S&T Bancorp Inc (STBA) 2017 Q2 法說會逐字稿

Greetings, and welcome to the S&T Bancorp's Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mark Kochvar. Thank you. You may begin.

Hi, thanks very much, and good afternoon, thanks for participating in today's call. Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors, which should be 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 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'd 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. We're very pleased to report record net income of $22.8 million or $0.65 per share for the second quarter, which is a 25% increase over our first quarter results of $18.2 million or $0.52 per share, and a 33% increase over second quarter of 2016 results of $17.1 million or $0.49 per share. The return on assets, return on equity and return on tangible common equity were 1.29%, 10.55% and 16.15%, respectively, for the quarter.

Highlights for the quarter, again, featured net interest margin expansion, controlled expenses, a reduction in the provision expense and security gains, which totaled $3.6 million or $0.07 per share. These were $1 million higher than previously disclosed in last quarter's call, and the variance is attributed to exiting a position in the banking entity who announced the merger in Q2. Excluding gains, core EPS was $0.58 per share, which was a 14% increase over the first quarter core EPS of $0.51, an 18% increase compared to core earnings per share of $0.49 in the second quarter of 2016.

Net interest margin increased 7 basis points to 3.57% over the first quarter. This was also a 13 basis point increase over the second quarter of 2016. And as a result, net interest income increased by $2.7 million or 5%, and year-to-date versus 2016, it's up $11.1 million or right around 11%. Again, controlling our noninterest expense continues to be a focus across the organization. For the quarter, expenses were down approximately $200,000 to $36.6 million versus the first quarter and are running flat year-to-date compared to last year.

The combination of increased revenues and flat expenses is creating nice operating leverage and is also positively impacting our efficiency ratio, which was at 51.48% for the quarter.

We also experienced some favorable trends in our asset quality metrics as overall provision expense declined by $300,000 to $4.9 million. Nonperforming loans declined by $9.3 million or 20% and now stand at $36.7 million or 0.63% of total loans.

Overall delinquency declined by 5 basis points to 0.87% and charge-offs for the quarter were $5.3 million and in line with expectations. We do like the direction of our asset quality numbers and the way they're moving and expect to see continued momentum in the second half of the year.

Balance sheet growth for the quarter was somewhat muted as loans and deposits were flat. Our customer deposit balances did increase $46 million for the quarter, however, overall deposits were down about $25 million as we let $55 million of brokerage CDs run off.

Our Chief Lending Officer, Dave Antolik, will elaborate on lending activity in a few moments. But overall, loan growth has been impacted by a conscious decision to manage the margin and increase spreads and not chase some ultra-competitive loan pricing on the long end of the curve that we're seeing in the markets right now. Our bankers continue to excel at developing and maintaining relationships that benefit our customers and our company for many years, and we believe competitive factors will more than benefit us once the market conditions turn more favorable.

All in all, we're very pleased with our core operating metrics and like how we're positioned as we move forward.

The final thing I just want to mention before I turn the program over to Dave is our Board of Directors did declare a $0.20 per share dividend, which is a 5.3% increase over the same period of last year.

So Dave, it's all yours.

Hey, thanks, Todd, and good afternoon, everyone. As Todd mentioned, we're very pleased with last quarter's results, particularly with solid growth that we saw in net interest income. Our focus for the second half of 2017 is to drive revenue growth by combining improved loan yields with single -- mid-single digit full year loan growth, all while continuing to improve our credit metrics.

Our decision to focus on improving loan yields and more modest loan growth is prompted by recent short-term rate increases combined with curve flattening and our reluctance to compete at lower spreads for new and repricing loans.

We've seen competitors reduce spreads, especially for term rates beyond 5 years, and we believe that maintaining our disciplined approach to loan pricing will benefit shareholders in the long run.

As we look forward to the second half of 2017, we expect to see the full benefit of the Fed's June 14 rate increase and the resulting tailwinds that will help to further improve revenue.

As a result of these strategies, we saw limited loan balance growth in Q2. Within the C&I book, we saw utilization rates reduce from 43% to 41% during the quarter as customers reduced inventories in order to reduce expenses, particularly in our automobile floor plan business.

Within the construction and CRE portfolios, we experienced the normal cycle of funding and completion of projects and movement of balances into the CRE portfolio.

We did experience increased payouts this quarter due to property sales and a more aggressive permanent loan market.

Finally, calling activities remain robust throughout all of our markets and our pipeline has increased in recent months. We continue to recruit bankers in order to build upon our proven ability to grow. We will continue to make this investment in our staff, and we like how we are positioned with great bankers and great markets with ample opportunity for customer acquisition and revenue growth.

And now, Mark will provide you with additional details on Q2 results.

Great. Thanks, Dave. The net interest income improvement in the second quarter of 2017 compared to the first quarter of '17 of $2.7 million was due to an increase in average loan balances of $128 million combined with higher short-term rates. We had strong loan growth at the very end of the first quarter, which carry through to the average balance increase in the second quarter, despite modest point-to-point growth in the second quarter.

Loan yields improved by 12 basis points this quarter, and we are now consistently seeing new loan rates higher than paid rates.

Cost and liabilities increased by 8 basis points this quarter compared to a 4 basis point increase between the first and fourth quarter of '16. Deposit costs were up 5 basis points this quarter compared to 2 basis points between the first quarter of '17 and the fourth quarter of '16. This acceleration is likely to continue into the third quarter, but the effective deposit beta does have some lag.

We still expect a net benefit to our net interest margin rate in the third quarter from the higher short-term rates that came with the Fed increase in June. The front end of the curve impacts us more than the long end, so the recent flattening will not cause a large drag.

The net interest margin rate increases will slow and the net interest margin should stabilize in the fourth quarter and into 2018, depending on the level of pressure on deposit rates from increased competition and higher customer expectation.

Net of security gains and noninterest income was in line with the first quarter. Noninterest expense exhibited good control and was also essentially flat to the first quarter. On a go-forward basis, we continue to expect our expense run rate to be in the range of $36 million to $37 million per quarter for the remainder of this year. Tax rate in the second quarter, 27.4%, that's in line with our full year expectation.

Our risk-based capital ratio has improved this quarter by about 35 basis points due to retained earnings and a reduction in risk-weighted assets as loan growth was slower and we continue to reduce our HVCRE exposure.

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

(Operator Instructions) Our first question comes from the line of Brody Preston with Piper Jaffray.

Mark, my line cut out a little bit, what was the expense number that you gave for the quarterly run rate?

$36 million to $37 million, in that range.

That's what I thought I heard. So on the margin, you said you're expecting to see deposit cost increase a little bit, but you expect to get full benefit from the June hike. So what could we sort of expect for a margin trajectory from here?

What -- I think, it's going to -- net interest margin rate should go up maybe a couple basis points as we go into Q3. But then, barring any future Fed increases, we should see it stabilize, and again, depending on level of competition, you could see a tick lower as we move into next year. But again, that getting pretty far out and depends on what the Fed does here in Q4, probably.

Okay. And I guess, going back to deposits, the deposit beta was a little bit bigger this quarter than last quarter. Is that something you expect to see sort of pick up from like the 25% that it was this quarter?

Yes, I do expect it to go up a notch higher because there is a bit of a lag there. It's -- as customers evaluate the situation, there's more attention paid to rates and it does take a little bit of time for that to happen, so we probably will see a little bit of an acceleration of that going into Q3.

Okay. And you mentioned that the pipeline had picked up and you're tracking for mid-single digit loan growth for the second half of the year.

Correct.

I guess, which geographies are you seeing that in? And which business lines?

We're seeing it across all of our geographies. In fact, the approach to the market of looking for more yields has impacted all of our markets, but we're seeing good activities in -- particularly in the newer markets, Western New York, Central Ohio, Central Pennsylvania, Northeast Ohio.

C&I business has been good in the Western PA.

Yes, our C&I team saw growth this quarter, although we did exit a few Shared National Credits and continue to look to exit some relationships where they're not -- don't fit our core strategy. In fact, if you look at the balance sheet in the quarter, there were approximately $18 million of C&I loans that were in loans held-for-sale.

Okay. All right. And then, just one more for me, credit continues to improve, but the net charge-offs picked up a little bit. Just wondering what drove that?

Yes. We had some resolution of a number of credits this year that were positive and this was kind of our expected for first half of the year to have kind of the heavy charges, especially coming in second quarter. So really, on that -- that charge number came in, I think, right on top of what our expectation was. I think, going forward, it will lighten. And I think, over the full year, Brody, our expectation is still in the range that we previously disclosed in that 22, 23 basis point range still for the year.

Okay. Great. And just one more, what loan categories were those charge-offs in?

It's across more between C&I and CRE. There wasn't one, I don't think, that was weighted too much over the other.

(Operator Instructions) Our next question comes from the line of Collyn Gilbert with KBW.

Mark, just for you, just on the NIM, obviously, came in strong this quarter, better than it's been what you were thinking going into the quarter. Was that a function of sort of the strategies that you indicated you implemented where you're going to pull back on growth and just really focus on yield? Or just -- just trying to connect the dots there as to why the NIM came in so much higher than it sounded like you were expecting it to going into the quarter.

I think, part of it was loan yield. I think, we're seeing a little bit better pricing on the front end. We got better stabilization with that paid versus new than we had expected. And then, I think, the lags on the pricing on the deposit side are a little bit more pronounced than we thought. We had some -- a little bit higher -- more aggressive rates out there, but they have not been as successful due to the competition. So on an incremental basis, more of our funding came from the wholesale market. It's actually a little bit cheaper than the deposit side. But as we get out there a little bit more on the customer deposit side, that's behind some of our previous comments that you might see a little bit of a higher trajectory to the liability costing changes as we move into Q3.

Okay. And on the brokered that you pushed out this quarter, is there more that you intend to do in the future? Or how are you seeing that portfolio sort of shake out?

That's going to be more a function of just kind of the net loan growth versus deposit growth and how it squares against other wholesale borrowing opportunities. We use that mostly to fill in mostly, and it's a pricing -- more of a pricing question than anything.

Okay. That makes sense. And then, just your comments that may be -- I know there's just a million variables and uncertainty here, but the fact that you may see a drop off in the NIM next year, is that just assuming that's just from the funding side, that the funding cost just...

Yes.

Okay. That's helpful. And then, the -- was there anything in particular on the other operating expense line that inflated this quarter? Were there any seasonal items that should be backed out, either on the fee or expense side as we go forward?

On the fees, it's really just the gain that's broken out. On the credit side, we did have a little bit higher -- some workout-related costs that were made about $0.5 million higher than usual. But other than that, expense side was pretty clean.

Okay. That's helpful. And then, just -- I just want to make sure I understand kind of the movement on the NPLs on some of the resolution that came in this quarter. The -- maybe could you just walk through that. Dave, I don't know if it's good for you to do or -- and then, the charge-offs that you took this quarter, I presume it was tied already to these credits that you've kind of been working to resolve over the last 2 quarters, is that right?

Yes, I'll start with the last part of your question first and that's -- you're absolutely on point with that. When you look at the numbers, if you think that we had -- as far as new formation, a little over $4 million, it's $4.2 million, $4.3 million if memory serves me right, kind of roll into NPLs, so it slowed quite a bit. And then, we had about $13 million to $13.5 million, somewhere in between there, of resolution. Now, obviously, we have about $5 million in charge, so that means we had $8 million in positive resolution, so our positive resolution outran our charges again for the second straight quarter.

Okay. That's great. And then, is there any -- was there any migration on the watch list side or any changes in risk ratings that occurred this quarter? I know, Todd, you had indicated your outlook for net charge-offs, so just curious about the rest of the movement within the portfolio?

There's changes in risk ratings all the time, Collyn, so as far as fluidity in the portfolio, but nothing that, I think, that has been detrimental in that more severe category as substandard.

Our next question come from the line of Matt Schultheis with Boenning and Scattergood.

So you talked earlier about hiring commercial lenders and was just trying to get a sense of are you looking to fill an existing geography or are you going to look to open, say, some new geographies? And how many you think you would add? And whether you're looking for big bank lenders or sort of people looking to make a lateral move to a different institution?

Matt, it's Dave Antolik. So our approach is not to add new geographies necessarily, but to kind of complement the teams that we have out there. We do have a couple of retirements that are taking place or that have taken place this year that we're looking to replace folks. So part of it is maintaining existing staff, but then, certainly, in order for us to drive growth, we need to add folks. We're particularly focused on C&I bankers, that's a big initiative of our strategic lease to grow that book. And typically, those folks would come from banks of similar size or larger.

But also, at the other end of the spectrum, there -- in some of the market that we're in there, there are some good opportunities in the business banking world, which is a small business division. So we have a couple of folks that we're talking to, probably 2 or 3 people in that line of business as well.

Okay. Any change from your historic M&A outlook?

Not really, Matt. I think, it's -- we're just going to maintain the discipline. Again, we feel very comfortable with our ability to grow the company organically again this quarter. We had nice effect on capital, so we'll continue to generate capital internally and just be prepared if and when a couple of folks that we would have an interest in would decide to do something.

Our next question come from the line of Daniel Cardenas with Raymond James.

I think, you mentioned in your comments that you exited some SNCs this quarter. Could you maybe give me some color as to how much of that represented, and categorically, what type of loans or what type of industries were this in and what are your plans for additional exits in the SNC portfolio looking forward?

So the -- few of the exits were special assets exits, and I don't have the numbers off the top of my head in terms of the amounts. But generally speaking, when we look at the SNC portfolio, it's not an area of focus for us. So unless we have a relationship that we can round down in terms of gathering depositors or creating other fee opportunities, we've looked to reduce our exposure in that portfolio, but there's no industry concentration. There's -- it's not oil and gas or anything specific in that respect.

Yes, this is Pat. As far as from the workout or the more severe rated loans from the SNC portfolio, I think, it's roughly about $5 million or $6 million of what we exited through there this month as well.

Okay. All right. And then, of the growth that we saw this quarter, was any of that via participations?

No.

No. We're not real active in that space. I mean, our total SNC is around $200 million or so. And that's been shrinking or flat -- and flat.

As the organic growth in your footprint improves, you're just kind of shrinking that portfolio, is that the assumption?

Yes. Again, it's not a -- our core strategy is still a relationship strategy, and it's -- as a participating banker, as a buyer of a portion of the SNC, it's difficult to round out that relationship. So it was our focus on growing deposits, growing other fee opportunities. It just doesn't fit with our core mission.

Okay. And then, I think, you also mentioned that perhaps you're being a little bit more measured and cautious in the loan portfolio, just given competitive factors out there. Is that more from smaller banks or larger financial institutions? And is that more pricing or structural in nature?

It's pricing, for the most part. On the longer end of the curve, it's primarily smaller banks who are willing to take 5-, 7- and 10-year rate risk. We're just talking about this the other day. We've got prime at 4.25, we're seeing 5-year pricing in the low to mid 4s, and 10-year pricing in the mid to high 4s. So we're just not going to participate that far out the curve and take that kind of rate risk. If you look at municipal banking, municipal lending opportunities is primarily the larger banks who are driving rates down. And they're subprime for 5- to 10-year fixed rates in a lot of cases there now. We will, from time to time, price something more aggressively where we want to protect an existing relationship. We're not aggressively looking to add new customers based on a very aggressive longer-term rate.

(Operator Instructions) And it seems that we have no further questions at this time. I'd like to turn the floor back over to management for any closing comments.

I just want to thank everybody for participating in today's conference call. And Mark and Dave and I appreciate the opportunity to discuss this quarter's results and look forward to hearing from you next quarter, so hope you all have a good day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.