S&T Bancorp Inc (STBA) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the S&T Bancorp Incorporated second 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. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Robert Rout, Executive Vice President and CFO for S&T Bancorp Incorporated. Thank you, you may begin.

Good afternoon, 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 live presentation. The 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 slides is included with this webcast, that support what we are about to discuss. We do not plan to review the slides in detail, but we will 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 a brief overview of S&T Bancorp's results from the second quarter.

Thank you, Bob, and good afternoon, everyone. It is good to be with you today to update you on what has been happening with S&T, from both a financial and a strategic perspective. We are generally pleased with our overall financial performance this quarter, and for the first six months of 2007.

As I stated in our press release, our staff has worked very hard to do what was necessary to stabilize our net interest margin, and good positive loan and core deposit growth have been particularly important contributors to that performance. Both net income and earnings per share from the second quarter of 2007 and the first six months in 2007, are well above the levels of the same periods last year. In the second quarter net earnings were 13.9 million, or $0.56 diluted earnings per share, for the second quarter of 2006, I'm sorry, compared to 11.2 net income, or $0.43 diluted earnings per share for the second quarter of 2006. And for the first six months as you can see, net income increased 7% to 27.2 million, and diluted earnings per share increased 11% to $1.08, as compared to the same period in 2006.

We also recognize that our performance comparisons this year of course are significantly influenced by the difficult second quarter of last year, when we had four troubled commercial credits that visited on us in a relatively short span of time. Two of those four credits are fully resolved. The other two are a little more complex, and still require additional workout time. The residual balance on these two loans currently comprises $6.1 million, or 22 basis points of our non-performing loans.

Progress in this area has been steady and positive as indicated by the $5 million reduction in non-performing loans the last six months. Net interest income had some positive growth this past quarter and year-to-date, and any net interest income growth in this rate environment is welcome news I think for anybody in our business.

The recent restructuring of our cash management account from an indexed pricing model to a non-indexed pricing model at the first of the year, has provided the needed flexibility to respond to the unusual rate environment. Even with those changes, core deposits continue to expand sufficiently to fund our loan growth, and once again, I credit our staff with doing a great job of retaining our CMA balances, in the face of the rate restructuring and growing core deposit balances overall.

From a consumer loan perspective, recent promotions have been successful in allowing this portfolio to grow $20 million year-to-date, and $46 million over the last 12 months. We like the customer relationships these loans bring, and our retail folks work to cross-sell opportunities very well.

From a commercial loan perspective, our loan origination activities continue to be very strong, however, the current environment makes it pretty attractive for commercial real estate customers to refinance into the permanent markets. So during the first six months of this year, we have experienced $107 million of commercial real estate paydowns, which is essentially is on-par with the $210 million in paydowns we experienced in this portfolio last year.

We recognize that accelerated commercial real estate pay-off risk, we recognize that that was a risk in this environment as it has been for the last year and a half, so we implemented strategies earlier late last year and beginning the first of this year, to focus more on the C&I loans, where that refinance risk is less, and the opportunity for cross-selling and other services is greater. Strategies are working as evidenced by a $63 million increase in C&I loans over the last six months.

The C&I strategy really has two aspects. One is a change to our lender incentive plan to emphasize and provide enhanced rewards to C&I relationships, and the other is the addition of a few seasoned quality lenders with significant C&I experience. Fee revenue growth so far this year is disappointing. Part of the issue is what we believe is an industry-wide phenomenon that indicates the consumers are pushing back on deposit related fees through behavior changes.

Part of the issue is also some restructuring of brokerage products in our Wealth Management Business and the associated transition challenges, and part of the issue is a slowdown in mortgage banking activities, and we will be providing some additional focus in these areas in the upcoming months.

Operating expenses are running a little higher than normal. The primary reason for this increase is that we have invested heavily into some new branch locations, facilities, operational infrastructure such as electronic delivery systems, and of course, in new talent, and those investments are just starting to hit a meaningful revenue strategy, excuse me. Plus the fact that when we eliminated stock options, we redesigned our incentive plans to be earnings per share driven, so the earnings per share growth is reasonably good, reasonably, so we have higher incentive accruals for the staff if those trends continue.

Now I would like to turn the microphone over to Todd Brice for a few comments.

Well, thank you, Jim, and good afternoon, everyone. As Jim mentioned, we are experiencing an increase in operating costs, some of which are a direct result of our new branch openings, such as our Indiana headquarters building, our Altoona branch and our Squirrel Hill branch, and we also a site in Fox Chapel scheduled to open next month, for which we have begun to incur some expense on, we feel these locations compliment our existing operations and will enable us to better serve our commercial retail Wealth Management and insurance customers in these markets.

Also in January, we introduced the Stewart Capital Mutual Fund as part of our Wealth Management array of products. We realized that we would incur a loss in the first year of operation. I am pleased to report, however, that they recently surpassed $10 million in funds under management, which enabled us to obtain a ticker symbol, which is SCMFX, and year-to-date the results are ahead of our projections. We are also very excited about the electronic delivery channels, and the opportunities that these present in gaining operational efficiencies, and also extend our market reach.

Finally, Jim mentioned our investment in talent. We have made investments in additional salespeople, in our retail , commercial, and Wealth Management areas, and these folks are getting up to speed rather quickly. I think if you look at our track record, we have been very disciplined in our approach to acquisitions, and we are going to continue to do so. We do feel that it is prudent, however, to make these types of investments in infrastructure branches, people, products, and technology, to help us achieve our growth objectives, which provide benefits to our shareholders for many years to come.

As we have mentioned in recent conference calls, we long ago discontinued the practice of providing specific earnings guidance, and with that in mind, Todd, Bob, and I would be more than happy to entertain any specific questions about our past performance, and the future outlook for our business in general.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. (OPERATOR INSTRUCTIONS) One moment please while we poll for questions. Our first question comes from the line of Wilson Smith, Boenning & Scattergood. Please proceed with your question.

Good afternoon, gentlemen.

Hi, Wilson.

Nice quarter.

Thank you.

A couple of quick questions for you, here. Is this the issues with the commercial real estate, is that just kind of continued conduit activity coming in, and pulling those loans away from you?

For the most part that is the way we interpret it. I mean, it's just, you know, they have come down the food chain a little bit I think as we've talked about before, and there our experience is one example I can think of, is we have a construction company and the developers that do hotels, and it used to be that we would finance the construction of a hotel and maybe have it on a mini-firm for a year, two years, maybe even three years, until it got seasoned, and was seasoned enough for the permanent markets.

And these days, it seems like they are a lot more aggressive and we have one case where we had a good flag and a nice location, but it really was not a proven product, and they essentially got a committment from a conduit lender to take it out the day they opened the doors. So we are seeing some of that.

It's kind of, it seems like there has been an acceleration of these takeouts, and of course the rates, the 10-year fixed rates they are able to get, and the other terms are able to get, make it very attractive for people in that business to do that, and generally we have their personal guarantees in the construction phase, and typically they get off their guarantees as well, so there is a lot of incentive for folks to do that, and that is kind of what we have seen, Wilson.

The other thing I would like to comment on, this is Todd, is originations are still running strong in that line of business, and our pipeline is still very nice as well. So just kind of running out the back door is where we are seeing it slip away from us.

Right. On the C&I side, are you able to diversify that as much throughout your branching territory, or do you find that the C&Is as more from, say the Pittsburgh market?

Really, we have seen it come in through the 10 county market area, we have had nice success in Blair County, there has been some in Allegheny, and so in our northern markets as well, we have had some nice new business walking in the door.

One of the a couple that, Todd mentioned some of the people we have added, two of the pretty experienced, actually three of them are are pretty experienced C&I lenders, one of them is a gentleman from Blair County that has 20 years experience in that market, and he has been with us now, a year and a half maybe?

And the other one was a gentleman who actually started here as a Credit Analyst and went to a competitive, a large competitor for probably eight years, and then returned to us recently, and his business and most of his contacts were in the Allegheny County, north of Butler County, western, northern Pennsylvania markets, and so, but I think Todd is right. The C&I stuff is widely spread.

The other thing we have seen in the C&I line of business interestingly enough is a lot of people are starting to cash out, and a lot of liquidity in the marketplace, so we have had three or four significant relationships that have decided to sell their business, and what that has done is created some pretty nice opportunities for our wealth management business as well. And that we have been able to grow that line of business, even in light of payoff, has been a nice surprise for us.

Interesting. Okay, and Bob, how much further down are you planning on letting more of investment portfolio run down?

I think that we are pretty close to the bottom here now, Wilson. Just from a liquidity standpoint. We might see some further run-off, but we are being patient, and we are trying to be disciplined. And as long as our liquidity ratios hold up, we don't see a need to do that.

Okay, well certainly that has been helpful in terms of protecting your margin, and you have done a great job with the cost of funds and adjusting the mix of your funding side there. Do you think that you have really seen the bottom now, in terms of the margin?

How about " I hope so".

(laughter)

It's a function of the competition and the rate environment, and this interest rate environment is the toughest we have seen in our banking career, and it's just very stubbornly persistent. This is not normal, you know, as Jim Miller has mentioned a couple times, he said, you know, money still has a time value, but it is just not being reflected in the curve.

And the other area that is really impacted our margin too on a year-to-year basis are demand deposit accounts up over $20 million, which is about 5%, so we tend to focus some attention on that, and I think it is paying off for us.

We have got some pretty serious bank-wide incentive programs out there for demand deposits, and we have put some other programs in place, and hired some people to focus attention on our cash management products, and we really tried to get the message through very clearly, both in terms of what we say to our staff, and how we reward people, and then what we say to the marketplace about how valuable these core deposits are to us, and particularly demand deposits, and that seems to be having some positive impact.

The other thing I would say that has been good in this regard, and I don't want to go on too long with this, but we have done some fairly aggressive restructuring in pricing on the cash management. We are still paying 5% at the top tier, so anybody, you know, with a million dollars or more I think we are still paying 5, but some of the lower tiers we have cut back a little more aggressively, and I think we are down to maybe 4.25, on the lowest here.

I am looking around the table here, and I believe that is what the number is 4.25, so those people have seen about a 100 basis point drop from the top, and we, our people in the branches have done a great job of retaining that business. I think part of that is also the fact that a lot of it was probably in money-market accounts with us, and/or savings accounts with us, so they got the nice ride up as well, but a fair amount of it is new money, and it seems to be sticking pretty nicely. It is not growing at the same pace with this rate structure of course, but we have been able to retain the balances pretty well with the restructuring we have done, so we feel good about that.

Wilson, the other answer is with the net account pushing close to a billion dollars, if there would be further contraction or inversion in the yield curve, we think there is still more pricing room to be had, if that would happen.

Let me ask one last question here. Jim, in terms of the loan loss reserve levels and the condition of the watchlist, and so fourth, the reserve has come down, or the ratio has come down from just south of 1.5% to just a little bit over 1.3, and do you think that you can continue to release reserves in here, or do you think that reserves provisioning is going to have to keep a little closer pace to increases in loans?

Well, I think part of the answer, Wilson, is that we had a fairly high level of specific reserves in there when the number, when the percentage was a lot higher anticipating some of the issues that happened when those four problems were visited on us last year, so that didn't, you know, exactly sneak up on us, so I think part of it is we were higher specific reserves, I think they were over $9 million at one point, and now we are down to specific reserves, I think a 3.4 is what I saw in this quarter, so that is part of the answer.

We honestly do, in fact our new Chief Credit Officer, Tony Kallsen, I call him new, he has been here for a year and a half now, or 15 months anyway, but he is with us in the meeting today too, but we really do a fairly detailed analysis every quarter of the portfolio, and we think the number that we have in there is the right number for the quality of the portfolio we have, and with some of the initiatives that we have under way here.

One of the things that if you are smart, and I have been through this a few times in my career here, when you have a problem like we experienced last year, and we have had, there are times in the past when we have had other issues maybe it might be longer, and it might be interest rate, or it might be anything, but hopefully you learn from those experiences and you do the right things, in terms of making sure that you respond appropriately, and then put the policies and the procedures in place, to hopefully guard against other shocks of that nature in the future.

And I think we have done some of that, and I feel pretty good about some of the things that Tony has on his agenda, and some of the things we have implemented even to-date, in terms of maintaining the quality of that portfolio, so I guess the answer is I don't necessarily see it going up as a percentage, on a percentage basis, as the portfolio increases. I really think our objective is to allow it to truly reflect the quality of the portfolio that we have at that point in time.

Thank you, gentlemen. I will let some other people get in now.

Thank you. Our next question comes from the line of Steve Moss with Janney Montgomery Scott. Please proceed with your question.

Good afternoon, guys.

Hi, Steve.

Just on the specific reserves, how was the interest a little bit quarter-over-quarter? Was that back in relation with the $6.1 million residual balance that you mentioned before?

Steve, this is Bob Rout, and I will answer that. Yes, partially. We have signed some additional specific reserve that I think was maybe slightly over a million, and also there is another new construction amount in there that we are working through that is not nearly the size of the ones that we had, or the construction company loans, not nearly the size of what we were dealing with last year, so those two pieces constitute the bulk of that $3.4 million.

Okay, and what is your view on economic activity out there in Western Pennsylvania? Is it pretty stable still, or are you having more concerns with regard to construction or housing along those lines?

It is still pretty good. I mean, you have heard us say this before, but we don't tend to, the population growth here is pretty minimal, if at all, and we haven't seen the problems that some of the higher growth markets have experienced in overbuilding, or the subprime issue I don't think has been such a big problem in Western Pennsylvania, so, and the economy still is quite good, from all of these normal indicators, unemployment rates still very low in this area, based on or compared to historic levels, and things from what we see tend to be pretty good.

The other thing we talk about sometimes, we don't publish it, but our 30-day delinquency numbers are usually some kind of a precursor, as we said, they continue to be very manageable levels under 1%, so that is usually a good indicator too about the economy, and how people are able to pay their bills. So I think when you slice and dice our delinquencies, you will see that the mortgage number is a little on the high side. I think it is about 1.5, or what was it? 1.68.

But a lot of that has to do with a single credit that we feel comfortable with the collateral on, and that can happen to you as well, so in general, I think the economy is still pretty good.

Okay, and I guess lastly, one more question with regard to the margin, it held up pretty well here, and I think it was related to parts of the cash management accounts you guys have there?

Right.

Are there any further decreases planned on the rate there or no?

I think we left the yield curve and the margin dictate that. We think there is room there, and also it has a balance with making sure that you have adequate funding for this loan growth is still pretty strong.

Okay, thank you very much, guys.

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

Thank you, good afternoon.

Hi, David.

Could you comment on what your target capital levels are, and if you expect your share buyback to slow going forward?

Well, I mean, obviously it is going to be well capitalized position. We, in June, authorized another million shares of buyback after completing a million share buyback that we had authorized in December of 2006. We would certainly like to get more hybrid securities in our capital mix, just to drive down that cost of capital.

When we look at our balance sleet compared to other peers, we are an extremely low level of usage, the hybrid securities within the capital, and we just think that it is a much more efficient manner in which to capitalize a company that is especially like ours, where the earnings are growing, and exceeding the growth needs at this point.

But would you take your would you take your cap to 6 to 6.5% on the tangible equity?

I don't know if I am ready to give a projection on that or not, David but 6.5% wouldn't scare me.

Okay. Historically you have had closer to 10, so I guess -

Yes, and it's all a function too of how much stock you can pick up in the market at a reasonable price, without getting into some type of accelerated buyback program, which I don't think we are going to do.

Okay. And then your tax rate was a little bit lower for the quarter.

Yes.

Can you give us a little data for the tax rate for the second half of the year?

Yes, we had a rather large rehabilitation tax credit deal that we signed up for here, and that pushed down our effective tax rate probably 0.5 a basis point, 0.5%.

Okay. And then as far as the margin is concerned going forward, assuming loan growth, every time it moves along in the mid-single digit rate, can you maintain a roughly stable margin but then if loan growth accelerates, you probably are facing some pressure given the need to raise some funding?

Yes, there is an awful lot of liquidity in the system right now, David, and pricing from competition for good commercial loans is very stiff, and we will meet that competition especially when it involves a commercial relationship that fits our profitability criteria, and it has long term relationships, so there are pressures there on that side, and on the funding side, we are not seeing a whole lot of price competition I think on the funding side.

Okay, so that sounds good. And then Wealth Management excluding the mutual fund, are you still seeing some traction in growth in that group?

On a year-to-year basis, if you look at the number in there, they are down because we had an extra period in last year's results, and also in the first few months of this year, David, we made the changeover as Jim alluded to in his comments. We changed over from Raymond James to IPI as our broker/ dealer, and actually that took us a little longer to integrate than what we anticipated, but I think we are getting back up to where we were prior to the change, and also we have been able to add a couple people to that on the sale side, in that area, so we would expect that to continue to ramp up a little bit.

Okay. Great, thanks.

Thank you, David.

Thank you. Our next question comes from the line of Matthew Schultheis, Ferris Baker Watts. Please proceed with your question.

Good afternoon.

Hi, Matt.

Quick question for you. Sorry if I missed this already. You were talking about the increase in your operating expenses. Could you go over some of the detail of that again?

Yes. I did get your e-mail question in anticipation of this meeting, and some other things was on the linked quarters?

Yes.

And on the linked quarter, our operating expense was up $500,000 and some of that is really related to just having an extra day in the quarter from a number mismatch, but primarily it does expect the minus staff expense. Also, the biggest component of that increase would be in our facilities.

Okay.

As a couple of these new locations come on-line with sizeable rental expense, that number is up significantly, and also, when we opened up the new Altoona office, we abandoned an existing loan production-type office, and had written off approximately $100,000 of lease hold improvements, when we shifted that staff over there, and just a smaller item, we have a little bit of a backlog, or a dispute with a man that removes our snow, and it took longer to reconcile that bill and get it paid.

Beyond facilities and beyond staff, we have a couple different consulting initiatives going on, primarily there is a big one going on in our London administration area, as we want to make sure that that is employing all of the Best Practices that are out there today, especially in light of our commercial lending focus, and also, as we took a real hard look at some of our incentive and retirement plans, that whole area is getting a little more complicated with the 409-A rules, and also with the introduction of the expanded proxy disclosure material for executive compensation.

And I guess the other criteria is there is a little more entertaining going on in the Spring and Summer months, than there is in January and December, so a lot more ball games and some golf outings. But that is really it on a linked quarter, Matt.

Okay, thank you very much.

Okay. Thank you. Our next question comes from the line of Bret Ginesky with Stifel Nicolaus & Company. Please proceed with your question.

Hi, guys. Just have a quick question for you, because most everything else has been answered, but just on the M&A front, what are you guys looking for and any target, and are you seeing a lot more banks for sale out there now in your area?

We have not seen a lot more for sale in our area. We would like to. Our history has been that we would love to do something within our current footprint if that is possible. We have only done five in the last 20 years, but they have all been in contiguous counties or within our market footprint. So that would be good for us. We haven't ruled out doing something of size, although typically we have done something in the 200 to 500 range, we would consider certainly larger partners than that.

We do like the Western Pennsylvania marketplace, but again, we are interested in growing our franchise, growing our business, and doing the right thing for our shareholders, so we will look at anything that bank or thrift charter that comes to the market within reason. We want to be able to understand the business, understand the quality of the operation is important to us, being able to manage the culture is important to us, and integrate it well.

When we have done acquisitions in the past, the day we have consummated the transactions, we have always been fully integrated on our systems, and up and running on day one, which has been helpful to us. So our preference is to do them within the Western Pennsylvania area, we wouldn't rule other possibilities out, and we have tried to be disciplined about it.

We do have a portfolio of bank stocks. There are a few banks in this area that we have a significant stake in today, the three that we own 5% or more of their shares, so that is, if you are looking for the profile that we prefer, those would probably be good ones to think about.

And which banks are those? Can you disclose that?

I thought it would be known. In the filings.

I am sure I can find them out there.

Yes, you can find them. (laughter) Bob is shaking his head like I shouldn't say anything, so, yes, I think there is probably public filings out there, but --

Yes, there is.

We have talked about some of them in the past, but in case they are listening, we are still interested, so please, give us a call.

(laughter) Thank you. Thanks a lot, guys. I appreciate it.

Thanks, Bret.

Thank you. Ladies and Gentlemen, (OPERATOR INSTRUCTIONS) We do have a follow-up question from the line of Wilson Smith with Boenning and Scattergood.

Jim, you had a pretty sharp decline in your gains on sale of bank stocks.

Right.

In the quarter, and just as we would look at that going forward, can we basically expect the second quarter to be a pretty decent run rate?

I think it is going to depend on, I mean, obviously if there is M&A activity, that we have a stake in the company, we are going to have to recognize the pace, and so some of it is out of our control. Other gains, we are, we will do, if we believe it makes sense to do it. The portfolio as a whole is out of favor.

Our bank stock, so we have not been too aggressive and in fact, we have been deemphasizing the gains as part of our revenue stream, because we know that that's, it is not a, I'm sorry, it is not a portfolio for us any longer that we look on as a sustainable necessarily source of revenue. We have got, it depends on how things go, but we are not going to be terribly aggressive with those gains, beyond recognizing what we need to do on the M&A side, and some of that is probably already programmed in.

Yes, and we have a couple automatic gains are coming in here in the third quarter as a result of mergers, and, I mean, our run rate has been 4 to $5 million a year, Wilson.

Right.

And it depends on what the market presents to us.

Okay, great. Thank you.

You are welcome.

Thank you. Once again, ladies and gentlemen, (OPERATOR INSTRUCTIONS) Gentlemen, at this time there are no further questions. Do you have any closing comments?

Yes. Thank you, I just want to thank everyone for participating in our conference call today, and Todd and Bob and I and the other folks here really appreciate the opportunity to discuss the second quarter financial results of S&T Bancorp, and we look forward to having our discussion with you again next quarter, and thanks for being with us today!

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.