S&T Bancorp Q2 2024 Earnings Call Transcript

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Provided by Quartr
July 18, 2024

There are 9 speakers on the call.

Operator

Welcome to the SMT Bancorp Second Quarter 2024 Conference Call. After the management's remarks, there will be a question and answer session. Now I would like to turn the call over to Chief Financial Officer, Mark Kochvar. Please go ahead.

Speaker 1

Thank you, and good afternoon, everyone. Thanks for participating in today's earnings call. Before beginning the presentation, I want to take time to refer you to our statement about forward looking statements and risk factors. This statement provides the cautionary language required by the Securities and Exchange Commission for forward looking statements that may be included in this presentation. Copy of the Q2 2024 earnings release as well as this earnings supplement slide deck can be obtained by clicking on the materials button in the lower right section of your screen.

Speaker 1

This will open up a panel on the right where you can download these items. You can also obtain a copy of these materials by visiting our Investor Relations website at stbankcorp.com. With me today are Chris McAmish, S&T's CEO and Dave Antolik, S&T's President.

Speaker 2

I would now like to turn the program over to Chris. Chris? Mark, thank you and good afternoon everybody and welcome all of you to the call. We appreciate the analysts being here with us and we look forward to your questions. I'm going to begin my remarks on Page 3.

Speaker 2

But before I do, I do want to take a minute to thank our employees, shareholders and others listening in on the call. To our leadership team and our employees, your commitment and engagement is what drives these financial results that we're going to discuss. These results are yours and you should be very proud. Our performance this quarter reflects our continued progress centered on S and T's People Forward purpose and more specifically how our focus on this purpose is delivering for our customers, shareholders and the communities we serve. As we've discussed before on this call, this purpose defines who we are and our values define how we do our work.

Speaker 2

All of this is connected to the 4 core drivers of our performance, the health and growth of our customer deposit franchise, delivering consistent solid credit quality, best in class core profitability, all of this underpinned by the talent and engagement level of our teams. This is where we are focused and this focus is what's delivering for our shareholders. To sum it up, we made strong progress on all four of our performance drivers as they've showed great progress and they produced the results that you will see in this deck. Turning to the quarter, our $34,000,000 in net income equated to $0.89 per share, up $0.08 from Q1. Our return metrics were excellent with a 15% ROTCE while our PPNR remained strong at 1.82 and the efficiency ratio was below 55% to 54.92%.

Speaker 2

Our NIM and NIM both improved versus Q1 as our net interest margin was at 3.85 which is very strong. This is a direct result of very solid customer deposit growth and mix shift in our deposits, which led to a moderating cost of funds. Mark will provide more detail here. Our credit quality remains stable to improving and Dave is going to dive more deeply here in a few minutes. He will also have additional detail provided on our multifamily and office CRE exposure and we'll also touch on the pickup we're seeing in our loan pipelines.

Speaker 2

Moving to Page 4, while loan growth was in line with previous guidance, while we saw meaningful deposit growth. On the deposit side, customer deposit growth was more than $150,000,000 in the quarter. This was after $75,000,000 of growth in Q1 and produced over 8.5 percent annualized growth. While mix shift continued $17,000,000 in DVA balance growth resulted in strong performance and overall DDA balances remained strong at 29% of total balances. The customer deposit growth allowed us to reduce wholesale deposits and borrowings by $85,000,000 which obviously has a positive impact on our net interest margin.

Speaker 2

I'm going to stop right there and turn it over to Dave and he can spend a little bit more time on the loan book and credit quality, then Mark will provide more color on the income statement and capital. I look forward to your questions.

Speaker 3

Well, thanks Chris and good afternoon everyone. If I can direct your attention to Slide 5 in order to walk you through our asset quality results for Q2. As presented, our allowance for credit losses grew by $1,300,000 in the quarter, which represents a modest increase from 1.37% to 1.38% of total loans. A number of factors influence this outcome. First, we are actively executing on our exit strategy with the 1 Western Pennsylvania relationship that I mentioned last quarter and have established a specific reserve for that credit of $2,900,000 during Q2.

Speaker 3

2nd, we continue to see improvement in our rating stack through reductions in our criticized and classified assets. Those C and C assets declined by 12% quarter over quarter and are down 29% year over year. That equates to a $107,000,000 reduction in the past 4 quarters. Finally, we experienced a net recovery of $400,000 during Q2. In addition, NPLs remained at a very manageable 45 basis points of total loans plus OREO.

Speaker 3

During this period of modest loan growth, our efforts continue to be focused on improving asset quality as a fundamental driver of our financial performance. Looking forward, we expect loan growth for Q3 to be in the low single digits, driven primarily by consumer and retail mortgage activities. As our pipelines for commercial and business banking grow, we do expect that that will point towards increased growth in Q4. Turning to Pages 6 and 7, we've included updates relative to our office and multifamily CRE portfolios. Starting with office, we saw a reduction in balances of $20,000,000 and the total number of loans in this portfolio quarter over quarter as loans in this category continue to amortize and payoffs occur.

Speaker 3

Highlights include small average loan size, diverse geography, manageable maturity concentrations and limited CBD exposure. Moving to multifamily CRE, where we continue to have a positive outlook for this segment in the markets that we serve. As a reminder, that includes Pennsylvania and the contiguous states of Ohio, Maryland and Delaware and performance of these assets continues to meet our expectations. During Q2, outstandings in this portfolio increased by approximately $25,000,000 primarily the result of construction loans converting to permanent loans. In addition, we added new construction commitments of $15,000,000 It's important to note that these new construction loans are underwritten to current credit standards, including 25% to 30% equity, LTVs below 65% and debt service coverage ratios in excess of 120 at 25 year amortizations and using current interest rates.

Speaker 3

We anticipate the construction completion and stabilization cycle to continue to put downward pressure on these balances as permanent financing options for these loans are available and include favorable financing terms including 30 year amortizations and extended interest only periods. I'll now turn the program over

Speaker 1

to Mark. Mark? Thanks, Dave. On next slide, the 2nd quarter net interest margin rate of 3.85 percent is up 1 basis point from the 1st quarter and net interest income increased as well, which represents an improvement from the last several quarters of declines. Strong customer deposit growth allowed to pay down to broker CDs and wholesale borrowings.

Speaker 1

Mixed changes continue to moderate with an increase in DDA for the quarter both point in time and average. This resulted in the slowing of the increase in the cost of funds shown on the bottom left to just 5 basis points in the 2nd quarter. We expect funding cost pressure to continue to moderate with net interest margin at or close to bottom now, not factoring any Fed increases. We are still asset sensitive on the front of the curve. And should the Fed decide to move rates lower, we would expect 2 to 3 basis points of net interest margin compression for each of the first couple of 25 basis point cuts.

Speaker 1

Moving on to non interest income, we saw improvement here, but it was primarily due to some seasonal changes in debit and credit card fees. We did recognize a $3,100,000 gain related to Visa Class B1 shares that we own. That is in the other category here. We took the opportunity to sell about $49,000,000 of lower yielding securities picking up about 3 70 basis points with an earn back of just over 2 years. Nonish expenses on NexSky declined $900,000 in the 2nd quarter compared to 1st.

Speaker 1

That's in line with our expectations. Most of the favorable variances here are timing related. We are experiencing higher than normal medical expense this year, especially in the 2nd quarter as a self funded plan, we have seen some higher claims. We expect our run rate though on the expense side to continue to be approximately $54,000,000 per quarter moving ahead. Lastly, on capital, the TCE ratio increased by 18 basis points this quarter.

Speaker 1

TCE remains quite strong due to good earnings and relatively small securities portfolio. All of our securities are classified as AFS. Capital levels position us well for the environment and will enable us to take advantage of organic or inorganic growth opportunities as we look forward to move into the latter part of this year. I would like to we had a question that came in prior to this call. It was related to the amount of pure floating rate loans that we have currently on the balance sheet and the yield on those loans.

Speaker 1

So right now, our balance sheet on the loan side, we have about 30, 39% of our loans are tied to prime or sulfur, an additional 25% are ARMs and the remaining 36% are fixed. In addition to that, we do have about $500,000,000 of swaps. If you factor that in, those are received fixed swaps. That would bring kind of that floating exposure down to about 33% of the kind of the net loan book if you factor that in. The yield on those, on the floating side is right at 8% on a blended basis.

Speaker 1

The arms are at about a 5.36% and the fixed rate is about a 5.18%. So with that, I'll turn the call over to the operator to allow further questions to be asked.

Operator

The floor is open for questions. Your first question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.

Speaker 4

Thank you. Good afternoon, guys. Thanks for taking my questions.

Speaker 2

Sure. Thank you.

Speaker 4

Yes, so I apologize, I heard most of your guidance, especially on Mark's side. But I think I missed the NIM before you talked about the rate cuts. Can you just repeat what you said about where you expect the NIM to go from here?

Speaker 1

Yes, I guess, we do expect some cost of funds pressure, but the NIM, we think we're really pretty close to the bottom here. So it might be plus or minus a couple of basis points either way, but we think that's kind of stabilized a little bit sooner than we had thought.

Speaker 4

Okay. So I guess it was a bit of a surprise to see the margin expand in the quarter and that was driven by the good performance on the funding side. And it seems like you lowered were able to lower broker deposits in FHLB. So I guess first, where are broker deposits in terms of balances at the quarter end? And then second, what do you think your abilities or opportunities to reduce those as well as the FHLB going forward are?

Speaker 1

Yes. So the at quarter end, we had another we had an additional 300,000,000 dollars of brokered and we still have about $200,000,000 in that BTFP program. That one doesn't mature until January. And it has a little bit of a favorable rate and take a couple of cuts before it would make sense to pay that off. It has a sub-five rate.

Speaker 1

The brokers, we'll look as depending on how the deposit and loan books go over the quarter. We have some maturing, I think over $100,000,000 maturing in Q3, that we should be able to reduce. We also have some floating rate brokers that are not CDs or money markets. Those we could reduce at any time, just depending on how the rest of the balance sheet looks.

Speaker 4

Okay, perfect. And then lastly, the balance sheet repositioning in the second quarter, when did that take place? And then what was sold and what was purchased if you have used those funds already?

Speaker 1

Yes. So, it was done in the latter part of June, so late in the quarter. So there's not a whole lot of impact of that in the margin. We sold $49,000,000 primarily a couple of treasuries and a few mortgage backed agency CMOs that we have or excuse me, commercial backed mortgages that we have. We've repurchased similar CMBS related assets and CMOs farther out the curve kind of with a 5, 6 duration level and picked up about 3 70 basis points on that trade.

Speaker 4

370 basis points. Okay, great. Okay, I'll step back. Thanks for all the detail.

Speaker 5

Sure.

Operator

Your next question comes from the line of Kelly Motta with KBW. Please go ahead.

Speaker 6

Hey, good afternoon. Great quarter.

Speaker 7

Thanks Kelly. Thanks

Speaker 6

Kelly. I was hoping thanks for the commentary about the loan pipeline, the commercial pipeline strengthening. Just wondering if you could give us additional color on what you're seeing with that. Is there any particular area where the pipeline is strengthening either by region or loan type? And what are you attributing that to?

Speaker 6

Is it the expectation of rate cuts? Is that impacting borrowers starting to come back with more demand, economic activity? Just any qualitative color on that would be excellent.

Speaker 3

Yes. It's a mix of activity and it's throughout our regions. I think there is some pent up demand relative to rates moving downward. So I think folks are with that anticipation of rates down, they're looking at possibility of refinancing or moving forward with projects now that there's some better visibility amongst our customers relative to rates.

Speaker 2

And Kelly, I'll just add to Dave's comments. This is Chris. I've had a number of conversations with our team leaders as Dave, Commercial Banking team leaders throughout the geography over the last as we were heading into the end of the quarter. And they're seeing a lot more activity in the marketplace. I would agree with Dave that it's across the board probably a little more C and I than CRE obviously given the state of CRE and our business banking pipeline continues to grow.

Speaker 2

I just think there's a feel, a sense almost a little bit more optimism out the marketplace from a customer base standpoint is part of it.

Speaker 6

Got it. That's super helpful. And then on the commercial real estate side, I appreciate that it was excellent here and you actually had net recoveries this quarter. But how are you feeling? It seems like the tone, not just on growth but also on credit, might be a bit more optimistic than last quarter.

Speaker 6

I'm hoping what are you still watching closely? Any pockets of weakness that we should keep in our sites

Speaker 3

here? The way we manage that risk is to look at what those results look like for those customers relative to current financing options, right? So if you have something that's in the midst of a 5 year ARM, maybe you're 2 years in, we re underwrite that to the current conditions and see what that cash flow looks like to get ahead of potential issues. And our performance relative to that kind of stress testing has been good. So we're happy with the results.

Speaker 3

And as I mentioned in my prepared comments, our underwriting standards have moved to be a little more conservative relative to loan to value. And we always have a kind of a plan B relative to refinancing of these assets or the sale of these assets. That's why we've stuck to things like 25 year amortizations in the multifamily space to give ourselves room in the event that we need to reposition an asset. The challenge in the CRE space is really construction costs and the borrowers and developers ability to get a decent cash on cash return given the cash flows that these assets and projects can produce. So the good ones will find a way to get a project done with additional equity and get a return and that's what we're seeing relative to the movement I described in our multifamily construction portfolio.

Speaker 3

And we'll continue to support them because we like the results that we see. Awesome.

Speaker 6

Thanks so much. I'll step back.

Speaker 3

Sure. Thanks, Kelly.

Operator

Your next question comes from the line of Matthew Breese with Stephens Incorporation.

Speaker 5

Hey, good afternoon, everybody.

Speaker 3

Hey, Matt. Hey, Matt. Hey.

Speaker 8

Mark, I appreciate the color on the floating rate exposure and the yields. What was interesting there was how low the fixed rate and the ARM portfolios are in the low 5% range. I guess my first question there is, 1, what are the new loan yields for those books? I'm assuming they're a good 250 basis points to 3 100 250 basis points higher. Yes, that's the first one.

Speaker 1

Yes. So new yields on the mortgage side, they're just under 7, probably about a 6.80 around there. And on the other kind of ARM books, they're also quite right around 7%.

Speaker 8

Okay. And as we think about that dynamic of the 5s, the low 5% rates resetting into the high 6s, is that helping the NIM outlook as we think about rate cuts later this year and into 2025? I mean cycle to date, your loan beta is kind of knocking on about 50%. Would you expect that to be better as we head into the next rate cutting cycle?

Speaker 1

Yes. So we generally see and expect to continue to see around 4 to 5 basis points on the loan side of repricing benefit before you get to any type of rate cuts. And that's just kind of the natural repricing of the fixed book and those ARM resets. The other thing that will begin to help us in 2025 starting at the end of the Q1 is that the $500,000,000 that we have in swaps, those are laddered out pretty much $50,000,000 a quarter starting in Q1 of 20 25. And so those will have a repricing or a maturity opportunity for us.

Speaker 1

Those are kind of in a negative position by anywhere from 250 basis points to 350 basis points. So we'll have an opportunity to reset those starting in late Q1.

Speaker 8

Great. That will

Speaker 3

support later. Very helpful.

Speaker 8

One of the things that was really nice this quarter was the provision with the net recoveries. I was hoping you could provide some color on how you think the provision will shake out for the back half of the year. And if you can't answer that directly, how comfortable you feel with the overall reserve level at 138 here?

Speaker 1

I think overall, I mean, we're by definition comfortable with that 138. We are seeing and Dave alluded to that is, over the past several years, we've been working with a much higher relative to peer amount of criticized and classified special mentioned substandard loans. That has forced us essentially to have a higher than peer ACL level. Those are improving quite a bit, as Dave mentioned, over $100,000,000 this year to date. So as that moves through that pipeline, the need for reserve begins to moderate.

Speaker 1

So we're seeing that already where that kind of the quantitative part of our model is directing us to a lower level of needed reserve. We do expect that to continue barring anything unexpected on the macro front. So that will provide continued support just from an ACL need standpoint. On the charge off standpoint, we're not we don't have anything on our sites other than the one significant credit that Dave mentioned. But that again can change at any time, but we're feeling pretty good about asset quality at this juncture.

Speaker 8

Okay, great. I appreciate that. And then with the balance sheet at $9,600,000,000 I know in past quarters you guys have provided plenty of detail on the Durbin impacts. One thing I was curious on is just the preference on how you cross. Is there a preference to do it organically or through M and A?

Speaker 8

And just love some color there.

Speaker 2

Yes. All of our plans matter to focus on that which we have direct control over, which is our organic growth. And so we're preparing to cross over as the result of our organic growth. And you think we had approximately $100,000,000 a quarter of assets that would take us between now and this time next year, right? And so we've been over the past 3 years, we've been firmly focused on building the foundation of our company, building the infrastructure to move through that level, so that we have we're in compliance with rules and rags and all the additional standards that are required.

Speaker 2

That being said, we believe we're more the marketplace is becoming more many more discussions relative to inorganic growth opportunities and that's a key component of our future and desire to be a bigger player in the markets that we serve and in this general geography. So it's an and bolt. We're not going to slow down organic growth to wait for something by the same token, we're preparing for that event should it happen for us.

Speaker 1

Okay. And then just my last one and tied to M

Speaker 8

and A is just what is your preference in terms of geography for deals or types of banks that look to partner with?

Speaker 2

Yes. So we're very focused on kind of the geography that we're in and kind of contiguous states. And so you could look as far south of here into the Maryland, West Virginia, Virginia area, East into Ohio. And then obviously here in Pennsylvania and the markets Pennsylvania and looking to expand there. Great.

Speaker 2

I'll leave

Speaker 5

it there. Thank you for taking all my questions.

Speaker 1

Appreciate it. Sure thing.

Operator

And your next question comes from the line of Manuel Nava with D. A. Davidson. Please go ahead.

Speaker 5

Hey, good afternoon. Can you talk about deposit pipelines a bit more and then the competition there? It seems like you might have a little bit increase in deposit costs, but you're still getting some nice flows. If you could just talk through that a bit?

Speaker 2

Yes. I'll start and then have Dave jump in because it's just so core to what we believe as a company and it was long before this dramatic rate rise in interest rates. We believe that the customers define themselves as to where they bank with it from their deposit relationship and our the customer experience, customer loyalty that we have along with we're big enough to have the product capabilities that we need. It's been a strategic focus of ours over the past few years and it's starting to pay dividends. So we've developed products.

Speaker 2

You may have I mean, we've talked about some of the work we've done on the treasury management side, not just with more people, but also product capability. That's both for our commercial customers and business banking customers. That's been a big focus of ours. We also have been very focused on our existing customer relationships and recognizing that we've got tremendous customer loyalty. And during a time of great disruption, our proactive outreach pays dividends for us.

Speaker 2

And so what we've seen is expansion of customer relationships throughout the company, our retail consumer customers, our business banking customers and our commercial customers, all getting a greater share of wallet with those relationships due to our focus as well as alignment with the loyalty. I think Dave can talk about activity levels and pipelines and things like that.

Speaker 3

Yes. Just to add to Chris' comments, if you look at Q2, the growth was really widespread across all of our divisions. The commercial, the treasury management that supports commercial and business banking as well as consumer. So the focus has been and will continue to be growing wallet share with the existing customer base. That being said, we are also in the business of attracting new clients as well.

Speaker 3

That activity has been, I'll call it, consistent for the last 6 months. We're seeing new opportunities. Those tend to be more rate competitive opportunities. So we feel that continuing to focus on the existing customer base, building out capabilities from a product and service perspective is going to propel us forward. And we still believe there's ample opportunity within the existing customer base to move the needle and continue to grow deposits.

Speaker 2

The other part of your question, Manuel, I think really related to kind of what's the competitive environment look like. And customers are still rate sensitive, but it's not at a kind of a fever pitch as it was as rates were moving up very quickly. I think there's more stability in the market. And therefore, we have the ability to go through our proactive outreach to have conversations that give us a better chance winning versus losing and doing it at a rate, at a rate and a fee structure that makes sense.

Speaker 5

That's really great color. In terms of the deposit flows, is that kind of where with the NIM kind of bottoming and maybe some stability here before rate cuts, is that a kind of where there could be a wildcard? Do you have borrowing pay down in your guidance or any excess deposit growth that pays down broker that pays down borrowings, could that offer a little bit upside on NII and NIM?

Speaker 1

Perhaps a little bit. We still have wholesale levels of around $500,000,000 So there's still some opportunity to replace those higher cost funds.

Speaker 5

Sure.

Speaker 1

Okay. That is kind of built that is somewhat built into where we're headed over the next several quarters.

Speaker 5

Okay, great. And if there's extreme excess that would be where it could potentially be some upside.

Speaker 1

I'd love to have that

Speaker 5

Has this changed your this better NIM? Has this changed your evaluation of where it could bottom at some point next year? We are going to have some I believe we're going to have some break cuts. Where do you think it could bottom and could that be a little bit higher than maybe expectations previously?

Speaker 1

Yes, I think, I mean overall, I think we landed at a bottom that's maybe around 10 basis points higher than we had anticipated. So our expectations for the impact on a per cut basis are kind of changed. So all equal, it would be like 10% higher, I think, for depending on how many cuts there

Speaker 5

are. That's great. That's transformative. Do you have can you just give us a color on the recovery? This is my last kind of question.

Speaker 1

I think it was more about that there weren't any charges. We typically have a certain small level of recoveries that our special assets folks are working on, but the fact that there was no significant charges at all in the quarter.

Speaker 5

Perfect. I appreciate that. Thank you. No further questions.

Speaker 2

Thank you, Ben.

Operator

Your next question comes from the line of Daniel Cardenas with Janney. Please go ahead.

Speaker 7

Good afternoon, guys.

Speaker 3

Hey, Dan.

Speaker 7

Mark, I'm sorry, I missed your comments on the criticizing to where those levels were at the end of the quarter versus last quarter.

Speaker 3

Yes. So we're down 12% quarter over quarter and 29% year over year.

Speaker 1

I think the dollar amount for the

Speaker 3

quarter was about $38,000,000 It was about $38,000,000 for the quarter and $107,000,000 year over year. Great. And we think there's still some room to improve there as well.

Speaker 2

And that goes right back to that. We talk about our 4 drivers and that number 2 is asset quality and the entire team is focused on it and we're really working proactively to enhance and build relationships that represent long term opportunities for us and those that don't necessarily fit our either credit profile or where we're headed long term. Those are those that we're moving out. And the results are going to speak for themselves so far.

Speaker 7

Got you. Okay, perfect. And then on the fee income side, so the core number that we saw this quarter backing out the Visa transaction and the securities, the offset on the securities side, is that kind of a good run rate to build off of here for the back half '24?

Speaker 1

Yes. We'd expect around that $13,000,000 a quarter level.

Speaker 7

Okay, perfect. And then what was your AOCI number for this quarter?

Speaker 1

It's $93,000,000

Speaker 7

Okay. All right. Perfect. Perfect. So then given, I think it was Dave's comments that you're kind of looking for low single digit growth in Q3.

Speaker 7

Does that trend kind of carry into Q4, maybe not so much mortgage driven to maybe more commercially driven?

Speaker 3

Yes. I think that's accurate, Dan.

Speaker 2

That's what we do. David talked about relative to the growth in the pipeline and what we're seeing. There's seasonality to it and there's better activity. So it's a

Speaker 5

Okay, great. All right. That's all I

Speaker 7

have right now. All my other questions have been asked and answered. So thank you guys. Thank you. Thanks,

Speaker 5

Dan. I would like

Operator

to turn the call over to Chief Executive Officer, Chris McComish for closing remarks.

Speaker 2

Okay. Well, again to the group on the phone, great questions. Really appreciate the and most importantly for me and Dave and Mark and everybody, it's the continued trends that we're seeing, the engagement level of our teams, the commitment that they have to our customers, all of that represents a lot of positivity for us. And we appreciate your interest in our company. So have a great rest of the day.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now

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S&T Bancorp Q2 2024
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