S&T Bancorp Inc (STBA) 2012 Q1 法說會逐字稿

Greetings, and welcome to the S&T Bancorp, Inc. First-Quarter 2012 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.

Thank you. Good afternoon, everybody, and thanks 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 provided by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation.

A copy of the first-quarter earnings release can be obtained by clicking on the press release link on your screen, or by visiting our Investor Relations website at www.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.

Thank you, Mark, and good afternoon everyone. As we announced in yesterday's press release, we reported net income of $3.5 million, or $0.12 per share for the quarter. Obviously, we are disappointed in our results, which were impacted by volatility in our loan-loss provision, and the one-time charges associated with the Mainline bank conversion. Mark and Pat Haberfield are going to provide more color on these areas in a few moments.

We also know we have had some difficulty with our organic loan growth, and it's been a challenge, but the balance sheet was positively impacted by the consummation of the Mainline bank transition on March 9 this quarter. So far, things are going as planned with the integration.

We are on track with expected cost synergies and operating results to date have been positive. Through the expanded mix of products and services that we can now offer to Mainline customers. Both retention and new product sales or meeting, and in some cases exceeding, our expectations.

We are also extremely pleased with the announcement of the partnership with Gateway Bank, and we expect to close on that transaction in Q3. As you know, Gateway has two locations -- one in Washington County, and one in Cranberry, which are two very dynamic markets. One of our strategic initiatives this year was to expand our presence in Washington County where we didn't have any kind of a retail presence.

The partnership with Gateway will help accelerate our growth objectives in this market. Gateway does have a seasoned team of bankers who have developed a very nice book of business, and we feel that with access to a larger balance sheet, they will be able to ramp up lending, wealth management, insurance, and retail opportunities.

In addition, we currently have today about $75 million in loans and about $20 million in deposits with S&T clients who reside within a five-mile radius of their headquarters in McMurray, and we're very confident that we will be able to generate additional revenue opportunities with them by having an expanded presence in the market.

Both of these transactions will help to augment growth plans for the year and offset the challenges we have been experiencing on the organic front. We do believe that the M&A market is going to continue to be active in the region, and we do like our position from a balance-sheet perspective, and intend to continue to look for the right opportunities.

While overall loans were up for the quarter as a result of adding the Mainline portfolio, we did experience additional run-off in our core portfolio this quarter. Once again, we've been impacted by large payoffs, primarily in our CRE book. Just to give you an example of the competitive landscape out there, we also did have a $10 million participation on the C&I side that was re-purchased by the lead bank just prior to quarter-end, which impacted the numbers in our C&I book.

I think overall, lending activity is up considerably over the same period last year, both in originations and in our pipeline, which has increased about 200% from the first quarter of 2011 on the commercial side. And we're also beginning to see a lift in consumer portfolios and small business lending activity. I would say additionally, the economy in western Pennsylvania is as good as it's been in many years, and we're hearing a lot positive news from clients, which does bode well for future activity.

Our market-based strategy that we implemented last year to serve our customers continues to gain traction, as we've seen a 30% increase in introductions across lines of business in the first quarter. Again, that's translating to increased loan activity, additional new households on the retail side, nice increases in our insurance and wealth management divisions, as well.

While results this quarter have been disappointing, we do have a lot of initiatives occurring in our lines of business that will have a positive impact as we move forward. Now I'd like to turn the call over to Pat, and he will answer some of your questions at the conclusion of the call.

Thanks Don. Good afternoon everyone. Provision expense for the first quarter of 2012 was $9.3 million, resulting in an ending balance in the loan-loss reserve of $47.8 million, or 1.49% of total loans. This compares to a provision expense of $10.6 million, and a loan-loss reserve balance of $61.7 million, or 1.8% at March 31, 2011. Included in the March 2012 allowance of $6 million in specific reserves, as compared to $5.5 million over year-end 2011. Our reserved NPL coverage of 74% which does compare to 76% March 31, 2011.

Non-performing assets ended the quarter $67.9 million, or 2.12% of total loans plus OREO, as compared to $60 million, or 1.92% of total loans plus OREO at December 31, and $88.5 million, or 2.67% at March 31, 2011. Our non-performing assets increased due to receiving several updated appraisals, exhibiting stress valuations and causing a reaction to take impairment charges against the collateral value to loan balance, and thus moving these credits into a non-accrual status.

Each of the credits reviewed have worked-out plans and it is believed that resolution of these credits will occur over time. The majority of these credits are stalled construction projects, whereby we have gone through this additional round of re-valuing the assets, and reacting to the market values that have been established.

During the first quarter of 2012, the bank experienced net charge-offs of $10.3 million, which compares to $5 million in the linked quarter, and $400,000 in the year-ago quarter. As previously discussed, a number of our charge-offs are due to receiving an annual appraisal on the collateral security sub-standard loans, and our loans classified as troubled-debt restructures. Approximately half of our charge-offs for the quarter were the result of lowered values on the collateral securing our TDRs.

The appraisals of these assets returned a value substantially less than previous appraised values. Much of these values are based on new-to-substandard TDR status, thus causing us to react to taking the appropriate charge to the new established values. A majority of these charges did occur in our CRE construction portfolio, as stated earlier.

Along with the treatment of the TDR accounting rules, we are closely monitoring this portfolio, completing an analysis on philosophy and absorption rates in order for us to determine future expectations regarding performance and valuations on these assets.

Our TDR portfolio is currently $64.1 million, which compares to $44.1 million at March 31, 2011. $41.2 million are accruing and performing as expected, and $22.9 million are on non-accrual. Of the non-accruing TDRs, approximately $16.2 million, or 70%, are current under-obligations, which also represents approximately 25% of the total TDRs. While some may be on non-accrual status, they are making their payment sustain current. The re-default rate on our TDRs is approximately 10.5% of our total universe of these classifications.

Total special mention of substandard continues to progress, ending the fourth quarter of $331 million, as compared to $344 million in the previous quarter, and $379 million at March 31, 2011. We are beginning to see some of our classified loans build velocity on our projects, and many of our CNC loans are beginning to show more positive financial results as we receive updated year-ending financial statements. Total delinquency for the fourth quarter was 2.75%, as compared to 2.43% in December, and 3.26% in the year-ago period.

Our earlier-stage delinquencies, those in the 30- to 89-day categories, which is one leading indicator, of course, of problem loans, performed within tolerances. The 30- to 59-day delinquency bucket is at 68 basis points, up slightly from 48 basis points in the linked quarter, and is comparable to 62 basis points at March 31, 2011. The 60- to 89-day delinquency bucket is at 5 basis points, which is in comparison to 16 basis points in December and 20 basis points March of last year.

The over 90-day delinquency is currently at 2.01%, which compares against 1.79% in the linked quarter, and 2.45% at March 31 in the linked quarter, and 2.45% at March 31, 2011. Mark will now provide you with additional details on our financial results.

Our performance in the first quarter was impacted by one-time merger-related expenses, and the higher-than-anticipated provision for loan losses that was just discussed. The merger-related expenses for the quarter were $3.9 million, or about $0.11 a share, including severance and other personnel-related expenses of $1.7 million, data processing of $1.6 million, and other primarily professional fees of $500,000.

Since the merger did not close until March 9, there was limited ongoing benefit from the merger realized in this quarter. Going forward, we expect approximately $0.01 to $0.02 per share improvement per quarter. In addition to the merger-related expenses, we also experienced higher salaries and benefits, due to merit increases that took effect on January 1 of about $400,000, higher pension expense for the quarter of $500,000, which will be higher throughout 2012, and payroll tax of about $700,000, which is typically seasonally high in the first quarter.

Given the announced merger with Gateway Bank of Pennsylvania, which is expected to close in the third quarter this year, we do anticipate some additional merger-related expenses in that third quarter; however, since the systems conversion is not expected until the first quarter of 2013, some of these expenses may not be incurred until then. We're still working through the details of timing, but expect the total one-time expenses to be approximately $3.3 million.

Non-interest income showed improvement over last quarter, primarily in wealth management and insurance, where we have added resources over the past year. Security gains related to a position we had in a financial institution that was sold and the transaction closed in the first quarter. We sold this position after that merger closed.

(inaudible) margin, which was down 10 basis points from last quarter, continues to be challenged by loan run-off, which impacts the asset mix; loan resets; and new loan replacement volumes at lower rates than what it is paying off. While we anticipate continued pressure on the margin rate, it should stabilize as long as net loan run-off slows.

Not including the addition of Mainline loans, we are down about $60 million in loans from year-end. Funding cost were down, as CDs are priced and the mix changed, with some additional borrowings utilized to maintain liquidity. Going forward, we have limited repricing opportunities in core rates, but we do have about $128 million of higher-priced CDs maturing this summer that should provide some relief.

The capital ratios remained essentially unchanged from year-end, due to the merger and no retained earnings growth. We did, however, enjoy our first quarter without any preferred dividends. Thanks very much. At this time, I'd like to turn it over to the operator to provide instructions for asking questions.

Thank you. At this time, we will be conducting a question-and-answer session. (Operator Instructions) Damon DelMonte, KBW.

Good afternoon, guys.

Damon, how are you doing?

Good, thanks. With regards to the increase in the NPLs, is any of that related to a regulatory review?

No, it was not.

It was not. It was all driven by the appraisal process that you guys conduct internally?

That's right.

Do the majority of those appraisals happen at the end of the calendar year, and it just took time to come in, or is it an ongoing basis?

No, this is an ongoing basis, very fluid. These all occurred and received in the first quarter.

Okay. Are you currently doing another round of appraisals, or are you up-to-date on everything right now?

No, we're as up-to-date as we can be. I think it's kind of a fluid process, Damon, where you're going to have some come in the first quarter, you're going to have some come in second, third quarter. As I stated, we're doing our analysis on that sub-standard portfolio, trying to determine any type of valuation mix and coming up with our answers from there. Again, it's more of a fluid process.

Yes, I'd just like to comment a little bit on this, because obviously this is a subject that needs drove down into a little bit. But about $6 million of the provision expense was attributed to maybe four projects, where they were construction loans where we had new appraisals in the normal course that came in significantly lower. There was some distress, so they were in the substandard bucket. All of them were current at the time, but when we go in and you have an extension or whatever you have to do, you've got to then become the TDR, it goes into a parent analysis, so that's what happened. But I would say, that there is movement on these accounts. I just think the appraisers in the market are being very conservative.

One of the projects in particular, is there's a letter of intent out to sell a chunk of the ground at a value three times higher than the appraised value. I think some of it is a timing issue on how we have to treat from an accounting perspective. But we do anticipate to continue to work with the clients and maximize our long-term value on these things. The other ones, there are active work-out plans in place. If we deem it's a project, if it looks like it is stalled and it's not going anywhere, then we're going to get a little more aggressive and push to come up with maybe more active work-out or foreclosure plans. But in these cases, we still feel that there are viable strategies in place to move the properties, and kind of work through them. I hope that provides some color for everybody.

Damon, if I could just add real quick, too, is that Todd's exactly right on the valuation of these. We did the right-downs solely based on the value of the asset, not determined anything about collectibility.

Okay, and so those write-downs came through in the form of the charge-offs this quarter, then?

Yes.

And of those --

Well, it's in the provision.

I guess so definitely, how much of the charge-off this quarter were related to those four construction projects?

About four, about half.

About half?

Yes,

Was the other half just other items in the portfolio that are making their way through?

I would say the other half is normal course.

That was some of the specific reserves that we had allocated or identified in prior quarters.

Last question, were these construction projects in market in Pennsylvania, or in your general lending area, or were they out of market?

Had about half that were in, and half that were out.

Okay. One more quick question for Mark, you said about $120 million of CDs are re-pricing over the summer,

That's right.

What are they currently costing you right now?

About 210.

210. Do you think you can re-price them to--?

Well if they are current, depends on where they go. If they were priced in the same bucket, it'd be about 70 basis points, might be a touch lower than that depending on what people hop for.

Okay, thank you very much, guys.

Damon, the other thing, too, is I don't want to be too specific on the nature of the projects. I just want to say they are construction, but again the folks are still actively marketing the property, putting development plans in place, and I certainly don't want to hinder any of their efforts in any way, shape or form.

Got it, thank you very much.

Mike Shafir, Sterne Agee,

Just a quick question on the timing. The deal closed right at the beginning of March, correct?

It was March 9. From an average earnings asset standpoint, we should see a lift, just as a function of you guys actually having the assets from the deal for a full quarter? Right. On the average balance basis, loans worth a little over $30 million. Deposits were about $52 million, using a quarterly average.

I'm sorry, could you just repeat that?

About -- just over $30 million of loans on average for the quarter.

Okay.

And about $52 million of deposits.

Right, so we should see those numbers from an average earning asset base grow just as a function of you guys having the deal for a full quarter?

That's correct, into next quarter.

And then along those same lines, on the non-interest expense line specifically, with the salaries and employee benefits, we should see a full quarter of Mainline's expenses running through next quarter, as well?

Right. This quarter, essentially was fees. This quarter, we had maybe only about $40,000 of fees from Mainline, about $250,000 of expense. Again, that's for 23 days out of the quarter, so that will ramp up as well.

As we kind of think about if you're talking about operating expenses this quarter ex the merger expenses, call it $29 million, would it be fair to say that we're probably going to exceed that level next quarter or are you going to be able to kind of keep that relatively flat as a function of getting some of the expense saved out next quarter?

We expect in that our expenses on a quarterly run rate basis to be around $28 million to $28.5 million.

Okay. As the deal closes with Gateway, obviously some of that will ramp and then come back down as you extract cost saves there?

Right. There, we may not get much of the cost saves really until 2013, because that's when the system conversion is going to happen. We probably won't see any expense synergies at all in 2012.

Okay.

Because we'll have to operate them as a bank subsidiary for a couple of quarters.

Okay, and just on the margin. I know that you guys -- you said you're going to be able to get some relief from the CD re-pricing over the summer, that would be I guess toward the back end of the second quarter, maybe going into the third quarter? What about the asset yields? Those have continued to come down. I know that the stagnant loan growth has kind of helped or cause some of that, but just from a loan perspective, as you're putting on new CRE and new C&I products, where is that coming on the books?

We're seeing pricing come in between $225 million and $275 million over cost of funds.

Okay. Thanks guys, I appreciate all that detail.

Thanks, Mike.

David Darst, Guggenheim Securities.

Good afternoon.

Hi, David.

Mark, on the margin and on the earning asset mix, do you foresee over the next year that you'll be able to begin to shift back and rebuild the loan portfolio, and kind of improve the earning asset yield from a mix standpoint?

That's certainly our hope, and we have seen some positive developments on the pipeline, but as you saw this quarter, the loan payoffs has still been heavier than we expected. So until that turns, and we have those new loans coming in a little bit faster, we still may see some pressure there.

The other thing I think is positive is in the first quarter, we booked about $90 million in commitments. When you compare it to the past couple of quarters, it's up maybe -- that amount's probably double where we were for the past couple of quarters. We think that goes well, as people initially take them down and as their expansion plans kind of come to fruition, they start to get into the lines a little bit and take down balances.

So from that perspective, Todd, do you think you're at a point where your balance or loans will at least be stable?

I mean David, as Mark said, that would be the hope, but there's still some payoff risks out there and some projects in the normal course. I can't -- a thing I can say is like our pipelines are up three times what they were last year, and we booked good bookings and commitments the first quarter. The activity's there, so from a timing perspective, when it's going to occur, I can't really sit here and say that it's going to be this quarter.

The other thing, last year we experienced -- even though it was kind of small -- we experienced runoff in our consumer portfolios. We're seeing those reverse the trend a little bit this year. Even if we can kind of stem the runoff in those, that helps. We re-vamped our small-business lending units last year, and in the first quarter, we're pretty much double on accounts that we've booked, balances that have been booked in the first quarter, year-over-year.

The trends are there, and like I say we're having a lot of good -- I spent a lot of time over the last month, having conversations with a very diverse group of our customer base, and everybody is pretty positive right now. I think it's going to start translate into some activity. So I think people are just getting ready to hire people, which helps us on lines and the insurance side on compensation, insurances that we sell. Automotive's been good. There's just been a lot of different industries that are really good in the region right now.

Okay, so I guess it's most of the pay-down activity related to the out-of-state portfolio?

There was some significant pay-down in the out-of-state portfolio, but just to give you an example, in March we had $22 million worth of CRE loans that were refi'd into the perm market. Then as Todd mentioned, there was this one $10 million shared national credit that we were taken out on, so it all happened kind of at the end of the quarter. About half of that, half -- I take that back, about $17 million of that $22 million was in the out-of-state portfolio.

Okay. Todd, could you kind of run over the Washington County strategy? I guess that's the market where you have most of the Marcellus drilling activity, and a lot of the headquarters are related there for companies that have come into the region--

Yes.

Do you have plans to build out the commercial lending effort around South Point?

We do. If you look -- I think what you need, even though this bank is small, the lenders that they have on their team down there are well-seasoned bankers that had very successful careers at larger institutions, and managed significant $300-million-plus portfolios with people working for them. The intent with our balance sheet is to kind of turn them loose and let them go out and recruit talent, number one; and then go out and do deals, and they don't have mortgage -- already we're having discussions. Nothing's finalized, but they have a $4 million opportunity that's a little bit larger than they can handle at this point in time. And I think there's a pretty good chance that we're going to get involved with it. They have some mortgage opportunities on the residential side. Already, we're having our mortgage originators discuss with the client.

I think that's really, David, that's where we want to be. We want to go in and someone had asked about the cost synergies, there's not a lot of cost synergies out of this deal. They only have 23 or 24 employees, but where we want to view this thing is really a growth strategy from a revenue standpoint. We think again, we think with the resources that we come to bear, we can attract and build out a nice team in that market, and add on, not only on the lending side, but again, the activity on the shale side. There will be wealth management opportunities, and also insurance and the like. We're really excited and just from the talent that we're going to be able to partner up with down there, I really have a high regard for.

Okay, good. Okay, thank you.

Collyn Gilbert, Stifel Nicolaus.

Thanks, good afternoon, guys.

Hi, Collyn.

The residential construction credits that were obviously re-appraised this quarter, when were they originated?

They were originated anywhere from the 2008, 2009 period, all within that cycle, the up-swing in that cycle.

Okay. Do you know what the vintage is in general of your NPLs? I mean, how much was originated during that period versus after?

We have access to that information, I don't have it at my fingertips.

Okay.

Just to give you a sense, Collyn, if you look at our construction bucket, we have about $160 million on in that. $32 of that is in a sub-standard category, and we've probably done impairment testings on a good chunk of that, and then you have another $14 million or so that are in special mention. We scrub this stuff up and monitor it pretty closely, but you're still just subject to risk, or if something goes sideways. It's not all residential, either, so just to clarify that point to you

Okay. Todd, just to your point on the appraisals, and it's not a phenomenon that we're seeing only with you guys. There's -- banks are coming out -- well, in your part of the region, we're just trying to get our heads around, with some revised appraisals much lower. Do you think it really is -- it's an issue more with the appraisers than it is with the market values? Is there any way you can kind of approach it somewhat differently, or quantify how much you think has really just been overly written down or compare write-downs to market values, or just -- I mean it seems, taking your comment -- and correct me if I'm wrong -- but it seems like this has been -- these appraisals have been pushed down to a level, just unjustifiably so.

They're fairly conservative, we feel. I do think the appraisers are taking a look at it, and one of these situations -- for whatever reason, again I don't want to get into it -- but the developer just decided, he made the right business decision to put the project on hold for a period of time. Then they're looking at okay, what's the absorption, or what activity have you had over the last 12 to 18 months, and if they don't see any, they're going to be pretty aggressive on the marks.

We look more kind of forward-looking basis, and again with some of the activities that we know that in discussions that they're having, there's going to be -- I would say we're going to see some recoveries on some of this stuff. I just can't tell you when, but like I said if we didn't think there was a good resolution at the end of the day, we'd probably accelerate things and try and minimize our losses at this point in time.

Okay, that's helpful. Just in your earlier comments, Todd, you said 30% increase, I think if I heard you right, in introductions?

That's kind of our referrals across lines of business, whether it's from insurance to the retail side, or the retail to the small-business, but we kind of divided our Company up into six different regions and it's really been working well for us. We have a lot of good collaboration among lines of business, and I think some of that is apparent and if you look at both insurance and wealth management, they are up about $400,000, year-over-year from Q1 to Q1. A lot of good positive trends.

Okay. That's it, thanks.

Rick Weiss, Janney Montgomery Scott.

Thank you. Is there any change in terms of the competition regarding lending?

I'll let Dave Antolik handle that one, Rick.

I don't know that there -- I mean, the players are the same, but pricing is getting skinnier, I think everyone is facing the same pressures with regards to trying to build assets. We're seeing very impressive pricing and terms, as well.

Is that from some of the larger banks or smaller banks, or generally everybody?

It is kind of across the board. I mean, the smaller banks tend to get more aggressive with terms, the larger banks to get more aggressive with pricing.

Okay. Specifically, this $3.9-million merger charges this quarter, was that built into the Other expense line, or is some also falling into salaries, benefits?

It was spread out over all the categories, but $1.7 million in salaries and benefits, $1.6 million in data processing, and about $0.5 million in other.

How much was in data processing, I'm sorry?

$1.6 million.

Okay. My last question is, what sort of tax rate would you use to model forward?

Probably in the low 20s%.

Low 20s%. Okay, thanks very much.

There are no further questions in queue at this time. I would like to turn the call back over to Management for closing comment.

Okay, thank you, operator. I just again want to thank everybody for participating in today's conference call. We do appreciate the opportunity to discuss the quarterly results, and look forward to hearing from you on our next conference call. I hope everyone has a good day.

This concludes today's teleconference, you may disconnect your lines at this time and thank you for your participation.