S&T Bancorp, Inc.

Good afternoon, ladies and gentlemen, and welcome to the S&T Bancorp, Inc. Fourth Quarter Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be opened 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.

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.stbankcorp.com. We will be reviewing an earnings supplement slide deck as part of this presentation. You can obtain and copy 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 Entel, 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've reported net income of 62 cents per share, or $24.2 million, compared to 43 cents per share, or $16.7 million in the third quarter. Profitability metrics for the quarter include a return on asset of 1.05%, a return on equity of 8.35%, and a return on tangible of 12.71%. Also, pre-tax, pre-provision totaled $37 million, or 1.61% of average assets. Results this quarter were favorably impacted by a nine basis point improvement in our net interest margin and strong mortgage banking fees, which totaled $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 deposit 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 include 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. Non-performing loans increased by $52.7 million 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 were moved into non-accrual. 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 28 cents per share payable on February 25th. The share holds a record on February 11th. So at this point, I'd like to turn the program over to our President, Dave Antoli. Hey, thank you, Todd.

Good afternoon, everyone. As reported, portfolio loans decreased during the quarter by $169 million, which included the $85 million in triple P forgiveness that Todd mentioned and is detailed on slide five. This forgiveness accounted for essentially all of the CNI reduction in the quarter. CNI 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 that we forecast being reborrowed by our customers in the latter part of 2021. Activity in the CNI space has improved, particularly in our asset-based lending area, which tends to be countercyclical. 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 again to slide five, we have identified the impact of Triple P unselected ratios and the continuation of forgiveness, which stands at 25% as of January 22nd. We are fully participating in Triple P round two. We have seen an early tally of approximately 650 applications. And unlike round one, we are accepting applications from non-S&T customers. Slide six provides a history of modified loan balances It's important to note here the impact of the movement of hotel balances into non-accrual, 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 seven provides additional detail on our hotel portfolio. Since year end, We have successfully exited one hotel loan and anticipate the sale of another in Q1. These exits total approximately $9 million. Looking forward, excluding Triple P, we expect loan balances for 2021 to grow modestly in the low single digits. This is supported by anticipated improved CNI utilization rates that I mentioned, growth in our portfolio mortgage balances, and improved pipelines as compared to the previous two 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 part of the model due to the pandemic. Those increases slowed in Q3 as a 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 one base point and 1.7%. Moving to slide nine, net interest income increased by about $650,000 compared to the third quarter, mostly due to increased Triple P forgiveness. The total net interest income from Triple P 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 nine basis points to 3.38%. The increased Triple P income more than offset the one basis point drop in the core X PPP NIM rate, as well as the impact of lower loan balances. We continue to make progress with lowering our liability costs, which were down 13 basis points compared to last quarter, mostly driven by deposit repricing, which was down 12 basis points. We anticipate a relatively stable core dentist 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 six months to help offset lower due versus paid rates on the loan side. The total period decline in deposits in Q4 was mostly purposeful, as Todd mentioned, if we'd like to not compete on several higher rate accounts, given our liquidity position. Non-interest income in the fourth quarter decreased by $874,000 compared to the third quarter. 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 non-just income of around $15 million per quarter. Non-just 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 categories. Higher occupancy in parts relates to accelerated rent from a branch and an office closure. We expect the run rates going forward to be $47 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 wealth 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. This is my retirement date. March 31st is right around the corner. It really has been an honor to serve as the CEO of S&P Bancorp for 13 years. I've enjoyed working closely with our analysts, Russell Gunther from Davidson, Matt Brees at Stevens, Wally Wallace at Raymond James. Joe Pletlich at Bang and Colin Gilbert at KBW. I've always appreciated your candor and support. Also, to the many investors who I've 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 advisors that we work with on projects. Your counsel 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 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, Opera, it's back to you. Thank you again.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask if you are listening via speakerphone to please pick up your handset for optimum sound quality. Once again, if you have any questions or comments, please press star 1 now. Our first question today is coming from Russell Gunther. Please announce your affiliation, then pose your question.

Hey, good afternoon, guys. Russell Gunther from Davidson. How are you? Good, thanks. First off, Todd, congratulations. Best of luck in retirement. I hope to stay in touch. Thank you. Moving on to the first question. Just to follow up on the expense guide, 47 to 48, a little bit of relief relative to the last couple quarters. Just curious as to what's driving that and is there embedded in this guidance any any thought around a broader, whether it's branch rationalization or expense initiative?

We continue to believe that on the expense side, we already run a pretty lean shot, especially when you think about the branching footprint. So other than kind of one here and one there, we don't expect any type of large program to reduce branch size. Expenses just had a few items that were 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 costs related to the branch office closures. So fairly consistent with where we're at, just maybe a little bit lower than we're running right now.

Got it. Okay, great. Thanks for the color there. You know, 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?

Hey, Russell. It's Dave Ansell. 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, if you think about where we were last year, we had just consummated the DNV 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 that 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 know, 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. So I think that's something that we'll look at 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.

Great. Okay, guys, thanks again for taking my question.

Thank you, Russell. Thank you, Russell.

Thank you. Our next question today is coming from Matthew Brees. Please announce your affiliation, then pose your question.

Hey, good afternoon. This is Matt Brees with Stevens, Inc. Todd, first of all, just best of luck in retirement. It's been a real pleasure over many years. I sincerely wish you well in the next chapter here.

Thanks, Matt.

Maybe to start, you know, the hotels that went non-performing this quarter, you know, 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 18, If you look at, you know, there are 18 loans. A total of $57 million were moved into non-accrual. 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 app.

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 reserve.

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

Hey, Matt, it's Dave Antolik. So if you look at the universe of those loans at $18 million, it's very granular. Some of that's in the business banking space, so you're talking about half-million-dollar-sized 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 two other quick ones. You know, the first one is just, you know, it sounds like you anticipate a reversal in C&I growth this year. We'll see some residential growth. Could you talk a little bit about the commercial real estate and construction pipeline and how you think those will behave?

Yeah, so we're seeing some decent activity within 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 payoffs into the permanent market to reduce, and that's based upon conversations that we have with customers. Typically, we're able to look at 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 have 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 has picked up as well.

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

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

Okay. Uh, last one is just, you know, could you give us an update in terms of the, you know, the CEO search and, you know, when we might expect to, you know, hear about, uh, you know, the successor?

Yeah. So there, you know, there's still, uh, conducting interviews, uh, both internal candidates and, and external. And, you know, the intent all along was to, uh, you know, have someone in place by the end of the first quarter. And so I think that's still on track to meet that timeline.

Okay. Well, I appreciate it. Again, Todd, best of luck. Thanks for taking my questions.

Thanks, Matt.

Thank you. Our next question today is coming from Joseph Plevlich. Your line is live. Please announce your affiliation and then pose your questions.

Yes, good afternoon. This is Joe Plevelich from Binning and Scattergood. How's everyone today?

Good, Joe.

Todd, yeah, I really appreciate the kind words. I 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 adventures here.

I appreciate that, Joe, very much.

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?

The number is about $15 million is 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, you know, how do we think about potential volumes from the second round of PPP here?

Yeah, that would be X PPP. So, you know, core loan growth is low, low single digit. You know, we're just getting our arms around the initial applications with PPP, but I would look for something, you know, in the magnitude of maybe a third of what we did in round one. Is it the parameters around who's eligible for the program? have been tightened, although we are getting some interest from non-S&T customers, and we did not process those applications in round one. 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 two.

Sure. And in the direction of NIM, here we were, 338 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?

Yeah, I think first half we should see relative stability in that core net margin rate, so without the triple P. After that, we could, as we've run out of liability repricing that helps us out, we'll be more left to just kind of the loan pricing versus how that's coming off versus the new. So it could be some pressure on them in the back half of the year coming from the asset side.

And the last one 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 we get better fourth quarter numbers, that should improve. was related to the asset volume metrics. So, we do think that the current order is probably the best estimate going forward for now.

Thanks. Thank you. Ladies and gentlemen, if there will be any final questions or comments, please press star 1 now. 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. But it's been a real pleasure, and, again, I 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.