S&T Bancorp Inc (STBA) 2024 Q2 法說會逐字稿

Welcome to the S&T Bancorp second-quarter 2024 conference call. (Operator Instructions)

Now I would like to turn the call over to Chief Financial Officer, Mark Kochvar. Please go ahead.

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 Exchange Commission for forward-looking statements that may be included in this presentation.

Copy of the second quarter 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. This will open up a panel right where you can download these items. You can also obtain a copy of these materials by visiting our Investor Relations website at stbancorp.com.

With me today are Chris McComish, S&T's CEO; and Dave Antolik, S&T's President. I would now like to turn the program over to Chris. Chris?

Mark, thank you, and good afternoon, everybody, and welcome to 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. 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&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.

All of this is connected to the four 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 million in net income equated to $0.89 per share, up $0.08 from Q1. Our return metrics were excellent with a 15% ROTCE (sic - see slide 3, "ROTE"), while our PPNR remained strong at 1.82%, and the efficiency ratio was below 55% at 54.92% (sic - see slide 3, "54.94%"). Our NIM and NII 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 will also touch on the pickup we're seeing in our loan pipelines.

Moving to page 4, well, 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 million in the quarter. This is after $75 million of growth in Q1, and produced over 8.5% annualized growth, while mix shift continued $17 million in DDA 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 million, which obviously has a positive impact on our net interest margin.

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.

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 $1.3 million in the quarter, which represents a modest increase from 1.37% to 1.38% of total loans.

A number of factors influenced this outcome. First, we are actively executing on our exit strategy with the one Western Pennsylvania relationship that I mentioned last quarter and have established a specific reserve for that credit of $2.9 million during Q2.

Second, we continue to see improvement in our rating stack through reductions in our criticized and classified assets. Those C&C assets declined by 12% quarter over quarter and are down 29% year over year. That equates to a $107 million reduction in the past four quarters.

Finally, we experienced a net recovery of $400,000 during Q2. In addition, NPLs remain at a very manageable 45 basis points of total loans plus OREO. 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 million and the total number of loans in this portfolio quarter over quarter as loans in this category continue to amortize and payoffs occur. 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 million, primarily the result of construction loans converting to permanent loans. In addition, we added new construction commitments of $15 million. It's important to note that these new construction loans are underwritten to current credit standards, including 25% to 30% equity. LTV is below 65%, and debt service coverage ratios in excess of [$120 million] at 25-year amortization and using current interest rates.

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 to Mark. Mark?

Thanks, Dave. On next slide, the second-quarter net interest margin rate of 3.85% is up 1 basis point from the first quarter, and net interest income increased as well, which represents an improvement from the last several quarters of declines.

Strong customer deposit growth allowed paydowns of brokered CDs and wholesale borrowings. Mix 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 second 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.

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 $3.1 million gain related to Visa Class B-1 shares that we own. That is in the other category here. We took the opportunity to sell about $49 million of lower-yielding securities, picking up about 370 basis points with an earn back of just over two years.

Non-interest expenses on next slide declined $0.9 million in the second quarter compared to first. 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 second 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 million per quarter moving ahead.

Lastly, on capital, the TCE ratio increased by 18 basis points this quarter. 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. So right now, our balance sheet, on the loan side, we have about 39% of our loans are tied to prime or SOFR, an additional 25% are ARMs, and the remaining 36% are fixed.

In addition to that, we do have about $500 million of swaps. If you factor that in, those are received fixed swaps. That would bring that floating exposure down to about 33% 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, the ARMs are at about 5.36%, and the fixed rate is at about 5.18%.

So with that, I'll turn the call over to the operator to allow for other questions to be asked.

(Operator Instructions) Daniel Tamayo, Raymond James.

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

Yeah. 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.

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've lowered 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 there?

Yeah. So at quarter end, we had another -- we had additional $300 million of brokered, and we still have about $200 million in that BTFP program. That one doesn't mature until January, and it has a little bit of a favorable rate to take a couple of cuts before it would make sense to pay that off. It has a sub-5 rate.

The brokered, we'll look depending on how the deposit and loan books go over the quarter. We have some maturing -- I think over $100 million 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. It's just depending on how the rest of the balance sheet looks.

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?

Yeah. 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 million, 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 five, six duration level and picked up about 370 basis points on that trade.

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

Sure.

Kelly Motta, KBW.

Hey, good afternoon. Great quarter. 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? 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.

Yeah. 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 the possibility of refinancing or moving forward with projects now that there's some better visibility amongst our customers relative to rates.

And Kelly, I'll just add to Dave's comments. this is Chris. So I've had a number of customer conversations with our team leaders as has 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.

So I would agree with Dave that it's across the board, probably a little more C&I than CRE obviously, given the state of CRE and our business banking pipeline continues to grow. I just think there's a feel, a sense almost a little bit more optimism out in the marketplace from a customer base standpoint as part of it.

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 maybe a bit more optimistic than last quarter, I'm hoping. What are you still watching closely? Any pockets of weakness that we should keep in our sites 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 five-year ARM maybe your two 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. 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 multi-family 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 multi-family construction portfolio. And we'll continue to support them because we like the results that we see.

Awesome. Thanks so much. I'll step back.

Sure. Thanks, Kelly.

Matthew Breese, Stephens Incorporation.

Hey. Good afternoon, everybody.

Hey, Matt.

Hey, Matt.

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, one, what are the new loan yields for those books? I'm assuming they're good 250 to 300 -- 250 basis points higher. Yeah, that's the first one.

Yeah. So new yields on the mortgage side, they're just under 7%, probably a 6.80%, around there. On the other ARM book, they're also kind of right around 7%.

Okay. And as we think about that dynamic of the low-5% rates resetting into the high-60s, 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?

Yes. 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 it'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 '25 starting at the end of the first quarter is that the $500 million that we have in swaps, those are laddered out pretty much $50 million a quarter starting in first quarter of '25. And so those will have a repricing or a maturity opportunity for us.

Those are in a negative position by anywhere from 250 to 350 basis points. So we'll have an opportunity to reset those, starting in late Q1. That we will report later.

Okay. Very helpful. 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 do you feel with the overall reserve level at 1.38% here?

I think overall, I mean we're, by definition, comfortable with that 1.38%. What 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 mention substandard loan. That has forced us essentially to have a higher-than-peer ACL level.

Those are improving quite a bit, as Dave mentioned, over $100 million just year to date. So as that moves to that pipeline, the need for reserve begins to moderate. So we're seeing that already, where 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 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 junction.

Okay. Great. I appreciate that. And then with the balance sheet of $9.6 billion, I know in past quarters, you guys have provided plenty of detail on the Durbin impact. 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&A? Just love some color there.

Yeah. All of our plan’s matter are 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 million a quarter of assets that would take us between now and this time next year, right?

And so we've been -- over the past three years, we've been firmly focused on building the foundation of our company, building the infrastructure to move through that level so that we we're in compliance with rules and regs and all the additional standards that are required.

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 our desire to be a bigger player in the markets that we serve and in this general geography. So it's an end bolt. We're not going to slow down organic growth to wait for something that could happen down the future. By the same token, we're preparing for that event should it happen for us.

Okay. And then just my last one and tied to M&A. It's just what is your preference in terms of geography for deals or types of banks that you look to partner with?

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

Great. I'll leave it there. Thank you for taking all my questions. Appreciate it.

Sure thing.

(Operator Instructions) Manuel Navas, DA Davidson.

Hey, good afternoon. Can you talk about deposit pipelines a bit more and 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.

Yeah. 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 rise in interest rates. We believe that the customers define themselves as to where they bank from their deposit relationship and 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. 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.

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.

Yeah. 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 consumers. 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. That activity has been, I'll call it, consistent for the last six 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.

The other part of your question, Manuel, I think were related to what's the competitive environment look like. And customers are still rate sensitive, but it's not at a kind of a fevered 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, through our proactive outreach, to have conversations that give us a better chance of winning versus losing and doing it at a rate in a fee structure that makes sense.

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

Perhaps a little bit. I mean, we still have wholesale levels of around $0.5 billion. So there's still some opportunity to replace those higher-cost funds.

Sure. Okay.

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

Okay. Great. And if there's extreme access that would be where it could potentially be some upside.

(inaudible)

Has this changed 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 rate cuts. Where do you think it could bottom, and could that be a little bit higher than maybe expectations previously?

Yeah. 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 hadn't changed. So all else equal, it would be like 10 higher, I think, depending on how many cuts there are.

That's great. That's transformative. Do you have -- can you just give a little color on the recovery? This is my last question.

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

Perfect. Appreciate that. Thank you. No further questions.

Thank you, Manuel.

Daniel Cardenas, Janney.

Hey, good afternoon, guys.

Hey, Dan.

Mark, I'm sorry. I missed your comments on the criticized and classified levels that you made earlier. Can you maybe just repeat those for me? I'm just trying to get a sense as to where those levels were at the end of the quarter versus last quarter.

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

I think the dollar amount for the quarter was about $38 million.

It was about $38 million for the quarter and $107 million year over year.

Okay, great.

And we think there's still some room to improve there as well.

And that goes right back to that -- we talked about our four drivers and that number two 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 of opportunities for us that those that don't necessarily fit are either credit profile of where we're headed long term. Those are those that we're moving out. And the results speak for themselves so far.

Got you, 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 security side, is that a good run rate to build off of here for the back half of '24?

Yes. We expect around that $13 million a quarter level.

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

$93 million.

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, does that trend carry into Q4, maybe not so much mortgage you are going to do maybe more commercially driven?

Yeah. I think that's accurate, Dan.

That's what we do. Dave talked about relative to the growth in the pipeline and what we're seeing. There's seasonality to it and there's better activities.

Okay, great. All right. That's all I have right now. All my other questions have been asked and answered. So thank you, guys.

Thank you.

Thanks, Dan.

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

Okay. Well, again, to the group on the phone, great questions. Really appreciate the dialog and your engagement with us. If you've got other follow-up, feel free to reach out.

We're darn proud of this quarter. 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.

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