Earnings Call: Q2 2021

Jul 22, 2021

Good day, ladies and gentlemen, and welcome to the S&T Bancorp, Inc. 2nd 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 questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mark Kochvar. Sir, the floor is yours. Well, thanks very much. 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 Q2 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 the earnings supplement slide deck as part of this presentation. You can obtain a copy of those slides through the link on your screen or also on our website under Events and Presentations, 2nd quarter 2021 earnings conference call. A click on the Q2 2021 earnings supplement. With me today is David Tullock, S&T's President and Interim Chief Executive Officer. I'd now like to turn the program over to Dave. Well, thank you, Mark, and good afternoon, everyone. Mark and I appreciate you joining us for the call today and for your ongoing interest and support of S and T Bank. As announced last earnings release. Our Board of Directors has chosen Mr. Christopher McComish as our new CEO. Chris comes to us with a wealth of executive bank leadership experience, and I look forward to him joining us on next quarter's call. I've had the pleasure of spending time with Chris over the past several weeks as we work together to transition duties and welcome him to our organization and community. I strongly believe that his experiences leading larger customer focused and employee driven organizations, particularly in the digital and consumer spaces will complement my long tenure and understanding of our culture, customers and my experience in the commercial banking space. I believe that we have found the right leader to move us forward as a strong independent community bank focused on growth and providing soft returns for our shareholders. If I could refer you to Page 3 of our earnings supplement for the quarter, I am pleased to report net income of $28,400,000 that translates to total earnings of $0.72 per share. Our return metrics remain solid and in line with our expectations with ROA of 1.21%, ROE of 9.65%, return on tangible common equity of 14.41% and pre tax pre provision to average assets of 1.61%. I'm also pleased to report that our Board of Directors has declared a $0.28 per share dividend consistent with Q1 and with the same period last year. The dividend is payable August 19 to shareholders of record on August 5. Slide 4 highlights the changes to our balance sheet during Q2. Cash balances grew by $985,000,000 Our primary goal for deploying this liquidity is by growing customer loan balances. In support of this call, we experienced improved customer demand as evidenced by a continuation of growing loan pipelines in all categories, a modest increase in commercial utilization rates and increases in total commitments of $189,000,000 during the quarter. Year to date, loan production is well ahead of goal in all categories and was particularly strong in late June. However, this production was offset by higher CRE payoffs earlier in the quarter. Highlighting consumer loan balance activity was an increase in home equity balances that was offset by lower residential mortgage balances. We expect the residential mortgage balances to reverse course as we book more to the portfolio in support of our cash deployment strategy and a change in customer activity from refinance to purchase and construction. We anticipate the second that second half loan growth, including excluding PPP to be in the low single digits consistent with prior guidance. During the quarter, we made several key additions to our production staff, including a new market executive in Northeast Ohio, Director of Mortgage Sales, 2 Business Bankers and 3 Commercial Bankers. I'll now turn the discussion over to Mark to cover the next few slides. Thanks, Dave. On Slide 5, we have the net interest income, which shows that it decreased by $2,400,000 compared to the 1st quarter. This is mostly due to a decrease in PPP contribution of $1,700,000 from $5,800,000 in the 1st quarter to $4,100,000 in the 2nd quarter. Although the amount of loan balances forgiven actually increased compared to last quarter, the contribution was lower and we had more larger balance loans being forgiven. Those carry lower fees as a percent of the balance. Also contributing to lower net interest income was a lower average loan balance, not including ATTP of $123,100,000 The headline net interest margin rate declined by 31 basis points compared to the 1st quarter to 3.16%. The largest contributor to the decrease was a $483,000,000 increase in average cash balances, which reduced the net interest margin rate by 18 basis points. The lower PPP contribution I discussed already accounts for another 8 basis points of the decline. We had lower yields on loans and fees, which resulted in a decline of 7 basis points and lower securities yields and other mix changes reduced adjusted interest margin by another 3 basis points. This is only partially offset by lower costing liabilities of 5 basis points. We anticipate that the cash levels will persist for some time as we still have an additional $336,000,000 of PPP loans yet to be forgiven and there are no signs yet that deposit levels will reduce. With low single digit loan growth and not much appetite For huge investments in fixed income, we expect an interest margin to stay at or slightly below these levels for the next several quarters. That might come with some volatility as the remaining PPP loans are forgiven, particularly in the Q4. On the next slide, non interest income in the 2nd quarter decreased by $1,800,000 compared to the Q1. The largest decrease was in mortgage banking, which declined by $2,600,000 to $1,700,000 Production remained strong but shifted more to the balance sheet, including to home equity loans, as Dave discussed. We also experienced some tightening of spreads in our sales to Fannie Mae. Mortgage servicing rights valuations swung the other way with 2nd quarter in 2nd quarter with lower rates, resulting in a quarter over quarter decline of $1,200,000 The price of is the debit card, which is now running well ahead of pre pandemic levels. We also saw improved numbers in wealth management through a combination of asset depreciation and increased customer activity. We expect the run rate in non interest income to be $15,000,000 to $16,000,000 per quarter. On Slide 7, The non interest expense was essentially flat overall compared to the Q1, well controlled at $45,800,000 Higher salary and benefits of $1,200,000 and annual merit increases. Other expense categories were in line with prior with the prior quarter. We still expect our run rate going forward to be closer to $47,000,000 due to new hires and a focus on production. On Slide 8, at the top, our ACLs to loans decreased from 1.60% in Q1 to 1.56% in the 2nd quarter, that's 1.64% from 1.72% excluding PPP. The $5,500,000 release came in part from specific reserves, which are down $1,600,000 and also from lower qualitative adjustments due to the improvements economic outlook. Yes. During Q2, we experienced our 2nd consecutive quarterly decline in NPLs as the impacts of the pandemic and economic recovery become more clear. In some cases, uncertainty remains for customers who are still recovering. As we receive updated financial reporting and valuations, we adjust our reserves accordingly. The effect of the updated valuations directly impacted charges Q2. And then finally on Slide 9, capital, the risk weighted capital levels all improved, while leverage ratio and TCE continue to be weighed down by PPP and also the higher cash levels. All capital ratios are in excess regulatory and well capitalized levels, and our capital cushion continued to expand. In March of 2021, the Board extended repurchase authorization for additional year through the Q1 of 2022. We have $37,400,000 remaining on that authorization. While we have no immediate plans to do by its facts, we are monitoring valuations and are prepared to respond to conditions warrant. Our preference is to utilize our capital to support growth organically or through M and A. So in conclusion, we are excited to move forward under new leadership with improved clarity on economic conditions and feel that we are well positioned to achieve improved growth in the coming quarters. I'll now turn the program back to our host and open the lines for questions. Earnings Conference Call. Star 1 on your phone at this time. Our first question today is coming from Michael Perito at KBW. Your line is live. Hey, good afternoon, guys. Hi, Mike. Hello. I wanted to start on the loan growth side. It Sounds like you guys are a bit more optimistic about pipelines and we have seen there will be a little bit of activity in your markets from a lending this quarter. I guess, wonder if you take some of your high level remarks a step further here, I mean, what are some of the dynamics that need to occur for you guys to kind of put on some consistent net growth in the back half of the year. And as we try to handicap what that could look like? I mean, do you think you can do like a mid single digit rate per quarter in the back half of the year annualized? Or do you think it might take some time to build up to that type of level of production? Yes. So Mike, there are a couple of back points that I would point to. The first is that increase In commitments that we saw for the quarter, dollars 189,000,000 and that split about $100,000,000 in the commercial space, which The revolving availability along with construction commitments, along with activity in the consumer space, home equity and normal revolving consumer products. So I think that points towards better growth in the second half of the year. We did see a modest increase in utilization quarter over quarter, and I would expect that to continue as well. And our pipelines in virtually all areas are up quarter over quarter. That coupled with our desire to deploy some of the cash by booking some additional portfolio mortgage activity and customer demand moving from refi to construction and purchase, which is more it would make Our portfolio of products more attractive. I do believe that we can get to single digit loan growth on an annualized basis for the last couple of quarters. And can you guys can you expand on that dynamic just a little bit more as we think about kind of the mortgage banking fees versus the portfolioing of residential production and how that dynamic might impact kind of the geography of those revenues in the back half of the year? Yes. So one of the important points to make with regard to the mortgage activity is that on a gross dollar basis, quarter over quarter, the activity was up and our pipeline again is up. So it's really the dynamic between what we sell, Spreads that we see on the sale, which were down slightly during the quarter, as Mark mentioned, and then the customer demand, which is shifting more 2 portfolio products. The other big factor in the mortgage banking revenue number was the MSR change That cost us about $1,200,000 quarter over quarter. So some of it's going to be rate dependent, some of it's going to be appetite of buyers. And then in addition, our home equity product, firstly, our home equity product is very attractive too, which could bolster portfolio balances as well. So it's a dynamic and a balance between customer need and customer desire and then where the product best It's the customer. But then we anticipate the activity overall to continue at the current pace. Got it. And then just that's helpful. Thank you. And then just lastly for me, I mean, it feels like with the non performers dropping in the quarter and I've seen the XPPP ACL come down a little. And I mean, are we close to turning the corner here on the charge off activity? Do you expect it to subside in the back half of the year given what you know at this point? Yes. As we gain clarity throughout the rest of the year, It's a big issue for us. As you know, in Q4 of last year, we downgraded a big chunk of the wholesale portfolio. We continue to monitor that closely. And there is some valuation risk as we get assets reappraised through the balance of the year. I mean directionally, I think We should continue to see improvement, but there is some uncertainty there. Got it. Okay. Earnings call. Our next question today is coming from Russell Gunther at D. A. Davidson. Your line is live. Hi, good afternoon, guys. Hey, Ralph. Hi. Can you circle back to the margin discussion for a bit? I think I heard you, Mark, say at or below kind of current levels near term. And so just want to get a better sense for the dynamic there. I mean, first off, are you guys Expecting to see continued pressure on new money loan yields and just kind of what helps kind of claw us out of this $3.16 range going forward. Yes, I think for the next couple of quarters, we still see Some pressure on, if you could call it, the core margin if you strip out kind of the cash and the PTP activity. The deposit costs are about as low as they can go. We saw those drop by another 7 basis points this quarter, but there's not much left there. On the asset side, we continue to see a fairly large difference between the new and the paid that has expanded to around 80 basis points this past quarter. So there's some asset yield pressure That's still there. That will reduce not from the new loan rates, but the paid rates should moderate as we get into the back half of the year. So for us, the rate, I don't expect that to improve a lot with the exception of the PPP timing. What we'd like to see happen, we expect to happen is that the loan balances will start to grow. And just from an absolute dollar revenue perspective that we should see some improvement there. Yes, that's the upside for us, Russell, is fulfilling And delivering on these pipelines that we have in order to redeploy the cash that's earning very little at the Fed. I appreciate that guys. I guess the other part of my question then would be, so it sounds like the loan growth is going Turn the corner for the back half. How are you thinking about the investment portfolio as a use of Soften up some of that excess cash as well. It'll probably be fairly limited. We've been adding maybe $25,000,000 to $50,000,000 per quarter. We just don't see a whole lot of value in the bond stack these days. The yield on the type of active or the type of bonds that we are comfortable with They are in the low very low 1 percent of that. So we're just not sure that the risk reward trade off is there given our desire eventually to get that back in loans. So we don't anticipate any wholesale or any large move from cash into the investment portfolio at this time. Okay. Okay, great. And then just a housekeeping question. Do you have the kind of outstanding PPP loan balance and remaining fees? Yes, it's about $336,000,000 at the end of the quarter. EASE is about $9,000,000 left to recognize. Okay. Thanks for that. And then just a bigger picture question with Chris coming in, in a month and Dave, you guys have spent some time together. Just any thoughts on any bigger picture strategic decisions that you guys may be contemplating, whether it's Taking a look at the expense base, getting active in M and A, just any broad strokes, early innings with Chris coming on board. Beyond the high level message that I believe that sends to our employees, our communities, shareholders that we anticipate remaining independent. Obviously, we need to earn that, but the investments that the Board has made in Chris and MB and the rest of the staff, It should point us towards growing above and beyond $10,000,000,000 and moving forward. So kind of all of the above, the focus In the short run, it's making sure that we're able to drive revenue on an organic basis and continue to augment that in The M and A space or other revenue diversification activities. Got it. Thanks, Dave. Guys, that's it for me. Thanks for taking my questions. Thank you, Russell. Thank you. Our next question today is coming from Matthew Breese at Stephens Inc. Your line is live. Good afternoon. Matt, Matt. Maybe just following up on the top line, the NIM question just asked a different way. So if I exclude PPP income, I see core NII of about $64,200,000 this quarter and it's been here in and around this range for about 3 quarters. With the loan growth and securities growth that you're contemplating, is this level is this market bottom in your view? And if so, where do you think You can grow revenues core NII too over the next, call it, 6 to 12 months. I agree. Yes, I hope We do think that we're at or close to the bottom. Again, given The ability or what we thought in the back half of the second quarter in terms of the loan growth. So we do think that it's positive going forward. But it is going to depend on how the recovery progresses and our ability to grow Those loans that will govern how much of that increase can happen over the next 6 to 12 months. Okay. And then just following up on Chris and some of the broader strokes there. I couldn't help but notice that his background is Pretty heavy in consumer, both the TCF and then at Scottrade. As we think about the road forward for S and T, should we contemplate more of a consumer offering a more balanced approach there? And if so, what kind of services and products do you think we could see that would be new and different? Yes. That's certainly one of the goals, Matt, is to provide better balance, and that's something that I've been working on with our consumer team over the past year or so to help diversify revenue independence upon net interest income in the commercial space. So We have seen some pretty nice increases in terms of the fundamental revenue sources that come out of the consumer bank. I would expect Chris to continue that. If you look at the investments we made, particularly through the D and D franchise, That's a very attractive market and exploiting that opportunity on a in the consumer bank is a focus for us. So Yes. I think that everything is on the table in terms of growing revenue. We certainly don't want to give up what we do well, and we'll continue to be a commercially focused bank. But His background, as I mentioned in my prepared comments, really complements mine, and that's why we're excited about this partnership and where we're able to where we will be able to take things. Great. Well, I appreciate that. I'm sure there's more to come next quarter when he's on the call. Thank you. Thanks, Matt. We have no further questions in the queue. Well, thank you for your participation in today's call. Mark and I welcome your questions and comments, and we look forward to next quarter and having Chris McComis join us for the call. Thank you, and have a wonderful day. 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.