Q2 2021 S&T Bancorp Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to the SMT Bancorp, Inc. Second quarter 2021 earnings Conference call. At this time, all participants have been placed on a listen only mode and the floor will be opened for questions and comments. After the presentation. It is now my pleasure to turn the floor over to your host Mark coach far Sir the floor is yours.
Thanks, very much and good afternoon, everyone. Thank you for participating in today's conference call before beginning of the presentation.
Got you refer you to our statement about forward looking statements and risk factors, which is on the screen in front of you. The statement provides the cautionary language required by the Securities and Exchange Commission for forward looking statements that may be included in the presentation a.
A copy of the second quarter of 2021 earnings release can be obtained by clicking on the press release link on your screen or by visiting our Investor Relations website at SP Bancorp Dot com.
We will be reviewing the earnings supplement slide deck as part of his presentation.
And the pain of copy of those slides through the link on your screen, where also on our website under events and presentation second quarter of 2021 earnings call Conference call.
Click on the second quarter 2021 earnings supplement.
With me today is Dave Antolik, S&P, President and interim Chief Executive Officer, I would now like to turn the program over the day 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 and tea bag as announced last week. Our board of directors has chosen Mr. Christopher Mccormick.
And as our new CEO, Chris comes to us of the wealth of executive leadership experience and I look forward to him joining us on next quarter's call I've had the pleasure of spending time of Chris over the past several weeks as we work together to the transition duties and welcome him to our organization and community I strongly believe that.
His experiences leading larger customer focus and employee driven organizations are particularly and the digital and consumer spaces will complement my long tenure and understanding of our culture of customers and my experience and the commercial banking space I believe that we have found the rate we entered the move us forward and the 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 72 per share. Our return metrics remained solid and in line with our expectations with ROA of 121%.
ROE of $9.6 5% return on tangible common equity of 14, 4.1% and pre tax pre provision to average assets of $1.6 1% and <unk>.
And so pleased to report that our board of directors has declared a <unk> 28 per share dividend consistent with Q1 and with the same period last year the.
The dividend is payable August 19th to shareholders of record on August 6.
Slide 4 highlights the changes to our balance sheet. During Q2 cash balances grew by $985 million, our primary cool cool for the deploying this liquidity is by growing customer loan balances and support of this goal, we experienced improved customer demand as evidenced by our continuing.
And of growing loan pipelines in all categories of Mod.
The 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 and home equity balances that was offset by lower residential mortgage balances and we expect the residential mortgage balances to reverse course, as we book more to the portfolio of and support of our cash deployment strategy and a change in customer activity from refinance and purchasing.
Instruction.
We anticipate the second that second half loan.
Growth, including excluding the Triple C to B and the low single digits consistent with prior guidance during the quarter. We made several key additions to our production staff, including a new market executives and northeast, Ohio, and new director of mortgage sales 2 business bankers and 3 commercial bankers and I'll now turn of the disc.
And over to Mark to cover the next few slides.
Thanks, Dave and slide.
Slide 5 we have the net interest income, which showed that of decreased by $2.4 million compared to the the first quarter.
This is mostly due to a decrease and triple P contribution of $1.7 million from $5.8 million and the first quarter of $2.4.1 million and the second quarter.
Although the amount of the loan balances forgiving and actually increase compared to last quarter's contribution was lower and we had more larger balance loans being forgiven, though.
And as carry lower fees as a percentage of the balance.
Also contributing to lower net interest income was the lower average loan balance not including PTP of $123.1 million.
The headline net interest margin rate declined by 31 basis points compared to the first quarter to $3.1 6% the largest contributor to the decrease was the $483 million increased and average cash 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 of the decline.
The lower yield on loans and fees, which resulted in the decline of 7 basis points and lower securities yields and the other mix changes reduced the net interest margin by another 3 basis points.
This is the only partially offset by lower coffee and liabilities of 5 basis points.
Just the pace at the cash levels will persist for some time and we still have an additional $336 million of triple P loans, yet to be forgiven and there are no signs yet the deposit levels will reduce.
With low single digit loan growth and not much appetite for huge investments and fixed income we expect the net interest margin the stay at or slightly below these levels for the next several quarters.
That might come with some volatility as the remaining P. P loans are forgiven, particularly in the fourth quarter.
On the next slide non interest income and the second quarter decreased by $1.8 million compared to the first quarter. The largest decrease was the mortgage banking, which declined by $2.6 million to $1.7 million.
Production remains strong and shifted more of the balance sheet, including the home equity loves the day discussed we also experienced some tightening of spreads and our sales of Fannie Mae.
The mortgage servicing rights valuation so all of the other way with second quarter, and the second quarter with lower rate, resulting in a quarter over quarter decline of $1.2 million.
The bright spot and beef.
As of the debit card, which is now running well ahead of pre pandemic levels. We also saw improved numbers wealth management through a combination of at the depreciation and increased customer activity.
We expect the run rate and non interest income to be $50 million to $60 million per quarter.
On slide 7 and the non.
Expense was essentially flat overall compared to the first quarter well controlled at $45.8 million higher salary and benefits of $1.2 million came mainly through incentives and annual merit increases.
Other expense categories were in line with prior of the prior quarter and we still expect our run rate going forward to be closer to 47 million per 40.
The $47 million due to the new hires and a focus on production.
On slide 8 at the top of.
Our ACL to loans decreased from 1, 6% and Q1 to 1.5%, 6% and the second quarter at 164% from 172% excluding triple peaks.
The $5.5 million release came in part from specific reserves, which are down $1.6 million and.
And also from lower qualitative adjustments due to the improvement and the economic outlook.
During Q2, we experienced our second consecutive quarterly decline and Npls and the impacts of the pandemic and economic recovery become more clear and.
And some cases uncertainty remains of our customers who are still recovering and.
And we received updated financial reporting and valuations, we adjusted our reserves accordingly the effect.
And of the updated valuation is directly impacting charges for Q2.
And then finally on slide 9 capital the risk weighted capital levels, all improved while the leverage ratio and TCE continued to be weighed down by Triple P. And also of the higher cash levels of capital ratios are in excess of regulatory well capitalized levels and our capital cushion continues to expand and.
In March of 'twenty, 1 and the board extended the repurchase authorization for additional year through and the first quarter of 2022.
The $37.4 million remaining on that authorization, while we have no immediate plans to do buy backs. We are monitoring valuations and are prepared to respond should conditions warrant.
Our preferences and utilize our capital to support growth organically or through M&A.
So in conclusion, we are excited to move forward under new leadership with the improved clarity on economic conditions and feel that 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 of call or questions.
Thank you, ladies and gentlemen of the floor is now open for questions. If you have any questions or comments. Please press star 1 on your phone at this time, we do ask that 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 price.
Star 1 on your phone at this time.
Our first question today is coming from Michael Perito of K B W. Your line is live.
Hey, good afternoon, guys and I.
Hi, Mike.
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'd be a little bit of activity and your markets from a lending perspective this quarter I guess.
If you take you come some of your high level remarks, and step further here I mean, what are some of the dynamics that the need to occur for you guys to kind of kind of put on some consistent net growth and the back half of the year and and as we're trying to handicap what that could look like I mean do you think you can do like a mid single digit rate per quarter and the back half of your annualized or or do you.
And it might take some time to build up to that type of the level of production.
Yeah. So Mike there there are couple of.
At that point that I would point to the first is that increase in commitments that we saw for the quarter.
$189 million and that and that's split about $100 million and the commercial space, which would be revolving availability along with the construction commitments.
And along with our activity and the consumer space home equity and.
And normal revolving consumer products, so I think that points towards the better growth and 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 of 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 sing.
The single digit loan growth on an annualized basis for the last couple of quarters.
And can you guys can you expand on that dynamic just a little bit more as we think about kind of of the mortgage banking fees versus the other portfolios of residential production and how that dynamic might impact kind of the geography of those revenues and the back half of the year.
Yeah. So 1 of the important points to make with regard to the mortgage activity is that the honest gross dollar basis quarter over quarter of the activity was up and our pipeline again is up so it's really the dynamics between what we sell the spreads that we see on the sale of which were down slightly during the quarter as Martin.
And as Mark mentioned, and then the customer demand, which are shifting more to the portfolio of products and the other big factor in the mortgage banking revenue number was the MSR change the cost us about a million to quarter over quarter. So some of it is gonna be break dependents and it's gonna be.
Appetite of buyers.
And then and in addition, our home equity products. Firstly, the home equity product is very attractive to which could bolster the portfolio of balances as well so it's a dynamic and the balance between customer.
Need and customer desire and the worth of products that fits the customer.
We anticipate the activity overall to continue and at the current pace.
Got it.
And then just that's helpful. Thank you and and then just lastly for me I mean.
And it feels like with the non performers dropping and the quarter and.
Seeing the X P. P. P. A C. All 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 and and the back half of the year of given what you know at this point.
Yes, as we gain clarity throughout the rest of the year and the big issue for US as you know the 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.
Got it okay.
Very helpful. Thanks for taking my questions I appreciate it.
Thanks, Mike.
Thank you. Our next question today is coming from Russell Gunther at D. A Davidson your line is live.
Hey, good afternoon guys.
Yes.
Can you circle back to the margin the discussion for a bit of I think I heard you mark say at or below kind of current levels.
Our near term and so yeah.
Just wanted to get a better sense for the the dynamics. There I mean first off are you guys expecting to see continued pressure on.
The new money loan yields and.
Just kind of of what helps the kind of clause and us out of the $3.16 range going forward.
Yeah, I think for the next the next couple of quarters, we still see some.
And some pressure on it you could call. It the core margin if you strip out kind of the cash in the and the PPP activity.
The deposit costs are about as low as they can go and we saw those drop and go buy another 7 basis points this quarter, but there's not much left there on the on the asset side, we continue to see.
It's a fairly large difference between the new and the pace and has expanded to around 80 basis points. This past quarter. So there's some asset yield pressure.
And that's that's still there and that'll that'll reduce not from them.
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The new loan rate, but the pay rates you know should it should moderate and we get into the back half of the year. So breadth of the rate I don't expect that to improve a lot with the exception of the P. P timing of what we'd like to see half of we expect to happen is that the the love balance of school starts to grow and just from an absolute dollar of revenue.
Active debt, we should see some improvement there.
And 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 with the fed.
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 of that how are you.
Thinking about the investment portfolio.
Use of <unk>.
Something of some of that excess cash as well.
And it'll probably be fairly limited, we you know we've been adding.
The 25 and $50 million per quarter.
We just don't see a whole lot of value in the and the.
1.
The stack. These days you know the the yields on the type of active or the type of bonds that we are comfortable with the.
The low very low 1% of that so we're just not sure of the risk reward trade off of there given our desire of basically to get that back into the lungs.
So you don't anticipate any and wholesale or any large.
The move from cash into the and desktop display at this time.
Okay. Okay.
Okay, Great and then just a housekeeping question do you have the set of outstanding PPP loan balance and the remaining fees.
And then about 336 as of the end of the quarter.
And there's about 9 million left to recognize.
Okay.
Thanks for that and then just of a bigger picture question.
And Chris coming in and and a bunch of and Dave you guys.
And I've spent some time together.
And just any thoughts on and then the bigger picture strategic decision.
The decisions that you guys may be contemplating whether it's taking a look at the expense base.
Getting active in M&A.
Any broad strokes and early innings with with Chris coming onboard.
Yeah, the beyond the high level.
Message that I believe this and to our employees our communities shareholders that we anticipate the remaining independent and obviously, we need to earn that but you know the investments that the board has made and Chris and India and the rest of the staff it should point us towards growing above.
And beyond 10 billion and and moving forward. So the kind of all of the above that the the focus in the short run is making sure that we're able to drive revenue on an organic basis.
And you'll continue to augment that in the.
The M&A space or other of revenue diversification of activities.
Got it thanks, guys. That's it for me thanks for taking my questions.
And you Russell.
Thank you. Our next question today is coming from Matthew Breese at Stephens, Inc. Your line is live.
Afternoon.
And then maybe just following up.
On the top line.
The NIM question just at the different way.
So if I exclude P. P. P income I see core NII of about $64.2 million this quarter and it's been here.
This range for about 3 quarters.
With the loan growth and securities growth that you're contemplating.
Is this level of this market bottom and your view and if so where do you think you can grow revenues.
Core NII to over the next call it 6 to 12 months.
Migrate out of it.
And we didn't think that we're at or close to the thought of.
And given the.
The.
The ability or what we thought of and the back half of the second quarter and in terms of the loan growth. So what do you think that that's positive.
Going for it but it is kind of depend on how the recovery progresses, and and our ability to to grow those those funds that will govern how how much of that increase can happen over the next 6 to 12 months.
Okay.
And then just following up on on Chris and some of the broader strokes there couldn't help but notice that his background is.
The heavy consumer both the Tcf and then the Scottrade.
And should we think about the road forward for us and 2 should we contemplate more of a consumer offering a more balanced approach share and if so what kind of services and products. Do you think of you know, we could see that would be new and different.
Yeah, well, that's certainly 1 of the 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 the help diversify revenue and dependent.
Upon.
Net interest income and the commercial space. So we have seen some pretty nice increases in terms of the fundamental revenue the sources that come out of the consumer bank and I would expect Chris the 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 AR and the consumer bank and is in the focus for us. So yeah, I think I think that everything's on the table in terms of growing revenue and we certainly don't want to give up what we do well and will continue to be of commercially focused bank, but his background as I mentioned and more.
The prepared comments really complement of mine.
And that's why we're excited about this partnership and and where we're able to where and we will be able to take that.
Great well I appreciate that and I'm sure there's more to come next quarter when he's on the call. Thank you.
Thanks, Matt.
Thank you once again, if there are any questions or comments. Please press star 1 at this time.
Yeah.
We have no further questions in the queue.
Well. Thank you for your participation in today's call Mark and I welcome your questions and and comments and we look towards the next quarter and having a crisp of Congress join us for the call. Thank you have a wonderful day.
Yeah.
Yeah.
Thank you, ladies and gentlemen, and this does conclude todays event you may disconnect at this time and have a wonderful day. Thank you for your participation.
Hmm.