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NPBC > SEC Filings for NPBC > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for NATIONAL PENN BANCSHARES INC

Form 10-Q for NATIONAL PENN BANCSHARES INC


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to assist in understanding and evaluating the major changes in the earnings performance and financial condition of the Company as of and for the three and nine months ended September 30, 2012, with a primary focus on an analysis of operating results. Current performance does not guarantee, and may not be indicative of similar performance in the future. The Company's consolidated financial statements included in this Report are unaudited, and as such, are subject to year-end examination.

Statement Regarding Non-GAAP Financial Measures:

This Report contains supplemental financial information determined by methods other than in accordance with Accounting Principles Generally Accepted in the United States of America ("GAAP"). National Penn's management uses these non-GAAP measures in its analysis of National Penn's performance. These measures should not be considered a substitute for GAAP basis measures nor should they be viewed as a substitute for operating results determined in accordance with GAAP. Management believes the presentation of the following non-GAAP financial measures, which exclude the impact of the specified items, provides useful supplemental information that is essential to a proper understanding of the financial results of National Penn.

          Tangible common equity excludes goodwill and intangible assets and
           preferred equity. Banking and financial institution regulators also
           exclude goodwill and intangible assets from shareholders' equity when
           assessing the capital adequacy of a financial institution. Tangible
           common equity provides a method to assess the Company's tangible
           capital trends.


          Tangible book value expresses tangible common equity on a per-share
           basis. Tangible book value provides a method to assess the level of
           tangible net assets on a per-share basis.


          Adjusted net income and return on assets exclude the effects of
           certain gains and losses, adjusted for taxes when applicable. Adjusted
           net income and returns provide methods to assess earnings performance
           by excluding items 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.


Table of Contents

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 primary business is accepting deposits from customers through its retail branch offices, and investing those deposits, together with funds generated from operations and borrowings, in loans, including commercial business loans, commercial real estate loans, residential mortgages, home equity loans, other consumer loans, and investment securities. The Company's strategic plan provides for it to operate within growth markets focusing on diversification of revenue sources and increased market penetration in growing geographic areas.

At September 30, 2012, National Penn operated 120 retail branch offices. It has 119 retail branch offices in Pennsylvania and one retail branch office in Maryland through National Penn Bank and its KNBT 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 and lease 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.


Table of Contents

Overview

(dollars in thousands, except
per share data)                                Three Months Ended                           Nine Months Ended
                                  September 30,     June 30,      September 30,     September 30,      September 30,
                                      2012            2012            2011               2012               2011
EARNINGS
Total interest income            $      78,344     $  79,896     $      86,055     $      239,654     $      263,153
Total interest expense                  14,790        16,697            21,638             49,083             67,771
Net interest income                     63,554        63,199            64,417            190,571            195,382
Provision for loan and lease
losses                                   2,000         2,000                 -              6,000             13,000
Net interest income after
provision for loan and lease
losses                                  61,554        61,199            64,417            184,571            182,382
Loss on sale of building                     -             -            (1,000 )                -             (1,000 )
Loss on debt extinguishment                  -             -              (998 )                -               (998 )
Net gains (losses) from fair
value changes of subordinated
debentures                                 101          (810 )            (506 )              936               (987 )
(Losses) gains on investment
securities                                   -          (277 )           1,022               (277 )            1,022
Other non-interest income               26,664        21,543            24,623             70,803             71,676
Other non-interest expense              53,339        52,269            55,053            158,048            166,011
Income before income taxes              34,980        29,386            32,505             97,985             86,084
Income tax expense                       8,964         6,938             7,692             24,219             19,283
Net income                              26,016        22,448            24,813             73,766             66,801
Preferred dividends and
accretion of preferred discount              -             -                 -                  -             (1,691 )
Accelerated accretion from
redemption of preferred stock                -             -                 -                  -             (1,452 )
Net income available to common
shareholders                     $      26,016     $  22,448     $      24,813     $       73,766     $       63,658

Basic earnings available to
common shareholders              $        0.17     $    0.15     $        0.16     $         0.49     $         0.42
Diluted earnings available to
common shareholders                       0.17          0.15              0.16               0.49               0.42
Dividends per common share                0.09          0.07              0.03               0.21               0.05

Net interest margin                       3.50 %        3.48 %            3.46 %             3.51 %             3.52 %
Efficiency ratio (1)                     56.26 %       58.42 %           58.54 %            57.36 %            58.81 %
Return on average assets                  1.23 %        1.07 %            1.15 %             1.17 %             1.03 %
Asset Quality Metrics
Allowance / total loans and
leases                                    2.16 %        2.24 %            2.54 %
Non-performing loans / total
loans and leases                          1.11 %        1.13 %            1.27 %
Delinquent loans / total loans
and leases                                0.45 %        0.46 %            0.56 %
Allowance / non-performing loans
and leases                               194.8 %       197.6 %           200.5 %
Annualized net charge-offs /
average loans and leases                  0.39 %        0.53 %            0.53 %             0.49 %             0.82 %

(1) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.


Table of Contents

Net income available to common shareholders increased 15.9% to $73.8 million for the nine months ended September 30, 2012, as compared to $63.7 million in the same period of the prior year. Improvements in net income available to common shareholders resulted from the following items:
Net interest income totaled $191 million for the nine months ended September 30, 2012 compared to $195 million for the nine months ended September 30, 2011. The decrease in net interest income is the result of the continued low interest rate environment. However, management of deposit and funding costs have helped to mitigate the effect of declining asset yields due to loan and investment repayment and replacement. Additionally, during the third quarter of 2012, the Company improved the cost of borrowings through the restructuring of $400 million of fixed rate FHLB advances that had a weighted average interest rate of 4.59%. This transaction reduced the average cost of FHLB borrowings by 45 basis points, to 4.09% for the third quarter of 2012. The Company's interest rate management initiatives maintained net interest margin at 3.51% for the nine months ended September 30, 2012 on $7.8 billion of average earning assets. Net interest margin for the comparable prior year period was 3.52% on $8.0 billion of average earning assets.

The Company continues to benefit from improving asset quality. Classified loans declined by 21% since September 30, 2011, and non-performing loans declined to 1.11% of total loans and leases at September 30, 2012. The improvement in asset quality resulted in a $7.0 million decrease to the provision for loan and lease losses ("provision") which totaled $6.0 million for the nine months ended September 30, 2012, compared to $13.0 million for the nine months ended September 30, 2011. The provision was unchanged from the second quarter of 2012, and the allowance to non-performing loans and leases was 195% at September 30, 2012.

Other non-interest income was stable year over year and totaled $70.8 million for the nine months ended September 30, 2012. Low interest rates increased customer interest rate swap and mortgage banking income for the nine months ended September 30, 2012, when compared to the prior year to date period. Service charges on deposit accounts offset the improvements to other non-interest income for the nine months ended September 30, 2012, by $2.4 million, due to declines in overdraft volume.

Other non-interest expense continued to be well controlled during the nine months ended September 30, 2012, at $158 million, as compared to $166 million in the prior year period. FDIC insurance and other operating expense reductions led to an $8.0 million net decline in non-interest expense for the nine months ended September 30, 2012, compared to the prior year to date period. The efficiency ratio was stable at 57.36% for the nine months ended September 30, 2012, as the Company continued to effectively manage expense levels.

Adjusted net income and returns are non-GAAP measures and exclude certain items which management believes affect the comparability of results between periods. The following table reconciles the non-GAAP measure of adjusted net income to the GAAP measure of net income available to common shareholders and diluted earnings per share and calculates the adjusted return on average assets.

(dollars in thousands, except per share data)                   Three Months Ended
                                                 September 30,       June 30,       September 30,
                                                      2012             2012              2011
Adjusted net income reconciliation
Net income available to common shareholders     $       26,016     $    22,448     $       24,813
   After tax unrealized fair value (gain) loss
on subordinated debentures                                 (66 )           527                329
Adjusted net income available to common
shareholders                                    $       25,950     $    22,975     $       25,142

Earnings per share
Net income available to common shareholders     $         0.17     $      0.15     $         0.16
   After tax unrealized fair value (gain) loss
on subordinated debentures                                   -               -                  -
Adjusted net income available to common
shareholders                                    $         0.17     $      0.15     $         0.16

Average assets                                  $    8,386,342     $ 8,473,164     $    8,588,269
Adjusted return on average assets                         1.23 %          1.09 %             1.15 %


Table of Contents

Adjusted net income was $26.0 million, or $0.17 per diluted share, for the third quarter of 2012 compared to $23.0 million, or $0.15 per diluted share, for the second quarter of 2012 and $25.1 million, or $0.16 per diluted share, for the third quarter of 2011. Adjusted net income remains stable despite modest reductions to net interest income, as asset quality trends and expense levels continue to be favorable. During the third quarter of 2012, other non-interest income improved as a result of increased customer interest rate swap and mortgage banking activity due to low interest rates. The income trends resulted in an adjusted ROA of 1.23% and 1.16% for the quarter and nine months ended September 30, 2012. Adjusted net income excluded the effects of the changes in the fair value of the Company's subordinated debentures accounted for at fair value.

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