S&T Bancorp Inc (STBA) 2016 Q1 法說會逐字稿

Greetings. Welcome to the S&T Bancorp Inc. first quarter 2016 earnings conference call.

(Operator Instructions)

I'd now like to turn the conference over to your host, Mark Kochvar, Chief Financial Officer for S&T Bancorp Inc. Thank you, Mr. Kochvar. You may begin.

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 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 announced in this morning's press release, we reported net income of $16.1 million, or $0.46 per share, compared to earnings of $12.8 million, or $0.41 per share in the first quarter of 2015, and $17.4 million, or $0.50 per share in the fourth quarter 2015.

We are very pleased with our top-line revenue growth this quarter. However, overall, our performance was lower than our expectations due to increased non-interest expenses and, also, increased credit cost. From a business development standpoint, things are very robust and we're pleased with the activity that we're seeing across all of our lines of businesses, as well as throughout our various markets, particularly in south-central Pennsylvania.

Loan growth is once again a highlight this quarter, as total portfolio loans increased $149 million, or 11.9% annualized, which includes $137 million of commercial loans and $12 million of consumer loans. This represents the fourth consecutive quarter of growth in excess of $100 million.

Another bright spot this quarter is the growth in our deposit base, which increased $141 million, or 11.7%, annualized. As we mentioned last quarter, deposit generation is a strategic objective for our company this year and through the first quarter we're on track to meet our goals. Compared to the first quarter of last year, a big increase in CDs, which are up about $221 million. But, we're also seeing a nice lift in DDA balances and money market balances, which are up $35 million and $26 million, respectively.

Our increase in loan balances, as well as the impact of the 25-basis-point increase in the Feds' funds rate in December enabled us to increase net interest income by over $750 million to $49.6 million. Interest income, related to purchase accounting through the merger, decreased approximately $550,000 for the quarter, so the net change to the margin on a gross basis was [roughly] $1.3 million.

I also want to point out that year-over-year, we had a 10% increase in tangible book value per share, which now stands at $14.76, versus $13.40 at the end of the first quarter last year. And finally, as I mentioned earlier, our performance was impacted by larger-than-expected increase in our non-interest expense. And I assure you that we're addressing the areas in which we had unfavorable variances, and we will drive our efficiency ratio back into historical ranges. In addition, the loan loss provision expense increased by $1.1 million, which now totals $5 million for the quarter, really due to deterioration in two credits, one in the energy field and one, also, in the metals field. Pat will talk about those a little bit later.

And the other thing that impacted provision increase was higher-than-anticipated loan growth volumes for the quarter, which came in much higher than expected. So, finally, I'm pleased to report that our Board of Directors approved a dividend of $0.19 per share for the quarter, which will be paid on May 19. Thank you for your time. At this point, I'm going to turn the program over to Dave Antolik, our Chief Lending Officer.

Thanks, Todd and good afternoon, everyone. As mentioned, commercial loan growth continued to be very strong this quarter. This is particularly rewarding in what's been historically a slow-growth quarter. Highlights include an increase in the commercial real estate portfolio of $93 million and a $77 million increase in our C&I portfolio. We experienced a decline of $34 million in our commercial construction balances, as several large projects completed construction and moved in to the permanent portfolio. We expect this decline to reverse course in Q2, as we head in to the spring and summer construction season, additionally supporting this anticipated growth, our unfunded construction commitments grew by $50 million, from $400 million at 12/31, to $450 million at the end of the first quarter.

Our exposure within the commercial real estate and commercial construction portfolios remains diversified, both geographically and by property type, with no single concentration representing more than 14% of the commercial real estate portfolio or 20% of our outstanding construction commitments.

Our C&I growth was driven by two important factors. First, we saw an increase in our total commitment amount, along with increased utilization rates from 40% at year end to 43% at the end of the first quarter. This accounted for nearly half of our C&I balance growth. Second, our efforts to recruit C&I bankers, which includes the addition of our Pittsburgh commercial banking team, along with C&I bankers in south-central Pennsylvania, has resulted in solid new-customer acquisition results. We'll continue to concentrate on C&I growth as a means of maintaining prudent portfolio diversification. With respect to commercial loan growth at our loan production offices and in south-central PA.

For the quarter, loan balances in Northeast Ohio grew by $27 million. Central grew by $28 million. Western New York grew by $16 million. South-central PA saw a growth of $36 million. We continue to forecast high single-digit loan growth for 2016 and believe we can achieve that growth without adding significantly to our staff and to our expense structure. Now, Pat will provide you with additional details on our asset quality.

Thanks, Dave, and good afternoon, everyone. Net charge offs for the quarter were $2.8 million, well up from the year-ago quarter of $1 million, but still considerably less than the previous quarter of $5.7 million. Provision expense was $5 million for the quarter, as compared to $3.9 million in the previous quarter. The current quarter provision was driven by specific reserves of $2.2 million, as well as loan growth. The charge-offs were driven by write down to $2 million on a specific credit, directly related to the oil and gas sector. I'll speak more to our oil and gas and metal sector portfolios in a moment.

Non-performing loans currently at $51.8 million, compared to $35.4 million in the previous quarter. While this is an increase of $16.4 million, quarter over quarter, it's important to note that a [complete] analysis and appropriate plans of action are in place and being executed on each of these credits. While elevated, as compared to most recent history, as we have done in the past, we will aggressively and appropriately manage this part of our portfolio towards timely and ultimate resolution. Individually-assigned credits have been reviewed, appropriate credit marks and charges have occurred, and our specific reserves of $2.2 million consists of, again, a single-credit relationship with exposure to the metals sector. I continue to expect positive results on the NPL portion of the portfolio over time.

We continue to keep a watchful eye on our oil and gas portfolio, as well as scrap and metal-related portfolios. As a reminder, our oil and gas portfolio's total exposure of $45 million, which is less than 1% of our portfolio, and paying special attention to the same two credits we've spoken about over the last several quarters, as we continue to monitor their action plans. One of the credits mentioned above is substandard, nonrecurring credit, which made up most of our quarterly charge-offs. The remaining portfolio is performing, [pass-rated], with regular checkpoints on performance, based on our portfolio management expectations. The balances and risks, as it pertains to this small piece of this portfolio remain manageable and appropriate action plans are in place.

Our scrap and metal portfolio has outstandings of $34 million, which is also less than 1% of our portfolio, with identified isolated issues on two individual credits, which, again, we have plans in place and are being closely monitored.

It should be further noted that a majority of our specific reserves this quarter, specifically $1.7 million, is held within our SNC portfolio. Our SNC portfolio is less than 4% of our portfolio, and the remainder of the portfolio continues to perform well within expectations. While several of these credits are those discussed in previous quarters, involved [in] acquired loans, south-central portfolio is fully integrated in to our expected portfolio management processes.

I trust I added appropriate color to our metrics and this time I'd like to turn the call over to Mark.

Thanks, Pat. The headline net interest margin rate improved by 3 basis points, and the net interest margin rate net of purchase accounting improved by 7 basis points, compared to the fourth quarter. Purchase accounting accretion was $734,000 this quarter, and we expect that to continue to decline to about $400,000 a quarter by the fourth quarter. The can be, again, some volatility with [loans to loan-related] part of the accretion, depending on asset quality and timing issues with the purchase loans.

As we saw this quarter, we believe any further rate increases by the Fed will benefit us; without further short-term increases, however, margin pressure will return. We continue to see the gap between new and paid loans shrink down to just 23 basis points this quarter. The weighted average rate of new loans improved to 3.89%, due to higher prime and LIBOR rates. Total deposits increased by $141 million, but customer deposits, which we define internally as not including brokered, official, or internal trust deposits, increased by $187 million, or 17.3% annualized.

The growth came from both business and personal, from both new and existing customers, and across all geographies. Our goal is to fund our loan growth with customer deposits. Non-interest income increased by $2.7 million, the most significant item was the gain on the sale of our credit card portfolio for $2.1 million, as we're in the process of a strategic repositioning of the credit card product and have entered into a joint marketing agreement with a third party. We also had a $1 million gain, which is in the other category, and that relates to the freezing of our pension, which took effect at the end of the first quarter. This will also have a favorable impact on expenses going forward.

Debit and credit card fees declined, due to unwinding the points liability related to the strategic repositioning of the credit card product that was recorded in the fourth quarter. The improvement in insurance is due to billing seasonality, combined with $420,000 of annual profit-sharing payments from insurance carriers.

While we typically see an increase in non-interest expense as we move from the fourth quarter to the first quarter, due to seasonality, timing, and other scheduled increases, the $4.6 million increase was higher than we expected. Overall about $2.8 million of the increase was seasonality and timing related. About $400,000 was related to one-time items. And the remaining $1.4 million was a combination of scheduled increases in other [brands].

The largest timing item relates to how we account for vacation. Employees earn vacation evenly over the year, but tend to take vacation in the third and fourth quarters. We ever have to accrue for unused, but earned vacation, in the first half of the year, and unwind that in the second half. When we go from the fourth quarter unwind to the first quarter accrual, we typically see an unfavorable variance. This year that was $1.4 million.

There's also seasonality in payroll taxes, as the new year brings a restart to the employer contribution for payroll taxes. This was a $630,000 change, compared to the prior quarter. Also, in salaries and benefits, related to timing, are semiannual contributions we make to employees' health savings accounts. These currently happen in the first and third quarters and are just under $500,000 per instance.

The remainder of the seasonality and timing variances are in equipment, which we have more maintenance contract renewals in the first quarter. That's about $200,000. And we also have a timing mismatch with a contribution that was made without a related share tax credit for $250,000; that will occur in the second quarter. These were, in part, offset by seasonably lower marketing expenses.

The most significant one-time item is in the other category and is related to the prior-quarter's reversal of an unfunded commitment reserve, with the reclassification of our credit card portfolio, to held for sale, that occurred in the fourth quarter. Scheduled expense increases include merit and promotional increases of approximately $400,000, and higher incentive accruals of $300,000, related to new plans and also higher expected production.

Some other variances included higher pension costs, due to worse-than-expected [HAFFA] performance in the first part of 2016, That was about $185,000. And also some additional equipment purchases of $125,000.

So if you look ahead, we do expect expenses to moderate, as some of the timing and seasonality items normalize. In the second quarter, lower expenses will include the following decreases. There will be no health savings account expense, that's about $500,000. Should see reduced incentive accruals, also about $500,000. Lower pension costs, due to the freeze, another $500,000. The shared tax credit I mentioned, about $250,000. Lower payroll taxes, about $300,000. So, these items alone account for expense decreases of approximately $2 million, and we're aggressively reviewing our spending plans across the bank and expect to identify additional cost savings.

The tax rate for the first quarter was just under 27%. That's in line with our current full-year expectation. Our risk-weighted capital ratios declined slightly this quarter, due to risk-weighted asset growth, driven by our strong-loan growth. Expected continued solid loan growth in 2016. We don't anticipate any meaningful changes to our capital ratio. We're comfortable with our current capital levels and have no immediate plans to make any changes.

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

Thank you.

(Operator Instructions)

Our first question is from the line of William Wallace with Raymond James.

Thanks. Good afternoon.

I wanted to ask about expenses and about credit. I don't know which one to ask first. Easier question would maybe be on expenses, Mark.

You just outlined roughly $2 million of expenses that should come out in the second quarter, and then we'll see like the HAS will come back again in the third quarter, but the rest of that stuff should be out for the remainder of the year, is that correct?

Yes.

Okay.

And, then, are there any other investments internally that we should anticipate, or do you feel like the look that you are taking would be to drive that down further in future periods?

Yes, we're kind of doing a full bank review right now, and going through and identifying things, but, our goal through that is to definitely find things that are going to reduce that expense number.

If you look historically, Wally, we operate in the mid-55, you know, so efficiency ratio, and that's where we're going to get it to.

Okay. And that would be a target exclusive of -- that would be a target you'd like to get to, just by driving change on the expense side?

Correct. (Inaudible).

Okay. So moving on the credit, I can't help but wonder with your MPAs more than doubling in the past two quarters and I'm looking at all the categories that you break out in the release; every one of them is, the MPAs are up. So, how you get comfortable that there's not something in your market, you know, there's not a weakening of the economic factors that's driving some of these increases? Can you maybe provide us information that you are looking at or some anecdotal thoughts?

This is Pat.

We continue to monitor anything that's going on economically in all of our markets. We actually track and report on, here internally, everything as it performs to each portfolio, both external factors, internal factors, and again, I think with, obviously, the oil and gas sector, the metals, so that those commodity-driven sectors, obviously, is a concern. We keep a close eye on them.

And had a couple pieces of offering, but the biggest thing this quarter that we experienced was really on the snake portfolio, through snake reviews. And, again, it's looking at declining trends on a customer's financial statement, and really being tainted by what sector of the market they're in, oil and gas, metals, or whatever it is.

Now, I would tell you that the downgrade we had in the metal sector, to NPL's through the SNC review, we had to place $1.7 million specific reserve on it. I'll tell you that the thing continues to actually perform, if you will. It's never missed a payment, performs within boundaries of the agreement, but because of some declining trends and things of that nature we were handed a new NPL.

Okay. Then, maybe you can talk a little bit about the consumer. I'm looking at your residential mortgage, up from $3 million at the end of the third quarter, to just over $9 million this quarter.

That's really actually impacted, Wally; obviously, fed call code, but within that, if you will, that resi mortgage portfolio, it is not your typical residential mortgage. It's a conglomerate of a couple deals that are actually commercial loans that have income producing-type properties that are fed-call-rated as a residential mortgage.

They are farms and acreage and they are offset.

So, that relationship was about $3 million and, again, I think we've looked at it and we think we have a good collateral package around it. And, we're working - the borrower is working with us on an orderly liquidation, and he just -- business conditions in his industry, he was impacted and so he understands he has to unwind some of their debt and we're doing it in due course.

Maybe this will help real quick handle, kind of the NPL impact of what you've seen. You've got just about $4.7 million, which is a hotel that is actually outside of any oil and gas-related territories, had metal, the metal sector, which I talked to you about, with the $1.7 million, specifically was related to SNC, is about $4.7 million.

Second metal sector, which was about $2.1 million, that also is a SNC. That's been in, fluttering around an NPL category. We expect to get some nice pay downs on that, actually. And a CNI and CRE mix of about $4.6 million, some of which we just talked about. And then, investment real estate of a $1.5 million. That's really the bulk of all that influx.

You can see it's not a concentrated area. Not a concentrated market. But they truly, truly are these -- I don't know if I dare to say, like the one-off situations of what we're experiencing.

I'd say, overall, too, we just had a meeting with a client yesterday, and housing, Western Pennsylvania is very strong right now. There's a lot of activity in sales, both new and existing. And out on the central part of the state, too, I was out there last week and what we were hearing was that market conditions are as good as they've been in since 2007, 2008, 2006 - back in that timeframe.

So, there's a good velocity in markets and like I say we know we have a little bit of an increase and Pat and his team and, historically, if you look at our record, we've been aggressive on the marks and we work very diligently to try and maximize returns on the back end.

And keep in mind too, those sectors of the portfolio, the commodity driven sectors, they're small pieces of our entire picture of the portfolio, as well.

Can you remind us how big the SNC portfolio is?

It's less than 4%. It's around $190 million.

Thanks. I'll hop off and let somebody else ask a question. I appreciate the color.

Our next question is from the line of Collyn Gilbert with KBW.

Thanks. Good afternoon. Pat, just to follow up, first on the credit discussions, the SNC portfolio you said is $190 million. And what is the -- how much of that is now in nonperforming?

We've put an NPL roughly about $6.8 million.

Okay.

And about $1.7 million of that has a specific reserve on it.

Okay. And then the rest of your NPLs, that's in the balance, what's the reserve of what's on the balance of NPLs?

As far as specific reserves, Collyn, is that what you're saying?

Yes.

We have $2.2 million total in specific reserves, $1.7 million on one, so it leaves about half a million dollars.

Okay. All right.

And then, just on the expenses, Mark, it seems, even if we were to back out the $2 million or bring back in the 2nd quarter, bring that number down, it still seems like it's running at a rate at least higher than where I was projecting. Quite a bit higher. Is there investments that, you started the year, that you realized you needed to make? Is it a function of the expansion efforts are costing more than you perhaps had thought? I'm trying to understand a little bit how that trajectory jumped somewhat quickly, as it did on the expense side.

A lot of it is in the benefits area. As we planned it, the base salary components really came in close to target; where we seem to be running a little bit higher is on the benefit side. Some of that are some incentives and new plans that are related to new people and growth. The pension plan hurt us a little bit, because we had to revalue that, related to the freeze.

Probably the biggest thing was the medical. We typically see a big drop off in claims as they move from the fourth quarter to the first quarter. We're a self-funded; we have self- funded plans. Because people typically have to restart their co-pays and deductibles and things like that.

We saw virtually no drop-off in medical claims, as we moved from the fourth quarter to the first quarter. That's about -- typically we'd see about a $600,000 to $700,000 decrease in claims. And those were flat moving across. So, we're digging in to that a little bit, trying to understand what's going on.

There were a couple shock claims I know we had in there.

Getting close to, but not quite the shock. We did have higher experience there. And that could be a function of just having more people, but our experience in the past has been well below the COBRA levels, and this puts us a little bit closer to COBRA levels. So that's something we're going to, that did surprise us and we're going watch pretty closely.

Okay. So outside of this issue, there's nothing else that's going on bank-wide that would be driving this?

No. The vast majority was in the benefits, in the [multiple speakers] most of them are benefits.

Okay. That's helpful.

Then just a question on the deposit side. It looks like deposit costs climbed a bit this quarter. Can you talk a little bit about what was driving that and what your intentions are going forward? I know, Mark, you said the intention is to have loan growth be funded by deposits. Do you see upward pricing on the deposit mix, as we look out, to satisfy that? Or, talk a little bit about deposit side.

We have been more - we set some pretty aggressive goals for ourselves to deal with, keep pace on the, with the loan side. So we do have some specials on the CD and money market side. We do expect that to continue.

So, we do expect to see some higher deposit costs, but we do that as the price we have to pay to be able to keep growing. So, that should, you get a little bit of help first quarter from the rate increase in December. So that will contribute to some margin compression over the course of the year, and being more aggressive on the deposit side.

Got you. Okay. I'll leave it there. Thank you.

(Operator Instructions)

The next question is from the line of Matthew Breese with Piper Jaffray.

Good afternoon, everybody. Just touching on the oil and gas and metal sectors; could you remind us what the dollar amount of exposure are to each of those?

Yes. Oil and gas is around $45 million, and the metal sector is about $34 million.

From what you're seeing -- I know you are closer to what's going on in Western Pennsylvania than anybody, on the deterioration, you're calling it one-offs. And it's not an indication that things are, more broadly deteriorating in your market. Accurate?

Yes, you know, we had - they're, obviously, going through the impact of the NPLs and everything. You know, there hasn't been a real concentration outside of those commodity price-driven markets.

Yes, you look at Western Pennsylvania, Matt, I mean, energy is one component, but tech is really expanding, regionally. And you've got some of the big names, too. Google, Apple, Facebook, Uber, and they're driving a lot of activity, both on the commercial real estate side and the residential real estate side in the region and you have your eds and meds, again, regionally, which are hanging in there very nicely. Manufacturing has still been pretty stable.

And financial services, but, I think steel-related right now, and on the oil and gas side, is a little bit softened up somewhat. So, -- but again, that's why I like how the Company's positioned, too, because, in addition to Western Pennsylvania, and some of these Ohio markets now are really generating nice activity.

They're different economic characteristics, certainly Central Pennsylvania are a couple of the highest growth markets that we have in the State right now. We're riding a wave out there, as well, with across-the-board commercial, consumer activities out there, our mortgage activities out there. And then, Western New York has been pretty solid too.

And, again, I like, kind of, how the mix is not all in one basket, in Western Pennsylvania now. We're adding more diversity into the loan portfolio.

So, as I think about the provision going through the rest of the year, it's been climbing fairly regularly over the past five quarters or so. Is there a way you would tell us to think about that? Is it just as likely to drop off as it is to stay at this level?

We're continuing to evaluate the model we use, what's allotted, economic, different economic factors, our own delinquency level and character of the NPLs. A lot of it's going to spin on that, and also, just the rating stack, which actually has been fairly consistent. We didn't see much of a change in our curbside and classified assets, as we moved from the fourth quarter to the first.

So it really depends, more function on that, the absolute bubble reserve. And other than that, it's going to be very heavily influenced by the level of charges in a given quarter. We'll have to see how that goes.

As we've done in the past, we're going to continue working through these and addressing them. We do have several of our nonperforming loans that are actually current on payments.

My last credit question. Of the SNC portfolio, the $190 million, how much of that has gone through the review process?

All of it.

And, then, switching to the margin, absent any more rate hikes, what kind of margin compressions could we see throughout the year?

We're still looking at probably a couple of basis points a quarter, potentially. We do continue to see narrowing of the gap between the new and the paid. That softens that a little bit. That's now below 25 basis points. So that continues. That helps us support some of the things we're doing on the deposit side. They still see a couple of basis points a quarter, potentially.

My last one, insurance revenues this quarter were a bit higher than expected. I know that business can be seasonal. Can you give us some idea how it might trend through the rest of the year?

The bulk of that is seasonal. There's the semi annual billing that accounts for about $200,000 of that, and then on an annual basis, we get profit sharing from the insurance carriers. That was up $400,000, so that combination accounts for the bulk of the variance there. But, usually, you'll see it drop off, potentially by that much, in Q2.

They've had some nice activity on some of their bonding-related accounts that have been busy this quarter. So that will offset some of the expected decline, as well. So, activity levels are good, seasonal impact in Q1.

Okay. I appreciate it. Thanks.

There are no additional questions at this time. I will turn the floor back over to management for any closing remarks.

Again, I just want to thank everybody for participating in today's call. We appreciate the opportunity to discuss the quarter results and look forward to hearing from you at our next conference call.

Thank you. This concludes today's conference. Thank you for your participation and you may now disconnect your lines at this time.