S&T Bancorp Inc (STBA) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the S&T Bancorp, Incorporated Fourth Quarter 2004 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. Web cast listeners can send questions by e-mail to investor.relations@stbank.net. If anyone should require operator assistance during the conference, please press “*0” on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Robert E. Rout, Senior EVP and CFO of S&T Bancorp Incorporated. Thank you, you may begin.

Good afternoon, everyone, and thank you for participating in the conference call. Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors in the second slide of our web cast slide presentation. This statement provides the required cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. Listeners are also reminded that a copy of the fourth quarter earnings release can be obtained at our investor relations website at www.stbancorp.com. In addition, a set of financial highlight slides is included with this web cast that support what we are about to discuss. We do not plan to review the slides in detail, and would be more than happy to respond to any questions concerning them or any other aspect of our financial performance.

I would like to introduce Jim Miller, S&T’s Chairman and CEO, who is going to provide an overview of S&T Bancorp’s results for the fourth quarter.

Thanks, Bob. And welcome, everyone. Once again, it’s a pleasure to be with you to update you on what’s been happening with S&T, both from a financial performance as well as a strategic perspective. As you can see from our earnings release, we had a solid quarter and another year with record earnings. While most all areas of the bank performed well this year, I was particularly pleased with 3 areas. Number one, our continuing success in growing our commercial loan portfolio. Second, our core deposit growth. And third, our improved asset quality numbers.

We increased our commercial loan balances by a little over $208m or about 14% this year. This is where many of the significant new relationships to the bank are coming from and it really provides us with a great opportunity to also sell our cash management, wealth management, and insurance products. As we mentioned in the news release, I believe the appointment of Todd Brice as President of the Bank in August has been helpful to the cross referral and joint servicing initiatives among our product lines. Todd formerly headed the commercial lending area and now both wealth management and insurance report to him as president.

There was some offset to the commercial loan growth, about $22m decline in the consumer and residential mortgage loans, and that was primarily a result of lower origination volume. We also allowed about $93m runoff in the securities portfolio as maturities hit during the same period. And this was really a conscious asset/liability management strategy to reduce borrowing levels, reduce balance sheet leverage, and consequently reduce the potential interest rate risk of a flattening yield curve.

Our organizational focus on growing deposits through cash management and other products and services assisted in increasing deposits by $214m or 11% in 2004. The really good news is that roughly $164m, or about 77% of that increase was in demand money market savings deposits which, of course, are particularly favorable sources of funding. We also had solid growth in fee revenue despite a substantial decline from last year’s record activity in mortgage banking with an overall increase of about 3%.

Non interest expense declined for the fourth quarter and full year of 2004 primarily due to the $3.6m prepayment penalty that we incurred in the fourth quarter of 2003 for the early repayment of $89m of long term debt. That early repayment was also a strategy to reduce the interest rate risk associated with the flattening yield curve and the ongoing shift of commercial loan customers into variable rate loans.

Asset quality continues to be very acceptable. Net loan charge offs for the full year 2004 were only $1.6m or .07% of average loans. That’s the lowest I can remember in my time here. This was due primarily to good debt loan recoveries of about $2.6m for the fourth quarter of 2004. During the fourth quarter, 2 significant troubled commercial loan relationships were resolved, resulting in the gross recovery of $3.9m of previously charged off loans.

Also in the fourth quarter, S&T recorded a negative provision for loan losses of $.5m. We feel the provisioning expense is consistent with the continuing improvement in overall asset quality at the bank. Finally, as we’ve mentioned in other recent conference calls, we have discontinued the practice of providing earnings guidance for future quarters. And with that in mind, Bob and I would be very happy to entertain any specific questions about our past performance and the future outlook for our business in general. Any questions? I’m not sure if - - we’re not hearing any questions if there are any.

[OPERATOR INSTRUCTIONS]. Our first question is from Wilson Smith. Mr. Smith, you may proceed.

Good afternoon, gentlemen. Nice quarter again. If you could, Jim, can you tell us what the balance was on that commercial loan that you got the $2.8 m recovery on and could you give us a little bit of color on that loan?

Actually I can’t create - - I’m sorry, Bob’s helping me here. The balance was about 3.8. We had previously charged it down. It actually was a series of real estate investments that we felt a little uncomfortable with and fortunately they were good properties and through the course of time, the owners were able to sell those properties and make us whole, and for some reason the market for those types of properties just got very favorable this year and we’re very pleased to be able to book those recoveries. Actually, they were a series of properties.

Excellent. And how doe the launch list look at this point?

It looks as good as it has for awhile. Honestly, we keep knocking on wood here and looking at the economy, I think it’s evidence that the economy really is getting stronger and in we’re seeing that. Our 30 day delinquency numbers were under 80 basis points, I think, and the outlook is just pretty good. Launch list is at low levels on a relative basis and we just feel good about the outlook for asset quality at this time. It doesn’t mean something couldn’t jump up and bite us, but we’re feeling pretty good about it. And I think what it is is a testimony to a strong economy. I think it’s a testimony to the underwriting and credit administration processes we have here. Most of us who sit around the table and evaluate these credits when they come in, and most of the people that are out there acquiring the credits today, have been together for awhile. And I think we have some good experience looking at them. But again, sometimes things happen that are beyond your control. And when that happens, we’ve made a practice of addressing them aggressively and early and in these 2 cases this quarter that we had a favorable outcome from, we lost money on the one hotel that we talked about before, but not as much as we had anticipated we could. So we just feel good about the way a couple of these problems got resolved.

And kind of a follow up on that, kind of given the scrutiny that the loan loss provisions have been getting now via the SEC and the auditors and so forth, given this decline in the MPAs that you had and the excellent performance and the improving condition of the watch list, how is that - - can you give us a little bit of thoughts on how that might impact your reserve levels in ‘05?

Wilson, I’ll answer that. You’re absolutely right - - the review process from both the banking standards and also the external auditors and also the SEC, has become much more rigorous on the adequacy of the loans per loan loss. We believe we have a model that adequately addresses the risks that are inherent within that portfolio and we also know that we have to take into consideration the large amount of new loans that are being brought in that portfolio. So as you look back over our trend, the asset quality in the overall portfolio really doesn’t change that quickly unless you have some type of economic shock or some type of breakdown in your credit administration. So with that said, that allowance for loan loss reserves should run fairly steady or change moderately over time.

The thing that jumps to my mind when you ask that question, Wilson, is also - I mean a net charge off this quarter, or for the year of 7 basis points, I mean, that is a very low number. Nobody is going to sustain that kind of a number year after year. I mean, if you look back over the last 5 or 6 or 7 years, you’re probably going to see us somewhere between 25 and 30 basis points on average. And that’s probably a more realistic expectation over time for net charge offs.

Good. And Bob, it looked as though, and you’ve been doing this all year, you’ve been bringing down the level of the investment securities. Do you think your kind of at where you want to keep it at this point? Or do you think that you may take it down further?

No, we’re pretty comfortable where it’s at now. What we’ve been wanting to do is get into a position where we’re borrowing short term funds and investing them in intermediate or long terms securities as a leveraging tactic. And that pulling down or that leveraging on the balance sheet worked out very well for us here this past year because the yield curve did flatten and so those tactics are really just a strategy to get our balance sheet into a position in anticipation of what we saw was going to happen.

One more question then I’ll let some other folks hop in here. But your net interest margin was also improved, it was a nice improvement this quarter. Can you give us a little bit of feel for how you might be thinking about how the net interest margin might continue to improve throughout the year if the Fed continues to increase rates?

Well of course in theory where our balance sheet is, we continue to be asset sensitive and probably have been for the last 2 years primarily because of the way the commercial lending customers preference shift toward more variable rate loans at least in our market. So the theory is, that as short term rates go up, with an asset sensitive balance sheet, it should have improvements to the net interest margin. But what that does not take into consideration is the flattening of the yield curve as we’re seeing here which provides a little more dynamic type scenario. So I think it’s going to be a combination. Short term rate increases will help us. But it also depend what happens in that long end of the curve as well. Does that answer your question?

That helps, thank you. And I do have a couple more questions but I’ll come back in at the end if they’re not asked by somebody else.

Our next question is from Colin Gilbert with Ryan Beck & Company. Mr. Gilbert, you may proceed.

Jason O’Donnell: Hi, gentlemen. Actually it‘s Jason O‘Donnell sitting in for Colin. Congratulations on your quarter. I just had a couple of quick questions with regard to on the fee side. You had some nice improvement in your wealth management business in terms of fee income. You have 14.75% growth on quarter. Can you just describe a little bit about what’s driving that and also sort of your outlook going forward in terms of that business? And also on the insurance line item we kind of conversely saw the opposite of that and saw a decline of 6% quarter over quarter which was pretty dramatic. Could you just talk a little bit about your expectations over the near term as far as that business?

I’ll talk about wealth management and let Bob talk about insurance. In terms of wealth management, a couple of things going on. One is that the focus of the group has shifted in terms of new business into the metropolitan Pittsburgh market. We did open an office down there 2.5 years ago in downtown. We have a group there that has been working with some Senator influence and cracking some business. And it’s been good business. We see that continuing. We are adding staff down there and when our lease expires in the space that we’re in today, which will be later this fall, we expect to probably increase the amount of space we have and probably put a team together down there including a commercial lender, cash management person and build a little different type of delivery system there than we currently have.

But a lot of it and the majority of the folks in the office will still be related to wealth management. The other thing that’s happened is that in some of the older markets that we’re in we have some folks who were older retire, and they were primarily - - we’ve been able to replace them with folks at lower salary levels who are younger, less experienced people. We’ve also got brokerage folks that we’re kind of fully staffed up there now out in the hubs, for the retail hubs. And that seems to be working very well. So it’s been a combination. I mean, the revenue growth was a little bit ahead of plan on the wealth management side because the business was a little stronger than we had anticipated. And on the expense side, they did a wonderful job of managing their expenses but not to the degradation of future business, we don’t believe. So I think we have a better model now, a little different model than we’ve had in the past. And the overall net contribution exceeded plan by probably 6 or 7%. But yeah, we’re pleased with the way things are going there.

Jason O‘Donnell: Great. Thank you very much.

And I’ll address the question on insurance. The decline - - you’re looking at a link quarter, is that correct? Hello? Hello?

Our next question - -

Are we still on line, Mr. Moderator?

Yes, Sir.

Okay, I want to address the question about the insurance. The insurance is actually up comparing the fourth quarter of ‘03 to fourth quarter ‘04. It is down slightly about $60,000 on a link quarter basis, and that’s primarily 2 factors. The first being is that the third quarter was just an outstanding quarter for our insurance agency bringing on a couple of large new accounts that weren’t repeated here in the fourth quarter. The third quarter was actually also very, very strong for our 2 title insurance company activities, one dealing with commercial titles and one dealing. So I think it’s more of a factor of the third quarter being extra strong with the fourth quarter being more normalized. Okay, so we’re ready for more questions.

Our next question is from Matt Schultheis with Ferris Baker and Watts.

Good afternoon, gentlemen. Quick question for you related to sort of liquidity ratios. Do you have a sense of how many liquid assets, or a percentage of earning assets that you would prefer to see in liquid assets? And I ask that in regard to you obviously delivered some here from the year and I just wanted to see if you have kind of a baseline of where you started adding securities and whatnot back on for liquidity management purposes.

Yeah. Matt, we utilize the various liquidity ratios, the economy liquidity ratio is pretty much our red flag. As far as a management pool, we find that they’re somewhat limited. We like to use a more dynamic model that we have as sort of a liquidity gap where we can look out over 12, 18 months and anticipate what’s happening in the way of liquidity. Now we do know that earlier this year when we ran that model, and were having such tremendous loan growth, and we looked out into the future with that model we knew we were starting to get a little bit sweet. So at that time, we took a couple of different actions that worked out very well for liquidity and this cut back a little bit on our upside from a cost perspective related to the net interest margin because whenever you add liquidity, it does become more expensive.

In the third quarter we went out and purchased $28m of broker CDs. We also got a little more aggressive on our internally generated CD programs. And in August of this year, we introduced a savings account called the Green Plan that is indexed to the Fed funds rate. And over the past 5 months, we’ve added close to $200m in that account, it’s very attractive. So with any liquidity issues that we had previously, have certainly been addressed. The Green Plan not only provides good core low cost internal funds for us, but it also fits in very nicely with the shift that we’re seeing with our commercial loans going towards more variable rate loans.

The other thing I’d mention is that about 40, 50% of that is new funds.

Yeah. It wasn’t just a shift of things cannibalizing our existing accounts. Probably close to $100m of that $200m raised in that savings account was new funds from outside the bank.

Well, I guess I’m more focused on the asset side of the balance sheet. At some point, you don’t want your balance sheet to consist of loans as assets and liabilities. You need some source of liquidity on the asset side as well. And I guess I was questioning more, do you try to keep liquid assets as a percentage of total assets or earning assets at some ratio? And realizing that that’s a somewhat simplistic and rule of thumb approach, or are you - - you don’t even manage it that way?

No, it is an integral part of our whole asset/liability management. I mean, it’s something we look at each month, the ratios. Again, we do have specific targets for them that I don’t have here with me right now, but our treasurer is here with me, let me ask him.

One of our policy limits we use run rates like a percentage of loans and letters of credit as a kind of asset, but we don’t have any specific targets for securities per se. We also look at what we have available on the borrowing side.

Can you share with me the loans and letter of credits earning asset ratio?

The internal memo uses like 85%.

Okay. Just one last question. In the past, you‘ve had some, a little bit of volatility in your, excuse me, in your mortgage servicing rates. I guess in the last 2 quarters you’ve had an upswing in one quarter and downswing in the next, or my memory may be flawed there. How did those hold up in the fourth quarter and how do you think they’re going to hold up going forward?

Well, as you know, they are tied into where the long term interest rates are growing. This past quarter we just had a small, minor adjustment to those valuations, so as - - in fact, we have a very small, I guess, allowance for those reserves set aside at this point so if interest rates go up, there would be a small recovery.

Okay. Do you value those monthly or quarterly?

Quarterly.

Okay. Does that mean you put, when you put new rates on, do you do that quarterly or monthly?

Quarterly

Okay, I guess that’s all my questions. Thank you.

Gentlemen, there are no further questions at this time.

No further questions? If there are no more questions, thank you for participating on today’s conference call. We certainly appreciate the opportunity to discuss our financial results for the fourth quarter and for the year and look forward to talking with all of you again next quarter if not before.