Greetings and welcome to the S&T Bancorp First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded..

I’ll now turn the conference over to your host, Mr. Mark Kochvar, CFO. .

Thanks very much and good afternoon everybody. 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 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 and good afternoon everyone. As announced in this morning’s press release, we reported net income of $14 million or $0.47 per share for the quarter which compares very favorably to both the fourth quarter ’13 results of $11.9 million or $0.40 per share and the first quarter ’13 of $12.3 million or $0.41 per share.

So this represents an increase of 18% over Q4 and 14% over the first quarter of last year respectively. And again the financial performance this quarter is really just a continuation of the focused execution on our strategic initiatives by our team members..

I think first and foremost really we saw loan growth of $61.7 million which is about 7% annualized. I think this growth is really again attributed to the strength of our bankers in all of our lines of business and more importantly their ability really just to foster long term relationships with clients in our markets.

I think on a year-over-year comparison, the portfolio has increased about $246 million or 7%, which again, when combined with our disciplined deposit pricing focus has resulted in an increase in net interest income of $1.9 million or right around 6%.

The second area of strategic focus for the organization really is continuing to look for ways to improve efficiencies and managing expense levels. Again this quarter non-interest expenses for the quarter were $28.9 million versus $29.4 million in Q4 and also $31.6 million in the first quarter of last year..

I think really one of the main contributors really has been the ability of our staff to identify areas where we can right size and reallocate some resources. So for the period we’re down since the end of ’12, we’re down 59 FTEs which is about 5.9%.

So this has really enabled us to reinvest our resources in there as we can grow the bank without drastically impacting our efficiency numbers. During the quarter I just want to mention that we also have closed another one of our branch locations and we’re going to continue to evaluate the retail network going forward.

We talked the length of our asset quality in prior calls and our efforts to really proactively manage portfolios have enabled us to once again post some very favorable results..

For the quarter we had net recoveries of $72,000 which helped to significantly reduce our loan loss provision for the quarter which totaled $289,000 and compares very favorably to our fourth quarter and first quarter of last year provisioning expenses of $1.6 million and $2.3 million respectively.

Furthermore non-performing assets decreased by 6.6% or $1.5 million and now stand at $21.4 million and the non-performing asset to loans and OREO ratio is 0.59%. Also want to mention efforts to non-interest income levels.

Fee income for the quarter was relatively flat but the big variance was within our wealth management division of about $400,000 or 16%.

It’s really helped to offset the decline in mortgage banking activities and today assets under management stand at about $1.9 billion, which is a 4% and 17% increase over the fourth quarter of last year and first quarter of 2013..

One of the ways that we’ve been able to manage expenses has been through investments that we’ve made in technology platforms over the years to continually improve efficiencies, enhance delivery channels to our clients. At the present time we have six significant projects underway that’s going to help us to assist with these initiatives.

We expect these projects really to have no impact on net income in the short run but long term with these investments, we do expect to achieve increased efficiencies. It’s going to help us control expenses and also drive revenues through enhanced distribution capabilities.

And finally I want to mention our efforts to expand our brand into some new markets. Again we talked about the Northeast Ohio and that team continues to build market share and also preliminary activities in both Central Ohio and state college are very encouraging..

Now Dave Antolik is going to discuss these in greater detail in his comments. But again overall we’re extremely happy with all these bankers as well the focus of our team members in existing markets that positioned our Company to continue to grow organically in the coming year.

From a capital perspective, we like our position as we feel that we have adequate levels for organic growth and also potential M&A opportunities and also we’re pleased to announce a 6.3% increase to our dividend from $0.16 per share to $0.17 per share for the quarter and also when you compare it to this period last year so it’s up about 13.3%..

And again thanks for your time afternoon. I know I was a bit longer than usual but we have a lot of positive momentum going on throughout the organization that we just want to share with you and Dave Antolik will talk a little bit about some of our lending opportunities right now. .

Thanks Todd and good afternoon everyone. As Todd mentioned, we’re happy to report another good quarter of solid loan growth. This represents our 7th consecutive quarter of loan growth and is the direct result of our organic growth strategy.

This strategy includes entrances into vibrant new markets where we can take advantage of our size and relationship banking philosophy..

With regard to our approach, once we identify a new market for entrance, the key factor in determining our success is our ability to staff our LPOs the same manner that we staff our existing end market offices with seasoned, professional, commercial bankers.

During the quarter we opened our Central Ohio loan production office in Dublin and to date our team of personal bankers have booked $12 million in new commercial loans and generated 21 new deposit accounts. In addition the Central Ohio team has a solid pipeline to support future volumes.

We’re very excited about these results given the short period of time that the office has been open..

We continue to see solid loan growth in Northeast Ohio where our loan balances now exceed $112 million and our deposits exceed $13 million. We are currently in the process of expanding our capabilities in that region that include a focus on treasury management and private banking.

We’re also pleased with the progress that we've made in state college where we've filled key leadership roles and are in the process of rounding out our teams to enable us to approach the market with a full complement of banking services..

In terms of loan activity for the quarter, balance growth was driven primarily by a C&I increase of $42 million or 5%. Key drivers include increases in total line commitments, balances and utilization. Line utilization accounted for $27 million of the C&I increase and we saw utilization rates increase from 41% to 43% for the quarter.

Included in these increases is a $7 million increase in floor plan assets..

The remaining C&I growth was the result of new customer acquisition. Our commercial real estate balances for the quarter were flat while our commercial construction portfolio increased by nearly $24 million. We continue to benefit from average funding of approximately $10 million per month in that portfolio..

Finally, competition remains experienced in all of our markets but we’ve been able to maintain loan spread without stretching on credit. Our commercial and small business pipelines remain strong and we’re at levels slightly higher than at this time last year..

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

Thanks Dave. Net interest income was relatively unchanged compared to the prior quarter. We overcame the $600,000 impact of 2 fewer days through strong loan growth and higher prepayment fees. The net interest margin continues to be very stable at 3.51% this quarter and has been within 2 basis points, or 3.5%, for the past seven quarters.

The rate differential between new production and payoff continues to narrow and is now just 50 basis points overall and close to 30 basis points for the commercial portfolio. We did have higher than expected cash balances which impacted the asset mix due to deposit inflows that were in part temporary and seasonal in nature.

We believe that our balance sheet is in a good position for the potential higher interest rate. A significant portion of our loan portfolio, almost 45%, is tied to prime or LIBOR with relatively few quarter’s impact..

Our securities portfolio is relatively small and represents less than 12% of total assets. The biggest unknown is how our customers and our competition will respond to higher rates. But we think we will have sufficient flexibility derived from the expected loan re-pricing to retain and even grow deposits while still improving margin.

Although difficult to quantify, there did appear to be some weather related impact on both non-interest income and non-interest expense this quarter. Activity related to both deposit and card fees were slower than normal in January and February but did rebound in March.

This is also true for mortgage banking which has also been impacted by the slowdown in new financing. In response, we’ve reduced FTE and asset department [indiscernible] through attrition and reassignment.

The mortgage pipeline is up from its low point in the first quarter and we do expect to see better activity in both our sales to the secondary market and what we portfolio on our book..

The improvement in insurance is due to a combination of receiving our annual profit sharing from the carrier which was in line with last year, normal seasonal fluctuation and better performance from our credit our insurance product. Non-interest expense for the quarter was well controlled and better than our expectation.

Weather played a role by delaying the timing and extent of some internal projects and activities. We expect that the quarterly expenses will be more in line with our previously disclosed estimate of less than $30 million. Our tax rate of just over 21% is in line with last year.

Improved pretax earnings this year could result in slightly higher rate as we move through 2014.

The risk based capital ratios improved as retained earnings growth offset loan growth and as Todd mentioned we like where we are from a capital perspective and believe that we are well positioned to absorb any BASEL III impact, support organic loan growth, effectively deal with acquisition opportunity and provide for the increased dividend announced today..

Thanks very much. And at this time I’d like to turn it back over to the operator to provide instructions for asking questions. .

[Operator Instructions] Our first question is coming from William Wallace of Raymond James. .

On the credit side of the house you had net recoveries for the period.

Was that driven by a recovery on one large credit or did you have several recoveries? Could you give a little color there?.

Yes William this is Pat Haberfield. Just actually it wasn’t just one large credit. We had some pretty nice recoveries from several different credits that we worked on this quarter. .

And net charges for the quarter were about $1 million, so that offset the gross. .

And then how did the gross charge offs compare to what you saw in the fourth quarter?.

Was down. .

It was down. We saw in the fourth quarter looking [ph] at $4 million and gross was down substantially. .

And then as I look at your reserves and kind of think about your loan growth, would you best think about a reserve to loan ratio or are you guys kind of looking at it on a dollar basis? How are you thinking about that and just kind of trying to think about my model?.

Little bit combination. We’ve been keeping the dollars. The dollars remain flat and the percent has been coming down. One of the main drivers in our model is that -- the price stack with the rating and that has been improving as well and the higher tax credit that we have, have a much lower historical loss. So it’s kind of a combination of both.

So we don’t look at just one or the other, but the dollars have been staying equal, it depends on the net loan growth too. .

So as you think about moving forward, obviously your historical loss experience is going to improve.

When you think about the management discretionary piece of your reserves, do you think that there is a floor made on a reserve to loans ratio that you guys would want to make sure you didn’t drop below, no matter what the model tells you?.

Yes, that’s a tricky area because there’s a lot of different opinions on that, and we’ll continue -- we have a committee that reviews that on a quarterly basis and we’ll continue to evaluate that as we go. So it’s hard to say where that’s going to end up. .

Okay. And then one question on the margin, as you have been kind of bouncing around that 350 range.

Do you think that, that’s where we stay given what you’re seeing in the competitive environment now and outside of our rising short rates?.

Outside of rising short rates, it will be difficult for us to meaningfully increase that. We have some perhaps additional pressure later in the year. We have some cash that we anticipate to growing over the course of the next couple quarters, that will improve the mix and offset some of the loans pressures that we’re still feeling.

But as I mentioned, we’ve seen a narrowing of the rate differential between the new and the payoff and that’s helped a lot. We could see a little bit of pressure but I don’t think it’s going to be, at least for this year, more than a few basis points per quarter in the back half of the year. .

Our next question is coming from Taylor Brodarick of Guggenheim Securities. .

If we look at the LPO strategy, it seems like it’s been really successful in boosting loan growth. So I was just thinking in terms of our whole bank acquisition, what would be the advantage in doing that again when the LPO strategy seems to be working. Especially if you look at Central Ohio, it seems like there’s been a lot of deals.

So I don’t know kind of how you evaluate the 2?.

Yes, I think they’re kind of independent of each other and we’re going to continue on the LPO strategy. I would say probably though we made a couple of very significant moves in the first quarter.

So the focus for the rest of this year in that area will be just really get them up and running and as Dave said they’re kind of coming out of the chute pretty solid right now and we’re just making sure we integrate those successfully into the organization..

And we’re always on the lookout on the M&A side and we’re going to do what makes sense to the organization too. So I think we’ve been pretty disciplined there over the years and we’re not going to really deviate from that, that we want to look for the right company to partner up with that’s going to add value to our shareholders. .

Okay. So you see advantages still for both, despite the focus on LPOs. .

You could kind of -- one could augment the other one too. .

Yes, exactly.

And then on kind of the efficiency initiatives, I guess maybe a little more detail on maybe what the opportunities are now with improvement this quarter? What do you see going forward that you could improve on?.

Well, like I said we have six IT projects in the pipeline right now, and -- for example one is automating our floor plan system, right. And about a $95 million portfolio and outstanding balances about $140 million -- $135 million in commitments. But we support 4,000 notes plus or minus on kind of more of a manual basis.

So we’re rolling out just on May 1st a system that’s going to automate that.

So it’s going to improve reporting, it’s going to improve some of the control environment, and also just to make a lot more efficient over there and then you have four or five people in that area that we’re going to be able to reallocate into other areas of the company where maybe we have some pressure and need to help over in the operation side..

Again deposit origination side, that’s probably more towards the end of May and again we’re going to automate that system where a lot of it’s going to be delivered through electronic signatures but again you have four to five people that and who are looking through these areas that you’re not necessarily going to cut, but we can reallocate and not have to hire in other areas.

And again later in the year we’re looking at a mortgage origination system which is going to kind of give us some of the same bells and whistles as the deposit side. We’re also looking at upgrading our commercial loan system.

It’s going to take it from cradle to grave, from the time we make -- customer makes an application through the credit process and then ultimately when the loan gets booked on the system. So we won’t have to touch that paper as it kind of goes through the system.

And so it is slowly going to improve a lot of efficiencies and how we serve the customer, which we think will ultimately -- grow on the revenue side of the house too. So that’s the area that we’re focusing on this year. .

And then apology if I missed it.

Was there -- did you quantify any impact on weather or was it maybe just delaying new activity?.

We don’t have a solid number but it seemed to have impact both on the fees, especially on the activity, deposit and card fees and expenses. Our P&E was low and we know that there are some projects that just didn’t quite get off but those expenses will -- some of those expenses will still come. .

Our next question is coming from Collyn Gilbert of KBW. .

Mark, just a quick follow up to your comment just on the expense side.

So you had said that expenses would probably migrate up to that $30 million level and then if we just think about the efficiency initiatives Todd that you laid out, is that really going to be more than on the revenue side in a sense that we should continue to see increases of expenses in investments of this nature but yet you hope to get higher revenue out of it to lower that efficiency ratio or how do we tie all that together?.

Those expense initiatives and the cost of those are already embedded in our plan numbers. We include that -- a little bit less than $30 million per quarter is what we’re expecting. But most of that’s baked into there. So I think a lot of it is that gives us the ability to grow revenue without increasing expenses as we move ahead.

It won’t have an immediate increase in either revenue or expense. It will just gives a better foundation to grow off of. .

And then Todd, to your comment about M&A can you just sort of update us on your thinking on that and what the environment for potential targets looks like, the geographies that you’re interested in and is there any -- are you seeing any behavioral changes among some of the smaller banks in the last six months than what you’ve seen prior to that?.

I think certainly, we’ve talked about some of the LPO activity we have on Ohio. So we’re starting to take a little bit of a closer look at that market and I think we’re start to see some consolidation from some of the smaller organizations out there.

Certainly you open up a state college market, it would get us a little closer to that central part of the state but -- and I know there was a small deal that went off in our marketplace here in Pennsylvania but -- so there’s a little bit more chatter but I still think it’s probably and certainly in the Pennsylvania market, there’s still not a real robust market on M&A but we’re going to again just continue to have dialogue with people and I think position ourselves for when the opportunity arises or they decide to look for a partner that we’re positioned as good as we possibly can be.

And it’s going to -- in the mean time getting -- keeping our earning stream going on a consistent basis and trying to get the stock price up a little bit so it provides us with nice currency when those opportunities arise. .

And just a question, what was the prepayment income that you guys had this quarter?.

It was about $480,000. .

Okay.

And do you know what that compares to last quarter?.

It was a lot lower last quarter. It was about, less than $30,000. .

Okay.

And is it more normalized run rate, that $30,000 level?.

There’s a lot of strange things that go through margins and we look at that overall number. It was about $200,000 high this quarter. .

[Operator Instructions] Our next question is coming from Matthew Breese of Sterne Agee. .

I wanted to get back to the provisioning levels and it’s been a really tough figure to target the model from our perspective and just kind of thinking about that number on an annual basis -- should we be figuring on it higher or lower than where it was in 2013?.

We would hope lower, but exactly how much is going to just depend on what happens.

Pat?.

I think we looked at it -- we realized maybe going into 2014, it was going to be from a credit perspective, a loss perspective, that great of an improvement over 2013, it could be slightly. So I think maybe if you look at modeling something, we model that at basically flattening to last year, I think maybe we’ll be down slightly. .

That’s why the results we had in the first quarter kind of helps to keep that in check, at least our expectations that it would be down a little bit after Q1. So and again I think you have to kind of look at the whole picture as we alluded to. Delinquencies continue to come down.

Your non-performing loans are down another 6% or so, another $1.5 million. And the formation this quarter was maybe $1.8 million or so. So we’re not seeing a lot of run in that back door right now. And while criticizing classifieds, they were up slightly but there a couple of counts in there..

But I think today we’re pretty comfortable with the trends that we’re seeing in those areas. So again we like to look at kind of all those different components in aggregate to kind of try and give us a little bit of a picture on where we’re going and again those trends continue to be positive again this quarter. .

It’s kind of been frustrating on our end too, Matt, but when we have kind of a better than expected result like this quarter we’ll take that. .

When we look back historically and we had number of years where net charges are below 10 basis points. And while we certainly like to see those results again, we can’t hang on closed [ph] low levels. .

And then thinking about forward loan growth, the last four quarters have been pretty solid, ranging from 1.5% to 2% sequential growth and just kind of wanted to get your thoughts on how sustainable that level of loan growth is?.

We believe that the strategy that we’ve employed organically that it’s sustainable. We don’t see anything in terms of pipelining that would lead us to draw any other conclusion. And as we build out our capabilities, we know we need to grow in a balanced way.

So we’re looking at this private banking initiative, particularly Northeast Ohio and trying to grow some consumer loan balances as well. Although we haven’t gotten where we need to in terms of overall loan growth and balance, that’s something that’s on our plate and we believe that it’s sustainable. .

The other that’s really I think been meeting or exceeding expectations has been the small business group that we put in place about 18 months ago. And their originations were off a little bit this quarter.

We think -- again, there is an area where some of it was attributed to the weather, but their pipeline is up significantly over where it was at this point last year, and they continue to just generate a lot of nice looks..

And the nice thing about that business too, at least a lot other opportunities through insurance, some treasury management, the ability to go in and generate some consumer lending for, like Dave said, private banking.

And you mentioned Northeast Ohio but also state college is an area we’re going to really focus our attention on, trying to drive some of that particular line of business. .

That’s probably the one area that’s been a little bit disappointing for us, has been on the consumer side and again we’re taking a look at how we kind of ramp that up. So that’s kind of going to be the next piece for us, I think we focus on the commercial. Then the small business and now we’re going to attack the consumer.

Over probably the next 12 to 18 months we would hope to start to see some improvement..

And quite frankly, we've stemmed the tide a little bit, when you look at, you go back over the last probably six quarters or so. We were starting to see some flattening, where it’s not a lot of growth but we’re not having a lot of pay off in that portfolio as well.

So we think we’re kind of starting to turn the corner but we know we have some work to do in that area. But it’s still a small portion of our overall loan book. .

Right, and if you had to kind of draw the map out, the $60 million in net loan growth we saw this quarter; how does it shake out in terms of your core Pennsylvania markets versus Ohio?.

The majority of loan growths came from the core markets. We saw some activity in Columbus but those guys are really just getting off of square one. And North East Ohio had a good quarter, not as good as they did last quarter. So it’s good core growth. A lot of it is coming within the core geographies. .

Last question, I think you had mentioned that we could experience a higher tax rate from this quarter.

What should we be thinking about there?.

For us, if it goes higher it’ll be driven by higher pretax. So right now we’re at little over 21%. If we continue to stay on how our results are on pretax basis that’s what can drive that little bit higher. We still think it wouldn’t go too much higher than the low-to-mid 20%. But that would be with improved bottom line results. .

Our next question is coming from William Wallace of Raymond James. .

Just one follow up. I wanted to maybe talk a little bit about the wealth management business. You had a very strong sequential increase in the fees there and I’m curious if that’s being driven by new customer acquisition or if that’s just a bounce back from a weak fourth quarter, if you could just talk a little bit more about that line item. .

Really it’s a combination, I mean we had -- we did increase the fee schedule over in wealth last year I think in the second half of the year and also I think we’re taking another slice at that in January this year. There was a pretty strong new customer growth this quarter.

We had a couple of large liquidity events with some customers and then also just a combination of market improvement too. So all 3, good stuff..

The other area wealth and insurance are 2 areas that we really look at kind of right size if you will and really streamline operations. So when we talk about some of the reduction in staff, there was probably 8 or 9 in one area and 7 or 8 in the other area that came out in both of those respective lines of business.

So from a contribution standpoint both of those lines of business are going to be a lot different this year than they did in ‘13. .

And in your prepared remarks, you didn’t say specifically but it sounded like perhaps you’ve invested I’m guessing maybe insurance and wealth and the new markets including state college.

Is that true?.

Probably right now it’s more on the LPO side in the new markets and we have some staff out and certainly Central Ohio State College and that’s been really the focus right now. .

So has that been a last 3 months kind of addition or has that been a last year kind of addition to those?.

On wealth?.

On wealth. .

We really have -- well some of the changes -- the reallocation of the staff and resources is probably more in the fourth quarter -- third, fourth quarter of last year. We haven’t had anybody over to that side of the house.

So if that’s what you’re asking?.

Yes, that is what I am asking. So I guess, also I’m trying to get at is, I look at the markets and they certainly didn’t improve that strongly in the first quarter and 15% sequential growth.

I’m just trying to get a sense of how sustainable growth is going to be in that line item this year, what your expectations might be?.

Half of the increase came from the traditional trust business and is based on the increase in assets under management primarily. And then about another, little over 1/4 of it came from more activity on what we call discount broker side or financial services side which is more transaction based.

I know we did have about $70,000 increase in mineral management area as related to the Marcellus area. So it’s a broad mix where all the sub-lines of businesses that they have did better last quarter. So we do think the majority of that is sustainable. .

At this time I would like to turn the floor back over to management for any additional or closing comments. .

Thank you Donna. And again I just want to thank everybody for participating in today’s call and Mark and Dave and I appreciate the opportunity to further discuss our quarter results. We think we have a lot of momentum going on and hopefully we’ll be back next quarter for some more good news. So thanks again..