S&T Bancorp Inc (STBA) 2008 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the S&T Bancorp third quarter 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. Robert E. Rout, Senior Executive Vice President, Chief Administrative Officer, and Chief Financial Officer of S&T.

Good afternoon everyone, and thank you for participating in the conference call.

Before beginning I want to take time to refer you to our statement on forward-looking statements and risk factors in the third slide of our webcast slide presentation. This statement provides the cautionary language required by the SEC, for forward-looking statements that may be included with the presentation.

Listeners are also reminded that a copy of the third quarter earnings release can be obtained at our Investor Relations website at www.STBancorp.com. A set of financial highlight slides is included with the webcast, that supports what we are about to discuss, but we don't plan to review the slides in detail, but would be more than happy to respond to any questions concerning them, or any other aspect of our financial performance.

I would like to introduce Todd Brice, S&T's President and Chief Executive Officer, who will provide an overview of S&T's third quarter results.

Thank you, Bob. Good afternoon, everybody. As you can see from our earnings release and financial slides accompanying this webcast, we had a mixed quarter. We did have outstanding growth in our core lines of business, and that was somewhat masked by increased provision expense for three commercial credits that were placed on non-performing status.

Net income for the quarter was flat to last year, with earnings per share of $0.57 represented a 10% decrease year-over-year. I think when you compare the two quarters it is important to keep in mind that we currently have 2.8 million more shares, that were issued as a partial payment for the Irwin Bank transaction. And also we had a non-recurring benefit of about $0.03 per share in last year's third quarter related to an accounting change in our deferred compensation plan.

We do continue to see tremendous growth opportunities in our markets, our commercial loan volume is running at a record pace, along with solid performances in the retail side of our business. The increase is attributed to several factors. I think most predominantly the relatively stable economy of western Pennsylvania, has not experienced a devaluation in real estate that other markets are dealing with.

And really credit issues are impacting our competitors in our marketplace in a very tight securitization market, are leading to increased lending opportunities, and in addition to increased volumes, we are taking advantage of market conditions to increase loan spreads, as well as structured transactions on more favorable terms. We believe that we are uniquely positioned with the depth of our lending staff, to take advantage of these opportunities.

While we are experiencing excellent growth in our DDA accounts, I think they are about up 13% year-to-date, our overall deposits have contracted somewhat. We talked about this last quarter. Some of it has been by design, since deposit pricing has been a little bit irrational in our market. That some institutions have been offering higher rates in attempts to shore up liquidity.

We think our liquidity has been made even stronger by the Irwin Bank acquisition, and has provided plenty of funding for our loan growth. But as that loan growth continues to grow, we are probably going to be looking at becoming a little bit more aggressive on the deposit side of our business.

I would also like to take this opportunity to discuss credit quality issues. As you know, our commercial loan portfolio of $2.6 billion, with a portfolio of that size, we always have a handful of relationships that are experiencing economic stress at any given time, and certainly this is a period of economic stress for many businesses throughout the country. This quarter we did place three loan relationships on non-performing status.

The first is a group of apartment complexes in western Pennsylvania that have an outstanding balance of $15.4 million. The borrowers experienced cash flow issues, due to difficulties really in some other real estate investments that he made that we did not finance. And due to this reduction of cash flows, maintenance was deferred on our properties, and we have established a $2.6 million specific reserve on the loans, in the event that our borrower does not complete the necessary repairs to the property. I do want to mention however, that they do have a funding mechanism in place, but it remains to be seen, if they can execute on their plan to rehabilitate the property.

One of the other large credits is an $8.8 million condominium construction project in Long Island, New York. This is with a customer that we have been doing business with for over 15 years. There were numerous cost overruns. Now with the sluggish residential real estate market in the region, it really has prompted us to establish a $1.8 million specific reserve, to bring the value in-line with current market conditions.

The third loan is a $1.8 million project in the food service industry in central Pennsylvania. The business filed for bankruptcy, and we have established a $1.1 million specific reserve. We typically try to resolve troubled loans fairly quickly and aggressively, but these three loans have fairly complex workout projects, and we know with the market, what we are dealing with these days it is just going to take a little bit longer. So therefore we can expect to be dealing with these credits for at least the next couple of quarters. I also wanted to mention that with our increased loan volume this quarter of approximately $100 million, that has impacted our provision as well, and that attributed about $1 million to our additional provision expense this quarter.

In the past gains from our equity holdings have been a contributor to our earnings. These gains will be limited or non-existent going forward since we all know what's been happening in the equities market, and particularly bank stocks, which comprised the bulk of that portfolio. This quarter we were forced to take a $2.5 million impairment charge, related to one of our holdings in that portfolio. The charge was offset somewhat by gains that we were able to take. But we do intend to wind down that portfolio, except for the strategic holdings, where we do have potential strategic merger interests.

We did consummate our merger with IBT on June 6, and I could not be more pleased with the conversion and the integration of both organizations. We feel that this has been a smoothest conversion in our history, and we are very excited about our prospects going forward. We have been able to achieve or exceed most of of the cost savings that we built into our original pro forma, and the revenue synergies are now starting to kick in, and their footprint really fits right into our strategic direction, so we are really excited about that opportunity.

In our fee revenue areas, such as retail and card related activities, wealth management, insurance and lending are putting in solid performances, despite a difficult market for everyone. And again, our market comparisons to prior periods are affected by that non-recurring benefit to our deferred compensation plan last year. We also believe that our operating expenses are running at an efficient level, especially with the synergies that we have achieved with the IBT acquisition.

I think we will all agree that the banking industry is undergoing the most profound restructuring since the Great Depression, and we continue to evaluate all of the new laws and regulations coming out of Washington on almost a daily basis, and really what that means strategically for a bank like us. I think the most pressing timeframe-wise is participation in the Treasury's capital purchase program. I think if you need the capital, it is a pretty easy decision. But for conservative banks like us, that have always tried to be well capitalized it is a much more difficult evaluation.

I think having excess capital could some banks get a little bit out of their comfort zone, deploy that capital in order to minimize the dilutive effects. At the current time we are leaning towards not participating. However, we will be performing a complete analysis over the next few weeks, on the pros and cons of participating in that program, and really what that means for us. We will certainly inform folks if we decide to move in a different direction.

In any case, we can all agree that the playing field for all banks has changed almost overnight. The area of regulatory risk has taken on a whole new level of intensity. We still believe if we continue to stick with our fundamental banking principals, with strong underwriting, building consumer confidence, and building customer relations through exceptional service and maintaining our strategic focus, we will continue to prosper well. As I mentioned in recent conference calls, we long ago discontinued the practice of providing specific earnings guidance each quarter.

With that in mind, Bob and I would be more than happy to entertain any specific questions about our past performance, or on the future outlook for our business in general. With that, I will turn it back over to the speaker.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS) First question is from Matt Schultheis, Boenning & Scattergood, please go ahead with your question.

Good afternoon, gentlemen.

Hi, Matt.

I know you went over the loans that you had to deal with. You had the $8.8 million condo. What was the first one you you talked about? I kind of missed that.

That was an apartment project, Matt in Western Pennsylvania. The borrower invested in some other properties out of market, which we did not finance, but they had been a severe drag on cash flow and took some money out of this project to put it into some of the other projects, and there is some deferred maintenance that needs to be done.

He does have a funding mechanism in place, but we just took a conservative approach if he can't execute on his plan, we are going to have to spend some money to get the apartments up to speed.

Okay. What was the dollar figure of that?

15 --

$15.4 million outstanding, and a $2.6 million specific reserve.

Okay. Aside from the one in New York, do you see any problems with anything else out of market?

We have a couple of lot development projects in Florida, that probably are just going to take some time to work through, obviously with that market down there. We feel we have some pretty good guarantors in place, that have some pretty solid projects in western Pennsylvania, and we were just having discussions with them last week, and they have put a lot of their equity into it already, and they are probably going to face putting some more in, and they have the wherewithal to do it.

Are they cross-collateralized with their western PA properties?

We are in the process of some of that, Matt.

Okay. What is your total exposure to out-of-market?

I will defer to Tony Kallsen who is with us, he is our Chief Credit Officer.

We have about $318 million in out-of-state, or what we consider out-of-state transactions. That represents about 18% of our commercial real estate portfolio.

Okay.

I would point out as well, Matt, that only around 7% of that is in one-to-four family lot developments. So most of the profile of what we do when we are looking at out-of-state transactions, first it is with customers that we have a track record with, and second, the majority of the exposure is in either apartments, or redevelopment.

Or owner occupied too, we have a fair amount of owner occupied as well.

And then it is split up between a number of different states too, Matt. There are probably I think collectively --

Are you there?

We are trying to--

There wasn't even static.

Probably about 20 some states we are in. It is pretty disbursed.

I notice your press release did not discuss 90 days, or I may have missed it, 90 days past due or 30 to 89, can you comment on either of those, or both of those?

They would have been attached to the spreadsheet that we provided, Matt, with the press release.

Okay.

But I can give you those numbers here very quickly. At the end of the third quarter, our non-performing loans to total loans was 0.92%. And our non-performing loans, or non-performing assets to total assets --

I can see non-performing assets, but how about 90 days past due?

It is still accruing.

That is right. How about 30 to 89?

Don't have that handy here, Matt.

We have seen some deterioration, we typically don't publish that. We have seen some deterioration from prior months. Things slowing down a little bit.

Most of the increases in both of those numbers are a result of the three non-performing loans.

Sure.

That we talked about.

Any idea how long it might take to clean those three up? I mean, I know you guys are fast, but --

Well, the problem is, this is Tony. The problem is that the strategies are based on selling real estate in this market. So whether we sell it or whether they sell it, it is the same basic strategy.

Sure.

We have already gone through the process of trying to identify other assets, and getting lien positions on those other assets. So and really, it is going to take some time to work through those because we are talking about selling real estate.

Okay. That is it for me. Thank you very much.

Thanks, Matt.

The next question is from David Darst with FTN Midwest. Please go ahead with your question.

Good afternoon.

Hi, David.

Bob, given the recent rate cuts, could you you give us kind of an update on your balance sheet position, and whether you are asset sensitive or liability sensitive?

Yes, we continue to remain liability sensitive, and certainly we will benefit slightly, we are fairly well balanced. There will be a slight benefit with the rate cuts. But as you know, if they go down too much more, then you start hitting floors on core deposits.

The other mitigating issue as Bob mentioned in his introductory comments, with this loan growth, we will need to be a little more aggressive going forward in attracting deposits than what we have had. That sort of unique liquidity position that we had over the past couple quarters with the acquisition of Irwin, is slowly winding down, again, as we are seeing all these good loan opportunities.

With that being said, though, I mean, we are able on the asset side, we are able to generate probably spreads of 1 point to 1.5 points higher, than where we were at this point last year.

Yes, the pricing on commercial loans, and retail loans for that matter, have gone our way here over the last quarter or two, and it is not getting in the way.

Are you comfortable growing the loan book at this pace for a couple of quarters, or do you feel like you are going to slow it down?

We are being selective. But I can tell you, there is an awful lot of business out there to be had.

I will say, last quarter there was a little bit of a temporary spike that we will probably see a little bit of it this quarter as well. But we had about $70 million of product in the lower floater bonds, that were backed by letters of credit that we issued, and with the commercial paper market drying up, they weren't able to remarket those, so we got those put back to us, and I think last quarter it amounted to about $25 million, there was probably a similar amount in October that we funded as well.

Meaning an additional, or was that a roll?

Additional.

How about as far as the disruption of markets, have you been able to pick up any new lenders, and where do you go with your commercial lenders in the Irwin market?

I mean, we are kind of just letting them continue to do their job. We try to stay out of their way down in the Irwin markets, and they have a pretty good following down there, and we are able to bring some increased capacity to them, and really just support them a little bit, and get them acclimated a little bit on how we do business.

There were a lot of similarities. As far as any new lenders, I don't think we picked any up. I'm sorry, we did, we brought one in one of our northern markets. And again, if you find the right person, we would consider bringing them on, but don't have a 'Help Wanted' sign hanging out on the door that we are looking for people. We look for the quality people.

Okay. Thanks.

Thanks, David.

The next question is from Collyn Gilbert with Stifel Nicolaus. Please go ahead with your question.

Thanks, good morning, guys, or afternoon, evening, whatever it might be. Sorry. Just a question following up to some of Matt's comments on the out-of-market, do you have the delinquency and charge-off trends, or metrics of the out-of-market portfolio?

We don't. This is Tony. We don't track those separately. I can tell you from a charge-off perspective, I am not sure we have taken a charge on anything out of state at this point.

It has been a couple years, yes. And the only problem one that we have currently is the condominium units up in Long Island. Everything else is current.

Okay. And then in terms of your exposure on the commercial real estate side to retail related projects, what is the exposure there, and what types of retail do you guys have relationships with, what types of retail buyers?

One of the things I will refer you to is our slide show. We did present a slide that segregates us by type of loans for commercial real estate, and if you just give me a second here, I will refer to it. Our largest component, total commercial real estate portfolio is about $1.8 billion. 16% of that would be retail and strip malls, $250 million is residential rental properties, apartments, et cetera. $244 million, or 14% would be office buildings. And then from there on, you just get on below in single digits, hotels, manufacturing, residential development. Real estate residential development is about $106 million, or 6% of that portfolio.

Okay.

We have some business colleges. We have some juvenile prisons. The biggest component is the retail and strip mall and residential apartments.

Okay. And are you concerned at all, or maybe what segments of the CRE portfolio, outside of resi development, are you kind of looking at most closely now?

I would say you are right on point. I would say the retail is one that is just kind of an unknown on how the tenants are going to be impacted going forward in this economic downturn.

The other thing that is going to concern me is going forward, when we kind of, the one thing I will say, we have stuck to more the traditional underwriting over the years, where we required guarantees and a down payment, equity, putting in 25% equity. And we amortized them out over 15 or 20 years. We weren't doing any of that 10 year interest-only strips, that a lot of these guys were placing on that stuff.

When those start to reprice, or balloon, there is going to be a big void in the marketplace. It is just tough for them to go out and find financing on those larger projects right now. People are either going to have to put more equity into them, or there may be kind of a glut on the market. So I mean, that is definitely an area that we are paying attention to right now.

I think we are comfortable with our underwriting, but there is no doubt that the commercial real estate segment of the country is going to undergo some softness, as leases renew and tenants leave. But we think we are in a good position for that as compared to others.

To date, we haven't seen any discernible decline in that particular product yet.

Okay. Okay. That is helpful. Thank you.

You are welcome.

The next question is from Rick Weiss with Janney Montgomery Scott. Please go ahead with your question.

Hey, guys.

Hi, Rick.

When you are talking about picking up commercial loan opportunities, would that be commercial business, or commercial real estate? And what is your typical loan size that you are going to see right now?

On the C&I is probably in that couple, $3 million range. And you kind of put a limit to any one project in the $10 million range, at $10 million then we have an in-house limit of 22, and then we do have some accounts above that, but they are cut up into four or five or six different projects, of maybe 6 to $7 million chunks.

Okay. And Irwin did not exceed that?

No.

And trying to make sense out of the loan loss allowance. The provision has been jumping around, to say the least, the last couple of quarters.

Right.

And I was wondering kind of what is, I think the merger probably influenced a lot of that, but kind of, I know you don't give guidance, but just want to ask anyway. What sort of run rate would you think is fair?

As you know, we are all subject to the SEC's guidelines on how that loan loss reserve is calculated, and most of that is done on retrospective type data. And so you pretty much have to look at the portfolio as it is in a particular quarter, and that becomes the basis for your loan loss going forward. That is the accounting perspective.

Now from the banking perspective, as we are all in the business, we like to take a prospective look, and sometimes the accounting rules clashes with that type of perspective. So as far as run rate goes, Rick, what we have been telling our folks is if you look back over history, the losses in our portfolio have ranged between 25 and 35 basis points. And sometimes it is as low as 0.01, and sometimes it has been as high in the high 30s or 40s.

But that is what we usually tell folks, take a longer term perspective. 25 to 35 basis points of losses. That is pretty much the benchmark for our provision expense, plus some additional for whatever growth we are putting on the books. Now with that said, we certainly are entering into different times. We just don't know what the next couple of quarters are going to bring.

Okay. All right. So I don't think it is going to be jump from like a negative, what was it, 118,000 in the second, to 6 million, and back to negative. That was just kind of weird. Was that because of the merger?

No, I think some of it was. Some of it is also our credit quality at the second quarter was in pretty good shape, and that became the basis for our loan loss reserve. Come the third quarter, you are seeing three troubled commercial loans go non-performing. We put aside $5.4 million of specific reserves, just for those three loans.

Okay.

And actually, without those, our loan loss provision would have been around $1 million this quarter.

Greg, it is Tony. We have some unusual events take place in Q2. One was an improvement in credit metrics, and that feeds into that model. But the other was the release of a lot of specific reserves, on some problem accounts that we resolved in June, so we had a release of a lot of that in Q2.

Yes, good point.

With the apartments, the guy is still making payments and working on getting these things rehabbed, and getting them released up, and the guy in New York has a plan in place to market some of these in a little bit different way.

So we are still actively managing these accounts, and hopefully we will have a positive resolution at the end of the day. But we deal with just where market conditions are today, this is the prudent approach to take.

As we see that loan portfolio today, we believe that loan loss reserve is adequate to handle future losses.

Okay. No, I am not really trying to bust your chops. I am trying to figure out what to do for my own model.

It is a legitimate question.

I was actually thinking if you could figure out how to do a LLL, we would hire you.

I wish it was the old days, where you could just say, I am targeting a loan loss reserve or 1.3, or whatever it is, and go from there. I guess with the Irwin merger, did you guys change the name, like to S&T on signage, and things like that?

Yes, fully integrated.

Okay. Got it. Thank you very much.

Okay, Rick.

(OPERATOR INSTRUCTIONS). Next question is from Andy Stapp with B. Riley & Co. Please go ahead with your question.

Hi, guys.

Hi, Andy.

I came a little late on the call and missed some of the detail on these three credits, which I can look at the transcript to get that. But just trying to get a feel, I mean, you have had you are commercial lenders, so you sometimes have just lumpiness, when a couple credits go into non-accrual status. Just trying to get a feel how much was related to the economy, and how much was related to just the lumpiness?

The question on everybody's mind is when you see problem credits in the banks, is it one-off, or customer specific, or is it something happening with the general economy.

Especially, it looked like your NPAs were way down outside of these three credits, plus like you mentioned, the provision would have been fairly nominal outside of these.

Well, I think the answer, I mean, we said it is company specific that these problem loans, or is there something more related to systemic issues going on in the economy, and I think the answer is yes, it is both of those.

Okay. That is what I figured.

One of those is the apartment deal, the fellow made some out-of-state real estate investments.

Okay.

That we did not finance but it affected his level of cash flows, and then the other one, which is the condominium units in Long Island, yes, the guy that we have been doing business with for 15 years, his project is definitely affected by what is happening in the economy. Especially with job losses in the New York region, and bonuses aren't going to be very high, where people are going to be looking for new housing. I think it is both.

Andy, if I could just make one important distinction too. The $15 million apartment loan is not in the non-performing category right now. It is still performing. It is just impaired.

It is non-performing --

I thought you placed all three on non-accrual status.

Todd talked about specific reserves that were placed on specific projects. Let me make this clear. The way our model works is we look at specific analysis, or we look at reserve analysis on accounts that are impaired for non-performing.

So they could be accrual accounts, and this large apartment project that we are talking about is about $15.4 million in outstanding, that we do have a specific reserve on. That is accrual at this point.

Okay. I must have misread the press release.

Andy, your question on the economic, I mean, I would attribute a large part of what happened with the apartment project on management, and I would attribute a large part of what happened with the condo project as economic.

Okay.

Andy, you are right, that there is a misstatement in the press release, those three loans weren't all placed on non-performing status. One is just impaired.

Okay. So two of them were, but the apartment complex was not?

That is correct.

Okay. And you mentioned you are going to have to go at some point more aggressively after deposits. Just wondering if you could tell me, tell us what some of the deposit rates going out there are, especially with some of these, your more distressed competitors who need funding. And some color to your best ability, as to how aggressively I mean, would you have to match that funding to get the funds you need, or given that you don't have the issues they have, you think, how much do you think you could discount, relative to these competitors?

We are running a special right now, 3.70 for six months, and we are getting some pretty good action on it right now, and others are a little bit higher. Maybe a half point to even 75 basis points higher. I think you are right, Andy. I mean, the first question out of the customer's mouth is not today what's your rate, it is what your financial stability, and we are able to paint a pretty good picture for people looking to make a change.

Okay. And is my understanding correct, you don't participate in national shared credits?

No. I mean, Andy, we probably have two or three, but I will tell you that the credits that we have shared in are within our region, and with people that we have other relationships with.

Okay.

And there are a couple of real estate projects that we got involved with in the Pittsburgh marketplace, that involved four or five banks. As a practice, we don't go on the shared national type credits.

Okay. That is it for me. Thanks.

Thank you Andy.

There are no further questions in queue. I would like to turn the call back over to management for closing remarks.

Well, thank you for participating in today's conference call, everybody, and Bob and Tony and I appreciate the opportunity to discuss this quarter's results, and we look forward to hearing from all of you at our next conference call. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.