Q2 2019 Earnings Call

Matthew Davis.

Hi, sorry lost in Sir.

The I guess.

And the company or with.

Hey, I E R.

Yes.

And you're calling for which program today.

The S&P Bancorp call.

Perfect all the line.

To the S&P Bancorp Inc. second quarter 2019 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. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr. Mark coach Farr, 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 state when a 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 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 Dot SP Bancorp Dot com.

I would now like to introduce Todd Brice, S&P, CEO , who will provide an overview of these results.

Well. Thank you Mark and good afternoon, everybody were pleased to announced net income of 76 cents per share or $26.1 million. This represents a 25% increase in earnings per share over last years second quarter results of 61 cents per share or $21.4 million and a 15% increase in EPS over first quarter results of 66 cents per share or $22.9 million.

Operating metrics for the quarter were very strong with an ROI 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 Dnbi financial as we discussed on our merger announcement call.

Dnbi is based in the rapidly expanding Chester Philadelphia in Delaware County markets, which will provide significant growth opportunities as we move forward.

We have made all the necessary Siri regulatory filings and we anticipate closing in the fourth quarter of 2019.

For the quarter, a balance sheet growth as the big story is before the 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 run off netting brokered.

Our customer deposits increased by $74 million or five or 6.6% annualized and they were mostly in the money market in non interest bearing DDA accounts.

This is a result of targeted geography promotions and increased deposits with existing customers.

Compared to one year ago portfolio loans were up $247 million or 4.3% in 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 three basis points from Q1, but approximately four basis points higher than what we were anticipating.

We did experienced heavy.

A heavy quarter in loan pay offs, and which positively impacted the margin through the acceleration of some of the origination.

Fees and prepayment fees.

Our asset quality metric 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.

Nonperforming 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 nine basis points and now stands at.

<unk>, 0.92%.

Expenses were slightly higher than expected, but were impacted by some merger related costs as well as several several other unusual items as a result, our efficiency ratio did increase to 54% and Mark's 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 northeast, Ohio are experienced in mice 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.

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 27 cents per share payable on August 15th.

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&P 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 for 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 cnine capabilities into all of our markets under the leadership of our managing director of Cnine 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 CRM 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 pay offs.

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 a million and a half dollars.

And Thats in this space, we've seen year over year originations increased by over $20 million and year to net loan 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 are 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 a half million dollars due to higher average loan balances of 44, and a half million and one additional day in the quarter.

The second quarter net interest margin rate was supported again by higher than typical prepayment 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 low lower prepay fees, along with additional pressure in the event that fed lowers rate 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 $800000.

I 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 $500000 compared to the first quarter.

The $1.4 million increase in noncash expense was in part due to $618000 or about a penny paying a half 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 million dollars per quarter, not including merger related expenses merger merger expenses will be heaviest in Q4, when the transaction is expected to close.

And the first quarter of 2020, when the systems 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 it back over to the operator to provide instructions for asking questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to have yourself from the queue for participants using speaker equipment, maybe necessary to pick up your handset before pressing the star keys and one moment. Please poll for your questions.

Our first question comes from the line of Matthew Breese with Piper Jaffray. Please proceed with your question.

Good afternoon.

Hi, Matt.

Hey, just sticking with the NIM, maybe maybe just wanted some color on iron ore.

We potentially weeks away from the Fed Cup, but just some color on the market and how things are progressing in terms of your ability to cut deposit cost. It was encouraging to hear that you were leaving yourselves. Some brokered deposits is that opportunity is still there.

Okay on the brokers or just the cutting of the rate.

It was two questions in one there really.

Just one color on the deposit market and competition and into does that does that opportunity to you know continuing to wind down some of the higher cost deposits is that still there the brokered stuff.

I think we still have me, we realize we have some a decent amount of floating rate assets and so we've tried to match that up at least in part with some floating rate.

Items on the liability side, we have a our our lead to money market account is tied to the fed funds rate. So that will go down automatically when if 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 on so we do have a decent amount of costing liabilities that are more price I mean, there's 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 you know like growth and.

And 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 index and if it's 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 cod.

Beyond just the first one any color on impact to NIM per fed cod is that something you could provide.

Yeah, Hey, roughly that move on on this first cut we were looking at about a three or four basis points.

So I'd expect that about probably about the same amount for each for each one and they kept on going.

Okay.

And then it sounds like a more.

Definitely more positive quarter on the loan growth front.

Just curious what are you seeing out there in terms of competition spreads duration structure or things any better or worse and.

I'm just thinking about beyond 2019, 2020, how the landscape looks.

Yeah, Matt This is Dave Antolik, we continue to see pressure, particularly in the C. R. E spaces as I mentioned payout pressure from both property sales and competitive offers particularly on pricing. So spreads from the competition of have decreased and we continue to compete with a 30 year amortization and we're starting to see some longer io periods on CRM products.

Yes, we don't I don't anticipate that.

Any relief.

In that space. So that's why we're looking at diversified growth in any secret diversified growth this quarter.

With the with residential mortgage continuing down the path to grow our RC and AI capabilities and construction lending as well with the.

You know the the yield curve.

We're seeing more requests for maybe longer term fixed rates.

Because I think quite frankly, they are cheaper than some of the floating rate.

Ah options that would that we can do but that's why the swap swab numbers were up significantly this quarter, because we've been able to roll them into a swap products were not taking that rate risk on the balance sheet.

Right 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 timeframe do you.

Do you set that target.

When we look at it continually Matt you know now you know if you get some pressure with rates down you know that.

No that that will impact the ability to kind of cut that but like I said there was some what we call unusual items at one time, so that's probably why that might have.

You know bumped it up a a percent or maybe a percent and a half but oh, we look at that every every day on where could we be more efficient and how can we how can we control expenses while at the same time.

Making investments in and grow the business like I said you know, we we opened up some branches in Q1, we added some some people but was really starting to see you know the you know the results for making those investments in pipelines and in overall activity as well right right, Yes, we should see some improvement once the.

Dnbi. It integrated you know there are some improvements in the 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.

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 I rather slow.

I appreciate your thoughts around the margin and a fed cuts scenario just curious what you guys are assuming internally for fed actions and.

And how you're positioning the balance sheet as a result.

Uh huh.

We don't have a formal do you. So we'll we'll take a well do modeling with various assumptions I mean are you know just from the press the consensus certainly seems like at least one maybe two so we're we're planning ahead to at least be prepared for for those for those events, but haven't modeled anything beyond that beyond two 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 P., a particularly strong this quarter, maybe just any color you could share on what growth what drove the strength. This quarter and then expectations you know going forward I understand you we committed to that kind of mid single digit guide, but you know where that growth would be coming from.

Yes, some of it was staffing so making sure we have the right folks are in the right markets, where we see opportunity or some of it was sharpening our pencil on some pricing on some deals that we really like particularly in the legacy Western Pennsylvania market.

And most consistently the business banking segment that I mentioned, we know that that that has been our most consistent provider of asset growth on the numbers aren't as large as.

[laughter] excuse me as a traditional commercial banking area, but if we can get outsized growth, 89% in that in that book of business.

Yeah. That's that's helped to drive a lot of growth for us as well.

And like you said the pipeline is up what was it up there. So that's the wonderful pipelines up about 40% over last year. At this time, you know that that spread throughout the five market. So making sure that we have the capabilities and all five markets Rolling RC an eye platform recruiting to support that growth is a big part of whats driven our success.

That's very helpful. Thank you guys and then just last one for me or anything you could update us on as to where you stand in the sea so implementation process and any early indications of that.

Hi, This is mark I mean, we continue to work with our the vendor that we had used a prior prior just diesel for a triple l. activity and we've been working with them to work through the different changes to our pooling and also when you're looking at a different options to calculate the historical loss I'm, we're looking at that data right now and.

We are getting close to trying to make a selection of which which model makes the most sense for us and we don't have any guidance on the impact of that yet, but don't anticipate any problems internally with the implementation of a seasonal.

Got it okay, great. That's all I had thank you guys that's Russell.

Thank you once again as a reminder, if you would like to ask a question. Please press star one on your telephone keypad for participants using speaker equipment, maybe necessary to pick up your handset before pressing the star Keys. Our next question comes from the line of Collyn Gilbert with KBW. Please proceed with your question.

Thanks, Good afternoon, guys I call.

I just wanted to start on the fee side. So I know you had indicated I'm Mark where your you know the outlook for quarterly fees going forward, but just the sort of the composition of that and 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 some of the trends within the fee lines a little bit more.

I'm, probably the biggest a change in the composition are the other swap fees that we alluded to ending those have really been a lot higher than usual, there's there's a little bit of a you know rate rate play in there. So those may or may not you know last or maybe not as repeatable as some of the other fees and we have seen continued good activity so far.

This this quarter, so that looks positive, but but there are some risk at that if the fed moves and we get a slow back into the curve that some of the swap fees might might reduce a little better I come back to a more normal level.

The mortgage on the mortgage banking side, Dave Yeah, So on the mortgage banking side and we've been portfolio.

Portfolio only about 60% of the activity, yes, it's really a matter of at what point do we decided to retain and when we decide to sell so they 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 on the debit to say I think it's a combination of just increase utilization from existing clients and we're also seeing some nice household growth in in our retail a book. So it just you know more and more people swiping a plastic than what we had a year ago.

Okay. Okay. That's helpful and then.

On the buybacks you guys Didnt buy back any shares this quarter did you.

A very small amount maybe I think very at the very beginning of the quarter, we picked up around 72000 shares.

Okay and do we should we assume that that the buyback activity is going to be limited now in the wake of Dnbi.

Well probably be more selective you know given given that we do have the acquisition out there, we still have about $23 million or so of room in the current authorization.

But its something well what kind of evaluate that as we go but it might be a little bit lower than we saw in Q1. There are some constraints on what we can we do as well Ryan. There's some you know with the S. Four is in the timing of all that Theres a lot of blackout periods Yep got it. Okay. And then just finally can you offer us any updates on the M.B. I mean, how things are going so far any changes to how you know that the that the construct of their balance sheet or our growth trends or anything like that since you guys announced it yeah. No I mean, we're really getting really really positive and you know we're in we made the regulatory filings Weve had meetings with employees and you know all the feedback. So far is very good you have the more we get in a you know and and working with them. The more apparent the culture is really align a you know we think that will bode well for Ah, yes, when we get into the transition and integration period, but both teams are working very deal with.

Currently in very well with each other right now so we're starting to begin the mapping process is on the I.T. and everything and and you know so we're all all good things so far.

Okay.

Okay. Good I think that was a that was all I had thanks guys.

Thank you our next call.

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

Hi, good afternoon guys.

Good to hear that.

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 or is that something that we see every quarter or is there something behind that that.

Oh, maybe you can point to to explain why we saw a modest decrease linked quarter.

Yeah, I think that's just seasonality you know weve tractors for many years and yeah, we 'cause it's surprisingly consistent it runs between 41 and 43% if we if we get outside of that range than we might start looking a little more heavily we did see some reduction in a floor plan balances of floor plan utilization this quarter I'm, so that drove some of that number.

Okay, so that I, we shouldn't read into it that.

Perhaps a borrowers are stepping back on the sideline to no 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.

Having conversations with it where customers are still very positive. There is 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 positions. So and every day, they're they're looking for a 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 you know wage pressures across various various industries right now.

Okay.

Good good and then maybe Mark if you can remind me just the percentage of your loan portfolio, that's tied to LIBOR.

It's a kind of mid 40%.

Okay. That's out there like we are in prime.

Okay like borne fruit.

All right and then maybe just on the credit quality front.

Any color you can give on on.

Kind of watch list 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.

Yeah, Dan this is Pat.

You know what what we're seeing in or trends is.

Those numbers are staying relatively stable, obviously, we had a decrease in delinquency in the N P A's and really into substandard categories. All the categories, we like to see.

We still have a few credits and that worked out bucket that we talked about in previous quarters 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 you know going forward on our loss expectations are exactly what we said last quarter.

And I was looking for more just stabilization.

Okay, Great Thats, all I have right now thanks, guys. It's damn thing now.

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

Okay I just want to thank everybody for participating in todays call, Mark, Dave and I and Pat I appreciate the opportunity to discuss this quarter's results and look forward to hearing from you in our next conference call.

If 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.

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