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Executives

Scott V. Fainor – President & CEO

Michael J. Hughes – SEVP & CFO

Sandra L. Bodnyk – SEVP & CRO

Analysts

Jason O’Donnell - Merion Capital Group

Bob Ramsey - FBR

Christopher Marinac – FIG Partners

David W. Darst – Guggenheim Securities LLC

Matthew Schultheis – Boenning & Scattergood

Blair Brantley - BB&T Capital Markets

National Penn Bancshares (NPBC) Q2 2013 Earnings Conference Call July 25, 2013 1:00 PM ET

Operator

Good afternoon everyone and welcome to National Penn Bancshares Second 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 a 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 V. Fainor

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

Slide number 3, in our presentation outlines some of the highlights of our second quarter financial performance. National Penn reported another solid consistent quarter of financial performance as we delivered $0.17 per share and a strong 1.21% return on assets.

We are very pleased with these quarterly results. Our focus during the quarter was on growing commercial loans, we have been consistent in stating that and this continued in the second quarter as we built upon our recent growth trend and achieved 3.5% year-to-date annualized growth of high quality customers in the commercial portfolio.

As I have stated in previous quarters, I remain encouraged by the loan pipeline volumes and our customer calling efforts. These strategic initiatives will continue throughout 2013 and National Penn bankers will convert these loan pipelines and new customers into new booked business to our company.

I always talk about our strong asset quality and this solid story continues at National Penn. We remain focused on maintaining our excellent asset quality metrics. Based on the strength of our balance sheet and this solid financial performance for the quarter, National Penn declared a third quarter cash dividend of $0.10 per share.

I would like to now turn this presentation over to Mike Hughes. Mike?

Michael J. Hughes

As Scott mentioned the second quarter another strong and consistent quarter with EPS at $0.17 and the ROA 1.21%, as you can see a very consistent trend. But, for the first six months, adjusted EPS increased 10% over the comparable period in the prior year.

The margin expense to 3.53% from 3.49% due primarily to the actions we took in the first quarter, i.e., the redemption of the retail trust preferred and the restructure of the Federal Home Loan Advances.

Net interest income expands for two reasons, the margin I’ve just discussed and the number of the days in the quarter. Our guidance for the year is in 3.50 range which is predicated on low single digit commercial loan growth and despite increasing longer term rates we believe the margin will continue to be pressured in the second half as the impact of deposit pricing diminishes.

Loans grew modestly in the quarter as we continued to allow the mortgage portfolio to decline which you can see on slide 6. Commercial loans increased 3% year-over-year net of reduction in classified loans of $68 million and the refinance of some larger credit into non-bank debt. The market remains competitive, we have not pursued longer term fixed rate lending on either the commercial or consumer side, but rather have focused on offering floating rate loans with an interest rate swap. We believe that this will bode well for margin over the longer term.

Asset quality remains very strong, classified loans down 22% year-over-year, down 10% in the first six months, you can look at net charge-offs down 39% year-over-year. And at the bottom of slide 7, relative to our peers level of non-performance very reasonable compared to the peer group, in fact about half the peer group average and reserve coverage levels very strong.

As it relates to other income, had a good quarter in other income $25 million or 24.9 versus 23.5. Mortgage banking business at National Penn is relatively modest and we’re a selling, servicing [release] [ph]. We do believe there will be a reduction in refinance activity, but don’t think it will, do not believe it will have a material impact on our performance. In the quarter refinance activity accounted for about half of our volume as compared to three quarters of our volume in the first quarter.

In our wealth management business and you can see a break out of transactional and the classic asset management business performed well on both sides increasing 16% year-over-year, the revenue as I said on both sides of the house, a growth, but the transaction business is more volatile.

On slide number 9, operating expenses well controlled, operating expenses in the first six months up less than 1%, the efficiency ratio year-to-date of 58% and you will recall operating expenses over the several years have been relatively flat.

Just taking a quick look at capital, we’re evaluating Basel III in detail, but we believe that it will have a modest impact on both our capital position as it currently is, and on our ability to manage capital in the future relative to our peers, our capital position is indicative of the strength of our balance sheet. We continue to be well positioned to manage capital, grow the company organically through M&A or otherwise.

During the quarter, however, the unrealized mark on the investment portfolio impacted tangible book value and our tangible common equity ratio.

With that I will turn it back to Scott.

Scott V. Fainor

Thanks Mike. As we continue to stay focused on building long term shareholder value, slide number 11, outlines our thoughts about National Penn. A consistent earner at a relatively high level as evidenced by our 1.21% return on assets this quarter, our superior asset quality with strong coverage and reserves, a strong balance sheet that positions us to continue our disciplined growth strategy, a continuing focus on quality loan growth as well as growth in revenue and fee income as we navigate through this ongoing soft regional economy.

I still remain optimistic at this time as we sense positive momentum building when we talk and meet with our customers that we will continue to convert the commercial and retail business that is in our pipelines today.

Regarding merger and an acquisition activity, I’ve previously stated this remains an important part of our growth strategy. With our disciplined approach we continue to look for partners who would like to join 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 would like to now open it up for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And our first question comes from the site of Jason O’Donnell with Merion Capital. Your line is open.

Jason O’Donnell - Merion Capital Group

Good afternoon.

Scott V. Fainor

Good afternoon, Jason.

Jason O’Donnell - Merion Capital Group

Just to follow up on the margin discussion a little bit, can you just give us color around the impact that the premium amortization expense is having on your margin just given the shift in the curve, I’m wondering maybe how much premium you all incurred in the second quarter versus the first, if you have it in front of you and whether you expect to some relief on the back half of the year?

Michael J. Hughes

We have a guideline, not so much a policy Jason, of buying securities at a relatively low premium to par. And we did have some modest benefit in the hundreds of thousands dollars and we think we’ll have that on an ongoing basis in the next couple of quarters, but we didn't have a heavy burden of amortization previously, so we don't think we will have a material benefit going forward.

Jason O’Donnell - Merion Capital Group

Okay. That's very helpful. And then, just maybe just to give us some sense of what we might expect from that kind of the core securities yield trend, can you just tell us where cash flows are being reinvested roughly into that portfolio in terms of yield and maybe duration?

Michael J. Hughes

Yeah, the cash flow, the duration of the portfolio is about three and a half years. We are very consistent buying mortgage backed and CMOs with the duration that would be in that 3 to 5 year range. That was investment yields purchases were in the 1.60% range in the first quarter probably in 1.90% to 2% range in the second quarter and would be a little bit better right now going forward.

So, we believe rates in general, rising rates will benefit us because we are asset sensitive. We believe the long end of the curve won't help us much, but it does help us somewhat in the redeployment rates and mitigating the cash flows that are coming off the mortgage-backed security portfolio.

Jason O’Donnell - Merion Capital Group

Okay, great. And then, one more I am going to step out. In terms of the lending strategy, has your view at all changed on the retention of longer term resi mortgages, I’m curious if you have been retaining any 15 or 30 year fixed-rate product or at least considering going down that path at some point in the event rates are moving even higher?

Michael J. Hughes

Yeah. We really haven't Jason, changed our philosophy there. As you know, the 30 year conforming we have sold all of that or the vast majority of it. What we keep in the portfolio would be jumbos or some non-conforming high credit quality mortgages. The run-off in that portfolio is probably in the low 40 million and we have kept about, you can see it goes down about $10 million a quarter.

So, we are putting some mortgage, residential mortgage on the balance sheet. It is not longer term fixed-rate, high quality in market and we really don't envision at this point in time putting those longer term mortgage on the balance sheet.

Jason O’Donnell - Merion Capital Group

It's helpful. Thanks guys.

Scott V. Fainor

Thank you.

Operator

Your next question comes from the site of Bob Ramsey with FBR. Your line is open.

Bob Ramsey - FBR

Good afternoon.

Scott V. Fainor

Hey Bob! How are doing?

Bob Ramsey - FBR

Good. Thank you. Just a sort of follow up on the margin questions and I know you all said you expect a little more margin pressure in the back half of the year, I was - which makes sense. But I was curious if you had any thoughts around the magnitude and then with little bit better security reinvestment a little bit of steeper curve, when do you think margin sort of hits a bottom?

Michael J. Hughes

Well, I’ll take a shot at the first one, I am not sure, I have the crystal ball and when it hits the bottom, although I will say this, your point is well taken that the redeployment rates or the new loan rates versus what's coming off has narrowed. So, you got pressure, but you don’t have the pressure that you’ve had historically. I think generally there’s about five basis points of margin compression on a quarterly basis, ex-loan growth and we hope to be able to offset some of that with the loan growth. So, our guidance has been and continues to be we believe will be in the 3.50 range for the year.

Bob Ramsey - FBR

Okay. That helps. And then on credit, the credit trends looking really good you’ve got a pretty big reserve that looks like to me anyway given where all your credit metrics are today. Just curious, how to think about the pace or provisioning whether you’re going to continue to sort of take the reserve down a little bit a quarter every quarter or whether at some point if you’re more comfortable on the move that is more significant?

Michael J. Hughes

Well, I would say when you really look at this we say there’s several factors that drive the provisioning level of classified loans, net charge offs and loan growth. And we have been prudent and cautious as we re-leased reserves, it is formulaic in how we approach it and I would anticipate that will be consistent in our application.

Scott V. Fainor

And Bob, this is Scott, also on that, I started off in my comments by saying that the story here at National Penn is just a quality, asset quality metrics and the continued strength in the way that we handle a loan and asset quality overall and that will continue.

Bob Ramsey - FBR

Great. And then last question and I will back out, with a 1.20 ROA your profitability is very strong, but you’ve obviously got a lot of excess capital which I think you highlighted on page 10 that sort of weighs on the ROEs, just curious how you’re thinking about the levers you have to deploy that capital?

Michael J. Hughes

Sort of a good problem Bob, isn’t it, but yeah, I would say, when we talked before and we’re again consistently looking at that M&A would be our preference, M&A would be our preference in market or contiguous market. We believe that perhaps we can drive some better economics from an earnings per share perspective by having more cash in a deal and less stock. We continue to evaluate and we wanted to see where Basel III came out as it relates to a stock repurchase plan, we’ll go through our capital planning and our stress testing as we move throughout the year and continue to evaluate that. When you look at the dividend and the payout ratio pretty full, I want to anticipate in the short run that that’s something that we would move materially and then organic growth. So it’s a balance of all those M&A being a preference, we’ve been disciplined in our approach and we will continue to be.

Bob Ramsey - FBR

Any sense that sellers are more amenable or the bid [inaudible] gap is narrowing?

Scott V. Fainor

I would say that as we continue to move forward quarter-over-quarter, there continues to be more conversations. I think that there will continue to be more activity. We certainly are remaining disciplined and as you know, we want to make sure that it's meeting our financial metrics internally before any deal or whatever be announced.

So, we are focused on it. It’s part of our strategy that we have been talking about and we are going to continue to try to execute on that in the future.

Bob Ramsey - FBR

Okay great. Thank you.

Scott V. Fainor

Thank you.

Operator

Your next question comes from the site of Christopher Marinac with FIG Partners. Your line is open.

Christopher Marinac – FIG Partners

Thanks, good afternoon. Scott and Mike, I wanted to see if you could give us a little color on how you think about deposits and the behavior of your customers if and when rates rise, even if that’s not for a couple of quarter, or several quarters out. How sticky so you think your customers are and how you think about that as you model out for that?

Scott V. Fainor

I am just going to make a comment; Mike is going to follow up. Since our franchise is very concentrated in its branch network, and we have been continuing over the last three years to cross sell and to promote checking accounts and transaction accounts, and all of the electronic banking and the mobile banking and online banking. We continue to build the strong culture here at National Penn that those are the customers and the relationships that we want to continue to drive into the company. We have continued to be successful in growing those quality balances and accounts. I think what you have seen run down has been on the CD side by design as we brought pricing down.

I think as the long end of the curve goes up in rates, maybe you will see some customers come back into CDs, but we at National Penn will continue to keep promoting the transaction accounts both retail and business and we are going to continue to keep promoting all of the electronic banking products that's attached to those.

Michael J. Hughes

I would agree with Scott’s comments. When you look at Nat Penn in the concentration of its franchise and demographics in which the markets that we are in, I mean, I think that is one of our strengths. Now as in industry issue, I am appreciative that if rates go back up, I think you see just sort of intermediation of assets or deposits out of transaction accounts in some CDs. But, I do think at Nat Penn specifically, we have a strong long term customer base and I would anticipate that would continue.

Christopher Marinac – FIG Partners

Great. Thank you for that and I guess, do you think that percentage of DDAs may continue to creep up as opposed to recent scores?

Michael J. Hughes

Based upon the rate environment and based upon what we are trying to do on the commercial loan side, we are hopeful that we can see that growth. But, I really won't predict what kind of rate.

Christopher Marinac – FIG Partners

Okay, very well. And then, just a quick one for Sandy, Sandy is there anything in terms of on your horizon for charge-offs that would make the future any different, the material either better on the lower side or just rising a little bit?

Sandra L. Bodnyk

I think, we have had very consistent performance in the asset quality metrics and I think you kind of accept the thing going through.

Christopher Marinac – FIG Partners

Okay, very good. Thank you very much.

Scott V. Fainor

Thank Chris.

Operator

I will take our next question from the site of Matthew Schultheis with Boenning & Scattergood. Your line is open.

Matthew Schultheis – Boenning & Scattergood

Good afternoon!

Scott V. Fainor

Thanks Matt. How are you doing?

Matthew Schultheis – Boenning & Scattergood

I am doing well. Thank you. Quick question related to Chris’s question about sort of funding and deposits. It looks to me in quarterly, a large decrease in your jumbo CDs or increase in Federal Home Loan Bank borrowings. I was wondering at the nature of one-off the CDs whether it's municipal or just broker or just lower the rates so much so everybody left and what type of structure you have in Federal Home Loan Bank borrowings that you had?

Michael J. Hughes

Matt, you may recall that when we repaid the federal home loan advances in order to be able to expend that pre-payment penalty in the first quarter, we had a look for alternative sources of funding other than the federal home loan.

So, for a period of 60 to 90 days, we made a consorted effort to pay down the federal home loan by about 400 million in the first quarter and to use jumbos, some structured repose, some brokered CDs and on a interim basis as funding and then our intention which we executed upon was to come back in and borrow from the federal home loan again.

So, all that movement that you see, quarter-over-quarter, was anticipated. It was not a function of ray and was related to the restructuring of the federal home loan advances.

Matthew Schultheis – Boenning & Scattergood

The federal home loan borrowings that you put on this quarter, what was the structure of those, what was the term like?

Michael J. Hughes

The majority of them were short-term floaters.

Matthew Schultheis – Boenning & Scattergood

Okay. Thank you very much.

Scott V. Fainor

And very consistent with our strategy we announced in the first quarter and also last year. Thanks Matt.

Operator

Our next question comes from the site of David Darst with Guggenheim. Your line is open.

David W. Darst – Guggenheim Securities LLC

Hi, Good afternoon.

Michael J. Hughes

Hey David! How are you doing?

David W. Darst – Guggenheim Securities LLC

Good. Mike, as you comment around waiting for Basel III to have better visibility of what the cap ratios need to be, in the context of what you might want to do in M&A situation. It seems like you have so much regulatory capital that it just don't matter from a buyback perspective, you seem to have a lot of room to keep buying back.

Michael J. Hughes

I agree. I mean, what we wanted to do, you look at sort of where these bank stocks went over the quarter and evaluations that we have gotten the question before why don't you have a current repurchase share plan in place. And, we were patient in evaluating that. We wanted to see where Basel III came up. But, your point well taken.

Basel III did materially impact our capital position and we will just go through our normal planning process and will evaluate as you know, going to the regulators and getting a repurchase plan approved over the remainder of the year.

Scott V. Fainor

David, just one more comment and that is and Mike stated this in previous quarters, you know, we did execute on our 5% share buyback last year. So, we were ahead of the curve maybe on that buyback in front of others, but I think ultimately, our excess capital as Mike is outlining comes in those four categories on how we want to continue to look at deploying and putting cash into a deal. If it came about would be a top priority.

Michael J. Hughes

And we are managing capitals, Scott's point to 5% repurchase was which was completed in December, but then, in the first quarter we went back out and bought 75 million of retail trust preferred at 785 back.

So, we do have a strong internal generation of capital based upon ROA of 121. We continue to manage it, but if you looked overtime, we haven't managed that excess capital down appreciably. I am not sure that's necessarily a bad thing, but it's certainly a goal overtime to get the capital levels down from where they currently are.

David W. Darst – Guggenheim Securities LLC

Okay. And then, I guess in an acquisition, do you anticipate something that you are actually able to lever into better organic growth? I understand your dialog about accelerating customer in each and every activities, but I guess at this point, in a lot ways it doesn't like we are seeing business momentum build?

Michael J. Hughes

I think we – I think one of the things we have been very consistent with at National Penn, is that we said that our loan growth and especially, once again, in our commercial businesses which we have talked about, was going to be more in those lower single digit and then at the same time, we have been showing very consistent growth levels although they have been lower percentage wise, they have been very consistent and of a high quality nature as offset by our then high quality credit metrics.

So, I believe if there was to be a merger transaction at some point, we would be looking at cost reduction, we would be looking at trying to leverage revenue enhancement, but it would be more cost reduction, it will be more of similar type of risk culture.

David W. Darst – Guggenheim Securities LLC

Okay, great. Thank you.

Operator

And we will take our last question from the side of Blair Brantley with BB&T Capital Markets, your line is open.

Blair Brantley - BB&T Capital Markets

Good afternoon everyone.

Scott V. Fainor

Hello.

Blair Brantley - BB&T Capital Markets

Couple of questions most of them have been answered. What's the swap income this quarter and how that compared to last quarter.

Michael J. Hughes

Swap income I would say, last year I think was in the 3.5 million range. We had a very low quarter in the first quarter it was like in the hundreds of thousands and in this quarter it's about a million dollar.

Blair Brantley - BB&T Capital Markets

Is that something you think that kind of stays, stays couple of quarters or like it has been?

Michael J. Hughes

Well, I would think take out the first quarter I think it's been fairly consistent, but it's a reflection of loan demand also reflection I think, the biggest factor that impacts that is the some competition willing to do longer term fixed rate lending and as provided that the swap credit plus the credit spread, it's somewhat synonymous or in our guess to where the fixed rate alternative is from competing institutions we think that will be sort of a constant source of revenue, but there's some volatility your points will take.

Blair Brantley - BB&T Capital Markets

Okay. Thanks. In terms of the loan growth strategy where do new hires for venture to that, are for actually you seeking new lenders or you just kind of working with -- had at this point.

Michael J. Hughes

Over the, over the past 24 months I think we, we reported that we were very consistent in hiring new lenders into our teams and upgrading some of the talent in some of the regions where it was needed throughout all of National Penn's footprint. I would say that we continue to look for high quality, high performing small business, commercial and middle market banking and relationship management officers, we will continue to do that but the team as it's put together today, I think it's been doing an excellent job with calling on perspective new customers, working with their current customers and I think it's been, it's been very consistent, pipelines have continue to build, and our cross selling activities between the banking teams, the wealth management teams and the insurance teams is going extremely well so far in '13. We will need to do more of that at the second half of this year but I'm quite confident and I'm quite optimistic that we will continue to be consistent in this performance.

Blair Brantley - BB&T Capital Markets

Okay, great that's all for and one of my last question, on the consumer side on portfolio, do you see that kind of trending down to more or we getting close to a kind of bottoming out there?

Sandra L. Bodnyk

From my perspective the consumer portfolio of the bank has been holding quite well there, there’s the good amount of rate competition and we chose to play at what we consider a philosophical rate hold to this input that will take little long term rate positions, but we’ve been unable to invest in people in our market who are reminding that portfolio and eventually keep our portfolio relatively constant without this trying to do going forward.

Michael J. Hughes

Consumer actually residential mortgage portfolio has been relatively constant, we envious that would be I think depending upon what happens with refinance activity, we could still see some decline in mortgages overtime albeit March.

Blair Brantley - BB&T Capital Markets

Yeah, great. Thank you very much.

Scott V. Fainor

Thank you Blair.

Operator

And we have no further questions at this time, I’ll now hand the call back to Mr. Fainor for any closing remarks.

Scott V. Fainor

So, I want to thank everyone for joining our second quarter 2013 webcast conference call today. We appreciate all of your questions and we wish you a great rest of the week and weekend and we look forward to talking to you next quarter, thank you very much.

Operator

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

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