S&T Bancorp Inc (STBA) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the first quarter earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Webcast listeners can also send questions by e-mail to Investors Relations at STBank.net. (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. Thank you. You may begin.

Thank you and good afternoon, everyone. Thank you for participating in the call.

But before beginning the discussion I need to refer your attention 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 SEC for forward-looking statements that may be made or included in this presentation.

Listeners are also reminded that a copy of our first quarter earnings press release can be obtained at our Investor Relations website at www.STBancorp.com. We've also included on that site a set of financial highlights slides that we are about to discuss here. We don't plan to review those slides in detail but certainly would be more than happy to respond to any questions concerning those slides or any other aspect of our financial performance.

Now I would like to introduce Jim Miller, our Chairman and Chief Executive Officer, who is going to provide a quick overview of S&T Bancorp's results for the first quarter.

Thanks, Bob, and let me add my welcome to everyone to our first quarter earnings conference call. Both net income and earnings per share for the first quarter are a little below the levels of last year at $13.3 million and $0.52 earnings per share. I know we are all tired of hearing about this inverted yield curve; but it really is an extremely difficult operating environment for almost all financial institutions.

So while these numbers are certainly not where we want them to be or consistent with our historical track record of earnings increases, the performance is actually about what we expected in our 2007 plan.

I wouldn't want anyone to get the impression that we are passively riding out this unusual situation. We continue to follow our strategic game plan to grow our business by developing new and deepening current customer relationships. We also have implemented a number of tactics, such as restructuring our deposit pricing, limiting security purchases, carefully managing our staffing, leveraging technology to control costs, and buying back stock in order to mitigate the current inverted yield curve pressures. And we have been fairly successful in that regard, I think, as evidenced by our ROA and ROE numbers.

Our ROA and ROE performance should keep us classified as a top performer among our peer banks.

Just to provide a little more detail, as you can see from the schedules investment securities are down $31 million. This as mentioned earlier is one of our asset liability management strategies to help contend with the interest rate environment. We are quite pleased with this quarter's loan growth of $66 million, along with a very strong pipeline of loans that are yet to be closed.

Typically the first quarter hasn't been the best time for us to generate commercial loans. I'm not comfortable predicting that that $66 million net loan growth would be a run rate for the year. But it was certainly good the first quarter.

Deposits are up a little by about $12 million. There may be some seasonality in that number since December is usually a heavy deposit month. In any case, deposit growth is something we focus a lot of attention on and build incentive plans around, both relative to the volumes and the mix of deposits.

In terms of the components of loan growth for the quarter, consumer loans had a terrific year in 2006. We're off to a little slower start on the consumer side in '07. Commercial loans, on the other hand, are surprisingly strong for this early in the year as we've mentioned. We are finding commercial loan pricing is very competitive these days; but our lenders are doing a terrific job of demonstrating there's always good business to be developed no matter what the economic or interest rate environment.

In that regard, we've added three new season commercial lenders in the past 12 months, which we believe is key in growing the business in our markets.

Loan growth is only as good, as we all know, as the borrowers that pay you back. So asset quality is an area where we continue to spend a lot of time and resources. Net charge-offs to average loans of .01%, of course, is extremely good for the quarter and in spite of our hiccup in 2006 more consistent with our traditional track record of loan quality.

The residual balance of a couple of those loan problems in '06 still remain in nonperforming loans and nonperforming assets, until we successfully liquidate the collateral. That process is going well. It's just that the size and complexity of those relationships take time to work through the various processes involved with liquidation of the Company's assets in one case, and with the ongoing litigation in the second smaller credit.

Taking a closer look at the income statement, the current interest rate environment is compressing net interest income growth despite very good loan growth, as we said. Provision expenses slightly higher than the plan for the first quarter. Given last year's problems, we are very aggressive and I would hope conservative, even in dealing with problem loans, and want to make sure that we have adequate reserves to put aside when a problem occurs.

Service revenues or the fees are down 100,000. Some of that is due to a $400,000 one-time accrual adjustment last year in our wealth management area. We do believe that fee revenue will pick up as the year progresses.

Non-interest expense is up a modest 4% and our efficiency ratio is still one of the best in the business. But we never quit looking for new opportunities to do things better or less expensively. We do believe there are opportunities for technology improvements and electronic delivery systems to play an even larger role in that effort as we progress through the year.

So in summary, even though this first quarter financial performance is about what we expected, it is not where we want to be. We continue to make good progress in implementing the strategies we have adopted to grow our business profitably.

And with that I would like to open the floor to questions and Todd Brice, our President and Chief Operating Officer, as well as Bob Rout, our Chief Financial Officer, and I will be happy to respond to any questions that you may have.

(OPERATOR INSTRUCTIONS). Wilson Smith with Boenning Scattergood.

(technical difficulties) on nonperforming status in the quarter?

Yes. Well, I can tell you that it's a situation that we see some problems with the credit. We have put it on nonaccrual and we have taken a special provision that we believe will cover any potential loss. We are continuing to receive some payments that we are applying to the balance of some interest payments. I think it is one of those situations that is going to get resolved relatively quickly. It is not a very larger complicated situation so we will see.

But I think we are trying to be as conservative and aggressive as we can be within. It's in terms of our historical -- just to expand a little bit on the -- in terms of our historical averages we talked about in the past. Last year we had 49 basis point of charge-offs which is a big number. Certainly for us a big number. Historical track record, I'm sure you recall from our previous discussions, is closer to 30 basis points. And so that's where we would hope to be for this year.

Do you think that this particular credit -- is that -- is it more of a restructuring issue or is it just a work out where you've got to sell off some collateral?

This one, quite honestly, may be just a work out. I mean I think the folks would like to restructure -- again we are taking probably the most conservative view of it. And we've taken a specific provision that we think will cover us through a liquidation scenario, if we happen to get fortunate and they do find some way to move forward and gets restructured then that would be all to the good.

Good. How does the watchlist look?

It looks fine. We are feeling pretty good about asset quality in general in the watchlist. As I said our thought process is that the 25 to 35 basis point range is about where we expect to get to, which would be normal credit cycles for us over a long period of time.

You know, we have a new Chief Credit Officer that we brought in about a year ago and he's doing a nice job. It's good to have a fresh set of eyes on things. His experience is a lot on the work outside. But he's a very knowledgeable guy and he's bringing a lot of good new ideas and suggestions to us. We are implementing a lot of his ideas.

The -- so -- and with the full cooperation of our commercial lending staff, I mean there's never been any issues here in terms of disagreements in those areas. It's always trying to get to the best decision for the customer and for the bank. But quite honestly, we feel reasonably good about what we say down the road in terms of asset quality right now.

The other thing, Wilson, is you know there is an awful lot of liquidity in the marketplace right now and we've had several credits that have been on our watchlist that we've been able to come up with a good exit strategy to move them on to some of more aggressive competitors. So that's been a good thing.

That actually leads into another question which is how is the conduit activity? Is that still coming in and picking off a lot of your loans?

Yes unfortunately. It is. That's why I was saying that $66 million that we solve the first quarter may not be an appropriate run rate although the pipeline is quite strong. But there are a couple of situations that we are aware of that we're going to be paid off on because they have more attractive alternatives with the permanent markets.

And I don't think of the situation as probably would have occurred regardless somewhere down the line to do things to the an acceleration of that. I sit on the board of a nonprofit -- one of these senior housing projects in town. We had our annual meeting today and they're refinancing this project with -- I can't remember or recall the lender now but it's a 6.25% 35-year fixed-rate nonrecourse. And those are pretty attractive ways to go. And there's a lot of appetite for that kind of stuff out there.

When prime is 8.25 and that's what you are getting from your developers on some of these projects, it's easy to see why they are anxious to move them somewhere else.

Right.

We've had some pretty good luck this quarter. As Jim alluded to we've brought three new lenders on. A couple of them came on in the fourth quarter last year but their background is a little bit more C&I oriented so we're seeing some, I think, some pretty good activity in that line of business. And hopefully there's a little bit more stability in that line as opposed to the commercial real estate line of business, where it's a little bit more in and out.

Bob, one question and I'll let some other people get in. In terms of the green plan restructuring, if you hadn't done that what would have been the effect on the margin in the first quarter?

It would've been an additional $650,000 of expense. That gives you a perspective of the pressure of this inverted yield curve.

Absolutely. Okay. Thank you very much.

One other thing too; we just recently last week moved that down even a little further. Kind of 15 basis points.

Rick Weiss with Janney Montgomery Scott.

I was just wanting to follow up on one of Wilson's comments regarding the deposit growth. I was wondering what impact you thought having to I guess change the structure of the green plan account that had on obtaining additional core deposits?

That's a very good question. Because that was a big concern to us when we made the change. I mean we knew we had to go there because when you look at where we are against peers our problem isn't on the asset side. It's pricing on the liability side.

So when we made the change and some of these people were impacted as much as 75 basis points in one fell swoop; and through the first quarter we haven't (inaudible) as you know and through the first quarter we were pleased. We actually had a little bit of net growth in the account overall; and that's what gave us the courage to maybe tweak it again here and will we did was take about 15 basis points off of the bottom tier, 10 off the second tier and five off of the third tier. We left the top tier which I think cuts it $1 million and a loan at 5%.

So, hopefully, we've done it intelligently. I mean we've looked real hard at these customers and most of the ones that are in there, a lot of the ones that are in there -- especially in the bottom couple of tiers -- are people that have been long-term loyal customers to the bank that were in our other savings were money-market products and our high multiple service users.

There is some loyalty there. I mean we don't try to take advantage of that but the comment I get from -- when I talk to people in the branches is that people realized that they got there were getting an awfully good deal before. And so we've been pleased. We're watching it closely. We want to be careful about how we handle that, but so far so good. Obviously the concern is that if that stuff runs out the door, moves over into CDs, then we've got to either pay a higher price on the CDs or replace it with the borrowings that are higher priced. So we are trying to be sensitive to it and do a good balancing act with it.

And then -- .

And it represents about 30% of our deposits right now.

Yes. I saw it got pretty high. I guess just briefly -- I don't want to take up everybody's time. Could you just talk a little bit about the local economy in Western PA in your markets because I guess regarding the lending area, you know. What do you see out there? If things are going to improve or get worse?

It's pretty steady. I mean, the unemployment rate in this county that where we are headquartered is the lowest I have ever seen it. It's like 4.1% and it has been double-digit here a long time. So I -- and there's a lot of people that, their issues that for industries that are active that are growing now and they're having trouble finding good people still. So that's what we hear. So I don't know.

And again, our 30-day delinquency numbers -- well, I know we don't publish that but they're still quite good. The pressure has come because of the increase in rates on the short end and some of those borrowers that are prime based or LIBOR based, well, the prime-based people are all trying to get to LIBOR people. But all of them we're seeing pressure on those folks.

So maybe they are a little slower in making their payments. But the overall 30-day and above delinquency numbers are still just a little bit north of 1%, which is historically quite good.

I don't know. I will let others comment too. The other thing that we watch very closely, of course. We -- as well as many other banks -- do a fair amount of lending into real estate development. We have some of these people who develop the lots for residential housing and multifamily housing with the quad units and those kinds of things and we watch that pretty closely. We've taken a close look at that just recently and while things have certainly slowed down a little bit, the absorption through the first quarter is better than we might have expected.

I think that is a function of the fact that the long rates and the residential mortgage rates are still relatively attractive. So I guess to answer your question in one word, we keep expecting things to get worse on that side. But so far it's really not presenting us with any broad-based problems on a one off basis or with some of the weaker sisters you are seeing the problems come out. But as far as the broad economy and our portfolio in general, it's -- I think it's still pretty good.

Right so I guess everything is okay (inaudible) in the yield curve.

If you have some way of helping us with that we would be forever in your debt.

David Darst with FTN.

Could you comment on your deposit competition and where you're pricing CDs off your competitors? And if you have given lower rates on your tax management product if you foresee any transitioning or any CD growth?

Yes we are maybe at the upper end of the range but we're not up at the highest range because of our perspective on CD pricings. Certainly a cash management account that we restructured here in the first quarter continues to be a free mirror product in the market.

How about any differences you see in Pittsburgh versus your other markets?

I think it's pretty much a blended market.

Okay. Then how about as far as your lending competition? Are you seeing any differences down there with competitors (inaudible) on terms?

There are certainly more competitors and that's the market to be. Yes we are seeing an awful lot of pricing competition and an awful lot of liquidity. There's good credit through here competing with a number of other players.

We just -- we are involved with a credit recently within the last couple of weeks. It's been a long-time client of hours and happened to run into one another local bank and you know we were talking about that there were seven banks that had been on the transaction. The people keep a pretty substantial deposit relationship; and should be a pretty sure payback but we got pretty aggressive on it. It's tough in the marketplace right now.

Yes, geography is not a protection any longer.

While I think what has to happen to it if we have even in some of the rural markets in Clarion County, in Jefferson County, Clearfield County we may have companies up there that do $50 million or $100 million in sales. So it's not like they are captive to us in any way, shape, or form. The (inaudible) of the world are out there calling on them as well as Wachovia and who knows who else?

So that doesn't protect us from -- in those types of situations.

Where we think the magic maybe comes in is by attracting the right kind of talent to our Company that have relationships with some of these better customer, better commercial customers; and the people that run those businesses see value in continuing to work with those people. So we are pretty -- we work hard to make sure that we hang onto the good people that we do have, by making sure that they are well compensated and have the proper type of incentive arrangements.

Then we are constantly on the lookout to bring good commercial lenders, as well as other financial advisers or whatever the case might be. But the quality of the talent that we have we think will really dictate the opportunities that we see in the future. And in markets like western Pennsylvania, where you are not getting any benefit as we said in the past from the rising tide, it's a very slow-growth economy out here.

How about on the M&A side? Do you think there's some smaller banks that are more likely to sell this year?

I -- we can only hope. But I'm not hearing much about that; and we've talked to quite a few of them. So I don't know, David. I'm hoping that you guys will come around and stir some of them up.

How about pricing expectations? Do you think any of them will (multiple speakers)?

(multiple speakers) deal up in (inaudible) that was done within the past couple of months. Northwest was the buyer, I think. That seemed to be a little more modest type of deal. So I hope that the expectations will moderate a little bit.

(OPERATOR INSTRUCTIONS) Gentlemen, there seem to be no further questions at this time. Do you have any closing comments?

Yes. Thank you for participating in today's conference call. Bob and Todd and I appreciate the opportunity to discuss the first quarter financial results of S&T Bancorp and we look forward to hearing from you at our conference call next quarter. Goodbye.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time.