Q4 2020 S&T Bancorp Inc Earnings Call

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Good afternoon, ladies and gentlemen.

And welcome to the SMT Bancorp, Inc. Fourth quarter earnings Conference call. At this time, all participants have been placed on a listen only mode and the floor will be opened for questions I'd comments. After the presentation. It is now my pleasure to turn the floor over to your host Mark coach for Sir the floor is yours.

Thank you very much on good afternoon, everyone and thank you for participating on today's conference call for.

Beginning of the presentation on let's take time to refer you to our statement about forward looking statements risk factors would you be on the screen in front of me. This statement provides cautionary language required by the Securities Exchange Commission for forward looking statements that may be included in this presentation a.

A copy of the fourth quarter of 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 Dot just few bancorp dot com.

We will be reviewing earning supplement slide deck as part of this presentation you can obtain a copy of the slides on our website under events and presentations fourth quarter 2020, earning conference call. There you can click on the fourth quarter of 2020, earning supplement.

With me today on Todd Brice, <unk> CEO of S&P and David Hill at present.

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

Well, thank you Mark and good afternoon, everybody. We appreciate you taking time to join US for our fourth quarter earnings report is on.

Now from our press release. This morning, we reported net income of 62 per share for $24 2 million compared to <unk> 43 per share for $16 7 million in the third quarter.

Profitability metrics for the quarter include a return on assets of one point on a 5% return on equity of 835% and return on tangible of $12 seven 1%.

Also pre tax pre provision totaled $37 million for 1.61% of average assets.

Our results this quarter were favorably impacted by a nine basis point improvement in our net interest margin and strong mortgage banking fees was $3 1 million.

Balance sheet growth was muted as loans declined by $84 million on <unk>.

Not including PPP forgiveness of $85 million in the fourth quarter.

Customers are still feeling the impacts of the effects of Covid Todd.

Total deposits decreased by $213 million, primarily in our now money market and certificate of deposit categories as we focused on reducing deposit costs due to our liquidity position.

Asset quality metrics for the quarter included a provision expense of $7 1 million.

The $10 4 million a decrease from Q3 net charge offs of 11 2 million.

Versus $12 9 million in the third quarter on.

Non performing loans increased by $62 7 million to $146 $8 million for two 3% of total loans the.

The majority of the increase is attributed to $56 $7 million of hotel loans that are moving into non accrual we.

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 ACO was stable for the quarter at 163% of total loans compared to 164% Inc.

Three.

The PPP loans the ratios were 174%.

Versus 177% in the third quarter.

For the last year and finally, the board of directors declared a quarterly dividend of <unk> 28 per share payable on February 25 to shareholders of record on February 11 at this point I'd like to turn the program over to our President Dave Antolik.

Thank you Todd and good afternoon, everyone.

As reported portfolio loans decreased during the quarter by $169 million, which included the $85 million in Triple P. For instance, that Todd mentioned and as detailed on slide five this forgiveness accounted for essentially all of the C&I reduction in the quarter C&I commitment utilization rates remained for years.

5% below pre pandemic levels due to the impact of stimulus and customers retain liquidity.

This reduced utilization accounts for approximately $150 million in balances that we forecast being re borrowed 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 counter cyclical.

Continue to feel pressure on our CRE balances that pay offs into the permanent markets continued into 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 red.

<unk> mortgage balances this year.

Referring again to slide five we've identified the impact of Triple T on selected ratios and the continuation of forgiveness, which stands at 25% as of January of 'twenty.

We are fully participating in triple E round, two we have seen an early tally of approximately 650 applications and unlike round. One we are accepting applications from non SMT customers.

Slide six provides a history of modified loan balances.

To note here the impact of the movement of hotel balances into non accrual, which helped reduce the modified balances excluding that 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 seven provides additional detail on our hotel portfolio.

Since year end, we have successfully exited one hotel loan and anticipate the sale of another in Q1. These exits total approximately $9 million looking forward, excluding triple T. We expect loan balances for 2021 to grow modestly in the low single digits. This is supported by it.

<unk> improved C&I utilization rates that I mentioned gross in our portfolio of mortgage balances and improved pipelines as compared to the previous two quarters and now I'll turn the program over to Mark for additional detail on our financial results.

A little more detail on the progression of the allowance for credit losses can be seen on slide eight.

We are a January 2020 people adopter and had fairly significant reserve build in the first half of the year, mostly on the economic forecast and qualitative factors part of that model due to the pandemic those increases slowed in Q3 as a better macro forecast offset downgrades in our hotel portfolio.

In Q4 with some of the hotels moving to NPL with limited specific reserves still favorable macro outlook and lower loan balances. We saw slight net decrease from the reserve for about $3 million for say $118 million.

Again as Todd mentioned this represents ACL of about 163%.

Down one basis point, and 1.74% net pvp down three basis points.

Moving to slide nine net interest income increased by about 650000 compared to the third quarter, mostly due to increased triple pay forgiveness.

Net interest income from Triple peaks with 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 90 basis points to 338%.

The increase Triple P income more than offset one basis point drop in the core ex PPP NIM rate as low as the impact of lower loan balances.

We continue to make progress on lowering our liability costs, which were down 13 basis points compared to last quarter, mostly driven by positive 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 with it forgiveness timing of Triple peaks.

Slide nine also shows that we do have a $333 million of liabilities repricing over the next six months to help offset lower new vs paid rate on the loan side.

The total period of decline in deposits in Q4, it was mostly a purposeful as Todd mentioned as we like to not compete on several higher rate accounts, given our liquidity position not net.

Net income in the fourth quarter decreased by 874000 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.

<unk> related fees are still being impacted by the pandemic, but we did see some better activity and plot for this quarter.

We continue to expect that run rate and interest income of around $50 million per quarter.

Non interest expense was flat compared to the third quarter fourth quarter impacted by higher workout related expenses, which show up on the other expense category.

Occupancy and part relates to salary rent from branch and an office closure.

Is that the run rate going forward to be 47% to $48 million per quarter.

Capital levels on slide 10, I will improve 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 triple Piedmont by about 50 basis points.

Thanks, very much at this time I'd like to turn it back over to Todd for some closing remarks, well. Thank you Mark and before we open it up for questions.

This is my last earnings call as my retirement date of March 31st is right around the corner. It really has been an honor to serve as the CEO of SP Bancorp for 13 years I have enjoyed working closely with our analysts Russell Gunther from Davidson, Matt Breese with Stephens Wally Wallace at Raymond James Joe Platelets bedding in Cogs.

Yogurt gave you W.

I've always appreciated your candor in support.

Also through the many investors, who I've met and develop 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 advisers that we've worked with on projects on 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&P to over $9 billion company today.

Finally, thank you to my colleagues on the S&P team, it's been incredibly credible working with you and I know you will work tirelessly to serve our wonderful customers continuing 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. Thank you again.

Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.

We do ask if you are listening via speakerphone. Please pick up your handset for optimum sound quality. Once again, if you have any questions or comments. Please press star one now.

Our first question today is coming from Russell Gunther. Please announce your affiliation and pose your question.

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

Okay.

Alright. Thanks.

First off Todd Congratulations best of luck in retirement I hope to stay in touch.

For us.

Mike.

Thank you moving on to first question. So just to follow up on the expense guide.

47 to 48.

A little bit of relief relative to the last couple of quarters just.

I'm curious as to what's driving that.

Is there embedded in this guidance any any thought around day to broader whether it's branch rationalization or expense initiatives.

Yes.

We continue to believe that you on yet.

Syed.

We already run a pretty lean shop, especially when you think about the branch footprint. So other than kind of one one on one here on one there we don't expect a large and you have a large program to reduce branch side.

That does just assets.

Few items that were.

More nonrecurring in nature, we also what we did.

We did have some higher loan related expenses that we don't think we will continue into the year and also some software and we did have some costs related to the.

Branch office closures.

So fairly consistent with where we're at a low.

But lower than we're running right now.

Got it okay, great. Thanks for the color there and then.

I caught your comments on the low single digit loan growth.

Some other drivers within C&I and <unk>.

Any additional color to share within pockets of strength from a geographic perspective.

Yeah, Hey, Russell, it's Dave Antolik.

Seeing pretty good activity out of.

Central Ohio, and that that was a strong market for us last year and particularly in Q4.

So in and around the Columbus, where we hope to add some additional staff in order to take advantage of other.

The market opportunity there and then with regard to eastern Pennsylvania.

If you think about where we were last year, we just consummated the dnb merger. 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 that to get back in and make that a bigger part of our organization. So I think we will see additional growth coming out of that market as well.

Alright, great. That's very helpful. And then just last question for me you mentioned in the prepared remarks in the slide that showed the excess capital position that continues to build.

Could you just share your thoughts on on the potential buyback and use of capital going forward.

Okay.

At this point, we're still cautious on the credit side, because there's still a lot of uncertainty related to the pandemic.

Pandemic and how that's going to impact our customers on the hotel portfolio. So right now we have a little bit of a wait and see attitude as we continue to build that debt capital and see how the balance sheet debt.

I think that's something that we'll look at we'll.

We will look at again, probably closer to the second or third quarter, but right now we don't have any plans at the moment to do on your buyback program.

We start that.

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

Thank you Russell day around them.

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

Hey, Good afternoon. This is Matt Breese with Stephens, Inc.

Alright, Todd first of all true.

That's a walk on retirement, it's been a real pleasure over many years I sincerely wish you well and in the next chapter here.

Thanks, Matt.

Maybe to start the hotels that debt when nonperforming this quarter.

Maybe to start can you just remind us how many there were I know you said that there's been an exit you expect another exit so that the reduction there and then maybe just talk a little bit about the appraisals on where they came in relative to the ltvs.

Right.

So if you go to slide eight.

If you look at the other 18 loans that totaled $57 million, we moved into non accrual.

And then on the Ltvs.

The average on those were 73%.

Got it okay.

I'm, sorry, I missed that and then the $6 7 million reserve does that does that cover the difference I am assuming it does between the new appraisal on where you have it on the books at.

Yes, that's an approximation of that where.

Where we have the vs the liquidation value.

Hopefully a conservative assumption.

And overall, we have about eight 5% of the total hotel portfolio allocated in our reserve.

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.

They are not they the transition to M P age or whats the exit strategy.

For those and should we expect anything from a credit formation or or P&L impact.

Yeah, Hey, Matt David on until it. So if you look at the universe of those loans at $18 million, it's very granular some of that's in the business banking space. So you are talking about a half million dollar size loans.

There are a few larger deals included in there so I wouldn't read anything into that other than we hope we hope to reduce that balance even further isolate from the problem within the retail portfolio. 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 will see some residential growth could you just talk a little bit about the commercial real estate and construction pipeline and how you think those will behave.

Yeah. So we're seeing some decent activity within the in the CRE space.

Multifamily has been a very solidly performing segment for us.

And cautious about that as we monitor internal.

Limits on what 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.

We were able to look at 90 to 120 days and get ahead of ahead of the pay offs were just not seeing the same pace. So I don't know if that's a function of that market being less active or the loans that were eligible for refinance into that space.

It's gone through that process.

But we are seeing we are seeing renewed opportunity.

Do you have any process, particularly we have a pretty robust previewed process for CRE deals on the C&I deal activity through those channels. It has picked up as well.

Okay.

And then in terms of the Securities book, you still have a 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.

I think there are certain extent, we do have you mentioned, we do have from excess liquidity, we'll watch what happens with the rest of the balance sheet.

Loan growth side, the pace of the TPP now we have the second PPP and then also how the customer deposits behave we do think we get from surge deposits from the first round and stimulus we will see how that goes but.

Offsetting that is the securities yield while better net cash are not are not huge so we'll be cautious cautious as to how much we put into debt securities book, but you could see some increase there okay.

Okay.

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

For the successor.

Yeah. So there are other still.

Conducting interviews, both internal candidates and external.

Kind of all along was to.

We have someone in place by the end of the first quarter.

So I mean, I think that's still on track to meet that timeline.

Okay.

Well I appreciate it again Todd best of luck, thanks for taking my questions.

Thank you. Our next question today is coming from Joseph your.

Your line is live please announce your affiliation then pose your question.

Yes. Good afternoon. This is Joe Lebel Lynch from bidding in scatter good how's everyone today.

Good job.

Todd I really appreciate the kind words, havent had an opportunity to work too much with you but.

Enjoyed our.

Conversations and certainly.

Everyone from from our firm wishes you the best of luck with your next mix of interest here.

I appreciate that Joe very much.

On a couple one I don't know if I heard correctly was.

Yeah.

Other income.

Target for 2021 was that $15 million, a quarter or $60 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.

Yes. The number is about $15 50 million is what we expect for quarter.

Do you think that debt spring that probably isn't until the back half back half for the year on we do also expect to see the mortgage.

Numbers continue to stay.

Stayed pretty healthy for me.

Most of the year as well.

Got it okay.

And then the low growth that was on an ex PPP basis, and then you know how do we think about the potential volumes from the second round of PV Peter.

Yeah that would be ex PPP, so core loan growth low low.

Low single digit.

Just getting our arms around what the initial applications with triple B, but I would look for something.

In the magnitude of maybe a third of what we did is in round. One is it the parameters around who is eligible for the program have been tightened. Although we are getting some interest from non SMT customers that we did not profit the applications in round one.

But we've got the processes and systems in place to handle those and we expect there to be a nice lift with triple T round two.

Sure.

And then the direction of NIM.

Here, we were a $3 38 in the fourth quarter.

Assume first quarter might look similar given some some benefit of these deferred pvp fees, where does it had after the first quarter.

Yeah, I think the first half we should see relative stability in net core net interest margin rate, but without the triple peaks on after that we could.

On a run out of liability repricing debt that help us that will be more left to do can you just kind of the loan pricing versus how that's coming off versus the new so we could see some pressure on him on the back half of the year coming from the asset side.

Yeah.

For the last one I had was just on the FDIC insurance expense it's on.

Also weighted oscillate a little bit here in the second half from here is there a good run rate for 'twenty 'twenty one.

On that.

We get.

Better fourth quarter numbers.

So that should improve some of that was related to the asset quality metrics.

So we do think that the debt at.

Current quarter is probably the best estimate going forward for now.

Okay.

Thank you, ladies and gentlemen, if there will be any final questions or comments. Please press star one now.

Okay.

Okay.

We have no questions on the Q do you have any closing comments you'd like to finish with.

I just wanted to thank everyone for participating on today's call and we look forward to connecting with you.

Next quarter, I guess market day, as well so but.

But it's been a real pleasure.

Again, I appreciate everyones kind words, thank you.

Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.