S&T Bancorp Inc (STBA) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the S&T Bancorp, Inc. fourth quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Robert E. Rout, Senior Executive Vice President and Chief Financial Officer of S&T Bancorp, Inc.

Good afternoon, everyone. Thank you for participating in the conference call. Before I begin the presentation, I want 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. This statement provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included with this presentation.

Listeners are also reminded that a copy of the fourth-quarter earnings release can be obtained at our investor relations Web site, at www.STBancorp.com. A set of financial highlights slides is included with the Webcast to support what we are about to discuss, but we do not plan to review the slides in detail, and 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 Todd Brice, S&T's President and Chief Operating Officer, who will provide an overview of S&T Bancorp's results during the fourth quarter and also for the full year ending December 31, 2007.

Good afternoon, everybody, and thank you for joining us for our fourth-quarter earnings conference call. As you can see from our earnings press release and the financial slides accompanying this Webcast, we closed out the quarter and the year with a very solid performance.

The full-year earnings per share of $2.26 represents a 10% increase over 2006. This year we have seen asset quality performance measurements return to more typical levels for a bank with a commercial lending focus such as ours. And in addition, we have experienced decent loan and deposit growth, which has positively impacted our net interest margin. We've seen improvements in our fee income revenues, and we have completed a successful stock repurchase program.

But more importantly, from a strategic perspective, this year's performance, we feel, positions us well to take advantage of current disruptions in the market, as many institutions are preoccupied with sub-prime and other credit-related issues. As we've stated before, we do not have any exposure to sub-prime. We think expanding organically has always been a strength throughout our history through our relationship banking strategies, and we believe the current banking environment provides us with seldom seen opportunities.

Organic growth, however, is only one of the strategic growth strategies available for us to grow our company. We also had a busy year in 2007 with our de novo activities, opening three branches in Squirrel Hill, one in Altoona, and one down in O'Hara Township. These were markets where we already had a strong commercial presence, and the retail facilities are a nice complement to our activities. Early indications have been very positive from these three branches, and we're ahead of our projections. The retail branches are an area that we constantly review and restructure when appropriate. During 2007 we also closed four low-volume branches, two of which were in-store Wal-Mart branches.

And finally, our last growth strategy is our acquisition strategy, which we are very much looking forward to completing our transaction with Irwin Bank in June. As we stressed in our announcement, Irwin is a very attractive partner and will provide many synergistic opportunities. Their culture and focus on their customer relationships fit extremely well with ours, and we're anxious to extend our expanded product offering to their customer base. Historically we have been a disciplined acquirer. Our last acquisition was in 2002, and before that 1997. Irwin Bank is an institution that we worked to partner with for a long time. They operate primarily in Westmoreland County, which is appealing with its favorable market demographics.

Overall we're pleased with our results, and feel that our prospects are bright in 2008 for all of our core businesses. With that in mind, I'd like to turn the floor back to Bob Rout, S&T's Senior Executive Vice President and CFO.

Let me just reiterate what Todd said. We are seeing very encouraging signs in our current performance that leads us to believe that we are well-positioned for the upcoming year. Loan growth was relatively modest by historical standards, at $129 million for the year. But anecdotally, we are seeing some rationality return to the competitive market, with more attention being paid to credit terms and risk-based pricing.

Many times over the last two years, we have walked away from deals because the pricing and the credit terms just did not make sense, especially in the commercial real estate secondary markets. This year the market trend appears to be turning back to underwriting basics, and our commercial loan pipeline has never been stronger.

We are seeing similar activity in our consumer mortgage and home equity product lines. A lot of the mortgage brokers and large out-of-state conduits are quickly closing up shop. It is also especially pleasing to see that the mix of our loan growth is beginning to diversify. The growth in C&I, or small-business non-real estate lending, is rewarding, since this is a direct -- this was a direct strategic focus. These types of loans fit very well with our relationship banking philosophy, and provide enormous cross-sell opportunities for our other product lines, such as retail, insurance and wealth management.

Credit quality is stable. In this market, stable is wonderful. With a commercial lending focus such as ours, you always have a handful of troubled credits at any given time. But there is nothing currently giving us any undue heartburn. Again, I want to emphasize we don't have any sub-prime exposure. We don't make those types of loans and we don't buy those types of securities.

The net interest margin has been fairly steady all year despite some volatile rate environments. Here, too, steady is good, with a fairly balanced asset liability position. It is currently slightly liability-sensitive at this time. We did have an e-mail question prior to the conference call concerning how the most recent 75 basis point drop in Fed funds rates will affect our balance sheet positioning.

Just to walk through some of the mechanics, we currently have about $1 billion of prime and LIBOR-based loans in our portfolio. Offsetting that, on the liabilities side, we have about $800 million in our cash management accounts, which we have moved the rates on those accounts down 75 basis points, in lockstep with the Fed rate. We also have about $100 million of [overnight] borrowings and about $100 million of retail suites, providing a pretty well-balanced position for those types of interest rate swings. One potential benefit that is not currently apparent in the balance sheet is our CD portfolio is rather short. We have about $500 million of CDs maturing over the next six months at an average rate of 4.44%. And hopefully this might lead to some additional repricing benefits as well.

The second part of that question we received is -- what happens if the Fed moves down another 50 basis points? We believe that the technical behavior of the balance sheet is going to be similar to what we're seeing here with the most recent 75 basis point reduction. You notice I emphasize the word technical. Because of course, the real unknown, or qualitative, aspect to any asset liability management program is how is the customer going to behave in response to these interest rate movements, and how rationally is your competition going to behave? But we are real comfortable with our balance sheet position. Typically you won't find us deliberately taking too much interest rate risk one way or another. We actually got a little unusual benefit here in the fourth quarter when our LIBOR loans reset during a period of very wide spreads between LIBOR and Fed funds. Most of that benefit was temporary, even though some of that spread still remains.

Looking at the fee areas, insurance and debit card fees continue very good growth. Retail mortgage banking and wealth management fees were essentially flat or down slightly this past year. We do expect these areas to pick up in 2008 as a result of several strategic initiatives. As you already know, we did get a onetime benefit in the third quarter this year of $1.2 million in the fee revenue area related to an accounting reclassification for some deferred compensation investments.

Our operating expense, or non-interest expense increases, are really the result of conscious, strategic initiatives for operational and technology infrastructure, new branches and administration facilities, and the recruiting of new talent in our business lines. This additional capacity is certainly a good thing to have in looking to integrate an upcoming merger.

Another e-mail question that we had was concerning the $1.5 million increase in operating expense on a linked-quarter basis. Just to briefly go down through some of the major components of that increase, the first being about $300,000 related to the Visa lawsuit settlement, [an accrual] that we had set up for potential payouts as a result of our being a participant with Visa. We had a $289,000 write-down on the historical rehabilitation tax credit limited partnership. The partnership recently sold, and we did not receive as much proceeds as we had been accounting for on the books.

Also in the third quarter, as we have mentioned before, almost all of our incentive programs are earnings per share growth-based. And as a result of that, we had to beef up our accruals for the potential payouts of approximately 300,000 on that. Another small item of $156,000 related to vacation accrual. Typically in very busy times, such as we had this past year trying to put together the final pieces of a merger, we will allow our employees to take up to three business days, or three vacation days, and carried them over into the next year. And our auditors, external auditors, suggested that we needed an accrual for that, which we appropriately booked here in the fourth quarter.

And also the fourth quarter is a very busy time related to customer relations, gifts, holiday parties. We also had some additional expenses related to the recruiting of that new talent I referred to earlier, with a result of the recruiting fees and relocation activities.

And some small increases in consulting of about $100,000. We've had a group within our credit administration area just really turning over all the stones, looking for all the efficiencies that we can possibly find, in order to better position them for the growth that we expect to continue in that area.

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

With that, I'll turn it back over to the moderator.

(OPERATOR INSTRUCTIONS). David Darst, FTN Midwest.

Bob, you indicated that you're seeing pretty well-diversified loan growth, and that's something you haven't seen in a while. Can you comment on where you think the pockets of demand will be, and where the opportunities are in the market for 2008?

I'll take a quick shot at it, and then I'll turn it over to Todd. It's really coming from everywhere. It's no particular industry or segment. We primarily focus on those family-owned and entrepreneurial businesses. And right now the economy is still holding very well for small manufacturers and service companies. And that's where we've seen it. We also have brought on some commercial lending talent in order to generate those types of loans. And thus far what we've seen from that particular strategy, we're very pleased with. Todd, did you have something you (multiple speakers)

The only other thing I'd just like to mention, David, we've seen a noticeable uptick in real estate activity as well. I think some of it's a result of the drop in rates, and also just some of the turmoil in the secondary markets. We've taken a look at a couple of deals that probably would have went out to some conduit in the past.

How about your construction portfolio? That looks like it's kind of trended lower over the past year. Do you think you'll grow it from here? Or is that somewhere that you're being a little more cautious?

We just haven't seen a lot of activity. I think a lot of the demand has just kind of dried up, and really no one is looking to go out and really do any new projects on the residential real estate side. We have seen some activity on the commercial side.

Okay. How about going into the acquisition, you're probably not going to be buying back any stock or looking at leveraging the balance sheet any, are you?

We're going to need most all the capital we have in order to integrate this thing here in the second quarter, and we'll also be raising some.

Great. Thank you.

Rick Weiss, Janney Montgomery Scott.

Actually, David asked my question about the leverage. But let me just ask you -- with respect to deposit gathering, are there any kind of initiatives that you are thinking about doing to get more core deposits?

Yes. There's a number of programs that we're running. It's not just the promotion of the week or promotion of the month. We have a conscious ongoing strategic focus in gathering core deposits. Again, the family-owned and entrepreneurial commercial loan business that I talked about earlier is certainly a very high potential market for us. And we do a pretty good job of gathering that. We have specialists who go out and meet with those folks and walk through how their whole treasury function can be better managed. That has paid off. On a retail basis, we think the cash management account is very competitive and fits very nicely, again, with our balance sheet and our composition of commercial loans, how they are priced in the retail. This isn't a strong growth market, and we just have to do things a little better and a little smarter in order to take that business away from the competition.

When you're growing your commercial loans, do you typically get the deposit relationship (multiple speakers)

We have several people dedicated just to kind of work in conjunction with the commercial lenders, and that's all they do. Once we close the loan, they come in and set up all the cash management products and the online banking. And last year we had pretty good success in there. I think it was $30-something million.

It's typically not a credit requirement in order to approve the loan. But we think our product is as good as anything out there in the market, and there's no reason that they shouldn't be dealing with us on those issues.

We realize, too, that in addition, we can skinny up on the price a little bit. But if you do, you have to really tie in the whole relationship. And those deposits are just so very, very critical in generating a higher return for us. So, we would focus a lot of attention on that.

Thank you very much.

(OPERATOR INSTRUCTIONS). Bret Ginesky, Stifel Nicolaus.

My question was, basically, you bought back shares pretty aggressively in the first half of the year, and in the second half you only bought back, it looks like, 20,000 shares. So I was wondering where you're going, going forward from here, with your buyback strategy.

Some of that pullback was in anticipation of this upcoming merger. Again, we knew that we were going to need capital in order to put a size -- an acquisition on such as Irwin. So I don't think you'll see us being too active in the buyback market.

Could you talk a little bit about just the credit, and the outlook for it for 2008?

We're still addressing some of those nonperformers that we have. And it looks like those -- some of those may be coming to resolution one way or another. And we really haven't seen any deterioration in delinquency problems right now. We're cautious. Because you know, you keep hearing what you keep hearing; the recessionary pressure is going to impact the market. Our customers are still telling us, particularly in the manufacturing (inaudible) still very -- see a high demand and trying to hire people. So I guess it's kind of wait and see where the economy goes.

What about the non-performers that you added in the quarter? What were those representative of, like which (inaudible)?

The big one was the apartment buildings. There was a real estate related credit in Pittsburgh, in multiple locations, and really (inaudible) domestic issue between the principal and his spouse, and we're working through that now.

Great. Thanks a lot.

Mr. Brice, there are no further questions at this time. Do you have any closing comments?

I'd like to thank everybody for participating in today's conference call. Jim and Bob and I appreciate the opportunity to discuss the fourth-quarter financial results of S&T Bancorp, and we will look forward to hearing from you at the next quarter's conference call.

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