S&T Bancorp Inc (STBA) 2016 Q3 法說會逐字稿

Greetings and welcome to the S&T Bancorp's Inc. third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Mark Kochvar, Senior Executive Vice President and CFO. Thank you Mr. Kochvar, you may 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. The 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 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. I am extremely pleased to announce that we reported record net income of $20.6 million, or $0.59 per share for the quarter, which is a 20% increase over second-quarter results of $17.1 million, or $0.49 per share, and a 9.3% increase over the third quarter of 2015 results of $18.6 million, or $0.54 per share. For the quarter, our return on assets, 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 were 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-offs were $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 loan balances, as well as stabilizing core loan and deposit rates.

Controlling expenses has and 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 stands 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 nonperforming assets decreased $2.2 million, or 5.15%, for the quarter, and we're seeing nice trends in overall delinquency rates, which declined by 39 basis points to 1.05 bank-wide. While growth has slowed from the rates that we experienced in the first and second quarter, our focus is growing the balance sheet with a better mix of loans and deposits.

Net 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 payoffs in Q3. Some of these were planned, as we exited several participation credits and also made a strategic decision not to get into a bidding war on some lower yielding 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 are also repricing some higher costing certificates of deposits as they mature, and these are having 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 17. This is the fourth consecutive year of dividend increases for our shareholders.

At this point, I'm going to turn the call over to our Chief Lending Officer, Dave Antolik.

Thank you, Todd, and 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 Pennsylvania, and our pipeline remains consistent with level 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 a 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. The 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, platinum banking, and consumer banking services.

We did experience a decline of $41 million in C&I balances during the quarter. As Todd mentioned, the majority of this reduction was the result of our decision to exit a handful of participating credits and the lower-yielding credits that did not fit our relationship banking model. Revolving C&I utilization remained flat at 41% quarter over quarter. With the additions that we've made in the past year to our C&I banking staff, we remain very optimistic about our ability to compete effectively and grow in this space.

In total, commercial loan payouts during the third quarter exceeded average payoffs 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 of payoffs for the fourth quarter.

In conclusion, we like how we are positioned geographically in order to take advantage of opportunities unique 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.

Thank you, 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 $430,000. This last item helped improve the net interest margin rate by about 3 basis points versus second quarter, but the core loan rate and costing liabilities were essentially flat quarter over quarter, despite a 30-basis-point gap between new and paid loans. We did get some help on our floating rate loans, as one-month LIBOR increased over the quarter.

Going forward, we do expect continued net interest margin rate pressure from the flatter curve. But we think the declines have moderated to more in the 1 to 2 basis points per-quarter range. We believe a fed increase would be beneficial to our net interest margin and interest income due to the approximately $1.2 billion repricing gap we have on the front end 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 was up about $500,000. About half of that improvement came from higher volume, and the other half came from a more favorable rate environment, which improved the quarter-end mark and relative mortgage-servicing right valuation.

Debit and credit card fees were up $300,000, mostly due to 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 declined to under 52% this quarter.

Core salaries were essentially flat. The increase in the salaries and benefits line item is due to lower benefit accruals last quarter and an 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 in 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 the low end of our prior guidance.

Tax rate in the third quarter was 26.4%, which is a little bit higher due to improved pretax earnings. Our risk-based capital ratios all improved by over 30 basis points this quarter 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.

Thank you very much. At this time, I'd like to turn it back over to the operator to provide instructions for asking questions.

(Operator Instructions)

Collyn Gilbert, KBW Wealth Managers Group.

Thank you. Good afternoon, guys. 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's some credit-related recoveries that we got from some paid-off loans. It was about -- a little over $400,000. So that was the main driver for the rate 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 -- do some slightly different pricing in the south-central Pennsylvania market. We have backed off a little bit on CDs, which we emphasized earlier 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 rate that's tied the fed funds rate, and that seen some success. So we're staying on the, mostly on the short end -- or the front end of the curve on the deposit side. So it's just a better matchup with where our loan growth has been.

So we still anticipate our growth on the deposit side to match up pretty closely, at least over time with our loan growth. With the bulk of that, at least in the medium -- short to medium term, coming from the money markets and it would also picking up on the -- through the commercial side in DDA We also had some success on the public funds side, and a lot of that money comes in now accounts. We continue to see some opportunities for growth in those markets as well.

Okay, that's helpful. And then just a bigger-picture -- or question, 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.

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 monitoring processes and controls that we have within the organization. And I think we have received favorable feedback that they like what we've done is areas.

And we slice and dice both the CRE portfolio and the construction portfolio by geography, by asset class, and we are very well diversified. And I think that carries a lot of weight and gives us a lot of comfort as a 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, so Collyn, I don't think it's really changed from a 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 you know how we've managed the Company is to grow it organically. Like I said, we've build some capital this quarter. We need to build that up a little bit, and we'll keep our eyes open. If there's something that comes to market that makes sense from -- to extend the franchise and we like the deals that are accretive right out of the chute, we will take a look at.

Okay.

But 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's a lot of things that go into that. But overall, I wouldn't expect it to veer too much from the current levels, if you just looked at it a reserve to loan spaces. You might see some decrease in that going forward, depending on how MPAs and our (inaudible) to classified numbers change over time. But overall, I wouldn't expect a big changed.

The other thing, in quarters 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, I think the one quarter was about a $1.8 million was -- in Q2 and we had a couple hundred million dollars of loan growth, too.

Collyn, this is Pat. I'm still pretty happy with the momentum we've created. As you can see in the trends, moving downward. And I will say that, but keep in mind, we still have a little bit to clean up, a little ways to go on at before I'm completely satisfied. So again, we're just going to continue with the momentum we've created and continue to roll.

Okay. Okay. That's great, thank you.

(Operator Instructions)

Matthew Breese, Piper Jaffray.

Good afternoon, everybody.

Hi Matt.

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 was 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?

I think the big changes are behind us. It drifts down, I think by the -- in our forecast anyway, by the end of next year it will be closer to $350,000 a quarter.

Okay. Okay and outside of the trajectory of accretable yields, what kind of core margin pressure do you expect on like a quarterly basis?

I think it's in that 1- to 2-point-basis range, but it does it depend on the mix on the growth. We have some emphasis on the loan side to try to get better yields, and we're 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're still optimistic, but our miles indicate that 1- to 2-basis-point range for next couple of quarters 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 you expect to recover on the loan growth front over the next --?

I think if you strip out those unusual payoffs 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. Okay. And then my last one is really regarding the overall market as it pertains to your exposure to the energy segment. 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.

Hey Matt, this is Pat. As far as our energy exposure, again, it came down quarter over quarter about $4.6 million, due to amortization and payoffs in there. So our true oil, gas, energy-related exposure is about $32 million. So in the scheme of things, it is relatively small, but it does continue to perform quite well.

Dave and I both have had conversations with different people in the oil and gas batch, and activity levels are certainly looking up for Q4. There's going to be increased 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're going to see a decent fourth quarter, and that will probably carry over into Q1. And there is still some pipeline activity, so as a lot of -- some of this stuff continues to improve access 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 I think, long term, we like the prospects and what it brings 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 would 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 at our next conference call. Have a great day.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful rest of your day.