S & T Bancorp Inc (STBA) Q1 2021 Earnings Call Transcript

Image source: The Motley Fool.

S & T Bancorp Inc (STBA 1.17%)
Q1 2021 Earnings Call
Apr 22, 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 First Quarter 2021 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to turn the floor over to your host, Mark Kochvar, CFO. Sir, the floor is yours.

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

Thank you and good afternoon everyone. Thank you for participating in today's conference call. Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors, which is on the screen in front of you. This statement provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the first quarter 2021 earnings release can be obtained by clicking on the Press Release link on your screen or by visiting our Investor Relations website at stbancorp.com.

We will be reviewing an earnings supplement slide deck as part of this presentation. You can obtain a copy of those slides by clicking on the earnings supplement link on your screen or on our website under Events and Presentation First Quarter 2021 Earnings Conference Call. Click on the First Quarter 2021 Earnings Supplement.

With me today is Dave Antolik, S&T's President and Interim CEO. I'd now like to turn the program over to Dave.

David G. Antolik -- Interim Chief Executive Officer and President

Thank you, Mark and good afternoon, everyone. We appreciate you joining us for our first quarter earnings call. I personally want to thank you for your continued interest in S&T Bank. As you may know, our Board of Directors continues its search for a permanent CEO and, in the interim, has entrusted me with the honor of serving as CEO.

While we recognize the challenges that exist in the current environment, our energy is focused on new growth initiatives and preparing for future as a dynamic high-performing community bank. I'm encouraged and proud of the progress that we've made, and I'm pleased to report record net income of $31.9 million in Q1. This translates into $0.81 per share versus $0.62 per share in the previous quarter.

Our return metrics were also much improved this quarter with ROA of 1.42%, ROE of 11.15%, return on tangible common equity of 16.78%. Our pre-tax pre-provision to average assets also improved to 1.89%. Mark will walk you through a more detailed discussion of our financial results. But I would like to highlight a $1.2 million increase in mortgage banking fees, quarter-over-quarter; a nearly 20% increase in wealth management revenue, quarter-over-quarter; a modest increase in the core NIM rate; improving asset quality; and a continued focus on expense control, which contributed to an improvement in our efficiency ratio to 51.47%. I'm also pleased to report that our Board of Directors has approved a $0.28 per share dividend, consistent with the same period last year. This dividend is payable May 20 to shareholders of record on May 6. Our portfolio loan balances continue to reflect the impacts of stimulus programs, primarily PPP.

If I can direct your attention to Page 5 of the earnings supplement, you will see an update of forgiveness for Round 1 and bookings of $190 million in Round 2 through March 31. As a reminder, Round 1 activities were limited to existing customers, while Round 2 included new customers of the bank.

Page 6 provides a history of our modified loan balances. We have seen modifications reduced to less than 1% of total loans. Most encouraging is the continued reduction of modified hotel balances, which are now just $32 million compared to $177 million at the end of the year.

As I mentioned earlier, we have renewed our focus on growth and we have seen improvements in both our commercial and consumer pipelines when compared to the last quarter and last year. Our commercial pipeline is at its highest point in the past five quarters. We continue to experience payoff pressure from permanent market offerings in the CRE portfolio. In order to combat these pressures, we recognize the need for additional volume in the commercial space and, in Q1, added four commercial bankers in order to improve production. We also added four mortgage loan originators in Q1.

Our consumer pipeline is up 30% versus Q1 of last year, and we continue to see strong demand for our home equity promotional product that is currently in the market. With regard to our mortgage activity, our pipelines are pointing toward decreased activity in Q2 along with a meaningful shift in mix, primarily -- nearly 90% of all activity being sold in Q1 to more meaningful portfolio activity and a reduction in civil loans as customer preference moves toward purchase and construction.

I'd now like to turn the presentation over to Mark.

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

Thanks, Dave. To round out the credit discussion, I'd like to point out that our ACLs and loans decreased slightly to 1.60% in the first quarter from 1.63% at the end of the year and to 1.72% from 1.74%, excluding PPP. So $2.5 million relief came out of specific reserves, which are down $5.4 million from the fourth quarter. The general reserve actually increased by about $2.9 million.

Slide 7 shows that net interest income increased by about $800,000 compared to the fourth quarter. This is mostly due to the increased triple PPP activity. Total net interest income from PPP was approximately $5.8 million in the first quarter compared to the $4.9 million in the fourth quarter, which helped to improve the headline NIM rate by 9 basis points to 3.47%. There remains about $4 million of net deferred fees from PPP Round 1 and with what was booked in Round 2, by the end of the quarter, we have an additional $7.3 million of net deferred fees. The core net interest margin rate improved by 2 basis points compared to the fourth quarter to 3.37% as lower interest bearing deposit costs, as seen on the lower chart, more than offset lower earning asset yields from lower LIBOR and a less favorable asset mix.

We continue to make progress with lowering our liability costs, which were also down 9 basis points compared to last quarter. We are, however, running out of room to lower deposit costs going forward and anticipate that improvement will slow in the second quarter before stabilizing in the second half of the year. Some volatility in headline margins rate will come with the forgiveness timing of PPP Round 1 and 2.

Cash balances accelerated significantly at the end of March with stimulus payments and Round 2 of PPP, all about $70 million of cash balance at period end [Indecipherable]. And while point-to-point cash balances increased over $440 million, it coming late in the quarter had a more muted impact on average balances, which increased only about $60 [Phonetic] million. The first quarter average balance level of cash lowers the net interest margin rate by about 9 basis points compared to normal and if the quarter-ending higher level holds throughout the second quarter, we could see an additional 15 basis points of net interest margin rate pressure. We remain cautious on investing significant amounts of this cash in bonds, given the rate volatility, only modest yield pickup and uncertainty surrounding the digital online COVID [Phonetic] deposit surge.

Non-interest income in the first quarter increased by $1.6 million compared to the fourth quarter. As Dave mentioned, the largest increase was in mortgage banking, which improved by $1.2 million to $4.3 million. Production remains strong and we also benefited from better mortgage servicing rights valuation on new loans and also a recapture of $941,000. Consumer related fees are showing signs of improvement as card-related fees are now running ahead of pre-pandemic levels. NSS still lags influenced by the improved liquidity of consumers.

We also saw improved numbers in wealth management through a combination of asset appreciation and increased customer activity. While we don't expect to repeat this quarter's level of fee income, given better mortgage volume, improvements in wealth, a return of the consumer fees, the run rate in non-interest income should improve to closer to $60 [Phonetic] million per quarter.

Non-interest expense decreased by over $2.9 million from the fourth quarter to $45.6 million. The largest decrease came in workout-related expenses, which are in the other category. They were down by $1.7 million after being elevated in the fourth quarter. The other larger decrease came in marketing, down almost $800,000 due to higher campaign expenses in the fourth quarter. Despite lower expenses this quarter, we still expect our run rate going forward to be $47 million to $48 million per quarter as we work through some credit issues and begin to focus on production and new hires. PPP salary deferrals, which were about $500,000 in the first quarter will come to an end and we expect our bankers to be more active as travel and customer activity resumes.

Better fees, stable net interest income and lower expenses resulted in a nice improvement in pre-tax pre-provision and an efficiency ratio that Dave mentioned. And we expect it to moderate some as fees and expenses normalize and core net interest income remains stable.

The risk-weighted capital levels on Slide 8, all improved by about 50 basis points. Both leverage and TCE are weighed down by PPP by about 50 basis points and additionally, by the higher cash flows. Our capital ratios are in excess of regulatory [Indecipherable] cap rate levels and our capital efficiency continues to expand.

In March, the Board of Directors extended the repurchase authorization that was set to expire on March 31 of this year for an additional year through the end of the first quarter 2022. We have $37.4 million remaining on that authorization. And while we have no immediate plans to do buybacks, given improved valuations and our purpose to use that capital to support growth, we have the flexibility to act, should conditions change.

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

Questions and Answers:

Operator

[Operator Instructions] Your first comment -- your first question is coming from Matthew Breese. Your line is live.

Matthew Breese -- Stephens -- Analyst

Hey, good afternoon.

David G. Antolik -- Interim Chief Executive Officer and President

Hey, Matt.

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

Hi, Matt.

Matthew Breese -- Stephens -- Analyst

Just curious on -- so curious on the new hires. Market wise, where are they focused? And then, you did mention stronger -- a stronger commercial pipeline. Just curious on your loan growth core, ex-PPP, your core loan growth outlook for the year.

David G. Antolik -- Interim Chief Executive Officer and President

Yeah, Matt, it's Dave. So those hires were all in Eastern Pennsylvania. So if you think about where we were when we consummated the DNB merger was right at the time of the beginning of the pandemic. So we weren't able to execute fully on our strategic vision for that market. Now we've gotten through some of the noise of 2020. We've gone back on the offensive from a hiring perspective and those are focused on that market. We did see a decline in core loan balances in Q1 and that was anticipated. So we do expect to -- the growth to happen in the back half of the year. We're still in the low -- projecting low-single-digits for the full year.

Matthew Breese -- Stephens -- Analyst

Okay. Okay. And then, could you give us an idea of -- you mentioned competition and pressure. Just can you give us an idea where new loan yields are shaking out and maybe some of the different structures your competition is offering customers?

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

Yes, let me -- the average yield on loans last quarter was in the low 3s, right around 3.25%, kind of all in, in terms of it weighing toward commercial, but we're right around that 3.25% number.

David G. Antolik -- Interim Chief Executive Officer and President

Yeah, and the payoff pressure is coming from the permanent market and most of that 10-year paper and we're competing on the shorter end of the curve. The spreads haven't moved significantly. In fact, we've been holding pretty steady on spreads, but yields, in the competitive environment, particularly in the permanent space, are still more aggressive than what we would pick up and putting on our own balance sheet.

Matthew Breese -- Stephens -- Analyst

Okay. You are still holding on to some excess liquidity. Just curious if we should anticipate continued build in the securities book or are you more focused, at this point, on back half of the year loan growth and holding on to it for now?

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

I guess, maybe more holding on to it. We might -- you might see a little bit of an increase on the securities, but nothing significant. I would start with a small, maybe $40 million increase point-to-point [Indecipherable] in that range. The current yield level holds but we're not going to jump in with both feet on the securities book at this point.

Matthew Breese -- Stephens -- Analyst

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

David G. Antolik -- Interim Chief Executive Officer and President

Yeah, the book has yet to be completed, the final chapter, on the kind of macroeconomic issues, but from what we see right now, I would anticipate improving credit trends throughout the year. We did see reduced delinquency this quarter as well. So that's a big positive for us. We are looking at other ways to reduce NPLs more aggressively if we have the opportunity. So I would anticipate improving credit trends trending [Phonetic] through the year.

Matthew Breese -- Stephens -- Analyst

Okay, great. That's all I had. I'll leave it there. Thank you.

David G. Antolik -- Interim Chief Executive Officer and President

Thank you, Matt.

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

Thank you.

Operator

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

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

Hey, good afternoon, guys.

David G. Antolik -- Interim Chief Executive Officer and President

Hey Russ.

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

Hi, Russell.

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

Dave, I think in your prepared remarks, you were talking about growth initiatives. I believe I heard you say revenue growth initiatives. We spoke a bit about some of the new hires, but is there anything else that you're referring to or a more formal approach that you could share from a perspective?

David G. Antolik -- Interim Chief Executive Officer and President

Yeah, so we strategically realigned the Wealth Management Group last year with the Consumer Bank. I like to say we need to resource the opportunity. So we saw a larger opportunity particularly in our Financial Advisory business. So the first quarter really proved that out. If you look at wealth management fees, a big portion of that is just based on renewed activity, selling our corporate and personal credit cards, a renewed emphasis on merchant and then we're also looking at potentially other avenues and new revenue sources that might move to other partnerships or perhaps some acquisition activity in the non-interest income space.

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

Okay, great. Thanks, Dave. And then I heard your commentary on organic growth expectations for the year, both from a mix and timing perspective, but it looked like core C&I ex the PPP was up a bit. Could you give some color in terms of what the dynamics were there and what the related growth outlook is?

David G. Antolik -- Interim Chief Executive Officer and President

Yeah, I think the core C&I was actually flat to down slightly on the quarter once you take out the PPP. PPP was down on the quarter $40 million to $50 million, once you take out all the activity surrounding forgiveness of Round 1 and then bookings for Round 2. But C&I activity, the utilization rate was flat for the quarter. We did have some activity toward the end of the quarter with some new names and about 50% of the pipeline at this point is C&I versus CRE. So I would anticipate some reborrowings as we work through the year and companies work through their liquidity, particularly their stimulus-related liquidity, and improved borrowings as folks get more comfortable with making capital investments in the current environment as well.

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

Great. Well, thank you for the -- thank you for the clarification and thoughts there. Just last question for me. I heard you under-guide on the expenses, kind of 47 [Phonetic], 48 [Phonetic] going forward. You mentioned where that incremental dollar was coming from, but is there a thought being contemplated as to how you might offset that, support positive operating leverage going forward in terms of any expense initiatives?

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

It's something we're always looking at. We don't have -- as we've talked about before, given our footprint, we don't see any huge opportunity to make up a lot of strides there. So for us, it's going to be a lot of singles to try to hit in order to keep the expenses under control and we don't take initiatives planned to -- for layoffs or branch closures or anything along those lines. It's going to have to be managing it item by item.

David G. Antolik -- Interim Chief Executive Officer and President

Yeah, and then on the revenue side, Russell, it comes down to some of these non-interest income initiatives and accelerated growth and in addition the staff in the lending space should help with that. So our focus is on growing revenue because we know we run an efficient shop and if we cut any deeper, we don't want to cut too deep.

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

Understood. Well, great, guys. That's it for me. Thanks for taking my questions.

David G. Antolik -- Interim Chief Executive Officer and President

Thanks, Russell.

Operator

There are no further questions from the lines at this time. I would now like to turn the floor back to David Antolik for closing remarks.

David G. Antolik -- Interim Chief Executive Officer and President

Yes. Mark and I had one question that came in that he would like to answer.

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

Yes. The question came in through email and I get a chance to answer; related to the amount of purchase accounting adjustments in the margin this quarter. It occupied about 3 basis points this quarter, a little bit higher than usual. Typically we run about 2 basis points, runs a little less than $100,000 per month or about $300,000 a quarter. And we have about $5.6 million less purchase accounting adjustments to go to income related to prior acquisitions, primarily the DNB merger. So, Dave, back to you for the closing comments.

David G. Antolik -- Interim Chief Executive Officer and President

Great, thank you, Mark. And thank you everyone on the line for your continued interest in S&T Bank and I look forward to talking to you next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

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

David G. Antolik -- Interim Chief Executive Officer and President

Matthew Breese -- Stephens -- Analyst

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

More STBA analysis

All earnings call transcripts