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S&T Bancorp, Inc. (NASDAQ:STBA)

Q1 2008 Earnings Call Transcript

April 23, 2008 4:00 pm ET

Executives

Bob Rout – EVP and CFO

Todd Brice – President and CEO

Tony Kallsen – Chief Credit Officer

Analysts

Matthew Schultheis – Ferris, Baker Watts

Steve Moss – Janney Montgomery Scott

David Darst – FTN Midwest

Operator

Greetings ladies and gentlemen and welcome to the S&T Bancorp, Inc. first quarter earnings conference call. (Operator instructions) As a reminder, this conference is being recorded.

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

Bob Rout

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

Listeners are also reminded that a copy of the first quarter earnings release can be obtained on our Investor Relations Web site at www.stbancorp.com. Also, accompanying the conference call here today on the Web site is a set of financial highlight slides that support what we are about to discuss. We do not plan to review the slides in detail but certainly 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 newly elected President and Chief Executive Officer, who is going to provide an overview of our first quarter results.

Todd Brice

Thank you, Bob, and welcome everyone. As you can see from our earnings release and financial slides accompanying this webcast, we are off to an excellent start in 2008. Earnings per share of $0.60 represent a 15% increase over the same period last year. But even more encouraging is the quality of those earnings, coming from net interest income expansion and improved credit quality metrics. Market disruptions caused by the subprime loan crisis are creating growth opportunities for banks such as ours that have not strayed from our fundamentals.

I never miss an opportunity to remind our investors that we don't have any of the subprime loan exposure and we don't make those kinds of loans. Bob will provide a more comprehensive analysis of our financial statements in a few minutes, but I do want to highlight several areas that are impacting our results.

Loan volume was very solid in the first quarter I think in both our commercial and the retail side of our business. The increase can be attributed to favorable economic conditions generally in western Pennsylvania, as well as the credit issues that are impacting some of our competitors. We've also been able to reduce rates in our CMA deposit accounts in conjunction with a reduction in interest rates at Federal Reserve. We think this combination of increased volumes and aggressive reduction in deposit rates have resulted in an 8% increase in our margin.

In addition to increased volumes, we're seeing a firming of price and credit terms, as some competitors are preoccupied with some of their subprime issues. And we believe that we are well positioned to take advantage of opportunities as they present themselves in the market.

We're also experiencing growth in our wealth management and insurance lines of business, in spite of a challenging stock market and soft insurance market. These lines of business continue to complement our commercial lending activities.

And in 2007, we were also pretty aggressive in our de novo activities, opening three new branches. I just want to mention, all three of these locations are meeting our expectations. However, with the pending IBT merger, we're going to purposely slow down our de novo initiatives. Really, at this time, we only have one new branch in the pipeline and we just began construction last week on that full-service facility in Wexford, which is in Allegheny County. And that will replace one of our business banking offices several miles away over in Cranberry.

Since our last call, we've also added two seasoned loan officers in our commercial lending department. One has an extensive background in commercial real estate and the other one is a pretty experienced C&I lender, who's covered Allegheny County, Fayette County, and Westmoreland County. Both of these folks are very experienced and they will complement our relationship banking philosophy and our existing commercial lending activities very nicely.

We continue to get more excited about the IBT acquisition, which we anticipate closing in the first week of June. Our shareholder approval and all other integration activities are progressing well. Again, we become more and more excited every day really because of the geographical fit, as well as the cultural fit. And it will solidify our position in the market with very favorable demographics where we can expand our commercial lending, retail lending, wealth management, and insurance activities.

At this point, I would like to take this opportunity to address several credit-related issues. As you know, our commercial portfolio is about $2.2 billion. And with a portfolio of that size, you're always going to have a handful of relationships that are experiencing economic stress. So I thought I'd shed a little bit of light on what's going on in the commercial side.

First off, I'm pleased to report that we were able to finally resolve one of our previous nonperforming loans. This was the $1.7 million residual on a mixed-use, commercial real estate participation loan that was partially charged off in 2006, and the resolution of the credit resulted in a $500,000 recovery over our remaining book value.

During the quarter, we did add two commercial loan relationships to nonperforming status. The first is a $4.7 million loan to an operating company. I really can't shed more light on what the nature of the business is. As I mentioned, it is in operations at this point in time. They're in a pending sale and we do anticipate that being resolved in the second quarter. However, we have added a $1 million specific reserve to this particular credit as we try to get this thing worked out.

The other relationship that we've added to nonperforming status this quarter is a $4.2 million relationship to a local real estate management company. The relationship is comprised of small apartment complexes around the city of Pittsburgh. We did add a $300,000 specific reserve for this relationship. But, because of the nature and in fact there are multiple units of collateral that are going to need to be sold, the cleanup of this relationship may take a little bit longer. We don't believe that the problems with this relationship are the result of any economic or real estate contractions in our market. The borrower was really experiencing domestic issues that affected his overall management of the properties, and in fact, he's fled the country.

The other significant loan in nonperforming status is the road contractor that was partially charged off in 2006, and this relationship has a remaining book value of $3.7 million. Our progress continues to bring closer to this credit, but we are not yet in a position to definitively say when that will occur. We do hope to have good news over the next few quarters. But, at this point, we just are not ready to let you know where we are. But I think, all in all, we're very pleased with our first quarter results, and we're quite excited about our prospects of going forward in 2008.

With that, I would like to turn the podium over to Bob Rout.

Bob Rout

Thank you, Todd. Just as a follow-up to Todd's comments, we are very encouraged by the performance indicators that we are seeing here with the first quarter numbers. Loan growth was atypically strong this quarter. Sometimes we have seen seasonal slowdowns this time of year, but activity was surprisingly active, and the pipeline of deals yet to close is full as well.

Deposit growth was slow, but that was by design, until we see some pricing irrationality get flushed out of the market. The $2.3 million or 8%, increase in net interest income is really the result of many different factors, first being loan growth, a yield curve that is starting to slope upwards, some firming of loan pricings, and disciplined deposit pricing on our part. Our cash management high-yield savings account rate is moving lockstep in line with the Federal Reserve moves. The $740-million balance in these accounts matches up very favorably with our LIBOR- and also our prime-based loans.

And finally, prepayment language that we have in most of our fixed-rate loan documents helps to manage refinance requests when rates are dropping. We've also been slowly weaning ourselves of equity security gains. The $600,000 of gains this quarter is pretty much in line with our 2008 plan.

Insurance, debit cards, credit cards, and commercial loan swap fees continue to be the strongest drivers of our non-interest revenue.

Also included in non-interest revenue for this quarter is $400,000 of gains from the Visa IPO. That is offset by $400,000 of an accounting entry for mark-to-market valuations on our deferred compensation plans. That accounting entry gets offset by a corresponding entry in our staff expense line.

Occupancy expense is up from last year and that is primarily due to a result of the several new branches opened last year. We are certainly not afraid to spend money to grow our business whenever we see the right opportunities, such as we did with those markets with three new branches.

As I mentioned in recent conference calls, we have discontinued the practice of providing specific earning guidance each quarter. With that in mind, certainly Todd and I and some other folks that we have here would be more than happy to entertain any specific questions, either about our past performance or on the future outlook of our business in general.

Before we start taking questions, I just want to maybe respond to a question I received here right before our e-mail. It is from one of our shareholders that wanted to know what our plans are for stock buybacks going forward.

And the answer is that, in the past two to three years, we've been very aggressive in buying back shares of S&T Bank stock. As we move closer – the primary reasons for those buyback activities was to get a greater mix of hybrid securities in that equity mix, either it be through trust preferred or subordinated debt.

But, as we move closer to the consummation day of the Irwin Bank merger, we will be needing all the capital or excess capital that we have in order to integrate that merger. So you will see us pulling back somewhat on the buyback activities, at least in the short term here.

So, with that, we will certainly open up the conference call to any specific questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from Matthew Schultheis with Ferris, Baker Watts. Please go ahead with your question.

Matthew Schultheis – Ferris, Baker Watts

Good afternoon. A quick question for you, what do you expect your net interest margin to be after the acquisition of Irwin, all else being equal and if you merged today?

Bob Rout

Of course, Matt, this is Bob Rout. Their margin has not been as strong as ours, so I think an initial reaction – you could see a 10 to 15-basis point drop until we get their business integrated with ours over the summer.

Matthew Schultheis – Ferris, Baker Watts

Okay. And you talked about the $400,000 in Visa gains. And was that a cash gain? I mean, did you sell your Visa stock to get that or some of your Visa stock?

Bob Rout

Actually, it was a forced sale, where we actually got cash for a portion of that Visa stock. There's rights to some remaining shares, but that has restrictions on it. It can't be sold. I believe it's for a three-year period.

Matthew Schultheis – Ferris, Baker Watts

Okay. And this is obviously not the same thing as the, I guess, expense you had to book for the lawsuit contingency plan, I guess, for Visa last quarter.

Bob Rout

Well, there were some impacts here this quarter, Matt. In the fourth quarter last year, we set an accrual for $267,000 in anticipation of those losses. This quarter, we were able to back off $167,000 of that accrual, and that gets classified in other operating expense. And we still have $100,000 accrual remaining out there for remaining lawsuits at this point.

Matthew Schultheis – Ferris, Baker Watts

Okay. Thank you very much.

Bob Rout

Thank you, Matt.

Operator

(Operator instructions) The next question is from Steve Moss with Janney Montgomery Scott. Please go ahead with your questions.

Steve Moss – Janney Montgomery Scott

Good afternoon guys.

Bob Rout

Steve, how are you?

Steve Moss – Janney Montgomery Scott

Doing pretty good. How is the loan pipeline looking these days?

Todd Brice

Steve, it's probably as good as it's been in a long time. I mean, we're seeing a lot of activity on both the real estate lending, more so on the C&I side of the business. And, also, there's some action on the retail side. But a lot of it's getting driven by some of the issues a few of the competitors are having in the marketplace right now.

Steve Moss – Janney Montgomery Scott

Okay. And, going back to expenses here for a moment, you mentioned there was a $400,000 expense, I believe, during the quarter.

Bob Rout

It's really two pieces, Steve. The first entry for the valuation of those deferred comp trust plans that get mark-to-market. There would have been a, from comparing this quarter with same quarter last year, $400,000 reduction in other revenue.

Steve Moss – Janney Montgomery Scott

Okay.

Bob Rout

The offset to that is a $400,000 reduction to staff expense.

Steve Moss – Janney Montgomery Scott

Okay. And –

Bob Rout

Now, that's a change in accounting that we implemented here in the third quarter of last year, so we have another quarter or two for it to continue to play out in some of the variance explanations.

Steve Moss – Janney Montgomery Scott

Okay. And then, with regard to the asset quality, how are delinquency trends moving up?

Todd Brice

I'm going to defer to Tony Kallsen who is with us, our Chief Credit Officer.

Tony Kallsen

Hi, delinquency trends are actually holding very well. In fact, at year-end, it's very comparable to where we're at today. In fact, if anything, our 30-day delinquencies are down and our 90-days are up slightly, as Todd alluded to, with the increase in the NPLs. But, overall, pretty strong.

Steve Moss – Janney Montgomery Scott

Okay. Thank you very much.

Todd Brice

Thanks, Steve.

Operator

The next question is from David Darst from FTN Midwest. Please go ahead you’re your question.

David Darst – FTN Midwest

Hi, Todd. Hi, Bob. Could you comment on your local market condition and as opposed to like the housing market, do you have any insight into retail expansion, as far as expansion of shopping centers or franchises, and the outlook that they have for expanding in your markets?

Operator

Ladies and gentlemen, please stand by while we get the speakers reconnected. Now, we are joining our speakers, please go ahead with your question.

Todd Brice

Sorry, everyone. We had a little bit of technical difficulty. So, David, you had a question. We didn't get a chance to hear what it was.

David Darst – FTN Midwest

Okay. Maybe you could give us some insight on the local economy, the housing markets and also things like retail expansion and what you're hearing from some of the franchises that you work with.

Todd Brice

Right now, David, I would say the economy in Western Pennsylvania is probably as good as it's been in a long time which, with all the noise you hear out in the marketplace about recession and everything else, it's kind of contradictory to what's going on in the rest of the nation. But, manufacturing is very strong. I think some of that's being helped by the soft dollar. We're seeing the export business pick up. And then the energy-related businesses up in our neck of the woods, with the natural gas and the coal producers here are just very, very strong right now. Housing in Western Pennsylvania, it softened a little bit but it's still pretty stable. I mean, we never had some of the big appreciations that some of the other markets have experienced and we haven't had some of as big as the dips either. But, what we're hearing from some of our developers, things are slowing up a little, but they're still moving units, which is a good thing. And then the retail, the retail environment, I don't know what to say. Right now, it still appears to be good. But, with consumer confidence levels where they are and their impact on the overall spending, it's going to be impacted at some level. Just how much, we're not sure. And I do know, with the increase in energy costs and food costs, that is really chewing into people's disposable income. So, obviously, you're going to see some softening. But, how deep? We're just not sure at this point.

David Darst – FTN Midwest

Okay. And then, as far as the commercial loan demand that you're seeing and given the change in competitive environment, are you doing larger deals than you've historically done, or is everything about the same?

Todd Brice

I would say everything's about the same, David. We try and stick to that $1 million to $5 million. It's probably our bread and butter. And we'll do a little bit larger, but if it gets over $10 million, we really start trying to eyeball it and, occasionally, we'll look for (inaudible) and we do have a couple on that were over that, but no – we haven't really changed our size too much.

David Darst – FTN Midwest

Okay. Thanks and congratulations.

Todd Brice

Thank you, David

Operator

There are no further questions in queue. I'd like to turn the call back over to management for closing comments.

Todd Brice

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

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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