S&T Bancorp Inc (STBA) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the S&T Bancorp, Incorporated, first-quarter 2010 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@S&T bank.net. (Operator instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Todd D. Brice, President and Chief Executive Officer of S&T Bancorp, Incorporated. Thank you. You may begin.

Thank you, operator, and good afternoon, everybody. Thank you for participating in today's conference call. Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors, which is on the screen in front of you. This statement provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the 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.STbank.com.

As we announced in our press release yesterday, we earned $9.8 million, or $0.35 per share. This compares favorably to $0.28 per share from the previous quarter and a loss of $0.11 per share in the comparable period one year ago. Again, asset quality continues to be the primary driver of our results this quarter as well, but in a positive way this quarter. For the quarter we recorded a provision expense of $4.4 million compared to $10.4 million in the fourth quarter of '09. In addition, charge-offs were $1 million for the quarter, so nice improvement in our credit metrics.

I think these two improvements in these two metrics really is a result of stabilization in non-performing loan numbers. Bill Kametz, our interim Chief Credit Officer, is going to be providing more color regarding our asset quality numbers in a few moments.

I think overall, if you look at our operating results, loan volume was essentially flat for the quarter. We did have some runoff in the consumer portfolio, and that was offset by a slight increase in our commercial loan portfolio. We are viewing this, really, as a result positively. We had forecast a decline in outstanding balances for the first quarter, so we are pleased with the result.

In addition, we have experienced a 1 to 2 percentage point lift in line utilization in the first quarter, and also we note a significant increase in our committed loan pipeline, which is basically our backlog. But we are seeing nice trends in those respective areas.

Again, conversations with really a diverse group of customers, our customer base, indicate that they're being cautiously optimistic in their outlook. I think, overall, sales volumes appear to be showing signs of improvement. In many cases they are thinking about making additions to their staff. Obviously, we feel, organization, that we are well-capitalized to really grow with the market as it continues to expand.

The final comment that I just want to make relative to the loan portfolio is that we were able to increase our net interest margin by 6 basis points to 4%. And we put a lot of attention to this, and it's been accomplished through disciplined pricing on both the asset and liability sides of our balance sheet. And, again, as for our other lines of business, retail -- while the loan demand has been a little bit sluggish, we are planning some promotional activities to stimulate retail loan demand. I think, overall, we are very pleased with demand deposits. We have been pretty aggressive in trying to acquire those, and they are up $84 million year-over-year.

After a difficult 2009 our Wealth Management insurance division showed some nice improvement this quarter. Wealth Management has been positively impacted by, obviously, market gains as well as new business development. We are seeing some nice activity down there. Again, our pipeline in this area is growing as well. Revenues were up $250,000 over the first quarter of 2009.

And, finally, revenues in our Evergreen Insurance group were up $500,000 over the first quarter of 2009. And really, what's going on there -- the payments were a result of bonus commissions that were associated with favorable loss experiences in our insurance book of business.

At this point I would like to formally introduce the newest members of our senior management team, who are with me today -- Mark Kochvar, our CFO; and Bill Kametz, who I mentioned is our interim Chief Credit Officer. Bill and Mark have provided valuable leadership throughout this transition period, and I'm confident you will enjoy getting to know them as you interact with them going forward.

At this point I'd like to turn the discussion over to Bill for a credit review.

Thanks, Todd, and good afternoon, everyone. Provision expense was $4.4 million for the quarter, resulting in an ending balance in our loan loss reserve of $63 million or 1.85% of total loans as compared to 1.75% at 12-31-09. Included in the allowance is $20.3 million of specific reserves, an increase of $3.2 million over fiscal year end. This represents 23% of impaired loans. In addition to various collateral for non-performing loans, two impaired credits are supported by approximately $6.8 million in USDA guarantees. Three transactions affected the increase in our specific reserves. The first was a commercial real estate construction project located in Florida. The properties were sold during the first week of April, and the bank increased its specific reserve by $1.6 million to write down the loan balance to the sale price of the properties.

The second is a $2.4 million commercial office building located in western Pennsylvania. The project has experienced slow absorption and a declining cash flow. The bank has established a specific reserve of $1.2 million, which is supported by our current market value appraisal.

The final transaction was an increase of $0.8 million to an existing specific reserve of $1.5 million on a project that had been previously reported on. This $5 million project is an industrial and warehouse facility located in the southeast. The bank has been working with ownership to develop a liquidation strategy, and an auction is scheduled for this project at the latter part of April.

Non-performing assets increased $4.5 million or 4.7% over last quarter. There is one significant addition, a $15.4 million multi-family apartment complex located in western Pennsylvania that has been experiencing high vacancy rates and an insufficient cash flow. This credit was previously classified as an impaired loan in the third quarter of 2008, and a specific reserve was established at that time. The specific reserve was increased to $4.1 million during 2009 and remains consistent at quarter end.

During the first quarter the bank experienced minimal net charge-offs of $1 million. The most significant charge-off was $0.6 million for a commercial relationship. The charge was the result of a write-down on the collateral of a residential property to current market value.

Total criticized and classified loans increased 10.6% over last quarter. Within these risk ratings we continue to observe an increase in our criticized loans, while our classified loans experienced a 6.3% decrease. The out-of-state portfolio totaled $355 million. This represents 10% of total loans and 20% of the total construction and commercial real estate portfolio.

New York loans were 30% of the total out-of-state loans, and Ohio loans represented 20%. The balance of the portfolio is spread over 25 states with no other state's concentration in excess of 6%. Segmentation concentration for the out-of-state portfolio, our retail strip, had 26%; rental properties at 13% and hospitality at 10%.

At quarter end, the bank at exposure of $112 million of purchased participation loans. $32 million or six relationships of that are subject to shared national credit. $5.6 million of loans subject to SNC are adversely classified.

Next I'd ask Mark if he could provide us with more details on our financial results.

Thanks, Bill. And good afternoon, everyone. As Todd mentioned, our improved performance this quarter is in large part due to lower net charge-offs and stabilization in our non-performing assets. Slightly lower earning assets were offset by margin rate improvements to keep net interest income in line with previous quarters. Seasonality led to lower deposit-related fees, which were offset by annual insurance bonus commissions and market-driven improvements in Wealth Management.

Expenses were $2.8 million higher on the quarter. 80% of those were one-time legal and consulting expenses. Consulting expenses related to an internal or an external review of some of our data processing contracts which will pay off for us in the long-term.

We posted net securities gains for the quarter as our approximately $14 million equity portfolio of primarily local bank stocks benefited along with the rest of the market. We anticipate far fewer impairments in 2010 as bank stock prices appear to have bottomed. With more predictable earnings we see the effective tax rate settling in at just over 23%. However, this could fluctuate depending on provision.

Deposit balances have remained stable with good growth in DDA balances. Competitive pricing pressures have eased somewhat, and we have benefited from a core deposit repricing late in the fourth quarter of 2009 and favorable CD rollover repricing. This has come close to running its course as rates appear to be near a turn and fewer of our deposits remain to be repriced.

Borrowing levels have decreased significantly, as earning assets have decreased and we have had net deposit growth. This reduced borrowing level puts us in a good position to take advantage of growth opportunities and respond to interest rate risk challenges. We remain slightly asset sensitive and are in a good position to benefit, should rates begin to increase.

Our capital ratios continued to improve as risk-weighted assets remain stable and we are able to increase retained earnings. We are monitoring the situation with the capital purchase program. We intend to be patient to ensure that we are through the crisis, that our regulators are comfortable with our plans and that any actions are accomplished in a shareholder-friendly manner.

Thank you very much. At this time I'd like to turn it back over to the operator, who will provide details on instructions for asking questions.

(Operator instructions) Damon DelMonte.

Could you just talk a little bit about your outlook for loans going forward? I know you had mentioned that there was an uptick in utilization rates and your customers seemed cautiously optimistic. But would you say that any additional growth that you see in the coming quarters -- would that be new loan demand, or would that be more or less taking market share from some competitors?

Probably a mix, Damon. Going into the year we had projected some decline in balances and still kind of being cautious. I think the trends have been certainly more positive in the first quarter, just looking -- like I said, we've had an increase in line utilizations. We've seen a lot of, over the last month or so, a lot of nice new activity in our loan committees, and that was the result of both new relationships that may be coming out of competitors as well as some expansion of projects by existing clientele. So a little bit of both.

Okay, great. And then, with respect to your expense line items this quarter, you mentioned there's some legal and consulting charges. Could you quantify that from a modeling perspective going forward?

I think you could probably remove about -- a little over $2 million from that first quarter number to get a better run rate.

Okay, great. Lastly, regarding TARP, I heard the comments about just continuing to be cautious with your outlook in the economy. But can you give us a time frame for when you may expect to go down the path of repaying TARP?

I think -- like I said, the first thing is, we want to make sure we are through the crisis or through most of the recession. So I think we'll be looking closely at our credit metrics, and we want to make sure that we're out of the woods, that we've truly made a turn. So it's hard to predict exactly when that will be, but I think that's probably the first thing that really has to happen.

Andy Stapp.

You've had some variability in terms of charge-offs in recent quarters. Could you discuss trends in early-stage delinquencies and other metrics so we might have a better feel for future charge-offs?

Sure, Andy, this is Bill. On the delinquencies side we did have an earlier question about giving a little bit of history on the 30-60-90-day trend, and I have to go back two years on that, so if I could just review that. As of March 31, 2010, our 30-day delinquency was 0.79%. Our 60-day delinquency was 0.38%, and our 90-day -- our NPL plus 90-day delinquency was 2.85%, for a total delinquency at quarter end of 4.02%.

For quarter ending March 31, 2009, the 30-day delinquency was 0.72%, the 60-day was 0.33%, the NPL plus 90-day delinquency was 2.62%, and our total delinquency was 3.66%. And then going back to quarter end 2008, the 30-day delinquency was quarter 0.42%, the 60-day was 0.18% and the 90-day plus NPL was 0.81%, for a total delinquency of 1.41%.

Okay. Do you think that you might have to increase the size of your loan workout staff, or are you pretty comfortable with the current staffing level?

We're pretty comfortable, Andy. If you look at the mix of that $99 million NPA bucket that we have, it's really four or five accounts that comprise a big chunk of that and we did add the staff. Within the last year, we've added resources. So I would say today that we're pretty comfortable; but, again, if we see -- and then we have some very competent people in there. But if we see continued deterioration, we are not going to hesitate to provide resources to make sure we give it the appropriate attention.

Okay. And, in your last call you mentioned that you had a couple of auctions scheduled for March. Just wondering if in fact they did occur and how they fared.

Yes. That was what Bill addressed in his comments, but actually we had to back them up into -- one was in the first week of April, and that was the lot developments that we were carrying in Florida for [3-3]. So it's in that East Coast market that got impacted by some of the cutbacks in the space program, so that didn't fare as well as what we had anticipated. We had relatively recent appraisals on that, but we did take an additional $1.5 million specific reserve the first quarter just to write it down to the sales value. And then the other account is going to be scheduled for auction tomorrow, and we think we were pretty conservative on our reserve amount.

The sale that's scheduled for tomorrow does have -- I'm sorry, it's Thursday -- does have a reserve number in it, so there's a little bit of protection on the downside if it wouldn't sell.

(Operator instructions) Matthew Schultheis.

You did have some growth in your jumbo CDs this quarter, if I'm reading this right.

Those are primarily -- we go back and forth, sometimes, between the home loan bank and the SEDARs' program, where oftentimes you can pick up short-term jumbo CDs at pretty favorable rates. So we go back and forth, just depending on pricing.

Okay. And you mentioned, and I may have missed heard this, that your criticized and classified loans were up 10.6%, but your classifieds were down 6%. And is that on a linked-quarter basis?

Yes, that's quarter over quarter, yes.

So basically, your criticized's were up considerably because your classifieds are down, you come out to 10.6%.

That's correct.

Okay, just making sure I've got that right. And about $2 million in one-time charges, you said?

Yes.

Mike Shafir.

I was just wondering, as we do think about TARP repayment, if you guys wanted to go ahead and pay that back before your three-year anniversary, in my opinion, it doesn't seem like, from a regulatory standpoint or a risk-based capital ratio standpoint you certainly would need any kind of capital. But would you be forced to do a qualified equity raise of some sort (technical difficulty) pay back?

Not sure. The guidance that we are getting is each -- the regulators look at each case on its own individual merits, and I think it really is just a function of your overall balance sheet, loan mix and asset quality metrics.

There is still some uncertainty as to whether or not some of the capital ratio requirements are going to change, so that will be a consideration as well.

Right, but I believe you guys are at, what, 15.75 on a total risk-based capital ratio right now?

Right.

Right.

So I can't see a situation where whatever the new rules would be would certainly exceed that.

Well, there's been some talk that they might be 12%, say. And taking the TARP out would take at least 3% out of that number. So the question becomes how much of a cushion do we feel we need and what level of cushion do the regulators feel is appropriate for the amount of risk that we would have in the balance sheet at that time?

That would be the ratio that we would be the tightest on, would be the total risk base.

And then, as we look at salary expense, it ticked up just a little bit this quarter, as I believe you guys mentioned that you are starting a bonus accrual. And you guys accrue for that throughout the year; right?

Correct.

So we should see kind of -- that's the new number to work off of in terms of moving forward on the salaries and employee benefits line?

Right. There's a few other things that sometimes cause fluctuations in there that don't really reflect true salaries. We do the FAS 91 deferral, so that can get influenced by changes in loan origination volume. And then the other thing that flows through there that can throw things off is the mark to market on our Rabbi Trust. So, barring those things behaving badly, we should see that close to what you're seeing now.

Okay, so it's a pretty good core number to start to work off of?

Yes.

Rick Weiss.

I was wondering if you could talk a little bit about what you're seeing in competition regarding lending in western Pennsylvania.

Yes. I would still say things are not overly aggressive, and what we are hearing from customers. They are still a little bit reluctant to make a switch. I would say we are, on the commercial, or C&I side, you are seeing a little bit of movement or downward pressure on spreads. However, underwriting standards are kind of -- haven't been compromised too much yet. But I think everyone is looking at their book right now and saying, how do you diversify out of real estate a little bit. So people are chasing the C&I business a little bit more than the real estate side.

And on the consumer side I think it's just kind of flat right now. We've tried a couple of promotions, and I don't think people are rushing out to really borrow money. I think some of it was actually weather-related. People just seemed to get pushed back. But we're hoping to see a little bit of a lift this quarter.

It looks -- once again, I'm sure that with your non-performing loans a lot of them are emanating from the out-of-state portfolio. In terms of new loan growth, are you still going to follow customers out of Pennsylvania, or are you looking more towards western Pennsylvania for future loan growth?

I think we'd like to stay in western Pennsylvania. But we do have a couple loans that we just approved that are underwritten, we think appropriately, with pretty healthy cash flow ratios and equity requirements and very good sponsorship. And we're not going to shy away from a good deal and, I mean, good spreads. But at the same time, we're not going to really go out and really chase it, either. So we're going to be cautious on it.

Todd, would these be the customers that you know that -- ?

Yes.

-- out of state? So they are not participations, or -- ?

No. We originate them, we own them, they're our customers. And on some of it, it really is in, as Bill alluded to, in contiguous states, too -- Ohio, West Virginia, western New York. So those have really been the focus of where we've been looking for out of state, not so much in some of the other states that have been hit a little bit harder from an economic standpoint.

Finally, are you seeing any impact from the Marcellus Shale that's coming on in PA? Is this impacting anything with your business?

Sure. You look at -- we've got three or four hotels right in town here, and you go by their parking lots at night, and the lots are full of trucks from the service industry. And you pull into the gas stations in the morning, and there's just crews and crews of guys in there buying gas and buying their breakfast and just a lot of ancillary business. You've got guys in the fuel supply business that, now these wells take 100,000 gallons or so of fuel to drill the well and frac them, and so there's a lot of demand for fuel companies. You have other service companies that provide the water. So yes, they have been buying equipment. But yes, there just is a lot of ancillary business. We really haven't participated directly in the Marcellus play because it's really just some of the bigger energy companies coming in and making huge investments in the region right now. But we've been able to benefit from some of the offshoots.

Collyn Gilbert.

Kind of a follow-up to a couple of topics that have already been touched on. Can you give us a little bit of color -- and maybe this is for Bill -- on what the structure of some of these NPLs were at origination in terms of LTVs, debt service coverages, and if there's any -- if you can draw any correlation as to what it is, necessarily, that's driving these credits and what could be driving the pickup in criticized credits, but yet the decline in classified?

To address your comment on the NPL as far as originations and so on and so forth, I guess, as Todd commented earlier, as we did file our clients outside of the western Pennsylvania markets. But they were underwritten, at the time, under the same guidelines as we did here in western Pennsylvania as it related to LTV and debt service coverage ratios. And we tried to be a little conservative as we went into that, depending on the state, as we talked about, contiguous state. But they were traditionally underwritten, I guess is the point I was trying to make. And then, with the change in the economy, obviously values changed and the circumstances changed, as you saw as it occurred last year.

As far as the criticized loans growth, we were talking earlier about we're in the process now of receiving statements from last year. We've noted our customers had a pretty difficult time last year in the recession as far as how quickly they were able to react to that. And so we're trying to be on top of that, be a little proactive. And so we are looking at our risk ratings very closely. But from an underwriting standpoint as we move forward, we've made some adjustments as we look to LTVs and underwriting guidelines as we look at deals today.

The other comment I'd just like to make, Collyn, too, is as you know we had a pretty positive result the first quarter. We were able to move $10 million of non-performing assets off the balance sheet either through just paydowns and/or sales. And for the most part, we were able to do it at carrying cost and in some cases a little bit better. Then we had the one credit that rolled in for $15 million. But we identified that back in '08, and we had previously recognized about a $4.1 million specific reserve on it.

Okay, that's helpful. And I know that this is touched on also, but can you give us any color on how we should think about the provision going forward, just considering the choppiness of net charge-offs or maybe, if you can't give specifics on that, just talk a little bit about the reserve strategy? I'm finding that particular line item very difficult to model for you guys.

Yes. I wish we could be a little more specific, but each quarter we do an analysis of what we have in NPAs and what's coming in the queue. And all I can say is, there's probably going to be a little lumpiness in there, Collyn. I wish I could be a little bit more specific. But I would say this quarter was a lot better than what we had anticipated, and there will be some things that jump up, coming down the road, and hopefully there will be some other things that we have a good experience on.

I think, from a qualitative standpoint and when we look at the FAS 5 part, we hit that fairly hard. So, short of another -- a double-dip type recession, I wouldn't imagine that the qualitative things, short of our own portfolio getting significantly worse, would cause us to increase that much more. So it may be more dependent on just the actual -- in and out flows of actual new non-performing versus [what it leaves] and the charge-offs related to that.

Okay, I was going to say, so if we think about it kind of the matching of the purge and the charge-offs, although you did just --

We're closer to that point, again, short of something larger happening that could cause us to reevaluate that FAS 5 part.

Doug Rainwater.

I guess I should first say, congratulations to Mark and Bill. And then the one question I would have -- have you been, bid, might you bid or might you even have any opportunities in markets of interest to you as it relates to failed banks? Just some color on that.

Yes. I think if something would come up, obviously we would. But I don't think that we're probably looking to go do anything out of market, or outside of our -- we like to be in contiguous markets, Doug.

And so, at this point, probably no real opportunities or you don't expect -- I think -- it seems like there are obviously other markets that would not be of interest to you that would hold more opportunity?

When you look at the various lists, there's not a whole lot that's at risk in western Pennsylvania.

Right, and I guess that's a good thing?

Right. So, again, as Todd said, we're probably not going to be jumping too far out of market. So short of something else shaking loose there, it's probably less likely.

Okay, good deal. Congrats on a good quarter. Thanks, guys.

(Operator instructions) Mike Shafir.

I just wonder if I could get a little bit more clarity on the potential impact of the new NSF legislation, back end of this year, and what you guys are thinking.

Sure, Mike. And Ed Hauck is in here, who's our Chief Operating Officer; he's been working on this project pretty extensively. So I'm going to turn it over and let him tell you where we are in the process. But it's something that we're looking at very, very closely.

We have been looking at this line of business for a number of years and view it very much as a line of business. We started fairly aggressively, actually, soliciting a targeted group of our customer base about two months ago and have had a fairly good response rate for the opt-in process, so we think we're being fairly aggressive about pursuing the customers who are most impacted by this. I think we'll have a much better handle on it by the end of June, when we see what the opt-in rate is. But I'll tell you, we have very specific marketing strategies around the customer base that this impacts.

We've identified about 17,000 customers that, really, we're going after to protect that income stream. And as Ed said, probably, today, we have about a 20% opt-in. People have responded back to opt-in. Again, we are going to have future mailers, e-mails, phone campaigns. We're going to try and be pretty aggressive just to make sure we're protecting that line of business because it is a significant number for us.

So if we go back to 2009 and we're looking at the service charges in deposit accounts on an annual basis, it looks like around $12.9 million. And I'm assuming not all that is deposit fees, it's overdraft fees?

Yes.

So how much of that would be -- out of the $12.9 million, how much of that would be related to the overdraft?

In total, overdraft is around, net, is about $8 million.

But the debit card is --

But about half of that is not impacted by legislation because it's related to checks. The other half is at risk, the ATM and PLS piece.

So is it about $4 million that's at risk?

$4 million would be at risk annually.

And depending on the speed of -- and you said you had about 20% already opt in; right?

Correct.

So there is a potential for you guys to actually see some impact, back end of the year, in terms of those line items coming down?

Absolutely.

Definitely.

Do you think you could quantify that on some level?

I personally think that it's too early to quantify that because it's too early in the process to know what the opt-in penetration is going to be. I think, as we get closer and it gets more publicity and people understand, we will see more people opt in. We've done a lot of research in this area, as others have. And what we've learned is that people that use this service know exactly what they are doing. And so I think we'll see a heavier opt-in as we get closer. So I think it's too early to quantify.

So just to recap, so it's $4 million at risk, and 20% of that has opted in?

Well, 20% of the people, not necessarily 20% of the dollars.

Right, okay. Thanks a lot for that clarity, guys, I appreciate it.

Andy Stapp.

I'm having difficulty navigating through your online slide presentation, and there's a couple of data points I usually get from it. Would you happen to have handy what the average interest-bearing liabilities and your yield on loans were in Q1?

Yield on loans for Q1 was 5.08%. I'm sorry, what was the other one?

Average interest-bearing liabilities.

The yield or the -- I mean, the cost?

Or the average balance during the quarter.

$2,566,613,000.

Mr. Brice, there are no further questions at this time.

Okay, just two other questions that came in from -- via the e-mail system. But one is, how has the competitive market changed because of First Niagara?

And, really, two components. On the retail side, we are still seeing some net inflows of customers. They've slowed a little bit, but obviously, when the merger occurred, they were a little heavier. And then, on the commercial side, really they kind of to date, been a non-factor. We really haven't run across them too much in the market right now. But I think they're going to be a good competitor because it's when they get their arms around it. They've been pretty aggressive from an advertising perspective, I know, in the marketplace.

And then, also was, how would you characterize the economy in western Pennsylvania?

And I would say, overall, it's a pretty positive outlook. Unemployment continues to be under the national averages. Again, we are seeing some lift and customers have seen activities and sales and hiring, and energy certainly has been playing a big part in that in some of our core markets right now. So I'd say, overall, it's pretty good.

But other than that, if no one has any further questions, I just want to thank everybody for participating in today's conference call. And Bill and Mark and I appreciate the opportunity to discuss this quarter's results and look forward to hearing from everybody on our next conference call. So thank you very much.

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