S&T Bancorp Inc (STBA) 2014 Q4 法說會逐字稿

Greetings and welcome to the S&T Bancorp fourth quarter 2014 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Mark Kochvar. Thank you. You may begin.

Good afternoon and thank you for participating in today's 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. The statement provides cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation.

A copy of the fourth 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'd 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. Good afternoon, everyone. I just want to apologize. I'm fighting a little bit of a sinus today, so I hope you can understand me okay.

I am pleased to report net income of $14.5 million or $0.49 per share, which is a 22% increase over our 2013 fourth quarter results of $11.9 million or $0.40 per share. For the full year, we reported net income of $57.9 million, or $1.95 per share which is a 15% increase over Q4 of last year. Fourth quarter is a continuation of the positive operating trends that we've experienced throughout 2014. For the period, we did have solid loan growth of $89.5 million or 9.6% on an annualized basis which helped to offset margin compression and grow net interest income by over $500,000.

Excellent asset quality metrics once again. Net charge-offs for the quarter were $511,000 or 0.05% of average loans and, again, disciplined expense management which were up only $270,000 versus Q4 of 2013, and it did include approximately $689,000 in merger-related expenses.

On an annual basis, again we're very pleased with our results. We experienced average loan growth of $259 million or 7.5%, which had a variable favorable impact on net interest income which increased 8.8% -- or $8.8 million or 6.4%.

Non-interest expense totaled $117 million and was flat to 2013. We were able to accomplish this while making significant investments in talent, technology, and other areas that will enable us to continue to grow our balance sheet and maintain our expense discipline going forward. Again, significant improvements in asset quality metrics was a big contributor to our performance.

Provision expense was $1.7 million versus $8.3 million in 2013. Net charge-offs for the year were $58,000, which on a percentage basis was 0% to total loans. And also good story on our non-performing assets which declined by $10.2 million or 45% to only $12.6 million in the current level of non-performing assets now stand at just 0.33% to total loans plus OREO.

Also as of year end, criticized and classified loans totaled $139 million which is $49 million or 26% reduction year-over-year. So while we're pleased with our results and asset quality, moving forward we will continue to monitor all aspects of our loan portfolios and identify any potential issues as soon as possible to stay on top of it. But, in summary, we like the positive momentum and trends we're seeing in loan growth, expense control, and asset quality, and we're excited as we look forward to 2015.

Dave Antolik is going of to touch base on lending activities in a few moments, but I do want to mention that we've hired a seasoned banker in the Rochester, New York, market where we have developed a nice book of business over the past 15 years and expectations and that we will experience results similar to our Ohio and State College markets. And also bankers in our core markets continue to do a nice job of solidifying relationships with existing customers as well as developing and identifying new opportunities, and we expect continued growth in these areas as well.

And, finally, things are progressing very nicely with our Integrity Bank acquisition. They announced earnings last week which were in line with expectations. In addition, the integration is going very well and we're on track to close on the holding company level in early March. Merger of the bank and conversion of IT systems are anticipated in May and, as expected, we've been spending a considerable amount of time in Camp Hill and I get more excited about the potential opportunities in the south central Pennsylvania market each visit. They have great people, great customers, and a great market.

And, again, just want to thank all of you for our support this past year, and I assure you that all the folks at S&T Bank are working very hard to earn your trust once again in 2015. And now I'd like to turn the call over to David Antolik, our Chief Lending Officer.

Thanks, Todd, and good afternoon, everyone. As mentioned we're very pleased to report another quarter of quality organic loan growth. Similar to prior quarters, this increase was driven by growth in total commercial loans of $71 million.

Leading the way for the quarter was an increase of $48 million in C&I balances. We continue to benefit from the investment we made in our floor plan area and during the quarter our floor plan outstandings increased by $24 million to $110 million, and our commitments increased by $21 million to $168 million.

New customers include automobile, motorcycle, and farm implement dealers. The remainder of the C&I growth was the result of diversified new customer acquisition. C&I utilization rates for the fourth quarter remain similar to prior quarters.

The balance of the growth came in our commercial construction portfolio where we saw an increase of $32.6 million. Within this portfolio, the largest growth components are multifamily and retail which represent 25% and 20% of commercial construction outstandings respectively. Construction funding for the quarter was $55 million, which compares favorably to last year's quarterly average of $51 million. These increases were partially offset by a decline in the permanent CRE portfolio of $9 million. This was primarily driven by property owner seeking permanent, nonrecourse, long-term fixed rate financing for retail, multifamily and office projects.

With regard to our loan production offices, Northeast Ohio ended the year with $187 million in outstandings and Central Ohio ended with $65 million. We continue to explore opportunities in our Ohio markets that include talent acquisition and the expansion of product offerings.

In State College our team continues to build the pipeline, and we are pleased with the progress that we've made and believe that we will drive positive results in 2015. We are also excited about our entrance into Western New York where we just started the process of building our team in Rochester. In total, our commercial and business banking pipelines remain solid and are slightly higher than what we experienced during the second and third quarters.

Finally, with the recent volatility in energy prices, we've received questions regarding our exposure to the oil and gas industry. Our outstandings in this portfolio totaled $53 million at year end. It's important to note that we do not have significant direct commodity exposure. The overwhelming majority of this exposure is to service companies that support natural gas drilling activity. We stay in close contact with these customers and they report continued strong business activity.

We believe that over time reduced energy prices will benefit the vast majority of our customers and far outweigh any potential slowdown in drilling activity. Mark will now provide you with additional details on our financial results.

Thanks, Dave. Our net interest income improved this quarter by over $500,000 due to continued strong loan growth. The net interest margin rate declined 7 basis points from the prior quarter due to a combination of factors. The largest is that demand from our customers continues to be predominantly floating rate loans and debts to prime and LIBOR.

All of our loan growth in the fourth quarter came in floating rate loans. The gap in rates between new production and payoffs and pay downs shrank this quarter to only 35 basis points, the lowest we have seen, but our weighted average rate on new loans was about 3.62%, resulting in a 4 basis point decline in average loan yield. Asset mix also played a role. Higher earning loans represented a slightly smaller percentage of earning assets this quarter.

Finally, we saw an increase in our deposit costs in the fourth quarter as a result of some CD promotion. While these promotions were successful in you attracting funds, the longer term and higher rate of the offer did increase costs. Given the recent further decline in rates, we are focusing our deposit gathering efforts more on core and short-term CDs.

Starting the fourth quarter of 2014 we began utilizing brokered money market funds that we expect to replace some of our brokerage CDs. This accounted is for about $59 million of the increase in money market deposits.

Non-interest income decreased compared to the third quarter due to seasonality in our insurance business and the timing of how we recognize fees in our merchant business partnerships. Non-interest expense for the fourth quarter increased by $1.3 million. This includes $689,000 of expenses related to the Integrity merger. There will be additional expenses in the first quarter with the anticipated holding Company merger and in the second quarter when we expect the bank merger and systems conversion to occur.

Expenses for the year were well controlled, averaging about $29.25 million per quarter. We do expect S&T's run rate to be approximately $30 million in 2015, not including the Integrity acquisition.

Our 21.5% tax rate for the fourth quarter was a bit lower than anticipated due to some one-time adjustments. The full year tax rate of 23.2% will likely increase to the mid-20s as pretax income improves.

Capital ratios were little changed this quarter and earnings retention kept pace with loan growth. Slight decline in TCE ratio was due to a higher pension liability with annual adjustment to discount rates which decreased this year. Thanks very much. At this time, I'd like to turn it back over to the operator to provide instructions for answering -- or asking questions.

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

Our first question comes from the line of William Wallace with Raymond James. Please go ahead with your question.

Hello, guys.

Hi, William. Good morning.

My first question is, if you look at a map and you now add in Rochester, that's a pretty big leap geographically. So, I was wondering if you could talk a little bit about the strategic reasons behind the decision to begin loan production in that market.

We've had pretty good experience in terms of loan growth in that market. We've been lending into Western New York for probably 10 years and the outstandings in that market are close to $100 million. It just made sense for us to have boots on the ground there.

And the gentleman we're bringing over, Pat Tobin, we've known for that probably entire 10-year period. He's a former banker and was working on the real estate side of it, something that we've -- are very comfortable with his abilities and everything. So, again, we're looking for some good growth out of that market.

When you say $100 million outstanding, are you saying in Rochester or are you saying Western New York?

Rochester, Buffalo primarily.

Okay. And so now you've got -- you're opening up Rochester and you've got a little bit more now I guess time to get some presence in the Ohio markets. What's your kind of expectation from an organic basis of what you might be able to see in loan growth in 2015?

We expect to see pretty consistent loan growth compared to what we saw this year, past year, 2014.

High single digits?

I think that's reasonable.

And then, you said in the prepared commentary that all of your new loans in the quarter were a variable-rate product and the average yield was 3.62%?

That's the average yield on all the loans, but when we look at the growth, we actually had more growth in floating-rate loans than we did overall. So, the fixed rates continue to pay off faster than they're replaced.

Is that 3.62%, that's the weighted average rate on new production, right?

Correct.

Okay. So how does that compare to the third quarter?

It was down about 12 basis points.

Okay. And then, so presumably then you'll expect some continued margin compression in 2015, assuming that the mix remains weighted towards the variable-rate product for new production?

It's going to depend on if that trend continues where we're going to see most of that new production on the floating side.

Is there any seasonality? Is there any reason to think that, that trend would change?

No, not really, Wally.

Okay. Guys, appreciate it.

I think it's just the nature of the business. The more the commercial lending and the commercial real estate, construction funding projects. The one thing, the rates are the one area. The other thing I want to stress is that our bankers once we get that relationship, they've done a very good job on tying up other ancillary business as well and just keeping those relationships, which help in other areas as well.

Are these loans, the majority of them, without floors?

Yes.

At least you'll be positioned well if the Fed ever does anything.

We're not expecting that. We like to think that, but I think kind of how we're managing the Company, Wally, is okay, this is going to be another kind of looking out this year, going to be another tough year. So, we're going to focus on growing the loan book to offset some of that margin compression. We're going to focus on controlling expenses.

We did a, we think, a pretty good job of that last year and certainly the wild card is the asset quality. I'm not going to sit here and say that we would expect to have another $50,000 net charge-off year, but when you look at the trends on where we're going on declines and NPAs on declines, criticized and classified delinquencies, we like what we're seeing in those respective areas to manage those asset quality costs as well.

I'll hop off and let somebody else hop on. Thanks, guys.

Thanks, Wally.

Thank you. And our next question comes from the line of Collyn Gilbert with KBW. Please proceed with your question.

Thanks. Good afternoon, guys. Just to follow up on your comments there on credit. Obviously the trends have been really stellar. How should we think about that reserve then going forward? As you look on almost every metric, reserves to NPAs, reserves to loans, your net charge-offs have been really good. I would think that, that reserve could come down quite a bit. How are you guys thinking about that?

I'll probably defer to Mark on that. We're comfortable with the level that it's at. We are growing the loan book, so we need to kind of make sure that we're funding the new production appropriately as well.

The other thing that goes into that, we did have very, very low net charge-offs, but that's mostly because we had very good recoveries this year. We still had about $6.5 million of gross charge-offs. What we would not expect to repeat next year are those recoveries to that extent. So, there is some losses still in the portfolio, and then we are expanding into some of these new markets where we have a little bit less experience. So that factors into maybe maintaining a little bit higher of a reserve than what we otherwise might.

I do want to stress again some of the new markets we have brought on credit support to help us out with appropriate underwriting in those markets.

Okay. Okay. That's helpful. Mark, could you just kind of give us some thoughts on where -- how you're thinking about the securities portfolio, where you're adding, where you may see shrinkage, and just kind of the yield dynamic that's going on there?

Well, I mean, securities portfolio is a tough place to be right now, especially with the rates, where they've gone, especially recently. We're not overall generally very big on having a large securities portfolio. We have what we need to have proper asset liquidity on the balance sheet. We're getting close to the point where we're comfortable at that level. So, it would be more a function in terms of the size of the securities portfolio, just the size of the balance sheet, just to maintain that on-balance sheet liquidity.

In terms of what we're buying, we do buy a little bit farther out in the curve, primarily because we have such a short floating rate book of loans adding some duration to the balance sheet, to the securities portfolio just as a hedge against that in the event the Fed delays further their rate increases.

Okay. Okay. And then, just to circle back on your comments about the broker deposits, what exactly is it that you're doing? You brought in money markets to pay off some of the brokered CDs? Could you just go through that again? I'm sorry.

There's a program that's offered by a number of different entities where you can pick up brokered money market funds that come from some of the second-tier brokerage houses, and those funds tend to be -- they're still classified as brokered. They're kind of netting transactions that happen every day, but they're more stable than brokered CDs. They tend to stay a little bit longer.

So, we were getting a reasonably sized book of that and we opted to move a portion of that into the money markets because it's easier to manage, it's more stable, and it floats off the same index, LIBOR, that we use for a lot of our loans. So we're just in a transition period. I just pointed that out because you'll see some increases in money market funds that are customer deposit related.

Got it. Okay. Okay. That's helpful. Okay. I think that was all I had. Thanks.

Thanks, Collyn.

Thank you.

(Operator Instructions)

And our next question comes from the line of Matthew Breese with Sterne Agee. Please go ahead with your question.

Good afternoon, guys.

Hi, Matt.

Just curious where you -- where the margin will shake out with Integrity with the acquisition.

Their margin is a little bit better than ours, maybe 15, 20 basis points, so we would expect to pick up a -- everything else being equal, maybe just a couple basis points with the merger, not a whole lot.

Is that on a core basis or including some of the accretable yield adjustments?

Just on the core. We're not -- at least not yet modeling in anything from accretable yield. We still have yet to go through that exercise for the purchase accounting.

Okay. And then, just following up on Collyn's question, how much of your deposits are now considered brokered, either money market or CDs?

About $240 million.

And the promotional product this quarter that led to the increase in cost, would you kind of characterize that as the beginning of a trend and we should expect deposit costs to creep up a little bit, or more of an aberration because it was a promotional product?

I think for now, again, with the rates coming down again, we've kind of backed off that product. We saw good volume in there, but probably a little less net growth than we had hoped. We're kind of re-evaluating the cost and the benefits of having those -- something a little bit longer like that, especially with the curve kind of flattening off again. We're, for now, backing off that at least for the next quarter or so.

Okay. In the near term we shouldn't expect deposit costs to increase?

No.

Okay. And then, hopping back on the energy exposure stuff, I was just hoping for a little bit more color on how the recent energy volatility would benefit your customers. You said that the lower prices [they were worded] (inaudible). So, I was hoping to get a little more color around that.

Just kind of anecdotally, Matt. We were out with a client last week in the automotive business. Sales are up because consumers are starting to feel a little more confident. Clients in the restaurant or hospitality business are seeing more activity. People are going out to spend money in those.

We have manufacturers, one in particular, they're picking up about $20,000 a month in natural gas savings. They use a lot in their manufacturing process. Plus they're picking up another $8,000 or $9,000 a month in their fleet operations from just fuel savings. So, it's touching a lot of different people in a lot of different ways. I know the folks at -- and we have people that drive probably 50 miles or more round trip a day, even employees and stuff, and it starts to add up and so they're starting to spend some of that money back through the various segments of the economy.

Great. I appreciate the color, guys. Thank you.

Sure.

Thank you. And it seems that we have no further questions at this time. I'd like to turn the floor back over to management for any closing remarks.

We do have a couple questions that came in via e-mail. I'm going to let Mark go ahead and address those.

First of those was, when are the shareholders going to see the benefits of the prior acquisition?

Well, from both -- the two most recent ones on Mainline and -- which were in [2012] -- and Gateway, they're kind of baked into the numbers. On the Mainline acquisition it was more of a cost savings and we exceeded our cost estimates that we had put into our models. And then on the Gateway, it's just in a market that is great demographics and our team down there has really done a nice job of just growing their balance sheet and revenue streams.

Second question there was of the loan increase, how much was attributable to the new loan offices? I think Dave Antolik addressed that in his comments. The ending balance in Northeast Ohio was --

$186 million, Central Ohio, 65. Total increase for the year was about $146 million out of the new loan production offices.

Okay. And then as a follow up on that, what is the strategic thinking I think more generally behind the establishment of these outlying loan offices?

Experienced folks in those markets and an accelerant to growth is really what we're talking about into fairly robust markets where we see an opportunity to grow.

Okay. Thanks.

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

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.