S&T Bancorp Inc (STBA) 2017 Q4 法說會逐字稿

Greetings, and welcome to the S&T Bancorp Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Mark Kochvar, CFO. Please go ahead, Mark.

Thanks, and 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.

The statement provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the fourth quarter and full year 2017 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 are pleased to report net income of $9.3 million or $0.27 per share versus $17.7 million or $0.51 per share in the fourth quarter of 2016.

Our results this quarter were impacted by a $13.4 million or $0.38 per share from the remeasurement of our net deferred tax asset as a result of the tax reform passed in Q4. And net of the DTA, remeasurement core earnings were very solid, with net income of $22.7 million or $0.65 per share, which is a 27% increase over the fourth quarter of 2016.

Core operating metrics were also very strong, with an ROA of 1.26%, return on equity of 10.09%, return on tangible equity of 15.16% and an efficiency ratio of 51.75%.

For the full year, we are reporting net income of $73 million or $2.09 per share, and again, full-year results are impacted by the $13.4 million DTA remeasurement. But on a core basis, net income increased 21% to $86.4 million or $2.47 per share versus $71.4 million or $2.05 per share in 2016. Again, core operating metrics for the full year were very strong, with an ROA of 1.22%, return on equity of 9.9%, and return on tangible equity of 15.08% and an efficiency ratio of 51.77%.

Our balance sheet growth this quarter was mixed as we experienced $100 million of client loan balances. The majority of the decrease occurred in our commercial portfolio, which was impacted by the sale of the State College branch and also abnormally high -- higher payoffs in the quarter. Our Chief Lending Officer, Dave Antolik, will provide some more color on our lending activities in a few moments.

Credit metrics were a bright spot this quarter as nonperforming assets decreased by $6.1 million or 20% to $24.4 million.

Nonperforming loans, the total loans now stand at 42 basis points. Our net charge-offs for the quarter were $1.3 million or 9 basis points annualized. So as a result of improved credit metrics, reduced charges and slower loan growth, we record a provision expense of $1 million versus $2.9 million in the third quarter and $5.6 million in the fourth quarter of 2016.

Our controlling expenses continues to be a strategic focus of the organization, with efficiency ratios in the low 50s on both a quarterly and annual basis. And going forward into '18, we're going to continue to maintain tight controls over expenses and expect to at least maintain, if not improve on historical levels.

We did consummate the sale of a majority interest in our Evergreen Insurance division to the Reschini Group on January 1, and we expect the book-to-gain in the neighborhood of $1 million for the first quarter.

The Reschini Group is one of the top insurance agencies in Pennsylvania, specializing in employee benefit plans, and with their industry knowledge and product set, we anticipate increased net contributions to the bank.

And we're excited about our prospects for 2018. Honestly, a big lift will come from the change in the federal tax rates, and at this point, we're evaluating options on investing some of these savings back into the company, where we can receive the best long-term benefit.

Furthermore, we're also evaluating capital management strategies, which would include buybacks or increased dividends. And in addition, we have a great team of seasoned bankers who excel at developing long-standing relationships. We operate in great markets, which bode well for creating long-term value.

2017 was a great year, and we expect to continue to post strong profitability metrics in ROA, return on equity, return on tangible equity to benefit our shareholders in the coming year.

And finally, I want to mention that our Board of Directors has approved a quarterly dividend of $0.22 per share payable on February 22, which is a 10% increase over the prior year.

We appreciate your continued support of S&T Bancorp, and now I'd like to turn the program over to David Antolik.

Thank you, Todd, and good afternoon, everyone. I'd like to start with an overview of some of our successes in commercial banking in the fourth quarter, then address the balance declines and discuss our expectations for 2018.

First, our business banking group had its best loan growth quarter since the second quarter of 2016. Our dedicated credit delivery and customer relationship model for this segment has created a unique position in the market for us, and this is a division that we intend to grow.

In the quarter, we added 4 new business bankers to our team in order to support growth. Second, we experienced loan growth of $25 million in Western New York. Loan balances now exceed $325 million in this market, and our team has a solid pipeline to support future growth.

Third, our investment in Central Pennsylvania continues to yield positive results as we saw loan growth of $17 million and added one experienced commercial banker during the fourth quarter in that market.

In addition, our North Shore Pittsburgh corporate banking group saw a modest loan growth in the quarter despite headwinds that impacted bank-wide C&I growth. We also saw very strong business demand deposit growth, capping a year in which we grew this deposit type by nearly $100 million.

Our loan balance declines were the result of several factors, including the sale of our State College branch, which accounted for $41 million of the reduction, and elevated commercial loan payoffs that were approximately 60% higher than the average for the previous 4 quarters. This unusual payoff level was anticipated as several large construction and stabilized CRE loans moved to the permanent market.

We also saw nearly $30 million in payoffs as the result of companies and properties being sold and made the decision to exit one Shared National Credit for $10 million.

In addition, our revolving line of credit utilization rate, excluding 4 planned commitments, declined from 42% to 39%.

Moving forward, we expect payoffs and utilization rates to return to historic levels. Our forecast is for full-year loan growth of mid-single digits, with more modest growth in the early part of the year as we continue to grow our pipeline. We expect to achieve this loan growth while focusing on protecting our net interest margin and remaining disciplined with regard to credit risk.

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

Okay. Thanks, Dave. Although point-to-point quarter end balance -- loan balances were down, average loan balances increased in the fourth quarter compared to the third quarter by about $49 million, which combined with the Fed increase in mid-December, resulted in an increase in net interest income and relatively stable net interest margin rate.

We continue to see a competitive environment for funding but should see some improvement in net interest income in the first quarter as we realize a full quarter of the Fed increase.

Net interest margin rate moving into 2018 will decline by about 5 basis points due to the lower fully taxable equivalent adjustment, everything else being equal. Beyond that, the net interest margin rate will depend on Fed moves and the shape of the yield curve. We continue to think that we will benefit modestly from rates up.

Noninterest income includes some one-time items the past couple of quarters, a gain on the branch sale in the fourth quarter by $1 million and a BOLI claim in the third quarter of about $700,000. We did take about $1 million in security losses in the fourth quarter as part of a strategy related to tax reform, which we should get back over the next 1.5 years with better net interest income.

Going forward with the sale of the majority of our insurance business, we expect fee income to be approximately $12 million per quarter. Noninterest expense again exhibited good control this quarter. Increases were due to timing of marketing programs, higher loan-related expenses and some one-time items related to the sale of our insurance business.

Without the insurance business in our financials going forward, we expect expenses to be relatively flat to 2017 in the $36 million to $37 million per quarter range.

With tax reform, we expect our new effective rate in 2018 to be in the low- to mid-16% area. Our risk-weighted capital ratios were relatively unchanged as earnings were impacted by the net DTA remeasurement.

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

(Operator Instructions) Our first question is coming from the line of Collyn Gilbert with KBW.

Mark, maybe just start on the NIM and sort of your expectations. I know you said you expect to get a slight benefit from rates moving higher. Can you just talk about what you're anticipating in terms of deposit costs within your assumptions for next year and how you're seeing competitive pricing within your marketplace?

Yes, so overall, for margin next year, again with the 5 basis point decline in the FTE adjustment offset a little bit by some benefit from the rest of the Fed, we expect first quarter to be in the mid-3.50s, probably 3.55%, 3.56% and relatively stable after that. Going forward, we're seeing a little bit better pricing because of a higher yield curve on the loan side. And although we expect and have seen deposit pricing pressure, it has slowed down a little bit. We saw a little bit better -- or a little bit lower repricing in the fourth quarter than we saw in prior quarters. So we're looking for a relatively stable margin rate over the course of the year.

Okay. That's very helpful. Okay. And then just on provisioning, credit has obviously been trending really, really well. Do you think the provision in '18 will align more with what you guys did in '17? Or do you think it would revert back to what you were doing prior to '17? And tie that in -- I was going to say and tie that into your outlook for credit, which, hopefully, yes, is not going to be reflective of perhaps what you saw in '15 and '16.

Yes, if you look at the 3 big quarters that we had, Collyn, on charges, were the fourth quarter of '16 and then the first 2 quarters of '17. And the last 2 quarters have been very good, and probably, I mean, the third quarter is probably a better indication of where we're going to be, probably be in that range would be my estimation.

There was some impact this quarter on provisioning because the loan balances were down. So with some return of growth, we would expect the provision to be maybe a little bit higher, but the net charge-offs, we would hope, would stay closer to where -- what we experienced in the back half of 2017.

Yes. For the year, charges, Collyn, we are anticipating 15, 18 basis points, in that range.

Okay. Okay. That's helpful. And then, Dave, just maybe a question for you. As you guys think about the loan growth going forward, and as you mentioned, elevated payoffs in the fourth quarter, I usually see that seasonally, but just what are you assuming in paydown activity within that sort of mid-single-digit loan growth rate?

Okay. So we track it on a quarterly basis, and I've gone back several years and it's fairly consistent, including the fourth quarter of 2016. So 2017 payoffs were truly outlying with regard to historical levels. So we would expect them to return to more historical levels. And some of that, as I mentioned, was due to some sales that we knew were going to happen. Fortunately, we've been able to turn those sales into some nice deposit accounts of wealth opportunities, other revenue-generating opportunities for ourselves.

Yes, some of that -- the loan growth range, Collyn, is by choice. I mean, we're focusing on trying to maintain spreads on new credits, and I think our bankers are doing a good job getting increased spreads. And we're really looking to have to try and maintain that margin this year rather than just chasing growth for growth's sake and see your margin decline.

Okay. That's very helpful. Okay. And then, Todd, maybe just offer some of your thoughts on where you're thinking about M&A at this point, activity in the market, potential activity in the market or how, as you build out kind of a strategic plan over the next couple of years, how you see M&A fitting into that.

Collyn, I don't think it changes much from how we've approached this historically. We think -- we're not big -- we have -- the company set up to grow organically, and when needed meet expectations. And capital levels are kind of building a little bit, so you -- we will keep a little powder, and if the right opportunity comes up, we'll certainly take a look. But we're not going to go out and necessarily try and overpay to do a deal just to say we're doing a deal.

Our next question comes from the line of Brody Preston with Piper Jaffray.

So I guess just going back to (inaudible) for a sec, are you guys including any rate hikes in your guidance?

No, we're not.

Okay. That's what I figured. All right. And I guess going back to loan growth moving forward, you mentioned that, I guess maybe the first half of the year, you expect to be a little bit slower than the second half of the year as you continue to build the pipeline. What, I guess, what sort of -- I guess across the various loan categories, what do pipelines look like now and I guess where would you like them to be?

Right. So the pipeline, as we exited the fourth quarter, was slightly higher than it was. We kind of bottomed out at the end of the second quarter through the third quarter, so we have been growing the pipeline. As I mentioned, we've added a few new producers as well. And we feel good about the markets and the conversations that we're having with our clients and where tax reform might take them, and the impact of that is creating a lot of positive momentum for many of our customers. So we believe that will lead to some additional lending opportunities as well.

Okay. Great. And I think the total number of people you said you added from a loan production perspective, was that 5, correct or...

Yes. So there are actually 6. We added another commercial banker in Northeast Ohio as well.

Okay. Okay. So that's 6 new commercial bankers total?

Yes, 4 business bankers and 2 commercial bankers.

Okay. And I guess if the guidance for expenses is in that $36 million to $37 million range, so back normalized a little bit lower than what you saw this quarter. I'm assuming that those -- there're additional salaries and benefits that come with those hires. I guess where are you looking to trim on the expense line items to keep it within that quarterly range?

The big impact is the insurance business that we had. That will no longer be consolidated after the first of the year, and so the annual run rate on that was $4 million-ish, so that can be gone. We also sold the State College branch in the fourth quarter, and so those expenses will also be out. So we're really redeploying some of those expenses, in part, into the commercial lending producers.

Okay. Okay. And then last one for me. Did I hear you correctly, you said the tax rate guide is in the low- to mid-16%, so 16% to 16.5%?

Correct. We're still working through some of the numbers, but that's where it looks like it's going to end up.

(Operator Instructions) The next question is from the line of Daniel Cardenas with Raymond James.

So just in terms of additional talent addition -- or I guess the talent additions for 2018, I mean, I know it's subject to finding the right people, but I mean, what are your expectations for additional new hires in the coming year?

Well, we're always in the market looking for new commercial bankers for a couple of reasons, one, total pipeline for potential retirements or new markets, but we feel good about that. And some of this is going to come down to where we want to go, if we do enter a new market, finding the right talent. But for the foreseeable future, we're looking to grow within the existing markets and add incrementally to those teams.

Good. And then for the new hires in Q4, are they all operating under noncompete agreements? Or can they start bringing some of their book over?

It's a mixed bag. So typically, the business factors do not have nonsolicit agreements.

Okay. All right. All right. Good. Good. And then one quick question on deposit competition, maybe some color as to what you're seeing throughout your footprint. Is competition starting to intensify? And if so, where is that coming from in terms of larger or smaller financial institutions or even credit unions?

We're still seeing, I think, pricing competition from all the markets and pretty much all the segments. It still is very competitive on the public fund side, but we're also seeing a still fair amount of CD specials especially in the 1-year to 2-year range and also money market accounts that have fairly high rates.

Okay. And then of this last rate increase that we saw, how much of that do you anticipate passing on to depositors?

Our -- I mean, our deposit betas, they've -- there's a lag -- there's been a lag to them. It slowed down a little bit in the last quarter, but out of the 25 basis points or so, we're usually giving up, depending on how you look at it, anywhere from around 5 to 10 basis points of that, depending on how you measure it.

Thank you. At this time, I'll turn the floor back to management for closing remarks.

Well, thank you. And again, thank you for participating in today's conference call. Mark, Dave, and I appreciate the opportunity to discuss this quarter's results, and we look forward to hearing from you at our next conference call. I hope you have -- all have a good day.

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