S&T Bancorp Inc (STBA) 2011 Q4 法說會逐字稿

Greetings and welcome to the S&T Bancorp Inc's fourth 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.

Okay. Thank you. 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 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 fourth 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. As we announced in yesterday's press release, net income for the 2011 was $39.7 million or $1.41 per share versus $37.3 million or $1.34 per share in 2010. For the fourth quarter, we earned $9.3 million or $0.33 per share, which compares favorably to $8.7 million or $0.31 per share in the fourth quarter of 2010. I think all in all, we're pleased with our results as we continue to see positive trends in our operations. Big news this quarter was the redemption of the $109 million in CPP funds, which was done without any -- issuing any additional shares. The redemption did necessitate taking a one-time charge of $1.8 million or $0.06 per share in the quarter, but going forward it's going to have a positive impact in 2012 of about $6.2 million or $0.22 per share. We're also beginning to see increased activity in our loan portfolio, as loans for the quarter were basically flat after experiencing run-off in the portfolio for over two years.

One of the areas that we look at continually is outstandings and commitments in our C&I book and again we're starting to see some -- at least some signs of life. We did have a slight uptick in Q4 in both outstandings and commitments, which was the first time this has occurred going back to September of '09. And also, our pipeline continues to grow in all lines of business on the loan side -- commercial, small business lending, our home equity lines -- and again the major factor having a positive impact on volumes continues to be the robust economy. In Western Pennsylvania, again, which has benefited from some of the growth in the energy industry, unemployment in our region is about 7.2%, which is well below state and national averages of 7.9% and 8.6% respectively. Pat Haberfield, our Chief Credit Officer, is going to comment on asset quality in a few moments, but overall I just want to mention that trends are heading in the right direction, as charge-offs and provision expense were down on a year over comparison. I think, also, we continue to make progress in our nonperforming asset numbers, which were down $5 million over the third quarter. Today, our nonperforming asset to total loans plus OREO ratio is below 2% at 1.92%.

In our fee revenue areas, we had a good year in both Wealth Management and also our S&T-Evergreen Insurance Group and then we think we've laid the foundations for some good things going forward in 2012. In Wealth Management, we made a lot of progress on several fronts, which, again, we think are going to benefit us in 2012. We've added salespeople in our financial services area. We hired a person with wholesaling experience to market our Stewart Capital Mid Cap Fund and we're seeing some activity expanding our delivery channels. The Fund once again received a five star ranking from Morningstar for their one, three, and five year performance, and their investment returns continue to place them in the top decile from a performance standpoint in the mid-cap space.

And mineral management continues to be a bright spot. We've talked about that in prior calls. But we significantly exceeded goals that we set when we entered the program under acreage under management and we will begin to see some revenues hitting the income statement this quarter. I think more importantly, the program is performing exactly as we intended, as we've been able to establish wealth management advisory accounts with clients who have had royalty income coming in or will have some fee revenue coming in from the upfront bonus payments. And so again, this is where we really think we have the ability to generate some nice fee revenue.

On the S&T Insurance and Evergreen side, we generated about $980,000 in new business in 2011. Total revenues for that division were $5.2 million or up 5%. Similar to Wealth Management, we've added production people in our team on the insurance side in 2011 and we're now beginning to see activity that we think is going to show up on the income statement in 2012. So, we expect insurance to continue to move forward in 2012.

And then finally, the retail division has some nice activity as well. We are starting to see an uptick in home equity applications in January. Our Mobile Banking product has been well-received by our customer base and today we have now over 5,300 users using that delivery channel. We also introduced a new Preferred Savings Account product in December that generated about $30 million in deposits, $21 million of that was new money, and we've been extremely happy with results in retail and, again, I think they've been well-positioned or are well-positioned for growth in 2012.

So at this point, I would like to turn the call over to Pat and he can fill you on what's going on, on the credit area.

Great. Thanks, Todd, and good afternoon, everyone. Our provision expense for the fourth quarter 2011 was $2.3 million, resulting in an ending balance in the loan loss reserve of $48.8 million, or 1.56% of total loans. This compares to a provision expense of $7.7 million, a loan loss reserve balance of $51.4 million, or 1.53% at December 31, 2010. Included in the 2011 allowance is $5.5 million of specific reserves, which compares to $3.6 million over year-end of 2010. Our reserve to NPL coverage remains strong at 87%, as compared to 80% in 2010. As Todd briefly mentioned earlier, nonperforming assets decreased to $60.1 million or 1.92% of total loans plus OREO, as compared to $65.2 million or 2.08% of total loans plus OREO in the linked quarter, and $69.7 million or 2.07% at December 31, 2010. Our non-performing assets continue to trend downwards, decreasing $5.1 million or 7.8% from the third quarter and $9.6 million or 13.8% in comparison to December 31, 2010.

During the fourth quarter of 2011, the Bank experienced net charge-offs of $5 million, which compares to $8 million in the linked quarter and $12.6 million in the year-ago quarter. For the year, our net charge-offs were $18.2 million, as compared to $37.7 million in 2010. When compared to average loans, 2011 net charge-offs were 56 basis points as compared to 1.11% in 2010. Total Special Mention and Substandard continued to progress as expected, ending the fourth quarter at $344.5 million, which compares to $356.2 million in the third quarter of '11, and $329.1 million at December 31 of 2010. Our strategy to work with our borrowers through this economic cycle, coupled with some additional improvements economically, is beginning to show in many of our metrics.

Total delinquency for the fourth quarter was 2.43%, which compares to 2.23% in the year-ago period. Our earlier stage delinquencies, the 30 to 89 day categories, which of course is one leading indicator of potential problem loans, continues to perform within tolerances. The 30 to 59 day delinquency bucket is at 48 basis points compares to 33 basis points in the linked quarter and 21 basis points at December 31, 2010. The 60 to 89 day delinquency bucket is at 16 basis points versus 14 basis points in September, and 12 basis points at December of 2010. The over 90 day delinquency is at 1.79%, which favorably compares against 1.89% in the linked quarter and 1.90% at year end of '10. We witnessed the mix of seasonality in the early stage over the 30 to 59 day delinquencies and a positive trend of customers being able to make payments to reduce their delinquency status from the later stage delinquencies as well. From the perspective of comparing delinquency by dollars, rather than by percentages, the delta between the previous periods is quite narrow, so we have not seen a considerable amount of further weaknesses.

Next, I'll turn the call over to Mark who will provide you with some additional details on our financial results.

Thanks, Pat. Our performance in the fourth quarter was down compared to the prior quarter due to non-cash charges related to redeeming the CPP funds, higher expenses, and higher provisions. Margin improved in the fourth quarter in both dollars and rate, due to sub-debt and CD repricing, combined with slowed net loan run-off. Although average loans were down $45 million, we are encouraged that loans were essentially flat when comparing period-end balances. We do expect to experience net interest margin pressure in 2012, but it will be reduced as long as we can turn the corner on loan growth. In the fourth quarter, we had a full quarter benefit from the reset of a $25 million sub-debt issued that went from fixed at 678 to floating at LIBOR plus 150 late in the third quarter. We also saw lower CD rates with maturities that migrated into shorter term, lower rate [sessions].

The improvement in non-interest income in the fourth quarter was primarily related to timing and valuation items listed in the Other category. In the third quarter, we had an impairment charge to our mortgage servicing rights asset of $763,000, as compared to an impairment recapture of $302,000 in the fourth quarter, a favorable variance of over $1 million. In addition, there is a valuation adjustment related to our deferred compensation in a Rabbi Trust that accounts for a favorable variance of $484,000. Non-interest expense in the fourth quarter increased in salaries and benefits due to higher incentive expense of $711,000, higher medical of just over $500,000, and the other side of the previously mentioned deferred compensation expense, again, of $484,000. The other major variance is a decrease in the provision for unfunded loan commitments of about $0.5 million compared to a decrease of $1.2 million in the third quarter, which makes for an expense increase of $700,000. The provision for unfunded commitments has decreased with lower commitment volumes.

Our capital ratios were impacted by the redemption of the Capital Purchase Program fund. This accounted for a decrease of approximately 3.4% on the risk weighted asset ratios. Also impacting capital ratios this quarter was the pension valuation. The discount rate used to value our liability is down 1% from last year, which increases the liability and decreases equity by approximately $12.5 million. This change explains the reduction in our TCE ratio and also the declines in the common and tangible book value. We are finalizing our integration preparations for the Mainline Bancorp acquisition that was announced in the third quarter. We continue to anticipate closing the transaction in the first quarter of 2012. Thank you very much. At this time, I'd like to turn the call back over to the operator to provide instructions for asking questions.

Thank you. At this time we'll be performing a question-and-answer session.

(Operator Instructions)

Thank you. Our first question is coming from Collyn Gilbert from Stifel Nicolaus. Please proceed with your question.

Great. Thanks. Good afternoon, gentlemen.

Hi, Collyn.

Todd, just in your commentary on the wealth management side, could you just go into a little bit more detail on that and maybe describe a little bit how those wealth fees break down because you guys were really probably one of the only banks that I've seen post a good number this quarter. I know you went through the initiatives that you've got in place but maybe just a little bit more color on how that fee structure breaks down?

Yes, so we have an arrangement with the people and it kind of depends on the level of service but it's a fee arrangement, Collyn, then we split with -- like we mentioned before we partner with this Heritage Trust bank out of Oklahoma City, and we split the fees that come in and then but really where the end game is for us is securing these wealth management advisory accounts and so we have a couple that are going to convert this quarter to couple of them will be receiving some pretty significant upfront bonus payments and then you're looking at maybe establishing some wealth management accounts and also we have another situation where people already have some lease revenue coming in for I think $20,000 to $25,000 a month, they're going to park that over with our wealth people. So that's really where we think we see the business going. Again, right now we're just kind of building the book and we set some goals when we got into it a year ago and I would say we're probably close to about not quite double but almost double than where we had established where we wanted to be when we got into it from an acreage position.

Okay. Okay. That's helpful. And then -- Mark, if you covered this I apologize -- but you'd mentioned there were some prepays, prepayment fees, in the margin this quarter. How much was that on a dollar basis?

Yes, they were maybe -- to check on that number right now. We'll get back to you later in the call on that one.

Okay. Okay. And then just finally on the CD side, do you all have opportunities to continue to lower that? I think it looks like your CD rate is a little bit higher than what's being advertised on the web. I just didn't know if that's a good number that's being advertised and if you could see your CD rates drop to that level or what opportunity you see for CDs going forward?

It's the next major amount, a large amount of CDs that we have maturing doesn't come until the end of the second quarter, first part of the third quarter, where we still have some higher rate CDs that are going to mature. So we don't see a whole lot of change on the liability side through the first to the second quarter.

I think our -- overall our CD rates are pretty modest. We did introduce, as I mentioned the Preferred Saving Account which I think has a 1% rate on it but we tie it into having other minimum balances and into checking accounts and some of those things and it's limited to $100,000 accounts, too, so it's not like we're off chasing the jumbo market. It's more just to try to give our branch managers a product to be competitive and continue to go out and drive other ancillary business out of it.

Okay. That's great. And then just one final question. The loan runoff obviously slowed significantly this quarter. What were the originations like in the fourth quarter compared to third quarter to try to get an understanding of what that momentum could look like going forward?

I have -- Dave Antolik here.

Quick calculation. I have a monthly. Then I can get a quarterly here.

I know we were pretty active in December. That's why Mark mentioned on a point-to-point basis it was flat. On an average basis, a lot of it hit headed toward the end of the year. What are you looking for, Collyn, just third quarter to fourth quarter or--?

Yes. Yes, on the origination side.

Total originations in the third quarter were about $160 million, and they were just shy of $250 million in the fourth quarter.

Okay, and we assume that the runoffs, obviously, in the third quarter were greater. So I mean, do you have a sense of what you think the loan growth could look like on a percentage basis for 2012?

Well, Collyn, it's still -- next year, I'd say that the pipeline is up. There's a lot of activity. But we're just kind of looking through and we know that there's some real estate projects that we have, we were just talking today, about a $9 million project that's going to get taken out to a bond financing. So the secondary markets are loosening up. Some of these bigger jumps may or may not come down. So it's still going to be a little bit lumpy this year from a growth standpoint. I would hope that we could at least keep up with the runoff but I can't guarantee that that's going to happen.

Okay. Okay. All right. Thanks so much.

And then just the other point to that, Collyn, too, is we are seeing some activity on both on the real estate side but I think we're getting some nice looks on the C&I side, starting to see some nice activity over there too. So that's the line item we're looking at to make sure that we can try and continue to grow that piece of the portfolio.

Okay. Great. Thank you.

Thank you.

(Operator Instructions)

Our next question is coming from Mike Shafir from Sterne, Agee. Please proceed with your question.

Hello, good afternoon, gentlemen.

Hi, Mike.

I was just wondering, on the Mainline acquisition, are we looking kind of more towards the end of the first quarter, just to kind of think about the contribution to average earning assets and is it going to be more of the income statement impact will be seen in the second quarter?

Yes, we're probably looking at closer to mid-March.

Okay. It will be kind of towards the end of the quarter with minimal kind of income statement impact this quarter, you will see the bulk of it in the second quarter?

That's correct.

And then just as we think about that, relative to average earning assets, pretty small portion of it but outside of the purchase accounting marks, I'm assuming the impact on the net interest margin is going to be negative?

Well, it's fairly neutral. I mean, they have I think just a slightly lower margin than we have and the purchase accounting adjustments look like they're going to for the most part offset so they'll still come across at a margin in the 3.60%, 3.70% range, if you were to look at them by themselves. And because of the size relative to ours, it's not going to make a whole lot of difference when you calculate the margin rate again.

Okay. So then I mean, just kind of thinking about that [3.79%] and some of the comments that you guys made in relation to Collyn's question on the offset, you guys really don't have a lot of borrowings to kind of speak of so is there anything that's coming down in the first couple of quarters on the borrowing side? Clearly the sub-debt piece was helpful this quarter, I would assume?

Right. We don't have anything really to speak of in 2012, the next borrowings that we have that come off are in 2013, that's only $10 million, so there's not a lot of relief left there.

Okay, all right thanks a lot, guys. I appreciate all that detail.

Okay, Mike.

Thank you.

(Operator Instructions)

Our next question is coming from Damon DelMonte from KBW. Please proceed with your question.

Hello, good afternoon, guys. How are you?

Hello, Damon.

Question for you on the reserving level. Again, as the credit continues to improve, obviously the reserve building in the past starts to get released. But can you kind of help us think about going forward what a comfortable reserve level would be for you especially now as you expect to start to see a ramp-up in booked loans?

I think this -- Damon, this is Mark -- I mean, our model is very dependent on the level of special mention and substandard loans so a lot of the amount of the reserve is going to be dependent on how well we do in reducing that. To the extent those continue to reduce, that required reserve level is going to go down as a result of that. So it's going to be a wait and see as we go through the quarter of how that proceeds.

I think Damon, this is Pat. I think as we're trying to look at the metrics and everything, I think our anticipation is to see, I guess I'll call it some slight improvements over 2012 and I think it's going to improve throughout the year, just not coming all at once. So really I think our portfolio trends are going to show slight improvement and continued stabilization.

So it's fair to say the net charge-offs would be down on a year-over-year basis?

I think what we would be looking at -- you look at our specific reserves coming out of the quarter, $5.5 million, I think what we're looking at on a net charge basis is to look to be flat compared to 2011.

Okay. Great. And then just with respect to the loan growth that you've been seeing, could you give us some color on the type of pricing you're seeing on the commercial side?

I'll left Dave Antolik speak to that.

It's very competitive right now. We just went through the tax anticipation of season here and we lost a number of bids that were very competitively quoted. So folks are chasing assets. They're also moving out on the yield curve too. We're seeing some 10 year pricing that's very aggressive from our competition, as well.

Is most of this spread based?

Yes.

And is the benchmark LIBOR or--?

Yes, typically LIBOR. The spreads are -- we're getting back down to the 200 kind of spread on some of these deals.

Would hat be for a 5 year or for a 10 year?

For 5 year.

5 year. Okay. And then I guess the last question, for Mark. The tax rate, could you guide us to a good tax rate for 2012?

It's going to be dependent on pre-tax. We do look -- we had some additional low-income housing projects that provided some tax benefit so we do anticipate that the rate is going to decrease a little bit from what we saw in 2011. So we expect to be kind of in the low 20% range.

Okay. Great. Thank you very much.

Thank you.

(Operator Instructions)

Our next question is coming from Rich Weiss from Janney Montgomery Scott. Please proceed with your question.

Okay. Thank you. Hello, there.

Hello, Rich.

Let me just follow up on the loan thing, rather, try not to beat it to death. Why don't you think there's loan growth given that there seems to be much more activity with Marcellus Shale?

Well, I can speak a little bit to the pipeline, it's up significantly from where it was last year at this time and we're seeing a pretty nice mix between the C&I that is being driven in large part by the Marcellus. What we don't have control of are the payoffs and we saw a number of significant payoffs, some of which were substandard credit so we were able to exit during the fourth quarter so it's pretty difficult to budget around anticipated payoffs but we know that some of that stuff is going to be moving in. We also, during the quarter, booked a couple of new construction commitments. So it's really a matter of building that backlog and driving volume over the long-term.

And there are some other pockets, automotive has been good, we're seeing people -- dealers increase their inventory levels because their sales have been pretty good. And actually, we've been adding some new names into that portfolio, so that continues to grow a little bit. But it's just not going to be -- it's kind of growing but it's just not probably at the level that we would all -- we would like to be a little bit quicker as well.

Right, I'm sure. And are you seeking the loan growth primarily in the Western Pennsylvania markets or are you following customers into other states?

The loan growth that we've seen is primarily Western PA.

Okay, and just to shift gears, on your non-interest expenses, I was wondering if you can give any guidance or will you have any additional expenses as a result of the new regulations as well as the wealth management initiatives, higher advertising, that type of thing, Todd?

Well, I think across the board, they're probably in the numbers in Q4 but we've added some people to the production side and sales staff on both insurance, lending side and the wealth side. I don't think we're going to do much different on the advertising side as far as the wealth. I think we have programs in place so you won't see any significant increases on that but it's been more in the people and just trying to drive volumes.

Okay and I guess the final question, one I get a lot from our retail investors is with respect to the dividends. Would you anticipate that going up? Are you setting that at a certain payout ratio? What's the policy?

I think we're going to be pretty patient with the dividends. We're still paying out above 40% when you look at the last couple years of income. We think and when you look at the guidance from the Fed to the large banks which tends to trickle down to us, they're guiding generally lower than that 40% level into the mid-30%s or even lower. So until our earnings I think get to the level where we can justify higher dollar amount and still stay within those guidelines, we'll probably still hold at our current level.

The other thing along those lines too is we were able to get out without doing any kind of a raise, so they didn't incur any dilution. But obviously it had a negative impact on our overall capital levels and now that we've paid it back and reduced those a little bit, I think the intent would be to kind of grow those back and we would rather do it through internally than maybe external to grow that. But I do think kind of looking out and that the M&A market is going to be -- there's going to be some activity out there. So I think growing your capital levels back and having a little extra doesn't hurt you kind of looking out a few months or a couple quarters.

Oh, okay. And the guidelines you're saying, that's just the guidelines for the large banks, nothing you heard specifically?

That's correct.

Okay, got it. Thank you very much.

Thank you.

(Operator Instructions)

It appears there are no further questions. I'd like to turn the floor back over to management for any further or closing comments.

Okay. Thank you, operator. We did have one question that came in via e-mail. And the question was what business or banking activity does S&T believe will provide better opportunities for the bank over the next year or two? What areas should the bank focus on in particular such as retail deposits, commercial or personal loans in wealth management. I think, hopefully we've addressed a lot of these items through the course of our discussion and the questions. But I think overall, one of the things that we continually focus on and stress throughout the Organization is providing exceptional service and really we have a relationship versus transactional orientation. And we feel that this has and will continue to create opportunities in the market, enable us to differentiate ourselves. And as I mentioned across all of our lines of business I think we're well positioned.

On the commercial side we have a pretty seasoned staff. I believe they've proven themselves, they excel in business development. On the retail side, we have a great team of branch managers and people staffing the branches that really have earned the trust of customers, enable us to kind of dig deeper and generate additional opportunities. The small business area we streamlined processes to really facilitate more of a hands-on approach and with this customer base and we're starting to see some traction in that portfolio. And again, as we talked about with some of the questions on the wealth and insurance side, we've been adding to staff. So I think, all in all, we continue to make progress. We're well-positioned and we know that continuing to grow the Organization is very important to us. So hopefully that answered that. I thank everybody for their time today. I think Mark had one other thing too.

And just as a follow-up to a question from Collyn, at the beginning of the question-and-answer period, between the third quarter and the fourth quarter, we had an increase of about $265,000 in prepayment fees. Todd?

Yes, so that wraps it up. And again, we appreciate everyone participating in today's call and the only thing I just want to mention is keep your TVs on February 2, so you can see if our friend up in Punxsutawney, Punxsutawney Phil, sees his shadow or not. So with that, have a good day, and thanks again. We'll look forward to talking to you next quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.