National Penn Bancshares' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.25.13 | About: National Penn (NPBC)

National Penn Bancshares, Inc. (NASDAQ:NPBC)

Q3 2013 Earnings Conference Call

October 25, 2013 01:00 PM ET

Executives

Scott V. Fainor – President and Chief Executive Officer

Michael J. Hughes – Senior Executive Vice President and Chief Financial Officer

Sandra L. Bodnyk – Senior Executive Vice President and Chief Risk Officer

Analysts

Bob H. Ramsey – FBR Capital Markets

David W. Darst – Guggenheim Securities LLC

Damon P. DelMonte – Keefe, Bruyette & Woods, Inc.

Chris W. Marinac – FIG Partners LLC

Blair C. Brantley – BB&T Capital Markets

Operator

Good afternoon everyone and welcome to the National Penn Bancshares Third 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 the 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. You may begin.

Scott V. Fainor

Thank you for joining our third 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 third quarter. National Penn reported another solid consistent quarter of financial performance as we delivered $0.17 per share and a strong 1.17% return on assets. We are very pleased with these quarterly results.

We've been stating in previous quarters that our number one priority is quality loan growth. And as we have discussed this in previous quarters, we know that that loan growth has been slow to materialize in 2013.

However, I still remain encouraged when I look at our loan pipelines. The volumes within those categories our calling efforts, our continued focus on newly booked quality commercial loan business and how that has come to bear in National Penn throughout the year. The strategic initiatives that we have in place to grow loans, not only for remaining part of 2013 but as we go into 2014, will be continued to be executed upon and despite the still sluggish economy and competitive landscape, we’re going to stay focused on these initiatives.

Mike is going to go into some further detail in a few moments. I always talk about our strong asset quality and this quarter is no different. This story about strength and asset quality continues at National Penn. And based on the strength of our balance sheet, and the solid financial performance for the quarter, National Penn once again has declared a fourth quarter cash dividend of $0.10 per share.

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

Michael J. Hughes

Thanks Scott. I’ll start on Slide 4 on the points that Scott previously made regarding the EPS and the ROA. You can see there, our return on assets is among the strongest in the peer group.

Looking at Slide 5 and the margin, year-to-date 3.51% comparable to last year, a job well done in a difficult rate environment. In the quarter the margin was 3.49% down from 3.53% in the previous quarter and we affirm our guidance that the margin will be in the 3.50% range for the year.

As we look at loans on Slide 6, loans have grown modestly throughout the year. We’re disciplined in our approach to growing loans primarily due to a limited appetite for long term fixed rate lending in this rate environment.

Competitive pricing has not reflected a move of over a 100 basis points in the 10-year swap rates. About 40% to 50% of our new floating rate loan originations have been swapped, giving our customers the benefit of the current rate environment. And also positioned our interest rate sensitivity better and reduced its current net interest income. We continue to allow the mortgage portfolio to decline and have sold the long-term fixed rate originations.

On Slide 7, in the quarter, we secured some municipal deposits to replace FHLB advances. This was a short-term opportunity and we anticipate utilizing our capacity in FHLB in future quarters. This was substitute financing as average earning assets were comparable quarter-over-quarter. Asset quality improves quarter-over-quarter. We’ve classified assets down 7% in the quarter, 26% year-over-year, non-performing loans, relatively flat quarter-over-quarter. Again they’re valued about $0.55 and $1 considering charge-offs and specific reserves.

Net charge-offs relatively flat in that $4 million to $5 million range as is the provision at $1.5 million to $1.25 million. And you can see down at the bottom of the slide the comparison from the peer group very strong with our non-performing loans at 1.04% and our coverage at 184%.

As it relates to other income in the quarter, Wealth continues to perform well both in the assets management and the brokerage business. Mortgage banking income declines from $2.1 million to $1.6 million as refinance activity declined in the quarter. We recorded approximately $700,000 of other income in the quarter related to investment in a mezzanine investment fund. We recorded these gains when underlying investments are liquidated and these gains are of recurring nature on an annual basis.

On Slide 10, when you look at operating expenses and look at the year-to-date period, our operating expense is up little over $1 million for the nine months, less than 1%. And in the upper left hand side of the slide you can see that on a quarterly basis operating expenses relatively flat in that $52 million to $53 million range.

Finally on Slide 11, the strong earnings performance and the internal generation of capital resulted in excess capital position despite the capital management initiatives we’ve executed; the repurchase of 5% of the shares in the prior year, the redemption of the retail trust preferred. The graph on the upper right give some context as to level of excess capital and we will be finalizing our annual capital plan in the fourth quarter and evaluating capital planning strategies for 2014.

As it relates 2014, we’re in the midst of our strategic planning and budgeting process and we’ll provide some guidance as it relates to 2014 in January. Generally I would say we’re focused, as Scott mentioned, on loan growth, M&A opportunities, capital management including our share repurchase and a deeper review of the expense reduction opportunities including a rationalization of the branch network.

With that, I’ll turn it back to Scott.

Scott V. Fainor

Thank you, Mike. In summary, we continue to stay focused on building long-term shareholder value and Slide #12 outlines our thoughts about National Penn. Consistent performance at a relatively high level as evidenced by our 1.17% return on assets this quarter. Our on going management of the net interest margin to mitigate compression in this extended low interest rate environment.

There is a continuing focus on quality loan growth as not only, I said in my open remarks, but as Mike said in his comments. This quality loan growth will materialize in the future and we’re still focused on growth in revenue and fee income. I remain encouraged as I said earlier, and at this time we still sense some positive momentum building when we talk with our customers and new prospective customers in all the markets that we serve.

We also continue with sustained strong asset quality metrics. That story continues at National Penn and will continue in the future.

Our balance sheet; the balance sheet that positions us well for disciplined growth and capital management not only for the remaining part of 2013 and Mike outlined some of those important items, but also the strength in capital management as we set the tone for 2014. This includes M&A which remains an important part of our growth strategy. We continue to proactively look for partners who would like to join National Penn.

And finally, I would like to note that we’ve made substantial progress on our corporate relocation plan, which we’ve talked about in previous quarters. We started the internal fit out on both our new Reading Area Business Center and our new headquarters at Allentown. We are on schedule to begin moving our teams into these locations towards the end of 2013 and beginning of 2014. And we remain excited about the opportunities these new locations present to us with all of our employees.

We are now going to open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the side of Bob Ramsey with FBR. Your line is now open.

Bob H. Ramsey – FBR Capital Markets

Hey, good afternoon.

Scott V. Fainor

Hello, Bob.

Bob H. Ramsey – FBR Capital Markets

Hey, you mentioned on the conference call in your prepared remarks, but you are looking at rationalization of the branch network. I was just wondering you could elaborate a little bit on what’s prompted that, which you’re looking for, what the opportunity maybe?

Michael J. Hughes

Bob, I think when you look at the investment we have made in technology as it relates to mobile banking and the enhancement of ATMs and something’s we’re looking at there prospectively. We are in the early stages of the budgeting and strategic planning process, we are not in a position to say we will close branches, but it is something that as we move into 2014. We are certainly taking a hard look at.

Scott V. Fainor

And Bob, this is Scott. Our Chief Banking Officer, Dave Kennedy, he has continued throughout 2012 and 2013 to look at branch profitability and his team that runs our entire network, they are very focused on making sure that each office is contributing. But as you know, with the low interest rate environment and once again with a sluggish economy, we’re going to continue to look for more contribution and more leverage out of that network.

Bob H. Ramsey – FBR Capital Markets

Okay. And then you also mentioned again the headquarters move which is quickly coming up here. Remind me how we should think about the financial impact of the headquarters move in terms of what impact it has on your costs, sort of once the move itself is done?

Michael J. Hughes

Bob, I think, this is Mike. On an ongoing basis that cost is in the hundreds of thousands on an annual basis as opposed to the millions. Now, we will either in the fourth or first quarter have some non-recurring costs related to the move itself, but on an ongoing basis, it’s relatively immaterial.

Bob H. Ramsey – FBR Capital Markets

Great. And then maybe last question, you guys really have made tremendous progress on the credit quality front, you still got what I think is a pretty big allowance, what are you guys looking for to sort of began moving that further down.

Scott V. Fainor

And Bob, I think if you look over the trend and you can look not only this year, but look at the prior year, we have released reserves over time and what I would believe is a prudent and conservative way and if asset quality, and we say that drivers of that reserve are loan growth, which hasn’t materialized to a great extent. Net charge-off, which you see year-over-year, come down somewhat. We’d like to see them come down further and classified assets. So you’ve seen a trend where we’ve been – as asset quality has improved the reserve has been reduced and I think that would be the drivers of future releases.

Bob H. Ramsey – FBR Capital Markets

Great. Thank you very much guys.

Michael J. Hughes

Thanks, Bob.

Operator

And our next question comes from the side of David Darst with Guggenheim Securities. Your line is now open.

David W. Darst – Guggenheim Securities LLC

Hey, good afternoon.

Scott V. Fainor

Hey, David.

David W. Darst – Guggenheim Securities LLC

Scott, making sure you’re talking about both M&A and buybacks.

Scott V. Fainor

Yes.

David W. Darst – Guggenheim Securities LLC

How should we think about just the balance between the two? And maybe the size of a relative transaction and maybe if you could comment on the frequency you’re having dialog with partners.

Scott V. Fainor

As we stated in previous quarters and I think it goes back into 2012, we set up that. When we look for partners we’re looking in market, we’re looking in contiguous county or contiguous state, we’re looking at relative risk of those partners, we’re looking at banks between $500 million in assets to $5 billion in assets, and we’re trying to find good partners that would like to look at the strengths of the currency of National Penn.

I think when it comes to share repurchase we completed our first 5% share buyback in the last 2012. We announced it in early 2012 and I think when we stated that we wanted to deploy capital management opportunities and initiatives, we’ve been able to deliver on them. So that will be analyzed and evaluated. And I think Mike, why don’t you make a few comments as well.

Michael J. Hughes

I think our priorities would be M&A first and share repurchase second. It’s more than it sound right here when we say we’ve been disciplined in evaluating acquisitions because we have and we’ll continue to be so. But when you look at the capital base of National Penn, we believe we have the ability to do both. And as Scott had said previously, it’s more a balanced approach to both the dividend and share repurchase and M&A, but M&A would be our preference and as you know it’s more reactive than proactive then.

David W. Darst – Guggenheim Securities LLC

Would you say that the kind of the milestone or the primary use of capital in 2013 has been restructuring?

Michael J. Hughes

I would say the restructuring and the redemption of the retail trust preferred.

David W. Darst – Guggenheim Securities LLC

Okay.

Scott V. Fainor

Yes.

David W. Darst – Guggenheim Securities LLC

And then, you’ve done a good job managing expenses. It sounds like you recognize there is more that you can focus on. But from where you are with your kind of installed base, do you think there is a lot more on the regulatory front that you need to prepare for that would result in the further ramp expenses that you’re trying to balance out?

Michael J. Hughes

I would say the next hurdle for us on the regulatory side is over $10 billion. I think from where we are sitting right now and as you know, if you look back at Nat Penn over the history since 2010, we have invested in many things that I think that others maybe going through now. I think we’ve incurred many of those expenses in the run rate.

Scott V. Fainor

Especially in our past investments and technology.

Michael J. Hughes

Correct.

David W. Darst – Guggenheim Securities LLC

Great. Thank you.

Scott V. Fainor

Thank you, David.

Operator

And we’ll next go to the side of Damon DelMonte with KBW. Your line is now open.

Damon P. DelMonte – Keefe, Bruyette & Woods, Inc.

Hey. Good afternoon, guys. How are you?

Michael J. Hughes

Hey.

Scott V. Fainor

Hello, Damon.

Damon P. DelMonte – Keefe, Bruyette & Woods, Inc.

Just a question for you on the deposits. I think you mentioned that the large increase in the NOW accounts relate to municipal deposits. Is that correct?

Scott V. Fainor

That is correct. We have a short-term opportunity. Well, two things. You’ve got seasonality as it relates to municipalities and the tax collection season, but there was also another opportunity to upsize that gave us the ability to substitute some of our funding on a short-term basis using municipal deposits as opposed to the Federal Home Loan advances.

Damon P. DelMonte – Keefe, Bruyette & Woods, Inc.

So how long do you expect those to retain those deposits, is there some seasonal aspects where you’ll see those kind of trail-off in the upcoming quarters?

Scott V. Fainor

I think it’s quarters rather than years and I couldn’t anticipate, I mean you’ll see more fourth to first and maybe third to fourth, but over the next year we look at that as a short-term tactic, not a long-term strategy.

Michael J. Hughes

And Damon, our government banking group, which is a specialized industry here at National Penn, we’ll look for those opportunities with the strong relationships that we have with all government entities and municipalities whenever they might exist. We evaluate them one at a time.

Damon P. DelMonte – Keefe, Bruyette & Woods, Inc.

Okay. Perfect. And I’m sorry. I’m bouncing between conference calls here. So I apologize if you had addressed this, Mike, could you just talk a little bit about maybe some of the ways to protect the margins in the upcoming quarters?

Michael J. Hughes

Well, Scott’s earlier comments about loan growth, obviously that is number one and we are focused on that. Some of my comments were that you’re sacrificing short-term margin to position this company, well, in any longer-term environment and not going out and doing that fixed rate lending. So loan growth as the key we would anticipate, as we have said for this year, low-single digits. We like it to be a little bit higher, but based upon where the competitive environment is we’ve been disciplined.

The other thing I would say and as REIT stayed flat for this extended period of time, we have continued to address deposit pricing and although it won’t give us the benefit to the degree it has in prior quarters, we will still get some benefit out of it. So as we move through, our guidance for the year is $350 million. We’re not prepared to give guidance for 2014 and I think as it relates to longer term it is loan growth and deposit pricing.

Damon P. DelMonte – Keefe, Bruyette & Woods, Inc.

Okay, great. That’s all I had. Thank you very much.

Scott V. Fainor

Thanks, Damon.

Operator

And we will next go to the side of Chris Marinac with FIG Partners. Your line is now open.

Chris W. Marinac – FIG Partners LLC

Hi, good afternoon Scott and Mike and others.

Scott V. Fainor

Good afternoon.

Michael J. Hughes

Hi, Chris.

Chris W. Marinac – FIG Partners LLC

I wanted to ask about the net charge-off. It’s been a relatively tight pay in the last several quarters. Is there any reason that could change next year and perhaps go on the lower side of that?

Michael J. Hughes

Well, when you look at the net charge-offs, they’re in the 30 basis point range. Certainly we are focused on that. We have tended to now, on these classified credits, try to develop stay strategies rather than exit. So it will be a little bit more patient. But we really don’t have a forecast on where net charge-offs are gone. I think they are relatively low. Could they be a little bit better, we hope, but that’s sort of where we are.

Chris W. Marinac – FIG Partners LLC

Okay. And I guess second question perhaps for Scott or Sandy or others. It’s just about sort of the policy of your customers. Do you sense that folks are more willing to commit to borrowing next year or is it more the same compared to previous quarter’s comments?

Sandra L. Bodnyk

I think they are thinking about it, but I think there continue to be events in the economy that impacts that thinking. So they continue to hold back at the same time. We know that they have projects planned. We know that they want to grow, but they keep getting negative government members, negative hiring and things like to shut down that impedes the thought process.

Scott V. Fainor

It seems like when I mount [ph] on calls and I’m talking with all different size, revenue, customers there is positive momentum at the end of the second quarter and into the beginning of the third quarter. And then with some things that we’re going on in Washington and with the economy it has the stopping and starting, which creates uncertainty, which then has them pullback and now we need to create certainty to start having to be more confident, and that’s what we’ve been dealing with for the last, let’s say, 18 months to 24 months, the same kind of stopping and starting.

Chris W. Marinac – FIG Partners LLC

Great. And I guess you’re excluding the success you had on the municipal deposits. That’s also driving some deposit activity to imagine.

Michael J. Hughes

That is true. I mean I think loan growth will drive deposit levels and excellent growth as you’ve seen the Company has been relatively the same size throughout the year.

Chris W. Marinac – FIG Partners LLC

Great. Thanks for the color guys.

Scott V. Fainor

Thanks, Chris.

Operator

And we’ll next go to the side of Blair Brantley with BB&T Capital Markets. Your line is now open.

Blair C. Brantley – BB&T Capital Markets

Good afternoon, everyone.

Scott V. Fainor

Hey. Good afternoon.

Blair C. Brantley – BB&T Capital Markets

A couple of questions for you. Regarding M&A, it sounds like I guess there’s been some active conversations or there’s some active searches out there. Has there anyone [indiscernible] for that role or was that a team effort?

Scott V. Fainor

Go ahead, Mike. Go ahead.

Michael J. Hughes

I would say it’s pretty much a team effort and it’s the office of the President if you will, but it goes down to the next level down. So we have a fair number of people involved and looking at transactions.

Blair C. Brantley – BB&T Capital Markets

Okay. And kind of changed gears, what’s the borrowing shift with communities, is there a big weight differential there?

Michael J. Hughes

That was not a big rate difference. I would say 15 to 20 basis points is probably where we were on a short-term basis.

Blair C. Brantley – BB&T Capital Markets

Okay.

Michael J. Hughes

Beneficial to us.

Scott V. Fainor

Beneficial to us.

Michael J. Hughes

Yes.

Blair C. Brantley – BB&T Capital Markets

Yes, okay. And then just in terms of what you’re seeing out there in loan pricing, obviously it’s very competitive. How are rates comparing versus last quarter in terms of new money coming on?

Scott V. Fainor

Well, let me – it’s definitely more competitive. At the same time we continue to do relationship pricing wherever we can try, get other products and services within a loan proposal and we can get cash management and more deposits, we’d balance that out. We’re seeing some of the floors within our deals move away and we are seeing some pressure on loan pricing when we have more competitors bidding on one deal. But overall we’re going to continue to keep taking more shots on goal.

Our calling efforts are definitely at a higher level this quarter than last quarter and it’s been building over the last 18 to 24 months, and we’re just going to have to offset that with more fee income business products and services and make it more relationship driven, but more pressure downward we’re getting by that by cross-selling more products and services.

Michael J. Hughes

And the only thing I’d add to Scott’s comments is if you look at loan originations on average, our average yield of new loans put on in the second and third quarter are relatively comparable.

Blair C. Brantley – BB&T Capital Markets

Okay. And then in terms of production from quarter-to-quarter, is that a pretty steady number or is it trending higher or any…

Michael J. Hughes

It’s relatively within a tight band.

Blair C. Brantley – BB&T Capital Markets

Okay. And then sorry, just one more final question. I know mortgage is not a big piece of the overall total revenue number, but obviously with the drop this quarter what are you seeing for the pipeline for Q4, and is there any lag effect or any benefit that may impact this quarter due to accounting and timing differences anything like that?

Scott V. Fainor

Yes, it’s a fair comment, Blair. When you look at over the last couple of years, you go back two or three years that mortgage revenue is a relatively small business line. There has been between $5 million and $7.5 million in revenue. You’ve seen that trend come down from $2.1 million to $1.6 million this quarter. We are not going to really speculate line by line, but I would suspect that there is a little more pressure to come in the mortgage revenue side in the fourth quarter.

Blair C. Brantley – BB&T Capital Markets

Okay. Thank you for your time.

Scott V. Fainor

Thank you, Blair.

Operator

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

Scott V. Fainor

Okay. We want to thank everyone for all your questions and for all of you joining our third quarter 2013 webcast conference call. Everyone have a great weekend and we look forward to talking with you soon. Bye-bye.

Operator

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

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National Penn (NPBC): Q3 EPS of $0.17 in-line. (PR)