S&T Bancorp, Inc. (STBA) Q4 2014 Earnings Report, Transcript and Summary

Greetings and welcome to the S&T Bancorp Fourth Quarter 2014 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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, good afternoon and thank you 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 fourth 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. And I just want to apologize I'm fighting a little bit of a sinus us today so I hope you can understand me okay, but I'm pleased to report net income of $14.5 million or $0.49 per share, which is a 22% increase over our 2013 fourth quarter results of $11.9 million or $0.40 per share. For the full year we reported net income of $57.9 million or $1.95 per share which is a 15% increase over Q4 of last year. Fourth quarter is a continuation of the positive operating trends that we've experienced throughout 2014. For the period we did have solid loan growth of $89.5 million or 9.6% on an annualized basis which helped to offset margin compression and grow net interest income by over $500,000. Excellent asset quality metrics once again net charge-offs for the quarter were $511,000 or 0.5% of average loans and again disciplined expense management which were up only $270,000 versus Q4 of 2013 and it did include approximately $689,000 of merger related expenses. On an annual basis we are again we are very pleased with our results. We experienced average loan growth of $259 million or 7.5% which had a variable favorable impact on net interest income which increased 8.8% or $8.8 million or 6.4%. Non-interest expense totaled $117 million and was flat to 2013. We were able to accomplish this while making significant investments in talent, technology, and other areas that will enable us to continue to grow our balance sheet and maintain our expense discipline going forward. Again significant improvements in asset quality metrics was a big contributor to our performance. Our provision expenses $1.7 million versus $8.3 million in 2013 and net charge-offs for the year were $58,000 which on a percentage basis was 0% to total loans and also good story on our non-performing assets which declined by $10.2 million or 45% to only $12.6 million and the current level of non-performing assets now stand at just 0.33% to total loans plus OREO. And also, as of year-end criticized and classified loans totaled $139 million which is $49 million or 26% reduction year-over-year. So while we are pleased with our results and asset quality moving forward we will continue to monitor all aspects of our loan portfolios and identify any potential issues as soon as possible to stay on top of it. But in summary, we like the positive momentum and trends we're seeing in loan growth, expense control, and asset quality, and we're excited as we look forward to 2015. David Antolik is going to touch base on lending activities in a few moments. But I do want to mention that we have hired a seasoned banker in the Rochester and New York market where we have developed a nice book of business over the past 15 years and expectations that we will experience results similar to our Ohio and State College markets. Also, bankers in our core markets continue to do a nice job of solidifying relationships with existing customers as well as developing and identifying new opportunities, and we expect we could see continued growth in these areas as well. And finally, things are progressing very nicely with our Integrity Bank acquisition. They announced earnings last week which were in line with expectations. In addition, the integration is going very well and we are on track to close on the holding company level in early March, merger of the bank and conversion of IT Systems are anticipated in May. And as expected, we've been spending a considerable amount of time at Camp Hill and I get more excited about potential opportunities in the South Central Pennsylvania market each visit. They have great people, great customers, and a great market. And again, just wanted to thank all of you for your support this past year and I assure you that all the folks at S&P Bank are working very hard to earn your trust once again in 2015. And now, I'd like to turn the call over to David Antolik our Chief Lending Officer.

Thanks, Todd, and good afternoon everyone. As mentioned, we're very pleased to report another quarter of quality organic loan growth. Similar to prior quarters this increase was driven by growth in total commercial loans of $71 million. Leading the way for the quarter was an increase of $48 million in C&I balances. We continue to benefit from the investments we made in our core plan area and during the core, our core plan outstandings increased by $24 million to $110 million and our commitments increased by $21 million to $168 million. New customers include automobile, motorcycle, and farm implement dealers. The remainder of the C&I growth was the result of diversified new customer acquisition. C&I utilization rates for the fourth quarter remain similar to prior quarters. The balance of the growth came in our commercial construction portfolio where we saw an increase of $32.6 million. Within this portfolio the largest growth components are multi-family and retail which represent 25% and 20% of commercial construction outstandings respectively. Construction funding for the quarter was $55 million which compares favorably to last year's quarterly average of $51 million. These increases were partially offset by a decline in the permanent CRE portfolio of $9 million. This was primarily driven by property owner seeking permanent non-recourse long-term fixed rate financing for retail multi-family and office projects. With regard to our loan production offices, Northeast Ohio ended the year with $187 million in outstandings and Central Ohio ended with $65 million. We continue explore opportunities in our Ohio markets that include talent acquisition and the expansion of product offerings. In State College our team continues to build pipeline and we are pleased with the progress that we've made and believe that we will drive positive results in 2015. We are also excited about our entrances into Western New York where we just started the process of building our team in Rochester. In total our commercial and business banking pipelines remain solid and are slightly higher than what we experienced during the second and third quarters. Finally, with the recent volatility in energy prices we've received questions regarding our exposure to the oil and gas industry. Our outstandings in this portfolio totaled $53 million at year-end. It's important to note that we do not have significant direct commodity exposure. The overwhelming majority of this exposure is the service companies that support natural gas drilling activity. We stay in close contact with these customers and they report continued strong business activity. We believe that overtime reduced energy prices will benefit the vast majority of our customers and far outweigh any potential slowdown in drilling activity. Mark will now provide you with additional details on our financial results.

Thanks David. Our net income improved this quarter by over $500,000 due to continued strong loan growth. The net interest margin rate declined 7 basis points from the prior quarter is due to a combination of factors. The largest is that demand from our customers continues to be predominantly for floating rate loans indexed to prime and LIBOR. All of our loan growth in the fourth quarter came in floating rate loans. The gap in rates between new production and payoffs and pay downs shrank this quarter to only 35 basis points the lowest we had seen but our weighted average rate on new loans was about 3.62% resulting in a 4 basis point decline in the average loan yield. Asset mix also played a role higher earning loans represented a slightly smaller percentage of earning assets this quarter. And finally we saw an increase in our deposit cost in the fourth quarter as a result of some CD promotions. While these promotions were successful in attracting funds, the longer-term and higher rate of the offer did increase cost. Given the recent further decline in rates we were focusing our deposit gathering efforts more on core and short-term CD. Starting the fourth quarter of 2014 we began utilizing brokered money market funds that we expect to replace some of our brokered CDs. This accounted for about $69 million of the increase in money market deposits. Non-interest income decreased compared to the third quarter due to seasonality in our insurance business and the timing of how we recognize these in our merchant business partnership. Non-interest expense for the fourth quarter increased by $1.3 million, this include $689,000 of expenses related to the Integrity merger. There will be additional expenses in the first quarter with the anticipated holding company merger, and in the second quarter when we expect the bank merger and systems conversion to occur. Expenses for the year were well controlled averaging about $29.25 million per quarter. We do expect S&T's run rate to be approximately $30 million in 2015 not including the Integrity acquisition. Our 21.5% tax rate for the fourth quarter was a bit lower than anticipated due to some one-time adjustments. The full year tax rate of 23.2% will likely increase to the mid 20s as pretax income improved. The risk-based capital ratios were little changed this quarter as earnings retention kept pace with loan growth. A slight decline in the TCE ratio was due to a higher pension liability with the annual adjustment to discount rates which decreased this year. Thanks very much. And at this time I'd like to turn it back over to operator to provide instructions for answering or asking questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. And our first question comes from the line of William Wallace with Raymond James. Please go ahead with your question.

Hello guys.

Hello.

My first question is if you look at a map and you now add in Rochester, that's a pretty big leap geographically. So, I was wondering if you could just talk a little about the strategic reasons behind the decision to begin loan production in that market.

Yes, we've had pretty good experience in terms of loan growth in that market. We've been lending into Western New York for probably 10 years and the outstandings in that market are close to $100 million so it just made sense for us to have boots on the ground there.

And the gentlemen we're bringing over Pat Tobin. We've known for that entire 10-year period he is a former banker and was kind of working on the real estate side but something that we're very comfortable with his abilities and everything. So again we're looking for some good growth over that market.

When you say $100 million outstanding, are you saying in Rochester or are you saying Western New York?

It's Western, its Western New York.

Rochester, Buffalo but primarily, Wally.

Okay. And so now you've got -- you're opening up Rochester and you've got a little bit more now I guess time to get some presence in the Ohio markets. What's your kind of expectation from an organic basis of what you might be able to see in loan growth in 2015?

Yes, we expect to see pretty consistent loan growth compared to what we saw this year and this past year 2014.

So high, high-single-digits?

I think that's reasonable.

And then you said in the prepared commentary that all of your new loans in the quarter were variable rate product and the average yield was 3.62%?

That's the average yield on all the loans but when we look at the growth, we actually had more growth in floating rate loans than we did overall. So the tax rates continued to payoff faster than they're replaced.

Is that 3.62%, that's the weighted average rate on new production right?

Correct.

Okay. And so how does that compare to the third quarter?

Was down about 12 basis points.

Okay. And then so presumably then you'll expect some continued margin compression in 2015 assuming that the mix remains weighted towards the variable rate products for new production?

We like that a little bit again it is going to depend and if that trend continues well we're going to see most of that new production on the floating side.

Is that -- is there any seasonality or is there any reason to think that that trend would change?

No, not really Wally.

Okay guys, appreciate it.

I think it's just the nature of the business. It's the -- more of the commercial lending and on the commercial real estate construction funding projects. And the one thing the rate, the only area but I think the other thing I just want to stress is our bankers once we get that relationship they're doing a very good job on tying up other ancillary businesses as well and just keeping those relationships which help in other areas as well.

Are these loans the majority of them without floors?

Yes.

At least you'll be positioned well if the Fed ever does anything.

We're not expecting that. We like to think that, but I think kind of how we're managing the Company, Wally is okay, this is going to be another kind of looking out this year, going to be another tough year. So we're going to focus on growing the loan book to offset some of that margin compression. We're going to focus on controlling expenses. We did we think a pretty good job of that last year and certainly the wild card is the asset quality. I'm not going to sit here and say that we would expect to have another $50,000 net charge-off year but when you look at the trends on where we're going on declines in NPAs, on declines in criticized and classified delinquencies and everything, we like what we're seeing in those respective areas to manage those asset quality cost as well.

I'll hop off, let somebody else hop on. Thanks, guys.

Thanks.

Thanks, Wally.

Thank you. And our next question comes from line of Collyn Gilbert with KBW. Please proceed with your question.

Thanks. Good afternoon guys.

Hi, Collyn.

Hi, Collyn.

Hi. Just a follow-up on your comments there on credit. Obviously, the trends have been really stellar. How should we think about that reserve then going forward? You should look on almost every metric. Reserves to NPAs, reserves to loans, your net charge-offs has been really good. I mean, I would think that that reserve should come down quite a bit. How are you guys thinking about that?

I'm probably defer to Mark on that. But I mean we were comfortable with the level that it's at. And I mean we're growing the loan books. So we need to kind of make sure that we're funding the new production appropriately as well.

I guess, the other thing that goes into that I mean we did have very, very low net charge-offs. So we -- but that's mostly because we had very good recovery this year. We still had about $6.50 million of gross charge-offs. What we would not expect to repeat next year is -- are those recoveries to that extent. So there is some losses on the portfolio. And then we are expanding into some of these new markets where we have a little bit less experience. So that factors into may be maintaining a little bit higher of a reserve than what we otherwise might.

I do want to stress, so again in some of the new markets I mean we have brought on credit support to help us out with appropriate underwriting in those markets.

Okay. That's helpful. And Mark, could you just kind of give us some thoughts on where just how you're thinking about the securities portfolio, where you are adding, where you may see shrinkage and just kind of a yield dynamics that's going on there?

Well, securities portfolio, it's a tough place to be right now especially with the rates, I mean, where they've gone especially recently. And we're not overall generally very big on having a large securities portfolio. I mean we have what we need to have proper asset liquidity and the balance sheet. We're getting closer to the point where we're comfortable at that level. So it will be more a function in terms of the size of security portfolio that's just the size of balance sheet, just to maintain that on balance sheet liquidity. In terms of what we're buying, we do buy a little bit further out in the curve primarily because we have such a short floating rate book of loans. We're adding some duration to the balance sheet, to the securities portfolio just as a hedge against that in the event the Fed delays further the rate increases.

Okay. Okay. And then just go back on your comments about the broker deposit, so what is it that you're doing, you brought in money markets to pay off some of the broker CDs, or just -- could you just go through that again, I'm sorry.

So there's a program, it's offered by a number of different entities where you can pick up in brokered money market funds that come from some of the second tier brokerage houses. And those funds tend to be they're still classified as brokers and it's kind of netting transactions that happen every day but they are more stable than brokered CDs, they tend to stay a little bit longer. So we're getting a reasonably tight look at that and we opted to move a portion of that into the money markets just because it's easier to manage, it's more stable, and it floats off the same index LIBOR that we use for a lot of our loans. So we're just in that transition period, so I just pointed that out because you will see some increases in money market funds that are customer deposit related.

Got it. Okay, okay, okay, that's helpful. Okay. I think that was all I had. Thanks.

Thanks, Collyn.

Thank you. [Operator Instructions]. And our next question comes from the line of Matthew Breese with Sterne Agee. Please go ahead with your question.

Good afternoon guys.

Hi, Matt.

Hi, Matt.

Just curious where you -- where the marginal shake out with the Integrity with the acquisition?

Their margin is a little bit better than ours 15 basis points, 20 basis points. So we would expect to pick up everything else to equal in may be just a couple of basis points with the merger and not a whole lot.

Is that on a core basis or including some of the accretable yield adjustments?

Just on the core. I mean we're, at least not yet modeling in anything from accretable yield, I mean we still have yet to go through that exercise for the purchase accounting.

Okay. And then just following up on Collyn's question, how much of the -- how much are your deposit are now considered broker in your money market or CDs?

It's about $240 million.

And the promotional product this quarter that led the increased cost. Would you kind of characterize that as we're getting with trend and we should expect deposit cost to creep-up a little bit or more of an operation because it was a promotional product?

I think for now it's again with the rates coming down again we have kind of backed off that product. We saw good volume in their but probably a little less in net growth than we had hoped. So we're kind of reevaluating the cost and then the benefits of having those -- something a little bit longer like that especially with the curve kind of flattening off again. So we're for now and we're backing off that at least for the next quarter or so.

Okay. So in the near-term we shouldn't expect deposit cost increase?

No.

Okay. And then hopping back on the energy exposure stuff I was just hoping for a little bit more color on how the recent energy volatility would benefit your customers, you said that the lower prices it will reward always found the determent. So I was hoping to get a little bit more color around that?

Yes I mean it just kind of ended early, Matt, we are all with the client last week in the automotive business their sales were up because people or consumers are starting to feel a little more confident. Clients in the restaurant or hospitality business are seeing more activity; people are going out to spend money in those. We have manufacturers one in particular so they're picking up about $20,000 a month in natural gas savings they use a lot in the manufacturing process plus they are picking up another $8,000 or $9,000 a month in their fleet operations from just fuel savings. It's touching a lot of different people in a lot of different ways and I know folks that and we have people that drive probably 50 miles or more round-trip a day we even employ those stuff and it starts to add up and so they are starting to spend some of that money back money through the various segments of the economy.

Great I appreciate for the color guys. Thank you.

Thank you. And it seems now we have no further questions at this time. I'd like to turn the floor back over to management for any closing remarks.

We did have a couple of questions that came in the email and I'm going to let Mark to go ahead and address those.

So first of those was where are the shareholder's going to see the benefit of the prior acquisition?

So for both the two most recent ones on mainline and which we were in 2012 in gateway I mean they're kind of baked into the numbers. On the mainline acquisition it was more of cost savings and we exceeded our cost estimates that we had put into our models and then on the gateway again it's just in a market that is the great demographics and our team down there is really done a nice job of just growing their balance sheet and revenue streams.

And the second question was the loan increases how much was attributable to the new loan offices. I think Dave Antolik can address that in his comments. The ending balances in Northeast Ohio was --

$186 million Central Ohio $65 million but total increase for the year was about $146 million of the new loan production offices.

Okay. And then as follow-up on that what is the strategic thinking I think more generally how establishment of these outlying loan offices?

And again experienced folks in those markets and an accelerant to growth is really what we're talking about into fairly robust markets where we see an opportunity to grow.

Okay. Thanks.

Well again, just wanted to thank everybody 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 in our next conference call. Thank you.

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