Q2 2022 S&T Bancorp Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the SMT Bancorp incorporated second quarter earnings Conference call.
At this time, all participants have been placed on a listen only mode and we will open up the floor for questions and comments. After the presentation. It is now my pleasure to turn the floor over to your host Marc <unk>, Sir the floor is yours.
Thank you very much and good afternoon, everybody. 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 is on the screen in front of you. This statement provides the cautionary language required by the Securities Exchange Commission for forward looking statements that may be included in.
This presentation a copy of the second quarter of 2022 earnings release can be obtained by clicking on the press release link on your screen or by visiting our Investor Relations website at Www Dot SP Bancorp Dot com.
We will be reviewing an earnings supplement slide deck as part of the presentation. You can obtain a copy of those slides on our website under events and presentations second quarter 2022 earnings conference call click on our second quarter 2022 earnings supplement link.
With me today are Chris <unk>, <unk>, CEO , and David Antolik, S&P's President I'd now like to turn the program over to Chris Chris Mark. Thank you and good afternoon, everybody and welcome to our second quarter call really appreciate you being with US and look forward to your questions afterwards.
Starting on page three and before getting into the numbers I do want to take a.
Just a moment of personal privilege as I have essentially been here for one year with the company while our company at the same time is celebrating our 120 or 120 year anniversary is obviously been a year of significant change both internally and externally and for that I need to recognize.
Our employees through Pandemics and hybrid work inflation challenges and a new CEO .
We stayed focused and committed to our customers. This is evidenced by yet another form of external recognition. Following on the heels of our J D Power award for retail customer experience that we received in April we announced this week a best in state bank for the state.
Pennsylvania Award from Forbes.
We certainly don't take this type of recognition lightly as it is a clear proof point around the customer trust that's embedded in this company from our customers both our customers as well as the markets. We serve and for me. It's the best reflection of the talent level of our team and its the position you.
Want to be and as a banker during more uncertain economic times.
As you may recall from our previous discussions my primary focus has been to strengthen our foundation built on S&P's distinctive customer trust and improve the core of the organization, including safety and soundness, while positioning our company for further growth and impact in the marketplace.
I've been clear throughout that our financial performance and results will be driven through a focus on building and enhancing employee engagement and the engagement and commitment of our teams to deliver for customers and that will rise and fall on the effectiveness and the work that we're doing as leaders.
We've made a conscious effort here at S&P over the past 12 months to create a blend of new talent into the organization as well as providing promotional up an expanded leadership opportunities for talented leaders already here at S&P.
Its actually reflected of the three by the three of US on this call between Dave and Mark We've got more than 60 years of S&P experienced and me being here new for a year, but taking that combination of outside industry expertise with deep <unk>.
Knowledge and knowledge of the markets that we serve and how we win and who we are as a company is creating a great recipe for success as we move forward today. It's also reflected in some of the new roles that we have in the company, including both of our heads of commercial and consumer banking.
Our head of marketing and customer experience.
Our head of our Chief Human Resources Officer.
As well as the top two individuals both running our credit risk management organization and our risk management organizations. This blend of talented individuals committed to FMT and the customers we serve.
I can't be more excited about the future and the team that we built.
As well as the progress we're seeing to date.
Like here's a couple of highlights from the quarter's results $29 million of net income meaningful year over year and quarter over quarter increases in VPN are driven through significant margin expansion.
Additionally, we've seen further declines in our NPA levels and improvement in quality credit quality with NPA is down 35% linked quarter. This has been a significant priority for our company and will continue to be so we also saw solid consumer loan growth in the quarter I am particularly.
Pleased by this I've talked about this last quarter, but this is the result of a strategic focus of our organization to deepen customer relationships. These are customers that have meaningful relationships with us these lending opportunities represent expansion of those relationships.
As we move forward our foundation buildings remains the focus enhancing capabilities to deliver for customers with an eye towards safety and soundness, all underpinned and led by a great team.
As I said in the beginning I'm honored to be here and I'm excited about who we are our team and our ability to deliver.
I look forward to your questions and again I'll turn it over to Dave and Mark for more details.
Well, thank you, Chris and thanks to all on the line for your interest in our progress Slide four provides an overview of quarterly balance sheet changes the reduction in cash was in part. The result of an increase in loans of $107 million. When you exclude triple T. As Chris mentioned this was primarily driven by consumer loan balance growth.
This activity was the result of newly originated production in our mortgage division along with a combination of increased utilization and newly originated debt consolidation activity in our home equity book. This is all focused on helping our customers manage their payment obligations in a rising rate environment and our commercial book we saw C&I.
Balances increased by $20 million as our customers continue to actively manage cash and to focus on rebuilding inventory levels as supply chain issues stabilize for the quarter C&I utilization rates increased by approximately 2% to 43% as a reference point utilization peaked at about 44.
5% in the months, leading up to the pandemic and our CRE book, we continue to see reductions.
We saw a reduction to the tune of $65 million during the quarter as projects continue to be sold and refinanced into the permanent market looking forward loan pipeline activity has shifted with mortgage Inc, and super pipelines down from the end of Q1, and commercial and business banking pipelines up compared to Q1 in total.
We would anticipate Q3 loan activity to produce results similar to what we saw in Q2.
Production in deposits of $348 million is the primary driver of our cash reduction. It is important to note that the majority of this change was focused in approximately highly 30 highly interest rate sensitive depositors and our strategy to reduce deposit conscience concentrations and manage manage dip.
<unk> cost also factoring into this change where the sunsetting of a deposit offering that was tied to the fed funds rate and the result of our strategy, referring customers into wealth products as it means that prevented providing better yields, particularly to our municipal and corporate customers and building off balances and fee income.
We're very pleased with the health of our deposit franchise and this is best reflected in our noninterest bearing demand and savings balances, which in total experienced a modest increase this quarter.
Other balance sheet items worth, noting are at $41 million increase in securities and $30 million reduction in Triple P. Balances are signaling that we are nearing the end of that very successful program here at S&P.
Turning to page five you will see that our asset quality statistics continue to improve highlighted by a significant reduction in our NPA by nearly $21 million or 35% in the quarter included in these results is the complete resolution of one C&I credit that had taken nearly two years too.
Complete further highlighting our progress as the year over year reduction in NPA has a $75 million or nearly 66%.
Net charge offs for the quarter totaled $3 million or 17 basis points.
For the quarter move.
Moving forward, we remain focused on monitoring customer liquidity customer margins collateral values and the impact that this might have on customer cash flow I'll now turn it over to mark to provide more detail on the reserve for the quarter and additional comments on our performance great. Thanks, Dave.
The ACL decrease overall in the second quarter by four basis points to 139%.
High resolution mentioned by Dave resulted in a charge off in the second quarter that we had a specific reserve for at the end of Q1.
This resulted in a decline in the ACL, which was partially offset by a modest increase in the qualitative part of our ACL. Our outlook has become more cautious given broader economic concerns related to higher rates and the potential for a recession.
Net interest income increased by $7 5 million or 11% compared to the first quarter ex PPP increase was $8 2 million or 12, 4%.
<unk> continues to wind down for us with just $11 7 million outstanding and only about $300000 apiece remaining at the end of the second quarter.
This margin rate is up 40 basis points 42, ex PPP as loan yields improved by 34 basis points.
Asset mix improved with lower cash and the cost of interest bearing deposits was flat compared to the first quarter.
In mid June we made our first adjustments to core money market rates and introduce short term deed vessels as part of our core deposit retention strategy.
We've experienced only modest pressure to make exceptions, which we evaluate individually based on customer relationship.
Our loan portfolio is over 50% tied to short term rates and we have moved beyond the impact of our floors. So going forward every 25 basis point increase translates into approximately 9 million of annualized additional interest income.
Our net interest income and net interest margin outlook for the next few quarters remains positive given expectations for additional short term rate increases.
Noninterest income decreased by $2 6 million in the second quarter compared to the first the largest item is decline in the fair value of the assets in our nonqualified benefit plan, which relates to stock market performance.
This was a negative $1 4 million in the second quarter compared to a negative <unk> 4 million in the first quarter, resulting in a $1 million quarter over quarter unfavorable variance.
This also shows up as a reduction in salaries and benefit so it's P&L neutral.
Mortgage banking decreased by <unk> 5 million compared to the first quarter as we directed the majority of our production to the portfolio total mortgage production was actually higher in the second.
By almost 25%.
Agent fees were essentially flat despite the drag of lower stock market as activity continues to be very good as we engage with our customers.
We expect the mortgage and wealth the income numbers to be under some pressure for the remainder of the year, resulting in a lower quarterly fee outlook of 14% to $15 million.
Expenses were up by $1 million compared to the first quarter salary and benefits increased primarily due to higher incentives related to our improved performance and also elevated medical costs.
Improved revenue drove the efficiency ratio lower by 200 basis points and resulted in positive operating leverage our quarterly expense expectations remain in the 49% to $50 million range.
We have strong capital levels and are well positioned for growth, we executed just over $4 million in buybacks during the quarter and we will continue to look for opportunities depending on economic conditions, our financial performance and the price of our stock we have approximately $33 3 million of repurchase capacity remaining in our buyback authorization.
Thanks, very much at this time I would like to turn the call over to the operator to provide instructions for asking questions.
Thank you ladies and gentlemen, the floor is now open for questions. If you wish to ask a question. Please press star one on your phone at this time.
We asked about posing your question you please pickup your handset.
Speaker phone to provide optimum sound quality once again, please press star one on your phone at this time, if you wish to ask a question.
Please hold while we poll for questions.
And the first question is coming from Daniel Tamayo from Raymond James.
Daniel Your line is live.
Good afternoon, everyone.
Hello.
Maybe we can.
Okay.
Yes, I got the fee income and expense guidance here at the end.
Did you give.
<unk> expectations for NII or the margin.
Not specific I mean, given that outlook, we do have a better read on on the interest income side.
Of that the deposits and the timing of and the <unk>.
Reaction of our customers is a little bit harder to predict.
But we do we do expect that the NIM and net interest income to increase fairly significantly or at least for the next two quarters.
That stops us.
As expected by the market, we would then expect net.
Net interest income.
To come down slightly as pricing catches up over time.
Got it.
I guess, maybe digging a little little further into the NIM in particular there.
Looking historically you guys are I guess, if you if you do continue to see some pretty substantial expansion in the next couple of quarters as rates rise as expected here.
It will take you to levels on the margin that you haven't seen in quite a while obviously the.
Deposit base has.
Improved substantially over the last few years.
Right.
How are you thinking about that level of performance on the margin relative to S&P, historically and how the biggest drivers of that.
Yes.
It looks like the loan portfolio mix is pretty similar as it is this simply a function of the.
The deposit base being better.
If so.
Deposit betas to be.
<unk>.
Thanks.
Question, but.
And I think youre right on the loan side.
Similar we've always had a fairly high concentration in the floating rate.
Area I think the difference will come in deposit we have much higher demand deposit levels than we've ever had previously.
As we had talked about before we relied historically on a product.
Tied to the fed funds rate that no longer is the case that just.
Our regular money market and also historically, we've had a lot more borrowings than we currently have most of those were floating rate borrowings.
So the liability side.
We're able to manage that successfully will be the differentiator in both the improvement in the net interest income and margin and how much of that over time, we're able to retain.
Okay. That's very helpful. I appreciate it.
This is Chris I'll, just add we spent we're spending a lot of time talking about this.
The health of that deposit franchise and the importance of it not just from the financial results, but what it says about the relationship with customers and.
That's that's where the loyalty comes in Thats, where our work is so to see things like external recognition around that.
It feels pretty good right now in the environment that we're in and we will continue to maintain that focus on the deposit franchise.
Move that we made relative to that product Mark talked about that was tied to more market rates that was a proactive decision that we made towards the end of last year.
Recognizing that there are alternatives for our customers that we can help them with Dave mentioned being able to move some things off balance sheets for customers and then being able to then help control the margin a little bit better.
By linking that product to the to.
To the Treasury.
Market, so theres some strategic decisions that we've made as well as just being understanding the importance of paying attention to the deposit franchise is reflected in our customer relationships.
That's very helpful. Chris I appreciate it.
I hope overlap on what you just said, but.
You talked about in the release.
Letting rate sensitive it's run off.
The loan deposit ratio jumped up pretty.
Significantly in the quarter because of that and the good loan growth.
How do you think about the interplay there.
Comfortable.
<unk> deposits come down or is that portfolio balances in that rate sensitive product.
Small enough now.
Focus on growth from here.
Yes, I mean, historically, we've run over 100% I think are are.
Appetite for that is not what it probably used to be and we'd probably be more comfortable closer to where we are now so our focus right. Now is is on retention.
And we'd like to see that loan to deposit stay more stable at this level or even lower as we.
Put more effort on that cultivating that deposit franchise.
Okay terrific.
I apologize.
Just one cleanup question here did you mentioned, how the fair value changes were in the quarter.
The bond portfolio.
It played in the noninterest income and expenses.
It was for the quarter it was $1 million for.
Quarter over quarter, it was $1 million because last quarter, we also had a $4 million.
As well.
Perfect.
Current quarter.
Okay terrific. That's all I had thanks, so much for all of it.
Thanks, Dan and thanks, David.
Thank you and the next question is coming from Michael Perito.
Okay VW Michael your line is lives.
Hey, good afternoon guys.
Hey, Mike.
Thanks for taking my questions I wanted to start on the credit side, obviously, just looking at that.
Over the last six quarters tremendous improvement.
Just as we look at the towards the outlook.
And even more line of sight on anything else kind of larger that you guys are working through that could impact our financials in the back half of the year and then just secondly to that I noticed the comment in the deck about how.
Thank you might've increase some of the qualitative macro factors in your reserves just curious if you could.
Could you expand a little bit more on kind of what youre thinking in the reserve as a percentage still stepped down a bit but just curious where you think that could kind of stabilize here just given what you know today.
Yes, I'll take the first part of the question Mike. So if you look at what we see heading into the second half of the year in terms of individual.
Credit issues, we continue to work the NPA downward.
And we would expect that to continue.
Formation has been far lower than.
<unk>.
Then what we have been able to move out so the net effect is improvement in the NPA book.
But we are very cautious about particularly in the commercial book, where you have a lot of exposure and I mentioned in my prepared comments monitoring liquidity.
Inventory levels are high.
Folks rebuild inventories in order to keep up with.
Sales expectations.
The value of that collateral then.
As we see some risk in that being overvalued. So we're very cautious on how we grow with our customers and monitor those activities very very closely.
The consumer book, we know there are pressures from a credit perspective on folks in terms of their again their obligations and their ability to make payments. So we are working a lot on helping our customers with.
With managing that process.
There is a fair amount of uncertainty from a macro environment, but we do know that with the fed each fed increase comes additional credit pressure and in cash flow pressure on many of our customers.
So far we haven't seen it manifest itself in.
Additional deterioration.
On an AD hoc basis, there's a lot of this is just anecdotal and conversations with commercial clients and customers and folks in the branch world.
But we do know that there will be pressure as we as we move forward and I think thats reflective and it reflected in our qualitative analysis.
So this is Mike the qualitative piece.
A large part of that was driven just by that reasonable and supportable forecast.
Element in there we saw a little bit of an uptick in the unemployment rate.
Historically low but.
From a management perspective, when we look at that given the concerns out there on the inflation with IV for a recession and we started to make some adjustments related to that and also just some concerns we have with with certain portfolios, where there may be more stressed going forward. We've also made a few adjustments.
Prior prior to this strong rates up in a recession fears I would have said that we would expect the risk there.
Come back to sort of pre.
Pre pandemic post seasonal levels, which for us is maybe around $1 10, or so but given the outlook I guess I wouldn't expect us to get there.
That's able to engineer a nice soft landing for us post that we could potentially get to something that looks like.
That low low 1% area.
Okay.
Thanks, Mark and then secondly, just.
You spend a minute on capital here.
Obviously, you guys have been insulated relative to a lot of peers on these <unk> impacts the tangible capital and book value levels.
<unk>.
Youre Reg ratios leverage specifically took a nice step ups at a very healthy level Youre npa's down your cash balances are still high the balance sheet looks conservative I know it.
It'd be nice to have a little bit more clarity on the macro but I feel like we're just kind of in as perpetual environment.
Can we get it.
I'm thinking about the buyback here.
Like the balance sheet relative to when we were asking you. This question a year ago.
Is it a really strong position.
We saw that the activity in the quarter do you think that could continue for the near term here and just any other broader thoughts around capital deployment would be great.
Yes.
Again, I think a quarter ago.
Probably said it was unlikely that we would we would do any buybacks in the fact that we started to do a little bit towards the end of the quarter as indications that we're taking a much harder look at that especially given even though the out like you said the outlook is is tough, but our we expect our earnings to be to be.
Good over the next several quarters, which should be supportive.
The capital levels.
Which then should support the buyback so I think we're looking at it a little bit more seriously now than we were in past quarters, but again with an eye on.
On what the macro environment does.
But.
Again, we'll probably take a much harder look in the second half here.
Hey, Mike It's Chris.
All these things together right focusing on safety and soundness, focusing on the credit book focusing on the deposit book all of those things represent the customer relationships and helping guide them through through these times and the strength of our balance sheet gives us not only the ability to work through these issues, but creates optionality for us.
As we move forward so.
And that reason.
The reason to be optimistic as we are as we're heading towards the second half of this year.
Great.
Thank you guys I appreciate it.
Thanks, Mike.
Thank you and the next question is coming from Russell Gunther from D. A Davidson Russell your line of lives.
Hey, good afternoon guys.
Hey, Ross.
Chris Congrats on the one year anniversary I.
I guess as you look forward maybe.
Maybe circle back to some loan growth comment the mix so.
<unk> was more consumer <unk> looking more commercial Chris as you look ahead, maybe bigger picture strategically any updated thoughts on what you think the right mix is for S&P going forward, yes.
<unk>.
A little bit about foundational lead who are we as an organization and what is it that we are distinctive and really good at.
My opinion is we've got it we've got a very strong commercial bank from the standpoint of ability to grow that vested in.
Human beings that are talented and known respected and delivering in the marketplace. So.
The leadership changes that we've made from a leadership standpoint within commercial banking your significant both of our head of commercial banking as well as our newly appointed Chief operating officer in commercial banking our field leadership teams.
A group of people that have got tons of confidence in from the standpoint of being out in the marketplace and delivering so that middle market commercial focus in CRE focus will continue to be really important to us we have a for the size of our company, we have a sizable business bank and those are the.
The smaller company, let's call it around $10 million in revenue.
A really strong and deep team of business bankers that I think that we have opportunities to build capabilities around not just in the asset generation, but more importantly, going back to the deposit focus on Pos.
Deposit rich.
<unk> of the market that is highly dependent upon physical distribution, both human beings in the branches that we have so we will continue to emphasize that area of the company.
We're going to be bringing in some additional capabilities from a treasury management and payments capability, we've got to build some things over time, but asset growth in the commercial space.
Continue to be important for us and it is how we can be distinctive in the marketplace.
From a name recognition standpoint, as well as his reputation foundational Lee our deposit book is very much rooted in our consumer business and those consumers who are giving us the routes from J D power in Forbes and all of that.
Tells me that we've got a story to tell David and I were talking earlier today, Dave makes a statement to be but we got to be more bolt and we've got to take the opportunity to.
Who we are as an organization still capabilities to build we've got functional capabilities from a digital banking standpoint that will continue to enhance and grow over time.
But the foundation really of <unk>.
A year later.
Got a team here that im really excited about now we're going to do.
Our attention and the focus is on some of those foundational opportunities.
I appreciate the commentary from a volume perspective ex PPP, you guys around 6% annualized and.
Comments suggest a similar result for <unk> so.
Is that the right way to think about SMT going forward is that kind of mid single digit results.
The near term macro headwinds put that at risk in the short term or are there anything strategic contemplated to try to push that into the high single digits over time.
I think theres so much.
There is a lot of variability externally in the market right now and so we're going to control those things that we can control and that is the number of the talent level of our team and the capabilities.
They have.
Respond accordingly, accordingly to the.
The marketplace as we see it.
And our ability to respond is very much dependent upon our financial condition and the strength of our balance sheet and all of the things that we've talked about so.
Growth for the sake of growth and.
In an environment like this is not necessarily something that we're going to put at the top of our list, but we certainly want to be opportunistic and to be opportunistic you've got to have foundation underneath you.
To make that happen.
Helpful. Thank you and then just last one to follow up on the deposit beta conversation.
I appreciate the guide for every 25 basis points.
Could you share your thoughts on what your through the cycle deposit beta might be.
Go to that once all of the heightened or any kind of digested, where do you think that total deposit beta through the cycle shakes out.
Yes, it's really just a guess we look to our prior performance.
As a starting point.
So with a better mix if we apply beta is it a little more granular level beyond just the total.
Better mix gives us a better number compared to what we what we did last we did lap lap.
<unk> cycle.
So depending how you measure it.
You go from kind of go from kind of mid <unk> or higher maybe to.
South south of 30%.
The other.
Factor in here is that just the pace and the size of the change being so different.
We may not have had time for the cumulative beta is to really find their way all the way through last cycle and to the extent. This one goes a little bit farther we will that will that be an impact or will it get cut off because of the recession fears and people want.
Sector get increased rates. So so my best guess is certainly better than last time, probably something less than 30%.
But again I might have a different answer next quarter.
Ross I think to add to Mark's comments, if you compare where we are today.
In terms of our overall funding sources were a much much better position in a rates up environment than we were through the last cycle, we were forced to compete on deposit rate.
Right. So for us it's not just deposit beta I mean, S&P took a step back and looked at that.
Costing liabilities data or the funding data that was higher still for us again because of the borrowing position that was mostly floating that we had so without that.
This is a better position there's more in that deposit beta than there was last time around.
Everything else equal.
That borrowing base was 100% so take them, we can state with a better loan deposit ratio and stay away from the borrowings were going to have a better what's more important NIM beta than we had in the prior cycle.
Understood Mark Dave. Thank you guys for the thoughts there I appreciate it that's it for me.
Thanks, Thanks Ross.
<unk>.
Thank you and once again, ladies and gentlemen, if you wish to ask a question. Please press star one on your telephone keypad at this time.
<unk> is coming from Samuel <unk> from Stephens, Inc.
Neil Your line is live.
Good afternoon.
Alright, okay.
I just had a couple of follow up questions around the balance sheet look familiar sensitivity. So thank.
Thank you for the comments around the loan to deposit ratio Thats very helpful.
Wanted to ask if you could give us.
Some color on the monthly cash flow from the Securities book, where it is today.
I'm sorry, the what cashless.
Just starting the monthly cash flow that you got from the Securities book.
So we have.
The mortgage backs that we have it ranges, it's probably around $5 million to $10 million per month, and then we might have another 10.
Fully maturing securities every quarter, so on a quarterly basis, it's probably $25 million to $30 million.
Understood. Thank you.
And then on the <unk>.
Hi.
Can you give some.
Numbers around the roll on roll ups dynamics, specifically for the loan book at this point.
Just on that on the rates do you mean.
Yes.
And this past quarter, we were just about at parity, where the new loans was about the same as.
At the pay offs.
With the higher.
Fed move we expect that to.
To turn the corner in Q3, where I would expect that new rates.
Outpace that paid rates beginning in Q3, so we're just at that transition point in Q2.
Great. Thank you and my last question just around the conversation of margin.
Understanding that.
As previously noted.
Historically high levels here is there any sort of strategic.
Thinking around.
Stabilizing that module.
Through hedging or some other.
Options that you're looking at at this point.
Yes, so we.
Couple of things we've done we have added modestly to the securities book.
We've done that mostly with a little bit longer duration purchases and what we typically buy when we do that is securities that have.
Pretty good lockout, so that were not subject to the cash flow. So we're not behind pass throughs for example, buying structured more structured product and we have started a program of.
Of received fixed swaps.
Swaps and we're continuing to evaluate that and add to that to try to lock in some of the.
Some of it is some of this rate environment and to take them, we do have that over 50% of floating.
To bring that back for the overall balance sheet somewhat.
So.
I think at the end of last at the end of this quarter, we had about $300 million.
Received fixed swaps and will evaluate potentially doing more of that.
As is the rest of the year goes on.
Great. Thank you very much for answering my questions I appreciate it.
Thank you and there were no other questions in queue at this time.
Okay.
Listen thanks, everybody for your attention and your meaningful important questions and the dialogue. We certainly appreciate your interest in our company and.
We're very enthused to be.
Moving forward in light of the market and the environment that we're in so have a great rest of the day and we look forward to talking to you soon.
Thank you ladies and gentlemen, this does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day. Thank you.
You for your participation.