STBA
#Thanks very much, Rob.
Good afternoon, everybody, and thank you for participating in today's conference call.
Before I can begin 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'd now like to introduce <UNK> <UNK>, S&T's President and Chief Executive Officer, who will provide an overview of S&T's results.
Well, thank you, <UNK>, and good afternoon, everyone.
As announced in this morning's press release, we reported net income of $18.2 million or $0.52 per share for the first quarter of 2017, which is a 13% increase over our first quarter results of last year of $16.1 million or $0.46 per share.
It's also an increase over our fourth quarter results of $17.7 million or $0.51 per share.
Highlights for the quarter once again include loan growth, disciplined expense control as well as expansion in net interest margin.
For the quarter, portfolio loans increased $135 million or 9.8% annualized.
The majority of our growth was concentrated in our commercial lending division and was distributed across our 5 markets of Western Pennsylvania, Northeast Ohio, Central Ohio, South-Central Pennsylvania and Western New York.
Again, our success this quarter in growing the loan portfolio really is attributed to having a team of experienced bankers who excel at developing long-term relationships with clients and, in addition, the favorable economic conditions in our various markets.
Now these higher loan balances, along with the increase in short-term interest rates, positively impacted net interest margin, which expanded by 5 basis points to 3.5%.
Net interest income increased by $4.2 million or 8.5% over the first quarter of 2016 and $1.4 million or 2.7% compared to the fourth quarter.
Controlling our noninterest expense continues to be a focus throughout the organization.
And while we are pleased to report the $36.8 million expense is in line with expectations, resulting in an efficiency ratio of 53.83%.
We did close 3 branches in the first quarter, which now puts our average deposits per branch at $89 million.
And in addition, we will continue to evaluate other opportunities in all of our operational areas throughout the company for efficiency gains throughout the year.
Asset quality remains stable for the quarter, with net charge-offs declined to $2.1 million or 15 basis points annualized.
Nonperforming loans increased by $3.3 million, and as a result, we increased specific reserves by $2.5 million, so our ratio of NPL to OREOs is now 0.81%, and the allowance of ---+ for the loan loss reserve to loans is 0.97% of total loans.
Overall, delinquency for the quarter decreased by 1 basis point to 0.92% of total loans.
The increase in nonperforming loans was driven by several legacy credits in our C&I portfolio that we elected to reorganize through the bankruptcy courts.
We anticipate resolution of these credits in the third quarter.
I do want to bring your attention an event that's going to positively impact us in this quarter.
We will be taking a gain of approximately $2.6 million as a result of our holdings in Allegheny Valley Bank, which closed in their merger with Standard Bank on April 7.
Our ownership in the combined company is now 6.5%.
And finally, our Board of Directors approved a dividend of $0.20 per share at our meeting on Monday, which is a 5% increase over the dividend that was paid in the same period last year.
So at this point, I'm going to turn the call over to our Chief Lending Officer, <UNK> <UNK>.
Thanks, <UNK>, and good afternoon, everyone.
As <UNK> mentioned, commercial loan growth was strong again for the quarter and represents a continuation of the success we experienced in 2016.
Driving this growth was an increase in our commercial real estate portfolio of $116 million and a $21 million increase in our C&I portfolio.
Included in the CRE growth is approximately $20 million of owner-occupied real estate that is a direct result of our efforts to grow C&I relationships throughout our markets.
Our commercial construction outstandings were flat quarter-over-quarter.
From a regional perspective, during the quarter, our Western New York LPO experienced $69 million in net loan growth and now has $242 million in outstandings.
Northeast Ohio saw a growth of $23 million, and Central Ohio saw a growth of $22 million, bringing our total Ohio LPO outstandings to $698 million.
In South-Central Pennsylvania, we experienced net growth of $21 million, and our Pittsburgh C&I team continues to provide solid growth as their outstanding balances grew by $19 million.
Other factors impacting our C&I activity for the quarter included an increase in line utilization rates from 41% to 43%.
Floor plan commitments and outstandings were relatively unchanged from year-end at $240 million and $154 million, respectively.
As a result of the very strong activity experienced in Q1, our pipeline is down slightly from year-end, and we continue to forecast a mid- to high single-digit loan growth rate for 2017.
We believe this growth is achievable without adding additional staff and without expansion into new markets.
It's important to note that our unfunded commercial construction commitments declined by $63 million during the quarter and have reduced by nearly $100 million since the first quarter of 2016.
This reduction is the result of the completion of construction for a large number of projects and a slower replacement rate for new deals as we actively manage this concentration.
In conclusion, our commercial and business banking teams do an excellent job executing on our relationship banking strategy, and our results reflect those efforts.
And now <UNK> will provide you with some additional details on our financial results.
Yes, thanks, Dave.
Net interest income improvement in the first quarter of 2017 compared to the fourth quarter of 2016 of $1.4 million was due to an increase in average loan balances of $143 million, combined with higher short-term rates.
Loan rates improved by 11 basis points.
And for the first time in years, we saw our new loan rates higher than paid rates for the quarter.
With this turn, we are more optimistic about the net interest margin, which expanded by 5 basis points this quarter versus prior.
We are currently in the process of updating our models.
But going forward, we expect the net interest margin pressure to subside and come less from the loan and more from deposits.
And while we saw our overall funding costs increase just 4 basis points this quarter, competition has been increasing, and we are seeing more customer activity.
Customer deposit growth was lower than expected in the first quarter, with most of the overall deposit growth coming from brokerage CDs.
We saw some net customer deposit outflowed early in the quarter due to normal repositioning by our customers, combined with some seasonality in a number of sectors, including public funds.
But they rebounded strongly in March to put us in positive territory for the quarter.
We continue our deposit gathering efforts through numerous channels, all of our available geographies and from all of our customer segments.
Our goal remains to have customer deposit growth match our loan growth.
Noninterest income, excluding the security gain, decreased by $296,000 compared to the fourth quarter.
There were some seasonality and fewer days impacting service charges and debit and credit card fees.
These were offset somewhat by our insurance division, which received their annual profit-sharing from the carriers.
The security gain this quarter came from our portfolio of equity securities.
With the accounting change in 2018 requiring a quarterly mark-to-market through the income statement, we will be evaluating our holdings over the next few quarters.
At quarter end, the equity portfolio had a market value of $11.4 million, which included $4 million of unrealized gains.
And as <UNK> mentioned, we will be realizing about $2.6 million of those gains here in the second quarter.
Noninterest expenses increased by about $1.2 million from the fourth quarter.
Salaries and benefits were higher due to incentives and annual merit increases.
The remaining variance was relatively small and reflected normal timing and spending differences.
And on a go-forward basis, we continue to expect our expense run rate to be in the range of $36 million to $37 million per quarter.
The tax rate for the first quarter was 26.9%, which is in line with our full year expectation.
Our risk-based capital ratio has improved this quarter despite strong loan growth as we were able to reduce risk-weighted assets through lower HVCRE exposures and a change in our BOLI investments.
Thanks very much.
At this time, I'd like to turn it back over to the operator to provide instructions for asking questions.
Sure.
On ---+ just on our margin outlook, we're redoing some of the models, but ---+ especially the second Fed jump that was a little bit unexpected.
We re-running that through our models.
But for us, that cross of having the new loan rate above the paid rate and our expectation, we believe that, that should continue going forward.
And for the longest time, we would see continual decreases in the loan rates because of that turnover.
And with that out of the way, I mean, that helps to stabilize that net interest margin and actually provides some opportunity for pickup, depending on the timing of any future Fed increases.
(inaudible) on the deposit side to the extent we can keep the funding costs under control.
We have just seen a much more active environment in our markets anyway with specials, particularly on the CD side and also special money market rates and a lot of pricing that's not on rate sheets, basically.
And we're seeing that from all different competitors, both banks locally and also some of the market participants that are nonbanks.
So in particular, there's groups that provide deposit services for public funds that have been much more aggressive in their pricing as well.
I think the latter.
I mean, I think we should be able to manage that a little bit better and, hopefully, get some ---+ actually some improvement, driven by the loan pricing, the better loan pricing that we're seeing, which should cover, we think, whatever happens on the deposit side.
But there is some ---+ we have some concern there just because of our loan deposit situation.
We do want to keep pace on the funding side, which may lead us to be a little bit more aggressive.
It's Dave <UNK>.
Yes.
So the first quarter was a little hotter than what we had anticipated in terms of loan growth.
It's going to take a couple quarters for the constructions fundings to work their way through.
So the decline in the commitment level is foreshadowing some lower growth in that portfolio, but that's going to take a couple of quarters to work its way through.
And we continue to drive for better balance between C&I and CRE growth.
This is Pat <UNK>.
I think going into second quarter, we're definitely expecting provision to be about the same level as it was in the first quarter.
And as far as losses and ---+ which helps kind of drive that, we still expect full year losses to be in the low 20 basis point range.
This quarter, again, you had ---+ some of the lift in the provision was just ---+ we took the specifics, so if and when we would take a charge, we wouldn't necessarily replace those in the provision, but it may take a quarter or 2.
Yes.
So I'll let Pat answer that, <UNK>.
Yes, <UNK>.
So we essentially had a handful of some credits that eroded.
We were watching them.
We were in negotiations, and obviously, they tended not to go our way on this round.
They opted to file for protection through bankruptcy.
And we don't expect those to be kind of resolved until sometime in the third quarter because of the bankruptcy schedules.
So again, with those credits, we had some ---+ an increase in specific reserve of about $2.5 million, which took us up to about $3.5 million of specific reserves.
I would expect those to sit there for ---+ or at least the majority of them, perhaps for another quarter.
But again, we're still saying that on our run rate for charge-offs for the year, we're still expecting to be in that low 20 basis point range on losses.
Each of them were different.
Though I think one of them, maybe our larger one was ---+ is driven by commodity pricing type of scenarios.
And that one we thought we were going to have a good resolution, then something popped up kind of in the middle of our negotiations and they opted to file for protection.
So.
.
We had some ---+ obviously, some downgrades, upgrades, it was very fluid.
But we did experience some additional downgrades in that special mention type of category for the quarter from several credits.
And again, it is not one thing in particular.
Some are older loans from the legacy portfolio.
Each of them kind of has their own little nuance of story to it, which is ---+ kind of makes it a little tougher for us to pinpoint.
Yes.
And then the other point I would just make there, none of them are attributed to oil and gas.
That's right.
Honestly, <UNK>, it's a mix of both.
There's a bunch of smaller credits in there, and there's obviously a couple of larger ones.
I'm not going to get into all the details of the specifics of the credits, but there's a handful of just about everything in there.
And again, this is a nuance of the way in which we manage our portfolio and our credit risk management practices and in the way we tear the portfolio apart and take a look at it on a quarterly basis.
It's Dave.
So in January, we saw some pretty significant payoffs.
We saw some modest growth in February and then very strong growth in March.
Some of that growth I was anticipating to occur in the second quarter, so we ended up with stronger results than what we had anticipated.
This is <UNK>.
I mean, the 106%, realize it has been growing lately.
I mean, it's something that we'd like to see stabilize at least around that level.
And because of that position ---+ and you're right, I mean, it does put a little bit more pressure on us to try to maintain pace and to potentially be a little bit more aggressive.
So that is why we ---+ while we're pleased with what's happened on the loan side, we're cautious about margin going forward because of the position we're in from a funding standpoint, our need to maintain ---+ or to perhaps be a little bit more aggressive on the deposit side.
I would just add to that, Dan.
Certainly, deposit gathering is a focus throughout the organization.
And I think comparing fourth quarter to the end of first quarter sometimes is a little bit challenging because there is some seasonality in there, on the commercial deposits and public funds.
And then quite frankly, we had probably about $60 million of probably 4 or 5 different customers in early February that we just had some high dollar CDs that were maturing, we elected not to reprice.
I mean, it was ---+ <UNK> alluded to it.
It got pretty competitive, so we kind of let those go out the door.
But when you look year-over-year from March to March, we're up about $310 million or so in what we consider customer deposits.
And the good thing, too ---+ so that's about 6.7%, 6.8%, almost 7%.
And the good thing is the mix of that we like is the bulk is in DDA and in our money market savings products, which are core accounts and CDs are actually down maybe $20 million or so year-over-year.
So again, I think it's a good observation, something we're going to stay on top of, and we're going to continue to try and drive the core deposit growth across the organization.
I think, right now, if you look at our organic growth rate, it has been very good.
And so right now, the primary usage is just going to continue to grow the balance sheet.
If that would slow up a little bit, then maybe you take a look at some buybacks or ---+ down the road.
But I think those will be down the list.
But M&A, we like to keep a little powder.
If there's any M&A activity, I would say, things are kind of quiet right now, but we were ---+ I think we're comfortable with the capital levels that we have to support our growth objectives.
I think there's always going to be a mismatch, but ---+ there may be a little bit of a softening, like you say.
I think what you're seeing, the Allegheny and Standard kind of a merger of equals to try to get some scale, the (inaudible) was another one with a couple of banks in the center part of the state, kind of same thing, to get those both up to about a $1 billion size level.
So I think some of the smaller companies starting to feel the effects of some of the regulatory pressures, some of the need to spend on IT and some of those things, which I think is what's driving some of the M&A and ---+ but again, we like how we're positioned from an organic growth perspective.
I talked about the great teams of bankers and the great markets, but I mean, it's reality.
It shows up in our numbers, and so we don't feel pressured like we have to go out and do a deal to ---+ just to get bigger.
So if something comes across our desk, we want it to be a great fit and really add a lot of franchise value.
So we're going to go ---+ we'll be cautious on the M&A.
I think if you're in the footprints that we're operating in right now, Western Pennsylvania, there could be a couple potential companies that would certainly get our attention.
If we would round out some of the investment that we've made in Central Pennsylvania or even over in the ---+ with the folks in ---+ our LPOs in Ohio are very active.
And if we can find the right partner out there to really augment what they are doing, I think it would be something we'd definitely take a good hard look at.
Well, again, I just want to thank everybody for joining us in today's call and appreciate your support of S&T Bank, and we look forward to talking with you next quarter.
Thanks again.
