S&T Bancorp Inc (STBA) 2015 Q3 法說會逐字稿

Greetings, and welcome to the S&T Bancorp Inc. third 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, Chief Financial Officer. Please go ahead, sir.

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 may be 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 to 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 reported net income for third quarter of $18.6 million, $0.54 per share, which compares nicely to $18.2 million or $0.52 per share last quarter. This also represents a 10.2% increase over third quarter 2014 earnings of $0.49 per share. In addition, our return on average assets, average equity, and average tangible equity were 1.20%, 9.51%, and 15.61%, respectively.

We are pleased once again, by the solid profitability metrics that we experienced this quarter. A big factor driving these results have been the investments that we made in our franchise over the past two years in south central Pennsylvania, northeastern and central Ohio, western New York, State College and also our core markets in western Pennsylvania to position ourselves to grow and generate positive operating leverage.

For the quarter, our loan portfolio increased $128 million or 10.6% annualized. Again, we're seeing nice activity across our commercial, residential mortgage, and consumer lending divisions. We do have a seasoned team of bankers, who have a great track record in developing long-standing relationships with our clients, and work diligently to deepen those ties. Our Chief Lending Officer, David Antolik, will provide some more color in his commentary.

Deposit growth was somewhat muted this quarter, as we didn't see the typical in-flows from various municipalities, state-related agencies and school districts that we typically do this time of year, just because they're being impacted by the delay in passing the state budget out in Harrisburg.

Earlier, I mentioned positive operating leverage. Year-over-year, we were able to increase revenues by $12.6 million or 26% versus an increase in non-interest expense of $[5.4] million or 19%. And again, this is having a nice impact on our efficiency ratio, which is down to 53% in the third quarter.

[Our] disciplined approach to expense control and merger integration will continue to be a strategic focus throughout the organization. On the asset quality front, we did have a modest increase in net charge-offs which totaled $2.1 million or 0.17% annualized. NPAs did increase by $4.4 million this quarter, and as we work through resolution plans and valuations in our acquired portfolio.

But on a percentage basis, we still have a very respectable non-performing assets to asset ratio, 0.39%. One bright spot in the portfolio included a reduction of $18 million or about 7.5% in our criticized and classified loan categories which now stand at [4.48]% as a percentage of total loans, and along with delinquency also holding flat.

Finally, I want to mention that our Board of Directors approved a $0.01 per share, or a 5.6% increase in our quarterly dividend of $0.19 per share. This is the third consecutive year that we've increased our dividend.

And in closing, I just want to mention that again, we are pleased with our performance this quarter. And looking forward, we're going to continue to focus on maximizing revenue opportunities, controlling expenses, staying on top of credit quality, to meet our objectives. We have a lot of positive momentum across all of our lines of business, and I like how we're positioned to continue to grow our Company and reward our shareholders. So with that, 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 pleased with the solid loan growth we achieved for the quarter. We're also very pleased with the sustained level of activity as we head into the fourth quarter.

For the quarter, as Todd mentioned, total portfolio loans increased by $128 million, which represents a 10.6% annualized growth rate, and is our highest quarterly organic growth in the Bank's history. This growth was primarily driven by an increase in commercial real estate and construction balances of $96 million, along with increases in our residential mortgage outstandings of $26 million, and home equity growth of $10 million.

C&I balances were essentially flat quarter-over-quarter due to a slight reduction in utilization rates, along with the payoff and paydown of federal criticized and classified credits. Activity in the C&I portfolio remains strong, as evidenced by growth in the total number of commitments.

Highlights for the quarter include a $63 million increase in outstandings in our loan production offices. The combined balances for our northeast Ohio, central Ohio, State College, and western New York offices now exceed $450 million. We continue to explore opportunities to expand in these markets, and to further capitalize on this growing segment of our customer base.

Our business banking division, which focuses on credits under $1 million had its best quarter ever, increasing balances by over $11 million, and that portfolio now exceeds $519 million. The business banking area continues to be a very consistent growth performer, and we see solid opportunity in south central Pennsylvania for that division which we believe we can capitalize upon.

Our sales efforts and the investments that we made in our floor plan system continue to yield positive results, as evidenced by an increase in commitments of $55 million year-over-year, and $11 million for the quarter, along with an increase in outstandings of $34 million year-over-year, and $7 million for the quarter. Total commitments and outstandings for floor plans at September 30 were $202 million and $120 million, respectively. We also continued to see strong demand for commercial real estate and construction loans in nearly every market we serve.

During the quarter, we dedicated a significant amount of time to recruiting for, and strengthening our banking teams. We now have 49 commercial bankers and 19 business bankers employed at S&T, and we are very well-positioned to take advantage of market opportunities and disruptions, particularly in south central Pennsylvania. Finally, with regard to Integrity, I'm very pleased with the progress that we've made with the integration of a significant merger partner. We have maintained our momentum, and we look forward to continuing the pace of our growth. And now, Mark will provide you with additional details on our financial results.

Thanks, Dave. Total purchase accounting accretion in the third quarter was $2.2 million, which is down from $2.7 million in the second quarter. This equates to about $0.04 per share, approximately $1.8 million in loans, and about $400,000 in CDs. This impacted the [net] interest margin rate favorably by 16 basis points.

We expect accretion to continue, but at a declining rate. Our last modeling indicates about $1.1 million in the fourth quarter, and $750,000 in the first quarter of [2016]. There can be some volatility with the loan rate [par] decreasing, and depending on the asset quality of those purchased loans. Net interest margin rate was essentially unchanged, not including the fact of accretion quarter over quarter.

We did recognize two quarters of Federal Home Loan Bank dividend income in the third quarter, as we switch from a cash to an accrual basis. This was approximately $230,000. Net interest income increased overall by $785,000, despite the lower accretion in part due to the Home Loan Bank dividend, but also due to the over $100 million of growth in average loans, and also an extra day in the third quarter.

Our loan growth continues to be primarily floating, and we believe that any rate increases by the Fed will benefit us. In the meantime, margin pressure remains, with the gap between new and paid loans at about 43 basis points this quarter, just down from [54] basis points last quarter. The weighted average rate on new loans is holding steady in the [3.60%] to [3.70%] range.

Non-interest income declined by $900,000, mostly due to unusually high letter of credit and loan-related fees in the second quarter. Non-interest expense declined by about $1.6 million compared to the second quarter. A little over half of that or $866,000 was one-time merger-related items last quarter. And after a slow start, we are beginning to see more of these expense synergies from the merger.

We continue to expect expenses to be in the $34 million range next quarter, although we typically do see an increase as we move into new calendar year due to seasonality in the first quarter, and also merit increases. We expect the effective tax rate for this year to be just over 26%.

Capital ratios improved this quarter due to retained earnings, outpacing assets and risk-weighted asset growth. We filed a shelf registration last week, as ours from 2012 was set to expire. We are comfortable with our current capital levels, and have no immediate plans to make any changes.

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

Thank you.

(Operator Instructions)

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

Thanks. Good afternoon.

Hi, Wally.

Real quick, maybe just a follow-up. You had some commentary on the margin. How much was the FHLB dividend?

(Multiple speakers) -- the extra was about $230,000.

And then, I can't help but notice that your intangibles -- your intangible assets are going up. I assume -- are you writing up the CDI?

No, there was a small adjustment related to the eventual disposition of a [BOLI] from the merger. We had a slight change from that.

Did that happen in the second quarter as well?

There was a second quarter adjustment, but it was a different issue.

Okay. So all else equal then, what is the -- I guess, what's the amortization expense on the CDI that we should expect to see coming out of the intangibles balance?

I think -- I -- here or for the full year, we have about -- I think it's $950,000. So it's about $1 million a year starting out.

And are you doing sum of the years or a straight line, I can't remember?

It's sum of the years over 10, so it will be less next year. I think full, first full calendar year is about -- just over $1 million.

Okay. So you anticipate -- I'm back to the margin, sorry. I'm jumping around a little bit.

But do you anticipate we'll continue to see pressure on the margin without any benefit from any Fed rate hike? How -- I mean, how should we think about what that pressure might be?

Maybe on a core basis, let's take out the impact of the purchase accounting accretion, and think about it without that. How much do you think your margin is under pressure over the next couple, the four quarters, without it?

It might be 1 basis point a quarter, something like that. But not a whole lot more than that.

Okay. And then the $1.1 million of accretion in the fourth quarter, and $750,000 in the first quarter, that's your scheduled accretion, right? You're not trying to think about what one-time type accelerated accretion there might be, right?

That's correct. That's correct. If anything, it would probably go a little bit higher, if we -- or it could go a little bit lower. But early on here it's likely to go higher, if we have some type of payoff on a credit that we had a significant mark on, for example.

Okay. And then, you mentioned that you think your -- the expenses in the third quarter were probably flattish in the fourth quarter, with some time of normal seasonal pressures in the first quarter related to the comp increases, et cetera. So how are you offsetting the increases that will be coming from all the hiring that you guys are doing?

Hopefully, a lot of that will come in continued loan volume increases, primarily on the commercial side.

No, but I mean, I thought you meant that the expense base was flat. So you're hiring, you're adding expenses, but you've got to be taking expenses off somewhere (multiple speakers). On a dollar basis, right?

We made some investments in technology that in the backroom function, so that we can do more with the same amount of people, or decrease some people over on that side of the house, is where we're picking up some of that, Wally.

Okay.

You're talking about some that -- the people that we've been bringing on in some of the -- on the production side, sales guys?

Right, yes.

Yes, yes. So some of it's your volumes, and like I said, it's just through some other back room savings.

Okay. All right. I appreciate that. All right, thanks for the color, guys. I'll let somebody else ask a question.

Thank you. Our next question is from the line of Matt Schultheis with Boenning Scattergood.

Good afternoon.

Hi, Matt.

Hi, a couple of quick questions. It appeared that your deposit mix migrated somewhat towards CDs. Was that an intent to add some liability duration, or is that just the way things flowed this quarter?

Matt, most of that is brokered CDs, and they're mostly short, less than a year. So it's more just a funding.

Yes, though like I said, we had anticipated probably $50 million or $60 million of funds in the [Harris] operating account that didn't hit, just through some of the state-related issues over of the budget. So that would -- offset that somewhat as well.

Okay. And who knows when that will get resolved, right?

You're a little closer than I am, Matt. So when you figure it out, give us a call.

Yes, I'll let you know (laughter). What I can tell you is, don't hold your breath. As far as your loan growth for the quarter on a linked-quarter basis, can you break down how much of that growth came from your LPO offices, versus legacy S&T, Integrity footprint?

Right. The LPO growth including State College was about $63 million quarter-over-quarter.

Okay.

And in south central PA, the growth in the Integrity portfolio was around $30 million.

Okay. Thank you. And one last question.

I know your capital is -- it's still well above whatever you need for regulatory capital needs. And so, does this set you guys up for another M&A transaction, if something comes along? Are you looking? Or are you just sort of content to digest what you have for now?

I tell you what, Matt, right now, I'm pretty content with where we are. I mean, we're still kind of integrated Integrity, and really focusing a lot of attention on that market.

I think there's a lot of opportunity out there, in some of the investments that we made in some of the LPOs. So I like how we're positioned to grow the Company on an organic basis. Now that being said, if something would run across our desk that has some appeal, we're not going to walk away from it either, so --

Okay.

If there'd be something that would kind of fit our box, from an M&A standpoint and I like kind of where our -- we like our valuations today, pretty strong currency. So it does give us some additional fire power, if you get into an M&A situation.

Okay. Really, actually, I have two more really quick questions.

But with regard to what's happening in south central PA and the pending Metro transaction, does that transaction and the opportunity for retail deposit run-off, change your approach to the market at all? Or are you just thinking you continue with basically a business banking strategy in that market?

Well, I mean, Integrity did have a retail strategy. They were kind of -- actually they run a similar model to Metro, with some of the extended hours and stuff. And we would expect to continue to really to stay the course in what they're doing down there right now.

Okay. And then, a housekeeping question for Mark. What is the aggregate balance of the accretion discount that's expected to come in over the -- come into the income statement, the accretable yield, if you will?

For -- just the overall total?

Yes. At the end of the quarter.

For this quarter, I'm sorry?

No, just for -- what's the total amount of at the end of the quarter that's going to be realized?

Still to be realized?

Yes.

On the credit side, there's still about -- just under -- or about $8 million on the credit, and about -- and just under $2 million on the interest rate.

Okay.

So just about $10 million total.

Okay. Well, I appreciate your time. Thank you.

Thanks, Matt.

The next question is from the line of Collyn Gilbert with KBW. Please go ahead with your question.

Thanks. Good afternoon, guys.

Hi, Collyn.

Could you dig a little bit into the dynamics within the loan portfolio. I guess, my first question is just, commercial construction has been growing really nicely. Just if you could give a little bit of color as to what's driving that, and kind of what your outlook is from here on that part? And then, I've got a couple follow-ups.

Yes, I mean, it's pretty well diversified. We don't have any concentration in terms of product type or really geography. We break it down in both manners. So we're seeing good growth out of central Ohio, Northeast Ohio, Rochester, core markets, south central PA.

We continue to see pretty decent demand in that area. But it's a mix of all product types. Like I said, there's no significant concentration in the portfolio.

Like I said, it's as Dave said, you have some multifamily, you have some hotels, you have some office, you have some retail, you have some municipal projects that are lumped in there. The one area that's probably not real active is single family lot development, which we're not seeing a lot of that activity right now.

Okay. Is this -- I know you, I mean, guys sort of have an expertise in construction. Do you foresee the demand continuing to be there, as you look out over the next year or so? And if so, is there a certain target you maybe have on the size of this portfolio?

Yes, there's not necessarily a target. We've got internal limits that we have, that we exercise occasionally if we see an industry concentration, but there's no real target. And I see demand continuing at kind of the same pace that we've seen, in talking to different developers in various markets.

We do have some churn. I mean, as projects near completion, then they roll into your other bucket, or get financed out. So you'll see some ins and outs in that portfolio.

Okay. And actually that ties into my next question, Todd or David.

But the -- do you have the split between what the C&I paydowns were versus the originations in the quarter? I thought you guys maybe had indicated you were expecting some large paydowns this quarter on the C&I side.

We saw some C&I paydowns on a couple of criticized and classified assets. And like I said, our utilization rate was down marginally on the quarter.

But really what we look at is the number of customers, the number of commitments, and they were up again this quarter. So the activity's still strong. The borrowing utilization was down slightly, however.

Okay.

On a linked-quarter, that C&I portfolio was essentially flat.

Right. Quarter-over-quarter was essentially -- I think we were down just over $1 million.

Okay. And then just to tie all this together, it sounded like you guys are pretty comfortable with the rate of growth. Todd, you made reference to it, and David you did too. I mean, is it -- are you thinking kind of to maintain a 10% to 12% loan growth rate, or how are you thinking about all of this in totality as you build on the momentum of these new regions?

Yes, 10% to 12%, would be more -- we're still in that upper single-digit target range. I think that's realistic for us, based on our -- the teams that we have in place, what the market will give us.

And we're certainly not going to sacrifice any of our credit underwriting standards in order to grow. So we want to stay within the box, take advantage of the markets that we're in, and take advantage of the folks we have in the field, in order to understand those markets and drive some good, solid growth.

And there's some seasonality in there too. I mean, you'll usually -- the fourth quarter and first quarter are a little slower than your second and third, just for timing and everything.

Yes, and if you look at our pipeline today, it's very similar to where it was at the end of the last two quarters, so our pipeline's been fairly consistent. It hasn't expanded significantly.

But -- and despite the activity levels, which when loans fund, they come off the pipeline, we've been able to replace them with new opportunities. And that pipeline level has remained relatively static over the last few quarters.

Okay. That's helpful. That's helpful.

And then just on -- can you give us an update on how things are shaking out on kind of with the oil and gas? The drop obviously in oil prices, if you're seeing the trickle-down effect into any of your borrowers or the market area or just kind of some overarching views there? And I don't -- if there was anything in the NPL bucket that was tied to oil and gas that probably helped this quarter?

There was not anything in the NPA bucket that was directly tied to the oil and gas. And matter of fact, some of it was just expected clean-up on some of the acquired portfolio out east.

And then, we had a C&I credit out in one of the Ohio markets that just was due to some unforeseen circumstances, just kind of got sideways. But it was nothing related to oil and gas.

Now that being said, it's something that we're watching. There's been a couple of companies that have laid off in the area. You just look at, rig counts are down. I think at the peak, they were about 125, just looking at statistics a couple weeks ago. And last year about this time, there were maybe 55 rigs, and now there's 29 in Pennsylvania.

So it's going to have some pressure on some of the supply chain. But production's up. It's up to about 20 billion cubic feet a day, I think in the region is the last number I heard.

But the issue still is, getting it to market and the pipeline. I think capacity is maybe half of that. Now they anticipate that kind of equalizing about this time next year.

So they'll at least be able to get what they can produce to market. And then, probably in 2017 to maybe 2018, that number goes up. So you can start to be kind of a net exporter on the resource.

But that being said too, there's a lot, a lot of activity in the region. It appears that the Shell is still moving forward with their big project out in Beaver. We've seen clients that are getting inquiries from a lot of petrochemical type companies, or end users of the products or manufacturing concerns that can be right on top of a cheap energy source. So even though there might be a little bit of a slowdown for the next year or so, long-term, it's going to be just really, really good for the region so.

It's kind of tough to measure too on -- when you're going into the local gas station in the morning, you used to see a few more bodies around from the service company guys. And so, the impact on those types of businesses or hotels or whatever, still not showing up in the numbers yet. But again, it's just something we're probably going to take a look at. Dave or Pat, you're welcome to weigh in too.

I think you said it right. Collyn, this is Pat. Looking at our portfolio, it still performs extremely well. And again, we're not into a lot of the extraction or production, but to remind you, that all of our credit structure on the loans on quick amortization as well.

Our portfolio kind of indirectly tied into it is about $[50] million, and the average risk weightings are about 3.5[%]. So mostly, pretty clean today.

Okay. That's helpful. And then, just two quick -- I keep saying this, and I keep going but housekeeping items.

One is Mark, the drop, or I shouldn't say drop, but insurance revenues were flat in the third quarter, and I thought usually there's a seasonal pickup in 3Q. Was there something else going on there, and just kind of what your outlook is from here?

They do have a lot of ties to the energy sector. So they've had some customer losses related to that.

There's been some consolidation. I mean, they get couple clients who got sold.

Okay.

To bigger entities. And then they -- some is tied in, some workers' comp customers, and kind of the shrinking payroll and this stuff is impacting premiums as well.

Okay, okay. And then my last question. Mark, so just trying to reconcile the comment that you made that the core NIM, you may be see 1 basis point or so a quarter. I'm just trying to reconcile that with -- I think I heard you say that the loan origination yields are coming on 43 basis points lower than the maturation yield? So just trying to -- it seems like a really big gap, to only then see 1 basis point of core NIM compression?

Well, on a monthly or quarterly basis, that's going to impact -- certainly not the whole portfolio. It might be maybe $200 million to $300 million of the -- or not even that much, maybe $200 million of the whole portfolio. So it's a slow -- it's a slower (multiple speakers).

I got you. I see, it's just slower roll off.

Okay, great. All right. Thanks, guys.

Thanks, Collyn.

(Operator Instructions)

The next question is from the line of Matthew Breese of Piper Jaffray. Please go ahead with your question.

Good afternoon, guys.

Hi, Matt.

Just a couple of quick, quick follow-ups. On the $50 million of exposure, can you update us on the amount of that debt is in the form of shared national credit, and whether or not those have gone through the redetermination process recently?

Yes, I don't believe anything is on a SNC in the portfolio.

Okay. And then, just going back to the Integrity acquisition, at this point percentage-wise, how much of the of cost saves have you already realized?

I would probably -- maybe a little over half, I would say.

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

Okay, Matt.

Thank you.

(Operator Instructions)

Thank you. There are no additional questions at this time. I'll turn the floor back to Management for closing comments.

I want to thank everybody for participating in today's call. And Mark and Dave and I appreciate the opportunity to discuss the quarter's results, and look forward to hearing from you in our next conference call in January. So thank you very much.

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