S&T Bancorp, Inc. (STBA) Q2 2012 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to the S&T Bancorp Incorporated Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Kochvar, Senior Executive Vice President and Chief Financial Officer for S&T Bancorp. Thank you. Mr. Kochvar, you may begin.

Good afternoon and thank you for participating in today’s conference call. Before beginning the presentation, I want to take time to refer you to our statement about forward-looking 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.stbankcorp.com. I would to now 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, 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-off of $8.2 million are higher than we would like and negatively impacted our results this quarter. We do continue to work diligently to identify issues early with conservative valuations on nonperforming loans. In addition, we experienced a 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, the business development standpoint. We are seeing nice increases in the residential mortgage activities and also the wealth management lines of business in the mainline markets and I think what’s nice a lot of the of the activities is with new customers and we are seeing cross-selling opportunities for core DDA and other retail product. In addition, we’re going to continue to actively mine the mainline customer base to increase penetration and 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 basis and about $800,000 year-to-date versus 2011. This is an area where we did focus a lot of attention on in 2011 and the increases are -- I think believe are a direct result of these efforts. We’ve -- we do have a lot of momentum going on in the wealth management side now at this point in time and 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 the $60 million decline that we experienced in the first quarter. While we are still being impacted by payouts in our CRE portfolio there is 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, and we have had nice activity in our markets and we’ve seen nice levels of new loan requests over the past few weeks. One of the strategic initiatives to grow our loan portfolios is to add seasoned lenders to fill in gaps in our markets and in the second quarter we were able to add 2 members to our team to cover the Allegheny and Beaufort county markets. And I’m pleased to announce that as of last week we’ve hired 3 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 than our current customer base. All these folks have managed extensive portfolios for many years in Akron. We are excited to have them on board and 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 and 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 new markets. It gives us a little bit of geographic diversity. And I think and more importantly just bringing on the right team members to S&T to our team, so we really excited. I also mentioned the impact of mainline earlier in the call, but we are looking forward to our upcoming partnership with Gateway Bank. We expect the transaction to close in early August. I’m confident that Gateway is going to be a great fit. The economy in Washington County continue to be very robust and 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 and then we’re going to hit the ground running and really trying to penetrate that market. So at this point I’m going to turn it over to Pat Haberfield, our Chief Credit Officer, and then when Pat is done Mark Kochvar is going to review our operating results in more detail at the end of the call, and then we will back up for questions. So Pat, I’ll turn it over to you.

Hi, thanks, Todd, and good afternoon. Provision expense for the second quarter 2012 was $7 million resulted in an ending balance in the loan loss reserve of $46.7 million or 1.46% of total loans. This compares to a 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 is $2 million of specific reserves which compares to $6 million in specific reserves at March 31, 2012. Nonperforming assets ended the quarter $72 million or 2.25% of total loans plus OREO as compared to $67.9 million or 2.12% total loans plus OREO at March 31 and $82 million or 2.18% at June 30 of 2011. Our nonperforming assets increased for the second quarter due in part to receiving several appraisals exhibiting stress valuations causing a reaction to take impairment charges against the collateral value to loan balance and thus moving these credits into a nonaccrual status. In addition, we self identified several credits which recently exhibited some additional stress on their projects which caused for strict actions to identify these credit as impaired and conduct an analysis on the valuation of these assets, which results in a write-down to the newly established value. We aggressively identified these shortfalls asset-by-asset and take the appropriate charges. Each of the credits reviewed at workout plans, and it is believed that the 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 exercise of reevaluating 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 compared 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 in specific reserve. In addition, $2.1 million was a result of valuation activities as previously discussed associated with TDRs. Our construction portfolio, which includes 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 are a result of TDR valuation activities, which I think further exhibits our potential lead assets and showing 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 on March 31, 2012. Currently, $25.2 million of our TDRs are accruing and performing as expected and $37.5 million are nonaccrual with approximately $10.2 million of new nonaccrual loans are paying as agreed in this category, but placed into nonaccrual 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 a potential of returning to accrual status. Our total commercial loans special mention and substandard categories ended the second quarter of $291.1 million as compared to $308.6 million in the previous quarter, and $357.7 million at June 30, 2011. Included in these number is the $69.1 million are nonperforming loans, of which $13.4 million are new or nonperforming for the quarter and $9.9 million are classified in the construction or our land developments and commercial real estate portfolio and further describes the 2 relationships with $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 2 relationships. These relationships favor the markdowns to 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% March of 2012 and 2.66% in the year ago period. The 30- to 59-day delinquency bucket is at 30 basis points, which compares the 68 basis points in the last 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 of 2012 and 20 basis points in 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 comparison to the prior quarter again due to the $3.9 million of onetime 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 point 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 and 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 payouts remain elevated and were slightly higher than the new volume that’s here today. 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 have some benefit from higher rate CD maturities at the end 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 onetime merger expenses in the first quarter. Outside of this, there were 2 main items that increased expenses: the impairment of low income housing project for about $280,000 and an increase in the reserve for unfunded commitment of $650,000. Our expense run rate is up to about $1 million -- is 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 of the first quarter of 2013. Our tax rate is somewhat lower due to consistent permit items and 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 operator to provide instructions for asking questions.

[Operator Instructions] Gentlemen, it appears there are no questions at this time.

Okay. Well if anybody does have any follow-up questions, please feel free to reach out 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 with just under $7.5 million. Our savings -- expected savings is about $2.8 million, so that leaves about a $4.5 million of run rate. So, we do expect just under $3 million of a saving going forward. Of that savings of about $2.8 million about $1.7 million of that is salary and benefits related and we are seeing that debt benefit almost right away here in the second quarter. Okay, thanks, operator.

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