S&T Bancorp Inc (STBA) 2009 Q4 法說會逐字稿

Greetings and welcome to the S&T Bancorp Incorporated fourth-quarter earnings conference call and webcast. 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 Rout, Senior Executive Vice President and CFO for S&T Bancorp. Thank you, Mr. Rout. You may now begin.

Thank you, Chris, and good afternoon everyone. Thank you for participating in our conference call. Before beginning the presentations, 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 presentation. The statement provides the cautionary language required by the SEC for forward-looking statements that may be included within the presentation.

Listeners are also reminded that a copy of the fourth-quarter earnings release can be obtained at our investor-relations website at www.stbancorp.com. As I mentioned earlier, a set of financial-highlights slides is included with the webcast to support what we are about to discuss. But we don't plan to review the slides in detail, but certainly would be more than happy to respond to any questions concerning them or any other aspect of our financial performance.

Now I'd like to introduce Todd Brice, S&T's President and Chief Executive Officer, who is going to provide an overview of our fourth-quarter results.

Thank you, Bob, and good afternoon, everybody. As indicated in our press release, we had net income this quarter of $7.6 million or $0.28 per share. This provided a small net income for of the year of $2 million or $0.07 earnings per share. While this performance is far removed from our historical performance and goals, we feel it's certainly a positive direction from an extremely difficult first two quarters of 2009 and consistent with our third-quarter performance.

Credit issues continue to dominate our financials as well as our own organization's strategic focus. Stress continues within almost all categories of our commercial-loan portfolio. And we feel it is still too early to call a bottom to this credit cycle, but the stabilization of credit metrics on a linked-quarter basis, as well as the anecdotal feedback from our customers are both encouraging.

Tony Kallsen, our Chief Credit Officer, will be providing some specifics about this quarter's credit quality activities and how we are addressing and monitoring issues that this recession has created. Following his presentation, Bob Rout will be discussing other areas of this quarter's financials.

Commercial loan growth continues to be negative, and obviously the commercial real estate market is very soft, as developers continue to be cautious. Many of the new transactions that we are looking at either have credit issues or are being impacted by the overall decline in real estate valuations, so we're being very cautious in our underwriting. We are seeing some deals where borrowers are being offered significant discounts to buy out their performing loans as banks look to pare down portfolios due to concentration issues.

We also continue to see contraction on the C&I side of our portfolio as well. The decline in C&I outstandings has had the biggest impact on loan balances. We lost very few relationships in 2009, but the utilization of credit lines are down almost 23% or $87 million for the year. Businesses are reacting normally to this recessionary environment. I think we'd all agree when sales are down, you're going to have less financing needs for receivables, inventory, equipment purchase and facility expansions.

(Inaudible) maintaining and expanding those existing customer relationships is the cornerstone of our strategic focus and operating philosophies. So even though credit needs are down, we've used this period to present cash management, insurance and wealth management products to those customers via joint calling activities. Some of those cross-sell activity results can be seen in our $112 million increase in DDA balances over the last year.

The wealth management insurance area has also had tough market conditions to deal with this past year. And we continue to look at strategic restructuring of these areas to ensure that they are in the best position for an uptick in the economy. We think a bright spot at year-end was the four-star designation by Morningstar of our Stewart Capital Mutual Fund that our Wealth Management area manages.

Retail had a good year in many areas. This was the first full year of the IBT merger acquisition. Strong performance in mortgage banking was certainly helpful, and we continue to see growth opportunities in home-equity markets and through our home-center branding.

With that, I'll turn the discussion over to our Chief Credit Officer, Tony Kallsen.

Good afternoon. Provision expense was $10.4 million for the quarter, resulting in an ending balance in the provision account of $59.6 million or 1.75% of total loans. Although the bank recognized $11.7 million in charges, the reserve decreased by only $1.3 million over the last quarter. This is attributed to significant adjustments and several qualitative risk factors within the ALLL model based on prolonged adverse trends in unemployment, classified and nonperforming loans.

Nonperforming loans increased 5% over last quarter. There were two significant additions. The first is a $10 million resort facility in Pennsylvania that experienced a decline in bookings and cash flow. The bank has an 80% deficiency guarantee on approximately half of this exposure. At year-end there was no specific reserve, but this is subject to change based upon an updated appraisal.

The second is a $5 million facility on an industrial warehouse project in the southeast. The project has suffered from slow absorption and was historically subsidized by the guarantors. Based on diminished sponsor capacity, the bank elected to recognize this loan as an NPL and established a specific reserve of $1.5 million. The bank is working with ownership to develop a liquidation strategy.

Total criticized and classified loans increased 8% over last quarter. Within these risk ratings we continue to observe a migration to substandard. Total loan delinquency rested at 3.64% compared to 3.57% in September. It's not a surprise that the largest delinquencies continue to appear in the CRE and CRE construction portfolios.

The out-of-state portfolio totaled $385 million. This represents 11% of total loans and 22% of total CRE loans. New York loans were 28% of total out-of-state loans and concentrated in the Rochester, New York metro and Buffalo MSAs. Ohio loans were 20% of out-of-state loans and concentrated in Cincinnati, Dayton and Columbus.

Segment concentrations are retail strip at 24%, rental properties at 12% and hospitality at 11%. $54 million, or 14%, of the out-of-state portfolio is adversely classified. And the delinquency rate is 7.33%, compared to 7.5% last quarter. At year-end the bank had exposure to $107 million of purchased participation loans. $38 million of that is subject to Shared National Credit examination. 11% of loans subject to SNC are adversely classified. Next, Bob will provide you with more details on our financial results.

Thank you, Tony. Again, good afternoon, everyone. I will take a walk down through the income statement in order to provide a little more color on some of the more significant items this quarter. And the first would be net interest income.

Net interest margin was maintained at 3.94%, as compared to the linked-quarter, through higher loan spreads, and we continue to chip away funding costs. Earning asset levels, on the other hand, declined primarily due to reduced demand for commercial loans and our strategy of not replacing maturing securities unless necessary.

In addition, delinquent interest has been a drag on net interest income throughout the year. As mentioned before, we have been deleveraging voluntarily from a securities perspective, but the decrease in loans and security -- this decrease in loans and securities, along with funds received in our participation in the CPP program have provided a significant opportunity to pay down borrowings and reduce the need to aggressively solicit deposits.

Year over year, our borrowings are down $420 million. We believe that a high liquidity and a high capital position is not only the place to be in riding out the recession, but it also positions us well for when the economy does begin an upturn. With regard to liquidity, we have also taken a number of actions to reduce our borrowing exposure in the Federal Home Loan Bank and to diversify sources.

During the fourth quarter we recognized $0.5 million of other-than-temporary impairment charges in our equity portfolio. This portfolio primarily consists of local bank stocks where we may have a future merger interest. Bank stocks, as you know, have not been a strong performer in this market and these impairment charges have been a drag on earnings throughout 2009. The good news is that our current exposure in this portfolio is about $12 million market value, including $400,000 of unrealized losses that may represent potential future impairment risk, depending on how bank stocks perform going forward.

In the fee revenue area, most of our business lines have been fairly sluggish this year, with the exception of mortgage banking and our debit- and credit-card income. Mortgage banking in particular was beneficial, providing $900,000 of revenue in the fourth quarter and $2.7 million for the year. Our portfolio of debt securities has not incurred any impairment charges, and we believe it's a fairly conservative portfolio with no subprime, [TRUP] or other corporate exposures.

Operating expense throughout the year has increased substantially. Some of that increase is due to several unusual items, including FDIC insurance surcharges, loan collection cost, impairment on affordable-housing projects, higher defined benefit pension-plan costs, higher reserves for unfunded commitments, as well as the full-year effect of having the Irwin Bank acquisition in our numbers.

We have aggressively cut back on discretionary expenses in 2009, including the elimination of customer and employee events, more careful hirings and the elimination of most incentive plans. While these actions were helpful, they only slightly offset the surge in our expense base.

The only unusual item in our fourth quarter's $25.1 million of operating expense is a $400,000 charge-off of a receivable related to funds that had been advanced for the startup of the mutual fund that we manage. Some additional write-downs could be possible in 2010, depending upon how that fund performs.

Also for your information, there were no salary merit increases granted for employees at the end of the year, as had been our typical pattern. So, with that, I'd be more than happy to open up the call to any questions

(Operator instructions). Mike Shafir with Sterne Agee.

Good afternoon, guys.

Hi, Mike.

Just kind of a quick one. What is the tax rate we should be using moving forward? It has been around 22% the last several quarters.

You know, of course with our losses here this quarter -- I'm just looking here at a schedule. Yeah. I mean, our typical run rate's about 29%, Mike.

Okay. Is that a good number to use into 2010?

Assuming there's no losses, then it's a different number.

Fair enough. As we look at kind of your core Pennsylvania portfolio, versus some of the out-of-market stuff, where are you guys now seeing the most stress? I know that you just mentioned you're seeing a lot of stresses kind of across the board. But, if you could compare the Pennsylvania core portfolio to the out-of-market, just kind of generally?

Well, this is Tony Kallsen, the Chief Credit Officer. The delinquency rates in the out-of-state portfolio are certainly higher than what we experienced in the in-state portfolio. In terms of where we see stresses, it's in the usual suspects. It's in the commercial real estate, commercial real estate construction arenas. We have had some in the C&I segment as well, but not as much there.

Okay. And I guess last quarter, as we were on this call, I think you guys mentioned that, barring some really unforeseen circumstances in terms of stresses in the portfolio, as you thought about the provision, it would start to more closely match your net charge-up instead of kind of building reserves. I was wondering if that still holds true.

Well, we don't see any reason in the economy, nor in our credit numbers or metrics to justify bringing it down. No, we like where it's at, given the way we value and analyze the portfolios, Mike.

Okay. Thanks a lot, guys.

Thanks, Mike.

Andy Stapp with B. Riley & Co.

Could you talk about opportunities for further net interest margin expansion? And while you're talking about the margin, if you could also provide some color as to how you're positioned for eventual Fed rate hikes, including the impact of interest rate floors on loans?

Well, I'll go ahead and start first, Andy. It's Bob Rout. We continue to see some firmness in the pricings of the loans that do come through committee. Where you were looking maybe a year or two ago at 125, 150 over LIBOR, north of 300 is not unusual. And there's not a lot of complaints when you go back with those rates. So -- and we're not seeing any wild cards out there from a competitive standpoint trying to buy the business.

The other thing is, we just recently put through another reduction in some of our core deposits, which we think is going to provide a little bit of benefit for us going into next year. We have, as I said, been very aggressive in cutting down some of our borrowing costs, which has then helped to stabilize that margin and --

I think overall, too, we're comfortable with our position. We're asset sensitive, so we're anticipating a rate increase at some point. So we're well positioned.

There's not a lot of room to go down, Andy.

Yeah.

We like our position where it is now from an asset/liability standpoint.

What about the initial impact with interest rate floors? Would there be a possible margin compression, temporary margin compression because of the floors, or is it sufficiently asset sensitive that your margins should go up?

Yeah, we have put floors in so you won't get the immediate benefit on the rising rate. It's not that big a portion of the portfolio at this point.

We've been trying to focus more on spread adjustments, too, Andy. We have put floors in. We've had lines up for renewal or new deals going on the books. We're looking more to increase the spread as opposed to putting floors in.

Gotcha.

The other thing, Andy, we can always offset those effects by lagging core deposit increases. We're not seeing a whole lot of deposit competition these days in the market.

Right. Okay. And, just touching on your out-of-state loan portfolio again, some of these issues popped up a little bit earlier than in Pennsylvania. Are you getting -- do you think you're getting your hands around it such that it might be behind you in a quarter or two?

Well, this is Tony. I don't know if I can make that prediction yet, but I will say that we really didn't have a whole lot in terms of additions to NPL this quarter, which is a nice change for us.

As Tony mentioned earlier in his commentary, the big one was the resort property. And again, we have an 80% USDA guarantee on half of that loan. And I think the other good thing, too, when you look at our NPA's, $95 million, we have about $17 million of specific reserves allocated towards those nonperformings. You have another $6 million or $7 million of USDA guarantees embedded in a couple of credits that we have in there. And we do have about $17 million of sales, either in process or scheduled for the first and second quarters.

So we did receive a $2.2 million paydown in early January. Next month we have about $2.8 million of OREO properties that are scheduled for sale. Then we have a couple options in March and another property that's under agreement for $3.5 million. So, we're making progress. We're not out of the woods. We have some work to do, but we're making progress.

Yeah, understood. Other noninterest income, your last catch-all category in noninterest income was up about $1 million sequentially. Any unusual items there?

No. That's the mortgage banking activity primarily, Andy.

Was it up $1 million? Is that what you're saying?

Yes. It was primarily flat in the third quarter and the combination of origination share with us in the fourth quarter, and we had a little bit of pickup in the mortgage servicing rights as interest rates increased.

All right. That's all I had. Thank you

(Multiple speakers) Thanks, Andy.

Damon DelMonte with KBW.

Good morn -- good afternoon, guys. How are you?

Good, Damon, how are you?

Good, thanks. Could you update us on your thoughts on the repayment of TARP, please?

Yes, certainly. As you know, to participate in that was a difficult decision for us. We viewed it really as a form of insurance. It's been an expensive form of insurance to the tune of about $6 million a year or $0.22 earnings per share. We still view that as being the cheapest form of capital out there, so we're going to hold onto it, at least through the next couple of quarters until we're absolutely sure that some of the shocks in the economy are over. And once we're sure of that, then we'll go ahead and take steps to try to get that paid back in the most shareholder-friendly manner possible. (Multiple voices) I couldn't give you --

Do you hope to have it repaid by the end of 2010?

I wouldn't make that prediction. Again, we're going to -- we have the flexibility to see what happens with the economy and our own asset quality to make that decision. And, of course, as the stock price goes up too, if you have to go back into the capital markets, that's also helpful to us as well.

Okay. Great. And did you mention that one of the nonperforming loans -- there's the $10 million resort credit -- did you say that there was no reserve against that?

There is no reserve at 12/31, that's correct.

Okay.

Keep in mind that about half of that exposure, though, has an 80% USDA guarantee on it.

Okay, great. That's all I had for now. Thank you.

(Multiple speakers.) Thank you.

Collyn Gilbert with Stifel Nicolaus.

Great, thanks. Good afternoon, guys.

Hi, Collyn.

Todd, I just wanted to follow up on your comment suggesting that in the next quarter or so you've got some projects that are in the pipeline to be sold. Are you finding that the pricing of these projects to be at, above or below what the appraisal values have been?

I think they're -- right now, Collyn, what we're seeing is, we've been able -- we've been experiencing numbers in line with our carrying values. I mean, we have a couple auctions scheduled in March, so that's a little bit of an unknown right now. But we do think that we've been pretty conservative and aggressive in putting the appropriate provisions against the credits, and we're hoping for good outcomes.

Okay. So you're not seeing a big disconnect then, between as these loans are coming on past due an you have to go out and reappraise, what the appraisers are coming back and saying a property is worth versus what you had sort of valued it to be?

When we -- when they go in, Collyn, I think we're doing that analysis up front, and we're recognizing appropriate provision at that point in time when we're putting them into NPL.

Okay. So you're -- even then from that point, you're still not seeing much of a swing factor from what you would have anticipated? I'm just trying to gauge --

No.

Okay. Okay. And then, Todd, I don't know if it was just the tone of your voice, but it seemed in -- think about the outlook for future loan growth and future loan demand. It doesn't sound all that positive. I mean, do you have a sense, and, Bob, if you want to chime in too, as to what you could expect for loan growth for 2010?

It's going to be challenging. I'm not going to try and paint a rosy picture. Companies, even though kind of anecdotally, you're hearing they're starting to see some improvement, they're still being very reluctant to go out and expand inventories and create -- or make capital investments back into the companies at this point in time. I think a lot of them made cuts. I think they're finding they're in some cases more profitable than they were at higher sales levels, and they're just going to be very cautious until there's a clear direction on which way this overall economy is going.

Okay. And then in terms of new deals that you're seeing come in, you had said that they're just not on the criteria that you would choose to portfolio.

Well, I mean, yes, it's kind of a mixed bag. There are some that are coming in, but they have some issues. I think we're just being very cautious right now, obviously as everybody is, in our underwriting practices.

Okay. Are there any definitive trends that you're seeing in the market, either on the loan or deposit side, whether it's flows or pricing as it relates to PNC or with First Niagra now having come into your market? Is there any competitive disruption that you're seeing?

Collyn, this is Dave Antolik, Chief Lending Officer. I will comment that the competition for C&I credits is -- has intensified. We did see some of our competitors drop floors altogether, and the thought process is that they've got CRA concentration issues. So everybody's trying to diversify away from real estate.

As Todd mentioned in his comments, we saw significant declines in line utilization for those C&I customers. So the competition for the C&I business has intensified. There's a lot of trading of assets on the real estate side. If we wanted to book significant real estate loans, we could do it right now. That is available to us. We're seeing some of these trades at discount. So, C&I business is very competitive right now.

Okay. What are you seeing in terms of line usage rates on the C&I side? You said it was off 23%, but from what level?

It's up 40.

Our -- a year ago our outstanding C&I lines were $875 million. They're about $767 million now. And the utilization rate was 44% a year ago, and it's about 38% today.

Okay. Okay.

The other thing I would say, Collyn, to your comment on pricing too. On the deposit side, seems to be more rational. People aren't really out chasing deposits in the market today.

Okay. Okay, good. And then just one final question I think for you, Bob. With the anticipation that rates are going to go higher, are you -- and you may have said this. If you did, I apologize. Are you doing anything to start to extend your borrowings or extend the duration on the funding side of the balance sheet?

Somewhat, Collyn. You won't see us taking big interest-rate-risk bets. We're positioned for an upward trend, but slightly negative. That's not where we try to make the money, making interest-rate-risk bets.

Okay.

Or [portfolio] bets.

Okay. I think that was it. That's all I have. Thanks.

(Multiple speakers.) Thanks, Collyn.

Rick Weiss with Janney Montgomery Scott.

Hi, guys.

Hi, Rick.

Actually, I think all my questions have been answered. Thank you very much.

Okay. You're welcome.

(Operator instructions). There are no further questions at this time. I'd like to turn the floor back over to management for any additional remarks or comments you may have.

Sure. We had a couple questions that came in via e-mail. I'm going to let Tony Kallsen address the first one.

The first question had to do with total loan delinquency, 30, 60 and 90 days as of 12/31/09. I think I mentioned the NPL rate anyway, which is our 90-plus day past-due was $90.8 million at 12/31. That, just to compare to September last quarter, at $86.4 million. So it's about a 5% increase. Let me just tick through the dollar amounts for 12/31/09 and the percentages.

Our 30 days -- this is total loan delinquency. Our 30 days was $10.8 million, that's 32 basis points; 60 days was $22.3 million, that's 66 basis points; 90 days, $90.8 million, that's 2.67%; for a total of $123.9 million, or 3.64%. And that compares to September of '09 -- 30 days was 84 basis points; 60 days, 22; 90 days was 2.51% for a total of 3.57%.

Thanks, Tony. And the other question that we had was, what is the economic outlook for western Pennsylvania? And I would say overall, we're pretty positive. Unemployment for the region is about 7.5%, which is below the national averages. Western Pennsylvania has a pretty diverse employment base. And on the commercial real estate side, too, we're seeing some good outcomes. The office space, there was net absorption last year. Class A space is certainly tightening up a little bit. Industrial vacancies are below 10%. And apartments are stabilized right now. So again, that's positive.

Also we're seeing a lot of activity in some of our rural counties from this energy and Marcellus Shale impact, a lot of impact on hotel and other service industries in a positive way. And also, just in talking with customers in a variety of different industries -- and whether it be retail, heavy equipment, distributors, fuel distributors, steel-related and other wholesalers -- that things are positive. So I'm hoping that we begin to see a little bit of a turn. And hopefully that impacts our business, and they start to begin to expand a little bit.

And there were two other questions. One was TARP, I think we addressed, and the other competitive environment in western Pennsylvania. And I believe we talked about that as well. So, if there are no further comments, I just want to thank everybody for participating in today's conference call. Bob, Tony, Dave Antolik and I appreciate the opportunity to discuss this quarter's results. And we look forward to hearing from everybody at our next conference call. Thank you.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time, and we thank you all for your participation. Have a wonderful day.