Good afternoon, ladies and gentlemen, and welcome to the S&T Bancorp, Inc. Fourth Quarter 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..

Thank you very much and 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 should be 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 fourth quarter 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.stbancorp.com. We will be reviewing an earnings supplement slide deck as part of this presentation.

You can obtain a copy of those slides on our website under Events and Presentations Fourth Quarter 2020 Earnings Conference Call, there you can click on the Fourth Quarter 2020 Earnings Supplement. With me today, are Todd Brice, CEO of S&T and David Antolik, S&T’s President.

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. As announced in our press release this morning, we reported net income of $0.62 per share or $24.2 million compared to $0.43 per share or $16.7 million in the third quarter.

Profitability metrics for the quarter included a return on asset of 1.05%, a return on equity of 8.35% and a return on tangible of 12.71%, also our pretax pre-provision totaled $37 million or 1.61% of average assets.

Results this quarter were favorably impacted by a 9 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, not including PPP forgiveness of $85 million in the fourth quarter.

Our customers are still feeling the impacts of – the effects of COVID. Total deposits decreased by $213 million, primarily in now Money Market and Certificates 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, which is a $10.4 million decrease from Q3, net charge-offs of $11.2 million versus $12.9 million in the third quarter. Nonperforming loans increased by $62.7 million to $146.8 million or 2.03% of total loans.

The majority of the increase is attributed to $56.7 million of hotel loans that are moved into non-accrual. We did perform new appraisals on the majority of these loans in the fourth quarter, and believe that we are adequate reserves at this time. The ACL was stable for the quarter at 1.63% of total loans compared to 1.64% in Q3.

Including PPP loans the ratios were 1.74% versus 1.77% in the third quarter of last year. And finally, the Board of Directors declared a quarterly dividend of $0.28 per share payable in February 25th to share holders of record on February 11th. So 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 PPP forgiveness that Todd mentioned, and is detailed on Slide 5. Now this forgiveness accounted for essentially all of the C&I reduction in the quarter.

C&I commitment utilization rates remain 4% to 5% below pre-pandemic levels due to the impact of stimulus and customers retaining liquidity. This reduced utilization accounts were approximately $150 million in balances. The reforecast 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 countercyclical. We continue to feel pressure on our CRE balances as pass into the permanent markets continued into Q4. The pace of these payouts isn’t dissipated 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 residential mortgage balances this year.

Referring again to Slide 5, we identify the impact of PPP on selected ratios and the continuation of forgiveness, which stands at 25% as of January 22. We are fully participating in PPP round two. We have seen an early tally of approximately 650 applications. And unlike round one, we are accepting applications from non-S&T customers.

Slide 6 provides a history of modified loan balances. It’s important to note here, the impact of the movement of hotel balances into non-accrual, which helped reduce the modified balances. Excluding the 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 7 provides additional detail on our hotel portfolio. Since year end, we had successfully exited one hotel loan and anticipate the sale of another in Q1. These exits totaled approximately $9 million.

Looking forward, excluding PPP, we expect loan balances for 2021 to grow modestly in the low-single-digit. This is supported by anticipate improved C&I utilization rates that are imagine, growth in our portfolio, mortgage balances and improved pipelines as compared to the previous two quarters.

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

Thanks, Dave. Little more detail on the progression of the allowance for credit losses can be seen on Slide 8. We are January 2020 CECL adopter and had fairly significant reserve built in the first half of the year, mostly in the economic forecast and qualitative factor part of the model due to the pandemic.

Those increases slowed in Q3 as a better macro forecast offset downgrade in our hotel portfolio. In Q4, with some of the hotels moving to NPL with limited specific reserves, but still favorable macro outlook and lower loan balances, we saw a slight net decrease in the reserve of about $3 million to $118 million.

Again, as Todd mentioned, this represents ACL of about 1.63% down 1 basis point and 1.74% ex-PPP down 3 basis points. Moving to Slide 9, net interest income increased by about $650,000 compared to the third quarter, mostly due to increase PPP forgiveness.

The total net interest income from PPP was approximately $4.9 million in fourth quarter compared to $3.2 million in third quarter, which helps to improve the net interest margin rate by 9 basis points to 3.38%. The increase in PPP income more than offset 1 basis point drop in the core ex-PPP NIM rate, as well as the impact of lower loan balances.

We continue to make progress at lowering our liability costs, which were down 13 basis points compared to last quarter, mostly driven by positive repricing, which is down 12 basis points. We anticipate relatively stable core net interest margin rate for the first half of the year. Some volatility will come with the forgiveness timing of PPP.

Slide 9 also shows that we do have about $333 million of liability through pricing over the next six months to help offset lower due versus paid rates on the loan side. The total period decline in deposits in Q4 was mostly purposeful, as Todd mentioned, as we’d like to not compete on several higher rate accounts even our liquid position.

Non-interest income in the fourth quarter decreased by $874,000 compared to third quarter largest decline was in mortgage banking, which although is still strong for us at $3.1 million, but down from a very busy third quarter. Consumer-related fees are still being impacted by the pandemic, but we did see some better activity and swap this quarter.

We continue to expect a run rate in non-interest income of around $15 million per quarter. Non-interest expense was flat compared to third quarter, fourth quarter was impacted by higher workout related expenses would show up in the other expense category.

Higher occupancy in part related to accelerate rent from branch and office closure, we expect the run rate is going forward to be $47 million to $48 million for the quarter. Capital levels on Slide 10, well improved by about 25 basis points due to earnings retention and lower risk-weighted assets.

All capital ratios are an excess of regulatory well-capitalized level and our capital cushions continues to expand. Both leverage and TCE ratios are impacted by the PPP loans by about 50 basis points. Thanks very much. At this time, I like to turn it back over to Todd for his closing remarks..

Well, thank you, Mark. And before we open up for questions, as most of you know, this is my last earnings call as my retirement date is the March 31 is right around the corner. It really has been an honor to serve as a CEO of S&T Bancorp for 13 years.

I’ve enjoyed working closely with our analysts, Russell Gunther from Davidson, Matt Breese of Stephens, Wally Wallace of Raymond James, Joe Plevelich of Boenning and Collyn Gilbert of KBW. I’ve always appreciated your candor and support. Also to the many investors who I’ve met and developed relationships with over the years.

Thank you for your support as well and a big thank you to the – thoughts of the great group of investment bankers and advisors that we’ve worked with on projects, your counsel and advice has been invaluable and helping us grow our organization from $300 million organization when began my career with S&T to over $9 billion company today.

And finally, thank you to my colleagues on the S&T team. It’s been incredible working with you, and I know that you will work tirelessly to serve our wonderful customers and continue to grow the organization, everywhere 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. [Operator Instructions] Our first question today is coming from Russell Gunther [D.A. Davidson]. Please announce your affiliation then pose your question..

Good afternoon, guys, Russell Gunther from Davidson. How are you? First off, Todd congratulations, best of luck in retirement. Hope to stay in touch.

Moving on to first question, so just to follow-up on the expense guide, $47 million to $48 million, a little bit of relief relative to the last couple quarters, just curious as to what’s driving that? Is there embedded in this guidance, any thought around a broader whether it’s branch rationalization or expense initiative?.

We continue to believe that, on the expense side that we already run a pretty clean shop, especially when you think about the branch footprint. So other than kind of one-off, one here, and one there, we don’t expect a large – any type of large program to reduce franchise. Expenses just to add a few items that were non-recurring in nature.

We also – we did have some higher loan-related expenses that we don’t think 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 maybe a little bit 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 and some of the drivers within C&I in resi, any additional color to share within pockets of strength from a geographic perspective?.

Yes, Russell, it stayed until like, we were still seeing pretty good activity out of Central Ohio, that was a strong market for us last year and particularly in Q4, so in and around Columbus, where we hope to add some additional staff in order to take advantage of the market opportunity there.

And then with regard to Eastern Pennsylvania, if you think about where we were last year, we had just consummated the DNB merger, so there was all this opportunity and then COVID hit.

So we’re working hard to revisit those opportunities and make sure that we have the people running the products and the promotion in place to get back and make that a bigger part of our organizations. I think we’ll see additional growth coming out of that market as well..

All right, great. That’s very helpful.

And then just last question for me, you mentioned in the prepared remarks in the slide deck show, the excess capital position that continues to build, could you just share your thoughts on a potential buyback and use of capital going forwards?.

At this point, you were still cautious on the credit side and there is still a lot of uncertainty related to the pandemic, how that’s going to impact our customers and the hotel portfolio. So right now we have a little bit of a wait and see attitude, as we continue to build that capital and see how the balance sheet goes.

So I think that’s something that we’ll look at again, quite closer to the second or third quarter. But right now, we don’t have any plans at the moment to do any buyback program or to restart that..

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

Thank you. Our next question today is coming from Matthew Breese [Stephens]. Please match your affiliation then pose your question..

Good afternoon. This is Matt Breese from Stephens, Inc. Todd, first of all, best of luck in retirement. It’s been a real pleasure over many years. I sincerely wish you well in the next chapter here..

Thanks, Matt..

Maybe to start – the hotels that went non-performing 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 and where they came in relative to the LTVs?.

Right. So if you go to Slide 8, if you look at it, there are 18 loans or so, $57 million have moved into a non-accrual. And then on the LTVs the averages on those were 73%..

Got it. Okay. I’m sorry. I missed that. And then the $6.7 million reserve.

Does that cover the difference? I’m assuming it does between the new appraisal and where you have it on the book side?.

Yes. That’s an approximation of the – of where we had at versus the liquidation value. So it’s a – I hope it’s conservative assumption..

And overall, we got about 8.5% of the total portfolio allocated in our reserves..

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, whether or not they transitioned to NPAs? Or what’s the exit strategy for those, and should we expect anything from a credit formation or P&L impact?.

Matt, it’s Dave Antolik. So if you look at that, the universe of those loans is $18 million. It’s very granular. Some of that’s in the business banking space. So you’re talking about $0.5 million size loans. There are a few larger deals included in there.

So I wouldn’t read anything into that other than we hope to reduce that balance, even further isolating the problem within the hotel portfolio..

Okay. And then two other quick ones, first one is just, it sounds like you anticipate reversal in C&I growth this year. We’ll see some residential growth.

Could you just talk a little bit about their commercial real estate and construction pipeline and how you think those will behave?.

Yes. So we’re seeing some decent activity within the CRE space. Multifamily has been a very solidly performing segment for us. We’ve been cautious about that as we monitor internal limit. But we do see some additional opportunity there.

I mentioned in my prepared comments that we do anticipate – the permanent market to reduce and that’s based upon conversations that we have with customers. Typically, weren’t able to look at 90 to 120 days and get ahead of the payoffs. We’re 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 has gone through that process.

But we are seeing renewed opportunity, the committee process, particularly we have a pretty robust preview process for CRE deals and C&I deals activity through those channels that has picked up as well..

Okay. And then in terms of the security book, you still have a little bit excess liquidity.

I’m just curious, should we expect a continued build there if loan growth doesn’t stop up all the extra liquidity?.

I think to a certain extent, we do have – we did have some excess liquidity we’ll watch what happens with the rest of the balance sheet. Loan growth size paces PPP. Now we have the second PPP and then also how that customer deposits behave. We do think we get some search deposits from the first round and stimulus. We’ll see how that goes.

But offsetting that is the security yields while better than cash are not huge. So we’ll be cautious as to how much we put into that security book, but you could see some increase there..

Okay.

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

Yes. So we’re still conducting interviews both internal candidates and external. The intent all along was to have someone in place by the end of the first quarter. And so I think they’re still on track to meet that timeline..

Okay. I appreciate it again, Todd. Best of luck. Thanks for taking my questions..

Thanks, Matt..

Thank you. Our next question today is coming from Joseph Plevelich [Boenning & Scattergood]. Your line is live, please announce your affiliation and then pose your question..

Yes. Good afternoon. This is Joe Plevelich from Boenning & Scattergood.

How’s everyone today?.

Hey Joe..

Todd, yes. I really appreciate the kind words. Haven’t had an opportunity to work too much with you, but I enjoyed our conversations and certainly everyone from our firm wishes you the best of luck with your next adventure..

I appreciate that Joe very much..

Okay. A couple, one, I don’t know if I heard correctly was the fee income target for 2021 was at $15 million a quarter or $16 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 late a little bit more?.

Yes, the number is about $15 million is what we expect for quarter. You think that that spring back probably isn’t until the back half of the year. We do also expect to see the mortgage numbers continue to stay pretty healthy for most of the year as well..

Got it. Okay.

And then the long road that was on an ex-PPP basis, and then how do we think about potential volumes from the second round of the PPP here?.

Yes, that would be ex-PPP. So, core loan growth is low single digit. We’re just getting our arms around the initial applications with PPP book.

I would look for something, in the magnitude of maybe a third of what we did in round one, is the parameters around who’s eligible for the program have been tightened, although we are getting some interest from non-S&T customers, and we did not process those 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 PPP round two..

Sure. And in the direction of NIM here we were $338 million in the fourth quarter, I assume first quarter might look similar given some benefit of these deferred PPP fees.

Where does it head after the first quarter?.

Yes. I think first half we should see the relative stability in that core margin rate without the PPP. After that, we could – as we’ve run out of liability repricing that helps us out, we’ll be more left to – just kind of the loan pricing versus how that’s coming off versus the new.

So we could need some pressure on NIM on the back half of the year coming from the admin side..

Got it. Okay. And the last one I had was just the FDIC insurance expense. It’s off the wait a little bit here in the second half of the year.

Is there a good run rate for 2021?.

As we get better fourth quarter numbers that should improve, some of that was related to the asset quality metrics. So we do think that the current order is probably the best estimate going forward for now..

Thanks..

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

Do you have any closing comments you’d like to finish with?.

I just want to thank everyone for participating in today’s call. And we look forward to connecting with you at – I guess, Mark and Dave, will. But it’s been a real pleasure. And again, appreciate everyone’s 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..