S&T Bancorp Inc (STBA) 2012 Q3 法說會逐字稿

Greetings and welcome to the S&T Bancorp third 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, Mr. Mark Kochvar, Senior Executive Vice President and Chief Financial Officer for S&T Bancorp. Thank you, you may begin.

Good afternoon and thank you all for participating in today's conference call. Before beginning the presentation I want to take time to review referring to our statement about forward-looking statements and risk factors, which is on the screen front of you.

This statement provides the cautionary language required by the Security and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the third-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 this morning's earnings release we reported net income of $12.6 million or $0.43 per share versus $8.6 million or $0.30 per share in the second quarter. I would say that all in all we are pleased with our performance this quarter, as we've seen some improvement in our asset quality metrics. We did complete the Gateway Bank acquisition in mid-August and we're getting our Akron loan production office ramped up. I think the partnership with Gateway Bank is an exciting opportunity as it provides an interest into vibrant Washington County market.

More importantly, Gateway has a very experienced team of bankers who are going to benefit from the extent of product mix and bigger balance sheet that will enable them to meet credit needs of their customer base. Today we are seeing a nice increase in both commercial and residential mortgage activity in this market and we expect to continue to see both of these pipelines grow in the coming months as we increase our presence.

While we once again experienced a decline in our loan portfolio from an organic perspective. We are finally seeing some positive trends in our portfolio, which did have positive growth in both August and September. Unfortunately in July we experienced some pretty significant payoffs, but we were able to make a lot of that back up. I think furthermore the commercial volumes in our pipeline is up 35% from the end of the second quarter. And we also now have over $100 million in expected funding, primarily from construction commitments, which is a $40 million increase from the beginning of the year.

Residential mortgage lending continues to be robust, as closings were approximately $55 million in Q3 and going into Q4 the pipeline remains solid. Our Akron LPO has been operational for a full quarter and the reception from the market and our team has been well received. To date we have built a pipeline in the $40 million range, which exceeded our expectations, and the opportunities that we're seeing are with well-established companies. They are really in the S&T Bank's sweet spot. And I'm confident with the team that we've assembled out there, we are going to continue to grow this book of business.

So, I do believe that with the extension into Washington County, the organic activity that we're seeing on both our commercial lending and real estate mortgage areas and the opportunities in Akron, we're on our way to reversing the negative trends that we've experienced from an organic growth perspective in the coming quarters, as we expect our volumes to pick up. And also as I mentioned earlier, we are pleased with the progress that we saw this quarter in asset quality metrics. We did have a nice improvement in the loan loss provision, which declined $2.3 million versus $7 million in Q2, as well as improving trends in our delinquency and substandard loan numbers. So, I want to turn the program now over to Pat Haberfield, our Chief Credit Officer, who's going to talk about some of these in a little bit more detail.

Thanks, Todd, and good afternoon, everyone. Todd said the provisional expense for the third quarter 2012 is $2.3 million, which resulted in an ending balance and a loan loss reserve of $46.3 million or 1.41% of total loans. This compares to a provisional expense of $7 million, with a loan loss reserve balance of $46.7 million or 1.46% at June 30, 2012. Included in the September 2012 allowance is $2.9 million as specific reserves as compared to $1.4 million at June 30, 2 012. Non-performing assets ended the quarter at $67.6 million or 2.06% of total loans plus OREO, as compared to $72 million or 2.25% of total loans plus OREO at June 30, 2012 and $65.2 million or 2.08% at September 30, 2011.

We continue to self identify any potential weaknesses in our classified asset categories and have had some success in reducing our non-performing loans during the quarter across all avenues of NPL reduction activities, meaning payoffs, paydowns and improved asset quality ratings, which is shown in the reduction in this category and the lower level of charge-offs for the quarter. Coupled with these items we're able to outrun our inflows into the NPA category and saw a dramatic decrease in our inflows, essentially seeing a slowdown during the quarter of about 50% of new non-performing loans. The strategic plan's in place for targeted reductions in this category of our portfolio are continuing.

Also during the third quarter 2012 the bank did experience net charge-offs of $2.7 million, which compares to $8.2 million in the linked quarter and $8 million in the year ago quarter. Of the $2.7 million in charge-offs in the current quarter, we previously established $1.4 million in specific reserves. Our TDR portfolio is $60.5 million, of which $37 million are on accrual status and performing and $23 million remain on non accrual status. And we do continue to monitor the performance of our troubled debt restructurings for continued improvements.

Total commercial loans special mentioned in substandard categories ended the third quarter at $312.9 million, which compares to $291.2 million in the previous quarter and $335.6 million at September 30, 2011. It should be noted, though, that our classified loans were those rated substandard and doubtful decreased by $23 million quarter-over-quarter and $52 million over the year-ago quarter. Special mention category was impacted by one large relationship. Approximately 50% of the increased amount in the special mention category, which we prudently decided to downgrade from pass to special mention category by what has been deemed by Management to be a temporary issue affecting cash flow.

A thorough review, including current values, indicating very well heeled loan-to-value and all contractual payments having been paid as agreed, leads us to believe that we do not expect any chance of loss or further deterioration in this relationship. We prudently, again, downgraded the classification in order to ensure a closer touch points in order for the return to a full pass credit.

Our delinquency for the third quarter was 2.61%, which compared to 2.93% in June 2012 and 2.36% in the year-ago period. The early indicators of 30 to 59 day delinquency bucket is at 25 basis points, which compares to the 30 basis points in the linked quarter and the 60 to 89 day delinquency bucket is at 30 basis points versus 47 basis points in June of 2012. Mark will now provide you with some additional results -- additional details on our financial results.

Thanks, Pat. Our performance in the third quarter included 50% of the quarter with our recent acquisition of Gateway Bank. Gateway added $100 million of loans and $107 million of deposits at the time of the merger or about $53 million of loans and $56 million of deposits on average for the quarter. Incremental expenses related to Gateway totaled about $1.1 million month between one time and some ongoing expenses. We anticipate a first quarter 2013 bank level merger and systems conversion.

The interest income for the quarter was essentially unchanged, as the increase in earning assets from the Gateway merger was partially offset by a decrease in S&T loans of $29 million on average, $14 million on a point-to-point basis, and decline in the net interest margin rate of seven basis points. We continue to see assets repricing faster than our ability to offset those changes through liability repricing or loan growth. With lengthening expectations for low interest rates and slower loan growth, we did add modestly to the securities portfolio this quarter.

We expect the margin rate compression to continue for the next few quarters, although at somewhat slower pace. Security gains of about $2.2 million included the sale of a position in a local financial institution that we sold after an increase in value from a recent merger announcement. Todd and Pat have already discussed the improvement in provision, which did have a significant impact this quarter.

Managed income was flat to the prior quarter, but is up over 20% from last year due to strong performance in both Mortgage Banking and Wealth Management, as well as improvements in Insurance and Card related income. Noninterest expense is up primarily due to the previously mentioned impact of the merger. Also the provision for unfunded commitments in the quarter was just over $1 million, a $400,000 increase from the prior quarter as construction commitments have grown. 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)

Damon DelMonte, KBW.

I was wondering if you guys could quantify the amount of loan runoff that you saw during the quarter versus the amount of originations that came on, excluding the acquired loans from Gateway?

Just give us a moment, we don't have that at our fingertips but we can get it for you.

For the quarter, total loans were approximately over $200 million of new loans, but we saw paid of approximately the same amount. So, that was about flat. And then on a line basis, we had growth of about maybe $23 million and then that gets offset by the scheduled amortization of about $20 million. So, that left us with down about $14 million or $15 million for the quarter from an organic basis, just S&T's portfolio.

But as you come out of the third quarter and head into the fourth quarter of the year, you feeling more comfortable that the pace of the paydowns is slowing?

Yes. Damon, this is Dave Antolik. What we've seen over the last two quarters is the pace of the decline has reduced. At the same time we've seen an increase in our construction commitments, which would point towards further fundings in the fourth quarter and first quarter of next year, along with a significant increase in our pipeline of newly approved loans.

And those construction commitments, what areas are they in? Is it like --?

The areas and of growth that we've seen -- we've seen housing project, there's some government related municipal type deals, as well as a few healthcare related deals.

And a couple office deals too that have fully leased and lot development. The total construction portfolio is in the $200 million range, Damon. The lot developments, which was a big component of that, a year, maybe even two years ago was down to maybe about 20% of that portfolio now.

Got it. Okay.

So, it's a lot more diverse and as Dave alluded to we're sitting on about $100 million in expected fundings out of that portfolio over the next six to nine months.

And then switching over to expenses, how much of the Gateway expenses account for this quarter's $31 million? I should say, sorry, $30.4 million if you look at core operating?

About 1.1[%].

1.1%?

Net one time and some ongoing.

What should we look at for targeted core run rate then going forward? Something in the low $30 million a quarter level?

Yes. It shouldn't be a whole lot more than $30 million, if not a little bit below.

We also had a little bit of a lift in the unfunded construction reserve, which gets expensed because of the growth that we've had in that portfolio, so that was how much, Mark, this quarter?

This quarter that was $1 million, but that again depends on what the growth in that, net growth in that portfolio is.

And then just my final question, I think you mentioned there was a larger loan that got downgraded, a special mention during the quarter?

Yes. It was a relationship of about four or five different projects. But it's a temporary cash flow issue, so we did downgrade it. We've gone in and looked at valuations, had current appraisals performed on them, and from a loan to value, it's really low leverage and again, as a temporary. So, we would expect that to reverse itself out some point maybe midyear next year.

And what was the size of that relationship?

Collectively it's about $24 million or $26 million.

Damon, it really was. We scrubbed this thing. It truly is a temporary issue for this borrower. And we fully expect to have this thing returned out of that category next year.

But, again, it was spread out over about six different projects.

I'm not losing sleep over it, Damon.

That's good to hear. So that's just in special mention though. It hasn't slipped into nonperformance, correct?

No. And, again, we don't expect it to further deteriorate at all.

That's all I had for now. Thank you very much.

David Darst, Guggenheim Securities.

Todd, as you were going through your numbers on the loan production, you indicated a $55 million loan. Was that residential originations in (multiple speakers).

Yes. That was just what we originated on the residential side. And that is comprised probably about 50-50 of what we would sell and what we would put on the balance sheet.

Have you decided to hold more for the balance sheet given just the need to maybe stabilize your earning asset base?

We did start to hold some 10 and 15 year paper earlier this year, so that number was up to about -- it was up about $40 million for the year.

And we've been booking a lot more mortgages, ones we're keeping and we're thinking about expanding that potentially.

And, Mark, I think in the past you talked about maybe you had liquidated the mainline securities portfolio and then reinvested it. Have you done anything similar to Gateway? And then, as a result are we going to see a more stable securities yield from you going forward?

They had -- Gateway had very little in the way of securities. They were -- had a fairly high loan to deposit ratio. So, they only had about $8 million worth of securities. And they still remain a separate subsidiary bank, so they have retained for now, those securities.

So we don't anticipate any change with the securities portfolio relative to the Gateway acquisition. We are looking, just because of the way the loan book has gone and with the rate environment as it is, of putting some of the cash that we have sitting at the Fed into the securities portfolio.

So that should help on the just the pace of the yield decline?

It will help stem that.

On the credit side, I guess other than the special mention that you highlighted, everything is improving, but it continues -- you've seen a lot more volatility than your peers and charge-offs and provision NPAs. Are you at a point where you feel like you're getting back to more of a historical loss rate for the next couple quarters? And are you more comfortable with the balance sheet risk today, or do you think there will still be things that will generate some volatility?

David, this is Pat. I can tell you from -- I'm encouraged with the quarter we had. I'm liking what I'm seeing better. With having a commercial real estate portfolio, of course there's going to be some volatility in there. But I think we've come a long way and I think our numbers are starting to show that. And I can answer you by saying that I'm feeling more comfortable today and liking what I'm seeing in the portfolio. And I think our balance sheet, even as Todd and Dave were talking about the construction commitments, as you can see there's much more diverse risk spread out more evenly.

So, the trends are heading in the right direction, Dave. When you look at delinquencies, we are down. You know that substandard category was down about $27 million for the quarter. We did have a little bit of an increase into the [vibe rated] category, but it is something we have a -- we are monitoring very closely.

So not that something can't jump up and hit you, but we're scrubbing this stuff up pretty extensively, so we're just trying to be prepared if something would jump up. Like I said, we like the direction of where it's going right now.

And then could you give us a little guidance on the tax rate? It was up in the quarter, but it was also down a little bit more than I thought it might be.

We generally -- it looks like it should be in the kind of low to mid-teens for the year.

Okay, great. Thank you.

Thank you, David.

Collyn Gilbert, Stifel Nicholas.

Just to follow-up on David's question about the credit. So, if we think about what you have -- the progress you guys have made and where you think the portfolio and the risk can go from here, where do you think then that the reserve should ultimately settle out? The reserve to loans?

Mark, give us some color on the reserve?

I think it's really hard to tell because there's so many things that go into that. But I would -- our best guess is that the charges and the provision will at least be close to one another going forward.

We wouldn't anticipate any further kind of deterioration than that.

We had small release in the reserve, but it was -- still it was fairly minimal this quarter.

So you think that charge-offs should more or less match provisions at least in the foreseeable quarters, you think?

Right. Absent any deterioration, what drives our model quite a bit is the rating stack, how much special mention and substandard loans we have. So that has a pretty significant impact.

So, as long as that is relatively stable or declining, we wouldn't expect to see a big increase in the reserve need when we calculate that. In the absence of that change causing a big reserve need, we wouldn't expect that we would have to do anything more but cover the charges.

And then just shifting to the balance sheet, with the commentary on the pipeline and some resurgence in construction, can you guys tie that to a loan growth expectation?

I mean, it seems like while you've spoken to some decent originations, obviously the challenge has been the paydowns, which has kept, really kept balances more or less flat. But do you think that this could translate into single digit loan growth numbers for next year? Or how are you thinking about just the totality of the balance sheet?

Yes. Collyn, we need to walk before we run, so we're really looking at just getting back to breakeven. And then perhaps midway through next year, start to see some growth, if these trends continue. Obviously, we can't control the payoffs as well as we'd like.

So, you're always at risk if a customer sells a project, or they sell their business, or something gets refinanced into the permanent market. But, based on what we see in the construction portfolio and the growth in the pipeline, we're confident we can get back to seeing some organic growth next year.

And then I guess sort of maybe a final question, to Todd, to you or Mark, but do you guys have an efficiency ratio in mind that you'd like to target? Historically you guys have run such an efficient shop in the 55% range. Do you think it's reasonable to get back to that level? Or how are you thinking about the efficiency ratio if at all now?

Yes. So, as Mark said, just kind of said how we are thinking about it, lower. (laughter) But it's interesting, we've been spending a lot of time and looking for ways to run a more efficient organization. It's been a hallmark of our Company, so we are looking at different strategies, whether it be branch rationalization or just other areas where we can become more efficient. But it's a constant focus of the organization, so we'll be looking at a lot of different levers to pull to try and drive that down.

For us, the increase in that has really been driven more by the margin issues that we've had, as opposed to the expenses. There has been expense component, but it's really going to hinge more on recovery of the margin rate, and that gets back to loan growth.

And then just on that point, Mark, you had said expect compression maybe a little bit less than what you guys saw this quarter and the next couple quarters. Are you only speaking in the next couple quarters, because that's just kind of as far out as you're comfortable going? Or is there going -- do you anticipate sort of a change in the balance sheet that could start to see longer-term margin stabilization?

I think it should stabilize more going forward. I think what we would hope for is that as the loan growth returns, as David had mentioned, possibly later next year, that we could hopefully see it go the other way as we shift more to loan to loan. So it's not thinking that it's going to go, start to go down even more again.

And does that assumption mean that the loan yields that you guys are seeing on your new originations are higher than what the blended yield is of the current portfolio?

They're getting unfortunately much closer. But the totality of the book is still higher than the new, but that difference has been shrinking. It's may be closer to 75 basis points now, where it used to be almost 2%.

And sorry, just one other thing on the NIM. The compression is coming, I presume, primarily on the asset side because is there more room -- just if I look at the TD rate. So you guys, it looks like your advertised CD rates are running in like that 35, 45 basis points. So, well below what you posted this quarter. Do you think you could eventually roll that portfolio that low? Or should we not even be thinking about that as a repricing option?

There's a little bit of room on the funding side, but not like there used to be. We still have a few feet, older CD tranches from specials from years ago that will reprice in the coming couple quarters. But it's not going to be enough to offset what we see for the next couple quarters potentially, in terms of the loan stuff.

Okay. All right. Thanks so much.

(Operator Instructions)

Matthew Breese, Sterne Agee.

I wanted to start my question following up on the margin discussion. What are some of the new yields you're seeing out there for -- on securities funds?

On securities? Depending on how far up the curve, the agency paper is sub 1%, unless you get on past five years. We have looked at selectively at some longer municipals that we think offer some value. Those on a before tax -- before you do the tax adjustment can run in the low 2% to 2.5%. And then some types of CMO's or mortgage-backed paper that we like are maybe in the 1.60%, 1.70% range.

So, it sounds like there's going to be a little more emphasis on the securities portfolio?

I think so. And just the impression we're getting in the forecast from economists and the Fed, certainly points this rate environment lasting quite a while yet.

So, if I'm thinking about the balance sheet over the last 18 months or so you guys have built up an increasingly large liquidity position, so you now have $350 million in cash and $2 million from banks? How much of that do you foresee going into the securities portfolio and how much of that do you think is going to loans over the next year?

I think we're still working through our planning, we're still working through those numbers. Wouldn't want to commit to anything quite yet.

Do you anticipate having liquidity position of this magnitude going into 2013?

In terms of cash, probably not. We'll probably reduce that. But we will -- the securities that we'd end up purchasing would be still fairly liquid. And we would give up some liquidity for that, but we would still retain those as being unpledged and available to either be pledged to borrow or to be sold if needed.

And what portion of the balance sheet you think you're willing to let securities run-up to?

I think we haven't come to a final conclusion on that yet.

That's all I have, guys. Thank you.

Rick Weiss, Janney Montgomery Scott.

I guess if I could start with some color behind your loan pipeline, is this improvement coming from existing customers or are you seeing new business relationships?

It's a combination of the two. There's a lot of new customer contact being made. But at the same time, we've seen some existing clients look at new projects. The other thing we've seen on the C&I front is an increase in line utilization over the last two quarters. So, we are seeing some signs of life in terms of demand from the current customer base.

And how is your competition from at least on Eastern part of the state everybody says it's been fierce on pricing. Is that what you see on the Western Pennsylvania side too?

Yes.

And what is your take on just the Western PA economy and what's the impact, if any, from Marcellus Shale? Is that increasing or staying about the same?

Well, the Western PA economy continues to be fairly stable. We're fairly lucky that it hasn't been as volatile as many regions in the country. The Marcellus impact, what has happened, I think, has happened.

There's a lot of new activity. We've seen a lot of the drilling move into eastern Ohio, where they are drilling for oil. But the long-term impact is going to happen because they've drilled a lot of wells. Those wells need to be serviced. Transmission lines need to be developed in order to get that gas to market, and I think in the future we'll see a significant impact when prices increase.

I would say all in all, that, too, Rick, in addition to the Marcellus, I mean it's still a pretty diverse region. And if you look at housing is still pretty solid. The sales have been good. Unemployment below state averages and national averages, and some of the manufacturing sectors are pretty strong right now. So, I think Western Pennsylvania is holding its own relative to the overall national economy.

And just finally, I'd be curious on your take on what's going on in the M&A market. In general, not specifically for you.

Yes. I think you -- obviously, you're seeing some more activity. And everybody is sitting around and trying to look at the impact of the reduced -- the market pressures that you're going to have next year, and some of the other increased operating costs. So, we were able to do two mergers this year, and I think you're going to continue to see activity and I think we are well-positioned to select the right partner for our organization.

Okay. Got it. That's all I had. Thank you very much.

There are no further questions at this time. I'd like to hand the floor back over to management for closing comments.

We did have one other question that came in on an e-mail. And that was related to noninterest expense versus the third quarter of 2011. Just want to go through some of the major increases there. We had mentioned the impact of the Gateway merger, both one-time and ongoing expenses. That was about $1.1 million.

And then also versus a year ago we had the Mainline acquisition that we did in the first part of the year. Their ongoing operating expenses are about $1 million a quarter, so that added about $1 million. Another large item was this unfunded commitment and in a quarter-over-quarter comparison that adds about $2.3 million of expense.

The pension this year versus last has increased due to the lower discount rate that we have to use. That's about $700,000 a quarter. And then we had some joint venture projects for low income tax housing project that we participate in. Those are higher this year by about $250,000. And the other question was related to a similar question that was asked about the efficiency ratio.

Thanks, Mark. And thank you, everybody, for participating in today's conference call. We do appreciate the opportunity to discuss our quarter's results and look forward to hearing from you at year-end. So, thank you.

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