S&T Bancorp Inc (STBA) 2010 Q3 法說會逐字稿

Greetings and welcome to the S&T Bancorp, Inc. Third Quarter 2010 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, Mark Kochvar, Senior Executive Vice President and Chief Financial Officer for S&T Bancorp. Thank you, Mr. Kochvar you may now begin.

Good afternoon. 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 third quarter earnings release can be obtained by clicking on the press release link on your screen or by visiting our investor relations website at www.stbancorp.com. I would now like to introduce Todd Brice, S&T's President and CEO, who will provide an overview of S&T's results.

Well, thank you Mark and good afternoon, everybody. As we announced in yesterday's press release, I'm pleased to report net income of $10.9 million or $0.39 per share. For the third quarter, this represents a 39% increase compared to the $0.28 per share that we earned in the second quarter. I think overall our performance is a continuation of the stabilization that we're experiencing in our asset quality metrics, as well as growth in core lines of business, particularly in our mortgage banking unit this quarter. I think additionally we experienced favorable variances in non-interest expenses as well. So, what we're seeing, the low environment, the low interest-rate environment is having a very positive impact on mortgage banking activities. For the quarter we sold approximately $25 million in mortgages, primarily to Fannie Mae. As a result, the mortgage banking line generated approximately $1.6 million in fees for the quarter versus $200,000 in fees in Q2. Refinancings represented approximately 80% of new originations and also in the volume, approximately 60% of that represented new money . We think this provides a great opportunity to cross-sell additional services and products. And it's been a focus, and our think our team's really been doing a great job selling depository wealth management insurance and other such products to these new households.

The pipeline continues to be strong and we anticipate another robust quarter in this line of business. If our asset quality metrics continue to show improvement. Favorable trends represent improving business conditions in western Pennsylvania, I think, as well as a continued focus by our lending and credit administration personnel in managing these portfolios. For the quarter, nonperforming assets remain basically flat. However, I think our overall delinquency has declined from $105 million to $90 million. On a percentage basis, delinquency now stands at 2.69% versus 3.1% at the end of the second quarter. And we're also seeing positive trends in our clear side and classified loan categories which experienced a $31 million or 8.5% reduction for the quarter. I think delinquency and criticizing classified levels are obviously early indicators of potential problems, so we're very pleased to see improvements in these particular measurements.

On the lending side of the business, results were mixed. We did experience several large paydowns in July and August which resulted in a decline in outstandings. We have seen a little bit of a lift in September and October and so we're seeing some positive movement in our portfolios. In addition, we've been pleased with the increase in net interest margin which improved to 4.09% from 4.05%. I think overall going forward, I'm cautiously optimistic regarding loan volume. I think we are experiencing increases in loan requests at our committees and we're seeing a little bit of a lift in our pipeline. So I would expect that that's going to translate into growth in our portfolios going forward. We're also in the midst of growing out a new underwriting process to streamline small business lending requests . We do think this is going to enable branch managers and small business lenders to really focus on developing new relationships and we feel that there are very many opportunities to grow this line of business in our marketplace. I would say in this region, the energy sector continues to be the big story as the Marcellus Shale activity is having a very positive impact in really many sectors of our local economies.

Unemployment regionally stands at around 8.5%, below national averages. Commercial real estate vacancies are also trending well below national averages. And we're hearing that manufacturing activity is picking up. They are beginning to hire back. And also checking with some of our automotive dealers, car sales have been particularly strong. So, all in all, again, I guess I'm cautiously optimistic, but positive in our outlook going forward. Mark Kochvar, our CFO, and Pat Haberfield, our Chief Credit Officer, are also participating on the call with me today and will provide further insight into our operating performance and portfolio trends. And at the conclusion of their remarks, we're going to open up the lines for questions. So now, I would like to turn the call over to Pat.

Thank you, Todd, and good afternoon ,everyone. Provisional expense for our quarter was $8.3 million, resulting in an ending balance in the loan loss reserve of $56 million or 1.67% of total loss, as compared to 1.59% at June 30, 2010. Included in the allowance is $10.5 million of specific reserves, an increase of $2.5 million dollars over the last quarter. Our reserves in NPL coverage are 75%. Nonperforming assets remain stable at $82.7 million, as compared to $82 million in the second quarter of 2010. Our nonperforming loans continue to trend downward, decreasing $2 million, or 3%, from last quarter and $21.5 million or 22% in comparison with our first quarter 2010. The slight increase in NPA this quarter was driven by a $6.7 million C&I loan, located in western Pennsylvania, which we are taking a $5.5 million specific reserve.

Additionally, ORE increased by $2.6 million. This is further reflective of our strategy to proactively resolve problem loans and bring them to final resolution. While we continue to aggressively manage our NPAs within this category were $14.6 million in TDRs, or troubled debt restructurings. We've been encouraged by this as we continue to maintain a philosophy to work closely with our customers in an effort to work out all these issues and to maintain performance within our loan portfolio. We have been able to work with our borrowers to find amicable solutions to some challenging loan situations that many borrowers find themselves in these somewhat difficult times. Some of these actions, including charging down the supported valuation levels, that are substantiated and/ore carried by cash flow of the projects are now being monitored for season performance.

During the third quarter of 2010, the bank experienced net charge-offs of $6 million. Several of the credits associated with the charges were attributed to specific work-out plans and restructuring, as outlined above. Total criticized and classified loans decreased $31.8 million or 8.7% over last quarter. The trend has been impacted by a stabilizing local economy, as well as action plans that have been implemented and we have been working on starting to come to fruition. Delinquency was 2.69% as of September 2010, as compared to 3.10% in the previous quarter. Our earlier stage delinquencies, meaning the 30 and 60-day categories, are performing well within expectations.

The out-of-state, commercial real estate and construction portfolio totaled $360 million. This represents 10.7% of total loans and 21% of the total construction and commercial real estate portfolio. New York loans were 28% of the total out-of-state loans, Ohio loans represented 20% and West Virginia represented 6%. The balance of the portfolio is spread over 24 states with no other state concentration in excess of 6%. Segment concentrations for the out-of-state portfolio are retail strip at 26%, hospitality at 11% and rental properties at 10%. We continue to see improvement with the out-of-state NPL's as they have decreased to $13.6 million in the current quarter from $15.7 million in the second quarter of 2010. Also at quarter-end, the bank had exposure of $102 million of purchase participation loans. $36 million, or (inaudible) of that, are subject to shared national credits. $1.2 million of loans subject to (inaudible) are classified. Next, Mark will provide you with more details on our financial results.

Thanks, Pat. Our performance in the third quarter showed improvement in almost every major category. Net interest income on an FTE basis, as well as the net interest margin rate, were up slightly, despite a decrease in average earning assets of over $50 million. Lower liability costs came from a combination of continued CD repricings, core rate changes made in mid-quarter and improved deposit mix marked by growth in DDA. Loan yields remain fairly stable. Our margin will be challenged going into 2011, especially if the yield curve flattens further. We have limited ability to drive deposit costs lower and we will see assets yields decrease, both in securities, through normal maturities and prepayments, and in loans, where we have commercial loans that are up for three of five resets, we're pricing up to 3% lower rates. As well as the normal replacement of maturing and amortizing loans also have lower rates. Loans declined about $25 million from second quarter after being essentially flat the first half of the year. The decrease showed up mostly in construction, although the real decrease came in commercial real estate as balance has shifted from construction to commercial real estate.

We've allowed the securities to run off due to the low interest-rate environment, but we are nearing our minimum levels due to pledging and liquidity limitations. Deposits remain fairly stable. We have not been aggressive in deposit pricing due to subdued funding needs. Todd mentioned noninterest income improvements were dominated by the strong activity in mortgage banking. Offsetting the strong performance was a decrease in NSF fees of about $200,000 due to Reg E changes made in mid-August, which was in line with our expectations. Letter of credit fees were down almost $350,000 primarily due to timing and a strong second quarter. Expense improvements are due to an additional decrease in the reserve for unfunded commitments of $884,000, compared to $432,000 decreased in the second quarter. This is due to a reduction in unused lines of over $38 million. The acceleration of our annual salary merit increase we spoke about last quarter, which we expected to add -- that would add about $350,000 was offset this quarter by a favorable expense adjustment due to better investment performance. Legal expense is also down quarter-over-quarter, due to one-time expenses in the second quarter of $450,000 related to a legal settlement. Offsetting these improvements was the write-off of the remaining capitalized expenses related to our mutual fund of $871,000, compared to a similar write-down of $377,000 in the second quarter. This receivable has now been completely written off.

Despite a number of larger variances, we expect our expense run rate to be in the $25 million to $26 million in the near-term. Our capital ratios improved versus second quarter due to increase retained earnings and decreases in risk-related assets. We are monitoring the capital purchase program and the capital markets. We would not alter our stance as it relates to our continued participation in the CPP. We intend to be patient to ensure that we are through the crisis, that the 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 over to the Operator to provide instructions for asking questions.

Thank you. We will now be conducting the answer session. (Operator Instructions) Thank you. Our first question is from the line of Damon Delmonte with Keefe, Bruyette & Woods. Please proceed with your question

Hi. Good afternoon, guys. How are you?

Good, Damon. How are you doing?

Great. Thanks, Todd. Question for you on the Reg E. I know we saw some compression in the fees this quarter, but what are you thinking for next quarter and what have you guys been doing to try to combat the lost revenue?

So we have, Damon, Ed Hauck, our Chief Operating Officer, has spent a lot of time on this project with us, so I'm going to kind of turn it over to him

Hi, Dan. Well Mark indicated what we saw was very much in line with what we expected. But to your question about how do we expect to recoup some of those fees, we do expect to generate additional fee income from a new suite of core checking products going forward. Because like most banks, we've spent the last three quarters re-evaluating our checking products suite, looking at customer profitability, product profitability, and then, also segmenting the customer base. So while where not ready to yet launch this new suite, we're very confident in our ability to do so and that it'll generate meaningful additional fee income from that. We do have pro formas, but I'm not really ready to share those numbers yet.

Okay, fair enough. Also, Mark, you made a comment about expenses in the $25 million to $26 million range, what was unique to this quarter? For lower expenses?

Probably the biggest thing was the release of reserve for the unfunded commitments. That was the $884,000, like the largest single item.

Okay and was that captured in the other line?

Correct

Okay

And Mark (inaudible) was 890, kind of a one-time thing too.

Yes, it was going the other way.

Okay. And then just to kind of circle back on the whole TARP situation, would you guys consider applying for a partial repayment?

That's something that we're kicking around. We've said before that we'd like to see some direction in asset quality. I think it certainly happened this quarter. So, it's something we're probably going to sit down and evaluate.

Okay. Great. Thank you very much

Thank you. Our next question is from the line of Andy Stapp with B. Riley & Co. Please proceed with your question

Good afternoon, nice quarter

Thank you, Andy

I'm afraid you got me multi-tasking and I missed the dollar amount of watch list and delinquencies. Would you mind -- I'm sorry, but would you mind repeating that, please?

Sure. I'll let Pat take care of that, Andy

Not at all. Andy, nonperforming assets were about $82.7 million, as compared to $82 million second quarter 2010. Again, we've come down on our nonperforming loans $2 million, 3% from last quarter and about $21.5 million dollars, or 22%, from first quarter 2010. We did have a new NPA with a specific reserve debt hit on a local Western PA company.

Right.

And ORE really drove this increase by about $2.6 million with some good plans in place. But, we've got about $14.6 million in TDRs and again, I think that's definitely positive movement .

Yes. I caught that. My question was more addressed to the watch list and the delinquencies

Delinquency at the end of the quarter was at 2.69%

Versus 310.

Versus 310 second quarter.

That equates on an absolute basis, Andy, to about $90 million versus $105 million. And then when you strip out your nonperforming loans, which in essence are accounts over 90 days, there's about $15 million in that under 90 day bucket

And how did your watch list compare quarter-to-quarter?

Quarter-to-quarter our total, if you look at our C&C buckets, we are actually down -- in the total C&C we're down almost $32 million.

And then to watch kind of what we have outside of the criticized and classified, you're also down another $30 million or so. So again, it's positive trends is what we're seeing.

Okay, and how does asset quality in your out-of-state loan portfolio perform?

Good. It's still coming down. Our nonperformings dropped from -- they were a little over 15 about 15.5 at the end of the second quarter and they're down around $13 million or so this quarter.

Okay and --

And Andy, we haven't seen any new names on the delinquency list on the out-of-state portfolio.

Okay, and you're mentioning you're nearing the floor on securities. When you hit the floor, what type of its securities do you plan to buy?

We're pretty conservative when it comes to the securities portfolio, so it's probably going to be stuff that doesn't yield very well, but agency and some mortgage backed paper.

You're looking at 2% yield?

If we're lucky

Okay. All right. I'll get back in the queue. Thank you.

Thanks Andy

Our next question is from the line of Collyn Gilbert of Stifel Nicolaus. Please proceed with your questions.

Great. Thanks. Good morning, or good afternoon, guys.

Hi, Collyn.

Todd, could you just go into a little bit more detail on your cautious optimism as it related to loan volumes. And what you're seeing in the pipeline, the types of credits, where they're coming from, size and just a little bit more color on that front?

Yes, like I say, it's kind of a mix, Collyn. A little bit of real estate, a little bit from our manufacturing, we brought a new lender on board last quarter that really has -- his area of expertise is floor plan so with a pretty nice poke of business too. So, we've seen some opportunities in that arena and market. In talking with a lot of our -- not only floor plan dealers, but other customers in the market, the auto guys are pretty positive right now. They been pretty good. So, that's why the last, like I say, I think you start to see some increased activity. We're also talking with a lot of the manufacturers regionally and they're in the market to hire people. Their backlogs are increasing and I think they're really trying to ramp up or they're expecting to have a pretty robust second order as some things kind of transpire. So, all in all, again, cautiously optimistic.

Okay. Okay. That's helpful. And then, just to clarify, I think, Mark, you had said when you were talking about the outlook on the NIM, and you had indicated, you said current loans were coming on at 3% lower -- at rates 3% lower than what they were rolling off?

We have some flat three and five year reset loans.

Okay.

We have a number of those that are resetting in 2011, 2012 and 2013. And just the way the curve has flattened so much, they're repricing some of them up to 3% lower.

Okay. Okay. Do you have an amount of loans that are within that bucket?

In 2011, it's about -- just over 100 million.

Okay. Okay. That was all I had, thanks.

Thanks, Collyn.

Thank you. Our next question is from the line of David Darst with Guggenheim Securities. Please proceed with your question.

Good afternoon

Hi, David.

Todd, do have any borrowings that will be maturing in the next couple of quarters?

Nothing material, no.

Okay. So we'll see the fixed rate borrowings remain relatively steady around $120 million?

Right. Most of that is our subordinated debt and trust preferreds.

Okay. Okay.

For the much longer term

And then, within your commercial loan portfolio this quarter, were any of these construction loans that declined refinanced in the permanent financing at the bank and commercial real estate?

Yes this is Dave Antolik, Chief Lending Officer. Yes. So, a lot of those automatically convert to an amortizing permanent loan on our books

But, I think you're asking, have we seen any -- the securitization market loosen up a little bit? I don't think we've seen that yet.

No, we haven't seen payoffs from other sources, no.

Okay. But Dave, you are answering the question. The $20 million or $30 million decline in construction.

Right

A lot of that did go into permanent financing in the bank.

Yes

Sorry about that, David.

Okay. Got it, thank you. And then, as you were referencing TARP and repayment, you indicated that you're monitoring the capital markets. Is that implying that you are considering raising some common when you complete the TARP repayment process?

No. We're just staying in touch in the event that, that's required of us. So we understand how the market might view us coming to the market for stock in the event that, that's necessary

Okay and then the auto market portfolios, looks like there was some growth there. Are those new originations or are those draws on existing projects?

A lot of those were draws on existing projects. There really wasn't a whole lot of growth. We haven't seen anything new come across the table for anything out of market.

Okay, great. Thank you

Thank you. Our next question is from the line of Mike Shafir at Sterne Agee. Please proceed with your questions.

Hello. Good afternoon, guys.

Hi, Mike.

Mike, how are you?

Doing all right. Maybe just go back to the margin for a bit. How long do you guys think that you're going to be able to sustain some of the loan yields as we go to 2011? Are we going to start to see some of that decline in the fourth quarter or is it going to be more of a middle of 2011 event? Is that -- loan and yield -- I'm sorry, the loan yields on securities yields start to put pressure on that?

I think it is -- this is Mark. I think it will be gradual. It actually started already. That $100 million I referenced is spread across the entire year. So a lot of it has to do with what the shape of the curve is across the span of the year, too because those things reprice on a date or during the year. So, it's very curve dependent as we move through the year. But, it's not concentrated at any given quarter. I think we'll just start to see a gradual decrease in some of those asset yields.

Okay, so -- because the securities yields looks like it came down about 38 basis points, sequentially?

Yes.

And then, the time deposits came down about 13. Do you have anything left on the CD side that will offset some of that?

On the first half of the year, we don't have very much. We have a little bit in third quarter and some in the fourth. But the first half of the year, most of what we have maturing is at sub 1% as it is, so there's going to be limited improvement there. We do have some older CD's in the 2.5% to 3% range that come off in third quarter, so we'll see some benefit there.

So, as it stands right now, it looks like the loan yields are going to have a gradual decline along with the securities yields while the cost of funds is going to stay relatively flat?

Right. We are looking at our options. While it's difficult, we still may have some room on the core level, but we've cut that pretty dramatically over the past couple years. So, we're just not confident how much further we can go on that.

Okay. And then just to address TARP again, it's my understanding that once we get into 2000 -- towards the back end of 2011, you would be able to repay that without a qualified equity raise? Is that accurate?

You know we've had some preliminary discussions, but basically, they say come to us with your plan and then we'll tell you if we think it's okay or not. But just looking at where some of the metrics of other organizations that have repaid and were they are, I think that would put us in the range at that point in time on being able to get out without maybe doing a raise. That would be our intent.

And where is total risk-based capital stand at this point? The ratio?

1635.

And without the TARP, where would that go?

We'd take out about, a little over 300 basis points.

So, right about 12?

13.

I'm sorry, right about 13.

A little over 13

Okay. Thanks a lot, guys

Thanks

Thank you. (Operator Instructions) Our next question is from Matthew Schultheis with Boenning and Scattergood. Please proceed with your question

Good afternoon.

Hey, Matt.

Couple quick questions, you mentioned that -- I think you have you said I think $102 million in purchase participations and the shared national credit number, was that $36 million?

Yes, it was.

And you said it was 1% delinquent on those?

We have $1.2 million, that's actually classified.

Okay. Okay. And with regard to this quarter's provision expense, how much of that was tied to TDRs that you actually worked on in the quarter?

I'm looking here. I'm not sure we can put our hands on that. Maybe we can get back to you with that answer to that one.

Okay, sounds good. And do you know how much of it was tied to -- you said you had one large NPA come in this quarter? And how much did you provision for that?

We had a specific of 5.5 for that.

Okay, that's it for me. Thank you very much.

Thanks, Matt.

Thank you. Our next question is from the line of Richard Weiss, Jr. with Janney Montgomery Scott. Please proceed with your question.

Good afternoon.

Hi, Rick.

I wonder if you could talk a little bit about what you see coming up in the merger and acquisition area?

So, Rick still -- we're optimistic there are probably going to be some opportunities. Western Pennsylvania doesn't have a lot of banks on the troubled list so you don't have some of that dynamic that other markets are dealing with. But you still look around and I think, even in good times, you have some of the smaller institutions in our markets that were making 30, 40 basis point return on assets, 6% to 7% return on equities and obviously, I think we all know that the markets have shifted a little bit. So, getting back to those levels are going to be difficult. So, we think there's going to be probably some opportunity. The other thing that were noticing in the markets too and it's going to be a little further out, but -- is the number of conversions by some of the threats in stock companies. So, I think, what is it? A three-year window they have? But there may be some opportunities with some of those companies down the road as well.

Right, I saw that. Does it mean anything that you have TARP now when you're looking at acquisition opportunities? What's the effect of having TARP on either the potential sellers look at that?

Well I can't I really can't speak for the sellers. I assume probably some people will look at it in different ways. I think our feeling on that though is that ultimately it comes down to your performance. And I think we've been able to demonstrate that over the long-term we've been able to put up some pretty decent returns. And we think we're a viable option that people are looking to partner with the right organization.

Okay and speaking of M&A deals, is there any kind of -- I guess what was the longer term prospectus from the PNC in that city? Was there any fallout? Business that you guys were able to get from that merger? Or were users losing business to PNC was a tougher competitor? How did that shake out?

I tell you what, Rick, I think a lot of it took place six months, a year to 18 months prior to even the acquisition taking place. So that was -- kind of the horse was out of the barn, if you will. PNC certainly does a nice job and I would say it's probably stable from our point. They don't -- on some of the more localized credits, I would say that you maybe don't see them as much as you do on some of the larger credits.

Okay. Thank you very much

Thank you. (Operator Instructions) Our next question is a follow-up from the line of Andy Stapp of B. Riley. Please proceed with your question.

Hello, again.

Hi, Andy.

With the improvement in asset quality, what do you foresee in terms of reserve building in upcoming quarters?

I think eventually, Andy, you would expect us to start to level off a little bit, I mean we did build a little bit this quarter. But it's still unknown. If you get something that kind of pops up that you're not expecting. So, again, we still think there's probably going to be some lumpiness in there.

Our general reserve has been really flat for the last three quarters at least. The -- really the fluctuations have been more in the specific reserve category, things kind of move in and out of there.

And I think that's a reflection of us trying to, again, aggressively managing these situations and getting to the right mark.

Okay. And what's a good run rate for the effective tax rate?

Probably about 25% to 26%

All right. Thank you

Thank you. There are no further questions at this time. I would like to turn the floor back to management for closing comments

Just real quick, an answer to a question from Matt Schultheis. As we go through the TDRs, actually the bulk, really the majority of all this TDRs were already nonperforming. So there was really no additional specific that went along with those as they became TDRs or got classified as TDRs.

So, I hope that clears that up. And again, I want to thank everybody for participating in the call today. Mark, Pat and the rest of the management team appreciate the opportunity to discuss this quarter's results and we look forward to hearing from you at our next conference call.

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