Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

S&T Bancorp, Inc. (NASDAQ:STBA)

Q3 2013 Earnings Conference Call

October 29, 2013 01:00 p.m. ET

Executives

Mark Kochvar – Senior Executive Vice President and Chief Financial Officer

Todd D. Brice – President and Chief Executive Officer

David G. Antolik – Senior Executive Vice President and Chief Lending Officer

Analysts

Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.

Matthew Breese – Sterne, Agee & Leach, Inc.

Matt Schultheis – Boenning & Scattergood

Operator

Greetings, and welcome to the S&T Bancorp Third 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. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Mark Kochvar, Chief Financial Officer for S&T Bancorp. Thank you, Mr. Kochvar, you may begin.

Mark Kochvar

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 SEC 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.

Todd D. Brice

Well, thank you, Mark, and good afternoon, everyone. I’m pleased to announce that we had another solid quarter as we reported net income of $12.2 million or $0.41 per share versus net income of $14.1 million or $0.47 per share in Q2 and $12.6 million or $0.43 per share in the third quarter of last year. I think the performance this quarter as a continuation of the positive trends and themes that we’ve been experiencing for the past four quarters, once again, we had solid organic loan growth which increased $68 million or 2% on a quarter basis.

We also saw nice increases in the main deposit accounts which were up $53.8 million or 4.3% on a quarter basis, asset quality metrics continued ahead in the positive direction with net charge-offs of $1.5 million also $46 million or 17% reduction in our special mention and loan categories and $1.4 million or 4% decline in our non-performing assets which are now at 1.05 [inaudible] or $37 million.

In addition we like the trend that we’re seeing in a number of our fee revenue categories, wealth management is up 10% on a year-to-date basis and we’re beginning to feel the impact of changes that we made in deposit fee schedules this quarter and going forward we’re going to continue evaluating a number of plans to enhance non-interest income.

Controlling operational cost has been an area of focus, we made improvements throughout the year and branch efficiencies, we’ve invested in technology and workflows, we realigned resources or personnel throughout the organization and certainly our improving asset quality is also paying dividends as we’re benefiting from reduced legal costs, loan collection and expenses.

I want to mention the successful integration of Mainline and Gateway this year. We knew we had – our targets on expense savings, really the price – account activity in these markets and really what’s exciting us. We’re seeing a less across the board on all lines of business coming out of these markets, consumer lending is up about three times versus the volumes that they had last year, we’re originally over $16 million of residential mortgages over what we did in these markets in prior years. Lending teams on a commercial side really beginning to gain traction, as they now access to bigger balance sheet and are seeing nice activity in small business groups as well in these markets and the other thing we’re able to layer on is wealth management insurance and they’ve been well received as we begin to integrate these business lines into the product mix.

I know David is going to discuss some of the lending activities in more detail, but I do want to mention that Northeast Ohio production office continues to generate a nice business for us as we continue to expand our presence in that market. And just finally before I close, I just want to point out that our board of directors has approved the 6.7% or $0.01 per share increase and our quarterly dividend which is now $0.16 per share. So, I appreciate the confidence that you all have S&T Bank and at this point, let me turn the program over to our Chief Lending Officer, Dave Antolik.

David G. Antolik

Thanks Todd and good afternoon everyone. As Todd mentioned we’re pleased to report continued loan growth for the third quarter as evidenced by a net increase of $68.1 or 2% in total portfolio loans. We continue to enjoy the positive impact of our standard sales efforts within our core markets and our Northeast Ohio loan production office.

For the quarter commercial loans grew by $52.3 million or 2.1%. This growth was primarily driven by an increase of $51.3 million in the combined CRE and construction loan portfolio. Additionally we saw positive movement for the quarter in our consumer loan balances which saw an increase of $15.8 million or 1.7%. This growth was largely result of an increase in our residential loan portfolio of $13.7 million or 3%.

I would now like to add some details to the activity that we saw this quarter. with regard to our commercial real estate activities, we experienced a $15 million decline in construction, this was the result of two factors. First we saw payouts of approximately $7.5 million as the result of anticipated property and lot sales. Second, we had 14 loans of total $20 million that converted from the construction portfolio to the CRE portfolio. It’s important to note that our construction loan activity remains solid as evidenced by a $32 million increase in our construction commitments during the third quarter. The funding of these construction commitments will help to provide stability to our real estate balances in the coming quarters.

With regard to our Northeast Ohio region, we saw $50 million to $80 million at September 30 and our commitments grew by $14 million for that same period. Additionally relationships have provided numerous cross sell opportunities for other lines of business. Our business banking team enjoyed another solid quarter originating in excess of $28 million in loans for the third quarter versus $20 million in the second quarter.

From a strategic growth perspective, much of our focus during the first three quarters of 2013 was spent recruiting and building out our lending team, I’m pleased with the progress that we’ve made and we’ll continue to explore new opportunities for talent acquisition and market growth. Finally, our pipelines remain solid and we continue to refine product underwriting and sales process is in order to growth. We still anticipate hires and payouts from the fourth quarter as a result of a sale of large real estate portfolio.

Mark will now provide you with some additional details on our financial results.

Mark Kochvar

Thanks, Dave. $678,000 increase in net interest income compared to last quarter was primarily due to lower funding costs. We benefited from the fourth quarter with $45 million of subordinated debt that we repaid in June as well as the large block of higher rate CDs that matured in July and August. Loan growth offset the decline in loan rates that we continue to see due to normal portfolio activity and competition. Interest rate margin rate remains essentially unchanged compared to last quarter down just one basis point. But without anything significant to provide relief on the funding side in the fourth quarter we do expect to see margin rate pressure in the low single digit to provide loan activity.

Noninterest income was down slightly overall, primarily due to a decrease in mortgage banking activity which was off by approximately $650,000. $200,000 of the decrease was related to lower sales of Fannie Mae, while the remaining $450,000 was related to MSR and valuation changes.

We have seen a reduction in activity and a lower pipeline since the increase in rate during the second quarter and anticipate a lower level of fees going forward. Service charges are up due to fee changes we made in June, July and increase in other is from swap fees with our commercial customers. The provisions for loan losses increased to $3.4 million compared to only $1 million, increase was due a new specific reserve of $3.1 million.

Asset volume improvement, big driver of earnings improvement this year, net charge-off were only $1.5 million this quarter and total only $5.3 million year-to-date which equates to just 21 basis points annually.

Noninterest income expense was well controlled again this quarter, the only unusual item was the $500,000 expense recovery related to one of our acquisitions in 2012. Without that one time item expenses were essentially flat and about $1 million below our expected run rate at $29.5 million to quarter. Our capital ratio with little change as retained earnings reported loan and loan commitment growth. Our tax rate for the quarter was elevated at 25.6% due to the flow than expected pre-tax earnings we had this year. We expect to see a quarterly rate going forward closer to the year utilization rate which is just over 21%.

Thank you very much at this time I would like to turn it over to the operator to provide instructions for asking questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting question-and-answer session. (Operator Instructions) Our first question comes from Collyn Gilbert of KBW. Please go ahead.

Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.

Thanks, good afternoon.

Mark Kochvar

Hi Collyn! How are you doing today?

Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.

Good, Thanks. You covered this in your comments, I apologize. But just getting a sense, kind of the where you are seeing current loan origination yield versus sort of what's going on and kind of the impact there, I think you guys have done a really good job of realizing that margin. I am just trying to understand that a little bit better.

Mark Kochvar

Yeah. The loans that are coming on are coming on spread in the 225 basis point range which aren’t enough to make up for the decline of what's going on, so you will the net interest margin was essentially flat despite pretty good increase in the loan balances. Our new yields are in the 350 to 375 range in terms of new stuff coming on. And payoffs are about 75 basis points higher than that maybe about 450, so we still have that differential that we are working on.

Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.

Okay that’s helpful. And so Mark you had mentioned on the expense side that $29 million to $29.5 million on a quarterly basis I mean is that – are you going to be able to – do you think sufficiently kind of run the bank at that level even with the incremental growth that you are seeing or should we think about that moving higher in the next year?

Mark Kochvar

I think, with the changes that we made throughout the beginning of this year that has given us a little bit of a head start on keeping that low and we typically feed them higher expenses as we enter the new year with merely increases and things like that. So we still are working towards that 29.5 million run rate.

Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.

Okay. And then just sort of the final question, just on how you are thinking about funding the balance, I mean you guys have a strong deposit base which is great although it's such a low cost, I just wonder if you think about for the susceptibility to those costs moving higher over the sort of longer term and then I know you guys had utilized the short term funding -- short term borrowing this quarter, so if you could just sort of a maybe marked short term or anything about funding and then kind of longer term as you look at the balance sheet in totality?

Mark Kochvar

In the shorter term we have used the whole share market now for some broker CDs just because of that on an incremental basis continue to be the best alternatives for reasonably small amount as loan growth continues, I mean that is something that you know after examined, but it is difficult to keep incremental cost funding down to reasonable levels if you need to raise a lot of money just because of where rates are out we think we have the pay up quite a bit to get significant incremental growth without some great movement so that maybe something that we’ll have to address if the loan growth continues.

Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.

Okay, that’s helpful. That’s all I have for right now, thanks guys.

Mark Kochvar

Thanks Collyn, thank you.

Operator

Thank you. Your next question comes from the Taylor Brodarick of Guggenheim Securities, please go ahead.

We will move onto next question it comes from Chris Jackman of Sterne, Agee, please go ahead.

Matthew Breese – Sterne, Agee & Leach, Inc.

Good afternoon guys, this is actually Matt Breese.

Mark Kochvar

Okay Matt, how are you doing?

Matthew Breese – Sterne, Agee & Leach, Inc.

Good. Just a few quick questions, one what was the size of the loan pipeline, at quarter end and how that compared to last quarter?

Todd D. Brice

We don’t disclose the pipeline, but it’s similar to where it was quarter-over-quarter.

Matthew Breese – Sterne, Agee & Leach, Inc.

And then, you had mentioned in your comments that the provision was up due to a specific reserve I think it has 3.1 million?

Todd D. Brice

Right.

Matthew Breese – Sterne, Agee & Leach, Inc.

Any color behind that? Why such a large specific reserve?

Todd D. Brice

Yeah Matthew, -- this is a -- in market loan we’ve had sub standard for awhile, we had a valuation difference that we’re actually looking into and trying to analyze on a couple of different things. So we considerably took 3.1 million specific which showed to be the shortfall on this loan and once we finish our analysis and where we are and some of the potential payments coming out of this rank we’ll not take it probably last of the Q4.

Matthew Breese – Sterne, Agee & Leach, Inc.

Okay, is it still occurring? So is it already in non-performing?

Todd D. Brice

It is in non-performing.

Matthew Breese – Sterne, Agee & Leach, Inc.

Thank you. Okay. And then as far as overall liquidity goes you guys are – quite a bit of cash and cash equivalence. What's the strategy there and is it kind of start to wind down?

Mark Kochvar

Getting overtime, I mean, our plan is to deploy that cash into loans overtime we are doing it for on the quarter-by-quarter basis. So we expect the cash balance to be down considerably year from now.

Matthew Breese – Sterne, Agee & Leach, Inc.

Where would you be comfortable taking that down to?

Mark Kochvar

I mean really just converting liquidity from the cash, liquidity of unfunded security position. So we don’t have a specific cash balance per say, we have overall half of the liquidity target that we work with.

Matthew Breese – Sterne, Agee & Leach, Inc.

All right. Thank you.

Operator

Thank you. (Operator Instructions) The next question comes from Matt Schultheis – Boenning & Scattergood, please go ahead.

Matt Schultheis – Boenning & Scattergood

Thank you. Good afternoon.

Mark Kochvar

Hi, Matt.

Matt Schultheis – Boenning & Scattergood

Quick question specifically with regard to your operation in Ohio in Akron, in Ohio, where are the, in your opinion, with regard to their capacity level, higher than we are expecting them to bringing a loan book of X they are currently at what percentage of X?

Todd D. Brice

I would say about 50% of capacity. Now we are looking at adding additional folks to that team and if that – capacity receive more market opportunity there we will continue to add staff. We want to take advantage of that opportunity.

Matt Schultheis – Boenning & Scattergood

Would you look to duplicate this in other markets, in Ohio?

Todd D. Brice

We are looking at other markets to duplicate this, yes.

Matt Schultheis – Boenning & Scattergood

Okay.

Mark Kochvar

I think Ohio as well as other areas as well there.

Matt Schultheis – Boenning & Scattergood

Okay. General question with regard to your history of doing mergers and acquisitions things of that nature, any change in your appetite there?

Todd D. Brice

Not really. You know, I think, you’ve seen the kind of deals that we have done in the past, I think that would be – we are not going to change our profile at all – heck of a lot on that matter. We want to make sure that we are partnering with the right organizations that we are franchise value to S&T bank.

Matt Schultheis – Boenning & Scattergood

Okay. that’s it from me. Thanks.

Mark Kochvar

Okay.

Operator

Ladies and gentlemen we have no further questions at this time. Would you like to make any additional remarks?

Mark Kochvar

Yes. This is Mark. We had a question that came in online from [inaudible] earlier. The first question was relative to the reserve. His question, are you comfortable at 1.2% to 1.3% of loan range to be looked for that to continue in that range or would it turn higher?

I think right now given the sack and the direction of the five and six for the sub standard and special mention rate of loans, I think we are comfortable with this right now on that 1.5, 1.2% range. We wouldn’t expect that on the personal loan basis to go a lot higher than that.

The second question was what percent of loan production is coming from the Northeast Ohio?

To put in perspective if you look at the previous 12 months' somewhere in the 40% range of net production came out of Northeast Ohio.

We look at overall, I mean sort of growth came there but their base was essentially zero. The thing is you know, over that 12 months period, we probably generated $600 million or so of commercial loan. So, if they generate about 90, that we are looking about maybe 15% of the overall production, but it does represent outside percent of the growth because of the base.

I think that’s all the question we have.

Todd D. Brice

So again, thank you everybody for participating in today’s conference call. We appreciate the opportunity to discuss this quarter's result and look for the hearing from you in our next conference call. So 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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: S&T Bancorp's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts