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

Q4 2013 Earnings Call

January 28, 2014 1:00 PM ET

Executives

Mark Kochvar – Senior EVP and CFO

Todd Brice – President and CEO

David Antolik – Senior EVP and Chief Lending Officer

Analysts

Taylor Brodarick – Guggenheim

Collyn Gilbert – KBW

Matthew Breese – Sterne Agee

Matt Schultheis – Boenning & Scattergood

Operator

Greetings, and welcome to the S&T Bancorp Fourth 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, Mark Kochvar, CFO for S&T Bancorp. Thank you, sir. You may begin.

Mark Kochvar

Thanks very much. 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 fourth 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 Brice

Well, thank you Mark and good afternoon everybody. Please bear with me. I am fighting a little bit of a cold and then also some laryngitis. So I hope you can hear me okay out there today, but I am pleased to announce that we had another solid quarter as we reported net income of $11.9 million or $0.40 per share versus $9.5 million or $0.32 per share in the fourth quarter of 2012 and $12.2 million or $0.41 per share in third quarter of 2013.

For the full year we did see significant improvement over 2012 as net income increased 48% to $50.5 million or $1.70 per share versus $34.2 million or $1.18 per share in 2012. Significant factors impacting our performance this year include solid loan growth of $220 million or 6.6%, disciplined expense management, also continued integration of our mergers with Gateway Bank and Mainline Bank where we were able to realize our cost savings projections. We are also starting to see some meaningful contributions from a revenue perspective from these markets as well.

And I think the big story this year is the improvement in our asset quality metrics. Excuse me as of yearend our non-performing assets now totaled $22.9 million versus $55.9 million at the end of 2012, which represents a $33 million or 59% improvement. Net charge-offs for the year were $8.5 million versus $25.2 million in 2012 for an improvement of $16.7 million or 56%. Special mention and substandard loans decreased by $149 million or 44% now totaled $188 million. And the non-performing to total loan and OREO ratio declined from 1.66% to 0.64%, which is we feel very desirable place where we like to see it. And finally total delinquency under 1%. So all-in-all we are happy with the improvements that we made in these areas in 2013.

For the quarter the story is very similar, loan growth of $54.9 million or 1.6% as robust economy in our markets is having a nice impact on our new loan activities. I also want to mention that we were successful in recruiting two commercial lenders to our team in the Columbus market out in Ohio. This is a new market for us, but it’s going to complement to successful efforts that we have experienced in Northeast Ohio over the last 18 months. Dave Antolik, our Chief Lending Officer is going to talk about this a little bit more detail in his comments.

Asset quality again experienced favorable trends. In the fourth quarter our non-performing assets declined by $14 million or 38% and our provision expense totaled $1.6 million versus $3.4 million in Q3. Looking forward to 2014 we expect to continue to grow our business organically about – through activity in our commercial, retail, wealth management insurance divisions. And we are going to augment that growth with M&A opportunities and LPOs as they present themselves. Also we are going to continue to streamline our delivery channels and utilize technology and manage expenses and improve efficiencies across organization. Again we are extremely satisfied with the progress that we have made in 2013 and look forward to capitalizing on the momentum that we experienced in 2014. We do appreciate your support that you provided to the S&T Bank over this past year.

And now I would like to turn the call over to David Antolik, our Chief Lending Officer.

David Antolik

Thanks Todd and good afternoon everyone. As Todd detailed we are pleased to report another solid quarter of loan growth. For the quarter total commercial loans grew by $46.1 million or 1.8%. We saw good growth in both our combined construction and commercial real estate portfolios and the C&I portfolio. The combined commercial real estate and commercial construction portfolios increased by $31.4 million or 1.8%, despite a decline of $8.5 million in commercial construction. However, foreshadowing future construction funding is our unfunded construction commitment that is now over $200 million. Overall demand in the commercial real estate space remains stable and competition for creditworthy deals remains fierce with spreads narrowing for the strongest deals.

With regard to the C&I portfolio, the fourth quarter of 2013 saw an increase of $14.7 million or 1.8%. Growth drivers include continued success in our corporate lending activities, where we experienced a $4 million increase in commitments and a $13 million increase in outstandings during the fourth quarter. We also have increased borrowings for municipal customers primarily in support of infrastructure projects in Western Pennsylvania. Additionally, we saw total consumer loans increased by $8.7 million or nearly 1% for the quarter. This growth was driven by increases in the residential mortgage portfolio.

Turning to our newest markets, our experience in Northeast Ohio continues to be positive. Year-end outstandings exceeded $100 million with an average loan size of over $2.2 million and total deposits from these customers exceeding $50 million. We now have five lenders working in our (indiscernible) office and expect to see continued asset growth in that market. In addition, as Todd mentioned, we recently announced our entrance into Central Ohio with the addition of two very experienced bankers in Columbus. We believe that Central Ohio provides us with an opportunity similar to Northeast Ohio. Our ability to recruit experienced, committed bankers allows us to successfully to employ this healthier strategy.

Finally, for the quarter, we experienced lower than anticipated payoff volumes. We do expect heavier than normal payoffs that will challenge loan growth in the first quarter of this year. As an offset, our commercial and small business pipelines remained strong and our levels higher than those that we saw during the second half of 2013.

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

Mark Kochvar

Thanks, David. Better than expected 2 basis point increase in the net interest margin was primarily due to the loan growth we experienced in the fourth quarter. We also benefitted from a full quarter of a large block of higher rate CDs that matured in third quarter. Loan growth offset the decline in loan rates that we continue to see due to normal portfolio activity and competition. However, the difference in rate between new production and payoff continued to narrow and was down to about 60 basis points in the fourth quarter. This narrowing combined with expected loan growth and asset mix improvement over the next couple of quarters should stabilize our margin rate. In the second half of the year, we do expect to see some renewals of modest margin rate pressure that our excess cash should be fully deployed and we will no longer see an asset mix benefit.

Non-interest income was down in a number of areas by about $1.2 million in total. The decrease in the debit and credit card line of about $380,000 – that decline, excuse me, the decrease in debit and credit card and about $380,000 declining insurance was related to timing and seasonality. The remainder of the insurance decrease of about $250,000 was due to higher claims in our credit disability insurance product, where we maintained a piece of the underwriting risk. Swap fees decreased to slower activity in our financial services area in the fourth quarter, the other decrease primarily due to unusually high swap fees in the third quarter.

Our mortgage banking fees show an increase. Income related to new activity is down about $100,000 is being offset this quarter by improved relative valuation in mortgage commitment. We expect that mortgage banking will be challenging during 2014 due to rate environment and lower refi business.

Non-interest expense increased by $1.5 million compared to last quarter. Higher salaries and benefits, was primarily due to increased medical cost, which are typically higher versus the fourth quarter. Since we are self-insured and planned participants, I am more likely to have hit their out-of-pocket maximum. The furniture and equipment and marketing increases reflect timing of purchases and campaigns. Other includes charitable contributions of $580,000, which were over $450,000 higher than in the third quarter. These contributions were partially offset with tax credits that are reflected in the other taxes line this quarter. In addition to the charitable items, the variance in other is due to a $500,000 expense recovery related to one of our acquisitions in 2012 that occurred in the third quarter of 2013. All-in-all, expense this quarter were in line with our previously disclosed run rate of $29 million to $29.5 million per quarter.

As you move into 2014, we do expect the run rate to increase slightly, but still average less than $30 million per quarter. Our capital ratios improved as retained earnings growth outpaced loan incentive growth. The additional increase in tangible equities to assets and in both book value and tangible book value was due to a much improved annual pension actuarial evaluation, which increased equity by about $11 million. With higher rates, the discount rate assumption we used increased by 75 basis points, which decreased its pension liability. And the strong stock market resulted in return on pension assets of 19% for 2013. Our full year tax rate of 22.3% was a bit higher than we had expected due to better pre-tax earnings. We do expect to see our tax rate in 22% range in 2014 as well.

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

Question-And-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Taylor Brodarick with Guggenheim. Please proceed with your question.

Taylor Brodarick – Guggenheim

Great. Thank you. I guess the first question would be you can be successful with the LPOs in Ohio. Is there a thinking maybe of adding some more wealth management focused individuals in this office are or doing some hiring there?

Todd Brice

I think eventually Taylor, that’s what we like to get to like I say we’re about 18 months into it in Northeast Ohio. And the next step would be to start to maybe layer on some of the other services that we could provide and we’re evaluating a couple of options in that regard.

Taylor Brodarick – Guggenheim

Okay. And then I guess one more question related to asset quality. I guess with the big drop in provision, would you remind us sort of your feeling on the relative loss reserve and where you want to see that trend with loan growth?

Mark Kochvar

I think right now we’ve been keeping the dollar amount fairly stable. We’re pretty comfortable with where the reserve is. We’ll see over time but we specially mentioned in sub-standard loans continue to decrease that will put less pressure on that reserve. So, we could see the reserve rate drift downward a little bit, we still expect it to keep in the downward range in the 130 that we are at right now.

Taylor Brodarick – Guggenheim

Right, okay. Thank you very much.

Operator

Our next question comes from the line of Collyn Gilbert with KBW. Please proceed with your question.

Collyn Gilbert – KBW

Thanks. Good afternoon guys.

Todd Brice

Hi, Collyn.

Collyn Gilbert – KBW

Just give a little bit more color on what your expectations are for loan growth. It’s kind of been steady here over the last two years. Did you – with the new – the move into the new markets, do you think that can accelerate in 2015 I’m sorry in 2014 and how much would you say?

Mark Kochvar

Yes, I would anticipate the run rate to be similar. 2013 was positively impacted by Northeast Ohio with Columbus coming online, Central Ohio, I think we should be able to maintain that out. That being said this first quarter we will be challenged based on some of the pay-outs that we anticipate.

Todd Brice

The other thing going on Collyn is you know on the retail side some of your mortgage activity has flown up a little bit as well.

Collyn Gilbert – KBW

Okay, okay, okay. That’s helpful. And then the pickup that you guys saw and as you look out over the next year?

Todd Brice

Comparing to the rate improvement that was to carryover from third quarter where we had some higher price stuff mature. A lot of the growth in CDs that we’re – that you’re seeing there is brokered CDs, it’s not consumer CDs.

Collyn Gilbert – KBW

Okay.

Todd Brice

Yes, that’s the broker market. In markets like this where rates are low and it’s difficult to get people to move that to be cost effective as a funding source.

Collyn Gilbert – KBW

Okay. So what’s the duration that you’re generally seeing on these brokered CDs?

Todd Brice

We’re staying pretty short on those, they are usually a year.

Collyn Gilbert – KBW

Okay, okay. That’s helpful. And then just insurance, the insurance business I mean do you think that can grow next year or sort of what’s your outlook for that?

Todd Brice

I would say kind of steady maybe up a little bit, but we’re looking out a couple of things over there, we did some benchmarking, it’s really what we – we focus on next year that is really improving the operational efficiency out of there at the bottom line. But this year we did have a pretty good year with referrals and from the bank side of the house we’re probably double where they were over 2012. And you want to continue to guide and chip away that and now it’s going to be a nice little business for us to really submit those relationships with our client base.

Collyn Gilbert – KBW

Okay, okay. And then just one last thing on the fee side. Mark I know you said that these certain seasonal trends led to the drop in the debit and credit cards this quarter. It was down in the third quarter. Is it the seasonality for you guys really that means lower in the back half of the year or again I’m just trying to again gauge kind of growth in these fee businesses?

Mark Kochvar

Yes, it’s really the merchant servicing business that we have that we roll up into that debit and credit card. The arrangement that we now have we are out of that servicing business.

Collyn Gilbert – KBW

Yes.

Mark Kochvar

Based on referral fees and different goals that we hit and those tend to be frontloaded during the year but that’s where that timing different comes in the tip less about the debit fee and credit card revenue itself.

Collyn Gilbert – KBW

Okay, it’s helpful. Okay, I think that’s all I had, thanks.

Todd Brice

Thanks, Col.

Operator

Our next question comes from the line of Matthew Breese with Sterne Agee. Please proceed with your question.

Matthew Breese – Sterne Agee

Hi, guys.

Todd Brice

Hi, Matt.

Matthew Breese – Sterne Agee

I am just curious if you can walk us through some of the rates you are able to garner to in terms of real estate and C&I loans this quarter?

Todd Brice

Yes, I mean that the spreads in the market are similar now they are narrowing for stronger deals. We are seeing more aggressive pricing from the competition, but the spreads for C&I deals could be anywhere from 150 to 350 depending on the quality of the deal, so it’s a pretty wide range of spreads that we are seeing from a competition. And on commercial real estate deals, spreads remained fairly steady throughout the year and the deals we are looking at now are similarly priced.

Matthew Breese – Sterne Agee

Could you remind us what the – where you guys have seen it?

Todd Brice

Generally 250 to 275 spread.

Matthew Breese – Sterne Agee

And it’s on FHLB or the five-year CMT?

Todd Brice

That could be over a LIBOR that could be over five-year FHLB and for longer term deals we price off of the interest rate swap curve.

Matthew Breese – Sterne Agee

Okay. And then maybe hopping to the M&A discussion, how would you guys kind of sum up on a cadre or deal flow that you are gearing about in your market share. And then could you remind us of how big of the deal you are going to do whereabouts and kind of the accretion and dilution if you are willing to do deal at?

Todd Brice

Yes, pricing in our markets there is still the activity is still a little bit buying where maybe other areas of country and as you all see some of the announcements coming out of peers like its picking up. But so in this quarter, say lot of chatter going on right now, but we want to keep our eyes on, we like our position from a capital perspective though we were going. And I would say the deal up to may be 1.5 billion in abstracts part of the top end maybe you consider something in the $2 billion range, but that could help us the Eastern part of the state and like I say we are starting to learn a little bit more about Ohio. And like some of the things we are experiencing every day and we would be post the deal with the right partner in that market as well.

Matthew Breese – Sterne Agee

Okay. And then my last question surrounding capital, you guys have been dealing capital over the past – couple of years now, I am just curious of what point do we see either a buyback program or maybe a pickup in the dividend some sort of other capital deployment tool?

David Antolik

We are always taking a look at that. I mean as Todd mentioned we do like our capital position and that it gives us some capacity to do a deal. We did increase the dividend last quarter. And the other thing that we are still evaluating is the impact of (indiscernible), we expect that deal is a little bit of a type, maybe 50, 60 basis points on capital as well. So we had nothing, no firm plan to do any buyback at this point.

Matthew Breese – Sterne Agee

That’s all I had. Thank you.

Todd Brice

Thanks Matt.

Operator

(Operator Instructions) Our next question comes from the line of Matt Schultheis with Boenning & Scattergood. Please proceed with your question.

Matt Schultheis – Boenning & Scattergood

Hi, good afternoon.

Todd Brice

Hi, Matt.

David Antolik

Hi Matt.

Matt Schultheis – Boenning & Scattergood

Two quick questions, one is why Columbus has opposed to consolidating on the Eastern third of Ohio maybe you have been into the Northern panhandle of West Virginia?

Todd Brice

Go ahead, Dave.

David Antolik

Part of it is we were taking advantage of a consolidation situation where we have been able to identify two season folks to join our team. So really these LPOs kind of first step is looking at demographics of the regional arena into and we like Columbus like we like Cleveland the big markets where we can have an impact without having to gain substantial market share. But the bigger piece of it is finding the right people, so some of this is about finding the right people in the right markets. And we also look at the traditional education, medicine and government, so eds, meds and government provide some economic stability to a region and Columbus kind of ticks all those boxes.

Todd Brice

I can say, Matt, it’s more of an LPO play in Columbus, we would have to have an opportunity on the M&A front. I think the markets that you are probably suggesting probably make a little bit more sense for us at this point in time.

Matt Schultheis – Boenning & Scattergood

Okay. And just as a follow-up to the M&A question, the previous M&A question really. Would you guys consider a merger of equals or something close to if you could find a partner that you think you could (indiscernible) was used with?

Todd Brice

It’s up to you. You kick around a little bit, but I still think some of the logical ones, there is still some obstacles to overcome if you would do it. So I think probably not in the cards at this point in time and I’d say down the road that definite view to start on the line that you probably have to consider it.

Matt Schultheis – Boenning & Scattergood

Okay, thank you very much.

Todd Brice

Alright.

Operator

Our next question is a follow-up question from Matthew Breese with Sterne Agee. Please proceed with your question.

Matthew Breese – Sterne Agee

Hi, I am sorry, had one follow up, what’s the good tax rate to you going forward?

Mark Kochvar

It looks like it will be around 22.

Matthew Breese – Sterne Agee

That’s everything. Thank you.

Operator

It appears we have no further questions at this time. I would now like to turn the floor back over to Mr. Brice for closing comments.

Todd Brice

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

Operator

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

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