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’s teleconference. At this time all participants are in a listen only mode. I will now turn the call over to Michelle Debkowski. Go ahead please.
Thank you. Good afternoon and welcome to National Penn Bancshares third quarter 2007 earnings webcast. We’re glad you’re able to join us. Questions will be accepted during the webcast via email. Please use the email button located on the screen to ask your question. Due to time constraints we will not be able to respond to all your emails. We will review questions received; we may combine questions that raise similar issues or can otherwise be combined for comment.
As part of our webcast presentation you will see that there are slides of financial highlights available to you for your independent review. The presentation and slides will be available on our website as well as filed with the Securities and Exchange Commission following our webcast.
This presentation contains forward-looking information that is intended to be covered by the Safe Harbor or Forward-Looking Statements provided by the Private Securities Litigation Reform Act of 1995. Many of these factors are listed on the slide on your screen. I’ll give you a moment to review this slide. I’d now like to charge today’s presentation over to Glenn Moyer. Glenn?
Thank you Michelle. Joining me today is Mike Reinhard, Treasurer and Chief Financial Officer of National Penn Bancshares. I will start the call today by reviewing highlights from our third quarter 2007 earnings release, which is available on the investor relations section of our website. Earlier today we included the press 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 will then briefly review our loan growth and credit quality and provide a concluding comment on our third quarter 2007.
Beginning with financial highlights: our third quarter 2007 results under accounting principles generally accepted in the United States, referred to as GAAP reflect, record net income of $16.81 million, a 183,000 increase over GAAP earnings for the third quarter 2006. We earned $0.34 per diluted share in third quarter 2007, which exceeds the $0.33 cents diluted earnings per share for third quarter 2006.
Our growth in earning assets contributed to our net income for the third quarter of 2007 as compared to the prior year, as did increases in some key fee income areas, and a controlled level of non-interest expenses. We provided funding in the 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 leases at September 30, 2007. I will provide additional details on the loan portfolio later in this webcast.
I now turn the presentation over to Mike Reinhard for a closer look at our third quarter 2007 financial results.
Thank you and good afternoon. Let me begin by noting that per share results for 2007 have been restated for the 3% stock dividend paid September 28, 2007. I’d also like to note that this presentation contains 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-related goodwill and intangibles and is used by National Penn’s management for comparative purposes in its analysis of the company’s performance. A reconciliation of our GAAP and non-GAAP return on equity ratios is included in our presentation today for your review.
Our third quarter 2007 earnings of $16.81 million increased approximately 1.10% over the $16.62 million reported in third quarter 2006. Third quarter 2007 earnings produced a return on average assets of 1.18% and a return on average equity of 12.30%, compared to 1.25% and 12.83% respectively in third quarter 2006.
Net income 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 dividing annual net income by average equity that is reduced by average acquisition-related goodwill and intangibles.
For the first nine months of 2007, ROA is 1.17%, ROE is 11.94% and return on average tangible equity is 24.72%. Net interest margin decreased to 3.35% during this 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 have seen margin stabilization over the last few quarters with the fourth quarter 2006 net interest margin at 3.35%, the first quarter 2007 margin at 3.42%, and the second quarter 2007 margin at 3.39%.
We have experienced some growth in the overall dollars of net interest income on a fully tax equivalent basis. Net interest income for third quarter 2007 on a fully tax equivalent basis increased $1.64 million over third quarter 2006, and $982,000 over second quarter 2007.
For the first nine months of 2007, the net interest margin was 3.39%, compared to 3.62% for the first nine months of 2006. Full taxable equivalent net interest income is $127.1 million for the first nine months of 2007, compared to $124.76 million for the same period in 2006.
The provision for loan losses of $1.42 million in third quarter 2007 represents an $859,000 or 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 than the $371,000 of net chargeoffs in third quarter of 2006.
The provision for loan losses for the first nine months of 2007 was $4.03 million versus $1.70 million for the same period in 2006, while net chargeoffs were $6.05 million and $1.42 million for the first nine months of 2007 and 2006 respectively. Glenn will discuss credit quality in more detail in his remarks.
Non-interest income of $18.25 million in this year’s third quarter is up $1.83 million or 11.3% as compared to last year’s third quarter. Wealth management continues to contribute positively with third quarter 2007 income of $844,000 or 24.01% over third quarter 2006.
Other non-interest income was up significantly, primarily due to a fair market value gain on the company’s subordinated debt related to NPB Capital Trust II trust preferred security.
Earlier this year, we adopted FASB 159 and specified this trust preferred debt as an instrument subject to fair market valuation. Various service charges and fees on deposit accounts, mortgage banking revenue and insurance agency revenue were all slightly down from the prior year’s quarterly revenue. Quarterly gains on sales of investment securities were up from last year. Income from bank owned life insurance or BOLI was down $647,000 from third quarter 2006. This decrease was due to a death benefit received in third quarter 2006.
For the first nine months of 2007 wealth management continues to show the greatest revenue momentum, growing 23.94% over the first nine months of 2006 to $12.71 million of income. Other income categories showing positive income growth for the first nine months of 2007 include BOLI revenue, securities gains, and other non-interest income. First nine months of 2007 declining income categories include mortgage banking and equity method income.
Total non-interest expense for third quarter of 2007 increased by $1.64 million or 5.06% over the same period last year. Excluding an $856,000 third quarter 2006 recovery related to the company’s fraud loss in 2004, non-interest expense would have increased by $787,000 or 2.36%.
Total non-interest expenses for the first nine months of 2007 are up $3.44 million or 3.49% compared to the first nine months of 2006. Excluding the aforementioned fraud loss recovery, non-interest expense for this period would have increased $2.59 million, or 2.60%. Also included in the year-to-date increase is a $1.67 million increase in premises and equipment expenses.
Regarding the balance sheet, total assets grew 5.72% since year end 2006 to $5.76 billion at September 30, 2007. Non-annualized growth in loans and leases over the past nine months was $181.56 million, or 5% as adjusted for a loan securitization. Glenn will provide more specific 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 from time deposits into more desirable transaction accounts.
At September 30, 2007, National Penn was in compliance with all applicable regulatory capital requirements. National Penn and National Penn Bank each are considered well capitalized as defined by banking regulators. We target our tangible equity to tangible assets to be a minimum of 5%. At September 30, 2007, our actual ratio is 5.04% - a slight increase over the prior quarter despite the company’s opportunistic repurchase of approximately 500,000 treasury shares at what management felt was an unusually low dip in the company’s stock price in August.
Right now I’d like to turn it back to Glenn Moyer, President and CEO of National Penn Bancshares.
Thank you 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% annualized growth rate for the first nine months of 2007, when adjusted for the effects of a $26.7 million securitization of adjustable rate mortgages. These loans now exist as a mortgage-backed security in the company’s investment portfolio providing increased liquidity and pledging availability.
We continue to target loan growth in the mid to high single-digits for all of 2007, although a lower portion of this range now seems attainable due to the slower actual growth in the first nine months of the year, as well as some indications of slowing loan demand. Loan growth in 2007 is reflected exclusively in the area of commercial business purpose lending, which increased $195.56 million or 9.87% on an annualized basis.
At September 30, 2007, our commercial loan categories represented 74.93% of our total loans, as compared to 72.74% at September 30, 2006. The level of non-performing assets plus loans over 90 days to liquid category at September 30, 2007, was $1.48 million lower 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 million at June 30, 2007. Overall, we are pleased with these improvements at this point of the year. We believe we remain appropriately positioned in our overall loan and lease loss reserve at $56.29 million or 1.49% of total loans and leases as of September 30, 2007. This is after third quarter net chargeoffs of $2.13 million.
Based on 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 quality indicators and our ongoing loan monitoring processes, we increased our provision for loan and lease losses by $859,000 during third quarter 2007 as compared to third quarter 2006.
As we have said many times, this is a dynamic process, and we will continue to reevaluate the appropriate level of provision on a quarterly basis. Despite the increased net chargeoffs we believe our loan portfolio as a whole remains in good condition, as partially evidenced by the lower level of non-performing assets. We continue to monitor our portfolio’s risk and concentration exposure diligently.
A significant highlight of this quarter was our announcement on September 7 of a definitive merger agreement with Pennsylvania-based KNBT Bancorp Inc. We believe this merger provides an attractive extension to National Penn’s northeast Pennsylvania footprint, especially in the demographically strong LeHigh Valley. We’re excited about the opportunities this quality organization provides to us in expanded geographic areas to deliver our product and service offerings as well as its anticipated ability to deliver increasing fee revenues.
Our joint meeting with KNBT’s leadership group was met with enthusiasm for our future together. Our integration discussions are already underway. We’re looking forward to working with the current executive management and employee teams who will continue to lead the combined company’s business expansion efforts. This transaction, subject to conditions and contingencies including shareholder and regulatory approvals, is anticipated to close in the first quarter of 2008.
Progress on the Christiana Bank & Trust merger continues on track for an early 2008 closing, assuming the necessary regulatory and shareholder approvals are received. Our balanced growth strategy continues to focus on organic and merger growth, and as you can see, we’ve been busy on both fronts as we move forward toward wrapping up 2007. We were pleased to see that the downward pressure on our stock price eased somewhat during the third quarter as we’ve felt our community and super-community banking sector as a whole had been oversold and was in a period of adjustment.
While all of us in our industry segment continue to face challenges in increasing near-term quarter earnings growth, due to margin and competitive pressures we continue to be motivated by the longer term opportunities for a dynamic organization like National Penn to grow and be successful. We will continue our focus on diversified earnings growth and cost containment efforts that will allow us to build shareholder value through this challenging period. We thank you for your continued interest in National Penn.
This ends our planned remarks and we will now address questions that have been received during the course of our discussion. Michelle?
Thank you Glenn. We had a few questions presented during the webcast and Mike I’ll begin to direct these questions to you. We had a few questions on our other incomes for the quarter; specifically can you address any non-recurring or unusual items in the other income line?
Yes Michelle. There was a fair market value adjustment to NPB Capital Trust II as we mentioned during the presentation. The amount of this adjustment was approximately $775,000 after tax. This amount was partially offset by new unusual negative items including severance of approximately $163,000 after tax, generated by a realignment of the company’s senior management structure, as well as a $200,000 after tax negative impact on the company’s tax expense during 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 quarter 2007 was higher than the average balance during second quarter 2007 due to borrowings increasing during the second quarter.
Mike, we have received a couple of questions on the impact of the federal reserve rate cut on National Penn, specifically can you discuss your interest rate sensitivity and will the fed interest rate cut last month help improve your margin?
We expect no major change in margin due to the fed rate cut as we remain relatively matched from an interest rate sensitivity standpoint and we see no easing in the competitive environment in which we operate.
Glenn I’ll address this next question to you. Please discuss the local economy and your anticipated long-term growth.
Michelle, I’ll talk about that in two parts. First of all a general view of the local economy. We are fortunate to have our core market areas in some of the most economically strong areas in the mid-Atlantic region. I think the economy that we enjoy is well diversified and in decent condition. The growth seems to be slow but I do not believe at this point that I would not buy into the talk of being in a recession. And we expect that slow growth approach to be with us for the remainder of the year and into the early part of ‘08.
Related to our anticipated loan growth, as I said in the comments, we had targeted for the year mid-to-high single digit growth, we certainly are hitting that target in the commercial loan categories, we have not hit those targets in consumer related loan categories and so I believe that the lower portion of that range seems 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 this quarter, do you think it’s sustainable?
Our core non-interest income categories are performing nicely, but as we already discussed fair market value changes would not be considered sustainable.
And Mike what is a good tax rate to use for a run model?
Well as we already noted, FIN 48 had the effect of increasing tax expense during the third quarter 2007, and may also effect the fourth quarter. A range of 22.5% to 23.0% would be our estimated tax run rate for the near future.
Thank you Mike. Glenn, the next question for you. Have you seen any spill over from the deterioration in the residential housing market into other areas of your portfolio?
Not at this point. We have seen a slowdown in the absorption rates of our residential tract developers but no crisis situations currently exist.
And two final questions: Mike, the first one to you: why the spike in jumbo CDs?
The increase in jumbo CDs was due to an inflow of school district deposits which normally occurs during late August and September as they collect their tax revenue.
And Glenn, finally, can you give us any update on this large II credit that you talked about last quarter. How much of net chargeoffs, if any, are related to these credits?
I can share Michelle that approximately $1.4 million of the total $2.13 million for chargeoffs for the third quarter came from these two credits.
That was our final question. This concludes our presentation. Thank you all for joining us.