Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - NATIONAL PENN BANCSHARES INC | ex32-2.htm |
EX-32.1 - EXHIBIT 32.1 - NATIONAL PENN BANCSHARES INC | ex32-1.htm |
EX-31.2 - EXHIBIT 31.2 - NATIONAL PENN BANCSHARES INC | ex31-2.htm |
EX-31.1 - EXHIBIT 31.1 - NATIONAL PENN BANCSHARES INC | ex31-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
|
SECURITIES EXCHANGE ACT OF 1934
|
||
For the quarterly period ended June 30, 2011 | ||
OR | ||
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
|
||
For the transition period from ________________ to ________________ |
000-22537-01
(Commission File Number)
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NATIONAL PENN BANCSHARES, INC.
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(Exact Name of Registrant as Specified in Charter)
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Pennsylvania
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23-2215075
|
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(State or Other Jurisdiction of Incorporation)
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IRS Employer Identification No.
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Philadelphia and Reading Avenues,
Boyertown, PA 19512
(Address of Principal Executive Offices)
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(800) 822-3321
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Registrant’s telephone number, including area code
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(Former Name or Former Address, if Changed Since Last Report): N/A
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 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 x No o
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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 x Accelerated filer ¨
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 x
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
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Outstanding at August 4, 2011
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Common Stock, no stated par value
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151,681,748 shares
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TABLE OF CONTENTS
Part I - Financial Information.
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Page
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||||
Item 1.
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Financial Statements
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||||
Item 2.
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Management’s Discussion and Analysis of
|
||||
Financial Condition and Results of Operation
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|||||
Item 3.
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Quantitative and Qualitative Disclosures About
|
||||
Market Risk
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|||||
Item 4.
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Controls and Procedures
|
||||
Part II - Other Information.
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|||||
Item 1.
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Legal Proceedings
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||||
Item 1A.
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Risk Factors
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||||
Item 2.
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Unregistered Sales of Equity Securities
|
||||
and Use of Proceeds
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|||||
Item 3.
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Defaults Upon Senior Securities
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||||
Item 4.
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[Removed and Reserved by the SEC]
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||||
Item 5.
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Other Information
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||||
Item 6.
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Exhibits
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||||
Signatures
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|||||
Exhibits
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
|
||||||||
(dollars in thousands)
|
June 30,
|
December 31,
|
||||||
2011
|
2010
|
|||||||
ASSETS
|
||||||||
Cash and due from banks
|
$ | 105,918 | $ | 90,283 | ||||
Interest-earning deposits with banks
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513,132 | 612,099 | ||||||
Total cash and cash equivalents
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619,050 | 702,382 | ||||||
Investment securities available for sale, at fair value
|
1,696,682 | 1,632,118 | ||||||
Investment securities held to maturity
|
||||||||
(Fair value $529,162 and $537,932 for 2011 and 2010, respectively)
|
518,578 | 546,957 | ||||||
Other securities
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75,308 | 80,615 | ||||||
Loans held for sale
|
8,852 | 12,785 | ||||||
Loans and leases, net of allowance for loan and lease losses of $137,909 and $150,054
|
||||||||
for 2011 and 2010, respectively
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5,032,165 | 5,163,884 | ||||||
Premises and equipment, net
|
103,017 | 105,483 | ||||||
Accrued interest receivable
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31,862 | 33,829 | ||||||
Bank owned life insurance
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136,606 | 134,154 | ||||||
Other real estate owned and other repossessed assets
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8,407 | 7,453 | ||||||
Goodwill
|
258,279 | 258,279 | ||||||
Other intangible assets, net
|
18,970 | 22,217 | ||||||
Unconsolidated investments under the equity method
|
12,327 | 11,482 | ||||||
Other assets
|
113,038 | 132,982 | ||||||
TOTAL ASSETS
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$ | 8,633,141 | $ | 8,844,620 | ||||
LIABILITIES
|
||||||||
Non-interest bearing deposits
|
$ | 839,811 | $ | 808,835 | ||||
Interest bearing deposits
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5,104,350 | 5,250,338 | ||||||
Total deposits
|
5,944,161 | 6,059,173 | ||||||
Securities sold under repurchase agreements
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738,628 | 734,455 | ||||||
Short-term borrowings
|
6,390 | 10,000 | ||||||
Federal Home Loan Bank advances
|
627,332 | 703,761 | ||||||
Subordinated debentures
|
143,261 | 142,780 | ||||||
Accrued interest payable and other liabilities
|
39,856 | 57,014 | ||||||
TOTAL LIABILITIES
|
7,499,628 | 7,707,183 | ||||||
SHAREHOLDERS' EQUITY
|
||||||||
Preferred stock, no stated par value; authorized 1,000,000 shares
|
||||||||
Series B, $1,000 liquidation preference, 5% cumulative; 150,000 shares issued and
|
||||||||
outstanding as of December 31, 2010
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- | 148,441 | ||||||
Common stock, no stated par value; authorized 250,000,000 shares, issued and
|
||||||||
outstanding: June 30, 2011 - 151,660,444; December 31, 2010 - 136,792,414
|
1,379,690 | 1,292,342 | ||||||
Accumulated deficit
|
(258,125 | ) | (293,940 | ) | ||||
Accumulated other comprehensive income (loss)
|
11,948 | (9,406 | ) | |||||
TOTAL SHAREHOLDERS' EQUITY
|
1,133,513 | 1,137,437 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 8,633,141 | $ | 8,844,620 | ||||
The accompanying notes are an integral part of these financial statements.
|
3
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months
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Six Months
|
|||||||||||||||
(dollars in thousands, except per share data)
|
Ended June 30,
|
Ended June 30,
|
||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
INTEREST INCOME
|
||||||||||||||||
Loans and leases, including fees
|
$ | 67,553 | $ | 77,830 | $ | 136,781 | $ | 156,484 | ||||||||
Investment securities
|
||||||||||||||||
Taxable
|
11,552 | 11,457 | 22,909 | 22,555 | ||||||||||||
Tax-exempt
|
8,401 | 8,803 | 16,894 | 17,641 | ||||||||||||
Federal funds sold and deposits in banks
|
234 | 218 | 514 | 465 | ||||||||||||
Total interest income
|
87,740 | 98,308 | 177,098 | 197,145 | ||||||||||||
INTEREST EXPENSE
|
||||||||||||||||
Deposits
|
10,974 | 16,464 | 22,381 | 34,745 | ||||||||||||
Securities sold under repurchase agreements
|
2,346 | 2,808 | 4,741 | 5,682 | ||||||||||||
Short-term borrowings
|
- | - | - | - | ||||||||||||
Federal Home Loan Bank advances
|
7,039 | 8,010 | 14,256 | 16,063 | ||||||||||||
Subordinated debentures
|
2,386 | 2,383 | 4,755 | 4,753 | ||||||||||||
Total interest expense
|
22,745 | 29,665 | 46,133 | 61,243 | ||||||||||||
Net interest income
|
64,995 | 68,643 | 130,965 | 135,902 | ||||||||||||
Provision for loan and lease losses
|
3,000 | 25,000 | 13,000 | 57,500 | ||||||||||||
Net interest income after provision for loan and lease losses
|
61,995 | 43,643 | 117,965 | 78,402 | ||||||||||||
NON-INTEREST INCOME
|
||||||||||||||||
Wealth management
|
5,856 | 7,238 | 11,780 | 14,339 | ||||||||||||
Service charges on deposit accounts
|
4,616 | 5,446 | 9,280 | 10,787 | ||||||||||||
Insurance commissions and fees
|
3,520 | 3,639 | 6,741 | 7,410 | ||||||||||||
Cash management and electronic banking fees
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4,645 | 4,614 | 9,016 | 8,772 | ||||||||||||
Mortgage banking
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1,014 | 1,231 | 2,094 | 2,384 | ||||||||||||
Bank owned life insurance
|
1,233 | 1,280 | 2,453 | 3,263 | ||||||||||||
Equity in undistributed net earnings of unconsolidated investments
|
116 | 537 | 1,816 | 700 | ||||||||||||
Gain on pension plan curtailment
|
- | - | - | 4,066 | ||||||||||||
Other operating income
|
1,818 | 2,771 | 3,873 | 5,504 | ||||||||||||
Net (losses) gains from fair value changes on subordinated debentures
|
(430 | ) | 1,543 | (481 | ) | (5,718 | ) | |||||||||
Net gains (losses) on sales of investment securities
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- | 214 | - | 214 | ||||||||||||
IMPAIRMENT LOSSES ON INVESTMENT SECURITIES:
|
||||||||||||||||
Impairment losses on investment securities
|
- | - | - | (634 | ) | |||||||||||
Non credit-related losses on securities not expected to be sold
|
||||||||||||||||
recognized in other comprehensive loss before tax
|
- | - | - | - | ||||||||||||
Net impairment losses on investment securities
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- | - | - | (634 | ) | |||||||||||
Total non-interest income
|
22,388 | 28,513 | 46,572 | 51,087 | ||||||||||||
NON-INTEREST EXPENSE
|
||||||||||||||||
Salaries, wages and employee benefits
|
30,408 | 30,999 | 61,857 | 60,428 | ||||||||||||
Net premises and equipment
|
6,787 | 7,209 | 14,059 | 15,207 | ||||||||||||
Goodwill impairment
|
- | 8,250 | - | 8,250 | ||||||||||||
FDIC insurance
|
2,726 | 4,056 | 6,183 | 8,153 | ||||||||||||
Other operating expenses
|
14,200 | 16,049 | 28,859 | 32,182 | ||||||||||||
Total non-interest expense
|
54,121 | 66,563 | 110,958 | 124,220 | ||||||||||||
Income (loss) before income taxes
|
30,262 | 5,593 | 53,579 | 5,269 | ||||||||||||
Income tax expense (benefit)
|
7,054 | 9,132 | 11,591 | 4,882 | ||||||||||||
NET INCOME
|
23,208 | (3,539 | ) | 41,988 | 387 | |||||||||||
Preferred dividends and accretion of preferred discount
|
- | (2,005 | ) | (1,691 | ) | (4,010 | ) | |||||||||
Accelerated accretion from redemption of preferred stock
|
- | - | (1,452 | ) | - | |||||||||||
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
|
$ | 23,208 | $ | (5,544 | ) | $ | 38,845 | $ | (3,623 | ) | ||||||
PER SHARE OF COMMON STOCK
|
||||||||||||||||
Basic earnings available to common shareholders
|
$ | 0.15 | $ | (0.04 | ) | $ | 0.26 | $ | (0.03 | ) | ||||||
Diluted earnings available to common shareholders
|
$ | 0.15 | $ | (0.04 | ) | $ | 0.26 | $ | (0.03 | ) | ||||||
Dividends paid in cash
|
$ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.02 | ||||||||
The accompanying notes are an integral part of these financial statements.
|
4
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Accumulated
|
||||||||||||||||||||||||
(dollars in thousands, except share data)
|
Series B
|
Other
|
||||||||||||||||||||||
Common
|
Preferred
|
Accumulated
|
Comprehensive |
|
||||||||||||||||||||
Shares
|
Value
|
Stock
|
Deficit
|
Loss
|
Total
|
|||||||||||||||||||
Balance at December 31, 2010
|
136,792,414 | $ | 1,292,342 | $ | 148,441 | $ | (293,940 | ) | $ | (9,406 | ) | $ | 1,137,437 | |||||||||||
Comprehensive income:
|
||||||||||||||||||||||||
Net income
|
41,988 | 41,988 | ||||||||||||||||||||||
Other comprehensive income, net of taxes
|
21,354 | 21,354 | ||||||||||||||||||||||
Total comprehensive income
|
41,988 | 21,354 | 63,342 | |||||||||||||||||||||
Cash dividends declared common
|
(3,031 | ) | (3,031 | ) | ||||||||||||||||||||
Cash dividends declared preferred
|
(1,583 | ) | (1,583 | ) | ||||||||||||||||||||
Shares issued under share-based plans,
|
||||||||||||||||||||||||
net of excess tax benefits
|
537,451 | 3,805 | 3,805 | |||||||||||||||||||||
Shares issued in private placement
|
14,330,579 | 84,543 | 84,543 | |||||||||||||||||||||
Amortization of preferred discount
|
1,559 | (1,559 | ) | - | ||||||||||||||||||||
Repayment of Series B Preferred Stock
|
(150,000 | ) | (150,000 | ) | ||||||||||||||||||||
Repurchase of common stock warrants
|
(1,000 | ) | (1,000 | ) | ||||||||||||||||||||
Balance at June 30, 2011
|
151,660,444 | $ | 1,379,690 | $ | - | $ | (258,125 | ) | $ | 11,948 | $ | 1,133,513 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
|
||||||||||||||||||||||||
5
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
|
Six Months Ended June 30,
|
|||||||
2011
|
2010
|
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net income
|
$ | 41,988 | $ | 387 | ||||
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
Provision for loan and lease losses
|
13,000 | 57,500 | ||||||
Share-based compensation expense
|
2,182 | 895 | ||||||
Depreciation and amortization
|
8,242 | 8,111 | ||||||
Amortization (accretion) of premiums and discounts on investment securities, net
|
948 | (4 | ) | |||||
Gains on investment securities, net
|
- | (214 | ) | |||||
(Losses) gains on equity-method investments, net of distributions
|
(845 | ) | 85 | |||||
Loans originated for resale
|
(59,960 | ) | (84,511 | ) | ||||
Proceeds from sale of loans
|
65,332 | 87,483 | ||||||
Gain on sale of loans, net
|
(1,439 | ) | (888 | ) | ||||
(Gain) loss on sale of other real estate owned, net
|
(7 | ) | 433 | |||||
Gain on sale of bank buildings
|
- | (223 | ) | |||||
Increase in fair value of subordinated debtentures
|
481 | 5,718 | ||||||
Impairment losses on investment securities
|
- | 634 | ||||||
Bank-owned life insurance policy income
|
(2,453 | ) | (3,263 | ) | ||||
Gain on pension plan curtailment
|
- | (4,066 | ) | |||||
Goodwill impairment
|
- | 8,250 | ||||||
Changes in assets and liabilities:
|
||||||||
Decrease in accrued interest receivable
|
1,967 | 820 | ||||||
Decrease in accrued interest payable
|
(4,260 | ) | (1,717 | ) | ||||
Decrease in other assets
|
14,024 | 5,329 | ||||||
(Decrease) increase in other liabilities
|
(10,915 | ) | 6,113 | |||||
Net cash provided by operating activities
|
68,285 | 86,872 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Proceeds from maturities and repayments of investment securities held to maturity
|
28,087 | 22,141 | ||||||
Proceeds from sales of investment securities available for sale
|
- | 6,668 | ||||||
Purchase of investment securites held to maturity
|
- | (50 | ) | |||||
Proceeds from maturities and repayments of investment securities available for sale
|
150,289 | 213,232 | ||||||
Purchase of investment securities available for sale
|
(184,263 | ) | (259,560 | ) | ||||
Proceeds from sale of loans previously held for investment
|
2,764 | 10,973 | ||||||
Net decrease in loans and leases
|
114,157 | 195,923 | ||||||
Purchases of premises and equipment
|
(2,064 | ) | (2,212 | ) | ||||
Claims from bank owned life insurance
|
- | 2,082 | ||||||
Proceeds from sale of bank buildings
|
- | 911 | ||||||
Proceeds from the sale of other real estate owned
|
375 | 4,354 | ||||||
Net cash provided by investing activities
|
109,345 | 194,462 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Net (decrease) increase in core deposits
|
(378 | ) | 54,967 | |||||
Net decrease in certificates of deposit
|
(114,634 | ) | (297,614 | ) | ||||
Net increase in securities sold under repurchase agreements
|
4,173 | 14,991 | ||||||
Net (decrease) increase in short-term borrowings
|
(3,610 | ) | 100 | |||||
Repayments of FHLB advances
|
(75,963 | ) | (49,259 | ) | ||||
Proceeds from shares issued under share-based plans
|
1,132 | 230 | ||||||
Excess tax expense on share-based plans
|
(221 | ) | (28 | ) | ||||
Issuance of shares under dividend reinvestment plan
|
548 | 622 | ||||||
Issuance of common stock in private placement
|
84,543 | - | ||||||
Repayment of Series B Preferred stock
|
(150,000 | ) | - | |||||
Repurchase of common stock warrants
|
(1,000 | ) | - | |||||
Cash dividends, common
|
(3,031 | ) | (2,509 | ) | ||||
Cash dividends, preferred
|
(2,521 | ) | (3,750 | ) | ||||
Net cash used in financing activities
|
(260,962 | ) | (282,250 | ) | ||||
Net decrease in cash and cash equivalents
|
(83,332 | ) | (916 | ) | ||||
Cash and cash equivalents at beginning of year
|
702,382 | 603,257 | ||||||
Cash and cash equivalents at end of period
|
$ | 619,050 | $ | 602,341 | ||||
6
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company considers cash and due from banks, interest bearing deposits in banks and federal funds sold as cash equivalents for the purposes of reporting cash flows. Cash paid for interest and taxes is as follows:
Six Months Ended
|
||||||||
(dollars in thousands)
|
June 30,
|
|||||||
2011
|
2010
|
|||||||
Interest
|
$ | 50,393 | $ | 62,961 | ||||
Taxes
|
13,703 | - | ||||||
The Company’s investing and financing activities that affected assets or liabilities, but did not result in cash receipts or cash payments were as follows:
Six Months Ended
|
||||||||
(dollars in thousands)
|
June 30,
|
|||||||
2011
|
2010
|
|||||||
Transfers of loans to other real estate¹
|
$ | 1,798 | $ | 9,539 | ||||
Other than temporary impairment on investment securities
|
- | 634 | ||||||
Dividends accrued not paid on Series B Preferred Stock
|
- | 938 | ||||||
¹ $0.9 million and $4.8 million of OREO was disposed of during the periods ending June 30, 2011 and 2010, respectively.
|
||||||||
|
||||||||
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, 2010, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (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, 2011.
The consolidated statement of operations includes Christiana Bank & Trust Company’s (“Christiana”), a Delaware state-chartered bank and trust company, results of operations until its divestiture on December 3, 2010, for the period it was owned by National Penn.
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 (“National Penn Bank”). All material intercompany balances and transactions have been eliminated in consolidation. References to the Company include all the Company’s subsidiaries unless otherwise noted.
7
2. EARNINGS PER SHARE
(dollars in thousands, except per share data )
|
Three months ended June 30,
|
Six months ended June 30,
|
||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Income for EPS:
|
||||||||||||||||
Net income (loss) available to common shareholders
|
$ | 23,208 | $ | (5,544 | ) | $ | 38,845 | $ | (3,623 | ) | ||||||
Calculation of shares:
|
||||||||||||||||
Weighted average basic shares
|
151,601,052 | 126,045,667 | 151,034,207 | 125,960,351 | ||||||||||||
Dilutive effect of:
|
||||||||||||||||
Share-based compensation
|
234,350 | - | 269,390 | - | ||||||||||||
Warrants
|
- | - | - | |||||||||||||
Weighted average fully diluted shares
|
151,835,402 | 126,045,667 | 151,303,597 | 125,960,351 | ||||||||||||
Earnings per common share:
|
||||||||||||||||
Basic
|
$ | 0.15 | $ | (0.04 | ) | $ | 0.26 | $ | (0.03 | ) | ||||||
Diluted
|
$ | 0.15 | $ | (0.04 | ) | $ | 0.26 | $ | (0.03 | ) | ||||||
The following options were excluded from the computation of earnings per share as they were anti-dilutive:
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Stock Options
|
3,494,093 | 4,534,699 | 3,354,531 | 4,453,495 | ||||||||||||
Exercise Price
|
||||||||||||||||
Low
|
$ | 5.85 | $ | 5.60 | $ | 5.85 | $ | 5.60 | ||||||||
High
|
$ | 21.49 | $ | 21.49 | $ | 21.49 | $ | 21.49 |
8
3. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities are summarized as follows:
June 30, 2011
|
|||||||||||||||||
Gross
|
Gross
|
||||||||||||||||
(dollars in thousands)
|
Amortized
|
unrealized | unrealized |
Fair
|
|||||||||||||
cost
|
gains
|
losses
|
value
|
||||||||||||||
Available for Sale
|
|||||||||||||||||
U.S. Treasury securities
|
$ | 19,979 | $ | 17 | $ | - | $ | 19,996 | |||||||||
U.S. Government agency securities
|
4,996 | 81 | - | 5,077 | |||||||||||||
State and municipal bonds
|
334,723 | 7,795 | (7,657 | ) | 334,861 | ||||||||||||
Agency mortgage-backed securities/
|
1,267,621 | 34,906 | (1,816 | ) | 1,300,711 | ||||||||||||
collateralized mortgage obligations | |||||||||||||||||
Non-agency collateralized mortgage obligations
|
18,632 | 475 | (84 | ) | 19,023 | ||||||||||||
Corporate securities and other
|
13,039 | 136 | (570 | ) | 12,605 | ||||||||||||
Marketable equity securities
|
3,759 | 733 | (83 | ) | 4,409 | ||||||||||||
Total | $ | 1,662,749 | $ | 44,143 | $ | (10,210 | ) | $ | 1,696,682 | ||||||||
Held to Maturity
|
|||||||||||||||||
State and municipal bonds
|
$ | 426,426 | $ | 10,200 | $ | (2,623 | ) | $ | 434,003 | ||||||||
Agency mortgage-backed securities/
|
91,083 | 2,974 | - | $ | 94,057 | ||||||||||||
collateralized mortgage obligations | |||||||||||||||||
Non-agency collateralized mortgage obligations
|
1,069 | 33 | - | $ | 1,102 | ||||||||||||
Total | $ | 518,578 | $ | 13,207 | $ | (2,623 | ) | $ | 529,162 | ||||||||
December 31, 2010
|
||||||||||||||||
Gross
|
Gross
|
|||||||||||||||
(dollars in thousands)
|
Amortized
|
unrealized | unrealized |
Fair
|
||||||||||||
cost
|
gains
|
losses
|
value
|
|||||||||||||
Available for Sale
|
||||||||||||||||
U.S. Treasury securities
|
$ | 19,952 | $ | - | $ | (3 | ) | $ | 19,949 | |||||||
U.S. Government agency securities
|
4,995 | 99 | - | 5,094 | ||||||||||||
State and municipal bonds
|
345,310 | 4,880 | (16,836 | ) | 333,354 | |||||||||||
Agency mortgage-backed securities/
|
||||||||||||||||
collateralized mortgage obligations | 1,216,153 | 26,854 | (11,648 | ) | 1,231,359 | |||||||||||
Non-agency collateralized mortgage obligations
|
25,071 | 280 | (277 | ) | 25,074 | |||||||||||
Corporate securities and other
|
14,189 | 90 | (1,245 | ) | 13,034 | |||||||||||
Marketable equity securities
|
3,759 | 506 | (11 | ) | 4,254 | |||||||||||
Total | $ | 1,629,429 | $ | 32,709 | $ | (30,020 | ) | $ | 1,632,118 | |||||||
Held to Maturity
|
||||||||||||||||
State and municipal bonds
|
$ | 427,720 | $ | 1,281 | $ | (12,593 | ) | $ | 416,408 | |||||||
Agency mortgage-backed securities/
|
||||||||||||||||
collateralized mortgage obligations
|
117,756 | 2,241 | - | 119,997 | ||||||||||||
Non-agency collateralized mortgage obligations
|
1,481 | 46 | - | 1,527 | ||||||||||||
Total
|
$ | 546,957 | $ | 3,568 | $ | (12,593 | ) | $ | 537,932 | |||||||
9
Gains and losses from sales of investment securities are as follows:
For the six months
|
||||||||
(dollars in thousands)
|
ended June 30,
|
|||||||
2011
|
2010
|
|||||||
Gains
|
$ | - | $ | 214 | ||||
Losses
|
- | - | ||||||
Net gains from sales of
|
||||||||
investment securities
|
$ | - | $ | 214 | ||||
The table below indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2011 and December 31, 2010, respectively.
June 30, 2011
|
||||||||||||||||||||||||||||
Less than 12 months
|
12 months or longer
|
Total
|
||||||||||||||||||||||||||
(dollars in thousands)
|
No. of
Securities |
|
Fair
Value |
Unrealized
Losses
|
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
||||||||||||||||||||
State and municipal bonds
|
285 | $ | 108,863 | $ | (2,249 | ) | $ | 71,331 | $ | (8,031 | ) | $ | 180,194 | $ | (10,280 | ) | ||||||||||||
Agency mortgage-backed securities/
|
||||||||||||||||||||||||||||
collateralized mortgage obligations
|
44 | 217,650 | (1,809 | ) | 253 | (7 | ) | 217,903 | (1,816 | ) | ||||||||||||||||||
Non-agency collateralized mortgage obligations
|
4 | - | - | 2,266 | (84 | ) | 2,266 | (84 | ) | |||||||||||||||||||
Corporate securities and other
|
10 | 2,907 | (42 | ) | 3,953 | (528 | ) | 6,860 | (570 | ) | ||||||||||||||||||
Total debt securities
|
343 | 329,420 | (4,100 | ) | 77,803 | (8,650 | ) | 407,223 | (12,750 | ) | ||||||||||||||||||
Marketable equity securities
|
3 | 639 | (83 | ) | - | - | 639 | (83 | ) | |||||||||||||||||||
Total
|
346 | $ | 330,059 | $ | (4,183 | ) | $ | 77,803 | $ | (8,650 | ) | $ | 407,862 | $ | (12,833 | ) | ||||||||||||
December 31, 2010
|
||||||||||||||||||||||||||||
Less than 12 months
|
12 months or longer
|
Total
|
||||||||||||||||||||||||||
(dollars in thousands)
|
No. of
Securities
|
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
|||||||||||||||||||||
U. S. Treasury securities
|
1 | $ | 19,949 | $ | (3 | ) | $ | - | $ | - | $ | 19,949 | $ | (3 | ) | |||||||||||||
State and municipal bonds
|
907 | 474,765 | (17,811 | ) | 67,841 | (11,618 | ) | 542,606 | (29,429 | ) | ||||||||||||||||||
Agency mortgage-backed securities/
|
||||||||||||||||||||||||||||
collateralized mortgage obligations
|
66 | 382,356 | (11,647 | ) | 2,016 | (1 | ) | 384,372 | (11,648 | ) | ||||||||||||||||||
Non-agency collateralized mortgage obligations
|
7 | 3,363 | (58 | ) | 4,195 | (219 | ) | 7,558 | (277 | ) | ||||||||||||||||||
Corporate securities and other
|
11 | 1,854 | (151 | ) | 5,471 | (1,094 | ) | 7,325 | (1,245 | ) | ||||||||||||||||||
Total debt securities
|
992 | 882,287 | (29,670 | ) | 79,523 | (12,932 | ) | 961,810 | (42,602 | ) | ||||||||||||||||||
Marketable equity securities
|
2 | 50 | (11 | ) | - | - | 50 | (11 | ) | |||||||||||||||||||
Total
|
994 | $ | 882,337 | $ | (29,681 | ) | $ | 79,523 | $ | (12,932 | ) | $ | 961,860 | $ | (42,613 | ) | ||||||||||||
The amortized cost and fair value of investment securities, by contractual maturity, at June 30, 2011 are shown below. Expected maturities will differ from contractual maturities because investment securities may be called or prepaid.
(dollars in thousands)
|
Available for Sale
|
Held to Maturity
|
||||||||||||||
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||
Cost
|
Value
|
Cost
|
Value
|
|||||||||||||
Due in one year or less
|
$ | 27,731 | $ | 27,801 | $ | 4,148 | $ | 4,182 | ||||||||
Due after one through five years
|
42,039 | 44,010 | - | - | ||||||||||||
Due after five through ten years
|
200,968 | 211,561 | 30,516 | 31,378 | ||||||||||||
Due after ten years
|
1,388,252 | 1,408,901 | 483,914 | 493,602 | ||||||||||||
Marketable equity securities
|
3,759 | 4,409 | - | - | ||||||||||||
$ | 1,662,749 | $ | 1,696,682 | $ | 518,578 | $ | 529,162 | |||||||||
10
Investment securities were pledged as collateral for the following:
(dollars in thousands)
|
June 30,
|
December 31,
|
||||||
2011
|
2010
|
|||||||
Deposits
|
$ | 859,601 | $ | 893,532 | ||||
Repurchase agreements
|
798,153 | 835,640 | ||||||
Other
|
47,992 | 126,091 | ||||||
$ | 1,705,746 | $ | 1,855,263 | |||||
Evaluation of Impairment of Securities
As of June 30, 2011 and December 31, 2010, there were no amounts recorded in OCI for the non credit-related component of OTTI.
The majority of the investment portfolio is comprised of U.S. Treasury, Government Agency, state and municipal securities, mortgage-backed securities, and collateralized mortgage obligations. The unrealized losses in the Company’s investments 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.
The majority of the unrealized losses for twelve months or longer are attributed to municipal bonds. The Company evaluates a variety of factors in concluding whether the municipal bonds are other-than-temporarily impaired. These factors include, but are not limited to, the type and purpose of the bond (the Company primarily owns general obligation bonds and essential purpose revenue bonds), the underlying rating of the bond issuer, and the presence of credit enhancements (i.e. state guarantees, municipal bond insurance, collateral requirements, etc.). At June 30, 2011, approximately 70% of the Company’s municipal investment securities were general obligations of various municipalities. As a result of its review and considering the attributes of these bonds, the Company concluded that the securities were not other-than-temporarily impaired since the decline in the fair value of these securities is due to changes in relative credit spreads for the industry.
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 fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.
Other securities on the Company’s consolidated balance sheet totaled $75.3 million and $80.6 million as of June 30, 2011 and December 31, 2010, respectively. The balance includes FHLB of Pittsburgh stock and Federal Reserve Bank stock. These securities lack a market, and as such they are carried at cost since fair value is not readily determinable. The Company evaluates these securities for impairment each reporting period and has concluded the carrying value of these securities is not impaired. The Company will continue to monitor these investments for impairment each reporting period. During the first half of 2011, the FHLB of Pittsburgh repurchased $5.3 million of its capital stock from the Company at par.
11
4. LOANS
The following tables represent loan and lease classifications as of June 30, 2011 and December 31, 2010:
Performing
|
||||||||||||||||||||
June 30, 2011
|
Pass Rated Loans
|
Special Mention Loans
|
Classified Loans | Non-Performing Loans |
Total Loans
|
|||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||
Commercial and industrial loans and leases
|
$ | 2,064,154 | $ | 84,001 | $ | 229,448 | $ | 31,338 | $ | 2,408,941 | ||||||||||
CRE - permanent
|
703,308 | 39,039 | 61,841 | 14,376 | 818,564 | |||||||||||||||
CRE - construction
|
88,206 | 35,270 | 31,743 | 15,844 | 171,063 | |||||||||||||||
Commercial real estate
|
791,514 | 74,309 | 93,584 | 30,220 | 989,627 | |||||||||||||||
Residential mortgages
|
728,222 | - | - | 6,117 | 734,339 | |||||||||||||||
Home equity lines and loans
|
753,004 | - | - | 2,296 | 755,300 | |||||||||||||||
All other consumer
|
277,378 | 3,199 | 6,930 | 3,212 | 290,719 | |||||||||||||||
Consumer loans
|
1,758,604 | 3,199 | 6,930 | 11,625 | 1,780,358 | |||||||||||||||
Total loans and leases
|
$ | 4,614,272 | $ | 161,509 | $ | 329,962 | $ | 73,183 | $ | 5,178,926 | ||||||||||
Performing
|
||||||||||||||||||||
December 31, 2010
|
Pass Rated Loans
|
Special Mention Loans
|
Classified Loans | Non-Performing Loans |
Total Loans
|
|||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||
Commercial and industrial loans and leases
|
$ | 2,032,157 | $ | 101,667 | $ | 266,179 | $ | 34,957 | $ | 2,434,960 | ||||||||||
CRE - permanent
|
649,122 | 48,213 | 53,832 | 17,821 | 768,988 | |||||||||||||||
CRE - construction
|
159,410 | 36,045 | 66,209 | 19,392 | 281,056 | |||||||||||||||
Commercial real estate
|
808,532 | 84,258 | 120,041 | 37,213 | 1,050,044 | |||||||||||||||
Residential mortgages
|
759,605 | - | - | 5,809 | 765,414 | |||||||||||||||
Home equity lines and loans
|
742,177 | - | 33 | 2,914 | 745,124 | |||||||||||||||
All other consumer
|
315,213 | 3,778 | 9,219 | 2,971 | 331,181 | |||||||||||||||
Consumer loans
|
1,816,995 | 3,778 | 9,252 | 11,694 | 1,841,719 | |||||||||||||||
Total loans and leases
|
$ | 4,657,684 | $ | 189,703 | $ | 395,472 | $ | 83,864 | $ | 5,326,723 | ||||||||||
12
The following tables represent the details for past-due loans and leases as of June 30, 2011 and December 31, 2010:
June 30, 2011
|
30-59 Days
Past Due and
Still Accruing
|
60-89 Days
Past Due and
Still Accruing
|
90 Days or
More Past Due
and Still
Accruing (1)
|
Total Past Due
and Still Accruing
|
Accruing
Current Balances
|
Non-Accrual Balances
|
Total Loan Balances
|
|||||||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||||||||
Commercial and industrial loans and leases
|
$ | 4,557 | $ | 598 | $ | 63 | $ | 5,218 | $ | 2,372,448 | $ | 31,275 | $ | 2,408,941 | ||||||||||||||
CRE - permanent
|
2,204 | 233 | - | 2,437 | 804,248 | 11,879 | 818,564 | |||||||||||||||||||||
CRE - construction
|
1,294 | - | - | 1,294 | 153,925 | 15,844 | 171,063 | |||||||||||||||||||||
Commercial real estate
|
3,498 | 233 | - | 3,731 | 958,173 | 27,723 | 989,627 | |||||||||||||||||||||
Residential mortgages
|
3,356 | 422 | - | 3,778 | 725,365 | 5,196 | 734,339 | |||||||||||||||||||||
Home equity lines and loans
|
2,439 | 853 | 354 | 3,646 | 750,127 | 1,527 | 755,300 | |||||||||||||||||||||
All other consumer
|
2,488 | 402 | 1,150 | 4,040 | 284,617 | 2,062 | 290,719 | |||||||||||||||||||||
Consumer loans
|
8,283 | 1,677 | 1,504 | 11,464 | 1,760,109 | 8,785 | 1,780,358 | |||||||||||||||||||||
Total loans and leases
|
$ | 16,338 | $ | 2,508 | $ | 1,567 | $ | 20,413 | $ | 5,090,730 | $ | 67,783 | $ | 5,178,926 | ||||||||||||||
Percent of total loans and leases
|
0.32 | % | 0.05 | % | 0.03 | % | 0.39 | % | 1.31 | % | ||||||||||||||||||
December 31, 2010
|
30-59 Days
Past Due and
Still Accruing
|
60-89 Days
Past Due and
Still Accruing
|
90 Days or
More Past Due
and Still
Accruing (1)
|
Total Past Due
and Still Accruing
|
Accruing
Current Balances
|
Non-Accrual Balances
|
Total Loan Balances
|
|||||||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||||||||
Commercial and industrial loans and leases
|
$ | 2,541 | $ | 2,740 | $ | 88 | $ | 5,369 | $ | 2,394,722 | $ | 34,869 | $ | 2,434,960 | ||||||||||||||
CRE - permanent
|
2,176 | 1,310 | - | 3,486 | 747,681 | 17,821 | 768,988 | |||||||||||||||||||||
CRE - construction
|
1,061 | 2,500 | - | 3,561 | 258,103 | 19,392 | 281,056 | |||||||||||||||||||||
Commercial real estate
|
3,237 | 3,810 | - | 7,047 | 1,005,784 | 37,213 | 1,050,044 | |||||||||||||||||||||
Residential mortgages
|
5,240 | 1,487 | 7 | 6,734 | 752,878 | 5,802 | 765,414 | |||||||||||||||||||||
Home equity lines and loans
|
3,688 | 745 | 781 | 5,214 | 737,777 | 2,133 | 745,124 | |||||||||||||||||||||
All other consumer
|
2,185 | 380 | 877 | 3,442 | 325,645 | 2,094 | 331,181 | |||||||||||||||||||||
Consumer loans
|
11,113 | 2,612 | 1,665 | 15,390 | 1,816,300 | 10,029 | 1,841,719 | |||||||||||||||||||||
Total loans and leases
|
$ | 16,891 | $ | 9,162 | $ | 1,753 | $ | 27,806 | $ | 5,216,806 | $ | 82,111 | $ | 5,326,723 | ||||||||||||||
Percent of total loans and leases
|
0.32 | % | 0.17 | % | 0.03 | % | 0.52 | % | 1.54 | % | ||||||||||||||||||
(1) 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.
|
||||||||||||||||||||||||||||
13
Changes in the allowance for loan and lease losses by loan portfolio for the three and six months ended June 30, 2011 are as follows:
June 30, 2011
|
||||||||||||||||||||
Three months ended
|
Commercial 1
|
Commercial Real Estate 2 |
Consumer 3
|
Unallocated
|
Total
|
|||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||
Allowance for loan and lease losses:
|
||||||||||||||||||||
Beginning balance
|
$ | 65,791 | $ | 48,911 | $ | 20,118 | $ | 8,140 | $ | 142,960 | ||||||||||
Charge-offs
|
(5,430 | ) | (2,358 | ) | (2,724 | ) | - | (10,512 | ) | |||||||||||
Recoveries
|
364 | 288 | 1,809 | - | 2,461 | |||||||||||||||
Provision
|
3,178 | (2,299 | ) | (794 | ) | 2,915 | 3,000 | |||||||||||||
Ending balance
|
$ | 63,903 | $ | 44,542 | $ | 18,409 | $ | 11,055 | $ | 137,909 | ||||||||||
Six months ended
|
Commercial 1
|
Commercial Real Estate 2 |
Consumer 3
|
Unallocated
|
Total
|
|||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||
Allowance for loan and lease losses:
|
||||||||||||||||||||
Beginning balance
|
$ | 69,655 | $ | 51,177 | $ | 20,897 | $ | 8,325 | $ | 150,054 | ||||||||||
Charge-offs
|
(14,999 | ) | (7,671 | ) | (6,595 | ) | - | (29,265 | ) | |||||||||||
Recoveries
|
614 | 782 | 2,724 | - | 4,120 | |||||||||||||||
Provision
|
8,633 | 254 | 1,383 | 2,730 | 13,000 | |||||||||||||||
Ending balance
|
$ | 63,903 | $ | 44,542 | $ | 18,409 | $ | 11,055 | $ | 137,909 | ||||||||||
Ending balance: individually evaluated for impairment
|
$ | 4,186 | $ | 2,737 | $ | 302 | $ | - | $ | 7,225 | ||||||||||
Ending balance: collectively evaluated for impairment
|
$ | 59,717 | $ | 41,805 | $ | 18,107 | $ | 11,055 | $ | 130,684 | ||||||||||
Total loans and leases
|
$ | 2,408,941 | $ | 989,627 | $ | 1,780,358 | $ | - | $ | 5,178,926 | ||||||||||
Ending balance: individually evaluated for impairment
|
$ | 31,275 | $ | 30,219 | $ | 10,122 | $ | - | $ | 71,616 | ||||||||||
Ending balance: collectively evaluated for impairment
|
$ | 2,377,666 | $ | 959,408 | $ | 1,770,236 | $ | - | $ | 5,107,310 | ||||||||||
1. Commercial includes all C&I Loans, including those secured by real estate, and Capital Leases.
|
|
2. CRE is defined here as loans secured by non-owner-occupied real estate which have a primary source of repayment of third-party rental income or the sale of the property securing the loan.
|
|
3. All Other Consumer loans include direct consumer loans (secured by residential real estate and other collateral), indirect consumer loans, consumer lines of credit (secured residential real estate and other collateral), and overdrafts.
|
|
The Company did not have any loans acquired with deteriorated credit quality.
|
|
14
Changes in the allowance for loan and lease losses by loan portfolio for the three and six months ended June 30, 2010 are as follows:
June 30, 2010
|
||||||||||||||||||||
Three months ended
|
Commercial 1
|
Commercial
Real Estate 2
|
Consumer 3
|
Unallocated
|
Total
|
|||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||
Allowance for loan and lease losses:
|
||||||||||||||||||||
Beginning balance
|
$ | 80,297 | $ | 51,826 | $ | 15,157 | $ | 6,570 | $ | 153,850 | ||||||||||
Charge-offs
|
(10,342 | ) | (8,047 | ) | (8,927 | ) | - | (27,316 | ) | |||||||||||
Recoveries
|
1,729 | 211 | 565 | - | 2,505 | |||||||||||||||
Provision
|
3,771 | 9,538 | 12,640 | (949 | ) | 25,000 | ||||||||||||||
Ending balance
|
$ | 75,455 | $ | 53,528 | $ | 19,435 | $ | 5,621 | $ | 154,039 | ||||||||||
Six months ended
|
Commercial 1
|
Commercial
Real Estate 2
|
Consumer 3
|
Unallocated
|
Total
|
|||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||
Allowance for loan and lease losses:
|
||||||||||||||||||||
Beginning balance
|
$ | 73,030 | $ | 55,653 | $ | 13,828 | $ | 3,760 | $ | 146,271 | ||||||||||
Charge-offs
|
(13,476 | ) | (28,038 | ) | (13,284 | ) | - | (54,798 | ) | |||||||||||
Recoveries
|
2,603 | 1,415 | 1,048 | - | 5,066 | |||||||||||||||
Provision
|
13,298 | 24,498 | 17,843 | 1,861 | 57,500 | |||||||||||||||
Ending balance
|
$ | 75,455 | $ | 53,528 | $ | 19,435 | $ | 5,621 | $ | 154,039 | ||||||||||
Ending balance: individually evaluated for impairment
|
$ | 5,501 | $ | 2,522 | $ | 2,195 | $ | - | $ | 10,218 | ||||||||||
Ending balance: collectively evaluated for impairment
|
$ | 69,954 | $ | 51,006 | $ | 17,240 | $ | 5,621 | $ | 143,821 | ||||||||||
Total loans and leases
|
$ | 2,605,133 | $ | 1,204,204 | $ | 1,946,898 | $ | - | $ | 5,756,235 | ||||||||||
Ending balance: individually evaluated for impairment
|
$ | 33,923 | $ | 46,981 | $ | 15,295 | $ | - | $ | 96,199 | ||||||||||
Ending balance: collectively evaluated for impairment
|
$ | 2,571,210 | $ | 1,157,223 | $ | 1,931,603 | $ | - | $ | 5,660,036 | ||||||||||
1. Commercial includes all C&I Loans, including those secured by real estate, and Capital Leases.
|
2. CRE is defined here as loans secured by non-owner-occupied real estate which have a primary source of repayment of third-party rental income or the sale of the property securing the loan.
|
3. All Other Consumer loans include direct consumer loans (secured by residential real estate and other collateral), indirect consumer loans, consumer lines of credit (secured residential real estate and other collateral), and overdrafts.
|
The Company did not have any loans acquired with deteriorated credit quality.
|
15
Impaired loan and lease details as of June 30, 2011 and December 31, 2010 are as follows:
June 30, 2011
|
Recorded Investment With Related Allowance |
Recorded Investment Without Related Allowance
|
Total Recorded Investment
|
Life-to-date Charge-offs
|
Contractual Balances
|
Related Allowance
|
Average Recorded Investment
|
|||||||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||||||||
Commercial and industrial loans and leases
|
$ | 12,478 | $ | 18,797 | $ | 31,275 | $ | 12,932 | $ | 44,207 | $ | 4,186 | $ | 33,038 | ||||||||||||||
CRE - permanent
|
2,976 | 11,399 | 14,375 | 9,436 | 23,811 | 58 | 16,404 | |||||||||||||||||||||
CRE - construction
|
9,867 | 5,977 | 15,844 | 18,215 | 34,059 | 2,679 | 17,826 | |||||||||||||||||||||
Commercial real estate
|
12,843 | 17,376 | 30,219 | 27,651 | 57,870 | 2,737 | 34,230 | |||||||||||||||||||||
Residential mortgages
|
907 | 5,210 | 6,117 | 593 | 6,710 | 185 | 6,435 | |||||||||||||||||||||
Home equity lines and loans
|
380 | 1,563 | 1,943 | 295 | 2,238 | 117 | 2,060 | |||||||||||||||||||||
All other consumer
|
- | 2,062 | 2,062 | - | 2,062 | - | 1,921 | |||||||||||||||||||||
Consumer loans
|
1,287 | 8,835 | 10,122 | 888 | 11,010 | 302 | 10,416 | |||||||||||||||||||||
Total loans and leases
|
$ | 26,608 | $ | 45,008 | $ | 71,616 | $ | 41,471 | $ | 113,087 | $ | 7,225 | $ | 77,684 | ||||||||||||||
December 31, 2010
|
Recorded Investment With Related Allowance |
Recorded Investment Without Related Allowance
|
Total Recorded Investment
|
Life-to-date Charge-offs
|
Contractual Balances
|
Related Allowance
|
Average Recorded Investment
|
|||||||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||||||||
Commercial and industrial loans and leases
|
$ | 17,800 | $ | 17,069 | $ | 34,869 | $ | 3,729 | $ | 38,598 | $ | 6,473 | $ | 33,970 | ||||||||||||||
CRE - permanent
|
9,656 | 8,165 | 17,821 | 8,725 | 26,546 | 2,087 | 15,419 | |||||||||||||||||||||
CRE - construction
|
- | 19,392 | 19,392 | 20,163 | 39,555 | - | 35,302 | |||||||||||||||||||||
Commercial real estate
|
9,656 | 27,557 | 37,213 | 28,888 | 66,101 | 2,087 | 50,721 | |||||||||||||||||||||
Residential mortgages
|
- | 5,802 | 5,802 | 648 | 6,450 | - | 13,965 | |||||||||||||||||||||
Home equity lines and loans
|
- | 2,133 | 2,133 | 390 | 2,523 | - | 2,789 | |||||||||||||||||||||
All other consumer
|
- | 2,094 | 2,094 | 4,182 | 6,276 | - | 3,058 | |||||||||||||||||||||
Consumer loans
|
- | 10,029 | 10,029 | 5,220 | 15,249 | - | 19,812 | |||||||||||||||||||||
Total loans and leases
|
$ | 27,456 | $ | 54,655 | $ | 82,111 | $ | 37,837 | $ | 119,948 | $ | 8,560 | $ | 104,503 | ||||||||||||||
Impaired and restructured loans:
(dollars in thousands)
|
June 30, 2011
|
December 31, 2010
|
||||||||||||||
Balance
|
Allowance
|
Balance
|
Allowance
|
|||||||||||||
Impaired loans without a specific reserve
|
$ | 45,008 | $ | - | $ | 54,655 | $ | - | ||||||||
Impaired loans with a specific reserve
|
22,775 | 6,982 | 27,456 | 8,560 | ||||||||||||
Restructured loans (1)
|
3,833 | 243 | - | - | ||||||||||||
Total impaired loans
|
$ | 71,616 | $ | 7,225 | $ | 82,111 | $ | 8,560 | ||||||||
Undrawn commitments to lend on restructured loans
|
$ | - | $ | - | ||||||||||||
(1) Restructured loans include $2.5 of commercial loans modified during the second quarter of 2011 and $1.3 million of consumer loans which were modified for customers who were experiencing financial difficulty and were in jeopardy of losing their homes to foreclosure.
|
For the three months
|
For the six months
|
|||||||||||||||
(dollars in thousands)
|
ended June 30,
|
ended June 30,
|
||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Gross interest due on impaired loans
|
$ | 1,523 | $ | 1,860 | $ | 3,671 | $ | 3,984 | ||||||||
Interest reversed (received) on impaired loans
|
6 | (48 | ) | (504 | ) | (127 | ) | |||||||||
Net impact of interest income on impaired loans
|
$ | 1,529 | $ | 1,812 | $ | 3,167 | $ | 3,857 | ||||||||
Average recorded investment in impaired loans
|
$ | 73,405 | $ | 105,547 | $ | 77,684 | $ | 112,134 | ||||||||
16
5. DEPOSITS
(dollars in thousands)
|
June 30, 2011
|
December 31, 2010
|
||||||||||||||
Balance
|
Cost
|
Balance
|
Cost
|
|||||||||||||
Savings
|
$ | 464,055 | 0.18 | % | $ | 438,879 | 0.20 | % | ||||||||
NOW accounts
|
1,158,161 | 0.22 | % | 1,181,850 | 0.23 | % | ||||||||||
Money market accounts
|
1,631,779 | 0.60 | % | 1,664,620 | 0.60 | % | ||||||||||
CDs $100 or less
|
1,261,026 | 1.74 | % | 1,378,060 | 1.89 | % | ||||||||||
CDs greater than $100
|
589,329 | 1.49 | % | 586,929 | 1.75 | % | ||||||||||
Total interest bearing deposits
|
5,104,350 | 0.85 | % | 5,250,338 | 0.97 | % | ||||||||||
Total non-interest bearing deposits
|
839,811 | - | 808,835 | - | ||||||||||||
Total deposits
|
$ | 5,944,161 | 0.74 | % | $ | 6,059,173 | 0.84 | % | ||||||||
At June 30, 2011 maturities of certificates of deposits were as follows:
(dollars in thousands)
|
||||
2011
|
$ | 806,056 | ||
2012
|
579,304 | |||
2013
|
171,252 | |||
2014
|
181,581 | |||
2015
|
60,800 | |||
Thereafter
|
51,362 | |||
$ | 1,850,355 | |||
6. BORROWINGS
(dollars in thousands)
|
June 30, 2011
|
December 31, 2010
|
||||||||||||||
Balance
|
Cost
|
Balance
|
Cost
|
|||||||||||||
Securities sold under repurchase agreements
|
$ | 738,628 | 1.37 | % | $ | 734,455 | 1.48 | % | ||||||||
Short-term borrowings
|
6,390 | - | 10,000 | - | ||||||||||||
Federal Home Loan Bank advances
|
627,332 | 4.50 | % | 703,761 | 4.35 | % | ||||||||||
Subordinated debentures accounted for at fair value
|
65,940 | 7.85 | % | 65,459 | 7.85 | % | ||||||||||
Subordinated debentures accounted for at amortized cost¹
|
77,321 | 5.74 | % | 77,321 | 5.73 | % | ||||||||||
Total borrowings and other debt obligations
|
$ | 1,515,611 | 3.21 | % | $ | 1,590,996 | 3.22 | % | ||||||||
¹The cost includes the impact of the interest rate swaps.
|
7. EQUITY
Common Stock
On January 7, 2011, Warburg Pincus LLC invested $86.7 million in National Penn Bancshares, Inc. common stock, with the purchase of 14,330,579 newly issued common shares. This transaction completed Warburg Pincus’ $150 million investment in the Company, and as a result, Warburg Pincus owns 16.4% of the Company’s common stock.
Series B Preferred Stock and Common Stock Warrant
On March 16, 2011, National Penn redeemed the entire amount of Series B Preferred Stock issued to the U.S. Treasury under the TARP Capital Purchase Program. The Company paid $150.6 million, including approximately $0.6 million of accrued and unpaid dividends. The preferred shares had a carrying value of $148.4 million at December 31, 2010, net of unaccreted discount. National Penn accelerated the accretion of the discount in the first quarter, reducing net income available to common shareholders by $1.5 million or $0.01 per share. On April 13, 2011, National Penn repurchased the remaining 735,294 outstanding warrants held by the U.S. Treasury that were issued in conjunction with the preferred shares for $1.0 million.
17
8. ACCUMULATED OTHER COMPREHENSIVE INCOME
Total comprehensive income includes net income and certain other items which affect equity during the three and six months ended June 30, 2011:
Three months ended June 30, 2011
|
||||||||||||
Before
|
Net of
|
|||||||||||
(dollars in thousands)
|
Tax
|
Tax
|
Tax
|
|||||||||
Amount
|
Expense
|
Amount
|
||||||||||
Net income
|
$ | 30,262 | $ | 7,054 | $ | 23,208 | ||||||
Unrealized gains on investment securities
|
||||||||||||
available for sale
|
20,012 | 7,004 | 13,008 | |||||||||
Unrealized gain on cash flow deriviatives
|
528 | - | 528 | |||||||||
Other comprehensive income
|
20,540 | 7,004 | 13,536 | |||||||||
Total comprehensive income
|
$ | 50,802 | $ | 14,058 | $ | 36,744 | ||||||
Six months ended June 30, 2011
|
||||||||||||
Before
|
Net of
|
|||||||||||
(dollars in thousands)
|
Tax
|
Tax
|
Tax
|
|||||||||
Amount
|
Expense
|
Amount
|
||||||||||
Net income
|
$ | 53,579 | $ | 11,591 | $ | 41,988 | ||||||
Unrealized gains on investment securities
|
||||||||||||
available for sale
|
31,245 | 10,936 | 20,309 | |||||||||
Unrealized gain on cash flow deriviatives
|
1,045 | - | 1,045 | |||||||||
Other comprehensive income
|
32,290 | 10,936 | 21,354 | |||||||||
Total comprehensive income
|
$ | 85,869 | $ | 22,527 | $ | 63,342 | ||||||
Accumulated other comprehensive income (loss) was comprised of the following components, after-tax:
(dollars in thousands)
|
June 30,
|
December 31,
|
||||||
2011
|
2010
|
|||||||
Unrealized gains on investment securities
|
$ | 22,057 | $ | 1,748 | ||||
Unrealized (losses) on cash flow hedges
|
(760 | ) | (1,805 | ) | ||||
Pension
|
(9,349 | ) | (9,349 | ) | ||||
Total accumulated other comprehensive income (loss)
|
$ | 11,948 | $ | (9,406 | ) | |||
9. CONTINGENCIES
On January 26, 2010, Plaintiff Reynaldo Reyes filed a putative class action lawsuit pursuant to the RICO Act, 18 U.S.C. § 1961, et seq., in the United States District Court for the Eastern District of Pennsylvania against multiple defendants, including National Penn Bank (Case No. 2:10-cv-00345). The complaint essentially alleges that the defendants were part of a fraudulent telemarketing scheme whereby funds were unlawfully withdrawn from Plaintiff's bank account by telemarketers, deposited into the telemarketers' accounts with the bank defendants (including National Penn Bank) via payment processors, and then transferred to offshore accounts. Plaintiff seeks to recover damages on behalf of himself and a purported nationwide class. National Penn plans on vigorously defending this lawsuit. Each of the defendants filed a motion to dismiss in response to the complaint. In late March 2011, the Court dismissed all defendants' motions without prejudice and ordered the Plaintiff to file a "RICO Statement" and set forth in detail the factual basis for Plaintiff's claims. Plaintiff's RICO Statement was filed in April 2011. National Penn renewed its motion to dismiss in May 2011 and briefing on the motion was completed at the end of July 2011. National Penn expects that a decision will be issued in the third quarter of 2011. If National Penn's renewed motion to dismiss is denied, the parties will take discovery and the Court will establish a schedule for a class certification motion and related briefing. To date, a class has not been certified.
18
10. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
Contract or notional amounts are as follows:
For the period ending
|
||||||||
(dollars in thousands)
|
June 30,
|
December 31,
|
||||||
2011
|
2010
|
|||||||
Financial instruments whose contract amounts represent credit risk:
|
||||||||
Commitments to extend credit
|
$ | 1,436,246 | $ | 1,497,983 | ||||
Commitments to fund mortgages held for sale
|
20,345 | 12,785 | ||||||
Commitments to sell mortgages to investors
|
29,197 | 17,145 | ||||||
Letters of credit
|
140,986 | 157,096 | ||||||
The Company enters into interest rate lock commitments with its loan customers which are intended for sale in the future. These commitments are derivatives and, as such, are reported on the consolidated balance sheet at their estimated fair value. To hedge the fair value risk associated with changing interest rates on these commitments, the Company enters into forward commitments to sell the closed loans to investors. These hedges are economic hedges and are not designated in hedging relationships. The forward sale commitments are also derivatives and are recorded on the consolidated balance sheet at their estimated fair value.
Shown below is a summary of the derivatives designated as accounting hedges at June 30, 2011 and December 31, 2010:
(dollars in thousands)
|
Notional
|
Receive
|
Pay
|
Life
|
||||||||||||||||||||||||
Positions
|
Amount
|
Asset
|
Liability
|
Rate
|
Rate
|
(Years)
|
||||||||||||||||||||||
June 30, 2011
|
||||||||||||||||||||||||||||
Pay fixed - receive floating
|
||||||||||||||||||||||||||||
interest rate swaps
|
3 | $ | 75,000 | $ | - | $ | 760 | 0.27 | % | 3.26 | % | 0.33 | ||||||||||||||||
Total derivatives used in hedging relationships
|
$ | 75,000 | $ | - | $ | 760 | 0.27 | % | 3.26 | % | 0.33 | |||||||||||||||||
December 31, 2010
|
||||||||||||||||||||||||||||
Pay fixed - receive floating
|
||||||||||||||||||||||||||||
interest rate swaps
|
3 | $ | 75,000 | $ | - | $ | 1,805 | 0.29 | % | 3.26 | % | 0.83 | ||||||||||||||||
Total derivatives used in hedging relationships
|
$ | 75,000 | $ | - | $ | 1,805 | 0.29 | % | 3.26 | % | 0.83 | |||||||||||||||||
In October 2008, the Company entered into interest rate swap contracts to hedge the cash flows of $75.0 million of subordinated debentures. The interest rate swap transactions involved the exchange of the Company’s floating rate interest payments on the subordinated debentures for fixed rate interest payments without the exchange of the underlying principal amount. The term of these swaps were for a period of three years. These swaps were designated, and qualify, for hedge accounting. Cash collateral pledged for these swaps totaled $1.3 million at June 30, 2011.
Summary information regarding interest rate swap derivative positions which were not designated in hedging relationships at June 30, 2011 and December 31, 2010 is as follows:
(dollars in thousands)
|
Notional
|
Receive
|
Pay
|
Life
|
||||||||||
Positions
|
Amount
|
Asset
|
Liability
|
Rate
|
Rate
|
(Years)
|
||||||||
June 30, 2011
|
||||||||||||||
Receive fixed - pay floating
|
||||||||||||||
interest rate swaps
|
85
|
$ 199,071
|
$ 19,944
|
$ -
|
6.10%
|
1.83%
|
4.85
|
|||||||
Pay fixed - receive floating
|
||||||||||||||
interest rate swaps
|
85
|
199,071
|
-
|
19,944
|
1.83%
|
6.10%
|
4.85
|
|||||||
Net interest rate swaps
|
$ 398,142
|
$ 19,944
|
$ 19,944
|
3.96%
|
3.96%
|
4.85
|
||||||||
December 31, 2010
|
||||||||||||||
Receive fixed - pay floating
|
||||||||||||||
interest rate swaps
|
82
|
$ 202,643
|
$ 20,384
|
$ -
|
6.10%
|
1.90%
|
4.95
|
|||||||
Pay fixed - receive floating
|
||||||||||||||
interest rate swaps
|
82
|
202,643
|
-
|
20,384
|
1.90%
|
6.10%
|
4.95
|
|||||||
Net interest rate swaps
|
$ 405,286
|
$ 20,384
|
$ 20,384
|
4.00%
|
4.00%
|
4.95
|
||||||||
19
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. These interest rate swaps are also considered derivatives and are also not designated in hedging relationships. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the consolidated statement of operations.
The following summarizes the Company’s derivative activity:
Derivative Activity
|
Balance Sheet Effect at
June 30, 2011 |
Income Statement Effect For The Three Months
Ended June 30, 2011
|
Income Statement Effect For The Six Months
Ended June 30, 2011
|
|||
Cash flow hedges:
|
||||||
Pay fixed - receive floating interest rate swaps
|
Increase to other liabilities of $0.8 million and a corresponding decrease to OCI.
|
The ineffective portion is zero.
Increase to interest expense of $0.6 million for net settlements.
|
The ineffective portion is zero.
Increase to interest expense of $1.1 million for net settlements.
|
|||
Interest rate swaps:
|
Increase to other assets/liabilities of $19.9 million.
|
No net effect on other operating income from offsetting $2.0 million change.
|
No net effect on other operating income from offsetting $0.4 million change.
|
|||
Other derivatives:
|
||||||
Interest rate locks
|
Increase to other liabilities of $0.6 million
|
Decrease to mortgage banking income of $0.7 million
|
Decrease to mortgage banking income of $0.6 million
|
|||
Forward sale commitments
|
Increase to other assets of $0.5 million
|
Increase to mortgage banking income of $0.6 million
|
Increase to mortgage banking income of $0.6 million
|
|||
Balance Sheet Effect at
|
Income Statement Effect For The Three Months
|
Income Statement Effect For The Six Months
|
||||
Derivative Activity
|
December 31, 2010
|
Ended June 30, 2010
|
Ended June 30, 2010
|
|||
Cash flow hedges:
|
||||||
Pay fixed - receive floating interest rate swaps
|
Increase to other liabilities of $1.8 million and a corresponding decrease to OCI.
|
The ineffective portion is zero.
Increase to interest expense of $0.6 million for net settlements.
|
The ineffective portion is zero.
Increase to interest expense of $1.1 million for net settlements.
|
|||
|
||||||
Interest rate swaps:
|
Increase to other assets/liabilities of $20.4 million.
|
No net effect on other operating income from offsetting $2.0 million change.
|
No net effect on other operating income from offsetting $6.7 million changes.
|
|||
Other derivatives:
|
||||||
Interest rate locks
|
Increase to other assets of $0.1 million
|
Decrease to mortgage banking income of $0.6 million.
|
Increase to mortgage banking income of $0.5 million
|
|||
Forward sale commitments
|
Increase to other liabilities of $0.1 million
|
Increase to mortgage banking income of $0.7 million.
|
Decrease to mortgage banking income of $0.7 million
|
11. FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company provides estimates of the fair value of its 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 are 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.
The types of instruments valued 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.
20
The types of instruments valued 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 for these securities is determined by reference to transactions in other issues of these securities with similar yields and features.
|
Level 3 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.
|
·
|
Marketable equity securities are securities 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. Additional indications of pricing, which are considered, 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.
|
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 in order to arrive at a fair market value. These characteristics classify interest rate swap agreements as Level 2.
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, that are otherwise not permitted to be accounted for at fair value under other accounting standards. 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.
21
Specifically, the fair value option was applied to the Company’s only fixed rate subordinated debenture liability with a cost basis of $65.2 million. The fair value as of June 30, 2011 was $65.9 million. Non-interest income included a loss of $0.5 million and $5.7 million for the change in fair value of the subordinated debenture for the six months ended June 30, 2011 and 2010, respectively. This subordinated debenture has a fixed rate of 7.85% and a maturity date of September 30, 2032 with a call provision after September 30, 2007. The Company elected the fair value option for asset/liability management purposes. The subordinated debenture is measured based on an unadjusted quoted price of the traded asset in an active market on the final day of each month.
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair values on a recurring basis, as of June 30, 2011 and December 31, 2010, 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:
Total
Fair Value at |
Quoted Prices
in Active |
Significant
Other |
Significant
Unobservable |
|||||||||||||
(dollars in thousands)
|
||||||||||||||||
Assets
|
||||||||||||||||
U.S. Treasury securities
|
$ | 19,996 | $ | 19,996 | $ | - | $ | - | ||||||||
U.S. Government agency securities
|
5,077 | - | 5,077 | - | ||||||||||||
State and municipal bonds
|
334,861 | - | 334,861 | - | ||||||||||||
Agency mortgage-backed securities/
|
||||||||||||||||
collateralized mortgage obligations
|
1,300,711 | - | 1,300,711 | - | ||||||||||||
Non-agency collateralized mortgage obligations
|
19,023 | - | 19,023 | - | ||||||||||||
Corporate securities and other
|
12,605 | 1,066 | 9,539 | 2,000 | ||||||||||||
Marketable equity securities
|
4,409 | 3,318 | - | 1,091 | ||||||||||||
Investment securities, available for sale
|
1,696,682 | 24,380 | 1,669,211 | 3,091 | ||||||||||||
Forward sale commitments
|
508 | - | 508 | - | ||||||||||||
Interest rate swap agreements
|
19,944 | - | 19,944 | - | ||||||||||||
Liabilities
|
||||||||||||||||
Subordinated debentures
|
$ | 65,940 | $ | 65,940 | $ | - | $ | - | ||||||||
Interest rate locks
|
$ | 574 | - | 574 | - | |||||||||||
Interest rate swap agreements
|
20,704 | - | 20,704 | - | ||||||||||||
Total
Fair Value at |
Quoted Prices
in Active |
Significant
Other |
Significant
Unobservable |
|||||||||||||
(dollars in thousands)
|
||||||||||||||||
Assets
|
||||||||||||||||
U.S. Treasury securities
|
$ | 19,949 | $ | 19,949 | $ | - | $ | - | ||||||||
U.S. Government agency securities
|
5,094 | - | 5,094 | - | ||||||||||||
State and municipal bonds
|
333,354 | - | 333,354 | - | ||||||||||||
Agency mortgage-backed securities/
|
||||||||||||||||
collateralized mortgage obligations
|
1,231,359 | - | 1,231,359 | - | ||||||||||||
Non-agency collateralized mortgage obligations
|
25,074 | - | 25,074 | - | ||||||||||||
Corporate securities and other
|
13,034 | 2,130 | 9,904 | 1,000 | ||||||||||||
Marketable equity securities
|
4,254 | 3,140 | - | 1,114 | ||||||||||||
Investment securities, available-for-sale
|
1,632,118 | 25,219 | 1,604,785 | 2,114 | ||||||||||||
Interest rate locks
|
60 | - | 60 | - | ||||||||||||
Interest rate swap agreements
|
20,384 | - | 20,384 | - | ||||||||||||
Liabilities
|
||||||||||||||||
Subordinated debentures
|
$ | 65,459 | $ | 65,459 | $ | - | $ | - | ||||||||
Forward sale commitments
|
53 | - | 53 | - | ||||||||||||
Interest rate swap agreements
|
22,189 | - | 22,189 | - | ||||||||||||
22
The following table presents activity for assets measured at fair value on a recurring basis for the six months ended June 30, 2011:
(dollars in thousands)
Level 1 |
Beginning
Balance
January 1, 2011
|
Gains/(losses)
included in
earnings
|
Gains/(losses)
included in other
comprehensive
income
|
Purchases
|
Maturities/
Calls/Paydowns
|
Accretion/
Amortization
|
Transfers
|
Ending
Balance
June 30, 2011
|
||||||||||||||||||||||||
U.S. Treasury securities
|
$ | 19,949 | $ | - | $ | 20 | $ | - | $ | - | $ | 27 | $ | - | $ | 19,996 | ||||||||||||||||
Corporate securities and other
|
2,130 | - | (63 | ) | - | (1,000 | ) | (1 | ) | - | 1,066 | |||||||||||||||||||||
Marketable equity securities
|
3,140 | - | 178 | - | - | - | - | 3,318 | ||||||||||||||||||||||||
Total level 1
|
$ | 25,219 | $ | - | $ | 135 | $ | - | $ | (1,000 | ) | $ | 26 | $ | - | $ | 24,380 | |||||||||||||||
Level 2
|
||||||||||||||||||||||||||||||||
U.S. Government agencies
|
$ | 5,094 | $ | - | $ | (18 | ) | $ | - | $ | - | $ | 1 | $ | - | $ | 5,077 | |||||||||||||||
State and municipal bonds
|
333,354 | - | 12,094 | - | (12,330 | ) | 1,743 | - | 334,861 | |||||||||||||||||||||||
Agency mortgage-backed securities/
|
||||||||||||||||||||||||||||||||
collateralized mortgage obligations
|
1,231,359 | - | 17,886 | 183,406 | (129,502 | ) | (2,438 | ) | - | 1,300,711 | ||||||||||||||||||||||
Non-agency collateralized
|
||||||||||||||||||||||||||||||||
mortgage obligations
|
25,074 | - | 388 | - | (6,457 | ) | 18 | - | 19,023 | |||||||||||||||||||||||
Corporate securities and other
|
9,904 | - | 783 | 857 | (1,000 | ) | (5 | ) | (1,000 | ) | 9,539 | |||||||||||||||||||||
Total level 2
|
$ | 1,604,785 | $ | - | $ | 31,133 | $ | 184,263 | $ | (149,289 | ) | $ | (681 | ) | $ | (1,000 | ) | $ | 1,669,211 | |||||||||||||
Level 3
|
||||||||||||||||||||||||||||||||
Corporate securities and other
|
$ | 1,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 1,000 | $ | 2,000 | ||||||||||||||||
Marketable equity securities
|
1,114 | - | (23 | ) | - | - | - | - | 1,091 | |||||||||||||||||||||||
Total level 3
|
$ | 2,114 | $ | - | $ | (23 | ) | $ | - | $ | - | $ | - | $ | 1,000 | $ | 3,091 | |||||||||||||||
Total available for sale securities
|
$ | 1,632,118 | $ | - | $ | 31,245 | $ | 184,263 | $ | (150,289 | ) | $ | (655 | ) | $ | - | $ | 1,696,682 |
Transfers of securities between levels in the table above result from changes in the availability of market data for similar instruments and are measured as of the beginning of the period.
The following table sets forth the Company’s financial assets subject to fair value adjustments (impairment) on a nonrecurring 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)
|
||||||||||||||||
June 30, 2011:
|
Quoted Prices
in Active |
Significant
Other |
Significant
Unobservable |
Balance
|
||||||||||||
Assets
|
||||||||||||||||
Loans held for sale
|
$ | - | $ | 8,852 | $ | - | $ | 8,852 | ||||||||
Impaired loans, net
|
- | - | 64,391 | 64,391 | ||||||||||||
OREO and other repossessed assets
|
- | - | 8,407 | 8,407 | ||||||||||||
December 31, 2010:
|
||||||||||||||||
Assets
|
||||||||||||||||
Loans held for sale
|
$ | - | $ | 12,785 | $ | - | $ | 12,785 | ||||||||
Impaired loans, net
|
- | - | 73,551 | 73,551 | ||||||||||||
OREO and other repossessed assets
|
- | - | 7,453 | 7,453 |
Fair value for loans held for sale is estimated based upon available market data for similar pools of loans, more specifically mortgage backed securities with similar interest rates and maturities. There were no write-downs recorded to loans held for sale as of June 30, 2011 and December 31, 2010.
Impaired and restructured loans totaled $71.6 million with a specific reserve of $7.2 million at June 30, 2011, compared to $82.1 million with a specific reserve of $8.6 million at December 31, 2010. Fair value for impaired loans is primarily measured based on the value of the collateral securing these loans 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.
23
Fair value for OREO and other repossessed assets is estimated based upon its appraised value less costs to sell. Additional write-downs of OREO and other repossessed assets were $0.1 million for the three and six months ended June 30, 2011 and there were no write-downs as of December 31, 2010.
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, many of such 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. 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. The estimation methodologies, resulting fair values and recorded carrying amounts at June 30, 2011 and December 31, 2010 were as follows:
(dollars in thousands)
|
June 30, 2011
|
December 31, 2010
|
||||||||||||||
Carrying
|
Carrying
|
|||||||||||||||
Amount
|
Fair Value
|
Amount
|
Fair Value
|
|||||||||||||
ASSETS
|
||||||||||||||||
Cash and cash equivalents
|
$ | 619,050 | $ | 619,050 | $ | 702,382 | $ | 702,382 | ||||||||
Investment securities available for sale
|
1,696,682 | 1,696,682 | 1,632,118 | 1,632,118 | ||||||||||||
Investment securities held to maturity
|
518,578 | 529,162 | 546,957 | 537,932 | ||||||||||||
Loans held for sale
|
8,852 | 8,918 | 12,785 | 12,795 | ||||||||||||
Commercial and industrial loans and leases
|
982,167 | 967,799 | 960,765 | 947,722 | ||||||||||||
Real estate loans:
|
||||||||||||||||
Construction and land development
|
207,643 | 200,212 | 339,242 | 325,640 | ||||||||||||
Residential
|
2,400,164 | 2,360,857 | 2,372,182 | 2,329,578 | ||||||||||||
Other (non-farm, non-residential)
|
1,366,530 | 1,266,340 | 1,405,642 | 1,294,090 | ||||||||||||
Loans to individuals
|
213,570 | 195,007 | 236,107 | 223,350 | ||||||||||||
Total loans
|
5,170,074 | 4,990,215 | 5,313,938 | 5,120,380 | ||||||||||||
Allowance for loan and lease losses
|
(137,909 | ) | - | (150,054 | ) | - | ||||||||||
Net loans
|
$ | 5,032,165 | $ | 4,990,215 | $ | 5,163,884 | $ | 5,120,380 | ||||||||
OREO and other repossessed assets
|
8,407 | 8,407 | 7,453 | 7,453 | ||||||||||||
Interest rate locks
|
- | - | 60 | 60 | ||||||||||||
Forward sale commitments
|
508 | 508 | - | - | ||||||||||||
Interest rate swap agreements
|
19,944 | 19,944 | 20,384 | 20,384 | ||||||||||||
LIABILITIES
|
||||||||||||||||
Non-interest bearing deposits
|
$ | 839,811 | $ | 839,811 | $ | 808,835 | $ | 808,835 | ||||||||
Interest-bearing deposits
|
3,253,995 | 3,253,995 | 3,285,349 | 3,285,349 | ||||||||||||
Deposits with stated maturities
|
1,850,355 | 1,862,368 | 1,964,989 | 1,979,819 | ||||||||||||
Repurchase agreements
|
||||||||||||||||
and short-term borrowings
|
745,018 | 745,018 | 744,455 | 744,455 | ||||||||||||
FHLB advances
|
627,332 | 704,653 | 703,761 | 783,164 | ||||||||||||
Subordinated debentures
|
143,261 | 143,261 | 142,780 | 142,780 | ||||||||||||
Forward sale commitments
|
- | - | 53 | 53 | ||||||||||||
Interest rate locks
|
574 | 574 | - | - | ||||||||||||
Interest rate swap agreements
|
20,704 | 20,704 | 22,189 | 22,189 | ||||||||||||
The loan classifications in this table are based upon regulatory classifications.
|
For June 30, 2011 and December 31, 2010, 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.
24
Fair value of non-interest bearing demand deposits has been estimated to equal the carrying amount, which is assumed to be the amount at which they could be settled.
Fair value for interest bearing deposits is based on the assumption that the exit value of the instruments would be funded with like instruments by principal market participants.
Fair value of deposits with stated maturities is estimated at the present value of associated cash flows using contractual maturities and market interest rates.
Fair value for repurchase agreements and short-term borrowings has been estimated at the present value of associated cash flows using contractual maturities and market interest rates for each instrument.
Fair value for 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.
Fair value for subordinated debentures that float with LIBOR are estimated to equal the carrying amount exclusive of related hedges.
12. RETIREMENT PLANS
The Company has a non-contributory defined benefit pension plan covering substantially all employees of the Company and its subsidiaries. The Company-sponsored pension plan provides retirement benefits under pension trust agreements. The benefits are based on years of service and the employee’s compensation during the highest five consecutive years during the last ten consecutive years of employment. The Company does not expect to make a contribution in 2011 because the plan’s credit balance would be applied toward reducing the contribution requirement.
On February 12, 2010, the Company curtailed the National Penn Bancshares, Inc. Employee 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. The curtailment resulted in a gain of $4.1 million in the statement of operations for the three months ended March 31, 2010.
Net periodic defined benefit pension expense for the six months ended June 30, 2011 and 2010 included the following components:
(dollars in thousands)
|
Six Months Ended June 30,
|
|||||||
2011
|
2010
|
|||||||
Service cost
|
$ | 60 | $ | 546 | ||||
Interest cost
|
1,165 | 1,112 | ||||||
Expected return on plan assets
|
(1,370 | ) | (1,401 | ) | ||||
Amortization of prior service cost
|
- | (61 | ) | |||||
Amortization of unrecongnized net actual loss
|
145 | 453 | ||||||
Net periodic benefit (gain) cost - recurring
|
- | 649 | ||||||
Non-recurring curtailment gain
|
- | (4,066 | ) | |||||
Net periodic benefit (gain) cost
|
$ | - | $ | (3,417 | ) |
25
13. SHARE-BASED COMPENSATION
At June 30, 2011, the Company had certain compensation plans authorizing the Company to grant various share-based employee and non-employee director awards, including common stock, options, restricted stock, restricted stock units and other stock-based awards (collectively, “Plans”).
A total of 5.3 million shares of common stock have been made available for awards to be granted under these Plans through November 30, 2014. As of June 30, 2011, 2.0 million of these shares remain available for issuance. The Company has 239,000 awards expiring during the next twelve months ending June 30, 2012.
As of June 30, 2011, there was approximately $2.0 million of total unrecognized compensation cost related to unvested stock options and approximately $2.5 million of unrecognized compensation cost for other share-based awards that is expected to be recognized over a weighted-average period of less than five years.
The table below summarizes activity related to share-based plans during the period:
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
(dollars in thousands)
|
June 30,
|
June 30,
|
June 30,
|
June 30,
|
||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Share-based compensation expense
|
$ | 637 | $ | 492 | $ | 2,182 | $ | 895 | ||||||||
Cash received
|
100 | 129 | 1,132 | 230 | ||||||||||||
Intrinsic value of options exercised
|
480 | 125 | 3,112 | 188 |
14. SEGMENT REPORTING
The Company’s operating segments are components, which are evaluated regularly by the chief operating decision-maker in deciding how to allocate and assess resources and assess performance. The Company’s chief operating decision-maker is the Chief Executive Officer. The Company determines its segments based primarily upon product and service offerings and through types of income generated. The Company’s segments are “Community Banking” and “Other.”
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. For example, commercial lending is dependent upon the availability of funding from retail deposits and other borrowings and the management of interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending.
The Company has also identified several other operating segments. These non-reportable segments include National Penn Wealth Management, N. A., National Penn Capital Advisors, Inc., National Penn Insurance Services Group, Inc., Caruso Benefits 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.
26
Reportable segment-specific information and reconciliation to consolidated financial information is as follows:
As of and for the Three Months Ended
|
||||||||||||
June 30, 2011
|
||||||||||||
Community
|
||||||||||||
(dollars in thousands)
|
Banking
|
Other
|
Consolidated
|
|||||||||
Total assets
|
$ | 8,573,827 | $ | 59,314 | $ | 8,633,141 | ||||||
Total deposits
|
5,944,161 | - | 5,944,161 | |||||||||
Net interest income (expense)
|
67,131 | (2,136 | ) | 64,995 | ||||||||
Total non-interest income
|
12,454 | 9,934 | 22,388 | |||||||||
Total non-interest expense
|
46,192 | 7,929 | 54,121 | |||||||||
Net (loss) income available to common shareholders
|
24,699 | (1,491 | ) | 23,208 | ||||||||
As of and for the Six Months Ended
|
||||||||||||
June 30, 2011
|
||||||||||||
Community
|
||||||||||||
(dollars in thousands)
|
Banking
|
Other
|
Consolidated
|
|||||||||
Net interest income (loss)
|
$ | 135,183 | $ | (4,218 | ) | $ | 130,965 | |||||
Total non-interest income
|
26,219 | 20,353 | 46,572 | |||||||||
Total non-interest expense
|
94,663 | 16,295 | 110,958 | |||||||||
Net (loss) income available to common shareholders
|
45,069 | (6,224 | ) | 38,845 | ||||||||
As of and for the Three Months Ended
|
||||||||||||
June 30, 2010
|
||||||||||||
Community
|
||||||||||||
(dollars in thousands)
|
Banking
|
Other
|
Consolidated
|
|||||||||
Total assets
|
$ | 9,136,218 | $ | 85,909 | $ | 9,222,127 | ||||||
Total deposits
|
6,496,205 | - | 6,496,205 | |||||||||
Net interest income (expense)
|
70,566 | (1,923 | ) | 68,643 | ||||||||
Total non-interest income
|
15,760 | 12,753 | 28,513 | |||||||||
Total non-interest expense
|
59,536 | 7,027 | 66,563 | |||||||||
Net (loss) income available to common shareholders
|
(3,799 | ) | (1,745 | ) | (5,544 | ) | ||||||
As of and for the Six Months Ended
|
||||||||||||
June 30, 2010
|
||||||||||||
Community
|
||||||||||||
(dollars in thousands)
|
Banking
|
Other
|
Consolidated
|
|||||||||
Net interest income (loss)
|
$ | 139,684 | $ | (3,782 | ) | $ | 135,902 | |||||
Total non-interest income
|
34,358 | 16,729 | 51,087 | |||||||||
Total non-interest expense
|
110,288 | 13,932 | 124,220 | |||||||||
Net (loss) income available to common shareholders
|
5,182 | (8,805 | ) | (3,623 | ) |
27
15. GOODWILL
As of June 30, 2011, the Company performed the annual impairment test of goodwill for each of its reporting units, which are “community banking” and “other.” As of June 30, 2011, the carrying value of goodwill assigned to the community banking segment was approximately $235 million and the carrying value of goodwill assigned to the other segment was approximately $23 million. Both reporting units passed the step one goodwill impairment test with its fair value in excess of its carrying value, inclusive goodwill assigned to it. As a result, no further analysis was performed.
16. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2011, the Financial Accounting Standards Board released clarifying guidance to establish a consistent framework for creditors to use in determining whether a loan modification represents a troubled debt restructuring. The additional guidance prescribes that in a troubled debt restructuring the Company must conclude that the borrower is experiencing financial difficulty and a concession has been granted to the borrower. This guidance further clarifies what circumstances constitute a creditor concession and when a borrower is experiencing financial difficulty. The guidance became effective for the Company for the quarter beginning July 1, 2011, and adoption was required retrospectively to January 1, 2011. Adoption of this guidance did not materially impact the Company’s results of operations or financial condition.
17. SUBSEQUENT EVENTS
On July 28, 2011 National Penn Bank and its primary regulator terminated the informal Memorandum of Understanding (MOU) as well as the related individual minimum capital requirements (IMCR) entered into on January 27, 2010.
28
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 six months ended June 30, 2011, 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 excludes the effects of certain gains and losses, adjusted for applicable taxes. Adjusted net income 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 Financial Highlights and financial data tables.
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 and lease 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.
29
FINANCIAL HIGHLIGHTS
Business and Industry
National Penn Bancshares, Inc. is a Pennsylvania business corporation and a registered bank holding company headquartered in Boyertown, 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; National Penn Capital Advisors, Inc.; Institutional Advisors, LLC; National Penn Insurance Services Group, Inc., including its Higgins Insurance division; and Caruso Benefits Group, Inc.
The Company’s business is primarily accepting deposits from customers through its community 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 provides for it to operate within growth markets focusing on diversification of revenue sources and increased market penetration in growing geographic areas.
At June 30, 2011, National Penn operated 123 retail branch offices. It has 122 retail branch offices in Pennsylvania and one retail branch office in Maryland through National Penn Bank and its KNBT, HomeTowne Heritage Bank, and Nittany Bank divisions.
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 and lease 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, fair value measurements and gains and losses from sales of securities or 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.
30
Overview
Three and six months ended June 30, 2011:
(dollars in thousands, except per share data)
|
||||||||||||||||||||
Three Months Ended
|
Six Months Ended
|
|||||||||||||||||||
June 30, 2011
|
March 31, 2011
|
June 30, 2010
|
June 30, 2011
|
June 30, 2010
|
||||||||||||||||
EARNINGS
|
||||||||||||||||||||
Total interest income
|
$ | 87,740 | $ | 89,358 | $ | 98,308 | $ | 177,098 | $ | 197,145 | ||||||||||
Total interest expense
|
22,745 | 23,388 | 29,665 | 46,133 | 61,243 | |||||||||||||||
Net interest income
|
64,995 | 65,970 | 68,643 | 130,965 | 135,902 | |||||||||||||||
Provision for loan and lease losses
|
3,000 | 10,000 | 25,000 | 13,000 | 57,500 | |||||||||||||||
Net interest income after provision
|
||||||||||||||||||||
for loan and lease losses
|
61,995 | 55,970 | 43,643 | 117,965 | 78,402 | |||||||||||||||
Net losses from fair value changes of
|
||||||||||||||||||||
subordinated debentures
|
(430 | ) | (51 | ) | 1,543 | (481 | ) | (5,718 | ) | |||||||||||
Other non-interest income
|
22,818 | 24,235 | 26,970 | 47,053 | 56,805 | |||||||||||||||
Goodwill impairment
|
- | - | 8,250 | - | 8,250 | |||||||||||||||
Other non-interest expense
|
54,121 | 56,837 | 58,313 | 110,958 | 115,970 | |||||||||||||||
Income (loss) before income taxes
|
30,262 | 23,317 | 5,593 | 53,579 | 5,269 | |||||||||||||||
Income tax expense (benefit)
|
7,054 | 4,537 | 9,132 | 11,591 | 4,882 | |||||||||||||||
Net income
|
23,208 | 18,780 | (3,539 | ) | 41,988 | 387 | ||||||||||||||
Preferred dividends and accretion of preferred discount
|
- | (1,691 | ) | (2,005 | ) | (1,691 | ) | (4,010 | ) | |||||||||||
Accelerated accretion from redemption of preferred stock
|
- | (1,452 | ) | - | (1,452 | ) | - | |||||||||||||
Net income available to common shareholders
|
$ | 23,208 | $ | 15,637 | $ | (5,544 | ) | $ | 38,845 | $ | (3,623 | ) | ||||||||
Basic earnings available to common shareholders
|
$ | 0.15 | $ | 0.10 | $ | (0.04 | ) | $ | 0.26 | $ | (0.03 | ) | ||||||||
Diluted earnings available to common shareholders
|
0.15 | 0.10 | (0.04 | ) | 0.26 | (0.03 | ) | |||||||||||||
Dividends per common share
|
0.01 | 0.01 | 0.01 | 0.02 | 0.02 | |||||||||||||||
Net interest margin
|
3.53 | % | 3.58 | % | 3.50 | % | 3.56 | % | 3.47 | % | ||||||||||
Efficiency ratio (1)
|
58.25 | % | 59.61 | % | 57.72 | % | 58.94 | % | 58.12 | % | ||||||||||
Return on average assets
|
1.08 | % | 0.88 | % |
NM
|
0.98 | % |
NM
|
||||||||||||
Asset Quality Metrics
|
||||||||||||||||||||
Allowance / total loans and leases
|
2.66 | % | 2.73 | % | 2.68 | % | ||||||||||||||
Non-performing loans / total loans and leases
|
1.42 | % | 1.51 | % | 1.73 | % | ||||||||||||||
Delinquent loans / total loans and leases
|
0.39 | % | 0.48 | % | 0.58 | % | ||||||||||||||
Allowance / non-performing loans and leases
|
188 | % | 181 | % | 155 | % | ||||||||||||||
Annualized net charge-offs
|
0.62 | % | 1.31 | % | 1.70 | % | 0.96 | % | 1.69 | % | ||||||||||
(1) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 2.
|
Net income available to common shareholders increased to $38.8 million for the six months ended, June 30, 2011 as compared to a $3.6 million loss in the prior year. For the second quarter of 2011 net income available to common shareholders was $23.2 million, an increase from $15.6 million for the first quarter of 2011 and a loss of $5.5 million in the previous year quarter. Improvements in net income available to common shareholders resulted from the following items:
·
|
Sustained asset quality improvement resulted in a 77% decrease, or $44.5 million, to the provision for loan and lease losses (“provision”) to $13.0 million for the six months ended June 30, 2011, from $57.5 million for the six months ended June 30, 2010. In the second quarter 2011, the provision for loan and lease losses was $3.0 million, compared to $10.0 million in the first quarter of 2011 and $25.0 million in the prior year period. Delinquencies and the level of non-performing loans remain low while classified loans declined by 8% during the second quarter of 2011 and 16% since December 31, 2010. Allowance coverage ratios remain strong and totaled 188% of non-performing loans and leases and 2.66% of total loans and leases for June 30, 2011.
|
·
|
Earning assets have continued to decline primarily as a result of proactive management of lower quality credits, the divestiture of Christiana in 2010 and disciplined deposit pricing. The reduction of interest earning assets resulted in net interest income of $65.0 million for the second quarter and $131 million for year to date 2011. Deposit and customer management efforts led to overall improvement in deposit mix and have mitigated the managed declines of earning assets. As a result, net interest margin expanded to 3.56% as compared to 3.47% in the prior year. Net interest margin for the second quarter 2011 was 3.53%, a slight decrease from the first quarter 2011, for which net interest margin was 3.58%.
|
31
·
|
Other non-interest income remained comparable on a linked-quarter basis when considering the earnings from a mezzanine debt fund of $1.7 million in the first quarter of 2011. Year to date other non-interest income totaled $47.0 million compared to $56.8 million in 2010 and included $3.2 million of earnings from Christiana, which was divested in December 2010, and a gain of $4.1 million from the curtailment of the Company’s pension plan during the first quarter of 2010.
|
·
|
Non-interest expense decreased by 4.8% on a linked quarter basis to $54.1 million and totaled $111 million for the six months ended June 30, 2011. The efficiency ratio was stable at 58.25%, for the second quarter of 2011, as management’s continues its focus on expense controls.
|
The following table reconciles the non-GAAP adjusted net income performance measure to the GAAP performance measure of net income available to common shareholders and diluted earnings per share. A more detailed description of these items is included in the beginning of Item 2 to this Report.
(dollars in thousands, except per share data)
|
Three Months Ended
|
|||||||||||
June 30, 2011
|
March 31, 2011
|
June 30, 2010
|
||||||||||
Adjusted net income reconciliation
|
||||||||||||
Net income available to common shareholders
|
$ | 23,208 | $ | 15,637 | $ | (5,544 | ) | |||||
After tax unrealized fair market value (gain) loss on
|
||||||||||||
subordinated debentures
|
- | - | (1,003 | ) | ||||||||
Accelerated accretion from redemption of preferred stock
|
- | 1,452 | - | |||||||||
BOLI tax expense
|
- | - | 8,081 | |||||||||
Goodwill impairment
|
- | - | 8,250 | |||||||||
Adjusted net income available to common shareholders
|
$ | 23,208 | $ | 17,089 | $ | 9,784 | ||||||
Earnings per share
|
||||||||||||
Net income available to common shareholders
|
$ | 0.15 | $ | 0.10 | (0.04 | ) | ||||||
After tax unrealized fair market value loss on
|
||||||||||||
subordinated debentures
|
- | - | (0.01 | ) | ||||||||
Accelerated accretion from redemption of preferred stock
|
- | 0.01 | - | |||||||||
BOLI tax expense
|
- | - | 0.06 | |||||||||
Goodwill impairment
|
- | - | 0.07 | |||||||||
Adjusted net income available to common shareholders
|
$ | 0.15 | $ | 0.11 | $ | 0.08 | ||||||
Adjusted net income excludes certain items which management believes affect the comparability of results between periods. There were no such adjustments for the second quarter 2011, and as a result adjusted net income totaled $23.2 million or $0.15 per diluted share. Adjusted net income for the first quarter 2011 totaled $17.1 million or $0.11 per diluted share, and $9.8 million, or $0.08 per diluted share for the second quarter of 2010. Adjusted net income continues to increase due to asset quality improvement, while earnings and expenses have remained relatively stable. Adjusted net income excluded the effects of the following items during the periods presented:
·
|
The first quarter of 2011 included accelerated accretion of $1.5 million from the repayment of TARP.
|
·
|
Non-interest income in 2010 included a $1.5 million gain, or $1.0 million after-tax, on the Company’s subordinated debentures accounted for at fair value, and a $4.1 million, or $2.6 million after-tax, gain on the curtailment of the Company’s defined benefit pension plan.
|
·
|
The second quarter 2010 included a non-tax deductible goodwill impairment charge of $8.3 million or $0.07 per common share, from the announced sale of Christiana.
|
·
|
Income tax expense for the three months ended June 30, 2010, included $8.1 million or $0.06 per common share, of income taxes related to the announced redemption of separate account BOLI. |
32
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of Financial Condition as of three and six months ended June 30, 2011
SUMMARY BALANCE SHEET
|
June 30, 2011
|
March 31, 2011
|
December 31, 2010
|
|||||||||
Total cash and cash equivalents
|
$ | 619,050 | $ | 505,368 | $ | 702,382 | ||||||
Total assets
|
8,633,141 | 8,543,267 | 8,844,620 | |||||||||
Investment securities and other securities
|
2,290,568 | 2,235,777 | 2,259,690 | |||||||||
Total loans and leases
|
5,178,926 | 5,245,146 | 5,326,723 | |||||||||
Deposits
|
5,944,161 | 5,933,016 | 6,059,173 | |||||||||
Borrowings
|
1,515,611 | 1,472,987 | 1,590,996 | |||||||||
Shareholders' equity
|
1,133,513 | 1,097,609 | 1,137,437 | |||||||||
Tangible book value per common share (1)
|
$ | 5.65 | $ | 5.40 | $ | 5.18 | ||||||
Tangible common equity / tangible assets (1)
|
10.25 | % | 9.91 | % | 8.27 | % | ||||||
(1) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 2.
|
Assets
Loans and Leases
The Company’s customers are affected by economic conditions. Although the economy and credit environment continue to be uncertain, the Company has experienced stabilization in both its commercial and consumer loan portfolios, demonstrated by the sixth consecutive quarter of asset quality improvement. Reduced levels of commercial real estate exposure, particularly construction, and proactive management of lower quality credits has helped to mitigate the continuing impact of housing market conditions and declining real estate and commercial property values, which resulted in higher than historic levels of charge-offs throughout 2010 and 2009. The Company remains focused on customers’ needs and delivering solutions to them.
Federal Reserve economic data suggests the following trends:
·
|
Throughout the second quarter, the pace of recovery has slowed. Business activity has improved overall with retailers, auto dealers, and manufacturers reporting increases in sales, shipments and new orders but at a much slower pace than the previous quarter. Third District banks reported minimal change in loan volume outstanding and that credit quality has been improving. The general view is that loan demand will increase slightly going forward.
|
·
|
The commercial real estate sector has demonstrated minimal change. Vacancy rates have edged down due to companies trading up for higher quality. Residential real estate has shown an improved sales pace attributed to seasonality and buyers’ concern that mortgage rates are likely to increase in the future. Demographic and employment trends resulting from the economic downturn continue to impact demand for housing in the region, which has resulted in continued weakness in real estate and collateral values.
|
·
|
Employment data suggests that the stress in local labor markets has subsided somewhat with a slight year over year improvement. Wage pressures are contained in most Districts, as abundant labor availability has continued to limit the pace of wage growth. In the Third District, wages were reported steady. Several Districts reported fuel surcharges have increased but in the Third District, there has been a limited ability to pass through these cost increases to consumers.
|
·
|
The outlook among Third District business contacts remains positive. Most agreed that slight growth will occur and improve throughout 2011.
|
33
The Company’s loans are diversified by borrower, industry group, and geographical area in the Company’s market areas. The following summary shows the composition of the Company’s loan portfolio for June 30, 2011 and December 31, 2010:
(dollars in thousands)
|
June 30,
|
December 31,
|
||||||||||||||
2011
|
2010
|
Increase/(decrease)
|
||||||||||||||
Commercial and industrial loans and leases
|
$ | 2,408,941 | $ | 2,434,960 | $ | (26,019 | ) | (1.1 | )% | |||||||
CRE - permanent
|
818,564 | 768,988 | 49,576 | 6.4 | % | |||||||||||
CRE - construction
|
171,063 | 281,056 | (109,993 | ) | (39.1 | )% | ||||||||||
Commercial real estate
|
989,627 | 1,050,044 | (60,417 | ) | (5.8 | )% | ||||||||||
Residential mortgages
|
734,339 | 765,414 | (31,075 | ) | (4.1 | )% | ||||||||||
Home equity lines and loans
|
755,300 | 745,124 | 10,176 | 1.4 | % | |||||||||||
All other consumer
|
290,719 | 331,181 | (40,462 | ) | (12.2 | )% | ||||||||||
Consumer loans
|
1,780,358 | 1,841,719 | (61,361 | ) | (3.3 | )% | ||||||||||
Total loans and leases
|
$ | 5,178,926 | $ | 5,326,723 | $ | (147,797 | ) | (2.8 | )% | |||||||
Allowance for loan and lease losses
|
137,909 | 150,054 | (12,145 | ) | (8.1 | )% | ||||||||||
Loans and leases, net
|
$ | 5,041,017 | $ | 5,176,669 | $ | (135,652 | ) | (2.6 | )% | |||||||
Net loans and leases decreased $136 million, or 2.6%, to $5.0 billion at June 30, 2011 from $5.2 billion at December 31, 2010. The allowance for loan and lease losses decreased to $137.9 million at June 30, 2011 from $150.1 million at December 31, 2010 due to net charge-offs of $25.1 million and a provision of $13.0 million for the six months ended June 30, 2011. Management’s efforts to reduce credit risk on the balance sheet resulted in a 16% decline in classified loans since December 31, 2010. Overall, loan balances have also declined as customers deleveraged their own balance sheets. Loan balances declined overall from managed reductions to construction loans exposure, which decreased $110 million from December 31, 2010, and residential mortgages which continue to decline as originations are primarily sold to investors. Improving overall asset quality metrics resulted in the reduction in provision and allowance during the first half of 2011 and particularly during the second quarter where the provision declined $7.0 million to $3.0 million on a linked-quarter basis.
The following table shows asset quality indicators for the periods presented:
(dollars in thousands)
|
June 30,
|
March 31,
|
December 31,
|
|||||||||
2011
|
2011
|
2010
|
||||||||||
Nonperforming loans
|
$ | 73,183 | $ | 79,153 | $ | 83,864 | ||||||
Nonperforming loans to total loans
|
1.41 | % | 1.51 | % | 1.57 | % | ||||||
Delinquent loans
|
$ | 20,413 | $ | 25,342 | $ | 27,806 | ||||||
Delinquent loans to total loans
|
0.39 | % | 0.48 | % | 0.52 | % | ||||||
Classified loans
|
$ | 403,145 | $ | 438,275 | $ | 479,336 | ||||||
Classified loans to total loans
|
7.78 | % | 8.36 | % | 9.00 | % | ||||||
Tier 1 capital and ALLL
|
$ | 1,060,366 | $ | 1,032,433 | $ | 1,074,197 | ||||||
Classified loans to Tier 1 capital and ALLL
|
38.02 | % | 42.45 | % | 44.62 | % | ||||||
Total loans and leases, including loans held for sale
|
$ | 5,178,926 | $ | 5,245,146 | $ | 5,326,723 | ||||||
34
The following table shows detailed information and ratios pertaining to the Company’s non-performing assets:
(dollars in thousands)
|
June 30,
|
March 31,
|
December 31,
|
|||||||||
2011
|
2011
|
2010
|
||||||||||
Non-accrual commercial and industrial loans and leases
|
$ | 31,275 | $ | 34,122 | $ | 34,869 | ||||||
Non-accrual commercial real estate-permanent
|
11,879 | 15,407 | 17,821 | |||||||||
Non-accrual commercial real estate-construction
|
15,844 | 18,012 | 19,392 | |||||||||
Total non-accrual commercial real estate loans
|
27,723 | 33,419 | 37,213 | |||||||||
Non-accrual residential mortgages
|
5,196 | 5,303 | 5,802 | |||||||||
Non-accrual home equity lines and loans
|
1,527 | 1,965 | 2,133 | |||||||||
All other non-accrual consumer loans
|
2,062 | 1,810 | 2,094 | |||||||||
Total non-accrual consumer loans
|
8,785 | 9,078 | 10,029 | |||||||||
Total non-accrual loans
|
67,783 | 76,619 | 82,111 | |||||||||
Restructured loans (1)
|
3,833 | 351 | - | |||||||||
Loans 90+ days past due & still accruing
|
1,567 | 2,183 | 1,753 | |||||||||
Total non-performing loans
|
73,183 | 79,153 | 83,864 | |||||||||
Other real estate owned and other assets
|
8,407 | 7,653 | 7,453 | |||||||||
Total non-performing assets
|
$ | 81,590 | $ | 86,806 | $ | 91,317 | ||||||
Total loans and leases, including loans held for sale
|
$ | 5,178,926 | $ | 5,245,146 | $ | 5,326,723 | ||||||
Average total loans and leases
|
$ | 5,269,556 | $ | 5,311,204 | $ | 5,761,647 | ||||||
Allowance for loan and lease losses
|
$ | 137,909 | $ | 142,960 | $ | 150,054 | ||||||
Allowance for loan and lease losses to:
|
||||||||||||
Non-performing assets
|
169 | % | 165 | % | 164 | % | ||||||
Non-performing loans
|
188 | % | 181 | % | 179 | % | ||||||
Total loans and leases
|
2.66 | % | 2.73 | % | 2.82 | % | ||||||
Average total loans and leases
|
2.62 | % | 2.69 | % | 2.60 | % | ||||||
(1) Restructured loans include $2.5 of commercial loans modified during the second quarter of 2011 and $1.3 million of consumer loans which were modified for customers who were experiencing financial difficulty and were in jeopardy of losing their homes to foreclosure.
|
The following table provides additional information on the Company’s non-accrual loans:
(dollars in thousands)
|
June 30,
|
March 31,
|
December 31,
|
|||||||||
2011
|
2011
|
2010
|
||||||||||
Total non-accrual loans
|
$ | 67,783 | $ | 76,619 | $ | 82,111 | ||||||
Non-accrual loans and leases with partial charge-offs
|
$ | 35,127 | $ | 43,257 | $ | 33,351 | ||||||
Life-to-date partial charge-offs on nonaccrual loans and leases
|
$ | 41,471 | $ | 40,025 | $ | 37,837 | ||||||
Charge-off rate of nonaccrual loans and leases with partial charge-offs
|
54.1 | % | 48.1 | % | 53.2 | % | ||||||
Specific reserves on impaired loans
|
$ | 7,225 | $ | 4,673 | $ | 8,560 | ||||||
At June 30, 2011, the Company’s non-accrual loans totaled $67.8 million and included $35.1 million of non-accrual loans which have been charged-off by 54.1% or $41.5 million. Non-accrual loans declined in all categories from December 31, 2010 to June 30, 2011. The Company’s non-accrual and restructured loans comprise its impaired loans and leases which are evaluated individually. Impaired loans have a specific reserve in the allowance of $7.2 million related to $26.6 million of underlying principal balances. There is a portion of the Company’s impaired loans that have not been reserved or partially charged-off, since the collection of interest and principal is not assured but principal appears to be collectible. The Company does not believe these amounts are material for purposes of further disclosure and analysis.
35
An analysis of net loan and lease charge-offs for the three and six months ended June 30, 2011 and 2010 are as follows:
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
June 30,
|
June 30,
|
|||||||||||||
(dollars in thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Commercial and industrial loans and leases
|
$ | 5,066 | $ | 8,613 | $ | 14,385 | $ | 10,873 | ||||||||
Commercial real estate-permanent
|
1,242 | 1,509 | 5,188 | 1,869 | ||||||||||||
Commercial real estate-construction
|
828 | 6,327 | 1,701 | 24,754 | ||||||||||||
Total commercial real estate loans
|
2,070 | 7,836 | 6,889 | 26,623 | ||||||||||||
Residential mortgages
|
483 | 5,367 | 2,126 | 8,068 | ||||||||||||
Home equity lines and loans
|
833 | 658 | 1,991 | 1,118 | ||||||||||||
All other consumer loans
|
(401 | ) | 2,337 | (246 | ) | 3,050 | ||||||||||
Total consumer loans
|
915 | 8,362 | 3,871 | 12,236 | ||||||||||||
Net loans charged-off
|
$ | 8,051 | $ | 24,811 | $ | 25,145 | $ | 49,732 | ||||||||
Net charge-offs (annualized) to:
|
||||||||||||||||
Total loans and leases
|
0.62 | % | 1.73 | % | 0.98 | % | 1.74 | % | ||||||||
Average total loans and leases
|
0.62 | % | 1.70 | % | 0.96 | % | 1.69 | % | ||||||||
Allowance for loan and lease losses
|
23.42 | % | 64.60 | % | 36.77 | % | 65.11 | % | ||||||||
Consistent focus on asset quality has resulted in sustained asset quality improvements. As a result, net loan charge-offs decreased to $25.1 million in the first half of 2011, compared to net loan charge-offs of $49.7 million during the same period in 2010. On a linked quarter basis, charge-offs declined by $9.0 million from the first quarter of 2011 and $16.8 million from the second quarter 2010 to $8.1 million in the second quarter of 2011. Annualized net charge-offs as a percentage of average loans and leases decreased to 0.96% for the first half of 2011 compared to 1.69% for the prior year period. For the second quarter of 2011, annualized net loan charge-offs decreased to 0.62%, the lowest rate in ten quarters. Efforts to reduce exposure to commercial real estate-construction loans throughout 2009 and 2010 has reduced the portfolio to $171 million, or 3.3% of total loans and leases at June 30, 2011, compared to $281 million or 5.3% of total loans and leases at December 31, 2010. The reduced level of construction loans has resulted in decreases in net charge-off levels throughout those periods. Management’s timely resolution of lower quality credits has helped to position the Company for future opportunities and reduce its relative risk profile.
The following table shows a roll-forward of the allowance for loan and lease losses:
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
(dollars in thousands)
|
June 30,
|
June 30,
|
June 30,
|
June 30,
|
||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Balance at beginning of period
|
$ | 142,960 | $ | 153,850 | $ | 150,054 | $ | 146,271 | ||||||||
Charge-offs:
|
||||||||||||||||
Commercial and industrial loans and leases
|
5,430 | 10,342 | 14,999 | 13,476 | ||||||||||||
Commercial real estate
|
2,358 | 8,047 | 7,671 | 28,038 | ||||||||||||
Consumer loans
|
2,724 | 8,927 | 6,595 | 13,284 | ||||||||||||
Total charge-offs
|
10,512 | 27,316 | 29,265 | 54,798 | ||||||||||||
Recoveries:
|
||||||||||||||||
Commercial and industrial loans and leases
|
364 | 1,729 | 614 | 2,603 | ||||||||||||
Commercial real estate
|
288 | 211 | 782 | 1,415 | ||||||||||||
Consumer loans
|
1,809 | 565 | 2,724 | 1,048 | ||||||||||||
Total recoveries
|
2,461 | 2,505 | 4,120 | 5,066 | ||||||||||||
Net charge-offs
|
8,051 | 24,811 | 25,145 | 49,732 | ||||||||||||
Provision charged to expense
|
3,000 | 25,000 | 13,000 | 57,500 | ||||||||||||
Balance at end of period
|
$ | 137,909 | $ | 154,039 | $ | 137,909 | $ | 154,039 | ||||||||
36
The following table shows the composition of the allowance for loan and lease losses:
(dollars in thousands)
|
June 30,
|
December 31,
|
||||||
2011
|
2010
|
|||||||
Specific reserves
|
$ | 7,225 | $ | 8,560 | ||||
Allocated reserves
|
119,629 | 133,169 | ||||||
Unallocated reserves
|
11,055 | 8,325 | ||||||
Total allowance for loan and lease losses
|
$ | 137,909 | $ | 150,054 | ||||
Overall, the allowance decreased to $137.9 million at June 30, 2011 and represents 2.66% of total loans and leases and 188% of non-performing loans, compared to $150.0 million at December 31, 2010, or 2.82% of total loans and leases and 179% of non-performing loans. The decrease of the allowance was due primarily to the reduction in classified loans and continued improvement in asset quality, which began in 2010 and continued through June 30, 2011. These improvements resulted in a provision for loan and lease losses of $13.0 million for the six months ended June 30, 2011, a $44.5 million decrease from $57.5 million for the first half of 2010.
Liabilities
Liabilities totaled $7.5 billion at June 30, 2011 a decrease of $208 million, or 2.7%, from $7.7 billion at December 31, 2010. Total deposits, the Company’s primary source of funding, decreased $115 million during the first six months of 2011. The decrease in interest bearing deposits was the result of the Company’s continued efforts to improve deposit mix and manage high cost, non-relationship based wholesale, and time deposit customers. At June 30, 2011, transaction, savings and money market accounts comprised 69% of deposits. The cost of deposits declined by 10 basis points to 0.74% for the quarter ended June 30, 2011 compared to December 31, 2010 resulting from disciplined deposit pricing.
(dollars in thousands)
|
||||||||||||||||
June 30, 2011
|
December 31, 2010
|
Increase/(decrease)
|
||||||||||||||
Non-interest bearing deposits
|
$ | 839,811 | $ | 808,835 | $ | 30,976 | 3.8 | % | ||||||||
Savings
|
464,055 | 438,879 | 25,176 | 5.7 | % | |||||||||||
NOW accounts
|
1,158,161 | 1,181,850 | (23,689 | ) | (2.0 | )% | ||||||||||
Money market accounts
|
1,631,779 | 1,664,620 | (32,841 | ) | (2.0 | )% | ||||||||||
CDs $100 or less
|
1,261,026 | 1,378,060 | (117,034 | ) | (8.5 | )% | ||||||||||
CDs greater than $100
|
589,329 | 586,929 | 2,400 | 0.4 | % | |||||||||||
Total deposits
|
$ | 5,944,161 | $ | 6,059,173 | $ | (115,012 | ) | (1.9 | )% | |||||||
Deposit funding is supplemented by additional sources of borrowings which include securities sold under repurchase agreements, short-term borrowings, Federal Home Loan Bank (“FHLB”) advances, and subordinated debentures. In the aggregate, these funding sources totaled $1.5 billion at June 30, 2011, which was a decrease of $75.4 million or 4.7% from December 31, 2010.
·
|
Securities sold under repurchase agreements totaled $739 million at June 30, 2011 and were relatively unchanged from December 31, 2010.
|
·
|
FHLB advances decreased $76.4 million, or 10.9%, to $627 million at June 30, 2011 from $704 million at December 31, 2010, due to advances that matured and were not replaced.
|
37
Shareholders’ Equity
Shareholders’ equity totaled $1.1 billion at June 30, 2011, a decrease of $3.9 million from December 31, 2010. Activity during the six months ended June 30, 2011 included:
·
|
Net income of $42.0 million;
|
·
|
Net proceeds from the Warburg Pincus second closing of $84.5 million.
|
·
|
Redemption of Series B preferred stock, including accelerated accretion of $1.5 million, for $150 million.
|
·
|
Repurchase of common stock warrant of $1.0 million.
|
·
|
Accumulated other comprehensive income of $21.4 million.
|
·
|
Cash dividends on preferred stock of $1.6 million; and
|
·
|
Cash dividends on common stock of $3.0 million.
|
38
Results of operations for the six months ended June 30, 2011 and June 30, 2010
Net Interest Income
The following table presents average balances, average yields, interest rate spread and net interest margin information for the six months ended June 30, 2011 as compared to the same period in 2010. Interest income and yields are presented on a full taxable equivalent (“FTE”) basis, using a 35% effective tax rate. Net interest margin is expressed as net interest income (FTE) as a percentage of average total interest earning assets.
Average Balances, Average Rates, and Interest Rate Margin
For the six months ended June 30,
|
||||||||||||||||||||||||
2011
|
2010
|
|||||||||||||||||||||||
(dollars in thousands)
|
Average
|
Average
|
Average
|
Average
|
||||||||||||||||||||
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|||||||||||||||||||
INTEREST EARNING ASSETS:
|
||||||||||||||||||||||||
Interest earning deposits at banks
|
$ | 487,806 | $ | 515 | 0.21 | % | $ | 399,704 | $ | 466 | 0.23 | % | ||||||||||||
U.S. Treasury
|
19,974 | 27 | 0.27 | % | 145,584 | 298 | 0.41 | % | ||||||||||||||||
U.S. Government agencies
|
1,374,367 | 21,549 | 3.16 | % | 1,176,592 | 20,948 | 3.59 | % | ||||||||||||||||
State and municipal*
|
761,978 | 25,710 | 6.80 | % | 796,114 | 26,859 | 6.80 | % | ||||||||||||||||
Other bonds and securities
|
95,602 | 1,333 | 2.81 | % | 98,609 | 1,309 | 2.68 | % | ||||||||||||||||
Total investments
|
2,251,921 | 48,619 | 4.35 | % | 2,216,899 | 49,414 | 4.49 | % | ||||||||||||||||
Commercial loans and lease financing*
|
3,430,280 | 89,644 | 5.27 | % | 3,973,926 | 104,590 | 5.31 | % | ||||||||||||||||
Installment loans
|
918,946 | 22,993 | 5.05 | % | 959,981 | 25,100 | 5.27 | % | ||||||||||||||||
Mortgage loans
|
920,330 | 25,561 | 5.60 | % | 986,883 | 28,456 | 5.81 | % | ||||||||||||||||
Total loans and leases
|
5,269,556 | 138,198 | 5.29 | % | 5,920,790 | 158,146 | 5.39 | % | ||||||||||||||||
Total earning assets
|
8,009,283 | 187,332 | 4.72 | % | 8,537,393 | 208,026 | 4.91 | % | ||||||||||||||||
Allowance for loan and lease losses
|
(152,189 | ) | (163,947 | ) | ||||||||||||||||||||
Non-interest earning assets
|
793,411 | 909,067 | ||||||||||||||||||||||
Total assets
|
$ | 8,650,505 | $ | 9,282,513 | ||||||||||||||||||||
INTEREST BEARING LIABILITIES:
|
||||||||||||||||||||||||
Interest bearing deposits
|
5,142,615 | 22,381 | 0.88 | % | $ | 5,737,498 | $ | 34,745 | 1.22 | % | ||||||||||||||
Securities sold under repurchase agreements
|
699,057 | 4,741 | 1.37 | % | 744,095 | 5,682 | 1.54 | % | ||||||||||||||||
Short-term borrowings
|
6,781 | - | 0.00 | % | 6,926 | - | 0.00 | % | ||||||||||||||||
Federal Home Loan Bank advances
|
639,301 | 14,256 | 4.50 | % | 746,210 | 16,064 | 4.34 | % | ||||||||||||||||
Subordinated debentures
|
142,808 | 4,755 | 6.72 | % | 136,090 | 4,753 | 7.04 | % | ||||||||||||||||
Total interest bearing liabilities
|
6,630,562 | 46,133 | 1.40 | % | 7,370,819 | 61,244 | 1.68 | % | ||||||||||||||||
Non-interest bearing deposits
|
825,736 | 799,434 | ||||||||||||||||||||||
Other non-interest bearing liabilities
|
42,828 | 36,637 | ||||||||||||||||||||||
Total liabilities
|
7,499,126 | 8,206,890 | ||||||||||||||||||||||
Equity capital
|
1,151,379 | 1,075,623 | ||||||||||||||||||||||
Total liabilities and equity capital
|
$ | 8,650,505 | $ | 9,282,513 | ||||||||||||||||||||
INTEREST RATE MARGIN**
|
141,199 | 3.56 | % | 146,782 | 3.47 | % | ||||||||||||||||||
Tax equivalent interest
|
10,234 | 10,880 | ||||||||||||||||||||||
Net interest income
|
$ | 130,965 | $ | 135,902 | ||||||||||||||||||||
*Full taxable equivalent basis, using a 35% effective tax rate.
|
||||||||||||||||||||||||
**Represents the difference between interest earned and interest paid, divided by total earning assets.
|
||||||||||||||||||||||||
Loans outstanding, net of unearned income, include non-accruing loans.
|
||||||||||||||||||||||||
Fee income included.
|
||||||||||||||||||||||||
39
The following table allocates changes in FTE interest income and interest expense based upon volume and rate changes. For purposes of this table, variances not solely due to rate or volume are allocated to volume. Changes attributable to both rate and volume that cannot be segregated have been allocated proportionately.
(dollars in thousands)
|
Six Months Ended June 30,
|
|||||||||||
2011 compared to 2010
|
||||||||||||
Volume
|
Rate
|
Total
|
||||||||||
Interest Income
|
||||||||||||
Interest earning deposits at banks
|
$ | 96 | $ | (47 | ) | $ | 49 | |||||
Securities
|
||||||||||||
U.S. Treasury
|
(195 | ) | (76 | ) | (271 | ) | ||||||
U.S. Agencies
|
3,275 | (2,674 | ) | 601 | ||||||||
State and municipal
|
(1,152 | ) | 4 | (1,148 | ) | |||||||
Other bonds and securities
|
(41 | ) | 65 | 24 | ||||||||
Total investment securities
|
1,887 | (2,681 | ) | (794 | ) | |||||||
Loans
|
||||||||||||
Commercial loans and leases
|
(14,212 | ) | (734 | ) | (14,946 | ) | ||||||
Installment loans
|
(1,050 | ) | (1,056 | ) | (2,106 | ) | ||||||
Loans held for sale
|
(1,874 | ) | (1,022 | ) | (2,896 | ) | ||||||
Total loans
|
(17,136 | ) | (2,812 | ) | (19,948 | ) | ||||||
Total interest income
|
$ | (15,153 | ) | $ | (5,540 | ) | $ | (20,693 | ) | |||
Interest Expense
|
||||||||||||
Interest bearing deposits
|
$ | (3,330 | ) | $ | (9,034 | ) | $ | (12,364 | ) | |||
Securities sold under repurchase agreements
|
(330 | ) | (611 | ) | (941 | ) | ||||||
Short-term borrowings
|
- | - | - | |||||||||
Federal Home Loan advances
|
(2,367 | ) | 560 | (1,807 | ) | |||||||
Subordinated debentures
|
229 | (227 | ) | 2 | ||||||||
Total borrowed funds
|
(2,468 | ) | (278 | ) | (2,746 | ) | ||||||
Total interest expense
|
(5,798 | ) | (9,312 | ) | (15,110 | ) | ||||||
Increase (decrease) in interest income
|
$ | (9,355 | ) | $ | 3,772 | $ | (5,583 | ) | ||||
Overall average earning assets declined to $8.0 billion as a result of management’s focus on improving deposit mix by managing high cost, non-relationship based wholesale, and time deposit customers and due to the divestiture of Christiana. At June 30, 2011, transaction, savings and money market accounts comprised 69% of deposits compared to 64% at June 30, 2010. Time deposits were the largest source of decline and decreased $463 million to $1.9 billion at June 30, 2011, including approximately $35 million of time deposits at Christiana. The improvement in mix combined with disciplined deposit pricing reduced the cost of deposits by 31 basis points to 0.76% for the six months ended June 30, 2011.
Interest expense decreased by 24.7%, or $15.1 million, and totaled $46.1 million for the six months ended June 30, 2011. The improvement in interest expense mitigated the effect of decreasing asset yields, but managed reductions to earning assets resulted in a 10.2%, or $20 million decrease to interest income ($20.7 million on a FTE basis), which totaled $177 million for the first six months of 2011. Net interest income for the six months ended June 30, 2011 was $131 million, a decrease of $4.9 million, or 3.6%, compared to $136 million for the first six months of 2010. The net interest margin expanded 9 basis points to 3.56% for the first half of 2011 from 3.47% in the prior year period.
Provision for Loan and Lease Losses
The provision for loan and lease losses totaled $13.0 million for the six months ended June 30, 2011, compared to $57.5 million for the same period in 2010. The reduction to the provision was due to sustained improvement in asset quality. For the quarter ended June 30, 2011, delinquencies remained stable at 0.39% of total loans and leases, net charge-offs declined to $8.1 million or 0.62% of average loans. The decrease in charge-offs was the sixth quarter of decline which began in the first quarter of 2010. Classified loans declined 16% from December 31, 2010 and non-performing loans declined by 13% to 1.41% of total loans and leases. The allowance as a percentage of non-performing loans increased to 188% at June 30, 2011, and the allowance to total loans and leases remained strong at 2.66%. For additional analysis of the allowance refer to “Loans and Leases.”
40
Non-Interest Income
(dollars in thousands)
|
Six Months
|
|||||||||||||||
Ended June 30,
|
||||||||||||||||
NON-INTEREST INCOME
|
2011
|
2010
|
Increase (Decrease)
|
|||||||||||||
Wealth management income
|
$ | 11,780 | $ | 14,339 | $ | (2,559 | ) | (17.8 | )% | |||||||
Service charges on deposit accounts
|
9,280 | 10,787 | (1,507 | ) | (14.0 | )% | ||||||||||
Insurance commissions and fees
|
6,741 | 7,410 | (669 | ) | (9.0 | )% | ||||||||||
Cash management and electronic banking fees
|
9,016 | 8,772 | 244 | 2.8 | % | |||||||||||
Mortgage banking income
|
2,094 | 2,384 | (290 | ) | (12.2 | )% | ||||||||||
Bank owned life insurance income
|
2,453 | 3,263 | (810 | ) | (24.8 | )% | ||||||||||
Equity in undistributed net earnings of unconsolidated investments
|
1,816 | 700 | 1,116 | 159.4 | % | |||||||||||
Gain on pension plan curtailment
|
- | 4,066 | (4,066 | ) | (100.0 | )% | ||||||||||
Other operating income
|
3,873 | 5,504 | (1,631 | ) | (29.6 | )% | ||||||||||
Net losses from fair value changes of subordinate debentures
|
(481 | ) | (5,718 | ) | 5,237 | (91.6 | )% | |||||||||
Net gains (losses) on sales of investment securities
|
- | 214 | (214 | ) |
NM
|
|||||||||||
Loans held for sale
|
||||||||||||||||
Impairment losses on investment securities
|
- | (634 | ) | 634 |
NM
|
|||||||||||
Non credit-related losses on securities not expected to be sold recognized
|
- | |||||||||||||||
in other comprehensive loss before tax
|
- | - | - | |||||||||||||
Net impairment losses on investment securities
|
- | (634 | ) | 634 |
NM
|
|||||||||||
Total non-interest income
|
$ | 46,572 | $ | 51,087 | $ | (4,515 | ) | (8.8 | )% | |||||||
"NM" - Denotes a value displayed as a percentage change is not meaningful
|
The $4.5 million decrease in non-interest income for the six months ended June 30, 2011 compared to the quarter ended June, 2010 was primarily due to the following items:
Increases:
·
|
Equity in undistributed net earnings of unconsolidated investments represents earnings of a mezzanine debt fund and increased $1.1 million to $1.8 million, as the timing of fund activities and “exits” vary.
|
·
|
Loss on the Company’s subordinated debentures (Nasdaq: NPBCO) accounted for at fair value reduced non-interest income in 2010 by $5.7 million compared to $0.5 million in 2011.
|
Decreases:
·
|
The six months ended June 30, 2010 included a gain of $4.1 million from the curtailment of the Company’s defined benefit pension plan.
|
·
|
Exclusive of Christiana’s divestiture in December 2010, wealth management income increased $0.6 million due to increased commission income on retail investment product sales and the positive impact of appreciation of the equity markets on fee-based business. Overall, wealth management income decreased modestly by $2.6 million, to $11.8 million for the six months ended June 30, 2011, as Christiana contributed $3.2 million of wealth management income during the six months ended June 30, 2010.
|
·
|
Service charges on deposit accounts declined $1.5 million to $9.3 million for the six months ended June 30, 2011 as a result of reduced overdraft volume and the impact of regulatory changes affecting electronic customer transactions.
|
41
Non-Interest Expense
(dollars in thousands)
|
Six Months
|
|||||||||||||||
Ended June 30,
|
||||||||||||||||
NON-INTEREST EXPENSE
|
2011
|
2010
|
Increase (Decrease)
|
|||||||||||||
Salaries, wages and employee benefits
|
$ | 61,857 | $ | 60,428 | $ | 1,429 | 2.4 | % | ||||||||
Net premises and equipment
|
14,059 | 15,207 | (1,148 | ) | (7.6 | )% | ||||||||||
Goodwill impairment
|
- | 8,250 | (8,250 | ) |
NM
|
|||||||||||
FDIC insurance
|
6,183 | 8,153 | (1,970 | ) | (24.2 | )% | ||||||||||
Other operating expenses
|
28,859 | 32,182 | (3,323 | ) | (10.3 | )% | ||||||||||
Total non-interest expense
|
$ | 110,958 | $ | 124,220 | $ | (13,262 | ) | (10.7 | )% | |||||||
RECONCILIATION TABLE FOR NON-GAAP FINANCIAL MEASURES - EFFICIENCY RATIO (1)
|
||||||||||||||||
Efficiency Ratio Calculation
|
||||||||||||||||
Non-interest expense
|
$ | 110,958 | $ | 124,220 | ||||||||||||
Less:
|
||||||||||||||||
Goodwill impairment
|
- | 8,250 | ||||||||||||||
Operating expenses
|
$ | 110,958 | $ | 115,970 | ||||||||||||
Net interest income (taxable equivalent)
|
$ | 141,199 | $ | 146,782 | ||||||||||||
Non-interest income
|
46,572 | 51,087 | ||||||||||||||
Less:
|
||||||||||||||||
Gain on pension plan curtailment
|
- | 4,066 | ||||||||||||||
Net losses from fair value changes
|
(481 | ) | (5,718 | ) | ||||||||||||
Adjusted revenue
|
$ | 188,252 | $ | 199,521 | ||||||||||||
Efficiency Ratio
|
58.94 | % | 58.12 | % | ||||||||||||
(1) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 2.
|
||||||||||||||||
Non-interest expense, exclusive of $12.6 million of Christiana expenses (including goodwill impairment) included in 2010, decreased $0.7 million in the six months ended June 30, 2011 when compared to the prior year. Continued focus on expense controls reduced expenses overall as demonstrated by the efficiency ratio of 58.94%.
Income Tax Expense
Income tax expense for the six months ended June 30, 2011 was $11.6 million compared to $4.9 million for the six months ended June 30, 2010. Tax expense for the six months ended June 30, 2010 included $8.1 million of taxes related to the redemption of separate account BOLI, while tax expense for the first half of 2011 reflects increasing pre-tax income with a relatively consistent level of tax free income. The Company’s net deferred tax asset (“DTA”) decreased to $72.5 million at June 30, 2011 primarily from a reduction to the allowance for loan and lease losses and an increase in the fair value of investment securities available for sale.
Each quarter, the Company evaluates the realizability of the DTA. As of June 30, 2011, the Company concluded that the DTA was realizable, and a valuation allowance was not required. In reaching this conclusion the Company carefully weighed both positive and negative evidence present. Since December 31, 2010, the Company has continued to demonstrate increased profitability and performance in line with management projections. Therefore, management believes that the DTA continues to be realizable and will be fully utilized as planned.
If there are substantial, adverse economic developments that deteriorate credit quality or profitability, the judgments made regarding the Company’s ability to utilize the DTA may change. This would result in additional income tax expense being recorded in the Consolidated Statement of Operations. These types of events or a valuation allowance would impact regulatory capital by the amount of the DTA included in regulatory capital.
42
LIQUIDITY, CAPITAL AND INTEREST RATE SENSITIVITY
Analysis of Liquidity and Capital Resources
Liquidity
The following table sets forth contractual obligations representing required cash outflows as of June 30, 2011:
Payments Due by Period:
|
||||||||||||||||||||
After one
|
After three
|
|||||||||||||||||||
One Year
|
year to
|
years to
|
More than
|
|||||||||||||||||
(dollars in thousands)
|
Total
|
or less
|
three years |
five years
|
5 Years
|
|||||||||||||||
$ | 1,850,355 | $ | 1,212,999 | $ | 431,044 | $ | 198,320 | $ | 7,992 | |||||||||||
Federal Home Loan Bank advances
|
627,332 | 90,605 | 54,500 | 74,000 | 408,227 | |||||||||||||||
Subordinated debentures
|
143,261 | - | - | - | 143,261 | |||||||||||||||
Minimum annual rentals on non-cancelable operating leases
|
43,519 | 7,098 | 10,460 | 8,572 | 17,389 | |||||||||||||||
Total
|
$ | 2,664,467 | $ | 1,310,702 | $ | 496,004 | $ | 280,892 | $ | 576,869 |
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 Federal Home Loan Bank of Pittsburgh (“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 serves as an additional source of liquidity.
|
As measured using the Consolidated Statement of Cash Flows, the Company used $83.3 million and $0.9 million in net cash and equivalents for the six months ended June 30, 2011 and 2010, respectively. Cash was deployed during the first six months of 2011, in the following ways:
Financing activities
·
|
$150 million repayment of Series B Preferred stock
|
·
|
$1.0 million repurchase of common stock warrants
|
·
|
$115 million reduction in certificates of deposit
|
·
|
$76.0 million of payments for maturing of FHLB advances
|
Investing activities
·
|
$184 million of investment security purchases
|
Operating activities generated $68.3 million of net cash for the six months ended June 30, 2011 compared to $86.9 million for the six months ended June 30, 2010. During the six months ended June 30, 2011, cash was generated from the following additional sources:
Investing activities
·
|
$150 million of maturities and repayments of investment securities available-for-sale
|
·
|
$114 million net maturities and repayments from loans and leases held for investment
|
Financing activities
·
|
$84.5 million of issuance of common stock in private placement
|
43
Capital
At June 30, 2011, National Penn and National Penn Bank’s capital ratios met the criteria to be considered a “well-capitalized” institution. Management believes that, under current regulations, the Company and National Penn Bank will each continue to exceed the minimum capital requirements in the foreseeable future.
Tier 1 Capital to
|
Tier 1 Capital to Risk-
|
Total Capital to Risk-
|
||||||||||||||||||||||
Average Assets Ratio
|
Weighted Assets Ratio
|
Weighted Assets Ratio
|
||||||||||||||||||||||
June 30,
|
December 31,
|
June 30,
|
December 31,
|
June 30,
|
December 31,
|
|||||||||||||||||||
2011
|
2010
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||||||||
The Company
|
11.20 | % | 10.59 | % | 16.43 | % | 16.12 | % | 17.68 | % | 17.38 | % | ||||||||||||
National Penn Bank
|
10.10 | % | 8.89 | % | 14.93 | % | 13.39 | % | 16.19 | % | 14.65 | % | ||||||||||||
"Well Capitalized" institution
|
5.00 | % | 5.00 | % | 6.00 | % | 6.00 | % | 10.00 | % | 10.00 | % | ||||||||||||
under banking regulations
|
Beginning at September 30, 2009, National Penn and National Penn Bank eliminated from inclusion in their regulatory capital the net amount of deferred tax assets, since these regulations are more restrictive than GAAP as it relates to the usage and recognition of the deferred tax asset. Beginning in the second quarter of 2010, a portion of the net deferred tax asset was included in the computation of National Penn and National Penn Bank’s capital and as of June 30, 2011 continues to be included in the computation.
Other Commitments
The following table sets forth the notional amounts of other commitments as of June 30, 2011:
After one
|
After three
|
|||||||||||||||||||
Less than
|
year to
|
years to
|
More than
|
|||||||||||||||||
(dollars in thousands)
|
Total
|
one year
|
three years
|
five years
|
five years
|
|||||||||||||||
Loan comitments
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$ | 1,436,246 | $ | 740,831 | $ | 145,046 | $ | 117,300 | $ | 433,069 | ||||||||||
Letters of credit
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140,986 | 95,511 | 42,348 | 465 | 2,662 | |||||||||||||||
Total
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$ | 1,577,232 | $ | 836,342 | $ | 187,394 | $ | 117,765 | $ | 435,731 | ||||||||||
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. The reserve totaled $1.5 million at June 30, 2011.
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 currently 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, see Footnote 10 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:
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Timing differences between contractual maturities and or repricing of assets and liabilities (“gap risk”),
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Risk that assets will repay or customers withdraw prior to contractual maturity (“option risk”),
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Non-parallel changes in the slope of the yield curve (“yield curve risk”), and
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Variation in rate movements of different indices (“basis risk”).
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ALCO employs various techniques and instruments to implement its developed strategies. These generally include one or more of the following:
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Changes to interest rates offered on products,
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Changes to maturity terms offered on products,
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Changes to types of products offered, and/or
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Use of wholesale products such as advances from the FHLB or interest rate swaps.
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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.
The following table demonstrates the expected effect that a parallel interest rate shift would have on the Company’s net interest income for the subsequent twelve months:
Change in Interest Rates
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Change in Net Interest Income
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(in basis points)
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June 30, 2011
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June 30, 2010
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||
+ 300
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7.2%
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8.8%
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||
+ 200
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4.6%
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5.8%
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||
+100
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2.1%
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2.8%
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||
- 100
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-2.1%
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-2.8%
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||
As measured by the net interest income analysis, the Company reflects an asset sensitive risk profile and should benefit over the next twelve months by an increase in interest rates.
The results of the net interest income analysis fall within the compliance guidelines established by ALCO and the Board of Directors.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The information presented in the Liquidity and Interest Rate Risk section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations of 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 June 30, 2011, National Penn’s management, under the supervision of 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 management concluded that National Penn’s disclosure controls and procedures were effective as of June 30, 2011.
There were no changes in National Penn’s internal control over financial reporting during the quarter ended June 30, 2011 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. National Penn intends to continue improving and refining its internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The information presented in Footnote 9 to the unaudited interim financial statements included in Part I, Item 1 of this Report is incorporated herein by reference.
Item 1A. RISK FACTORS
National Penn’s failure to comply with the pervasive and comprehensive federal and state regulatory requirements to which its operations are subject 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. 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. 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 be materially adverse to National Penn’s shareholders.
The impact of recent legislation, proposed legislation, and government programs intended to stabilize the financial markets cannot be predicted at this time, and such legislation is subject to change. In addition, the failure of the financial markets to stabilize and a continuation or worsening of current financial market conditions could materially and adversely affect National Penn’s business, results of operations, financial condition, access to funding and the trading price of National Penn’s common stock.
New or changed governmental legislation or regulation and accounting industry pronouncements could adversely affect National Penn.
Changes in federal and state legislation and regulation may 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 has, and will continue to, implement significant changes to the U.S. financial system, including among others:
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New 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 the sponsorship, or the acquisition or retention of ownership interests, in private equity funds.
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The creation of a new 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.
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The creation of a Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk.
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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.
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A provision that broadens the base for FDIC insurance assessments.
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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.
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The requirement that National Penn submit its executive compensation program to an advisory (non-binding) shareholder vote.
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While a few of the Dodd-Frank Act’s provisions became effective immediately, many 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. In addition to the regulatory requirements of the Dodd-Frank Act, National Penn is subject to changes in accounting rules and interpretations. 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. Doing so 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, 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.
Deterioration in credit quality, particularly in commercial, construction and real estate loans, has adversely impacted National Penn and may continue to adversely impact National Penn.
In late 2008, National Penn began to experience a downturn in the overall credit performance of its loan portfolio, as well as acceleration in the deterioration of general economic conditions. National Penn believes that this deterioration, as well as a significant increase in national and regional unemployment levels and decreased sources of liquidity, have been the primary drivers of increased stress being placed on many borrowers and is negatively impacting borrowers’ ability to repay.
National Penn’s credit quality may remain challenging throughout 2011. Deterioration in the quality of National Penn's 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 National Penn's capital, financial condition and results of operations.
National Penn's allowance for loan and lease losses may prove inadequate or be negatively affected by credit risk exposure.
National Penn depends on the creditworthiness of its customers. National Penn periodically 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 has from time to time increased its allowance for loan losses. The allowance for loan losses may not be adequate over time to cover credit losses because of unanticipated adverse changes to the economy caused by recession, inflation, unemployment or other factors beyond National Penn's control. 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.
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. To a lesser extent, National Penn's deposit base is also generated from this area. As a result, National Penn's consolidated financial performance depends largely upon economic conditions in this region. Weak local economic conditions from 2008 through 2011 have caused National Penn to experience 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. A continued downturn in the regional real estate market could further harm National Penn's 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 a further decline in real estate values, the collateral for National Penn's loans will provide less security. As a result, National Penn's ability to recover on defaulted loans by selling the underlying real estate will be diminished, and National Penn 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 National Penn's 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. National Penn periodically, but not less than quarterly, evaluates investments and other assets for impairment indicators. National Penn may be required to record additional impairment charges if investments suffer a decline in value that is considered other-than-temporary. If National Penn determines that a significant impairment has occurred, National Penn would be required to 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.
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National Penn's investment portfolio includes approximately $49 million in capital stock of the Federal Home Loan Bank of Pittsburgh as of June 30, 2011. This stock ownership is required of all Home Loan Bank members as part of the overall Home Loan Bank capitalization. The Home Loan Bank is experiencing a potential capital shortfall, has suspended its quarterly cash dividend, and could possibly require its members, including National Penn, to make additional capital investments in the Home Loan Bank. In addition, the debt ceiling crisis being experienced by the United States Federal government could indirectly adversely affect the Home Loan Bank system. In order to avail itself of correspondent banking services offered by the Home Loan Bank, National Penn must remain a member of the Home Loan Bank. If the Home Loan Bank were to cease operations, or if National Penn were required to write-off its investment in the Home Loan Bank, National Penn's business, financial condition, liquidity, capital and results of operations may be materially and adversely affected.
National Penn may incur impairments to goodwill.
At June 30, 2011, National Penn had approximately $258 million recorded as goodwill. National Penn tests its goodwill for impairment at least annually as of June 30th. 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.
Realization of a deferred tax asset 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.
Negative conditions in the general economy and financial services industry may limit National Penn's access to additional funding and adversely impact liquidity.
An inability to raise funds through deposits, borrowings and other sources could have a substantial negative effect on National Penn's liquidity. National Penn's access to funding sources in amounts adequate to finance its activities could be impaired by factors that affect it specifically or the financial services industry in general. Factors that could detrimentally impact National Penn's access to liquidity sources include a decrease in the level of its business activity due to a market downturn or adverse regulatory action against it. National Penn's ability to borrow could also be impaired by factors that are nonspecific to National Penn, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole as evidenced by recent turmoil in the domestic and worldwide credit markets.
National Penn may need to, or may be compelled to, raise additional capital in the future. However, capital may not be available when needed and on terms favorable to current shareholders.
Federal banking regulators require National Penn and National Penn Bank to maintain adequate levels of capital to support their operations. These capital levels are determined and dictated by law, regulation and banking regulatory agencies. In addition, capital levels are also determined by National Penn's management and board of directors based on capital levels that they believe are necessary to support National Penn's business operations. To be "well capitalized" under current bank regulatory guidelines, banking companies generally must maintain a Tier 1 leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6%, and a total risk-based capital ratio of at least 10%.
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If National Penn raises capital through the issuance of additional shares of its common stock or other securities, it would likely dilute the ownership interests of current investors and could dilute the per share book value and earnings per share of its common stock. Please refer to the risk factor below titled "There may be future sales or other dilution of National Penn's equity, which may adversely affect the market price of National Penn's common stock." Furthermore, a capital raise through issuance of additional shares may have an adverse impact on National Penn's stock price. New investors may also have rights, preferences and privileges senior to National Penn's current shareholders, which may adversely impact its current shareholders. National Penn's ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of its control, and on its financial performance. Accordingly, National Penn cannot be certain of its ability to raise additional capital on terms and time frames acceptable to it or to raise additional capital at all. If National Penn cannot raise additional capital in sufficient amounts when needed, its ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect National Penn's operations, financial condition and results of operations.
National Penn may be required to pay significantly 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 will require increased assessments that are to be borne primarily by institutions with assets of greater than $10 billion. 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. Additionally, several of National Penn's banking competitors are financial institutions that received multi-million or multi-billion dollar infusions of capital from the U.S. Treasury or other support from federal programs, which strengthened their balance sheets and enhanced their ability to withstand the uncertainty of the current economic environment. 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.
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 (from participation in the U.S. Treasury’s Capital Purchase Program or otherwise), 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. As a result, such non-bank competitors may have advantages over National Penn Bank and 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's subsidiaries face intense competition with 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, 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. These competitors may offer greater compensation and other benefits, which could result in the loss of potential and/or existing key personnel. 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.
50
Variations in interest rates may negatively affect National Penn's financial performance.
Changes in interest rates may reduce profits. The primary source of income for National Penn currently 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. As prevailing interest rates change, net interest spreads are affected by the difference between the maturities and re-pricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations. An increase in the general level of interest rates may also adversely affect the ability of certain borrowers to repay their obligations. In a declining interest rate environment, National Penn may be unable to re-price deposits downward in the same magnitude and/or with the same timing as the movement in its interest-sensitive assets. Accordingly, changes in levels of market interest rates, whether upward or downward, could materially adversely affect National Penn's net interest spread, loan origination volume, asset quality and overall profitability.
If National Penn's information systems are interrupted or sustain a breach in security, those events may 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. A breach of National Penn’s information security may result from fraudulent activity committed against National Penn or its clients, resulting in financial loss to National Penn or its clients, or privacy breaches against National Penn’s clients. Such fraudulent activity may consist of check fraud, electronic fraud, wire fraud, “phishing”, social engineering or other deceptive acts. 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.
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. In addition to better serving customers, the effective use of technology increases efficiency and enables National Penn to reduce costs. National Penn's future success will depend, 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. Additionally, as technology in the financial services industry changes and evolves, 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.
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.
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There may be future sales or 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 151.7 million shares were outstanding as of June 30, 2011, 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 compensation including shares available 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 also has the ability to issue an unlimited amount of securities including common stock, preferred stock, debt securities, depositary shares and securities warrants, from time to time at prices and on terms to be determined at the time of sale under an active shelf registration statement, which it filed with the SEC on November 7, 2008. National Penn's board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares. These 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 further 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 June 30, 2011, National Penn Bank did not have the ability to pay dividends to National Penn without prior regulatory approval. There is no assurance that National Penn Bank, and/or National Penn's other subsidiaries, will be able to pay dividends in the future.
In July 2011, National Penn’s Board of Directors approved a third quarter 2011 cash dividend of $0.03 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 increase its dividend to historical levels or otherwise. 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.
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 may be involved from time to time in a variety of litigation arising out of its business. 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.
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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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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.
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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.
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·
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National Penn may be unable to attract, motivate, and/or retain key executives and other key personnel due to intense competition for such persons, National Penn’s cost saving strategies, increased governmental oversight or otherwise.
|
·
|
Growth and profitability of National Penn’s non-interest income or fee income may be less than expected, particularly as a result of current 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.
|
·
|
Current 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.
|
·
|
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.
|
53
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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no repurchases by National Penn of its common stock at any time during the quarter ended June 30, 2011.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. [Removed and Reserved]
Item 5. Other Information.
None.
54
Item 6. Exhibits.
3.1
|
Articles of Incorporation, as amended, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to National Penn’s Report on Form 8-K dated April 24, 2009 as filed on April 24, 2009.)
|
3.2
|
Bylaws, as amended, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to National Penn’s Report on Form 8-K dated March 24, 2010, as filed on March 29, 2010.)
|
3.3
|
Bylaws, as amended of National Penn Bank (Incorporated by reference to Exhibit 3.2 to National Penn’s Report on Form 8-K dated December 2, 2008, as filed on December 2, 2008.)
|
10.1
|
Letter Agreement between National Penn Bancshares, Inc. and the United States Department of the Treasury. (Incorporated by reference to Exhibit 10.1 to National Penn’s Report on Form 8-K dated April 13, 2011, as filed on April 13, 2011.)
|
31.1
|
|
31.2
|
|
32.1
|
|
32.2
|
55
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NATIONAL PENN BANCSHARES, INC.
|
|||||
(Registrant)
|
|||||
Date:
|
August 9, 2011
|
By:
|
/s/ Scott V. Fainor
|
||
Name:
|
Scott V. Fainor
|
||||
Title:
|
President and Chief Executive Officer
|
||||
Date:
|
August 9, 2011
|
By:
|
/s/ Michael J. Hughes
|
||
Name:
|
Michael J. Hughes
|
||||
Title:
|
Chief Financial Officer
|
56