Q2 2023 S&T Bancorp Inc Earnings Call
Welcome to the S&T Bancorp second quarter 2023 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 Coatsbar. Please go ahead.
Great, thank you. Good afternoon, everyone. Thank you for participating in today's conference call. You can follow along with the slide portion of the presentation by clicking on the Page Advanced button at the bottom of your screen.
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 page 2.
This provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the second quarter 2023 earnings release, as well as the 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 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 McComish, S&T's CEO , and Dave Antilik, S&T's president. And now I'd like to turn the program over to Chris. Chris?
Great, Mark. Thank you and good afternoon everybody. Just for all of you following along, I'm going to begin my remarks on page three and welcome all of you to the call this afternoon. I certainly appreciate the analysts being here with us. And we look forward to your questions. I also want to take a second to thank our shareholders and employees.
our company forward and what we've defined as our people forward purpose. This purpose is driving our actions and behaviors and is the cornerstone of our efforts to drive top-tier employee engagement and customer loyalty, the keys to us achieving our financial goals. During the quarter we saw further evidence of this people forward purpose coming to us.
For the quarter, we earned 89 cents a share, just under $35 million. And a PPNR that was actually up seven basis points compared to Q1. That improvement, in spite of all of the changes in the interest rate environment and everything, is really driven by two factors. One
We ended up with a quarter at a 422 net interest margin. While that's down 10 basis points compared to Q1, we drove right at $88 million of net interest income. Mark's gonna talk more about that on page six, but that is evidence of the revenue-generating power of the organization.
and the work that we did to really manage our balance sheet during this time. There's certainly incredible intensity for deposits in the marketplace. We've taken a very proactive and customer relationship focused...
to this work.
working hard to protect all that we have and grow what we have while at the same time balancing balance sheet growth while maintaining our margin. So a 10 basis point decline on a starting pouring of 432 down to 422 is not all declines are...
should be looked at equally and we feel very good about what we've been able to work through. The other driver of that PPNR was our expense control. We ended up with an efficiency ratio of 48.2 for the quarter. Again, it speaks to the disciplined way in which we're running the business, but those two factors... don't Mark company but can change and
in the environment that we're in, resulting in the earnings is something that we feel good about. We did have.
Net charge off is about $11 million in the quarter, and Dave's going to provide more details in that. And again, we're optimistic about the good work that we're doing. Certainly feel good about the engagement they have with our teams and the work that we're doing with our customers, and we're moving forward. So with that, I'll turn it over to Dave and allow him to spend some time.
residential mortgage balances grew by 98 million dollars driven by purchase activity that has remained steady and our strategy of booking these loans to our balance sheet given the current rate environment.
We've also added seven mortgage bankers this year who've helped to boost production. And given current pipelines, we expect growth in Q3 for this segment to look similar to Q2 and then to reduce somewhat in Q4. CRE growth of $79 million was driven by two factors.
First, the completion of several construction projects that move from construction to CRE. Second, new activity in our warehouse and multifamily categories.
As a follow-up to the information that we presented last quarter, our office exposure remained relatively unchanged in Q2. In our C&I book, balances declined by $70 million focused in our manufacturing warehouse or I'm sorry wholesale and services segments.
In addition, we saw some softening in CNI revolving line utilization during the quarter.
Based on current pipelines, we anticipate low single digit growth for the balance of the year.
Shifting to deposits, balances were relatively unchanged, and I will note that we booked $100 million of brokered CDs during the quarter. We continue to experience a shift in balances into interest-bearing accounts and into products that offer expanded FDIC insurance coverage.
The competition for deposits remains intense. We believe our approach to proactively managing our deposit book and our deposit customers has allowed us to retain balances and at the same time protect our name as Chris mentioned.
We've developed an active and efficient process for our bankers to respond to market pressures that have retained approximately $850 million dollars in customer deposits without having to reprice the entire book.
At the same time, we are investing in people and products to support our deposit franchise. Examples include the hiring of our Director of Treasury Management and our Director of Consumer Products. We've also enhanced product offerings by eliminating non-sufficient fund fees in April this year and by adding numerous treasury management sales and support roles in support of our custom trends.
points for the quarter. The decrease in the ACL is due largely to a charge-off of a previously established specific reserve of 4.2 million dollars that we discussed last quarter, which was partially offset by a higher quantitative reserve related to loan growth and risk rating change.
The total reserve stands at 1.44% at the end of the quarter, which we believe is an adequate level given the current environment.
During the second quarter, we had net charge of $11 million, which were comprised of two CNI credits. The first credit is a $4.2 million specific reserve that I mentioned that we established last quarter. This credit was brought to full resolution during the quarter through liquidation. The next quarter is a $4.2 million specific reserve that I mentioned that we established last quarter through liquidation. This credit was brought to full resolution during the quarter through liquidation.
The second CNI credit was a specialized manufacturer who lost two significant contracts. We are working through a resolution process with this customer and we charged the loan down by $6.8 million to the estimated realizable value. We expect to resolve this credit during the third quarter.
Our non-performing asset levels remain low at only $18 million or 25 basis points of total loans in Oreo. During the second quarter our non-performing assets decreased $9.7 million from the prior quarter. We successfully resolved a $5.4 million commercial real estate non-performing loan that resulted in a $900,000 recovery.
The remaining decline related to the $4.2 million CNI charge off that I mentioned earlier.
Thanks, Dave. Slide six shows net interest income and net interest margin since before the beginning of this rate cycle. Before rates started moving higher back in the fourth quarter of 21, our quarterly net interest income was $68.4 million and the net interest margin rate was 3.12%.
While that has been and will continue to be some pressure on funding costs, our asset-sensitive balance sheet has provided significant revenue improvements over the past six quarters.
Here in the second quarter of 2023, the net interest margin rate is 110 basis points higher, and we are generating almost 29 percent or $20 million of additional revenue per quarter compared to the beginning of the cycle.
Second quarter margin rate of 4.22 down 10 basis points from the first quarter as earning asset yield improvement of 22 basis points did not keep pace with the 46 basis point increase in costing liabilities. The total cost of deposits including DDA increased by 28 basis points to 1.13%.
representing a quarterly beta of 60% and bringing the cycle of 8 betas to 21%.
While we have seen declines in DDA balances as they describe our deposit mix, remains much improved compared to the end of the last cycle, rate-sub cycle in 2019, when we had just 24% of deposits in DDA compared to 33% today.
We are experiencing a high level of customer interest in seeking higher rates, and the deposit market is very competitive.
A possibility of an additional Fed rate increase in July will be supportive of the NIM in the third quarter due to our high level at standard 50% of loans that flow. However, funding cost pressures expect to continue and we expect the net interest margin compression in the range of 10 basis points per quarter.
in the back half of 2023.
On slide seven, non-interest income increased by $1 million in the second quarter compared to the first. This primarily relates to a gain on Oreo of $600,000, which shows up in the other line item.
Mortgage banking was essentially flat compared to the first quarter as almost all of our production continues to go to the portfolio, contributing to the loan growth we had in that category.
debit card and wealth activity did show some improvement in the quarter.
Our fiat look for the quarterly going forward is in the $13.5 to $14 million range.
On page 8, expenses were well controlled, down $2 million compared to the first quarter, with an efficiency ratio of just 48%. Decreasing expenses came primarily in salaries and benefits, as expectations for the year have moderated and incentive plans have reset.
These will normalize in the third quarter, so our quarterly expense expectations remain in the $52 to $53 million range per quarter as we continue to make investments in people and infrastructure. Slide 9 shows a 23 basis point quarterly decline in TCE as 20 million share repurchases combined with higher rates.
and an AOCI that was also higher.
TCE remained very stable last year despite these challenges due to strong earnings and a relatively small securities portfolio.
All of our securities are classified as available for sale.
Our regulatory capital ratios are strong and well positioned for the environment with ample excess capital levels.
Our remaining share repurchase authorization is $9.8 million after the activity in the second quarter. We'll cautiously look for opportunities to deploy the remaining authorization depending on economic conditions, financial performance and outlooks, and the price of our stocks.
Thank you. At this time I'd like to turn the call over to the operator to provide some instructions for asking questions.
At this time, I'd like to turn the call over to the operator to provide some instructions for asking questions.
If you have any questions, please press star 1 on your telephone. And we ask that while asking your question, please pick up your phone and turn off speaker phone for enhanced audio quality. Please hold while we poll for questions.
Our first question comes from the line of Daniel Tomayo from Raymond James. Please go ahead. Samuel, thank you for happening.
Hi, good afternoon everybody. Thanks for taking my question.
Maybe first on the margin and on the funding cost. The net expiring balances as a whole and percentage of overall pods really hung in there better than a lot of your peers and expectations.
I'm just curious how you're thinking about, you know, within the guidance that you gave for contraction, you know, how you think about those balances moving forward.
Well, we do continue to expect some continued normalization on the DDA front. There's continued to be some migration to both interest bearing and then also out of the bank as there is some, appears to be some increasing in spend both on the consumer and the business side. So a lot of the compression margin we expect is driven by that.
shift out of DDA. We saw moderation in other shifts. In the first quarter, we saw a lot of movement from money markets into CDs. That has slowed down considerably. We expect it to continue, but at a lower pace. So a lot of it's driven by that DDA migration that we're seeing.
out of DDA. We saw moderation in other ships. In the first quarter, we saw a lot of movement from money markets into CDs. That has slowed down considerably. We expect it to continue, but at a lower pace. So a lot of it's driven by that DDA migration that we're seeing. Okay.
And Daniel, it's Chris. I just want to add the point that Dave made, and that is our proactive engagement from a banker with customer and an efficient process that we're utilizing for our business.
rate exceptions in order to retain balances for our relationship customers. And we feel very good about the processes that we built, the tracking that we're doing, changes that we need to make in order to respond. And so far so good as you said.
It seems to be working, and I think that's reflective of this customer loyalty that we have and the customer experience that's been driven over a long period of time. It is a competitive advantage for us to be able to have those conversations with our customers. Understood.
And then I guess on the guidance, the 10 basis points, a quarter of compression over the next couple of quarters. So, you've got the July . 25 basis point hike built into that for the 3rd quarter where you'll get the benefit on the variable rate side. Um, and then some hasn't gone along.
and then flat in the fourth quarter. So as we think about how your balance sheet reacts, are you assuming there's...
that essentially the migration on the funding cost is slowing in the fourth quarter? Or is there some fixed rate assets that will continue to help on the As you get beyond the rate hikes, just help me think about how the balance sheet reacts.
once rate hikes stop, basically. Yeah, I mean there's a couple of things that will begin to moderate the compression. You know, one is just the, is the some slowing of the migration from DDA. Exactly the pace of that remains to be seen, but we do anticipate that that will slow some.
We'll pick up a little bit of repricing on both the fixed and the fixed.
In the securities book, that's relatively so. We also do have a fairly sizable ARM portfolio that's mostly three and five-year resets. We'll start to see some benefit of that. That's more in 2024 and beyond. The other thing that helps us is that we had, going into this, we had a pretty short CD portfolio.
Those started to reprice significantly in the fourth quarter of last year. So we saw those reprice from practically nothing to 4 and even 5% more recently.
As those turn, starting here in fourth quarter, their reset rates will be a lot less than they were prior. So we'll see less of a degradation in the margin from the CD book repricing because it'll have less. The rest of it's just wiring up.
less distance to travel to market. Okay, that's great. And then I guess just finally, again on the margin, I think last quarter you talked about expecting 5 to 10 basis points of compression a quarter. We got 10 this quarter. You're saying now about 10 for the rest of the year, which would take us...
down close to 4%, which kind of jives with what you said last quarter as well about
where the Fed funds rate is and where the NIM could end up. But just curious, assuming we don't get rate cuts, where you see the margin kind of settling at, is it around that 4% range still or you think it drifts down into threes or?
you know kind of more materially. Yeah that gets a lot more difficult to project. I mean I think there's probably a little bit more compression to go after you know after fourth quarter but we should see a significant slowing there because some of these other factors like the the CD book repricing begins to stabilize.
we'll get a more steady stream of ARM and security reset and hopefully the consumer demand for migrating from DDA and savings rates slows down considerably. So probably a little bit below four, but hopefully not meaningful below that. But I think we'll know more as time goes by.
Our next question comes from the line of Michael Perito from KBW. Please go ahead.
Hey, good afternoon guys. Thanks for taking my questions.
I wanted to start on the credit side. I mean, it's, you know, I know one of these credits was kind of a carryover from last quarter, and it really doesn't sound like, you know, just based on the broad detail that there's really kind of any
concerns that would permeate to the rest of the portfolio from these two specific C&I credits. But I guess just generally just listening to you guys kind of describe like some of the catalysts to what brought us to this point. I mean are we?
Are you guys seeing just more like you mentioned something about losing two larger customers for the one and then there was another comment when talking about deposits about how you're seeing consumers and small businesses kind of run their cash flow. I mean are we just getting to a point in the credit cycle here where...
you know, the borrower is just getting kind of weaker as every quarter that passes or you think that that's kind of reading too much into the events that you're seeing with these two particular credits over the last couple quarters.
Yeah, Mike, I think there are indications within the book that it's the ladder of your thoughts. So we're monitoring particularly the CNI book for anything that has higher leverage because these companies obviously are more suspect to negative changes in their operating environment.
I think things like declines in utilization rates, like we saw this quarter, would indicate that there's not a liquidity crunch at the customer level.
And I think ultimately we're adequately reserved as presented in the ACL analysis that we presented.
Yeah, and Mike and Chris, I'll just add to that. I've spent a lot of time the past few weeks out with customers throughout our footprint. And it's still, you hear a lot of talk from those middle market businesses that say, there's revenue growth opportunities out there. We feel good about the future, while at the same time, those that may be oriented more closely.
That's really helpful, thank you.
Can you maybe spend an additional minute here just on the outlook for loan growth at this point and kind of just the internal appetite for net growth at this point? We're halfway through the year. You guys have a good sense of where the pipeline and credit is here, and some of the liquidity concerns I think appear a little bit more manageable today than they were when they were more uncertain 90 days ago. So just curious if you can put it maybe either the Trif-
in the marketplace for growth if you want it. It feels like it's a lot of loan only relationships that our competitor banks are looking and saying, where do we want to allocate and spend our capital? So we're gonna be very smart and judicious about what we do and we are very focused, as others are on building meaningful.
of ours and a key driver of what's going to make us successful.
Got it. And then just lastly,
You guys have the –
mostly have rectified these two CNI credits. The reserve still stands at a fairly healthy level. I don't know that there's great clarity today in terms of the credit outlook, but I mean, everything seems,
to be reasonable, I guess, from a risk management standpoint today. So, I mean, do buybacks kind of continue here if the valuations for the industry remain kind of trough or softer from your perspective for S&T.
I mean, I think it's still something we'll look at. We are and do anticipate to have good core earnings that can be supportive of that. We don't have a lot. It's just under $10 million left on this authorization. So we'll see how it goes for the quarter, see how the price in the market behaves, and then we'll be revisiting.
you know, how to think about it going forward with our board and with management as we get through the rest of the year.
think about it going forward with our board, with management as we get through the rest of the year.
Hey, good afternoon. As you consider that the loan growth guide of most single digits, are you seeing any change in the mix there or how that should progress in the back half of the year? What kind of...
trend that you see in demand there. Yeah, so based on the pipelines, I think we'll see similar mix in the back half of the year driven primarily by residential mortgage growth. Our pipeline there is pretty predictable. We haven't seen any kind of payoff pressure in that book obviously with elevated rates, so I think you're going to see consistent growth.
The commercial growth should be similar, maybe in that 1, 1.5% range in the back half of the year.
Similar to the first half. Okay, that's really helpful. I think a lot of my questions have been answered. Thank you very much. Okay, thank you. It appears we do have one more question from the line of Daniel Cardenas from Danny Montgomery Scott. Please go ahead.
Good afternoon, guys.
Good afternoon, guys.
Maybe just a little bit of color in terms of the yield that you're seeing on new production right now on the loan portfolio.
Maybe just a little bit of color in terms of the yield that you're seeing on new production right now on the loan portfolio. I'm sorry, Dan, which portfolio?
Just your overall loan portfolio. All we're seeing are low fixes on new production weighted average.
Okay, and then, you know, in a few weeks here into the third quarter, are you seeing any pickup in line utilization rates?
Line utilization rates here early in the third quarter, it looks like they're going to return to some kind of normalized level. I think what we saw in the second quarter was more seasonal.
Okay, good, good. And then just kind of a quick question for my model. What kind of tax rate should I assume for you guys?
Okay, good, good. And then just kind of a quick question for my model. What kind of tax rate should I assume for you guys in the back half of the year?
I believe your number is mid-18th. Okay, great. And then just one question quickly on the positive trends here.
As we've kind of started third quarter, have you seen any slowdown in the migration shift, or is it kind of continuing at the pace that you were seeing here in Q2?
Yeah, I mean just early overall even deposit numbers have been pretty flat so we have noticed
any acceleration for sure and it's been slow so far. But sometimes there's, you know, within the month there's some outsize activity towards the end of the month that could go either way. So it's hard to give a good answer without a full month or full quarter picture. So far we haven't.
seeing any acceleration. Gotcha, gotcha. Okay, last question for me, I guess just given your asset sensitive balance sheet, you know, what kind of steps are you guys thinking of taking, you know, once rates do kind of flatten out here to protect that margin?
Well, we have taken some. We do have about 500 million of received fixed swaps that are on the books. The deposit repricing that we've done, and it's primarily either non-maturity or relatively short CDs.
you know, provide some cushion to rate down in our ability to reprice those. It's things that are stable. And the other thing we're doing on the loan sign is we've seen a little bit more migration to fixed rate preferences on our customers behalf. For example, less mortgage production is really all fixed.
to the extent that, you know, if rates move down and that rate down movement is on the short end of the curve, we wouldn't expect there to be as much of a drop out on the curve, you know, which should provide some support in that we wouldn't see the prepaid numbers tick up on that mortgage portfolio in a short rate down situation. Those would be more stable.
And so that should also provide some benefit to the margin or some offset to the margin with that floating rate. But we'll continue to model those out and look for opportunities or potential changes to that outlook and other things that we might need to do.
Good. And I guess just one more question on the residential growth that you're seeing in your portfolio is that.
primarily 30-year fixed or is it adjustable? What's kind of the type of...
the type of loan that you're adding to your books. It's mostly
of loan that you're adding to that to your books? It's mostly just standard fixed.
Mostly 30, some 15 in there, but mostly 30. Thanks guys, I'll step back. Okay, thanks Dan. Okay, we did receive a couple of other questions that we
talk about at this point, but that's something that we'll continue to work on and have some anticipation that we'll potentially have something, but nothing is for certain.
The second question is, has there been, have we gone to the Federal Reserve for any borrowings? We have not, either with the discount window or the new BTLF program, we have not borrowed. There are borrowings that are primarily from the Home Loan Bank. Another question was whether long-term bonds held by S&T have been devalued.
And then finally, what was the deposit change since the beginning of the year? If you put the two quarters that we've had together, we're down about $79 million, or 1.1% since the end of 22.
That's all the questions that we got online.
I'll turn it back over to Chris here for final comments. Yeah, I'll just wrap it up and again thank everybody for being on the call and your interest in our company and these good questions. We will look forward to being back with you again about 90 days from now. In the meantime, we're going to go back to work and focus on our customers. So thank you. Thank you, ladies and gentlemen.
I'll turn it back over to Chris here for final comments. Yeah, I'll just wrap it up. And again, thank everybody for being on the call and your interest in our company and these good questions. And we will look forward to being back with you again about 90 days from now. In the meantime, we're going to go back to work and focus on our customers. So thank you. Have a great day. Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation.
you may now disconnect.
thankno.