S&T Bancorp, Inc.
Q4 2007 Earnings Call Transcript

Published: 24 Jan 2008

[Operator:]

Good afternoon ladies and gentlemen, and welcome to the S&T Bancorp Inc., Fourth Quarter 2007 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Webcast listeners can send questions by email to [e-mail]. (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. Thank you sir, you may begin.

[Robert Rout:]

Good afternoon everyone and thank you for participating in the conference call. Before I begin the presentation, I want to take time to refer you to our statement of our 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 maybe included with this presentation. Listeners are also reminded that a copy of the fourth quarter earnings release can be obtained at our Investor Relations website at www. stbankcorp.com. A set of financial highlight slides is included with the webcast that supports 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.

[Todd Brice:]

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 in the financial slide 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 represent a 10% increase over 2006. This year we have seen asset quality, performance measurements returned to more typical levels for our bank with a commercial lending focus such as ours, and in addition at this end we have experienced decent loan and deposit growth, which has positively impacted our net interest margins. We've seen improvements in our fee income revenues, and we 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 subprime and other credit related issues. As we stated before, we do not have any exposure to subprime. We think expanding organically has always been our strength throughout our history and 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. Now we also had a busy year in 2007 with our de novo activities opening three branches in Squirrel Hill, on at Altoona, and one down O'Hara Township. These were markets where we already had a strong commercial presence, and the retail facilities are nice compliments 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 a customer relationship did 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 work to partner with for a long time. They operate primarily in Westmoreland County which is appealing with its favorable market demographics. And overall we are pleased with our results and feel that our prospects are bright for 2008 for all of our core businesses. With that in mind, I would like to turn the floor back to Bob Rout, S&T’s Senior Executive Vice President and CFO.

[Robert Rout:]

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 markets, with more attention being paid to credit times 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 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 trouble credits at any given time, but there is nothing currently giving us any undue heart burn. Again, I want to emphasize, we don’t have any subprime 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 email question prior to the conference call concerning how the mercerizes in 75-basis points 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 liability 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 long step with effect to our rate. We also have about a $100 million of overnight borrowings and about a $100 million of retail fleets providing a pretty well balanced position for those types of interest rate swings. One potential benefit which is not to 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 re-pricing benefits as well. The second part of that question we received is, you know what happens if the Fed moves another 50 basis points. And 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. I emphasized the word, technical, because, of course the real unknown are qualitative aspect to any asset liability management program is

[Operator:]

Ladies and gentlemen at this time we'll be conducting a question-and-answer session. (Operator Instructions). Our first question is coming from David Darst at FTN Midwest.

[Todd Brice:]

Hi David.

[David Darst:]

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

[Robert Rout:]

I will take a quick shot at it, and then I will turn it over to Todd. It’s really coming from everywhere. I mean

[Todd Brice:]

I think I'd just like to mention David that we've seen a nervous little uptick in real estate activity as well. And I think it's the drop in rates and also just some of the turmoil in the secondary markets. We've taken a look at couple of deals that probably would have gone out to some conduits in the past.

[David Darst:]

Okay, and

[Robert Rout:]

Well, we just haven't seen a lot activity. I think a lot of the demand just kind of dried up and really no ones 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.

[David Darst:]

Okay. And

[Robert Rout:]

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

[David Darst:]

Okay, great. Thank you.

[Todd Brice:]

Thank you.

[Robert Rout:]

Thanks, David.

[Operator:]

Our next question is coming from Ric Weiss with Janney Montgomery Scott. Please read your question.

[Ric Weiss:]

Hi, guys. Actually, may be if I could question about your leverage. But let me just ask you with respect to deposit gathering

[Robert Rout:]

Yeah, there're a number of programs that we're running, Ric. 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 already 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 veritable 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 and the retail. I mean

[Ric Weiss:]

When you are growing your commercial loans do you typically get the positive relationship?

[Todd Brice:]

Let's say, we have several people dedicated just to kind of work in conjunction with the commercial lenders and that’s all they do is, once we close the loan and they come in and setup all the cash management products on the online banking. And last year we had a pretty good success. I think it was some [$30 million].

[Robert Rout:]

Yeah, 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 is no reason that they shouldn’t be dealing with us on those issues.

[Todd Brice:]

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

[Ric Weiss:]

Got you. Okay. Thank you very much.

[Robert Rout:]

Thank you, sir.

[Operator:]

(Operator Instructions). Our next question is coming from Bret Ginesky with Stifel Nicolaus. Please state your question.

[Bret Ginesky:]

Hi guys.

[Robert Rout:]

Hi Bret.

[Bret Ginesky:]

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

[Robert Rout:]

Well some of that pull back was in anticipation of this upcoming merger. So, again, we knew that we were going to need capital in order to put a sized acquisition on such as Irwin. So I don’t think you will see us being too active in the buyback market.

[Bret Ginesky:]

Okay. And then

[Todd Brice:]

We were still addressing some of the non-performance that we have, and it looks like some of those maybe coming to resolution in way or another. And we really haven’t seen any deterioration in delinquency problems right now, but we are cautious because you keep hearing, why you keep hearing and the recessionary pressure is going to impact the market, and our customers are still telling us, particularly in manufacturing and there is [model of the two].That looks still very -- we see a high demand and China hire people and so I guess it’s kind of wait and see where the economy goes.

[Bret Ginesky:]

What about the non-performers that you added in the quarter? What were those representatives of? Like which --?

[Todd Brice:]

The thin one was the apartment buildings, there was a real estate related credit in Pittsburgh and multiple locations, and it really came as a result of a domestic issue between that the principal and its spouse and we're working through that now.

[Bret Ginesky:]

Okay, great. Thanks a lot guys.

[Operator:]

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

[Todd Brice:]

I would 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 look forward to hearing from you at the next quarter's conference call.

[Operator:]

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