Q2 2020 S&T Bancorp Inc Earnings Call
[music].
Please standby.
Good day, ladies and gentlemen, and welcome to the Essen T. Bancorp Inc. second quarter earnings Conference call.
After the presentation, there will be a question and answer session. If he should require assistance during the call. Please press star zero in an operator will assist you at this time, it's my pleasure to turn the floor over to Mr. Mark coach far Sir the floor is yours.
Okay and good afternoon, everyone. Thank you for participating in today's conference call before.
Following the presentation I want to take time to refer you to our statement or Dave and risk factors, which is on screen Friday.
The statements provided the cautionary language acquired by the Securities Exchange Commission for Florida statements that may be included in the presentation.
A copy of the second quarter 2020 earnings release can be seen by clicking on the press release link on the screen or related visiting our Investor Relations website at Www Dot <unk> Bancorp Dot com.
We will be reviewing and earnings doesn't imply that part of this presentation. You 15 copy others live on our website under events and presentations second quarter 2020 earnings conference call on the earnings talent like.
With me, they're tied right CEO that he and Dave Antolik at present.
I'd now like turn the program over the time will begin todays presentation.
Well, thank you Mark and good afternoon, everybody as previously reported in our 8-K filed on May 26, that's at the bank with subject to a significant checks a scheme conducted by a single this customer is criminal activity is negatively impacted our results to square and we're reporting a loss of $33.1 million range.
That's for sure.
Depended and try to review conducted and this was a onetime event related to one customer and there were no S&P employees involved. In addition, we've implemented process and monitoring actions to prevent future trials. We've also taken a number of steps and are actively pursuing collection activities are legal channels that may result in summary.
Oh, sorry.
Moving a loss from the customer fraud, we posted core EPS of 34 cents per share, which translated into return on assets, 0.57% return on equity of 4.48% return on tangible common equity of 6.86%.
Our pretax pre provision increased by 16% to $41.9 million or 1.79% of average assets.
Another bright spot is our efficiency ratio, which came in.
Equally by 1%.
Enjoying expensive it a hallmark for our company and we'll continue to be so going forward.
For the quarter, we experienced significant deposit growth of $810 million over half of the growth $548 million was in noninterest bearing demand deposit accounts.
And just bearing demand money market savings accounts increased 92 million on a 54 million an $80 million, respectively, and we do estimate at approximately 40% of deposit growth is associated with the PDP growth program.
Government stimulus programs mortgage banking was a bright spot this order as well year to date production of $230 million represented 54% increase over the same period of last year. The breakout is about 70% refinancing and we saw about 70% allow us to Fannie Mae.
Good 19, and certainly impacting how we operate and we continue to protect the health and safety our employees and customers as we mentioned before we have employees work and remote we reopened with enhanced safety measures and we extended PBP finds it up our customers impacted by the pandemic, although with a heightened.
Whereas on social and while I will remain committed to fostering an environment that promotes diversity inclusion.
As you would expect year over year branch transactions have declined by 24%.
Call Center volumes have increased by 41% mobile banking activation is up 50% Delta is up 57% Enzo payments are up 27%. So it was in a lot of migration into our digital channels and also excited as an asset on Tuesday, we rolled out a new websites and better serve our digital clients and really the intended to help.
Them become more self sufficient in the financial.
Awareness, our marketing team has been working on the project for about nine months in the timing really could have been better. Some of the features include mobile first design easier navigation.
Online digital sales tool that we're calling Merlin and that's also going to provide enhanced data analytics to provide more customized sales offerings for our clients.
As we mentioned last quarter, we were recognized by JD powers, a number one bag and customer satisfaction in retail banking in the mid Atlantic region.
And the website as well other initiatives are part of our commitment to continually improving the bank experience for our loyal customers.
Switching gears I want to touch base on credit metrics for the quarter. We did recorded an allowance net of the thrive $28.1 billion. We also incurred a net charges of $9.4 million. This includes $4.2 million associated with a real estate loan.
Pertaining to the customer incurred perpetrated the cutting scheme.
Total reserve increased 18.3, or 4% to $114.6 million reserve to loan ratio is now 1.64%, excluding PPP and finally NPH decreased by $15.7 million a 92 point.
9 million or 1.19% of total loans and again and Dsos were negatively impacted by 10.9 billion the trajectory in through this year 11 assess whether fraud.
Finally, please to report that our board of directors declared a dividend of 28 cents.
Which is a 3% increase over the same period last year.
Before I get started presentation over to Dave Antolik, our president I knew I mentioned that we are resilient coming with 108 18 year track record of serving our loyal customers and communities through good times in challenging times and we will continue to worked very diligently every single day to deliver exceptional service insight to that.
Thank you for your continued support of S&P bank or and now I'll turn the primary merger at present data until it gets Danny got good afternoon, everyone I'd like to direct your attention to slide nine which provide information our loan mix. We're moving here is the impact of therapy now those loan balances were $548 million at the end.
In Q2 and were responsible for the growth and see nylons in total portfolio on a $359 million and $302 million effectively during the quarter RC Aerie balances declined by $97 million, primarily due to continued payoffs in the current market and floating production.
We did experience growth in our construction balances of $62 million in the quarter as projects proceeded through the spring and summer building season.
The 19 as had minimal impact on our construction loans during the quarter, new commercial construction commitments out a funding, resulting in a 6 million dollar increase in available to them.
Moving Triple B C high balances declined by $189 million. This reduction was result of significant deleveraging by customers quarter over quarter revolving cninety utilization rates declined from 45% to 37%.
No cnine commitments expanded during the quarter by $15 million as the result of new customer acquisition.
Factors impacting cnine balances, including customers using lower cost being triple B partners to reduce revolving borrowings and customers in certain segments struggling to maintain inventory levels. This was most noticeable in our automobile dealer floorplan or portfolio, where balances declined by $58 million.
While commitments or flat quarter over quarter, we have not experience defensive line dropped by customers in order to build their liquidity.
Commercial pipeline to decline across the board well activity in our residential mortgage area remains very robust.
Slide 10 provides an update to our hardship assistance programs, we have seen a decline in the overall percentage modified excluding triple FY, 15% of loans as of July 21st down 20% as of June Thirtyth generally we offer three to six month interest only or payment or where suit.
American borrowers based on our assessment of the hard kit.
As commercial modifications begin to expire we have seen customers return to original contractual payment terms, resulting in the reduced modify balances that you'd see through July 21st.
Early results on slide 11 are encouraging, but 68% of expiring commercial modifications were returning to contractual payments. This has resulted in a declining commercial modifications from 22% added 630% to 17% as of July 21, which is detailed violent.
On slide 12.
Our customers who are granted shorter term modifications that have expired we have in certain cases extended modified term in order to provide ongoing assistance and then again economic events unfold.
Slide 13 provides detail on our most severely impacted loan segment hotel, we have implemented an extremely robust monitoring process for this segment that focuses on frequent data collection, including occupancy average day rates cash levels net working capital assessments payable trends and break.
Even points along with that examination of sponsorship free support franchise obligations in relationships as well as geographical and location lindblad.
Totally relief and through documentation review this portfolio, we had his data longer recover recovery period for this segment as we move forward Slide 14 details our consumer loan hardship assistance program. This program expires at the end of July and modification extensions or non currently being off.
Offered our triple B resolve their displayed on slide 15, we've undergone a significant strong process of all triple B loan to prepare them for the forgiveness process process, which we will be preparing to launch on August 10, I'll turn the program over Smart Board regional details on our results.
Thanks, David net interest income was essentially flat compared to the first quarter as pressure from lower short term rates was offset by higher average, earning assets primarily related to CTP not.
The net interest margin compression quarter over quarter with 22 basis points.
Approximately five basis points as a compression was due to TPP and playing inquiry about 3.36% inline with our expectations.
The short rates stabilizing, albeit at very low levels, we anticipate relatively stable net interest margin percentage for the next couple of quarters volatility will come with that for giving and timing of TPP and the resolution of loan bought modifications.
16 shares that we do have some liability were pricing over the next 12 months to help offset lower new versus the take rate on the loan side.
Certainly deposits in the second quarter came mostly low cost core deposits, we were able to substantially reduce our short term borrowings and our maintain higher than normal cash balances had an opportunity to reduce floating rate brokered CD later this quarter.
On down we don't believe the increased deposit and it will have much of an impact on net interest margin rate.
Noninterest income in the second quarter was impacted significantly by the stock market as the mark to market in a nonqualified benefit plan combined with an increasing the value of some banks that have we own were the primary drivers in a $3.7 million increase in other income.
We saw the impact of the pandemic several fee category, including services chart service charges on deposit account, particularly NSF fee and the commercial loan swap.
Mortgage banking revenue improved significantly at the lowest rate interest environment that heavy refinancing activity.
We do expect some continued weakness in service charges and swaps in the second half that continued anticipated mortgage activity, although not at the levels, we saw in second quarter.
We expect the run rate of 13 to 14 million per quarter, the remainder of the year in noninterest income.
Non interest expense declined compared to the first quarter, primarily due to $2.3 million merger related items in the first quarter on other events in the first quarter included 1.2 million related to some sort of pack tax credits and we expect that expense run rate to be into 45 46 million range per quarter.
Capital level on slide 17 remained strong and an excess of regulatory well capitalized metals were coupled with our ability to absorb losses based on internal stress tests that we have completed including coping related scenarios.
But the beverage NTT ratios are impacted by the PTC month.
Now I'd like to turn.
The call over to our.
To the operator for questions.
Thank you, Sir and again, ladies and gentlemen that star one on your Touchtone telephone if people would like to ask a question at this time Star. One. Please please make sure your mute function is turned off till you're signal to return equipment.
We'll take our first question from Russell Gunther with D.A. Davidson.
Hey, good afternoon guys.
Hi, Russell Hey, Rob.
Mark just following up on the expense guide you gave for the back half of the year end Todd's comments in your prepared remarks about.
You know track record of expense discipline, just given the challenging operating environment.
Are there initiative contemplated that might reduce the expense rate beyond the second half guide in 2021 are you guys looking at your branch network or any other moving pieces that might help generate some positive operating leverage.
Year, roughly you've seen a lot as you know releases of people cutting back on branches, but we have 72 branches in our in our system Irish franchises is about 100.
It was over $100 million. So I mean, it's something we continue to look at our annual basis, and we all the cable, but I'm not going to come out today commit to say, we're going to close to 10% or anything like that but it. We look good we look at all facets of the organization I mean, yes, we're just reviews of things.
Last week in you know so we've had 12 positions that have been exited from me from a copy you know whether you retire somewhat taking another job we've not replaced.
It was about a million three.
We're looking at other positions as those become open and how do we ship resources around we're looking at some pick them up technology to help create two efficiencies capacity. So this is something we do every day and give you know we know we're gonna have margin pressure next year.
So we continue to look for ways, we've got to squeeze squeeze a spreads out of the organization and manage that low 50 numbers I guess would be my answer Russell.
Okay, great. Thank you Todd and then.
On the deferrals slide 10, you referenced the about 15% of loans as of.
Last week.
How do you expect that the trend over the next couple of months.
When we're talking next quarter.
Do you have a sense for for where that could shake out.
Yes, so the ROFO list. This day with what you see there most of the activity in terms of the modifications happen at the end the margin in early April so those things expired in the first part of July.
Our expectation would be that we'll continue to see reductions in the amount of modified loans that we are keeping very close tabs on segments, where we have concern.
Thats why we concluded some additional information on our hotel portfolio.
Other segment that concern with.
A retail retail CRT.
And we're gathering information and doing deep dives in terms of understanding what impact. The you know these economic prices will have are those customers.
And with regard to consumer lot, yeah with regard to consumer modifications. Those all worked their way through other process by the end of July.
Okay.
Thanks, Dave and then I guess just.
Given those comments, particularly on the commercial side of things.
You know is the expectation then.
For that reduction, but whatever remains.
Those do you consider to be more at risk loans, and therefore, that's already accounted for and.
Yes, qualitative reserves that may have been taking or as those.
Kind of work their way through is that an incremental provision headwinds.
Russell. This is mark we have started to factors some of that and both through the in the forecast, which relied on unemployment rate, but also in some different portfolios that do have a higher risk as we do anticipate there being some issues with.
By the time they get to the ended their modification period. So we had made some qualitative adjustments in particular for the hotel portfolio to to try to get ahead of the fact that we do you think there's going to meet the needs of that.
That portfolio right, we started last quarter as well. So you know this quarter you have that as I mentioned in my comments out of the BBP you know the reserve to loans is about a 1.6 or so.
There were couple of where that is today, but it's something we're going to evaluate every quarter.
Okay. Thanks, guys and then just last one for me I mean, it doesn't sound like.
You know loan growth opportunities on organic side or are all that robust at the moment for the back half of the year and so unlikely an issue, but just your thoughts on the balance sheet in general where you might end the year and.
What's the thought of the 10 billion threshold.
Potentially around the corner, how you're thinking about that.
Yes, I, certainly don't see any kind of significant loan growth through the through the balance of your were partially resources to attack that the modifications and making sure that we've got our arms around credit risk. We are onboarding, some new customers, particularly in the see an ice basically that at.
Some set.
With our age group.
But as I mentioned the de leveraging has been a significant so some of its going to come down here existing borrowers or re advancing online it as I pointed out a floor plan.
Portfolio, it's amazing to me that our AR balances reduce over a two month period in Q2 by 45%.
And those those.
Customers are flourishing, they're doing very well, they're profitable, but they can't get inventories. So some of its going to be the macro economic issues in the availability of inventory and whether or not easy United borrowers re leverage.
So some of that is kind of on known as we move forward into the balance of the year. The other thing that we're way and will be the.
Forgiveness on the PDP loans of that 550, and whereas amazing you know about 80% of that gets forgiven by year end as well so those will those online.
Great well. Thank you often that's it for me.
Thank you Ross extra.
Well take our next question from Matthew Breese with Stephens, Inc.
Good afternoon.
Hi, Matt just one question on on the on the fraud, so I struggle to understand.
How and why the fraud was classified in selling to pay commercial loan charge offs buckets I figured it would have hit the piano elsewhere can you just help me kind of walk me through how it ended up there versus elsewhere.
Oh, I'm, Matt technically because it it created overdraft becomes up alone.
Okay doesn't know advertising allowance, though that prescribed that it works its way through the allowance process like any other like any like a charge off with loan charge offs.
So typically don't typically see at that we will have lot lot DHR dr. overdraft charge off essentially every every quarter, but there are very very small, but they run through the the reserve process as well.
Okay, Great that's very helpful.
On page 11, it looks like the bulk of the loans requiring a second deferral. They consist of office flux mixed use in hotels.
You provide the hotel LTV on one of the into an pages, but can you just talked about the ltvs and the office and flex space that requires second deferral, just wanted to get a sense for buffer against losses.
Yes, we don't have that right now we can get that for you.
Okay.
And then lastly.
On page 17.
I know you talked about having capital in excess of regulatory minimums.
We haven't seen a number of of your peers with similar.
Axis capital, but but still raising preferred or self that I'm just curious your thoughts there and whether whether that's something we might see you you know pursue.
As a part I mean, that's something we continue to evaluate the market and that you know that.
At a cost to it so we're looking at it and we don't have any firm plan as of right now to do any issuance okay.
Okay. That's all I had I appreciate it thank you.
Thanks.
We do have a question, it's coming through from Collyn Gilbert with Katy KBW.
Thanks, Good afternoon guys.
Well just start with I guess, a credit question do you happen to have what the average loan size is within the hotel book and then what the average loan types as with any retail theory buckets.
Yeah, it's on that slide or how is it okay.
So on slide 13 has the.
Average hotel, so Eric totality, the total bucket 3.1 million and the modified averages, but the higher 3.8.
Okay, sorry, yes, I see that right there sorry I, Okay got it. Thank you that's helpful and then just.
In terms of the fraud and I apologize if if you happen to covered at all if I hear comments Todd I got on a little late but is there anything that you guys have done differently internally from a process perspective, and because of how that came through and then also to just curious when not relationship originated with the bank.
So I think it goes back to 2016 as relationship and you know when we did a very thorough investigation and really if you know we've just enhance processes and.
And oversight really.
Call is when it comes down to.
Okay.
Okay.
Okay, and that's all I had thank you.
Yes.
Thanks.
At this time there are no further questions in the queue I'd like turn the call back over to management for any closing remarks.
So I just like to thank everybody for participating in the call today.
Mark Dave and I. Appreciate you often discussed this quarter's results and look forward to hearing from you at our next conference call. Thank you know Vic.
Ladies and gentlemen, this does conclude today's conference. We appreciate your participation you may disconnect at this time and have a great day.
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