S&T Bancorp Q3 2007 Earnings Call Transcript

Oct.17.07 | About: S&T Bancorp, (STBA)

S&TBancorp, Inc. (NASDAQ:STBA)

Q3 2007Earnings Call

October 17, 2007, 4:00 a.m. ET

Executives

JimMiller - Chairman and Chief Executive Officer

ToddBrice - President and Chief Operating Officer

RobertRout - Executive Vice President and Chief Financial Officer

DaveKrieger - Senior Executive Vice President, Commercial Lending

Analysts

Steve Moss- Janney Montgomery Scott

David Darst- FTN Midwest Securities Corp.

BretGinesky - Stifel Nicolaus & Company

Operator

Greetings, ladies andgentlemen, and welcome to the S&T Bancorp Inc. Third Quarter earnings conferencecall.

It is now my pleasureto introduce your host, Mr. Robert Rout, Executive Vice President and CFO.  Thank you. Mr. Rout, you may begin.

Robert Rout

Good afternoon everyoneand thank you for participating in the conference call.  Before beginning the presentation, I want totake time to refer you to our statement about forward-looking statements andrisk factors in the third slide of our webcast live presentation.

The statement providesthe required cautionary language by the SEC for forward-looking statements thatmay be included with this presentation. Listeners are also reminded that a copy of the third quarter earnings releasecan be obtained from our Investor Relations website at www.stbancorp.com.

In addition, a set offinancial highlights slides are included with the webcast that support what weare about to discuss.  We do not plan toreview the slides in detail, but we would be more than happy to respond to anyquestions concerning them or any other aspect of our financial performance.

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

Jim Miller

Thank you, Bob, andgood afternoon.  Thanks for joining inour earnings conference call today.  Asyou can see from our earnings press release and the financial slides accompanyingthis webcast, we had a good quarter with earnings per share of $0.63 ascompared to $0.57 for the third quarter of 2006, representing an 11% increase.

We did have one unusualitem in this quarter as detailed also in the press release.  Our results include a $1.2 million one-timebenefit in other revenue as a result of an accounting change for deferredcompensation investment portfolios.  Thischange provided about $0.03 per share to this quarter's results.  The primary purpose was to eliminatequarterly volatility in the income statement caused by using a differentaccounting methodology.  Some of theother factors affecting our performance this quarter would include our netinterest income, which has shown only modest growth on a quarter-to-date and year-to-datebasis.

We are fairly pleasedwith the stability of our net interest margin during this volatile interestrate 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 ushave seen in our careers.  We are notdispleased with the 2% increase when, as you know, many banks are actuallyseeing negative growth in net interest income.

Asset quality continuesto improve and all the metrics regarding asset quality are well withinacceptable tolerances.  That improvementis of course, reflected in provision expense for the quarter and for theyear-to-date.

As a footnote, we arestill working through the residual of our two remaining problem credits fromlast year.  We do not expect anysignificant negative surprises on these relationships as we work through themand are actively pursuing the potential recoveries on them.

Non-interest income,after discounting the accounting change impact, has been fairly modest thisyear.  This area, I believe, has a lot ofopportunity and would certainly be an area of strategic focus to get thisrevenue back to historical growth trends going forward.

The sub-prime loancrisis that hit in the third quarter disrupting credit markets certainly hashad an impact on all financial institutions. We, throughout the whole sub-prime rise and fall, have tried to remaindisciplined.  As a result, we do not haveany sub-prime exposure either in our loans or in our investment portfolios.  It has been a tough temptation to avoid, butas you can see, year-to-date balances in the securities portfolio declined $68million, and loan growth of $84 million is below our historical trends.  That strategy, however, is proving to be thecorrect decision and should put us in a good position going forward.

While loan growthincreased $84 million on a year-to-date basis, on a linked quarter basis growthis a modest $8 million.  Our consumerloans are benefiting from some strategic initiatives implemented lastyear.  They are up $41 millionyear-to-date.  That is a good thing,because our commercial real estate portfolio has been affected negatively by anuptick in seasoned loans refinancing into the secondary markets.

As you all know, theconduits, REITS and insurance companies, with all the liquidity that has beenavailable, had been offering rates and credit terms to our customers that wesimply could not compete with.

We have seen thishappening over the last couple of years. 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&Iloans, I think, indicates that the strategy has been working pretty well forus.

Operating expenses arerunning a little hot, but most of the increase is related to what I would callconscious strategic investments in new branches, expanded operationalinfrastructure and acquiring new talent over the last 12 months.  We believe these initiatives will enhance ourrevenue streams in the future once we get through the initial startup periods.

Just a brief comment ondeposits, which increased $55 million year-to-date.  Competition here too is pretty intense andsometimes not all that rational.  We believethat our DDA, Electronic Banking, Commercial Cash Management and CashManagement Accounts are among the best that we see in the market.  There is no reason why we cannot continue toenjoy good growth in these important funding and customer relationship buildingproducts.

We have had discussionsin the past, you may recall, about our out-of-state commercial real estateexposure, which we frankly view as a good thing.  I think it is important to talk about it,especially with what is happening in select markets around the country.  I want to turn over the discussion to ToddBrice, our President and Chief Operating Officer, to provide some additionaldetail on these out-of-state loans.

Todd Brice

Thank you, Jim, andgood afternoon, everyone.  As Jim mentioned,we have had a number of inquiries regarding our exposure in our commercial loanportfolio on projects that we financed out-of-state.  We think this is a line of business that wehave pursued for many years, and the loans are typically made to borrowers withwhom we have long-standing relationships, who for one reason or another haveexpanded their business into other markets. Now we feel that those types of loans provide us with some geographicdiversity in our portfolio and they truly have been made to the very bestcustomers of the bank.  At the end of thethird 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 statesrepresented in the portfolio.  However, tenstates have exposures over $10 million, which represent $200 million or 90% ofthe portfolio.  The ten states and theirrespective balances are as follows: Ohio - $46 million; New York - $32 million;Florida - $31 million; Arizona - $23 million; Tennessee - $17 million; NorthCarolina - $12 million; South Carolina - $11 million; Connecticut - $10million; West Virginia - $10 million, and – sorry, South Carolina, I think Idoubled up on that, but it was $10 million as well.

This portfolio iscomprised almost entirely of commercial real estate and consists ofapproximately $170 million in income-producing properties, either retail stripmalls, hotels, office buildings, apartment buildings and also some owner-occupied.  We also have $30 million in exposure on theresidential development side.

Again, I just want tostress that all of these loans have been made to long-standing S&T Bankcustomers.  They have been underwrittenin a conservative nature.  In addition tothe underlying collateral, all the loans have personal guarantees, which alsoprovides strong secondary sources of repayment. Looking through the list, I am not aware of any delinquency issues atthe 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 atthe conclusion of the presentation.

With that, I will turnit back over to Jim.

Jim Miller

I think we havementioned in recent conference calls that we long ago discontinued the practiceof providing specific earnings guidance each quarter.  With that in mind, Todd, Bob or I would behappy to entertain any specific questions about our past performance and thefuture outlook for our business in general.

With that, we will takequestions.

Question-and-Answer Session

Operator

Our first questioncomes from the line of Steve Moss with Janney Montgomery Scott.  Please proceed with your question.

Steve Moss - Janney Montgomery Scott

I just want to ask if youare seeing any stress from any of your borrowers on the commercial side withthe falling economy?

Jim Miller

We measure that in alot of different ways, I guess.  Theprimary one is the 30-day delinquency number, which is usually your firstindicator.  Those numbers have beenpretty steady and honestly continue to be pretty good.  I think over the most recent month , which Iknow we do not publish it, but I guess we can talk about it in this conferencecall, it is just a little bit south of 1.1. So it is like 1.08 or something in that neighborhood 30-day and overdelinquency.  That has been prettyconsistent over the last 12 months.

I would say then thenonperforming numbers have improved.  Iam sure the 50 basis point drop in prime is going to be helpful to a lot of thecommercial borrowers.  We have not seenit yet, and what we tend to hear when we go out in the marketplace and talk toour customers, the people that are in the value-added manufacturing and thattype of thing, they are still pretty busy.

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

Steve Moss - Janney Montgomery Scott

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

Jim Miller

It was a couple ofdifferent loans.

Steve Moss - Janney Montgomery Scott

Okay.  Were they on the commercial side?

Jim Miller

Yes.

Steve Moss - Janney Montgomery Scott

Yes, okay.

Jim Miller

Well, yes, they were onthe commercial side.

Steve Moss - Janney Montgomery Scott

Okay.  Thank you very much.

Jim Miller

Charge-offs were a mixturetoo, because you got some consumer, you got some business in there.  It was a little bit of everything.

Robert Rout

Yes, you have a mix inthere, but the major pieces of it would be commercial.

Todd Brice

It was probably spreadacross a couple of different commercial relationships and in differentpatterns.

Jim Miller

Yes, exactly.  We were confused among ourselves for a littlebit I think.

Todd Brice

There is adifferentiation between reserve (Voice Overalp) and the charge-offs.

Jim Miller

Charge-offs wereactually a mix.  Nothing particular inone area or another.  The number wasactually well within what we had planned for this year, for this quarter.

Steve Moss - Janney Montgomery Scott

Okay.  Thanks a lot.

Operator

Our next question comesfrom the line of David Darst with FTN Midwest Securities Corp.  Please proceed with your question.

David Darst - FTN Midwest Securities Corp.

I understand that youfeel like the local market is pretty stable, and it does not have a lot ofswings either way.  But could you give usa little bit more detail about the tenor of the local residential market, andmaybe how much exposure you have to residential developers?

Todd Brice

What is our exposure toresidential developers?  Notspecifically, but we have not anticipated any major problems with any of thosedevelopers other than the normal sluggishly moving inventory.

Jim Miller

Yes, I think there hasbeen some slowdowns 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 Iguess would be Bryan and Heartland and Miranda.  Iam sure that they are not all meeting their takedown schedules.  But this did not, I do not think, catchanybody in these markets by surprise. They have been anticipating this, and most of them are pretty solidfolks that have the capacity to weather a slowdown.

I would tell you thatit has not stopped by any means.  Most ofthe homebuyers here are end users, of course. We do some financing for some homebuilders as well, and the ones we havein our portfolio do not seem to be feeling a lot of stress right now becausethere seems to be plenty of availability on their lines.  We have not had any significant delinquenciesin this area. It is certainly something that we have watched closely, but weare not seeing a lot of stress there right now, and it is probably because ofgood planning on their part.

Todd Brice

The other thing we havedone, David, is as these lines come up for renewals, we have done some stresstesting on the interest reserves to make sure those are adequate for the nextyear.  And if we go in their division, we,in some instances, require them to post some additional reserves to just weatherany downturn in the market.

David Darst - FTN Midwest Securities Corp.

Okay.  Thanks.

Todd Brice

And most of them areprobably, and just the one more thing to add to that, David, most of them areprobably tied to prime, and the drop is probably going to provide a little helpto them, too.

David Darst - FTN Midwest Securities Corp.

Okay.  Your reference to the expense growth, kind ofrunning at above-average pace for the past year, are most of those initiativesfully incorporated in the run rate now where expense growth should normalizegoing forward?

Todd Brice

Yes, I think so, David.  We have plans maybe to close one more branch,and there may be some write-offs on some leasehold equipment.  But I think for the most part we have all ournew branches online.  There is maybe oneor two in the planning stages at this point that have not gotten online.  But yes, that is about it.

David Darst - FTN Midwest Securities Corp.

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

Robert Rout

We are pretty wellbalanced.

David Darst - FTN Midwest Securities Corp.

Do you think you canmaintain a stable margin?

Robert Rout

Yes.  Certainly.  What has happened with the 50 basis pointdrop, we actually saw just a slight improvement to our margin as a result ofthat; just a couple of basis points.  Sowith our cash management account, we priced that downward lockstep with the Fedmove.  It is pretty well balanced withour variable rate commercial loan portfolio and other variable-rate typeassets.  We are well pleased with itbeing balanced at this point.

Jim Miller

The one thing thatcould probably jump up and bite us a little bit there, David, is the customerbehavior.  A lot of those are consumersof those balances, and they have received at least one month-end statementsince the change, and we have not seen a lot of movement yet.  You might anticipate seeing some of that cashmanagement liquid money moved into the short-term CDs.  That would be the potential downside.  We will monitor that pretty closely as we gohere, but I would anticipate some of that behavior.

David Darst - FTN Midwest Securities Corp.

Okay.  One more question for you.  Could you give us the amount of shares yourepurchased during the quarter?  It lookslike maybe you had some options that were exercised and drove the numbers up?

Robert Rout

Yes, we had 20,000purchased during the quarter.  I thinkstock options exercised, I do not have the exact numbers, but they were notvery significant.  I would say under10,000 shares.

David Darst - FTN Midwest Securities Corp.

Okay.  And do you have capital (Voice Overlap)

Robert Rout

I am sorry, wait.  Jim just corrected me.  There were some stock options.  It might be a little bit north of the 20,000that we have repurchased.

David Darst - FTN Midwest Securities Corp.

Okay.  Yes, because it looks like the period-end wentup but the average came down.  Then areyou kind of comfortable with where your capital is now?

Robert Rout

No, we will continue tolook for opportunities to get some hybrid securities into our capital mix,barring any type of acquisition or other very extensive growth mode in thebalance sheet.  We will continue to lookfor those opportunities.  But as youknow, the trust preferred and the subordinated debt markets, this is not thetime you want to be doing any type of issuance.

David Darst - FTN Midwest Securities Corp.

Okay.  I guess one more question.  Are you seeing any benefit in your marketsfrom the conduits kind of shutting down? That should straighten your pipeline and slow your payoff, shouldn't it?

Robert Rout

I am going to turn thatover to one of our lenders here.  We haveDave Krieger, who is our Senior Executive Vice President of Commercial Lendingand who has been in this market probably longer than he wants to admit.  But David, what you are hearing out there asfar as conduits and insurance?

Dave Krieger

It is certainly goingto slow it.  We have had numerous payoffsover the last 12 to 18 months, and it is kind of hard to grow.  But we are seeing that slowing down quite abit, and I think we are going to be able to retain some of those assets on thebalance sheet that left us previously, but time will tell.

Robert Rout

Another thing, there isnothing tangible yet but there have been a couple of looks at some credits thatwe probably would not have gotten in the past. There are a couple of other things in the queue that hopefully willmaterialize towards the end of the quarter.

Dave Krieger

There were a couple ofcustomers who were planning to go to the secondary market and found out thatthe rates and terms are not nearly as attractive as what they were 60, 90 daysago.  Anecdotally, we have seen it, butwe still have not seen any growth in our, especially our Commercial Real Estateportfolio at this time.

David Darst - FTN Midwest Securities Corp.

Okay.  Well, it sounds like it is a positive orcould be a positive for you.

Dave Krieger 22:07

It could be.  It should be.

David Darst - FTN Midwest Securities Corp.

All right, thank you.

Operator

Our next question comesfrom the line of Bret Ginesky with Stifel Nicolaus & Company.  Please proceed with your question.

Bret Ginesky - Stifel Nicolaus & Company

I have a question foryou regarding the wealth management fees. There was a decrease on a linked quarter basis, and I was wondering whatthat was attributable to?

Robert Rout

Well, we have that areagoing through some restructuring with the brokerage, bringing in some newtalents and some new products, and I would say they are just going through somegrowth changes here and moving forward. Our expectations are that we would get back up in the double-digitranges again.

Todd Brice

The other thing, theyhad some pretty hefty estate revenues that hit that have rolled off too.  Plus, last year you might do a comparison, comparingto a very good quarter. 

Jim Miller

Yes we have, we havemade, they have started up a mutual fund down there, and we have made someother changes and enhancements.  We haveadded some talent.  Again, I think youare sort of in a kind of spooling up mode if that is the right word, which hasaffected the net revenue growth in that area. Although we still see it as a very good contributor in the long-term toour renewable fee revenue, and a nice fit honestly too with the family-ownedbusinesses and entrepreneurs that we tend to focus our commercial lendingactivities on, which as you know has been a driver for our growth over a fairlylong period.

Bret Ginesky - Stifel Nicolaus & Company

Okay.  I guess my second question is, could youdisclose or just talk about the Arizona loans?  Iknow you said it was $23 million.  Isthat all to one borrower?

Todd Brice

No.  You have probably four or five differentgroups, and I could say there might be $4 million to $5 million in one to fourfamily residential type development.  Theother is, a couple of them are actually owner-occupied.  Then you have some retail strip exposure thatare big, long, long time customers.  A coupleof them are in the lease-up stage or construction phase, but they have somepretty good pre-leasing activities before they even come out of the ground.

Bret Ginesky - Stifel Nicolaus & Company

Now, how much of thatis already completed construction, and how much of it is actually still in aphase of construction right now?

Todd Brice

Probably the majorityof it is done.  There might be $1 millionto $2 million in commitments outstanding. Some of it again is in the development stage where we funded the landacquisition, and now they come back to us with the development fixed.  We just do not have that fixed yet, but weare pretty comfortable with what we have out there.

Bret Ginesky - Stifel Nicolaus & Company

Okay.  And the $23 million figure then is totalcommitments.  It is not—(Voice Overlap)

Todd Brice

That is pretty muchoutstandings.

Bret Ginesky - Stifel Nicolaus & Company

Okay, okay, great.  If you can also just talk about the reserveand what level are you comfortable with?  I mean, it dropped seven basis points on alinked quarter basis.  I know some ofthat is probably what they are being told to do, but where do you see thatpedaling in at going forward?

Robert Rout

Well, it is all afunction of what is happening with asset quality, and right now that assetquality is going pretty good.  So we arecomfortable with where it is at today based on what we have seen in theportfolio.

Bret Ginesky - Stifel Nicolaus & Company

Okay.  Great.

Robert Rout

We really do not set atarget for it either percentage-wise or dollar-wise.  I mean that is a very intense analysis andprocess and various levels of reviews that it goes through for us to come upwith that number, and that is what we do every quarter.

Bret Ginesky - Stifel Nicolaus & Company

Okay, just one morequestion.  On the other income line, if Iback out the $1.2 million gain that you guys had there from the 4.2, you arestill up on a linked quarter basis by over like 10%.  I was just wondering what led to that?

Robert Rout

Our debit and creditcard activities continue to run very strong. If I also recall, I think we had a swap fee from one of our commercialcustomers in there for $150,000.  It probablywas not repeated in the second quarter.

Bret Ginesky - Stifel Nicolaus & Company

Okay, great.  Thanks a lot, guys.  I appreciate it.

Todd Brice

Just one other thing Iwanted to mention.  In my comments, theone state I omitted was California.  We havean exposure of about $11 million out there.

Bret Ginesky - Stifel Nicolaus & Company

Okay.  Thank you.

Operator

Gentlemen, there are nofurther questions in the queue.

Jim Miller

Very good.  Well, thank you for participating in today'sconference call.  Todd and Bob and Iappreciate the opportunity to talk about the third quarter financial results ofS&T Bancorp, and we look forward to talking with you at the next quarter'sconference call.

Operator

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

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