S&T Bancorp, Inc.

Good afternoon, ladies and gentlemen, and welcome to the S&T Bank Corp 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 first quarter 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 stbankcorp.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, first quarter 2021 earnings conference call. Click on the first quarter 2021 earnings supplement. With me today is Dave Antolik, S&P president and interim CEO. Now I'd like to turn the program over to Dave.

Thank you, Mark Ann. Good afternoon, everyone. We appreciate you joining us for our first quarter 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 $31.9 million in Q1. This translates into 81 cents per share versus 62 cents per share in the previous quarter. Our return metrics were also much improved this quarter, with ROA of 142, ROE of 1115, return on tangible common equity at 1678. Our pre-tax pre-provision to average assets also improved to 1.89%. Mark will walk you through a more detailed discussion of our financial results, but I would like to highlight a $1.2 million 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 20th to shareholders record on May 6th. Our portfolio loan balances continue to reflect the impacts of stimulus programs, primarily Triple P. If I could direct your attention to page five of the earnings supplement, you will see an update of forgiveness for round one and bookings of $190 million in round two through March 31st. As a reminder, round one activities were limited to existing customers, while round two included new customers to the bank. Page six 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 million compared to $177 million 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 and last year. 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 four commercial bankers in order to improve production. We also added four 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.

To round out the credit discussion, I'd like to point out that our HDL to loans decreased slightly to 1.60% in the first quarter from 1.63% at the end of the year and to 1.72% from 1.74%, excluding triple P. The $2.5 million relief came out of specific reserves, which are down $5.4 million from the fourth quarter. Slide 7 shows the net interest income increased by about $800,000 compared to the fourth quarter. This is mostly due to increased PPP activity. Total net interest income from PPP was approximately $5.8 million in the first quarter compared to $4.9 million in the fourth quarter, which helped to improve the headline NIM rate by nine basis points to 3.47%. There remains about $4 million of net deferred fees from PPP Round 1, And with what was booked in round two, by the end of the quarter, we have an additional $7.3 million of net deferred fees. The core energy margin rate improved by two basis points compared to the fourth quarter at 3.37%, as lower interest-bearing deposit costs, as seen on the lower chart, more than offset lower earnings asset yields from lower LIBOR and a less favorable asset net. We continue to make progress with lowering our liability costs, which were also down nine basis points compared to last quarter. We are, however, running out of room to lower deposit costs going forward and anticipate that improvement will flow in the second quarter before stabilizing in the second half of the year. Some volatility in headline margin rates will come with the forgiveness timing of PPP round one and two. Cash balances accelerated significantly at the end of March with stimulus payments and round two of PPP all but about $70 million of the cash balance at period end was interest-bearing. And while point-to-point cash balances increased over $440 million, it coming late in the quarter had a more muted impact on average balances, which increased only about $60 million. The first quarter average balance level of cash lowers the net interest margin rate by about nine basis points compared to normal, and with the quarter ending higher level holds throughout the second 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 first quarter increased by $1.6 million compared to the fourth quarter. State pension, largest increase within mortgage banking, which improved by $1.2 million to $4.3 million. Production interest 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 lagged, influenced by the improved liquidity of consumers. We also saw improved numbers in wealth 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 a return of consumer fees, the run rate in non-interest income should improve to closer to $16 million per quarter. Non-interest expense decreased by over $2.9 million from the fourth quarter to $45.6 million. The largest decrease came in workout-related expenses, which are in the other category. They were down by $1.7 million after being elevated in the fourth quarter. The other larger decrease came in marketing, down to almost $800,000 due to higher campaign expenses in the fourth quarter. Despite lower expenses this quarter, we still expect our run rate going forward to be $47 to $48 million 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 first quarter, will come to an end, and we expect our bankers to be more active as travel and customer activity resumes. Better fees, stable net interest income, and lower expenses resulted in a nice improvement in pre-tax pre-provision and the efficiency ratio that Dave mentioned. We would expect those to moderate some as fees and expenses normalize and core net interest income remains stable. The risk-weighted capital levels on slide 8 all improved by about 50 basis points. Both leverage and TCE are weighed down by triple P by about 50 basis points and additionally by the higher cash flows. All capital ratios are in excess of regulatory world capitalized levels, and our capital pushing continues to expand. In March, the Board of Directors extended the repurchase authorization that was set to expire on March 31st of this year for an additional year through the end of first quarter 2022. We have $37.4 million remaining on that authorization. While we have no immediate plans to do buyback given improved valuations and our purpose to use that capital to support growth, We have the flexibility to ask 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. If you have any questions or comments, please press star 1 on your phone now. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold a moment while we poll for questions. Your first question is coming from Matthew Breeze. 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 a stronger commercial pipeline. Just curious on your long-growth core, XPPP, your core long-growth outlook for the year.

Yeah, I was about to say, so most hires were all in eastern Pennsylvania. So, you know, if you think about where we were when we consummated the D&D merger was right at the time of the beginning of the pandemic. So 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, and 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. 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?

The average yield by loan last quarter was in the low three, right around three and a quarter. That's kind of all in. It's definitely weighted towards commercial, but we're right around that three and a quarter number.

Yeah, 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. In fact, we've been holding pretty steady on spread. But, you know, 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. Okay. You are still holding on to some excess liquidity. Just curious if, you know, 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. You might see a little bit of an increase on the securities, but nothing significant. We saw a small, maybe $40 million increase point to point. Might look for something in that range, you know, if the current – yield level hold, but we're not going to jump in with both feet on the security foot at this point.

Okay. Okay. And then just last one for me, you know, deferrals down to $62 million, a far cry from where we were mid-last year. So, you know, job well done. Just curious, any thoughts you have on, you know, from here, kind of credit quality, charge-off, provisioning outlook that might be helpful?

Yeah, as you know, it's a The book has yet to be completed, the final chapter on the 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 NDLs 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 have. I'll leave it there. Thank you.

Thank you, Matt.

Thank you. Your next question is coming from Russell Gunther. Your line is live.

Hey, good afternoon, guys.

Hey, Russ.

Hi, Russell. 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?

Yeah, so we strategically realigned the wealth management group last year with the consumer bank. You know, I like to say we need to, you know, resource the opportunity. So we saw a larger opportunity, particularly in our financial advisory business. So first quarter 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, you know, heard your commentary on organic growth expectations for the year, you know, both from a mix and timing perspective, but it looked like core CNI, you know, X 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?

Yeah, I think of course CNI was actually flat down slightly on the quarter when she'd take out the Triple P. We think Triple P was down on the quarter $40 to $50 million when she'd take out all the activity surrounding forgiveness of round one and then bookings for round two. But CNI 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 the pipeline at this point is CNI versus CRE. So I would anticipate some re-borrowings as we work through the year and companies work through their liquidity, particularly their stimulus-related liquidity, and improved 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. This last question for me, I heard you on the guide on the expenses, kind of 47, 48 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, that's something we're always looking at. we don't have, as we talked about before, given our backframe footprint, we don't have any huge opportunities to make a lot of strides there. So for us, it's going to be a lot of singles to try to hit in order to keep the expenses under control and no big initiatives planned for layoffs or branch closures or anything along those lines. It's going to have to be managing it item by item.

Yeah, and then on the revenue side, Russell, you know, 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, you know, 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 and Tolick for closing remarks.

Yes. Mark has one question that came in that he would like to answer.

Yes, a question that came in through an email that he had a chance to answer. It related to the amount of purchase accounting adjustments in the margin this quarter. It occupied about three basis points this quarter, a little bit higher than usual. Typically, we run about two basis points. It runs a little less than 100,000. Thanks, Becky, for the closing comment.

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.