Earnings Call: Q1 2021

Apr 22, 2021

Good afternoon, ladies and gentlemen, and welcome to the S and T Bancorp First Quarter 2021 Earnings Conference Call. At this time, all participants have been placed on a listen only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mark Kochvar, CFO. Sir, the floor is yours. Thank you, 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 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 Q1 of 2021 earnings release can be obtained by clicking on the press release link on your screen or by visiting our Investor Relations website at stbancorp.com. We will be reviewing an earnings supplement slide deck as part of this presentation. You can obtain a copy of those slides by clicking on the earnings supplement link on your screen or on our website under Events and Presentations, Q1 2021 earnings conference call. Click on the Q1 2021 earnings supplement. With me today is Dave Antowiak, S&T's President and Interim CEO. I'd now like to turn the program over to Dave. Thank you, Mark, and good afternoon, everyone. We appreciate you joining us for our Q1 earnings call. I personally want to thank you for your continued interest in S&T Bank. As you may know, our Board of Directors continues its search for a permanent CEO and in the interim has entrusted me with the honor of serving as CEO. While we recognize the challenges that exist in the current environment, our energy is focused on renewed growth initiatives and preparing for a future as a dynamic high performing community bank. I'm encouraged and proud of the progress that we've made and I'm pleased to report record net income of $31,900,000 in Q1. This translates into $0.81 per share versus $0.62 per share in the previous quarter. Our return metrics were also much improved this quarter with ROA of $1.42 ROE of $11.15 return on tangible common equity of $16.78 Our pre tax pre provision to average assets also improved to 1.8 9%. Mark will walk you through a more detailed discussion of our financial results, but I would like to highlight a $1,200,000 increase in mortgage banking fees quarter over quarter, a nearly 20% increase in wealth management revenue quarter over quarter, a modest increase in the core NIM rate, improving asset quality and a continued focus on expense control, which contributed to an improvement in our efficiency ratio to 51.47%. I'm also pleased to report that our Board of Directors has approved a $0.28 per share dividend consistent with the same period last year. This dividend is payable May 20 to shareholders of record on May 6. Our portfolio loan balances continue to reflect the impacts of stimulus programs, primarily PPP. If I could direct your attention to Page 5 of the earnings supplement, you will see an update of forgiveness for round 1 and bookings of $190,000,000 in round 2 through March 31. As a reminder, round 1 activities were limited to existing customers, while round 2 included new customers to the bank. Page 6 provides a history of our modified loan balances. We have seen modifications reduced to less than 1% of total loans. Most encouraging is the continued reduction of modified hotel balances, which are now just $32,000,000 compared to $177,000,000 at the end of the year. As I mentioned earlier, we have renewed our focus on growth and we have seen improvements in both our commercial and consumer pipelines when compared to last quarter last year. Our commercial pipeline is at its highest point in the past 5 quarters. We continue to experience payout pressure from permanent market offerings in the CRE portfolio. And in order to combat these pressures, we recognize the need for additional volume in the commercial space and in Q1 added 4 commercial bankers in order to improve production. We also added 4 mortgage loan originators in Q1. Our consumer pipeline is up 30% versus Q1 of last year and we continue to see strong demand for our home equity promotional product that is currently in the market. With regard to our mortgage activity, our pipelines are pointing towards increased activity in Q2 along with a meaningful shift in mix from nearly 90% of all activity being sold in Q1 to more meaningful portfolio activity and a reduction in sold loans as customer preference moves towards purchase and construction. I'd now like to turn the presentation over to Mark. Thanks, Dave. To round out the credit discussion, I'd like to point out that our ACL to loans decreased slightly to 1.60% in the Q1 from 1.63% at the end of the year and to 1.72% from 1.7 4 percent excluding PPP. The $2,500,000 release came out of specific reserves, which are down $5,400,000 from the 4th quarter. The general reserve actually increased by about $2,900,000 Slide 7 shows the net interest income increased by about $800,000 compared to the 4th quarter. This is mostly due to increased PPP activity. Total net interest income from PPP was approximately $5,800,000 in the Q1 compared to $4,900,000 in the 4th quarter, which helped to improve the headline NIM rate by 9 basis points to 3.47%. There remains about $4,000,000 of net deferred fees from TCP round 1 and with what was booked in round 2 by the end of the quarter, we have an additional $7,300,000 of net deferred fees. The core net interest margin rate improved by 2 basis points compared to the 4th quarter to 3.37% as lower interest bearing deposit costs as seen on the lower chart more than offset lower earning asset yields from lower LIBOR and a less favorable asset mix. We continue to make progress of lowering our liability costs, which were also down 9 basis points compared to last quarter. We are, however, running out of room to lower deposit costs going forward and anticipate that improvement will slow in the 2nd quarter before stabilizing in the second half of the year. Some volatility in headline margin rate will come with the forgiveness timing of PPP Round 12. Cash balances accelerated significantly at the end of March with stimulus payments and Round 2 of PPP, all but about $70,000,000 of cash balance at period end with Digirosparity. And while point to point cash balances increased over 440,000,000 dollars it coming late in the quarter had a more muted impact on average balances, which increased only about $60,000,000 The 1st quarter average balance level of cash lowered the net interest margin rate by about 9 basis points compared to normal. And the quarter ending higher level holds throughout the 2nd quarter, we could see an additional 15 basis points of net interest margin rate pressure. We remain cautious on investing significant amounts of this cash in bonds given the rate volatility, only modest yield pickup and uncertainty surrounding the eventual unwind of this deposit surge. Non interest income in the Q1 increased by $1,600,000 compared to the 4th quarter. As Dave mentioned, largest increase was in mortgage banking, which improved by $1,200,000 to $4,300,000 Production remained strong and we also benefited from better mortgage servicing rights valuations on new loans and also a recapture of $941,000 Consumer related fees are showing signs of improvement as card related fees are now running ahead of pre pandemic levels. NSF still lag influenced by the improved liquidity of consumers. We also saw improved numbers in both management through a combination of asset appreciation and increased customer activity. While we don't expect to repeat this quarter's level of fee income, given better mortgage volume, improvements in wealth and return of consumer fees, the run rate in non interest income should improve to closer to $16,000,000 per quarter. Non interest expense decreased by over $2,900,000 from the Q4 to $45,600,000 dollars The largest decrease came in workout related expenses, which are in the other category. They were down by $1,700,000 after being elevated in the 4th quarter. The other larger decrease came in marketing down almost $800,000 dollars due to higher campaign expenses in the Q4. Despite lower expenses this quarter, we still expect our run rate going forward to be $47,000,000 to $48,000,000 per quarter as we work through some credit issues and begin to focus on production and new hires. Triple P salary deferrals, which were about $500,000 in the Q1 will come to an end, and we expect our bankers to be more active as travel and customer activity resumes. Better fees, stable debt interest income and lower expenses resulted in a nice improvement in pretax pre provision and the efficiency ratio that Dave mentioned. We expect those to moderate some as fees and expenses normalized and core interest income remains stable. The rich weighted capital levels on Slide 8 all improved by about 50 basis points. Both leverage and TCE are weighed down by PPP by about 50 basis points and additionally by the higher cash levels. Our capital ratios are in excess of regulatory well capitalized levels and our capital cushion continues to expand. In March, the Board of Directors extended the repurchase authorization that was set to expire on March 31st this year for an additional year through the end of Q1 2022. We have $37,400,000 remaining on that authorization. And while we have no immediate plans to do buybacks given improved valuations and our purpose to use that capital to support growth, we have the flexibility to act should conditions change. Thanks very much. At this time, I'd like to turn the call back over to the operator to provide instructions for asking questions. Ladies and gentlemen, the floor is now open for questions. Your first question is coming from Matthew Breese. Your line is live. Hey, good afternoon. Hey, Matt. Hi, Matt. Just curious on the new hires, market wise, where are they focused? And then you did mention stronger commercial pipeline. Just curious on your loan growth core, ex PPP, your core loan growth outlook for the year. Yes. Matt, it's Dave. So those hires were all in Eastern Pennsylvania. So if you think about where we were when we consummated the DNB merger was right at the time of the beginning of the pandemic. So if we weren't able to execute fully on our strategic vision for that market, now that we've gotten through some of the noise of 2020, we've gone back on the offensive from a hiring perspective and those folks are focused on that market. We did see a decline in core loan balances in Q1 and that was anticipated. So we do expect to the growth to happen in the back half of the year. We're still in the low projecting low single digits for the full year. Okay. Okay. And then could you give us an idea of, you mentioned competition and pressure. Just can you give us an idea of where new loan yields are shaking out and maybe some of the different structures your competition is offering customers? Is that the yield mark number? Yes. So the average yield on loan last quarter was in the low 3s, right around 3.25% as kind of all in, it's heavily weighted towards commercial, but we're right around that 3.25% number. Yes. And the payoff pressure is coming from the permanent market and most of that's 10 year paper and we're competing on the shorter end of the curve. The spreads haven't moved significantly. That we've been holding pretty steady on spreads. But yields in the competitive environment particularly in the permanent space are still more aggressive than what we would be comfortable putting on our own balance sheet. Okay. You are still holding on to some excess liquidity. Just curious if we should anticipate continued build in the securities book or are you more focused at this point on back half of the year loan growth and holding on to it for now? I think it's going to be more holding on to it. We might you might see a little bit of an increase on the securities, but nothing significant. We saw small maybe $40,000,000 increase point to point. We might look for something in that range, the current yield levels hold, but we're not going to jump in with both feet on the security book at this point. Okay. Okay. And then just last one for me. Deferrals down to $62,000,000 a far cry from where we were mid last year. So job well done. Just curious any thoughts you have on from here kind of credit quality charge off provisioning outlook that might be helpful. Yes. The book has yet to be completed the final chapter on the kind of macroeconomic issues. But from what we see right now, I would anticipate improving credit trends throughout the year. We did see reduced delinquency this quarter as well. So that's a big positive for us. We are looking at other ways to reduce NPLs more aggressively if we have the opportunity. So I would anticipate improving credit trends as we move through the year. Okay, great. That's all I had. I'll leave it there. Thank you. Thank you, Matt. Thanks. Your next question is coming from Russell Gunther. Your line is live. Hey, good afternoon, guys. Hey, Russ. Hi, Russ. Hey, Dave. I think in your prepared remarks, you were talking about growth initiatives. I believe I heard you say revenue growth initiatives. We spoke a bit about some of the new hires, but is there anything else that you're referring to or a more formal approach that you can share from a perspective? Yes. So we strategically realigned the wealth management group last year with the consumer bank. I like to say we need to resource the opportunity. So we saw a larger opportunity particularly in our financial advisory business. So the Q1 really proved that out. If you look at wealth management fees, a big portion of that is just based on renewed activity. Selling our corporate and personal credit cards, a renewed emphasis on merchant. And then we're also looking at potentially other avenues and new revenue sources that might include other partnerships or perhaps some acquisition activity in the non interest income space. Okay, great. Thanks, Dave. And then, heard your commentary on organic growth expectations for the year, both from a mix and timing perspective, but it looked like core C and I, ex the PPP was up a bit. Could you give some color in terms of what the dynamics were there and what the related growth outlook is? Yes. I think the core C and I was actually flat to down slightly on the quarter once you take out the PPP. If you think PPP was down on the quarter $40,000,000 to $50,000,000 Once you take out all the activity surrounding forgiveness of round 1 and then bookings for round 2. But C and I activity, the utilization rate was flat for the quarter. We did have some activity towards the end of the quarter with some new names and about 50% of pipeline at this point is C and I versus CRE. So I would anticipate some reborrowings as we work through the year and companies work through their liquidity, particularly their stimulus related liquidity and improve borrowings as folks get more comfortable with making capital investments in the current environment as well. Great. Well, thank you for the clarification and thoughts there. Just last question for me. I heard you on the guide on the expenses kind of $47,000,000 $48,000,000 going forward. You mentioned where that incremental dollar was coming from. But is there a thought being contemplated as to how you might offset that, support positive operating leverage going forward in terms of any expense initiatives? Well, I guess, that's something we're always looking at. We don't have as we talked about before, given our branch footprint, we don't see any huge opportunities to make a lot of strides there. So for us, it's going to be a lot of signals to try to hit in order to keep the expenses under control and no big initiatives planned to for layoffs or branch closures or anything along those lines. It's going to have to be managing it item by item. Yes. And then on the revenue side, Russell, it comes down to some of these non interest income initiatives and accelerated growth, and the addition to the staff in the lending space should help with that. So again, our focus is on growing revenue because we know we run an efficient shop. And if we cut any deeper, we don't want to cut too deep. Understood. Well, great guys. That's it for me. Thanks for taking my questions. Thanks, Russell. There are no further questions from the lines at this time. I would now like to turn the floor back to David Antolik for closing remarks. Yes. Mark, I had one question that came in that he would like to answer. Yes. A question that came in through an email that he get a chance to answer related to the amount of purchase accounting adjustments in the margin this quarter. It occupied about 3 basis points this quarter, a little bit higher than usual. Typically, we run about 2 basis points, runs a little less than $100,000 per month or about $300,000 a quarter. And we have about $5,600,000 left of purchase accounting adjustments to go through income related to prior acquisitions, primarily the D and D merger. So Dave, thank you for the closing comments. Great. Thank you, Mark, and thank you, everyone on the line for your continued interest in S&T Bank, and I look forward to talking to you again next quarter. Thank you. Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.