S&T Bancorp, Inc. (NASDAQ:STBA)
Q2 2008 Earnings Call
July 23, 2008 4:00 pm ET
Robert E. Rout – Chief Financial Officer, Senior Vice President, Chief Administrative Officer & Secretary
Todd D. Brice – Chief Executive Officer & Director
Welcome to the S&T Bancorp, Inc. second quarter earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host Robert E. Rout, Senior Executive Vice President, Chief Administrative Officer & Chief Financial Officer of S&T Bancorp, Inc.
Robert E. Rout
Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors on the third slide of our webcast presentation. This statement provides the cautionary language required by the Securities & 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 investor relations website at www.STBancorp.com. A set of financial highlight slides is included with the webcast information and supports what we are about to discuss but we do not plan to review the slides in detail but would be more than happy to respond to any questions concerning them or any other aspect of our financial performance.
I would like now to introduce Todd Brice S&T’s President and CEO who will provide an overview of S&Ts first quarter results.
Todd D. Brice
As you can see from our earnings release and financial slides accompanying this webcast, we had another solid quarter and we’re very pleased with our quarter and year-to-date results. Growth in our core lines of business has been the primary driver in our performance and we continue to be positive about our growth prospects in spite of current market conditions.
Earnings per share of $0.54 represents a slight decrease over the same period last year but this quarter’s results do include $4.2 million of one-time expenses relating to the IBT merger, write downs in our equities portfolio from some of our bank holdings and a write down in our low income and housing tax credit partnerships. We believe that the market disruptions created by the subprime loan crisis are presenting tremendous growth opportunities for banks like us that have not strayed from banking fundamentals and I never miss an opportunity to remind investors that we don’t have any subprime exposure in our loan or investment portfolios.
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. Commercial loan volume is running at a record pace along with solid performances in the retail side of our business. This increase is attributed to several factors, the relatively stable economy in Western Pennsylvania, which has not experienced a devaluation in real estate that other markets are dealing with, our credit issues that are impacting creditors and also a very tight securitization market. In addition to increased volumes we are taking advantage of market conditions to increase loan spreads as well as structuring transactions on more favorable terms.
We believe that we are uniquely positioned with the depth of our lending staff to take advantages of these opportunities. While we are experiencing excellent growth in our demand deposit accounts, overall deposits have contracted somewhat. Some of this is by design since deposit pricing has been a little irrational in our market as some institutions are offering high rates in an attempt to sure up liquidity. Our liquidity position which has been made even stronger by the Irwin Bank acquisition will provide plenty of funding for expected loan growth until those deposit markets settle down. I would also like to take this opportunity to discuss credit quality issues. As you know, our commercial loan portfolio is now $2.5 billion and with a portfolio that size, you always have to have a handful of relationships that are experiencing economic distress at a given time.
I am pleased however to report that we were able to resolve two of our significant non-performing loans. The first is a $3.7 million residual balance on a road construction company that was partially charged off in 2006. We received $4.5 million through collection activities and these collection activities are ongoing as well. The other was a $4.7 million loan that was classified as non-performing during the first quarter. A resolution of this credit included a $1.1 million charge off this quarter but no residual balance remains on the account. There were a couple of other smaller credits that were added to the non-performing status this quarter but nothing we believe is out of the ordinary or are really significant.
As we previously announced, we consummated our merger with Irwin Bank on June 6th. I couldn’t be more pleased with the conversion and the integration of both organizations. We feel that this has been the smoothest conversion in our history and we are very excited about our prospects going forward. We have been able to achieve or exceed most of the cost savings that we built in to our original pro forma.
In summary, we’re very pleased overall with our second quarter results and are quite excited about our prospects for the remainder of 2008. With that I’d like to turn the floor over to Bob Rout S&T’s CFO.
Robert E. Rout
As a follow up to Todd’s comments, we are very encouraged by the performance indicators that we’re seeing in the numbers after looking through the one-time issues. So, it is probably worthwhile to take a few minutes to walk through those one-time issues. The first being $900,000 of non-capitalized merger costs. These were mostly data processing, conversion, marketing and new account kits and new debt cards for the Irwin Bank customers. We also incurred a $700,000 loss on the sale of Irwin Bank debt securities. These securities were mark-to-market on Friday, June 6th when we consummated the merger and it was our plan to sell them since they really weren’t a good mix with our own portfolio. But, by Monday, long term rates had moved up significantly causing us to incur some additional loss beyond the original mark-to-market.
The third item is S&T is currently a limited partner in 22 affordable housing partnerships. Five of those partnerships have reached the end of their tax credit period and were scheduled for impairment review. As a result we incurred a $1.4 million evaluation charge on these five partnerships. What we have done is also adjusted our future accounting for all of our partnerships so impairment will not be an issue going. We incurred a $1.1 million impairment charge this quarter for two bank common stock equity holdings. As we have stated previously we are in the process of methodically exiting our equity portfolios except for those with select strategic stake out positions.
These portfolios currently have a market value of $23 million and are primarily made up of bank holding company common stock. Within that portfolio there is no preferred stock or any Fannie Mae or Freddy Mac issuance. Now, while this equity portfolio has started to swell over the years, we really consider it to be a temporary parking place for excess capital until we could put it to use in core banking activities or mergers like we did here with the Irwin Bank acquisition. Until we fully exit these equity portfolios we may experience future other than temporary impairments if the market for bank stocks doesn’t improve. The total of these unusual charges was $4.2 million or about $0.10 earnings per share.
There was other unusual item this quarter. As part of the $4.5 million settlement of that non-performing road contractor that Todd was referring to earlier, we established a $1.2 million specific reserve or a $1.3 million outstanding letter of credit. That had the effect of increasing our non-interest expense by $1.2 million and reducing our allowance for loan losses by the same amount. But, this entry is not really part of the $4.2 million non-recurring issues list that I thought it worthy to note in order to explain some of the noise in the numbers. After you get through that non-recurring noise, the growth in core revenue becomes very apparent. Record loan growth, steepening of the yield curve, DDA growth, the Irwin merger and pricing discipline for both loans and deposits have all positively converged to benefit our net interest income.
Reduced market values have somewhat constrained our wealth management revenues and of course, mortgage banking has also slowed in this environment. But, all of the other areas of non-interest income have the become to show real momentum. As we mentioned in recent conference calls, we have long ago discontinue the practice of providing specific earnings guidance each quarter, with that in mind Todd and I will certainly be happy to entertain any specific question about our past performance or the outlook for our business in general. But, before we do that I did want to respond to a couple email questions that we received from shareholders and analyst earlier this week that I promised them that we would respond to those questions in this conference call.
The first question came from an analyst that wanted to know after the Irwin Bank merger what would be our tangible book value. That tangible book value after the Irwin transaction at June 30th was $9.52. We currently have $163 million of good will on our balance sheet and $112 million of that was brought on here in the last month with the Irwin transaction. The total of other intangibles is $16 million and $12 million of that is related to the Irwin acquisition as well.
Another question that we got from again, a shareholder is what has been our experience recently with respect to residential mortgage asset quality. I had our chief credit officer do some research on this and what we found is our residential mortgage delinquency has actually improved over the last six months rather than deteriorated. When you look at our delinquency numbers as compared to FDIC and the Federal Reserve’s averages for banks in Pennsylvania, we are significantly below those numbers. Actually, our net charge offs for residential mortgages the first six months of this year are actually at net recovery. We really consider residential mortgage loans to be the smallest risk within our loan portfolios. Our total loans are now $3.5 billion, $432 million is related to home equity and $409 million is residential mortgages.
We sell most of our residential mortgages in to the secondary market and only hold a selected few on our balance sheet. So, as far as asset quality risk is concerned, we consider residential mortgages and home equities to be far down on that risk list because of our conservative underwriting and because of the lack of speculative buying that Western Pennsylvania has not experienced that other parts of the country have.
The third question was from a shareholder after seeing some of the media frenzy with uninformed headlines of doom and gloom for banks and he’s concerned about his dividend on his S&T stock and I just want to reassure that we certainly don’t have any plans at this time to change our dividend. Earnings per share growth is certainly sufficient to keep that going and we typically payout between 50% and 55% of our net income in dividends.
With that review I’d certainly like to open it up to any questions that we might have.
Question-and-Answer Session Operator
(Operator Instructions) We have no questions.
Todd D. Brice
Thank you for participating in today’s conference call and Bob and I appreciate the opportunity to discuss this quarter’s results and we look forward to hearing from you at our next conference call.
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