S&T Bancorp Inc (STBA) 2018 Q4 法說會逐字稿

Greetings, and welcome to the S&T Bancorp Fourth 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. Thank you, sir. You may begin.

Thank you very much. Good afternoon, everyone, 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 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 2018 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 Chief Executive Officer, who will provide an overview of S&T's results.

Well, thank you, Mark, and good afternoon, everyone. We're pleased to once again announce very solid quarter and full year results. For the quarter ending 12/31/2018, we're reporting net income of $26.9 million or $0.77 per share versus $9.3 million or $0.27 per share in the fourth quarter 2017 and $30.9 million or $0.88 per share in the third quarter of 2018. Remember, 2017 results were negatively impacted by a $13.4 million or 38% share adjustment as a result of the deferred tax remeasurement related to the Tax and Jobs Act (sic) [Tax Cuts and Jobs Act]. In addition, Q3 results were positively impacted by a onetime tax reduction of $2.9 million or $0.08 per share attributed to our pension contribution.

Operating metrics for the quarter were again very, very strong with a return on asset of 1.5%, return on equity of 11.5% and return on tangible equity of 16.82%. And the efficiency ratio also improved to 50.64% versus 51.33% in Q3.

For the full year, net income was a record $105.3 million or $3.01 per share versus $73 million or $2.09 per share. When you back out the effect of the deferred tax remeasurement last year, non-GAAP earnings were -- in 2017 were $86.4 million or $2.47 per share. And again, for the full year, the operating metrics were very, very strong with a return on asset of 1.5%, return on equity of 11.6% and return on tangible common equity of 17.14%.

One of the highlights for the quarter was strong balance sheet growth in both loans and deposits. On a linked quarter basis, portfolio loans increased to $139 million or 9.5% annualized, and the growth was spread out across all of our markets and segments of our portfolio. Deposits again were another bright spot, increasing $206 million or 15% annualized and most of the growth was in the money market and CD categories, which increased $114.9 million and $102.6 million, respectively.

With the volatility of financial stocks, in December, we did make the decision to repurchase shares under our previously authorized share buyback program. For the quarter, we repurchased 321,731 shares or slightly less than 1% of our total shares outstanding at an average price of $38.10, which totaled $12.3 million. Tangible common equity at the end of the quarter was essentially flat at 9.28% versus 9.25% on a linked quarter basis. And looking forward, we may repurchase additional shares at opportunistic times when market conditions dictate. Our target range for TCE is in the 8% to 9% range.

From a credit metric standpoint, the provision expense for the quarter was in line with previous guidance. Net charges for the year were 18 basis points and in line with our expectations. Our nonperforming assets did increase by $25.3 million and is attributed to 3 commercial credits that have experienced deteriorating financial trends. Consistent with our past conservative practices, we have obtained current asset valuations and then recognized the appropriate charges and reserves in Q4.

Finally, our Board of Directors approved a $0.27 per share dividend payable on February 28, which is an increase of $0.05 or 22.7% over the same period last year.

I'm now going to turn the program over to David Antolik, our Chief Lending Officer and newly named President. Dave and I have had the pleasure of working together for 29 years, and in his capacity as our Chief Lending Officer for the past 15 years, he has been instrumental in leading our lending activities, which have been a big contributor to our overall success. Dave will continue in his current capacity as Chief Lending Officer. And in his new role, he is going to coordinate our new market-based approach by providing leadership to our newly-appointed market presidents in our 5 markets. This is a significant shift from how we managed the company in the past. However, it's going to enhance the already great job that we do in building longstanding relationships. Moving forward, our market presidents will continue to promote the S&T brand in their respective markets to broaden our customer engagement. So I'm excited about this new initiative and look forward to working with Dave for many years. I'm confident under Dave's leadership that it will only enhance the returns that we will deliver for shareholders.

And now I'd like to turn the program over to our new S&T Bank President, Dave Antolik.

Good afternoon, everyone. I want to start by thanking Todd and our Board of Directors for providing me the opportunity to serve as the Bank's President. Underlying my appointment is a fundamental change in our strategy to a true market-based growth platform. As you know, we serve 5 distinct markets, Western Pennsylvania, Central Pennsylvania, Northeast Ohio, Central Ohio and Upstate New York. And we recently promoted market presidents for each in support of our strategy. We recognize that each market is unique and that all provide opportunities for growth. By driving strategic decisions into each market and by integrating all of our business lines, we believe our ability to take advantage of these opportunities and build upon a long history of success will be greatly enhanced and support our long-term vision for our company.

I now like to provide some highlights of very successful fourth quarter that capped a record year for net income at S&T. We experienced strong net loan growth in Q4 with an increase of $139 million in total loans or 9.5% annualized. Several factors impacted this positive result, including the following: $28 million in consumer loan growth, driven primarily by solid residential mortgage activity. We added 5 mortgage loans originators during 2018, and we entered 2019 with an expanded pipeline versus the same period last year; a $95 million in commercial real estate growth that was partially offset by a $27 million decline in commercial construction balances. We did see a $28 million increase in unfunded commercial construction commitments during the quarter; C&I growth of $42 million. That is the result of solid customer acquisition activity. This has reflected in an expansion of total commitments during the quarter. We also saw utilization rates increase from 40% to 41% quarter-over-quarter. Our business banking division had its strongest quarter in recent history with approximately half of its net loan growth for the year coming in the fourth quarter. Additionally, payouts were approximately $45 million lower than levels experienced in the prior 3 quarters.

We continue to reinvest in order to grow the bank, and during the quarter, booked our first deals in Berks County, Pennsylvania, which is an extension of our Central Pennsylvania market. We also look forward to relocating our Columbus LPO to a full-service office in late February and the opening of an additional branch location to serve the Akron market this spring. Based on current and planned activity levels, we anticipate mid-single digit loan growth for 2019 with seasonality and balanced growth favoring the second half of the year.

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

Thanks, Dave. Net interest income improved by about $600,000 due to strong average balance sheet growth. The net interest margin rate declined by 2 basis points compared to the third quarter due to the competitive pricing environment and also due to the strong growth, which came in at a lower incremental spread compared to the NIM rate. The increase in interest-bearing liability rates at 18 basis points outpaced earning asset rate improvement of 10 basis points. We are now expecting net interest margin compression of 1 or 2 basis points in the first quarter as deposit betas accelerate and balance sheet growth returns. We are actively managing specials and exceptional pricing to find the right balance between growth and revenue.

With the Fed pause and further balance sheet growth, we would expect similar NIM compression to continue into the second quarter followed by stabilization as we work through the deposit beta lags. Both fees and expenses this quarter -- were impacted in the fourth quarter by the stock market decline. We have a deferred compensation plan that is accounted for as an offsetting asset and liability on the balance sheet, correlating market value changes result in offsetting fees and expenses. This is P&L neutral and typically is not large enough to show up in our results. However, due to the significant market declines in the fourth quarter, we experienced an $856,000 decrease in both fees and expenses. Also, in fees, we had a $500,000 decline in the value of our equity holdings that are marked through the income statement. On the expense side, overall levels remain well controlled with no other large notable variances.

Going forward into 2019, we expect fee income to range between $11.5 million to $12.5 million per quarter and expenses to range between $37.5 million and $38.5 million per quarter. We expect our tax rate to settle in the 16.5% to 17% range in 2019.

Our risk-based capital ratios declined slightly in the fourth quarter as loan growth was strong, and we did do some share repurchases.

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

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

Just wanted to kind of talk about the loan growth. Obviously, came in really strong this quarter. And Dave, it sounds like your outlook is pretty favorable going forward. Can you just talk a little bit more about that? I mean, again, I know you gave some color, but I guess, just in the wake of maybe a slowing economic environment, you seem to still feel optimistic about your ability to grow loans and just wanted to hear a little bit more about that?

Yes. I mean, this is a combination of the factors that I mentioned. So we did see utilization rate increase and commitments in the C&I book increase as well. So good C&I activity, particularly coming out of North Shore Group. And then from a geographic perspective, we saw growth in all of our markets, and some of the additions to staff in all of our segments. In the B2B space, we added a few bankers and saw really, really strong results in that segment as well. And then with regard to consumer loans, the hires that we made at the MLO -- in the MLO space have paid off as well. So it's pretty good growth across the board and in all of our markets.

Okay. Do you think -- I mean, what would you be your outlook as to what you guys could potentially deliver in terms of loan growth in 2019?

Yes. I think mid-single digit loan growth is doable. We did see it accelerate in the fourth quarter because payouts were down by about $45 million relative to the first 3 quarters, so we did have that wind in our back.

Okay. And then just in terms of the pricing that you are seeing on these new originations and maybe on the pipeline, I know, Mark, you had indicated that the spread was coming on lesser than your current NIM rate, but thinking that's more deposit base driven than it is asset yield driven. So just curious as to what you're seeing on kind of new loan origination yields?

Yes. So overall, new loan in the fourth quarter on the commercial side was about 5.16%, which is up about 20 basis points from the prior couple quarters. So we have seen some decent loan pricing.

Okay. That's helpful. And then just your new -- for the new incremental deposits that are coming in the door, Mark, what are you having to pay on those. I know it's going to range on...

Yes. On the -- yes, I'm sorry. On the CD side, the new ones are coming in around 2.5% on average. We do have -- we did see some growth in our money market accounts that is indexed to the Fed funds rate, at that 1.88% rate. But we're also seeing some repricing within the book as some of the lower price deposits come in for a better deal, basically.

Yes. Okay, okay. And then just lastly, can you just give a little bit of color as to the -- kind of the history there on the 3 credits that went into the nonperforming book this quarter? And when they originated and then also kind of what you think the resolution time line and costs might be to those?

Yes. So they're all 3 kind of one-offs. So one's the CRE, one was a construction and one's a C&I credit. As far as the -- I mean, they -- we've had them on the books for probably 3-plus years, Collyn, and then the resolution probably late second quarter is somewhere near may be, might bleed in over into third. But as in the past, we try and work through them as quickly as we can and come to a favorable resolution. Like, again, we have taken the -- we had current valuations done in Q4, and consistent with our past practices, we've taken the marks off the levels that we were carrying them at. And if that...

It's all -- yes, I just -- I think it is important to understand these were 3 really distinct and different situations and different pieces of our portfolio. So there is nothing pointing here to anything that is inherent in any certain portion of our portfolio or anything.

Our next question comes from the line of Matthew Breese with Piper Jaffray.

Maybe just following up on the margin question. You did note that the incremental spread was coming in, and so I was just curious to what extent is the first quarter spread shaking out relative to 4Q? What's that compression look like?

My best estimate right now is 1 to 2 basis points, that's assuming that, that curve stays about where it is. We have some -- we'd have additional flattening here in the last couple days. So -- and the last model runs were before that. That doesn't have a huge impact on us. But we're not factoring in any additional Fed changes really for the rest of the year. So absent all that and with the growth that we have -- that we anticipate, I'd expect couple basis points.

Understood, okay. Okay. And then maybe turning to loan growth, I know you mentioned that prepay slowed down a bit. As you expect -- expectation that they pick up again to get you down to a lower annual page for 2019? Or was there -- or is there some sort of rush towards the end of the year to close deals until the...

Well, there wasn't at the end of the 2017, so relative to prior year, we saw a significant rush. 2018, they slowed. But I would not anticipate the same low level that we saw in the fourth quarter as we move into 2019. I think there's still some sense among the customer base that they need to react, particularly in the CRE space to move to a permanent long-term fixed rate deal. Although we did see nice activity from a swap perspective that drove -- helped drive better fee income in Q4 where we were able to retain some clients and provide them with fixed rates.

Got it, okay. And then just on the compensation front, I'm assuming that we should add back that nearly $1 million or $0.8 -- $800,000 to salaries and benefits for a good run rate in the first quarter?

Yes, that's correct.

Yes.

Okay, okay. And then lastly, just on the 3 credits. Were those syndicated loans or just yours?

They were ours.

They were ours.

Okay. And geographically, how are they spread out?

They're across -- 2 of them are in one market and one's in the -- 2 are in one specific market and one's in our Western PA market.

Okay. And are there personal guarantees or what are the sources of repayment?

Yes. So when you have real estate and you have some leases, and Pat, do you want to provide...

Yes. So obviously, one structure, you're going to have some real estate. There's guarantees on those to a certain extent. On the more C&I-related credit, obviously, we have assets that we're looking at, that's a potential ongoing concern. And on the real estate one, obviously, there is value in leases and any new lease-up activity.

Understood. And how are they performing post quarter-end? Is that gotten better or worse?

About the same.

Yes. I don't think -- yes, I don't think they're any better or any worse.

Understood, okay. Okay. I guess the last one is just in regards to M&A chatter activity, interests, all the above?

Yes. We like where the valuations of the stock are, so it makes our currency strong, but it's been kind of quiet. I mean, to be honest with you, there have not been a lot of books that we've seen. Last year, there was one that was a smaller one that we just weren't interested in. But we're still -- we're having conversations with potential targets and folks that we would have an interest in. It's just -- I think overall, earnings are good right now for financials, and we don't see a lot of movement on people who are willing to -- rushing to sell their companies.

Our next question comes from the line of Russell Gunther with D.A. Davidson.

I appreciate your comments on the loan growth strength this quarter being broad-based within the verticals and geographically. Could you maybe share what's your outlook for '19 at the mid-single digits? How would you expect that mix to shakeout from a loan vertical perspective as well as any particular geographies that are more of a source of strength for you right now?

Yes. I mean, in terms of geography, Central Pennsylvania and Central Ohio certainly drive a lot of the incremental growth. They're newer markets relatively speaking, but they are markets that we have been in for 3 to 5 years, and we have very strong teams, and we're adding to our banker base. So as I mentioned, in Central Pennsylvania, we booked our first deals in Berks County, which is a new market for us. And I anticipate good activity as we move eastward. And Central Ohio has just been a strong platform for us. In Central Ohio and Central PA, we've got a pretty good mix of CRE and C&I. And then with the introduction of our new C&I Manager, Brian Dobis, I anticipate that we'll continue to see pretty decent growth in the C&I space. As so we anticipate 60-40 kind of split between CRE and C&I as we move forward. The other bright spot as I mentioned was our business banking segment, where we've seen good solid growth and continue to see good opportunities as well.

Great. Very helpful. And then a last one for me, circling to Matt's question on the M&A front. You mentioned it has been quiet, talking to the folks you're interested in. Could you just give us a reminder as to sort of an ideal partner for you right now?

Yes. So probably company in the $500 million to $700 million range on the low end and maybe up to couple billion dollars on the upper end in assets. Ohio, certainly, would have some appeal with the offices that we have out there. There is some -- certainly some candidates in Western Pennsylvania that would have a lot of appeal and maybe some fill-in opportunities out in Central Pennsylvania, which are kind of the geographic areas we would look at.

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

Maybe a little bit of color on deposit growth. Kind of how you see that shaping up throughout 2019? Do you think it's -- is the goal to kind of keep up with the loan growth expected during the year? Is that going to lag a little bit?

Our goal is probably that deposits will be a little bit behind on loan side, but not too far. We continue to probably see most of the net growth in money markets and CDs, but also on the -- especially on the consumer side, some growth some DA growth from some program or targeted programs that we've been running.

And do you see any benefit from the shale deposits? Is that help out any?

Not to any great degree for us.

Okay, fair enough. And then how should I be thinking about charge-off levels for you guys for 2019. I mean, you've been fairly well behaved, I think, overall, for the last couple of years. But are you beginning to see kind of any cracks in the foundation or anything that's given you pause for concern right now as it applies to credit quality?

Yes. This is Pat. No, we're not seeing any or feeling any cracks as you asked. And I guess, the guidance would be looking forward, we're looking at about the same basis point level that we were experiencing over the last couple years.

Kind of in that 20 basis points, little bit less than that range?

18 to 20.

18, yes, 20 range.

Great. And then, I think on the 3 credits that popped up, the construction credit, was that kind of single-family home related or what was that multi-family? What kind of construction lending was that?

Yes. No, it did not have anything to do with any type of residential. It was commercial.

Commercial, okay. All Right. And collateral levels, you feel comfortable with minimal loss expectations on these 3 credits, is that your assumption?

Yes. Again, on these 3 credits, we went through our full impairment analysis, and we put them the appropriate charges in, also with the specific reserves on them as well. So as of today, we're real comfortable where we are.

We have no further questions at this time. I would now like to turn the floor back over to management for 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 at our next conference call. Have a great day.

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