S&T Bancorp, inc (STBA) Q2 2021 Earnings Call Transcript

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S&T Bancorp, inc (STBA 0.39%)
Q2 2021 Earnings Call
Jul 22, 2021, 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, Inc. Second Quarter 2021 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

Well, thank you very much. Good afternoon everyone. Thank you for participating in today's conference call.

Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors, which is on the screen in front of you. This statement provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the second quarter 2021 earnings release can be obtained by clicking on the press release link on your screen or by visiting our Investor Relations website at stbancorp.com. We will be reviewing an earnings supplement slide deck as part of this presentation. You can obtain a copy of those slides through the link on your screen or also on our website under Events & Presentation, Second quarter 2021 Earnings Call -- Conference Call. Click on the Second Quarter 2021 Earnings Supplement.

With me today is David Antolik, S&T's President and Interim Chief Executive Officer. I would now like to turn the program over to Dave.

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

Well, thank you, Mark and good afternoon, everyone. Mark and I appreciate you joining us for the call today and for your ongoing interest and support of S&T Bank.

As announced last week, our Board of Directors has chosen Mr. Christopher McComish as our new CEO. Chris come to us with a wealth of executive bank leadership experience and I look forward to him joining us on next quarter's call. I've had the pleasure of spending time with Chris over the past several weeks as we worked together to transition duties and welcome him to our organization and community. I strongly believe that his experiences leading larger customer-focused and employee-driven organizations, particularly in the digital and consumer spaces, will complement my long tenure and understanding of our cultured customers and my experience in the commercial banking space. I believe that we have found the right leader to move us forward as a strong independent community bank focused on growth and providing solid returns for our shareholders.

If I could refer you to Page 3 of our earnings supplement for the quarter, I am pleased to report net income of $28.4 million, that translates to total earnings of $0.72 per share. Our return metrics remain solid and in line with our expectations with ROA of 1.21%; ROE of 9.65%; return on tangible common equity of 14.41%; and pre-tax pre-provision at average assets of 1.61%. I'm also pleased to report that our Board of Directors has declared a $0.28 per share dividend, consistent with Q1, and with the same period last year. The dividend is payable August 19 to shareholders of record on August 5.

Slide 4 highlights the changes to our balance sheet during Q2. Cash balances grew by $985 million. Our primary goal for deploying this liquidity is by growing customer loan balances. In support of this goal, we experienced improved customer demand, as evidenced by a continuation of growing loan pipelines in all categories, a modest increase in commercial utilization rates and increases in total commitments of $189 million during the quarter. Year-to-date loan production is well ahead of goal in all categories and was particularly strong in late June. However, this production was offset by higher CRE payoffs earlier in the quarter.

Highlighting consumer loan balance activity was an increase in home equity balances that was offset by lower residential mortgage balances. We expect the residential mortgage balances to reverse course as we book more to the portfolio in support of our cash deployment strategy and a change in customer activity from refinance to purchase and construction. We anticipate the second -- that second half loan growth, including -- excluding PPP to be in the low single-digits, consistent with prior guidance.

During the quarter, we made several key additions to our production staff, including a new market executive in Northeast Ohio; a new director of mortgage sales; two business bankers; and three commercial bankers.

I'll now turn the discussion over to Mark to cover the next few slides.

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

Thanks, Dave. On Slide 5, we have the net interest income, which shows it had decreased by $2.4 million compared to the first quarter. This is mostly due to a decrease in PPP contribution of $1.7 million from $5.8 million in the first quarter to $4.1 million in the second quarter. Although the amount of loan balances forgiven actually increased compared to last quarter, contribution was lower and we had more larger balance loans being forgiven. Those carry lower fees as a percent of the balance. Also contributing to lower net interest income was a lower average loan balance, not including PPP of $123.1 million.

The headline net interest margin rate declined by 31 basis points compared to the first quarter to 3.16%. The largest contributor to the decrease was a $483 million increase in average cash balances, which reduced the net interest margin rate by 18 basis points. The lower PPP contribution I discussed already accounts for another 8 basis points for the decline. We have lower yields on loans and fees which resulted in a decline of 7 basis points and lower security yields and other mix changes reduced the net interest margin by another 3 basis points. This was only partially offset by lower costing liabilities of 5 basis points.

We did state that the cash levels will persist for some time and we still have additional $336 million of PPP loans yet to be forgiven and there are no sign yet that deposit levels will reduce. With low-single digit loan growth and not much appetite for huge investments in fixed income, we expect the net interest margin to stay at or slightly below these levels for the next several quarters. That might come with some volatility as the remaining PPP loans are forgiven, particularly in the fourth quarter.

On the next slide, non-interest income in the second quarter decreased by $1.8 million compared to the first quarter. The largest decrease was in mortgage banking, which declined by $2.6 million to $1.7 million. Production remained strong but shifted more to the balance sheet including the home equity loans as Dave discussed. We also experienced some tightening of spreads in our sales to Fannie Mae. Mortgage servicing rights valuations [Indecipherable] the other way with second quarter -- in the second quarter with lower rates, resulting in a quarter-over-quarter decline of $1.2 million. [Indecipherable] is the debit card, which is now running well ahead of pre-pandemic levels. We also saw improved numbers in wealth management through a combination of asset appreciation and increased customer activity. We expect the run rate in non-interest income to be $50 million to $60 million per quarter.

On Slide 7. The non-interest expense was essentially flat overall compared to the first quarter; well-controlled at $45.8 million. Higher salary benefits of $1.2 million came in through incentives and annual merit increases. Other expense categories were in line with prior -- with the prior quarter. We still expect our run rate going forward to be closer to $47 million due to new hires and a focus on production.

On Slide 8, at the top, our ACL to loans decreased from 1.60%, in Q1 to 1.56% in the second quarter and 1.64% from 1.72%, excluding PPP. The $5.5 million release came in part from the specific reserves, which were down $1.6 million and also from lower qualitative adjustments due to the improvements in the economic outlook.

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

During Q2, we experienced our second consecutive quarterly decline in NPLs as the impact of the pandemic and economic recovery become more clear. In some cases, uncertainty remains for customers who are still recovering. As we receive updated financial reporting and valuations, we adjust our reserves accordingly. The effect of the updated valuation is directly impacting charges for Q2.

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

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

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

So in conclusion, we are excited to move forward under new leadership with improved clarity on economic conditions and feel we are well-positioned to achieve improved growth in the coming quarters.

I'll now turn the program back to our host and open the lines for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question today is coming from Michael Perito at KBW. Your line is live.

Michael Perito -- KBW -- Analyst

Hey, good afternoon, guys.

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

Hi, Mike.

Michael Perito -- KBW -- Analyst

I wanted to start on the loan growth side. It sounds like you guys are a bit more optimistic about pipelines and we have seen there be a little bit of activity in your markets from a lending perspective this quarter. I guess, what are -- if you take your comments -- some of your high level remarks a step further here, I mean, what are some of the dynamics that need to occur for you guys to kind of put on some consistent net growth in the back half of the year? And as we try to handicap what that could look like, I mean, do you think you can do, like, a mid single-digit rate per quarter in the back half of the year annualized or do you think it might take some time to buildup to that type of level of production?

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

Yeah. So, Mike, there are a couple fact point that I would point to. The first is that increase in commitments that we saw for the quarter, $189 million and that's way above $100 million in the commercial space, which would be revolving availability along with construction commitments, along with activity in the consumer space, home equity and normal revolving consumer products. So I think that points toward better growth in the second half of the year. We did see a modest increase in utilization quarter-over-quarter. And I would expect that to continue as well.

And our pipelines in virtually all areas are up quarter-over-quarter. That, coupled with our desire to deploy some of the cash by booking some additional portfolio mortgage activity and customer demand, moving from refi to construction and purchase, which is more -- it would make our portfolio of products more attractive. I do believe that we can get to single-digit loan growth on an annualized basis through the last couple of quarters.

Michael Perito -- KBW -- Analyst

And can you guys -- can you expand on that dynamic just a little bit more as we think about kind of the mortgage banking fees versus the portfolio in residential production and how that dynamic might impact kind of the geography of those revenues in the back half of the year?

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

Yeah, so one of the important points to make with regard to the mortgage activity is that, on a gross dollar basis, quarter-over-quarter, the activity was up and our pipeline again is up. So it's really the dynamic between what we sell, the spreads that we see on a sale, which were down slightly during the quarter, as Mark mentioned, and then the customer demand, which is shifting more to portfolio of products. The other big factor in the mortgage banking revenue number was the MSR change that cost us about a $1.2 [Phonetic] million quarter-over-quarter. So, some of it's going to be rate dependent, some of it's going to be appetite of buyers.

And then, in addition, our home equity product -- firstly, home equity product is very attractive too, which could bolster portfolio balances as well. So it's that dynamic and a balance between customer need and customer desire and then where the product best fits the customer. So we anticipate the activity overall to continue at the current pace.

Michael Perito -- KBW -- Analyst

Got it. And then just -- that's helpful. Thank you. And then just lastly for me, I mean, it feels like with the non-performers dropping in the quarter and seeing the ex-PPP ACL come down a little, and I mean are we close to turning the corner here on the charge-off activity? Do you expect it to subside in the back half of the year, given what you know at this point?

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

Yeah. If we gain clarity throughout the rest of the year is a big issue for us. As you know in Q4 of last year we downgraded a big chunk of the hotel portfolio. We continue to monitor that closely. And there is some valuation risk as we get assets reappraised through the balance of the year. I mean, directionally, I think we should continue to see improvement, but there is some uncertainty there.

Michael Perito -- KBW -- Analyst

Got it. Okay, very helpful. Thanks for taking my questions. I appreciate it.

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

Thanks, Mike.

Operator

Thank you. Our next question today is coming from Russell Gunther at D.A. Davidson. Your line is live.

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

Hey, good afternoon, guys.

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

Hey, Russ.

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

Hey.

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

Can you circle back to the margin discussion for a bit? I think I heard you, Mark, say at or below kind of current levels near term. And so just want to get a better sense for the dynamics there. I mean, first off, are you guys expecting to see continued pressure on new money loan yields and just kind of what helps kind of claw us out of this 3.16% range going forward?

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

Yeah, I think for the next couple of quarters, we still see some pressure on, if you could call it, the core margin, if you strip out kind of cash and the PPP activity, the deposit costs are about as low as they can go. We saw those drop by another 7 basis points this quarter. But there is not much left there. On the asset side, we continue to see a fairly large difference between the new and the paid, that has expanded to around 80 basis points this past quarter. So there is some asset yield pressure that's still there and that will reduce not from the new loan rates, but the paid rates should moderate and into the back half of the year. So for us that's the rate. I don't expect that to improve a lot with the exception of the PPP timing. What we'd like to see happen -- we expect to happen is that the loan balances will start to grow and just from an absolute dollar revenue perspective that we should see some improvement there.

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

Yeah, that's the upside for us, Russell, is fulfilling and delivering on these pipelines that we have in order to redeploy the cash that's earning very little as I said.

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

I appreciate that, guys. I guess, the other part of my question then would be, so it sounds like the loan growth is going to turn the corner for the back half, and how are you thinking about the investment portfolio as a use of [Indecipherable] assume that excess cash as well?

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

Probably be fairly limited. We've been adding maybe $25 million to $50 million per quarter. And we expect to see a whole lot of value in the bond stack these days, the yield on the type of active or the type of bonds that we are comfortable with, right now in the low -- very low 1% of that. So we're just not so sure that the risk-reward for trade-off is there, given our desire, I think, to get that back into loans. So you're going to not just take any wholesale or any parts to move from cash into the loan portfolio at this time.

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

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

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

It's about $336 million [Phonetic] as of the end of the quarter, fees is about $9 million left to recognize.

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

Okay, thanks for that. And then just a bigger picture question. With Chris coming in, in a month and, Dave, you guys have spent some time together. Just any thoughts on any bigger picture strategic decisions that you guys may be contemplating, whether it's taking a look at the expense base, getting active in M&A, just any broad strokes early innings with Chris coming on board?

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

Beyond the high level message that I believe that's sent to our employees, our communities, shareholders that we anticipate remaining independent, obviously, we need to earn that, but the investments that the Board has made in Chris and in the rest of the staff, it should point us toward growing above and beyond $10 billion and moving forward. So that have all of the above. The focus in the short run is making sure that we're able to drive revenue on an organic basis and continue to augment that in the M&A space or other revenue diversification activities.

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

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

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

See you, Russell.

Operator

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

Matthew Breese -- Stephens, Inc. -- Analyst

Good afternoon.

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

Hey, Matt.

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

Hey, Matt.

Matthew Breese -- Stephens, Inc. -- Analyst

Maybe just following up on the top-line, the NIM question just as a different way. So if I exclude PPP income, I see core NII of about $64.2 million this quarter and it's been here in and around this range for about three quarters. With the loan growth and securities growth that you're contemplating, is this level -- is this market bottom in your view? And if so, where do you think you can grow revenues core NII to over the next, call it, six to 12 months?

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

I hope -- we do think that the quarter at or close to the bottom, again, given the ability or what we saw in the back half of the second quarter in terms of the loan growth. So we do think that it's positive going forward. But it is going to depend on how the recovery progresses and our ability to grow those loans that will govern how much of that increase can happen over the next six to 12 months.

Matthew Breese -- Stephens, Inc. -- Analyst

Okay. And then just following up on Chris and some of the broader strokes there, couldn't help but notice that his background is pretty heavy in consumer both at TCF and then at Scottrade. As we think about the road forward for S&T, should we contemplate more of a consumer offering, a more balanced approach there? And if so, what kind of services and products do you think we could see that would be new and different?

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

Yeah, well, that's certainly one of the goals, Matt, is to provide a better balance and that's something that I've been working on with our consumer team over the past year. So to help diversify the revenue it depends upon net interest income in the commercial space. So we have seen some pretty nice increases in terms of the fundamental revenue sources that come out of the Consumer Bank. I would expect Chris to continue that. If you look at the investments we made, particularly through the DNB franchise, that's a very attractive market and exploiting that opportunity on a -- in the Consumer Bank is a focus for us.

So yeah, I think that everything's on the table in terms of growing revenue. We certainly don't want to give up what we do well and we'll continue to be a commercially focused bank. But his background, as I mentioned in my prepared comments, really complements mine and that's why we're excited about this partnership and where we're able to -- where we will be able to take things.

Matthew Breese -- Stephens, Inc. -- Analyst

Great. Well, I appreciate that. I'm sure there's more to come next quarter when he is on the call. Thank you.

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

Thanks, Matt.

Operator

Thank you. [Operator Instructions] We have no further questions in the queue.

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

Well, thank you for your participation in today's call. Mark and I welcome your questions and comments, and we look forward to the next quarter and having Chris McComish join us for the call. Thank you. Have a wonderful day.

Operator

[Operator Closing Remarks]

Duration: 23 minutes

Call participants:

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

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

Michael Perito -- KBW -- Analyst

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

Matthew Breese -- Stephens, Inc. -- Analyst

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