S&T Bancorp Inc (STBA) 2014 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the S&T Bancorp third-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Mark Kochvar, CFO. 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 maybe included in this presentation. A copy of the third 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.

As we announced in this morning's press release, we did report net income of $14.7 million or $0.49 per share for the quarter, versus $14 million or $0.49 per share in Q2. Both net income and diluted earnings per share increased 20% as compared to the third quarter of 2013 results of $12.7 million and $0.41 per share respectively.

The main drivers of our performance were once again solid loan growth, disciplined expense control, and positive trends in our asset quality metrics, all of which have contributed to an improvement in the overall quality of our results this quarter. Q3 represents our ninth consecutive quarter of organic loan growth. For the period, loans increased $76.1 million or 8% annualized, and really the growth was a nice mix with C&I and CRE and is distributed throughout our core markets, as well as our newer ventures in Ohio and State College, where we're continuing to see some nice momentum.

Another bright spot is a favorable variance that we experienced in our non-interest expense numbers. Quarter over quarter, expenses were down $1.7 million or 5.7%. Mark will discuss some of the details in a few moments, but one of the main factors contributing to the lift in productivity is the -- is the experience that we are seeing from investments that we made in technology. With some of the efficiencies that we picked up, we've been able to manage our staff and reassign employees to other areas to support some of our growth initiatives. Asset quality continues to trend favorably as well. While we did incur a more normalized revision expense of $1.5 million, net charge-offs were only $700,000 or 8% annualized.

In addition, nonperforming assets declined by $1.7 million or right around 11%, and now stand at $13.7 million or 0.36% of total loans plus OREO. Overall delinquency declined 5 basis points to 0.54%. A criticize in classified loans decreased $18 million or 10%. So looking forward, we expect to continue to maintain comparable levels as the economy and our market continues to improve. We're also pleased with the performance this quarter, and we like how we're positioned for future growth.

We have the appropriate infrastructure in place to support our initiatives, and we also like our position from a capital perspective to sustain both organic growth as well as look for potential M&A opportunities. And finally, our board of directors has approved a 1%, or 5.9% per share increase to our quarterly dividend to $0.18.

Going back to the third quarter of 2013, this is the third time that we've increased the dividend and it represents a 20% increase from that period. So with that, I just want to again thank everybody for your continued support of S&T Bank, and I will turn the program over to our Chief Lending Officer, David Antolik.

Thanks, Todd. Good afternoon, everyone.

As reported and primarily as a result of our commercial organic growth strategies, we experienced an increase of $76.1 million in total portfolio loans for the third quarter. We continue to see positive momentum in both our commercial real estate and C&I portfolios, where we saw quarterly growth of $55.3 million and $24.2 million respectively.

With regard to commercial construction, loan balances declined by $4.8 million reflecting the seasonality in this portfolio, as well as the completion of projects totalling $25 million that moved to the permanent commercial real estate category. Commitments for future construction funding remain strong and unchanged quarter over quarter at $200 million. Negatively impacting the rate of our commercial real estate growth is a more aggressive permanent loan market. During the quarter, we received higher than historical payouts from permanent lenders on apartment, student housing, and ops projects.

We expect this appetite for quality real estate loans to continue within the permanent market; and while this poses an increased challenge, we remain confident in our ability to win and maintain relationships with quality customers to develop these types of projects. Our C&I growth was well diversified again this quarter, as evidenced by increases in the total number of accounts, total number of commitments, total gross commitments, and total outstandings.

Our efforts in Ohio continue to yield positive results and have helped to accelerate loan growth, as evidenced by a $53 million increase in total loans from the two LPOs for Q3. During the quarter, we added two members to our central Ohio banking team in order to round out our commercial and business banking production staff.

We now have teams of eight talented, seasoned, and professional bankers in both northeast and central Ohio, and we're in the process of recruiting talent and developing strategies to further leverage the opportunities that we see in Ohio. In all of our markets and on all of our commercial and business banking teams, we continue to benefit from a credit delivery model that is customer-focused and balanced by our strong credit risk practices.

Finally, we believe that our balance sheet is well positioned for a potential increase in interest rates, with 49% of loans tied to prime or LIBOR, another 20% of loans resetting as ARMs, typically in three to five-year increments. Now, Mark will provide you with some additional details on our financial results.

Thanks, Dave. The improvement in net interest income this quarter was primarily due to earning asset growth and a better asset mix. Average loans increased by almost $106 million, higher than our period-ending increase due to momentum from strong activity at the very end of the second quarter.

Securities were also up by about $29.5 million, as we continue to deploy excess cash. The net interest margin rate declined from last quarter due to some one-time items in the second quarter that accounted for about 4 basis points of the 6-basis point decline.

Our net interest margin has been within a few basis points of 3.5% for the past 10 quarters and we expect that to continue for the next several quarters short of any said moves. We did see a slight widening in the rate differential between new and payoffs this quarter. All that widening was due to some higher rate loans that paid off in the third quarter.

Non-interest income was overall relatively unchanged compared to last quarter. Consumer fees improved due to more activity in the summer season and our insurance benefited from higher renewals, which occur in the third and first quarter.

Decline in other was due to lower letter of credit fees, which fluctuate depending on renewal dates. Non-interest expense for the third quarter was lower in the second quarter by $1.7 million and helped to drive a lower efficiency ratio and a better quality of earning.

The two main items contributing to lower expenses this quarter were salaries and benefits and other. Salaries and benefits declined in part from continued bank-wide retentions efficiency, as evidenced by a net decrease in FTE of 17 since the end of last year.

The decline in other was primarily due to a decrease in the reserve for unfunded commitments, resulting from lower exposures and expected loss levels. Our tax rate for the quarter was unchanged from second quarter at about 25%. The year-to-date rate of just under 24% is in line with our expectations for the fourth quarter. The risk-based capital ratios improved this quarter, as earnings retention kept pace with loan growth.

We expect to see an approximate decline of 75 basis points in our risk-weighted capital ratios with the implementation of Basel III in the first quarter of 2015. As Todd mentioned, we like where we are from a capital perspective and can continue to leverage our capital with strong organic growth for the right M&A opportunity.

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

Thank you.

(Operator Instructions)

Collyn Gilbert, KBW.

Thanks. Good afternoon, gentlemen.

Mark, just to go back to your comments on the NIM. You had indicated that this quarter there was -- it was an unusual gap between some higher yielding loans that paid off versus the new yields that have put on; but going forward, is that spread narrowing, and is that really what's driving this tight NIM? Or are you still anticipating better earning asset mix shift?

We'll still see a little bit better asset mix. We still anticipate loan growth, and we still do have some cash on the balance sheet that we intend to wind down over time.

So we'll still get the mix benefit. I think we have seen over the last several quarters, probably the last seven or eight quarters, narrowing of the spreads between new and what was paying off.

I think this quarter was more of an anomaly, just because of the character of the loans that paid off. But I think we'll see that continue back on a narrowing trend going forward.

Okay, and so the question is on the new -- the new loan origination yields, have they consistently been about the same and the variation is really coming from what's paying off?

Right, so for this Q3, and we saw no change in the average new rate.

Okay.

What we saw was a little bit of a jump in the rate of the payoff.

Okay, okay. That's helpful. And then just -- I know -- could you talk a little bit about how you're thinking about funding the balance sheet? I know that the borrowings moved up again a little bit this quarter. Are you doing some extensions? Just talk maybe, if you could, about that.

As Dave mentioned, all our LIBOR and prime portfolio is now just under half of the balance sheet, and that's where our net growth has come from over the course of the year. That's grown from 45% at the end of the year.

So the incremental funding that we've done that hasn't been from the deposit base has been short both in borrowings portfolio and also in the CDs. From a strategic standpoint, we are going to be putting a lot more emphasis and effort internally on generating more deposits going into next year.

So, our goals are to self-fund from deposits more so than borrowings going forward into 2015.

Okay. That's helpful. And then just finally, Todd, maybe if you could just talk about, it sounds like you're getting growth across a lot of the markets.

How has the competition changed in some of the markets, certainly in what you're doing in Ohio and I know you said State College is looking good. Is that because there is less competition happening in those markets?

Is it just a share gain issue? Or are you actually seeing some economic growth in each of those pockets?

It's a little bit of a combination of all three, depending on the markets. I think certainly in Western Pennsylvania, we're seeing some nice activity across all sectors of our client base.

A lot of it's just having the right people, Collyn. Some of the teams we're bringing on, or not some, all of the teams are very seasoned bankers, as Dave said, and they are bankers who have long-standing relationships in communities.

Yes, some of it's dealer market share, and then just being positioned whenever clients are in the mood to expand or have the need to make an investment back into their Company.

Are you seeing much of that? Are you seeing borrowers either line usage increase or them moving and looking to expand the companies?

Yes, what was our line utilization this quarter? We just looked at it,

It was 44%

So it was up significantly from where it was last year, year-to-date, our existing line utilization.

The total commitments are up significantly as well, so outstandings, utilizations, total number of C&I clients, they are all -- they have all increased.

Okay, great. Okay. That was all I had. Thanks, guys.

Thank you, Collyn.

Matt Schultheis, Boenning and Scattergood.

Good afternoon. I was just curious with your pace of organic growth, has your appetite towards the M&A side of strategy changed at all?

I don't think so, Matt. If you look at our history, it's been a combination of organic growth and then over time, when we found the right partner to partner up with, we pulled that lever, too.

If you look at our history, again, it's -- for the most part, it's been with companies that have been good performers, and so then you're able to kind of integrate them effectively and really just ramp them up very quickly just by layering on some additional capacity in their ability to borrow and maybe some additional products and services. So we'll look at both.

Okay. Does your change in geographic focus, say Columbus to State College, does that mean that you'll be willing to look in those areas to actually acquire something too at this stage?

Yes, I think that's a fair assessment. We have looked at some things in Ohio. We just haven't quite found something that really fits our model, but certainly State College, we're seeing some nice activity and we've got a good team of bankers up there and off of that center part of the state is certainly -- would be something we would consider as well.

And then lastly, with regard to that, as we enter the budget and strategic branding season for banks, are you seeing more books or fewer books than, say, you did in the first half of the year?

I think it's about the same. I haven't seen anything really driving a big impetus right now of books yet, but I think you're probably right on the money. Banks are getting into that planning season, so that may increase over the next couple months.

Okay. Well, thank you.

Thanks, Matt.

Matthew Breese, Sterne Agee.

Good afternoon, guys. On the overall level of expenses, I know in the release you had noted that there were some timing issues, and going back to your earlier comments, I was just wondering how much was related to the timing issue? And related to that, what would be a good run rate going forward?

I would -- when we had our forecast for this quarter, it was about $29.3 million. So I would say up to about maybe $800,000 of that could be attributed to timing. I think that mid-$29 million is still a better run rate for us.

Okay. Then the difference, I'm assuming, would come from nonsalary and benefit lines?

Right, and the biggest thing was this reserve for unfunded commitments that decreased this quarter. So that's something that may or may not -- it's not something you can count on going forward. The variance there was about $500,000.

Right. Okay. Then, Todd, I think you had mentioned in your comments that you felt like the provision returned to a more normal level this quarter. Considering charge-offs and the pace of growth, is a $1.5 million about right when we think about 2015 per quarter?

We think so. We're right now -- I think our expectation $700,000 may be a little light, but when you look at where we are year-to-date, we're still in net recovery position.

I think a normalized environment, maybe in the 15-basis point range would be probably on the high end. But from what we're seeing, again, we like the trends that we're seeing on delinquency related to trends we are seeing on our criticizing classified nonperformers, so looking into the crystal ball, those give you your first indications of what you're going to see.

Right. Okay. Then given the disruption in the oil markets and the price of oil, I was just curious, has that had any impact on activity in Western Pennsylvania?

We haven't seen it as of yet. In fact, our C&I borrowers in that state continue to demand additional credit. So we're keeping our eye on it, though, very closely.

We know ultimately that the commodity price is going to drive activity, but at this point, we haven't seen any negative result from the recent downturn in prices.

I think the other thing that sometimes if you do see a little bit of a turn is okay, what happens to real estate prices? I would argue that today, vacancy rates in Western Pennsylvania probably are some of the lowest we've seen in 30 years, and they are some of the lowest in the country right now in certain classes.

That could maybe migrate back to more normal kind of a vacancy environment; but again, I think it's a long-term play. There will be some fluctuations in prices and there may be some periods where it does have an impact on borrowing demand.

We haven't seen it yet, but again, as Dave said, it's something that we're looking at. Also, I think with some of the diversification into some of the other markets out into Ohio and State College, will help to kind of offset some of the, maybe the organic growth that we've experienced from our core market. So I like that diversification, getting in some new markets.

Right.

The other thing I just want to mention, too, Dave did mention in his comments, but he mentioned about hiring a couple people out in Ohio. Again, that -- the lift-out or adding talent to our bench has been very important to some of our growth.

He also hired a very solid C&I lender in the Pittsburgh market that probably has 30-plus years of client relationships that will be coming over from a bigger competitor and we expect that he's going to hit the ground running pretty quickly and we'll be able to generate some nice volumes for us as well.

Wonderful. Thanks for the color, guys.

Thanks, Matt.

(Operator Instructions)

William Wallace, Raymond James.

Good afternoon, guys. How are you?

Good. How are you doing, Wally?

Good, thanks. Most of my questions have been asked, but, Mark, you mentioned there has been maybe a little bit of a change of focus internally, shifting more towards deposit gathering. I wonder if you could expound on that a little bit, give us a sense of what you are doing and what you're targeting?

I wouldn't call it a shift, I would say we're just adding that to the focus. I don't think it's going to lessen what we're trying to do on the loan side at all.

But we're just trying to reorient the focus internally on deposits, establish better accountability with our lines of business, the way we're organized, and set goals and expectations for people. We think with the decline that we saw in loans a few years back, we all had plenty of deposits to work with; and now that we're in this growth mode, I guess from a liquidity perspective over longer term, we need to have those deposits to keep pace with loans.

We think we're more than capable to do that, but just something we need to refocus internal resources on.

Right. The other point I would like to make there, Wally, the last couple years have really the strategic focus of the organization has been asset generation.

That will continue to be a focus, but also in conjunction with that, deposits are going to get more of an emphasis, as Mark said. I think we have the right folks out on our team that will be able to achieve the goals that we're going to set for them and execute on our strategies.

Are you going to -- is there going to be some sort of compensation shift? Or is it really just more turning management eyes to it as a tool when they are reviewing lenders, or how do you--

It will be a combination. So as Mark stated, we're going to create a more, stronger accountability here. There will be a shift in some of the commercial and business banking incentive plans to emphasize deposit generation as well. So a combination.

Plans on the retail side of our operation as well.

Okay. And then along the same lines, how has the experience from the deposit side been in your Akron and in Columbus markets?

It's been good. It's been good.

So we do have -- we did get banking powers in Ohio so we can accept deposits now if we choose to open a branch. I don't know that we're going to be going crazy on building out a retail network out there.

At some point, it may make sense to put a private banking-type model of an office in out there. Like we say, we have treasury management people that work closely with our lending teams, we are able to put in the remote deposit capture technology. Pretty much for every business client that we're bringing on board, we're gathering deposits, along with the loan. That's the expectation and our folks out there are doing a very nice job in capturing that.

Okay. Thanks, guys. I appreciate your time.

Thanks, Wally.

Thank you. There are no further questions at this time. I would like to turn it back to management for closing comments.

Well, I just want to thank everybody for participating in today's call, and Mark and Dave and I appreciate the opportunity to discuss this quarter's results and look forward to hearing from you in our next conference call. Hope you have a good earnings season, and we'll talk to you in about 90 days.

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