S&T Bancorp Inc (STBA) 2013 Q2 法說會逐字稿

Greetings and welcome to the S&T Bancorp second-quarter 2013 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Kochvar, Chief Financial Officer for S&T Bancorp. Thank you, sir; you may begin.

Thank you. 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 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, everyone. I'm pleased to report net income for the second quarter of $14.1 million or $0.47 per share versus $12.3 million or $0.41 per share in the first quarter of this year, and $8.6 million or $0.30 per share in the second quarter of 2012.

I would say all in all we are very pleased with our results this quarter as we continue to experience positive trends in loan growth, asset quality, net interest margin, fee revenues, expense controls; and also, we're seeing some benefits from the synergies afforded to us by our 2 mergers last year. I think all of these areas have been a major focus for us over the past year, and it's really nice to see our efforts impacting our business in a favorable manner.

For the quarter the loan portfolio increased $61.3 million over the prior quarter, which contributed to part of our $900,000 increase in net interest income. Our Chief Lending Officer, David Antolik, is going to elaborate a bit more on loan growth in his comments, but it was really fairly evenly distributed between our CRE, C&I, and mortgage lines of business.

Also building out sales teams as been a focus over the past year, and some of the folks that we've brought on board are beginning to see their production ramp up and hit the balance sheet. And I'm also pleased to report that we've recruited 5 new members to our commercial lending team since the last call, and we expect to see their production ramp up towards the end of this quarter once they get settled into their new roles.

Asset quality metrics continue to show a nice improvement, as our provision expense for the quarter was $1 million versus $2.3 million in Q1. I think we had another good story in net charge-offs for the quarter, which totaled $900,000.

Nonconforming loans now stand at $37.9 million, which is an 18% or $8.4 million decrease from the end of Q1, when they were $46.3 million. And NPL to total loan ratio is now 1.1%, so nice trends on those metrics.

And finally, the substandard and special mention loans decreased by $20.6 million or 7% to $269 million at the end of the quarter. These results really are a direct reflection on the hard work that the credit and lending teams are undertaking, really just to improve the risk metrics of our portfolio.

Another area where we do expect to see some softening is in our mortgage banking division, which is beginning to see the effects of increasing interest rate environment. For the year, originations were up approximately 14% over last year. But at the end of Q2 we did begin to see our pipeline slip a little bit.

One bright spot is the volume of purchase money mortgages, which continue to increase as home sales in the Western Pennsylvania marketplace continue to be very strong. While we don't expect to fully make up from the reduction in refinancing requests through purchase money activity, we do expect to see a slowdown in payoffs in our home equity portfolios, which should help with offsetting some of the decline in new origination volumes.

To further offset the slowdown in the mortgage business, we are focusing our attention on our consumer lending areas. And this year we've increased originations by 22% through the first 6 months of 2013 as compared to last year. And a lot of this activity is coming in our home equity products. Also, small business production through our branch network is gaining traction as we continue to focus on our efforts in this segment of the market through that delivery channel.

And on the retail side, we're also seeing some nice growth in the number of DDA accounts, which are up about 6% year to date on a per-household basis. And we are aggressively focusing our attention on cross-selling efforts to maximize penetration in these households.

We've also modified several of our fee schedules on our deposit products, which should begin to hit the income statement in Q3 and Q4. And then wealth management, again, another bright spot as fees have increased about 8% compared to last year.

We really had some nice traction on the stored capital mid-cap fund, which has grown by about 40% year to date. And today assets under management in our wealth division now total about [$1.72 billion].

And then just finally, I just want to mention that many of the expense initiatives that we have implemented through the first couple of quarters are beginning to gain traction. Noninterest expense for the quarter was $28.4 million. That compares favorably to $31.6 million in Q1. We also anticipate closing 2 more branches this quarter, which, again, should have minimal impact on our customer base but will help with expense control going forward. I know Mark is going to provide some more color on our expected run rate and the margin in his comments in a few moments.

So at this point, I would just like to turn the call over to our Chief Lending Officer, David Antolik.

Thanks, Todd, and good afternoon, everyone. As Todd highlighted, the Bank experienced solid loan growth in the second quarter, as evidenced by a net increase of $61.3 million or 1.8% in total portfolio loans. This growth was a direct result of our strategies to improve our sales effort and to add highly qualified professionals to our sales team.

For the quarter commercial loans grew by $44.5 million, or 1.8%, with an increase of $24 million in CRE and construction loans; and an increase of $20.5 million in C&I loans. Additionally, residential mortgages continued their strong growth, with balances increasing by $20.7 million or 4.7% for the quarter.

I'd now like to provide an update to some of the strategic initiatives that I outlined during last quarter's earnings call. First, we hired 5 commercial lenders since the last call. These folks are all seasoned banking professionals. 3 of these new hires are additions to our lending team in our core markets of Western Pennsylvania, and 2 are additions to our Northeast Ohio staff.

Now, second, our business banking team -- those lenders who handle aggregate commercial lending relationships under $1 million -- had its strongest production quarter since its inception, of nearly $20 million. Supporting this growth is a fully developed and implemented underwriting platform. This growth is a product of being fully staffed with business bankers who work closely with their partners on the retail side of the Bank to identify new lending opportunities.

Third, our Northeast Ohio region continues to grow. That team now has 6 members and commercial loan outstandings of approximately $50 million.

Next, we continued to see growth in our dealer core plan business across all of our markets, with increases in commitments of 5.6%, from $123 million to $130 million, and an increase in outstandings of 6.5%, from $76 million to $81 million for the quarter. Additionally, the quarter saw growth in our commercial construction portfolio, and that growth continues to help provide stability to our commercial real estate balances. Total commercial construction commitments at June 30 were $320 million, which includes $167 million outstanding, versus $297 million in total commitments and $165 million outstanding at March 31.

We also saw our C&I revolving line of credit utilization rate increase from 42% to 45% quarter over quarter. That increased utilization helped to drive much of our C&I growth.

Our commercial pipeline continues to be solid as a result of our additions to the commercial lending staff, and particularly strong with regard to our small business lending area. We did have several large commercial loan payouts that were anticipated for the second quarter that were delayed. We anticipate that these payoffs will occur in the third and fourth quarters and will provide an additional challenge to our loan growth goals.

Mark will now provide you with some additional details on our financial results.

Thanks, David. The improvements we experienced in core performance for the second quarter 2013 came from every significant line item -- higher net interest income, high recurring fees, lower expenses, and lower provision. The $900,000 increase in net interest income was helped by a net $400,000 of unusual items; a large interest income recovery from a previously charged-off loan, which was partially offset by accelerated expenses related to the early redemption of $45 million of subordinated debt.

The remaining increase in net interest income is due to loan growth, disciplined deposit pricing, and the redemption of the sub-debt. The net of the unusual items equates to 4 basis points in the net interest margin rate. So the 2 basis point increase we saw this quarter otherwise would have been a decrease of 2 basis points.

We anticipate that our net interest margin rate will decline further, but at a very slow pace. We also expect that despite challenges with the margin rate, net interest income will expand through loan growth and a better asset mix.

Adjusting for the $3.1 million gain on the sale of our merchant card servicing business last quarter, fees are up almost $1.2 million this quarter. Of the nearly $700,000 improvement in debit and credit card fees, almost $500,000 is related to merchant fees. The timing of recognizing these fees during the year is different under the arrangement with our new partner, but we expect full-year fees to be in line with last year at approximately $1.7 million.

The improvement in mortgage banking is due to a $425,000 increase from the recapture of mortgage servicing rights and the change in the value of mortgage commitments. The fees we earned from actually selling mortgages in the second quarter were a little changed from the first quarter.

As Todd mentioned, we anticipate some softness in this area due to fewer refis. Our income from sales in each of the past 2 quarters has been about $550,000, split between held-for-sale fees and the value of the new mortgage servicing rights.

Noninterest expense decreased by $3.2 million, and at $28.4 million this quarter it's a little below our expected quarterly run rate of $29 million to $29.5 million. The first quarter included merger-related and branch closure costs of $1.1 million, and the earnings from the provision for unfunded commitments was $1.2 million favorable. An expense in the first quarter of $750,000 compared to a contra expense this quarter of $450,000.

The impact of some of our expense initiatives can be seen in salaries and benefits, which is down $1.3 million this quarter. Over half of this decrease is in actual salaries. So far this year we have completed the conversion of the Gateway Bank; closed 2 branches; implemented branch capture, which helped proof expense; and sold our merchant business, all of which are having a favorable impact. The remainder of the salary variance is due to the timing of payroll tax expense and somewhat lower commission and incentive expense.

Our capital ratios were impacted this quarter by the redemption of the subordinated debt and the decrease in the value of our bond portfolio. We redeemed $45 million of tier 2 sub debt in mid June. The weighted average rate on these borrowings was LIBOR plus 2.94%, or approximately 3.20% all-in.

We expect to save in excess of $1 million annually in interest expense. The capital impact of sub debt is limited to our total risk-based capital ratio, which decreased by approximately 138 basis points due to this redemption. We believe that given the new capital rules, which place less emphasis on tier 2, that we have sufficient total capital.

The increase in interest rates this quarter had a negative impact on the market value of our bond portfolio, decreasing the unrealized gain from $12.8 million at the end of the first quarter to $631,000 at the end of the second quarter. This $12.2 million decrease translates to a $7.9 million equity impact through AOCI, or approximately 17 basis points on our TCE ratio. This also impacted our book value by about $0.27 per share.

Our bond portfolio is relatively modest at $471 million, or only 10.4% of total assets. The duration of the bond portfolio at the end of the second quarter was 3.8 years, essentially unchanged from the end of the first quarter.

Our exposure to mortgage-backed securities is only $132 million -- 28% of the bonds and less than 3% of total assets.

And finally, our tax rate for the quarter was 21.9%, and it's 18.9% year to date. With the improvement in our pretax income, we do expect to see somewhat higher effective tax rate for the year, probably in the low 20%s.

Thank you very much. At this time, I'd like to turn it over back to the operator to provide instructions for asking questions.

(Operator Instructions). Collyn Gilbert, KBW.

You gave a lot of great detail. Just wanted to talk a little bit about the loan growth and your outlook. Obviously, you are seeing some improvement and good momentum from the teams that you hired. Can you quantify where you think you can go with your loan portfolios, and what your plans are in terms of hiring additional teams from here?

Sure, I will take a first stab; and then, Dave, you can fill in, too.

Sure.

We are happy with the growth that we have had for the first 2 quarters. The pipelines are still fairly strong, both on the commercial side really are -- we're starting to see some traction. We mentioned that B2B area, which is a small business, but that loan -- or that pipeline is really starting to see some nice lift and activity over there. We would expect to continue to build those out.

As Dave mentioned in his comments, Collyn, there are some headwinds with some payoffs that we are tracking. But the nice thing with that construction bucket building up -- that funds to the tune of about $10 million-plus a month. So that will help to offset some of the big -- the construction bite that we may feel over the next couple of quarters.

But as far as growth to the end of the year, I would expect us to continue to be up maybe -- I think this was a pretty successful quarter as far as hiring folks. Dave, are you going to --?

Yes, in terms of the payoffs, just to add a little color, some things that we were expecting to happen, payoffs that we were anticipating in the second quarter, as I said, were delayed. And these payoffs are really the result of some customers selling assets. In one case it is a portfolio of properties that a customer is selling.

So the good news is, we are able to retain those relationships. We will lose balances, but we will have other opportunities. And the challenge for us is going to be to continue to grow our pipeline and create earning assets. And those activities have been strong.

As Todd mentioned, the pipeline continues to be solid. And we're able to attract talent in order to grow assets. So asset-generating activities continue to be strong.

Okay, that's helpful. What about pricing? How are you guys seeing pricing? And loan yield's still coming on at lower rates than what is rolling off. And have you been able to pass through any of the rate increase into some of your loan pricing buckets?

Yes, we are seeing some increase in the 5- and 10-year buckets as our cost of funds increase. They are reflected in the pricing of the new loans coming on.

The competition continues to be aggressive with regard to pricing, so we have seen some folks delay or hold onto to rates that may have been committed to within the past month or two. But for the most part our competition has adjusted the pricing like we have.

Okay. And then just on the expense front, I know you guys ran through some of the initiatives that had caused expenses to fall into where they are today, but as you maybe continue to add lenders, or your asset generation starts to increase, do you think you can still hold that expense line steady? Or should we start to see that start to migrate higher?

I think over a longer period, certainly they will get higher; but we think in the relatively shorter term, over the next several quarters, the initiatives that we have done over the last couple of quarters should offset any increases we're seeing on the production side.

Okay.

Just another thing, Collyn, in that regard is a lot of the -- what we call the investments that we have made over the last couple of years in, I will call it, some of the fixed costs, more of the back-room functions, those have been made. So we anticipate being able to grow the balance sheet with minimal impact on some of the support areas.

Okay, that's good. And then just one final question on the deposit side. Your loan growth seems to be outstripping deposit growth a little bit here. How are you thinking about your deposit strategy going forward? Is it intentionally -- are you intentionally trying to put on CDs? Or just maybe if you could talk a little bit about that.

On the CD side, the growth in there is really participations that we have done in the CDAR program with the one-way buys. So we've actually had a decline in customer CDs.

We've not been aggressive on the pricing side as of yet. We think we still have some room on the increment to do the funding from a wholesale side, which we think at this point is still incrementally cheaper with the level of loan growth that we have had so far. But that is something we are constantly taking a look at.

Okay. That's helpful. I will hop off. Thanks.

Thanks, Collyn.

Matthew Breese, Sterne, Agee.

Just to be clear on the new loan yields, so the 5-year treasury is up anywhere from 55 to 65 basis points from year end. New loan yields based off either the FHLB advances or the 5-year treasury -- how much of that increase has been passed on to new loans?

Well, in terms of the customer-facing, it has all been passed on. Our spreads are -- we've maintained our spreads, but that cost hasn't passed through to the customer.

You guys are seeing in new loans the full 65 basis points --?

Right.

Yes.

Yes. And as loans reprice, that is reflected in the repricing as well.

And how much of your commercial loan portfolio is priced off of either the 5-year treasury or FHLD advances?

It is probably about a quarter.

You still have your --. (multiple speakers)

We still have close to -- a very large percentage. Maybe about $1.1 billion to $1.2 billion of the commercial book is off prime or LIBOR. So the majority of that book floats.

How big were percentages LIBOR upfront, I'm sorry?

About $1.2 billion of the total loan portfolio.

Okay. And then going back to the deposit cost strategy, you guys had mentioned -- it sounded like you were going to ratchet down some of the costs there?

We continue to look at that. We did make some adjustments to the savings rates this quarter. It is getting -- we say this every time. It's getting more and more difficult to continue to do that. We do have some higher-priced CDs from about 3 years ago that are coming off in the third quarter. That will help the funding. And then we'll get the full benefit of the subordinated debt redemption going forward in the third and fourth quarter.

Right now with the -- most pricing for bank deposits has been on the short end of the curve. We really haven't seen a lot of rate movement inside of 2 and 3 years. And competitively, nobody has really made any substantial moves. So we're biding our time for now and seeing how pricing develops.

Okay. And with all that being said, better spreads and lower funding costs -- and you guys say that line that you expect to see some margin compression in the quarter -- it sounds like we have to be pretty close to the inflection point. Where do you foresee the bottom, and how soon are we getting there?

Are you talking about the bottom of the margin rate?

Yes.

I'm hoping we are getting toward the bottom. But again, we are -- in terms of pricing, we're probably a little more sensitive to the very, very front end of the curve.

So as long as the Fed stays camped where they are, we're still going to feel that pressure. So I don't know exactly how many basis points we have. It is a function of how long we stay at this level. We're still seeing loans coming off at higher rates than what the new rate is going back on. We're still seeing asset yield pressure.

Okay, thank you, guys.

Jake Civiello, RBC Capital Markets.

Are there any one-time expenses coming in the third quarter associated with the planned branch closings?

I think they will be minimal if they are, Jake. The one branch is a really small branch, and we own it. And the carrying costs are pretty low on that. So I don't think they would have any significant impact on that -- material impact to the numbers.

Okay, is there anything else unusual that we could see coming in the second half of the year?

Not that we are aware of.

Okay. All right, thanks. That's really all I had.

David Darst, Guggenheim Securities.

On the credit costs and your level of NPLs, and the improvement in the substandard and watchlists, are you at a point where -- I guess you are just going to go through a longer trough, or your credit costs maybe go back to some historically low levels? Or is there still visibility where you know you've had some lumpiness that needs to be cleaned up and charged off?

You always are at risk if something big pops in there to some lumpiness, David. But I think if you look at the trends, if you look at -- it starts with delinquency. And we are at 1.4% from a delinquency ratio.

And then if you look at your criticized and classified loans, those are down another $20 million to $268 million. Then you take a look at your NPA levels. And those are down to 38.

So I think if you look at the last couple of quarters, the marks that we have had on the loans have been pretty conservative. So we have been able to reduce nonperformings without taking corresponding charges. In fact, this quarter we had about $2 million in recoveries from 3 or 4 larger ones that impacted charge-off numbers.

So I'm not going to sit here and say that we are going to have $2 million in recoveries every quarter, but I still think there's room to move down some of those levels, and do it without incurring a lot of charges over and above what we've already recognized on those accounts.

Is something -- I'm sorry.

Go ahead.

I was just going to say, it is something around $2 million to $2.5 million a good run rate for a couple of quarters on provisioning and charge-offs?

Provision -- it is probably -- if you just do the math, if we took $1.1 million this quarter or so; if you add the $2 million back, that gets you in that $2.5 million to $3 million range, probably somewhere in there.

Okay. And then would you be willing to further build the securities portfolio from this level?

We still have a fairly high level of interest-bearing balances at the Fed. So over time we anticipate shifting that from cash into securities.

Okay. And, Mark, I know in your filings you have the ALCO model for a parallel shift. Do you think you are inherently better positioned for the steeper curve? Or do you think the parallel shift is the best environment for you, with the short rates coming up?

On the parallel, it's a bit better. But we do have -- we do see some benefit when we run simulations for a steepener because of the better pricing for those 3- and 5-years, as well as a 3- and 5-year reset. That could depend somewhat on how that impacts the funding side to the extent it gets competitive longer out, and people begin to shift out of core into CDs. That could dampen that somewhat. But we still see a favorable benefit in managed income and margin from a steepener.

But not as much as you do when you run your model for a parallel shift?

That's correct.

Okay, got it. Okay, thank you.

(Operator Instructions). Gentlemen, it appears there are no further questions at this time. Do you have any closing comments?

I'd just like to make one other point of clarification regarding Jake's question on some of the one-time charges. I think maybe what he was trying to get at -- if you looked at it in the first quarter, we had some one-time charges associated with some branch closures. And the real estate that we had the branches on was newer, so the carrying charge was a little bit higher. And accordingly -- and we got it sold rather quickly. So thought it was prudent to maybe just take a little bit less of a price, just to move it so we didn't have to carry it.

But like I said, with -- these other branches we've had for many, many years, and the carrying values are fairly low. So we shouldn't expect to see any major, major impact from some of the one-time charges like we did in the first quarter.

Okay, operator. We also have a couple of questions that came in through email.

The first of those is why hasn't S&T increased the dividend, since earnings have increased significantly and the Bank has greatly improved asset quality?

The dividend is something that the Board of Directors takes a look at every quarter. There is a lot of factors that go into that, including our earnings and our outlook for earnings; the capital requirements of the regulatory agencies; the payout ratios; the dividend yield -- a lot of different factors.

This past quarter we did do some capital changes with the payoff of the subordinated debt. And we've got our payout ratio, given the first couple of quarters this year with improved earnings, in a range that we are a little bit more comfortable with, in the 30% to 40% range. So while it is something that we do look at every quarter, it's not something that the Board felt was appropriate at this time. But they will continue to look at it on an ongoing basis every quarter as we move forward.

Yes, that's it.

The second question that we got, and I will paraphrase it a little bit, had to do with how we can -- or how someone can try to predict what the quarterly loan-loss provision for S&T is. That is something that presents a challenge for us, as well.

We have historically had some volatility in our charge-offs and therefore also our provision levels. There's a lot of factors behind that, including our -- some of the size of some of our credits tend to be larger. And we also are fairly aggressive when there is a problem to take charges that we feel are appropriate, which tend to be larger when we do take them. We try to take them all at once, so that leads to some additional volatility in the credit. So it's a challenge for us to predict what credit losses are going to be over the next several quarters, so it is hard for me to provide any further insight into that.

Okay, thanks, operator.

I think with that, we will adjourn for the day, and we appreciate the opportunity to address some of your concerns. And we'll look forward to talking with you in next quarter's call.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.