S&T Bancorp Inc (STBA) 2007 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the S&T Bancorp Inc. third-quarter earnings conference call. (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. Thank you. Mr. Rout, you may begin.

Good afternoon, everyone, and thank you for participating in the conference call. Before beginning the presentation, I wanted to take time to refer you to our statement about forward-looking statements and risk factors in the third slide of our webcast slide presentation. The statement provides the required cautionary language by the SEC for forward-looking statements that may be included with this presentation.

Listeners are also reminded that a copy of the third-quarter earnings release can be obtained from our Investor Relations website at www.stbancorp.com.

In addition, a set of financial highlight slides are included with the webcast to support what we're about to discuss. We do not plan to review the slides in detail, but we would be more than happy to respond to any questions concerning them or any other aspect of our financial performance.

Now I would like to introduce Jim Miller, S&T's Chairman and Chief Executive Officer, who will provide an overview of S&T Bancorp's results during the third quarter.

Thank you, Bob, and good afternoon. Thanks for joining in our earnings conference call today.

As you can see from our earnings press release and the financial slides accompanying this webcast, we had a good quarter with earnings per share of $0.63 as compared to $0.57 for the third quarter of 2006 representing an 11% increase. We did have one unusual item in this quarter as detailed also in the press release. Our results include a $1.2 million onetime benefit in other revenue as a result of an accounting change for deferred compensation investment portfolios. This change provided about $0.03 per share to this quarter's results, but the primary purpose was to eliminate quarterly volatility in the income statement caused by using a different accounting methodology.

Some of the other factors affecting our performance this quarter would include our net interest income which has shown only modest growth on a quarter-to-date and year-to-date basis. We're fairly pleased with the stability of our net interest margin during this volatile interest rate environment over the past couple of years.

Ideally we would like to see much more robust growth in this line item, but this environment is probably the toughest for bank earnings that many of us have seen in our careers. So we're not displeased with the 2% increase when, as you know, many banks are actually seeing negative growth in net interest income.

Asset quality continues to improve, and all the metrics regarding asset quality are well within acceptable tolerances. That improvement is, of course, reflected in provision expense for the quarter and for the year-to-date.

As a footnote, we're still working through the residual of our two remaining problem credits from last year. We don't expect any significant negative surprises on these relationships as we work through them and are actively pursuing the potential recoveries on them.

Noninterest income after discounting the accounting change impact has been fairly modest this year. This area, I believe, has a lot of opportunity and will certainly be an area of strategic focus to get this revenue back to historical growth trends going forward.

The subprime loan crisis that hit in the third quarter disrupted credit markets. Certainly this has had an impact on all financial institutions. We throughout the whole subprime rise and fall have tried to remain disciplined. As a result, we don't have any subprime exposure either in our loans or in our investment portfolios. It has been a tough temptation to avoid, but as you can see, year-to-date balances in the securities portfolio declined $68 million, and loan growth of $84 million is below our historical trends. That strategy, however, is proving to be the correct decision and should put us in a good position going forward.

While loan growth increased to $84 million on a year-to-date basis, on a linked quarter basis, growth is a modest $8 million. Our consumer loans are benefiting from some strategic initiatives implemented last year. There are up $41 million year-to-date, and that is a good thing because our commercial real estate portfolio has been affected negatively by an uptick in season loans refinancing into the secondary markets.

As you all know, the conduits, REITs and insurance companies with all the liquidity that has been available had been offering rates and credit terms to our customers that we simply could not compete with. So we have seen this happening over the last couple of years, and this year we took the initiative to focus more on our C&I business, at least until the commercial real estate market has become more rational. $80 million of year-to-date growth in C&I loans I think indicates that that strategy has been working pretty well for us.

Operating expenses are running a little hot, but most of the increase is related to what I would call conscious strategic investments in new branches, expanded operational infrastructure and acquiring new talent over the last 12 months. We believe these initiatives will enhance our revenue streams in the future once we get through the initial startup periods.

Just a brief comment on deposits which increased $55 million year-to-date. Competition here too is pretty intense and sometimes not all that rational. We believe that our DDA, electronic banking, commercial cash management and cash management accounts are among the best that we see in the market. So there is no reason why we cannot continue to enjoy good growth in these important funding and customer relationship building products.

We have had discussions in the past, you may recall, about our out-of-state commercial real estate exposure, which we, frankly, view as a good thing. But I think it is important to talk about it, especially with what is happening in select markets around the country.

So I want to turn over the discussion to Todd Brice, our President and Chief Operating Officer, to provide some additional detail on these out-of-state loans. Todd?

Well, thank you, Jim, and good afternoon, everyone. As Jim mentioned, we have had a number of inquiries regarding our exposure in our commercial loan portfolio on projects that we financed out-of-state. We think this is a line of business that we pursued for many years, and the loans are typically made to borrowers with whom we have had long-standing relationships with whom for one reason or another have expanded their business into other markets. Now we feel that those types of loans provide us with some geographic diversity in our portfolio, and they truly have been made to the very best customers of the bank.

At the end of the third quarter, our out-of-state exposure totaled $255 million. Out-of-state balances on these loans totaled $225 million with another $30 million available in commitments. There are 25 states represented in the portfolio. However, 10 states have exposures over -- I'm sorry, $10 million, which represents $200 million or really 90% of the portfolio. And the 10 states and their respective balances are as follows -- Ohio $46 million; New York $32 million; Florida $31 million; Arizona $23 million; Tennessee $17 million; North Carolina $12 million; South Carolina $11 million; Connecticut $10 million; West Virginia $10 million, and -- sorry South Carolina I think I doubled up on that, but it was $10 million as well. This portfolio is comprised almost entirely of commercial real estate and consists of approximately $170 million in income producing properties either retail strip malls, hotels, office buildings, department buildings and also some owner occupied. We also have $30 million in exposure on the residential development side. Again, I just want to stress that all of these loans have been made to long-standing S&T Bank customers. They have been underwritten in a conservative nature.

In addition to the underlying collateral, all the loans have personal guarantees which also provides strong secondary sources of repayment. Looking through the list, I am not aware of any delinquency issues at the present time in any of these accounts.

I hope this sheds some light on some of our out-of-state activities. I would be happy to answer any questions at the conclusion of the presentation.

With that, I will turn it back over to Jim.

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

With that, we will take questions.

(OPERATOR INSTRUCTIONS). Steve Moss, Janney Montgomery Scott.

I just want to ask if you're seeing any stress from any of your borrowers on the commercial side with the falling economy?

You know, we measure that in a lot of different ways I guess. The primary one is the 30-day delinquency number, which is usually your first indicator, and those numbers have been pretty steady and honestly continue to be pretty good. I think over the most recent month, which I know we don't publish these but I guess we can talk about it in this conference call, it is just a little bit north -- a little bit south of 1.1. So it is like 108 or something in that neighborhood 30-day and over delinquency. And that has been pretty consistent over the last 12 months.

So I would say and then the nonperforming numbers have improved. So -- and I'm sure the 50 basis point drop in prime is going to be helpful to a lot of the commercial borrowers. So we have not seen it yet, and what we tend to hear when we go out in the marketplace and talk to our customers, the people that are in the like value-added manufacturing and that type of thing, they are still pretty busy.

So we are not hearing a lot about any significant slowdowns in these markets. But remember, this is Western Pennsylvania, and we never seem to experience the boom or the bust times to the extent that other areas of the country do.

Okay. And with regard to the charge-offs this quarter, was that from one specific loan or a couple of loans that were previously disclosed?

It was a couple of different loans.

Okay. Were they on the commercial side?

Oh, yes.

Yes, okay.

Well, yes, they were from the commercial side.

Okay. Thank you very much.

But the charges were a mixture too because you had some consumer, you had some (inaudible) in there. It was a little bit of everything.

Yes, you would have a mix in there, but the major piece of it would be commercial.

It was spread across a couple of different commercial relationships.

(multiple speakers). Yes, we were confused among ourselves for a little bit I think.

There is a differentiation between reserve and (multiple speakers) reserves and (multiple speakers). The charge-offs were actually a mix of nothing particular in one area or another. It is actually a pretty -- the number was actually well within what we've had planned for this year, for this quarter.

David Darst, FTN Midwest Securities.

I understand that you feel like the local market is pretty stable, but could you -- and it does not have a lot of swing either way. But could you give us a little bit more detail about the tenor of the local residential market and maybe how much exposure you have to residential developers?

What is our exposure to residential developers? Not specifically, but we have not anticipated any major problems with any of those developers other than we were sluggishly moving inventory.

Yes, I think there has been some slowdown in terms of the inventory. The people that we deal with in that business are pretty seasoned folks, and they tend to deal with the major homebuilders in these markets, which I guess would be [Ryan] and Heartland and [Miranda]. And I'm sure that they are not all meeting their takedown schedules, but they -- this did not I don't think catch anybody in these markets by surprise. They have been anticipating this, and most of them are pretty solid folks that have the capacity to weather a slowdown. And I would tell you that it has not -- you know, it has not stopped by any means. And most of the homebuyers here are end users, of course. And we do some financing for some homebuilders as well, and they don't seem to be -- the ones we have in our portfolio -- don't seem to be feeling a lot of stress right now because there seems to be plenty of availability on their lines and we have not had any significant delinquencies in this area. It is certainly something that we watched closely, but we have not -- we are not seeing a lot of stress there right now, and it is probably because of good planning on their part.

The other thing we have done, David, is as you know as these lines come up for renewals that we have done some stress testing on the interest reserves to make sure those are adequate for the next year, and if we fill their division, we in some instances require them to post some additional reserves to just weather any downturn in the market.

Okay. Thanks.

And most of them are probably -- it's just the one more thing out of that, David, most of them are probably tied to prime, and the drop is probably going to provide a little help to them too.

Okay. And your reference to the expense growth kind of running at above-average pace for the past year, are most of those initiatives fully incorporated in the run-rate now where (inaudible) should normalize going forward?

Yes, I think so, David. We have plans maybe to close one more branch, which there may be some write-offs on some leasehold equipment. But I think for the most part we have all our new branches online. There is maybe one or two in the planning stages at this point that have (multiple speakers) online. But yes, that is about it.

Okay. And then, Bob, what are the results on the margin and how much benefit you might be able to receive from the rate cut?

We're pretty well balanced.

So do you think you can maintain a stable margin?

Certainly what has happened with the 50 basis point drop, we actually saw just a slight improvement to our margin as a result of that. Just a couple of basis points. So with our cash management account, we priced that downward lockstep with the Fed move. And it is pretty well balanced with our variable-rate commercial loan portfolio and other variable-rate type assets. We are real pleased with it being balanced at this point.

The one thing that probably could jump up and bite us a little bit there, David, is the customer behavior. A lot of those are consumers of those balances, and if they -- and they have received at least one month end statement since the change, and we have not seen a lot of movement yet. But you might anticipate seeing some of that cash management liquid money moved into the short-term CDs. That would be the potential downside. But we will monitor that pretty closely as we go here. But I would anticipate some of that behavior.

Okay. One more question for you. Did you have some -- could you give us the amount of shares you repurchased during the quarter? And then it looks like maybe you had some options that were exercised and drove the numbers up.

Yes, we had $20,000 purchased during the quarter. And I think stock option exercise, I don't have the exact numbers, but they were not very significant. I would say under 10,000 shares.

Okay. And do you have capital --

Jim just corrected me. There were some stock options. So it might be a little bit north of the 20,000 that we purchased.

Because it looks like the period then went up but the average came down. Then are you kind of comfortable with where your capital is now?

No, we will continue to look for opportunities to again continue to get some hybrid securities into our capital mix, barring any type of acquisition or other very extensive growth mode in the balance sheet. So we will continue to look for those opportunities. As you know, the trust preferred and the subordinated debt markets, this is not the time you want to be doing any type of issuance.

Okay. I guess one more question. Are you seeing any benefit in your [interim] markets from the conduit kind of shutting down? That should strengthen your pipeline and slow your payout, shouldn't it?

I'm going to turn that over to one of our lenders here. We have Dave Krieger, who is our Senior Executive Vice President of Commercial Lending and who has been in this market probably longer than he wants to admit. But, David, what are you hearing out there as far as conduits and insurance -- (multiple speakers)?

It is certainly going to slow it. We have had numerous payoffs over the last 12, 18 months, and it is kind of hard to grow it. But we're seeing that slowing down quite a bit, and I think we're going to be able to retain some of those assets on the balance sheet that left us previously, but time will tell.

Another thing there is nothing tangible yet, David, but there have been a couple of looks at some credits that we probably would not have gotten in the past. And there's a couple of other things in the queue that hopefully will materialize towards the end of the quarter.

And there were a couple of customers that were planning to go to the secondary market but did not and found out that the rates and terms are not nearly as attractive as what they were 60, 90 days ago. So anecdotally we're seeing it, but we still have not seen any growth in our -- especially our commercial real estate portfolio at this time.

Okay. Well, it sounds like it is a positive or could be a positive for you. (multiple speakers) Alright. Thank you.

(OPERATOR INSTRUCTIONS). Bret Ginesky, Stifel Nicolaus & Co.

I had a question for you just regarding the wealth management fees. There was a decrease on a linked quarter basis, and I was wondering what that was [paintable] to?

Well, we have that area going through some restructuring with the brokerage, bringing in some new talents and some new products, and I would say they are just going through some growth changes here going forward. And our expectations are that we have got back up in the double-digit ranges again.

The other thing they had some pretty hefty estate revenues that hit that have rolled off too. Plus, last year (multiple speakers) comparing to a very good quarter. Yes, we have (inaudible). They started up a mutual fund down there, and we have made some other changes and enhancements. We have added some talent. And again, I think you're sort of in a kind of spooling up mode if that is the right word, which has affected the net revenue growth in that area. Although we still see it as a very good contributor in the long-term to our renewable fee revenue, and a nice fit honestly too with the family-owned businesses and entrepreneurs that we tend to focus our commercial lending activities on, which, as you know, has been a driver for our growth over a fairly long period.

Okay. And then I guess my second question is, could you disclose or just talk about the Arizona loans and I know you said it was $23 million. Is that also one borrower?

No. (multiple speakers). You have probably four or five different groups, and like I say, there might be 4 to $5 million in one to four family residential type development. And then the other is -- a couple of them are actually owner occupied, and then you have some retail strip exposure that we think long, long time customers, and a couple of them are in the lease-up stage or construction phase, but they have some pretty good pre-leasing activities before they even come out of the ground.

Now how much of that is already completed construction, and how much of it is actual still in a phase of construction right now?

There is probably -- probably the majority of it is done. There might be $1 million to $2 million in commitments outstanding. Now some of it again is in the development stage where we funded the land acquisition, and now they come back to us with the development piece. We just don't have that piece yet, but we're pretty comfortable with what we have out there.

And the $23 million figure then is total commitments. It is not --?

That is pretty much outstanding.

Okay. Great. And then if you can also just talk about the reserve and what level you are comfortable with. I mean it dropped 7 basis points on a linked quarter basis. Some of that is probably, you know, what they are being told to do, but where do you see that pedaling in at going forward?

Well, it is all a function of what is happening with asset quality, and right now that asset quality is going pretty good. So we are comfortable with where it is at today based on what we have seen in the portfolio.

Okay. Great. (multiple speakers)

We really don't set a target for it either percentagewise or dollarwise. I mean it is a very intense analysis and process and various levels of reviews that would get us through (inaudible) come up with that number, and that is what we do every quarter.

Okay. And then just one more question. On the other income line, if I back out the $1.2 million gain that you guys had there from the 4.2, you're still up on a linked quarter basis by over like 10%. I was just wondering what led to that?

Our debit and credit card activities continue to run very strong. And if I also recall, I think we had a swap fee from one of our commercial customers in there for $150,000. It probably was not repeated in the second quarter.

Okay. Great. Thanks a lot, guys. Appreciate it.

Just one other thing I wanted to mention. In my comments the one state I omitted was California. We have an exposure of about $11 million out there.

(OPERATOR INSTRUCTIONS). Gentlemen, there are no further questions in the queue.

Very good. Well, thank you for participating in today's conference call. Todd and Bob and I appreciate the opportunity to talk about the third-quarter financial results of S&T Bancorp and look forward to talking with you at the next quarter's conference call.

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