S&T Bancorp, Inc. (NASDAQ:STBA)
Q3 2016 Earnings Conference Call
October 20, 2016 01:00 PM ET
Todd Brice - President & CEO
Mark Kochvar - SVP, CFO
Dave Antolik - Chief Lending Officer
Pat Haberfield - Chief Credit Officer
Collyn Gilbert - KBW Wealth Managers Group
Matthew Breese - Piper Jaffray
Greetings, and welcome to the S&T Bancorp Inc Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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, Mr. Mark Kochvar, Senior Executive Vice President and Chief Financial Officer. Thank you, Mr. Kochvar. You may now begin.
Thank you. 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 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 third 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. I am extremely pleased to announce that we have reported record net income of $20.6 million or $0.59 per share for the quarter which is a 20% increase over second quarter result of $17.1 million or $0.49 per share and a 9.3% increase over third quarter 2015 results of $18.6 million or $0.54 per share.
For the quarter our return on asset, our return on equity and return on tangible equity were 1.23%, 9.85%, and 15.46%. Furthermore year-to-date net income totaled $53.7 million or $1.54 per share versus $49.7 million or $1.48 per share and our ROA, ROE and ROTC 1.1%, 8.78% and 13.95% respectively through the nine months. Also tangible book value per share has increased 9.2% to 15.57% versus 14.26% at year end. We are very pleased with our performance metrics this quarter as total revenue increased by $2.7 million, expenses decreased by $300,000 and net charge off for $936,000 or 0.07% annualized.
Furthermore our provision expense declined by $2.3 million quarter-over-quarter and net interest income increased $1.7 million versus Q2 or 3.5% and really the big driver was $101 million increase in average of loan balance as well as stabilizing core loan and deposit rates.
Controlling expenses has and we will continue to be a hallmark of our organization as we continuously look for ways to drive efficiencies throughout the organization, year-to-date the efficiency ratio now stand at 54.41% versus 56.81% in 2015. To that end we did close one branch in the third quarter and we will continue to evaluate other opportunities moving forward.
Relative to asset quality, I want to note that non-performing assets decreased $2.2 million or 5.15% for the quarter and we are seeing nice trends in overall delinquency, which declined by 39 basis points to 1.05 [ph] bank wide. While growth is slower from the rate that we experienced in the first or second quarter, our focus is growing the balance sheet with a better mix of loans and deposits. Network portfolio loans and deposits increased $28 million and $25 million respectively with the bulk of the increase coming in our consumer division as commercial loans were essentially flat. Dave Antolik, will provide more color in his commentary, but we did have some abnormally high pay-offs in Q3 some of these were planned as we excited several participation credits and also we made a strategic decision not to get into a bidding war on some lower yield accounts that were being refinanced at even lower rates.
Deposits were up $25 million quarter-over-quarter however we did let approximately $24 million of broker deposits run-off we are encouraged by our bankers continued focus on growing client deposits which were up $59 million with the majority of activity in core DDA and money market accounts. We're also re-pricing some higher costing certificates deposit as they mature and these are adding favorable impact on net interest margin.
Finally, I want to mention that our Board of Directors approved a 5.3% increase to our dividend to $0.20 per share versus $0.19 per share which will be paid on November 17th and this is the fourth consecutive year of dividend increases for our shareholders.
So at this point I'm going to turn the call over to our Chief Lending Officer, Dave Antolik.
Thanks Todd. Good afternoon, everyone. Highlights of our third quarter results include year-to-date growth of $390 million or 10% annualized in total portfolio loans. And we remain on track to meet our full year loan growth goal for 2016. We are especially pleased with our consumer loan growth of $29 million for the quarter, which included a $21 million increase in residential mortgage balances along with an $8 million increase in home equity and consumer balances.
Our residential mortgage activity is strong in all of our retail markets, particularly South Central of Pennsylvania and our pipeline remains consistent with levels experienced in prior quarters. Commercial real estate balances grew by $38 million and commercial construction grew by $4 million during the quarter. The overwhelming majority of the incremental growth in these categories came from our LPOs. During the quarter we reached the major milestone in Ohio with our loan balances growing to $600 million, $322 million in Northeast Ohio and $278 million in Central Ohio.
We also experienced very strong quarterly growth in Western New York, where our balances now exceed $114 million. Investments that we've made in these markets continue to yield positive results and we look forward to the opening of our new banking facility in Akron during the fourth quarter where we will offer commercial banking, business banking, treasury management, flatten banking and consumer banking services.
We did experience a decline of $41 million in CNI balances during the quarter. As Todd mentioned the majority of this reduction was a result of our decisions to exit a handful or participated credit and lower yielding credits that did not fit our relationship banking model. Revolving CNIs utilization remains flat at 41% quarter-over-quarter. With the additions that we've made in the past year to our CNI banking staff we remain very optimistic about our ability to compete effectively and grow in this space.
In total commercial loans payouts during the third quarter exceeded average payouts in the first two quarters by approximately $55 million, which contributed to commercial loan balances remaining flat for the quarter. We do not anticipate the same level pay-off for the fourth quarter.
In conclusion we like how we are position geographically and also take advantage of opportunities it needs to each of our five markets. Activity remains steady early in Q4 and our teams of highly seasoned professional bankers continue to focus on quality, earning asset growth.
And now Mark will provide you with some additional details on our results.
Thanks Dave. The net interest income improvement this quarter of $1.7 million was due to the increase in average loan balances of $101 million, an extra day in the quarter which added approximately $450,000 and higher one-time credit-related items that contributed another $433,000. This last item helped to improve the net interest margin range by about 3 basis points versus second quarter. Both the core loan rates and crossing liability were essentially flat quarter-over-quarter, despite a 30 basis points gap between new and paid loans. We just get some help on our floating rate loans as one month labor increased over the quarter.
Going forward we do expect continued net margin rate pressure from the flatter curve, but we think the declines have moderated to more into 1 basis points to 2 basis points per quarter range. And we believe that increase would beneficial to our net interest margin and then net income due to the approximately 1.2 billion re-pricing gap we have on the frontend of the curve. Pricing pressure on both loans and deposits will ultimately determine how much makes it to net interest income.
Loan purchase accounting accretion was not a big factor in our quarter-over-quarter variances. It currently is running about 500,000 per quarter. Non-interest income increased by $1 million with a good quarter in mortgage banking which is up about 500,000. About half of that improvement came from higher volumes and the other half came from the more favorable rate environment which improved the quarter end loss and relative mortgage servicing right valuations.
Debit and credit card fees were up 300,000 mostly due higher seasonal activity, non-interest expense declined by about 300,000 from the second quarter, combined with better interest income and fees operating leverage improved and our efficiency ratio decline is under 52% this quarter. Core salaries were essentially flat, the increased in the salaries and benefits line items is due to lower benefit accrual last quarter and annual true-up of our pension expense this quarter.
DP expense was down primarily due to the start of new contract which will continue to deliver about 300,000 per quarter of savings going forward. The other category was favorably impacted by lower credit related expenses. There were some unusual items going both ways this quarter and non-interest expense. But on a go-forward basis, the net was approximately $700,000 favorable which puts our expense run rate at just over $35 million per quarter at a low end of our prior guidance.
Tax rate in the third quarter was 26.4% which is a little bit higher due to the improved pretax earnings. Our risk based capital ratios all improved by over 30 basis points this quarter and due to earnings retention and a decrease in our risk weighted assets. Mostly driven by lower high volatility CRE commitments as those projects fund and we have adjusted our underwriting.
Thanks very much at this time I'd like to turn it back over to the operator to provide instructions before asking a question.
Thank you. [Operator Instructions]. Our first question comes from the line of Collyn Gilbert of KBW Wealth Managers Group. Please proceed with your question.
Mark, I just wanted to -- I missed it, I apologize, but your NIM comment, you said 3 basis points of the increase this quarter came from what? I'm sorry.
There is some credit related recoveries that we got from some paid off loans. It's about little over 400,000. So that was a main driver for the rates improvement.
Okay, that's helpful. And then just on the deposit side, can you just talk a little bit about how you guys are positioning yourselves in the market in some of your newer markets and where you think deposit growth is going? And also from a rate perspective, where you see that migrating.
We don’t differentiate a lot between the various markets we do have to do some slightly different pricing in the South Central Pennsylvania market. We have backed off a little bit on CDs which we emphasized early at this year and at the end of last year. A lot of our growth has come in a product that’s a money market product that offers a rate that's tied to the fed funds rate, and that's being some success.
So we're sitting on the mostly on the short end or the frontend of curve on the deposit side, so it’s just a better match up with where our loan growth has been. So we still anticipate our growth on the deposit side to match up pretty closely. We said overtime with our loan growth, with the bulk of that at least in the short to medium term coming from the money market and we’re also picking up on the -- through the commercial side in DDA. We've also have had some success on the public funds side and lot of that money comes in now accounts and we continue to see some opportunities for growth in those markets as well.
Okay, that's helpful. And then just a bigger picture comments or question I guess Todd or Dave. Just what are the regulators saying to you all about the CRE concentration limits? Is it a pressure point? Are you guys needing to modify anything that you're doing? If you could just give a little bit of color as to what might be going on there, that would be helpful.
So I mean we really haven’t had a lot of feedback. I think a lot of it is dependent on your risk management practices and we've put a lot of emphasis over on our credit side, on our loan review side and the various monitory processes and controls that we have within the organization and I think we have received favorable feedback that they like what we've done in those areas.
And we slice and dice both the CRE portfolio and the construction portfolio by geography, by asset class and were very well diversified I think that carries a lot of weight and gives us a lot of comfort as the management team that we can manage that portfolio.
Okay. That's helpful. Todd, any update on your acquisition appetite and how you see the supply of potential sellers in the market as you look out into next year?
Yes, I don’t think it's really changed from historical perspective if you look at our track record we’ll do a deal maybe every two or three years, we’re about a year and a half into the Integrity acquisition and we’re still absorbing that and we’re seeing some nice activities out of that market. I think how we manage the company is to grow it organically, expect we built some capital this quarter. We need to build that up a little bit and we’ll keep our eyes open, if there is something that comes to the market that makes sense to extend the franchise and we like the deals that are accretive right out on the shoot. We will take a look at it.
So I would say as far as deal flow, I would probably slow it up a little bit I would say over the last six months there has been some activity, but probably not as much as what we saw at this time last year.
Okay. That is interesting, that is helpful. Okay, and then just one final question. Mark, on the net charge-offs, obviously, really low this quarter, and if you said it in your initial comments, I apologize, but just how we should be thinking about the provision and the reserve going forward. It's been steady. You guys had that one blip in the first quarter, but outside of that, it's been fairly steady. Just how you're thinking about credit as we look out.
I think the way our model works there is a lot of things that go into that. But overall, I wouldn’t expect it to veer too much from the current levels. And if you just look at it a reserve to loans basis you must see some decrease in that going forward depending on how NPAs and our [indiscernible] classified numbers change over time. But overall we don’t expect a big change.
The other thing in quarter one and two we had some pretty big loan growth, so that impacted the provision expense to an extent in those quarters as well. Probably the one quarter was about $1.8 million in Q2 when we had couple $100 million loan growth.
Collyn, this is Pat. I'm still pretty happy with the momentum we've created. As you can see kind of in the trends moving downward and I'll say that but keep in mind we still have little bit to clean up, a little way is to go on that before I am completely satisfied. So again we are just going to continue with the momentum we have created and continue to roll.
[Operator Instructions] our next question comes from the line of Matthew Breese of Piper Jaffray. Please proceed with your question.
Just staying on the margin, I had a couple of questions there. First, was there any accretable yield in there, and if so, what was it?
There is about 500,000 of loan purchase accounting another 100,000 related to deposits in the quarter.
And what's the outlook from here for accretable yield? Are you getting to the end of what should flow through?
The big change is there behind us. It drifts down, I think by the -- in our forecast by the end of next year it will be closer to $350,000 a quarter.
Okay and then outside of the trajectory of accretable yields, what kind of core margin pressure do you expect on like a quarterly basis?
Yes I think it’s in that 1 to 2 basis points range, but it does depend on the mix. The mix on the growth, we have some emphasis on the loan side to try to get better yields and we are being more cautious on the deposit side and the funding side trying to manage that a little bit better less CDs more core. So we are still optimistic but our miles indicate that 1 to 2 basis points range for next couple of quarter anyway.
Right. And then on the loan growth side, I know historically, you have been a high single-digit to low double-digit growth rate on an annualized basis. This quarter it seemed like there were some more one-timey things that occurred. Do expect to recover on the loan growth front over the next?
I think if you strip out those kind of unusual payouts that we saw this quarter we’d be in that 6% growth range, so I would expect loan growth moving forward to be in that 6% to 8% range.
Okay. And then my last one is really regarding the overall market as it pertains to your exposure to the energy segment. I know last quarter we talked about most of the, the worst of it being behind you and I just wanted to get some updated commentary around that.
This is Pat. As far as our energy exposure, again it came down quarter-over-quarter by $4.6 million due to the amortization pay-offs in there. So our true oil and gas energy related exposure was about $32 million. So in the scheme of things it is relatively small. But it does continue to perform quiet well.
Yes, Dave and I both had conversations with different people in the oil and gas batch and the activity levels are certainly looking up for Q4. I know there is going to be increase rig activity some of the service companies that we lend into will benefit from that on making locations and some of the services they provide. So I think you are going to see a decent fourth quarter and that will probably carry over into Q1 and there is still some pipeline activities, so a lot of some of the stuff continues to improve excess to markets.
I think and again long-term it's going to be a good play. And certainly the noise out of the ethane plant out in Beaver County, still there is a lot of activity surrounding that and that will continue to do so as well. So again I think long-term we like the prospectus and when it bring to the region.
Great, that's all I had. I appreciate it, thank you.
There are no further questions in the audio portion of the conference at this time. I would now like to turn the conference back over to management for closing remarks.
I just like to thank everybody for participating in today’s call. Mark and Dave and I appreciate the opportunity to discuss the quarter results and look forward to hearing from you in our next conference call. Have a great day.
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