S&T Bancorp's CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.23.13 | About: S&T Bancorp, (STBA)

S&T Bancorp Inc. (NASDAQ:STBA)

Q1 2013 Earnings Call

April 23, 2013 1:30 PM ET

Executives

Mark Kochvar – CFO

Todd Brice – President and CEO

David Antolik – Chief Lending Officer

Patrick Haberfield – Chief Credit Officer

Analysts

Collyn Gilbert – KBW

David Darst – Guggenheim

Mathew Breese – Sterne Agee & Leach Inc.

Operator

Greetings and welcome to the S&T Bancorp First Quarter 2013 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce host, Mark Kochvar, Chief Financial Officer for S&T Bancorp. Thank you. Sir, you may now begin.

Mark Kochvar

Thank you. Good afternoon and thank you for participating in today’s 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 if you’re using the webcast. 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 the 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.

Todd Brice

Well, thank you, Mark, and good afternoon everyone. As announced in this morning’s press release, we reported net income of $12.3 million or $0.41 per share for the first quarter versus $9.5 million or $0.32 last quarter and $3.5 million or $0.12 per share in the same period last year. All in all we’re pleased with our performance as we once again experience favorable trends in two key areas, loan growth and asset quality. In addition, we’re seeing positive momentum in several areas from the successful integration of our Mainline and Gateway acquisitions.

For the quarter, our portfolio loans grew by approximately $35 million or 1% on a point-to-point to basis. And we continue to be pleased with our activity levels in all of our lending areas, our commercial lending, retail mortgage, small business and consumer. Our Chief Lending Officer, David Antolik, will provide more color on lending activities in a few moments.

From an asset quality perspective, we have another good story to tell this quarter as non-performers, delinquency, special mention and substandard loans continue to trend in the right direction. Compared to Q4, non-performing assets decreased $9 million or 16% to $46.9 million. Special mention and substandard loans declined by $48 million or 14%. Total delinquency improved by 33 basis points to 2.8% and net charge offs were $2.9 million versus $4 million. All of these factors contributed to a favorable variance in our provision expense which was $2.3 million or $44.2 million in Q4 for a net reduction of $1.9 million. Our Chief Credit Officer, Pat Haberfield will be available to answer question pertaining to credit in the Q&A portion of today’s call.

I also want to provide some color on a $3.1 million gain that we recognize from the sale of our merchant card servicing business. This is a business that we started from scratch approximately 10 years ago. And while it was very successful from a long-term strategic outlook, we determined that it would be more difficult to compete in the space due to technological advances that have either occurred or we anticipate happening. The agreement that we have reached is going to benefit us in several ways, first being the gain on the sale of our existing book of business. More importantly, we’re now able to offer a more robust lead of merchant-related services through our partner while maintaining the overall relationship with our customers.

Going forward, the agreement provides for a fee-sharing arrangement on new business referrals and we expect that the reduction in full-time employees in sales and support will offset the annual revenue loss. The transaction closed in January. And to date the partnership has exceeded expectation as a number of merchant sales is actually up over last year due to the enhanced suite of products to our customers.

As we’ve discussed in previous calls, our M&A strategy is a very important part of our overall growth and we’re beginning to see the impact of the successful integrations of Mainline and Gateway. Since completing the conversion of Gateway Bank in February, the former Gateway branches have booked more consumer business to date than what they booked the entire year in 2012. We addition, we added a mortgage originator to the team. And while early, average mortgage loan amounts in that market have been almost double, $280,000 versus $140,000 bank wide.

Wealth management, insurance and merchant offerings are also new products that we’re now able to offer to this new customer base and we’ve been able to cross-sell these products as well. Now, that the conversion is complete, our commercial lending team has been able to focus on expanding the commercial of many reach [ph] and we’re beginning to grow the pipeline in this market at this time.

Mainline is also providing benefits in the Blair and Cambria County market as they generated $5 million in mortgage volume in the first quarter versus the same period last year. And also, we’re seeing nice trends in the financial services division in these markets.

And finally, we have a number of initiatives to offset some of the pressures on the net interest margin. We are reviewing feed schedules on selected deposit, loan and wealth management products. And the changes that we’re going to be making will enable us to remain very competitive from a pricing standpoint and should begin to be reflected in our numbers in the second half of this year.

On the expense side, as mentioned in our earnings release, we did close two branches this quarter. We also recently announced that we have another branch scheduled to close in Q3. We did have several retirements this quarter that we’re not going to replace as we have good succession plans in place to absorb the workloads.

And another area I just like to mention to is the rolling out of the branch capture which is going to improve the efficiency of our proof [ph] function and going to result in approximately $250,000 in annual savings.

So I hope this gives you a sense of how we’re looking to enhance non-interest income streams and control operating expenses to mitigate some of the effects of the low interest rate environment. Mark is going to talk about some of those in his presentation. But now I’m just going to turn the program over to our Chief Lending Officer, Dave Antolik.

David Antolik

Thanks, Todd, and good afternoon everyone. Todd mentioned total portfolio loans increased by $35 million or 1% on a point-to-point basis for the first quarter of 2013. With regard to commercial loans, we saw an increase of $39 million or 1.6% for the quarter comprised of $24 million in commercial real-estate and construction loan growth and $15 million in C&I loan growth.

In an effort to drill further into this growth, I’d like to highlight some areas of success and share some strategic perspective. First, we continue to be successful in recruiting lenders for both our business banking and commercial lending teams. The business banking team handles customer with aggregate credit exposure of less than $1 million. Here in the quarter, we had two business bankers and one C&A lender. We have an additional C&I lender joining S&T by this month’s end. All of these recruits have significant banking experience and joined existing teams in Pittsburgh, Greensburg in Indiana.

Second, we have successfully grown our for-plan book [ph] since March 31st of 2012 from $89 million in commitments with $61 million outstanding to $133 million in commitments and $76 million outstanding. This represents a 38% increasing commitments and 25% increasing outstanding over the past year.

In addition, we expect to onboard several new four plan customers in the coming months and we’ve increased our calling efforts in this space. In order to support this group, we’ve recently contracted to upgrade our four plan systems. This IT upgrade will enhance the customer experience and provide the necessary infrastructure to support anticipated growth.

Third, our LPO and [inaudible] results have exceeded our initial goals. Through March 31st, the Northeast Ohio region has bought loans to the committee that exceeds $38 million but $33 million in outstandings. The team in Ohio has a very strong pipeline and we’re in the process of recruiting additional bankers in order to fill growth and leverage the experience management that we have in that region.

Next with regard to our business banking efforts, we’ve successfully fill all of our impositions. We are now seeing the result of being fully staffed.

From a production perspective, the first quarter of 2013 was our best ever and we experience month-over-month growth in January, February and March. Overall we see our pipeline remain solid and our business development activity is strong. We continue to see positive economic signs in our markets including increased demand for most commercial loan categories particular apartments, investment properties, manufactures and investment borrowers.

In addition our C&I utilization rate increased, we acquire about 2% during the first quarter. With regard to consumer and retail mortgage loans, we experienced a slight decline of $4 million or less than one-half of 1% for the quarter. This decline was primarily due to reductions in home equity and some loan balances of $20 million or 3.9%.

We’re experiencing accelerated pay loan [ph] activity in our home equity portfolio and the consumer is up for more favorable mortgage financing options. Offsetting this decline was residential, mortgage and construction.

Operator

You are now rejoining the main conference.

David Antolik

– current loan activity up 20% versus the first quarter of 2012. In addition branch-driven small business lending activity was up 42% for the first quarter evidencing an enhanced focus on small business.

Our residential mortgage origination exceeded $50 million in the first quarter of 2013 versus $41 million for the first quarter of 2012. During the quarter, we hired two new mortgage originators, one in Butler and one is McMurray and we have seen a small shift in demand from refinance to purchase money.

Overall, our consumer and retail mortgage pipeline are strong and growing. Mark will now provide you with some additional details on our financial results.

Mark Kochvar

Thanks, Dave. Our improved core performance in the first quarter was highlighted by loan growth and improving asset quality. One-time items during the quarter included the $3.1 million gain on the sale of our merchant business which is offset by $800,000 of merger related expenses for the system’s conversion of Gateway Bank. And an additional $276,000 related to branch closures.

Although net interest income for the quarter declined by about $600,000, it was mostly due to two fewer days in the quarter. The asset, asset mix improved. Loans were up on average by the quarter by $72 million all from organic growth. Security grew up $33 million and interest during deposits with banks declined by $57 million.

While we continue the loans reprising and lower replacement rates, an improved asset mix, an incremental improvement in funding can limit the margin rates decline and still needs the net interest income improvement.

Todd already described the impact on the non-interest income from the sale of our merchant business. In addition insurance increase due to annual profit sharing which is about $350,000 along with the typical seasonality of policy renewals which are higher in the first and third quarters.

Mortgage banking remains very active. And we are putting more discussion into our own loan portfolio and we have seen some decrease in our spread on sales. A none interesting [ph] sense other than the one-time item, we had a $1.7 million increase in salaries and benefits. Of this variance, $230,000 was related to annual merit increases and $310,000 to incentives and commissions from higher production and lending, wealth and insurance.

The remainder of the variance was timing and valuation items including seasonally high payroll taxes of $530,000, red line valuation of $90,000 and lower differed origination of $234,000.

We still expect a quarterly expense run rate to be in the $29 million range. We have a renewed emphasis on expense control which for us involves a lot of smaller efforts as opposed to any one large item.

Our first quarter effective cash rate was lower than expected due to an adjustment related to a prior tax year. We still expect the full-year tax rate to be in the high team depending on the realized level of pretax income.

Our capital continues to build to become earnings growth. We are still reviewing our option with respect to $45 million of subordinated debt that becomes callable at [inaudible] at our option during the second quarter.

We believe we have sufficient capital and flexibility to grow both organically or through acquisition. Thank you very much. At this time, I’d like to turn the call over to the operator to provide instructions for asking questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting our question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Collyn Gilbert with KBW. Please proceed with your question.

Collyn Gilbert – KBW

Great thanks. Good afternoon guys.

Todd Brice

Hi, Collyn.

Collyn Gilbert – KBW

Just curious Mark if you kind of or even Dave give us a sense of what the yield differential is on the loans that you’re seeing being put on versus what’s rolling off and if you’re seeing any relief in pricing pressure over the last couple of quarters or if it’s intensifying?

Mark Kochvar

Yes. The differential is about 1%, but we have seen some intensifying especially for chart [ph] of credit that we’ve seen in the market drift downwards in terms of spread.

Collyn Gilbert – KBW

Okay. And on an absolute basis, what’s the new loan yield on say, a commercial real estate credit for most of the loans that you’re booking?

Mark Kochvar

Yes, I mean the spreads are fluctuating between 200 and 275 over cost of funds. Our average weighted rate on new production is about 375 right now.

Collyn Gilbert – KBW

Okay, that’s helpful. And then do you see Mark much more that you can do? I know you’ve seen some mix shift in the balance sheet which certainly helps the margin. Is there much more of that that can continue or are we at the final ends of that? And then how much margin compression do you think you guys would see on a quarterly basis from here?

Mark Kochvar

Well, there are still a few levers that we can pull. We still have, as I mention, the subordinated debt that comes callable here in the second quarter. We’re paying about LIBOR plus 300 on that. We do expect the benefit from that.

We also have some additional CDs that were booked about four years ago coming off in the July-August timeframe. Those we’re currently paying rollover 3% on it probably about $25 million or $30 million there.

So we still have pockets but as you can imagine, it would be more difficult as time goes by. But our margin is beginning to stabilize somewhat and the forecast that we’ve done has that margin rate still declining but in the range of just a couple of basis points per quarter and that even slowing down as we get further into the year.

Collyn Gilbert – KBW

Okay, that’s helpful. And then, Dave getting back to you on the loan growth expectation, I mean you’ve talked about some of initiatives that are going on obviously with Ohio and recruiting lenders. How do you think that in the full pipeline can translate into expected loan growth for the year?

David Antolik

You know what, I’ll tell you historically that we saw a peak in the pipeline back in November and that’s really what’s driven the growth that you’ve seen in the fourth quarter and first quarter of this year. If the pipeline wasn’t quite as high as it was back in November but it’s certainly higher than what it was in the first quarter of 2012.

So we anticipate that we should be able to continue to see some loan growth [ph].

Todd Brice

The other thing that’s still hanging in there pretty strongly Collyn is the construction pipeline. We obtained a commitment to increase again this quarter to about $250 million and availability is still on $125 million range or so.

So that’s going to be a good buffer too to protect again some expected payoffs. I mean we still did have in the first quarter a number of payoffs that are just kind of normal cycle. And we think with some of the backlog that we have, it will mitigate some of those expected pressures.

Collyn Gilbert – KBW

Okay, that’s helpful. Thanks, guys.

Todd Brice

Thanks, Collyn.

Operator

Thank you, the next question comes from the line of David Darst Guggenheim. Please proceed with your question.

David Darst – Guggenheim

Hi, good morning.

Todd Brice

Hi, David.

Mark Kochvar

Hi, Dave.

David Darst – Guggenheim

When you talk about the floor [ph] plan business are you also the spending in direct lending?

Todd Brice

No, not at this point in time.

David Darst – Guggenheim

And then with your mortgage originators that you’ve hired, I guess, what percentage of a team has come in the last six months or so and are you going to grow that enough to offset any decline in volume later this year?

Todd Brice

I’m sorry, David, at the end of that was – what was the second half of that question?

David Darst – Guggenheim

Can you grow the team enough to offset a decline in volume later this year?

Todd Brice

That’s what we’re hoping though. What we are seeing is interesting, it’s – there is a shift in the portfolio. The last couple of years there’s been about 70% refinance and 30% purchased money and we’re seeing a shift in that, so now it’s on to about 60-40 and we expect that to continue to grow.

If you look recently, housing is pretty strong out there right now in the western Pennsylvania markets. So there might be a little bit of a dip, but I think with some of the additions that we’re making that hopefully we can at least [inaudible] on the – if there is a little bit of a slowdown.

David Darst – Guggenheim

Okay, and then, Todd, as you’re talking about the benefits you’re getting from Gateway and Mainline, can you maybe go in to some more detail on what you’re seeing in that southwestern market and is it more that you can do there going forward this year?

David Antolik

Yeah, this, Dave, that market we like there seems to be continued growth in that market in demand. The Gateway acquisition allows us to leverage some experienced lenders that we added to the team. And they’re really just getting up and running now and building a pipeline post merger and conversion. So that market is in large part being fuelled by oil and gas activity. But the whole south point region, Washington County [inaudible] economic activity.

David Darst – Guggenheim

But are you seeing a lot more penetration into new relationships in a different type of customer than you had when you’re first commuting into the market?

Todd Brice

Yeah, just to put it in perspective too, David, is they didn’t have some of the products that we had talked about. And so, in one month or in the first quarter, they’re probably the fifth most active branch on the consumer side in the retail side of the house. So we’re seeing some nice lift in consumer. And as they said, they’re just starting to really be able to get out and lever up the S&T balance sheet and their lending relationship.

David Antolik

Right, and –

Todd Brice

But we’re seeing some good looks on some stuff, right.

David Antolik

And that’s key for them. They have a very good client base. They did have a very good client base and they have maintained it. Now they have the ability to do much larger deals for those folks with our increased abilities.

Todd Brice

I think that we’re seeing there some opportunity as their lines of credit renew this year. We’re going to have to re-document those onto S&T forms, so it will be a good opportunity to get out and actually touch client, to have conversations with them and hopefully that will open up some doors as well.

David Darst – Guggenheim

Okay, good. And then, Mark, would you mind giving us a little bit of expense color if you may. It feels like you’ve got a number of leverage to pull. And then as the [inaudible] items come down, should we see a lot more leverage in the next two quarters?

Mark Kochvar

I think we’ll see an absolute change from that, the higher expense that we’ve posted this quarter. We, again, kind of ask that $29 million or so a quarter is sort of a clean number for us.

David Darst – Guggenheim

Okay, great. Thank you.

Operator

Thank you. The next question comes from the line of Mathew Breese with Sterne Agee. Please proceed with your question.

Mathew Breese – Sterne Agee & Leach Inc.

Good afternoon, guys.

Todd Brice

Hi, Matt.

Mark Kochvar

Hey, Matt.

Todd Brice

Just touching on credit, it feels like the last couple of quarters you guys have made substantial progress and it feels like we’ve hit the inflection point. And I think to some extent this quarter’s provision reflect that. So I wanted just some further color on the provision going forward and the credit pipeline as well.

Patrick Haberfield

Yeah, Matt, Pat Haberfield. From a credit perspective, I think we’ve seen, as you said, a couple of good quarters and having those back to back feels good and coming out of this quarter feels very good from my perspective. Our main driver here that we’re looking at when we’re talking about the NPAs is the inflow and really seeing that cut in half over the last two quarters sequentially is the driver for a lot of those – driving some of those credit losses

So what we see in the future is that we’ve identified and know what’s in that portfolio and I think, as I said in the past, how we’ve aggressively tried to manage through those through several of our processes as you’re starting to see the fruit is starting to bear with that. So as far as any type of pipeline, there are still some loans in there that can give you a little bit of heart burn, sure, but I think that’s going to be the case. It’s not going [ph].

The other thing, I think, typically we look at your buckets of criticizing classifieds and again those are down and your delinquency rates and those are kind of your leading indicators on what potentially could roll into there and then those coming down, we would expect to see a continuation of that inflow build being mitigated.

Todd Brice

Yeah, and the stress back [ph] we have not led up from our processes and the way we review credits and for any potential problems and we [inaudible].

Mathew Breese – Sterne Agee & Leach Inc.

Is there a reserve level you guys are comfortable with in maintaining?

Mark Kochvar

I think we’re comfortable with the level that we’re at right now. That will be evaluated every quarter and then one of the big drivers of that is that the ratings that we have how many [ph] substandard and special mention. So that will be a big driver of how comfortable we are with the reserve and whether that needs to change.

Mathew Breese – Sterne Agee & Leach Inc.

My other question was related to some of the changes in deposit service fees and how you guys are going to make up for some NIM compression. What kind of leverage are you going to pull there and how much of that can offset some of the behavioral changes from consumers that we’ve seen just simply not over-drafting as much, not taking as many charges as they have in the past?

Todd Brice

So, I think, one of the big areas we’re looking at right now is AA and we’re looking at where we stack up relative to a lot of the competition in the marketplace and we feel we’re underweighted there so we have some room to maybe move it on the low end of where the market is and give some lift.

And there are a couple of other areas on the consumer loan fees. We feel that we can restructure those in a fashion that will enable us to continue to lift volume as well as maybe generate some additional fees.

Mathew Breese – Sterne Agee & Leach Inc.

Are you guys looking for meaningful increases to the service lines?

Mark Kochvar

I think it’s fairly modest. I mean, it’s not going to replace all the margin compression that we’ve had. It’s just one of a number of things that we’re going to need to do both on the fee side and then also on the expense side to help mitigate that. It’s really going to be loan growth that’s going to be more driver plus overcoming the margin compression.

Mathew Breese – Sterne Agee & Leach Inc.

Right. Okay. And then I wanted to follow up on Collyn’s question. What was the pipeline at quarter end compared to year end?

Mark Kochvar

Yeah, we don’t disclose the pipeline but as I said just directionally it’s significantly higher than what it was last year at this time.

Mathew Breese – Sterne Agee & Leach Inc.

Okay. All right. Thank you guys.

Operator

Thank you. And as a reminder, ladies and gentlemen, if you would like to ask a question at this time, please play star one on your telephone keypad. One moment, please, as we poll for further questions. It appears there are no further questions at this time. I would like to turn the floor back over to Mr. Brice for any closing comments.

Todd Brice

Well, I just want to thank everyone for participating in today’s conference call. Mark, Dave, and I appreciate the opportunity to discuss this quarter’s results and look forward to hearing from your in our next conference call. So, thank you and have a good day.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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