S&T Bancorp Inc (STBA) 2014 Q1 法說會逐字稿

Greetings. And welcome to the S&T Bancorp first quarter 2014 earnings conference call. (Operator Instructions)

As a reminder, this conference is being recorded.

I'll now turn the conference over to your host, Mr. Mark Kochvar, CFO. Please proceed with your conference, sir.

Thanks very much. And good afternoon, everybody.

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 if you are using the webcast. 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 first 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.

Thank you, Mark. And good afternoon, everyone.

As announced in this morning's press release, we reported net income of $14 million, or $0.47 per share for the quarter, which compares very favorably to both the fourth quarter of 2013 results of $11.9 million, or $0.40 per share; and the first quarter of 2013 of $12.3 million, or $0.41 per share. So this represents an increase of 18% over Q4 and 14% over the first quarter of last year respectively. And again, the financial performance this quarter is really just a continuation of the focused execution on our strategic initiatives by our team members.

I think, first and foremost, really, you saw a loan growth of $61.7 million, which is about 7% annualized. I think this growth is really, again, attributed to the strength of our bankers in all of our lines of business, and more importantly their ability really just to foster long-term relationships with clients in our markets.

I think on a year over year comparison, the portfolio has increased about $246 million or 7%, which, again when combined with our disciplined deposit pricing focus, has resulted in an increase in net interest income of $1.9 million, or right around 6%.

The second area of strategic focus for the organization really is continuing to look for ways to improve efficiencies and manage expense levels. Again, this quarter, non-interest expenses for the quarter were $28.9 million versus $29.4 million in Q4, and also $31.6 million in the first quarter of last year.

I think, really, one of the main contributors has been the ability of our staff to identify areas where we can right-size and reallocate some resources. So for the period, we're down since the beginning of 2012 -- or, I'm sorry, the end of 2012 -- we're down 59 FTEs, which is about 5.9%. So this has really enabled us to reinvest our resources into areas where we can grow the bank without drastically impacting our efficiency numbers.

During the quarter, I just wanted to mention that we also closed another one of our branch locations. And we're going to continue to evaluate the retail network going forward.

We've talked at length about asset quality in prior calls. And our efforts to really proactively managing portfolios have enabled us to once again post some very favorable results.

For the quarter, we had net recoveries of $72,000, which helped to significantly reduce our loan loss provision for the quarter, which totaled $289,000 and compares very favorably to our fourth quarter and first quarter of last year provisioning expenses of $1.6 million and $2.3 million respectively.

Furthermore, nonperforming assets decreased by about 6.6%, or $1.5 million, and now stand at $21.4 million. And the nonperforming assets, the loans and OREO ratio is 0.59%.

Also want to mention efforts to boost non-interest income levels. Fee income for the quarter was relatively [flat]. But the big variance was a lift in our wealth management division of about $400,000, or 16%, which really helped to offset decline in mortgage banking activities. And today, assets under management stand at about $1.9 billion, which is a 4% and 17% increase over the fourth quarter of last year and first quarter of 2013.

One of the ways that we've been able to manage expenses has been through investments that we've made in technology platforms over the years to continually improve efficiencies, enhance delivery channels to our clients. At the present time, we have six significant projects underway that's going to help us to assist with these initiatives.

We expect these projects really to have no impact on net income in the short run. But long term, with these investments, we do expect to achieve increased efficiencies. It's going to help us control expenses, and also drive revenues through enhanced distribution capabilities.

And finally, I want to mention our efforts to expand our brand into some new markets. Again, we've talked about the Northeast Ohio. And that team continues to build market share. And also, preliminary activities in both Central Ohio and State College are very encouraging.

Dave Antolik is going to discuss these in greater detail in his comments. But again, overall, we're extremely happy with how these bankers, as well as the focus of our team members in existing markets, have positioned our company to continue to grow organically in the coming year.

From a capital perspective -- we like how we're positioned, as we feel that we have adequate levels to support organic growth, and also potential M&A opportunities. Also, we're pleased to announce a 6.3% increase to our dividend from $0.16 per share to $0.17 per share for the quarter -- and also, when you compare it to this period last year, so it's up about 13.3%.

Again, thanks for your time this afternoon. I know I was a bit longer than usual. But we have a lot of positive momentum going on throughout the organization that we just wanted to share with you. And Dave Antolik is going to talk a little bit about some of our lending opportunities right now.

Thanks, Todd. And good afternoon, everyone.

As Todd mentioned, we're very happy to report another quarter of solid loan growth. This represents our seventh consecutive quarter of loan growth and is a direct result of our organic growth strategy. This strategy includes entrances into vibrant, new markets where we can take advantage of our size and relationship banking philosophy.

With regard to our approach, once we identify a new market for entrance, the key factor in determining our success is our ability to staff our LPOs in the same manner that we staff our existing in-market offices, with seasoned, professional commercial bankers.

During the quarter, we opened our Central Ohio loan production office in Dublin. And to date, our team of commercial bankers have booked $12 million in new commercial loans and generated 21 new deposit accounts. In addition, the Central Ohio team had a solid pipeline to support future volumes. We're very excited about these results, given the short period of time that the office has been open.

We continue to see solid loan growth in Northeast Ohio, where our loan balances now exceed $112 million and our deposits exceed $13 million. We are currently in the process of expanding our capabilities in that region to include a focus on treasury management and private banking. We're also pleased with the progress that we've made in State College, where we've filled key leadership roles and are in the process of rounding out our teams to enable us to approach the market with a full complement of banking services.

Terms of loan activity for the quarter -- balance growth was driven primarily by a C&I increase of $42 million, or 5%. Key drivers include increases in total line commitments, balances and utilization. Line utilization accounted for $27 million of the C&I increase, and we saw utilization rates increase from 41% to 43% for the quarter. Included in these increases is a $7 million increase in floor plan assets.

The remaining C&I growth was the result of new customer acquisitions. Our commercial real estate balances for the quarter were flat, while our commercial construction portfolio increased by nearly $24 million. We continue to benefit from average fundings of approximately $10 million per month in that portfolio.

Finally, competition remains fierce in all of our markets. But we've been able to maintain loan spreads without stretching on credit. Our commercial and small business pipelines remain strong and are at levels slightly higher than at this time last year.

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

Thanks, Dave.

Net interest income was relatively unchanged compared to the prior quarter. We overcame the $600,000 impact of two fewer days through strong loan growth and higher prepayment fees. The net interest margin continues to be very stable, at 3.51% this quarter; and has been within 2 basis points of 3.5% for the past seven quarters. The rate differential between new production and payoffs continues to narrow and is now just 50 basis points overall and closer to 30 basis points for the commercial portfolio.

We did have higher-than-expected cash balances, which impacted the asset mix, to deposit inflows that were in part temporary and seasonal in nature. We believe that our balance sheet is in a good position for the potential of higher interest rates.

A significant portion of our loan portfolio, almost 45%, is tied to prime or LIBOR, with relatively few floors in effect. Our securities portfolio is relatively small and represents less than 12% of total assets.

The biggest unknown is how our customers and our competition will respond to higher rates. But we think we will have sufficient flexibility derived from the expected lumber pricing to retain and even grow deposits while still improving margins.

Although difficult to quantify, there did appear to be some weather-related impacts on both non-interest income and non-interest expense this quarter. Activity related to both deposit and card fees were slower than normal in January and February but did rebound in March. This is also true for mortgage banking, which has also been impacted by the slowdown in refinancing. In response, we reduced FTE in that department by 3 through attrition and reassignment.

The mortgage pipeline is up from its low point in the first quarter, and we do expect to see better activity in both our sales to secondary market and what we portfolio on our book.

The improvement in insurance is due to a combination of receiving our annual profit sharing from the carriers, which was in line with last year; normal seasonal fluctuations, and better performance from our credit insurance products.

Non-interest expense for the quarter was well controlled and better than our expectations. Weather played a role by delaying the timing and expense of some internal projects and activities. We expect that the quarterly expenses will be more in line with our previously disclosed estimate of less than $30 million.

Our tax rate of just over 21% is in line with last year. Improved pretax earnings this year could result in slightly higher rates as we move through 2014. The risk-based capital ratios improved as retained earnings growth offset loan growth. And as Todd mentioned, we like where we are from a capital perspective and believe that we are well positioned to absorb any BASEL III impact, support organic loan growth, effectively deal with acquisition opportunities, and provide for the increased dividend announced today.

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

(Operator Instructions) William Wallace, Raymond James.

On the credit side of the house, you had net recoveries for the period. Was that driven by a recovery of one large credit? Or did you have several recoveries? Could you give me a little color there?

Yes, William, this is Pat Haberfield.

Actually, it wasn't just one large credit; we had some pretty nice recoveries from several different credits that we worked on this quarter.

And net charges for the quarter were about $1 million, so (multiple speakers) right. [I'm sorry], gross.

And then, how did the gross charge-offs compare to what you saw in the fourth quarter?

Oh, down.

Oh, it was down. We saw in the fourth quarter pushing $4 million in gross. It was down substantially.

Okay.

And then, as I look at your reserves and kind of think about your loan growth, would you say I should think about a reserve-to-loan ratio? Or are you guys kind of looking at it on a dollar basis? How are you thinking about that, and just kind of trying to think about my model?

A little bit of combination of both. We've been keeping the dollars. The dollars have remained flat. And the percent has been coming down. One of the main drivers in our model is the credit stack with the ratings. And that has been improving as well. And the higher past credits that we have have a much lower historical loss.

So it's kind of a combination of both, so we don't look at just one or the other. But the dollars have been staying equal. It depends on the net loan growth, too.

So as you think about moving forward, obviously your historical loss experience is going to improve.

Right.

When you think about the management discretionary piece of your reserves, do you think that there's a floor made on a reserve-to-loans ratio that you guys would want to make sure you didn't drop below, no matter what the model tells you?

Yes. I mean, that's a tricky area, because there's a lot of different opinions on that. And then we'll continue -- we have a committee that reviews that on a quarterly basis, and we'll continue to evaluate that as we go. So it's hard to say where that's going to end up.

Okay.

And then, one question on the margin -- you've been kind of bouncing around that 3.50% range. Do you think that that's where we stay, given what you're seeing in the competitive environment now and outside of a rise in short rates?

Right. Outside of a rise in short rates, it'll be difficult for us to meaningfully increase that. We have, you know, some perhaps additional pressure later in the year. We have some cash that we anticipate deploying over the course of the next couple quarters that will improve the mix and offset some of the loan pressures that we're still feeling. But as I mentioned, we've seen a narrowing of the rate differential between the new and the payoff. And that's helped a lot.

So we could see a little bit of pressure, but I don't think it's going to be, at least for this year, more than a few basis points per quarter in the back half of the year.

Great. I appreciate it, guys.

Thanks, Wally.

Taylor Brodarick, Guggenheim Securities.

Looking at the LPO strategy, it seems like it's been really successful in boosting loan growth. So just thinking in terms of kind of whole bank acquisitions, what would be the advantage in doing that again when the LPO strategy seems to be working? Especially at Central Ohio, it seems like there's been a lot of deals. So I don't know how you evaluate the two.

Yes. I think they're kind of independent of each other. We're going to continue on the LPO strategy. I would say probably, though, we've made a couple very significant moves in the first quarter. So the focus for the rest of this year in that area will be just really kind of getting them up and running. And as Dave said, they're kind of coming out of the chute pretty solid right now. But just making sure we integrate those successfully into the organization.

And we're always on the lookout on the M&A side. And we're going to do what makes sense to the organization, too. So I think we've been pretty disciplined over the years, and we're not going to really deviate from that, that we want to look for the right company to partner up with that's going to add value to our shareholders.

Okay, so you see advantages still for both, despite the focus on LPOs lately? Okay, great.

Yes. I mean, one could augment the other one, too.

Yes. Exactly.

And then, on kind of the efficiency initiative -- I guess, maybe a little more detail on what the opportunities are now with the improvement this quarter? What do you see going forward that you could improve on?

Well, like I said, we have six IT projects in the pipeline right now. For example, one is automating our floor plan system, right? And --

(Multiple speakers)

Right.

-- have about a $95 million portfolio in outstanding balances, about $140 million or $135 million in commitments. But we support 4,000 notes, plus or minus, on kind of a more manual basis. So we're rolling out just on May 1st a system that's going to automate that. So it's going to improve reporting, it's going to improve some of the control environment. It's also -- just make [it] a lot more efficient over there. And then you have four or five people in that area that we're going to be able to reallocate into other areas of the company, where maybe we have some pressure and need some help over in the operations side.

Again, deposit origination side -- that's probably more towards the end of May. And again, we're going to automate that system, where a lot of it is going to be delivered through electronic signatures. But again, you have four or five people, when we're looking through these areas, that we're not necessarily going to cut, but we can reallocate and not have to hire in other areas.

And again, later in the year, we're looking at a mortgage origination system, which is going to kind of give us some of the same bells and whistles as the deposit side. We're also looking at upgrading our commercial loan system. It's going to take it from cradle to grave, from the time customer makes an application through the credit process, and then ultimately when the loan gets booked on the system. So we won't have to touch that paper as it kind of goes through the system. And it's really just going to improve a lot of efficiencies and how we serve the customer, which we think will ultimately grow in the revenue side of the house, too.

So (multiple speakers) some of the areas that we're focusing on this year.

Great. Appreciate the detail.

And then, apologies if I missed it -- do you quantify any impact on weather? Was it maybe just delaying new activity?

We don't have a solid number. But it seemed to have impact both on the fees -- especially on the activity deposits and card fees -- and then on expenses.

Right.

Our P&E was low, and we know that there's some projects that just didn't quite get off. But those expenses -- some of those expenses will still come.

Great.

Thank you, everybody. Appreciate it.

Thank you.

Collyn Gilbert, KBW.

Mark, just a quick follow-up to your comment just on the expense side. You had said that expenses would probably migrate up to that $30 million level. And then, if we just think about the efficiency initiatives, Todd, that you laid out, is that really going to be more, then, on the revenue side, in the sense that we should continue to see increases of expenses in investments of this nature, but yet you hope to get higher revenue out of it to lower that efficiency ratio? Or how do we tie all that together?

Those expense initiatives and the cost of those are already embedded in our plan numbers, which includes that. A little bit less than $30 million per quarter is what we're expecting.

Okay.

But most of that is baked into there. So I think a lot of it is just -- that gives us the ability to grow revenue without increasing expenses as we move ahead.

So we'll see --

Okay.

-- immediate increase in either revenue of expense. It'll just give a better foundation to grow off of.

Okay, that's helpful.

And then, Todd, to your comment about M&A -- can you just sort of update us on your thinking on that, and what the environment for potential targets looks like -- the geographies that you're interested in? And is there any -- are you seeing any behavioral changes among some of these smaller banks in the last six months than what you'd seen prior to that?

I think, certainly, we talked about some of the LPO activity we have out in Ohio. So we're starting to take a little bit of a closer look at that market. And I think you're starting to see some consolidation from some of the smaller organizations out there. Certainly, opening up the State College market would kind of get us a little closer to that central part of the state. But there was a small deal that went off in our marketplace here in Pennsylvania.

So there's a little bit more chatter. But I still think it's probably -- and certainly in the Pennsylvania market, there's still not a real robust market on M&A. But we're going to, again, just continue to have dialog with people and, I think, position ourselves for -- when the opportunity arises or they decide to look for a partner -- that we're positioned as good as we possibly can be. And it's going to mean kind of keeping our end stream going on a consistent basis, and trying to get the stock price up a little bit, so it provides us with the next currency when those opportunities arise.

That's helpful.

And just a question -- what was the prepayment income that you guys had this quarter?

It was about $480,000.

Okay. Do you know what compares to last quarter?

It was a lot lower last quarter. It was about -- less than $30,000.

Okay. And is the more normalized run rate that $30,000 level?

There's a lot of strange things that go through margin. And we look at that overall number. It was about $200,000 high this quarter.

That's super helpful.

Okay. Thanks, guys.

Thanks, Collyn.

(Operator Instructions) Matthew Breese, Sterne Agee.

I wanted to get back to the provisioning levels. And it's been a really tough figure to target, to model, from our perspective. And just kind of thinking about that number on an annual basis -- should we be figuring on it higher or lower than where it was in 2013?

Well, we would hope lower. But exactly how much is going to just depend on what happens.

Pat?

Yes. I think we've looked at it -- we didn't realize maybe going in that 2014 was going to be, from a credit perspective and loss perspective, that great of an improvement over 2013. It could be slightly.

So I think maybe if you look at modeling something, we modeled at basically a flattening to last year. [But I ] think maybe we'll be down slightly.

(Multiple speakers)

Certainly, with the results that we had the first quarter kind of helps to keep that in check, at least our expectation is that it would be down a little bit after Q1.

And again, I think you have to kind of look at the whole picture, as we alluded to. Delinquencies continue to come down. Your nonperforming loans are down another 6% or so, another $1.5 million. And the formation this quarter was maybe $1.8 million or so. So we're not seeing a lot run in that back door right now.

And while criticizing classifieds -- they were up slightly, but there are a couple accounts in there. But I think today, we still are pretty comfortable with the trends that we're seeing in those areas. So again, we like to look at kind of all those different components in aggregate to kind of try and give us a little bit of a picture on where we're going. And again, those trends continue to be positive again this quarter.

Right. Okay. That's helpful.

It's kind of been frustrating on our end, too, Matt. But when we have kind of a better-than-expected result, like this quarter, we'll take that.

When we look back historically, we had a number of years where net charges are below 10 basis points. And while we'd certainly like to see those results again, we can't count on those low levels.

Okay.

And then, thinking about forward loan growth -- the last four quarters have been pretty solid, ranging from 1.5% to 2% sequential growth. And just kind of wanted to get your thoughts on how sustainable that level of loan growth is.

Yes. We believe with the strategy we've employed organically that it's sustainable. We don't see anything in terms of pipelining that would lead us to draw any other conclusion. And as we build out our capabilities, we know we need to grow in a balanced way.

So we're looking at this private banking initiative, particularly in Northeast Ohio, to try to grow some consumer loan balances as well. Although we haven't gotten where we need to in terms of overall loan growth and balance -- that's something that's on our plate, and we believe that it's sustainable.

The other area that's really, I think, been meeting or exceeding expectations has been the small business group that we put in place about 18 months ago. And their originations were off a little bit this quarter. We think, again, there's an area where some of it was attributed to the weather. But their pipeline is up significantly over where it was at this point last year. And they continue to just generate a lot of nice looks.

The nice thing about that business, too -- it leads to a lot of other opportunities through insurance, some treasury management, the ability to go in and generate some consumer lending for, like Dave said, private banking. And he mentioned Northeast Ohio. But also State College is an area we're really going to focus some attention on, trying to drive some of that particular line of business.

That's probably the one area that's been a little bit disappointing for us has been on the consumer side. And again, we're taking a look at how we kind of ramp that up. So that's kind of going to be the next piece for us. I think we focus on the commercial, then the small business; and now we're going to attack the consumer. So over probably the next 12 to 18 months, we would hope to start to see some improvement.

And quite frankly, we've stemmed the tide a little bit. When you look at -- you go back over the last probably six quarters or so, we're starting to see some flattening where -- not a lot of growth, but we're not having a lot of payoff in that portfolio as well. So we think we're kind of starting to turn the corner, but we know we have some work to do in that area. But it's still a small portion of our overall loan book.

Right.

And if you had to kind of draw the map out of the $60 million in net loan growth we saw this quarter, how does it shake out in terms of your core Pennsylvania markets versus Ohio?

The majority of loan growth came from the core markets. We saw some activity in Columbus, but those guys are really just getting off of square one. And Northeast Ohio had a good quarter; not as good as they did last quarter. So it's good core growth. A lot of it is coming within the core geographies.

Okay.

Last question -- I think you'd mentioned that we could experience a higher tax rate from this quarter. What should we be thinking about there?

For us, if it goes higher, it'll be driven by higher -- just higher pretax. So right now, we're at a little over 21%. If we continue to expand on how our results are on a pretax basis, that's what could drive that a little bit higher. We still think it wouldn't go too much higher than the low to mid-20s. So that would be with improved bottom-line results, too.

Understood. Thank you.

Thanks, Matt.

William Wallace, Raymond James.

Just want to follow up. I wanted to maybe talk about the wealth management business. You had a very strong potential increase in the fees there. And I'm curious if that's being driven by new customer acquisition or about just a bounce-back from a weak fourth quarter. If you could just talk a little bit more about that line item?

Really, it's a combination. I mean, we did increase the fee schedule over on wealth last year, I think in the second half of the year. And also, I think we're taking another slice at that in January of this year.

There was pretty strong new customer growth this quarter. We had a couple of large liquidity events for some customers, and then also just a combination of market improvement, too. So all three. Good stuff.

The other area -- wealth and insurance are two areas that we really look to kind of right-size, if you will, and really streamline operations. So when we talk about some of the reduction in staff, there was probably eight or nine in one area and seven or eight in the other area that came out of both of those respective lines of business.

So from a contribution standpoint, both of those lines of business are going to look a lot different this year than they did in 2013.

In your prepared remarks, you didn't say specifically, but it sounded like perhaps you've invested in -- I'm guessing maybe it's insurance and wealth, and the new markets including State College? Is that true?

Probably right now, it's more been on the LPO side of the new markets. And we've had some staff out in certainly Central Ohio at the State College. And that's been really the focus right now.

So has that been a last-three-months kind of addition? Or has that been a last year kind of addition to the --

On wealth, or --?

In wealth.

No, we really haven't -- well, some of the changes -- the reallocation of the staff and resources is probably more in the fourth quarter, third and fourth quarter, of last year.

So do you expect --

We haven't had anybody over on that side of the house, Wally, if that's what you're asking.

Yes, that is what I'm asking. So I guess --

No.

-- also, what I'm trying to get at is -- I look at the markets, and they certainly didn't improve that strongly in the first quarter. And 15% sequential growth -- I'm just trying to get a sense of how sustainable growth is going to be in that line item this year; what your expectations might be.

About half of the increase came from the traditional trust business. And it's based on the increase in assets under management, primarily. And then, about another -- a little over a quarter of it came from more activity in the -- what we call discount brokerage side, or financial services side, which is more transaction-based. And then we did have about a $70,000 increase in the mineral management area. That's related to the Marcellus area.

So it's a broad mix, where all of the kind of sub-lines of business that they had did better last quarter. So we do think the majority of that is sustainable.

All right. Thanks, guys.

Thanks, Wally.

Thank you.

At this time, I would like to turn the floor back over to management for any additional or closing comments.

Thank you, Donna. And again, I just want to thank everybody for participating in today's call. And Mark and Dave and I appreciate the opportunity to really discuss our quarter results.

We think we have a lot of momentum going on, and hopefully we'll be back next quarter for some more good news.

So thanks again.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.