S&T Bancorp Inc (STBA) 2015 Q2 法說會逐字稿

Greetings, and welcome to the S&T Bancorp Incorporated second-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 today, Mr. Mark Kochvar. Thank you, sir. You may begin.

Okay, 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.

The statement provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the second-quarter earnings release can be obtained by clicking on the press release link on your screen or by visiting our Investor Relations website at www.STBancorp.com.

I would now like to introduce Todd Brice, S&T's President and CEO, who will provide an overview of S&T's results.

Well, thank you, Mark, and good afternoon, everyone. As announced in this morning's press release, we reported net income of $18.2 million or $0.52 per share, compared to first-quarter earnings of $12.8 million or $0.41 per share and second-quarter 2014 earnings of $14.7 million or $0.49 per share.

Once again, the big story this quarter is the continued integration of Integrity Bank. We completed the conversion of the banking entities and IT systems on May 11. And overall, the conversion went extremely well, thanks to the planning and preparation that was done by our conversion team.

We're very pleased with the activity levels that we're experiencing in the southcentral Pennsylvania market across all of our lines of business -- retail, commercial lending, mortgage banking, wealth management and insurance. So all in all, that's going very well.

Another big factor this quarter was loan growth. We set a new benchmark for the organization this quarter, which increased $115 million or 9.8% annualized. And it was, again, it was a nice mix across the board of commercial real estate and construction, and then C&I, which increased $61 million and $40 million, respectively. And our consumer loans increased by $14 million, which were predominantly home equity loans.

In addition to growth in core markets in southcentral Pennsylvania, we're also seeing nice activity in our LPOs in Ohio and western New York. As bankers in all of our markets are working very diligently to expand relationships with existing customers, as well as developing relationships with new clients. Our Chief Lending Officer, Dave Antolik, will provide more color in his comments in a few moments.

I think another good story this quarter was asset quality, which remains consistent with net charge-offs, totalling $1.3 million or 11 basis points annualized. Totals did increase in some of our criticized and classified categories as a result of the margin. But on a percentage basis, levels are still within acceptable levels, and we think they're going to be trending in the right direction.

Production in our retail mortgage division has been another bright spot. Total production, including Integrity division, was $102 million through June, versus a combined $75 million last year and this represents a 36% increase. The pipeline is also very robust, and we expect to continue to see a similar pace throughout 2015. I think mortgage banking fees were about $1.3 million for the first six months.

All in all, we're pleased with our performance this quarter. Now that the conversion is behind us, our focus will be on maximizing revenue opportunities throughout the organization, as well as being disciplined and efficient in our operational areas to control expenses. We really like our position as an organization, to generate returns that meet our shareholders expectations.

At this point, I will turn the program over to Dave Antolik. And I want to thank everybody for your continued support of S&T Bank.

Thanks, Todd. Good afternoon, everyone.

Todd mentioned our expansion into new markets, including southcentral PA, via the Integrity merger, continues to be the primary contributor to our loan growth. Growth in the Integrity portfolio totaled $33 million for the quarter. While our loan production offices in central and northeast Ohio, State College and western New York contributed $64 million to this quarter's $150 million total growth.

We're very pleased that our growth strategy has resulted in increased loan balances. And we're also very encouraged by our activity levels and the improved pipelines that exist in all of our markets. During the quarter, we expanded our commercial banking staff by adding three bankers to our western New York team, and one to our northeast Ohio team. In total, balances in our LPOs were $389 million at June 30.

We're also very encouraged by the diversity of growth that we achieved during the quarter. In addition to the $14 million in consumer loan growth that we experienced, balances in all of our commercial loan categories increased in Q2, as Todd detailed.

Within the C&I portfolio, we experienced increased line commitments and balances, along with an increase in the number of commitments. Revolving line utilization remained flat for the quarter. We continued to benefit from our investment in our floor plan lending area, where commitments increased by $12 million to $192 million, and outstandings increased by $7 million to $114 million during the quarter.

Another area of growth is municipal lending, where we've had success attracting borrowers looking to finance public projects or refinance public debt while rates remain low. It's also important to note that these relationships provide opportunities to attract significant deposits. Finally, our loan production offices grew their C&I balances by over $8 million during the quarter.

In conclusion, our growth this quarter came in spite of increased competition from bank and non-bank financing sources, who continue to offer very aggressive structural and pricing options that caused payoffs to exceed our expectations by more than 20% in the second quarter. We expect this trend to continue, but we're very confident in our ability to maintain the pace of our growth.

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

Okay, thanks, Dave. The impact of the merger with Integrity shows up in three main ways in this quarter's results.

First, the second-quarter results include a full quarter with the Integrity merger, compared to just 27 days in the first quarter. This impacts average balances, most income statement items and the average shares outstanding. Second, this quarter includes accretion related to the fair value of purchased loans and certificates of deposit. And third, we had $866,000 of one-time merger-related expenses.

The total accretion in the second quarter was $2.7 million or about $0.05 per share -- approximately $2 million impacting loans, and a little under $700,000 in the CDs. This impacted the net interest margin rate favorably by 21 basis points.

We expect the accretion to continue, but at a declining rate. Our modeling indicates about $1.7 million in the third quarter, and less than $1 million in the fourth quarter. There can be some volatility with the loan-related part of accretion, depending on the asset quality of the purchased loan. Without the accretion this quarter and the special items in both the first and second quarters, the NIM rate was essentially unchanged.

Loan growth continues to be primarily flowing. And the gap between new and paid loans widened slightly to about 50 basis points this quarter, compared to 35 basis points in the past two quarters. The one-time expenses of $866,000 primarily related to the system conversion this quarter, and should be at the end of our merger expenses. This represented about $0.02 per share.

Expense synergies are just now being fully realized, and we continue to expect our quarterly expense run rate to settle in at about $34 million. We also expect effective tax rate for the year to be between 26% and 27%.

The risk-based capital ratios declined this quarter due to loan and commitment growth that outpaced the increase in retained earnings. We continue to evaluate the impact of Basel III on our capital ratios, but remain comfortable with our current capital levels.

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

Thank you. At this time, we will conduct a question-and-answer session.

(Operator Instructions)

Our first question comes from Collyn Gilbert with KBW. Please proceed with your question.

Thanks. Good afternoon, gentlemen.

Just a couple questions on your loan growth outlook. It looks like -- and I know these portfolios are small, but you've seen some really good growth on the construction side. Can you talk just a little bit about that? And then also if you could tighten up your thoughts on loan growth as we look out, in terms of what you think the growth rate could be this year or next year? And then I've got a couple follow-ups, too.

Yes, we're still looking at upper single-digit loan growth. We think we've got the teams in place throughout all of our markets to drive that. Certainly the Integrity merger is going to help with that, as well. There's going to be some upside as we add the staff, but we're pretty well staffed in terms of production. So we think that up high-single-digit growth rate's still achievable.

We like how we're sitting for pipelines and --

Right. Pipelines are strong. We're just really getting western New York off the ground, and they've got some nice activity in that market. So in terms of the new market activity and core market activity, we're sticking to that high-single-digit number.

And economic conditions overall are still pretty good. There has been a little bit of a slowdown in the energy industry. But some of that right now has just shifted into -- from drilling over into the pipelines. There's 15 pipeline projects going on throughout the state, and that will create opportunities down the road too. So we like long-term prospects right now.

Okay. And any thoughts on construction, or how you are seeing those portfolios develop?

We're a construction lender; it's what we do. So we've seen some of that growth accelerate. It's really going to follow the economic activity throughout all of our markets. So as economies go in the various regions that we're in, those opportunities are going to provide themselves and we're going to move with them. And it's across the board. We've seen nice growth in the quarter in retail construction, apartment construction, office, and there's even some decent industrial. So it's pretty well-diversified in terms of type of growth that we're seeing.

Okay. And then could you just give a little bit of color on the NPLs this quarter? It's such a low level, it seems silly that we're even talking about it. But it looks like with the commercial credits that came on this quarter -- and then, did you see the resolution of the credits that came on in the first quarter?

Collyn, this is Pat. First is, an increase in the NPA numbers that you're seeing is really a direct effect of the merger. So we're integrating all those into our processes now. And those two credits that we did talk about last quarter, we did resolve those.

Okay, that's great. And then just back to your comment, Todd, on the oil and gas. Could you just give us an update where your exposures lie? I think you were at $53 million.

It's Todd. Yes, it's $54.2 million. We just ran it a couple days ago.

Okay. And any --

Out of that, the bulk of it is really just to support companies that -- it's to provide cancelling services. No really direct exposure into the drilling activities.

Okay. And no deterioration in credits there or anything?

No. As a matter of fact, they have contracts, and they're still fairly busy right now.

Okay. And then just one last housekeeping item. Mark, was there something in the other income line this quarter? Or is there anything -- I know, other than the merger charge, but is there anything else unusual or seasonal that will not repeat itself in the out quarters?

The other thing in the other, we did have some higher-than-normal loan-related fees. And there were a number of different categories, but our spot fees were about $250,000 -- just a little bit higher than normal. We also had some weather credit fees: that's mostly timing. And then we did have, related to a resolution of a non-performing item from years ago; we had a special asset fee of about $150,000. So that's unusual. So I'd say of that, it might be $300,000 or $400,000 that is above normal.

Okay, I'll stop there. Thanks.

Thanks, Collyn.

Our next question comes from Matt Schultheis with Boenning Scattergood. Please proceed with your question.

Good afternoon.

Hi, Matt.

Couple of quick questions with regard to the loan growth for the first quarter. How much of that was driven by increases in the line utilization from commercial borrowings, and how much of that was pure originations?

Utilization was flat quarter-over-quarter. So it's really additional commitments, additional customers.

Okay. With regard to the outlook for discount accretion going forward, how did the second quarter's experience actually compare to what you had anticipated going into the second quarter?

When we finally got a hold of the detail we needed as we were approaching the merger, the number for the quarter actually came in within $50,000 of what we had modeled out. But we really didn't have a good handle on that until midway through the second quarter.

Okay. So I think -- and correct me if I'm wrong. I think you had an original discount amount of something like $14.8 million on the loans?

Right. That's both the credit and the interest portion.

Okay. And so how much was the interest portion then?

About $500,000. I mean, of what we took this quarter. From the original, the credit was $11.7 million, and then the interest was just under $3 million.

Okay, all right. Thank you very much.

Thanks, Matt.

(Operator Instructions)

Our next question comes from Matthew Breese with Piper Jaffray. Please proceed with your question.

Good afternoon.

Hi, Matt, how you doing?

I'm doing fine, thank you. I just wanted to reaffirm the accretable yield guidance for the rest of the year. Am I correct -- $1.7 million for 3Q, and then $1 million for 4Q?

Yes, just under -- it was about $950,000 for fourth quarter.

Okay. And then what's the lifetime you're expecting for accretable yields?

I mean, there's a pretty long tail to that, because it goes with the whole life. We're actually doing the accounting for it at the loan note level, so it's going to depend. There's something on every single loan, essentially, that came over. So in theory, it lasts as long as the last loan that we bought. But it should -- I would say within a couple years, certainly, it becomes something that's relatively immaterial.

Okay. And I'm assuming once we get to 2016, we'll drop meaningfully below -- even have a $1 million run rate for 4Q?

Right. And we didn't go out any longer than that at this point. We wanted to get at least another quarter of the experience behind us before we re-forecast that.

Okay. And then just touching on the core margins, I know you had mentioned that new loan spreads versus what's existing actually widened this quarter. So maybe you could give us an update on where you expect the margin to shake out for the remainder of the year?

We still think it's -- without all the special items, it's in the -- about the 345-ish range. We still think it should hold in relatively close to that.

Do you get the sense that we're near a margin bottom in this interest rate cycle?

I hope so, but I think we're pretty close. We still could see a basis point here or there. But I think as far as meaningful declines, I believe we're past that, short of something else that's different perhaps with the yield curve, or the competitive environment changes quite a bit.

Okay. And then as we think about loan growth in the upper single-digits and maybe even surpassing that, can you give us a good sense of how you intend to fund that loan growth, and if there's going to be a need to put on some more bonds?

We have a lot of different efforts going right now on the deposit side. It's like utilizing some of the brokered markets, and also borrowings. So we'll do that when we can. At this level of rate, it can be difficult to get people to move, just because rates are so low. But we're doing a number of different things, both in the new markets. In southcentral Pennsylvania we think there's a lot of opportunity out there, since we're a relatively small player there, that we can do some things differently out there that might be effective. And then we're looking at some different sub-markets even within our own markets, that might have some potential. So we think there's a lot of room to operate within the current market, but we won't hesitate to borrow or to access the brokers markets a little bit further to fund that loan growth.

Is there any hesitation to maybe grow the loan-to-deposit ratio too much further beyond 100%? We're pretty close to it right now.

Yes, our goal is to try to stay under that 100%.

Got it. And could you remind us what is the broker deposit balance as of 6/30?

It was around $370 [million], I think.

That's all I had. Thank you very much.

Thanks, Matt.

At this time, there are no current questions in queue. I would like to turn the call back over to Mr. Brice for any closing comments.

I just want to thank everyone for participating in today's call. Mark, Dave and I appreciate the opportunity to discuss the quarter results, and look forward to hearing from you in our next conference call. So have a great day.

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