S&T Bancorp Inc (STBA) 2013 Q4 法說會逐字稿

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.

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.

Well, thank you, Mark. Good afternoon, everybody. Please bear with me -- I am fighting a little bit of a cold and 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 the 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.

I think the big story this year is the improvement in our asset quality metrics. As of year end, nonconforming assets now total $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 66%. Special mention and substandard loans decreased by $149 million, or 44%, now to $188 million. And the nonperforming 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 have made in these areas in 2013. For the quarter, the story is very similar. Loan growth of $54.9 million, or 1.6%. A 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 the successful efforts that we've experienced in northeast Ohio over the last 18 months. Dave Antolik, our Chief Lending Officer, is going to talk about this a little more detail in his comments.

Asset quality again experienced favorable trends. In the fourth quarter, our nonperforming assets declined by $14 million, or 38%. 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, both through activity in our commercial retail wealth management and 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 streamline our delivery channels and utilize technology to manage expenses and improve efficiencies across our organization.

Again, we are extremely satisfied with the progress that we've made in 2013 and look forward to capitalizing on the momentum that we are experiencing in 2014. We do appreciate your support that you have provided the S&T bank over this past year. And now, I would like to turn the call over to Dave Antolik, our Chief Lending Officer.

Thanks, Todd, and good afternoon, everyone. As Todd detailed, we are pleased to report another solid order of loan growth. For the quarter, total commercial loans grew by $46.1 million, or 1.8%. We saw a 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 credit worthy 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 floor plan 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 from municipal customers, primarily in support of infrastructure projects in western Pennsylvania. Additionally, we saw total consumer loans increase by $8.7 million, or nearly 1% for the quarter. This growth was driven by the 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 $15 million. We now have five lenders working in our Akron 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, and our ability to recruit experienced committed bankers allows us to successfully to employ this LPO strategy.

Finally, for the quarter, we experienced lower-than-anticipated payoff volumes. We do experience expect heavier than normal payouts that will challenge loan growth in the first quarter of this year. As an offset, our commercial and small-business pipelines remain strong and are at 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.

Thanks, David. A better-than-expected two basis point increase in the net interest margin was primarily due to the loan growth we experienced in the fourth quarter. We also benefited from a full quarter of a large block of higher rate CDs that matured in the 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 payoffs continues to narrow and went down to about 60 basis points in the fourth quarter. This narrowing, combined with expected loan growth and asset mix improvement over the last couple of quarters, should stabilize our margin rates. In the second half of the year, we do expect to see some renewed but modest margin rate pressure as our excess cash should be fully deployed, and we will no longer see an asset mix benefit.

Noninterest income was down in the number of areas by about $1.2 million in total. The decreased in the debit and credit card line of about $380,000 of that decline -- the decrease in debit credit card and about $380,000 decline in insurance was related to timing and seasonality. The remainder of the insurance decrease for about $250,000 was due to higher claims in our credit disability insurance product where we maintain a piece of the underwriting risk.

Wealth fees decreased to slow our activity in our financial services area in the fourth quarter. The other decreased primarily due to unusually high swap fees in the third quarter. While mortgage bank banking fees show an increase, income related to new activity is down about $100,000 and is being offset this quarter by improved relative valuation mortgage commitments. We expect that mortgage banking will be challenging during 2014 due to rate environment and lower refi business.

Noninterest expense increased by $1.5 million compared last quarter. Higher salaries and benefits was primarily due to increased medical costs, which are typically higher for us in the fourth quarter since we are self-insured, and plan participants are more likely to have hit their out-of-pocket maximums.

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, expenses this quarter were in line with our previously disclosed run rate of $29 million to $29.5 million per quarter.

As we 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 and commitment growth. The additional increase in tangible equity to assets and in both value and tangible book value was due to a much improved and real 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 decreases the pension liability. And the strong stock market resulted in a return on pension assets of 19% for 2013.

Our full-year tax rate of 22.3% was a bit higher than we expected due to better pretax earnings. We do expect to see our tax rates in the 22% range in 2014 as well. Thank you very much here at this time I would like to turn it back over to the operator to provide instructions for asking questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions).

Taylor Brodarick, Guggenheim.

First question would be, you have been successful with the LPOs in Ohio. Is there thinking maybe of adding some more wealth-management-focused individuals in these offices or doing some hiring fair?

I think eventually, Taylor, that is where we would like to get to. Like I said, we are about 18 months into it in northeast Ohio. The next step would be to start to maybe layer on some of the other services that we can provide. We are available evaluating a couple of options in that regard.

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

I think right now we had been keeping the dollar amount fairly stable. We are pretty comfortable with where the reserve is. We'll see over time, but especially as the special mention and substandard loans continue to decrease, that will put less pressure on that deserve. We could see the reserve rate drift downward a little bit, but would still expected to keep in the general range of the 130 that we are at right now.

Collyn Gilbert, KBW.

Thanks. Good afternoon, guys. Just a little bit more color on what your expectations are for loan growth? It has kind of been steady here the last two years with the move into the new markets. Do you think that can accelerate in 2014, and how much would you say?

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. That being said, this first quarter we will be challenged based on some of the paths that we anticipate.

The other thing you have going on, Collyn, is on the retail side some of your mortgage activity is slowing up a little bit as well.

Okay. That's helpful. And then the pickup that you guys saw in CDs this quarter, is there something going on in terms of funding strategy? I know borrowing has dropped, but how are you thinking about funding as you look out over the next year?

If you are referring to the rate improvement, that was just a carryover from third quarter where we had some higher-priced 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.

Okay.

We have to have brokered market. In markets like this where rates are low and it is difficult to get people to move, that could be cost effective as a funding source.

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

We are staying pretty short on those. They are usually a year or less.

Okay. That's helpful. And then just insurance, the insurance business. Do you think that can grow next year? What is your outlook for that?

I would say kind of steady. Maybe up a little bit, but we are looking at a couple of things over there. We did some benchmarkings. Really what we are focusing on next year in that group is really improving the operational efficiency out of there and the bottom line. But, this year we did have a pretty good year with referrals in from the backside of the house were probably double where they were over 2012. And you want to continue to kind of chip away at that, and it's going to be a nice little business for us to really cement those relationships with our client base.

Okay, and then just one last thing on the fee side. You know, Mark, I know you said that 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? I am just trying to, again, gauge growth in these fee businesses.

It's really did merchants servicing business that we have that we rolled up into debit and credit card. The arrangement that we now have, we're out of the actual (multiple speakers) based on referral fees and different goals of the hit. And those tend to be frontloaded during the year. So that is kind of where that timing difference comes from. It's less about the debit fee and credit card revenue itself.

Okay. That's helpful. I think that was all I had. Thanks.

Matthew Breese, Sterne Agee.

Just curious if you could walk us through some of the rates you are able to garner in terms of real estate and C&I loans this quarter.

This spreads in the market are similar. They are narrowing for stronger deals. We are seeing more aggressive pricing from the competition, but spreads for C&I deals could be anywhere from 150 to 350, depending on the quality of the deal. There's a pretty wide range of spreads that we are seeing from the 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.

Could you remind us what you guys are seeing?

Generally, a 250 to 275 spread.

That's on FHLB or the five-year [CNT]?

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

Okay. And then maybe hop into the M&A discussion. How would you guys sum up the amount of chatter or deal flow that you are hearing about in your markets? Could you remind us of how big of a deal you would be willing to do, whereabouts and kind of the accretion or dilution you would be willing to do a deal at?

I think in our markets there's still -- the activity is still a bit behind where maybe other areas of the country. You see so many announcements coming out, and it appears like it is picking up. In this part of the state, there is not a lot of chatter going on right now, but we are going to keep our eyes out. We like how we are positioned from a capital perspective. So, we would go in in, I would say, a deal up to maybe $1.5 billion in assets, probably be top end and maybe consider something in the $2 billion range, but that could encompass the eastern part of the state or, like I say, we are starting to learn a little bit more about Ohio. And we like some of the things that we are experiencing over there, and we wouldn't be opposed on a deal with the right partner in that market as well.

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

We are always taking a look at that. As Todd mentioned, we do like our capital position in that it gives us some capacity to do a deal. We did increase the dividend last quarter. The other thing that we are still evaluating is the impact of Basel III. We expect that to give us a little bit of a haircut, maybe 50 to 60 basis points on capital as well. But we have no firm plans to do any buybacks at this point.

(Operator Instructions). Matt Schultheis, Boenning & Scattergood.

Two quick questions. One is why Columbus as opposed to consolidating on the eastern third of Ohio, maybe even into the northern panhandle of West Virginia?

Part of it is we are taking advantage of a consolidation situation where we have been able to identify two seasoned folks to join our team. So, really these LPOs, the first step is looking at the demographics of the region that we are entering 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. Some of this is about finding the right people in the right markets. 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.

Like I say, Matt, too, you know it's more of an LPO play in Columbus. So if we would happen have an opportunity on the M&A front, I think the markets that you are probably suggesting probably make a little bit more since for us at this point in time.

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 it if you could find a partner that you think you could resolve the cultural issues with?

You know, it's something you kick around a little bit, but I still think some of the logical ones, there are still some obstacles to overcome if you would do it. So, I am thinking, probably not in the cards at this point in time, not to say down the road that if the stars align you would probably have to consider it.

Okay. Thank you very much.

Matthew Breese, Sterne Agee.

I just have one follow-up, what is a good tax rate to use going forward?

It looks like we will be around 22.

That is everything. Thank you.

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

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 at our next conference call. Everybody have a good day.

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.