S&T Bancorp, Inc. (STBA) Q4 2012 Earnings Report, Transcript and Summary

Greetings and welcome to the S&T Bancorp, Incorporated Fourth 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 of S&T Bancorp. Thank you. Mr. Kochvar, you may begin.

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. The statement provides the cautionary language required by the Securities & 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 visiting our Investor Relations website at www.stbancorp.com. I would like now 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 our press release this morning, we did report net income of $9.5 million or $0.32 per share versus $12.6 million or $0.43 per share in Q3 and $9.3 million or $0.33 per share in the fourth quarter of 2011. I would say overall we are very pleased with our performance this quarter as we experienced positive trends really in 3 key areas; number one, loan growth, also our net interest margin and our asset quality metrics. Average loans for the quarter increased $60 million as a result of increased commercial activities and also the pipeline continues to grow as a nice mix of both CRE and C&I credits. In Q4, we had a busy quarter, originations were almost double the average loans that we experienced in the first 3 quarters. However, we did continue experiencing payouts in the portfolio in Q4 which again were up about 50% over our quarterly averages. A lot of the payout activity was driven by some of our customers who were selling businesses really to lock-in capital gains in 2012. So that impacted some of the payoff activity. There also continues to be nice activity in the construction portfolio and we have a very nice backlog of fundings that are going to hit the balance sheet in 2013 and I think what's more important is the portfolios are a very diverse mix of projects, with multifamily comprising approximately 30% of the construction book, followed by single-family lot development which is 20% and then retail and municipal projects totaling 15% and 11% respectively. So we've done a lot to really change the risk in that construction portfolio. Again, increased loan volumes have helped stabilize our net interest income which increased one basis point to 3.51 for the quarter and on an absolute basis net interest income was up $500,000 for the quarter. I’ll talk a little bit about asset quality metrics. They improved in several important measurements. Pat’s going to elaborate in a little bit more detail in a few minutes, but I think most importantly, non-performing assets decreased $11.7 million as we were able to bring a number of projects to resolution in the quarter. Also, commercial sub-standard loans decreased by $24 million for the quarter, but I think more importantly were down about $49 million for the year, almost 25%. And finally, total delinquencies declined by 20 basis points to 2.41%. We think these trends are attributed to really a concerted effort by our special asset groups to identify issues early in the cycle, and once identified, bring them to resolution in a positive manner. As we look forward to 2013, we know expanding the loan book is going to continue to be one of our top priorities. As I mentioned earlier, we’re seeing nice trends in pipelines. The team in Akron [ph] funded their first deal in Q4, continues to grow their book of business. Also, the Gateway Bank conversion is scheduled for early February and we're confident that we're going to gain significant traction, when we’re able to approach the Washington County market as one S&T brand. Another area that we are focusing on for growth in 2013 is talent recruitment and I am pleased to report in the fourth quarter we added 1 commercial lender, 4 community bankers and one mortgage originator and all these folks have proven track records in their respective areas and are going to enable us to increase coverage and production in our markets. And finally, just want to mention several changes that we made to enhance the efficiencies in our retail network. We have few branches scheduled for closing in Q1 and we have also converted 2 of our locations to drive-through only. These are done in markets where we still have very significant coverage and don’t anticipate any major impact to our customer service levels. So again, we are trying to attack the expense side of the equation as well. So at this point, I am going to turn the program over to our Chief Credit Officer, Pat Haberfield.

Thanks, Todd, and good afternoon, everyone. Provision expense for the fourth quarter of 2012 was $4.2 million resulting in an ending balance in the loan loss reserve of $46.5 million or 1.38% of total loans. This compares to a provision expense of $2.3 million with the loan loss reserve balance of $46.3 million or 1.41% as of September 30, 2012. The full year 2012 provision expense was $22.8 million which does compare to $15.6 million in 2011, included in the December 31, 2012, allowance of $2.2 million of specific reserves as compared to $2.9 million at September 30, 2012 and $5.5 million at year-end 2011. Non-performing assets, as you previously heard, decreased $11.7 million ending the quarter at $55.9 million or 1.66% of the total loans plus OREO. As compared to $57.6 million of 2.06% of total loans plus OREO at September 30, 2012 and $60 million or 1.92% at December 31, 2011. For the second consecutive quarter our NPL run rate has been well below our most recent historical run rate, translating, this means less than $6 million per quarter. Our concentrated efforts to reduce our NPLs are evidenced by our extremely low OREO numbers as well as our continuing decline in NPLs overall. During the fourth quarter of 2012, the bank did experience net charge offs to $4 million as compared to $2.7 million in the linked quarter and $5 million in the year ago quarter. For the year, our net charge offs were $25.2 million as compared to $18.2 million in 2011. Of the $4 million in charge offs in the current quarter, we had previously established $1.7 million as specific reserve. Our troubled debt restructurings portfolio had $60.5 million, of which $41.5 million are on accrual status and performing and $18.9 million remain on non-accrual status. Our total Commercial Special Mention in substandard loan categories or C&C [ph]] ended the fourth quarter at $309 million which is a decrease of $3.9 million over last quarter and $14.8 million over year end 2011 balance of $323.8 million. As Todd mentioned earlier, our classified loans are those loans rated substandard, decreased by $24.3 million quarter-over-quarter and $49 million over the year ago quarter. Special Mention category was impacted by mix over few credits that we wanted to watch more closely, have more hands on, more eyes on and more importantly by several classified assets improving in performance. We have not had over the last few quarters any unexpected changes in downward movement to substandard. Our 30 to 59 day delinquency bucket is at 55 basis points which does compare to 25 basis points from the linked quarter. However, our 60 to 89 days delinquency bucket is at 11 basis points versus 30 basis points of September, 2012 and over 90 day delinquency is at 1.66% which compares against 2.06% in the linked quarter. Mark is now going to provide you with some additional details on our financial results.

Thanks, Pat. Our performance in the fourth quarter was highlighted by improved asset mix as the $60 million increase in average loans, $40 million increase in securities and a $62 million decrease in interest bearing deposits at banks produced a stable net interest margins rate and an increase in net interest income. Approximately $50 million of the growth in average loans is attributable to the Gateway merger which occurred in mid-August and is in our numbers for the full fourth quarter compared to only 1/2 of the third quarter. Organic loan growth was on average about $10 million. However, much of this growth occurred at the very end of December. Quarter end-to-quarter end portfolio loan growth of $67 million was all organic giving us some positive momentum going into the first quarter of 2013. We do anticipate that earning assets will reprice faster than our ability to offset those changes on the funding side. But we believe that this will be moderated by loan growth and disciplined shift out of cash, some continuation of CD resets, the linked quarter deposit rate changes along with the borrowing maturities including a $10 million at approximately 3.5% in the first quarter of this year. We do continue to take some net interest margin rate compression in 2013 but at a much slower pace than we experienced in 2012. Non-interest income was down $1 million in the fourth quarter compared to the prior quarter. The largest contributor to that decrease was insurance which was down about $680,000 due to seasonality in commissions, higher than normal claims impacting our life accident and health loan insurance and the only[ph] gain that occurred in the third quarter. The other category decreased due to unusual items in the third quarter including an annual fee related to merchant processing and a gain on the sale of our consumer discount business. The $11.6 million in fourth quarter is closer to our normal run rate. Non-interest expenses declined primarily due to the change in the provision for unfunded commitments which was almost $1.2 million in the third quarter and $144,000 negative in the fourth quarter as construction commitments grew significantly in the third quarter. The favorable salary variance in the quarter is primarily due to higher deferred costs that accompanied the improved loan originations and as valuation changes in our [indiscernible] Trust. The fourth quarter includes about $800,000 of one-time merger expenses for Gateway. Our full year 2012 effective tax rate was about 17.5% and we expect it to be a bit higher in 2013 probably in the high teens. Our capital ratios were generally down slightly due to the strong period in loan growth. I'm going to turn the program back over to Todd.

Thanks, Mark. And just before we get to the Q&A, I just want to mention several changes that are occurring on our management team. As we have previously announced, our Chief Operating Officer Ed Hauck who has been with the organization for 38 years is going to be retiring at the end of March. David Ruddock has been with our organization for 27 years, primarily in operation’s area will be resuming Ed’s responsibilities when Ed retires in March and then also Gary Small joined the organization on January 2 as our new Chief Banking Officer. Gary has held executive positions in several Midwestern banks and he will be responsible for directing retail banking, insurance and wealth management divisions and is going to coordinate activities of our market based team. I think Gary has been a nice addition to our team and I know you are going to enjoy meeting him in the coming year. So just want to bring that to your attention. And at this point, I would like to turn it over to the operator to provide the instructions for asking questions.

[Operator Instructions] Our first question comes from the line of Damon DelMonte of KBW.

First question I have is to do with the expense base. Are there any notable expenses that will be saved when you guys bring the Gateway branches over onto your platform in the first quarter?

No, there is not a whole lot there.

Okay. So just from like a starting point for building out in 2013 and this $29.7 million is decent relative to build off of…

That’s still a little bit high. As I mentioned, there is about $800,000 of one-time still in there. Our run rate is quite closer to $28.5 million, $29 million in that area.

And then the growth in the construction loans, I mean, should we start to see more traction in construction running again and can you just tell us a little bit about what you are booking these days for credit?

Yes Damon, it’s like I said pipeline has been very strong. We had a number of bookings in Q4 as Mark alluded to, a lot of those occurred within the last 2 or 3 weeks. But the construction portfolio when you look the increase quarter-over-quarter is up and also I think more importantly what I like to look at is what’s available and that jumped by about another 20%. We have about today about a $125 million of available funding out of our construction commitments and that’s compared to about a $103 million in the end of the Q3. And just to give you also in put in perspective a year ago at this point in time that was about $62 million. So, we think that’s going to be a nice backlog of funding that are going to hit the balance sheet and we are still going to be subject to some fluctuations in, due to pay offs. There is a little bit of seasonality in Q4 some people will pump up their balance sheets a little bit and then they come in and pay their lines back in early January. But most of the originations on a construction side are in market and as I mentioned about 30% of it is multi-family. The other big component is the single family lot development which is about 20% but those are all in market and the Pittsburg market has been very strong from new home sales, I think last year was one of their biggest years. And then we also have some retail strip which are typically we have significant leases in place upfront and under final larger component would probably be municipal projects. So we think it’s a pretty diverse, if you would go back those ‘07, ‘08 we probably had amount of $250 million in the pipeline and the bulk of it probably was in single family lot, so we really change the risk profile of that construction portfolio.

Okay, so you mentioned 30% multifamily, 20% single family lot, what’s the breakout between the retail and muni?

Retail is about 15% and the muni is about 11% or so and the multi-family is the mix with doing this some good solid apartment projects and also there is some student housing in there as well.

And then Mark you mentioned about the margin, should see some compression but at a slower pace than what we saw last year. If you had to kind of ballpark will you expect for quarterly compression rate, we are talking like 2 to 3 basis points?

Yes, some of that’s going to depend on loan growth, but we are looking at a couple of basis points a quarter probably.

Our next question comes from the line of David Darst of Guggenheim Securities.

Todd, could you maybe talk about the geographic focus of the pipeline, should we expect to see the outer market commercial real estate construction growing or is it primarily in market?

It’s predominantly in market, I mean you will see maybe other reports a little bit of lift, and probably that's going to be a reflection of the Ohio activity. But we are not real active, on out of state activity. Occasionally we’ll have a client who will do something that we, someone who we’ve had a proven track record with and we’d size it up appropriately. We are not going to shy away from it, but I just don't think you will see the growth in some of the other markets like we’ve had in other periods. So predominantly it’s into western Pennsylvania.

Okay. Mark do you expect to burn down your liquidity position by funding loan growth or are you going to grow the securities portfolio as well.

A little above that, I’d prefer it to come from the loan book but we all think at a pace that we are going to use some of that cash to buy some securities. That will still provide us with the liquidity, because what we buy we’ll have will be liquid and we will be able to use that for those purposes as well.

Do you think you can give us any insight into what your provision expense would be for the year or even maybe just the volatility around it.

I think we are comfortable with where our reserve is now given the stack on our loan ratings. So as that improves we shouldn't, we are hopeful that we wouldn't see any increased need on the reserve side. So in the event that that all happens, we should be able to manage the provision to be in line with how charge-offs go.

And are they the same or I mean is there anything or any quarters when you expect the resolution on a higher charge-off or should we think about just the past couple of quarters.

Yes, we think the third and fourth quarters are more representative of what we expect to see going forward.

Our next question comes from the line of Collyn Gilbert of Stifel, Nicolaus.

I apologize, Todd, if you covered this, just kind of honing it on your loan growth commentary, can you tie that do you think to sort of a specific targeted growth rate that you have for the year.

I mean there's still going to be some volatility in there, Collyn, just because we know what some of the payouts are. There's still some uncertainty out there, but the one comment I would make is the pipeline continues to grow and the activity levels at the committee levels are still very robust. We've added some talent in certain areas on both the commercial side and our community lending side and like I said we add some people on the mortgage side. So production capacity is going to be a clear focus for us next year, and we are going to continue to get out there and we are able to generate a nice new relationships to bring a lot of value to the organization when particularly when you add on your treasury management services, add some wealth on behind that and some also some insurance to an extent. I can't really nail down an actual growth target.

But I mean you sort of are seeing given the initiatives that you are putting forth and maybe some of the terms of the market that you are clear divergence it sounds like in terms of what we could expect in 2013 from what you all have previously agreed on a lot of couple of years exceed in terms of loan growth.

Yes, I would say the third and fourth quarter were active now. I think that there was a little bit of a lull in December, I think with some of the uncertainty over the [indiscernible] and some of the goings on in Washington. But it appears that people are starting to again loosen up a little bit and plan for some expansion. I would say, overall, the economy in Western Pennsylvania continues to remain very, very strong. Unemployment is again showing a good trend relative to state and national averages and it's an -- overall, there is a lot of different businesses that are benefiting. Certainly, energy continues to be top of the mind, but manufacturing has been good. And like I said, there has been some, housing is certainly been strong. So overall, we're very, very positive going in to this year.

Our next question comes from the line of Matthew Breese, Sterne Agee.

Going back to the conversation about the liquidity position, is there a targeted amount of cash that you guys are comfortable holding at the bank and at what timeframe do you think we can get there?

We don’t have a specific cash target. We do have specific asset liquidity target, but that would include cash and then securities that are not pledged, that we do have a haircut for. So we are well over those targets. We are looking at probably over the course of the year, but it's going to be depend on loan growth of potentially moving up to $100 million out of the cash and the securities.

Okay, and I am assuming the securities decision would be mostly agency or are you looking to do some corporate as well?

We generally don’t invest much in corporates, since we have so much of that type of risk on the balance sheet already, we tend to stick with agencies and some of munis and a little bit of a mortgage backed but all agency paper.

Okay, I had a follow up question on your expense discussion. You guys kind of outlined $28.5 million to $29 million a quarter. Does that include the branch closings and the conversions?

Yes.

And then one more follow up, what was the pipeline at quarter end and how does that compare to the pipeline at third quarter end?

We typically don’t divulge the actual number Matt, but it was [indiscernible] at the end it was down a little bit from the end of December, it was up on a quarterly basis.

It was up on a quarterly basis.

Yes, November at the end of December it dips a little bit just because of the fundings but it’s still up significantly from where we were at this point last year probably 2 times a little bit more.

It seems there are no further questions at this time. I would like to turn the floor back over for closing comments.

Again just thanks everybody for participating in today’s conference call. Mark, Pat and I appreciate the opportunity to discuss this quarter’s results and look forward to hearing from everybody at our next conference call. Thank you.

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