S&T Bancorp Inc (STBA) 2018 Q1 法說會逐字稿

Greetings, and welcome to the S&T Bancorp, Inc. First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mark Kochvar, Chief Financial Officer for S&T Bancorp. Thank you. Mr. Kochvar, you may begin.

Well, thanks very much. 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 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 record net income of $26.2 million or $0.75 per share. And this is a 44% increase over the first quarter of 2017 results of $18.2 million or $0.52 per share.

Performance metrics were also very strong with an ROA of 1.51, return on equity of 11.92, return on tangible common equity of 17.83% and an efficiency ratio of 50.35%.

Net income for the first quarter versus '17 was positively impacted by increased revenues, which were up 6.3%; controlled expenses, which declined by 2%; improved credit costs, which declined by 52%; and a reduction in taxes due to the decrease in the federal corporate tax rate from 35% to 21%.

For the quarter, balance sheet growth was muted as we experienced declines in our loans and deposit portfolios. Market conditions were again somewhat challenging in Q1 as we experienced higher-than-normal payoffs in both our commercial and consumer portfolios. We are seeing a nice lift, however, in our underwriting pipelines and expect to meet our overall growth objectives for the year.

We continue to focus on protecting our net interest margin through increased spreads on new loan originations and letting some higher-costing deposits run off. As a result, our net interest margin did expand by 1 basis point to 3.59%, even with the negative impact of the FTE adjustment from a lower statutory tax rate.

Controlled expense discipline continues to be a focus throughout the organization. Compared to first quarter last year, expenses were down $720,000, due in large part to the sale of a majority interest in our Evergreen Insurance division and the State College branch. These expenses were included in first quarter numbers last year.

Pretax, the gain on Evergreen was $1.9 million. However, the net gain after tax was approximately $500,000.

Overall, credit metrics for the quarter were very strong. Total delinquency declined to 0.53%, and we had net recoveries for the quarter of $184,000. Nonperforming loans also declined by $2.6 million or 10.9% and now stand at $21.3 million or 0.37% of the total loans.

Our OREO category did increase by $2.5 million but the main driver is attributed to 2 properties that were originally purchased for branch locations in York, PA. We've made a management decision not to build new locations in that market, and we are now currently marketing the properties for sale. And as a result, regulations necessitate the move into OREO.

I do want to bring your attention an issue that occurred during the course of our year-end audit. We did disclose this in our year -- in our 10-K that was filed on March 1. We disclosed a material weakness in our financial controls. And the issue relates to how we were internally validating risk ratings in our special mention and subloan categories in some instances where we had performing borrowers and performing loans but they did experience a deteriorating financial position on cash flows.

Our internal loan review department relied on credit risk mitigants, including guarantor support and interim financial statements to support the loan rating.

The control deficiency did not result in any restatements to our financial statements. And again, I do want to stress that all these loans are performing. We are monitoring the financial performance very closely. We did perform an in-depth analysis and review of our classifications with penetration rates of 87% in special mention and 69% in substandard accounts.

In addition, we're taking immediate steps to remediate the issue. And we've engaged an independent third party to evaluate our current activities relating to loan review risk rating assessments. And we do expect to have the matter resolved in Q3.

And finally, with our increased earnings levels and confidence moving forward, our Board of Directors has approved a 13.6% or $0.03 per share increase in our quarterly dividend to $0.25 per share. And this does represent a 25% increase in the dividend over the same period of last year.

So again, 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 by adding some details to Todd's comments regarding higher-than-normal payoffs in the first quarter.

In total, payoffs were approximately 25% higher than the quarterly run rate that we experienced through the third quarter of last year. These higher payout rates were anticipated and were the result of several factors, including the customer-directed sale of 4 operating businesses that contributed to C&I balance reductions of $26 million.

Also adding to the C&I reduction in Q1 was an $18 million decline in tax-free loans based on our decision to protect the net interest margin and the impact of tax reform on the revenue derived from these assets.

C&I utilization rates remained stable at 39% versus Q4, and we continue to see solid growth in treasury management revenue and in total number of business households. During the quarter, we experienced some modest growth in our commercial real estate portfolio. The permanent CRE portfolio increased by $75 million, while our construction balances declined by $60 million, resulting in net growth of $15 million.

During the first quarter, we saw $99 million of construction projects that were completed and transferred from the construction category to the permanent category. We also experienced several large property sales that resulted in higher-than-historical payoff levels.

It's worth noting that this is the first quarter in over a year that our unfunded construction commitments increased, indicating more stable balances in the construction portfolio moving forward.

Consumer loan balances declined by $19 million during the quarter due primarily to home equity declines.

Our residential mortgage pipeline has grown by approximately 33% over the last quarter. And we are launching a construction loan promotion that we believe will help to grow consumer loan balances.

From a regional perspective, our newer markets and LPOs continue to perform very well. During the quarter, we saw a loan growth of $22 million in Western New York, $8 million in Ohio, $6 million in Central Pennsylvania and $27 million from our North Shore Pittsburgh C&I team.

In conclusion, activity levels have increased. Our pipelines have expanded. And we continue to recruit and attract highly motivated bankers in order to meet our long-term growth objectives.

Our forecast for full year loan growth of single mid -- mid-single digits remains. And we anticipate improved origination activity for the remainder of the year.

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

Okay, great. Thanks, Dave. The net interest rate margin improvement of 1 basis point compared to the fourth quarter had some nonrecurring help from an increase in the Federal Home Loan Bank dividend and some payoffs from our acquired loan portfolio that resulted in favorable purchase accounting adjustments.

We also benefited from fed increases in December and March. And we experienced better new versus paid loan rate activity with a favorable difference of over 40 basis points in the first quarter.

Net interest income was down primarily to 2 less days in the quarter as the net positive impacts I just described offset a decline in average earning assets.

Looking ahead, we expect the NIM rate to be relatively stable with modest increases should the fed rate hikes continue.

We do continue to expect lag increases in our deposit betas, so there will be likely some catch-up in NIM compression should the fed pause.

Noninterest income included some onetime items the last 2 quarters, a gain on the sale of the majority interest in our insurance this quarter for $1.9 million and the gain on a branch sale in the fourth quarter of '17 of $1 million.

Going forward, we expect fee income to be approximately $12 million per quarter.

Noninterest expense again exerted the control this quarter. Overall, expenses are down as expected without the insurance business in our financials. This is most noticeable in salaries and benefits, as the insurance business had approximately 35 employees.

Other taxes are elevated this quarter and, to a lesser degree, in the fourth quarter of '17 due to assessments from a Pennsylvania State sales tax audit.

We continue to expect quarterly expense levels in the $36 million to $37 million range for the remainder of the year.

With tax reform, our expected effective tax rate in 2018 is in the mid-16% area. It was higher in the first quarter due to some onetime discrete items, mostly related to the sale of the majority interest in our insurance business.

In subsequent quarters, we expect the effective rate to return to the mid-16% area.

Our capital ratios improved by 25 to 30 basis points or more as strong earnings accompanied a relatively flat balance sheet.

Our TCE ratio exceeded 9% for the first time since 2014.

Our board authorized a $50 million buyback program in March of this year that will give us some flexibility to manage our capital position, depending on growth and also the performance of the stock.

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 comes from the line of Matthew Breese with Piper Jaffray.

I do appreciate all the color in the comments on fee income and expenses. But just one follow-up on the expense guidance. Does that include any corrective actions necessary to take care of the -- of some of the occurrences in the 10-K that you alluded to?

Yes, it does.

Okay, okay. And where will we see that show up?

To the extent that you would see anything, it'd end up there in the consulting line. Professional Services, I think we call it, in the press release.

Got it. Okay. And then if I think about getting back to that kind of mid-single-digit loan growth area for the year, considering overall profitability levels, I still feel like capital will grow, and that's with the increased dividend as well. So as we think about capital management throughout the remainder of the year and into the '19, what are some of the other options? And to what extent are you considering the buyback that you mentioned?

Right. Well, so we did put the buyback in place to provide us some flexibility there. We're evaluating at what level of our stock price it makes sense to do buybacks. We're still actively interested in M&A opportunities should they arise, and those tend to use some capital as well. And then also on the growth side, if that were to pick up as well beyond our expectations.

Got it. And on the M&A front, how have conversations developed since tax reform was enacted? Has there been any meaningful increase in the conversation levels from some of the relationships you've developed?

I haven't really noticed any, Matt. And again, if you look at our history, too, is we're going to stay pretty disciplined. And we want to make sure that they check the boxes that we look for enhancing franchise value and being accretive to our existing shareholder base.

Our next question comes from the line of Matt Schultheis with Boenning & Scattergood.

So with regard to your decision to not build these branches, should we look at this as a larger strategic view of your view of the branch network or more a commentary on this particular market?

I think probably, Matt, it's a little bit of both. But I mean, the bulk of our franchise in Central Pennsylvania and the other 3 counties that we operate in, in Dauphin, Lancaster and Cumberland. We have one branch over in York and -- we've gone slow on new branch construction throughout the footprint. If you look at our overall deposits for branches, $95 million-ish. And so again, it's expensive to develop branches and it takes a while to get a payback on them. So -- and I think the thinking going forward is we are evaluating a couple of options on where we'd maybe invest some resources. And it looks like we may do something in Columbus. But they're going to be a whole different model, a smaller scale, that they're probably less costly, and you don't need the real estate footprint that these particular 2 branches had.

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

Mark, just wanted to get a little bit more color on what's going on, on the deposit side. You guys had a big jump in money markets, it looks like, I think this quarter. And then -- so just was curious if there was a promotion running there or kind of how you guys are thinking about just the pricing and growth trends within some of those deposit categories.

For the money market, probably our most competitive product is a money market account that's tied to the fed funds. It runs at 75% of the fed funds rate. So it would currently price out as a 1.31. And so that's been where we've -- to the extent we've seen any growth, that's where it is. And to the extent we see some disintermediation, that is also where it goes. Pricing has been competitive, especially in certain pockets like public funds and some of the larger businesses that have a lot of liquidity. And also we are seeing some in the CD -- on the CD side, with rates kind of in the low to mid-2's, out to even 3% when you get out to 5 years. So the competition has been across the board. We've been competing mostly with -- at least recently, with -- on the money market side.

Right. And as Mark alluded to, Collyn, it's -- that growth in that money market account has predominantly come on the retail side. We did experience some declines in the Commercial Banking group and in the -- our public funds, as Mark said. And some of that is -- there is some seasonality to that. And we're already starting to see some of the moneys flow back in on the public fund side. And we would expect to see some on the commercial banking side as well.

Okay. Okay, that helps. That's good. And then just, Dave, your comment on the mortgage pipeline, up 33% over the last quarter. Just maybe talk a little bit about -- and market [this overlays a few], but just how you're thinking about kind of the outlook for mortgage and also mortgage banking. I know, Mark, you gave that $12 million quarterly run rate on fees, but just curious how the outlook for mortgage banking and mortgage in general fits into your overall strategy and outlook.

Yes. Well, we did hire some new folks. We have a new manager in that area. And he's building staff in order to help drive some volume there. But we do expect the balances to remain relatively flat.

Okay. And then on the mortgage banking -- sorry, go ahead.

I was just going to say, probably consistent with kind of the levels where we were last year, Collyn, is what we're -- our expectations are.

Yes. Actually, the decline in origination that we saw this quarter was mostly on the portfolio side. So from a fee perspective, we wouldn't expect -- even if volume picked back up, I don't think we're -- we expect large increases on the fee income line for mortgages. It would probably show up in -- on the balance sheet.

Okay, okay. And then the reserve built a fair bit this quarter, I -- more than what I think you guys had kind of have been running at for the last few quarters. Was that tied to the identification within the sort of the risk assessments? Or is that something different that led to that?

That was it, Collyn, yes, we had some shift in some classifications, so that flowed back through our revision and ultimately, into the provision expense.

Okay. So that was kind of onetime. Do you -- should we not expect that kind of build in...

That's our expectation, yes.

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

So just kind of jumping back to capital quickly with TC at 9%. I mean, ideally, where would you like to see that ratio? And how long do you think it would take you to kind of get to an ideal tangible common equity number?

We -- that's probably closer to the top end of where we'd like to see it -- or where we think we -- it needs to be.

We kind of like to stay in that -- we always talk about staying in that 8% to 9% range, Dan. And like Mark said, it's a little on the upper end. So we did jump the dividend this quarter just to kind of be consistent on a payout ratio with where we have in the past. And as Mark alluded to, we'll look at all options going forward, whether we elect to move forward with some of the buybacks that we recently had authorized, or down the road do you do something more on dividend or on the M&A front. So we're evaluating all the different levers you could pull on capital.

Right. Got you. Okay. And then on the lending front, on the commercial side, what your line utilization is looking like this quarter. And how does that compare to last quarter?

Yes, they were flat at 39% equal to the fourth quarter, which was down a little bit 1%, a percentage point or 2, from the earlier part of 2017. If you look at the first quarter, it was kind of the tale of 2 quarters. So January and February were slow. March was pretty strong. So our originations in March equaled what we had done in January and February combined. So we think that, that momentum will carry into the second quarter. And as I stated in my comments, we have seen some increase in our pipelines as well.

The other thing I want to mention regarding the commercial side is, we've made a conscious decision to try and focus on the margin as opposed to just volume and getting bigger, growth for growth's sake. So there have been some transactions where we've just elected not to participate on it from a spread standpoint. I think our bankers really have a comfort level now in pushing out some increased spreads, and it's showing up. And last quarter, our new loans that we were originating were, I think about -- what were they, Mark, 50 basis points higher than the...

40.

40 basis points higher than the loans that we're paying off. So that's starting to make a meaningful impact on the overall net interest margin.

Okay. And then mention -- maybe I understood you incorrectly, but it sounded like you guys had some additional hires in the quarter, was that correct, on the lending side?

Yes. We added a few business bankers, and we added one net commercial banker as well. And we're constantly recruiting primarily to build our C&I staff to drive better growth in that area.

But some of it is just reallocating resources, too, that maybe we've had some folks that have left for whatever reasons and we can take those dollars and then move those -- move our attention to some areas where we feel we have some higher growth prospects.

All right. And then how about in terms of the outlook for the remainder of the year? I mean, do you have a number in mind as to how many more folks you would like to add in 2018 on the lending side?

It -- our ability to recruit is determined by what the market availability of bankers is. So we're constantly looking at, again, the opportunity in the market and whether we can recruit there and moving resources from one area to another where there's greater opportunity. And we don't have necessarily a number in mind, but you know, we've put out there that our goal is to grow loans in the mid-single-digit area. So if we need to dedicate more resources to an area where there's fair opportunity to meet that goal, we're going to do it.

Okay, great. And then a last question, maybe just a little bit of color in terms of the construction loan product that you had mentioned that you were launching.

Yes. That's a rate special, essentially.

There are no further questions in the queue. I'd like to hand the call over back to management for closing comments.

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

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.