S&T Bancorp Inc (STBA) 2020 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the S&T Bancorp, Inc. Second Quarter Earnings Conference Call. (Operator Instructions) At this time, it's my pleasure to turn the floor over to Mr. Mark Kochvar. Sir, the floor is yours.

Thank you, and good afternoon, everyone, and 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 is on the screen in front of you. This statement provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the second 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 Second Quarter 2020 Earnings Conference Call, click on the Earnings Supplement link.

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

Well, thank you, Mark, and good afternoon, everybody. As previously reported in our 8-K filing on May 26, S&T Bank was subject to a significant check kiting scheme conducted by a single business customer. This criminal activity has negatively impacted our results this quarter, and we're reporting a loss of $33.1 million, or $0.85 per share. An independent internal review was conducted, and this was a onetime event relating to one customer, and there were no S&T employees involved.

In addition, we've implemented process and monitoring enhancements to prevent future fraud. We've also taken a number of steps and are actively pursuing collection activities through legal channels that may result in some recovery. Excluding the loss from the customer fraud, we posted core EPS of $0.34 per share, which translated into a return on asset of 0.57%, return on equity of 4.48% and return on tangible common equity of 6.86%. Our pretax pre-provision increased by 16% to $41.9 million or 1.79% of average assets.

Another bright spot is our efficiency ratio, which came in at 50.51%. Controlling the expenses have been a hallmark for our company and will continue to be so going forward. For the quarter, we experienced significant deposit growth of $810 million. Over half of the growth, $548 million was in noninterest-bearing demand deposit accounts. Interest bearing demand, money market and savings accounts increased $92 million, $154 million and $80 million, respectively. And we do estimate that approximately 40% of deposit growth is associated with the PPP program and other government stimulus programs. Mortgage banking was a bright spot this quarter as well. Year-to-date production of $213 million represents a 54% increase over the same period of last year. The breakout is about 70% refinancing, and we've sold about 78% of the loans to Fannie Mae.

COVID-19 is certainly impacting how we operate. And we continue to protect the health and safety of our employees and customers. As we mentioned before, we have employees working remote. We've reopened with enhanced safety measures and we extended PPP funds to help our customers impacted by the pandemic. Also with the heightened awareness on social inequality, we remain committed to fostering an environment that promotes diversity inclusion. As you would expect, year-over-year, branch transactions have declined by 24%, call center volumes have increased by 41%, mobile banking activation is up 50%, Bill Pay is up 57% and Zelle payments are up 27%. So we've seen a lot of migration into our digital channels. And also, I'm excited to announce that on Tuesday, we rolled out a new website to better serve our digital clients and really the intent is to help them become more self-sufficient in their financial awareness. Our marketing team has been working on the project for about 9 months, and the timing really couldn't have been better. Some of the features include a mobile-first design, easier navigation, an online digital sales tool that we're calling Merlin, and it's also going to provide enhanced data analytics to provide more customized sales offerings for our clients. As we mentioned last quarter, we were recognized by J.D. Power as a #1 bank in customer satisfaction and retail banking in the Mid-Atlantic region. And the website as well as other initiatives are part of our commitment to continually improving the bank experience for our loyal customers.

Switching gear, I want to touch base on credit metrics for the quarter. We did record an allowance, net of the fraud of $28.1 million. We also incurred net charge-offs of $9.4 million. This includes $4.2 million associated with the real estate loan, pertaining to the customer who perpetrated the kiting scheme.

Our total reserve increased 18.34% to $114.6 million. The reserve-to-loan ratio is now 1.64%, excluding PPP. And finally, NPAs increased by $15.7 million to $92.9 million, or 1.19% of total loans, and again, NPAs were negatively impacted by the $10.9 million that the Chancery and for the CRE loan associated with the fraud. I am finally pleased to report that our Board of Directors declared a dividend of $0.28, which is a 3% increase over the same period last year.

Before I do turn the presentation over to David Antolik, our President, I do want to mention that we're a resilient company with 118-year track record of serving our loyal customers and communities through good times and challenging times, and we will continue to work very diligently every single day, deliver exceptional service and value to them. And thank you for your continuing support of S&T Bancorp. And now I'll turn the program over to our President, David Antolik.

Yes. Thank you, Todd, and good afternoon, everyone. I'd like to direct your attention to Slide 9, which provides information on our loan mix. Worth noting here is the impact of PPP. Those loan balances were $548 million at the end of Q2, and were responsible for the growth in C&I loans and total portfolio loan of $359 million and $302 million, respectively. During the quarter, our CRE balances declined by $97 million, primarily due to continued payoffs from the permanent market and slower reproduction. We did experience growth in our construction balances of $62 million in the quarter as projects proceeded through the spring and summer-building season. COVID-19 has had minimal impact on our construction loans. During the quarter, new commercial construction commitments outpaced funding, resulting in a $6 million increase in available commitments. Excluding PPP, C&I balances declined by $189 million, this reduction was a result of significant deleveraging by these customers.

Quarter-over-quarter, revolving C&I utilization rates declined from 45% to 37%. On a positive note, C&I commitments expanded during the quarter by $15 million as a result of new customer acquisition.

Factors impacting C&I balances, including customers using the lower-costing PPP funds to reduce revolving borrowings and customers in certain segments struggling to maintain inventory levels. This was most noticeable in our automobile dealer floor plan portfolio where balances declined by $58 million, while commitments were flat quarter-over-quarter. We have not experienced defensive line drop by customers in order to build their liquidity. Commercial pipelines have declined across the board, while activity in our residential mortgage area remains very robust.

Slide 10 provides an update to our hardship assistance programs. We have seen a decline in the overall percentage modified, excluding PPP to 15% of loans as of July 21, down from 20% as of June 30.

Generally, we offer 3- to 6-month interest-only or payment forbearance to commercial borrowers based on our assessment of the hardship. As commercial modifications begin to expire, we have seen customers return to original contractual payment terms, resulting in the reduced modified balances that you see through July 21.

Further results on Slide 11 are encouraging, with 68% of expiring commercial modifications returning to contractual payments. This has resulted in a decline in commercial modifications from 22% as of 6/30 to 17% as of July 21, which is detailed by loan type on Slide 12.

For customers who are granted shorter-term modifications that have expired, we have, in certain cases, extended modified terms in order to provide ongoing assistance as pandemic and economic events unfold.

Slide 13 provides detail on our most severely impacted loan segment, hotels. We have implemented an extremely robust monitoring process for this segment that focuses on frequent data collection including occupancy, average daily rates, cash flows, net working capital assessments, payable trends and breakeven points, along with examination of sponsorship support franchise obligations in relationships as well as geographical and locational influences. COVID relief and through documentation review of this portfolio, we anticipate a longer recovery period for this segment as we move forward.

Slide 14 details our consumer loan hardship assistance program. This program expires at the end of July and modification extensions are not currently being offered.

Our PPP results are displayed on Slide 15. We've undergone a significant [scrub] process of all PPP loans to prepare them for the forgiveness process, which we will be prepared to launch on August 10.

I'll turn the program over to Mark for the details on our results.

Thanks, Dave. Net interest income was essentially flat compared to the first quarter, as pressure from lower short-term rates was offset by higher average earning assets, primarily related to PPP loans. The net interest margin compression quarter-over-quarter was 22 basis points. Approximately 5 basis points of the compression was due to PPP implying a core rate of about 3.36% in line with our expectations.

With short rates stabilizing, albeit at very low levels, we anticipate a relatively stable net interest margin percentage for the next couple of quarters. Volatility will come with the forgiveness timing of PPP and the resolution of loan modifications.

Slide 16 shows that we do have some liability repricing over the next 12 months to help offset lower new versus paid rates on the loan side. Certainly, deposits in the second quarter came mostly in low-cost core deposits. We were able to substantially reduce our short-term borrowings and are maintaining higher than normal cash balances ahead of an opportunity to reduce floating rate broker CDs later this quarter.

On balance, we don't believe the increase in deposits had or will have much of an impact on the net interest margin rate. Noninterest income in the second quarter was impacted significantly by the stock market as the mark-to-market, in a nonqualified benefit plan, combined with an increase in the value of some bank stock that we own were the primary drivers in a $3.7 million increase in other income. We saw the impact of the pandemic in several fee categories, including services -- service charges on deposit accounts, particularly NSF fees and in commercial loan swap fees.

Mortgage banking revenue improved significantly as the low rate interest environment led to heavy refinancing activity. We do expect some continued weakness in service charges and swaps in the second half but continue to anticipate good mortgage activity, although not at the levels we saw in the second quarter. We expect a run rate of $13 million to $14 million per quarter the remainder of the year in noninterest income. Noninterest expense declined compared to the first quarter primarily due to $2.3 million of merger-related items in the first quarter. Other expense in the first quarter included $1.2 million related to some historic tax credits. We expect our expense run rate to be in the $45 million to $46 million range per quarter.

Capital levels, on Slide 17, remains strong and in excess of regulatory well-capitalized levels. We're comfortable with our ability to absorb losses based on additional stress tests that we have completed, including COVID-related scenarios. Both the leverage and TCE ratios are impacted by the PPP loans.

Now I'd like to turn the call over to our -- to the operator for questions.

(Operator Instructions) We'll take our first question from Russell Gunther with D.A. Davidson.

Mark, just following up on the expense guide you gave for the back half of the year, and Todd, comments in your prepared remarks about track record of expense discipline, just given the challenging operating environment, are there initiatives contemplated that might reduce the expense rate beyond the second half guide in 2021? Or are you guys looking at your branch network or any other moving pieces that might help generate some positive operating leverage?

Yes, Russell, you've seen a lot of releases of people cutting back on branches, but we have 72 branches in our system. Our average branch size is about a 100 -- over $100 million. So I mean, it's something we continue to look at on an annual basis and it will be on the table, but I'm not going to come out today and commit to say we're going to close 10% or anything like that. But we look at all facets of the organization. I mean we're just reviewing some things last week. And so we've had 12 positions that have been exited from the company whether it be to retire or someone take another job. We've not replaced those, but that totals about $1.3 million. And we're looking at other positions as those become open and how do we shift resources around. We're looking at some technology to help create some efficiencies and capacity. So this is something we do every day. And again, we know we're going to have margin pressure next year. So we're continuing to look for ways to kind of squeeze expense out of the organization and manage to that low 50 number, I guess, would be my answer, Russell.

Okay. Great. And then on the deferrals, in Slide 10 that you referenced, about 15% of loans as of last week, how do you expect that to trend over the next couple of months? And when we're talking at next quarter, do you have a sense for where that could shake out?

Yes. So Russell, this is Dave. What you see there is most of the activity in terms of the modification happen at the end of March and into early April. Those things expired in the first part of July. Our expectation would be that we'll continue to see reductions in the amount of modified loans. We are keeping very close paths on segments where we have concern that's why we've included some additional information on our hotel portfolio. Other segments are concerned with the retail CRE, and we're gathering information and doing deep dives in terms of understanding what impact the economic prices will have on those customers. And with regard to the consumer -- yes, with regard to consumer modifications, those all work their way through the process by the end of July.

Okay. And then I guess just given those comments, particularly on the commercial side of things, is the expectation then for that reduction, but whatever remains, are those -- do you consider to be more at risk loans? And therefore, that's already accounted for in qualitative reserves that may have been taking? Or as those kind of work their way through, is that an incremental provision headwind?

Russell, this is Mark. We have started to factor some of that in both through the forecasts, which relies on the unemployment rate, but also with some specific portfolios that do have higher risk that we do anticipate there being some issues with by the time they get to the end of their modification period. So we have made some qualitative adjustments in particular for the hotel portfolio to trying to get ahead of the fact that we do think there's going to be some issues with that portfolio.

Right. We started last quarter as well. So this quarter, as I mentioned in my comments, that was the PPP, that reserves on loans is about a 1.64% so, we're comfortable with where that is today, but it's something we're going to evaluate every quarter.

Okay. And then just last one for me. I mean it doesn't sound like loan growth opportunities on the organic side are all that robust at the moment for the back half of the year. And so unlikely an issue, but just your thoughts on the balance sheet in general, where you might end the year and with the thought of the $10 billion threshold potentially around the corner, how you're thinking about that?

Yes. I certainly don't see any kind of significant loan growth through the balance of the year. We're [marking] resources to attack the modifications and making sure we've got our arms around credit risk. We are onboarding some new customers, particularly in the C&I space. We've had some success in -- with our ABL group. But as I mentioned, the deleveraging has been significant. So some of it is going to come down to existing borrowers readvancing online is -- I pointed out the floor plan portfolio. It's just amazing to me that our balances reduced over a 2-month period in Q2 by 45%. And those customers are flourishing. They're doing very well. They're profitable, but they can't get inventory. So some of it's going to be the macro economic issues and the availability of inventory and whether or not the C&I borrowers releverage. So some of that is kind of unknown as we move forward through the balance of the year.

The other thing that will weigh in will be the forgiveness on the PPP loans of that $550 million. We're estimating about 80% of that gets forgiven by year-end as well. So those will unwind.

We'll take our next question from Matthew Breese with Stephens Inc.

Just one question on the fraud. So I struggle to understand how and why the fraud was classified and fell into a commercial loan charge-off bucket. I figured it would have hit the P&L elsewhere. Can you just help me kind of walk me through how it ends up there versus elsewhere?

Matt, technically because it creates an overdraft becomes a loan. There's no -- it's technically a loan. So that prescribes that it works its way through the allowance process like any other, like any -- like a charge-off would, a loan charge-off. And so typically, [CSF] we will -- we'll have a lot of DDA charge-off or overdraft charge-offs essentially every quarter, but they're very, very small. But they run through the reserve process as well.

Okay. Great. That's very helpful. On Page 11, it looks like the bulk of the loans requiring a second deferral. They consist of office, flex/mixed use and hotels. You provide the hotel LTV on one of the ensuing pages. But can you just talk about the LTVs in the office and flex space that require second deferral? Just want to get a sense for buffer against losses.

Yes, Matt, we don't have that right now, but we can get that for you.

Okay. And then lastly, on Page 17, I know you talked about having capital in excess of regulatory minimums. We have seen a number of your peers with similar excess capital, but still raising preferred or sub debt. Just curious to your thoughts there and whether that's something we might see you pursue.

This is Mark. I mean that's something we continue to evaluate the market, but that does have a cost to it. So we're looking at it, we don't have any firm plans as of right now to do any issuance.

And we do have a question coming through from Collyn Gilbert with KBW.

Just to start. Just a credit question. Do you happen to have what the average loan size is within the hotel book and then what the average loan size is within the retail CRE book?

Yes, it's on that slide.

Oh, is it? Okay.

So Slide 13 has the average hotel. So average hotel is -- the total book is $3.1 million and the modified average is a little bit higher, $3.8 million.

Okay. Sorry. Yes, I see that right there, sorry. Okay. Got it. That's helpful. And then just in terms of the fraud, and I apologize if you happen to cover it at all in the beginning of your comments, Todd, I got on a little late. But is there anything that you guys have done differently internally from a process perspective because of how that came through? And then also, too, just curious when that relationship originated with the bank?

Yes. So I think it goes back to 2016 as a relationship, and we did a very thorough investigation. And really, we just enhanced processes and oversight really, Collyn, is what it comes down to.

And at this time, there are no further questions in the queue. I'd like to turn the call back over to management for any closing remarks.

So I'd just like to thank everybody for participating in the call today. Mark, Dave and I appreciate the opportunity to discuss this quarter's results and look forward to hearing from you at our next conference call. Thank you, and have a good day.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may disconnect at this time, and have a great day.