National Penn Bancshares' CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.19.13 | About: National Penn (NPBC)

National Penn Bancshares, Inc. (NASDAQ:NPBC)

Q1 2013 Earnings Call

April 19, 2013, 01:00 pm ET

Executives

Scott Fainor - President & CEO

Mike Hughes - SVP & CFO

Analysts

Bob Ramsey - FBR

Damon DelMonte - KBW

Matthew Kelley - Sterne Agee

Blair Brantley - BB&T Capital Markets

Mac Hodgson - SunTrust Robinson

Operator

Good afternoon everyone and welcome to National Penn Bancshares First Quarter 2013 Earnings Conference Call and Webcast. Please note that this call is being recorded. All callers will be in a listen-only mode during the prepared remarks. At the end of the prepared remarks, there will be a live question-and-answer session with analysts.

This call and the accompanying presentation slides located on National Penn’s Investor Relations website at www.nationalpennbancshares.com will be archived on the site following this call. A transcript of today’s call and the slides will also be furnished on SEC Form 8-K. National Penn’s earnings release was posted earlier today to National Penn’s Investor Relations website and will also be furnished following this call to the SEC on Form 8-K.

This presentation may contain forward-looking information that is intended to be covered by the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. Please take a moment to review the Safe Harbor slide of the presentation.

It is now my pleasure to turn the conference over to National Penn’s President and CEO, Scott Fainor.

Scott Fainor

Thank you for joining our first quarter 2013 earnings webcast conference call today. I am joined by Mike Hughes, our Chief Financial Officer and Sandra Bodnyk our Chief Risk Officer.

Slide number three in our presentation outlines some of the highlights of our first quarter 2013. I am very pleased to report another solid quarter of financial performance at National Penn as we delivered $0.16 of adjusted earnings per share and 1.14% adjusted return on assets for the quarter.

As we have discussed in previous webcast calls, National Penn completed the repayment and refinance of $400 million of Federal Home Loan Bank Advances and the redemption of our 7.85% trust preferred securities in the first quarter.

Our focus on growing commercial loans continues as we reported a 5% annualized growth rate in the quarter. I remain encouraged by the pipelines and customer calling initiatives. We will continue these initiatives throughout 2013 and will convert these pipelines into new business booked.

As we stated last quarter and last year, asset quality continues to be a solid story at National Penn and we all remain focused on maintaining our excellent asset quality metrics. Based on the solid recurring performance for the quarter, National Penn declared a second quarter cash dividend of $0.10 per common share.

I'll now turn the presentation over to Mike Hughes. Mike?

Mike Hughes

Thanks Scott. I am going to start on slide number four and reiterate a couple of comments that Scott made. If you look at the bottom left of the graph on earnings per share return, earnings per share $0.16 very consistent with what you've seen over the last several quarters and on the bottom right the ROA of 1.14%.

When you look at the reconciling items the Federal Home Loan repayment that $400 million at a cost of $0.29 a share on an after-tax basis and as you will recall we had marked our retail trust preferreds to market, they were market at $25.83 at the end of the year. We redeemed them. We recorded a gain of about $2 million pre-tax, a penny a share. That’s how we get from the reported loss of $0.12 through the adjusted income of $0.16.

Looking at slide five and looking at the margin; margin 3.49%, again our guidance for the year is in that 3.50% range. The three basis point accretion from the previous quarter is related primarily for those two initiatives we discussed, the Federal Home Loan Bank Repayment and the redemption of the trust preferreds. When you account for the number of days in the quarter, 90 versus 92 in the prior quarter, net interest income is comparable.

Looking at the bottom of that slide, we think appropriately based upon the rate environment and the fed guidance, we have taken the balance sheet to a more neutral position. As we look forward to the future, we do have the ability to adjust that on a timely basis should we deem it appropriate.

Looking at slide number six, as you remember in order to get the accounting we needed related to the Federal Home Loan advances, the $400 million was repaid at the Federal Home Loan and was financed through the structured repos of $125 million and through deposits, primarily wholesale deposits. Those liquidity items will mature in April or May and we’ll look at how we're going to finance going forward, but we do have the ability to go back into Federal Home Loan.

Looking at loan growth on the next slide, commercial loans grew 3% year-over-year. If you look at the first quarter on an annualized rate, it's 5%. The market is competitive and appears to be increasing in intensity and we're focused on growing high quality commercial loans.

Conversely, on the upper right on the mortgage side of the business, we have made a decision based upon the rate environment and our asset liability management position to sell the majority of our production and let that portfolio decline. So overall, you can see what the trends are on the bottom of the graph.

Looking at slide number eight, asset quality, strong to begin with and continues to be strong. We were able to reduce the provision modestly in the quarter to $1.5 million from $2 million. On the upper left classified loans down 7% in the quarter, down 30% year-over-year. On the bottom of the slide, non-performing loans comparable quarter-over-quarter, but about half the peer group average and the loan loss reserve coverage relative to the peer group, very strong.

Looking at other income; some seasonality in this area related to mortgage banking, refinance activity; we are seeing at decline in that and mortgage banking activity are gain on sale, declined about $600,000 quarter-over-quarter. Also in the quarter, we had a decline in swap income; we do think that is more seasonal and we anticipate that that will return to more normal levels.

The quarter did benefit from a benefiting wealth management as relates to the brokerage business, asset management, traditional asset management remained strong, but the wealth business as relate to brokerage increased by about $600,000.

Operating expenses, as you look at slide number 10, well controlled, flat quarter-over-quarter, flat compared to last year, you’ll recall that in 2012 our expenses were actually down 5%. So the efficiency ratio ticks up slightly more due to seasonality on some of the revenue items I talked about as opposed to expense control.

Slide 11, we thought we spend little time talking about the effective tax rate because it’s somewhat different this quarter. If you look at the bottom right, as we know the effective tax rate for National Penn has been in the low to mid 20s year-over-year; when you look at this quarter, on a recurring basis exclusive of the redemption of the trust preferreds and I should say the prepayment of the Federal Home Loan Advances, the effective tax rate is in the mid 20s, 25%. When you factor in the loss at incremental marginal rate it actually shows a 45% benefit in the quarter. And if you look at on the right hand side on the slide, we do anticipate that that rate on a recurring basis would be in the mid 20s on a quarterly basis, but when you look at the year accounting for the impact in the first quarter it’s more in the mid-teens.

And the last slide I have before I turn it back to Scott is looking at the capital levels. You can see despite the operating loss and the despite the redemption of the retail trust preferreds, capital levels are very strong in excess of the peer group and on the upper right giving some indication if you took well capitalized plus 250 basis points of what our excess capital might be in that $250 million or $400 million range.

As it relates to capital management, the $0.10 dividend is about a 62% payout in the current quarter, pretty full payout, but we’re very comfortable with that. As it relates to share repurchase, we completed the repurchase in the fourth quarter of 2012; we will continue to evaluate that as we move forward throughout the year from a liquidity perspective and also based upon the price of the stock. And then lastly M&A is an area that we remain focused on. We certainly like to participate in the consolidation of the industry and we believe we have a balance sheet that provides us the opportunity to do that. With that I'll turn it back to Scott.

Scott Fainor

Mike, thank you. As we continue to stay focused on building long term shareholder value slide 13 outlines our 2013 strategic objectives. The initiatives that we discussed over the last several quarters that were executed on in the first quarter of this year will strengthen National Penn for the future and are in alignment with these stated objectives. We remain excited about the markets in which we do business in which is Eastern and Central Pennsylvania. We continue to sense as we stated in January, some positive momentum building as we talk with our customers and as we continue to convert commercial business that's in our pipeline to new booked business at National Penn. I remain optimistic at this time.

During the first quarter, we renamed our last two divisional banks to the National Penn name. We now operate all 120 branches as National Penn. This coupled with our ongoing corporate relocation plan in Allentown, Wyomissing and Boyertown, Pennsylvania continues to strengthen National Penn’s brand everyday. We will remain laser focused on quality loan growth and in growth in revenue and fee income as we navigate this continued extended low interest rate environment and soft regional economy. We will also stay focused on the margin, expense management and maintaining our excellent asset quality metrics.

As Mike stated, M&A remains an important part of our growth strategy. We are positioned to be an acquirer of choice and will continue with a disciplined approach to look for partners who are appropriate for National Penn. This commitment to consistent financial performance and the strength of our balance sheet has and will continue to allow us to return capital to our shareholders. I want to thank everyone for joining the call today and now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the site of Bob Ramsey with FBR.

Bob Ramsey - FBR

I was curious if you could share some thoughts on net interest margins heading into the second quarter. I know that you've got a little bit of lingering benefit from the trough situation and just was trying to think about some of the moving pieces next quarter.

Mike Hughes

Yeah, Bob as we said you know our guidance for the margin is $350 million for the year. We really haven't gotten into quarter-to-quarter guidance. We do believe however that it’s in a relatively tight band of that 350 range. So we will get the benefit of a full quarter of both the redemption of the trust preferred and the refinance of the federal home loan bank. But as you know, there's core margin compression here and across the industry. So we think in general, our goal is to have that margin in the 350 range for the year, tight band around that on a quarterly basis.

Bob Ramsey - FBR

Okay, that’s helpful and then as you know, loan balances were sort of more or less flat this quarter and we've seen, sort of industry, wise, lot of people would have loans down a little bit as some volumes seem to be pulled forward in the fourth quarter. But I am just kind of curious what you are hearing from your loan customers and kind of what the outlook is as you said and look forward today for loan growth?

Scott Fainor

As we stated in our presentation and also in January, we're focused on small businesses and medium size business commercial lending. We're doing it in a relationship approach as we always have been. We're trying to cross-sell with the loan and deposit relationship, all of the fee income products of our wealth management, cash management and insurance businesses. We've been receiving more positive feedback from our current customers who have to make investments in deferred maintenance. They are talking about potential investments that they are now going to make that they’ve been holding off on in plant expansion. They are still being cautious but there is more optimism and there has been more projects that have been discussed with our banking team. I just want a couple along with that on the commercial businesses, we continue to have our different lines of business working as one team doing small business, blitz campaigns, all of our marketing is around the business; the business community in the markets we serve and that momentum will continue. So I think it's reflective of the 5% annualized quarter growth in commercial loan and we're going to continue to keep pushing on the commercial businesses and see where it takes us.

Mike Hughes

The only thing I would add to that to your first question is; the commercial loan growth we need to see that throughout the year to keep that margin in the 350 range.

Bob Ramsey - FBR

And what are you seeing from a competitive landscape, is it becoming increasingly competitive out there or about the same?

Scott Fainor

In Mike’s comment that he had made earlier, he talked about the competitive pressures are stepping up. And that is not a unique to where we are in the end of 2012, leading into ‘13. We feel that we have to continue to show the value of National Penn; we have to use senior management and calling efforts; we have to direct our marketing campaigns around our business calling efforts and that’s what we have been doing.

Operator

Thank you. We will take our next question from [Jason O’Donnell with Marion Capital Group]. Your line is open.

Unidentified Analyst

My first question relates to the drop in interest income tied to the loan portfolio. Can you just may be give us some color around, which lines of business droves your yield lower and to what degree if it all, you experienced a drop or decline in prepayment penalties?

Mike Hughes

Jason this is Mike. I think that it is across the board and it's just a fact of the interest rate environment. So the loans that are maturing are coming off at a higher rate than the one that the rate environment allowed even us to reprice at. But I couldn’t pick out one category. I think it's across the board and you look at other banks have reported to me it seems pretty consistent that you are having compression in the loan yield.

Unidentified Analyst

Okay. So not necessarily a function or an outside result of any type of shift in prepayment penalties necessarily just kind of across the board yield compressing.

Mike Hughes

I think that is very correct.

Unidentified Analyst

With respect to loan pricing maybe you could just talk a little bit about kind of the rates that you are seeing or otherwise getting and kind of non-multi family commercial real estate loans that might be helpful, thanks?

Mike Hughes

Yeah, we really haven’t given much guidance as to where or disclosed pricing loans that are coming or that mature or new loans. But in general I would say they are in that 4% range of where new loans are going on blended average across all categories.

Scott Fainor

And only thing I would add to what Mike stated is that when we are looking at doing loan pricing, we are really looking at relationship that has more than just the loan transaction. So we are looking much more today than in the past on the cash management, the wealth management, the insurance. So it has to be more of the blended relationship.

Unidentified Analyst

Okay, then one more and I will hop out. I wanted to ask you about the pick up in wealth management income you all posted this quarter, and just thinking about kind of the sustainability of that income line, is it safe to assume that the improvements mostly a function of just better market pricing or are you experiencing a growth clients. How do you characterize the kind of the drivers there and the sustainability of that income?

Mike Hughes

When you look at our wealth business Jason we have a classic asset under management under percentage fee and then we have a brokerage business. The improvement we saw in this quarter was related to the brokerage business more transactional, related to annuity. I would like to tell you its sustainable but I think you have some volatility in that quarter-to-quarter, and it’s really driven by market conditions. We supplemented the brokerage staff a little bit with a couple more. We think it’s a good solid business for us, but as you know it has some volatility to it.

Operator

We will now move to the site of Damon DelMonte with KBW. Your line is now open.

Damon DelMonte - KBW

I was wondering if you guys could talk a little about mortgage banking, obviously a decline is quite similar to what we are seeing across the industry, but can you talk a little bit about what your outlook is for the upcoming quarters?

Mike Hughes

Yeah, I'd say Damon if you look mortgage banking at National Penn is a relatively small business in the grand scheme of things as maybe you look at some of our peers or competitors. We did anticipate that based upon a slow in the refinance activity, we end seasonality in this market that you would see mortgage income decline to some degree in the first quarter. And I think it’s going to hinge on refinance activity going forward. We are hopeful that we see some consistency at this level.

Damon DelMonte - KBW

Okay, that's helpful. And then Mike, could you just clarify your comment on the tax rate, the [flies] online were tough to see, are you saying that the quarterly tax rate going forward would be in the mid 20s or the mid-teens?

Mike Hughes

The quarterly tax rate going forward is in the mid 20s. And when you look at the year because of the restructuring of the federal home loan advances for the year, it’s going to be in the mid-teens.

Damon DelMonte - KBW

Got you. Okay, that's helpful. Thank you. And then I guess my last question, could you guys give a brief update on M&A? I know you highlighted it’s an area of focus for you guys, but I mean, are you seeing an uptick in chatter here amongst some of these smaller banks that will be targeted you guys?

Scott Fainor

I just think as we've said in the past, there is more conversation, but ultimately we continue to focus in on the strength of National Penn and we've made it quite clear that we would like to be the acquirer of choice and we do that through our stronger currency and our strong fundamentals. And we believe that the industry will consolidate and due to the outside pressures within the industry, whether it would be regulatory or on the margin, we think the strength of National Penn will help us to grow through M&A in the future.

Damon DelMonte - KBW

Okay. That's helpful. And then just one more quick question, just wondering guys, Warburg Pincus, you know we've seen some other private equity firms that had stakes in Penn banks you know start to formulate an exit strategy. Just wondering if you could give us an update on your thoughts that you may have had with Warburg, your own thoughts on the situation, but is there any type of discussion regarding an eventual exit by Warburg?

Scott Fainor

I can't comment on Warburg Pincus. We have a great relationship with Warburg Pincus. Michael Martin is on our Board of Directors and we will continue to execute on our strategic plan which is part of our slides. And we want to execute in a way that continues to enhance long-term shareholders value and that's what we are focused on.

Damon DelMonte - KBW

Okay, thank you very much.

Scott Fainor

Thank you.

Operator

We will take our next question from the site of Matthew Kelley with Sterne Agee.

Matthew Kelley - Sterne Agee

Hi, guys. I was curious on your reserve coverage, you’ve commented on this in the past, but obviously your reserves a lot higher than most of your peers and credit is certainly stabilized, getting better with each quarter. Could you remind us again where you might be comfortable bringing the reserve coverage ratio down to as a percentage of total loans over time as things continue to heal?

Mike Hughes

Yeah, and we think that's very difficult to do because of in different economic conditions, in a different quality of portfolio and I know from the investment community to look at a percentage of loans is helpful. We don’t look at it that way. It's much more detailed and we really couldn't give you guidance. I would agree with your point that when you look at our coverages and our asset quality relative to the peer group, it's very strong. And if you look at what we've done over the last at least eight or nine quarters is we have had the ability as classified continue to decline to release reserves. We continue to look at that on a quarterly basis, but we don’t have any guidance on where we go as a percentage of loss.

Matthew Kelley - Sterne Agee

Okay. And just looking pre-crisis, pre-Great Recession, you now look they are in the 140 to 180 type range, I mean is there any reason to believe that we wouldn't eventually return to that type of level, probably not break down below that though?

Mike Hughes

I think based upon the economic environment, regulatory environment, it would be difficult to correlate what happen pre-crisis to what happen post-crisis.

Matthew Kelley - Sterne Agee

Okay, fair enough. Another question just on your deposit service fees, do you think you can grow those in absolute dollar terms in 2013 versus 2012? I know there has been some secular changes in consumer behavior and that line item has been slowing down for a lot of banks. I would like to know your thoughts on that.

Mike Hughes

There have been changes to your point on customer behavior and the regulatory environment as well. And we have and continually we look at our service charging and our methodologies in addition to what actually they are and we’ve laid some strides there. If you look at quarter over first quarter to first quarter we’re relatively flat, first quarter to fourth quarter we’re down. So there is some seasonality to that, but the trendline is down. We continue to evaluate methods to keep that relatively flat. And I would just say, first quarter to first quarter we're relatively flat.

Matthew Kelley - Sterne Agee

Okay. All right, thank you.

Scott Fainor

The only thing Matt, the only thing I would like to add to Mike’s comments is we are going to always continue to use the strength of our technology to look for additional opportunities in the electronic banking, in our mobile phone platform which we have launched to try to look for ways to create more fee income in the deposits service charge line, but it will be forthcoming over time.

Matthew Kelley - Sterne Agee

Yeah, I think its final way to charge for that and that’s part of the issue is that the technology is resulting in better information for the consumer.

Scott Fainor

That’s correct. Thanks.

Matthew Kelley - Sterne Agee

Thanks.

Scott Fainor

Thank you. Any other questions?

Operator

We will move now to the site of Blair Brantley with BB&T Capital Markets. Your line is open.

Blair Brantley - BB&T Capital Markets

I just had a question on the securities portfolio and just kind of what you are seeing trends there, are you going to try to keep it from the absolute level at this current just kind of balance and then also from the year perspective, what's you are kind of thinking there?

Mike Hughes

We do believe we will keep it in the relative same size, although we do evaluate whether we could marginally grow that portfolio. What we see as far as yield, the replacement rates versus what's coming off are probably down a 100 basis points. Most of that portfolio is mortgage-backed security. The municipal portfolio has been great for us on a tax equivalent basis and it's really helped us to this slow rate environment. So I would say we see it relatively the same size. We do continue to see based upon redeployment rates some contraction in yield on a quarterly basis.

Blair Brantley - BB&T Capital Markets

Okay. Thank you very much. I appreciate it.

Mike Hughes

Thanks, Blair.

Operator

And it appears we have no further questions. Actually you do have a question from the site of Mac Hodgson with SunTrust Robinson. Your line is open.

Mac Hodgson - SunTrust Robinson

Most of the questions were asked. Just a quick question on the FHLB repayment, I was curious what the cost of the deposit, also deposits in the restructured repos were [that should be 275] and 125?

Scott Fainor

What’s that math comes sorry, I didn't hear you?

Mac Hodgson - SunTrust Robinson

Yeah, the cost of that 275 million wholesale deposits and 125 million of structured repos they were used to repay the FHLB?

Mike Hughes

Right, we are probably in the 35, 40 basis point range.

Mac Hodgson - SunTrust Robinson

Okay. And you said those mature, was it this month or next?

Mike Hughes

They some mature this month and some in May, and we are just going to evaluate whether it is better to go back into the federal home loan on the short-term basis or it’s better to use that source of funding. If you look at our deposit base, this broker deposit or seeders that we have here is the only brokers or seeders we have. So we have that as a good funding source and we are just going to continue to look and see what’s the best avenue. I think longer term, we do have to go back and look at longer term for source of funding, but for right now we are going to stay short.

Mac Hodgson - SunTrust Robinson

And you said I think that you got about half the margin benefit maybe in the quarter from that transaction, but it done mid quarter I can’t recall?

Mike Hughes

The federal home loan restructuring is February 7th and redemption of the trust preferred was March 7th, so tough to quantify but as you know Mac, there is just so many moving parts on this margin, whether it’s the prepayment fees in the mortgage-backed portfolio or re-pricing deposits or loan growth. And so we tried to take a half a quarter and say we are going to get the full benefit next quarter I think is difficult. We are running hard to keep this margin where it is.

Mac Hodgson - SunTrust Robinson

Okay. That makes sense. Thanks a lot.

Scott Fainor

Thank you.

Operator

Okay. And it appears we have no further questions at this time. I will now hand the call back to Mr. Fainor for any closing remarks.

Scott Fainor

We want to thank everyone for joining the first quarter 2013 webcast conference call and for all the questions that you asked us today. Everyone have a great weekend and once again thank you.

Operator

That concludes today's presentation. You may disconnect at any time. Have a wonderful afternoon.

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