S&T Bancorp, Inc. (STBA) Q2 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the S&T Bancorp, Inc. Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Mark Kochvar, Chief Financial Officer. Thank you, you may begin.

Thank you. Good afternoon, everyone 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 CEO, who will provide an overview of S&T’s results.

Well, thank you, Mark, and good afternoon everybody. We’re pleased to announce net income of $0.76 per share or $26.1 million. This represents a 25% increase in earnings per share over last year’s second quarter results of $0.61 per share or $21.4 million, and a 15% increase in EPS over first-quarter results of $0.66 per share, or $22.9 million. Operating metrics for the quarter were very strong with a ROA of 1.44%, return on equity of 11%, and return on tangible of 15.89%. In addition to our overall performance, we’re extremely excited about our recent announcement regarding the acquisition of DNB Financial. As we discussed on our merger announcement call, DNB is based in the rapidly expanding Chester, Philadelphia, and Delaware County markets, which will provide significant growth opportunities as we move forward. We’ve made all the necessary regulatory filings and we anticipate closing in the fourth quarter of 2019. For the quarter, balance sheet growth is the big story as portfolio loans increased $98 million or 6.6% annualized. Our deposits were up $23 million; however, we did elect to let $50 million of brokered CDs runoff. Netting brokered out customer deposits increased by $74 million or 5.6% annualized. And they were mostly in the money market in non-interest bearing DDA accounts. This is a result of a targeted geography promotions and increased deposits with existing customers. Compared to one year ago, portfolio loans were up $247 million or 4.3%, and deposits were up $463 million or 8.6%. We do continue to see nice activity in both our lending and deposit gathering efforts across all of our five markets. Net interest margin was 3.68% for the quarter, which was down 3 basis points from Q1, but approximately 4 basis points higher than what we were anticipating. We did experience a heavy quarter in loan payoffs, and which positively impacted the margin through the acceleration of some of the origination fees and pre-payment fees. Our asset quality metrics showed nice improvements as well. We recorded a provision expense of $2.2 million, which compares favorably to $9.3 million in the second quarter last year and $5.6 million in the first quarter of this year. Non-performing assets decreased by $4.3 million or 8.4% to $46.5 million and represent 0.63% of total assets. And finally, total delinquency declined by 9 basis points and now stands at 0.92%. Expenses were slightly higher than expected but were impacted by some merger related costs as well as several other unusual items. As a result, our efficiency ratio did increase to 54%. Then Mark is going to explain some of the variances in a few minutes, but we will work diligently to drive that number down into the low 50% range. We are also seeing nice results from some of our recent investments to grow our various lines of business. Our small business lending group and our mortgage division had record quarters. Our new retail branches in Central and Northeast Ohio experienced a nice loan and deposit activity in both commercial and retail areas. And the bankers that we’ve added to our commercial banking, business banking, and mortgage teams across our footprint are building their pipelines. And we continue to see robust economic activity across our footprint and like our staff from a talent perspective to continue to grow the business. And finally, our Board of Directors declared a quarterly dividend of $0.27 per share payable on August 15. This represents an 8% increase over the dividend that was paid in the same period last year. So, thank you for your continued support of S&T Bancorp. Now, I’d like to turn the program over to our President and Chief Lending Officer, Dave Antolik.

Thank you, Todd, and good afternoon, everyone. We’re pleased to report loan growth of 6.6% annualized in the second quarter, that’s in-line with our expectations and guidance. For the quarter, we experienced growth in all loan categories. In the commercial portfolio, our investments in personnel and our strategy to expand our C&I capabilities into all of our markets under the leadership of our Managing Director of C&I banking, yielded growth of $47 million in Q2. Revolving utilization rates declined from 42% to 41% quarter-over-quarter. Offsetting this decline was an increase in total revolving commitments of $19 million and an increase in the total number of commitments. With regard to our CRE activities, balances grew modestly by $5 million and as Todd mentioned, we continue to experience an elevated level of property sales and competitive pressure causing higher levels of payoffs. We expect this pressure to continue into future quarters. Our Commercial Construction balances grew by nearly $22 million, and our unfunded construction commitments grew by $27 million quarter-over-quarter. Unlike the first quarter, balances were not heavily impacted by project completions and subsequent transfers from construction to the permanent category. We continue to see very positive results from our Business Banking group, which focuses on relationships up to $1.5 million. In this space, we’ve seen year-over-year originations increased by over $20 million and year-to-date net loan growth for this business line is approximately 8%. With regard to consumer loans, we saw growth of $24 million, driven primarily by residential mortgages. Year-to-date, we have added four mortgage loan originators and have closed nearly $100 million, up 45% over the first half of last year. Based on our current pipeline and the rate environment, we expect this level of production to continue through the balance of this year. Under the leadership of our Market Presidents, our market-based growth platform has become the primary driver of growth for our organization. For the quarter, we saw particularly strong loan and deposit growth in both Central and Western Pennsylvania. Based on our current commercial pipeline, which is over 40% larger than at this point last year, and the previously mentioned retail mortgage pipeline, we continue to remain comfortable with our mid-single-digit, full year loan growth guidance. And now Mark will provide you with some additional details.

Thanks, Dave. Net interest income improved by about $0.5 million due to higher average loan balances of $44.5 million and one additional day in the quarter. The second quarter net interest margin rate was supported again by higher than typical pre-payment activity, similar to what we experienced in the first quarter, which added about four basis points. We therefore continue to expect net interest margin contraction from lower pre-paid fees along with additional pressure in the event that Fed lowers rates at the end of the month. The combined impact of more normal prepaid and a 25-basis-point cut would likely put net interest margin rate in the lower 3.60% range in Q3. The $1.5 million increase in non-interest income is driven by higher commercial-related fees of almost $800,000. We had a very busy month with swaps which shows up in the other category. We also saw seasonally better activity in debit card and merchant fees, combined up over $500,000 compared to the first quarter. The $1.4 million increase in non-interest expense was in part due to $618,000 or about $0.01, $0.015 per share of merger-related expenses. The Other category which is up, includes higher OREO losses, along with higher collection and legal costs related to some ongoing loan workouts. Going forward in 2019, we expect fee income to be approximately $12 million per quarter and expenses to be approximately $39 million per quarter, not including merger-related expenses. Merger expenses will be heaviest in Q4 when the transaction is expected to close and the first quarter of 2020, when the system’s conversion takes place. Our tax rate in the second quarter was in-line with our full-year expectations of an effective rate of around 16.5%. Our risk-based capital ratios were essentially unchanged in the second quarter due to improved loan growth. Thanks very much. At this time, I’d like to turn back over to the operator to provide instructions for asking questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matthew Breese with Piper Jaffray. Please proceed with your question.

Good afternoon.

Hi, Matt.

Hi, Matt.

Hey, just sticking with the NIM, maybe just wanted some color on – I know we’re weeks – potentially weeks away from the Fed cut, but just some color on the market and how things are progressing in terms of your ability to cut deposit costs. It was encouraging to hear that you relieved yourselves some brokered deposits. Is that opportunity still there?

The brokers or just the cutting of the rates?

It was two questions in one there really, just one color on the deposit market and competition. And then two, does that opportunity to continue to wind-down some of the higher cost deposits, is that still there, the brokerage stuff?

I think we still have – we realize we have some – a decent amount of floating-rate assets, and so we try to match that up, at least in part with some floating-rate items on the liability side. We have – our lease money market account is tied to the Fed funds rate. So that will go down automaticallyif the Fed moves. And then we also have – most of our brokered deposits are tied to LIBOR. So those will reduce in rate as well. And then almost all of our wholesale borrowings are also either very short or LIBOR-based. So, we do have a decent amount of costing liabilities that we’ll reprice. I mean there still is a gap. And so we’ll work hard on some of the exception pricing items that we’ve done on the deposit side to review those and make some cuts. And then we’ll be looking at other things like growth in the fee and expense areas to try to make up the rest of the difference.

Right. Understood. Now, were you saying that the money market bucket in general is closely tied to the Fed funds? Or are you saying that you have a specific amount tied to Fed funds or indexed and if it’s to the latter?

I’m sorry, about half the money market is tied to Fed funds.

Got it. Okay. And then just thinking about going forward, if we are in an environment where the Fed is more apt to cut beyond just the first one, any color on impact to NIM per Fed cut? Is that something you could provide?

Roughly – I mean, on this first cut, we’re looking at about 3 or 4 basis points. So, I’d expect it about – probably about the same amount for each one if they kept on going.

Okay. And then it sounds like a more – it was definitely a more positive quarter on the long run loan growth front. Just curious, what are you seeing out there in terms of competition, spreads, duration, structure? Are things any better or worse? And just thinking about beyond 2019 with 2020, how the landscape looks?

Yes. Matt, this is Dave Antolik. We continue to see pressure, particularly in the CRE spaces, as I mentioned, pay off pressure from both property sales and competitive offers particularly on pricing. So, spreads from the competition have decreased. We continue to compete with the 30-year amortizations. And we’re starting to see some longer IO periods on CRE products. I don’t anticipate that any relief in that space, so that’s why we’re looking at diversified growth, and you see good diversified growth this quarter with residential mortgage, and we’re continuing down the path to grow our C&I capabilities and construction lending as well.

With the yield curve, we’re seeing more request for maybe longer-term fixed rates because I think quite frankly, they’re cheaper than some of the floating rate options that we can do, but – that’s why the swap numbers were up significantly this quarter because we’ve been able to roll them into swap products. We’re not taking that rate risk on the balance sheet.

Right, that makes sense. Okay. And then, Todd, just following up on one of your comments. The goal of getting to that low kind of 50% efficiency range. Over what time frame do you set that target?

Well, we look at it continually, Matt. Now, if you get some pressure with rates down, that will impact the ability to kind of cut that. But like I said, there were some, what we called unusual items and one times, so that probably might have bumped it up a 1% or 1.5%, but – and we look at that every day on where can we be more efficient and how can we control expenses while at the same time, making investments and grow the business. Like I said, we opened up some branches in Q1. We added some people, but we’re really starting to see the results from making those investments in pipelines and in overall activity as well.

Right.

Yes. We should see some improvement once the DNB is integrated. There’s some improvements in efficiency ratio, I think we’ll see from that as well.

Okay. All right. I’ll leave it there. I appreciate taking my questions. Thanks, guys.

Thanks, Matt.

Thanks, Matt.

Thank you. Our next question comes from the line of Russell Gunther with D.A. Davidson. Please proceed with your question.

Hey, good afternoon guys.

Hi, Russell.

I appreciate your thoughts around the margin and Fed cut scenario. Just curious what you guys are assuming internally for Fed actions and how you’re positioning the balance sheet as a result?

I mean, we don’t have a formal review, so we’ll take a – we’ll do modeling with various assumptions. I mean, just from the press, the consensus certainly seems like at least one, maybe two. So we’re planning ahead to at least be prepared for those events, but haven’t modeled anything beyond that – beyond 2 at this point.

Okay, great. Thanks for that. And then just switching gears to the loan growth. I heard you guys say Central and Western PA, particularly strong this quarter. Maybe just any color you could share on what growth – what drove the strength this quarter and then expectations going forward? I understand you recommitted to that kind of mid single-digit guide, but where that growth would be coming from?

Some of it was staffing, so making sure we have the right folks in the right markets, where we see opportunity. Some of it was sharpening our pencil on some pricing, and some deals that we really like, particularly in the legacy Western Pennsylvania market. And most consistently, the business banking segment, that I mentioned, that has been our most consistent provider of asset growth, and the numbers aren’t as large as the traditional commercial banking area. But if we can get outsized growth of 8%, 9% in that book of business, that’s helped to drive a lot of growth for us as well.

And like you said, the pipeline is up, what was update?

The commercial pipeline was up about 40% over last year at this time, and that’s spread throughout the five markets. So making sure that we had the capabilities in all five markets, rolling our C&I platform, recruiting to support that growth is a big part of what’s driven our success.

That’s very helpful. Thank you, guys. And then just last one for me. Anything you could update us on as to where you stand in the CECL implementation process and any early indications of that?

Hi, this is Mark, and we continue to work with our – the vendor that we had used prior to CECL for our ALLL activity, and we’ve been working with them to – work to do different changes to our pooling and also looking at different options to calculate the historical loss. And we’re looking at that data right now and are getting close to trying to make a selection of which model makes the most sense for us. We don’t have any guidance on the impact of that yet, but don’t anticipate any problems internally with the implementation of CECL.

Got it. Okay, great. That’s all I have. Thank you, guys.

Thanks Russell.

Thank you. [Operator Instructions] Our next question comes from the line of Collyn Gilbert with KBW. Please proceed with your question.

Thanks. Good afternoon, guys.

Hi, Collyn. Hello.

I just wanted to start on the fee side. So I know you had indicated, Mark, where your – the outlook for quarterly fees going forward, but just the – sort of the composition of that and how you sort of see mortgage banking trending. And then I know obviously the debit and credit card fees were up big this quarter. Anything that you guys are doing strategically different or just trying to dig into some of the trends within the fee lines a little bit more?

Quite a biggest change in the composition are the other swap fees that we alluded to, I think those have really been a lot higher than usual. There’s a little bit of a know rate play in there. So those may or may not last or maybe not as repeatable as some of the other fees. We have seen continued good activity so far this quarter. So that looks positive. But there is some risk if the Fed moves and we get slope back into the curve, that some of the swap fees might reduce a little bit or come back to a more normal level. Mortgage, on the mortgage banking side. Dave?

Yes. So on the mortgage banking side, we’ve been portfolio – portfolio I think about 60% of the activity. Yes, it’s really a matter of know what point do we decide to retain and what point we decide to sell. So you saw in the quarter we had pretty nice balance sheet growth in that segment. And of course, that comes to the detriment of the mortgage banking fees.

And on the debit, too. I think it’s a combination of just increased realization from existing clients. And we’re also seeing some nice household growth in our retail book. So, just more and more people are swiping the plastic than what we had a year ago.

Okay, that’s helpful. And then on the buybacks, you guys didn’t buyback any shares this quarter, did you?

Very small now, maybe. I think very at the very beginning in the quarter, we picked up around 72,000 shares.

Okay. And do we – should we assume that buyback activity is going to be limited now in the wake of DNB?

We’ll probably be more selective, given that we do have the acquisition out there. We still have about $23 million or so of room in the current authorization. But it’s something we’ll kind of evaluate as we go, but it might be a little lower than we saw in Q1.

There are some constraints on what we can – we do as well.

Right. There’s some – with the S4s and the timing of all that, there’s a lot of blackout periods.

Yes, got it. Okay. And then just finally, can you offer us any updates on DNB? I mean, how things are going so far? Any changes to how you know the construct of their balance sheet or growth trends or anything like that, since you guys announced it?

Yes, no. I mean, we’re really, again, really, really positive. And, we’re in, we made the regulatory filings. We’ve had meetings with employees. And all the feedback so far is very good. The more we get in, and working with them, the more apparent the cultures really align. We think that will bode well for – when we get into the transition and integration period. But both teams are working very diligently, and very well with each other right now. So, we’re starting to begin the mapping process on the IP and everything. And you know we’re all good things so far.

Okay. Good. I think that was all I had. Thanks, guys.

Thanks Collyn.

Our next question comes from the line of Daniel Cardenas with Raymond James. Please proceed with your question.

Good afternoon, guys.

Good afternoon.

So in your prepared comments, I think you guys mentioned that your line utilizations were down 41% versus 42% last quarter. Is that just kind of seasonal? Is that something that we see every quarter or is there something behind that, that maybe you can point to and explain why we saw a modest decrease linked-quarter?

Yes, I think that’s just seasonality. We’ve tracked this for many years and it’s surprisingly consistent, it runs between 41% and 43%. If we get outside of that range, then we might start looking a little more heavily. We did see some reduction in floor plan balances and floor plan utilization this quarter. So that drove some of that number.

Okay, so that we shouldn’t read into it that perhaps borrowers are stepping back on the sideline…

No, I think the big story for us is that the overall commit – revolving commitments were up and the number of commitments, meaning number of customers has increased as well.

Yes, I mean conversations with customers are still very positive, there’s a lot of activity. I think the big constraint that we’re hearing from – I don’t care what sector we’re going into is, just trying to find people to fill some of the positions. So – and every day they’re looking for talent, but with unemployment rates where they are, it’s been very difficult. So I think you’ll see probably some pressure on some wage – wage pressures across various industries right now.

Okay. Good. And then maybe, Mark, if you can remind me just the percentage of your loan portfolio that’s tied to LIBOR?

It’s kind of mid-40%.

Okay. And then…

That’s lend more Prime.

Okay. Lend more Prime. All right. And then maybe just on the credit quality front, any color you can give on watch lists trends in 30- to 90-day past dues? Is there anything out there that’s causing you concern right now? I mean, everything seems pretty manageable, but just kind of wondering if you’re seeing anything on the horizon that’s making you lose a little sleep at night?

Yes Dan, this is Pat. What we’re seeing in our trends is, those numbers staying relatively stable. Obviously, we had a decrease in delinquency in the NPAs and really in the sub-standard categories, all the categories we like to see. We still have a few credits in that work out bucket that we talked about in previous quarters that are going to be there for a little while. So I don’t necessarily see all the levels changing dramatically, but I would say that going forward on our loss expectations, exactly what we said last quarter. And I would look for more just stabilization.

Okay, great. That’s all I have right now. Thanks guys.

Thanks, Dan.

Thanks, Dan.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Brice for any closing remarks.

Okay. I just want to thank everybody for participating in today’s call. Mark, Dave, and I and Pat appreciate the opportunity to discuss this quarter’s results and look forward to hearing from you on our next conference call. Hope you have a great day.

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