Q3 2020 S&T Bancorp Inc Earnings Call

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Please standby we are about to begin good.

Good day, ladies and gentlemen, and welcome to your FMT Bancorp Inc. third quarter earnings Conference call. All lines have been placed in a listen only mode and the floor will be opened for your questions and comments. Following the presentation. At this time. It is my pleasure to turn the floor over to your host Mark Catchmark, Sir the floor is yours.

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David provides the cautionary language required by the securities gains.

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Yeah, those are where originally I gaming looking like personally link on your screen or by visiting our Investor Relations website at Www Dot E. Bancorp dotcom.

We will be reviewing and earning on that slide that as part of the presentation is paying a copy of those lives on our website under events and presentations third quarter 2020 earnings conference call put on its third quarter 2020 earnings supplement.

With me today are tied right, Oh, Gee and data analytic capacity right now.

I like to turn the program over to Todd will begin today's presentation.

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 43 cents per share compared to $26.9 million or 79 cents per share in the third quarter of 2019.

Operating metrics for the quarter included a return of Astro <unk>, 0.72% return on equity of 5.8% and a return on tangible common equity rate 0.96%.

Pretax pre provision number of $37.5 million or 1.61% average assets.

Results this quarter continued to be impacted by the effects of COVID-19 is having on the overall economy, that's sort of core loans contracted by $154 million. This economic uncertainty is still causing customers and businesses to pay down debt and they're being very cautious on credit requests.

But it's also decreased by $234 million. So we made a strategic decision to let $269 million as brokered Cds run off where a customer deposits were up $29 million and we also saw nice shift.

In the mix with an increase.

An increase in the accounts of $121 million 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 of this year.

On the credit front, we did record a provision of $70.5 million, which increased the allowance.

$21 million or 1.7 cents or 1.77% total loans excluding PDP.

Personal 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 dollar charge on CRB property instead has ceased operations.

For the for that for the time due to Covance load.

Load for old at the end of the core have declined significantly from $1.36 billion or 20% of loans, the $350 million or 5% of loans.

The hotel portfolio comprises about $230 million or 65% of the overall deferred balances.

Customers, who deferral period has expired gone back to contractual payments of principal and interest. So we are seeing a nice.

I'll, let Don that we also increased specific reserves by $6.2 million for the quarter and these were impacted primarily by two credits are $2.9 million associated with the Cnine credit.

Operations have been impacted by Cove is a copy of the snow operational and their current on their payments. We are negotiating the restructuring agreement on their debt three.

$3.4 million associated with the real estate relating to the check any customer that we spoke last quarter.

We did identify additional liens against the property.

Now signed a stalking horse agreements.

The auction process will begin in a few days and we expect to have a final agreement in place in Q4 and five.

And finally I'm pleased to report that our board of directors declared a dividend of 20 cents payable November 19, 2020 to shareholders of record on November two 2021. Thank you for your continued support of SP Bancorp now I'd like to turn the prior to our President Dave Antolik well. Thanks.

Thank you John and good afternoon, everyone as Todd mentioned kind of the loans reduced by $154 million in the quarter driven by declines in all categories with the exception of construction. Our CRT balances were impacted by an active permanent marketing, which is influenced payoffs along with slower demand in Q3 and then.

Mission, RC and add borrowers continued to conserve liquidity positively impacting deposit balances, while further reducing loan balances revolving utilization rates continue to decline in the quarter and ended the quarter at 34% down from 42% a year end and 37% at the end of Q2.

Consumer lending efforts have been primarily focused on residential mortgage activity and we've seen a 94% increase in production year over year as a result of our enhanced efforts, particularly in our newer markets in eastern Pennsylvania in Central Ohio, Todd mentioned the impact it 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.

Since rebounded nicely and since at its highest point since March in the pre cobot era, we still see significant improvements that will lead to occur, particularly in the supply chain in order for our cnine customers to gain better momentum in order to grow revenues and returned to more normal borrowing levels.

Page five details our triple B portfolio, along with the impact. These loans have had on selected operating ratios. We began accepting triple b forgiveness applications on October 5th.

And have not yet received any forgiveness funding from the SPM turning to page six we have seen differentials reduced steadily as commercial borrowers slowly normalized and returned to pre kind of its contractual payments on.

On page eight we have detailed the number and average size of a modified hotel loan along with details on our long range for these assets. We are working with these borrowers to provide additional credit enhancements, which represent significant commitment by these honors EPS performance begins to show improvement average office occupancy ranges.

Client from a low in the high teens in May.

This year to just over 40% in August.

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

I think Dave.

Slide nine has a little more detail on the progression of the allowance for credit losses.

We are equal adopter and had fairly significant reserve build in the first quarter and the second quarter, mostly in the economic forecasts and qualitative factor part of the model due to the pandemic.

At some of the credit issues in our portfolio became more apparent in the third quarter in particular hotels with a downgrade to discuss the allowance in that part of the model increase that its label 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 component.

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 870000 compared to the second quarter, mostly due to lower loan balances, which are down by about $150 million at quarter end and also on average.

The net interest margin rate was relatively typically staples down two basis points at the remaining linerboard drop overhang from the second quarter was mostly offset by growth in deposit repricing.

Next PPP and then 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 PDP, 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 helped offset lower new paid versus new versus take rate on the loan side.

The surge in deposits in the second quarter, they mostly lower cost core deposit with the average balance mix improving further in the third quarter.

So period end decline in deposits was due at times into a reduction in brokered pop.

Non interest income in the third quarter increased by $1.3 million compared to the second quarter, which resulted in total revenue increase of about 400000, most of the fee increase in mortgage banking.

$1.3 million lower crude environment led to continued refinancing activity.

We did also see a modest rebound the items most impacted by that dynamic including service charges on deposit accounts, particularly in the southeast and also a debit card debit credit card fees.

Commercial loan activity continues to lag as originations have been doing.

We do expect a better run rate in the noninterest income, especially with mortgage line posted a $15 million per quarter.

Non interest expense was elevated in the third quarter, but we do expect some moderation in coming quarters, probably closer to around $47 million in the quarter.

The largest part of the increase compared to the second quarter came in the salary and benefit line item.

Other expense deferrals related to the PPP originations in the second quarter accounted for about $1.3 million of the varying and others.

Another 700000 came from higher pension expense, which is triggered by more retirement that we had expected.

Also in salaries and benefits medical expenses were up about 770000 higher claims as restrictions related to the pandemic in some.

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, given more campaign activity and launch of the new website design.

Finally capital Slide our capital levels on slide 11 improved by 20 to 40 basis points to down ratio.

Finally, 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 test and we have is that we have completed including coping related.

Leveraged NTD ratios oriented that acted by the EMA.

Thank you very much at this time I'd like to turn program back over to the operator will provide instructions for asking questions.

Yeah, that's right.

Yes, now open for questions. If he would like <unk> <unk> <unk>, Jonathan one on your telephone keypad huh.

Using a speakerphone please pick up your <unk>.

Hi.

Good morning, ladies and gentlemen.

Thanks, Tim well Thomas Please press star one on your telephone Dupont.

[laughter] from that sounds really see anything.

Uh-huh.

Good afternoon guys.

Another assumed there.

I appreciate your comments on the dynamics within the loan portfolio this quarter.

10 show Green shoots for the four regarding CRT and see a nice if I heard that correctly, so who could you comment on organic growth expectations.

In the near term no longer terms, a little tougher, but how do you see that.

How do you see that translate into being able to generate positive loan growth.

Yeah, we think it's going to be another quarter before we see any kind of meaningful growth you know the pilot pipeline Pat Brown I'm, we're starting to see some operating leverage on some of our cnine borrowers balance sheets, but were.

But we're still having conversations around supply chain issues and we did we did see a modest increase in floor plan borrowing which is a which is a good leading indicator.

And we're having a a a much more robust.

Preview conversation, which is kind of a first step in looking at new commercial loans. It's all of those things will important towards growth I think we're another quarter out before we start to see some incremental growth.

Got it thanks, Dave.

Switching gears to the expenses Mark.

Mark I think I heard you at 47 for the coming quarter.

Yes, two things firstly 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.

With it with the increase this quarter, we did have a little bit of that catch up from prior quarter. So we would expect to see that moderate by a couple of hundred thousand gold.

Going forward.

Okay.

Got it. Thank you for that and then just you know bigger pick.

Bigger picture as we look at is still very challenging revenue outlook.

Near term potentially longer term are there any wholesale changes to the expense run rate being contemplated or weather.

Its branch rationalization or opportunities on on vendor contracts, just curious as to what.

What's the opportunity there might be.

Yeah. So I don't think there's a lot of room for us to move in terminals in terms of branch rationalization, we have been 72 branches and $90 million average size. There maybe one the Tuesday that we look at it dropped 2021, but we are taking a aggressive review approach all of our vendors and.

In terms of how we optimize existing contracts and may look to renegotiate or terminate certain contracts, which are productive as we move forward. So, but we're taking a fairly aggressive approach to that review and that might include everything from you know systems contract too you know leases on on physical.

Locations you name it we're looking at it.

Got it okay I appreciate the thoughts there Dave and then finally for me you provided.

You provided the breakdown of sort of the special mention and substandard within the hotel portfolio, but was hoping you could comment on the migration in general within criticized and classified this quarter.

So yeah, I mean in general, though the bulk of the downgrades work in the hotel portfolio into the criticized and classified there were a couple you know other some operating companies that you know, we we did agree but out of the <unk> the amounts it went over.

The big jump in the hotel portfolio.

Okay, and just a follow up do you guys have the total amount of criticizing classified this quarter versus last.

I think that that percent right now, it's a little bit under 8% I think.

I went from a little under 5% last quarter.

Okay. So 8% today includes both criticized and classified from five last quarter got it. Okay. Thanks. Thanks, guys. That's it for me.

Yeah.

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

Hey, good afternoon guys.

HM maybe maybe just staying on the credits topic for a minute it sort of see you know given.

Yeah Kevin.

Among kind of within the hotel booking allegion bucket, just any of the credits Chris criticizing classified the whole buckets I see the resolution of these credits working through in terms of potential further along restructurings or you know as you may see net charge off migrate through the year, just trying to get a sense of kind of the timing and magnitude of.

What how some of these credits can work through that worked through the system.

Sure. So you know and as Todd and Mark mentioned, the overwhelming majority of the downgrades. It seems he bucket show has on that slide eight and they are in those health portfolio, what's the word patent that by having robust conversations about credit enhancement.

And im using that as a tool to retain.

A better risk rating or we are going to have to go through the process no evaluating some of these for a NPL as we move forward. So we do anticipate some migration into the NPL bucket.

You know what we're looking at each one of these on an individual basis and determining a strategy and where you know the process of having the ones that are in the classified.

A bucket you know praised.

Our policy, so you're probably call it probably start to see some some migration and in Q4 and Q1 would be to get what your.

When you start to see some of that maybe the downgrades into the NPL bucket, yes. The second round. The second round of deferrals were released that we offer to those customers will expire at the end of Q1 of next year and into the early part of Q2.

Okay. So.

So given that then how should we do or how are you guys thinking about the reserve level. So does it sort of say that elevated for the next couple of quarters and then do you see foresee 2021 being an opportunity to kind of let the reserve level bleed a little bit lower.

It's just something to think about me in this morning and.

Yeah, the ads that as the criticized classified decline had to take some pressure off the overall reserve level above that the overall he bucket continues to decline as well.

Okay, Okay, and then just lastly.

Now to our buyback coming into the conversation at all for you guys. As you think about kind of capital deployment and its cap.

And its capital builds and if not is there a catalyst or is there something that you would need to see happen before you started kind of.

Engaging in buybacks.

I think we need to get a little bit farther past. The you know the worst part here the pandemic and see some recovery and feel better about the prospects for credit losses going forward before we entertain buybacks again.

I mean, as you know talking about a second wave call them and you know how deep is that are you know do they start.

Showing this is Scott again, so some of those things, we just want to see some growth.

Claire.

Clarity on.

Okay. Okay, Alright, that's all I had thanks guys.

As a reminder, ladies and gentlemen, if you would like Oh, that's like <unk> that's sorry.

Hi, Sam one on your telephone.

And we move next to Matthew Breese like even some <unk>.

Hey, good afternoon, Hi, Matt.

I mean I just just a couple of quick follow up question first I I think that Mr. Bush the the outlook for noninterest income next quarter.

Oh right around 50 50, Okay and then in terms of all in P.P.P. income for the quarter what was that.

It's about around including the interest that was around two 2 million.

Okay.

And.

And then Todd you mentioned that as as loans go into the classified bucket you go through the process a reappraisal.

I'm curious you know for the hotel loans that have made that jump.

What has been the change in the appraisal valuation what's been the the new versus old LTV. We were just in the process of ordering right now I'm as are we not we don't really have any indication on where those where those are at this point in time.

Okay.

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

Yeah, we've not disclose that because as you know they're still working through you know potential sales. So you know we want to respect their durability I mean, they were making payments Oakville. They decided they have that they had to close the door. So we're still working through you know try to liquidate about there as we have not disclosed what that is.

Got it okay.

All right very good that's all I had thank you.

But.

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

Yeah.

Okay.

Okay.

I think we had a question that came in on the on the Internet.

On the internet or an update on the fraud. So you know we are still pursuing collection activities as we discussed last last quarter or so.

Principal.

Good plead guilty yesterday charges were filed by the department of Justice or they're going through their discovery on assets just to see what may be available for fourth quarter merger and you know as I mentioned earlier, we're in the process of beginning the auction process on the underlying real estate collateral and Ah you know, we would hope to have that.

That wraps up the 40 to 50 days and a yet another contract in Q4 I get a close number so that's kind of where we're going at this point in time I think that was the only other one that we got right. So but again I want to thank everybody for participating in the call today that market David I appreciate your opportunity to discuss this quarters results, we look forward to.

Hearing from your next conference call. Thank you.

Well that's concludes today's conference call. We appreciate your time you may disconnect. Your lines at this time and have a great thing.

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