S&T Bancorp's (STBA) CEO Todd Brice on Q2 2014 Results - Earnings Call Transcript

Jul.29.14 | About: S&T Bancorp, (STBA)

S&T Bancorp, Inc. (NASDAQ:STBA)

Q2 2014 Earnings Conference Call

July 29, 2014 01:30 PM ET

Executives

Mark Kochvar - Senior EVP and CFO

Todd Brice - President and CEO

David Antolik - Senior EVP and Chief Lending Officer

Analysts

William Wallace - Raymond James

Terrell Broadrick - Guggenheim Securities

Matthew Breese - Sterne Agee

Operator

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.

Mark Kochvar

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 the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation.

A copy of the fourth quarter earnings release can be obtained by clicking on the Press Release link on your screen or by visiting our Investor Relations Web site 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.

Todd Brice

Well, thank you Mark and good afternoon everybody. The first quarter results of $14 million or $0.47 per share and second quarter results of last year of $14.1 million or $0.47 per share. Once again the themes contributing to our results are solid organic loan growth and continued positive trends in asset quality metrics which are now at levels we haven't experienced so it’s probably ’07 and ’08.

For the quarter our loan portfolio increased by $97.2 million or 11% annualized. This represents the 8th consecutive quarter that we’ve grown our portfolio as our lending activity continues to be very strong in core markets as well as the new markets that we’ve recently entered. Hereby 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.

Our trends in asset quality metrics continue to be a bright spot as well. For the quarter we had net recoveries 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 totaled $15.4 million or 0.41% of total loans plus OREO. We’ve also experienced a nice reduction in criticized and classified loans and was decreased by $15.8 million or 8% and the 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’re encouraged by the growth that we’re seeing in our non-interest bearing deposits which increased $58 million or 5.6% versus Q1 and $142 million or 15% versus Q2 of ’13. And again this growth really is attributed to the focus of our bankers and securing total relationships with our borrowers. The performance 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 financial needs. In addition, we continue to add production gains across all of our lines of business throughout the organization and expect to continue to back delivery recruit in a lot of different areas throughout the organization in the coming quarters.

And finally we like our position as an 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 this quarter, 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.

David Antolik

Thanks, Todd and good afternoon everyone. Todd mentioned we are very pleased to report another solid quarter of loan growth and over the eight quarters we've 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 their relationships and market knowledge, having dedicated staff housed in key markets has served us well from both the growth and risk perspective. Recently, we added two commercial bankers in Central Ohio and two in State College in order to further its customer focused growth strategy.

We are 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 our 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 multifamily accounting for nearly 24% of total outstandings and no other single concentration exceeding 19% of total outstandings. Our C&I growth for the quarter totaled $37 million was driven primarily by new customer acquisition. This is evidenced by increases 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 have been able to grow loans while maintaining our underwriting and pricing disciplines. We will continue to rely upon these discipline and our core relationship banking strategy to drive (all the) [ph] asset growth.

And now I will turn the call over to Mark who will provide you with some additional details on our financial results.

Mark Kochvar

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 2 of the 5 basis point increase. The differential between rates on new loans and line activity compared to pay-offs and pay-downs in the 50 to 60 basis point range, eases the pressure on our overall loan rate.

The weather related impact 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 slow first quarter. Insurance fees are down due to the timing of receiving our annual profit sharing from the carriers in the first quarter, along with some competitive pressure in the energy markets. 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, through 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 expenses 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, a 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 rates as we move through 2014. Our real estate capital ratios declined this quarter as loan growth outpaced solid retained earnings growth.

And as Todd mentioned, we like where we are from a capital perspective and can continue to leverage our capital with strong organic growth. Thank you very much, at this time; I would like to turn it over to operator to provide instructions for asking questions.

Question-and-Answer Session

Operator

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

William Wallace - Raymond James

If you look at your loan growth and then if you look at your loans relevant to your deposits, I am 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 divisions? Just trying to get a sense as to your ability to keep up with the potential for accelerating loan growth?

Mark Kochvar

This is Mark, in terms of the loan deposit ratio, that's something we keep an eye on I mean our comfort level is in the mid-90% range. We do think that 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 working with the customers in Ohio generating deposits and we’re looking at different options to extend on that as well [indiscernible]

David Antolik

Yes, hi William, its David Antolik. We've seen some pretty nice deposit generation in Ohio without putting a dedicated treasury management function 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 close to the range 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. So it’s a target for us as we move forward.

Mark Kochvar

So we are evaluating Ohio we were just recently approved that we made an application for branch approval. So we would have some further deposit making capabilities out in those markets and we’re evaluating exactly what approach we want to take. And as [indiscernible] we structure that a little bit differently that is more of a private banking office so we can take deposits from day one, reopen that mid-June. So we’re starting to get some nice activity in that market as well. But it’s an area that we focus a lot on the asset generation side of the house over the last couple of years and staying often you think you’re right on point is it’s certainly an area of emphasis as we move forward.

William Wallace - Raymond James

Okay. And then 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?

David Antolik

The FHLB Pittsburgh there is of course this half year I mean their performance has improved a lot and they've increased their dividend rate from I think 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 it doesn’t have a huge impact on the net interest margin. This quarter we did have some impact as I mentioned in the call from the recovery delta 2 basis points. We do see some rate improvement just from the mix. We’ve moved out of cash and into securities and loans which does help the overall mix and that loan growth net improves that the net interest income.

On a go forward basis, we’re 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.

Operator

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

Terrell Broadrick - Guggenheim Securities

Great, thank you. Just two questions from me, I guess firstly on the net grade 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 to get only better new problem loan just kind looking for some more detail.

Todd Brice

I think a little bit above, so we had some really two or three margin recoveries for the quarter. We had some charges and then but…

Pat Haberfield

Terrell, this is Pat. We had several blind side recoveries one large recovery but as far as [indiscernible] deterioration asset consideration of asset quality we’re not seeing this and quite [indiscernible] we have over the last few years. I think our run rate on NPLs is really down at maybe 1.5 million a quarter, so it’s not anything that’s too alarming.

Todd Brice

And that’s kind of what I tried to emphasize in my comments. So when you look at the leading indicators, delinquency of 59 basis points you’re criticizing classified levels under 5%, you’re NPAs are down to $15 million which these are levels we haven’t seen since ’07 or ’08. And our expectation is that we’re going to continue to see things kind of progressing in a favorable manner.

Terrell Broadrick - Guggenheim Securities

And then Todd a question for you kind of not about the quarter but about the release in mid-July about the new branch and its frame. Should we look at that more as that’s more of a laboratory for you to assess have your delivery system will evolve or is there going to be a lot of technology upgrades and branch refurbishment over the next…

Todd Brice

It just 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 50s 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, the lot was big enough that we can put a new facility right next to where it was and add some of the bells and whistles and yes, it will be a little bit of a test case but I mean you are not going to see any kind of a major roll-out of your change in direction on the retail side. We'll just be opportunistic and as circumstances dictate, when we have to spend some money, we'll do it in a favorable manner.

We are moving forward, we are going to probably add one more branch up in the -- it's been mentioned in the release, up in North Hills of Pittsburgh that will kind of supplement, augment the Westford and Granbury branches that we have.

But again it’s going to be a little bit of a different model, we are going to shrink the footprint a little bit, so it will be a little more cost effective in some of our historical branches that we build in the past.

Operator

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

Matthew Breese - Sterne Agee

Good afternoon everybody. Just with regards to the overall level of earning assets, given how strong loan growth was and how [indiscernible] portfolio pick up this quarter, I was surprised to see earning assets going up for $55 million, $60 million. Was a lot of the growth towards the end of the quarter?

Mark Kochvar

I think I mean there is a flip out between cash and so cash is down point-to-point by over 50 and at least that much on average.

Matthew Breese - Sterne Agee

That makes up the difference.

Mark Kochvar

The loan growth came a little bit heavier at the tail end of June, so you can see that in differencing our point-to-point at just under 100 versus the average at 70. So, was a little bit back weighted in the quarter, and that will give us momentum going into third quarter but I think the difference you are looking at is more the cash swap out.

Matthew Breese - Sterne Agee

Okay and then specifically on new loan yields, commercial real estate, C&I yields. Can you just give us some idea of what you are putting on the books today versus six months ago?

Mark Kochvar

Yes, the spreads are similar like I said in my comments; we've been pretty disciplined about how we are approaching pricing. And we have seen some competition bend a little more than we were willing to in order to grow their earning assets, grow their loans. We haven’t have to do that fortunately again sticking to the relationship banking strategy and not selling product, selling relationship that’s really what we are all about. We have been able to maintain the spread. We haven’t had to give.

Todd Brice

Yes, the overall new loan rates are about flat from six months ago.

Matthew Breese - Sterne Agee

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

Todd Brice

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

Mark Kochvar

I certainly wouldn’t model the negative provision, I mean that really was aided by the unusual recovery we had this quarter and we are comfortable with where our allowance is. The dollar amount is not the same and as a matter of fact that we did grow the portfolio quite a bit. So, we expect similar trends as our asset quality improves but it depends on, a lot on how the ratings of the loan change over the course of time and those have been headed in the right direction as well but the recovery situation is probably unusual.

Matthew Breese - Sterne Agee

And my last question, 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 loan growth this quarter, was it more heavily weighted in one area versus the other?

Todd Brice

I think it’s kind of strong across the board. Certainly in our core markets, I think conditions are probably as favorable I have seen in many years. I mean unemployment is low. There is a lot of growth and activity going on, demand by existing borrowers and some of these new markets that we are getting into as well, and we are seeing good activity levels out there. So, I mean I would kind of say it’s spread out.

Mark Kochvar

Yes, if you stripped out the LPO, it would still show nice growth, about 40 million of that 97 million was related to the two LPOs but they have the benefit of not having a lot of run-off yet. So, they are going to show outsized growth.

Operator

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

Todd Brice

Again, I 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 in our next call. So hopefully you all have a good day. Thank you.

Operator

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

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