S&T Bancorp Inc (STBA) 2005 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the S&T Bancorp third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded. I would like 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 now begin.

Good afternoon, everyone, and thank you for participating in our conference call. Before beginning the presentation, I wanted to take time to refer you to our statement about forward-looking statements and risk factors on the second slide of our webcast presentation. The statement provides the required cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included with our presentation. Listeners are also reminded that a copy of the third-quarter earnings release can be obtained at our Investor Relations website at www.stbancorp.com.

As usual, we have also provided a set of financial highlights slides which is included with the webcast that supports what we are about to discuss here today. We do not plan to review the slides in detail, but we 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 third quarter.

Thank you, Bob. And I'd also would like to add my welcome to everyone. It's a pleasure once again to be with you and to update you on what has been happening with S&T from both the financial performance as well as strategic perspective.

As you can see from the earnings release, earnings performance was solid in the third quarter of 2005, primarily due to progress made in our core revenue areas of interest income and noninterest income. Net income and earnings per share comparing third-quarter 2005 to third-quarter 2004 are up $1.1 million and $0.04 respectively which represents an 8% increase over last year. ROA and ROE were 1.84% and 16.22% respectively. Similar performance is evident for the year-to-date numbers with net income in earnings per share increasing 10% and 9% respectively.

There are a number items to note when comparing year-to-date 2005 to the same period last year. One, the deposit growth continues to be the most important factors in our earnings growth. The last 12 months, loans increased $118 million and deposits increased by 227 million, resulting in a 4.4 million or 5% increase in our net interest income. The net interest margin rate continues to be relatively stable despite rising short-term interest rates. Commercial lending continues to be the principal driver of our growth, increasing 110 million over the last 12 months. Past quarter's growth was a little more modest than we've experienced in recent quarters, primarily as a result of significant levels of payoff as some of our commercial real estate mini firms took advantage of good rates in the secondary markets, as well as the opportunity for the guarantors to go nonrecourse. Our pipeline for new loans still appears to be fairly strong.

Our Green Plan account which has been offered for a little over a year continues to contribute significantly to our deposit growth. The majority of the products, roughly $400 million growth has been new monies acquired from other financial institutions. Additional benefit of the product is it complements our asset-sensitive balance sheet and balanced portfolio of variable rate loans since it is indexed as you may recall to the Fed Funds target rate. Credit quality continues to be good. Net loan chargeoffs of $700,000 or 0.04% of average loans for the first nine months of 2005 are lower than the same period last year although we recorded a provision expense of $3 million as compared to $1.5 million in the third quarter of 2004, the provisions for loan losses for the first nine months was $1.4 million lower than the same period last year.

We are particularly pleased with the growth in noninterest revenue this year. If you take out the investment security gains, the security of our business grew $2.9 million or 14% during the first nine months compared to the same period in 2004. Primary drivers were increased activities in wealth management, insurance, letters of credit, and our debit and credit cards. Security gains from our equity portfolio are less than last year's, due to limited market opportunities during the current year. This has been and will continue to be our strategy to slowly de-emphasize equity security gains as a major component of our earnings streak. Noninterest expense increased 4% during the first nine months compared to the same period in 2004, due to adding new branches and expanding facilities. But net interest -- noninterest expense did benefit this quarter from several unusual items that included a reduction in our reserves for unfunded commitments, settlement of a small lawsuit in one of our historical rehab credits, our limited partnerships, and refunds on some previously paid Pennsylvania sales tax. Deficiency ratio remains steady at 42% for the first nine months compared to 43% for the same period last year.

As we've discussed 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 Brice, S&T's President and Chief Operating Officer will be very happy to entertain any specific questions about our past performance and the future outlook for our business in general. With that we will take questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Steve Moss with Janney Montgomery Scott.

Yes, good afternoon.

Hi, Steve.

I was wondering -- I think I just missed that with the loan reserve increase for the quarter, give some color as to why it went up to 150 basis points.

We had a provision expense of $3 million this quarter, was the primary reason and loan growth was a little less robust than some recent quarters, primarily due to payoffs and the combination moved us up to 150.

Was there any reason in particular for the large provision of -- versus previous quarters it looks much higher if it pans out.

I think you're -- I think we've talked about the idea of -- you are going to have some lumpiness. And we mentioned in the news release that it was related -- or in the news release it was related primarily to one -- a single credit.

Okay. And how does the loan pipeline look going forward?

Pretty good. It is still fairly healthy. We see a lot of activity, a lot of new business coming in the door.

Okay, great, thank you.

Our next question comes from Wilson Smith with Boenning.

Good afternoon gentlemen.

Hi, Wilson.

Hi, Wilson.

Could you give us a little bit of color on the increase in the nonperformers in the quarter? How many loans they were? Where they were geographically, sector break down, anything like that?

Yes, it was -- primarily, one, it's a -- was one fairly significant one that moved into nonperforming. We did have a fair amount of interest in it -- in the collateral that we have for that loan so -- I'm sorry. It's not specific reserve this time.

Right. Yes, there is no specific reserve scheduled for liquidation later in the quarter, and as Jim indicated we have a lot of activity, and we are expecting really no loss in that particular credit.

Is it primarily real estate there in back loan?

Yes.

And how does the watch list look at this point?

The watch list -- yes, I think we've probably reached the -- either the bottom or the high point of the credit cycle depending on how you want to look at it. With interest rates starting to move up, I think you are going to see, you know while our delinquency numbers, our net chargeoffs, nonperforming numbers are still very good against historical standards. We are starting to see a few more credits come on the watch list. I think that's probably going to be what you are going to see as the -- as rates move up.

As you say it is pretty tough at this point to expect things to get any better.

Well, that's it, I mean, that's the truth of it -- I think we've -- I think we've peaked in terms of asset quality. We were looking at our 30 -- at our 30-day delinquency numbers at our Board meeting on Monday and reviewing the last 12 months, and it has like been under 1% for the whole year, and I am reminding our Board that we used to look at 1.5% and say we were doing great. So you see these numbers at 0.6 and 0.8 for your 30-day delinquency. I can't imagine it staying there or -- with anybody or getting -- certainly getting any better. I think we've sort of peaked for asset quality. But having said that, we still feel very good about our portfolio.

And generally speaking, how is the -- how is your local economy holding up out there and we have been hearing some people talk about some fallout from these higher gas prices and so forth. Are you seeing anything with that out there?

I think we are still largely a beneficiary of that in our core markets here because we have a lot of energy-related activities, coal business, oil and gas business, that type of thing, so I am sure it is probably affecting the retail people more, and that could eventually effect some of the commercial real estate projects where we rely on the tenants that are there. But for the moment, I don't think we are seeing any significant impact from higher gas prices in this market that's negative.

Not yet. I mean you hear some anecdotal stories from people that their -- the price increases are being passed along now down to the retail level. We were in a meeting this morning with some customers, and they are starting to experience some supply chain issues, with I think -- they are in the construction business, and they are having a hard time starting to get materials, a lot of it is driven by the hurricane activity down in the South. So I think you are going to start to see some things creep up a little bit. But right now, Wilson, everything is still fairly strong.

One last question, and then I will let some other people get in. In terms of pricing and loan structure, what are you seeing out there, and is it getting tighter and are you seeing people coming in to -- trying to get the business by reducing structure?

I think we've probably seen some of that over the past, 12 to 18 months, maybe longer. As rates were falling and the yield curve was flattening I think people were probably working harder to put good loans on their books. And because of the differential that those rates provide to you over your alternatives. We've been in a very good position from that respect because our loan to deposit ratio has been and continues to be in excess of 100%, and so we -- I won't tell you we've never skinnied up a deal to keep a good customer because I am sure we have. Competitively we try and do what's necessary to hang on to those people that we have good, strong, long relationships with, if we're faced with that, but I don't think it has gotten any worse in the recent days and months.

No. I think what we saw this quarter, though, the ten-year treasuries came down to a level and a lot of the secondary markets skinnied up their spreads pretty significantly so it caused some people to take advantage of the market environment and prefinance some of our construction projects that we had in the pipeline. That was maybe 15 to 20 million. Then we had a couple of other occurrences that happened. We had a company that was sold. That was another pretty significant chunk. That was about a $15 million payoff, the nice thing we were able to capture back on the wealth management side about 7 or $8 million in wealth management accounts from the funds that the principles received. And then we had another real estate developer that sold us a portfolio of about $15 million and they all occurred probably within a two to three-week window. So we had some work to do to keep the volume growing, but I think overall, the pipelines are still fairly strong for where we are projection wise.

In our case to, Wilson, just to elaborate a little further on that question, I think it's impacting us more from a pricing perspective than it also a from a structure perspective. I don't think we've reached or compromised in terms of any of your normal terms or conditions. It normally impacted us more on pricing.

Very good. Thank you.

You are welcome.

Our next question is from David Darst with FTN.

Good afternoon.

Hi, David.

It looks like your funding cost increased at a little bit faster rate this quarter than they have over the past four quarters. Can you -- I know your Green Plan is tight but did you run any type of CD campaign?

Yes, we did, and that's part of what increased that cost. Just within the last probably six weeks, we had a very successful CD promotion. Just to try to -- try to have some diversity within our deposit mix rather than just all Green Plan. That has worked very well. The fact that short-term rates have increased gets customers watching their nonearning balances and their DDA accounts and some of their lower yielding money markets a little closer. And we probably have had a little bit of shifting of funds from our lower costs to money markets into the Green Plan accounts which provided a little bit of squeeze here in the third quarter, but we think it is the right thing to do for the long-term perspective.

From the asset side, David, even though you haven't asked, I will provide the information anyhow, we had an awful lot of liquidity come into us with these paydowns and also the increase in deposits and weren't able to probably deploy those funds as quickly as we would have liked either paying down long-term debt or putting it into loans. So that had a little bit of detrimental effect on the asset side of that net interest margin calculation. And then probably 3 or 4 basis points on the linked quarter declined and that net interest margin rate is related to higher delinquent interest. And also in the second quarter of this year compared to the third quarter, we had some fairly significant prepayment penalties and some other loan fees that we weren't able to duplicate here in the third quarter. So when we look at it, it looked like our core rates without fees and delinquent interest was down about 2 basis points on a linked quarter basis.

Okay. Thank you. One more question. You announced an initiative in your wealth management group this quarter as far as starting your own mutual fund family. Can you comment on any initial reactions or success that you anticipate?

Well, we are still in the infancy stages of that. I mean, we are still working with some attorneys just to prepare the proper documentation to get the fund up and running. We just did the filing but we wanted to take a very cautious approach. I mean, we have had some calls on what we are doing and people want us to get us listed on some National -- get some National exposure for it, but we are not ready to roll anything out yet and that's probably going to be, probably second quarter of next year before we do anything on that.

Okay.

Too soon to tell.

Okay. Thank you.

Thank you.

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

Good afternoon gentlemen.

Yes, we know Schultheis, because we have Schultheises here in this market, Matt.

Well, we are everywhere. I'm just wondering if you guys could quantify the unusual expense item? The settlement of the lawsuit, the reverse of the letter of credit reserve, and the tax refund?

Yes. The -- we have several historical rehabilitation tax credit deals that we have done with customers from time to time. And when there is a change in the partnership interest, whether it is through depreciation or some other type of revenue streams, they issue a K1, and it is usually a minimal amount, because down, it's adjusted through our other operating expense. In this particular case, the developer had a lawsuit going on I guess with one of the contractors, and was able to settle it, and we were able to also share in those proceeds. That was about 400,000.

Okay.

The other item within there, Matt, is the reserve or unfunded commitments. For the term loans that we have our commitments out there. That had a downward adjustment of about $200,000.

Was that related to what you did in the second quarter?

We split up from the provision -- or from the loan loss reserve to a separate category called reserve for unfunded.

Right.

As it has become more significant. And we had a downward adjustments on that reserve.

That ties back in to some of those construction payoffs that we experienced.

Okay.

Yes.

We also had a [INAUDIBLE] and take a look at some of our Pennsylvania sales and use tax, and we are able to successfully petition the Tax Board on some gray areas with Pennsylvania sales tax law dealing with data processing equipment, software, and other banking-type equipment.

Okay.

And we were successful in that and that was another 100,000 that got credited to that other expenses.

Okay.

And -- am I giving you more information than you want to know.

If you have more, I will take it.

Also in the third quarter, we have about 20 different low-income housing tax credit projects that we do which we, again, our limited partnership receives our K-1s and as part of our tax return filing exercise here in the third quarter we end up trueing up those K-1s to what our estimates had been for the year and those provided about $200,000 in benefits along with some other intangible adjustments. That was the benefit that we received in other expense.

Okay. I'm actually I am not a tax attorney. With the start of your proprietary funds, is there any cost that has to go into that? Or any significant cost?

Yes, we have already recognized the cost doing that process. The first step of that of course is establishing a registered investment advisory.

Right.

And we have done that. We have recognized all the legal costs and set-up costs associated with that, and right now that company is going to be running with pretty much existing personnel that we have within this corporation.

Okay. Do you guys have common trust funds now that you are going to put in there, or is this going to become starting from scratch really?

Well, one of the advantages of becoming a registered investment advisor is that we can start publicizing some of the results within the funds that we do run, these common funds. I don't know if common funds is the proper term.

We don't call them common funds right now.

Okay.

We have -- our Chief Investment Officer and some of our other investment officers have a portfolio that they manage but we don't have any common funding.

Okay.

That would mean to move some of that business over into the fund.

We will make it available even, maybe in our 401(k) plan or something like that as an option -- as an investment option.

Okay. Well, I guess that is it for me. Thank you very much.

You are welcome, Matt.

Our next question is from James Record from Moors and Cabot.

Hey, good afternoon guys.

Hi, James.

I think -- most of my questions have been answered. I guess, on the Green Plan, it looks like you had a huge increase in those deposits this quarter in particular, and are there any teaser rates on that right now, or?

No, it's -- it's right where it is -- it is what it is.

Okay.

I think we are, what, 3.75 -- if I was to guess, it's about 80 million this quarter.

Yes.

I think it is just a bunch of people managing things more closely, and, looking at their deeds and if you've got a money market. The minimum is 25,000 on it. So -- and then we have -- sometimes you will have some municipalities or school districts or even individuals that are wealthy individuals that may park some money in it for short periods of time and the school district are pretty big in that growth.

Okay. Bob, can you give any color sort of on your expectation there. I know the rate environment is a little bit uncertain, but your expectations for the margin in the next couple of quarters?

You know this flat yield curve always makes that tough, James.

Yes, for me too.

Yes. We continue to be asset-sensitive which theoretically tells you that you should benefit from a rising short-term interest rate. But with the flat yield curve or even the talk of an inverted yield curve, all bets are off at that point. Our forecast is projecting rate-wise more of the same short-term interest rates, continued flattening of the curve and that's how we are conducting our strategies. We don't perceive any major swings one way or the other at this point.

Okay. And then just doing the math on your repurchase activity, it looks like very little in the third quarter. Can you sort of discuss your posture on doing repurchases?

Yes, as you know the stock started out the third quarter very high. A lot of activity in it. With our stock repurchase program, we don't want to be the ones pushing the price up. So we see it hitting certain levels. We have some guidelines that we use when we want to get in, and when we don't, but with this, the price levels that we are seeing and the multiples as compared to what was happening with some of the rest of the sector, we weren't very active here in the third quarter.

Okay. Thanks, guys.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question is from Brett Gemsky with Ryan Beck.

Hi, guys. Most of my questions are answered. But one more, I was just wondering if you could talk a little bit more about the Green Plan and if you have any limits on how big you want to grow this?

That's a good question. We've talked about that ourselves a little bit. I would tell that you we are not anywhere near the limit yet, but that -- it's not something that is completely off our radar screen either. The way we look at it, we have been able to swap out some debt for deposits. And give our depositors the benefit of those good rates right now rather than paying it to Wall Street or somewhere. So it has worked very well for us and it's the first time in many years that our deposit growth has outstripped our loan growth. If he hadn't done that or something like that, in all likelihood we would be -- we would be getting questions about liquidity. So we think the Green Plan makes sense for us, and we also recognize that it has probably dampened our margins a little bit but we sort of view that as buying insurance, casting a little thread on the water, if that's the right word.

Those rates will catch up with everybody eventually, and I think by -- by putting it out there early on, it's given us the opportunity to capture some new -- some new market share, and so it has worked very well even though we recognize that there's a cost associated with it. We are not uncomfortable with the levels we are at today or we can go a fair amount higher than that. If the day comes when we -- when we have gotten our fill of it, let's say, and it is not impossible that that would happen, we would probably just not make the product available to customers in the future but grandfather those that are in it for now and then talk about some other options. But we are not anywhere near that point just yet.

Okay. Great. Could you also talk a little bit to your loan composition for the quarter?

Yes. The -- that's part of the slide show presentation that's on our website. We usually delineate the activity in that loan portfolio, comparing year-to-date and prior year and -- I guess maybe I have to ask you a question. I mean, the growth has predominantly come from our commercial end, that growth in commercial has been a fairly good mix between construction, real estate, and C&I-type lending. We have, however, done some things on the consumer side, changing the way we promote and originate those loans, and thus far, there has been some promise shown by those new initiatives as demonstrated with some growth within our home equity loans this past quarter.

Okay. Thank you very much. No further questions.

Gentlemen, there are no further questions in queue at this time.

Well, very good. Then thank you for your participation in today's conference call. Bob, Todd, and I appreciate the opportunity to discuss the financial results of S&T for the third-quarter of 2005, and good day.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.