S&T Bancorp, Inc. (STBA) Q3 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the S&T Bancorp Third Quarter 2015 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 would now like to turn the conference over to your host, Mr. Mark Kochvar, Chief Financial Officer. Please go ahead, sir.

Thank you. 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 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 website at www.stbancorp.com. I’d 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. As we announced in this morning’s press release, we reported net income for the third quarter of $18.6 million, or $0.54 per share which compares nicely to $18.2 million or $0.52 per share last quarter. This also represents a 10.2% increase over third quarter 2014 earnings of $0.49 per share. In addition our return on average assets, average equity and average tangible equity were 1.20%, 9.51% and 15.61%, respectively. We are pleased once again by the solid profitability metrics that we experienced this quarter. A big factor driving these results have been the investments that we made in our franchise over the past two years in South Central Pennsylvania, Northeastern and Central Ohio, Western New York, State College and also our core markets in Western Pennsylvania to position ourselves to grow and generate positive operating leverage. For the quarter, the loan portfolio increased to $128 million or 10.6% annualized. Again, we are seeing nice activity across our commercial, residential mortgage and consumer lending divisions. We do have a seasoned team of bankers who have a great track record in developing long-standing relationships with our clients and work diligently to deepen those ties. Our Chief Lending Officer, David Antolik will provide some more color in his commentary. Our deposit growth was somewhat muted this quarter as we didn’t see the typical inflows from various municipalities, state-related agencies and school districts that we typically do this time of the year just because they are being impacted by the delay in passing the state budget out in Harrisburg. Earlier I mentioned positive operating leverage. Year-over-year, we were able to increase revenues by $12.6 million or 26% versus an increase in non-interest expense of $5.4 million or 19%. And again, this is having a nice impact on our efficiency ratio, which is down to 53% in the third quarter. Disciplined approach to expense control and merger and integration will continue to be a strategic focus throughout the organization. On the asset quality front, we did have a modest increase in net charge offs with still $2.1 million or 0.17% annualized. NPAs did increase by $4.4 million this quarter and as we work through resolution plans and valuations in our acquired portfolio. But on a percentage basis, we still have very respectable non-performing assets to asset ratio of 0.39%. One bright spot in the portfolio included a reduction of $18 million or about 7.5% in our criticized and classified loan category which now stand at 4.48 [ph] as a percentage of total loans and along with delinquency also holding flat. Finally I want to mention that our board of directors approved $0.01 per share or 5.6% increase in our quarterly dividend to $0.19 per share. This is the third consecutive year that we’ve increased our dividend. And in closing, I just want to mention that again we are pleased with our performance this quarter and looking forward, we are going to continue to focus on maximizing revenue opportunities, controlling expenses, staying on top of credit quality to meet our objectives. We have a lot of positive momentum across all of our lines of business and I like how we are positioned to continue to grow our company and reward our shareholders. So with that, I will turn the program over to our Chief Lending Officer, David Antolik.

Thanks, Todd, and good afternoon everyone. As Todd mentioned, we are very pleased with the solid loan growth we achieved for the quarter. We are also very pleased with the sustained level of activity as we head into the fourth quarter. For the quarter, as Todd mentioned, total portfolio loans increased by $128 million, which represents a 10.6% annualized growth rate and is our highest quarterly organic growth in the bank’s history. This growth was primarily driven by an increase in commercial real estate and construction balances of $96 million along with increases in our residential mortgage outstandings of $26 million and home equity growth of $10 million. C&I balances were essentially flat quarter-over-quarter due to a slight reduction in utilization rates along with the payoff and paydown of several criticized and classified credits. Activity in the C&I portfolio remained strong as evidenced by growth in the total number of commitments. Highlights for the quarter include a $63 million increase in outstandings in our loan production offices. The combined balances for our Northeast Ohio, Central Ohio, State College and Western New York offices now exceed $450 million. We continue to explore opportunity to expand in these markets and to further capitalize on this growing segment of our customer base. Our business banking division which focuses on credits under $1 million had its best quarter ever, increasing balances by over $11 million and that portfolio now exceed $519 million. The business banking area continues to be a very consistent growth performer and we see solid opportunity in South Central Pennsylvania for that division, which we believe we can capitalize upon. Our sales efforts and the investments that we made in our floor plan system continue to yield positive results as evidenced by an increase in commitments of $55 million year-over-year and $11 million for the quarter along with an increase in outstandings of $34 million year-over-year and $7 million for the quarter. Total commitments and outstandings for floor plans at September 30 were $202 million and $120 million, respectively. We also continue to see strong demand for commercial real estate and construction loans in nearly every market we serve. During the quarter, we dedicated a significant amount of time to recruiting for and strengthening our banking teams. We now have 49 commercial bankers and 19 business bankers employed at S&T and we are very well positioned to take advantage of market opportunities and disruptions, particularly in South Central Pennsylvania. Finally, with regard to Integrity, I am very pleased with the progress that we’ve made with the integration of a significant market partner. We have maintained our momentum and we look forward to continuing the pace of our growth. And now Mark will provide you with additional details on our financial results.

Thanks, Dave. Total purchase accounting accretion in the third quarter was $2.2 million, which is down from $2.7 million in the second quarter. This equates to about $0.04 per share, approximately $1.8 million in loans and about $400,000 CDs. This impacted the net interest margin rate favorably by 16 basis points. We expect accretion to continue but as declining rates, our last modeling indicates about $1.1 million in the fourth quarter and $750,000 in the first quarter of 2016. There can be some volatility with the loan related part of accretion depending on asset quality of those purchased loan. Net interest margin rate was essentially unchanged, not including the fact of the accretion quarter-over-quarter. We did recognize two quarters of Federal Home Loan Bank dividend income in the third quarter as we switched from a cash to accrual basis. This was approximately $230,000. Net interest income increased overall by $785,000 despite a lower accretion in part due to the home loan bank dividend, but also due to over $100 million growth in average loans and also an extra day in the third quarter. Our loan growth continues to be primarily floating and we believe that any rate increases by the Fed will benefit us. In the meantime, margin pressure remains with the gap between new and paid loans at about 43 basis points this quarter, which was down from 54 basis points last quarter. The weighted average rate on new loans is holding steady in the 360 to 370 range. Non-interest income declined by $900,000 mostly due to unusually high letter of credit and loan related fees in the second quarter. Non-interest expense declined by about $1.6 million compared to the second quarter. A little over half of that or $866,000 was one-time merger-related items last quarter. And after a slow start, we are beginning to see more of expense synergies from the merger. We continue to expect expenses to be in the $34 million range next quarter, although we typically do see an increase as we move into the new calendar year due to seasonality in the first quarter and also merit increases. We expect the effective tax rate for this year to be just over 26%. Capital ratios improved this quarter due to retained earnings, outpacing assets and risk-weighted asset growth. We filed a shelf registration last week as ours from 2012 is set to expire. We are comfortable with our current capital levels and have no immediate plans to make any changes. Thank you very much. At this time, I would like to turn it back over to the operator to provide instructions for asking questions.

[Operator Instructions] Our first question is coming from the line of William Wallace with Raymond James. Please go ahead with your question.

Thanks, good afternoon. Real quick, maybe just a follow-up, you have some commentary on the margin, how much was the FHLB dividend?

With extra, it was about 230,000.

And then I can’t help, but noticed that your intangibles – your intangible assets are going up, I assume are you writing up the CDI?

No, there was a small adjustment related to the FHL disposition away [ph] from the merger, so we had a slight change from that.

And that happened in the second quarter as well?

That wasn’t a second quarter adjustment, but it was a different issue.

Okay. So all else equal then what is the – I guess, what’s the amortization expense on the CDI that we should expect to see coming out of the intangibles balance?

I think, year – for the full year, we have about – I think it’s about $950,000, so it’s about $1 million a year starting out.

And are you doing some of the years or straight on a carrying number?

That’s some of the years over 10, so it will be less next year, I think for first full calendar year, it’s about – just over $1 million.

Okay. So you anticipate – back to the margin, sorry, I am jumping around a little bit, but you anticipate that we’ll continue to see pressure on the margin without any benefit from any bad rate hike. I mean, how should we think about what that pressure might be? Maybe on a core basis, let’s take out the impact of the purchase accounting accretion and think about it without that, how much do you think your margin is under pressure over the next couple to four quarters without –

That might be a basis point a quarter, something like that, not a whole lot more than that.

Okay. And then the $1.1 million of accretion in the fourth quarter and $750,000 in the first quarter, that’s your scheduled accretion, right? You are not trying to think about what one time type accelerated accretion there might be, right?

That’s correct. And we think – if anything, it would probably go a little bit higher if we – or could go a little bit lower, but early on here, it’s likely to go higher if we have some type of pay-off on a credit that we had a significant mark on for example.

Okay. And then you mentioned that you think your expenses in the third quarter were probably flattish in the fourth quarter with some kind of normal seasonal pressures in the first quarter related to comp increases et cetera. So how are you offsetting the increases that will be coming from all of the hiring that you guys are doing?

Hopefully, a lot of that will come in continued loan volume increases, primarily on the commercial side.

No, what I mean – you meant that the expense base is flat, so you’re hiring – you’re adding expenses, but you got to be taking expenses off, somewhere on a dollar basis right.

We made some investments in technology in the backroom functions that we can do more with the same amount of people or decrease some people over on that side of the house is where we are picking up some of that, Wally. You’re talking about some of that the people will be bringing on and some of the – on the production side, sales side?

Right, yes.

So some of it’s through volumes and like I said, through some other backroom savings.

Okay, all right. I appreciate that. All right, thanks for the color guys. I’ll let somebody else ask a question.

Thank you. Our next question is from the line of Matt Schultheis with Boenning and Scattergood. Please go ahead with your question.

Thank you, good afternoon. All right, couple of quick questions. It appeared that your deposit mix migrated somewhat towards CDs, was that an intense to add some liability duration or is that just the way things flowed this quarter?

Matt, most of that is a brokered CDs and that mostly short left in the year, so it’s more just a funding.

Yeah, something like I said, we had anticipated probably $50 million or $60 million of funds in the various operating accounts that didn’t hit just through some of the state-related issues out of the budget, that was – offset that somewhat as well.

Okay. And who knows when that will get resolved, right?

You’re pretty [ph] closer than I am Matt, so you can – when you figure it out, give us a call.

Yeah, I’ll let you know. What I can tell is don’t hold your breathe. As far as your loan growth for the quarter on a linked quarter basis, can you break down how much of that growth came from your LPO offices versus legacy S&T integrity footprint?

Right. The LPO growth, including state college was about $63 million quarter-over-quarter. The -- in south central PA, growth in the integrity portfolio was around $30 million.

Okay. Thank you. And one last question, your capital is -- it’s still well above whatever you need for regulatory capital needs, and so does this set you guys up for another M&A transaction if something comes along or are you looking or are you just sort of content to digest what you have for now?

To tell you what, Matt, right now, I’m pretty content with where we are, I mean we’re still kind of integrating integrity and are really focused and a lot of attention on that market, because I think there is a lot of opportunity out there. Some of the investments that we’ve made in some of the LPOs, so I like how we’re positioned to grow the company on an organic basis. Now that being said, if something would run across our desk that has some appeal, we’re not going to walk away from it either. So it’s something that would kind of fit our box from an M&A standpoint. I like how our -- we like our evaluations today, pretty sharp currencies, so it does give us some additional firepower if we get into an M&A situation.

Okay. Really actually I have two more really quick questions, but with regard to what’s happening in south central PA and the pending metro transaction, does that transaction and the opportunity for retail deposit runoff change your approach to the market at all or you just think you continue with basically a business banking strategy in that market?

I mean, integrity did have a retail strategy. They were kind of -- actually, they run a similar model to metro with some of the extended hours and stuff and we would expect to continue to really just stay due course in what they’re doing down there right now.

Okay. And then a housekeeping question for Mark, what is the aggregate balance of the accretion discount that’s expected to come in over the -- come into the income statement, the accretable yield if you will?

For just the overall total.

Yeah. At the end of the quarter.

For this quarter, I’m sorry.

Just for -- what’s the total amount at the end of the quarter that is still to be realized?

Still to be realized. On the credit side, there is still about just under -- or about $8 million on the credit and about -- just under $2 million on the interest rate. So just about $10 million total.

The next question is from the line of Collyn Gilbert with KBW. Please go ahead with your question.

Could we just dig a little bit into some of the dynamics within the loan portfolio? I guess my first question is just, commercial construction has been growing really nicely, just if you could give a little bit of color as to what’s driving that and kind of what your outlook is from here on that part and then I’ve got a couple of follow-ups?

Yeah. I mean, it’s pretty well diversified. We don’t have any concentration in terms of product type or really, geography. We break it down in both manners. So we’re seeing good growth out of Central Ohio, Northeast Ohio, Rochester, core markets, south central PA, and we continue to see pretty seasoned demand in that area, but it’s a mix of all product types. Like I said, there is no significant concentration in the fourth quarter.

Like I said, as Dave said, you have some multifamily, you have some hotels, you have some office, you have some retail, you have some municipal projects that are lumped in there. The one area that’s probably not proactive is single family lot development, which we’re not seeing a lot of that activity right now.

Okay. Is this, I know I mean you guys kind of have an expertise in construction, do you foresee the demand continuing to be there, if you kind of look out over the next year or so and if so, there are certain target you may have on the size of this portfolio?

Yeah. There is not necessarily a target. We’ve got internal limits that we have, that we exercise occasionally if we see an industry concentration, but there is no real target and I see demand continuing at kind of the same pace that we’ve seen, in talking to different developers in various markets.

If you have some churn, I mean, as projects near completion, then they will enter your other bucket or get financed out, so you’ll see some ins and outs in that portfolio.

Okay. And actually that takes to my next question, Todd or David, but the -- give a split between what the C&I paydowns were versus the originations in the quarter kind of thought you guys indicated you were expecting some large paydowns this quarter on the C&I side?

Yeah. We saw some C&I paydowns on a couple of criticized and classified assets and like I said, our utilization rate was down marginally on the core, but really what we look at is the number of customers, number of commitments, and they were up again this quarter. So the activity is still strong, the borrowing utilization was down slightly however.

On a linked quarter, the C&I portfolio was essentially flat.

Right. More or less essentially, I think we were down just over $1 million.

Okay. And then just to tie all this together, it sounded like you guys are pretty comfortable with the rate of growth, Todd, you made reference to it and David, you did too. I mean is it, are you thinking kind of to maintain a 10% to 12% loan growth rate or how are you thinking about all this in totality as you kind of build on the momentum of these new regions?

Yeah. 10 and 12 would be more -- we’re still on that upper single digit target range. I think that’s realistic for us. It’s based on our -- the teams that we have in place, what the market will get us and we’re certainly not going to sacrifice any of our credit underwriting standards in order to grow. So we want to stay within the box, take advantage of the markets that we’re in and take advantage of the folks we have in the field in order to understand those markets and drive some good solid growth.

And there is some seasonality in there too, I mean it’s usually fourth quarter and first quarter a little slower than your second and third, just for timing and everything.

Again, if you look at our pipeline today, it’s very similar to where it was at the end of the last two quarters. So our pipeline has been fairly consistent, it hasn’t expanded significantly, but -- and despite the activity levels which went low, they came off the pipeline, we’ve been able to replace them with new opportunities and that pipeline level has remained relatively static over the last few quarters.

Okay. That’s helpful. And then just, can you give us an update on how things are shaking out on kind of with the oil and gas, the drop obviously in oil prices, if you’re seeing the trickle-down effect into any of your borrowers or the market area or just kind of some overarching views there, if there was anything in the NPA bucket that was tied to oil and gas.

There was not anything in the NPA bucket that was directly tied to the oil and gas. As a matter of fact some of it was just expected clean up on some of the acquired portfolio out East. And then we had a CNI credit out in one of the Ohio markets that just that was due to some unforeseen circumstances just kind of got sideways but it was nothing related to oil and gas. That being that said, something that we’re watching, there has been a couple of companies that have laid off in the area, you just look at, rig counts are down, and I think it’s peak there about 125, just looking at some statistics a couple weeks ago and I’m not sure about this time, there were maybe 55 rigs and now there is 29 in Pennsylvania. So that’s going to have some pressure on some of the supply chain. Production is up, it’s up to about 20 billion cubic feet a day I think in the region is the last number I heard. But the issue still is getting it to market and the pipeline and capacities maybe half of that. Now they anticipate that kind of equalize in about this time next year. So they’ll always be able to get what they can produce to market. And then probably in 2017 to maybe 2018, that number goes up, so you can start to be kind of in that exporter on the resource but now that being said too, there is a lot of lot of activity in the region, it appears that the Shell is moving forward with their big project at Beaver, we’re seeing clients that getting enquires from a lot of petrochemical type companies or end users of the product are manufacturing concerns that can be right on top of a chief energy source. So, even though there might be a little bit of a slowdown for the next year or so, long term it’s going to be just a really, really good for the region. And it’s kind of tough to measure too on, when you’re going into the local gas station in the morning used to see few more bodies around from the service company guys and so the impact on those type of businesses or hotels are whatever still, not show up in the numbers yet but again it’s just something we’re probably going to take a look at [indiscernible] into.

And I think you said it right, Collyn this is Pat, and looking at our portfolio, it still performs extremely well and again we’re not into lot of the attraction or production. But keep in mind too that all of our credit structure on the loan is on quick acquisitions as well.

Our portfolio kind of indirectly tied into it is about $50 million. And the average risk weightings are about 3.5. So felt pretty clean today.

Okay that’s helpful. And then just two quick, I keep saying this, and I keep going but housekeeping items. One is, Mark, the drop, or I shouldn’t say drop but insurance revenues were flat in the third quarter, and I thought usually there is a seasonal pick up in 3Q, was there something going on there and just kind of what your outlook is from here?

They do have a lot of ties to the energy sector. So they’ve had customer losses related to that.

There has been some consolidation, I mean, they had a couple of clients that got sold, the bigger entities and some was tied in, then you had some workers’ comp customers, kind of shrinking payrolls and stuff is impacting premiums as well.

Okay and then my last question. Mark, so just trying to reconcile the comment that you made just that the core NIM you may be seeing a basis point or so a quarter. I’m just trying to reconcile that with you, I think I heard you say that the loan origination yields are coming on 43 basis points lower than the maturation yield. So just trying to, it seemed like a really big gap to only then see a basis point of core NIM compression.

On a month later or quarterly basis that’s going to impact certainly not the whole portfolio, it might be maybe 200 million to the 300 million of the or not that much, maybe $200 million of the whole portfolio. It’s a slow --

I got you, I see, it’s just a slower roll off. Okay, very good, all right thanks guys.

[Operator Instructions] The next question is from the line of Matthew Breese from Piper Jaffray. Please go ahead with your question.

Just a couple of quick, quick follow up. On the 50 million of exposure, can you update us on the amount to that debt’s in the form of shared national credit and whether or not those have gone through the redetermination process recently?

I don’t believe anything is on in that portfolio.

Okay. And then, just going back to the Integrity acquisition, at this point, percentage wise, how much of the cost savings have you already realized?

It’s probably maybe a little over half I would say.

That’s all I had. Thank you very much.

Thank you. There are no additional questions at this time; I’ll turn the floor back to management for closing comments.

I just want to thank everybody for participating in today’s call and Mark, Dave, and I appreciate the opportunity to discuss the quarter’s results and look forward to hearing from you at our next conference call in January, so thank you very much.

This concludes today’s teleconference. You may disconnect your lines at this time, thank you for your participation.