S&T Bancorp Inc (STBA) 2011 Q2 法說會逐字稿

Greetings and welcome to the S&T Bancorp Incorporated second quarter 2011 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. (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 begin.

Good afternoon and 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 statement 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 second 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, everyone. I am pleased to announce as reported in yesterday's press release net income of $13.4 million or $0.48 per share for the second quarter of 2011 versus $4.7 million or $0.17 per share in Q1. Improvements in asset quality metrics were the major factor impacting this quarter's numbers. As a result our provision for loan loss expense was $1.1 million compared to $10.6 million last quarter. Some of the highlights include an $18.6 million reduction in our nonperforming assets, a decline in overall delinquency the 2.66 versus 3.26 in Q1 and a slight improvement in our special mention and substandard loan categories. These positive trends are a reflection of the concerted effort that our credit administration and lending staff have made to identify potential problems loans as soon as possible and resolve them as quickly and as efficiently as possible as well.

From a balance sheet and income statement perspective, we continue to experience a decline in our loan portfolio, which was down $77 million on an average basis quarter to quarter. We continue to be impacted by payoffs in our commercial real estate portfolio as a result of planned sales by some of our investors, as well as a robust secondary market, which is enabling customers to refinance properties at favorable terms and rates. I think overall the real estate market appears to be firming up in our region, as vacancy rates continue to be below national averages. Also discussions with real estate professionals in the region indicate that they anticipate increased activity in 2012. We do, however, expect to experience continued run-up in our commercial real estate portfolio over the next 1 to 2 quarters.

C&I portfolio was also lower on an average basis, but I think the story there is most of the runoff was a result of moving some of our special mention and substandard loans off the balance sheet. We are focusing on growing this line of business and really are pleased with the activity that we're seeing on new opportunities in several of our C&I categories, namely automotive, predominantly floor plans and also the energy book. In addition to a number of customers in manufacturing space have made request to increase their lines of credit really just to support additional working capital demands as businesses begin to pick up. In our fee-line pipeline, we are seeing that expand a bit and we'd expect to continue to see some lift in that line of business in the coming quarters.

From a fee revenue perspective, I'm excited about the activity that we're experiencing in our wealth management department really on 2 fronts. As a result of, I think, outstanding investment performance and also becoming GHS compliant. We're getting a lot of opportunities down there to make proposals to larger institutional accounts, which we feel is going to result in increased assets under management. Also there is a lot of momentum in our mineral management division, which we introduced in Q1. To date we've signed up about 44 accounts totalling approximately 4600 acres.

But I think more importantly the pipeline right now consists of over 115 customers controlling over 19,000 acres. But it has been a great way for us to kind of differentiate ourselves in the marketplace and really obtain a number of introductions to new potential clients to the bank. And again, we anticipate continuing to experience positive trends. Also, on the insurance division, we're experiencing some nice trends. Year-to-date we booked over $600,000 in new business premiums for the first 6 months, which is 100% increase over 2010. And finally, just want to mention that we continue to look at expense structure and really ways to improve our efficiencies. Recently we consolidated branches in our Clarion market.

We also have another one scheduled for our [Ford City] market in early September and we feel that both of these moves will have minimal impact from a customer service perspective, but it will improve operating efficiencies. We've also made a push over the last month to convert customers to electronic statements and I think we're really pleased with the ground that we're making in that regard and, while it is early, we did convert over 11,000 accounts in 1 month to electronic statements versus paper. So again, that's going to have a nice impact on overall operating expenses. So at this point, I want to turn the program over to our Chief Credit Officer, Pat Haberfield, want to review our asset quality and performance in more detail. And then, as always, we will be available at the end of today's presentation to answer any questions.

Thanks, Todd, and good afternoon, everyone. Provision expense for the second quarter of 2011 was $1.1 million, which resulted in an ending balance in the loan loss reserve of $58 million or 1.81% of total loans. This does compare to provision expense of $10.6 million to the loan loss reserve balance of $61.7 million or 1.87% at March 31, 2011. Included in the allowance was $7.5 million of specific reserves, which compares to $8.6 million over last quarter. This decrease of $1.1 million is contrasted by our previous increase of $5 million during the first quarter of '11. Our reserves NPL coverage is 93%, which compares to 76% at the end of the first quarter '11. Nonperforming assets did decrease this quarter to $69.9 million from $88.5 million in Q1 or 2.18% of total loans plus ORE.

This compares to 2.67% in the previous quarter and 2.41% at June 30, 2010. OREO properties relatively stable at $7.4 million, which compared to $7.7 million in March, 2011. As expected our TDRs, or trouble debt restructurings, ended the quarter at $46 million, of which $26 million are classified as NPL, but $20 million are accruing. Our philosophy in planing to work with our borrowers in problem loan situations to be monitored closely, with the results that between TDR's we are beginning to experience the benefits of these restructuring. Our monitoring of these and all special mention and substandard assets remains top of mind. Through our quarterly intensive review of these assets we're able to identify potential problems and work with our customers in situations warranted in order to continue with the relationship on a go forward basis.

Further, we continue to stress testing of our portfolio, as well as our robust loan review function, which are additional examples of our proactive credit risk management program. During the second quarter of 2011, the bank experienced net charge-offs of $4.8 million, which compares to $400,000 in the first quarter of 2011 and $18.2 million in the second quarter of 2010. Our annualized net charge-offs to average loans is 31 basis points as compared to 1.14% in the year-ago period. Total commercial special mention and substandard loans improved slightly, ending the second quarter at $357.7 million, which compares to $385 million in the first quarter of this year.

As stated in our press release, we have recorded $8.8 million in loans held for sale relative to a loan sale agreement, which is expected to occur and close during third quarter 2011. Total delinquency did decrease this quarter to 2.66% as of June, 2011, which compared to 3.26% in the previous quarter and 3.10% in June of 2010. Our earlier stated delinquencies, the 30 to 89 day categories, which is one leading indicator of potential problems, continue to perform within our expectations. The 30 to 59 day delinquency bucket is at 51 basis points. The 60 to 89 day delinquency bucket is at 20 basis points. And over 90 days is at 1.95%. This does compare to 62 basis points, 20 basis points, and 2.45% when we ended first quarter '11. I would like to turn it over to Mark now, so he can probably give us some additional details on our financial results.

Thanks, Pat. As we have discussed, our performance in the second quarter was largely influenced by a much lower loan loss provision, down $9.5 million from the first quarter. Although we had net charge-offs of $4.8 million, the reserve decreased by $3.7 million due to lower specific reserves of just over $1 million and lower general reserves due to some improvement in our overall historical loss experience. Revenue was down in the quarter due to margin decline, primarily from lower average loan balances of $77 million. Diminished margin rate was influenced by the shift from loans to lower earning securities and XF Fed balances. Loan balances remain a challenge in the second half of the year, as we continue to see higher paydowns. This will continue to impact the margin rate due to the change in the earning asset mix.

The funding side is relatively unchanged, as we have little room left for core repricing and we don't have any significant higher rate CD resets in the near future. We do get some relief moving into the fourth quarter, with a $25 million subset that reprices from fixed at 6.78% to LIBOR plus 1.60. Overall fees shows little change with lower secondary mortgage activity being offset by some seasonality in deposit fees and fee increases on selected deposit-related items. Expenses were down in the quarter and salaries primarily due to timing-related items and payroll and unemployment taxes. Compared to the year ago quarter, salaries are up mostly due to merit increases awarded mid-year 2010 and lower deferred salaries and FAS 91 caused by lower origination volumes. FDIC expense is down due to the new assessment base and other is down due to higher consulting expense in the first quarter and a gain on OREO property in the second quarter.

Our capital ratios improved significantly versus the first quarter by 75 basis points or more in the risk-weighted denominator ratios due to lower risk weighted assets caused by our loan runoff and a good quarter for earnings retention. We continue to explore our options with respect to our participation in the capital purchase program. We have withdrawn our application to participate in the small business lending funds, due to the net loan off we've spun off we had experienced over the past couple of quarters. It would be very difficult to attain the goals of the program, which sets the measurement base line with the 4 quarters ending in June 2010. Thanks very much. At this time I would like to turn it over to the operator to provide instructions for asking questions.

Damon DelMonte of KBW.

I was wondering if we could just start with the $8.8 million of loans that you have pending for sale this quarter. Could you just give us a little color on those as to maybe where they've been marked?

Yes, right now, Damon, again the $8.8 million, a couple of projects that are out of state up in New York, we do have a contract to sell and close those by the kind of mid third quarter. We did write those down about $3.4 million, I believe. And we do have significant non-refundable security clauses in hand as well. So we are pretty confident that it is going to move forward.

So does that mean that originally the loans were like $12.2 million and then you've since written them down to $8.8 million?

That's right.

I just wanted to be clear on that. Thank you. And then Todd, I think you mentioned that there is some good opportunities in your energy book for growth in the upcoming quarters?

We're seeing some activity. There's some people related to the Marcellus industry. Dave Antolik, our Chief Lending Officer, I may let him elaborate on that a little bit.

For the quarter we did see increases in balances in the energy book of about $7 million and we are seeing some additional opportunities, primarily related to the ancillary companies that I think we've talked about on some of the past calls. That stuff is coming to fruition for us. So we're pretty positive on what we've seen from the -- from our C&I group, who is attacking the opportunities in the Marcellus.

And what is the total on that portfolio currently?

It handles about $37 million.

And then I guess just to be clear, it noted in the press release that accrued in TDRs was up to $19.8 million from $3.8 million, that difference is the $16 million that you referenced in the press release?

That's correct. All right. That's all I had for now. Thanks very much. Thanks, Damon.

Matt Schultheis with Boenning & Scattergood

I was just hoping you might be able to provide a little bit more color with regards to when you think you might repay TARP and what you would view as indicators that things are improving in the credit book that you'd feel comfortable repaying that?

Well, that's something we're talking about more and more with our board recently, as well. And we're looking at a number of factors. Some of them you mentioned, our asset quality is important. Improvement in our capital ratio, I think, is also an important factor. But again, we are trying to do this in a shareholder friendly manner as possible. So we're not in any big rush. We are going to take our time and try and do the right thing.

Have you received any indication from your regulators what the new capital standards might be?

We have not.

Okay. Thank you very much.

Okay, Matt.

Andy Stapp of B. Riley.

Good afternoon, nice quarter.

Thanks, Andy.

Last call you guided to a quarterly run rate in non-interest expenses of $26 million. Is that still a good number?

Yes, there is always some things that move around, but that's probably the right range we see going forward.

And what are you looking for in terms of a effective tax rate in the back half of the year.

I think for the year, overall, it is going to depend on what our pretax number ends up, but we think it will be between 22% and 23%.

And what was driving the decline in securities with yields?

Look, we have a decent amount of balances in access at the Fed which we classify in the security group.

Okay.

So that is predominantly what drives that lower.

And last quarter you talked about purchasing securities in Q2, but it --.

We did a little bit, but less than we had anticipated. And just the uncertainty in the market, the yields drifting a little bit lower during the quarter, we held off a bit.

And so you are going to continue to hold off until they priced at more attractive levels.

We will see what happens next week.

Okay. All right. Thank you.

(Operator Instructions) Collyn Gilbert of Stifel Nicholas.

Just a question on credit. Obviously it was a big swing this quarter. Do you have a sense of where you all are in kind of this credit resolution cycle?

Collyn, I think we're through a lot of these assets. We're through a lot of these reviews. We're -- obviously, we're not letting up on the credit discipline or our credit risk management program we have instituted and enhanced. So as far as being through this credit, I think we're going to continue even as things improve with exactly what has gotten us to this improved point so far. But again, with downgrades, with upgrades, and different things, remember, it is more of a fluid situation, fluid movement of things in and out of this as you get financial statements, as you make contact with the customers, but I know I'm kind of talking in circles here, but really, we're a very, very good way through what we've reviewed so far and been able to identify.

So as you guys are doing reappraisals, have you seen a bottoming then of the reappraisals that keep coming in on some of the troubled credits?

I don't know that I'd say a bottoming. I think we have a very good base to anticipate what we think we're going to see as far as valuations.

That anticipation that you have, can you help shed some light on what -- how we should sort of be thinking about the provision in the reserve? I swear I know I ask this every quarter.

We talked about that earlier today, Collyn. I would say that last quarter, it was probably a little bit higher than what we certainly an anticipated. This quarter a little better than what we had anticipated. And somewhere in the middle is probably, however, a realistic run rate. But again, and I know you try and get to kind of a normalized run rate but with some of the nature of our portfolio there is a little bit of choppiness in there just because of some of the real estate.

All right. And if we have take it from kind of a different angle, if you -- the loss of areas that you're seeing in your troubled credits are roughly what?

It depends on the class. Looking across, we segment this out, fairly granularly, Collyn, so --

It carries probably book on 20%.

We're looking, CRE maybe 20%. And again, these are not any hard and fast numbers. But C&I could be, could range anywhere from 7% to maybe 12% depending on the range of what you're experiencing. So it floats depending on our look-back period and loss emergence.

And I guess then I look at the ratio you're reserved to NPAs, which has been steadily building and this quarter was at 83%, so I'm just trying to reconcile. I would look at your balance sheet and look at that metric, look at what you're saying the loss of areas are, look at reserves to loans and it just seems like you're in a very, very elevated reserve position. Do you see it that way or --?

I look at it is that we're in a very comfortable position.

Okay.

As a model, it factors all in there, the historical loss rates, it ties back into the loan ratings in some of those REITs, Collyn. So we're comfortable with where we have the level of provision is.

Just switching gears over to the loan side for a minute, can you talk a little bit about kind of the nature of the paydowns. Do you have any thoughts at all on when you think that -- those paydowns should slow, because it sounds like there is some optimism on the front end from an origination standpoint but yet you need that continue to get racked with some of these paydowns.

It depends on the segment, Collyn. I know in the CRE bucket over the next 90 to 120 days we have another chunk of 5 or 6 projects that we're looking at that -- we had 4 of them that have sold, another 1 is getting refinanced out through a life Company, and on the front end side, on the real estate side, there is just not the velocity to kind of offset that right now. But again, I think if you look regionally that vacancy rates again are below national averages. We're hearing some chatter that there is going to be some projects coming out of the ground and we have seen a few that we're involved with now, but I think you're going to see that pick up fourth quarter and particularly in the first or second quarter next year on the real estate side.

And again, on the C&I side, we were off a little bit this quarter, but again, some of it was some planned exits that are criticized and classified buckets and we are seeing some decent activity on the front end. And as Dave alluded to, the energy continues to get a little better. And there is a good editorial in "The Wall Street Journal" today just about some of the overall economic benefits that the Marcellus provides to the state and as well as on a per well basis and we're feeling the effects of that. So I think it is going to be a little slower than some of the chunks to come on and off on the real estate side, but long term, I think it is a good place to be.

Okay. That's helpful. Thanks.

(Operator Instructions) David Darst with Guggenheim Securities.

As you discussed in the expected payoffs, how much of those are in the outer markets, C&D and CRE portfolios versus in Pennsylvania?

They are all in market.

So is the balance of the outer market business relatively stable for now or should we expect to see some runoff happening there?

I think we saw about $30 million in out of state runoff, payoffs and exits in the quarter. And there are --

(multiple speakers) going forward or historically.

And going forward, there are a few projects we anticipate moving to the permanent market.

Could you help us quantify how much maybe total runoff you think you've got in the loan portfolio in the next 2 quarters.

I would just be guessing. A lot of it depends on timing, where the perm market is as these projects stabilize. And on that basis what replaces it.

And then you gave us the holding Company improvement and regulatory capital ratios. Were the bank level ratios similar to that given the change in this quarter assets?

Most of that would flow down to the bank.

So are you relatively comfortable -- I guess you still haven't put any of the cash into this [thought], have you?

Right, the PPT funds we left at the holding Company, so the main capital ratios are lower than the total Bancorp.

Okay, but I guess are they approaching a level now where you really don't feel like you need the excess capital given the deleveraging that we're seeing and the change in [risk related] assets?

That part of the analysis that we're going through as we try to evaluate the timing of what and how we are going to deal with the CPT, right.

So is that kind of changing the way you're thinking about raising common equity?

It enters into it that. We would like to again do it with as small a raise as possible. So as our capital ratios get better, I think that helps our case.

But I guess are you still waiting for some form of a common raise when you do it?

I'm not sure yet.

All right. Thank you.

Rick Weiss with Janney Montgomery Scott.

I want to follow-up a little bit with Collyn's question regarding the loan loss provisioning and that would be, is it fair to say that your provision is more volatile than most of your peers and is that because you use a different method of computing the loan loss reserves or do you have a different type of loan or the quality of loans that you make versus other banks in your area?

Well, I can just give you just a brief back ground of how our reserve model works. Again, I think the volatility has more to do with the nature of our portfolio than the model itself. But we look at a number of different factors. We start out by breaking out the loans into various sub-categories, commercial, construction, real estate, and C&I being the main commercial ones. And we further break that down by loan rating. And then we go back and look at history and what our charge-off experience has been in those various buckets of loans by rating. And we factor in what is called the emergence period, how long that since the event occurred that precipitated the eventual loss. So based on that history that forms our base loss percent.

So some of the volatility, for example, last -- moving from fourth to first quarter had to do with a fairly significant increase that we had in substandard rated loans. You can imagine that substandard rated loans carries a much higher history of losses than do even special mentioned and some of the past. So in last quarter, that's what caused the volatility or the increase in the provision, because the reserve we needed was much higher because of the higher dollar amount of substandard loans. So there are just a lot of moving pieces to it. And as all those things change, as our loss experience changes, we could see a difference in the reserve requirements because of that.

And shifting gears over to your net interest margin, how are you positioned with respect to changes in interest rates?

Our models indicate that we are fairly asset sensitive. As the one exposure that we do have with some repricings of some of our 3 and 5-year ARM REITs that's on the commercial side, in a very slow process, but as those things reprice, we're losing anywhere from 200 to 300 basis points as they reprice on a normal cycle. So we do have a little bit of margin pressure the longer we stay in this very low interest rate environment.

And just in terms of guidance from here, would you figure that the margins should be relatively flat?

I guess we're anticipating a little bit more decline in that margin rate. A couple quarters.

Okay, got it. Thank you.

Sure, thanks, Rick.

(Operator Instructions) There are no further questions at this time. I would like to turn the floor back to management for closing comments.

We did have one question that Mark just received that came in via e-mail. So I will let him address that.

The question was could you please provide a general breakdown of what the TARP money were used for and in addition was a report filed that would provide this information? The TARP funds, again, from a technical perspective are still at the holding Company. We view those as providing support through the capital that it provides. Money when it comes into the bank is fungible in nature, so it is hard to say exactly where it went. There is a report that we file on a annual basis with the Treasury Department that does provide some detail on what the funds were used for. And I will send an e-mail out on this question the link to that report.

Okay. And, again, I want to just thank everybody for participating in today's call. Mark, Pat and I appreciate the opportunity to discuss our results and we look forward to hearing from everybody at the end of next quarter. Have a great afternoon.

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