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NPBC > SEC Filings for NPBC > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for NATIONAL PENN BANCSHARES INC | Request a Trial to NEW EDGAR Online Pro



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 six months ended June 30, 2013, 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

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


The accounting and reporting policies of the Company conform to GAAP and predominant practice within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results:

allowance for loan losses;

goodwill and other intangible assets;

income taxes; and

other-than-temporary impairment.

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

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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; and National Penn Insurance Services Group, Inc., including its Higgins Insurance and Caruso Benefits divisions.

The Company's primary business is accepting deposits from customers through its retail branch offices, and investing those deposits, together with funds generated from operations and borrowings, in loans, including commercial business loans, commercial real estate loans, residential mortgages, home equity loans, other consumer loans, and investment securities. The Company's strategic plan 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, 2013, National Penn Bank operated 120 retail branch offices, 119 located in Pennsylvania and one in Maryland.

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

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                                                  Three Months Ended                            Six Months Ended
(dollars in thousands, except per    June 30,          March 31,            June 30,       June 30,         June 30,
share data)                            2013              2013                 2012           2013             2012
Total interest income             $    72,101       $     72,595           $ 79,896       $ 144,696        $ 161,310
Total interest expense                  8,847             10,971             16,697          19,818           34,293
Net interest income                    63,254             61,624             63,199         124,878          127,017
Provision for loan losses               1,500              1,500              2,000           3,000            4,000
Net interest income after
provision for loan losses              61,754             60,124             61,199         121,878          123,017
Net gains (losses) from fair
value changes of subordinated
debentures                                  -              2,111               (810 )         2,111              835
Net gains (losses) on investment
securities                                 22                 25               (277 )            47             (277 )
Other non-interest income              24,946             23,441             21,543          48,387           44,139
Loss on debt extinguishment                 -             64,888                  -          64,888                -
Other non-interest expense             53,153             52,434             52,269         105,587          104,709
Income (loss) before income taxes      33,569            (31,621 )           29,386           1,948           63,005
Income tax expense (benefit)            8,550            (14,217 )            6,938          (5,667 )         15,255
Net income (loss)                 $    25,019       $    (17,404 )         $ 22,448       $   7,615        $  47,750

Basic earnings per share          $      0.17       $      (0.12 )         $   0.15       $    0.05        $    0.31
Diluted earnings per share               0.17              (0.12 )             0.15            0.05             0.31
Dividends per share                      0.10                  -    (b)        0.07            0.10   (b)       0.12

Net interest margin                      3.53 %             3.49 %             3.48 %          3.51 %           3.52 %
Efficiency ratio (a)                    57.43 %            58.61 %            58.42 %         58.01 %          57.94 %
Return on average assets                 1.21 %               NM               1.07 %          0.18 %           1.14 %
Adjusted return on average assets
(a)                                      1.21 %             1.14 %             1.09 %          1.17 %           1.13 %

Asset Quality Metrics
Allowance / total loans                  1.99 %             2.04 %             2.24 %
Non-performing loans / total
loans                                    1.05 %             1.02 %             1.13 %
Delinquent loans / total loans           0.43 %             0.46 %             0.46 %
Allowance / non-performing loans          189 %              199 %              198 %
Annualized net charge-offs /
average loans                            0.32 %             0.41 %             0.53 %          0.36 %           0.54 %

(a) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.
(b) In lieu of a first quarter 2013 cash dividend, the Company paid an additional dividend of $0.10 per share in the fourth quarter of 2012.

"NM" - Denotes a value displayed is not meaningful.

      For the six months ended June 30, 2013, the Company recorded net income of
       $7.6 million, or $0.05 per diluted share, compared to net income of $47.8
       million, or $0.31 per diluted share, in the comparable prior year period.
       The decrease in net income resulted from a first quarter $64.9 million
       ($42.2 million after-tax) charge from the extinguishment of $400 million
       of previously restructured FHLB advances. Additionally, during the first
       quarter of 2013, the Company redeemed $65.2 million of 7.85%, fixed-rate
       subordinated debentures. This transaction produced a $2.1 million ($1.4
       million after-tax) gain because these instruments were previously
       accounted for at fair value and the Company had a call at par. These
       strategic initiatives were undertaken for asset/liability, interest rate
       risk, and capital management purposes.

Net interest income totaled $125 million for the six months ended June 30, 2013 compared to $127 million for the six months ended June 30, 2012. The Company's previously discussed interest rate management initiatives have allowed for a consistent net interest margin of 3.51% for the six months ended June 30, 2013 on $7.7 billion of average earning assets, compared to the net interest margin of 3.52% for the six months ended June 30, 2012, on $7.8 billion of average earning assets.

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The Company continues to experience improvements in asset quality. Classified loans declined by 22.4% since June 30, 2012, and non-performing loans declined to 1.05% of total loans at June 30, 2013, compared to 1.13% at June 30, 2012. The sustained improvement in asset quality resulted in a $1.0 million decrease to the provision for loan losses ("provision") which totaled $3.0 million for the six months ended June 30, 2013, compared to $4.0 million for the six months ended June 30, 2012.

Other non-interest income increased by $4.2 million over the prior year period and totaled $48.4 million for the six months ended June 30, 2013. The results of the wealth management and mortgage banking operations combined to contribute $2.8 million to the increase.

Non-interest expense, excluding the first quarter loss on debt extinguishment of $64.9 million, continued to be well controlled at $106 million for the six months ended June 30, 2013, which is less than a 1%, or $0.9 million, increase compared to the six months ended June 30, 2012. The efficiency ratio(a) was stable at 58.01% for the six months ended June 30, 2013, as the Company continued to effectively manage expense levels.

Adjusted net income and returns(a) 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(a).

                                                             Three Months Ended
(dollars in thousands, except per share data)     June 30,        March 31,       June 30,
                                                    2013            2013            2012
Adjusted net income reconciliation
Net income (loss)                               $    25,019     $   (17,404 )   $    22,448
After tax unrealized fair value (gain) loss on
subordinated debentures                                   -          (1,372 )           527
After tax loss on debt extinguishment                     -          42,177               -
Adjusted net income                             $    25,019     $    23,401     $    22,975

Earnings per share
Net income (loss)                               $      0.17     $     (0.12 )   $      0.15
After tax unrealized fair value gain on
subordinated debentures                                   -           (0.01 )             -
After tax loss on debt extinguishment                     -            0.29               -
Adjusted net income                             $      0.17     $      0.16     $      0.15

Average assets                                  $ 8,326,499     $ 8,298,815     $ 8,473,164
Adjusted return on average assets                      1.21 %          1.14 %          1.09 %

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

Adjusted net income was $25.0 million, or $0.17 per diluted share, for the second quarter of 2013 compared to $23.4 million, or $0.16 per diluted share, for the first quarter of 2013 and $23.0 million, or $0.15 per diluted share, for the second quarter of 2012. Adjusted ROAA was 1.21% for the second quarter of 2013 compared to 1.09% for the second quarter of 2012. Adjusted net income excluded the effects of the changes in the fair value of the Company's subordinated debentures and the loss on debt extinguishment from the first quarter of 2013, as discussed above. Adjusted net income benefited from the previously discussed improvement in other non-interest income, reduction in the provision for loan losses due to asset quality improvements and well-controlled expense levels.

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