S&T Bancorp Inc (STBA) 2017 Q3 法說會逐字稿

Greetings, and welcome to the S&T Bancorp's Third 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 your host, Mr. Mark Kochvar. Thank you. You may begin.

All right. Thank you. Good afternoon, and 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 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, who will provide an overview of S&T's results.

Well, thank you, Mark, and good afternoon, everyone. We're pleased to report net income of $22.7 million or $0.65 per share for the third quarter, which is a 10% increase over 2016 third quarter results of $20.6 million or $0.59 per share. In addition, our performance measurements are very strong with a return on asset of 1.27%, return on equity of 10.23% and a return on tangible equity of 15.47%. Earnings per share versus Q2 was up 12% when you exclude the $3.6 million in security gains that we booked in Q2. So results this quarter were really just attributed to solid core fundamentals.

Highlights for the quarter include net loan growth of $86 million or 6% annualized, a 2 basis point expansion on our net interest margin to 3.59%, increased net interest income of $900,000, controlled expenses resulting in an efficiency ratio of 50.16% and positive trends in our credit metrics.

As far as that goes, net charge-offs for the quarter were $1.5 million or 10% -- or 10 basis points on an annualized basis. Nonperforming assets declined by $7.8 million or 20%, and the NPA numbers were impacted by the resolution of the previously disclosed large C&I credit. And our provision expense for Q3 was $2.9 million, which was $2 million lower than the provision in Q2.

From a growth standpoint, we continue to see nice activity across all of our markets, including Western Pennsylvania, Central Pennsylvania, Northeast Ohio, Central Ohio and Western New York. Moving forward, we will continue to make strategic investments in all of our markets to expand our breadth of services and grow revenues in a disciplined manner.

As we announced last quarter, we are selling our State College branch and expect the sale to occur in December of this year. Loans and deposits included in the sale are $43 million and $39 million, respectively. And again, the attempt will be to reallocate some of the resources dedicated to that region into other regions where we're experiencing higher growth rates.

I'm pleased to report that our Board of Directors has approved a 10% increase of $0.02 to our dividend that will be paid on November 16, 2017. This is the sixth time that we've increased the dividend over the past 5 years.

So in closing, again, I just want to say that we're very pleased with our performance this quarter, which really is a reflection of good core fundamentals across the franchise and the great job that our bankers do in developing relationships with our clients, which has a long-term positive impact on our franchise.

Thank you very much. And at this point, I'll turn the call over to our Chief Lending Officer, Dave Antolik, who will provide additional color on our lending activities.

Thank you, Todd, and good afternoon, everyone. We're very pleased to report solid loan growth for the third quarter. Results were in line with our expectations, and we anticipate mid-single-digit annual loan growth moving forward.

We continue to focus on expanding our C&I portfolio, and our third quarter results showed growth of over $45 million in this category. This growth occurred in spite of a $25 million reduction in 3 shared national credits. Also, reducing C&I balances was the successful exit of the nonperforming loan that Todd mentioned in his comments. Our utilization rates remained stable at 42% compared to Q2, with growth being driven by a new customer acquisition and an expansion in total line commitments.

We continue to actively manage our commercial lending activities based on our desire to diversify the portfolio and with a focus on dedicating staff and resources to markets and segments with the greatest opportunities. As a result, virtually all of our growth this quarter was driven by market expansion in Central and Northeast Ohio and Western New York, along with solid activity in our dedicated small business line division.

With regard to our commercial real estate activities, balances grew by $17 million in the permanent portfolio while construction balances grew by $6 million.

For the quarter, our unfunded construction commitments remained flat when compared to Q2 and are approximately 20% lower than at year-end 2016. As a result, we do anticipate a reduction in construction outstandings as we enter the 2018 building season. This anticipated reduction is being driven by tempered demand and our active management of certain construction segments, including multifamily and retail. Our pipelines are down slightly from 2 -- Q2 but reflects stronger activity in both our C&I and small business segments. As a challenge to the fourth quarter growth, we anticipate higher payoffs in our commercial real estate book as permanent lenders have become more aggressive in acquiring CRE assets.

In conclusion, I believe that we remain exceptionally well positioned in order to provide solid results moving forward and to manage our growth for the benefit of our shareholders.

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

Thanks, Dave. The net interest income improvement in the third quarter 2017 compared to the second quarter of '17 of $900,000 was due to an extra day combined with the net benefit of the Fed increase late in the second quarter.

We're seeing a very competitive environment on the funding side, as evidenced by an 8 basis point increase in total cost and liabilities. Due to the lag in deposit betas and no additional Fed increases expected until December at the earliest, we expect the net interest margin rate to compress by 2 to 3 basis points in the fourth quarter.

Net interest income will, however, benefit from the third quarter loan growth coming late in the period. The net interest margin rate moving into 2018 will depend on the level and pressure on deposit rates due to increased competition and customer expectations, offset by any further Fed moves. The total deposit increase of $33 million this quarter includes the decline in broker deposits of $20 million. So net of that, deposits were up about $53 million in the third quarter.

The deposit mix improved with $47 million increase in average DDA balances. Excluding the security gains in the second quarter, noninterest income increased by about $900,000. The biggest variance came from a BOLI claim of approximately $700,000.

Noninterest expense again exhibited good control, with expenses being essentially flat on a quarterly basis through the first 3 quarters of the year. We expect expenses to be in the same $36 million to $37 million range in the fourth quarter as well.

Moving into 2018, we expect expenses to remain well controlled with modest increases in the low single digits on a full year basis.

Tax rate in the third quarter was 28.1%, up slightly from prior quarters due to the improved pretax earnings. We expect the full year tax rate to be in the 27.5% area.

Our risk-weighted capital ratios improved by about 17 basis points in the third quarter due to our strong earnings, and we continue to be comfortable with our capital level.

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

(Operator Instructions) Our first question is from Matthew Breese from Piper Jaffray.

Just wanted to dive into loan growth. Getting the sense that fourth quarter might be a little weak as construction stuff pays off, what's giving you the confidence into 2018 that we'll see a resumption of that mid to -- mid-single-digit growth?

It's really activity in the C&I space that we're seeing, and it's a matter of us dedicating more resources to that space. And we also have an expanded pipeline in our small business area as well. So to your point, fourth quarter, as I mentioned, could be challenged based on the timing of some payoffs that we anticipate as well as the reduction in construction commitments.

Got it. Okay. And then maybe just on the expense front. I mean, you guys have done a fantastic job here maintaining basically flat all year. It sounds like it can run that way through year-end. At what point do we see that start to break and move a little bit higher where you have to invest in the franchise a bit more?

Well, we've been making investments in the franchise, Matt. Again, we've -- wherever we reallocated resources, we might have to retire in one area on the personnel front, and you move it into another area, you just don't replace. So I mean, that efficiency ratio is very important to us and maintaining that so as we're getting the budgeting process now. But kind of the last couple of years, what we've targeted is expense growth in that 2% to 3% range. And our goal looking out to next year is to continue down that path.

Right. Okay. No, I didn't mean to take anything away from the reinvestment. It's just the flat expenses is exceptional.

But we -- even though this year, though, we've added bankers and markets and -- on the revenue side, and we will continue to do so next year, and we think there are opportunities. And Dave said that some of these higher-growth markets that we can fill out the franchise a little bit and introduce some new services or revenue lines, mortgage in certain areas, wealth management in certain areas and -- but again, we're going to do it without going crazy on the -- on blowing up the expense structure.

Right. And then as I think about just overall profitability, there's some meaningful improvements year-to-date. As you look into your crystal ball, is there anything really stopping you from continuing 1.15% to 1.25% kind of ROA from here on out?

I mean, that's our target, and we're going to try to manage to keep it there.

Great. And then my last one is really on the stock has shown some strength recently. And just wanted to get your thoughts on M&A and activity in your market and whether or not you think things are picking up and you might participate.

I think activity levels -- I'll start with that first, but I think it's somewhat muted right now. Not a lot of opportunities out there from what we're hearing. But yes, with the increase in the stock valuation, it certainly makes your currency a lot stronger, and we like the capital levels. We continue to build capital. So we're just going to continue to position ourselves that if something comes up, we'll certainly give it a good, hard look. But really, how we manage the company is to grow it organically, and we made investments in the 5 markets that we talked about and the people in those markets. And we like how we're positioned as we look forward to '18 just from an organic perspective.

Our next question is from Matt Schultheis from Boenning and Scattergood.

Quick question on the branch sale in State College. What kind of gain are you expecting to book with that?

It will depend on the composition of the deposits by the end, but something around $1 million.

Okay. And correct me if I'm wrong, did you rebrand Integrity this last quarter?

Yes. That was in September. It was right after Labor Day.

And how was the market -- how has the market reaction been so far?

Been very good. So we've done a lot of work up to that point to make sure people knew what the S&T -- it was -- we heard positive results, Matt. The other thing it provides is our new -- or not new, but our Director of Wealth Management, Greg Lefever, came out of that market. And so we talked to this fella, it makes a lot of sense to attack the market as one organization, yes, so we can leverage the brand. I mean, Integrity, well known and had a good brand out there, but we think moving forward, this is the appropriate course of action to take.

Right. And were there any costs embedded with rebranding in the third quarter results?

It was pretty minimal. Actually, we think we're going to -- we'll actually have saves going forward just by having more efficiencies on producing, marketing...

Marketing, websites and -- we have some signage expense to switch some of that over, but it wasn't really...

Not a lot that I could capitalize anyway, so it doesn't have a big impact on the quarterly results at all.

Understand. Understand. And so the last question, a bigger-picture question, I guess, is, are you seeing any change in customer behavior or your approach to the business in Pennsylvania due to the budget impasse?

Right now, Matt, I want to say no. But last year, as that thing dragged on, it definitely had an impact in a lot of areas. But so far, we haven't seen any analyst that -- he's shaking his head as well so -- but it's something that we're monitoring.

(Operator Instructions) And our next question is from Daniel Cardenas from Raymond James.

Just a quick question and just kind of going back to your branch sale. Are there any more branch rationalization sales kind of coming up in 2018? Or do you guys think you've just pretty much this one and done?

Yes. I mean, we continue to look at it, but I think we like how we're positioned from the branch footprint right now, and we don't see any major deviation from where we are today.

And then maybe some color on...

Dan, just to elaborate on that, too. If you look over the last year to 2 years, we've closed a number of branches so we've really pushed up the -- our average deposits per branch are right around $90 million or so. So we like that number. It's kind of how we look at it from a macro picture.

Okay. All right. Good. Good. All right. And then just in terms of deposit pricing pressures, what are you seeing? Is there any one section of your footprint that's perhaps showing more intense pressures than others? And how are you thinking about deposit betas going forward?

This is Mark. There has been pressure in pretty much all the markets, and we're seeing a lot of money market rates that are above 1% up to 1.30% range. On CD specials are plentiful and very competitive sort of in the -- also in that -- in the just under 1 year. Even out to 5 years, there's a number of specials. But there doesn't seem to be any -- it’s usually all the markets that are seeing that. From the betas, we do expect there to be some continued upward movement there. They do lag as people reprice their CDs and come in with all the press about higher rates. And that's what behind the couple of basis points compression we expect in Q4 since -- if the Fed does move, it won't be until mid-December, so we won't get a lot of help on the asset side from that.

And kind of just given where your loan-to-deposit ratio is right now, is this kind of the high watermark that we're seeing here? Or can this number go a little bit higher?

Yes. Definitely, it is. We are on the high side, and we'd like to keep it in this range and not go a lot -- a whole lot higher from here. So that puts a little bit more pressure on us to maintain deposit levels, and pricing is part of that.

Like I said, the last quarter was nice activity on the DDA side, so we're focusing on what type of deposit we're trying to get as well.

Right. And then on the commercial side, the move into more of the -- more C&I lending does help the mix there as you're more likely to get deposits and there are more likely to be lower-cost deposits from that line of business or that segment of loan activity.

Okay. All right. That seems fair. All right. And then on the tax rate, I missed the guidance that you gave for Q4. Could you hit that again, please?

We're looking at for the full year about 27.5% as our estimate for the full year tax rate.

Okay. Do you think that carries over into 2018?

It might tick up a little bit just -- the amount of our low-income housing credits start to burn off, and the improvement that we continue to expect on the pretax side will price the -- we haven't come up with a number yet, but we should -- we'll price a slightly higher effective tax rate. Unless there's tax reform, then all bets are off.

All right. And you guys are modeling that.

I think we had to get that one in there.

Our next question is from Collyn Gilbert from KBW.

Just a follow-up on some of the competitive discussions, Mark, that you were saying on the deposit side. Maybe David, are you -- what are you seeing on the lending side within your markets as it relates to sort of competitive pressures? And how does that tie in? I know you guys said before that you were probably more mindful of preserving the NIM and maybe sacrificing some growth in order to get there. I just kind of wanted to see how you're thinking about that balance as we look out into the fourth quarter and then into next year as well.

Yes. That thought process continues, and you certainly saw that last quarter in terms of muted loan growth. So we're going to do everything we can to protect the NIM, keep pressure off of deposit pricing as much as we can and still grow, but the growth rates are going to be mid-single-digit rather than high single-digit. Where we do see ability to grow is particularly in that small business segment, which is much more personnel. The corporate deals tend to get sent out to 5 banks, and the borrower examines 5 sheets of paper from 5 different banks and makes the decision. The small business borrower tends to need to react more quickly to their -- and we need to react more quickly and they need credit decisioning more quickly. And that's what we can deliver service. So yes, that thought process does continue.

Okay. And then are you seeing anything in the way in terms of your rationality among your competitors on the lending side, whether it's structure terms? And is that impacting the level of paydowns that you're seeing in your own portfolio?

In the CRE space, particularly on construction deals, we're seeing some pretty irrational higher-leverage deals than what we would be comfortable with. There's still expanded interest-only period. Per-market lenders are being more aggressive in taking out deals that are stabilized for shorter periods and they may have required a few years back, yes. So yes, there's definitely some more aggressive competition in the CRE space. We're holding our own in the C&I space, so that's the real bright spot for us. And I think that's more about the markets that we're in and the staff that we have and our ability to build relationships there.

Okay. Okay. That's helpful. And then, Todd, just back to the $90 million deposits per branch. Do you know how that would have been, I don't know, 3 years ago or so? Has that changed a lot? Just talking it's a high number.

Yes. It will be probably in, like, the $65 million to $70 million range, Collyn, so we pushed it up.

Okay. And I know -- and remind me again how many branches you've closed over time. I mean, I don't know how much of that is just branch closures or just the growth in deposits. But just trying to think through that metric a little bit more.

Yes. It's probably been -- Mark and I are just looking at each other because we have probably 10 over 3 or 4 years. We did 3 last year.

This concludes the question-and-answer session. I'd like to turn the floor back over to management for any closing comments.

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

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