S&T Bancorp Inc (STBA) 2005 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the S&T Bank Inc. first quarter 2005 earnings conference call. (Operator Instructions)

[Operator Instructions]

As a remainder this conference is being recorded. I would now like to turn the conference over to Mr. Robert E. Rout, Senior Executive Vice President and CFO of S&T Bancorp Inc. Thank you sir. You may begin.

Good afternoon, everyone, thank you all for participating in this conference call. Before beginning the presentation, I would like to take time to refer your attention to our statement about forward- looking statements and risk factors that is in the second slide of our webcast presentation.

The Statements provides the required cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included with this presentation. I'd like to also remind our listeners that a copy of the first quarter earnings release can also be obtained at our Investor Relations Web site at www.stbancorp.com.

In addition, as I said, there are a set of financial highlight slides included with this broadcast that support what we are about to discuss. However, we do not plan to review the slides in detail, but would be more than happy to respond any questions regarding them or any other aspect of our financial performance.

Now, I would like to introduce Jim Miller, S&T's Chairman and Chief Executive Officer who will provide an overview of S&T Bancorp's result during the first quarter of 2005.

Thanks Bob. Let me add my welcome to everyone. It is a pleasure, once again, to be with you here today to update you all on what has been happening with S&T from both a financial performance and a strategic perspective. But you can see from the earnings, earnings performance was solid this first quarter of 2005. We think it will compare favorably to peers even though it is still somewhat below what we would like to see.

Net income increased $800,000 to 13.8 million, which represents a 7% increase over the same period last year. Earnings per share increased $0.03 to $0.51 per share. ROI and ROE 1.87% and 15.86%, respectively.

A number of items to note when comparing the income statement for the first quarter of this year with last year. Although, the current interest rate environment and flat yield curve presents unique challenges, we were still able to grow net interest income on a fully taxable equivalent basis by $1.3 million, or about 5%. Asset quality and loan charge-offs are the best we've seen in many years. As a result of this performance, less provision for loan losses was required this quarter.

Service revenue growth which includes retail, insurance and wealth management, it is a pretty important strategic focus our us. So, we're very pleased with the progress as evidenced by the $500,000 increase in this area. We also realize that we are still in the early stages of fully developing the opportunities that exist for these revenue sources. Particularly successful has been the introduction of these products to the ever growing base of commercial loan customers.

The increased security gains are reflective of the continuing performances of our equities portfolio. These portfolios now have a market value of $70 million with unrealized gains of about 24 million. They do provide a nice supplement and have for years to our overall core banking revenue streams.

Operating expenses, also represent a significant challenge. Like most other companies, we continue to incur rising medical plan costs and like all SEC public companies, the additional requirements imposed by the Sarbanes-Oxley legislation has significantly increased our cost of operations. And, also during the past 12 months we have added or replaced five retail branch facilities and acquired two insurance agencies on January 1st of this year.

Having said that, a fair amount of the increased expenses this quarter are one-time issues relating to restructuring of our facilities in order to better position ourselves for the next level of growth. I will not go into detail on that right now, but if anyone has question, Robert Rout can answer it more fully than I can.

During the past 12 months we have been able grown the balance sheet by $72 million, primarily through commercial loan growth. The commercial lending group increased their portfolio by $161 million, or 10% over this period, and that good performance, we are seeing that continued this year.

Consumer loan growth for us has been tough in recent years, and part of that's pricing competition for these types of products. It has been especially intense. And our experience indicates that many banks without a strong commercial loan function are stretching pretty hard to acquire loan assets. That shows up both sometimes in pricing and structure. True on the commercial side as well as the consumer side.

Funding for balance sheet growth came primarily from core deposit growth. The growth in core deposits has been very helpful to our earnings, obviously because of the lower cost of these funds, the fees that they generate and the customer relationships that they help establish.

And, strategically, we're of the opinion that core deposits are going to be extremely important to our ongoing success. The biggest success story with deposits this past year was the introduction of our Green Plan savings account in August of 2004. The interest rate on the account is indexed to the Federal Funds rate - we're currently paying 2.75% on that. And, every time Chairman Greenspan announces an increase in short-term interest rates, the rate on the Green Plan account goes up by an equal amount. So, it's a very attractive plan for investors.

You'll also notice reductions in borrowings and invested securities. That's because the current interest rate environment with its relatively flat yield curve, is not very conducive in our opinion to leveraging activities. So, backing out of those leveraging activities over the past 12 months to 18 months was a pretty conservative strategy on our part. But we think it is played out well.

As we mentioned in other recent conference calls, we discontinued the practice we're providing specific earnings guidance each quarter. But with that in mind, Bob and I, along with Todd Brice, S&T's President and Chief Operating Officer, would be more than happy to entertain any specific questions about our past performance, as well as the future outlook for our business in general.

And, we will open the questions.

Thank you. We will be conducting the question and answer session. [Operator Instructions]

Our first question is coming from Wilson Smith of Boenning.

Good afternoon, gentlemen.

Good afternoon.

Nice quarter again. Bob, why don't we start off with those expenses, the increase in the expenses that was so nice of Jim to offer that you might like to break out for us? Tell us what some of the one timers were in there, could you?

Sure, I can do that Wilson. As you know the SEC came out with some guidance in February concerning the leasehold and rent payments -- leases that have accelerated rent payments. And, that caused us to go back through and just make sure that all leaseholds and our leases were in perfect sync for timing.

Another small piece, we also sold an off (inaudible) branch building that we acquired in a previous acquisition at a loss. We had another branch building as part of our restructuring with retail, where we moved to a more modern facility and decided donate that particular branch back to the local municipality.

We had some office space that was being utilized out by some of our insurance people, the space they had prior to our acquisition back in 2002. And, we recently expanded the facilities at our Reedsburg branch location almost to like a hub office size. And we have those folks move in there. But, there were still some remaining leasehold improvements left on the facilities that we had abandoned. So, that was pretty much it. Probably, the additional leasehold expenses that we incurred this quarter was about $0.01 a share.

I'm sorry, how much?

$0.01 a share, 100,000 (ph). The other expenses, we had medical plans up some. We have 15 new staff people as a result of opening new branches and other strategic initiatives. The big-ticket items this quarter were the operating expenses. And, again, It's about 400,000 to 450,000 we believe in one-time issues specific to this quarter.

With the salary increase there, is that $8.8 million, is that a good run rate for the year?

Are you referring to the eight quarters or the five-quarter spreadsheet that we sent out with the press release?

Yes. I think so.

I am not aware of anything more that should go in there that was not in there this quarter. Other than the fact that we have less number of days in this quarter than in future quarters.

Okay, so the medical plan costs, there weren't any one-time expenses in there?

No. That will be the run rate for us, probably.

And in terms of the insurance revenues, that certainly was a nice bump. The number there in the first quarter, is that pretty much of a good run rate, do you think, for the year?

I think so. We're just real pleased with the results that we are seeing from that whole group. We are getting an awful lot of synergies in introducing that line of business to our ever-growing base of commercial customers. As you know, Todd is heading up that initiative. Do you want to speak to that?

I was just gonna say,you need to be a little bit careful because, usually January 1st is a big renewal day in the insurance industry. So the first quarter numbers may tend to jump around. January and July seem to be the hot dates. There maybe a little bit of fluctuation between quarters. There is a lot of positive trends. We're seeing a lot of synergy by having our insurance personnel housed in the same location as our lenders and the pipeline in that business also looks very strong as well.

In terms of -- how does the loan pipeline look at this point?

It's good. I mean, it's -- I won't tell you it is as strong as it has ever been. But, it is pretty respectable.

And it is improving. I mean if you look at December, January, and February. We're showing nice trends. And there is a lot of good stuff in the pipeline.

Is that mostly in commercial real estate area or is CNI getting stronger at this point?

It is mixed. It is about equal across the board, Wilson, on a percentage basis.. January, February were a little soft, March -- we started to see some pickup and it seems to continue in April.

Which is not atypical, a lot of first quarters that we have seen some seasonal factors on loan demand.

Just one more question and I'll hop off and give some other people a chance here. In terms of asset quality here, things look like they're pretty good for you right now.

They are very good right now. They are so good it is scary. Our 30-day delinquency numbers have been at historically-low numbers. Our non-performing numbers are as good as they've been ever for a long period of time. We have always had good asset quality. If you look back over the last five years, I think our worst year on net charge-offs was probably 35 basis points but we are seeing some numbers now that are just, you know, hard to imagine that they could continue forever but we are enjoying the moment.

So, given the current position of the watch list and the look of the delinquencies and so forth, do you think that you're comfortable with the reserve levels that you have now? And do you think that the charge-offs going forward are going to be in line with the first quarter?

It is hard to say. We had actually budgeted a little higher number this quarter than we ended up with. It's just hard to say.

Yes, we had some recovery that was a kind of a carryover.

It was helpful to us. And as soon as I estimate that they're going to be much betteror this is going to be a good run rate for us something will pop-up so I do not want to jinx this, Wilson. I do not really know. I would tell you that all the predictors are good. We are under what we had budgeted for this by a fairly sizable number.

Okay, great I will hop off here. And if you'll allow me, I'll get back in the queue later on. Thank you.

You're welcom.

Our next question is coming from Matt Schultheis, Ferris, Baker Watts.

Good afternoon gentlemen, how are you? It looked like your service charge revenue declined link quarter and year-over-year, moderately. And I am just wondering if you could comment on that?

Are you looking at total service other income?

Services charges and fees looks like it went from about 2.5 million in the fourth quarter to 2.2 million in the first quarter, if I'm reading this right. It was pretty close to flat from year prior. But it was down slightly.

That is primarily, one on a link quarter. You know that the fourth quarters are very high activity during the holiday season for NSF charges, ATM charges et cetera. (inaudible) maybe on a link quarter basis.

On the year-to-year, we are seeing rather significant reduction in the amount of hard dollar fees being paid by our commercial customers for account analysis. Primarily because we are giving them more credits as short-term interest rates go up. We get less hard dollar fees, but, on the other end, the balances of your demand deposits become much more valuable to you.

Are you seeing any slowdown in NSF charges year-over-year?

Not a lot, no. It was primarily account analysis where we're seeing the biggest change.

Okay.

We actually had a little bump up in our rate, I think on the NSF.

Link quarter, looks like your deposits were fairly stalled, mostly in your money market account. And, it looks like you took on a fair amount of short-term borrowings. Do you have any comment on that?

You're seeing a little bit of cannibalization from those money market accounts moving into our new Green Plan savings account. Just because of the interest-rate differential. I think you may be seeing folks pulling money out for other investment opportunities. Municipalities pulling out.

Also, there is some seasonality during first quarter's deposits. With that said, yes, it is a little bit flat on the link quarter but we are pretty positive about what we're seeing on a trend basis.

Okay. Obviously, the pick up in short-term borrowings is to make up the difference there in the deposit funding. Do you think with everybody, or with the big push into the money market -the Green Plan money market and the increase in the short-term borrowings that margin expansion is stopped or at least dampened?

Well, the theory is with an asset sensitive balance sheet you should benefit from the rising rate scenario.

Doesn't the move into short-term borrowings and this Green account kind of take away some of your asset sensitivity?

Yes and we do that just to ensure that we have appropriate liquidity for the loan growth that we are expecting. Liquidity costs you somewhat. And also, just the flatness of the yield curve somewhat mutes that benefit that you can expect in a rising rate scenario in an asset-sensitive organization. It is not as quite as clean as what the theory says. There is other factors that probably again mutes the benefit that you'd normally expect.

Models only work in models.

Not to do with the rate but we've been very conservative as Jim mentioned earlier on the type of leveraging activities within the securities. Now, it's not the time to do that.

Right. Just to reiterate two points that you discussed with Wilson. It looks like the total once-off charges for the expenses in the quarter were between 400 and 450,000 is that correct?

That is correct.

Pre-tax?

Yes.

Okay. Though asset quality is certainly superb right now, and there was a slight uptick in, I guess, your non-performers for the quarter. Are you seeing any pressure on coverage ratios on your manufacturing customers as things like fuel costs eat into their cash flow?

I'll let Todd or Jim answer

Good question. I do not think we've seen it, in our financial statements where there's any delinquency or non-performing numbers. If it persists, as we look at financials going forward, it could have an impact on some of our folks. I mean, it could be a fairly broad group in those types of industries that rely heavily on energy costs, fuel costs.

I'll let Todd give his response, but I don't think -- a lot of the stuff we're looking at is yearend statements of people renewing their lines of credit and those types of things. I have not noticed it being a major issue up to now, but it could be.

And, you know, just really conversely, it's had a positive affect on number of our customers that are actually in the energy industry. Fuel suppliers, oil and gas, coal manufacturers, oil and gas producers. And we have a fair amount of that business on our book. They're seeing positive upward trend in that area.

The other thing we have seen happen and this isn't just right now but obviously these fuel prices and energy costs can be cyclical. And a lot of the people that depend heavily on it, people in the trucking business and things of that nature, they typically have escalators built into their contracts so they are not impacted so dramatically by the major changes in the prices of gasoline or fuel oil or diesel, or whatever it happens to be.

All right, thank you for your time.

Our next question is from Andy Stapp with Cohen Brothers.

Most of my questions are already answered. Just have, I think, tow questions. One, I notice that there was about a 16% linked quarter decline inother non-interest expense. I am just curious what was going on there.

We had a $500,000 contribution to our charitable foundation in the fourth quarter of last year. That would probably be the biggest chunk.

There was a decline in the effective tax rate. I think from 30% fourth quarter to 20%. What would be a reasonable tax rate going forward?

Probably 30, Andy.

Okay.

Thank you.

Thank you.

And our next question is from Collyn Gilbert with Ryan Beck. Please state your question.

Can you spend a little bit of time talking about the initiatives on the retail side and de novo plans and the five branches that you spoke of in your opening comments, did they all get sort of redesigned or added this quarter, in the first quarter or what was the timing on that?

Last 12 months. We had about 3, probably in the first quarter. Over the last 12 months there has been 5 new branches.

Okay, just talk a little bit about the de novo plans, and the additional 15 hires and where that's coming and what is going on there?

Over the last year, the 5 that we had that you had mentioned, Collyn -- there were two net new branches, one in LaTrobe and one, a business financial center in Altoona.

Then, looking forward, we are actively looking for some sites in the northern Pittsburgh area, as well as in the city of Pittsburgh. Right now, we are just trying to determine where we want to be and when we want it to be. But there are plans to expand.

We have a really a strategy for specific areas around Pittsburgh that we would really like to be. We're having tremendous success in the Westmoreland County markets, and tremendous success in the Allegheny County markets. Certainly, both of those are where we're going to be focusing on for retail expansion.

We are also seeing the concept of that Bob mentioned earlier where you set up hub operations, and get folks from your retail and commercial lending, insurance, wealth management, cash management really working as a team starting to have some very ood effects on business generation. And the example that I would point to our operation in Altoona, Pennsylvania, which has far exceeded our original expectations. It rally comes down to not so much location, but getting the right people there. That the market respects them, they know them and getting the group to work as a team.

So, there have been, as far as the 15 increase in full-time equivalent, some of that has been retail-related, some of them as been commercial lending-related and some of that is been around some of the support areas such as credit administration and, also here in finance and audit we have some new hires as well just to comply with some of the additional requirements under Sarbanes-Oxley and the section 404.

Okay. In terms of when you mention expansion in Pittsburgh, is that coming - is the development there as good as you would hoped, or you know, how's competition in there now right now also with Fifth Third also de novoing in that market.

It has always been a very competitive market. Fifth Third adds another wrinkle. But, you know there are an awful lot of banks in Allegheny County or do business in Allegheny County. It comes down to a question of typically differentiating yourselves, and in our case, you know, a large part of our success has come from the ability to do that through the service levels and a lot of that has to do with your people, and how you deliver your services and products.

I would not tell you that Fifth Third isn't going to have an impact, or that Sky (ph) increasing their presence through their acquisitions hasn't had an impact, or any other competitor. But, we are relatively, from a market share perspective, there is still a lot of opportunity for banks like us whose primary market is a family-owned business as an entrepreneur -- the people that want to borrow from couple hundred thousand to 5 or $10 million. We are very good fit for them. We are very responsive.

We have not made any secret of how we've grown this business. It's not just price, a lot of it has to do with the way you deliver. A lot of our new business comes from referrals. It is the friends or acquaintances of our customers today. It is their attorneys, their accountants who see how we do things and the way we deliver the service. They appreciate it. That's what is working for us because it's not a growing (market out here in Western Pennsylvania. It is a matter of differentiating yourself primarily on the basis of service quality, being responsive to those customers, and doing things the way you would like to have been done if you are a customer.

Okay, good. And just some housekeeping follow-up, I know Bob you had said that those one-time expenses of 400 to 450. Do have a specific dollar amount tied to the loss that you had on the sale of that bank branch?

134,000.

And then, just quickly on the new headquarters building? What is the plan there? Is it close to your current location or how is that being developed?

Actually, Collyn, it's going to be right on the exact location We have vacated the building as of Friday the 15th. We are in the process of clearing the remaining equipment out of there. We should have construction contracts back from selected general contractors next Tuesday. And, we hope to begin demolition and construction in the first or second week of May.

It would be about a 60,000 square foot building in total consisting of four floors, three - the initial intent is to use three floors, leave one vacant for future expansion. We also have a redesigned branching operation on the first floor as well as the rest of the administrative offices.

Okay. What is the current square-footage of the location?

It's mid-20s. So you're more than doubling the space probably if you count the basement, probably virtually tripling it.

We had people stacked on top of each other in the space and we used about every inch of space. Jim, hitit right on the head last week in a radio interview that it was built 25 years ago when the size of our bank was $35 million in the assets. We are about 100 times bigger than that now. We're going to consolidate operations there that are spread out over four buildings currently. Get everybody under one roof and we think we should be able to generate a number of efficiencies under that arrangement.

OK. Thank you very much.

Thank you. [Operator Instructions] Our next question is from James Record with Moors & Cabot Inc.

Great quarter. Could you guys have some of the Green Account coming off of teaser rates and maybe you could quantify how that affected the margin?

Well, that happened in December. When we introduced in August - it was August. We added 50 basis points to what the overnight rate was then with the disclosure that that would end with the Fed meeting in December. So, we have not had any inducement since December.

Would have been mid-December we pulled back on that, James.

What was the dollar amount?

50 basis points.

And, now of the deposits that...?

240 million roughly.

140.

I 240, 40% in new money. Just a little bit north of 40% new money.

Okay, then most of my questions have been asked. Maybe you could touch on sort what you are seeing in terms of the M&A environment in Pittsburgh? We've seen a slowdown nationally and I know the market had something to do with that. Are you seeing any change in sort of the opportunities that are presented to you guys?

We have not seen any change. Obviously, that would be something we would welcome. We have not seen any change. You read different things, and you see different things. I think when you look at the multiples that people have been paying over the last 12 months or so, in our view, they got a little out of hand. So, maybe people are reconsidering that issue.

I also have seen, in the press recently, people like M&T saying it's time to get introspective here again and let's look at our own expenses and make sure we are getting all the efficiencies out of these transactions that we said we could get and those types of things so I do not know. The kind of things that we often think would inspire someone to come to the market, whether it's performance issues or the regulatory environment that we're in right now with all of the ancillary costs there and additional costs. I don't know if those things will really motivate people or not.

I was sitting at one of our roundtable meetings with a group of the staff here about a month or so ago, and there was a fellow in the group that had been - that worked for two banks that had been sold before he came here. And, he just asked a question about what our intentions were. He said, well, from my experience, banks don't get bought, they get sold. And, regardless of what the buyers think, and want to talk about, it is really the people are in a position to sell and typically, that's the Board of Directors, initially who have to come to that conclusion. For some reason, we've not seen any movement.

Okay. I appreciate that. That's all I have.

Did I tell you more than you wanted to hear?

No, that was very good. Thanks guys.

Our next question is from David Darst of FTN Midwest.

One more question. There's been some of these acquisitions - I know they're not all directly in your footprint and I know they're mostly retail franchises that have been involved. How are you creating any opportunities from those acquisitions?

I think you always see a little opportunity anytime anybody in or near your footprint gets acquired. Any type of disruption like that is helpful. There have probably been --we have seen some on the commercial side. Nothing...it's not driving our business or anything. But, it is helpful.

Did you have any loan payoffs that were notable this quarter?

We had a couple of larger construction deals that did pay off, David. That is kind of a normal occurrence. On a quarterly basis, you're always going to have two or three. When you look at the numbers, construction loan numbers, and how we have grown that portfolio over the last couple of years. (inaudible) we focused on, and some come in, and some go out throughout the course.

We like that business because, especially after you have a track record with some of these developers. Because it's -- you get decent fees with it, you typically it's variably priced stuff with decent pricing and the negative is that and I do not know if it is a negative or not, but you have to deal with the payoffs. They come more quickly than others. But from every other aspect, the pricing and the fees, it is darn good business, we've found.

And then with your bank stock portfolio, that's under 9th Street Holdings (ph)? Is that correct?

There's actually two subsidiaries. One's 9th Street Holdings, it's a subsidiary of the Bancorp and there's another one called S&T Bank Holdings, which is a subsidiary of S&T bank. The combination of those two is about $70 million in market value.

Do you have any sort of reinvestment policy from your cash flows that you -- selectively as you view the market, or do you have current, I guess, bank's true dollar costs are averaging into?

Our strategy is to reinvest proceeds as sales and dividends are received. Because it would be a very conservative type growth mode within those portfolios. Again, we see those as being supplements to our core banking. Revenue streams really a core business. We are very conservative in how we manage them

Meaning, you're consistently reinvesting, or do you allow cash levels to build up at different points throughout the cycle or where you view prices?

Right now, our philosophy is to not reinvest automatically, but reinvest as we see buying opportunities in selected stocks that we want. For example, you may see $5 to $6 million in cash in those companies at any given time, and right now I think it is substantially below that because we've seen some buying opportunities.

Okay, thank you.

Thanks. You are welcome David.

Our next question is from Wilson Smith of Boenning.

Just quickly here, Jim, in the past you've indicated that you felt comfortable holding your loan loss reserve as a percentage of loans at right around 1.5%. And, given the improving credit quality here or the present condition of the credit quality, and where charge-offs are and so forth, do you still think that you are going to be able to hold it there? Or, given that the current requirement and the way you have to look at it, is that can be coming down as a reflection of the high credit quality?

Yes, let me I think Bob wants to respond to that. The truth is that we because of the increased SECs scrutiny here too, we have recently, I think, as of the end of the year, revamped our methodology in terms of the loan loss reserves. So, we are operating with a different methodology than we used to and beyond that, I will let Bob talk about it, a little bit.

Yes

He was chomping at the bit, waving his hands over here, saying let me answer that.

No, no I noticed how he asked you direct. I don't think it's a different methodology but an enhanced methodology of what we had been doing. What that loan loss result reserve is reflective of is the credit quality of the overall portfolio. That doesn't change very much if you're doing your job.

Unless there is some dramatic changes within the portfolio, credit-wise, then you would probably expect to see the loan loss reserve (inaudible) loans at the comparable levels where they are now. Because changes in overall credit quality in the portfolio don't change that quickly.

With that said, there will be more variability in our provision expense to more closely reflect what we are doing with actual charge-offs and you saw a little bit of that this quarter on the reverse side where we had some fairly significant recoveries and modest charge-offs. Therefore, the provision expense was lower than what we had done historically in different times. That answer your question?

It helps, thank you. And, Jim, just as a kind of a summary here, I think I always ask this question. How's the local economy looking now? You are obviously looking to expand the branch network more around Pittsburgh, but more) globally in your market area where are you seeing the best conditions? Are there any areas or sectors that are weaker?

It has improved. I would not tell you that it has improved over the last quarter necessarily, but for the last four, five or six quarters, we have been seeing improvements in virtually every sector, particularly impressive, of course, had been manufacturing, which we have really many of our customers in that area had struggled going back three or four years. They have been in a difficult environment for quite awhile. That has been getting better. It continues to -- I wouldn't say continues to get better, but it continues to stay pretty good.

Unemployment levels here, too, have improved some, which is certainly a healthy sign. We are just feeling pretty good about things right now. But does it continue to improve, I would say it's kind of flattened out. I think it's probably greater likelihood of it going in the wrong direction than going up but it's not impossible.

Great, thank you.

You're welcome.

Gentlemen, there are no further questions at this time.

Okay, great. If there are no further questions, I would like to thank everyone for participating in today's conference call. Bob and Todd I appreciate the opportunity to discuss our financial results for the first quarter for S&T Bancorp, and we look forward to talking to you all soon. Thank you.

Thank you this concludes today's conference. Thank you all for your participation.