S&T Bancorp Inc (STBA) 2011 Q1 法說會逐字稿

Good morning and welcome to the S&T Bancorp's Incorporated first quarter 2011 earning's conference call. At this time all participants are in listen only mode. 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 begin.

Thanks. And good afternoon, everyone. 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 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 a 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 as the Chief President and CEO who will provide an overview of S&T's results.

Thank you, Mark. Good afternoon, everybody. As we announced in yesterday's press release, we earned $4.7 million or $0.17 per share for the quarter. Obviously, we are disappointed in our performance this quarter, as the results were negatively impacted by the deterioration in our asset quality. For the quarter, we recorded a higher than anticipated loan loss provision. The AR expense this quarter was $10.6 million. The increase was really attributed to two factors. First, we had a $19 million increase in nonperforming assets, which really were impacted by two relationships that became impaired this quarter.

We established specific reserves of $6 million for these two accounts. In addition, we also had an increase of $5.4 million in our general reserve, which was a result of increase in our substandard loan portfolio. This increase was a result of continued focus on the overall monitoring of our portfolio. While the majority of these accounts are performing, the receipt and review of year end financial information, has precipitated many of these downgrades. We have historically been conservative in the recognition of losses embedded in our portfolio and will continue to do so as we move forward. Our Chief Credit Officer, Pat Haverfield, is going to provide more color on asset quality metrics in a few moments.

Loan growth also continues to be challenging in the current environment, and we are experiencing a run off and both our consumer and commercial real estate portfolios. On the commercial real estate portfolio, it's really being impacted by the availability of credit in CNBS Market. Many customers are refinancing and placing their projects into long-term mortgages. Also, there has been a lack of demand on real estate projects in the region.

On the consumer side, the decline in portfolio balances have been influenced by refinance activities that occurred at the beginning of the quarter where many of our portfolio loans were converted in the Fannie Mae products and were sold.

On a positive note, we have been seeing nice results from our emphasis on C & I business. Year-to-date, we have originated over $40 million in new relationships and this pipeline continues to build. It's been an area of focus for us over the past few quarters, and we expect this product line to continue to generate positive results.

Also, in the first quarter we rolled out a new centralized underwriting platform for small business accounts. The intent is to really to provide a uniform underwriting approach across our markets. In addition, it's going to enable our managers and other production personnel to focus their attention on interacting with customers and continuing to develop new relationships. We have devoted significant resources to this endeavor, and to date, we have not seen positive results.

Fee revenues for the quarter were down approximately $1 million with the majority of the decline coming in mortgage banking activities. We do have a decent pipeline in our insurance division which has been the beneficiary of a robust energy market.

Another area we are really excited about is our new Mineral Management Division that we introduced a month ago. We partnered with Heritage Trust who is an Oklahoma-based company that specializes in the oil and gas industry. Through Heritage we can now provide comprehensive oil and gas management services for landowners in our region. To date, I think the results have been very encouraging. We signed up 16 accounts of far. I'm seeing about 3000 acres. I think more importantly, we have over 120 referrals in the pipeline from landowners in the region who are interested in learning more about this service. We do feel it is a great [entry] into the landowners in the region who are going to be positively impacted by Marcellus Shell activity and we definitely think it is going to give us an advantage in capturing many of the wealth management opportunities that will arise when wealthy distribution checks begin.

At this point I want to turn the program over to Pat Haverfield, who is going to discuss our asset quality performance in more detail. Mark Kochvar is going to follow up and provide a more in depth overview of our financial results, and as always, at the end of our comments, we will open the call for questions. With that, I will turn it over to Pat Haverfield.

Thank you. Good afternoon everyone. Provision expense first quarter 2011, was $10.6 million, resulting in an ending balance in the low loss reserve of $61.7 million, 1.87% of total loans. This compares to a provision expense of $7.7 million [of loan loss] to $51.4 million or 1.53% at December 31, 2010. Including in the allowance of $8.6 million of specific reserves which compares to $3.6 million over last quarter. Our reserves NVL coverage were 76%, down just slightly from 80% at year end 2010. Nonperforming assets did increase to $88.5 million from $69.7 million in the fourth quarter of 2010.

ORE Properties are $7.7 million as compared to $5.8 million in December. Our TDR's or total debt restructuring, ended the quarter $38.2 million, of which $34.9 million are classified as NVL. We are closely monitoring the performance of each of these loans to ensure enhanced with new payment structures. Our approach to managing our credits and communicating with our customers have allowed us to identify trends and to apply a more conservative approach to identify potential credit risks through our portfolio stress testing, loan review, and criticizing classified asset reviews.

During the first quarter 2011, the Bank experienced net charge-offs of $400,000 as compared to $12.6 million in the fourth quarter 2010, and $1 million in the year ago quarter 2010. Today, special mention of substandard loans increased $46.6 million over December 31, 2010. As we continue to monitor the financial performance of our customers within our loan portfolios, we do continue to see the effects of our national and regional business climate. Through our quarterly portfolio review process, we have identified additional credit risks and weakness within our portfolios. These downgrades are one of the driving factors in our allowance model calculation and part of the increase you have seen in provision expenses in the first quarter.

The specific reserves are an indicator of potential losses in this portion of the portfolio and may change as these events change. In the first quarter 2011, two large relationships moved to impaired status. The first was the $12.1 million CRE relationship in the hospitality sector that has the experience in declining cash flow. The second is $6.7 million CNI relationship. These two relationships resulted in an increase of $6 million to our specific reserves for the first quarter of 2011.

Total delinquency was 3.26% as of March 2011 as compared to 2.23% in the previous quarter and 4.02% March of 2010. Our earlier stage delinquencies of 30 and 89 -- 289 day categories continued to perform well within what our expectations are. A large portion of the increase in delinquency quarter over quarter is made up of two loan relationships I reviewed earlier. We have quickly identified appropriate action plans and are working closely with these borrowers in an effort to monitor the current situation and to ultimately improve performance.

Next, I will turn it over to Mark so he can provide more details on our financial results.

Thank you, Pat. Our performance in the first quarter was largely influenced by higher loan off provision, of almost $3 million in the fourth quarter despite very low levels of charge offs. We are also seeing some revenue declines this quarter, both in margin and in fees. Approximately $650,000 of the margin decline of $1.5 million is due to fewer days in the quarter. The rest is primarily due to lower average loan balances which are down about $36 million, and 10 basis points lower loan rates. We had anticipated the lower loan rates, but the balance decline is somewhat more than we had expected. The core deposit reprising we competed at the end of the fourth quarter was not enough to offset these declines.

Loan balances will remain a challenge moving into the second quarter as evidenced by the lower quarter of Q1 ending balance and additional runoff we have seen in April already. You could see the margin rate decreased somewhat further over the next few quarters depending on loan balances and also some planned addition to the security portfolio to strengthen asset liquidity, which would impact the margin rate due to the change in the earning asset mix.

The shortfall in fees, was primarily due to the lower secondary mortgage loan sales which decreased from $1.3 million in the fourth quarter to $700,000 in the first quarter. The increase in rates had culminated in early December had a big impact on our origination volume in the pipeline has not rebounded.

Insurance revenue increased compared to the fourth quarter due to the annual bonus commissions related to claim experience. These were down from what we received in the year ago quarter. Compared to the year ago quarter and service charges, we are seeing the impact of lower NSF fees due to Reg E almost $200,000 per month lower. The other category was impacted by timing related to our merchant assistance which was unusually low in the first quarter a year ago.

Expenses were up in the quarter, in salaries, it primarily due to timing related to payroll and unemployment taxes. Compared to the year ago quarters, salaries were up mostly due to merit increases that were awarded mid year 2010.

Higher consulting expense in the first quarter this year of approximately $550,000 will offset high lower OREO activity, which was unusually high in the fourth quarter of 2010. ¶ Our capital ratios continued to improve versus the fourth quarter due primarily to lower risk weighted assets. We continued to explore all of our options with respect to our participation in the capital purchase program. We have submitted our application to participate in the small business lending plan, but have not yet come to a final decision. We have not altered 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 our regulators are comfortable with the plan and that any actions are accomplished in the shareholder friendly manner.

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

Thank you. (Operator Instructions) Our first question today is from the line of Damon DelMonte of KBW.

With regards to the two commercial credits that were moved to non-performing status, was that as a result of your own internal quarterly portfolio review, or does it have to do with review by the regulators

That's our own internal quarterly review.

When was your last regulatory exam?

In December or January of this year.

All the movement, Damon, was outside the regulatory exam. We didn't really -- we had no boundaries by the regulators.

And then those two credits, are they in market or are they part of your approximate $300 million of out-of-market loans?

The hospitality loans are in the Rochester, New York market. Which again, -- even though it's out of market, it acts very similar to the Pittsburgh market. And the C&I loan is right within the Pittsburgh market.

Okay, great. Lastly, Mark, for you. Is they're quantifiable benefit from the FDIC assessment change that took place as of April 1?

Yes. For us we were paying around 12 basis points, that dropped to about 7.

Okay. Thank you very much.

Thanks, Damon.

Thank you. Our next question is from the line of Rick Weiss of Janney Montgomery Scott.

I was wondering if regards to the charge off seemed a bit -- seemed low compared to the increase in the non-performing assets and a higher provisioning. What should we expect going forward?

Well, I mean, I think they were certainly -- they were a little bit below where we had anticipated, but they were possibly impacted by some recoveries that we had this quarter. Probably about $2 million. Again, I think in this month in April, we were at a net recovery position as well. I think when you look, Rick, kind of where we are, we have specific reserves today of about $8.5 million and $8.6 million. Those will be -- some of it will depend on the timing, but that is kind of an indication of what we have in the pipeline right now.

Rick, with the downgrades we have and with the impairments we put on these credits, obviously, doesn't mean you're going to have the losses, but as we work through these, I think it's going to be a quarter where they will start to see a little bit more loss than what we have. Again, the 8.6, in my opinion, it's a pretty good indication of where we sit right now.

We scrubbed that portfolio up pretty good. Even with the downgrades that we have on the six rated credits, we provision a little bit higher for those. For the most part, they are performing.

The majority of loans we downgraded are actually performing loans. Again, we are getting year end financial statements, we are doing our quarterly reviews. As we start to see stress in some of the borrowers' balance sheet and other issues they may be experiencing, we are kind of taking a conservative approach when we are downgrading them so we can watch them more closely. We want to be accurate. As soon as we find any type of issues, we are recognizing them and then we are putting together action plans to turn these things around.

I realized the charge offs are always lumpy. If I could go back to the quarterly rate, it does jump about a-- Last year, I think overall your charge off rate was 111 basis points in 2010, which is a lot lower than '09. What do you think the trend of lower charge offs is going to continue for the full year though? Maybe that's a better way of looking at it.

I guess that's real hard to put instinctively on there. Again, based on what we are seeing, I think we are not bothered by any type of trend we are actually seeing in that aspect of it.

Okay. And the other question I have is with regards to Marcellus Shale, I just hear and read about it all the time with increased activity. Yet it doesn't really translate into anybody's higher loan portfolio or growth. When do you think this is going to occur?

I think in this region, Rick, we are seeing opportunities. We have a lot of customers that provide ancillary services to the industry. We have had people that supply pipe, we have increased their lines of credit. We have another customer just this morning. We are a loan committee and they know you are looking for a couple million dollars for equipment that he needs just to kind of continue to service the industry.

So, I think what we have been seeing has kind of help offset some of the other exits that we've had in the portfolio. Last year, even though we are kind of flat when you look at that C&I business on a point to point basis, we did have a fair amount of customers maybe in that substandard category that we came up with exit plans. We were able to kind of offset that decline in balances with new volume from existing clients. And I think really where the sweet spot will be, Rick, is when some of these royalty checks start flowing to and when the car dealers and some of the other general businesses in the communities start to experience some of their growth and expanding their own operations. That's where you see a lift in loan volumes in the region.

So, that be like a 2012 event, you think, Todd?

Potentially. The other thing I talked to some other people in other regions too. Typically, what you see is some of your consumer lending gets impacted in a negative way. You have a lot of people that are flush with cash and they are coming and paying off debt. Whether it be mortgages or car loans and some of those things. I have heard that from some other bankers out in the energy regions.

I heard it too. Thank you very much.

Okay.

Thank you. Our next question is from the line of Mike Shafir of Sterne, Agee.

You guys made some comments about TARP and maybe we can get just kind of an update on your thought process on that and timing of when you are trying to get out of that program. Also, is there a situation where as you guys are exploring all the different kind of methodologies and different things you can do where you have a situation where the regulators let you exit the TARP program without having to raise any -- without having to do a common equity raise of any sort or any kind of raise.

Mike, this is Mark. Our original plan back a couple years ago when we took the TARP was to make sure that we could internally generate the capital to get out within the five-year period before the rate changed. Since then, of course, a lot has happened. We continue to look at it trying to figure out what the right course is to minimize the dilution to the shareholders by a common raise.

Right now we are still working through some of the stress testing that we need to do on our own capital to try to assess the right level of capital for us going forward. That will be an important part of what we need to do to present our case, eventually to the regulators so that we can make the right choice for us. So, we are still in that process. We are still kind of weighing our options we have. We haven't come to a firm conclusion yet. So, I can't really speak to the timing quite yet.

And then just your total risk based capital is right at 17% right now. So, ex the TARP, that would go somewhere right below 14%?

Our risk weighted assets have shrunk since we took it down to the -- we calculated it at about 1363 when we did at the end of the quarter.

Okay. Thanks a lot, guys. Appreciate that detail.

Thank you. Our next question is from Andy Stapp of B Riley.

On the FDIC assessment, I missed the second half of your comment.

We are seeing a decrease of about 5 basis points on an annualized basis that is around 1.5 million change. We will get three quarters of that this year.

Right. Okay. And could you talk about your decline in the yield on your securities portfolio and overnight investments, as well as on your securities portfolio, was the cash flowing and the roll on and roll off rates?

A lot of decrease in the rate was we had a higher accessed balances with the fed that we are including in margin. That was up about $50 million on the quarter. That had about a 6 basis point impact on the overall margin. I couldn't say offhand what it was just on the securities line.

The other thing is we are purchasing some additional securities right now to strengthen that asset liquidity number. So, with the purchase of that and we are buying those at lower rates than the current rate on that, so that's helping -- not helping, but causing that overall rate to come down as well. We purchased probably about $40 million or $50 million during the quarter. It had a big impact on that securities rate. For maturities, we don't have a whole lot. We have maybe $3 million or so a month of mortgage back up that rolls off every month. We don't have a lot of agencies that mature over the course of this year.

Okay.

We still have about $60 million of communities. Those are being slowly called away. It might be a couple million a month. That varies depending on the call schedule.

Okay. And did you provide your early stage delinquencies, where they were at quarter end? Or could you?

Give us a second here. Yes. Quarter end, our 30 to 59 day bucket was 62 basis points. Our 60 to 89 day bucket was at 20 basis points.

Okay. All right. Thank you.

Thank you. (Operator Instructions) The next question is coming from the line of Collyn Gilbert of Stifel Nicolaus

Thanks. Just a follow up on the two downgrades of the larger commercial relationships you saw this quarter. When in the quarter did you lower the ratings on those?

They were both were in March.

March. Okay. Are you still going through the process of receiving your borrower's financials and kind of going through those files? Is that process still occurring?

That is an ongoing process, yes.

Okay. So, do you think given that and just given as you have mentioned, obviously, the economic environment and that type of thing, that we could see future downgrades coming just as you are getting these updated financials?

Well, I think overall I cannot stay here and tell you are going to see same levels or amounts that we have seen this quarter, but, anecdotally, you are going to see some downgrades. You are going to see some weaknesses. Hopefully, also you are going to see some improvements and some upgrades and some resolutions of problem credits, which kind of help balance each other out so to speak.

Okay, okay. And then, Mark, just on the expense line. I know you mentioned the higher consulting fees and just the timing of certain payrolls. Is that -- should we then assume that kind of the run rate of expenses is going to be lower than where it was this quarter? I think going into the quarter you had mentioned on the last call that $26 million was going to be maybe perhaps a reasonable run rate. I am just trying to gauge where we are from here.

I still think 26 is going to be the better number. We had a couple unusual things this quarter, and then we had question alluded to that the FDIC benefit doesn't kick in.

Okay.

Our salary expenses, those tend to moderate after the first quarter as people hit their ceilings on various taxes.

Got you. Okay, okay. Thanks.

Thank you. Our next question is from David Darst of Guggenheim Securities.

Could you go back over some of the details on your loan pipeline and your outlook for loans to decline, and may be what at what point do you see that turning this year?

Yes, I mean on the real estate side, David, you're still going to see some run off. There is, there is a fair amount of activity into that securitization market right now. They're getting a little more active. The pricing is appealing for some of our borrowers, but we are seeing a little bit of a lift where there has been nice activity, and also there's a lift in the pipeline on the C&I side, which will offset that somewhat. Will it totally offset? I don't think so because they tend to kind of -- the real estate pieces tend to kind of come in bigger chunks. We view this more as a little longer play, but it is going to be more sustainable in the long run.

Okay. And, Pat, I think you mentioned that you weren't really bothered by the trends, the credit trends this quarter.

No. I didn't say I wasn't bothered by the credit trends. I said based on the marks we put on here and the specific reserves and where we see losses going, we don't see anything in the future that is completely keeping us up at night saying those things are going to balloon.

If I could just comment on that, Dave. What is disappointing for us, we had two or three quarters of the positive trend. We worked pretty hard to get that down in that 2% range and then you add a couple that jumped up and we continue to monitor the portfolios and work through and actively manage the accounts that we have that are in that bucket. So, as Pat alluded to, there's going to be some movement on some stuff out of the back end too. We are going to stay on top of it and do our darnedest to try and get it headed back down in the right direction.

Okay. And I guess could you say whether there would be any material change to your capital plan today given credit trends this quarter versus what it would have been at year end?

Not really. Like Todd said, it's disappointing and it certainly makes us think a little bit harder about that. I think over the next couple quarters that will help us better formulate our opinion on that.

Okay. So, is it more likely that you repay TARP sometime in 2012 than later this year?

We are just not really sure yet. Can't really commit yet.

Okay. Thank you.

Thank you. (Operator Instructions) Your next question is from the line of Matt Schultheis with Boenning and Scattergood.

Really quick question for you. What was the impact, if any, on your margin with reversing interest that was on loans that you may have put on non-accrual?

I think the two loans that went on I think it was about $250,000.

Okay. Thank you very much.

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

I just want to thank everybody for participating in today's conference call. Mark, Pat, and I appreciate the opportunity to discuss this quarter's results and look forward to hearing from you at our next conference call. Have a great day.

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