National Penn Bancshares Inc. released details Wednesday of a scheme perpetrated by one of its employees that affected roughly 85 customers.
The discovery of the fraud last month had forced the $4.5 billion-asset company to delay the release of fourth-quarter and full-year results. Those results were also released Wednesday.
In a conference call with reporters and analysts, National Penn's president, Glenn E. Moyer, said that a "mid-level lender," whom he did not name, stole loan money by "misappropriating" the identity of customers.
"It appears to be a textbook case of a bank officer abusing his trust and authority," Mr. Moyer said on the call. "National Penn has never before experienced anything like this in its 130-year history."
He called the fraud an "isolated event" but said the Boyertown, Pa., company would change how it verifies a customer's identity and signature.
The fraud had begun by early 2002, and the lender left National Penn before it was uncovered last month, Mr. Moyer said. He refused to provide more details, citing an investigation by the Federal Bureau of Investigation and the U.S. Attorney's Office.
Though less common than other types of malfeasance - such as borrowers' inflating the value of collateral - insider frauds can be costly.
In 2002 a loan officer at the $143 million-asset Sobieski Bank in Chicago stole $9.6 million by putting fabricated commercial loans on the books. Two years earlier the president of Malta National Bank in Ohio was charged with making $375,000 of bogus loans using the identities of six unwitting customers.
The fraud at National Penn cost it $6.7 million of gross revenue. The net loss, after taxes and other adjustments, was $3.4 million, which was recorded in a special charge against fourth-quarter earnings.
National Penn's fourth-quarter net income fell 5%, to $10.7 million. Full-year earnings rose 11%, to a record $47.9 million - its 27th consecutive annual earnings record.
Wayne R. Weidner, National Penn's chairman and chief executive, attributed the full-year earnings increase to double-digit increases in loans, deposits, and fee income.
But Richard D. Weiss, an analyst with Janney Montgomery Scott LLC in Philadelphia, said the earnings were inflated by two Pennsylvania acquisitions: the $461 million-asset Peoples First Inc. of Oxford, completed June 10; and the $155 million-asset HomeTowne Heritage Bank in Lancaster, completed Dec. 23, 2003.
National Penn's earnings per share (which analysts and investors watch much more closely than net income) rose just 1.4%, to $1.44.
"That shows you the magic of purchase accounting," Mr. Weiss said.
Mr. Moyer, however, said he expects earnings per share to improve this year as National Penn takes advantage of cost and revenue synergies from the two deals, which are now fully integrated.
The bright spots in the fourth-quarter results included a sharp drop in nonperforming assets, to $12 million, or 0.42% of loans, from $14.2 million, or 0.51%, on Sept. 30.
In midday trading Wednesday, National Penn shares were up 0.63%, to $25.40. In an interview Wednesday, Mr. Moyer called the gain a "clear indication" that his company had emerged from the fraud with its reputation intact.
After it first found evidence of fraud Jan. 13, National Penn delayed the release of its financial results and hired a team of lawyers and forensic accountants to conduct an investigation.
"I've got to tell you, we have taken and are taking this very seriously," Mr. Moyer said in the interview. "Our employees are taking it personally. They're more focused than ever."
On the call, he called the fraud a "sophisticated, pyramid-style scheme" and said all issues concerning customer account information and credit histories had been resolved.
National Penn will seek criminal charges against the former lending officer and will try to recover losses through insurance and civil claims, he said.
It said the incident would probably not delay the filing of its annual report. Last year it filed its 10-K report with the Securities and Exchange Commission on March 11.
