S&T Bancorp, Inc.

Good day, ladies and gentlemen, and welcome to the S&T Bancorp, Inc. Second 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, thank you 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 second quarter 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 through the link on your screen or also on our website under events and presentations, second quarter 2021 earnings conference call. Click on the second quarter 2021 earnings supplement. With me today is Dave Antolik, S&T's president and interim chief executive officer. I would 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&T Bank. As announced last week, our board of directors has chosen Mr. Christopher McCommish 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 solid returns for our shareholders. If I could refer you to page three of our earnings supplement for the quarter, I am pleased to report net income of $28.4 million. That translates to total earnings of 72 cents 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-provisioned average assets of 1.61%. I'm also pleased to report that our board of directors has declared a 28 cents per share dividend consistent with Q1 and with the same period last year. The dividend is payable August 19th to shareholders of record on August 5th. Slide four highlights the changes to our balance sheet during Q2. Cash balances grew by $985 million. Our primary goal for deploying this liquidity is by growing customer loan balances. In support of this goal, 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 million 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 that second half loan growth excluding Triple P 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, a new director of mortgage sales, two business bankers, and three commercial bankers. I'll now turn the discussion over to Mark to cover the next few slides.

Thanks, Dave. Slide 5, we have the net interest income, which shows that it decreased by $2.4 million compared to the first quarter. This is mostly due to a decrease in Triple P contribution of $1.7 million from $5.8 million in the first quarter to $4.1 million in the second 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 interest income was the lower average loan balance, not including PPP, of $123.1 million. The headline net interest margin rate declined by 31 basis points compared to the first quarter to 3.16%. The largest contributor to the decrease was a $483 million 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 eight basis points of the decline. We had lower yields on loans and fees, which resulted in a decline of seven basis points, and lower securities yields and other mixed changes reduced the net interest margin by another three basis points. This was only partially offset by lower costing liabilities of five basis points. We anticipate that the cash levels will persist for some time as we still have an additional $336 million of Triple P 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 PP loans are forgiven, particularly in the fourth quarter. On the next slide, Mounder's income in the second quarter decreased by $1.8 million compared to the first quarter. The largest decrease was in mortgage banking, which declined by $2.6 million to $1.7 million. Production remained strong, but shifted more of 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 in the second quarter with lower rates, resulting in a quarter-over-quarter of 1.2 million. A bright spot in fees 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 appreciation and increased customer activity. We expect the run rate in non-interest income to be 15 to 16 million per quarter. On slide seven, the non-interest expense was essentially flat overall compared to the first quarter, well controlled at $45.8 million. Higher salary and benefits of $1.2 million came mainly through incentives and annual merit increases. Other expense categories were in line with the prior quarter. We still expect our run rates going forward to be closer to $47 million due to new hires and a focus on production. On slide eight, at the top, our ATL to loans decreased from 1.60% in Q1 to 1.56% in the second quarter. That's 1.64% from 1.72% excluding Triple P. The $5.5 million release came in part from specific reserves, which are down 1.6 million, and also from lower qualitative adjustments due to improvements in the economic outlook.

During Q2, we experienced our second 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 for Q2.

And then finally on slide 9, capital, the risk-weighted capital levels all improved, while the leverage ratio and TCE continue to be weighed down by triple P and also the higher cash level. All capital ratios are in excess of regulatory and well-capitalized levels, and our capital cushion continues to expand. In March of 21, the Board extended the pre-purchase authorization for an additional year through the first quarter of 2022. We have $37.4 million remaining on that authorization. While we have no immediate plans to do by its facts, we are monitoring valuations and are prepared to respond should conditions warrant. Our preference is to utilize our capital to support growth organically or through M&A.

So in conclusion, we are excited to move forward on our 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 questions.

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 that 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 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. You know, it sounds like you guys are a bit more optimistic about pipelines. And, you know, we have seen, you know, there'd be a little bit of activity in your markets from a lending perspective, you know, this quarter. I guess, you know, what are, if you take, you know, 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 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 your annualized? Or do you think it might take some time to build up to that type of level of production?

Yeah, so, Mike, there are a couple fact points that I would point to. First is that increase in commitments that we saw for the quarter. And that split about $100 million in the commercial space, which would be revolving availability along with construction commitments, along with activity in the consumer space, home equity, and 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 products more attractive. I do believe that we can get to, you know, single-digit loan growth on an annualized basis for the last couple 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, you know, the portfolioing of residential production and how that dynamic might impact, you know, kind of the geography of those revenues in the back half of the year?

Yeah, 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, the 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 to portfolio products. The other big factor in the mortgage banking revenue number was the MSR change that cost us about a million to 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, a 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 fits the customer. But 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, you know, with the non-performers dropping in the quarter and, you know, seeing the ex-PPP ACL come down a little. 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?

Yeah, as we gain clarity throughout the rest of the year, the big issue for us, as you know, in Q4 of last year, we downgraded a big chunk of the hotel 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. Very helpful. Thanks for taking my questions. I appreciate it.

Thanks, Mike. Thank you. Our next question today is coming from Russell Gunther at DA Davidson. Your line is live.

Hi. Good afternoon, guys.

Hey, Russ.

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. Just want to get a better sense for the dynamics 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 316 range going forward?

Yeah, I think for the next couple of quarters, we still see some pressure on, you could call it the are about as low as they can go. We saw those drop by another seven 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'll reduce not from not 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 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.

Yeah, that's the upside for us, Russell, is fulfilling and delivering on these pipelines that we have in order to re-employ 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 low growth is going to turn the corner for the back half. How are you thinking about the investment portfolio as a use of some of that excess cash as well?

It'll probably be fairly limited. We've been adding maybe $25 to $50 million per quarter. We just don't see a whole lot of value in the bond stack these days. The yield on the type of bonds that we are comfortable with are in the very low 1% of that, so we're just not sure that the risk-reward tradeoff is there given our desire eventually to get that back into loans. Okay.

Okay, great. And then just a housekeeping question. Do you have the outstanding PPP loan balance and remaining fees?

Okay. Thanks for that.

And then, you know, just a bigger picture question, you know, with, uh, Chris coming in and in a month and Dave, you guys have spent some time together, you know, just any thoughts on, on any bigger picture, strategic, um, decisions that you guys may be contemplating, whether it's taking a look at the expense space, um, getting active in MNA, just any broad strokes, uh, early innings with, with Chris coming on board.

You know, beyond the high level, uh, message that I believe this sends to our employees, our communities, shareholders that we anticipate remaining independent. Obviously, we need to earn that, but the investment that the board has made in Chris and Indy and the rest of the staff, it should point us towards growing above and beyond $10 billion and moving forward. kind of all of the above. The focus in the short run is making sure that we're able to drive revenue on an organic basis, and you'll continue to augment that in the M&A space or other revenue diversification activities.

Got it. Thanks, Dave. Guys, that's it for me. Thanks for taking my question.

See you, Russell.

Thank you. Our next question today is coming from Matthew Brees at Stevens, Inc. Your line is live.

Good afternoon. Maybe just following up on the top line, the NIM question just adds a different way. So if I exclude PPP income, I see core NII of about $64.2 million this quarter, and it's been here in and around this range for about three 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, you know, where do you think, you know, you can grow revenues, core NII, too, over the next call at six to 12 months?

Well, I agree. I hope, you know, we do think that we're at or close to the bottom, you know, again, given the ability or what we saw in the back half of the second quarter in terms of the loan growth. So we do think that it's positive going forward. going forward, but it is going to depend on how the recovery progresses and our ability to grow those funds that will govern how much of that increase can happen over the next six 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 at TCF and then at Scottrade. As we think about the road forward for S&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?

Yeah, well, 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. on net interest income in the commercial space. 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&D franchise, that's a very attractive market. and exploiting that opportunity in the consumer bank is a focus for us. So, yeah, I think that everything's 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 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.

Thank you. Once again, if there are any questions or comments, please press star 1 at this time. 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 McCommis 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.