Dividends per share
0.10

 
0.10

 
0.10

 
0.30

 
0.20

(a) 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
3.43
%
 
3.43
%
 
3.49
%
 
3.43
%
 
3.51
%
 
Efficiency ratio (i)
57.29
%
 
57.02
%
 
58.16
%
 
57.95
%
 
58.06
%
 
Return on average assets
1.17
%
 
1.23
%
 
1.17
%
 
1.16
%
 
0.52
%
 
Adjusted return on average assets (i)
1.17
%
 
1.23
%
 
1.17
%
 
1.16
%
 
1.17
%
 
 
 
 
 
 
 
 
 
 
 
 
Asset Quality Metrics
 
 
 

 
 

 
 
 
 
 
Allowance / total loans
1.63
%
 
1.66
%
 
1.91
%
 
 
 
 
 
Non-performing loans / total loans
0.78
%
 
0.80
%
 
1.04
%
 
 
 
 
 
Delinquent loans / total loans
0.37
%
 
0.32
%
 
0.43
%
 
 
 
 
 
Allowance / non-performing loans
207.5
%
 
206.6
%
 
183.9
%
 
 
 
 
 
Annualized net charge-offs / average loans
0.14
%
 
0.25
%
 
0.38
%
 
0.24
%
 
0.37
%
 
 
 
 
 
 
 
 
 
 
 
 
(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.
(i) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.
For the three months ended September 30, 2014, the Company recorded net income of $25.3 million, or $0.18 per diluted share, compared to $24.6 million, or $0.17 per diluted share, in the comparable prior year period. Other non-interest income was $22.9 million for the third quarter of 2014, a decrease of $1.9 million compared to the prior year period, primarily as a result of a decline in mortgage banking income which was driven by lower levels of refinance activity in the marketplace. Other non-interest expense was $52.2 million for the third quarter of 2014, a decrease of $1.4 million from the prior year period as a result of a continued focus on expense control. The current quarter's efficiency ratio of 57.3% compared favorably to 58.2% for the prior year period.
For the nine months ended September 30, 2014, the Company recorded net income of $74.2 million, or $0.53 per diluted share, compared to net income of $32.2 million, or $0.22 per diluted share, in the comparable prior year period. The prior year period's results were impacted by the $64.9 million ($42.2 million after-tax) charge from the extinguishment of $400 million of previously restructured FHLB advances that occurred during the first quarter of 2013. Additionally, during the first quarter of 2013, the Company redeemed $65.2 million of 7.85%, fixed-rate subordinated debentures. This transaction produced a $2.1 million ($1.4 million after-tax) gain since these instruments were previously accounted for at fair value and the Company had a call at par. These strategic initiatives were undertaken for asset/liability, interest rate risk, and capital management purposes.

36


Net interest income totaled $189 million and $188 million for the nine months ended September 30, 2014, and September 30, 2013, respectively. The Company's net interest margin declined eight basis points to 3.43% for the nine months ended September 30, 2014, compared to 3.51% for the nine months ended September 30, 2013, as the prolonged low interest rate environment continued to impact loan and investment yields and as average earning assets increased $189 million to $7.9 billion for the nine months ended September 30, 2014.
Provision for loan losses was $2.3 million for the nine months ended September 30, 2014, compared to $4.3 million for the prior year period, as the Company continued to experience improvements in asset quality. Classified loans declined by 22.3% since September 30, 2013, and non-performing loans declined to 0.78% of total loans at September 30, 2014, compared to 1.04% at September 30, 2013.
Other non-interest income totaled $68.7 million for the nine months ended September 30, 2014, a decrease of $4.5 million, when compared to the prior year period. The decrease is primarily attributable to a decrease in mortgage banking income of $3.0 million and a $0.5 million loss incurred during the first quarter of 2014 on an unconsolidated equity investment.
Other non-interest expense for the nine months ended September 30, 2014 continued to be well controlled at $157 million, a decrease of $2.6 million when compared to the nine months ended September 30, 2013.

Adjusted net income and adjusted return on average assets(i) are non-GAAP measures and exclude certain items which management believes affect the comparability of results between periods. The following table reconciles the non-GAAP measure of adjusted net income to the GAAP measure of net income available to common shareholders and diluted earnings per share and calculates the adjusted return on average assets(i).
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands, except per share data)
September 30,
2014
 
June 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
Adjusted net income reconciliation
 
 
 
 
 
 
 
 
 
Net income
$
25,320

 
$
26,199

 
$
24,560

 
$
74,229

 
$
32,175

After tax unrealized fair value gain on subordinated debentures

 

 

 

 
(1,372
)
After tax loss on debt extinguishment

 

 

 

 
42,177

Adjusted net income
$
25,320

 
$
26,199

 
$
24,560

 
$
74,229

 
$
72,980

 
 
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
 
Net income
$
0.18

 
$
0.19

 
$
0.17

 
$
0.53

 
$
0.22

After tax unrealized fair value gain on subordinated debentures

 

 

 

 
(0.01
)
After tax loss on debt extinguishment

 

 

 

 
0.29

Adjusted net income
$
0.18

 
$
0.19

 
$
0.17

 
$
0.53

 
$
0.50

 
 
 
 
 
 
 
 
 
 
Average assets
$
8,569,734

 
$
8,512,845

 
$
8,310,626

 
$
8,521,085

 
$
8,312,023

Adjusted return on average assets
1.17
%
 
1.23
%
 
1.17
%
 
1.16
%
 
1.17
%
 
 
 
 
 
 
 
 
 
 
(i) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.

For the nine months ended September 30, 2013, adjusted net income excluded the loss on debt extinguishment of $64.9 million ($42.2 million after-tax) and the gain on the Company's subordinated debentures accounted for at fair value of $2.1 million ($1.4 million after-tax).

Adjusted net income of $74.2 million, or $0.53 per diluted share, for the nine months ended September 30, 2014 remained relatively stable when compared to the adjusted net income of $73.0 million, or $0.50 per diluted share for the nine months ended September 30, 2013, as asset quality continues to improve and expense levels remain well controlled.

37


FINANCIAL CONDITION AND RESULTS OF OPERATIONS


SUMMARY BALANCE SHEET
(dollars in thousands)
September 30, 2014
 
June 30, 2014
 
December 31, 2013
Total cash and cash equivalents
$
195,368

 
$
211,914

 
$
283,523

Investment securities and other securities
2,381,751

 
2,420,509

 
2,396,298

Total loans
5,469,842

 
5,406,031

 
5,338,219

Total assets
8,633,000

 
8,618,373

 
8,591,848

Deposits
6,287,936

 
6,108,483

 
6,072,578

Borrowings
1,141,766

 
1,316,253

 
1,282,289

Shareholders' equity
1,107,184

 
1,101,408

 
1,131,866

 
 
 
 
 
 

Assets

Loans and Allowance for Loan Losses

Economic conditions impact the Company’s customers. Although the economy and credit environment are inherently uncertain, the Company’s loan portfolio has demonstrated continued asset quality improvement. The Company remains focused on attracting and retaining high-quality commercial and retail customers to support quality loan growth.
 
Federal Reserve economic data regarding the Third District, which consists of eastern Pennsylvania, southern New Jersey, and Delaware, suggests the following trends, which may or may not apply to the Company:
Contacts in the Third District indicate that aggregate business activity continued to grow at a modest pace, most notably in tourism and manufacturing.
The growth in auto sales experienced in prior periods has moderated but remains strong. General retail showed slight growth. Service sectors maintained a moderate pace of growth overall. Residential construction and real estate sectors showed slight overall growth.
Financial firms continued to report slight increases in total loan volume, and credit quality has continued to improve. Demand has increased most significantly in consumer credit lines, such as credit cards and auto loans, and business capital spending has increased slightly.
The overall outlook for most sectors is positive as contacts continue to anticipate moderate growth over the next six months. Moreover, they generally express greater confidence in the underlying economy and more overall optimism for growth.


38


The Company’s loans are diversified by borrower, industry group, and geographical area throughout the markets it serves. The following table summarizes the composition of the Company’s loan portfolio:
(dollars in thousands)
September 30,
2014
 
December 31,
2013
 
Increase/(decrease)
Commercial and industrial
$
2,457,870

 
$
2,460,664

 
$
(2,794
)
 
(0.1
)%
 
 
 
 
 
 
 
 
CRE - permanent
1,086,346

 
994,838

 
91,508

 
9.2
 %
CRE - construction
208,728

 
198,334

 
10,394

 
5.2
 %
Commercial real estate
1,295,074

 
1,193,172

 
101,902

 
8.5
 %
Commercial
3,752,944

 
3,653,836

 
99,108

 
2.7
 %
 
 
 
 
 
 
 
 
Residential mortgages
660,923

 
652,225

 
8,698

 
1.3
 %
Home equity
776,486

 
762,608

 
13,878

 
1.8
 %
All other consumer
275,599

 
264,599

 
11,000

 
4.2
 %
Consumer
1,713,008

 
1,679,432

 
33,576

 
2.0
 %
 
 
 
 
 
 
 
 
Loans
$
5,465,952

 
$
5,333,268

 
$
132,684

 
2.5
 %
 
 
 
 
 
 
 
 
Allowance for loan losses
88,927

 
96,367

 
(7,440
)
 
(7.7
)%
 
 
 
 
 
 
 
 
Loans, net
$
5,377,025

 
$
5,236,901

 
$
140,124

 
2.7
 %
 
 
 
 
 
 
 
 
Loans held-for-sale
$
3,890

 
$
4,951

 
$
(1,061
)
 
(21.4
)%
 
Loans increased by $133 million, or 2.5%, to $5.5 billion at September 30, 2014 from December 31, 2013, driven by growth in commercial real estate and consumer loans of $102 million , or 8.5%, and $33.6 million, or 2.0%, respectively. Loan growth during the nine months ended September 30, 2014 was inclusive of a $21.8 million, or 11.4%, decrease in classified loans. Net charge-offs during the nine months ended September 30, 2014 totaled $9.7 million compared to $14.4 million for the prior year period, and the provision was $2.3 million during the nine months ended September 30, 2014, resulting in an allowance for loan losses of $88.9 million at September 30, 2014.
 
The following table demonstrates select asset quality metrics:
(dollars in thousands)
September 30,
2014
 
June 30,
2014
 
December 31,
2013
Non-performing loans
$
42,866

 
$
43,486

 
$
52,591

Non-performing loans to total loans
0.78
%
 
0.80
%
 
0.99
%
Delinquent loans
$
20,171

 
$
17,316

 
$
29,435

Delinquent loans to total loans
0.37
%
 
0.32
%
 
0.55
%
Classified loans (j)
$
169,790

 
$
173,610

 
$
191,589

Classified loans to total loans
3.10
%
 
3.21
%
 
3.59
%
Tier 1 capital and allowance
$
1,015,950

 
$
1,002,974

 
$
1,038,293

Classified loans to Tier 1 capital and allowance
16.71
%
 
17.31
%
 
18.45
%
Total loans
$
5,469,842

 
$
5,406,031

 
$
5,338,219

 
 
 
 
 
 
(j) Includes non-performing loans.
 
 

    

39


The following table summarizes the Company’s non-performing assets:
 (dollars in thousands)
September 30,
2014
 
June 30,
2014
 
December 31,
2013
Non-accrual commercial and industrial
$
11,205

 
$
9,641

 
$
14,935

 
 
 
 
 
 
Non-accrual CRE-permanent
2,887

 
4,811

 
4,258

Non-accrual CRE-construction
8,547

 
9,674

 
12,128

Total non-accrual commercial real estate
11,434

 
14,485

 
16,386

 
 
 
 
 
 
Non-accrual residential mortgages
6,803

 
6,265

 
7,037

Non-accrual home equity
3,961

 
3,631

 
4,787

All other non-accrual consumer
1,467

 
1,495

 
1,731

Total non-accrual consumer
12,231

 
11,391

 
13,555

 
 
 
 
 
 
Total non-accrual loans
34,870

 
35,517

 
44,876

 
 
 
 
 
 
Restructured loans (k)
7,996

 
7,969

 
7,715

Total non-performing loans
42,866

 
43,486

 
52,591

 
 
 
 
 
 
Other real estate owned and repossessed assets
1,561

 
1,758

 
1,278

Total non-performing assets 
44,427

 
45,244

 
53,869

 
 
 
 
 
 
Loans 90+ days past due & still accruing
2,961

 
2,097

 
3,466

Total non-performing assets and loans 90+ days past due
$
47,388

 
$
47,341

 
$
57,335

 
 
 
 
 
 
Total loans
$
5,469,842

 
$
5,406,031

 
$
5,338,219

Average total loans
5,406,073

 
5,360,641

 
5,256,841

Allowance for loan losses
88,927

 
89,848

 
96,367

 
 
 
 
 
 
Allowance for loan losses to:
 

 
 

 
 

Non-performing assets and loans 90+ days past due 
188
%
 
190
%
 
168
%
Non-performing loans
207
%
 
207
%
 
183
%
Total loans
1.63
%
 
1.66
%
 
1.81
%
(k) Restructured loans at September 30, 2014, included $0.6 million of commercial loans and $7.3 million of consumer loans which were modified for customers who were experiencing financial difficulty and were in jeopardy of losing their homes or businesses to foreclosure.

The following table provides additional information for the Company’s non-accrual loans:
(dollars in thousands)
September 30,
2014
 
June 30,
2014
 
December 31,
2013
Total non-accrual loans
$
34,870

 
$
35,517

 
$
44,876

Non-accrual loans with partial charge-offs
12,721

 
14,355

 
13,671

Life-to-date partial charge-offs on non-accrual loans
18,650

 
19,328

 
20,049

Charge-off rate of non-accrual loans
59.4
%
 
57.4
%
 
59.5
%
Specific reserves on non-accrual loans
$
2,697

 
$
2,053

 
$
5,761

 
 
 
 
 
 


    


40


At September 30, 2014, the Company’s non-accrual loans totaled $34.9 million and included $12.7 million of non-accrual loans which have been partially charged-off by 59.4%, or $18.7 million. Non-accrual and non-performing loan and asset levels continue to improve and represented a small percentage of total loans and total assets. Non-performing loans totaled 0.78% of total loans at September 30, 2014. Additionally, non-performing loans are included in impaired loans and are evaluated individually when determining the allowance. Impaired loans totaled $45.8 million at September 30, 2014, and there was a specific reserve of $5.1 million in the allowance related to $23.4 million of underlying principal balances of impaired loans. There is a portion of the Company’s impaired loans that have not been reserved or partially charged-off, since principal collection is probable.

An analysis of net loan charge-offs:
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands)
September 30,
2014
 
June 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
Commercial and industrial
$
19

 
$
2,049

 
$
3,059

 
$
3,218

 
$
6,993

 
 
 
 
 
 
 
 
 
 
CRE - permanent
1,072

 
599

 
909

 
2,094

 
1,587

CRE - construction
(221
)
 
90

 
(29
)
 
(101
)
 
382

Commercial real estate
851

 
689

 
880

 
1,993

 
1,969

 
 
 
 
 
 
 
 
 
 
Residential mortgages
138

 
162

 
209

 
1,981

 
2,064

Home equity
355

 
389

 
423

 
1,528

 
2,073

All other consumer
558

 
115

 
449

 
971

 
1,343

Consumer
1,051

 
666

 
1,081

 
4,480

 
5,480

 
 
 
 
 
 
 
 
 
 
Net loans charged-off
$
1,921

 
$
3,404

 
$
5,020

 
$
9,691

 
$
14,442

 
 
 
 
 
 
 
 
 
 
Net charge-offs (annualized) to:
 

 
 

 
 

 
 

 
 

Total loans
0.14
%
 
0.25
%
 
0.38
%
 
0.24
%
 
0.37
%
Average total loans
0.14
%
 
0.25
%
 
0.38
%
 
0.24
%
 
0.37
%

Net loan charge-offs totaled $9.7 million for the nine months ended September 30, 2014, a $4.8 million, or 32.9%, decrease compared to the prior year period. The linked quarter decrease in net loan charge offs was $1.5 million, or 43.6%. The net charge-off trend is consistent with the continued credit quality improvement of the Company's loan portfolio. Annualized net charge-offs as a percentage of average total loans were 0.14% and 0.24% for the three and nine months ended September 30, 2014, respectively, compared to 0.38% and 0.37% for the prior year periods.


    

41


Changes in the allowance for loan losses by loan portfolio:
(dollars in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
89,848

 
$
104,533

 
$
96,367

 
$
110,955

Charge-offs:
 

 
 

 
 

 
 

Commercial and industrial
513

 
3,335

 
4,740

 
8,084

Commercial real estate
1,100

 
936

 
2,427

 
2,402

Consumer
1,484

 
1,503

 
6,073

 
6,984

Total charge-offs
3,097

 
5,774

 
13,240

 
17,470

 
 
 
 
 
 
 
 
Recoveries:
 

 
 

 
 

 
 

Commercial and industrial
494

 
276

 
1,522

 
1,091

Commercial real estate
249

 
56

 
434

 
433

Consumer
433

 
422

 
1,593

 
1,504

Total recoveries
1,176

 
754

 
3,549

 
3,028

Net charge-offs
1,921

 
5,020

 
9,691

 
14,442

Provision charged to expense
1,000

 
1,250

 
2,251

 
4,250

Balance at end of period
$
88,927

 
$
100,763

 
$
88,927

 
$
100,763


The following table presents the components of the allowance:
(dollars in thousands)
September 30,
2014
 
December 31,
2013
Specific reserves
$
5,065

 
$
8,304

Allocated reserves
72,662

 
77,115

Unallocated reserves
11,200

 
10,948

Total allowance for loan losses
$
88,927

 
$
96,367

 
The allowance was $88.9 million at September 30, 2014 and represented 1.63% of total loans and 207% of non-performing loans, compared to $96.4 million, or 1.81% of total loans and 183% of non-performing loans at December 31, 2013. The decrease of the allowance during the period was due to the continued improvement in the various asset quality metrics. As a result of these factors, the Company recorded a provision for loan losses of $1.0 million for the three months ended September 30, 2014, compared to $1.3 million for the prior year period, and recorded a provision of $2.3 million for the nine months ended September 30, 2014, compared to $4.3 million for the nine months ended September 30, 2013.





42


Liabilities
 
Liabilities totaled $7.5 billion at September 30, 2014, increasing $65.8 million from December 31, 2013. The increase was primarily due to an increase in deposits of $215 million offset by a decrease in borrowings of $141 million and a $9.0 million reduction in other liabilities. The reduction in borrowings from December 31, 2013 to September 30, 2014 is the result of a decrease in FHLB advances of $244 million and the maturity of $50 million in structured repurchase agreements, offset by the issuance of $125 million of senior notes and an increase of $28.6 million in customer repurchase agreements.

Deposits, the Company’s primary source of funding, increased $215 million from December 31, 2013. The change consists of an increase in non-time deposits of $353 million, or 7.3%, offset by a decrease in time deposits of $138 million, or 11.0%. The increase in non-time deposits is primarily due to the increase in NOW accounts of $326 million, or 19.7%, which is the result of a seasonal increase in municipal deposits during the third quarter. The decrease in time deposits from December 31, 2013 is the result of a substantial amount of five year time deposit maturities during the second and third quarters.
    
(dollars in thousands)
September 30,
2014
 
December 31,
2013
 
Increase/(decrease)
Non-interest bearing deposits
$
990,438

 
$
970,051

 
$
20,387

 
2.1
 %
NOW accounts
1,981,608

 
1,655,425

 
326,183

 
19.7
 %
Money market accounts
1,658,815

 
1,670,035

 
(11,220
)
 
(0.7
)%
Savings accounts
544,625

 
526,576

 
18,049

 
3.4
 %
Time deposits less than $100
797,535

 
896,700

 
(99,165
)
 
(11.1
)%
Time deposits $100 or greater
314,915

 
353,791

 
(38,876
)
 
(11.0
)%
Total deposits
$
6,287,936

 
$
6,072,578

 
$
215,358

 
3.5
 %
 
 
 
 
 
 
 
 
Non-time deposits / total deposits
82.3
%
 
79.4
%
 
 
 
 

Shareholders’ Equity
 
Shareholders’ equity totaled $1.1 billion at September 30, 2014, decreasing $24.7 million from December 31, 2013. Significant activity during the nine months ended September 30, 2014 included: 
Net income of $74.2 million,
Other comprehensive income of $13.2 million,
Cash dividends paid to common shareholders of $41.8 million,
Shares issued under share-based plans, net of taxes, of $5.0 million, and
The repurchase of 7 million common shares at a cost of $75.4 million.

43


RESULTS OF OPERATIONS
 
Net Interest Income
 
The following table presents average balances, average yields, and net interest margin information for the nine months ended September 30, 2014 as compared to the same period in 2013.  Interest income and yields are presented on a fully taxable equivalent (“FTE”) basis using an effective tax rate of 35%.  Net interest margin is expressed as net interest income (FTE) as a percentage of average total interest earning assets.

Average Balances, Average Rates, and Net Interest Margin*
 
For the Nine Months Ended September 30,
 
2014
 
2013
(dollars in thousands)
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
Interest Earning Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest earning deposits at banks
$
73,940

 
$
87

 
0.16
%
 
$
105,671

 
$
164

 
0.21
%
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
1,005

 
14

 
1.86
%
 
960

 
28

 
3.90
%
Mortgage-backed securities/collateralized mortgage obligations
1,725,736

 
30,059

 
2.33
%
 
1,581,634

 
26,827

 
2.27
%
State and municipal*
602,190

 
29,746

 
6.60
%
 
666,872

 
32,884

 
6.59
%
Other bonds and securities
79,111

 
3,356

 
5.67
%
 
75,796

 
1,979

 
3.49
%
Total investments
2,408,042

 
63,175

 
3.51
%
 
2,325,262

 
61,718

 
3.55
%
 
 
 
 
 
 
 
 
 
 
 
 
Commercial loans*
3,684,144

 
107,079

 
3.89
%
 
3,556,488

 
111,740

 
4.20
%
Installment loans
1,028,703

 
31,654

 
4.11
%
 
1,011,509

 
32,190

 
4.25
%
Mortgage loans
657,172

 
22,073

 
4.49
%
 
664,463

 
23,388

 
4.71
%
Total loans
5,370,019

 
160,806

 
4.00
%
 
5,232,460

 
167,318

 
4.28
%
Total earning assets
7,852,001

 
224,068

 
3.82
%
 
7,663,393

 
229,200

 
4.00
%
Allowance for loan losses
(93,557
)
 
 

 
 

 
(108,257
)
 
 

 
 

Non-interest earning assets
762,641

 
 

 
 

 
756,887

 
 

 
 

Total assets
$
8,521,085

 
 

 
 

 
$
8,312,023

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Interest Bearing Liabilities:
 

 
 

 
 

 
 

 
 

 
 

Interest bearing deposits
$
5,134,563

 
$
13,927

 
0.36
%
 
$
5,169,446

 
$
17,213

 
0.45
%
Customer repurchase agreements
544,500

 
1,192

 
0.29
%
 
529,847

 
1,398

 
0.35
%
Repurchase agreements
38,553

 
1,406

 
4.87
%
 
82,750

 
1,956

 
3.16
%
Short-term borrowings
136

 
1

 
0.63
%
 
12,557

 
41

 
0.44
%
Federal Home Loan Bank advances
540,972

 
4,214

 
1.04
%
 
296,417

 
5,042

 
2.27
%
Senior long-term debt
6,868

 
227

 
4.42
%
 

 

 
%
Subordinated debentures
77,321

 
1,592

 
2.75
%
 
93,107

 
2,554

 
3.67
%
Total interest bearing liabilities
6,342,913

 
22,559

 
0.48
%
 
6,184,124

 
28,204

 
0.61
%
Non-interest bearing deposits
993,372

 
 

 
 

 
916,936

 
 

 
 

Other non-interest bearing liabilities
90,231

 
 

 
 

 
80,893

 
 

 
 

Total liabilities
7,426,516

 
 

 
 

 
7,181,953

 
 

 
 

Equity
1,094,569

 
 

 
 

 
1,130,070

 
 

 
 

Total liabilities and equity
$
8,521,085

 
 

 
 

 
$
8,312,023

 
 

 
 

NET INTEREST INCOME/MARGIN (FTE)
 

 
201,509

 
3.43
%
 
 

 
200,996

 
3.51
%
Tax equivalent interest
 

 
12,039

 
 

 
 

 
13,006

 
 

Net interest income
 

 
$
189,470

 
 

 
 

 
$
187,990

 
 

*Fully taxable equivalent basis, using a 35% effective tax rate.
Average loan balances include non-accruing loans and average net fees and costs.

44



The following table allocates changes in FTE interest income and interest expense based upon volume and rate changes. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately.
(dollars in thousands)
Nine Months Ended September 30,
2014 compared to 2013
Increase (decrease) in:
Volume
 
Rate
 
Total
Interest income:
 
 
 
 
 
Interest earning deposits at banks
$
(43
)
 
$
(34
)
 
$
(77
)
 
 
 
 
 
 
U.S. Government agencies
1

 
(15
)
 
(14
)
Mortgage-backed securities/collateralized mortgage obligations
2,495

 
737

 
3,232

State and municipal
(3,195
)
 
57

 
(3,138
)
Other bonds and securities
90

 
1,287

 
1,377

Total investments
(609
)
 
2,066

 
1,457

 
 
 
 
 
 
Commercial loans
3,913

 
(8,574
)
 
(4,661
)
Installment loans
541

 
(1,077
)
 
(536
)
Mortgage loans
(254
)
 
(1,061
)
 
(1,315
)
Total loans
4,200

 
(10,712
)
 
(6,512
)
Total interest income
3,548

 
(8,680
)
 
(5,132
)
 
 
 
 
 
 
Interest expense:
 

 
 

 
 

Interest bearing deposits
(115
)
 
(3,171
)
 
(3,286
)
 
 
 
 
 
 
Customer repurchase agreements
38

 
(244
)
 
(206
)
Repurchase agreements
(1,323
)
 
773

 
(550
)
Short-term borrowings
(52
)
 
12

 
(40
)
Federal Home Loan Bank advances
2,799

 
(3,627
)
 
(828
)
Senior long-term debt
227

 

 
227

Subordinated debentures
(389
)
 
(573
)
 
(962
)
Total borrowed funds
1,300

 
(3,659
)
 
(2,359
)
Total interest expense
1,185

 
(6,830
)
 
(5,645
)
Increase (decrease) in net interest income (FTE)
$
2,363

 
$
(1,850
)
 
$
513


The net interest margin for the nine months ended September 30, 2014 was 3.43% , a decline of 8 basis points from the 3.51% from the prior year period. The decrease in net interest margin was primarily due to lower yields on loans and investment securities, partially offset by an increase of $189 million of average earning assets when comparing the year-to-date periods.

For the nine months ended September 30, 2014, net interest income was $189 million and remained relatively stable compared to the nine months ended September 30, 2013, as the current year-to-date net interest margin declined 8 basis points compared to the prior year period. Interest income, on an FTE basis, declined by $5.1 million, or 2.2%, for the nine months ended September 30, 2014, when compared to the prior year period, as the increase in interest income of $3.5 million due to increasing average earning assets was offset by a decline in interest income of $8.7 million due to lower reinvestment rates. Interest expense declined by $5.6 million, or 20.0%, to $22.6 million for the nine months ended September 30, 2014, compared to $28.2 million for the prior year period, primarily due to various initiatives undertaken to manage the impact of the prolonged interest rate environment. These initiatives included:
 
Reducing the average cost of interest bearing deposits to 0.36% for the nine months ended September 30, 2014, from 0.45% for the nine months ended September 30, 2013, a decline of 9 basis points and $3.3 million of interest expense.

45


Interest expense on borrowed funds for the nine months ended September 30, 2014 decreased by $2.4 million when compared to the prior year period. The extinguishment of $400 million of FHLB advances and the redemption of the NPB Capital Trust II trust preferred securities during the first quarter of 2013 contributed to this decline.
The utilization of lower-cost funding sources, such as short-term FHLB advances, in place of maturing, higher-cost repurchase agreements.

On September 16, 2014, the Company issued $125 million aggregate principal amount of senior notes at an annual fixed rate of 4.25%. The notes mature on September 30, 2024, and are payable on March 30th and September 30th of each year, commencing on March 30, 2015. During the three and nine months ended September 30, 2014, interest and debt issuance cost amortization expense related to the notes was $0.2 million.

Provision for Loan Losses

Provision for the nine months ended September 30, 2014 was $2.3 million, compared to $4.3 million for the prior year period. The Company recorded a provision of $1.0 million for the three months ended September 30, 2014, compared to $1.3 million for the three months ended September 30, 2013. The trends in net charge-offs, classified loans, non-performing loans and improving asset quality metrics resulted in a reduction to the allowance, which totaled $88.9 million at September 30, 2014. The allowance as a percentage of non-performing loans increased to 207% at September 30, 2014 from 183% at December 31, 2013. The allowance amounted to 1.63% of total loans at September 30, 2014 compared to 1.81% at December 31, 2013.  For additional analysis of the allowance refer to “Loans and Allowance for Loan Losses”.

Non-Interest Income
(dollars in thousands)
Nine Months Ended September 30,
 
 
 
 
 
2014
 
2013
 
Increase/(decrease)
Wealth management
$
20,944

 
$
20,700

 
$
244

 
1.2
 %
Service charges on deposit accounts
10,744

 
11,407

 
(663
)
 
(5.8
)%
Insurance commissions and fees
9,835

 
9,664

 
171

 
1.8
 %
Cash management and electronic banking fees
14,115

 
14,132

 
(17
)
 
(0.1
)%
Mortgage banking
2,639

 
5,598

 
(2,959
)
 
(52.9
)%
Bank owned life insurance
3,654

 
3,727

 
(73
)
 
(2.0
)%
Earnings (losses) of unconsolidated investments
(506
)
 
653

 
(1,159
)
 
NM

Gain on sale of non-performing loans
946

 

 
946

 
NM

Other operating income
6,366

 
7,307

 
(941
)
 
(12.9
)%
Net gains from fair value changes of subordinated debentures

 
2,111

 
(2,111
)
 
NM

Net gains on sales of investment securities
8

 
54

 
(46
)
 
(85.2
)%
Total non-interest income
$
68,745

 
$
75,353

 
$
(6,608
)
 
(8.8
)%
 
 
 
 
 
 
 
 
"NM" - Denotes a value displayed as a percentage change is not meaningful
 
Non-interest income for the nine months ended September 30, 2014 and 2013 totaled $68.7 million and $75.4 million, respectively, and its components changed primarily due to the following items:

Mortgage banking income decreased $3.0 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 due to lower levels of refinance activity in the marketplace.

The nine months ended September 30, 2013 included a gain of $2.1 million from the redemption of the Company's subordinated debentures accounted for at fair value (formerly Nasdaq: "NPBCO").

Service charges on deposit accounts decreased $0.7 million for the nine months ended September 30, 2014 impacted primarily by a decrease in the number of overdraft items and relating overdraft income.
 
The Company recorded a $0.5 million loss for the nine months ended September 30, 2014 on its unconsolidated equity investment portfolio, compared to a gain of $0.7 million in the prior year period.


46


During the second quarter of 2014, the Company recognized a $0.9 million gain on the sale of non-performing loans.



Non-Interest Expense
(dollars in thousands)
Nine Months Ended September 30,
 
 
 
 
 
2014
 
2013
 
Increase/(decrease)
Salaries, wages and employee benefits
$
87,743

 
$
87,965

 
$
(222
)
 
(0.3
)%
Premises and equipment
23,690

 
22,726

 
964

 
4.2
 %
FDIC insurance
3,657

 
4,111

 
(454
)
 
(11.0
)%
Other operating expenses
41,519

 
44,388

 
(2,869
)
 
(6.5
)%
Loss on debt extinguishment

 
64,888

 
(64,888
)
 
NM

Total non-interest expense
$
156,609

 
$
224,078

 
$
(67,469
)
 
(30.1
)%
 
 
 
 
 
 
 
 
"NM" - Denotes a value displayed as a percentage change is not meaningful
 
 
 
 
 
 
 
 
Reconciliation Table For Non-GAAP Financial Measures - Efficiency Ratio (i)
 
Nine Months Ended September 30,
 
 

 
 

Efficiency ratio calculation
2014
 
2013
 
 

 
 

Non-interest expense
$
156,609

 
$
224,078

 
 

 
 

Less:
 
 
 
 
 
 
 
Loss on debt extinguishment

 
64,888

 
 
 
 
Operating expenses
$
156,609

 
$
159,190

 
 
 
 
 
 
 
 
 
 
 
 
Net interest income (taxable equivalent)
$
201,509

 
$
200,996

 
 

 
 

 
 
 
 
 
 
 
 
Non-interest income
68,745

 
75,353

 
 

 
 

Less:
 
 
 
 
 

 
 

Net gains from fair value changes of subordinated debentures

 
2,111

 
 
 
 
Net gains on investment securities
8

 
54

 
 
 
 
Adjusted revenue
$
270,246

 
$
274,184

 
 

 
 

 
 
 
 
 
 

 
 

Efficiency ratio
57.95
%
 
58.06
%
 
 

 
 

 
 
 
 
 
 
 
 
(i) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.
 
 
 
Non-interest expense totaled $157 million for the nine months ended September 30, 2014, compared to $224 million for the prior year period. The loss on debt extinguishment during the prior year period was related to the repayment of $400 million of FHLB advances. Continued focus on expense controls resulted in operating expenses(i) of $157 million, a decrease of 1.6% compared to the nine months ended September 30, 2013. The 2014 year-to-date efficiency ratio(i) was 57.95% compared to 58.06% for the prior year period.

47


Income Tax Expense

Income tax expense for the nine months ended September 30, 2014 and September 30, 2013 was $25.1 million and $2.8 million, respectively. The prior year period included a $22.7 million income tax benefit related to the loss incurred upon the extinguishment of $400 million of FHLB advances. The effective tax rate of 25.3% for the nine months ended September 30, 2014 is comparable to the prior period, exclusive of the prior year tax benefit. The Company’s net deferred tax asset of $59.5 million at September 30, 2014, decreased $17.1 million from December 31, 2013, primarily resulting from fluctuations in interest rates which impacted the fair value of the available-for-sale investment portfolio and an increase in current period net income when compared to the prior year period.

LIQUIDITY, COMMITMENTS, CAPITAL AND INTEREST RATE SENSITIVITY

Analysis of Liquidity and Capital Resources

Liquidity

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of September 30, 2014:
 
 
 
Payments Due by Period:
(dollars in thousands)
Total
 
One Year
or less
 
After one
year to
three years
 
After three
years to
five years
 
More than
5 Years
Maturities of time deposits
$
1,112,450

 
$
665,525

 
$
280,366

 
$
166,372

 
$
187

Federal Home Loan Bank advances
359,155

 
290,000

 
54,743

 
14,412

 

Senior long-term debt
125,000

 

 

 

 
125,000

Subordinated debentures
77,321

 

 

 

 
77,321

Minimum annual rentals on non-cancelable operating leases
58,331

 
6,720

 
12,078

 
10,504

 
29,029

Total
$
1,732,257

 
$
962,245

 
$
347,187

 
$
191,288

 
$
231,537

 
The Company does not presently have any commitments for significant capital expenditures.

The Company’s primary source of liquidity is deposits obtained from retail, business and institutional banking customers. The Company supplements liquidity with a mix of wholesale funding. The Company’s wholesale sources of funds include:
Relationships with several correspondent banks to provide short-term borrowings in the form of federal funds purchased.
The Company is also a member of the FHLB and has the ability to borrow within applicable limits in the form of advances secured by pledges of certain qualifying assets.
Overnight funds are available from the Federal Reserve Bank via the discount window, and serve as an additional source of liquidity.

As measured using the consolidated statement of cash flows, the Company deployed $88.2 million of cash and cash equivalents during the nine month period ended September 30, 2014, compared to deploying $211 million of net cash for the nine months ended September 30, 2013. Operating activities generated $77.0 million of net cash year-to-date 2014, compared to $125 million for the same period in 2013. During the current year, cash was deployed in the following ways:

Investing activities

$242 million of investment security purchases
$148 million net increase in loans


48


Financing activities

$244 million reduction in FHLB advances
$138 million decrease in time deposits
$75.4 million for the repurchase of common stock
$50.0 million of maturing repurchase agreements
$41.8 million in cash dividends
    
During the nine months ended September 30, 2014, cash was generated from the following additional sources:

Investing activities

$275 million of proceeds from maturities and repayments of investment securities

Financing activities

$353 million increase in transaction and savings deposit accounts
$125 million of proceeds from the issuance of senior notes
$28.6 million increase in customer repurchase agreements

Capital

At September 30, 2014, National Penn and National Penn Bank’s capital ratios exceeded the criteria to be considered a “well-capitalized” institution.  Management believes that, under current regulations, the Company and National Penn Bank will each continue to exceed the "Well Capitalized" capital requirements in the foreseeable future.
 
Tier 1 Capital to
Average Assets Ratio
 
Tier 1 Capital to Risk-
Weighted Assets Ratio
 
Total Capital to Risk-
Weighted Assets Ratio
 
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
National Penn
11.18
%
 
11.63
%
 
14.77
%
 
15.46
%
 
16.02
%
 
16.72
%
National Penn Bank
8.89
%
 
9.85
%
 
11.75
%
 
13.15
%
 
13.00
%
 
14.40
%
"Well Capitalized" institution under banking regulations
5.00
%
 
5.00
%
 
6.00
%
 
6.00
%
 
10.00
%
 
10.00
%

In January of 2014, the Company announced the repurchase of 7 million shares or approximately 27.0% of the outstanding common shares owned by Warburg Pincus. The repurchase was part of the Company's previously announced capital management strategy and deployed $75.4 million of excess capital.
 
In July 2013, the Basel III capital rules were finalized and will be effective January 1, 2015, with some transition period. National Penn's preliminary evaluation indicates that the impact of these rules on its capital levels and ratios, including the impact on National Penn Bank, is not expected to be material.

Other Commitments

The following table sets forth the notional amounts of other commitments as of September 30, 2014:
(dollars in thousands)
Total
 
One Year
or less
 
After one
year to
three years
 
After three
years to
five years
 
More than
5 Years
Loan commitments
$
1,897,474

 
$
677,507

 
$
253,133

 
$
230,952

 
$
735,882

Letters of credit
142,393

 
115,961

 
26,367

 
51

 
14

Total
$
2,039,867

 
$
793,468

 
$
279,500

 
$
231,003

 
$
735,896

 
The Company evaluates and establishes an estimated reserve for credit and other risks associated with off-balance sheet positions based upon historical losses, expected performance under these arrangements and current trends in the economy.


49


The Company may be required to utilize cash or other financial instruments on its balance sheet, if called upon, to perform according to the contractual terms of the commitments. The contract or notional amounts of the instruments reflect the extent of involvement the Company has for each class.

The Company uses derivative instruments for management of interest rate sensitivity. The asset/liability management committee approves the use of derivatives in balance sheet hedging. The derivatives employed by the Company may include forward sales of mortgage commitments, as well as fair value and cash flow hedges. The Company does not use any of these instruments for trading purposes. For details of derivatives, refer to Footnote 11 to the consolidated financial statements.

Interest Rate Risk Management

The Company’s largest business segment is its community banking segment, whose business activities principally include accepting deposits and making loans.  As a result, the Company’s largest source of revenue is net interest income, which subjects it to movements in market interest rates.  Management’s objective for interest rate risk management is to understand the Company’s susceptibility to changes in interest rates and develop and implement strategies to minimize volatility while maximizing net interest income.  The Board of Directors establishes policies that govern interest rate risk management.  This is accomplished via a centralized asset/liability management committee (“ALCO”).  ALCO is comprised of various members of the Company’s business lines who are responsible for managing the components of interest rate risk, which include:
Timing differences between contractual maturities and/or repricing of assets and liabilities (“gap risk”),
Risk that assets will repay or customers withdraw prior to contractual maturity (“option risk”),
Non-parallel changes in the slope of the yield curve (“yield curve risk”), and
Variation in rate movements of different indices (“basis risk”).

ALCO employs various techniques and instruments to implement its developed strategies.  These generally include one or more of the following:
Changes to interest rates offered on products,
Changes to maturity terms offered on products,
Changes to types of products offered,
Use of wholesale products such as advances from the FHLB or interest rate swaps, and/or
Purchase or sale of investment securities.

Interest rate sensitivity is a function of the repricing characteristics of the Company’s assets and liabilities. Minimizing the balance sheet’s maturity and repricing risk is a continual focus in a changing rate environment.

The Company uses a simulation model to identify and manage its interest rate risk profile.  The model measures projected net interest income “at-risk” and anticipated changes in net income for a rolling twelve month period.  The model is based on expected cash flows and repricing characteristics for all financial instruments at a point in time and incorporates Company-developed, market-based assumptions regarding the impact of changing interest rates on these financial instruments.

The Company also incorporates assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates.  These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income.  While actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies, this model is an important guidance tool for ALCO.


50


The following table demonstrates the anticipated impact of an instantaneous parallel interest rate shock on the Company’s net interest income for the subsequent twelve months:
 
 
Change in Net Interest Income
Change in Interest Rates
 
September 30,
(in basis points)
 
2014
 
2013
+300
 
3%
 
4%
+200
 
2%
 
3%
+100
 
1%
 
1%
-100
 
N/A*
 
N/A*
 
* Certain short-term interest rates are currently below 1%. Therefore, in a scenario where interest rates decline by 100 basis points, short-term interest rates decline to zero, resulting in a non-parallel downward shift. In this interest rate scenario, net interest income is estimated to decline for the subsequent twelve months by 2% and 3% based upon net interest income for the twelve months ended September 30, 2014 and 2013, respectively.
  
The Federal Reserve continues to indicate that the federal funds rate will remain at lower levels for a considerable time. ALCO forecasts net interest income and evaluates net interest income sensitivity on a continual basis based on a variety of factors and assumptions. ALCO believes an interest rate ramp over twelve months is a more probable rate scenario than an instantaneous interest rate shock. As of September 30, 2014, the twelve month ramp of +200 basis points results in an asset sensitivity position of approximately +2%.

The results of the net interest income analysis fall within the compliance guidelines established by ALCO and the Board of Directors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information presented in the Liquidity and Interest Rate Risk Management section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Report is incorporated herein by reference.

Item 4.  Controls and Procedures

National Penn’s management is responsible for establishing and maintaining effective disclosure controls and procedures. Disclosure controls and procedures are 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 required by the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be so disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  For National Penn, these reports are its annual reports on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K.

National Penn’s management is also responsible for establishing and maintaining adequate internal control over financial reporting.  A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

National Penn considers its internal control over financial reporting to be a subpart of its disclosure controls and procedures. In accordance with SEC regulations, National Penn’s management evaluates National Penn’s disclosure controls and procedures at the end of each quarter, while it assesses the effectiveness of its internal control over financial reporting at the end of each year.

As of September 30, 2014, National Penn’s management, under the supervision and with the participation of National Penn’s Chief Executive Officer and Chief Financial Officer, evaluated National Penn’s disclosure controls and procedures.  Based on that evaluation, National Penn’s Chief Executive Officer and Chief Financial Officer concluded that National Penn’s disclosure controls and procedures were effective as of September 30, 2014.


51


There were no changes in National Penn’s internal control over financial reporting during the quarter ended September 30, 2014 that materially affected, or are reasonably likely to materially affect, National Penn’s internal control over financial reporting.  

There are inherent limitations to the effectiveness of any control system.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Further, the design of a control system is limited by available resources, and the benefits of controls must be considered relative to their costs and their impact on National Penn’s business model.


52


PART II - OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
     Various actions and proceedings are currently pending to which National Penn or one or more of its subsidiaries is a party. These actions and proceedings arise out of routine operations and, in management’s opinion, are not expected to have a material impact on the Company’s financial position or results of operations.

Item 1A.  Risk Factors

Difficult conditions in the capital markets and the economy generally may materially adversely affect our business and results of operations, and these conditions may not significantly improve in the near future.

Our business and results of operations are materially affected by conditions in the capital markets and the economy generally. Concerns over the slow economic recovery, the level of national debt, unemployment, the availability and cost of credit, the housing market, inflation levels, the U.S. debt ceiling, the European sovereign debt crisis, energy costs and geopolitical issues have contributed to increased volatility and diminished expectations for the economy and the markets. As a result, the market for fixed income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. Securities that are less liquid are more difficult to value and may be hard to dispose of. Domestic and international equity markets have also experienced periods of heightened volatility and turmoil, with issuers (such as National Penn) that have exposure to the real estate, mortgage, automobile and credit markets particularly affected. These events and other market disturbances may have an adverse effect on us, in part because a portion of our assets are investment securities and also because we are dependent upon customer behavior. Our revenues, including net interest income and net interest margin, are susceptible to decline in such circumstances, and our profit margins could erode. In addition, in the event of extreme and prolonged market events, such as the global financial crisis, we could incur significant losses. Even in the absence of a market downturn, we are exposed to substantial risk of loss due to market volatility.

Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, and inflation all affect the business and economic environment and, ultimately, the profitability of our business. In an economic climate characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our financial products could be adversely affected. Issues with respect to the U.S. government’s debt ceiling and other budgetary and spending matters could contribute to the risk of slower economic growth. The nature and ultimate resolution of these issues, or a failure to achieve a timely and effective resolution, may adversely affect the U.S. economy through possible consequences including further downgrades in the ratings for U.S. Treasury securities, government shutdowns, or substantial spending cuts resulting from sequestration. Adverse changes in the economy could affect earnings negatively and could have a material adverse effect on our business, results of operations and financial condition.

National Penn is subject to pervasive and comprehensive federal and state regulatory requirements and possible regulatory enforcement actions, which may harm its business and financial results, its reputation, and its share price.

National Penn is supervised by the Federal Reserve, and National Penn Bank is supervised by the Office of the Comptroller of the Currency (the “OCC”). Accordingly, National Penn and its subsidiaries are subject to extensive federal and state legislation, regulation, and supervision that govern almost all aspects of business operations, which puts each of them at risk of being the subject of a formal or informal supervisory enforcement action. The expansive regulatory framework is primarily designed to protect consumers, depositors and the government's deposit insurance funds, and to accomplish other governmental policy objectives such as combating terrorism; that framework is not designed to protect shareholders.  Areas such as Bank Secrecy Act (“BSA”) compliance (including BSA and related anti-money laundering regulations) and real estate-secured consumer lending (such as Truth-in-Lending regulations, changes in Real Estate Settlement Procedures Act regulations, implementation of licensing and registration requirements for mortgage originators and more recently, heightened regulatory attention to mortgage and foreclosure-related activities and exposures) are being confronted with escalating regulatory expectations and scrutiny.  While National Penn has policies and procedures designed to prevent regulatory violations, there is a risk that such violations will occur. Failure by National Penn to comply with these requirements could result in adverse action by regulators, which would negatively affect National Penn's reputation and could adversely affect National Penn's ability to manage its business, and as a result, could adversely affect National Penn's shareholders.

The impact of legislation, including proposed legislation, and government programs adopted in response to the economic downturn, the U.S. debt ceiling and budget deficit concerns cannot be predicted at this time, and such legislation is subject to change.

53



New or changed governmental legislation or regulation and accounting industry pronouncements, including additional regulations and increased supervision resulting from additional growth in assets, could adversely affect National Penn.

Changes in federal and state legislation and regulation, including additional regulations and increased supervision resulting from additional growth in assets, may adversely affect National Penn's operations.  On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law.  The Dodd-Frank Act continues to require significant changes to the U.S. financial system, including among others:

Requirements on banking, derivative and investment activities, including: the repeal of the prohibition on the payment of interest on business demand accounts, debit card interchange fee requirements, and the “Volcker Rule,” which restricts proprietary trading and the sponsorship of, or the acquisition or retention of ownership interests in, private equity funds.

The creation of the Bureau of Consumer Financial Protection with supervisory authority, including the power to conduct examinations and take enforcement actions with respect to financial institutions with assets of $10 billion or more.

The Bureau of Consumer Financial Protection has issued new regulations that may have a significant impact on compliance requirements for National Penn Bank, including in the area of mortgage lending activities.

The creation of a Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk.

Stress testing requirements for bank holding companies with assets over $10 billion.

Provisions affecting corporate governance and executive compensation of all companies subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended, including the requirement that National Penn submit its executive compensation program to an advisory (non-binding) shareholder vote.

A provision that broadens the base for FDIC insurance assessments.

A provision that requires bank regulators to set minimum capital levels for bank holding companies that are as strong as those required for their insured depository subsidiaries, subject to a grandfather clause for holding companies with less than $15 billion in assets as of December 31, 2009.

Some of these provisions have yet to be implemented because the issuance of some rules has been delayed and the deadlines for adoption of other rules have not yet been reached.

On July 2, 2013, the Federal Reserve Board unanimously approved its final rule implementing Basel III. The rule was subsequently approved as a final rule by the Office of the Comptroller of the Currency on July 9, 2013 and requires banking organizations, such as National Penn, to calculate their risk-weighted assets under the final rule's standardized approach. The rule will be effective January 1, 2015, with some additional transition periods, and requires compliance with the revised definitions of regulatory capital, revised minimum capital ratios, and revised regulatory capital adjustments and deductions, among other issues. National Penn is also subject to changes in accounting rules and interpretations.

The impact of legislation, including proposed legislation, and government programs adopted in response to the economic downturn, the U.S. debt ceiling and budget deficit concerns cannot be predicted at this time, and such legislation is subject to change.  National Penn cannot predict what effect any presently contemplated or future changes in financial market regulation or accounting rules and interpretations will have on National Penn.  National Penn will have to devote a substantial amount of management and financial resources to ensure compliance with such regulatory changes, including all applicable provisions of the Dodd-Frank Act and its implementing rules as they are finalized and released, which may increase National Penn's costs of operations.  In addition, in some cases, National Penn's ability to comply with regulatory changes may be dependent on third party vendors taking timely action to achieve compliance.  Any such changes may also negatively affect National Penn's financial performance, the calculation of its capital ratios, its ability to expand its products and services and/or to increase the value of its business and, as a result, could be materially adverse to National Penn's shareholders.



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Our credit quality has been and may continue to be adversely affected by economic conditions.

Economic conditions have adversely impacted National Penn’s business and its results of operations, including the quality of National Penn’s credit portfolio. Beginning in late 2008, we experienced a downturn in the overall credit performance of our loan portfolio. Our loan portfolio has improved in credit quality since the downturn; however, in the aftermath of recessionary conditions, national and regional unemployment remains high and individuals have fewer sources of liquidity, many borrowers may continue to have a decreased ability to meet their loan obligations. Delayed improvement or another period of deterioration in the quality of our credit portfolio could significantly increase non-performing loans, require additional increases in loan loss reserves, elevate charge-off levels and have a material adverse effect on our capital, financial condition and results of operations.

Commercial, construction and real estate loans increase our exposure to credit risk.

As of September 30, 2014, $3.8 billion, or 68.6%, of National Penn’s loan portfolio consisted of commercial real estate loans and commercial and industrial loans. Subject to market conditions, we intend to continue to increase our origination of these loans. Commercial real estate loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Commercial real estate loans also typically involve larger loan balances to single borrowers or groups of related borrowers both at origination and at maturity. Commercial business loans expose us to additional risks since they typically are made on the basis of the borrower's ability to make repayments from the cash flow of the borrower's business and are secured by non-real estate collateral that may depreciate over time. In addition, some of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to a greater risk of loss.

Our allowance for loan losses may prove inadequate or we may be required to make further additions to our allowance for loan losses because of credit risk exposure.

We maintain an allowance for possible loan losses. If the economy and/or the real estate market weakens, we may be required to add further provisions to our allowance for loan losses as nonperforming assets could increase or the value of the collateral securing loans may be insufficient to cover any remaining net loan balance, which could have a negative effect on our results of operations.

National Penn reviews the adequacy of its allowance for loan losses, considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and non-performing assets, classified assets and other regulatory requirements. As a result of these considerations, National Penn evaluates the need to increase or decrease its allowance for loan losses.  This evaluation is inherently subjective, as it requires numerous estimates and there may be unanticipated adverse changes to the economy caused by recession, inflation, unemployment or other factors beyond National Penn's control.  Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary materially from our current estimates. If the credit quality of National Penn's customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the allowance for loan losses is not adequate, National Penn's business, financial condition, liquidity, capital and results of operations could be materially and adversely affected.

National Penn's financial performance is directly affected by interest rates.

Changes in interest rates may reduce profits. Our primary source of income currently is net interest income. Net interest income is the differential, or the net interest spread, between the interest earned on loans, securities and other interest-earning assets, and the interest paid on deposits, borrowings and other interest-bearing liabilities. Net interest margin is affected by changes in market interest rates, because different types of assets and liabilities may react differently, and at different times, to market rate changes. When our interest-bearing liabilities reprice or mature more quickly than interest-earning assets in a period, an increase in market interest rates could reduce our net interest income. Similarly, when interest-earning assets reprice or mature more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. These rates are sensitive to many factors that are beyond National Penn’s control, including general economic conditions, and monetary and fiscal policies of various governmental regulatory agencies, including the Federal Reserve.


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We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity, repricing and balance of the different types of interest-earning assets and interest-bearing liabilities. However, our ability to lower our interest expense is limited at the current lower interest rate levels, while the average yield on our interest-earning assets may continue to decrease. We have been able to achieve a relatively stable net interest margin over the last several years; however, a failure to effectively manage our interest rate risk could materially adversely affect our net interest spread, loan origination volume, asset quality and overall profitability.

National Penn could experience unanticipated costs and disruptions to our operations in connection with our corporate relocation plan.

As part of our corporate relocation plan, announced in October 2012, we opened a new Reading Area Business Center and moved our corporate headquarters to Allentown, Pennsylvania in the first quarter of 2014, while maintaining a presence in Boyertown. Due to the inherent difficulty in estimating costs associated with projects of this scale and nature, the costs associated with this project may be higher than we have estimated.

Because its operations are concentrated in eastern Pennsylvania, National Penn's performance and financial condition may be adversely affected by regional economic conditions and real estate values.

National Penn's loan activities are largely based in 13 counties in eastern Pennsylvania, and to a lesser extent, National Penn's deposit base is primarily generated from this area. As a result, our consolidated financial performance depends largely upon economic conditions in this region and demand for its products and services. Weak local economic conditions beginning in 2008 caused an increase in loan delinquencies, an increase in the number of borrowers who defaulted on their loans and a reduction in the value of the collateral securing their loans. Delayed improvement or another decline in the regional real estate market could again harm our financial condition and results of operations because of the geographic concentration of loans within this regional area and because a large percentage of its loans are secured by real property. If there is another decline in real estate values in our market area, the collateral for National Penn's loans will provide less security. As a result, our ability to recover on defaulted loans by selling the underlying real estate will be diminished, and we will be more likely to suffer losses on defaulted loans.

Declines in asset values may result in impairment charges and adversely impact the value of our investments, financial performance and capital.

National Penn maintains an investment portfolio that includes, but is not limited to, municipal bonds, bank equity securities, and individual trust preferred securities. The market value of investments may be affected by factors other than the underlying performance of the issuer or composition of the bonds themselves, such as ratings downgrades, adverse changes in business climate and lack of liquidity for resales of certain investment securities. We periodically, but not less than quarterly, evaluate investments and other assets for impairment indicators. We may be required to record additional impairment charges if investments suffer a decline in value that is considered other-than-temporary. If we determine that a significant impairment has occurred, we charge against earnings the credit-related portion of the other-than-temporary impairment, which could have a material adverse effect on results of operations in the period in which the write-off occurs.

Our investment portfolio includes approximately $29.8 million in capital stock of the Federal Home Loan Bank (“FHLB”) of Pittsburgh as of September 30, 2014. This stock ownership is required for National Penn to qualify for membership in the FHLB system, which enables it to borrow funds under the FHLB advance program. If the FHLB experiences a capital shortfall, it could suspend its quarterly cash dividend, and possibly require its members, including National Penn, to make additional capital investments in the FHLB. If the FHLB was to cease operations, or if National Penn was required to write-off its investment in the FHLB, National Penn's business, financial condition, liquidity, capital and results of operations may be materially and adversely affected.

If we do not manage our capital position strategically, our return on equity could be lower compared to our competitors as a result of our high level of capital.

If we are unable to use strategically our excess capital, or to successfully continue our capital management programs (such as the stock repurchase program or quarterly dividends to our investors), then our goal of generating a return on average equity that is competitive, by increasing earnings per share and book value per share, without assuming undue risk, could be delayed or may not be attained. Failure to achieve a competitive return on average equity might decrease investments in our common stock and might cause our common stock to trade at lower prices.


56


National Penn may grow its business by acquiring other financial services companies, and these acquisitions, including the recent acquisition of TF Financial, present a number of risks and uncertainties related both to the acquisition transactions themselves and to the integration of the acquired businesses.

On October 24, 2014, National Penn acquired TF Financial Corporation and its banking subsidiary 3rd Fed Bank.  The acquisition of TF Financial and acquisitions of other financial services companies or assets present risks to National Penn in addition to those presented by the nature of the business acquired. In general, acquisitions may be substantially more expensive to investigate or to complete than expected (including unanticipated costs incurred in connection with the integration of the acquired company, as a result of delays in receipt of regulatory approvals or regulatory approval conditions which may impose additional costs on National Penn or limit National Penn’s revenues). In addition, the anticipated benefits (including anticipated cost savings and strategic gains) may be significantly more difficult or take longer to achieve than expected. In some cases, acquisitions involve our entry into new businesses or new geographic markets, and these situations also present risks in instances where we may be inexperienced in these new areas. As a regulated financial institution, our ability to pursue or complete attractive acquisition opportunities could be negatively impacted by regulatory delays or other regulatory issues. The processes of integrating acquired businesses also pose many additional possible risks which could result in increased costs, liability or other adverse consequences. Finally, if an acquisition is not completed, National Penn may experience negative reactions from the financial markets and from its customers and employees.

National Penn may incur impairments to goodwill.

At September 30, 2014, National Penn had approximately $258 million recorded as goodwill.  National Penn evaluates its goodwill for impairment at least annually during the second quarter of its fiscal year.  Significant negative industry or economic trends, including the lack of recovery in the market price of National Penn's common stock, or reduced estimates of future cash flows or disruptions to National Penn's business could result in impairments to goodwill. National Penn's valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. National Penn operates in competitive environments and projections of future operating results and cash flows may vary significantly from actual results. If National Penn's analysis results in additional impairment to its goodwill, National Penn would be required to record an impairment charge to earnings in its financial statements during the period in which such impairment is determined to exist. Any such change could have a material adverse effect on National Penn's results of operations and stock price.

National Penn's ability to realize its deferred tax asset may be reduced, which may adversely impact results of operations.

As of September 30, 2014, National Penn had a deferred tax asset of approximately $59.5 million. Our ability to realize these tax benefits ultimately depends on the existence of sufficient taxable income of the appropriate character (ordinary income or capital gains) within the applicable carryback and carryforward periods provided under the tax law. Estimation of the deferred tax asset's realizability requires National Penn to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. National Penn's deferred tax asset may be reduced in the future if estimates of future income or our tax planning strategies do not support the amount of the deferred tax asset. If it is determined that a valuation allowance of its deferred tax asset is necessary, National Penn may incur a charge to earnings and a reduction to regulatory capital for the amount included therein.

National Penn may be required to pay higher FDIC premiums or special assessments that could adversely affect our earnings.

Bank failures over recent years severely depleted the FDIC's insurance fund.  In response, the FDIC took various measures in 2009 and early 2010. The Dodd-Frank Act, adopted in July 21, 2010, requires the FDIC to increase reserves against future losses, which requires increased assessments that are to be borne primarily by institutions with assets of greater than $10 billion. In addition, the FDIC may issue a special assessment across all FDIC insured institutions. Any future increases in assessments or higher periodic fees could adversely affect National Penn's earnings.

Competition from other financial institutions may adversely affect National Penn's profitability.

National Penn Bank faces substantial competition in originating loans, both commercial and consumer. This competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of National Penn's competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. Intensified competition from these institutions and/or economic conditions could reduce National Penn's net income by decreasing the number and size of loans that National Penn Bank originates and the interest rates it may charge on these loans.

57



In attracting business and consumer deposits, National Penn Bank faces substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of National Penn's competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than National Penn, which could decrease the deposits that National Penn attracts or require National Penn to increase its rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect National Penn's ability to generate the funds necessary for lending operations. As a result, National Penn may need to seek other sources of funds that may be more expensive to obtain and could increase National Penn's cost of funds.

National Penn Bank and National Penn's non-banking subsidiaries also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance agencies and governmental organizations which may offer more favorable terms. Some of National Penn's non-bank competitors are subject to less extensive regulations than those governing National Penn's banking operations. Additionally, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. As a result, such non-bank competitors may have advantages over National Penn Bank and its non-banking subsidiaries in providing financial products and services. This competition may reduce or limit National Penn's margins on banking and non-banking services, reduce its market share and adversely affect its earnings and financial condition.

Inability to hire or retain key personnel could adversely affect National Penn's business.

National Penn and its subsidiaries face intense competition from various other financial institutions, as well as from non-bank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance agencies and government organizations, for the attraction and retention of key personnel. As a result, National Penn may not be able to attract or retain talented employees, specifically those who generate and maintain National Penn's customer relationships and serve in other key operation positions in the areas of finance, credit administration, loan functions and information technology. The inability to hire or retain key personnel may result in the loss of potential and/or existing substantial customer relationships and may adversely affect National Penn's ability to compete effectively.

Interruptions to or security breaches of National Penn's information systems could negatively affect National Penn's financial performance and reputation.

In conducting its business, National Penn relies heavily on its information systems. Maintaining and protecting those systems is difficult and expensive, as is dealing with any failure, interruption or breach in security of these systems, whether due to acts or omissions by National Penn or by a third party and whether intentional or not. Any such failure, interruption or breach could result in failures or disruptions in National Penn's customer relationship management, general ledger, deposit, loan and other systems. Fraudulent activity committed against National Penn or its clients, such as check fraud, electronic fraud, wire fraud, “phishing”, social engineering or other deceptive acts, could also jeopardize the security of information stored in and transmitted through National Penn’s computer systems and network infrastructure. The policies, procedures and technical safeguards put in place by National Penn to prevent or limit the effect of any failure, interruption or security breach of its information systems may be insufficient to prevent or remedy the effects of any such occurrences.

The occurrence of any failures, interruptions or security breaches of National Penn's information systems could damage National Penn's reputation, cause National Penn to incur additional expenses, result in losses to National Penn or its clients, result in a loss of customer business and data, affect National Penn's ability to grow its online services or other businesses, subject National Penn to regulatory sanctions or additional regulatory scrutiny, or expose National Penn to civil litigation and possible financial liability, any of which could have a material adverse effect on National Penn's financial condition and results of operations.

We rely on third-party vendors to provide key components of our business infrastructure.
We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology, including customer relationship management, internet banking, website, general ledger, investment, deposit, loan servicing and loan origination systems. While we have selected these third-party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of inadequate or interrupted service, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business. Financial or operational difficulties of a third-party vendor could also hurt our operations if those difficulties interfere with the vendor’s ability to serve us, and replacing these third party vendors could result in significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to our business operations as well as reputational risk.

58



If National Penn's information technology is unable to keep pace with its growth or industry developments, National Penn's financial performance may suffer.

Effective and competitive delivery of National Penn's products and services is increasingly dependent upon information technology resources and processes, both those provided internally as well as those provided through third party vendors, such as firms which license their software solutions to National Penn. National Penn's continued success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services to enhance customer convenience, as well as to create additional efficiencies in its operations. Many of National Penn's competitors have greater resources to invest in technological improvements. As technology in the financial services industry changes and evolves, as is occurring in the payments industry, keeping pace becomes increasingly complex and expensive for National Penn.  There can be no assurance that National Penn will be able to effectively implement new technology-driven products and services, which could reduce its ability to compete effectively. In addition, the ongoing development and increasing use of "social media" presents challenges and opportunities that can lead to product communication and innovation issues as well as reputation risk.

National Penn's internal control systems are inherently limited.

National Penn's systems of internal controls, disclosure controls and corporate governance policies and procedures are inherently limited.  The inherent limitations of National Penn's system of internal controls include the use of judgment in decision-making that can be faulty; breakdowns can occur because of human error or mistakes; and controls can be circumvented by individual acts or by collusion of two or more people. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and may not be detected, which may have an adverse effect on National Penn's business, results of operations or financial condition. Additionally, any plans of remediation for any identified limitations may be ineffective in improving National Penn's internal controls.

There may be other dilution of National Penn's shareholders, which may adversely affect the market price of National Penn's common stock.

National Penn is not restricted from issuing additional common shares, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common shares. National Penn is currently authorized to issue up to 250 million common shares, of which approximately 139 million shares were outstanding as of September 30, 2014, and up to one million shares of preferred stock, none of which are outstanding.  In addition, National Penn's Board of Directors has made shares available for compensation purposes, including under its Employee Stock Purchase Plan, as well as for purchase under National Penn's Dividend Reinvestment and Stock Purchase Plan. The Employee Stock Purchase Plan allows employee shareholders to purchase shares of National Penn common shares at a 10% discount from market value.  In addition, shares are issuable upon the vesting of restricted stock units and/or exercise of stock options that have been, or stock options, stock appreciation rights, stock awards and restricted stock that may be, issued under National Penn's equity compensation plans.  Should National Penn experience strong participation in the Employee Stock Purchase Plan or the Dividend Reinvestment and Stock Purchase Plan, the issuance of the required shares of common stock may significantly dilute the ownership of National Penn's shareholders. National Penn's board of directors has authority, without action or vote of the shareholders, to issue all or part of its authorized but unissued shares. Authorized but unissued shares could be issued on terms or in circumstances that could dilute the interests of other shareholders.

National Penn relies on dividends it receives from its subsidiaries, may reduce or eliminate cash dividends on its common stock, and is subject to restrictions on its ability to declare or pay cash dividends and repurchase shares of common stock.

As a bank holding company, National Penn's ability to pay dividends depends primarily on its receipt of dividends from its direct and indirect subsidiaries. Its bank subsidiary, National Penn Bank, is National Penn's primary source of dividends. Dividend payments from National Penn Bank are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by bank regulatory agencies. The ability of National Penn Bank to pay dividends is also subject to profitability, financial condition, regulatory capital requirements, capital expenditures and other cash flow requirements. As of September 30, 2014, National Penn Bank had the ability to pay dividends to National Penn without prior regulatory approval. However, there is no assurance that National Penn Bank, and/or National Penn's other subsidiaries, will be able to pay dividends in the future.


59


In July 2014, the Board of Directors approved a third quarter 2014 cash dividend of $0.10 per share, and in October 2014 the Board of Directors declared a fourth quarter 2014 cash dividend of $0.11 per share. There can be no assurance that National Penn will pay dividends to its shareholders in the future, or if dividends are paid, that National Penn will maintain or increase the level of its dividend.  National Penn's ability to pay dividends to its shareholders is subject to limitations and guidance issued by the Board of Governors of the Federal Reserve System, or the Federal Reserve.  For example, under Federal Reserve guidance, bank holding companies generally are advised to consult in advance with the Federal Reserve before declaring dividends, and to strongly consider reducing, deferring or eliminating dividends, in certain situations, such as when declaring or paying a dividend that would exceed earnings for the fiscal quarter for which the dividend is being paid, or when declaring or paying a dividend that could result in a material adverse change to the organization's capital structure.  National Penn's failure to pay dividends on its common stock could have a material adverse effect on its business, operations, financial condition, access to funding and the market price of its common stock.

Severe weather and natural disasters may negatively affect National Penn's local economies or disrupt its operations, which could have an adverse effect on our business or results of operations.

National Penn's market area may experience severe weather events or natural disasters, such as hurricanes, blizzards, and other extreme weather conditions. Natural disasters and other severe weather events could negatively impact regional economic conditions; result in a decline in local loan demand and loan originations; cause a decline in the value or destruction of properties securing National Penn's loans and an increase in delinquencies, foreclosures or loan losses; damage its banking facilities and offices; and negatively impact National Penn's growth strategy. National Penn's management cannot calculate the effect of or predict whether or to what extent damage caused by severe weather or natural disasters would affect National Penn's operations. National Penn's business or results of operations may be adversely affected by these and other negative effects of such natural disasters.

National Penn may be a defendant from time to time in a variety of litigation and other actions, which could have a material adverse effect on its financial condition, results of operations and cash flows.

National Penn and its subsidiaries have been and may continue to be involved from time to time in a variety of litigation arising out of its business. An increased number of lawsuits, including purported class action lawsuits and other consumer driven litigation, have been filed and will likely continue to be filed against financial institutions, which may involve substantial compensatory and/or punitive damages. National Penn believes the risk of litigation generally increases during downturns in the national and local economies.  National Penn's insurance may not cover all claims that may be asserted against it, and any claims asserted against it, regardless of merit or eventual outcome, may harm National Penn's reputation and may cause it to incur significant expense.  Should the ultimate judgments or settlements in any litigation exceed National Penn's insurance coverage, they could have a material adverse effect on National Penn's financial condition, results of operations and cash flows.  In addition, National Penn may not be able to obtain appropriate types or levels of insurance in the future, nor may National Penn be able to obtain adequate replacement policies with acceptable terms, if at all.

A Warning About Forward-Looking Information

This Report, including information incorporated by reference in this Report, contains forward-looking statements about National Penn and its subsidiaries.  In addition, from time to time, National Penn or its representatives may make written or oral forward-looking statements about National Penn and its subsidiaries.  These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “project,” “plan,” “goal,” “potential,” “pro forma,” “seek,” “target,” “intend” or “anticipate” or the negative thereof or comparable terminology.  Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, rationales, objectives, expectations or consequences of various proposed or announced transactions, and statements about the future performance, operations, products and services of National Penn and its subsidiaries.  National Penn cautions its shareholders and other readers not to place undue reliance on such statements.

National Penn's businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the risk factors set forth above, as well as the following:


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Risks, uncertainties and other factors relating to the merger of TF Financial with and into National Penn, including:

Expected benefits may not materialize in the timeframe expected or at all, or may be more costly to achieve;
The parties may be unable to successfully implement integration strategies; and
Diversion of management time on merger-related issues.

National Penn's branding and marketing initiatives may not be effective in building name recognition and customer awareness of National Penn's products and services.

National Penn may be unable to differentiate itself from its competitors by a higher level of customer service, as intended by its business strategy and other marketing initiatives.

Expansion of National Penn's product and service offerings may take longer, and may meet with more effective competitive resistance from others already offering such products and services, than expected.  Additionally, new product development by new and existing competitors may be more effective, and take place more quickly, than expected.

Growth and profitability of National Penn's non-interest income or fee income may be less than expected, particularly as a result of financial market conditions.

General economic or business conditions, either nationally or in the regions in which National Penn does business, may continue to deteriorate or be more prolonged than expected, resulting in, among other things, a deterioration in credit quality, a reduced demand for credit, or a decision by National Penn to reevaluate staffing levels or to divest one or more lines of business.

In the current environment of increased investor activism, including hedge fund investment policies and practices, shareholder concerns or actions may require increased management/board attention, efforts and commitments, which could require a shift in focus from business development and operations.

Stresses in the financial markets may inhibit National Penn's ability to access the capital markets or obtain financing on favorable terms.

Repurchase obligations with respect to real estate mortgages sold in the secondary market could adversely affect National Penn's earnings.

Changes in consumer spending and savings habits could adversely affect National Penn's business.

Negative publicity with respect to any National Penn product or service, employee, director or other associated individual or entity whether legally justified or not, could adversely affect National Penn's reputation and business.

Significant negative industry or economic trends, including declines in the market price of National Penn's common stock, or reduced estimates of future cash flows or disruptions to National Penn's business could result in impairments to goodwill.

National Penn may be unable to successfully manage the foregoing and other risks and to achieve its current short-term and long-term business plans and objectives.

All written or oral forward-looking statements attributable to National Penn or any person acting on its behalf made after the date of this Report are expressly qualified in their entirety by the risk factors and cautionary statements contained in this Report. National Penn does not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.


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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information on repurchases by National Penn of its common stock in each month of the quarter ended September 30, 2014.

Period
 
Total No. of
Shares Purchased
 
Weighted-average
Price Paid per Share
 
Total No. of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Maximum No. of Shares
that may yet be
Purchased Under the
Plans or Programs
July 1, 2014 through July 31, 2014
 

 
$

 

 
289,810

August 1, 2014 through August 31, 2014
 

 

 

 
289,810

September 1, 2014 through September 30, 2014
 

 

 

 
289,810

Total
 

 
$

 

 
 

1.
National Penn's current stock repurchase program was announced by the Company on December 20, 2013 and is authorized for the remainder of 2014.
2.
National Penn's current stock repurchase program authorizes the repurchase of up to 5% of the outstanding shares as of December 18, 2013, the date of authorization of the repurchase plan by the Board of Directors, or 7,289,810 shares of common stock.
3.
The authorization of this repurchase plan supersedes all pre-existing share repurchase plans.


Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.


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Item 6.  Exhibits

2.1
Agreement and Plan of Merger by and between National Penn Bancshares, Inc. and TF Financial Corporation (Incorporated by reference to Exhibit 2.1 to National Penn’s Report on Form 8-K dated June 3, 2014, as filed on June 4, 2014).
3.1
Articles of Incorporation, as amended and restated, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to National Penn's Current Report on Form 8-K dated April 24, 2009 as filed on April 24, 2009.)
3.2
Statement with Respect to Shares (Incorporated by reference to Exhibit 3.1 to National Penn’s Current Report on Form 8-K dated October 27, 2009 as filed on November 2, 2009).
3.3
Statement or Certificate of Change of Registered Office (Incorporated by reference to Exhibit 3.4 to National Penn’s Annual Report on Form 10-K dated March 3, 2014, as filed on March 3, 2014).
3.4
Bylaws, as amended and restated, of National Penn Bancshares, Inc. (Incorporated by reference to  Exhibit 3.1 to National Penn’s Current Report on Form 8-K dated September 25, 2013, as filed on September 30, 2013.)
4.1
Senior Debt Securities Indenture, dated as of September 16, 2014 between National Penn Bancshares, Inc. and U.S. Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.1 to National Penn's Report on Form 8-K dated September 16, 2014 and filed September 16, 2014).
4.2
First Supplemental Indenture, dated as of September 16, 2014 between National Penn Bancshares, Inc. and U. S. Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.2 to National Penn’s Report on Form 8-K dated September 16, 2014 and filed September 16, 2014).

4.3
Form of 4.25% Senior Note due 2024 (Incorporated by reference to Exhibit 4.3 to National Penn’s Report on Form 8-K dated September 16, 2014 and filed September 16, 2014).
31.1
31.2
32.1
32.2

101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document



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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
 
NATIONAL PENN BANCSHARES, INC.
 
 
(Registrant)
 
 
 
 
 
Date:
November 7, 2014
By:
/s/ Scott V. Fainor
 
 
 
 
Name:
Scott V. Fainor
 
 
 
Title:
President and Chief Executive Officer
 
 
 
 
 
 
Date:
November 7, 2014
By:
/s/ Michael J. Hughes
 
 
 
 
Name:
Michael J. Hughes
 
 
 
Title:
Senior Executive Vice President and
 
 
 
 
Chief Financial Officer

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