National Penn Bancshares (NASDAQ:NPBC)
Q3 2007 Earnings Call
October 16, 2007, 1:00 pm ET
Michelle Debkowski -Investor Relations
Glenn Moyer - President,CEO
Mike Reinhard – CFO
Welcome to today’steleconference. At this time all participants are in a listen only mode. I willnow turn the call over to Michelle Debkowski. Go ahead please.
Thankyou. Good afternoon and welcome to National Penn Bancshares third quarter 2007earnings webcast. We’re glad you’re able to join us. Questions will be acceptedduring the webcast via email. Please use the email button located on the screento ask your question. Due to time constraints we will not be able to respond toall your emails. We will review questions received; we may combine questionsthat raise similar issues or can otherwise be combined for comment.
Aspart of our webcast presentation you will see that there are slides offinancial highlights available to you for your independent review. Thepresentation and slides will be available on our website as well as filed withthe Securities and Exchange Commission following our webcast.
Thispresentation contains forward-looking information that is intended to becovered by the Safe Harbor or Forward-Looking Statements provided by the PrivateSecurities Litigation Reform Act of 1995. Many of these factors are listed onthe slide on your screen. I’ll give you a moment to review this slide. I’d nowlike to charge today’s presentation over to Glenn Moyer. Glenn?
Thankyou Michelle. Joining me today is Mike Reinhard, Treasurer and Chief Financial Officerof National Penn Bancshares. I will start the call today by reviewinghighlights from our third quarter 2007 earnings release, which is available onthe investor relations section of our website. Earlier today we included thepress release in a form AK that we filed with the Securities Exchange Commission.Mike Reinhard will follow with an overview of our financial results, I willthen briefly review our loan growth and credit quality and provide a concludingcomment on our third quarter 2007.
Beginningwith financial highlights: our third quarter 2007 results under accountingprinciples generally accepted in the United States, referred to as GAAP reflect, record net incomeof $16.81 million, a 183,000 increase over GAAP earnings for the third quarter2006. We earned $0.34 per diluted share in third quarter 2007, which exceedsthe $0.33 cents diluted earnings per share for third quarter 2006.
Ourgrowth in earning assets contributed to our net income for the third quarter of2007 as compared to the prior year, as did increases in some key fee incomeareas, and a controlled level of non-interest expenses. We provided funding inthe third quarter 2007 for our loan and lease loss reserve, of $1.42 million,resulting in a loan and lease loss reserve of 1.49% of total loans and leasesat September 30, 2007.I will provide additional details on the loan portfolio later in this webcast.
Inow turn the presentation over to Mike Reinhard for a closer look at our thirdquarter 2007 financial results.
Thankyou and good afternoon. Let me begin by noting that per share results for 2007have been restated for the 3% stock dividend paid September 28, 2007. I’d also like to note that this presentationcontains a non-GAAP financial measure, return on average tangible equity. Due to a number of acquisitions in recent years,purchase accounting rules have negatively impacted our GAAP return on equity.The non-GAAP return on tangible equity ratio excludes the impact of acquisition-relatedgoodwill and intangibles and is used by National Penn’s management forcomparative purposes in its analysis of the company’s performance. Areconciliation of our GAAP and non-GAAP return on equity ratios is included inour presentation today for your review.
Ourthird quarter 2007 earnings of $16.81 million increased approximately 1.10% overthe $16.62 million reported in third quarter 2006. Third quarter 2007 earningsproduced a return on average assets of 1.18% and a return on average equity of12.30%, compared to 1.25% and 12.83% respectively in third quarter 2006.
Netincome return on average tangible equity was 25.29% in third quarter 2007,compared to 28.60% in third quarter 2006. This ratio is computed by dividingannual net income by average equity that is reduced by average acquisition-relatedgoodwill and intangibles.
Forthe first nine months of 2007, ROA is 1.17%, ROE is 11.94% and return onaverage tangible equity is 24.72%. Net interest margin decreased to 3.35% duringthis year’s third quarter compared to 3.45% during the third quarter of 2006.While this is a drop from 2006 third quarter, the good news is that we haveseen margin stabilization over the last few quarters with the fourth quarter2006 net interest margin at 3.35%, the first quarter 2007 margin at 3.42%, andthe second quarter 2007 margin at 3.39%.
Wehave experienced some growth in the overall dollars of net interest income on afully tax equivalent basis. Net interest income for third quarter 2007 on afully tax equivalent basis increased $1.64 million over third quarter 2006, and$982,000 over second quarter 2007.
Forthe first nine months of 2007, the net interest margin was 3.39%, compared to3.62% for the first nine months of 2006. Full taxable equivalent net interestincome is $127.1 million for the first nine months of 2007, compared to $124.76million for the same period in 2006.
Theprovision for loan losses of $1.42 million in third quarter 2007 represents an $859,000or 153.12% increase in the provision when compared to third quarter of 2006.Third quarter 2007 net chargeoffs of $2.13 million were $1.76 million more thanthe $371,000 of net chargeoffs in third quarter of 2006.
Theprovision for loan losses for the first nine months of 2007 was $4.03 millionversus $1.70 million for the same period in 2006, while net chargeoffs were $6.05million and $1.42 million for the first nine months of 2007 and 2006respectively. Glenn will discuss credit quality in more detail in his remarks.
Non-interestincome of $18.25 million in this year’s third quarter is up $1.83 million or11.3% as compared to last year’s third quarter. Wealth management continues tocontribute positively with third quarter 2007 income of $844,000 or 24.01% overthird quarter 2006.
Othernon-interest income was up significantly, primarily due to a fair market valuegain on the company’s subordinated debt related to NPB Capital Trust II trustpreferred security.
Earlierthis year, we adopted FASB 159 and specified this trust preferred debt as aninstrument subject to fair market valuation. Various service charges and feeson deposit accounts, mortgage banking revenue and insurance agency revenue wereall slightly down from the prior year’s quarterly revenue. Quarterly gains onsales of investment securities were up from last year. Income from bank ownedlife insurance or BOLI was down $647,000 from third quarter 2006. This decreasewas due to a death benefit received in third quarter 2006.
Forthe first nine months of 2007 wealth management continues to show the greatestrevenue momentum, growing 23.94% over the first nine months of 2006 to $12.71million of income. Other income categories showing positive income growth forthe first nine months of 2007 include BOLI revenue, securities gains, and othernon-interest income. First nine months of 2007 declining income categories includemortgage banking and equity method income.
Totalnon-interest expense for third quarter of 2007 increased by $1.64 million or5.06% over the same period last year. Excluding an $856,000 third quarter 2006recovery related to the company’s fraud loss in 2004, non-interest expensewould have increased by $787,000 or 2.36%.
Totalnon-interest expenses for the first nine months of 2007 are up $3.44 million or3.49% compared to the first nine months of 2006. Excluding the aforementionedfraud loss recovery, non-interest expense for this period would have increased $2.59million, or 2.60%. Also included in the year-to-date increase is a $1.67million increase in premises and equipment expenses.
Regardingthe balance sheet, total assets grew 5.72% since year end 2006 to $5.76 billionat September 30, 2007.Non-annualized growth in loans and leases over the past nine months was $181.56million, or 5% as adjusted for a loan securitization. Glenn will provide morespecific information on loan growth in his comments. Compared to year end 2006,total deposits increased at $3.93 billion, and there has been some shift fromtime deposits into more desirable transaction accounts.
AtSeptember 30, 2007, National Pennwas in compliance with all applicable regulatory capital requirements. NationalPenn and National Penn Bank each are considered well capitalized as defined bybanking regulators. We target our tangible equity to tangible assets to be aminimum of 5%. At September 30, 2007, our actual ratio is 5.04% - a slightincrease over the prior quarter despite the company’s opportunistic repurchaseof approximately 500,000 treasury shares at what management felt was anunusually low dip in the company’s stock price in August.
Rightnow I’d like to turn it back to Glenn Moyer, President and CEO of National PennBancshares.
Thankyou Mike. With respect to our loan portfolio, at the end of third quarter 2007,total loans and leases outstanding were $3.79 billion, representing a 6.67% annualizedgrowth rate for the first nine months of 2007, when adjusted for the effects ofa $26.7 million securitization of adjustable rate mortgages. These loans nowexist as a mortgage-backed security in the company’s investment portfolioproviding increased liquidity and pledging availability.
Wecontinue to target loan growth in the mid to high single-digits for all of2007, although a lower portion of this range now seems attainable due to theslower actual growth in the first nine months of the year, as well as someindications of slowing loan demand. Loan growth in 2007 is reflected exclusivelyin the area of commercial business purpose lending, which increased $195.56million or 9.87% on an annualized basis.
AtSeptember 30, 2007, our commercialloan categories represented 74.93% of our total loans, as compared to 72.74% atSeptember 30, 2006. The level ofnon-performing assets plus loans over 90 days to liquid category at September 30, 2007, was $1.48 millionlower than the September 30, 2006 level, and $4.39 million lower than at the June 30, 2007 level.
Specifically,this number as of September 30, 2007 is $8.87 million versus $10.34 million at September 30, 2006 and $13.25 millionat June 30, 2007.Overall, we are pleased with these improvements at this point of the year. Webelieve we remain appropriately positioned in our overall loan and lease lossreserve at $56.29 million or 1.49% of total loans and leases as of September 30, 2007. This is after thirdquarter net chargeoffs of $2.13 million.
Basedon the current reserve, our coverage ratio of non-performing assets is 634.9%.This compares to a coverage ratio of 572.7% at September 30, 2006, and 430.1% at June 30, 2007. Based on our review of overall credit qualityindicators and our ongoing loan monitoring processes, we increased ourprovision for loan and lease losses by $859,000 during third quarter 2007 ascompared to third quarter 2006.
Aswe have said many times, this is a dynamic process, and we will continue toreevaluate the appropriate level of provision on a quarterly basis. Despite the increased net chargeoffs webelieve our loan portfolio as a whole remains in good condition, as partiallyevidenced by the lower level of non-performing assets. We continue to monitorour portfolio’s risk and concentration exposure diligently.
Asignificant highlight of this quarter was our announcement on September 7 of adefinitive merger agreement with Pennsylvania-based KNBT Bancorp Inc. Webelieve this merger provides an attractive extension to National Penn’snortheast Pennsylvania footprint, especially in the demographicallystrong LeHigh Valley. We’re excited about the opportunities this quality organizationprovides to us in expanded geographic areas to deliver our product and serviceofferings as well as its anticipated ability to deliver increasing feerevenues.
Ourjoint meeting with KNBT’s leadership group was met with enthusiasm for ourfuture together. Our integration discussions are already underway. We’relooking forward to working with the current executive management and employeeteams who will continue to lead the combined company’s business expansionefforts. This transaction, subject to conditions and contingencies includingshareholder and regulatory approvals, is anticipated to close in the firstquarter of 2008.
Progresson the Christiana Bank & Trust merger continues on track for an early 2008closing, assuming the necessary regulatory and shareholder approvals arereceived. Our balanced growth strategy continues to focus on organic and mergergrowth, and as you can see, we’ve been busy on both fronts as we move forwardtoward wrapping up 2007. We were pleased to see that the downward pressure onour stock price eased somewhat during the third quarter as we’ve felt ourcommunity and super-community banking sector as a whole had been oversold andwas in a period of adjustment.
Whileall of us in our industry segment continue to face challenges in increasingnear-term quarter earnings growth, due to margin and competitive pressures wecontinue to be motivated by the longer term opportunities for a dynamicorganization like National Penn to grow and be successful. We will continue ourfocus on diversified earnings growth and cost containment efforts that willallow us to build shareholder value through this challenging period. We thankyou for your continued interest in National Penn.
Thisends our planned remarks and we will now address questions that have beenreceived during the course of our discussion. Michelle?
Thankyou Glenn. We had a few questions presented during the webcast and Mike I’llbegin to direct these questions to you. We had a few questions on our otherincomes for the quarter; specifically can you address any non-recurring orunusual items in the other income line?
YesMichelle. There was a fair market value adjustment to NPB Capital Trust II aswe mentioned during the presentation. The amount of this adjustment wasapproximately $775,000 after tax. This amount was partially offset by newunusual negative items including severance of approximately $163,000 after tax,generated by a realignment of the company’s senior management structure, aswell as a $200,000 after tax negative impact on the company’s tax expenseduring the third quarter, related to FIN 48.
Mike,why did long-term borrowings increase as much as it did in the third quarter?
Actually,long-term borrowings remained the same as the end of the second quarter 2007;however the average balance of long term borrowings during the third quarter2007 was higher than the average balance during second quarter 2007 due toborrowings increasing during the second quarter.
Mike,we have received a couple of questions on the impact of the federal reserverate cut on National Penn, specifically can you discuss your interest ratesensitivity and will the fed interest rate cut last month help improveyour margin?
Weexpect no major change in margin due to the fed rate cut as we remainrelatively matched from an interest rate sensitivity standpoint and we see noeasing in the competitive environment in which we operate.
GlennI’ll address this next question to you. Please discuss the local economy andyour anticipated long-term growth.
Michelle,I’ll talk about that in two parts. First of all a general view of the localeconomy. We are fortunate to have our core market areas in some of the mosteconomically strong areas in the mid-Atlantic region. I think the economy thatwe enjoy is well diversified and in decent condition. The growth seems to beslow but I do not believe at this point that I would not buy into the talk ofbeing in a recession. And we expect that slow growth approach to be with us forthe remainder of the year and into the early part of ‘08.
Relatedto our anticipated loan growth, as I said in the comments, we had targeted forthe year mid-to-high single digit growth, we certainly are hitting that targetin the commercial loan categories, we have not hit those targets in consumerrelated loan categories and so I believe that the lower portion of that rangeseems most likely for us when you look at the year as a whole.
Mike,back to you: a question stating that we had great fee income increase thisquarter, do you think it’s sustainable?
Ourcore non-interest income categories are performing nicely, but as we alreadydiscussed fair market value changes would not be considered sustainable.
AndMike what is a good tax rate to use for a run model?
Wellas we already noted, FIN 48 had the effect of increasing tax expense during thethird quarter 2007, and may also effect the fourth quarter. A range of 22.5% to23.0% would be our estimated tax run rate for the near future.
Thankyou Mike. Glenn, the next question for you. Have you seen any spill over fromthe deterioration in the residential housing market into other areas of yourportfolio?
Notat this point. We have seen a slowdown in the absorption rates of ourresidential tract developers but no crisis situations currently exist.
Andtwo final questions: Mike, the first one to you: why the spike in jumboCDs?
Theincrease in jumbo CDs was due to an inflow of school district deposits whichnormally occurs during late August and September as they collect their taxrevenue.
AndGlenn, finally, can you give us any update on this large II credit that youtalked about last quarter. How much of net chargeoffs, if any, are related tothese credits?
Ican share Michelle that approximately $1.4 million of the total $2.13 millionfor chargeoffs for the third quarter came from these two credits.
Thatwas our final question. This concludes our presentation. Thank you all forjoining us.
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