S&T Bancorp Inc (STBA) 2014 Q2 法說會逐字稿

Greetings and welcome to the S&T Bancorp second quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded. I would now like to turn the conference over to your host Mark Kochvar. Thank you, sir. Please go ahead.

Good afternoon and thank you for participating in today's conference call. Before beginning the presentation I want to take time to refer you to our statement about forward-looking statements and risk factors which is on the screen in front of you. This statement provides cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the second quarter earnings release can be obtained by clicking on the press release link on your screen, or by visiting our Investor Relations website at www.stbancorp.com. I would now like to introduce Todd Brice, S&T's President and CEO, who will provide an overview of S&T's results.

Well, thank you, Mark and good afternoon everybody. As announced in this morning's press release, we reported net income of $14.7 million or $0.49 per share for the quarter which compares favorably to both first quarter results of $14 million and $0.47 per share and second quarter results of last year of $14.1 million and $0.47 per share. Once again, the themes contributing to our results is solid organic loan growth and continued positive trends in asset quality metrics which are now at levels we haven't experienced since probably 2007 and 2008.

For the quarter, our loan portfolio increased by $97.2 million or 11% annualized. This represents the eighth consecutive quarter that we've grown our portfolio as our lending activity continues to be very strong in core markets, as well as in new markets that we have recently entered. Aided by our -- our loan growth, net interest margin has expanded 5 basis points to 3.56 and the net interest income increased for the quarter by $1.3 million. Trends in asset quality metrics continue to be a bright spot as well.

For the quarter we had net recovers of $1.1 million, and at the same time we were able to reduce non-performing assets by $6 million or 28%. And at the end of the quarter, non-performing assets totalled $15.4 million or 0.41% of total loans plus OREO. We've also experienced a nice reduction in criticized and classified loans which decreased by $15.8 million or 8%, and a delinquency ratio now stands at 0.59% versus 0.84% at the end of Q1. So the team has been working very diligently in these areas. We would expect to continue to see improvements in these areas in the next few quarters. While deposits are basically flat for the quarter we are encouraged by the growth that we are seeing in our non-interest bearing deposits which increased $58 million or 5.6% versus Q1, and $142 million or 15% versus Q2 of 2013.

Again, this -- this growth really is attributed to the focus of our bankers in securing total relationships with our borrowers. The performance again once again this quarter is a mix of strong organic growth in core markets as well as new activity in northeast Ohio, central Ohio, and our State College offices. Furthermore, I think it's a reflection of our team of bankers proven ability to establish long-term relationships with clients and provide comprehensive banking solutions for all their finance needs. In addition we continue to have production teams across all of our lines of business throughout the organization and expect to continue to actively recruit in a lot of different areas throughout the organization in the coming quarters.

And finally we like our position as and organization as we're confident that we're going to continue to execute on our organic growth strategy in the coming quarters, and we also like how we stand from a capital perspective to support not only our organic growth but potential M&A opportunities, where we have had a proven track record of successful integration as they develop. So with that I will turn the call over to our Chief Lending Officer, David Antolik.

Thanks Todd, and good afternoon everyone. As Todd mentioned we are very pleased to report another solid quarter of loan growth. Over the past eight quarters we have seen total organic loan growth in excess of $530 million or approximately 17%. We continue to benefit from our organic relationship-driven origination strategy that is centered around our bankers' ability to drive asset growth by leveraging the relationships -- their relationships and market knowledge.

Having dedicated staff housed in key markets has served us well from both a growth and risk perspective. Recently we added two commercial bankers in central Ohio and two in State College in order to further this customer-focused growth strategy. We're also very pleased with the quality and diversity of our commercial loan growth. For the second quarter we experienced growth in all of our commercial loan categories.

Commercial real estate outstandings increased by $28 million while commercial construction increased by $21 million. Our unfunded construction commitments increased by nearly $20 million and were nearly $200 million at the end of the second quarter. Our fundings in the commercial construction portfolio this quarter were $50 million.

The commercial real estate portfolio remains diverse with no individual concentration category accounting for more than 12.5% of outstandings in that portfolio. Our commercial construction portfolio is slightly more concentrated with multi-family accounting for nearly 24% of total outstandings, and no other single concentration exceeding 19% of total outstandings. Our C&I growth for the quarter totalled $37 million, and was driven primarily by new customer acquisition.

This is evidenced by increases in -- in the total number of accounts, the total number of commitments, the total growth commitments, and the total outstanding under those commitments. Similar to our commercial real estate portfolios, our C&I portfolio is diverse with no significant industry concentrations. With regard to our loan production offices, northeast Ohio ended the quarter with $141 million in outstandings, and central Ohio ended with $17 million. During the quarter we successfully opened our State College branch and have built a strong pipeline of opportunities based on the relationships and deep market experience of the team. In addition our dedicated business banking division had their strongest quarter ever in terms of net organic growth, with June being the strongest month for originations in that division's history.

Finally and perhaps most importantly we've been able to grow loans while maintaining our underwriting and pricing disciplines. We will continue to rely upon these disciplines and our core relationship banking strategy to drive quality asset growth. I will now turn the call over it Mark who will provide you with some additional details on our financial results.

Thanks, Dave. Improvement in net interest income this quarter was primarily due to the earning asset growth and a better asset mix. The net interest margin rate was also helped by the loan recoveries we experienced this quarter which accounted for approximately two of the five basis point increase. The differential between rates on new loans and line activity compared to payoffs and pay downs in the 50 to 60 basis point range eases the pressure on our overall loan rate. The weather related impacts we experienced in non-interest income and non-interest expense reversed in the second quarter. We saw better consumer activity in both deposit and card fees. Mortgage banking also improved in the second quarter after a slow first quarter.

Insurance fees are down to the timing of receiving our annual profit sharing from the carriers in the first quarter along with some competitive pressure in the energy market. Non-interest expense for the second quarter was higher than Q1 by $1.3 million, but it's below our expectations overall for the first half of the year averaging about $29.5 million per quarter. We continue to expect that quarterly expenses will be in line with our previously disclosed estimate of less than $30 million. Contributing to higher expenses this quarter were a number of items including higher incentives due to our strong performance, additional marketing campaigns, timing of some state tax credits recognized in Q1, some additional consulting expenses related to some internal projects, and higher loan related experiences due to strong origination volume and collection efforts.

Our [tax rate] for the quarter was just under 25% and that is due to higher pre-tax income. The year-to-date rate of just over 23% is more representative of our expectations going forward. However, improved pre-tax earnings could result in slightly higher rate as we move through 2014. Our risk-based capital ratios declined this quarter as loan growth outpaced solid retained earnings growth. As Todd mentioned we like where we are from a capital perspective and can continue to leverage our capital with strong organic grow. Thanks very much. At this time I would like to turn it over to the operator to provide instructions for asking questions.

Certainly. (Operator Instructions). And our first question comes from the line of William Wallace with Raymond James. Please proceed with your question.

Good afternoon, guys.

Hi Wally.

If you look at your -- your loan growth and then if you look at your loans relative to your deposits, I'm wondering if you could talk a little bit about where you feel comfortable running that level, and second what kind of experience you're seeing from a deposit gathering standpoint in the new markets you're in and in the business banking position. Just trying to get a sense as to your ability to keep up with the potential for accelerating loan growth.

Hey Wally. This is Mark. In terms of the loan deposit ratio, I mean that's something we keep an eye on. Our comfort level is in the mid-90% range. We do think that the -- the deposit with the strong loan growth and the deposit growth will be a challenge especially with rates this low. We have had some success in -- in working with the customers in Ohio generating deposits and we're looking at different options to expand on that as well. Maybe Dave--

Yes. Hi Wally. It's Dave Antolik. We've seen some pretty nice deposit generation in Ohio without putting a dedicated treasury management function in that -- in that region. We've looked at deploying a private banking strategy in Ohio as well to help drive some of that growth. With regard to the business banking division they're really closely linked with the branch networks so they work hand-in-hand, although that is a big part of their strategies, and a big part of their goal incentives are driven around deposit generation as well. We recognize the fact that we need to grow deposits in order to grow loans. So it's a target for us as we move forward.

But we are evaluating Ohio. We were just recently approved. We made an application for a branch approval, so we will have some further deposit taking capabilities out in those markets and we're evaluating exactly what approach we want to take and at State College we structured that a little bit differently. That is more of a private banking office so we can take deposits from day one. We opened that mid-June so we're starting to get some -- see some nice activity in that market as well, but the scenario that we focus a lot on the asset generation side of the house, the last couple of years and it's paying off and I think you're right on point, is it's going to be an area of emphasis as we move forward.

Okay. And then my -- my second and last question would be if I look at the margin and just kind of look at some of the moving parts it looks like the benefit on the asset side is really coming from that FHLB and other restricted stock line, and maybe you could help us figure out how you're thinking about the margin moving forward.

Well, the FHLB Pittsburgh of course is the past year their performance has improved a lot and they have increased their dividend rate from I think a year -- last year it was maybe 20 or 30 basis points and now it's up to 4%, but that's not a huge dollar amount for us so it doesn't have a huge impact on the net interest margin. This quarter we did have some -- some impact as I mentioned in the call from the -- from the recovery, so it was about two basis points. We do see some rate improvement just from the mix. You know, we have moved out of cash and into securities and loans, which does help the -- the overall mix and that loan growth net improves that -- the net interest income. On a go-forward basis we're pretty -- getting pretty close to what's coming off on the loan side versus the replacement in terms of rate so when we run our modeling out we hang in there at that 3.5% rate for the foreseeable future. So we expect it to be pretty stable short of any big change in rates on the short end.

Great. Really appreciate that. Take care.

Thanks, Wally.

Thank you. And our next question comes from the line of Taylor Brodarick with Guggenheim. Please proceed with your question.

Great, thank you. Just two questions for me. I guess firstly on the great asset quality just trying to figure out going forward was the recovery sort of -- was the recapture more of a function of the net recovery or just significantly better new [problem] loans. Just kind of looking for some more detail.

A little bit of both. You know, so it was -- we had some really two or three larger recoveries for the quarter. You know, we had some charges and then -- but, you know,.

This is Pat. Yes, we had several nice size recoveries. One large recovery. But as far as any type of deterioration in asset quality we're not seeing it in quite the mass that we had over the last few years. You know, I think our run-rate on NPLs is really down to maybe about $1.5 million a quarter so it's not -- not anything that's too alarming.

Yes. You know, that -- and that's kind of what I tried to emphasize in my comments when you look at the leading indicators, I mean delinquency of 59 basis points, you're criticized and classified levels under 5%. You know, your NPAs are down to $15 million which these are levels we haven't seen since 2007 or 2008, and our expectation is we're going to continue to see things progress in a favorable manner.

Great. And then, a question for you about the not about the quarter but about the release in mid-July, about the new branch in Indian Springs. Should we look at that more as -- that's more of a laboratory for you to assess how your delivery system will evolve or is there going to be a lot of, you know, technology upgrades and branch refurbishment over the next --

It's -- it was one of those things where it's an opportunity. I mean the branch is in Indiana. It's the second busiest branch that we have in the system. It was built in the early [fifties] and it needed an upgrade, and we were going to have to put a lot of money into the facility. And we just decided well, you know, the lot was big enough that we could put a new facility right next to where it was and add some of the -- the bells and whistles and yes, it will be a little bit of a test case, but you're not going to see any kind of a major rollout or change in direction on the retail side. We will just be opportunistic, and as circumstances dictate when we have to spend some money we will do it in a, you know, in a favorable manner so...

Great. Thank you, both. Appreciate it.

We are moving forward. We're going to probably add one more branch up in the -- as I mentioned in the release up in north hills of Pittsburgh that will kind of supplement and augment the Wexford and Cranberry branches that we have. But again it's going to be a little bit of a different model. We're going to shrink the footprint a little bit so it will be a little more cost-effective than some of our historical branches that we have built in the past.

Great. Thank you.

Thank you. (Operator Instructions). Our next question comes from the line of Matthew Breese with Sterne, Agee. Please proceed with your question.

Good afternoon everybody.

Hi, Matt

Just in regards to the overall level of earning assets, given how strong loan growth was and how (Inaudible -- background noise) portfolio picked up this quarter I was surprised to see earning assets only up $55 million, $60 million bucks. Was a lot of the growth towards the end of the quarter?

I think there -- I mean there is blip out between cash, so cash is down -- you know, point-to-point by over 50 and at least that much on average. Probably more.

That makes up the difference.

Yes.

Okay.

It was -- the loan growth came a little bit heavier at the tail end of June so -- I mean you can see that in the difference between our point-to-point at just under 100 versus average at 70 so it was a little bit back weighed in the quarter, so that will give us momentum going into the third quarter, but I think the difference you're looking at it is more the cash swap out.

Okay. And then specifically on -- on new loan yields, commercial real estate, T&I yields, can you just give us some idea of what you're putting on the books today versus six months ago?

Yes. The spreads are similar. Like I said in my comments, we've been pretty disciplined about how we're approaching pricing. We have seen some competition, bend a little more than we would be willing to in order to grow their earnings assets, grow their loans. We haven't had to do that fortunately. Again, sticking to the relationship banking strategy, and not selling products, selling relationships. That's really what we're all about. So we've been able to maintain the spread. We haven't had to give.

From six months ago there's a new -- there's an overall new loan rates are about flat from six months ago.

Okay. And then getting back to credit quality improvements and the overall level of provision, you know, how would you -- how would you assess your ability to, you know, keep a negative provision going? Is that realistic or should we, given the level of loan growth, putting something in there to what extent would you (Inaudible).

I wish we could. I don't think that's realistic. Mark, I will let you.

Yes. I certainly wouldn't model a negative provision. I mean that -- that really was aided by the -- the unusual recovery that we had this quarter. I mean we're comfortable with where our allowance is. You know, the dollar amount is about the same and that's -- in light of the fact that we did grow the portfolio quite a bit. So we expect, you know, similar trends as our asset quality improves, but it depends on a lot on how the -- the ratings of the loans change over the course of time and those have been headed in the right direction as well. But the recovery situation is probably unusual.

And my last question, you know, just bigger picture. Given your markets in both Pennsylvania and Ohio how would you kind of compare the two markets? Is one stronger than the other? And, you know, loan growth this quarter, was it more heavily weighted in one area versus the other?

No. I think it's kind of strong across-the-board. You know, certainly in our core markets I think conditions are probably as favorable as I have seen in many years. I mean unemployment is low, there's a lot of growth and activity going on. You know, demand by existing borrowers and some of these new markets that we're getting into as well and we're seeing good activity levels out there so I would say it's kind of spread out. Dave...

Yes. If you stripped out the LPOs we should still show nice growth. About $40 million of that $97 million was related to the two LPOs, but they had the benefit of not having a lot of run off yet so, you know, they're going to show outsize growth.

Very good. Thanks for the detail.

Thank you.

And it seems that we have no further questions at this time. I would like it turn the floor back over to management for closing remarks.

Well, I just again want to thank everybody for participating in today's call. Mark and Dave and I appreciate the opportunity to discuss this quarter results and look forward to hearing from you at our next call. So hopefully you all have a good day. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.