S&T Bancorp Inc (STBA) 2006 Q1 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the S & T Bancorp, Incorporated first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. Robert Rout, Executive Vice President and Chief Financial Officer of S&T Bancorp. Thank you. You may begin.

Good afternoon, everyone, and thank you for participating in the conference call. Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors in the second slide of our 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 first quarter earnings release can be obtained at our Investor Relations website at the website address www.stbancorp.com. In addition, a set of financial highlights slides, as I mentioned previously, is included with the webcast that support what we are about to discuss here, We do not plan to review those slides in detail, but would certainly 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 first quarter of 2006.

Thank you, Bob, and let me add my welcome to everyone. It's a pleasure to be with you here today, I hope the weather is as nice where you are as it is here. I want to update you on what's been happening with S&T from both a financial performance and a strategic perspective. You've all looked at the earnings release, I assume, and we feel that that was a good solid first quarter. Net income increased $400,000, to $14.2 million, representing a 3% increase over the same period last year. Earnings per share, of course, was up $0.03 to $0.54 per share, representing a 6% increase. The earnings per share increase, of course, was higher than the net income increase because we have been successful with our buyback program,,at what we think are fairly attractive prices with the bank stocks falling out of favor a little bit, as interest rates have been increasing.

ROA, ROE were 1.8% and 16.2% respectively. , We think these ratios are strong, and consistently tend to outperform our peers, and the quarter's performance should allow us to continue in that leadership position. Despite the current rate environment and flat yield curve, we were still able to grow our net interest income of a fully taxable equivalent basis by about $800,000 or 3%, and loan and deposit growth both remain strong. Asset quality remains relatively stable. The industry's enjoyed one of its best credit periods in history over the past couple of years, and in all honesty, we're beginning to see trends that indicate the cycle is moving towards a more normal credit environment, and in recognition of that reality, we thought it prudent to add to our loan loss reserve, and you'll notice our provision for loan loss expense was up about $700,000 over the same quarter last year.

We're very pleased with the progress in service revenue growth, as evidenced by a $1.3 million increase. Particularly successful has been our performance in wealth management, brokerage, insurance, credit and debit card areas. We had a slight increase in equity security gains this quarter. Those portfolios provided a nice supplement to our overall core banking revenue stream. Operating expense always represents a challenge, but we understand you need to spend money in order to make money, and certainly view the year-over-year expense increases as very reasonable considering the growth of the company.

Also during the past 12 months, we've been able to grow the balance sheet by $222 million, primarily through commercial loan growth. Commercial lending group increased that portfolio by $178 million, or 10% over the past 12 months. That performance includes $50 million of net loan growth during the first quarter of 2006. While commercial lending is a business line where we've traditionally been successful, consumer loan growth has been tough in recent years. We have initiated some new strategic moves over the past year, which achieved about a $52 million or 10% increase in this product line year-over-year. Funding for the growth came primary from core deposits, which we view as being strategically very important to us.

Our biggest success story with deposits over the past 18 months, as all of you know, has been our Green Plan, a savings account which has grown to about $635 million. We are convinced that this was a -- the right product for us at the right time, for the funding -- our funding and our balance sheet. Those needs have changed. In March of this year, we introduced a replacement, high-yield savings account called Plan B, which we are expecting to allow for continued core deposit growth. Plan B is not indexed, unlike the Green Plan.

Strategically, we continue to expand our de novo branching into such markets as Pittsburgh, as well as Blair and Butler counties, where results have been quite encouraging. Organic growth is also performed very well, especially considering the [technical difficulties] growth market of western Pennsylvania. We are extremely pleased with the team approach used by our wealth management, insurance, retail and commercial businesses to coordinate deliver of multiple products to customers. That teamwork is really the foundation of what we refer to as our relationship banking strategy.

While we never rule out growth through acquisition, we have been quiet on the acquisition front, because with the takeout multiples that we're seeing, we believe the success we've been experiencing with our de novo and organic growth activities, provides a better long term value proposition for our shareholders. As we mentioned in recent conference calls, we discontinued the practice long ago of providing specific earnings guidance, and with that said, Bob, myself, Todd Brice, our President and Chief Operating Officer, will be more than happy to entertain any specific questions about our past performance and the future outlook for our business in general. Thank you very much. Just kidding. Any questions?

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Mr. Andy Stapp. Please proceed with your question.

Hi, guys.

Hi, Andy.

I wonder if you can elaborate on your comments about the trend you're seeing moving toward a normal credit cycle.

I think, you know, our net chargeoff numbers are still very, very good. I think it was 11 basis points for the first quarter, all of last year was 7 basis points, year before that was 7 basis points, our 30-day delinquency numbers are still south of 1%, so things are still good. What we are seeing is, I said I think it's primarily driven by the increase in short term rates. We do a projected delinquency list early into the month, and then we -- particularly on the commercial accounts -- and then we monitor that throughout the month, and while we're seeing people -- that, as I mentioned, the delinquency numbers are still quite good by historical standards, we are seeing that list growing, and while we are collecting the vast majority of them by the end of the month, just that alone makes me think that -- and common sense would tell you that if prime was 4.5 a short time ago, and it's 7.75 today, it's a little tougher for people to come up with the money as timely as they used to. It hasn't showed up in our chargeoff numbers yet, but I think as rates continue to rise,, we're going to inevitably see a return to more normal numbers in terms of chargeoffs.

Okay, great. And on a quarter basis, loans were down somewhat. Anything particular there? Or is it just --

I'm not sure what you are looking at, Andy. With our presentation, we have mid-quarter -- or end of the year --

Actually I did it the wrong way. Usually I see the last quarter coming first, and you have it the other way and I was doing my math wrong.

Well okay. No, no, we're very pleased with that loan growth and [inaudible] this past quarter.

Great. So you can strike that question, and let me see if I had one other question. Your wealth management was -- was up very nicely at quarter, anything particular there?

Yes we did in our press release. We did have a change in accrual methodology. As you know, every area of the accounting is getting very close scrutiny these days under Sarbanes-Oxley, and as we look at it real close, we realized that we were recognizing our wealth management fees on a one-month lag basis, and chose to make that adjustment here in the first quarter.

So you basically had four months, is that what you are saying?

Yes.

Okay. All right. Understood.

And that was about $400,000. That would be an one time type of thing.

Yeah, I understood. Okay. Great, that's all for me.

Thank you, our next question comes from the line of Mr. Matt Schultheis from Ferris, Baker Watts.

Hi, good afternoon. I had a quick question for you regarding your borrowings. It looks like you moved about half of your short term borrowings into long term borrowings, and I was wondering if you could discuss what the structure of borrowings were you that left and what the structure is for the borrowings that you replaced them with.

We have our treasurer, Mark Kochvar, sitting here, and maybe we will let him answer that question, Matt.

Majority of what we left for floating rate borrowing, and we fixed the number of that in the 18-month to 3-year area. With the flatness of the curve we weren't getting up a whole lot With the change in the structure of our balance sheet it allowed us to move some of liabilities out to stay in a more neutral position.

Are there any swaps or anything were associated with those in the event that rates start to go back down, say in, oh, I don't know, nine months or so?

For those of them, no. They were relatively short- term, but on a nine-month horizon, no.

Okay. Just curious. Thank you very much.

Thank you, Matt.

Thank you. Our next question comes from Mr. Rick Weiss of Janney. Please proceed with your question.

Hey, guys.

Hi, Rick.

I have one question. it kind of ties into Andy's, do you think that the loan pricing now adequately reflects credit risk, and, if not today, then when do you think the market's going to realize that there should be a risk premium?

The -- and Todd may have perspective on this, because he comes out of the commercial lending area, but let me give you my thoughts and then Todd can talk. What we're seeing is lot of interest in good credit, and as a result of that, pricing and structure tend to get compromised a little bit, and we -- our philosophy is that if we've got a good customer or the opportunity to acquire a good customer, we will look hard at the pricing. We don't compromise on the structure typically. I wouldn't say that. And we've been able to acquire some new customers, but we try to hang on to the really good ones. We do -- Mark Kochvar you just heard from and his folks do an excellent job of -- of customer profitability, so we have a very good handle on what the relationship brings to the bank, but getting back to your question, I don't think that you're going to see the historical risk premiums going into the pricing until you industry goes through another credit [inaudible]. I think there's -- especially in the -- with the yield curve we have today. That's my own personal philosophy, not necessarily those expressed by others in the room.

I think Jim is right. I mean and that's why we focus a lot of attention on developing the overall relationship and the ancillary business. Probably one of our more profitable customers in the bank is probably one of the cheapest price relationships that we have, but you know, we offer a good fleet of cash management services, do a little management business with them. I don't think we are doing any insurance business yet, but when you look at the overall return, and you have those depository relationships on top of the lending relationship, it's a very lucrative [inaudible] and I know on an absolute basis it's the cheapest account that we have priced in the bank.

Okay. So I guess, like Jim, to summarize, it's almost like for the risk premiums, no pain, no gain?

Hone honestly, that's probably not a bad way of putting it. I think -- I think that -- I just -- I think people are either fighting really hard for the really good credit, and I think the ones that aren't good, I don't know who's taking them. I mean, nobody is knowingly -- that we compete against -- taking those credits, and we are not, certainly not looking at them, at the grade B stuff, so I don't think you're going to -- I mean, we're seeing pricing that, we used to say 250 to 300 basis points above the [inaudible] home loan bank on your very best customers these days. It's hard to maintain 250 basis points spread over the home loan bank because there's competitors out there that'll do it for something less than that.

Okay, thank you.

You're welcome.

Thank you. Our next question is from the line of Mr. Bret Ginesky from Ryan Beck. Please proceed with your question.

Hi, guys. Just a couple of quick questions for you. One. What drove the loan growth in the quarter on the linked quarter basis?

It was just kind of the normal -- the commercial business has been very good. Last year, first quarter, we experienced some rather large pay-down, and we didn't have that this quarter, and then the pipeline's fairly good, too.

Pretty balanced actually between between C & I and real estate.

Okay. Great.

Consumer [inaudible] Yeah, and the consumer.

Okay and then also

That is a little more price sensitive though I'd have to tell you, the consumer stuff.

Okay and then, I know you guys have the new Plan B account, replacing the Green Plan. Is the Green Plan completely gone? What happened with that?

We had an interesting discussion about the Green Plan. No, the Green plan, to answer your question, the Green Plan lives on. It's -- the people that have it are grandfathered. And we -- we -- we have a little bit of a different philosophy. I'm not sure that it plays well with the analyst community, but even on our specials, a lot of banks will say they limit them to new money. We don't do that. If we have a special out there, we make it available to all of our customers. We are interested in long-term relationships and long-term value, and we think it establishes credibility. We talked about different options with the Green Plan, and we've been thinking about this for a long time because we could see the rates rising, and having an indexed account leaves a large portion of your liabilities out there, priced sort of beyond your control. So we got to the point where we'd had enough of a good thing. We had a decision to make, and the decision we decided to make was that we would honor our commitment, and just discontinue the new product. And eventually, we'll see it run off, but right now, we saw a little back-off last week, I noticed, in the Green Plan deposits, and Plan B is -- is being pretty well received in the market. What'd we price Plan B at? Plan B's, 4.25, the Green Plan's at 4.75. We've got $635 million in the Green Plan, and Plan B is just getting off the ground. It's probably got 20 or so.

Okay. So the Green Plan deposits are basically the same as they were last quarter?

They are, and -- I don't -- we'll have to wait and see what happens with them, but our expectation is that there'll be some attrition there over time. Again, our basic thought is that, first of all, the long growth has always been where we've excelled. The deposit growth, has always been difficult for us to keep pace with the loan growth. The 18 months we had the Green Plan was the first time in recent memory that deposit growth actually outstripped the loan growth. Allowed us to retire some debt. Improved our liquidity position, some new customer acquisition. We have very specific plans to cultivate especially those single-service customers that have come to us. Number of institutions that we've got an entree to now that we didn't necessarily have before, so we have -- quite honestly, we're pleased with it, and we know we've given up some margins in the short run, but if you're going to have an indexed account, this is the right instrument, we believe, to index it to, and we get back to a more normal-sloping yield curve. I think it will continue to pay us big dividends, and I don't know how much other people worry about credibility with their deposit base, but it's important to us, and we think it's important to people in these markets, not to break faith with them. Also Important to our staff, the people that are out there selling this product, when we indicated that it would -- the rate would mirror the federal funds rate, we thought it was important to make good on that promise.

Okay. Great. Thanks. And then just one last quick question. On the Plan B accounts, I know with the Green Plan, usually have a much higher cross-sell rate that your customer is on. What's the initial impression been so far in the cross-selling with the Plan B account?

It's probably a little too early to tell. My expect -- it's only been since March 29th, I think, it hasn't been three weeks yet, or close to 3 weeks, I guess. We will have a better bead on that for the next conference call.

Okay, great. Thanks, guys.

Thank you. Our next question comes from the line of Mr. David Darst with FTN. Please proceed with your question.

Good afternoon.

Hi, David.

Looking at your [inaudible] linked quarter, I know you have got some stock option expense in there. Anything else that drove that higher this quarter?

We've [inaudible] I'm sorry. David. You didn't finish your question.

On the linked quarter basis

Oh, on a linked quarter basis, well, yeah, the stock options. Also we're paying a significantly higher amount of commission pay-outs related to insurance and brokerage activities is probably the big one, and we had, as we do, our year-end pay-outs for profit sharing plan in December. We calculate those final numbers in the accruals. and we were able to back off some of those accruals of 12/31. Medical expenses are probably lower here, first quarter link, and probably some mark to market adjustments in our deferred compensation plan as well. Nothing in there that is causing us any concern at this point, and we continue to add staff. Most of the line items are under control in our regard.

Okay. Can you give us an update on where you are as far as the percentage of variable-rate loans this quarter to a year ago?

I don't know if we have that at our fingertips, David. We are seeing a little bit of shift more into the fixed rates as customers try to take advantage of the yield curve. My guess is it hasn't been that significant of a swing of the quarter. I apologize. I don't have --

Wait. You know what. We'll look -- we'll see if we can determine that before the call end. Mark and Lindy have some information here. They'll try and discern that for you. My guess is that it probably is a little lower because I know just sitting in my loan committee meetings every week, we have seen more people coming in wanting the fixed rates with this yield curve, but here again, we're typically -- when we do that, it's generally, we are steering them toward 3-year rates, many firms, occasionally 5's, and rarely do go beyond that without doing a swap or something to [inaudible] Did you find that number, Mark?

Yeah, I got couple numbers. Look at pure prime and LIBOR-based, in the year ago quarter we were about 49.5%, and now we are about 47.3%.

You said 29 to 47?

49.5 to 47.3.

Okay.

And prime LIBOR, there's another group of ARM, 3- and 5-year [inaudible]

Okay.

Those are about flat, about the same [inaudible]

You get the numbers then David? 47.5.

As you add the more stuff, it's tied to [technical difficulties] Your part of the curve, are you seeing some limitations on getting your loan yields up further from the year, and what impact is that [technical difficulties]

You are breaking up a little bit, David, Could you repeat that, please?

Sure. Do you see that as limiting your margin going forward and making it more difficult for you to grow your loan yields as you add more stuff to the 3 year part of the curve?

I think that's part of the big problem with all banks, David. The flat yield curve's causing a little bit of a margin squeeze at this time.

Okay. So that trend where you're kind of eroding a little bit lower from the margins should continue?

Probably depends on where rates go.

Okay. One more [technical difficulties]

If it persists, I think that's probably a fair statement.

Okay. Thank you.

Thank you, [OPERATOR INSTRUCTIONS] Gentlemen, it appears there are no further questions at this time.

Very good. Well, again, if there are no further questions, thank you for participating in today's conference call. Bob, Todd and I appreciate the opportunity as well as the other folks around the table here to discuss the -- our results of the first quarter, and we appreciate your interest in our company. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time.