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ST Bancorp Inc (NASDAQ:STBA)
Q1 2020 Earnings Call
Apr 30, 2020, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the S&T Bancorp, First Quarter 2020 Earnings Conference Call. [Operator Instructions]. 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 Kochvar, Chief Financial Officer. Sir, the floor is yours.

Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer

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 statements provide 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.stbancorp.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 Todd Brice, S&T's Chief Executive Officer, who will begin today's presentation.

Todd D. Brice -- Chief Executive Officer of S&T and S&T Bank

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 and 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 are 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 DNB 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 continue 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 0.87% last quarter. Pre-COVID, we were seeing nice growth in all of our lines of business across all of our five regional markets. The DNB conversion went extremely well and then we are 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.

The COVID-19 response was focused on four stakeholders. First were employees and then customers and business -- customers and finally our communities. Protecting the health and the well-being of our employees and customers was the initial concern, so working from home and rotating schedules, putting our operational staff between multiple facilities, bonus pay for people that were coming into the office, picking up some child care expenses, drive through only [Phonetic] 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 focused on customer assistance program for consumers and businesses, which entail need-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 in terms of contribution to food banks and our regional medical provider.

Before I turn over to our President, Dave Antolik, I want to share some very exciting news. We have been recognized by J.D. Power as the Best Retail Bank in the Mid-Atlantic region. It's really an honor to receive this designation and it really is a reflection of the confidence and trust that our customers have placed in S&T Bank. We have 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, or an average of $30.52 per share. And as 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 $0.27 per share declared in the same period last year.

I want to thank you for your continued support of S&T Bancorp. Now, I'd like to turn the call over to our President, Dave Antolik.

David G. Antolik -- President and Chief Lending Officer

Hey, thank you, Todd, and good afternoon everyone. If I could direct your attention to Slide number 5, 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 6, we have provided payment assistance in the form of principal deferrals and payment forbearance for loans that totaled $1.258 billion. Now the approximate ratio of principle deferral versus payment forbearance is 50-50 and the length of these modifications is generally between three months and six months. Segments with the largest modified percentages include our Floorplans customers, where we waived curtailments 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 were 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 have 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 7, 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 flags and then our hotel portfolio was primarily comprised of business travel locations rather than leisure focused locations. I would also note that our oil and gas outstandings totaled $88 million at the end of the quarter, with approximately $66 million of that amount concentrated in several well yield convenient store brands that continued 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 release reduce rapidly and are assessing the need for these programs as we move forward.

On Page 9, 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. So we're helping our customers access this program. We've taken a very disciplined and thoughtful approach to our participation and with our mission of providing exceptional customer services represented in these results.

On Slide 10, you can see our utilization experience. Now 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 [Phonetic] 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 Kochvar, our Chief Financial Officer.

Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer

Thanks, Dave. Slide 11 shows the progression of the allowance for credit losses from the incurred methodology at the 12/31/19 CECL, which was impacted by the COVID-19 and the 3/31/20. The original day one impact was $18.4 million, $8.2 million related to the legacy S&T loan book, and $10.2 million for the acquired DNB loan portfolio, which funded prior account and 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 the 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 build, which mainly relates to the 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 net interest income improvement of $5.6 million compared to Q4 was primarily related to the DNB merger, which closed on November 30th, 2019. With our first full quarter of combined results, average loan balances increased by $666 million. The net interest margin compression quarter-over-quarter was just 2 basis points, as we aggressively repriced deposit costs and we benefited from a lag and decrease of LIBOR.

As LIBOR has come down in April, we expect additional NIM compression in Q2, more consistent with our prior experience of approximately 4 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 liability side as CDs, money markets and borrowings were priced over the next 12 months. This implies a core net interest margin rate ultimately declining to the 3.35% to 3.40% range. Included in net interest income in the first quarter is approximately 5 basis points of purchase accounting accretion.

The next couple of quarters will be impacted by the SBA PPP program and the amount is dependent on the pace of the forgiveness. Noninterest income in the first quarter was impacted significantly by the stock market as the mark to market and non-qualified deferred benefit plans, combined with a decline in the value of some bank stocks we own resulted in a $3.5 million decrease in other income.

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 the slowdown in swaps. We remain comfortable with the run rate of about $13.5 million to $14.5 million per quarter.

Non-interest expense included $2.3 million of merger-related items, the expense was favorably impacted by 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 offset for now by reductions in elsewhere, such as T&E and slower hiring. We continue to expect our expense run rate to be in the $45 million to $46 million range per quarter. We've set 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 remained 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 sheet.

Thank you very much. At this time, I'd like to turn it back over to the operator to provide instructions for asking questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. We'll go first to Russell Gunther at DA Davidson.

Russell Gunther -- D.A. Davidson -- Analyst

Hey, good afternoon guys.

David G. Antolik -- President and Chief Lending Officer

Hi, Russell.

Todd D. Brice -- Chief Executive Officer of S&T and S&T Bank

Hi, Russell.

Russell Gunther -- D.A. Davidson -- Analyst

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 5, I mean can this serve almost as a heat map in terms of where your initial concern may reside within the loan portfolio? Or how would you beyond the hotels kind of stack rank potential pockets of weakness within the S&T portfolio?

David G. Antolik -- President and Chief Lending Officer

Yeah, I think, if you look at Slide 6 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 risks due to COVID or is there a long-term impact on the underlying operations of these various businesses.

Russell Gunther -- D.A. Davidson -- Analyst

Okay, got it. Thanks, Dave. And then sort of sticking with that, are there any kind of underwriting characteristics you can share, whether it's 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?

David G. Antolik -- President and Chief Lending Officer

Yeah. So it's in the hotel portfolio, Russell. We tend to right at 70% loan to value. 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 is depending on asset classes traditionally underwritten to 75% to 80% loan to value and our debt service coverage ratios are 1.20% to 1.25% 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.

Russell Gunther -- D.A. Davidson -- Analyst

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 1.34% reserve today and consider those that would take that higher?

Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer

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

Russell Gunther -- D.A. Davidson -- Analyst

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

David G. Antolik -- President and Chief Lending Officer

Yeah, Russell, I think it's still unknown, I mean, Pennsylvania is a little bit behind other states, so our businesses that were able to be opened were very restrictive, and like tomorrow finally they are going to open up construction projects to be able to ramp back up everything in the supply chain. So what that does or doesn't mean, I think we are at a stage where we're doing a lot of offerings to clients to try and anticipate, but I think they're still trying to wade through kind of how they are going to do use their businesses right now, and it's something we're going to stay on top of it. And we want to be there for our customers when they need us and we'll continue to do so.

Russell Gunther -- D.A. Davidson -- Analyst

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

David G. Antolik -- President and Chief Lending Officer

Thank you, Russell.

Operator

[Operator Instructions]. We'll go next to Collyn Gilbert at KBW.

Collyn Gilbert -- Keefe Bruyette & Woods Inc. -- Analyst

Thanks, good afternoon guys.

David G. Antolik -- President and Chief Lending Officer

Hi, Collyn.

Collyn Gilbert -- Keefe Bruyette & Woods Inc. -- Analyst

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

Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer

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. We did put some -- 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 the early stages when we were doing this early in April. And then we have other more general factors that we can 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.

Collyn Gilbert -- Keefe Bruyette & Woods Inc. -- Analyst

And what were you using just for unemployment? I mean, were you guys following one of the Moody's forecast?

David G. Antolik -- President and Chief Lending Officer

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

Collyn Gilbert -- Keefe Bruyette & Woods Inc. -- Analyst

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 I'm assuming a lot of that has come just because of with DNB coming on. But looking at CDs at 1.80% kind of money market at 1.27%, 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?

Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer

Well, I think a lot of that has -- it's hard to see in the quarter's numbers because so much of the activity happened right at the end of the quarter. And so I think you'll see that we did do a lot. It will show up more in Q2 than it did in Q1. And the other thing is on the asset side, it's the same thing with 150 basis points cut, which at the timing of it really worked down to only maybe up 40 basis points for the quarter. So there is another 110 basis points to go and then with the LIBOR lag, we're going to see a bigger drop on the asset yield side in Q2.

Again that will be offset because of the lateness of when we changed our deposit rates in the first quarter.

Collyn Gilbert -- Keefe Bruyette & Woods Inc. -- Analyst

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? 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. So, 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?

David G. Antolik -- President and Chief Lending Officer

Hey, Collyn, it's Dave. So in the commercial business banking sectors, pipelines are off 50% -- 40%, 50% from where they were coming into the year, but those folks are looking at just getting through, getting the BBB proceeds used and focusing on forgiveness [Phonetic] efforts. So we're in the process of reforecasting and recasting where we think we might be. So we don't have a guidance right at this time. But demand is clearly off as people are looking at balancing and weighing working capital needs, but we're starting to hear conversations about revenue opportunities through people and how they might be able to find a silver lining in this storm.

The other pipeline that I will speak to you is our retail mortgage pipeline, which has been a sort of allowance for us, and then 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 will have some better clarity for you next quarter.

Collyn Gilbert -- Keefe Bruyette & Woods Inc. -- Analyst

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

Todd D. Brice -- Chief Executive Officer of S&T and S&T Bank

Great. Thank you, Collyn.

Operator

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

William Wallace -- Raymond James -- Analyst

Thanks, good afternoon guys.

Todd D. Brice -- Chief Executive Officer of S&T and S&T Bank

Hi, William.

David G. Antolik -- President and Chief Lending Officer

Hi, William.

William Wallace -- Raymond James -- Analyst

Hi. On the $537 million of PPP loans that you highlight in your deck, is that spread across both the first and second rounds?

David G. Antolik -- President and Chief Lending Officer

Yes.

William Wallace -- Raymond James -- Analyst

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

Todd D. Brice -- Chief Executive Officer of S&T and S&T Bank

The average -- what -- well, the average [Speech Overlap].

William Wallace -- Raymond James -- Analyst

The average fee?

Todd D. Brice -- Chief Executive Officer of S&T and S&T Bank

It is [Indecipherable]. [Speech Overlap]

William Wallace -- Raymond James -- Analyst

Okay. And as the -- are the fundings of those loans kind of spread evenly between both of the rounds?

Todd D. Brice -- Chief Executive Officer of S&T and S&T Bank

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

William Wallace -- Raymond James -- Analyst

Okay, thank you. So that core margin guidance of 3.35% to 3.40% does that include any impact from these loans or would that be on top of the guide?

David G. Antolik -- President and Chief Lending Officer

That will be on top of this. The timing of that is going to throw a little wrench in the margin calculations, if we do get a lot of that for forgiveness, say in Q3, it's going to pop margin pretty significantly. So that guidance is ex-FDA.

William Wallace -- Raymond James -- Analyst

Yeah, OK. Thank you. On your loan mods, are those -- it was a little bit confusing, are they all 90-day interest-only modifications across the board or variations around what types of mods you offered or gave?

Todd D. Brice -- Chief Executive Officer of S&T and S&T Bank

Yeah. In the commercial space, there are various modifications. So some of those are 30 days, 60 days, 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. Then I think on the consumer, yes, just 90 days.

William Wallace -- Raymond James -- Analyst

Okay.

David G. Antolik -- President and Chief Lending Officer

And some of those were interest-only [Indecipherable] principle and they are still paying interest on the consumer loans.

William Wallace -- Raymond James -- Analyst

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

Todd D. Brice -- Chief Executive Officer of S&T and S&T Bank

Well, they're interest and credit, but they operate differently now. Those will just get accretive, basically over, as those pay down.

William Wallace -- Raymond James -- Analyst

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 its double counting. [Speech Overlap]

Todd D. Brice -- Chief Executive Officer of S&T and S&T Bank

Yeah. I think those are not really, I mean I see those as they're going to run through margin, no matter what. The timing is just [Speech Overlap] whenever they are paid.

William Wallace -- Raymond James -- Analyst

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

David G. Antolik -- President and Chief Lending Officer

Thanks, William.

Operator

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

Todd D. Brice -- Chief Executive Officer of S&T and S&T Bank

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

Operator

[Operator Closing Remarks].

Duration: 29 minutes

Call participants:

Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer

Todd D. Brice -- Chief Executive Officer of S&T and S&T Bank

David G. Antolik -- President and Chief Lending Officer

Russell Gunther -- D.A. Davidson -- Analyst

Collyn Gilbert -- Keefe Bruyette & Woods Inc. -- Analyst

William Wallace -- Raymond James -- Analyst

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