S&T Bancorp Inc (STBA) 2020 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the S&T Bancorp, Inc. Fourth Quarter Earnings Conference Call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Mark Kochvar. Sir, the floor is yours.

Thank you very much, and good afternoon, everyone. Thank you for participating in today's conference call. Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors, which should be on the screen in front of you.

This statement provides cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the fourth quarter 2020 earnings release can be obtained by clicking on the Press Release link on your screen, or by visiting our Investor Relations website at www.stbancorp.com.

We will be reviewing an earnings supplement slide deck as part of this presentation. You can obtain a copy of those slides on our website under Events and Presentations, fourth quarter 2020 earnings conference call. There, you can click on the fourth quarter 2020 earnings supplement.

With me today are Todd Brice, CEO of S&T; and Dave Antolik, S&T's President. I'd now like to turn the program over to Todd, who will begin today's presentation.

Well, thank you, Mark, and good afternoon, everybody. We appreciate you taking time to join us for our fourth quarter earnings report. As announced in our press release this morning, we reported net income of $0.62 per share or $24.2 million compared to $0.43 per share or $16.7 million in the third quarter. Profitability metrics for the quarter included a return on asset of 1.05%, a return on equity of 8.35% and a return on tangible of 12.71%. Also, pretax pre-provision totaled $37 million or 1.61% of average assets.

Results this quarter were favorably impacted by a 9-basis-point improvement in our net interest margin and strong mortgage banking fees was $3.1 million. Balance sheet growth was muted as loans declined by $84 million, not including PPP forgiveness of $85 million in the fourth quarter. Our customers are still feeling the impacts of the effects of COVID.

Total deposits decreased by $213 million, primarily in our now money market and certificate of deposit categories as we focused on reducing deposit costs due to our liquidity position. Asset quality metrics for the quarter included a provision expense of $7.1 million, which is a $10.4 million decrease from Q3. Net charge-offs of $11.2 million versus $12.9 million in the third quarter. Nonperforming loans increased by $62.7 to $146.8 million or 2.03% of total loans. The majority of the increase is attributed to $56.7 million of hotel loans that are moved into nonaccrual.

We did perform new appraisals on the majority of these loans in the fourth quarter, and believe that we are adequately reserved at this time. The ACL was stable for the quarter at 1.63% of total loans compared to 1.64% in Q3. Including PPP loans, the ratios were 1.74% versus 1.77% in the third quarter of last year.

And finally, the Board of Directors declared a quarterly dividend of $0.28 per share payable on February 25 to shareholders of record on February 11.

So at this point, I'd like to turn the program over to our President, Dave Antolik.

Yes. Thank you, Todd, and good afternoon, everyone. As reported, portfolio loans decreased during the quarter by $169 million, which included $85 million in PPP forgives that Todd mentioned and is detailed on Slide 5.

This forgiveness accounted for essentially all of the C&I reduction in the quarter. C&I commitment utilization rates remained 4% to 5% below pre-pandemic levels due to the impact of stimulus and customers retaining liquidity. This reduced utilization accounts for approximately $150 million in balances, though we forecast being reborrowed by our customers in the latter part of 2021. Activity in the C&I space has improved, particularly in our asset-based lending area, which tends to be non-cyclical. We continue to feel pressure on our CRE balances as payouts into the permanent markets continued into Q4. The pace of these payouts is anticipated to reduce in 2021. CRE balances declined by $45 million in the quarter.

Total consumer balances declined by $33 million in Q4 due to residential mortgage declines with all other consumer categories remaining essentially flat. As our mortgage area grows, and we expand our construction and purchase activities, particularly in Central Ohio and Eastern Pennsylvania, we anticipate a reversal in residential mortgage balances this year.

Referring you again to Slide 5, we have identified the impact of PPP on selected ratios and the continuation of forgiveness, which stands at 25% as of January 22. We are fully participating in PPP round 2. We have seen an early tally of approximately 650 applications. And unlike round 1, we are accepting applications from non-S&T customers.

Slide 6 provides a history of modified loan balances. It's important to note here, the impact of the movement of hotel balances into nonaccrual, which helped reduce the modified balances. Excluding the hotel migration, we experienced significant improvement in the overall reduction in the remaining modified balances. Non-hotel modified balances at year-end reduced to only $18 million.

Slide 7 provides additional detail on our hotel portfolio. Since year-end, we had successfully exited 1 hotel loan and anticipate the sale of another in Q1. These exits totaled approximately $9 million. Looking forward, excluding PPP, we expect loan balances for 2021 to grow modestly in the low single digits. This is supported by the anticipated improved C&I utilization rates that I mentioned, growth in our portfolio mortgage balances and improved pipelines as compared to the previous 2 quarters.

And now I'll turn the program over to Mark for additional details on our financial results.

Thanks, Dave. A little more detail on the progression of the allowance for credit losses can be seen on Slide 8. We are a January 2020 CECL adopter, and had fairly significant reserve build in the first half of the year, mostly in the economic forecast and qualitative factors as part of the model due to the pandemic. Those increases slowed in Q3 as the better macro forecast offset downgrades in our hotel portfolio.

In Q4, with some of the hotels moving to NPL with limited specific reserves, a still favorable macro outlook and lower loan balances, we saw a slight net decrease in the reserve of about $3 million to $118 million. Again, as Todd mentioned, this represents ACL of about 1.63%, down 1 basis point, and 1.74% ex-PPP, down 3 basis points.

Moving to Slide 9. Net interest income decreased by about $650,000 compared to the third quarter, mostly due to increased PPP forgiveness. The total net interest income from PPP was approximately $4.9 million in the fourth quarter compared to $3.2 million in the third quarter, which helped to improve the net interest margin rate by 9 basis points to 3.38%. The increased PPP income more than offset the 1 basis point drop in the core ex-PPP NIM rate as well as the impact of lower loan balances.

We continue to make progress at lowering our liability costs, which were down 13 basis points compared to last quarter, mostly driven by positive repricing, which was down 12 basis points. We anticipate a relatively stable core net interest margin rate for the first half of the year, some volatility will come with the forgiveness timing of PPP.

Slide 9 also shows that we do have about $333 million of liabilities repricing over the next 6 months to help offset lower new versus paid rates on the loan side. The total period decline in deposits in Q4 was mostly purposeful, as Todd mentioned, as we like not to compete on several higher rate accounts given our liquidity position.

Noninterest income in the fourth quarter decreased by $874,000 compared to the third quarter. The largest decline was in mortgage banking, which, although still strong for us at $3.1 million, was down from a very busy third quarter. Consumer-related fees are still being impacted by the pandemic, but we did see some better activity in swaps this quarter. We continue to expect a run rate in noninterest income of around $15 million per quarter.

Noninterest expense was flat compared to the third quarter. The fourth quarter was impacted by higher workout related expenses, which show up in the other expense category. Higher occupancy in part related to facility rents from branch and office closure, we expect the run rate going forward to be $47 million to $48 million per quarter.

Capital levels on Slide 10, all improved by about 25 basis points due to earnings retention and lower risk-weighted assets. All capital ratios are in excess of regulatory well capitalized levels, and our capital cushion continues to expand. Both leverage and TCE ratios are impacted by the PPP loan by about 50 basis points.

Thanks very much. At this time, I'd like to turn it back over to Todd for some closing remarks.

Well, thank you, Mark. And before we open up for questions, as most of you know, this is my last earnings call as my retirement date, the March 31, is right around the corner. It really has been an honor to serve as the CEO of S&T Bancorp for 13 years. I've enjoyed working closely with our analysts, Russell Gunther from Davidson, Matt Breese at Stephens, Wally Wallace at Raymond James, Joe Plevelich at Boenning and Collyn Gilbert at KBW. I've always appreciated your candor and support. Also to the many investors who have met and developed relationships with over the years, thank you for your support as well. And a big thank you goes out to the great group of investment bankers and advisers that we work with on projects, your council and advice have been invaluable in helping us grow our organization from a $300 million organization when I began my career with S&T, to over a $9 billion company today. And finally, thank you to my colleagues on the S&T team. It's been incredible working with you, and I know that you will work tirelessly to serve our wonderful customers and continue to grow the organization and reward our shareholders moving forward.

So at this point, I'd like to turn the program over for questions. So, operator, back to you. Thank you, again.

(Operator Instructions) Our first question today is coming from Russell Gunther.

Russell Gunther from Davidson. First off, Todd, congratulations, best of luck on your retirement. I hope to stay in touch.

I look forward to it.

Moving on to first question. So just a follow-up on the expense guide, $47 million to $48 million, a little bit of relief relative to the last couple of quarters. Just curious as to what's driving that? And is there, embedded in this guidance, any thought around -- a broader, whether it's branch rationalization or expense initiative?

We continue to believe that on the expense side that we already run a pretty lean shop, especially when you think about the branch and footprint, so other than kind of one-off, 1 here and 1 there, we don't expect a large -- any type of large programs to reduce brand side. Expenses, just had a few items that were more nonrecurring in nature. We also -- we did have some higher loan-related expenses that we don't think will continue into the year and also some software, and we did have some cost related to the branch office closures. So fairly consistent with where we're at. It's maybe a little bit lower than we're running right now.

Got it. Okay. Great. And then I caught your comments on the low-single-digit loan growth and some of the drivers within C&I and resi. Any additional color to share within pockets of strength from a geographic perspective?

Yes. Russell, it's David Antolik. We're still seeing pretty good activity out of Central Ohio. That was a strong market for us last year and particularly in Q4. So in and around Columbus, where we hope to add some additional staff in order to take advantage of the market opportunity there. And then with regard to Eastern Pennsylvania, we -- if you think about where we were last year, we had just consummated the DNB merger. There was all this opportunity and then COVID hit. So we're working hard to revisit those opportunities to make sure that we have the people and the products and the promotion in place to get back and make that a bigger part of our organization. So I think we'll see additional growth coming out of that market as well.

All right. Great. That's very helpful. And then just last question for me. You mentioned in the prepared remarks and the slide deck show the excess capital position that continues to build. Could you just share your thoughts on a potential buyback and use of capital going forward?

At this point, we're still cautious on the credit side. There's still a lot of uncertainty related to the pandemic and how that's going to impact our customers and the hotel portfolio. So right now, we have a little bit of a wait and see attitude as we continue to build that capital and see how the balance sheet goes. I think that's something that we'll look at it again, probably closer to the second or third quarter. But right now, we don't have any plans at the moment to do any buyback program -- or to restart that.

Our next question today is coming from Matthew Breese.

This is Matt Breese with Stephens Inc. Tood, first of all, just best of luck in retirement. It's been a real pleasure over many years. I truly wish you well in the next chapter here.

Thanks, Matt.

Maybe to start, the hotels that went nonperforming this quarter. Maybe to start, can you just remind us how many there were? I know you said that there's been an exit you expect another exit so the reduction there. And then maybe just talk a little bit about the appraisals and where they came in relative to the LTVs?

Right. So if you go to Slide 8. If you look at -- there are 18 loans in total, $57 million we moved into nonaccrual. And then on the LTVs, the average on those were 73%.

Got it. Okay. I'm sorry, I missed that. And then the $6.7 million reserve, does that cover the difference? I'm assuming it does between the new appraisal and where you have it on the books at?

Yes. That's an approximation of where we have it versus the liquidation value. So it's a wholly conservative assumption.

And overall, we have about 8.5% of the total hotel portfolio allocated in our reserves.

Okay. And then the remaining deferrals, the nonhotel deferrals, can you just walk us through a little bit of what you expect to occur in 2021? Whether or not they transition to NPAs? Or what's the exit strategy for those? And should we expect anything from a credit formation or P&L impact?

Matt, it's Dave Antolik. So if you look at the universe of those loans is $18 million, it's very granular. That's in the business banking space. So you're talking about $0.5 million size loans. There are a few larger deals included in there. So I wouldn't read anything into that other than we hope to reduce that balance even further, isolating the problem within the hotel portfolio.

Okay. And then 2 other quick ones. The first 1 is just, it sounds like you anticipate a reversal in C&I growth this year. We'll see some residential growth. Could you just talk a little bit about the commercial real estate and construction pipeline, and how you think those will behave?

Yes. So we're seeing some decent activity within -- in the CRE space. Multifamily has been a very solidly performing segment for us. We've been cautious about that as we monitor internal limits, but we do see some additional opportunity there.

I mentioned in my prepared comments that we do anticipate pay off into the permanent market to reduce. And that's based upon conversations that we have with customers. Typically, we're able to look out 90 to 120 days and get ahead of the payoffs. We're just not seeing the same pace. So I don't know if that's a function of that market being less active or the loans that were eligible for refinance into that space has gone through that process. But we are seeing renewed opportunity. The committee process, particularly -- we have a pretty robust preview process for CRE deals and C&I deals, activity through those channels that has picked up as well.

Okay. And then in terms of the securities book, you still have a little bit of extra excess liquidity. Just curious, should we expect a continued build there if loan growth doesn't sop up the -- all the extra liquidity?

I think to a certain extent, we do have -- you mentioned, we do have some excess liquidity. We'll watch what happens with the rest of the balance sheet. Loan growth side paces PPP. Now we have the second PPP. And then also how the customer deposits behave, we do think we get some search deposits from the first round and stimulus. We'll see how that goes, but offsetting that is the security yields, while better than cash, are not huge. So we'll be cautious as to how much we put into that securities book. But we could see some increase there.

Okay. Last 1 is just could you give us an update in terms of the CEO search? And when we might expect to hear about the successor?

Yes. So they're still conducting interviews, both in general candidates and external. And the intent all along was to have someone in place by the end of the first quarter. And so I think that's still on track to meet that time line.

Our next question today is coming from Joseph Plevelich.

This is Joe Plevelich from Boenning and Scattergood. Todd, yes, I really appreciate the kind words. Haven't had an opportunity to work too much with you, but I enjoyed our conversations and certainly everyone from our firm wishes you the best of luck with your next ventures here.

I appreciate that, Joe, thank you very much.

A couple of -- one, I don't know if I heard correctly, was the fee income target for 2021 was at $15 million a quarter or $16 million a quarter. And do you think some of the consumer-linked areas such as debit fees and service charges, when might we see those spring back to life a little bit more?

Yes, the number is about $15 million what we expect per quarter. We do think that, that spring back probably isn't until the back half of the year. We do also expect to see the mortgage numbers continue to stay pretty healthy for most of the year as well.

Got it. Okay. And then the loan growth, that was on an ex-PPP basis? And then how do we think about potential volumes from the second round of PPP here?

Yes, that would be ex-PPP. So core loan growth is low. Low single digit. We're just getting our arms around the initial applications with PPP. But I would look for something in the magnitude of maybe 1/3 of what we did in round 1. It's the parameters around who's eligible for the program have been tightened. Although we are getting some interest from non-S&T customers that we did not process those applications in round 1, but we've got the processes and systems in place to handle those, and we expect there to be a nice lift with PPP round 2.

Sure. And in the direction of NIM, here we were 3.38% in the fourth quarter. I assume first quarter might look similar, given some benefit of these deferred PPP fees? Where does it head after the first quarter?

Yes. I think first half, we should see relevant stability in that core net interest margin rate, but without the PPP. And after that, we could, as we've run out of liability repricings that help us out, will be more less to just kind of the loan pricing versus how that's coming off versus the new. So we could see some pressure on NIM in the back half of the year coming from the asset side.

The last 1 I had was just the FDIC insurance expense, it's oscillate a little bit here in the second half of the year. Is there a good run rate for 2021?

As that -- as we get better fourth quarter numbers, that should improve. Some of that was related to the asset quality metrics. So we do think that current quarter is probably the best estimate going forward for now.

(Operator Instructions) We have no questions in the queue. Do you have any closing comments you'd like to finish with?

I just want to thank everyone for participating in today's call, and we look forward to connecting with you next quarter, I guess Mark and Dave will. So -- but it's been a real pleasure, and again, appreciate everyone's kind words. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.