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S & T Bancorp Inc (NASDAQ:STBA)
Q3 2020 Earnings Call
Oct 22, 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 your S&T Bancorp, Inc. Third Quarter Earnings Conference Call. [Operator Instructions]

At this time, it is my pleasure to turn the floor over to your host, Mark Kochvar. Sir, the floor is yours.

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

Thank you. Good afternoon, everyone, and 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 third quarter 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 Third Quarter 2020 Earnings Conference Call, click on the Third Quarter 2020 Earnings Supplement.

With me today, are Todd Brice, CEO of S&T and David Antolik, S&T's President.

I'd now like to turn the program over to Todd, 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. We appreciate you taking time to join us for our third quarter earnings update. As announced in our press release this morning, we reported net income of $16.7 million, or $0.43 per share, compared to $26.9 million, or $0.79 per share in the third quarter of 2019.

Operating metrics for the quarter included a return on asset of 0.72%; a return on equity of 5.8%; and a return on tangible common equity of 8.96%. And a pre-tax pre-provision number of $37.5 million, or 1.61% of average assets.

Results this quarter continued to be impacted by the effects that COVID-19 is having on the overall economy. And for the quarter, loans contracted by $154 million as economic uncertainty is still causing customers and businesses to pay down debt and they're being very cautious on credit requests. Our deposits also decreased by $234 million, so we made a strategic decision to let $269 million of brokered CDs run off, but our customer deposits were up $29 million and we also saw a nice shift in the mix with an increase in DDA accounts of $121 million and a reduction in the higher cost CDs of $92 million. Mortgage banking was a bright spot, generating $3.9 million in fees for the quarter, which was a $1.3 million increase over the second quarter this year.

On the credit front, we did record a provision of $17.5 million, which increased the allowance to $121 million, or 1.77%. The total loans excluding PPP, personal [Phonetic] allowance of $150 million in Q2, or 1.64% of total loans excluding PPP.

Charges for the quarter totaled $12.9 million, which included a $10 million charge on CRE property, which stands as [Phonetic] ceased operations for the time due to COVID. Loan deferrals at the end of the quarter have declined significantly from $1.36 billion, or 20% of loans to $350 million, or 5% of loans. Now, the hotel portfolio comprises about $230 million, or 65% of the overall deferral balances. Customers whose deferral periods have expired have gone back to contractual payments of principal and interest. So, we are seeing a nice lift on that.

We also increased specific reserves by $6.2 million for the quarter, and these were impacted primarily by two credits, $2.9 million is associated with the C&I credit, whose operations have been impacted by COVID. The company is still operational and they're current on their payments. But we are negotiating a restructuring agreement on their debt. $3.4 million is associated with the real estate relating to the check kiting customer that we disclosed last quarter. We did identify additional liens to get the property. We out-signed a stalking horse agreement and the auction process will begin in a few days and we expect to have a final agreement in place in Q4.

And finally, I'm pleased to report that our Board of the Directors has declared a dividend of $0.28 payable November 19, 2020 to shareholders of record on November 5, 2020.

I want to thank you for your continued support of S&T Bancorp. And now, I'd like to turn the program to our President, David Antolik.

David G. Antolik -- President and Chief Lending Officer

Well, thank you, Todd, and good afternoon, everyone. As Todd mentioned, total loans reduced by $154 million in the quarter, driven by declines in all categories with the exception of construction. Our CRE balances were impacted by an active permanent market, which has influenced pay-offs along with slower demand in Q3. In addition, our C&I borrowers continue to conserve liquidity, positively impacting deposit balances, while further reducing loan balances. Our revolving utilization rates continue to decline in the quarter, ending the quarter at 34%, down from 42% at year end and 37% at the end of Q2.

Our consumer lending efforts have been primarily focused on residential mortgage activity and we have seen a 94% increase in production year-over-year as a result of our enhanced efforts, particularly in our newer markets of Eastern Pennsylvania and Central Ohio. Todd mentioned the impact its had on fee income in the quarter, and Mark will discuss other fee income categories in his presentation.

Looking forward, our commercial banking pipeline bottomed in July, and it since rebounded nicely at its highest point since March in the pre-COVID era. We still see significant improvements that will need [Phonetic] to occur, particularly in the supply chain in order for our C&I customers to gain better momentum in order to grow revenues and return to more normal borrowing levels.

Page 5 details our PPP portfolio, along with the impact these loans have had on selected operating ratios. We began accepting PPP forgiveness applications on October 5, and have not yet received any forgiveness funding from the SBA.

Turning to Page 6. We have seen deferrals reduce steadily as commercial borrowers slowly normalize and return to pre-COVID contractual payments.

On Page 8, we have detailed the number and average size of the modified hotel loans, along with details on our loan ratings for these assets. We are working with these borrowers to provide additional credit enhancements that would represent a significant commitment by these owners as performance begins to show improvement. Average occupancy rate declined from a low in the high-teens in May this year to just over 40% in August.

I'll now turn the program over to Mark for additional details on our financial results.

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

Thanks, Dave. Slide 9 has little more detail on the progression of the allowance for credit losses. We are a CECL adopter and had fairly significant reserve build in the first quarter and the second quarter, mostly in the economic forecast and qualitative factor part of the model, due to the pandemic. As some of the credit issues in our portfolio became more apparent in the third quarter, in particular in hotels was a downgrade to discuss, the allowance in that part of the model increased. That is labeled portfolio changes between second quarter and the third quarter. However, the overall economic outlook did improve in the third quarter compared to the second quarter with the decline in the expected future unemployment rate that resulted in a decrease in our economic and qualitative factor components. On balance, we did see a reserve build of about $6 million to $121 million.

Moving to the next slide, net interest income declined by about $870,000 compared to the second quarter, mostly due to lower loan balances, which was down by about $250 [Phonetic] million at quarter end, and also on average. The net interest margin rate was relatively stable, down 2 basis points as the remaining LIBOR drop overhang in the second quarter was mostly offset by aggressive deposit repricing. Ex-PPP, the NIM rate was flat at 3.36% compared to Q2. We anticipate a relatively stable core net interest margin rate for the next couple of quarters. Some volatility could come with the forgiveness timing of PPP, along with any asset quality impact.

Slide 10 also shows that we do have almost $900 million of liabilities repricing over the next nine months to help offset lower new paid versus -- new versus paid rates on the loan side.

The surge in deposits in the second quarter came mostly lower cost core deposits with the average balance mix improving further in the third quarter. Total period end decline in deposits was due, as Todd mentioned, to a reduction in brokered deposits.

Non-interest income in the third quarter decreased by $1.3 million, compared to the second quarter, which resulted in total revenue decrease of about $400,000. Both of the fee increase came in mortgage banking, we got $1.3 million at the lowest rate environment led to continued refinancing activities. We did also see a modest rebound in some items most impacted by the pandemic, including service charges on deposit accounts, particularly NSF fees and also debit and cards -- debt and credit card fees.

Commercial loan swap activity continues to lag as originations have been muted. We do expect a better run rate in the non-interest income, especially with mortgage volume closer to $50 [Phonetic] million per quarter.

Non-interest expense was elevated in the third quarter, but we do expect some moderation in the coming quarters, probably closer to around $47 million a quarter. The largest part of the increase compared to the second quarter came in the salaries and benefits line item. Salary expense deferrals related to the PPP originations in the second quarter accounted for about $1.3 million of the variance. Another $700,000 came from higher pension accounting expense, which is triggered by more retirement than we had expected. Also, in salaries and benefits, medical expenses were up about $770,000 with higher claims as restrictions led to the pandemic eased up. FDIC expense is up due to the impact of our recent performance on the assessment calculation. And finally, marketing was higher in the third quarter due to more campaign activity and launch of the new website design.

Finally, capital slide, our capital element [Phonetic] Slide 11 improved by 20 basis points to 40 basis points depending on ratio, primarily due to earnings retention and lower risk weighted assets. All capital ratios are in excess of regulatory well-capitalized levels. Our capital cushion continues to expand. We are comfortable with our ability to absorb losses based on internal stress tests and we have -- that we have completed, including COVID-related scenarios. Both the leverage and TCE ratios are impacted by the PPP loans.

Thanks very much. At this time, I'd like to turn the program back over to the operator, who will provide instructions for asking questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Russell Gunther with D.A. Davidson. Please go ahead.

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

Good afternoon, guys.

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

Hey, Russell.

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

Hey, Russell.

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

Just that I appreciate your comments on the dynamics within the loan portfolio this quarter and potential green shoots for the fourth regarding CRE and C&I, if I heard that correctly. So, could you comment on organic growth expectation in the near-term? I know longer term is a little tougher. But how do you see that translating to being able to generate positive loan growth?

David G. Antolik -- President and Chief Lending Officer

Yeah. We think it's going to be another quarter before we see any kind of meaningful growth. The pipeline has grown. We're starting to see some operating leverage on some of our C&I borrowers' balance sheets. But we're still having conversations around supply chain issues. We did see a modest increase in Floorplans borrowings, which is a good leading indicator. And we're having a much more robust preview conversation, which is kind of the first step in looking at new commercial loans. So, all of those things will point toward growth. I think we're another quarter out before we start to see incremental growth.

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

Got it. Thanks, Dave. And then switching gears to the expenses. Mark, I think I heard you $47 million for the coming quarter. Two things, first, could you just touch on the trajectory of the FDIC insurance expense going forward? Is this a good run rate? Or are there other puts and takes I should be thinking about? That would be my first question.

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

With the increase this quarter, we did have a little bit of a catch-up from the prior quarter. So, we'd expect to see that moderate by a couple hundred thousand going forward on FDIC.

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

Okay. Got it. Thank you for that. And then just bigger picture as we look at a still very challenging revenue outlook near term, potentially longer term. Are there any wholesale changes to the expense run rate being contemplated, whether it's branch rationalization or opportunities on vendor contracts? Just curious as to what the opportunity there might be.

David G. Antolik -- President and Chief Lending Officer

Yeah. So, I don't think there is a lot of room for us to move in terms of branch rationalization. We have 72 branches and $90 million average size. There may be onesie, twosie that we look at throughout 2021, but we are taking an aggressive review approach to all of our vendors in terms of how we optimize the existing contracts and may look to renegotiate or terminate certain contracts, which aren't productive as we move forward. So -- but we're taking a fairly aggressive approach to that review. And that might include everything from systems contracts to leases on physical locations, you name it. We're looking at it.

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

Got it. Okay. Appreciate the thoughts there, Dave. And then finally, for me, you provided the breakdown of sort of the special mentions of standards within the hotel portfolio. But I was hoping you could comment on the migration in general within criticized and classified this quarter?

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

So, yeah. I mean, in general the bulk of the downgrades were in the hotel portfolio into the criticized and classified. There were a couple of other some operating companies that we did downgrade. But out of those the amounts went over. The big chunk is in the hotel portfolio.

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

Okay. And just a follow-up, do you guys have the total amount of criticized and classifieds this quarter versus last?

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

I think that the percent right now is a little bit under 8%. I think that went from a little under 5% last quarter.

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

Okay. So 8% today includes both criticized and classified from 5% last quarter?

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

Yeah.

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

Got it. Okay. Thanks, guys. That's it for me.

Operator

And our next question comes from Collyn Gilbert with KBW. Please go ahead.

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

Thanks. Good afternoon, guys.

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

Hey, Collyn.

David G. Antolik -- President and Chief Lending Officer

Hey, Collyn.

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

Dave, maybe just staying on the credit topic for a minute. How do you sort of see, given -- among kind of within the hotel book and the leisure bulk and just any of the credits, criticized and classified, the whole bucket, how do you sort of see the resolution of these credits working through in terms of potential further loan restructurings or as you may see net charge-offs migrate through the year? Just trying to get a sense of kind of the timing and magnitude of what -- how some of these credits could work through the system?

David G. Antolik -- President and Chief Lending Officer

Yeah, sure. So, as Todd and Mark mentioned, the overwhelming majority of the downgrades into the C&C bucket showed on that Slide 8 and they are in the hotel portfolio. We're attacking [Phonetic] that by having robust conversations about credit enhancements and using that as a tool to retain a better risk rating, but we are going to have to go through the process of evaluating some of these for NPL as we move forward. So we do anticipate some migration into the NPL bucket. We're looking at each one of these on an individual basis and determining a strategy.

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

And we're in the process of having new ones that are in that classified bucket phrase or policy. So you'd probably call -- probably start to see some migration in Q4 and Q1 will be the -- when you start to see some of the negative downgrades in the NPL bucket.

David G. Antolik -- President and Chief Lending Officer

Yeah. So the second round of deferrals were release that we offered those customers will expire at the end of Q1 of next year and into the early part of Q2.

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

Okay. So, given that then how should you or how are you guys thinking about the reserve level? So, does it sort of say then elevated for the next couple of quarters and then does it -- do you foresee 2021 being an opportunity to kind of let the reserve level bleed a little bit lower? [Speech Overlap] just think about the provisioning and...

David G. Antolik -- President and Chief Lending Officer

Yeah. I mean, as those criticized and classified decline, it actually takes some pressure off the overall reserve level as long as the overall C&C bucket continues to decline as well.

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

Okay. Okay. And then, just lastly, how to -- are buybacks coming into the conversation at all for you guys as you think about kind of capital deployment and as capital builds? If not, is there a catalyst or is there something that you would need to see happen before you started to kind of engaging in buybacks?

David G. Antolik -- President and Chief Lending Officer

I think we need to go with it farther past the worst part here of the pandemic and see some recovery and feel better about the prospects for credit losses going forward before we entertain buybacks again.

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

Yeah. I mean, that talking about the second wave, Collyn, and just how they put [Phonetic] that, do they start shutting this down again. So, some of those things we just want to see some further clarity on.

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

Okay. Okay. All right. That's all I had. Thanks, guys.

Operator

[Operator Instructions] And we move next to Matthew Breese with Stephens Inc.

Matthew Breese -- Stephens Inc. -- Analyst

Hey. Good afternoon.

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

Hi, Matt.

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

Hi, Matthew.

Matthew Breese -- Stephens Inc. -- Analyst

Just a couple of quick follow-up questions. First, I think I missed it, what was the outlook for non-interest income next quarter?

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

Around $15 million.

Matthew Breese -- Stephens Inc. -- Analyst

$15 million, OK. And then, in terms of all-in PPP income for the quarter, what was that?

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

It's about -- including the interest, it was around $2 million.

Matthew Breese -- Stephens Inc. -- Analyst

Okay. And then, Todd, you mentioned that as loans go into the classified bucket, you go through the process of reappraisal. Curious, for the hotel loans that have made that jump, what has been the change in the appraisal valuation. What's been the new versus old LTV?

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

We're just in the process of working [Phonetic] right now, Matt. So we would not -- we don't really have an indication on where are those -- where those are at this point in time.

Matthew Breese -- Stephens Inc. -- Analyst

Okay. And then, lastly for me, just on the commercial real estate loan that required a charge-off this quarter, could you remind us of what the underlying business was there? What sector was it in? And what happened there?

David G. Antolik -- President and Chief Lending Officer

Yeah. We do not disclose that because they're still working through a potential sale. So, we want to respect their ability. I mean, they were making payments until they just decided, they have to close the door. So, they're still working through, and trying to liquidate it on their end. So, we have not disclosed what that business is.

Matthew Breese -- Stephens Inc. -- Analyst

Got it. Okay. All right. Very good. That's all I had. Thank you.

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

Thanks, Matt.

Operator

And there appear to be no further questions at this time. So, I'll turn it back over to management for any closing remarks.

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

I think we had a question that came in on the Internet, an update on the fraud. So, we are still pursuing collection activities as we discussed last quarter. The principal [Phonetic] did plead guilty yesterday and charges were filed by the Department of Justice, so they're going through their discovery on assets to see what may be available for force majeure [Phonetic]. And as I mentioned earlier, we're in the process of beginning the auction process on the underlying real estate collateral. And we would hope to have that wrapped up in 14 to 15 days. And get under contract in Q4 and get it closed off. So that's kind of where we're at this point in time. I think that was the only other one that we had, right?

So, again, I want to thank you everybody for participating in the call today. And Mark and David, I appreciate your opportunity to discuss this quarter's results and look forward to hearing from you in our next conference call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 23 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 & Co. -- Analyst

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

Matthew Breese -- Stephens Inc. -- Analyst

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