Below is transcript of the National Penn Bancshares (NASDAQ:NPBC)’s Fourth Quarter and Full Year 2014 Earnings Call, held on January 22, 2015 at 10:00 a.m. EST. Lee Munder Capital Group, Bryn Mawr Capital and Stevens Capital Management was among National Penn Bancshares (NASDAQ:NPBC) shareholders at the end of the third quarter.
National Penn Bancshares (NASDAQ:NPBC) is a bank holding company. The Company provides financial services, principally through National Penn Bank, its national bank subsidiary. The Company’s financial services affiliates consist of National Penn Wealth Management, N.A., including its National Penn Investors Trust Company (NPITC) division; National Penn Capital Advisors, Inc.; Institutional Advisors, LLC, and National Penn Insurance Services Group, Inc., including its Higgins Insurance and Caruso Benefits divisions.
Company Representatives:
Scott Fainor – President and Chief Executive Officer, NPBC Inc.
Mike Hughes – Chief Financial Officer, NPBC Inc.
Analysts:
Rob Haderer – Sandler O’Neill
Michael Perito – KBW
David Bishop – Drexel Hamilton
Matthew Kelley – Sterne, Agee
Rick Weiss – Boenning
Blair Brantley – BB&T Capital Markets
Operator: Good morning everyone and welcome to National Penn Bancshares fourth quarter and full year 2014 earnings conference calling 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 investors relation website as www.nationalpennbancshares.com will be archived on the site following this call. The slides will be furnished on SEC form 8-k. National Penn’s earning relief was posted earlier today to National Penn’s investors relation website and will also be furnished to the SEC on a form 8-k.
Certain statements on this call may be constituted as forward-looking statements under securities laws. National Penn makes these statements on the basis of their views and assumptions regarding future events and business performance at the time they make them and National Penn does not undertake any obligation to update these statements. Forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from the results expressed or implied in light of a variety of factors including factors contained in the slides to this presentations, in National Penn’s annual report on form 10-k and in National Penn’s other filings with Securities and Exchange Commission. In addition please note that a reconciliation of non-GAAP measures that are referred to on this call to equivalent GAAP measures can be found in the slides to this presentation. It is now my pleasure to turn the conference over to National Penn’s President and CEO Scott Fainor.
Scott: Good morning and thank you for joining our 4th quarter and full year 2014 webcast conference call. With me today are Mike Hughes Chief Financial Officer, Sandy Bodnyk Chief Risk Officer and Dave Kennedy Chief Banking Officer. National Penn fourth quarter 2014 highlights are outlined on slide number 2 and we are very happy to report a strong fourth quarter and full year of financial performance, capital management strategy and execution in 2014 and the continuing momentum as we start into 2015. Based on our increased liquidity position at the holding company and confirmed strong capital levels that we have discussed in detail in our third quarter 2014 call, we are very pleased to announce today our approved $125 million common share repurchase plan for 2015. The National Penn team also closed the TF Financial Corporation acquisition on 10-24-2014 and successfully converted and integrated all systems as well as change the name and the brand to National Penn over that same weekend. This was all accomplished by the team at National Penn in less than 5 months from our announcement of the deal in June 2014 and with anticipated cost saves realized.
Slide 3 gives you a view of new strengthened and expanded region in franchise for our company and we are off to a great start with revenue producing teams building new pipelines and customer relationships, the cross selling of our wide array of products and services are all happening within the new markets in Philadelphia, Lower Bucks County and Western New Jersey. Also continuing to build is National Penn’s loan pipeline and it gives me great pleasure to report that organic loan growth for the fourth quarter of 2014 increased at an annualized rate of 6%. This is coming off of our reported 5% annualized loan growth in third quarter of 2014. The Pennsylvania economy is doing better and customer confidence throughout all of our commercial and consumers lines of business is stronger than it has been with loan pipelines and loan closings continued to built that higher levels than in early 2014. This strong financial performance as well as the strength of our balance sheet allowed National Penn to declare a first quarter 2015 cash dividend of 11 cents per share. I’m now gonna turn this presentation over to Mike Hughes for his comments on our financial performance. Mike.
Mike: Thank you, Scott. I am going to start on slide number 4. I think if you look at that slide, the two things you would take away from it is consistency and strong earnings at a high performance level, both for the year and the quarter. You can see that core net income in the year increased by 6%.In the quarter, the 18 cents was adjusted for about $3 million of nonrecurring costs related to TF. You recall that we estimated those costs to be about $10 million and $7 million of those were expensed pre-deal on the TF side. So you look at TF, the results we expected from the cost savings, a contribution and balance sheet impact were as we expected them to be.
On slide number 5 you look at that consistency of the margin on the right hand side year-over-year. I think that’s an accomplishment for us. We had estimated our margin to be in 340-range for the year, it was. In the quarter, the margins declined by 10 basis points, about 6 basis points of that decline related to the $125 million in senior debt and other 4 points core compression. As Scott mentioned, loan growth in the quarter was 6%.Looking at 2015, we expect the margin to be in the 3.25 range. You will note that based upon the TF acquisition and anticipated loan growth, which we view at the same levels of as in 2014, average earning assets would grow by about 10%.
Slide number 6 gives you an overview of the year and the quarter. For the year, loans on the bottom of the slide grow 4%, commercial loans up 5%. And again, we expect those types of growth rate as we move into 2015.
When you look at slide number 7 on the top left, classified loans declined by 10% in the quarter, 20% for the year, exclusive of the loans acquired from TF. TF loans were marked by about 2.7%. We talked about a $600 million portfolio, with about two-thirds of it being residential related.In the quarter, the provision increases to $3.5 million from a $1 million, despite the fact that net charge-offs are comparable. That is reflective of non-performing loans increasing from $43 million to $59 million primarily driven by a one credit. We think we have addressed that credit, consistent with our past practice as being timely and appropriately. But as you can look at the bottom of the slide, despite that increase in non-performer, our metrics relative to the peers remains very strong.
On slide number 8, in other income, little benefit in the quarter from wealth and mortgage but on an annualized basis, a little contraction based upon the mortgage refinance activity. As we look at 2015, we anticipate a growth rate in the low single digits as it relates to other income. Operating expenses and I’d focus you on the right-hand side of the slide. When we look at the year and you look at operating expenses in total, flat for the last three years, efficiency ratio in that 57% range. When you look at next year, our goal is to again keep these expenses flat adjusted for the TF acquisition.So we anticipate a quarterly run rate in the $55 million range. You will recall that early in the year, we rationalized our branch franchise by closing nine branches. Our 2015 estimates include further reductions in the cost of running the branch network, offsetting inflationary increases and allowing us to keep expenses relatively flat.
And then on slide 10, as it relates to capital, you could see some leverage in the quarter. Obviously as anticipated and structured in the TF transaction being a 60/40 deal, we did in the quarter repurchased a modest number of shares about 300,000, completing our 2014 repurchase. Scott mentioned the 125 million shares repurchase, which was approved. And if you look at the capital ratios and you look at our capacity, we certainly have the ability to execute that and continue to manage capital in other forms.If you look at 2015 and do a little projection outward, it’s reflecting the earnings of 2015 in dividend as well as the repurchase. We would anticipate our tangible common ratio is in the 8.5% range at year end. And with that, I will turn it back to Scott.
Scott: Thank you, Mike. I’d like to now have you turn to slide 11. This slide outlines a few of our very key strategic drivers and objectives for continuing to build long-term shareholder value. We have discussed these objectives many times before and we will continue to discuss these well into 2015.National Penn will remain laser focused on the execution of these objectives and we are pleased with our accomplishments in the fourth quarter and full year 2014, as outlined in the presentation today and as discussed by Mike and me. And we will continue with the questions after this presentation.We remain optimistic and very pleased with our loan growth momentum and our capital management strategies such as today’s announced share repurchase of $125 million, our strong cash dividend which we increased by 10% in the fourth quarter and then our first quarter 2015 dividend that we announced yesterday, all of this couples together giving us a very good start to 2015.
We’re going to continue to focus on growing quality loans across all segments as well as cross selling all of our wealth management and insurance products and services to increase overall fee income. As we realize the benefits of the TF Financial acquisition, we know that this will strengthen our franchise overall.I want to thank you for being on the call today. And I want to open up the line now for questions.
Operator: At this time if you would like to ask a question please press the *1 on your touchtone phone. You may withdraw your question at any time by pressing the pound key. Once again to ask a question please press * and 1 on your touchtone phone. Our first question comes from the site of Casey Haire with Jefferies. Your line is now open. Casey Haire with Jefferies, check your mute function please?
Scott: Casey, are you on? Okay, maybe we can come back to Casey.
Operator: We’ll go next to Frank Schiraldi with Sandler O’Neill. Your line is now open.
Rob: Hey, good morning guys. Actually Rob Haderer here, filling in for Frank this morning. Just a couple of quick ones for me. Could you guys maybe quantify the size of the incentive compensation adjustment in the quarter? That came down a little bit, you guys touched on the release. Could you maybe quantify the size of the true-up there?
Scott: Yeah, we look at total benefits in the quarter. They were down a couple million dollors. It was really a function of — we have over dozen incentive comp plans that have various factors. And we do look at them on a quarterly basis as well as other year-end employee benefits.
Rob: Got you. Okay. And just on the positive, it looks like just excluding, to exclude the TF Financial deposits brought on the deal looks like organic deposit actually contracted. Just wondering if this is sort of seasonal muni outflows or was there something else driving that?
Scott: Your points well taken, it’s definitely seasonal muni outflows. We said that our deposit growth would be driven by a great extent to our loan growth. We funded that throughout the year. But when you look at the quarterly reduction in deposits, it is almost totally attributable to munis. And that is a normal seasonal thing that we see annually.
Rob: Got it. Great. And then just one last one for me, look at the credit marked in the TF’s deal, I thought when it was — when the deal was announced, the credit mark was estimated close to 2%. It looks like it came in close to 3%. You talked about maybe what change or what factors might have driven that?
Mike: Yeah. In the executory period, as you would expect to look at some moving parts as it relates to the mark. When we did the transaction or model the transaction at announcement, we thought it will be in the $50 million range and it is. We had some benefits in other areas of some write-ups.We are conservative by nature. We looked at those marks and the 0.7% is probably $4 million incremental. So as I said in my remarks, what we thought at the modeling stage into diligent stage at TF really materialize that there is no one big factor there.
Scott: And I think to Mike’s point, overall great outcome and once again, right within our range.
Rob: Great. That’s it for me. Thanks for taking my questions.
Operator: We’ll take our next question from the line of Michael Perito with KBW. Your line is now open.
Michael Perito: Hi, everybody. Scott, first quickly on the buyback on the 125 million of purchase authorization. Can you maybe just give us little more thoughts on how you guys are thinking about executing that in terms of how active on a quarterly basis versus more opportunistic it will be?
Mike: Yeah. I think we’re going to look at — this is Mike. I think we’re going to look at a variety of potential alternatives there, open market purchases. We’re going to evaluate and accelerate the share repurchase, obviously, in the prior year or at ‘14. We had been fortunate enough to buys some shares back from Warburg Pincus.Again, we don’t believe that is necessarily case now but it may be throughout the year. So I think it’s a combination of open market purchases, negotiated transactions and accelerated share repurchase potentially but we’re just looking at them now.We look at all of our opportunities and as they come about in 2015, we’ll see how it works out.
Michael Perito: Okay. And Mike, your comments in your prepared remarks about — I believe whether you could execute the buyback and still have room for additional capital deployment. Can we read into that that M&A is still on the table, even if you guys are maybe more aggressive in the buyback?
Mike: I would say, M&A is definitely on the table and we believe that we can effectuate this buyback and continue to be acquisitive and being acquisitive would be a priority of ours.
Scott: And the deployment of capital needs to continue.
Michael Perito: Okay. And then just one quick clarification, the $55 million of range for the quarterly expense rate in 2015. I know, I saw on the slide that I just want to confirm, that includes a 100% of the expected cost saves from TF?
Mike: It does.
Michael Perito: Okay. Thanks, guys.
Operator: We’ll take our next question from the line of David Bishop with Drexel Hamilton. Your line is now open.
David: Hey. Following up on that question in terms of M&A and the capacity you done that has been successful for the TF Financial integration. Does that change your outlook in terms of the types of banks and the size of banks or the way you approach deals moving forward given the velocity, are you able to close this the TF Financial deal?
Scott: I think we’ve had a disciplined approach to M&A that goes back for a number of years. I think we’re going to continue to keep looking for franchises within market, contiguous county, contiguous state that makes sense for National Penn. Probably, a little bit larger in size, just due to the fact that we’re close to the $10 billion threshold.We want to make sure that we go over in a significant way if we do and I think our team internally to National Penn, it’s a knowledgeable, very solid team of technical and operational experience. And I think, just as you stated, we were able to evidence the strength of that National Penn team in the way that we work through our process to close that transaction in less than five months.So, I think, that all has benefits to National Penn and to partners that end up looking to join National Penn. But I would tell you, we are still going to hold to our disciplined approach. Mike?
Mike: I think your comments are very fair, Scott. I think what drives more of what we look at from an acquisition standpoint is that $10 billion threshold. So, I would think it’s a $1 billion or north of a $1 billion type of institution.
David: Got it. And then in terms of the, I got on late, any sort of guidance there in terms of the net interest margin there and if so, potential impacts from purchase accounting accretion from the TF Financial acquisition?
Mike: Yeah. The guidance we gave on the margin was in the 3.25 range, what was — is the seventh year of prolong below interest rates and I think the industry will continue to see some pressure there. As relates to the TF acquisition, the mark was net mark on that balance sheet was relatively insignificant, maybe a basis point or two, but nothing significant as I said.
David: Great. Thank you, guys.
Operator: We’ll take our next question from the line of Matthew Kelley with Sterne, Agee. Your line is now open.
Mathew: Hi guys. Just on your margin guidance for 3.25. Talk a little bit about some of the assumptions that are baked into that and you are you are thinking on interest rates and when that was formulated, obviously, the last couple of weeks was seems to pretty big decline in the long-term rates? So, just kind of give us a sense of what’s baked into that 3.25?
Scott: I think the big assumptions in that, Matt, are this loan growth that we talked about and ranges comparable to 2014. Our assumptions as to rates and as you know that forward curve keeps getting pushed out. Our assumption as to rates for 2015, our rates are flat on the short-term. If we get some benefit later in the year, we’d gladly take it, but it’s not factored into it.The long end coming down a little bit on the positive side. We hope that we see some incremental swap income. We hope we see a little bit more in incremental refinance activity on the mortgage side as it relates to the investment portfolio. The fact that the redeployment rates come down, somewhat impacts us, but not significantly.
Mathew: What is your thinking on premium amortization expense of the MBS book?
Mike: Yeah, our premium amortization has been relatively constant. We have a guideline of not buying at greater than like 102, 103. We don’t have much in that — volatility in that, it’s less than a couple million dollars on a quarterly basis.
Mathew: Okay, got it. And then, what was the dollar amount at the pipeline at year end versus September 30th?
Scott: We’ve not really disclosed the pipeline in regards to total dollars. I think I have been commenting that throughout 2014 coming off of the end of ’13. The pipeline has continued to grow quarter-over-quarter based on customer confidence. And I would say it’s throughout all of our lines of business too.
We are more weighted in the loan portfolio towards commercial lines of business than consumer. But we are very happy and pleased with the consumer lines of business and how the lines of credit continue to be accessed and continue to be originated. So it’s a good balance between all lines of business and pipelines continue to build based on this customer confidence.
Mathew: Okay. Got it. And then, what should we be using for an effective tax rate for the year?
Mike: The effective tax rate historically has been in the mid-20s, and we don’t see any significant change to that.
Mathew: All right. Great. Thanks, guys.
Operator: We’ll go next to the line of Rick Weiss with Boenning. Your line is now open.
Rick: Hi, I’m filling in for Matt today. And just I was wondering if you could give a little bit of color of — you’re not far away from going over the $10 billion of asset figure. What do you see happening and how that affects fee income, for example? Or would you have any additional costs associated with compliance or whatnot?
Scott: We think that Durbin amendment would impact us by about $7 million on an annual basis. As you know, Rick, there is a delay and when that impacts you, when you go over in another six-month period.So quantifying the Durbin amendment is about $7 million. We haven’t really gotten into disclosing. We’re certainly analyzing what that incremental expense maybe. We don’t believe that to be of a significant magnitude, but certainly additions to staff in both the finance and the risk management areas.
Rick: Okay. Those were my only questions. Thank you.
Scott: Thank you, Rick.
Operator: We’ll go next to the line of Blair Brantley with BB&T Capital Markets. Your line is open.
Blair: Good morning everyone. As a follow-up to that, with the $10 million asset thresholds, should M&A now play out as expected? Would you expect to surpass the $10 million mark just on an organic basis, or would you see maybe using that investment portfolio to fund loan growth?
Scott: Yeah. We think the economics are going over $10 billion on an organic basis would be beneficial. So to your point, our investment portfolio arguably, it may be bigger than others. But we have capacity to reduce the investment portfolio to fund loan growth. So we’ve said that we won’t grow organically over $10 billion and if we do through acquisition, we want to do in a meaningful way.
Blair: Okay. Thank you for that color. Also regarding to a recent peer being acquired, any potential opportunities there, any fallout that you could see that maybe, maybe having some upsides to what you kind of thinking for 2015?
Scott: Just as we have done in the past, when there is some disruption in the markets we operate, we will continue through Dave Kennedy and the Chief Banking Officer, Sandy Bodnyk and her credit folks. We attack the market in a very deliberate direct way on identifying customers continuing to roll out more marketing plans, to try to take advantage of that disruption and bring more customers into the National Penn family.We’ll also end up looking at bankers that might become available where we can round out our teams. And I would think that would not only go for that region, but also any region that we operate in or any contiguous region that we operate in. So it’s one thing that we need to continue to stay focused on and we will.
Blair: Okay. Thank you very much.
Operator: It appears that we have no further questions at this time. I’ll now hand the call back to Mr. Fainor for any closing remarks.
Scott: We would like to thank all of you for your questions today. We’d like to thank all of you for joining our fourth quarter and full year 2014 earnings webcast call. And we wish you all a great day and a great weekend. We will be talking with you all of you soon. Thank you.
Operator: This concludes today’s presentation. You may disconnect at any time.
