Q1 2024 S&T Bancorp Inc Earnings Call

Participants

Mark Kochvar; Chief Financial Officer, Senior Executive Vice President; S&T Bancorp Inc

Christopher McComish; Chief Executive Officer, Director; S&T Bancorp Inc

David Antolik; President; S&T Bancorp Inc

David Tamayo; Analyst; Raymond James

Kelly Motta; Analyst; Keefe, Bruyette & Woods North America

Daniel Cardenas; Analyst; Janney Montgomery Scott LLC

Matthew Breese; Analyst; Stephens Inc.

Presentation

Operator

Welcome to the S&T Bancorp of first quarter 2020 for a 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 ColdSpark. Please go ahead, Eric.

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. The 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 obtained by clicking on the Materials button in the lower right section of your screen. This will open up a panel on the right or you can download these items. You can also obtain a copy of these materials by visiting our Investor Relations website at ST. Bancorp.com. With me today are because of the commerce S. and TCEO. and Dave Antolik S & T's President. I'd now like to turn the program over to Chris. Mark.

Christopher McComish

Thank you, and good afternoon, everybody, and welcome to the call, and 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. But before we get into the numbers. I want to continue to express how good I feel about the progress that 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 in 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 for 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 are 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 midsize employers in the United States. And this is the 2nd 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 consensus estimate. With that net income over 31 million. Our return metrics were excellent with almost a 14% ROTCE. and our PPNR remained strong at one 76. Our net interest margin did see some contraction, though at three 84 is still very strong. The eight 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 love look at looking at things from a credit perspective there there was a little bit of movement. However, it's very manageable and private, 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 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 our 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 of 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. Then Mark will provide more color on the income statement and capital. We look forward to your questions after their remarks.
Dave, over to you.

David Antolik

Yes.
Thank you, Chris. Turning to page 5, I'd like to spend some time discussing asset quality results for the first quarter from the ACL reduction that is presented on this slide reflects improving asset quality as 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 rating stack via a combination of strategic gas 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 the 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 remained 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 six. 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 the geographic distribution of these properties and our limited exposure to Central Business District assets that totaled $47 million. Looking at that CAD47 million a segment that 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 our maturities by year. This information reflects limited maturity concentration in any one individual year digging into the largest exposures, the 29 that are represented on this page is exceeding $5 million of these loans include tune-up 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 four 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'll 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 nine displaying an average debt service coverage ratio of 1.6. These debt service coverage ratios exclude approximately seven 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 the very top tier borrowers who have experience and the appropriate capital. And we have no, we have no concerns at this point with these projects at this time in addition, we have multifamily construction commitments totaling 215 million with outstandings of $115 million in the quarter. All of these construction loans are within the contiguous states of Pennsylvania, Ohio and Maryland, as well as one deal in Delaware. And we continue to have a positive outlook for these multifamily properties. And this has been a portfolio has performed very well for us. And finally, both our office and multifamily portfolios have limited criticized classified and NPL categorize loans. And I'll 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 news margin rate, as Chris mentioned, three 84 down about eight basis points from the from last quarter, which does represent an improvement over last several quarters in terms of the decline 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 of this page, it cost of funds is up up 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 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 bottoming out in the mid three, 70 range in the second and third quarters. We're still asset sensitive on the front of the curve. So should the Fed decides to move rates lower, we would expect a two to three basis points of additional margin compression for each of the first few 25 basis point cut.
On Slide 9, 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 category. 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 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 eight basis points of drag from a greater AOCI impact TTY. remains quite strong due to good earnings and a relatively small securities portfolio. All of our securities are classified as AFS. capital levels positions 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.

Question and Answer Session

Operator

(Operator Instructions) Daniel Tamayo, Raymond James.

David Tamayo

Hey, good afternoon, guys. And maybe I appreciate all the of all the commentary on the credit side, and it seemed like it was and really the increase in net charge-offs and nonperformers were related to the single commercial real estate credit. But Tom, as we get through above 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 on what NCO's might look like for you as we go through the year, what provision, whatever procedure?

David Antolik

Yes, I think with you start with the ACL that showed some improvement. Now this quarter obviously evidenced some charges. So we think we're we know we are improving our asset quality. 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.

David 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 the 20 basis point a quarter numbers that seem like a reasonable, I guess, before the first quarter, were there a little bit higher?
I mean what how do you think about what a reasonable number is going forward? Is it closer to that 20 basis points or or should we be thinking 35 basis points or are some other numbers as a better run rate for you guys in terms of credit costs?

Mark Kochvar

Yes, Mark, I don't think that the first quarter experientially, it changes our thinking for the year, at least for the medium or near term. So we had been expecting so right in the 20 some place in terms of charges over the next several quarters on average.

David Tamayo

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

David Antolik

Yes. 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 balanced growth throughout the year. Low single digit numbers is what we would budget for them.
We've been pretty consistent about that kind of in that 3% range is where we've been looking.

David Tamayo

Great.
Okay.
All right.
I'll step back. Thanks for the color, guys.

Operator

Kelly Motta, KBW.

Kelly Motta

thanks for the question on maybe media carrying on on that, that loan loan growth question from before. Just wondering, I'm understanding that pipelines are relatively low where you're still seeing opportunities first first is on where are demand for credit. I'm your borrowers more muted at this point in the cycle.

Christopher McComish

Sure, sure.
We spent a lot of time building out our business banking teams. We think that's a space low, 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 them deposit opportunities as well.
So our approach to rebuilding 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, yes, things are not as robust in the commercial real estate area, as clearly as you'd expect, right, given the rate environment with this is as much a customer caution is 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 a lower demand. I think Dave is exactly right. The small business space has been one that's been a real real positive for us, both on the loan and deposit side, and that's an area that we'll continue to focus on.

Kelly Motta

That's super helpful. In the absence stronger growth at Capital continues sales quite nicely. Just wondering as you look ahead, what your priorities are for capital return here?

Christopher McComish

Yes.
Yes, until we get that question a lot seeing where we are relative to $10 billion in size and we have 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 we're there today. We also are highly interested in inorganic growth, and we believe there are there there may be opportunities down the road and those are long 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. And maybe last question for me and on the fee side, but both the card revenues and sorry, 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 in the service charges, primarily NSF. And that's often seasonal as seen on tax returns and some spending slows. So we typically see some slower end stuff in the first quarter of years.

Kelly Motta

Great.
I appreciate all the color.

Mark Kochvar

Thus far as a year ago, we did make some change some NSF changes for the year-over-year comparison on service charges impacted by that, but the from Q4 first, that's more seasonality.

Kelly Motta

Got it.
That's helpful. Thanks so much.

Christopher McComish

Thank you.

Operator

Manuel Navas, D.A. Davidson Companies.

Hi, this is Sharon G on from manual novice.
Thank you so much for taking my question. Home I Andrew, what sorry, what would you assume for deposit betas in our rate down scenario? Chimera, CFO, of really gets a little tricky because in the early stages of that with rates and if the Fed were to move, we would still anticipate our cost of deposits to increase some. But just as at a lower pace. And so we had the quantification that data gets a little a little a little trickier on so that the just for wastepaper way for me to think about it. It has been that our margin will be up again about two to three basis points lower than it would have been. And the absence of the Fed rate cuts. So we are expecting compression to the kind of mid three 70s in the kind of second quarter, third quarter timeframe. So if we were to see the Fed move say in September?

Mark Kochvar

No, I would I would expect that margin to go from kind of mid 70s to low three 70s and that experience would continue. We have to definitely keep on going for at least the next several cuts.

See. Thank you. And that's it for me.

Operator

Daniel Cardenas, Janney Montgomery Scott.

Daniel Cardenas

Good afternoon those through dividends and Martin, can you give me the on the AOCI. impact this quarter?

Mark Kochvar

That change was like eight, eight basis.

Daniel Cardenas

Okay.
And what was what was the dollar amount?
I think last quarter you were at 90.9 million or the that go to this this quarter?

Mark Kochvar

About 98.

Daniel Cardenas

Okay, excellent. As well.
And then on the credit quality front, can you give us a little bit of color as to the or the industry that the company now that you guys had some issues with what industry were they operating in? And then maybe some some thoughts as to just overall watch list trends. I mean, they sound pretty good, but maybe just a little bit more color on that.

David Antolik

Yes, Dan. Um, with regard to the one credit that's in workout, it is an active workout. I don't want to disclose anything that might disrupt our ability to collect with regard to the overall rating stack. And we have seen some improvement. And as I mentioned in the prepared comments, it is a combination of some strategic exits and we've got some additional execution there to continue to build momentum in reducing C and C assets because they they continue to be higher than where we'd like to have them on as well as the making sure that we're monitoring and actively following the remainder of the rating stack and where we have seen improvements.
And then on top of that, making sure that we're underwriting to the the current environment, meeting costs rates, all of those things, those things combined will help to continue us. It allow us to tell a better credit story as we move forward.

Daniel Cardenas

Okay.
And then with that one credit that you're working out, do you think you'll have any additional losses associated with that? Or do you think what the what happened this quarter is pretty much will cover cover those losses that we're in good shape relative to future losses.

David Antolik

It's just really a matter of timing of the final resolution with this with this customer.

Daniel Cardenas

All right.
And then on the deposit front, what we saw here in Q1, do you think that's sustainable throughout the rest of the year?
I mean, I know it's despite right now for everybody for the good core deposit growth, but how do you guys feel about the growth overall for 2024 on deposits there that?

David Antolik

Yes, that's correct.

Christopher McComish

I feel we feel very good about they the team and all the work that we've done, be it from the commercial side of our business and emphasis on treasury management, the additional channels and avenues through which where we're originating deposits and deepening customer relationships, the focus that we've put within our teams either in our branches or contact centers, how we've changed incentive plans there.
We've pulled many levers and none of those things happen overnight.
And this has been a couple of year journey that we're on long before the significant rise in interest rates. And as you said, this hand to hand combat started in the industry. So the progress we've been made we've made as a company feel very good about around this focus on our driver of the deposit franchise. And so we this is two quarters in a row of meaningful deposit growth, $100 million last quarter, $70 million this quarter. Our DDA percentages of a total remain remained solid. So we I think the stability of the rate environment actually helps us a little bit, and we're going to continue to be as proactive as we need to be.
Could.

Daniel Cardenas

Could you repeat the last question for me? How should we how should we be thinking about your tax rate on a go forward basis, looks like it was a little bit higher in Q1 versus last year. And is that 20% ish kind of a good run rate going forward?

Mark Kochvar

Yes, we expect around 20 affective.

Operator

(Operator Instructions) Matthew Breese, Stephens.

Matthew Breese

Hey, good morning, sorry, good afternoon, everybody. And Matt, I wanted to go back to the disclosures on the office book one quick one is just the average LTVs. Could you could you confirm for us those are those at origination or there any updates or how do you kind of go about that process, it would be the most recent appraisal available.

David Antolik

So in some cases where we have a reason to update the appraisal, we would use that number.
Otherwise, it's at that origination is there any sort of way to from that time was a weighted average of two, three years old or is it for the most part four or five years old?
Look the way we look at this book and the way that I look at values, we focus on debt service coverage, right? And that's net operating income because that ultimately determines the value of the property. So that's what we spend most of our time looking at testing stressing. So our rent, the rent roll that goes into making up that service coverage is what we what we focus in on and how often are those debt service coverage ratios updated at a minimum annually.
Okay. Yes.
So all the numbers that I referenced today would have come out of the most recent annual review, and most of those are done in the back half of the year. So those are pretty current numbers that I reference relative to debt service coverage.

Matthew Breese

Okay.
So along those lines, if I look at the maturities by year, you had 48 million maturing in 2024, and I'm assuming some of those have kind of already matured and renewed or gone elsewhere. I'm just curious as given it's a limited sample set as those have kind of come up for renewal, how have the debt service coverage ratios reacted and they've been able to kind of maintain a north of one or 1.2 times level from what you see as the first part of the question that these numbers are just moving forward.

David Antolik

So the things in Q1 that would have reset have already reset. They've matured and we've either rewritten them or they've been taken out by others, and we haven't seen any deterioration relative to resetting in the current interest rate environment. I think the biggest question here for for any bank is what we know, what does that occupancy look like? Unlike the multifamily office CRE has is usually limited to the number of tenants and those tenants pay a fixed rental rate for a longer period of time. So the as I as I mentioned in the call, the office CRE debt service coverage ratios tend to lag multifamily because multi-family landlords have the ability to adjust rental rates on a on a more frequent basis, typically annually.

Matthew Breese

Okay, that makes sense. Could you just go into the the biggest office loans, the $10 million bucket and the biggest multifamily loans, similar $10 million. How are those larger loans performing, any sort of past-dues or any sort of issues there?

David Antolik

Just just some broader color on the big stuff yes, I think the biggest takeaway is that those largest loans, particularly those above 10 million, have stronger debt service coverage ratios for both office and multifamily, some and in the multifamily space. The debt service coverage ratios are significantly higher than what we would test to in terms of an annual review for a debt service coverage. Our covenants that we have in place on most of these loans and there they're geographically diverse for the most part from this idea that other category is really just a deeper dive into our geography, but they're pretty well dispersed. Obviously, the larger concentration by number and dollar is in Pittsburgh, but they're not outsized. It's not a one 40 million loan. The average sizes are significantly larger than 10 million for the U.S., the largest type of loan that we have.

Matthew Breese

Okay.
And are any of these loans, you know, criticized or classified not consider pass?

David Antolik

There's about one three in the office space. That's criticized of the top, which I'm referring to the top 29 years with the biggest ones tend to DMOs damage when they when they go sideways down in Kazan and finish. There's one loan in the office pool. There's nothing in the multifamily. There's one loan in the office pool of those 5 million and larger that is a.
Yes, that's a criticized loan.

Matthew Breese

Okay.
The last one I had just in regards to the NIM. and appreciate taking all my questions. The pace of loan yield expansion has also slowed. And I was just curious, in the absence of rate cuts, is this kind of four to six basis point range of loan yield increase? Is this a good kind of near-term proxy for which we should expect until there's breakup?

Mark Kochvar

Yes, I think there is in that five, five to six right around in there. That's that we that's what we expect for the next term.
You're next several quarters, at least, I'll leave it there.

Matthew Breese

I appreciate taking all my questions.

Christopher McComish

Thank you.
Certainly, we yes, we appreciate the interest.

Operator

Thank you. There are no further questions at this time. I would like to turn the call over to Chief Executive Officer, Chris McCamish, for closing remarks.

Christopher McComish

Yes, thank you all for the engagement and the thoughtful questions of anything follow-up, feel free feel feel free to reach out again, we feel real good about the start started the year, particularly this deposit growth and where things stand, and we certainly appreciate your time and your interest look forward to talk to you soon about.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining.
You may now disconnect.