S & T Bancorp Inc (STBA) Q4 2020 Earnings Call Transcript

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S & T Bancorp Inc (STBA 2.56%)
Q4 2020 Earnings Call
Jan 28, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the S&T Bancorp, Inc. Fourth Quarter Earnings Conference Call. [Operator Instructions] It is now 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 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 statement and risk factors, which should be on the screen in front of you. This statement provide the cautionary language required by the Securities and Exchange Commission for forward-looking statements that are 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.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 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 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 fourth quarter earnings report. As announced in our press release this morning, we've reported net income of $0.62 per share or $24.2 million compared to $0.43 per share or $16.7 million in the third quarter. Profitability metrics for the quarter included 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.

Result this quarter were favorably impacted by 9 basis point improvement in our net interest margin and strong mortgage banking fees was -- totaled $3.1 million. Balance sheet growth was muted as well as 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 cost due to our liquidity position. Asset quality metrics for the quarter included provision expense of $7.1 million, which is a $10.4 million decrease from Q3. Net charge-offs was $11.2 million versus $12.9 million in the third quarter.

Nonperforming loans increased by $62.7 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 are 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. And clearly, PPP loans, the ratio was 1.74% versus 1.77% in the third quarter of the last year.

And finally, the Board of Directors declared a quarterly dividend of $0.28 per share payable on February 25th to shareholders of record on February 11th. So at this point, I'd like to turn the program over to our President, Dave Antolik.

David G. Antolik -- President and Chief Lending Officer

Hey, thank you, Todd, and good afternoon, everyone. As reported, portfolio loans decreased during the quarter by $169 million, which included the $85 million in PPP forgiveness that Todd mentioned and as detailed on Slide 5. This forgiveness accounted for essentially all of the C&I reduction in the quarter. C&I commitment utilization rates remain 4% to 5% below pre-pandemic levels due to the impact of stimulus and customers retaining liquidity. This reduced utilization accounts were approximately $150 million in balances, though we forecast being reborrowed by our customers in the latter part of 2021. Activity in the C&I space has improved, particularly in our asset-based lending area, which tends to be non-cyclical. We continue to feel pressure on our CRE balances as pay-off into the permanent markets continued in the Q4. The pace of these pay-offs 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 5. We have identified the impact of PPP on selected ratios and the continuation of forgiveness, which stands at 25% as of January 22nd. We are fully participating in PPP Round 2. We have seen an early tally of approximately 650 applications and unlike Round 1, we are accepting applications from non-S&T customers.

Slide 6 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 7 provides additional details on our hotel portfolio. Since year-end, we have successfully exited one hotel loan and anticipate the sale of another in Q1. These exits totaled approximately $9 million. Looking forward, excluding PPP, we expect loan balances for 2021 to grow modestly in the low-single-digits. This is supported by anticipated improved C&I 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.

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

Thanks, Dave. Little more detail on the progression of the allowance for credit losses can be seen on Slide 8. We have a January 2020 CECL adapter and had fairly significant reserve build in the first half of the year, mostly in the economic forecast and qualitative factor as part of the model due to the pandemic. Those increases slowed in Q3 as a better macro forecast offset downgrade 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 1 basis point and 1.74% ex-PPP, down 3 basis points.

Moving to Slide 9. Net interest income decreased by about $650,000 compared to the third quarter, mostly due to increased PPP forgiveness. The total net interest income from PPP was approximately $4.9 million in fourth quarter compared to $3.2 million in the third quarter, which helped to improve the net interest margin rate by 9 basis points to 3.38%. The increased PPP income more than offset 1 basis point drop in the core ex-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 net interest margin rate for the first half of the year, some volatility will come at 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 new versus paid rates on the loan side. The total period end decline in deposit in Q4 was mostly purposeful as Todd mentioned, as we 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. We did see some better activity in swap this quarter. We continue to expect a run rate in non interest income of around $50 million per quarter. Non-interest expense was flat compared to the third quarter. Fourth quarter was impacted by higher workout-related expenses, which show up in the other expense category. Higher occupancy and products related to facility rent from branch and an office closure, we expect the run rate going forward to be $47 million 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 well-capitalized levels and our capital cushion continues to expand. Both leverage and TCE ratios are impacted by the PPP loans by about 50 basis points. Thank you very much. At this time, like to turn it back over to Todd for some closing remarks.

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

Well, thank you, Mark, and before we open it up for questions, as most of you know, this is my last earnings call, as my retirement date the March 31st is right around the corner. It really has been an honor to serve as CEO of S&T Bancorp for 13 years. I've enjoyed working closely with our analyst, Russell Gunther from Davidson, Matt Breese with Stephens, Wally Wallace of Raymond James, Joe Plevelich with Boeng and Collyn Gilbert with KBW. I've 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 have worked 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 over a $9 billion company today. And finally, thank you to my colleagues on the S&T team. It's been incredibly -- 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 operator, back to you and thank you again.

Questions and Answers:

Operator

[Operator Instructions] Our first question today is coming from Russell Gunther. Please announce your affiliation, then pose your question.

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

Hey, good afternoon guys. Russell Gunther from Davidson. How are you?

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.

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

How are you?

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

Good, thanks. First off, Todd, congratulations. Best of luck to your retirement. Hope to stay in touch.

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

I look forward to it.

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

Thank you. Moving on to first question. So just to follow up on the expense guide, $47 million to $48 million. A little bit of relief relative to the last couple of quarters, just curious as to what's driving that? And is there embedded in this guidance any thought around a broader, whether it's branch rationalization or expense initiative?

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

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

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

Got it. Okay, great. Thanks for the color there. And then, 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?

David G. Antolik -- President and Chief Lending Officer

Hey, Russell. It's Dave Antolik. We're still seeing pretty good activity out of Central Ohio. That was the 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 in a way -- if you think about where we were last year, we have just consummated the DNB merger and 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 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.

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

All right, great. That's very helpful, and then just last question for me. You mentioned in the prepared remarks and the slide deck showed excess capital position that continues to build. Could you just share your thoughts on a potential buyback and use of capital going forward?

David G. Antolik -- President and Chief Lending Officer

At this point, we are still cautious on the credit side. There is 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 balance sheet goes, but I think it's something that we'll look at again probably closer to 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.

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

Great. Okay, guys. Thanks again for taking my questions.

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

Thank you, Russell.

David G. Antolik -- President and Chief Lending Officer

See you, Russell.

Operator

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

Matthew Breese -- Stephens Inc. -- Analyst

Hey, good afternoon. It's Matt Breese with Stephens, Inc.

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

How are you doing, Matt?

Matthew Breese -- Stephens Inc. -- Analyst

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.

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

Thanks, Matt.

Matthew Breese -- Stephens Inc. -- Analyst

Maybe to start, the hotels that were nonperforming this quarter, maybe to start, can you just remind us how many there were? I know, you said that there has 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?

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

Right. So if you go to Slide 8, if you look, there are 18 loans and so $57 million have moved into non-accrual and then on the LTVs, the average on those were 73%.

Matthew Breese -- Stephens Inc. -- Analyst

Got it, OK. 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 at?

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

Yes, that's an approximation of where we have it versus the liquidation value. So it's a hopefully a conservative assumption.

Matthew Breese -- Stephens Inc. -- Analyst

Okay.

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

And overall, we have about 8.5% of the total hotel portfolio allocated in our reserve.

Matthew Breese -- Stephens Inc. -- Analyst

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, whether or not the transition to NPAs or what's the exit strategy for those? And should we expect anything from a credit formation or P&L impact?

David G. Antolik -- President and Chief Lending Officer

Yeah, hey Matt. It's Dave Antolik. So if you look at the universe of those loans, it's $18 million, it's very granular. Some of that's in the business banking space. So you're talking about $0.5 million size loan. There are few larger deals included in there. So I wouldn't read anything into that other than we hope to reduce that down even further, isolating the problem within the hotel portfolio.

Matthew Breese -- Stephens Inc. -- Analyst

Okay. And then two other quick ones. The first one is just, 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 their commercial real estate and construction pipeline and how you think those will behave?

David G. Antolik -- President and Chief Lending Officer

Yes, so we're seeing some decent activity within the -- in 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 pay-offs 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 pay-offs, which is not seeing the same pace, so I don't know if that's a function of that market being less active or the the loans that were eligible for refinance into that space has gone through that process, but we are seeing renewed opportunity. The committee process, particularly -- and we have a pretty robust preview process for CRE deal and the C&I deals, activity through those channels has picked up as well.

Matthew Breese -- Stephens Inc. -- Analyst

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

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

I think to a certain extent we do have some excess liquidity. We'll watch what happens with the rest of the balance sheet on loan growth side to take this PPP, now we have the second PPP and then also how the customer deposits behave. We do think we get some search deposits from the first round and stimulus, we'll see how that goes. But offsetting that is the security yields while better cash are not huge. So we'll be cautious as to how much we put into that securities books, but you could see some increase there.

Matthew Breese -- Stephens Inc. -- Analyst

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

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

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

Matthew Breese -- Stephens Inc. -- Analyst

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

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

Thanks, Matt.

Operator

Our next question today is coming from Joseph Plevelich. Your line is live. Please announce your affiliation, then pose your question.

Joseph Plevelich -- Boenning & Scattergood -- Analyst

Yes, good afternoon. This is Joe Plevelich from Boenning & Scattergood. How is everyone today?

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

Good, Joe.

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

Good, Joe.

Joseph Plevelich -- Boenning & Scattergood -- Analyst

Todd, yeah, really appreciate the kind words. Haven't had 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 ventures.

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

I appreciate that, Joe, very much.

Joseph Plevelich -- Boenning & Scattergood -- Analyst

Couple of -- 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?

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

Yeah, the number is about $15 million is what expect for quarter and we do think that, that spring back probably is until the back half of the year and we do also expect to see some mortgage numbers continue to stay pretty healthy for most of the year as well.

Joseph Plevelich -- Boenning & Scattergood -- Analyst

Got it, OK. And then the loan growth that was on an ex-PPP basis and then how do we think about potential volumes from the second round of PPP here?

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

Yeah, that would be ex-PPP, so core loan growth, low single-digit. We're just getting our arms around the initial applications with PPP, but I would look for something in the magnitude of maybe a third of what we did in Round 1 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, who we did not process those applications in Round 1, 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 2.

Joseph Plevelich -- Boenning & Scattergood -- Analyst

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

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

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

Joseph Plevelich -- Boenning & Scattergood -- Analyst

Got it, got it. And the last one I had was just on the FDIC insurance expense. It's oscillate a bit here in the second half of the year, is it a good run rate for 2021?

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

I have not -- as we get better fourth quarter numbers, that should improve. Some of that was related to the asset quality metrics. So we do think that, that current quarter is probably the best estimate going forward for now.

Joseph Plevelich -- Boenning & Scattergood -- Analyst

Thanks.

Operator

Thank you. [Operator Instructions] We have no questions in the queue. Do you have any closing comments you'd like to finish with?

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

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, so -- but it's been a real pleasure and again, appreciate everyone's kind words. Thank you.

Operator

[Operator Closing Remarks]

Duration: 25 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.

Matthew Breese -- Stephens Inc. -- Analyst

Joseph Plevelich -- Boenning & Scattergood -- Analyst

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