S&T Bancorp, Inc. (NASDAQ:STBA) Q2 2023 Earnings Call Transcript

S&T Bancorp, Inc. (NASDAQ:STBA) Q2 2023 Earnings Call Transcript July 20, 2023

S&T Bancorp, Inc. reports earnings inline with expectations. Reported EPS is $0.89 EPS, expectations were $0.89.

Operator: 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’d like to turn the call over to Chief Financial Officer, Mark Kochvar. Please go ahead.

Mark Kochvar: 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 stbancorp.com. With me today are Chris McComish, S&T’s CEO; and Dave Antolik, S&T’s President. I’d now like to turn the program over to Chris? Chris?

Chris McComish: Great, Mark. Thank you, and good afternoon, everybody. Just for all of you following along, I’m going to begin my remarks on Page 3, 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 and others listening in on the call. It’s our employee commitment and engagement that drives these results. And we’re all proud to share them with you and have them part of this call. Before I get into the numbers, I do want to further emphasize how good I feel about the progress we are making around moving 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 life as we received from Forbes, our second consecutive best in-state award as defined by our customers. Now turning to Page 3. You’ll see on this slide, there’s a lot that we feel good – a lot that we feel good about in these numbers. For the quarter, we earned $0.89 a share just under $35 million in a PPNR that was actually up 7 basis points compared to Q1. That improvement in spite of all of the changes in the interest rate environment, everything is really driven by two factors.

One, we ended up the 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 is going to talk more about that on Page 6, 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 with maintaining our margins. So a 10 basis point decline on a starting pouring of 4.32 down to 4.22, 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 in the environment that we’re in, resulting in the earnings is something that we feel good about. We did have Net charge-offs of about $11 million in the quarter, and Dave is 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 on the balance sheet.

Dave Antolik: Great. Thank you, Chris. If I could direct your attention to slide 4. This slide depicts balance sheet changes for the quarter. Loans increased by $68.5 million or 3.8% annualized. This is primarily a result of activity in our residential mortgage and CRE segments. Residential mortgage balances grew by $98 million, 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 helped to boost production. And given current pipelines, we expect growth for, 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 moved 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 C&I 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 NIM, as Chris mentioned. We’ve developed an active and efficient process for our bankers to respond to market pressures and have retained approximately $850 million in customer deposits without having to re-price 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 business depositors.

Turning to slide 5, we have an overview of our asset quality results. I’ll begin with a short review of the allowance for credit losses bridge between Q1 and Q2. The ACL balance as a percentage of total loans is down 5 basis 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 that we discussed last quarter, which was partially offset by a higher quantitative reserve related to loan growth and risk rating changes. 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-offs of $11 million, which were comprised of two C&I 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 second C&I 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 quarter — or this credit during the third quarter. Our nonperforming asset levels remain low at only $18 million or 25 basis points of total loans in OREO. During the second quarter, our nonperforming assets decreased $9.7 million from the prior quarter. We successfully resolved a $5.4 million commercial real estate nonperforming loan that resulted in a $900,000 recovery. The remaining decline related to the $4.2 million C&I charge-off that I mentioned earlier.

I’ll now turn the program over to Mark.

Mark Kochvar: Thanks, Dave. Slide 6 shows net interest income and net interest margin since before the beginning of this freight cycle. Before rates started moving higher back in fourth quarter of 2021, our quarterly net interest income was $68.4 million, and the net interest margin rate was 3.12%. While there has been and will continue to be some pressure on funding costs, our asset-sensitive balance sheet has provided significant revenue improvement over the past six quarters. During the second quarter of 2023, the net interest margin rate is 110 basis points higher, and we are generating almost 29% 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 and that 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 to-date beta to 21%. While we have seen declines in DDA balances as they described our deposit mix remains much improved compared to the end of the last cycle, rates up cycle in 2019, when we had just 24% of deposits in DDA compared to 33% today. We are experienced a high level of customer interest in seeking higher rates and the deposit market is very competitive. Possibility of an additional Fed rate increase in July will be supportive of the NIM in third quarter due to our high level stands at 50% of loans that flow. However, funding cost pressure is expected 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 7, noninterest income increased by $1 million in the second quarter compared to the first. This is primarily related to a gain on OREO of $600,000, which shows up in the other line items. Mortgage banking was essentially flat compared to the first quarter as almost all of our production continues to grow 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 fee outlook for the quarterly going forward is in the $13.5 million 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%. The decrease in 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 million 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 at $20 million of share repurchases combined with higher rates and an AOCI that was also higher. TCE remains 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 outlook and the price of our stock. Thank you. At this time, I’d like to turn the call over to the operator to provide some instructions for asking questions.

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Q&A Session

Operator: The floor is now open for your questions. [Operator Instructions] Our first question comes from the line of Daniel Tamayo from Raymond James. Please go ahead.

Daniel Tamayo: Hi, good afternoon everybody. Thanks for taking my question. Maybe first on the margin and specifically on the funding cost. So the interest-bearing balances as a whole and percentage of overall pods to really hung in there better than a lot of your peers and I think expectations. Just curious how you’re thinking about within the guidance that you gave for contraction, how are you thinking about those balances moving forward?

Mark Kochvar: 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 and also out of the bank as there is some — there 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 a moderation in other ships. In the first quarter, we saw a lot of movement from money market into CDs that has slowed down considerably. We expect it to continue but at a lower pace. So a lot of it is driven by that DDA migration that we’re seeing.

Daniel Tamayo: Okay.

Chris McComish: 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 rate exceptions in order to retain balances for our relationship customers. And we feel very good about the processes that we’ve 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 and 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.

Daniel Tamayo: 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 third quarter where you’ll get the benefit on the variable rate side 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 – excuse me, fixed rate assets 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 hike stopped basically?

Mark Kochvar: Yes. I mean, there’s a couple of things that will begin to moderate that compression. One is just — 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 the — on both the fixed in the securities book, that’s relatively so. We also do have a fairly sizable ARM portfolio. It’s mostly three year 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.