S&T Bancorp Inc (STBA) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the S&T Bancorp Inc fourth quarter 2008 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. Webcast listeners can send questions by e-mail to investor.relations@STbank.net. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Robert E. Rout, Senior Executive Vice President and Chief Financial Officer of S&T Bancorp Inc. Thank you, you may begin.

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

Also a copy of the fourth quarter earnings release can be obtained from our Investor Relations website at www.stbancorp.com. A set of financial highlights slides that we're including with the webcast -- we don't plan to review those slides in detail but will be certainly more than happy to respond to any questions concerning them or any other aspects of our financial performance this last quarter. Now I'd like to introduce Todd Brice, S&T's President and Chief Executive Officer, who will provide an overview of S&T's first 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 solid growth in our core lines of business despite the last minute surprise with an incident involving one of our loan relationships that caused us to delay release of earnings. Trouble loans are a concern for everyone in the industry these days, but we continue to be positive about our growth prospects in spite of current market conditions.

Earnings per share for the fourth quarter were $0.57, representing a 6% increase over the same period last year. Full year net income increased 7%. Full year EPS was relatively flat due to the extra shares issued in the IBT second quarter acquisition. The full year earnings per share are certainly not where we planned to be. 2008 was a difficult year with a lot of extraordinary expense. We had some merger related costs, some credit issues obviously in there. We had various impairment charges in our equities portfolio, low income housing tax credit portfolio. All of those impacted our results.

But I think if you look beyond those issues, I really like what I see happening with our core businesses. First being our acquisition with IBT couldn't be going better and it is exceeding our expectations. This acquisition really gives us a strong footprint into contiguous markets, again with attractive demographics. There are also markets that are currently undergoing disruptions with mergers and troubled financial institutions, and these types of markets create opportunities for our incremental and opportunistic growth strategies.

Organic loan growth increased $281 million, with much of that growth the result of new relationships in our commercial lines, as many of our competitors were preoccupied with other issues. Organic deposit growth was not as robust as loan growth. The IBT acquisition provided ample liquidity to fund our record loan growth this year. This enabled us to be somewhat conservative on the deposit pricings, helping a 21 basis point improvement in our year-over-year net interest margin. We did see nice growth, organic growth in our DDA side of the business. It was up about $79 million, and it's especially pleasing since this area has been a significant focus of our relationship banking strategies.

In the fee areas, our deposit and debit card fees are starting to benefit from the IBT synergies and DDA account expansion, up $3.4 million. Wealth management and insurance revenue showed modest increases, but that performance too is encouraging since I think everyone would agree that these were some of the toughest markets in many many years for these areas. Mortgage banking, which is somewhat cyclical, but here too we're seeing a big resurgence of activity as mortgage rates move into that 5% range and a lot of refinancing activity going on right now. Over the last couple years, we've methodically reduced exposure in our equities portfolio, which is primarily comprised of bank stock, where we might have a potential merger interest. As you might expect, this portfolio has not performed very well recently. It was a source of $4.3 million of other than temporary impairment charges in 2008, and it could potentially have some impairment charges impacting our 2009 results, depending again how the market performs.

I think the good news from our perspective is the portfolio has been reduced to just under $15 million. We were fortunate in our bond portfolio not to be holding any subprime securities, trust preferred, Fannie Mae, or Freddie Mac preferreds. It might not be the highest yielding portfolio, but it does allow us to sleep at night. We are holding approximately $24 million of common stock in the Federal Home Loan Bank of Pittsburgh as a requirement of their borrowing programs. Federal Home Loan Bank has recently suspended dividends and redemptions of their stock, so we will be watching developments closely as that institution works through some of their own impairment issues.

On the credit side, we all realize that credit issues are on the top of everyone's mind in today's environment so I'll only take a few minutes just to walk through how we're doing. We get questions about the status of our residential mortgage and home equity portfolios. Their delinquencies at December 31, 2008 was less than 1% in that portfolio and negligible charge-offs for the full year. We only hold three OREO properties, in our home equity and residential mortgage portfolios, and those total $68,000. These portfolios probably give me the least concern. We never have lowered our underwriting standards. We have always originated our own mortgages. And particularly during the subprime boom, we think this really is benefiting us now. Market deterioration could change, but right now where we are sitting, we aren't seeing a whole lot of stress out in our markets in Western Pennsylvania.

On the commercial loan segment, we are experiencing stress in almost every category. Particular concern obviously is commercial real estate, which we don't believe has bottomed. That market needs to work through some of the deals that were being done in the secondary market in the last few years that were done with very aggressive underwriting standards. I think this correction is going to impact the overall economy and is going to impact our portfolio as well, but we trusted our underwriting and [current] administration process to get us through times such as these. I think it's times like these that make you think how thankful we are that we did stick to our normal underwriting criteria, which for the most part includes personal guarantees.

During the fourth quarter, we did add three significant credits to non-performing status. The first few totaled $7.5 million, and it appears at this time that the underlying collateral and the personal guarantees of the principals should be sufficient to minimize any potential charge-offs. The other loan involves a $6.7 million relationship that was discovered on January 14, and as we previously announced, caused us to delay our earnings announcement. That relationship involves two out of state construction projects. The developer was submitting fraudulent documents that [at these] construction draws. And as a result, we immediately engaged third party investigation, ordered new appraisals, delayed our earnings announcement. And the process indicates that we are going to incur a $4.6 million chargeoff and increase to our provision expense in the fourth quarter 2008, and this is reflected in our financial statements. These types of issues are not unusual but they are nonetheless unpleasant, and this case is particularly disturbing since it involved an 18 year customer and we've done many many deals in the past. I do think that hard economic times make people do uncharacteristic things, and it's a hard lesson, and it will make us stronger and smarter going forward. And as a result of our investigation we're certainly going to change some of our policies and procedures to prevent this type of occurrence from happening in the future.

The last issue I want to touch on is our receipt of our capital purchase program funds through the United States Treasury Department. This was a difficult decision for us, since our capital projections remain in the well capitalized range, even with our significant growth. These are, I think you all would agree, however, not normal times. And we believe that it's a risk of taking the capital purchase funds and then maybe needing it far outweigh the risk of taking the funds and then not needing it. So also it's also going to enable to grow our business and meet the credit needs of our customers. The capital purchase monies will have some earnings per share dilution effect until we can deploy in a meaningful, but I think more importantly disciplined manner. We are going to accept some short-term dilution as opposed to try and leverage it in a high risk investment scheme, especially in these market conditions. I think a conservative culture served us well over the last 100 years and we believe those basic banking principles will continue to be relevant in the future as well.

As I mentioned the recent conference calls, we've discontinued the practice of providing specific earnings guidance each quarter. And I think 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 of our business in general. So with that, Operator, I would ask you to open up to question and answer session.

Thank you. (Operator Instructions). Our first question is coming from Rick Weiss from Janney Montgomery Scott. Please state your question.

Hi there.

Hi, Rick. How you doing?

I'm good. I guess the question is with the asset quality. I was wondering why your reserves dipped in the fourth quarter, and you just ended it with the construction and the charge-offs were much higher, but -- instead of boosting your loan loss allowance in anticipation of worsening credit conditions?

Hi, Rick, we applied the factors in our model and I'll let Bob speak to this maybe a little bit more. But we run it through a pretty elaborate model and where we are, it came out actually down a little bit.

Rick, hi, it's Bob Rout.

Hi, Bob.

Actually, the allowance as measured by total loans outstanding is pretty consistent quarter to quarter. We had a little dip in the second quarter of last year as we brought on the Irwin Bank portfolio, but yes, it's been running [1.21% to 1.20%0. First quarter last year was [1.25%]. So we think we have the problems identified, and one of the issues with allowance for loan loss models is that they do take a historical snapshot. They don't provide for a whole lot of judgment or intuition about looking out into the future.

Okay.

I do know, Rick, that we obviously have been piping up our economic component of the model and increasing some of the factors that we apply from that regard, but it works out how it works out.

Okay, and I guess the second part would be -- I think you talked a little bit about the TARP and the earnings dilution that's expected to occur. Do you think -- it seems to me like doing as much lending as you can, given that you already had existing capital to support quality loans. So would most of the growth coming into investment securities to try to offset some of that dilution?

We're going to do some of that, but we'll take measured and incremental steps, Rick. The initial funds were used to pay down debt and we'll deploy some of that into some agencies and maybe some mortgage backed securities. As you know, what we would really like to do is to continue to grow the portfolio, the loan portfolio such as we did last year. Again, economic factors are going to play into that -- how much we can grow that portfolio in 09. Whatever we do, it will be incremental.

Right, and are you getting any sense from the regulators on how they are going to track the TARP funds?

I mean, I think first thing, they all need a lesson in bank accounting, because there's not funds to be lended. It's truly capital, but that's beside the point. We did get some notice from the FDIC that they would like included within our future financial statements a description of how those funds are being utilized for lending that, as you said, that whole directive is not settled on yet. It will be interesting to see how others present that information.

I mean we'd certainly love to have the opportunity to significantly grow our portfolios. I mean, we're seeing some nice activity on the residential side. I think some of it is being impacted obviously by our lower mortgage rates and the refinance activities. But the commercial side is tough right now. We're just seeing decreased demand. A lot of people are cutting back on capital expenditures or cutting back on inventory, and obviously preparing for a slowdown in their businesses as well. So just the demand has really dried up in the last quarter I think to an extent.

Would you be able to take off any business I guess as a result of PNC/Nat City?

Yes, we're seeing some of that right now, Rick. We certainly have some nice hits in the fourth quarter and I know we have some pretty significant relationships that we're in negotiations with right now.

Okay, one final question. Would you expect to see any more growth or any growth at all through participation, like some banks are deciding to go that route?

No, I mean, Rick, we've done a few participations, but they've been in market. For the most part, they've been companies that we've had relationships with, and we may leave some and maybe it's a project that's a little bit larger than what we want to take a full exposure on. So we might lay some of it off or maybe a borrower that we've had a relationship with that's done a project that the other bank are dealing with for this particular transaction wants to lay a piece off. So it's more relationship oriented as opposed to transactional based deals that really are just one offs and not going to benefit you in the long run.

That makes sense. Okay, thank you.

Thanks, Rick.

The next question is coming from Andy Stapp with B. Riley & Company.

Hi, guys.

Hi, Andy.

My first question you touched on somewhat. You had some really strong loan growth in recent quarters, but loans were essentially flat in the fourth quarter. How much of that is just the decline in commercial loan demand versus other factors?

Andy, I'll answer the first part of that. Some of that run-off in the fourth quarter was our choice. There was a couple of large loans that we're becoming more and more uncomfortable with and asked them to find another bank before things deteriorated too much. The second issue, we had some rather large loans get out into the lower floater market and I think it is telling that in the fourth quarter, that market seemed to be loosening up a little bit than it had in the past.

I'm sorry, what market was that?

Lower floaters, where they'll go out and have it secured by a bond and we back them with a letter of credit. So we saw some of that come back on to our balance sheet in the fourth quarter and then we see some of it going back off. We're also being careful of some of the new deals coming in. There are some strained businesses out there at this point, and you certainly don't want to jump in on the tail end of one that's having particular problems. And other than that, no. The economic times, there's just not a whole lot of expansion.

Well, the other thing we had too is we had a couple of businesses that sold.

A few large ones.

Right.

And the fourth quarter there was two large businesses that sold and come off our balance sheet. And on the other hand we pick that money up usually in the wealth management funds.

Okay, is there any guidance you could give us just what you expect in loan growth in '09?

I think all bets are off the table here with this economic scenario, Andy. Typically the first quarter is not a strong loan growth quarter for us, so it will be a few more weeks until we see how the markets shape up.

But just having conversations, Andy, with customers and even other business centers that maybe we don't deal with. But I think everybody across-the-board is trying to manage for a decline in their business of anywhere from 10% to 25%. So again, they are delaying capital expenditures or using inventory like I mentioned before. So it's going to be a challenge. We'll just have to go out and work a little harder, and like I said there's going to be some opportunities from some of the dislocation in the Nat City/PNC merger.

Yes, the biggest opportunities that we have in these market is when there are disruptions going on through mergers or maybe institutions having financial difficulties. That worked extremely well for us in 2008. We think that along those lines that there will be equal if not greater opportunities.

Okay. How did your 30 day to 89 day delinquencies fare quarter to quarter?

Quarter to quarter -- I know from November 30 to 12/31, they actually went down. Quarter to quarter, I'm not --

They were up [over 2%] in total delinquencies.

Okay. And how much do you expect your FDIC assessment to go up?

We expect at this point $2.5 million.

Okay. And how much did you receive in FHLB dividends in '08?

We'll have to look that up, because the balances, they do go back and forth. While we're looking that up, if you have another question, Andy, we'll move on, and if not I'll respond to it later in the call.

Just my last question is just what you see going forward for the net interest margin?

It's getting a little tougher. We were real pleased with the expansion in '08. I really give credit to our Treasurer Mark Kochvar for keeping us disciplined. We also have the added benefit of the liquidity that we acquired with the Irwin Bank transaction, and that allowed us to sit out some of the pricing wars that were going on in our market. Especially as you add institutions that are getting extremely desperate for liquidity as they encounter their own financial problems. Going forward, there's not a whole lot of downward movement on the rates, on the deposit rates. We know that an awful lot of that is going to have to be maintained on the asset side. One of the things that we have been doing is when we are renewing lines or having new business come in and they are LIBOR priced or prime priced, we're putting floors in, maybe taking them up prime plus.

Or increasing spreads, a combination of increasing spreads and some floors.

So we're trying to do everything we can on the asset side to push those yields up, because again, there's not a whole lot of [down] movement on your funding cost.

Are you seeing moderation in the deposit competitive pricing pressures?

Some. It's a disrupted market right now. We're seeing some, but not as bad as what we've seen in prior years. But anyway your answer to your question on the Federal Home Loan Bank dividends, last year in 2008, we had $635,000.

Okay. Thank you.

Thanks, Andy.

Our next question is coming from Collyn Gilbert with Stifel Nicolaus. Please state your question.

Thanks, good afternoon, guys.

Hi, Collyn.

Most of my questions have been asked, but just can you give us the exact quarterly expense of the TARP with the warrants?

Not with the warrants, Collyn. It's $108 million. [$676 million] times 5% after-tax.

Yes, I guess I was looking more for the warrants too on top of it.

Well, the warrants, we don't have the valuation completed yet.

Okay.

We didn't receive ours until after the first of the year.

Okay, all right. That was it. Thanks.

Thanks.

(Operator Instructions). Our next question is coming from Matt Schultheis with Boenning & Scattergood. Please state your question.

Good afternoon. All of my questions have been answered, so thank you.

I thought you were going to ask if the Steelers were going to win this weekend, Matt.

No comment.

We did get a couple questions or e-mail to me from another analyst, I'd like to address at this time and the first question was our anticipated expense for the defined benefit retirement plan of 2009. And we do expect that amount to be approximately $3.1 million.

The second question was the status of our bank owned life insurance programs, and we currently have about $51 million of bank owned life insurance. The biggest piece of that, $37 million, is with [Kemper], and is a separate account type BOLI and it's invested primarily in [pure] corporate debt securities. Last year, that BOLI yielded a pre-tax return of 6.29%. There is some noise out there in the market of various BOLI holdings experiencing some credit related issues. We did get notice that there would be a small adjustment to ours as a result of some of those credit issues, and right now we're anticipating that to be $28,000 in the first quarter. We also have two pieces that were BOLI that were required through our Irwin Bank merger, and that's $14 million of general account BOLIs, insurance policies. One is with Mass Mutual of $7 million and the other $7 million is with New York Life. And both of those agencies are rated excellent to superior, and their yields were running 5.6% and 6.4% respectively. So hopefully that will address the questions that we had e-mailed. So with that, any more questions?

Yes, we do have one last question coming from [Brett Morris] with FTN Midwest. Please state your question.

Thanks, guys, you actually had taken care of all my questions.

Good. Thanks, Brett.

We have no further questions, sir.

Well, I'd like to thank everybody for participating in today's conference call. Bob and I appreciate the opportunity to discuss this quarter's results, and look forward to hearing from you at our next call in the first quarter. So have a great weekend and it's been nice spending some time with you.

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