S & T Bancorp Inc (NASDAQ:STBA)
Q2 2016 Earnings Conference Call
July 21, 2016 01:00 PM ET
Mark Kochvar - Chief Financial Officer
Todd Brice - President and Chief Executive Officer
Dave Antolik - Senior EVP & Chief Lending Officer
Pat Haberfield - Senior EVP & Chief Credit Office
Matthew Breese - Piper Jaffray
Daniel Cardenas - Raymond James
Chris O'Connell - KBW
Greetings, and welcome to the S&T Bancorp’s Second Quarter 2016 Earnings Conference 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'd now like to turn the conference over to your host, Mark Kochvar, CFO. Thank you, Mr. Kochvar. You may now begin.
Okay, thanks. 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 page 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 second quarter earnings release can be obtained by clicking on the press release link on your screen or by visiting our Investor Relations Web site at www.stbancorp.com.
I'd like to now introduce Todd Brice, S&T's President and CEO, who will provide an overview of S&T's results.
Thank you, Mark, and good afternoon everyone. As announced in this morning's press release, we reported net income of $17.1 million or $0.49 per share versus net income of $16.1 million or $0.46 per share, and $18.2 million or $0.52 per share for the first quarter of 2016 and second quarter of 2015 respectively. Also we saw an improvement in our return on assets and return on tangible common equity to 1.05 and 13.3 for the quarter.
Business activity remains very robust across our footprint, as total loans increased $210 million or 16.4% annualized, customer deposits were up $166 million or 14.7% annualized. On a net basis, deposit growth was $102 million or 8.2% annualized as we replaced some of our brokerage CDs with borrowing to take advantage of lower cost bonds.
Loan growth this quarter represents the fifth consecutive quarter of growth in excess of $100 million, and is a reflection of the team of seasoned bankers that we have assembled through our five regions, which include Western Pennsylvania, South Central Pennsylvania, Northeast Ohio, Central Ohio and Western New York. Our bankers have deep ties into communities and excel at developing longstanding relationships with clients, which will provide many long-term benefits. In addition, economic activity across all of our regions is very robust and is contributing to our loan and deposit activity this quarter.
Asset quality metrics are another bright spot this quarter. For the quarter, net charge offs totaled $3 million and 23 basis points annualized. Provision expense totaled $4.8 million, of which $1.8 million or approximately $0.03 per share is attributed to covering our loan growth. I think most importantly we saw a significant improvement in non-performing assets, which declined $8.9 million, or 17%, to $43.2 million versus $52.1 million at the end of Q1.
The ratio of non-performing asset to total loans was [indiscernible] declined by 20 basis points to 80 basis points versus 1% at the end of the first quarter. Criticized and classified loans also decreased by $6.7 million and 2.85%. And again, overall, we like the trends that we experienced in our asset quality metrics this quarter, and we expect to see continued improvement in the coming quarters as we work diligently to reduce our exposure in this asset classification.
Growing our fee revenue businesses will be a focus in the coming quarters, and I am pleased to announce the addition of Greg Lefever to our executive team as the Head of our Wealth Management Division. I am very excited to have Greg join the S&T team as he set along a distinguished career in the wealth management business in the Lancaster County market. He previously ran the Central Pennsylvania market for a large super regional bank and his division was consistently one of the company’s leading regions.
Greg’s deep ties in the Central Pennsylvania region will be beneficial to both our core banking efforts, as well as ramping up our wealth management activities in the vibrant Central Pennsylvania marketplace. His expertise will also serve us well in expanding our presence in Western Pennsylvania and Ohio divisions as well.
Controlling non-interest expense is another area that we’re focusing a lot of attention on in both Q2 whilst moving forward. We’ve implemented a number of initiatives to keep these in check and began to see the effects in Q2 which is help to drive our efficiency ratio down to 54.37% versus 57.19% in Q1. Expense discipline has been and will continue to be a core competency of our organization as we move forward. We did experience some compression in our net interest margin, and Mark is going to discuss this in more detail in a few minutes.
But I do want to point out that we were a bit aggressive in some of our short-term deposit rates in the first six months. This was a strategic decision to create some excitement in our newer markets. And again, these are predominantly short-term deposits, and we’ve exceeded our growth to project those in the first half of the year. We have been lowering the rates as deposits mature and we’re seeing excellent retention across the board.
More importantly, we’re seeing inflow of new customers with whom we’ve been able to layer on additional products and service. Finally, our tangible book value during the quarter was 15.17%, which is $1.52 increase or 11% over last year. And our Board of Directors approved the quarterly dividend of $0.19, which is 5.6% increase over the same period last year.
So in closing, I just want to mention again that I really like how we’re positioned. We have a great team of bankers who excel at developing relationships in generating strong balance sheet growth. We operate in five distinct markets that provide deferring opportunities in various times, as well as a nice geographic diversification. We continue to maintain a disciplined expense environment and we expect to see continued improvement in our asset quality numbers in the coming quarters.
So at this point, I want to turn the call over to our Chief Lending Officer, Dave Antolik, who will be followed up by our CFO, Mark Kochvar and then we’ll open the call up for questions.
Thanks Todd. Good afternoon, everyone. Highlighting our record organic growth quarter for Q2 were increases in both total commercial and total consumer loans. Leading the way, commercial real-estate balances grew by $128 million while commercial construction outstandings grew by $19 million and C&I outstandings increased by $52 million. This unprecedented growth is a direct result of our new customer acquisition and market expansion strategies.
Nearly 60% of our commercial loan growth came from our LTOs with Northeast Ohio growing by $48 million, Central Ohio by $44 million and Western New York by $25 million. We continue to look at opportunities to stand services in these markets in order to complement our core lending activities. Our new Pittsburgh C&I team experienced the strong quarter, on-boarding several key new clients and building our brand as a preferred bank for the middle market in Western Pennsylvania.
Activity in South Central PA continues to be robust, and that market leads all of our teams in year-to-date new money production. In the C&I portfolio, we saw revolving utilization rates increase from 40% to 41% and our core plan commitments and outstandings grew to record levels at $232 million and $141 million respectively. It’s important to note that growth in the C&I portfolio is a strategic focus and that this growth continues to meet our expectations.
For the quarter, growth in our commercial real-estate portfolio was aided by $45 million of loans that completed construction and moved into the permanent CRE category along with fewer pay-offs. We also experienced very strong geographically diverse new customer acquisitions and stabilized project financing activities. Looking forward, we do not anticipate continuing the pace of loan growth that we saw in the second quarter, we do expect growth rates to return to levels we experienced in the prior three quarters.
Calling activities remained strong. And although our pipeline is slightly lower than it was at this time last year, we believe we remain well positioned to meet our growth objectives. Finally, with regard to our oil and gas, and metal portfolios, exposures declined by $8 million and $3 million to $37 million and $31 million respectively, both declining through normal amortization and pay-offs.
And now Mark will provide you with some additional details on our financial results.
Thanks Dave. Management income was essentially flat this quarter despite $167 million increase in interest bearing assets. The margin compression we experienced was driven by three main factors. First, we filled our credit card portfolio at the end of the first quarter of 2016, although it was relatively small at around $23 million in outstandings, it was one of the highest yielding assets on our balance sheet, earning over 9% last year.
The offset to this will come in higher non-interest income and lower expenses, but compared to last quarter, the impact on the net interest margin rate was about 2 basis points. Second, we did experienced some loan rate pressure and after seeing the GAAP between new and paid drops to 23 basis points in the first quarter, the GAAP increase in the second quarter to 42 basis points, mostly driven by lower rates on new loans and line utilizations. This accounted for another 2 basis points of the net interest margin decline. Third, we have been more aggressive on deposit pricing in order to fund our strong loan growth, and while successful from balance sheet perspective, we do see impact of those specials increased deposit cost by 6 basis points and the overall net interest margin by another 3 basis points.
Going forward, we do expect continued net interest margin pressure from the flatter curve as well as continued loan and deposits pricing competition. But we expect the declines to moderate to between 4 basis points and 5 basis points per quarter for the remainder of the year. We are reviewing both loan and deposit pricing strategies in order to lessen the net interest margin compression. And although down significantly from a year ago the purchase account incretion was not significant to the variance between the first quarter and second quarter in 2016.
Non-interest income decreased by $3.4 million, mostly due to one-time items in the first quarter, the sale of our credit card portfolio for $2.1 million and the curtailment gain that relates to the freezing of our pension, which took effect at the end of the first quarter for million dollars, that’s in the other category. Insurance was down this quarter due to billing seasonality, combined with about $420,000 of annual profit sharing payments from insurance carrier received in the first quarter.
Non-interest expense declined by $3.6 million from the first quarter and is more in line with our expectations going forward. Much of the decline from the prior quarter was related to timing and seasonality that we expected to see in the second quarter, including benefit accruals, seasonally lower payroll taxes, the timing of health and savings account contributions and also charitable contributions and the related tax credits. We are seeing lower pension cost after the freeze as well as lower incentive accruals. And we do expect to see some benefits from some expense initiatives that were recently put in place. So our expectation for the remainder of the year is for expenses approximately $35 million to $36 million per quarter.
Tax rate in the second quarter was 24.4%, and that reflects the ketch-up on the first quarter with the full year and remaining quarterly expectations of just under 26%. Our risk weighted capital ratios declined slightly this quarter due to risk weighted asset growth, driven by our strong loan growth. More moderate loan growth going forward should result in resumed quarterly increases to our capital ratios.
Thanks very much. At this time, I’d like to turn it over to the operator to provide instructions for asking questions.
Thank you. At this time, we’ll be conducting a question-and-answer session [Operator Instructions]. Our first question is coming from the line of Matthew Breese with Piper Jaffray. Please proceed with your questions.
Todd, I just want to get an update on more celestial activities given the rebound in energy prices. Where we are now, do you feel like that with the worst kind of behind us, so long as energy prices remain where they are. I would just love some commentary from the so called troops on the ground.
Thanks Matt and I’ll let Dave weigh in as well. But Dave and I both reached out to one of the trade associations about two weeks ago, I’ve got some pretty good data but we had a meeting with a couple of their key leadership folks. So the pricing on the gas is up to about $3 an Mcf in that range. We’re starting to hear that the companies are looking to increase drilling activity levels in Q3 and Q4. And then also there is still a lot of pipeline activity going on in the region and then the big news this quarter was the announcement of the Cracker plant the Shell Cracker plant in Beaver County.
But that’s going to just long-term create a lot of demand for local gas. So I think it's probably bottomed out. I wouldn’t say it's going to get back to the levels that we saw pre-drop, but there’ll be a fair amount or a steady amount of activity. And customers that we deal with on the service companies involved haul and water, joined some locations and moving some rigs around. So they have some contracts. So they’ve been busy, and they de-levered somewhat as well.
But I think I think you’ll see a little bit of an uptick in -- like I said in the second half of the year. But Dave any…
So the pay downs this quarter were normal de-leveraging by existing clients and we did have one paid off company which bought by a private equity firm. So there is some activity in that space as well. So we feel that the work is behind us and as prices return and as the market or the drillers determine where the gas will end up as the market develops, particularly with this Cracker plant, and we feel positive about those activities.
And then tying that commentary into the model, last couple of quarters, the provision has been elevated or little bit more elevated than we saw certainly until the ’15. With some more positive momentum on the Shell, could we see the provision come down?
I don’t think the -- we had a couple of credits related to the oil and gas. But we would expect to continue to see what we’re forecasting out improved credit metric trends. And like I said, charges were about 3 million 23 basis points this quarter, but about 1.8 million of the provision expense was tied to loan growth. So that was about $0.03 or so a share. So, I think it's going to be just determine more on our overall global metrics as opposed to tied into the oil and gas would be my opinion. And Pat Haberfield is with us too, he’ll….
I need to [indiscernible] with the way obviously David talked about the decrease in the oil and gas and the metal commodity type market with our exposure again through the normal amortization and a couple of those credits that we had identified, I would expect to -- hopefully I’ve resolved here over the next few quarters.
So in our history Matt as you know we’ve tried identify issues and when they happen early and then we try collect income up with plans to maximize value, and I think you’ve seen some of that this quarter, 3 million charges we’re able to flush out about 9 million, or $8.9 million or so in NPAs in total.
And again, what we’re expecting to see today and in the next couple of quarters we would continue to see some of those themes.
I like the momentum we’ve created on the back side of this and cleaning up the issues.
And then I thought it was interesting that deposit costs were up and I just wanted to follow up on that. And with the need to increase funding cost because of competition you’re seeing for deposits in the market, or was it more to fund better loan growth?
I think the later, I mean, there is some competition out there but we’ve taken a little bit more aggressive stance because we did see a lot of this growth at least coming and wanted to try to mask that as best as we could with customer deposit growth.
And the other thing was just to create some excitement throughout the footprint on the retail side. I mean, we haven’t been real aggressive, so we gave them a couple of tools to use and we’ve looked at and as a client acquisition standpoint, and they’re doing a nice job. Like I said, we paid up and in one of the particular products and since rolled off, we’ve re-priced those, retained about 70% of those or actually about 80%, and then our bankers out there, creating a lot of other deepening those relationships and selling ancillary products into that customer base.
Given the use of the mortgage for [Multiple Speakers]
Matt, we just let some of the brokerage roll off which again a strategic decision.
But given the use of -- what sounded some more promotional products. Will there be a roll back in deposit costs any time soon?
I wouldn’t expect that, I mean, if I would expect more just a moderation of the increase.
My last question, haven’t the overall M&A environment look today, is the deal flow that you’re seeing in the pitch books that come across your debt. Is it up or down versus last six to 12 months?
I’d say it's probably about the same. I mean we haven’t seen a few books here and there. But overall I think things are -- lot of credit issues are behind companies and the margin pressures are real for everybody. But I think it's just situation as if particularly some of the targets that we would look at probably 500 to -- say call $250 million to $700 million range, but it's going to be -- maybe there is secession, maybe they want liquidity or maybe some of the regulatory pressures are getting on. But we’ll continue to have conversations with people in the region. But again we’re going to be disciplined and we really-really like how we’re set up from an organic basis, and I think it's just about trying to fine tune some of these areas on loan yields and [temper] deposits. But we don’t feel we have to go on and do something just to say we’re going to go do a deal.
Our next question is from the line of Daniel Cardenas with Raymond James. Please proceed with your question.
Quick question here, if you could remind me again your commercial concentration as a percentage of total risk based capital I think you guys are bumping up around that 300% mark. Is that correct?
Dan, this is Pat. You look at Dan in both ways between the CRE to risk based capital percentage, it's in the 370 range, and the construction percentages is in the mid-60s.
So what’s the regulatory take on this right now? Is there any emphasis on you guys reducing that number? And if it is then would we expect most of the growth going forward to be more C&I related perhaps?
When you look at those things, as long as you have robust risk management practices, which are our operations have quite robust risk management operations around the real-estate and the way we monitor and report and things of that nature, we have not been criticized or been brought in the conversations to doing things different than what we’ve been doing.
Right, I mean, in last exam they reviewed those very thoroughly by our primary regulator. And so again we look at it slice and dicing a lot of different ways by markets, by different classifications, by concentrations.
And we break our concentration of value further to make sure we’re getting more granular and we’re actually spreading risk out among different pools.
And then turning to the margin, what contribution of any did accretion have to the ratio this quarter?
On the change it was really about the same, there is only about $75,000 difference. It's worth about 3 to 4 basis points still.
Going forward, 3 to 4 basis points, or…
No, over the next couple of quarters, it will, by the fourth quarter, be down closer to 2.
And then as you guys continue to, I mean it sounds like you’re working on extending your fee based income. I mean are there any other initiatives that we can expect to see here over the near-term to help you in that area?
I mean, like said, we’re looking at -- we just sold the credit card portfolio, so some of that will shift from -- as Mark said from margin to more of a fee based business and we’re just rolling out that new program and applications are going out, conversions are going out to client base. With that bringing Greg on-board with some very good ties in Central PA we’ve hired a couple of new sales people over on the wealth side, one in Central PA market and one in our Western PA market. But those will take a little longer as to come on board. And then you look at some of your debit card interchanges up nicely this year and we would expect to continue to see that -- that continue to grow a little bit as well.
And then given some market disruption in Ohio from the FirstMerit Huntington transaction, what kind of talent acquisition opportunities are you guys seeing from that if any?
There is a lot of opportunities, but again I want to stress that tie it back into the other comment. On M&A same thing on talent we’ve made significant investments on the front end side on -- and our banking teams in particularly in some of these markets. So we’re comfortable we’re not accurately recurring additional sales people and it's showing up in the numbers, I mean 16% on annualized growth rate. But it's more on the client side and we’ve been getting a lot of in part and we’ve had some pretty significant closings as well, the people were -- we’ve been having conversations, which are 12, 18, 24 months, and as announced that we’ve moved them over and there very, very nice -- very nice going to be a long-term relationships.
Good, and then good work on the reduction on the non-performers. What are your predictive indicators looking like on the watch list trends, or is your 30 day to 90 day number, how’s that trended over the past couple of quarters?
All of our leading indicators are favorable to what we monitor. And again when you look at our delinquency percentage, the vast majority of our overall delinquency is over 90 days S&P NPL bucket. The early indicators on risk distribution I think are favorable that’s what it’ll going forward I am just looking for the actual delinquency.
Again, like we said, your criticized and classified buckets were down little under 3% about $6.7 million.
And our 30 day delinquency buckets and 60 day delinquency buckets, when you break those down are really about the same they’ve been for probably year and half now. So really hasn’t had any movement or any other further indications.
For all delinquency they declined by 22 basis points, and that was again it was with the drop in our NPAs…
Yes, so that’s what’s driving.
[Operator Instructions] Our next question is from the line of Chris O'Connell with KBW. Please proceed with your questions.
Just filling in for Collyn. You guys said that rate assumptions going forward were going to be down 4 to 5 basis points a quarter in the NIM. And I was just wondering what the rate assumptions you guys had going into that, and maybe like how long you think it's going to persist?
That’s based on it's on the short end effect not doing anything, so we don’t break that into any of our forecast. That were to increased rates and we think it would help us out because we do have some asset sensitivity on the front end of the curve with our prime and LIBOR -- that 4 to 5 is based kind of on a current environment pretty flat low curve and no change instead.
And how many quarters do you think if you have an idea of how long that would persist if followed rates were to stay where they are now?
We took out just in detail just for the last -- the next two. I think it moderates after that but we need to do -- we have little more work to do before I want to speculate beyond the next couple of quarters.
And then sorry if I missed this earlier. But could you guys go into little bit more detail on what’s driving the NPA drop this quarter?
It was just strategies that we’ve had in place. Again as I said, we -- historically we’ve taken a very conservative approach or aggressive approach when we went with the problem, we identified and then we have routine with -- it's a combination of working with the front end, the credit people, credit teams and then we have a very strong special asset group. And it's just -- some of those activities and strategies that we’ve put in place to reduce those kind of came to fruition this quarter. And it wasn’t like it was in one any specific industry or anything like that. We’ve again said earlier I’d like the momentum we’ve created in cleaning up that portion of the portfolio. And we got some through to fruition and have some pay offs and it was very successful. And again I expect to see continued improvement going forward.
Thank you. There are no additional participants at this time. I would like to turn the floor to management for any further remarks.
Okay. Well, again, I just want to thank everybody for participating in today’s call. Mark and Dave and I appreciate the opportunity to discuss this quarter’s results and look forward to hearing from you in your next conference call. And have a good day folks.
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