S&T Bancorp, Inc. (NASDAQ:STBA) Q1 2024 Earnings Call Transcript

S&T Bancorp, Inc. (NASDAQ:STBA) Q1 2024 Earnings Call Transcript April 18, 2024

S&T Bancorp, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the S&T Bancorp First Quarter 2024 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 Kochvar. Please go ahead.

Mark Kochvar: Great. Thank you very much. Good afternoon, everyone. Thank you for participating in today’s call. Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors. This statement provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the first quarter 2024 earnings release as well as this earnings supplement slide deck can be attained 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 McComish : Mark, thank you, and good afternoon, everybody, and welcome to the call. We appreciate the analysts being with us this afternoon, and we look forward to your questions. I certainly also want to thank our employees, shareholders and others listening to the call this afternoon. Before we get into the numbers, I want to continue to express how good I feel about the progress that’s centered on S&T’s people forward purpose that we’ve made and how our strategic focus on this purpose is delivering for our customers, shareholders and the communities that we serve. A few weeks ago, we wrapped up an almost two-week road trip where we were able to speak face to face with all 1,250 of our employees in small groups. The energy, commitment and engagement that they displayed in these meetings was truly inspiring to both me and our entire executive leadership team.

Our people forward purpose connected to our core drivers of performance, the health and growth of our deposit franchise, solid credit quality, best-in-class core profitability and underpinned by the talent and engagement level of our teams or where we are focused to deliver for our shareholders. In addition to the numbers that we’ll go through on Page 5, in Q1, we saw further evidence of our progress as we were recognized by Forbes as one of America’s best banks from a financial performance perspective, and one of America’s best companies for employee loyalty and engagement. The employee loyalty award is broader than just financial services and looks at all mid-sized employers in the United States. And this is the second year in a row for this recognition.

Turning to our quarter on Page 5. You’ll see that we earned $0.81 a share, which is about $0.02 ahead of consensus estimates with that net income over $31 million. Our return metrics were excellent with almost a 14% ROTCE, and our PPNR remains strong at 176. Our net interest margin did see some contraction, though at 3.84% is still very strong. The 8 basis points of contraction is less than half of what we saw in Q4 of last year. And our net interest income remained above $83 million for the quarter. Mark will provide further color here in a few minutes. I would also — looking at things from a credit perspective, there was a little bit of movement. However, it’s very manageable and primarily related to a couple of strategic exits. Dave is going to dive more deeply here in a few minutes.

I would also call out Page 7, where we’ve added additional insight into our multifamily CRE portfolio. This is in line with the information that we have provided to you in previous quarters relative to office exposure. And again, we’ll spend more time and color on that in a few minutes. Moving to Page 4, you’ll see that loan growth for the quarter was muted, however, we saw meaningful deposit growth. Historically, Q1 is typically a lower loan growth quarter for us. On the deposit side, customer deposit growth was more than $78 million, producing over 4% annualized growth which is a number we feel very good about. While the deposit mix shift continued, we did see further slowing in the rate of decline in DDA balances with overall DDA balances remaining strong at 29% of total balances.

Additionally, our customer deposit growth allowed us to reduce borrowings by $130 million in the quarter, which obviously had a positive impact on our net interest margin. I’m going to turn it over to Dave now to talk more about the loan book and credit quality, and Mark will provide more color on the income statement and capital. We look forward to your questions after their remarks. Dave, over to you.

Dave Antolik : Yes. Thank you, Chris. Turning to Page 5. I’d like to spend some time discussing asset quality results for the first quarter. The ACL reduction that is presented on this slide reflects improving asset quality, particularly in our commercial loan book and is the direct result of the significant amount of work being done by our bankers and credit teams to manage and reduce credit risk in the current economic environment. We have seen improvement in our ratings stack via a combination of strategic assets or exit, sorry, as Chris mentioned, coupled with some modest improvement in the remaining book. Net charges for the quarter of $6.6 million were related to one of those strategic exits, which was a CRE relationship in Western Pennsylvania and the progression of one Western Pennsylvania operating company through the workout process.

The commercial real estate loans related to this operating company account for the majority of our NPA increased during the quarter from $23 million to $33 million but remain at a very manageable level of 44 basis points. We have a defined exit strategy for this credit, and we’re actively engaged in the execution of that strategy. As Chris mentioned, we’ve included additional details on Page 6 and 7 of this presentation regarding our office and multifamily portfolios. Starting on Page 6 with office, you’ll see the granular nature of this segment with an average loan size of $1.1 million and average loan to value of 55% based on the most recent appraisal available. It’s also important to note that geographic distribution of these properties and our limited exposure to central business district assets that totaled $47 million.

Looking at that $47 million segment, it is comprised of 30 loans averaging $1.6 million and the largest loan in that group totaling $7 million and the majority of those dollars being located in the Pittsburgh, Columbus and Buffalo MSAs. I’d like to call your attention to the pie chart on this and the next page and clarify that the other category is primarily made up of loans within our defined market of Pennsylvania and states adjacent to Pennsylvania. Also included in this detail are maturities by year. This information reflects limited maturity concentration in any one individual year. Digging into the large exposures the 29 that are represented on this page is exceeding $5 million. These loans include 2 non-owner-occupied properties, totaling $11 million, and in whole, there is a debt service coverage ratio well over 1.2% for the entirety of these loans.

And the 4 loans over $10 million average debt service coverage ratio of over 1.4. I’ll also note that our construction exposure in the office segment is insignificant. Turning to Page 7. You’ll see similar statistics relating to our multifamily portfolio. As with office, you will see very granular exposure as evidenced by an average size of $1 million and an equally diverse geographic distribution. In this segment, we have 30 loans exceeding $5 million that reflect an average debt service coverage ratio of over 1.4 with the largest 9 displaying an average debt service coverage ratio of 1.6. These debt service coverage ratios exclude approximately 7 properties representing $78 million in exposure that are still in their lease-up and stabilization phase.

We monitor this lease-up and stabilization versus our underwriting assumptions and limit the number of construction loans that we make to very top-tier borrowers who have experience and the appropriate capital. And we have no concern with these projects at this time. In addition, we have multifamily construction commitments totaling $215 million with outstandings of $115 million at the end of the quarter. All of these construction loans are within the contiguous states of Pennsylvania, Ohio and Maryland as well as one deal in Delaware. We continue to have a positive outlook for these multifamily properties and this has been a portfolio that’s performed very well for us. Finally, both our office and multifamily portfolios have limited criticized, classified and NPL categorized loans.

I’ll now turn it over to Mark to dig a little deeper.

Mark Kochvar: Great. Thanks, Dave. On Slide 8, we have net interest income. The first quarter net interest margin rate, as Chris mentioned, is 3.84%. That’s down about 8 basis points from last quarter, which does represent an improvement over the last several quarters in terms of the decline. It is in line with our expectations as the pace of deposit mix shift and exception pricing moderates. We also see this in the slowing increase in the cost of funds that’s shown at the bottom left of this page. Cost of funds is up about 15 basis points in the first quarter. It was up 28 and 27 basis points the prior two quarters. Our emphasis on the deposit franchise has aided in helping keep that DDA mix strong at 29% and has returned us to net customer deposit growth allowing us to reduce the more expensive wholesale funding.

That shift on the balance graph of about $100 million of brokered between money market and CDs was cost neutral. We expect funding cost pressure to continue to moderate with the net interest margin bottoming out in the mid-3.70% range in the second quarter and third quarter. We’re still asset sensitive on the front of the curve. So should the Fed decide to move rates lower, we would expect 2 to 3 basis points of additional margin compression for each of the first few 25 basis point cuts. On Slide 9, we have non-interest income, which returned to more normal levels in the first quarter after some unusual items in the fourth quarter. Those included a $3.3 million OREO gain and over $1 million of non-cash valuation adjustments those are all in the other categories.

We did experience some seasonality in debit card as well as in service charges in Q1. The Q1 results were in line with our recurring fee outlook of approximately $13 million per quarter. On the expense side, expenses were down $1.7 million in the first quarter compared to the fourth, more in line with our expectations. The largest decline was in salaries and benefits where medical expense returned to more normal levels after an unusually high fourth quarter. Our run rate expectation is approximately $54 million per quarter for expenses. And lastly, on Slide 11, capital TCE ratio increased by 15 basis points this quarter, overcoming 8 basis points of drag from a greater AOCI impact. TCE remains quite strong due to good earnings and a relatively small securities portfolio.

All of our securities are classified as AFS. Capital levels position us very well for the environment and will enable us to take advantage of organic or inorganic growth opportunities. Thanks very much. At this time, I’d like to turn the call back over to the operator to provide instructions for asking questions.

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Q&A Session

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

Daniel Tamayo: Hey, good afternoon, guys.

Mark Kochvar: Hi, Dan.

Daniel Tamayo: Maybe, I appreciate all the commentary on the credit side, and it seemed like it was really, the increase in net charge-offs and non-performers were related to the single commercial real estate credit. But as we get through bump your time and enter a period of uncertainty. Obviously, you provided a lot of color on the office and multifamily portfolios. But can you just provide where you think credit costs go for you from here? I mean just a high-level thought on what NCOs might look like for you as we go through the year or provision, whatever is easier?

Dave Antolik : Yeah. I think when you start with the ACL that showed some improvement. Now this quarter, obviously, evidence some charges. So we think we’re — we know we are improving our asset quality, and we expect that to continue throughout the year. I mean there’s still risk in these portfolios, and we think we’re adequately reserved for those risks.

Daniel Tamayo: I mean, is the run rate of — I mean, I don’t want to call it a run rate, but with net charge-offs bouncing around a 20 basis point a quarter number, does that seem like a reasonable I guess, before the first quarter where they’re a little bit higher. I mean, how do you think about what a reasonable number is going forward? Is it closer to that 20 basis points? Or should we be thinking 35 basis points or some other numbers is a better run rate for you guys in terms of credit costs?

Mark Kochvar: Yeah, this is Mark. I don’t think that the first quarter experientially changes our thinking for the — at least for the medium and near term. So we had been expecting sort of in the 20s someplace in terms of charges over the next several quarters on average.

Daniel Tamayo: Okay. All right. Thanks for that. And then I guess, secondly, and I apologize if I missed this, but obviously, getting the balance sheet right now, you’re adding deposits and loan growth is not the most important thing, but just curious what the most current outlook on loan growth is.

Dave Antolik : Yeah. So if you look at Q4, we saw relatively higher than normal loan growth. Those average balances carried into Q1 pipelines were relatively low at the beginning of Q1. They’ve grown into the balance of Q1, but we’re still not expecting any significant balance growth throughout the year, low single-digit numbers is what we would budget for.

Chris McComish : Dan, we’ve been pretty consistent about that kind of in that 3% range is where we’ve been looking.

Daniel Tamayo: Great, okay. All right, I’ll step back. Thanks for the color guys.

Chris McComish : Thank you.

Operator: Question comes from the line of Kelly Motta from KBW. Please go ahead.

Kelly Motta : Hi, thanks for the question. Maybe just carrying on, on that loan growth question from before. Just wondering understanding that pipelines are relatively low, where you’re still seeing opportunities versus where demand for credit from your borrowers is more muted at this point in the cycle?

Dave Antolik : Sure. Sure. We spent a lot of time building out our business banking teams. We think that’s the space. Lower middle market C&I as well where we can differentiate ourselves from many of our competitors and drive some growth. Those often come with deposit opportunities as well. So our approach to building relationships with these customers from a deposit perspective as well as supporting those customers with loan needs is important to us in terms of our people forward strategy.

Chris McComish : Yeah. The things are not as robust in the commercial real estate area, Kelly, as you’d expect, right, given the rate environment, this is as much customer caution as anything. The good news is we’ve got very deep relationships in the commercial real estate space. So we’re able to be proactive with them. So we don’t believe we’re missing opportunities. It’s really lower demand. I think Dave is exactly right. Small business space has been one that’s been a real positive for us, both on the loan and deposit side, and it’s an area that we’ll continue to focus.

Kelly Motta : Got it. That’s super helpful. And in the absence of kind of stronger growth if capital continues to build quite nicely. Just wondering, as you look ahead, what your priorities are for capital return here?

Chris McComish : Yeah. We get that question a lot, seeing where we are relative to $10 billion in size and the regulatory responsibilities that come with that, as we’ve talked about in previous quarters and for the past couple of years, we’ve really done a nice job of building this foundation for growth relative to regulatory and compliance oversight. And we feel like we’re there today. We also are highly interested in organic growth. And we believe there may be opportunities down the road, and those are long-term relationships that we’re working hard to continue to build. We believe that we’ve got a great story to tell in that regard. When you think about the capital levels of the company, the efficiency of our company, the customer experience recognition that we have, employee engagement, all of those things give us a good foundation to be able to potentially be a good partner for somebody that’s looking to become part of a larger organization.

So very interested in the states that we’re in today in both Pennsylvania and Ohio in this geography.

Kelly Motta : Got it. That’s helpful. Maybe last question from me. On the fee side, both the card revenues and service charges were a little weaker. How much of that was just seasonality? Or is there any other changes that were made that we should be cognizant of as we kind of think about the year ahead?

Mark Kochvar: I think most of it was seasonality. It was primarily in the cards, it was primarily debit card activity driven. And then in the service charges, it’s primarily NSF that’s often seasonal as tax returns and some spending slow. So we typically see some slower ends in the first quarter of years.