S&T Bancorp, Inc.

Good day, ladies and gentlemen, and welcome to the S&T Bancorp first quarter 2020 earnings conference call. All lines have been placed on a listen-only mode, and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host for today, Mr. Mark Hochbar, Chief Financial Officer. Sir, the floor is yours.

All right. 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 is on the screen in front of you. The 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 first 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.stbankcorp.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, first quarter 2020 earnings conference call. Click on the first quarter 2020 earnings supplement. I would now like to introduce Ty Brice, S&T's chief executive officer, who will begin today's presentation.

Well, thank you, Mark, and good afternoon, everybody. I hope that you're all staying safe and healthy through these unprecedented times. COVID-19 has impacted operations in our economies in unprecedented ways, so we've expanded our presentation this quarter to provide some granularity on the loan portfolio as well as some of our customer assistance programs that we've implemented. For the quarter, we're reporting net income of $13.2 million, or $0.34 per share, which included $2.3 million, or $0.05 per share, of merger-related expenses. in the quarter that were associated with the DMV transaction that we consummated last year. So core earnings for the quarter were $0.39 per share, which translates into a 70 basis point return on average assets, 5.13% return on equity, 7.79% return on tangible equity. Managing expenses continued to be a strategic focus. Our efficiency ratio for the quarter was 52.89%, and will continue to be a focus moving forward. We did elect to adopt CECL as of January 1st, and the uncertainty around COVID-19 resulted in a $20 million provision expense in Q1 compared to $2.2 million in the fourth quarter. So now our allowance for credit losses stands at $96.9 million, or 1.34% of loans, versus .87% last quarter. Pre-COVID, we were seeing nice growth in all of our lines of business across all of our five regional markets. The DMV conversion went extremely well, and then we were experiencing nice activity in southeastern Pennsylvania. For the quarter, portfolio loans increased to $109.6 million, or 6.2% annualized, and was distributed across commercial real estate, C&I, and construction categories. Our COVID... Next slide, Mark. The COVID-19 response was focused on four stakeholders. First were employees, and then customer and business... business customers, and finally our communities. Protecting the health and well-being of our employees and customers were the initial concern, so working from home, rotating schedules, splitting our operational staffs between multiple facilities, bonus pay for people that were coming into the office, picking up some childcare expenses, and a number of other initiatives that we did to really just try and make sure our employees were safe and healthy. So next we focus on customer assistance program for consumers and businesses, which entail needs-based loan payment deferrals, SBA PPP lending, extended solution center hours, and encouraging the use of online and mobile solutions. And finally, we're committed to supporting our communities that have done so through contributions to food banks and our regional medical provider. Before I turn it over to our president, Dave Antolik, I want to share some very exciting news. We have been recognized by J.G. Power as the best retail bank in the Mid-Atlantic region. It truly is an honor to receive this designation, and it really is a reflection of the confidence and trust that our customers have placed in ST Bank. We've been serving our communities for 118 years through good times, challenging times, economic downturns, and national disasters, and today we bring that same commitment to help our clients navigate the COVID-19 pandemic. Common shares, totaling $411,430, were repurchased during the first quarter of 2020. at a total cost of $12.6 million for an average of $30.52 per share. And at the impact of the COVID-19 pandemic spread, we did suspend repurchase activity in mid-March. And finally, I'm pleased to announce that our Board of Directors approved a $0.28 per share dividend for shareholders of record on May 19th. It was payable on June 2nd, 2020. This is an increase of 3.7% compared to the dividend of $0.27 per share. starting the same period last year. I want to thank you for your continued support of S&P Bancorp, and I would like to turn the program over to our president, Dave Antoli.

Hey, thank you, Todd, and good afternoon, everyone. If I could direct your attention to slide number five, we thought it would be helpful to provide an overview by category of the entire loan portfolio in order to frame our discussion today regarding credit risk and COVID-19 hardship assistance. focusing on those categories that have been most impacted by the crisis. As you can see on slide six, we have provided payment assistance in the form of principal deferrals and payment forbearance for loans that total $1.258 billion. The approximate ratio of principal deferral versus payment forbearance is 50-50, and the length of these modifications is generally between three and six months. Segments with the largest modified percentages include our floor plan customers, where we waive curtailment payments for essentially the entire book, as the various stay-at-home orders did not allow for continued operations. And as the overwhelming bulk of these dealers, who are also long-standing customers, are located in Pennsylvania, where automobile dealers were prohibited from selling cars until just last week, when the state allowed for online sales only. to restart. Other high impact categories include retailers and restaurants who've been forced to close or severely limit operations. This is having an impact on our strip mall and retail CRE borrowers as tenants ask for rent concessions. On page seven, we have provided more detailed information on our most negatively impacted category, hotels. It's important to note that approximately 84% of these properties carry solid mid-tier and that our hotel portfolio is primarily comprised of business travel locations rather than leisure-focused locations. I would also note that our oil and gas upstandings totaled $88 million at the end of the quarter, with approximately $66 million of that amount concentrated in several well-heeled convenience store brands who continue to perform well at this time. Turning to page 8. We have the most recent results of our consumer hardship assistance programs, where we have modified $60 million worth of loans, or 5% of the total balance. For both the commercial and consumer hardship assistance programs, we have seen requests for new relief reduce rapidly and are assessing the need for these programs as we move forward. On page nine, you will see the results of our participation in the Paycheck Protection Program. We are very proud of these results and our ability to refocus resources towards helping our customers access this program. We have taken a very disciplined and thoughtful approach to our participation and believe that our mission of providing exceptional customer service is represented in these results. On slide 10, you can see our utilization experience. The bottom line here is that we did not see significant line activity as a result of COVID-19. Finally, we are preparing for our return to business as usual activities in the coming weeks. As you know, the Commonwealth of Pennsylvania has announced a multi-phase reopening plan that they have described as cautious that divides the state into six regions where reopening of various segments of the economy will take place at varying times. We will continue to monitor closely the guidance and we will adjust our operations accordingly. I'd now like to turn the presentation over to Mark Coachvar, our Chief Financial Officer. Thanks, Dave.

Slide 11 shows the progression of the allowance for credit losses from the incurred methodology as of 12-31-19 to CECL, which was impacted by the COVID-19 as of 3-31-20. The original day one impact was $18.4 million, $8.2 million related to the legacy S&P loan book, and $10.2 million for the acquired D&B loan portfolio which under prior accounting carried no reserve. The additional day one adjustment primarily relates to the $9.9 million charge-off we had in the first quarter. Due to the timing of when we learned that a charge-off was appropriate, which was after the filing of the 10-K, but prior to the end of Q1, a specific reserve for that loan was included in the day one adjustment, since that had not been previously disclosed. That loan made up the majority of the $11.2 million in net charge-offs in the first quarter. And finally, the reserve bill, which may relate to pandemic-influenced economic forecast changes, added approximately $18.6 million. Our allowance stands at just under $97 million and 1.34% of loans at the end of the first quarter. This does not include the reserve for unfunded commitments, which stood at $6.1 million at the end of Q1. The NIMS income improvement of $5.6 million compared to Q4 was primarily related to the D&B merger, which closed on November 30th, 2019. With our first full quarter of combined results, average loan balance has increased by $666 million. The NIMS margin compression quarter over quarter was just two basis points as we aggressively repriced deposit costs and we benefited from a lag in the decrease of LIBOR. As LIBOR has come down in April, we expect additional NIMS compression In Q2, more consistent with our prior experience of approximately four basis points for every quarter point that decreased due to our asset-sensitive balance sheet as seen on slide 12. We will get some relief on the liability side as DBs, money markets, and borrowings reprise over the next 12 months. This implies a core diminished margin rate ultimately declining to the $335 to $340 range. Included in net interest income in the first quarter is approximately five basis points of personal accounting accretion. The next couple of quarters will be impacted by the SBA PPP program and the amount dependent on the pace of the forgiveness. Non-interest income in the first quarter was impacted significantly by the stock market as the market-to-market in a non-qualified deferred benefit plan combined with a decline in the value of some bank stocks we own resulted in a $3.5 million decrease in other incomes. Swap fees were strong again in the first quarter, and mortgage banking picked up with heavy refi activity. We expect some weakness in consumer fees with lower transaction volume moving into the second quarter, along with a slowdown in swaps. We remain comfortable with a run rate of about $13.5 to $14.5 million per quarter. Not just expense included $2.3 million of merger-related items, expense was favorably impacted in salaries and benefits, by $1.5 million from the other side of the valuation of the non-qualified deferred benefit plan that decreased other income. The net of these two is P&L neutral. And although we are experiencing some additional expenses related to the pandemic, they are being off-site for now by reductions elsewhere, such as T&E and slower hiring. We continue to expect our expense rent rate to be in the $45 to $46 million range per quarter. We expect our tax rate in 2020 to be somewhat lower than originally anticipated due to pressure on pre-tax income in the range of 17% to 18%. Capital levels on slide 13 remain strong, and in excess of regulatory well-capitalized levels, we're comfortable with our ability to absorb losses based on internal stress tests that we have completed. And finally, slide 14 shows that we have ample liquidity both on and off balance sheets. Thank you very much. At this time, I'd like to turn us back over to the operators to provide instructions for asking questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you'd like to ask a question, please press star 1 on your telephone keypad at this time. If you're using a speakerphone, we ask that you pick up your handset while you pose your question. Once again, star 1 for any comments or questions at this time. We'll go first to Russell Gunther at DA Davidson. Hey, good afternoon, guys.

Hey, Russell.

Hey, I appreciate all the detail in the slide deck. It's even more than the robust deck we usually get from you guys, as well as increased granularity around the hotel exposure. But I'm wondering if we look at slide five, I mean, can this serve almost as a heat map in terms of where your you know, initial concern may reside within the loan portfolio, or how would you, you know, beyond the hotels, kind of stack rank, you know, potential pockets of weakness within the S&T portfolio?

I think if you look at slide six, Russell, where we have the COVID loan modifications, and look at the categories where we have the highest percentage of modified balance, that would indicate the areas where we have the most risk. Now, what we're in the process of determining is, is it short-term risk due to COVID, or is there a long-term impact on the underlying operations of these various businesses?

Okay, got it. Thanks, Dave. And then sort of sticking with that, are there any kind of underwriting characteristics you could share, whether it's you know, current LTVs within some of those more at-risk buckets or just a reminder of sort of the general framework, whether it's a max LTV or minimum debt service coverage?

Yeah, so in the hotel portfolio, Russell, we typically write the 70% loan-to-value. You know, we haven't been booking new assets in that category. We have two loans that were under construction. that are being completed that are in strong markets. But generally speaking, we're 70% on hotels. The remainder of the portfolio, depending on asset class, is traditionally underwritten to 75% to 80% loan-to-value. And our debt service coverage ratios are 120% to 125% based on the asset class. Those were kind of pre-COVID underwriting standards. So we're looking at each individual deal and are including, as part of our underwriting and analysis, a thorough discussion and understanding of how each geography and industry is impacted by COVID. So it goes beyond kind of a broad underwriting guideline. It's really deeper into what the impact of COVID will have on each industry and geography.

Okay, great. Thanks, Dave. And then just looking at slide 11 and the glide path of the reserve, do you guys have much in the way of remaining credit marks on acquired loans that if we were to kind of look at the 134 reserve today and consider those that would take that higher?

Hi, this is Mark. We still have about $9 million in other reserves from acquisitions. And then we also have about $6 million in the unfunded commitment reserve.

Okay, great. Thanks, Mark. And then the last one for me, you know, you guys mentioned you hadn't seen much. I think it was, yeah, slide 10. And in terms of a significant pickup in line usage, just curious for your outlook for organic growth, you know, non-PPP for the rest of the year and And if you could just kind of comment, is there pent up demand? Is it reflective of just the deceleration and pay down expectations? Just any kind of commentary there would be appreciated.

Yeah, Russell, I think it's still unknown. I mean, you know, Pennsylvania is a little bit behind other states on, you know, our businesses are able to be open. We're very restrictive in, like, tomorrow, finally, they're going to open up a supply chain. So what that does or doesn't mean, I think, you know, we're doing a lot of outreach to clients and trying to anticipate, but I think they're still trying to wade through kind of how they, you know, are going to view their businesses right now with something we're going to, you know, stay on top of. And, you know, we want to be there for our customers when they need us. And, you know, we'll continue to do so.

Understood. Okay. Thanks, Todd. Thanks, guys. That's all I had.

Thank you.

Once again, ladies and gentlemen, it was star one if you have a question or comment at this time. We'll go next to Colin Gilbert at KBW.

Thanks. Good afternoon, guys. Mark, if we could just dig into the reserve kind of assumptions again. You guys did, you know, you built the reserve, you know, probably even more so than many of your peers, and that was certainly good to see. Can you just share with us what some of your economic forecast assumptions were on that and, yeah, just sort of what went into that methodology?

Well, we did adopt CECL, and so the biggest factor in our model is the unemployment rate. So there is some volatility just in the estimates there. So we're still evaluating those. There's some management judgment that we can exercise with that, and we did ramp that up as some of the estimates for what unemployment were going to be. We're still in their early stages when we were doing this early in April. And then we have other more general factors that we could bring into the analysis as well. We're not just limited to unemployment, but the unemployment rate is the major thing that drives the forecast for us.

And what were you using just for unemployment? Were you guys following one of the Moody's forecasts?

We are not using Moody's. We're actually using just a Fed forecast. So they've been a little bit behind on producing a new one, so we used our management a piece of that to essentially override that and use an implied higher unemployment rate.

Okay. Okay, that's helpful. And then, you know, Mark, you had given in your guidance the NIM, but just trying to – just breaking it down, just thinking, looking at some of the CD pricing, and, you know, I'm assuming a lot of that's just because of – with DMV coming on, but looking at CDs at 180, kind of money markets at 127, it seems like there's a lot more you can do there to reduce some of those funding costs. How are you seeing that kind of play out here in the next quarter or so on the funding side?

Well, I think a lot of that has – it's hard to see in the quarters numbers because so much of the activity happened right at the end of the quarter. I think you'll see that we did do a lot. It'll show up more in Q2 than it did in Q1. The other thing is on the asset side, it's the same thing. With the 150 basis point cut, which the timing of it really worked out to only maybe 40 basis points for the quarter, so there's another you know, 110 basis points to go. And then with the LIBOR lag, you know, we're going to see a bigger drop on the asset yield side in Q2. But again, that will be offset because of the lateness of when we changed our deposit rates in the first quarter.

Okay. Okay, good. And then just lastly, what does the loan pipeline look like? And just kind of what is your expectation for loan growth? You know, as you guys pointed out, Pennsylvania looks like it's going to open up. I know you feel like you're behind, Todd, but at least you're well ahead of what's happening, I think, in New Jersey and New York. But kind of what's your outlook for loan demand as we move into kind of the back half of the year and how some of your borrowers are anticipating to react once things start to open up again?

Hey, Collin, it's Dave. So in the commercial and business banking sectors, pipelines are off. you know, 50%, 40, 50% from where they were coming into the year. But most folks are looking at just getting through, getting the Triple P proceeds used and focusing on forgiveness efforts. So we're in the process of re-forecasting and recasting where we think we might be, so we don't have guidance right this time. But demand is clearly off as people are looking, balancing and weighing working capital needs. But we're starting to hear conversations about revenue opportunities for people and how they might be able to find a silver lining in this storm. The other pipeline that I will speak to is our retail mortgage pipeline, which has been at, for us, and we continue to see that kind of demand as rates remain low. So I think our mortgage banking activities will remain strong through this low interest rate period. But we hope to have some better clarity for you next quarter.

Okay. Okay, that's great. I will leave it there. That's really good color on the slide deck. Thanks for doing that.

Great. Yeah, thank you all.

We'll go next to William Wallace at Raymond James.

Thanks. Good afternoon, guys. Hi. On the $537 million of PPP loans that you highlighted in your deck, is that spread across both the first and second round?

Yes.

Could you separate those out and then also give us a sense of the average fees?

The average fee is just a shade under 3%.

Are the fundings of those loans kind of spread evenly between both of the rounds?

No. The first round was probably right under $500 million. We had a pretty significant number, but we were able to chew through a bunch of those. over the last couple days, and we were pretty comfortable where we are. But they were predominantly the sole proprietors and smaller businesses that couldn't apply until April 10th. The program started April 3rd, so they got jammed up in round one. So the average loan, we had about $190,000. We funded the loan as low as $370,000. So, round two is maybe, I'm going to say, we're still finalizing the numbers because we're still working through it. It's probably in the $35 million range, maybe $40 million range.

Okay. Thank you. So, that core margin guidance of $335 to $340, does that include any impact from these loans or would that be on top of the guidance?

That would be on top of this. The timing of that is going to throw a real wrench in the margin calculations. If we do get a lot of the forgiveness, say, in Q3, it's going to pop margin pretty significantly. So that guidance is X, SBA.

Yep. That's it. Thank you. On your loan mods, it was a little bit confusing. Are they all 90-day interest-only modifications across the board, or are there variations around what types of mods you offered or gave.

In the commercial space, there are various modifications. Some of those are 30, 60, 90 days. Some are as long as 180 days. We were following the TDR guidance and using that as a guide. Some of them are principle deferrals. Some are P&I deferrals. depending on the ability of the businesses to operate during this environment. And I think on the consumer, yes, just nine days.

Okay. Okay, great.

Thank you. That's helpful. And then I wanted to follow up on a question earlier where you mentioned said there's still $9 million in marks from purchased loans. Those are marks – those are interest rate marks. Is that correct?

Well, they're interest rate credits, but they operate differently now where those will just get accreted basically over – you know, as those pay down.

Right. So you couldn't – Those marks are tied to specific loans, so they cannot be used to support credit somewhere else. Is that correct? I think some people are trying to say it's double counting.

Yeah, I view those as not really – I mean, I view those as they're going to run through margin no matter what. The timing is just whenever they get paid.

Okay, thank you. That's all the questions I had. Thanks. I appreciate it.

Thanks, Wally.

And with no other questions holding, I'll turn the conference back to management for any additional or closing comments.

Well, thank you for participating in today's conference call. Mark, Dave, and I appreciate the opportunity to discuss this court of results and look forward to hearing from you at our next conference call at the end of Q2. And I hope you all stay safe and healthy.

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time, and have a great day.