S&T Bancorp Inc (STBA) 2015 Q1 法說會逐字稿

Greetings and welcome to S&T Bancorp first-quarter 2015 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. Thank you, 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 factor. It 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'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. And good afternoon, everyone.

As we announced in this morning's press release, we reported net income of $12.8 million, or $0.41 per share, compared to $14 million, or $0.47 per share in the first quarter of 2014, and $14.5 million, or $0.49 per share in the fourth quarter of 2014.

Really, the big story this quarter is the consummation of our margin with Integrity Bancshares on March 4. This did, however, have an impact on our financial results this quarter. One-time merger related charges were approximately $2.3 million, or $0.05 per share.

While it's been only a little over a month, we are very excited about our prospects in the south-central Pennsylvania marketplace. The S&T integrity brand has been well received by clients and early results are very promising. The next milestone will be combining the banking entities and IT systems, which are going to occur on May 11. I know our teams have been spending a considerable amount of time in preparation for the conversion and we do anticipate a smooth transition.

From a sales perspective, I really like our position across the organization in all of our lines of business, including commercial banking, small business, retail mortgage, and consumer banking. We have a seasoned team of bankers who excel in developing deep relationship with clients and it's really what we think adds long-term value and benefit to our organization.

We're also happy with our results on the deposit side of our Business this quarter. With the anticipated loan volumes that we expect to achieve in 2015, we made a strategic effort this year to focus on deposit gathering throughout the organization. And in Q1 deposits increased approximately $198 million, not including the merger. The goal for the year is to have our deposit growth equal to our loan growth and we're off to a nice start.

Once we've completed the Integrity conversion, our focus is going to be maximizing revenue and profitability in all of our markets including southwestern Pennsylvania, central Ohio, south-central Pennsylvania, and our new office in western New York. We think we have a lot of potential to grow the organization organically throughout our footprint with the investments that we've made over the past two years. Therefore, we can afford to be opportunistic in our approach to M&A and want to make sure it's the right fit for our organization.

On the credit front, net charges for the quarter were $1 million, or 10 basis points annualized. Non-performing assets did increase by $6.8 million, which was comprised of approximately $5 million of non-performing loans at S&T Bank, as well as about $1.3 million of OREO properties that were carried over from the merger.

Approximately half of the $5 million increase in NPLs is related to one borrower. And the good news is the properties are under contract to sell and we anticipate closing in late Q2 or early Q3. In spite of these increases, our ratio of non-performing assets to loans plus OREO is still very manageable at 0.41%.

So, all-in-all it's been an eventful quarter but we like how we're positioned as well as our prospects as we move forward. I also thank you for your continued support of S&T Bank. And at this time I'll turn the program over to our Chief Lending Officer, David Antolik.

Thanks, Todd, and good afternoon, everyone.

As Todd mentioned, we're very excited to have closed on the Integrity Bank merger, and look forward to the opportunities for the combined organizations in south-central Pennsylvania, particularly from a commercial and business banking perspective. Individually, each Company has its experienced historically strong results from these business segments, and each enjoys a strong and very capable staff that, when combined, will help to drive continued growth and exceptional financial performance.

We're also very pleased to have opened our newest loan production office in Rochester, New York on March 23, where we have two very experienced commercial bankers leading our efforts. And we are in the process of recruiting in order to round out our team in that region. We currently have approximately $90 million of outstandings in western New York and see great potential for S&T in that market.

We also eclipsed two significant milestones in northeast Ohio and central Ohio during the quarter, where our outstandings now exceed $200 million and $100 million, respectively. Our total outstandings in Ohio now exceed $319 million. It's also important to note that our growth in these new markets is rooted in our core relationship strategy that provides opportunities for deposit gathering, and fee generation from these new S&T bank customers.

Bank-wide we originated $282 million in new loans for the first quarter of 2015 versus $245 million during the first quarter of 2014 for a 15% year-over-year increase. With regard to total commercial loans, the overwhelming majority of the $757 million quarterly increase was the result of the Integrity merger. On an organic basis our commercial loan growth for the first quarter was approximately $41 million. That growth was driven by continued success in construction lending activities and increases in C&I outstandings.

We continue to experience increased competition from bank and non-bank financing sources from both a structural and pricing perspective. This has led and will lead to increased payouts, particularly in our commercial real estate portfolio. Fortunately, our team of commercial and business bankers, which now includes 63 calling officers, has built a pipeline that is significantly larger than we've enjoyed at any point during the past few years.

In addition to closely monitoring our competition and the source of pay-offs, we continue to keep our fingers on the pulse of activity in the various segments to which we have credit exposure, paying particular attention to the oil and gas industry where we've seen some slowdown in recent months. As mentioned last quarter, we do not have significant direct commodity exposure and we stay in very close contact with our customers and industry insiders in order to remain well informed.

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

Thanks, Dave.

This quarter's results include the impact of the Integrity merger. One-time expenses were $2.3 million, or about $0.05 per share, primarily data processing and investment banking fees. We do expect some additional one-time items in the second quarter related to the bank merger in May but it should be less than $1 million.

The Holding Company merger closed on March 4 so average balances include 27 days, or 30% of the quarter with Integrity numbers. The merger accounted for the majority of improvement in net interest income, but had no impact on the net interest margin rate. We received a special dividend from the Federal Home Loan Bank of Pittsburgh loan portfolio, mostly prepayment fees.

There is no impact yet in margin related to the credit or interest rate marks. We are still evaluating how that will impact us, and it is, of course, dependent on the eventual asset quality of the acquired loans. The credit mark on the loan portfolio is approximately $11.8 million.

With the addition $789 million in acquired loans with no reserve, our reported reserve to loan ratio decreased to 1.03%. Eliminating these loans and also acquired loans from previous mergers with remaining credit marks brings this ratio to 1.27%, unchanged from the fourth quarter.

Our own loan growth combined with acquired Integrity loans was primary floating for the quarter. The gap between new and paid loans has been about 35 basis points for the past two quarters, the lowest level in the past four years. This helped keep the loan rate stable, not including the positive impact of the prepaid fees.

Of the $198 million growth in deposits this quarter, $86 million was in retail and business, $47 million came from our wealth management division, which we do expect to be invested over the coming quarters, and the remaining $65 million was in broker funds that mostly went to decrease our borrowings.

As we detailed in the earnings release, fee income improved due to the merger by including one month of Integrity results along with seasonality in our insurance business. Expenses had quarter-over-quarter increases from one-time items of $1.6 million, $2.3 million was the total for the quarter, and another $1.4 million including one month of Integrity results.

Salaries and benefits increased beyond the merger numbers due to seasonal factors related to vacation accruals and payroll taxes. We expect a new quarterly expense run rate of approximately $33 million.

The tax rate for the quarter of 26.7% reflects our expectations for the full year. This quarter we had the implementation of the new Basel III capital rules which increased risk-weighted assets, and when combined with the impact of the merger accounted for the decrease in our risk-weighted capital ratios.

The leverage ratio shows an increase, since it is calculated using average assets which are lower than what they will be going forward due to the timing of the merger during the quarter. This ratio would have been approximately 9% with a full quarter average of acquired assets.

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

(Operator Instructions)

Our first question comes from the line of Collyn Gilbert with KBW.

Good afternoon, guys. Todd, could you just run through again a little bit more detail on those three credits that came up, just maybe when they were originated, what the nature of some of those credit scores, just to get a little bit more color there?

They've been originated for a few years. But one project they had a little bit of cash flow difficulty. But actually there's two credits combined with the one relationship. And like I said they're under contract, they are going to get sold. And even with the increase in NPAs, we had done all of our impairment analysis and we've take the appropriate mark this quarter. So, we're comfortable with where we are from a provisioning and reserve standpoint. Like I said, it was real estate and the other relation -- Pat is here, too.

The other relationship was just a C&I deal that experienced some job issues related to a contractor. But we expect to come out of that one here in the next quarter, as well. So, again, as Todd said, we've taken all of our marks, especially on those two real estate deals. I don't foresee any further payment on those.

Okay. So neither of these or none of these three relationships have anything to do with oil and gas?

No.

Okay, that's helpful. And then, Mark, do you happen to have what Integrity's net interest income dollar amount contribution was this quarter?

Yes, they were about $2.2 million.

Okay, great. And then if you could just give a little bit of color on your outlook for the NIM. I know you'd said obviously the gap between the loan yield origination and maturation is narrowing. Just how are you seeing NIM? And then also with the full impact of Integrity as we look out through the rest of this year and into next year, how you're thinking about the NIM.

We were at the 3.48%, which included the 3 basis points of the Home Loan Bank. And I think we're going to be in the mid 3.40%s to low 3.40%s. The exception will be if there's some timing-related issues with the credit mark accounting related to Integrity over the next several quarters. But the core rate I'd still expect to be in the 3.40%s.

Okay, that's helpful. And then just circling back on loan growth, you guys have said -- you've done a great job in Ohio, western New York, taking share away there. How are you thinking about loan growth longer term? Is it still in that high single-digit range or do you think that that can start to accelerate?

We still think that high single digit is reasonable for us. We don't want to take exceptional credit risk so it's something that we're focusing on. And building the team is a long-term proposition. We open an LPO, it takes a little while for it to get up and running and get some assets on the books. If you look at the Integrity opportunity and the pipeline that they have, along with our pipeline here, there's significant upside in terms of loan growth for us.

The wild card on pay-offs, as Dave said, they were up a little bit this quarter over where we experienced in the past. But, like I said, we like how the pipelines are growing. Not only the commercial side but also our small business is up significantly, retail mortgage is up, and we're seeing some nice activity on the consumer side. So, as I said earlier, we focus a lot of attention on the sales side of the house and I think it's really starting to pay off for us.

Okay, that's great, that's helpful. I'll leave it there. Thanks, guys.

(Operator Instructions)

Our next question comes William Wallace with Raymond James.

Hi, guys. Maybe just a little bit more clarity on margin. I believe in the prepared remarks you also mentioned that there was some benefit in the first quarter from prepayments. Can you quantify that?

Yes, it's about $200,000. Maybe around 2 basis points of that. Our core rate without those two items was probably flat to fourth quarter at about 3.43%.

Is that $200,000 above what you normally have?

Right. Actually in the fourth quarter we didn't have any.

Okay. That was all I had. Everything else you guys addressed.

Our next question comes from the line of Matt Schultheis with Boenning & Scattergood.

Hi, good afternoon, gentlemen. With regards to the deposit growth that you had, you broke down the retail and wealth management, but are you doing anything specific with, say, hot rates and money-market or CD specials or anything of that nature? Or is this just a more concerted effort to cross-sell or a little bit of both?

I think it's more the latter. We did have some specials in the fourth quarter but those weren't in place in the first quarter. There was some seasonality, I think, in the first quarter in the consumer side with taxes, so we did probably see some benefit from that. But I think it's more just the concerted effort and attention that we're paying to deposit growth internally.

Okay. And with regards to deposits in general or deposit service fees in general, obviously there's some distortion with the acquisition, but looking at relative to where you were anticipating overdrafts to be a theme of the first quarter to budget or plan, are they coming in a little light or are they coming in as anticipated?

The first quarter they were a little bit light. We did note that some, especially in January and February the activity was light. March, however, we did see a bit of a pick up. And we actually saw the first time in a long time the numbers in March were actually ahead of the year-ago period, but it wasn't enough to offset January and February which were lower than prior periods.

Okay. And one last question with regards to the loan growth in the quarter. It was a little bit below your targeted run rate of, say, 8%. I know there's always a little bit of seasonality but did the harsh winter make it a little more super-seasonal, if you will, or was this more of a function you had to take some people off the line and have them focus on the acquisition?

Matt, really, it was just seasonality. If you break the quarter down, January was a very difficult month. Originations were significantly less than what we had forecast. February was fairly robust and March was extremely strong. So, we like the trajectory, we like the pipeline, so I think we'll be back in line with our forecast.

Okay, thank you very much.

There are no further questions at this time. At this point I'd like to turn the call over to Todd Brice for closing comments.

Just one further point that we would like to make, too. I think, Collyn, you touched base on it, your question. Obviously there's a lot of attention right now on the oil and gas business in the region. And as Dave said, we're having continual conversations with clients and trying to stay on top of some of the events.

There's been some slowdown, there's been some migration of jobs out of the region. But I think for the most part, as we sit today, we haven't seen any deterioration in our portfolio as a result of the oil and gas exposure that we have.

Some of the activity has shifted from top-hole drilling to getting the gas to the market, which means pipelining is very active and servicing is very active as the industry continues to mature here in western Pennsylvania. So, we're happy with the exposure that we have. As Todd mentioned, we haven't seen any downgrades within the portfolio, and we're keeping our ears to the tracks with regards to activity in that industry.

Right. And there's a certain amount of infrastructure that still needs to be maintained once the wells are completed, too, whether it be hauling the water or some of the other services they provide. So, now that the wells are in place, again, some of our clients support the completed well programs and it's been good for their business. But it is an area we're looking at and we'll stay on top of it.

Again, we appreciate everyone's participation in today's call, and are looking forward to getting together next quarter to discuss our results. Thanks again.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a great day.