S&T Bancorp Inc (STBA) 2012 Q2 法說會逐字稿

Greeting ladies and gentlemen. Welcome to the S&T Bancorp Incorporated second 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.

Good afternoon. Thank you for participating in today's conference call. Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors, which is on the screen in front of you. This statement provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the second quarter earnings release can be obtained by visiting our Investor Relations website at www.stbancorp.com. I would like to now introduce Todd Brice, S&T's President and CEO, who will provide an overview of S&T's results.

Thank you, Mark. Good afternoon, everyone. As we announced in yesterday's press release, we reported net income of $8.6 million or $0.30 per share for the second quarter versus $3.4 million or $0.12 per share in the first quarter of 2012 and also versus $13.4 million or $0.48 per share in the second quarter of 2011. Obviously, our provision expense of $7 million and charge-offs of $8.2 million were higher than we would like and negatively impacted our results this quarter. We do continue to work diligently to identify issues early and put conservative valuations on non-performing loans. In addition, we experienced some deterioration in our net interest margin this quarter, as it continues to be impacted by the low interest rate environment.

On a positive note, this was the first full quarter in which we benefited from the Mainline integration. As a result, net interest income increased by $500,000 on a linked-quarter basis. Overall, we have been pleased with the integration of Mainline from both the retention as well as a business development standpoint. We're seeing nice increases in the residential mortgage activities and also the Wealth Management lines of business in the Mainline markets. I think what's nice, a lot of the activity is with new customers. We're seeing cross selling opportunities for core DDA and other retail products. In addition, yes, we're going to continue to actively mine the Mainline customer base to increase penetration of services per household and expect to continue to see positive results. I think another bright spot this quarter is the Wealth Management business, which was up about $200,000 on a linked-quarter business and about $800,000 year-to-date versus 2011. This is an area where we did focus a lot of attention on in 2011. The increases are, I think -- believe, a direct result of these efforts. We do have a lot of momentum going on in the Wealth Management side in house at this point in time. We expect to continue to see growth in this line of business going forward.

Net loans for the quarter were basically flat which does compare favorably to a $60 million decline that we experienced in the first quarter. While we're still being impacted by pay-offs in our CRE portfolio, there's some positive trends in the C&I and also the residential mortgage business which have enabled us to offset the runoff. In addition, the commercial pipeline continues to build. We've had nice activity in our markets. We've seen nice levels of new loan requests over the past few weeks.

One of the strategic initiatives to grow our loan portfolio is to add seasoned lenders to fill in gaps in our markets. In the second quarter, we were able to add two members to our team to cover the Allegheny and also Butler County markets. I'm pleased to announce that as of last week, we've hired three seasoned lenders with over 85 years of experience in the Akron, Ohio market. These folks have a proven track record of servicing a client base that has many of the same characteristics as their current customer base. All these folks have managed extensive portfolios for many years in Akron. We are excited to have them on board. We expect to see some nice business coming out of that market in the coming months. This is a very, very recent develop -- we just were able to get them on board at the end of last week, so I'm not going to go into a lot of particulars today. We can elaborate a little bit more detail at the end of next quarter. But again, we're excited. It's a little bit of a new market, so it gives us a little bit of geographic diversity. I think, more importantly, it's just bringing on the right team members to the S&T, to our team. So, we're really, really excited.

I also mentioned the impact of Mainline earlier in the call, but we're looking forward to our upcoming partnership with Gateway Bank. We expect the transaction to close in early August and are confident that Gateway's going to be a great fit. The economy in Washington County continues to be very robust. The Gateway customers and team members are going to benefit from having access to expanded product mix and also an expanded lending base. So we're going to hopefully get that thing closed up in early August. Then we're going to hit the ground running and really try and penetrate that market. At this point, I want to turn it over to Pat Haberfield, our Chief Credit Officer. When Pat's done, Mark Kochvar's going to review our operating results in more detail at the end of the call. Then we'll open it back up for questions. So, Pat, I'll turn it over to you.

All right. Thanks, Todd. Good afternoon. Provision expense for the second quarter of 2012 was $7 million, resulting in an ending balance in the loan loss reserve of $46.7 million or 1.46% of total loans. This compares to the provision expense of $9.3 million with a loan loss reserve balance of $47.8 million or 1.49% at March 31, 2012. Included in the June 2012 allowance was $2 million of specific reserves which compares to $6 million in specific reserves at March 31, 2012. Non-performing assets ended the quarter at $72 million or 2.25% of total loans plus OREO, as compared to $67.9 million or 2.12% of total loans plus OREO at March 31 and $82 million or 2.18% at June 30 of 2011. Our non-performing assets increased for the second quarter due in part to receiving several updated appraisals exhibiting stress valuations causing the reaction to take impairment charges against the collateral value to loan balance; thus, moving these credits into a non-accrual status.

In addition, we've self-identified several credits which recently exhibited some additional stress on their projects which caused for swift actions to identify these credits as impaired and conduct an analysis on the valuation of these assets, which resulted in a write down to the newly established value. We aggressively identify these shortfalls asset by asset and take the appropriate charges. Each of the credits reviewed have work out plans. It is believed that resolution of these credits will occur over time; thus, maximizing our established values of these assets. Many of these credits are deemed to be collateral dependent, whereby we continue to go through additional exercises of revaluing the assets and reacting to the market values and conditions that now exist.

During the second quarter of 2012, the Bank experienced net charge-offs of $8.2 million which compares to $10.3 million in the linked-quarter and $4.8 million in the year-ago quarter. Of the $8.2 million in charge-offs in the current quarter, we previously established $5.3 million of specific reserve. In addition, $2.1 million was the result of valuation activities, as previously discussed, associated with TDRs. Our construction portfolio, which includes raw land and development, experienced $3 million of the charge-offs, of which approximately half of this amount were on TDRs. Year-to-date, approximately 47% of our charge-offs were a result of TDR valuation activities, which I think further exhibits our intention to leave assets in the stream that we are performing mark to market valuations.

Our TDR portfolio is $62.8 million, of which $61.8 million are paying within contractual terms. We had $64.1 million in TDRs at March 31 in 2012. Currently, $25.2 million of our TDRs are accruing and performing as expected and $37.5 million are on non-accrual with approximately $10.2 million of the new non-accrual loans are paying as agreed in this category, but placed into non-accrual due to the accounting treatment of recognizing collateral shortfalls which is witnessed in our charge-off numbers and still others within that portion of the portfolio that we are monitoring for sustained performance for the potential of returning to accrual status.

Our total commercial loans special mention and substandard categories ended the second quarter at $291.1 million as compared to $308.6 million in the previous quarter and $357.7 million at June 30, 2011. Included in this number is the $69.1 million in non-performing loans, of which $13.4 million are near to non-performing for the quarter and $9.9 million are classified in the construction, raw land development and commercial real estate portfolio and further described as two relationships totaling $8.5 million, of which $3.7 million is identified as Troubled Debt Restructure. So again, a majority of this inflow is made up of a few relationships. These relationships have been marked down for the appropriate value and both continue to make contractual payments as agreed.

Total delinquency for the quarter stood at 2.93% as compared to 2.75% in March of 2012 and 2.66% in the year-ago period. The 30 to 59 day delinquency bucket was at 30 basis points, which compares to 68 basis points in the linked-quarter and 51 basis points in June of last year. The 60 to 89 day delinquency bucket is at 47 basis points versus 5 basis points in March 2012 and 20 basis points at June 30, 2011. Again, both delinquency buckets are performing within our expectations. The over 90 day and NPL delinquency is at 2.16%, which compares against 2.01% in the linked-quarter and 1.95% at June 30, 2011. Now, I'll turn it over to Mark so he can provide you with additional details on our financial results.

Thanks, Pat. As Todd mentioned, our performance in the second quarter included a full quarter with our recent acquisition of Mainline Bank. This resulted in higher net interest income and favorable expense comparisons to the prior quarter, again, due to the $3.9 million of one-time charges taken in that first quarter. Despite improved net interest income, the margin rate decreased by 12 basis points compared to the first quarter. 9 basis points of this decline is due to the increase in interest bearing deposits at banks, primarily excess cash at the Fed. Loan balances were essentially flat for the quarter. We'll need to turn this around in order to see better margin rates.

New loan volume is up over $100 million year-to-date compared to the same period in 2011, but loan payoffs remain elevated and we're slightly higher than the new volume this year to date. The average rate on new loan volume is under pressure from the very low rate environment and competition to add earning assets. On the liability side, we had some benefit from higher rate CD maturities at the end of this quarter which will continue into July and August. We also lowered some core rates very late in the second quarter and look for other opportunities to reduce deposit costs later this year. Non-interest income showed some improvement over last quarter, primarily in Wealth Management, mortgage banking and swap fees.

Expense comparisons between the second and the first quarter are difficult due to the one-time merger expenses in the first quarter. Outside of this, there were two main items that increased expenses -- the impairment of a low income housing project for about $280,000 and an increase in the reserve for unfunded commitments of $650,000. Our expense run rate is up to about -- it's up about $1 million per quarter with Mainline and stands at approximately $20 million per quarter. This will increase again when we add Gateway, which we anticipate closing in the third quarter. Gateway will also come with about $1.2 million of merger-related expenses in the third quarter. The systems conversion is scheduled for the first quarter of 2013.

Our tax rate is somewhat lower due to consistent permanent items and an increase in low income housing tax credits on a lower pre-tax income. We now expect the tax rate for the full year to be in the high teens. Thank you very much. At this time, I'd like to turn it over to the operator to provide instructions for asking questions.

(Operator Instructions) Gentlemen, it appears there are no questions at this time.

Well, if anybody does have any follow-up questions, please feel free to reach out to Mark or myself. We did have one call or question that came in on the -- via email. So I'll let Mark address that.

Thanks, Todd. The question was with the merger of Mainline Bank, will there be any salary savings because of the consolidation and if not, why not? Just to review, overall expenses at Mainline Bank prior to their conversion was just under $7.5 million. Our savings -- expected savings is about $2.8 million, so that leaves about a $4.5 million run rate. So we do expect to -- just under $3 million of savings going forward. Of that savings of about $2.8 million, about $1.7 million of that is salary and benefits related. We are seeing that benefit almost right away here in the second quarter.

I just want to thank everybody for participating in today's call. Mark and Pat and I appreciate the opportunity to discuss this quarter's results and look forward to hearing from you at our next quarterly meeting. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.