S&T Bancorp, Inc. (NASDAQ:STBA)
Q1 2017 Earnings Conference Call
April 20, 2017 01:00 PM ET
Mark Kochvar - SVP and CFO
Todd Brice - President and CEO
David Antolik - Chief Lending Officer
Pat Haberfield - Chief Credit Officer
Matthew Breese - Piper Jaffray
Collyn Gilbert - KBW
Daniel Cardenas - Raymond James
Greetings, and welcome to S&T Bancorp Incorporated First Quarter 2017 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. Thank you. You may begin.
Thanks very much Rob. Good afternoon everybody and thank you for participating in today's conference call. Before I could 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 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 Todd Brice, S&T's President and Chief Executive Officer, who will provide an overview of S&T's results.
Well, thank you Mark 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 and 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 five 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 to 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 fourth quarter. Controlling our non-interest expense continues to be a focus throughout the organization.
And while we are pleased to report the $36.8 million expense in line with expectations, resulting in an efficiency ratio of 53.83%. We did close three branches in the first quarter which now puts our average deposits for 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 declining to $2.1 million or 15 basis points annualized. Non-performing 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 to loan loss reserves 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 non-performing loans was driven by several legacy credits in our C&I portfolio.
We’ve elected to reorganize through the bankruptcy courts we anticipate resolution of these credits in the first quarter. I do want to bring your attention to an event that’s going to positively impact this -- 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 of last year.
So at this point, I want to turn the call over to our Chief Lending Officer, David Antolik.
Thanks Todd and good afternoon everyone. As Todd 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 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 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 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 long 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 that reduced by nearly $100 million since the first quarter of 2016. This reduction is a 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 Mark will provide you with some additional details on our financial results.
Yeah thanks Dave. Net interest income improvement in our 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 rate. Our loan rates improved by 11 basis points and for the first time in years, we saw new loan rates higher than pay grades for the quarter. With this term, 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 loans and more from deposits. While we saw our overall funding cost increased 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 brokered CD. We saw some net customer deposit outflows 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. Non-interest income excluding the security gains decreased by 296,000 compared to the fourth quarter. There's some seasonality and fewer days impacting service charges and debit and credit card fees, but 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 security. 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 gain. And as Todd mentioned, we will be realizing about 2.6 million of those gains here in the second quarter.
Non-interest expenses increased by about 1.2 million, up from the fourth quarter, salaries and benefits were higher due to incentives and annual merit increases. Our remaining [ph] variance is 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 ratios improved this quarter despite strong loan growth as we're able to reduce risk weighted assets through lower HVCRE exposures and a change in our [indiscernible] investments.
Thanks very much. At this time, I’d like to turn it back over to the operator to provide instructions for asking questions.
[Operator Instructions] Our first question comes from Matthew Breese with Piper Jaffray. Please proceed with your question.
I wanted to first go to the margin and talk a little bit about your comments on deposit competition. So I guess the first part of the question is what is your overall outlook for the margin over the next few quarters? And secondly, could you just walk through some of the deposit competition commentary and provide maybe some examples of where you're seeing the increases and how you're seeing what products.
And just on our margin outlook, we're re-doing some of the models, especially the second Fed jumped out a little bit unexpected, we’re rerunning that through our model. But for us that cross of having the new loan rates above the paid rates and our expectation, we believe 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 nearest margin and actually provide some opportunity for pick up depending on the time of any future Fed increases.
But I’ll leave this on a positive side, for example, we can keep the funding costs under control. We have just seen a much more active environment in our markets anyway with special, particularly on the CD side and also special money market rates and a lot of pricing that’s not on [indiscernible] basically. And we're seeing that from all different competitors both banks locally and also some of the market participants that are non-banks. So we in particular there's a group that provides deposit services for public funds that have been much more aggressive in their pricing as well.
And maybe tying that all together, I mean the margin expansion this quarter of 5 basis points concerning your commentary last quarter was a little bit more than I was thinking. Do you think the deposit competition and the changes in the arena will prohibit the margin from increasing for the remainder or you're expecting just a little bit more of a subdued pace of expansion?
I think the latter, I mean I think we should be able to manage that a litter bit better and hopefully get some - actually some improvement driven by the loan pricing - a better loan pricing that we're seeing, which should cover - we think whatever happened 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 more aggressive.
Okay. And then hopping to loan growth, it sounds like the construction portfolio, a lot of that's flowed through and we might not see the same pace of growth that we saw from over the last year. Is it suffice to say that expectations for the growth for the remainder the year will largely mimic what we saw this quarter, meaning commercial real estate, consumer loans and less so from the construction arena?
Yeah. Hey, Matt. It’s Dave Antolik. Yeah. 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 of quarters for the construction fundings to work their way through. So the decline and 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.
Got it. Okay. And then last one just around the provision. Is this $5 million a quarter level, is that the right run rate for the rest of the year?
Hey, Matt. This is Pat Haberfield. 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 which helps to 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 specific, so if and when we would take a charge, we’d necessarily replace those in provision, but it may take a quarter or two.
[Operator Instructions] Our next question comes from Collyn Gilbert with KBW. Please proceed with your question.
Great. Thanks. Good afternoon, guys. Just going back to the provision comment, Todd, so can you just break that down in terms of what specific reserve you did take this quarter and then just a little bit more color on those three, I think it was three C&I credits that eroded?
Yes. So I'll let Pat take that, Collyn.
Yeah. Collyn, so we essentially had a handful of some credits that eroded. We were watching them, we’re in negotiations and obviously the tenant got 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 to sometime in the third quarter, because of bankruptcy schedules. So again with those credits, we had some increases in specific reserve, 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 a majority of them, perhaps for another quarter. But again, we're still saying that our run rate for charge-offs for the year, we’re still expecting to be in that low 20 basis point range on losses.
Okay. And was there anything, the nature, you said a handful, was there any correlation among them or it just, they were all just sort of random situations?
Each of them were different. So I think one of whom, a large loan is driven by commodity pricing type of scenarios and that one we thought we were going to have a good resolution and something popped up kind of in the middle of our negotiations and we opted to file for protection.
Okay. And then how does the rest of the portfolio look? Has there been other movement in watching those credits or any other areas in the wake of kind of, I know we've had some healthcare hiccups among some other banks this reporting period and just obviously the retail component of CRE, are there any other areas where you guys are seeing potential stress?
We had some, obviously some downgrades, upgrades. It was very fluid, but we did experience some additional downgrades in the special mention type of category for the quarter from several credits. And again if it's not one thing in particular, some of our older loans from the legacy portfolio, each of them kind of has their own little nuance and story to it, which is kind of makes a little tougher for us to.
Yeah. And then the other point I would just make, none of them are attributable to oil and gas.
Okay. And just roughly the kind of the average size, I mean where you're seeing the deterioration, is it may be smaller credits just because?
It’s, honestly Collyn, it’s a mix of both. There’s a bunch of smaller critters in there and there's, I would say, a suitable of larger ones. I’m not going to get into all the details of the specifics of the drivers. But, there's just a handful of just about everything. And this is the nuance of the way in which we manage our portfolio and our further risk management practices and then the way we return the portfolio apart and take a look at them on a quarterly basis.
Okay. All right. That's helpful. And then just on the, you guys touched on this a little bit, but just the pipelines or just the loan growth. You saw great loan growth this quarter. It sounds like better than at least what we were thinking based on your comments off the fourth quarter the way the pipeline was shaping up. What -- was there stuff that kind of came in later in the quarter? I know a lot of it was CRE, but just maybe a little bit more color around where that growth is coming in and why the kind of maybe the better results than what you were initially thinking?
Yeah. Hey, Collyn. 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.
Our next question comes from Daniel Cardenas with Raymond James. Please proceed with your question.
Good afternoon, guys. Just looking at your loan to deposit ratio, I mean it's been creeping up here over the last several quarters and you're roughly around 106% right now. I mean, could you give us a little bit of color as to where you think that number maxes out. And when you talk about some of the deposit pricing pressure, can we expect then to see the growth in deposits put maybe more than expected pressure on the margin?
Hi, Dan. This is Mark. I mean, the 106 unrealized that has been growing lately, I mean it’s something that we'd like to see stabilize at least 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 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 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.
So 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 than your commercial deposits of public funds. And then quite frankly, we had probably about $60 million of -- there are probably four or five different customers in early February that would set some high dollar CD that maturing. We elected not to reprice. I mean as Mark alluded, 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 off about $310 million or so in what we consider customer deposits and a 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 in the -- bulk of them is in the 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 say stay on top of and we're going to continue to try and drive the core deposit growth across the organization.
Okay. Good. And then given your TCE ratio, I mean you've been holding around this 8.2% to 8.5% range for quite some time. Now, maybe some color as to what the priorities are for the use of capital here over the next year.
I think right now, if you look at our organic growth rate, it has been very good and so right now, the primary use 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 would be down the list. But M&A, we like to keep a little better, if there's any M&A activity that I would say, things are kind of quiet right now. But I think we're comfortable with the capital levels that we have to support our growth objectives.
Okay. And then just kind of looking at M&A seller expectations, do you think those are kind of coming back more in line with your expectations or is there still a bit of a mismatch out there?
I think there's always going to be a mismatch. But there may be a little bit of a softening and I could say, I think what you're seeing, the Allegheny and Standard kind of merger vehicles that try to get some scale. [indiscernible] in the center part of the state, kind of the same thing to get us up to about $1 billion size level. So I think some of the smaller companies will start to feel the effects of some of regulatory pressures, some of the need to spend on IT and some of those things, which I think is important to drive some of the M&A, but again, we like our position from an organic growth perspective.
I talked about the great teams of bankers and great markets, but I mean it’s reality. It shows up in our numbers. And so we don't feel pressure like we have to go out and do a deal to just to get bigger. So if something comes across our desk, we wanted to be a great fit and really add a lot of franchise values. So we're going to go, we’ll be cautious on the M&A.
All right. And do you guys have any geographic preference right now as to where you would like to go?
I think if you’re in the footprints that we’re operating in right now, Western Pennsylvania, there could be a couple of potential companies that would certainly get our attention, if we would round out some of the investment that we made in Central Pennsylvania or even over in with the folks in there, our LPOs are very active and if we can find the right partner out there to really augment what they're doing, I think it would be something we definitely take a good hard look at.
Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back to Todd Brice for closing remarks.
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’ll look forward to talking with you next quarter. Thanks again.
This concludes today's teleconference. You may disconnect your lines at this time and we thank you for your participation.
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