S&T Bancorp Inc (STBA) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for holding. Welcome to the S&T Bancorp, Inc. fourth quarter financial results conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Robert E. Rout, Executive Vice President and Chief Financial Officer of S&T Bancorp.

Good afternoon, everyone, and thank you for participating in the 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 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 the presentation. Listeners are also reminded that a copy of our fourth quarter’s earnings release can be obtained at our investor relations Website at www.stbancorp.com. In addition, a set of financial highlights slides is included with the Webcast that support 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’d like to introduce Jim Miller, S&T’s Chairman and Chief Executive Officer, who is going to provide an overview of S&T Bancorp’s results during the fourth quarter.

Thank you, Bob, and welcome, everyone. It’s a pleasure once again to be with you today to update you on what’s been happening with S&T Bank, ultimately financial performance as well as a strategic perspective.

As you can see from the earnings release, performance was solid in the fourth quarter and for the year ended December 31, 2005. We’re quite pleased with the progress in our core banking areas and, in particular, how the various areas of the Bank are coordinating and implementing our relationship banking strategy. While net income and earnings per share for the quarter were about even with the fourth quarter of 2004, both net income and earnings per share increased 7% over the full year. The fourth quarter comparison results are somewhat skewed by what might be referred to as lumpiness in the provision for loan loss expense. In the fourth quarter of 2004, you may recall, we had negative provision expense of $500,000 as compared to a more normalized provision expense for the fourth quarter of 2005 of $1.5 million.

Full-year ROA and ROE increased to 1.9% and 16.57% for 2005, respectively, compared to 1.83% and 16.07% in 2004. [Run] and deposit growth continue to be the largest factors in our earnings growth. Our commercial lending group had another successful year, increasing that portfolio by $175 million, or 10%. And, consumer loan also got some traction this year with about $30 million, or 5%, increase in outstandings.

Deposit growth was a very bright spot this year at $243 million, primarily driven by our Green Plan Savings Account. This account, which those of you who have been with us before know, is indexed as a Fed funds target rate. It’s certainly the premier product in the market today and proven to be an important component in that relationship banking strategy as well.

Overall, fee income was up $3.7 million, or 13%, for the year, excluding any equity security gain. We continue to see good opportunities in this area. Wealth management, which recently announced the establishment of a registered investment advisory company, and insurance, with two acquisitions in the last 12 months and an accelerated revenue trend, get lots of notice; but there were many other fee areas of the Bank, such as cash management, debit and credit cards, commercial loan swaps and letter of credit fees and various deposit products that are on similar growth tracks.

Despite the resources we’re devoting to our fee-based insurance and wealth management businesses and some unusual facility restructuring costs incurred this year, we continue to be a very efficient bank, as evidenced by the 42% efficiency ratio.

Both 2005 and 2004 were exceptionally good years for asset quality - net charge offs at surprisingly low levels. The fourth quarter did see some increases to non-performing loans, primarily due to (1) mixed use commercial real estate loans, which [tripped] the delinquent status and the residential development property acquired through foreclosures. [Inaudible] property we expect to be resolved early next month, and the non-performing commercial real estate loan is a little more complex and is going to take a little bit of time to resolve.

During 2005, our net interest margin benefited from rising short term interest rates and an asset-sensitive balance sheet, despite limited opportunities for security leveraging activities. Going forward, the balance sheet’s moved into a more neutral asset liability position, which is where we think we need to be, given all the uncertainty surrounding the yield curve and future Federal Reserve actions.

Strategically, we’ll continue to focus on our relationship banking strategy. It’s certainly not a new banking concept, but we think we do a pretty good job in referring and delivering products among and between business lines to our customers. We see growth opportunities organically via de novo branching, and, although I certainly don’t have any specifics to discuss, through both bank and non-bank acquisitions. The level of opportunity presented by each of these three growth categories is going to vary from time to time, but we have ongoing initiatives in all these areas at any given time.

As mentioned, in recent conference calls, we have long ago discontinued the practice of providing specific earnings guidance for each quarter. And, with that in mind, Bob and I, along with Todd Brice, S&T’s President and Chief Operating Officer, would be very happy to entertain any specific questions about our past performance and the future outlook for our business in general. Mr. Moderator, we’ll take questions now.

Thank you, sir. Ladies and gentlemen, at this time we will be conducting the question and answer session. [OPERATOR INSTRUCTIONS]. Our first question comes from Mr. Steve Moss from Janney Montgomery Scott.

Good afternoon. I was wondering about the Green Plan. By how much did it grow this past quarter?

We averaged about $105 million.

Okay. Also, I was wondering if you could give a little color with regard to the watch list and expectations for asset quality going forward.

In all honesty, we’re feeling pretty good about asset quality right now, especially with the dramatic rise you’ve seen in short term interest rates. I’ll get to the watch list is second. But, the-- Our 30-day delinquency number was 0.8 at year end, which is remarkably strong still, especially considering the amount of [very big] priced loans that we have in the portfolio. As far as the watch list goes, we reviewed it this morning in our senior loan committee. There’s really been no deterioration and very little expansion of that watch list over the past 6 to 12 months.

Okay. Great. Thanks a lot.

Our next question comes from Mr. Andy Stapp with the Cohen Bros.

Just with regard to the linked quarter net interest margin compression, maybe you could give me some color of what’s driving that. Is it the flat yield curve, or is it also competitive forces? If you could shed some color on the competitive forces in your markets, that would be great.

Hi, Andy. This is Bob Rout. I’ll be glad to take that question. Obviously, the flat yield curve is an issue. As we’ve been publicly disclosing, we backed off on any balanced sheet leveraging - significant levels of balance sheet leveraging. We’re using borrowed funds to buy securities. That obviously has an impact. Also, we made a conscious decision here over the last quarter, I would guess, where we’d give up some margin here in the short term in order to further our long term relationships and cross sell opportunities. Just some examples that we see in that decision-- we’ve been more aggressive on home equity loans, which the yields are pretty skinny these days. We certainly like the fees and the relationships that they bring. We’re also, as you have heard-- the price competition is getting pretty stiff, especially for some of the commercial loans that we’re seeing. We’ve taken the position that we don’t want to lose those long term relationships. In some cases, we have matched competitor rates in order to retain that relationship. The other thing you need to consider is that certainly our markets in western Pennsylvania are not generating large amounts of organic growth by themselves. If the loan growth continues to occur as we’ve seen over here the past several years at S&T Bank, we know that we’re going to need to acquire those funds somewhere. So, that’s why we’re continuing to utilize the Green Plan and keep them indexed to the Fed funds. We believe, again, for the relationship factor that we’re focusing on, that consistency and pricing with that product is important for us; and we don’t like to win the market with a lot of the teaser rates that you see sometimes out there in the market.

[Inaudible.]

Yeah; just one more thing I want to add, Jim, if I may. As Jim mentioned, we repositioned our balance sheet to a more neutral position. They’ve given up some of the upside benefit with an asset-sensitive balance sheet when you’re anticipating maybe a couple more steps in the Fed moving. We like this neutral position because it gives us the flexibility to react pretty quickly, again, in light of the uncertainty with the yield curve today and also future Fed actions.

The only thing I was going to add was that the-- As far as the Green Plan goes, I think we’ve given up a little yield, as Bob said, in the short run with that, recognizing that there’s been some cannibalization of the top tier of our money market. But, quite honestly, we monitor it very closely. The new money element there far exceeded our expectations. So, we feel good about that. The trick then is to make sure that we’re doing a good job of capitalizing on those new relationships. I think that’s really where we distinguish ourselves in the ability to broaden those relationships. When you get into this issue of price competition-- It goes back two or three years, but one of the most profitable accounts we have today was a customer that was probably the lowest spread to LIBOR that we have in the bank, or among the lowest. The reason is we brought the whole relationship. They’re also a great depositor. And, there are other fee-based type businesses that we’ve developed with that customer. So, it’s not always the going-in price that you have to meet competitively, which tells the story, although it’s certainly true that there continues to be pressure on margins because of the competition for good credits.

The other thing-- This is Todd Brice here. The other thing we’ve noticed a little bit is some structure issues. They’ve given up some guaranties. We had a couple of clients that we were taken out of. We just weren’t willing to compromise. A couple of the competitors thought otherwise, and they were just in the lines of business that we felt it was very important to maintain our underwriting standards. We think they kind of went outside the bounds. We don’t intend to deviate from the way we look at things.

Okay; good.

Our next question comes from Collyn Gilbert with Ryan Beck.

Thanks. Good afternoon, guys. Jim, just a follow up to your comments on the Green Plan and how you’re expanding the relationships that are coming in. Is anybody tracking that, whether it be through cross sell ratios or just kind of seeing specifically if there’s any data you can give us how those Green Plan deposits are turning into fuller relationships?

I think the-- I’m trying to think of what the ratio is for the Bank. It’s 2-something. It’s about 2.5 services per household, and Green Plan accounts are over 4. The other thing we’ve done is we’ve identified the single-service Green Plan customers. We’ve offered some fairly significant inducements and some flexibility to the people on the ground with those customers to bring their core relationships to us as well. They have some flexibility with that. Anecdotally, I could tell you a few stories about people that have had some success with that in some of our markets. We know it’s a-- Certainly, there’s nothing like it out there. Although, as time goes on, the money markets will-- they’re catching up, and they will catch up. I don’t know if the bank money markets will soon, but the broker money markets are catching up. We think-- we realize it’s a little bit of insurance for us, but honestly if we develop the opportunity properly, we feel good about it. We just need to keep working hard to broaden those relationships and continue to do a good job with those customers. We’re going to feel really good the first time the Fed drops rates.

Yeah. Absolutely. All right. Specifically, it’s indexed to the Fed funds, so it’s--

4.25.

Okay. So, it reprices automatically when the Fed fund rate changes?

It’s the target.

Okay. Then, just some housekeeping items. Bob, maybe if you could just go through sort of the drivers of other fee income. Other non-interest income it looks like was up about 9% on a linked quarter basis. What was driving that? Also, maybe just kind of what your expectations are for securities gains going forward. Also, on the expense side, it looked like other expense was up pretty dramatically on a linked quarter basis as well.

Okay. On a linked quarter basis, I’ll have to go to some of that detail. Let me answer the expenses first, Collyn, if I may. If you recall, in the third quarter, we had a couple different, let’s say, unusual issues. The first thing we had about a $200,000 reduction in the reserve for unfunded commitments. We also had about a $400,000 adjustment for one of our tax credit partnerships, where there was a lawsuit that went our way that we were able to pick that up. We also had recovery of some expenses related to a troubled debt that got resolved there in the third quarter, as well as in the fourth quarter of ’05 here, we did donate another branch building to a local municipality and took a $276,000 charge on that. So, I guess the bottom line on operating expense is that probably the fourth quarter is a more normal type run rate, and the third quarter was a little less.

Okay. That’s all. Thanks. Okay.

And, on a linked quarter as far as the service revenue, I think most of that was letters of credit fees and some small adjustments to our mortgage banking and mortgage servicing rates.

Okay. And, then, how about expectations of the securities portfolio? If you guys continue to de-emphasize the leverage, could we see securities gains going forward?

Are you talking equity securities?

Yes.

Equity securities?

Yes.

We will continue to look for opportunities. I would say the run rate we have now is probably where the market is.

Okay. Great. Thanks, guys.

Our next question comes from Wilson Smith with Boenning.

Good afternoon, gentlemen. I hope I’m not repeating anything here, but I dropped off the call for a second there inadvertently and had to get back in. In terms of the charge offs for the quarter, it was a good number; but if you gross it up to account for the $2.6 million recovery, charge offs were up a fair bit from the linked quarter. Were those increases in charge offs due to those two loans that went on, the one non-performing and the one that went into [inaudible]?

The one that’s gone into [inaudible], actually, we have an agreement reached with another party. We’re going to experience no loss at all.

Wilson, I think maybe the $2.6 million recovery that you’re referring to was a fourth quarter ‘04 issue.

Oh, I misread that.

Yes; that’s a fourth quarter ’04.

Okay.

We had a big negative provision in ’04; consequently-- We didn’t put anything in but took $0.5 million out.

Right. I remember.

This quarter, we put $1.5 million in. I think the only thing we were able to do this quarter was a couple specific reserves on some accounts. As I said, the net charge off number is around 7 basis points. It’s very similar to last year, which is just-- Everybody’s having a good experience with net charge offs, but it’s just outstanding. I wouldn’t tell you there aren’t loans out there that we are worried about or concerned about or working hard to manage because there always are. We feel pretty good about where we are right now. With the credits that are a concern, we try to be pretty aggressive about identifying and providing for specific reserves for those credits, and that all shows up in those allowance numbers.

Thanks. Okay. That’s what I get for working on this release on Monday.

Oh, that’s okay.

The cost of funds increased 35 basis points in the fourth quarter. Was that due almost entirely to the Green Plan, or was there rate competition coming in on the CD side as well?

I would say mostly it’s in the Green Plan.

If you recall, you had some Fed movements there in the fourth quarter [inaudible]. A little bit of CD action, but not a whole lot.

Okay. With moving to the neutral asset liability position and combine that with the price competition you’re seeing out there, do you think you’re going to be able to maintain the net interest margin in ’06 if we have a few more rate increases and then flatness?

I’m not sure how to answer that, since the Fed actions have such an impact in the shape of the yield curve. This yield curve is an issue for all banks. I think if things go the way we plan, we will be able to maintain that margin.

Having said that-- Bob having said that, all of us people who are the financial intermediaries do live off the slope in the yield curve to some degree. It would be helpful if we saw a little slope come back into the yield curve. But, that’s outside of our control, certainly. We focus on those things that we think are important to us that we can control within our core business activities. Quite frankly, we feel pretty good about the way those things are going right now. If you look at the year and the comparisons year over year, it’s real core earnings growth. It’s not reductions in the long lost reserve or the addition of additional equity gains. It’s core business. It’s that interest margin, and it’s the business as a result of retaining and growing relationships with existing customers and acquiring new customers.

Great. Could you just give us a little color on the overall economy out there - what portions of it are doing a little bit better than others and then how that feeds into the pipeline for new business?

Yes. I was talking-- I had a conversation yesterday. On Monday, we had our all-employee meeting, and we invited our advisory directors and board members to attend this year. We had over 800 people there. I like to get a-- kind of take the measure of some of these folks in different industries, particularly our advisory board and board members. One of the fellows there is an old-line manufacturing business, and he said it’s the best year they’ve ever had. I heard the same thing from another manufacturer. They’re starting to see some slow down in the future orders. However, they’d also be quick to tell you that in the late summer and early fall of ’05, they thought they were seeing a slowdown at that time too. It rebounded dramatically. It ended up a very strong year. So, I think the interest rates and the oil costs are bound to have an impact. But, there’s a lot of coal and natural gas activity in this region, and that’s been helpful to us and to the market. So, in general, these are good times in western Pennsylvania. I’m sure it will-- I’m sure that we’d be very happy to see a repeat of 2005 in terms of the economy here. My best guess would be that you’re probably going to see a little slippage, but still employment levels are higher than normal and people in some of these old-line industries, in manufacturing and mining and oil and gas exploration, they’re doing pretty well.

The housing market’s still fairly decent around here too. You hear some stories that you’re going to experience some slowdowns in different parts of the country, but for the most part the stuff we’re putting on around here is not speculative in nature. It’s just good core type housing at affordable price points. The one area that is a little bit soft is the automotive. I think some of the turmoil at Ford and GM are causing some people some concern in some of the automotive-related businesses that we deal with. That would be the one negative right now.

Great. Thank you.

Our next question comes from James Record with Moors & Cabot.

I think most of my questions have been asked. Could you just touch on share repurchases? It looks like you repurchased around 140,000 during the quarter. Is that about right?

That sounds about right. Yes.

What’s your philosophy there? What are you guys thinking in terms of capital management? Can you give us any color on that?

We have just re-authorized another million share buyback program for 2006. You probably saw the release. I think our philosophy is that if we can get all million of those shares, we’d be very happy. We think there’s plenty of room in the capital, barring an acquisition or some really unusual growth spurt that we might encounter. But, we want to do that without being the driving force on the price. So, we’ll look for softness in the stock price and move in those-- when we see that happening. We would really like to get maybe some trust preferred into our capital mix. It’s real hard for us to pick up the number of shares that would make that type of strategy work without paying a really high multiple for the stock at this point. Does that answer your question, James?

Yes. I think it does. Thank you. Could I ask [inaudible]--? You already gave out a difference in the average between the third and the fourth quarter for the Green accounts?

Yes. With Green, it was slightly under $100 million.

Would it be possible to get a period end Green account at the end of ’05 and then at the end of ’04? I can’t remember if you had it.

Yes. It was $495 million at the end of ’05.

At that point in time?

Yes.

Okay. And, did you have it at the end of ’04?

Oh, yes. We started in August of ’04. I think it was--

We just don’t have that number available.

I’m thinking it was between $200 and-- $250?

I would hate to venture a guess that I couldn’t validate.

What’s the minimum balance on that?

$25,000.

Okay.

And limited to two withdrawals a month.

We can get the signature card in the mail to you later today, James.

All right. I appreciate that. Thanks, guys. Have a good night.

[OPERATOR INSTRUCTIONS]. Our next question comes from David Darst with FTN Midwest.

Good afternoon. Given your deposit growth of approximately 10% in the second half of ’05 and then the [slow] rates of loan growth in the fourth quarter, are you expecting ’06 to be better as far as loan growth than ’05?

That’s certainly our goal.

The pipeline is strong on the commercial side. The nice thing in the fourth quarter-- we took a look at that retail line of business, and we had some good experiences on the home equity side. We’re expecting to continue high growth on that line. That’s been a little bit of a change from prior years, where we’ve actually seen a decline. In the first quarter of this year, we still were faced with some-- actually, the first half of the year-- we still got hit with some pay downs in the commercial portfolio, just from some refinancing.

Then, based on how well you know your customers, are there any points in 2006 where you expect higher pay downs?

I don’t think anything out of the normal.

I think people saw the opportunity when they felt that the 10-year rate, for instance, had kind of bottomed out. They could take something out to the wholesale market and get off the guarantees, a lot of them were doing it at that time.

There was a point, and I think it was in the late second quarter, that we had a company that was sold. That was about a $15 to $18 million relationship. We had another developer who liquidated his portfolio of real estate. That was probably about a $15 to $20 million hit. And, then there was-- we also got a pay down on another couple of construction projects all at one time. I think in total they were in the $60 million range, and we were able to get it back. Like I said, the pipeline’s as strong as it’s been in a couple of years.

Okay. How about from a de-leveraging perspective? Do you see yourself becoming more progressive?

As far as--?

Pulling down the securities portfolio or repaying [inaudible].

We’re pretty satisfied where that portfolio is now given the current balance sheet. We won’t intentionally be pulling it down.

Okay. Sounds good. Thank you.

Gentlemen, there are no further questions at this time.

If there are no further questions, thank you for participating in today’s conference call. Bob, Todd and I appreciate the opportunity to discuss the financial results of S&T for the fourth quarter of 2005. Thank you all, and have a good day.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time.