S&T Bancorp, Inc. (STBA) Q1 2016 Earnings Report, Transcript and Summary

Greetings. Welcome to the S&T Bancorp First 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, Chief Financial Officer for S&T Bancorp. Thank you, Mr. Kochvar. You may begin.

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 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 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 $16.1 million, or $0.46 per share, compared to earnings of $12.8 million, or $0.41 per share in the first quarter of 2015 and $17.4 million, or $0.50 per share in the fourth quarter of 2015. We are very pleased with our top line revenue growth this quarter. However, overall our performance was lower than our expectations due to increased non-interest expenses and also increased credit cost. From a business development standpoint, things are very robust and we're pleased with the activity that we're seeing across all of our lines of businesses, as well as throughout our various markets, particularly in South Central Pennsylvania. Loan growth is once again a highlight this quarter, as total portfolio loans increased to $149 million, or 11.9% annualized, which includes a $137 million of commercial loans and $12 million of consumer loans. This represents the fourth consecutive quarter of growth in excess of a $100 million. Another bright spot this quarter is the growth in our deposit base which increased to $141 million, or 11.7% annualized. As we mentioned last quarter deposit generation is a strategic objective for our company; this year and through the first quarter we're on track to meet our goals compared to first quarter of last year, a big increase in CDs which are up about $221 million. But we're also seeing a nice lift in DDA balances and money market balances which are up $35 million and $26 million respectively. Our increase in loan balances as well as the impact of the 25 basis point increase in the fed funds rate in December enabled us to increase net interest income by over $750 million to $49.6 million. Our interest income related to purchase accounting through the merger decreased approximately $550,000 for the quarter, so the net change to the margin on a gross basis was $1.3 million. I also want to point out that year-over-year we had a 10% increase in tangible book value per share which now stands at $14.76 versus $13.40 at the end of first quarter last year. And finally, as I mentioned earlier, our performance was impacted by larger than expected increase in our non-interest expense, and I assure you that we are adjusting the areas in which had unfavorable variances and we will drive our efficiency ratio back into historical ranges. In addition the loan loss provision expense increased by $1.1 million, which now totals $5 million for the quarter, really due to deterioration in two credits, , one in the energy field and one also in the metals field, Pat will talk about those in a little bit later. And the other thing that impacted provision increase was higher than anticipated loan growth volumes for the quarter which came in much higher than expected. So finally I am pleased to report that our Board of Directors approved a dividend of $0.19 per share for the quarter, which we paid on May 19. So thank you for your time. At this point I am going to turn the program over to Dave Antolik, our Chief Lending Officer.

Thanks, Todd, and good afternoon everyone. As mentioned, commercial loan growth continued to be very strong this quarter. This was particularly rewarding in what has historically been a slow growth quarter. Highlights included increase in the commercial real estate portfolio of $93 million and $77 million increase in our C&I portfolio. We experienced a decline of $34 million in our commercial construction balances as several large projects completed construction and moved into the permanent portfolio. We expect this decline to reverse course in Q2 as we head into the spring and summer construction season. Additionally supporting the anticipated growth are unfunded construction committeemen’s grew by $50 million from $400 million and 12/31 to $450 million at the end of the first quarter. Our exposure within the commercial real estate and commercial construction portfolios remains diversified both geographically and by property type with no single concentration representing more than 14% of the commercial real estate portfolio or 20% of our outstanding construction commitments. Our C&I growth was driven by two important factors. First, we saw an increase in our total commitment amount, along with increased utilization rates from 40% at year end to 43% at the end of the first quarter. This accounted for nearly half of our C&I balance growth. Second, our efforts to recruit C&I bankers, which includes the addition of our Pittsburgh commercial banking team, along with C&I bankers in South Central Pennsylvania has resulted in solid new customer acquisition results. We will continue to concentrate on C&I growth as a means of maintaining prudent portfolio diversification. With respect to commercial loan growth at our loan production office and at South Central PA, for the quarter loan balances in Northeast Ohio grew by $27 million, Central Ohio grew by $28 million, Western New York grew by $16 million and South Central PA saw a growth of $36 million. We continue to forecast high single digit loan growth for 2016 and believe that we can achieve that growth without adding significantly to our staff and to our expense structure. And now Pat will provide you with additional details on our asset quality.

Thanks, Dave, and good afternoon everyone. Net charge-offs for the quarter was $2.8 million, while up from a year ago quarter of $1 million, it is still conservative, less than previous quarter of $5.7 million. Provision expense was $5 million for the quarter, as compared to $3.9 million in the previous quarter. The current quarter provision was driven by specific reserves of $2.2 million, as well loan growth. And charge-offs were driven by write-down of $2 million on a specific credit directly related to the oil and gas sector. I will speak more to our oil and gas and metal sector portfolios in a moment. Non-performing loan is currently at $51.8 million compared to $35.4 million in the previous quarter. While this is an increase $16.4 million quarter-over-quarter, it’s important to note that a complete analysis and appropriate plans of action are in place and being executed on each of these credits. While elevated as compared to most recent history, as we have done in the past we will aggressively and appropriately manage this part of our portfolio towards timely and ultimate resolution. Individually assigned credits have been reviewed, appropriate credit marks and charges have occurred and our specific reserves of $2.2 million consisted of again a single credit relationship with exposure to the metals sector. I continue to expect positive results from the NPL portion of the portfolio over time. We continue to keep a watchful eye on our oil and gas portfolio, as well as scrap and metal related portfolios. As a reminder, our oil and gas portfolios total exposure of $45 million which is less than 1% of our portfolio and paying special attention to the same two credits we have spoken about over the last several quarters as we continue to monitor their action plans. One of the credits mentioned above is sub-standard nonrecurring credit which made up most of our quarterly charge-offs. The remaining portfolio is performing [as] [ph] rated with regular checkpoints on performance based on our portfolio management expectations. The balances risks as it pertains to this small piece of this portfolio remain manageable and appropriate action plans are in place. Our scrap and metal portfolio has outstandings of $34 million which is also less than 1% of our portfolio with identified isolated issues on two individual credits which again we have plans in place and are being closely monitored. It should be further noted that on the three of our specific reserves this quarter, specifically $1.7 million is held within our SNC portfolio. Our SNC portfolio is less than 4% of our portfolio and the remainder of the portfolio continues to perform well within expectations. While several of these credits and those discussed in previous quarters involve the acquired loans, South Central portfolios is fully integrated into our expected portfolio management processes. I trust I added appropriate color to our metrics, and at this I'd like to turn the call over to Mark.

Okay. Thanks, Pat. The headlines net interest margin rate improved by 3 basis points and the net interest margin rate net of purchase accounting improved by 7 basis points compared to the fourth quarter. The purchase accounting accretion was 734,000 this quarter and we expect that to continue to decline to about 400,000 a quarter by the fourth quarter. There can be again some volatility with loan – to loan related part of the accretion depending on asset quality and timing issues with the purchase loan. You saw this quarter we believe that any further rate increases by the Fed will benefit us, without further short term increases however margin pressure will return. We continue to see the gap between and new and paid loan shrink down to just 23 basis points this quarter. The weighted average rate of new loans improved to 3.89% due to higher price and level rates. Our total deposit increased by $141 million. The customer deposits which we define internally as not including brokered official or internal trust deposits increased by $187 million or 17.3% annualized. The growth came from both business and personal, from both new and existing customers and across all geographies. Our goal is to fund our loan growth with customer deposits. Non-interest income increased by $2.7 million, most significant item was the gain on the sale of our credit card portfolio for $2.1 million as we are in the process of a strategic repositioning of the credit card product and have entered into the joint marketing agreement with the third party. We also had $1 million gain which is in the other category and that relates to the freezing of our pension which took effect at the end of the first quarter. This will also have a favorable impact on expenses going forward. Debit and credit card fees declined due to unwind [ph] to points liability related to the strategic repositioning of the credit card product that was recorded in the fourth quarter. The improvement in insurance is due to billing seasonality combined with about 420,000 of annual profit sharing payments from insurance payers. While we typically see an increase in non-interest expense as we move from the fourth quarter to the first quarter due to the seasonality, timing and other scheduled increases, the $4.1 million increase was higher than we expected. Overall about $2.8 million of the increase was seasonality and timing related, about 400,000 was related to one-time items and the remaining $1.4 million was a combination of scheduled increases and other variance. The largest timing item relates to how we count for vacation, employees earn vacation evenly over the year [indiscernible] in the third and fourth quarters. We have our asset accrued for unused but earned vacation in the first half of the year and then wind that in the second half. When we go from the fourth quarter unwind to the first quarter accrual we typically see an unfavorable variance. This year that was $1.4 million. There is also seasonality in payroll taxes as the New Year brings a restart to the employer contribution for payroll taxes. This was a $630,000 change compared to the prior quarter. Also in salaries and benefits related to timing our semi-annual contribution we make to employee’s health savings account this currently have in the first and third quarters and are just under %500,000 per instance. The remainder of the seasonality and timing variances of equipment which we have more maintenance contracts renewals in the first quarter that’s about $200,000 and we also have a timing mismatch with a contribution that was made without a related shares pack credit for 250,000 that will occur in the second quarter. These were impart were offset by seasonally lower marketing expenses. The most significant one time items is in other category and is related to the prior quarters reversal of an unfunded commitment reserve with a reclassification of our credit card portfolios to help for sale that occurred in the fourth quarter. Schedule expense increases includes merit and promotional increases of $400,000 and higher incentive accruals of $300,000 related to new plans and also higher expected production. Some other variances included higher pension cost due to worse than expected asset performance in the first part of 2016, now it’s about 185,000 and also some additional equipment purchases of 125,000. So if you look ahead, we do expect expenses to moderate as some of the timing and seasonality items normalize. In the second quarter lower expenses will include the following decrease. We won't have - there will be no health savings account expense, that’s about $500,000. We should see reduced incentive accruals also about $500,000. Lower pension cost due to freeze, another $500,000. The shares tax credit I mentioned about $250,000, lower payroll taxes about $300,000. So these items alone account for expense decreases of approximately $2 million and we're aggressively reviewing our expanding plan across the bank and expect to identify additional cost savings. The tax rate in the first quarter was just under 27%. That’s in line with our current full year expectations. Our risk weighted capital ratios declined slightly this quarter due to risk weighted asset growth driven by our strong loan growth. Expected continued solid loan growth in 2016, we don’t anticipate any meaningful changes to our capital ratios. We're comfortable with our current capital levels and have no immediate plans to make any changes. Thanks very much. At this time, I'd like to turn it back over to the operator to provide instructions for asking questions.

Thank you. [Operator Instructions] Thank you. Our first question is from the line of William Wallace with Raymond James. Please proceed with your question.

Thanks. Good afternoon, guys.

Hi, Wally.

Hi, Wally.

Okay. So I want to ask maybe about expenses and about credit, I don’t know which one to ask first, easier question maybe on expenses, Mark, so you just outlined roughly $2 million of expenses that should come out through the second quarter? And then we'll see like the HFA will come back again in the third quarter, but the rest of that stuff should be out for the remainder of the year, is that correct?

Yes.

Okay. And then are there any other investments internally that we should anticipate or do you feel like the look that you guys are taking would be to drive that down further in future periods?

Yes, and we're kind of doing it - a full bank review right now, and going through and identifying things that you know, our goal through that is to definitely find things that are going to reduce that expense number.

I think if you look you know, historically Wally, we will operate in that mid-55 you know or so efficiency ratio and that's where we're going to get it to.

Okay. So – and that would be a target exclusive of – that would be a target you’d like to get to just by driving change on the expense side?

Correct.

Or are you looking for – okay. Okay, all right. So moving on to credit, I can't help but wonder with your NPAs more than doubling in the past two quarters and I am looking at all of the categories that you guys breakout in the release and every one of them is – the NPAs are up? So just I mean, how you guys get comfortable that there is not something in your market, there is not a weakening of the economic factors that’s driving some of these increase? Can you maybe just provide us an information that you guys are looking at or just some anecdotal thoughts?

You know, Wally this is Pat. We can change it to monitor anything that’s going on economically in all of our markets; we actually track and report on here internally everything as it performs to each portfolio, both external factors, internal factors. And again I think with obviously the oil and gas sector and the metals, so those commodity driven sectors obviously is concerned, we keep close eye on them. And there is – we got a couple of pieces that’s softening, but the biggest thing this quarter that we experienced was really on the SNC portfolio, through SNC reviews, and again it’s looking at declining trends on a customer’s financial statement and really being painted by what sectors the markets are in, oil and gas, metals or whatever it is. Now I would tell you that the downgrade we had in the metals sector to NPLs or the SNC review we had to place the $1.7 million specific reserve line up, so I am going to tell you that the thing continues to actually perform if you will, it’s never missed a payment, performs within boundaries of the agreement. But because of some declining trends and things of that nature we were kind of handed a new NPL.

Okay. And then maybe you talk a little bit about the consumer, if I am looking at your residential mortgage category, up from $3 million at the end of the third quarter to just over $9 million this quarter…

Yes, that’s really actually impacted, Wally, obviously fed call code but within that if you will, that resi mortgage portfolio is not the typical residential mortgage, it’s a conglomerate of couple of deals that are actually commercial loans that have income producing type properties that are fed call rated as residential mortgage.

That’s a part of the [indiscernible].

That’s right.

So…

That relationship was about $3 million and again I think that we've looked at it and we think we have a good collateral package around it and the borrower’s working with us on a orderly liquidation and he just – the business conditions in his industry, he was impacted and so he understands he has to unwind some of their debt and we're doing it in due course.

And Wally, maybe this will help, real quick kind of the NPL impact of what you've seen, so you know you got just about $4.7 million which is a – it’s a hotel that is actually outside of any oil and gas related territories. And the metals sector which I talked to you about with the $1.7 million specific reserve which was SNC, was about $4.7. Second metals sector which was about $2.1 million that also is a SNC, that’s been in - I guess, fluttering around an NPL category, we expect to get some nice pay-downs on that actually and the C&I and CRE mix of about $4.6 million some of which we just talked about and an investment real estate of $1.5 million. That’s really the bulk of all the influx. So you can see there is not a concentrated area. It’s not a concentrated market. But they truly, truly are kind of these – I don’t know if I dare to say, kind of like the one-off situations of what we're experiencing.

I would say overall too we decided a meeting with the client yesterday and you know, housing, Western Pennsylvania is very strong right now. There is lot of activity in sales, both new and existing and out in the central part of the state too, I was out there last week you know what we were hearing that you know, kind of market conditions are good as they been since '07, '08 [indiscernible] in that timeframe. So there is good velocity in markets, and like I say, we know we have a little bit of an increase and Pat and his team and historically if you look at our record we've been aggressive on the march and we work very diligently to try and maximize returns on the back end.

And keep in mind too those sectors of the portfolio, the commodity driven sector, they are small pieces of our entire picture of the portfolio as well.

Can you remind us how big the SNC portfolio is?

Its less than 4%, it’s around 190.

Okay. All right. Thanks. As I'll hop off and let somebody else ask a question. Appreciate the color.

Sure.

Thank you. [Operator Instructions] Our next question is from the line of Collyn Gilbert with KBW. Please proceed with your question.

Thanks. Good afternoon, guys. Pat, just to follow up first on just the credit discussion, so the SNC portfolio you said is $190 million and what is the – how much of that is now in non-performing?

You know, we had an NPL roughly about $6.8 million.

Okay.

And about $1.7 of that is kind of specific reserve loan.

Okay. And then the rest of your NPLs and the balance, what's the reserve on the balance of NPL?

As far as specific reserves Collyn is that what you're saying?

Yes.

So we have $2.2 million total in specific reserves, $1.71, so at least about $0.5 million.

Okay. Okay, all right. And then just on the expenses Mark, its seems even if we were to back out the $2 million or bring back in the second quarter, bring that number down, it still seems like its running at a rate, that at least higher than what I was projecting, quite a bit higher, is something, is there investments that you know, you guys started the year, and you realize that you needed to meet, get it a function of the expansion efforts are costing more than what you perhaps had thought? I am trying to understand a little bit how that trajectory jumped, somewhat quickly as it did on the expense side?

A lot of is in the benefits area, in the – as we planned it the base salary components really came in both the target, where we seem to be running a little bit higher on the benefit side, some of that are some incentives and new plans that are related to new people and growth. The pension plan hurt us a little bit because we had to revalue that related to the freeze Part of the biggest thing that was the medical, we typically see a big drop off in claims as we move from the fourth quarter to the first quarter for a self funded - we had self funded plans, because people typically after – they have to restart their co-pays and deductibles and things like that. We saw originally no drop off in medical claims as we move from the fourth quarter to the first quarter. That’s about a – we typically would see about $600,000 to $700,000 decrease in claims and those were flat moving across. So we're digging into that little bit trying to withstand what's going on. We had a couple shock things, I know we had in there, so been close to but not quite the shock. So we did have some higher experience there. And that’s – could be a function just having more people, but our experience in the past has been well below kind of the cobra levels and this puts us little bit closer to cobra level. So that’s something we're going to – that did surprise us, we're going to watch pretty closely.

Okay. Okay. So outside of this issues there is nothing else that’s going on bank wide that would be driving this?

No. [indiscernible]

Okay. That’s helpful. And then just a question on the deposit side, it looks like deposit cost climbed a bit this quarter, can you talk a little bit about what maybe – what was driving that and then what your intensions are going forward, I know Mark you said the intention is to have loan growth be funded by deposits. Do you see upward pricing on the deposit mix as we look out to sort of satisfy that or just talk a little bit about deposit side?

Right, we have been more – we got some pretty aggressive goals for ourselves, we keep pace on the – with the loan side. So we do have some special book on the CD and money market side and we do expect that to continue. So we do expect to see some higher deposit cost, but we do that as – the price we got to pay to be able to keep growing. So that should – we've got a little bit of help first quarter from the rate increase in December, so that will contribute to some margin compression over the course of the year.

Okay.

And being more aggressive on deposit side.

Got you. Okay. All right. I will leave here. Thank you.

Thanks, Collyn.

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

Good afternoon, everybody.

Hi, Matt.

Just touching on the oil and gas and the metal sectors, could you remind us what the dollar amount of exposure out of each of those?

Yes, oil and gas around $45 million and the metal sector is about $34 million.

Okay. And then hat you are seeing, I know you guys are closer to what's going on [indiscernible] anybody, on the deterioration you are calling it one offs, we're just – and its not indication that things are more broadly deteriorating your market, is it accurate?

Yes, we have the - obviously going through the impact of the NPLs and everything, as it’s been a real concentration outside of you know, those commodity price driven markets…

Yes, I mean, the Western Pennsylvania Matt, I mean, energy is one kind of component, but you know, tech is really expanding regionally and you have some big names too, Google, Apple, Facebook, Uber and they drive a lot of activity both on the commercial real estate side and the residential real estate side in the region and you have your eds and meds again regionally which are hanging in there very nicely, manufacturing is still been pretty stable, and financial services that you know, I think its still related right now and on the oil and gas side is a little bit softened up somewhat. So - but again that’s why I call the company's position too because in addition to Western Pennsylvania, some of these are higher markets now, and really generating nice activity, there are different economic characteristic. So central Pennsylvania have coupled highest growth to the markets that we have in the state right now, we're riding the wave out there as well with across the board commercial, consumer activities out there, our mortgage activities out there and then Western New York is been pretty solid too. So - and again I like kind of how the mix is, its not all in one basket in Western Pennsylvania, now we're adding some diversity into the land portfolio.

Right. So we think about the provisions going through Western and it’s been climbing fairly regularly over the past five quarters or so. Is there a way you would tell us to think about that, I mean, it’s just likely to drop off as it is to stay at this level?

I mean, we're continue to evaluate, I mean, that the model that we used [indiscernible] different economic factors around delinquency and kind of level and character of the NPL. So lots of it’s been on that and also just the rain stack. We're actually ahead fairly consistent, we didn’t really see much of a change in our per site and classified asset as we move from the fourth quarter to the first. So it’s really going depend more function on that to absolute global reserve, another than that is its going to be very heavily [indiscernible] by the level of charges in any given quarter and we'll see how that goes.

And you know, as we go on base, we're going to continue working through these and addressing them and we do have several of our non-performing loans are actually current not paying so.

And then my last credit question, of the SNC portfolio, the $190 million, how much of that is gone through the review process?

All over.

Okay. And then switching to the margin, absent any more rate hikes, what kind of margin compression would you do through out the year?

We're still looking at probably couple basis points a quarter potentially and we do see - continue to see narrowing of the gap between the new and the paid. So that softens that a little bit, that’s now down below 25 basis points. So that continues - that helps to support some of the things we're doing deposit side, but still see the – see couple basis points a quarter potentially.

Okay. And then my last one, insurance revenue this quarter were a bit higher than expected, I now that this can be seasonal, could you give us just some idea how it might trend throughout the rest of the year?

The bulk of that is – there semi-annual billing that accounts for about 200,000 of that and then on annual basis we did profit sharing from the insurance carriers and that was up 400,000. So that combination accounts for the bulk of the variance there. So you will see a drop of potentially by that much in Q2.

So there are some nice activity on some of that bonding related accounts have been busy quarter. So that loss, that some is expected decline as well, but activities levels are good, its kind of seasonal impacting Q1.

Got it. Okay. I appreciate. Thanks, guys.

Thank you. There are no additional questions at this time. I would turn the floor back to management for any closing remarks.

Okay. Again, I just want to thank everybody for participating in today’s call. We appreciate the opportunity to discuss the quarter results and look forward to hearing from you in our next conference call.

Thank you. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.