S&T Bancorp Inc (STBA) 2005 Q2 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the S&T Bancorp Incorporated Second Quarter 2005 Earnings Conference Call. At this time, all participants are in a listen-only mode and a brief question and answer session will follow the formal presentation. Webcast listeners can send questions by email to investor.relations@stbanc.net. [OPERATOR INSTRUCTIONS] As a remainder, this conference is being recorded. It is now my pleasure to turn the conference over to Mr. Robert E. Rout, Senior Executive Vice President and Chief Financial Officer of S&T Bancorp Incorporated. Thank you. You may begin.

Good afternoon, everyone. Thank you for participating in our conference call. Before beginning this 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 Webcast 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 second quarter earnings release can be obtained at our Investor Relations Website at www.stbancorp.com.

In addition, a set of financial highlights slide is included with this Webcast that supports what we are about to discuss. We do not plan to review the slides in detail, but would be more than happy to respond to any questions concerning 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 results during the second quarter.

Thank you Bob, and let me add my welcome to everyone. Once again, it is a pleasure to be with you today and to update you on what's been happening with S&T both from a financial performance and a strategic perspective. As you can see from the earnings release, earnings performance was solid this second quarter. Net income and earnings per share comparing second quarter 2005 to the same period in 2004 are up $1.9 million, and $0.07 per share respectively. It represents about a 14% increase over last year. ROA and ROE were a little over 2% ROA and 17.9% ROE, similar performance evident for the year-to-date numbers. The number of items to note when comparing year-to-date 2005 to the same period last year, loan deposit growth continues to be the largest factor in our earnings growth. In the last 12 months, we increased our loans $142 million, deposits increased by $232 million, resulting in a $3.1 million or 6% increase in our net interest income. The net interest margin also continues to expand modestly.

Commercial lending remains on the leading edge of our growth, increasing a $155 million over the last 12 months. The expanding commercial base has also been a wonderful referral source for other lines of business such as our retail wealth management and insurance. Referral process has not been all one way. Number of our commercial loan relationships started out in one of those other lines of business initially. Consumer lending growth has been a little more challenging for us, but despite the thinner yields and intense competition, we still like the business because of the fees it generates and because of the customer relationships that they also develop. Although deposit generation is always a challenge that new Green plan accounts that was introduced less than a year ago has been especially successful for us. We've seen some cannibalization of our money market balances as expected. The majority of the products, $295 million growth has been new money.

Credit quality continues to be exceptionally good. None of us around the table here can remember the time when it has been this good for so long and for such a broad spectrum as the industry but we are not under any illusions about this. We are expected to be the status quo going forward, and obviously the economic environment plays a significant role in asset quality. But for now, it is a refreshingly calm period that we seem to be enjoying. We are pleased with the growth in our key areas. We think the 1.6 million or 11% increase in service revenues is indicative that many of our relationship banking initiatives continue to bear fruit. Security gains from our equity portfolios are less than last year. Our objective has been to continue to de-emphasize the equity portfolio as part of our future earnings stream. It has treated us well over the years that we believe that capital can be better deployed in the core banking activities, whenever those opportunities present themselves.

And the operating expense levels continue to do very well, even with some extra cost associated this year with new branches and facility. As mentioned in recent conference calls, we have discontinued the practice of providing specific earnings guidance each quarter and with that in mind, Bob and I along with Todd Rice, S&T's present Chief Operating Officer would be happy to entertain any specific questions about our past performance and the future outlook for our business in general. And we'll open so that if you could just start.

(OPERATOR INSTRUCTIONS) Wilson Smith, Boenning & Scattergood.

Nice quarter. Given that the loan growth was really nice this quarter, it seems like the second quarter of every year is a good quarter for you guys. Was there any concentration either by business line or geography this quarter?

Not really. It was pretty diverse, Wilson, on the commercial side and it was spread very evenly between our construction lines and our real estate lines and then really we had a nice increase in our C&I prices and that represents I think about $46 to $47 million in that growth.

And how does the backlog look at this point?

It has been pretty steady. We see that our pipeline picked up a little bit (indiscernible).

Do you think that you are going to be able to maintain at this pace of growth throughout the rest of the year?

I'm going to let Andy answer that question but what happens in our business, and the reason is difficult to predict sometimes, is that we do a fair amount of construction type lending, and so we might be in some of these mini firms or a short period of time and sometimes when the market conditions are favorable at the wholesale market, it is a good time for some of those customers to take those credits out to the wholesale markets and get off the guarantees and lock up a long-term fixed rate. So, I think to the extent you see long-term rates rising, we might see more of that activity. So, it is just difficult to predict.

I noticed that this quarter you increased your reserve for unfunded commitments. Is that a result of expectations regarding the unfunded commitments, or is that more a function of growth in unfunded commitments?

It's more a function of getting our accounting in line with best practices. As you know, there has been a lot of tension, a lot of controversy and discussion on that issue. We decided now was the time to do it, did account for about four basis point decline in our loan loss reserve to total loans ratio. Actually, it was less than $1 million, and we just figured it was time to do it, before it does become significant.

Okay, it was interesting, I mean you have been holding your reserves pretty close to that 147 to 150 range for a while, and I think that Jim you had indicated that you were very comfortable with that 150 level, now that's coming down here, I guess it was at 140, 1.4 this quarter. Can you give us a little color, a little feeling --?

Sure, yes, I mean the truth is that the current methodology -- there is two things going on, the current methodology that we are using, is a more robust model, I guess than we have used in the past, and you are probably going to see bigger swings in both directions because of that, and secondly we are just in an awfully good time, the net charge offs for the year are under $300,000. Our non-performing numbers, our chargeoff numbers typically have been in the past probably four, five years at the 0.25 to 0.3 level. So, we don't have the luxury, if that's the right word, just budgeting our numbers and plugging them in there because of the new methodology for calculating the loan loss reserve. So, it was just helpful to us this quarter, helped with the earnings this quarter because of those factors. We had a couple of nice surprises, we had some recovery on some credits that had been previously charged off, and also we had, there was one account particularly; there was a specific reserve. We had some new valuations coming in with respect to collateral, there was some cash from life insurance and the real estate, and those were numbers that come in a little bit higher than what we had previously recognized. So, we had to actually reduce the reserve related to that particular account. A couple of -- several different factors that go into that model that we use, and they all have -- you know, it's a positive impact, the reserves this quarter. As a result you are seeing the results, us having to lower them a little bit.

Great, one last question, and then I will let some other people get in. How does the competitive environment look both from a rate and a structure perspective, and who do you see the most out there in terms of the competition?

Well, I'd say the competitive structure hasn't changed much. I think it's still very competitive, I think there are an awful lot of people in bank's, positions are here in Western Pennsylvania that are looking to put good assets on their books. So, I think the competitive environment probably for the last 12, 18, 24 months hasn't changed a lot, it has stopped. In terms of who do we see, it's the same people that we have been seeing in this market for the last couple of years. You know there are a couple obviously, (indiscernible) Pittsburgh, so you may bump into them occasionally where you didn't the couple of years ago, but beyond that it is Sky, First Commonwealth, (indiscernible), Dollar, PNC, and Business occasionally and they have the same characters.

Terrific. Thank you very much. I will pop back into the queue if the rest of my questions are --

Rick will stay as long as you like.

Andy Stapp, Cohen Brothers.

Hi guys, great quarter.

Thank you.

Thanks Andy.

Most of my questions and I got at least some questions for Rick, so let me be real quick here. Anything driving the strong rebound and service charges other than just -- just the general lumpiness there in seasonality, no price changes, for example?

I don't think price changes -- on the wealth management and insurance side, we are just seeing very good production.

Okay, and I'll ask my next question -- there's just no large state settlements?

No. It's just been getting some good business and quite honestly, our performance has been very good against all our benchmarks and against peers. So, that's very helpful to us and we take every opportunity to communicate that, so that we can -- no, it's just been getting a lot of looks at new business and the good fact that this relationship banking (ph) strategy we have talked about for a long time. It seems to be working pretty well.

Good. What about the other non-interest income, or any one-timers in that category?

Well, you always have fluctuations in there related to the mortgage banking, and the valuations on the servicing rates. One-timers, we had about $130,000 in recoveries on some OREO properties that we disposed off. It wasn't one property, it was a couple of different properties. We have also started to initiate programs going commercial lending swaps, which is generating some of that revenue, as well.

Okay, and last question, just curious what was driving the decline in mid-quarter compensation expense?

There is a couple of different pieces in there. Earlier this year, we did some major renovations on our medical plan and that's finally starting have a positive benefit. We also had a third compensation plan, and it gets mark-to-market and then that causes some fluctuations that went -- little bit positive to us this year. But, the biggest factor would be the deferral of loan origination cost under FAS 91 as our loan volume went up here in the second quarter. So, this is deferral of those costs.

Okay. That's all I had.

Thank you.

Matthew Schultheis, Ferris Baker Watts.

Hi gentlemen, how are you?

Hello Matt.

Actually my question -- my original question had been answered, but since you brought it up, how was the MSR this quarter?

I am sorry, you have to repeat the question.

How was the MSR this quarter, mortgage servicing rates?

We were able to pick up -- recover some of the previously charged down in prior quarter with the long-term rates moving (ph) up. And the mortgage servicing rates are probably valued pretty close to the bottom line at this point, 1%.

Okay. And actually my other questions have been answered. So, thank you very much.

Sure.

Thanks Matt.

Thanks Matt.

Steve Marsh (ph), Janney Montgomery Scott.

Good afternoon, nice quarter.

Hi Steve, thank you.

Question with regard to your asset sensitive position you have had in the past, are you still asset sensitive today as you were six or nine months ago, and what are your expectations for the net interest margin going forward?

We have our asset person sitting here, and I would say, there hasn't been much change from prior quarters on our asset sensitivity. We've still an awful lot of those new commercial loans coming in are still prime based and LIBOR based adding on to the balances, and the Green Plan has helped that asset sensitivity somewhat, but at this point, we're still within policy, but still slightly asset sensitive.

And also with regard to your securities gains for the quarter, were they mostly from bank stocks or other securities?

I believe it's mostly bank stocks.

Collyn Gilbert, Ryan Beck.

If you look out in terms of growth opportunities, where do you see the sort of the greatest opportunity there, whether it be from a geographic standpoint or business line standpoint, is there anything that's giving you all particularly excited?

Yes. The both -- I think, right now, we haven't had -- we haven't done much. We have been pretty quiet on the M&A side, as you know, because of the valuations there. So, we've sort of undertaken more of a de novo approach, and we've got a few new offices on line, as we moved some offices, we've consolidated some offices, and we've got a couple other sites that we are looking hard at right now. So, we're sort in that mode. We've always focused here in a market that's fairly compact and tight here in Western Pennsylvania in terms of the geography where we actually have offices. But one of the things we've done is that as we develop relationships with, and these are typically family-owned businesses, as we've said in the past, they're entrepreneurs, we tend to get additional work that others -- people in similar businesses or affiliated companies, in some cases they will, we have folks that are successful, let's say, developing real estate in this market. They may see opportunities in other markets. We follow them as long as we, the people and customers we've had for a while to additional -- outside of Western Pennsylvania to Arizona or Florida, we have done things of that nature. So, I think our focus is, in terms of where we put offices or where we install a home, is always going to be here in this Western Pennsylvania. We're going to grow the geography in a way that makes sense in terms of contiguous counties. We're not going to see us jumping over into Central Pennsylvania, Eastern Pennsylvania is doing acquisition, we're going to put offices in there probably. We want to continue to consolidate those commercial loan relationships through our being the leader of a lot of our new businesses we've mentioned before, and we will follow those customers and do everything we can to be that relationship vendor for them. That has also led to opportunities for their investor management. What management business, management planning, those types of activities as well as trust activities plus the insurance side has been very surprisingly good. We did one small acquisition since we bought the agency almost three years ago, the Evergreen agency, and they contributed a couple of $100,000 to the revenue this quarter. But that is about $1.7 million shop when we bought it. You know we could see that agency double in revenue in two years with some small piece of that coming from this acquisition. So we have been able to get (indiscernible) at business from many of those same customers and that's the strategy we want to continue. Focus on this market, focus on those family owned businesses and entrepreneurs in this market, be responsive to them, build our processes to suit them, make sure that we have leading edge abilities in terms of cash management services, and those types of activities, so we can gather in the deposits and then do such a good job of taking care of those customers that they are willing to give us a look at some of their other deep based businesses and that's what has been working for us, and we are still a relatively small player when you look at Pittsburgh (ph) market, but usually when we got a hold of a good commercial customer down there, we tend to hang on to them, and often get business referred to us by them.

Is there anything in the market or trends that you are seeing that would shift your sort of what has been kind of mid to high-single digit growth rates to kind of extending the double-digit growth rates. Do you feel any accelerated growth opportunities or is that more of the same?

I think we are comfortable saying more of the same, and the reason is it's a question of how you -- the ability to manage the growth. And you know, sometimes I think folks -- we had that in lot more customers where when they have $1 million in sales, and make a couple of $100,000 and they got a 10 million, they lose the 100,000. I guess it's important that you manage your growth in a way that you are comfortable creating and nurturing the culture that you want in the service levels. We've always taken it kind of slow and steady.

You will see specific business areas of the bank that will achieve double-digit. We are seeing that now with out wealth management and our insurance. Overall, as you said, it's going to be more the same until there is (indiscernible) start becoming a larger contributor throughout overall revenue streams.

And then finally, do you any of you all care to comment on the activity in your stock price as of late?

We looked (indiscernible) any comments from market values, your earning stream differently at different times. The best way we can control it is by making sure we are putting earnings per share increases on each subsequent period.

Wilson Smith, Boenning & Scattergood Inc. CFA.

Just a couple of quick follow-ups if I could. You had some comments about the insurance business and the first quarter was really quite strong and the second quarter here, I believe a bit slowed down a little bit. Was this kind of seasonal change for you or -- can you give a little color on that?

Yes, Wilson. I was looking at that. Somebody else had e-mailed me some questions. But the first quarter was exceptionally strong. Also included in those numbers were some revenue sources from our credit, our title insurance both on the retail and the commercial side that we weren't able to repeat this year. But we are not entirely optimistic on that line of business.

So, I guess we probably got insurance all along together. I was really referring to that property and casualty agency that we bought in 2002, closed in August, so it is simply 3 years. (indiscernible) that's the specific piece I was referring to.

That was the way I took it as well. What percentage of the insurance line would be the Evergreen Company?

They were probably about 1.9 year-to-date.

Well, if you look on our schedule, Title insurance for the quarter was 2.8. 1.9 was the Evergreen.

I think that 1.9 was about maybe $650,000 over prior-year period. So, we've seen a nice increase. I think the new business goal for the year was about 85% of that already through the first six months and probably 60% of that business is bank referred business over to the agency. We are just real pleased. We know our whole process is working. And another thing, in that industry, one of the key indicators is what they call the 'close the book,' and I think in the last couple of months we've had right around the 60% number, where the industry as you know, averages remain in the 35, high 30%. So, roughly we get a high level of referral (indiscernible).

Excellent. And I am not sure if Andy covered this in his question, but I missed it if he did. In terms of service charges, you had a really nice rebound in the second quarter, and I think that we talked about in the first quarter that some of that decline was due to the higher earnings credit rate for your commercial customers. Can you give us a little color on the outlook for the service charges at this point and whether or not you are still being kind of overly impacted by those increases beyond its credit rate?

We are certainly being impacted. When we look at our account analysis year-over-year, it is definitely down. But at the same time we are seeing, we saw some very nice increases in our NSF fees, this quarter as compared to last quarter and last year. There have been increases in our ATM as we get newer, and more and better ATM site locations, but you also have to consider Wilson that there are -- there is another extra day or two in the second quarter as compared to the first quarter. So, that has a little bit of an influence as well. But primarily driving the increase was the increase in NSF fees on linked quarter basis.

What is your bounced check charge now?

I have to look it up, 32 is what comes to mind.

When you clear a check, clear them as they are presented or do you do from high to low or?

I think it is a modified high to low. Well, we take our checks out first and then we go from high to low.

Gentlemen, we appear to have no further questions at this time. Would you like to make any closing statements.

Yes, there were a couple of questions that were e-mailed to me that I would maybe just take a minute to go over most of it. We have covered most of it. The first question was the increase in our linked quarter non-interest income, where you talked about the NSF fees, we talked about the increase in wealth management, insurance somewhat flat and also the mortgage banking on a linked quarter basis, but also included in there, again we had to gain on the (indiscernible), the commercial loan swaps and we are seeing some very nice steady increases in our debit and credit card transaction income on a linked quarter basis year-to-year. And the other question I had was what about the increase in non-interest expense on our linked quarter, which is about $600,000. If you recall, during the first quarter this year, we had several charges related to facilities where we had implemented some new leasehold depreciations, we had abandoned the building, and wrote off some equipment. We had donated another one, and that accounts for the biggest piece of that -- this increase. And we already answered the question about where we thought the loan loss reserve is going to end up.

Great. If nothing else, we appreciate your participation in our conference call today, and Bob and Todd and I look forward to these opportunities to discuss our financial results for S&T for the second quarter 2005. Thanks very much. We will talk to you all soon.

Ladies and gentlemen, thank you very much for your participation in today's audio conference. You may all disconnect your lines at this time, and have a wonderful day. Thank you.