Q3 2022 S&T Bancorp Inc Earnings Call
Good day, ladies and gentlemen, thank you for standing by welcome to the S&P Bank Corp, third quarter earnings Conference call. At this time all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session I would now.
Now I'd like to turn the call over to Chief Financial Officer, Mark <unk>. Please go ahead.
Thank you and good afternoon, everyone and 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. The 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 third 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 FTE Bancorp Dot com, we will be reviewing an earnings supplement slide deck as part of this presentation you can obtain a copy of those slides by clicking on the earnings.
<unk> link on your screen or also on the website under events and presentations third quarter 'twenty two earnings conference call click on the third quarter 'twenty two earnings supplement link with me today are Chris <unk>, <unk>, CEO and David <unk>, President I'd now like to turn the call and program over.
Chris Thanks, Mark and good afternoon, everybody. We're certainly pleased to be here with you reporting on very solid results for the quarter before I get into the numbers and then turn it back over to Mark and Dave for some more details.
I did want to briefly emphasize to you all of the progress that we continue to make building this company.
Deliver for both our shareholders customers and our employee base.
Over the past four or five quarters, we've been on a steadfast journey and our strategic focus around strengthening the foundation of S&P built over 120 years and rooted in our distinctive customer trust all of this with an eye to sustainable profitable top tier growth and performance I'm pleased to.
Report that we continue to make great progress, making progress both in building and enhancing our leadership team with an important blend of SMT legacy knowledge as well as outside industry expertise all built for growth with the appropriate focus on safety and soundness and all that we do.
Our leadership team clearly understands that we are the current stewards of this 120 year legacy of Great customer Trust and strong employee engagement and as I mentioned in our press release award winning on both fronts and our company's performance will rise and fall going forward on the effectiveness of this leader.
Ship.
While there is always work to do which we do embrace and are energized by and the environment remains uncertain.
I couldnt be more pleased with the progress that we've made and optimistic for our future.
Now let me go ahead and turn to the numbers.
And I'm on page three in the deck and as you can see.
<unk> $37 million and net income, which is a 28% increase in EPS for the quarter records on both fronts.
Our PPA at or above two to one 5% and solid revenue growth driving a 50% efficiency ratio for the fifth straight quarter, we've had meaningful asset quality improvement.
And our return metrics have led to another increase in our dividend.
The third in the last five quarters up to now 31.
Per share.
Turning to page four and before I turn it over to Dave for more details you will see that our loan growth and the majority of our pork as we see loan growth in the majority of our portfolios with some contraction that also does have an asset quality focus and on the deposit front. There is some contraction on a law.
Linked basis due to some seasonality as well as the rate environment and look forward to your questions and before that I will turn it over to Dave well. Thank you, Chris and thanks to everyone on the line. We appreciate your interest in our company and participation in the call as presented on slide four we realized overall loan growth of nearly 4% for the <unk>.
By category, we saw increases in all consumer loan types and in our C&I balances consumer activities remain robust as we head into Q4, and our pipelines point towards a continuation of this growth with.
With regard to C&I activity, our aggregate total revolving commitments grew during the quarter along with the total number of commitments. This growth coupled with a 1% increase in utilization rates to 44% when compared to Q2 resulted in balance growth of $20 million, we did experienced declines in our <unk>.
Sorry, and construction portfolios during Q3, and we expect to see continued pressure on the construction portfolio as demand has declined due to increased interest rates rising construction costs in most particularly availability and cost of labor and the permanent CRE book, we saw.
Normal normal course payoffs related to property sales in permanent market financing along with several exits of negatively rated loans were those in less desirable segments. We continue to closely monitor economic conditions and look for signs of stress and adjust our risk appetite in order to support our desire.
To improve asset quality.
Forecasting loan growth given the current economic environment is certainly challenging, but we remain comfortable with our low single digit guidance heading into Q4 and into early 2023.
<unk> to deposits, we experienced an overall decline of $202 million in Q3, adding some color to the changes by category on a point to point basis demand deposit balance declines were primarily the result of activity in a handful of business customers. It is important to note that we retain these customers.
<unk> shifts and that these changes were a result of their decision to utilize their cash in order to support business activities also important to note is that our average demand deposit balances actually increased in Q3 by $10 million. Additionally, interest bearing demand money market and CD changes were the result.
Market competition for those products and our active management of deposit costs.
We remain focused on building upon our 120 year legacy deposit franchise by investing in people and infrastructure. We are proud to announce that in August we hired a new director of Treasury management, who is focusing on product and sales capabilities in order to support our commercial and business banking relationships.
Turning to slide five we are very pleased with the trajectory of our NPA as presented we had minimal charge offs. During Q3, our ACL increased moderately in recognition of our qualitative analysis and impact of forecasted microeconomic macroeconomic slowdowns.
Ill turn the program over to Mark.
Thanks, Dave.
Income increased by $8 6 million or about 11% compared to the second quarter. The net interest margin rate in third quarter was 4.4% that's up 48 basis points from the second quarter, that's up 52 basis points ex PPP loan yields improved by 58 basis points.
The asset mix improved with lower average cash and the cost of total deposits increased by just 18 basis points during the quarter interest bearing deposits increased by 29 basis points.
51% of our loan portfolio is tied to short term rates, which has been a big driver of the net interest income and net interest margin improvement.
Part of our Alco strategy to protect the interest income and then there's this margin in a declining rate environment, we have hedged that floating rate loan concentration to approximately 44% with receive fixed swaps. We continue to evaluate the right level of hedging which will depend on the rate environment in our deposit pricing experience.
Net interest income and net interest margin outlook for the next couple of quarters remains positive given expectations for additional short term rate increases we expect the net interest margin rate to improve.
And to continue as short rates increase but moderate due to little additional improvement in asset mix higher deposits higher expected deposit betas and the execution of our hedging strategy.
Noninterest income increased by $2 1 million in the third quarter compared to the second largest item is a lower decline in the fair value of the assets in our nonqualified benefit plan, which relates to stock market performance and shows up in the other line.
This was negative $4 million in the third quarter compared to a negative $1 4 million in the second quarter, resulting in a $1 million quarter over quarter variance favorable variance.
Also shows up as a reduction in salaries and benefits, but it's P&L neutral.
Also impacting the other income line was the gain on sale of an Oreo property $4 6 million.
Mortgage banking was essentially flat compared to the second quarter as the majority of our production went to the portfolio.
Our quarterly fee outlook remains in the range of $14 million to $15 million.
Expenses were up $1 2 million compared to the second quarter salary and benefits increased primarily due to the other side of the nonqualified benefit plan that impacted fee income.
<unk> expense was also higher due to settlement accounting from lump sum payments on retirees improved revenue drove the efficiency ratios as Chris mentioned by over four 5% points.
Four five percentage points to just above 50% and also resulted in positive operating leverage a quarterly expense expectations remain well controlled and 49% to $50 million range.
We have strong capital levels are well positioned for the environment, we executed $3 5 million in buybacks during the third 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 $29 8 million to repurchase capacity remaining in our buyback authorization.
Smaller securities portfolio as a percent of assets strong earnings and a more efficient balance sheet, we have seen stability in our TCE ratio over the course of the year, despite higher OCI adjustments.
Thank you very much at this time I would like to turn the call over to the operator to provide instructions for asking questions.
Certainly the floor is now open for questions.
Have any questions or comments. Please press star one on your phone at this time, we also while posing your question. Please pickup your handset listening on a speaker phone to provide optimum sound quality. Please I will just a moment, while we poll for questions.
Your first question is coming from Daniel Tamayo with Raymond James. Please pose your question your line is lines.
Good afternoon, guys. Thanks for taking my question.
Sure.
Okay. What are you doing.
Let me start on the <unk>.
The NIM on deposits.
We saw a decline as you mentioned in the quarter. Thanks for the color on the.
The few commercial.
Clients that drove the decline in the demand.
Side, but just.
Curious on your thoughts.
What.
How you think deposit betas trends.
In the fourth quarter and kind of beyond.
And then how much impact that could have based on.
No need to grow deposits.
As you can kind of continue to creep up in terms of loan deposit ratio. Thanks.
Yes, so I mean, I think we do think that the deposit betas are going to increase.
Especially with the activity that is expected to have here.
In the fourth quarter with additional hikes in November and December as well.
That is going to impact the incremental margin that we would expect we would not expect it to continue at the pace that we've seen in the last couple of quarters.
Other thing is that the balance as you recognize the balance sheet mix in the earning asset mix is.
Is changing we have benefited from the reduction in cash which is improve that mix that has relatively little left to go as we move.
From the third quarter to the fourth.
A few more basis points of benefit to be derived there.
So we do expect that increase.
To possibly the half of what we would likely be seen in the last couple of quarters, assuming that the fed continues at that at the current pace.
We are continuing to evaluate how to how to position ourselves both competitively and then overall with the balance sheet I mean, we have a history of <unk>.
Operating at a lower loan to deposit ratios were working hard to make permanent changes.
That and investing in the deposit franchise.
But we're comfortable and familiar with the trade off between that and borrowing money in the wholesale market should that need arise.
Okay great.
And then I guess related to related to the investments that youre, making.
Strengthen deposit franchise, but you called out but the <unk>.
Guidance has really been in a relatively tight range on a quarterly basis.
Anything that we should think of in terms of as we go into 2023 from the expense base.
Perspective.
You think about what growth may look like next year given those investments.
Yes on the expense side, we would expect expenses to be able to hire both because of those investments and also just the inflationary environment is a little tighter and we continue to see a challenged.
<unk> market.
Things like merit to be higher.
Also still in the process of planning, but would expect to make additional hires to support that.
The deposit franchise, especially on the on the business side, where we see a lot of opportunities on Treasury management.
Yes.
Daniel This is Chris will also mean, some additional investments from a.
Technology and digital capability.
I've mentioned.
Our hiring of top tier Treasury management leader for our company that will between working with core providers other providers continue to enhanced service offerings.
For our customers.
Online or digital capabilities, both in the consumer side of our business and certainly in the commercial and the business banking side of the business. So some some.
Product capability enhancements as well as some additions of people.
I appreciate that.
Lastly, just a question on.
On the asset yields it looks like.
Real estate yields in particular.
<unk> has expanded a lot over the last couple of quarters.
Is there is there.
I guess, how much of that is floating.
Relative to.
To fix in that portfolio.
Another reason for why those would be able to kind of.
Increased so much in.
Short period of time I appreciate it.
There's a couple of things going on there there is a fair amount of floating I'd say about.
60% of it actually floats.
To US now those are a lot of those have been swapped.
Back to back to the customers so that the customer has a fixed payment but it's.
It's floating for us so that has helped in that.
You might think of the CRE is being fixed portfolio for us its probably 60% floating.
We also have been have had the benefit any way of the receive fixed swaps in there which have been cash flow positive for the last couple of quarters that is changing and we expect that to be become a little bit of a drag going into Q4 as that as the.
Short rates go higher.
Okay Thats terrific. Thanks for all the color that's all for me.
Thank you.
Your next question is coming from Michael Perito with <unk>. Please pose your question your line is live.
Okay.
Hey, guys good afternoon, Mike.
Mike.
I was wondering if you could spend a little bit more time, obviously.
Obviously, you guys are adding some to the reserve on a quality <unk>.
<unk>.
As you mentioned in the prepared remarks and in the release, but as you guys think about.
Talked a little bit about pipeline in the low single digit growth expectation, but if you think about the mix of that growth and the opportunities you guys have the appetite for them comfortable with today.
Any expansion you guys can provide on where you think some of the better higher quality growth opportunities are for you guys over the next three to six months.
At this point.
Sure Mike So one of the areas that we're focusing in on is our business banking segment, we feel that there is opportunity in essentially all of our markets too to do a better job there and there is some opportunity for us and we have added the staff in that segment and we think the consumer area, where we've been able to grow over the past.
Several quarters will continue to yield positive results and certainly within the C&I book within certain segments will continue to focus and look for growth as I mentioned in the prepared remarks, we will feel some pressure in some challenges to grow the construction book and the permanent CRE book as well.
<unk>.
Okay. That's helpful. Thank you and then just geographically I guess any.
Additional thoughts to add kind of the same context for that question.
Yes.
You look at our franchise and the legacy growth that we've seen in Pittsburgh, We're certainly focused on continuing that and to grow out west from Ta.
Eastern PAA is more of a CRE market, but we've also built C&I teams there as well so we think theres opportunity.
In Ohio in both northeast, Ohio, Central, Ohio, there'll be incremental opportunities, where there are some vertical opportunities within the ABL world.
<unk> added some exposure to our small REIT book that we participate in.
That has some exposure there. So we think that we're adding in a in a risk friendly way, where we get a return that is commensurate with the risk we take.
And we believe they will continue to be opportunities that will lead to this kind of low to mid single digit growth.
We've pointed towards.
Alright. Thank you and then just lastly for me just is there any should we think about it.
You guys mentioned kind of the near term expectation around noninterest income, but as we think to next year and beyond.
The focus on Treasury management and business banking I mean is there.
Opportunities with the products and technology that you have to kind of grow fee income around some of these business customers as we looked at like swap income or wealth management Treasury management or any of those elements that we should be thinking of.
Yes.
This is Chris Mike there are there are opportunities there.
We are bullish in the underpinnings of our Treasury management opportunities simply because of the current depth of relationships that we have and we think there's there's latent opportunities within the book, both within our business banking space and somewhat.
The C&I space as well.
Yes.
If you look at the slide the wealth management income that actually has held up pretty well. If you think about it thats all asset under management based it's not transaction fees sort of sort.
Sort of remained flat in a market that's down 20% to 25% that's telling you that we're picking up new business and expanding assets under management in spite of some headwinds there. So it's still going to be very dependent upon what's going on in the external market, but in talking with our teams our assay.
Bankers that are focused there as they are really good alternatives for our customers in this ever changing environment. So those conversations will remain important there is pressure on the consumer side and we will continue to look at what we're defining as deposit optimization and ensuring that we.
Got the right product set from a depository standpoint for our consumers and at the same time, we're on the right side of everything that we need to be doing promote customer experience standpoint relative to NSF fees and things like that so there's a little there's a little bit of a balance of both.
Big emphasis certainly on the.
The business commercial side and the Treasury management space.
Okay that makes sense perfect. Thank you guys appreciate the color and for taking my questions sure. Thanks. Thank you.
Thanks.
Your next question is coming from Matthew Breese with Stephens, Inc. Please pose your question your line is live.
Good afternoon.
And I wanted to just discuss a little bit more about the NIM outlook. Maybe first can you give us a sense for what the spot rate of deposits. All in were at the end of the quarter or as of.
Today.
So I get the FTE in the last month.
Of the quarter.
The kind of the overall deposit rates have ticked up a bit.
A little bit to about 56 basis points I think at the quarter we were.
<unk> to.
<unk> 43.
Okay, I mean to date, you've done a nice job kind of keeping the composition of noninterest bearing deposits are.
36% of the total Cds continue to.
Come down have you adjusted your outlook for deposit betas.
Through cycle at all or can you give us some update there.
I think it's still it's still evolving the speed of the fed is still.
Troublesome and how long the catch up takes.
But we still think we're better positioned overall.
Compared to last cycle, even though that cycle is very different in terms of how long it took.
And that cycle, we've kind of hit the mid mid <unk> with a better composition that you referenced, especially on the DDA side to extend them.
<unk> on the business side to maintain a lot of that if we're successful with that we would still expect our cumulative betas to be mid <unk> mid <unk> to low twenty's compared to that mid <unk> in the last cycle. Okay.
And then maybe along those same lines, assuming the fed is done.
By early 'twenty three or.
Wherever you choose them or assume that they stopped how far after that or how long after that just given the asset sensitive nature of the balance sheet do you expect to see the NIM.
Perhaps stop to stop increasing maybe even start to see some compression.
Yes, Matt I think there definitely will be some we do have a fair amount of.
<unk> product that will give us some continued improvement those are repricing higher and we expect that to continue but it's nowhere near the impact that.
The float has and on the liability side, there's very little Cds that will be.
Be there to offset that so it will be how long that pressure from the.
Transactional, especially the money market continues so I.
I think it.
It it probably continues as long as Theyre flat, there's always going to be a little bit of pressure.
Higher and depending on competition, if we get back into a growth mode.
US as well as others will be out there chasing deposits again.
So I think it depends a little bit on the trajectory of growth.
Post that stopping.
Got it Okay, and then last one for me.
Just wanted to talk a little bit about the construction portfolio could you remind us of kind of the underlying composition with the end projects are in the within the construction book the area that I think a lot of folks are starting to have some concern with this resi development just given the movement.
And mortgage rates from 3% a year.
Knocking on 7% today and the ultimate end consumers affordability of that.
Same kind of project yes.
In the commercial construction.
Segment, there is very limited exposure to development.
And the largest categories would be multi family there is some warehouse.
We also have some.
Wholesale and Theres some.
Other transportation.
Related construction projects.
Okay, and any signs of deterioration within the construction book to date.
We monitor it very very closely we have a very robust review process that we use and frankly, that's why you've seen some of the the reduction in the exposure because we manage it tightly and it's just really tough to get something approved today to get a bill on budget on time so.
Demand has declined and we would expect to see that decline continue so some of the contract contraction relates to those projects coming off being paid out or moving into another category and then the.
Not as much new coming on simply because what what Dave talked about got it. Okay. I. Appreciate it that's all I had thank you.
Your next question is coming from Daniel Cardenas with Janney Montgomery Scott. Please pose your question your line is live.
Afternoon, guys.
Hi, Dan.
Maybe maybe just.
I missed the line utilization number that you threw out.
Dave maybe if you could just.
Repeat that for me and then maybe compare it to what it what it was versus.
Pre pandemic levels.
Yes.
About the same level that it was pre pandemic was 44% for Q3.
Up from 43% the prior quarter.
<unk> trough in the in the low thirty's, 32% to 33% during the pandemic. So we're at about the same utilization level that we were pre pandemic. The one exception to that would be the floor plan portfolio, which has not recovered.
And it's half of what it was pre pandemic.
Okay.
Okay, good good and maybe a little bit of color in terms of.
Pay downs and payoffs have have they kind of normalized here.
And the last couple of quarters are you still seeing some pretty good headwinds.
Yes.
In Q3 as I mentioned it was a combination of normal course, and some payoffs that were credit related and we took the opportunity to exit a few credits that we felt werent.
Within our risk appetite from a credit perspective at this point.
So I would expect there to be a modest decline in Q4 in terms of payoffs that we forecast.
And then kudos on the reduction in your <unk>.
Non performers.
You know as we look at the commercial ones. So it was that primarily one when large credits.
Either returned to performing status or or paid down or was that multiple credits.
It was one credit primarily driving that number and it was it was an exit it was a real estate entity.
And what are your watch list trends looking like right now as you come into.
The fourth quarter and I was thinking about.
In 2023, I mean, just given that you bumped up your.
Your provision levels.
And your reserve levels, a little bit this quarter.
Yes. So Q3, there were a fair amount of inflows and outflows that kind of balanced each other so we're looking again at some additional macroeconomic pressure.
That's driving the additional provision.
Okay.
And then.
What's the M&A environment is looking like right now or is it fairly quiet are you guys seeing.
A pickup in deal flow.
It's Chris I would define it as fairly quiet.
Honestly, what we're focused on what we can control.
Very focused on delivering results and performance in <unk>.
Building, a currency that gives us an opportunity in the future.
Okay.
That's all I have for right now I'll step back thanks, guys. Thank you.
Once again, if there are any remaining questions or comments. Please press star one on your phone at this time, please hold a moment, while we poll for any additional questions.
Operator, we have one question that we got through the.
Online that we'd like to go through.
So that question is I think that last time. Your net interest margin was above 4% was in 2010 are there any structural or competitive reason the NIM can't stay above 4% and a flat to higher rate environment or do you think that net interest margin will ultimately revert back to $3 60, 370 pre pandemic level as funding.
Cost play catch up and so theres right. The last time I was looking at that myself last time, we were above four was was in 2010. So it has been has been quite a while to that low rate environment.
We think we think that we should be able to stay at a much higher rate.
And that 4% will be a good level to be able to do that there are some structural differences that we're enjoying right now and our emphasis on the deposit franchises to try to keep to maintain those and that's namely that.
A higher level of deposits and also a better mix.
So that didi, 8% in the mid 30 compares to probably mid twenty's or low twenties.
2010, and so if we are able to maintain those levels that we currently have that should give us a much better structural opportunity to maintain that 4% and then also the higher level of deposits and keeping that loan deposit.
Below below 100, certainly if not lower should allow us to stay away from and that higher rate environment will be higher cost wholesale funding to finish up that gap.
That is one of the main reasons why we are so focused on the deposit franchise, especially as we move potentially.
That higher rate environment for.
A longer period of time.
Operator that takes care of the question, we had anything else that youre seeing.
No there are no additional questions in the queue from the lines at this time at this time I would like to turn the floor back over to S&P Bancorp CEO , Chris Mccamish for any closing remarks.
Again, thanks to everybody on the call and for your interest in our company. Obviously, we're very proud of the quarter I'm really proud of this leadership team and our employee base, what we're doing everyday to take care of customers and we look forward to being.
Being back with you in another quarter if not.
Between now and then so thank you all very much.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.