S&T Bancorp, Inc. (STBA) Q1 2022 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the S&T Bancorp First Quarter Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mark Kochvar, CFO at S&T Bancorp. Sir, the floor is yours.

Thank you very much. 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. This statement provides 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 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.stbancorp.com. We will be reviewing an earnings supplement slide deck as part of this presentation. You can obtain a copy of those slides on our website under Events and Presentation First Quarter 2022 Earnings Conference Call, click on the First Quarter 2022 Earnings Supplement. 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?

Thank you, Mark, and good afternoon, everybody, and thanks for joining us. We look forward to the discussion of our Q1 performance as well as taking your questions. Before I give a brief overview of the numbers, I wanted to start off with some -- making sure everybody is aware of some recognition that we received from J.D. Power recently around retail customer service and retail satisfaction here in -- what they define as the Pennsylvania region. We were named as the number 1 bank based on their survey of bank customers. That is a really big deal for our company and certainly for our employees. It's a tremendous complement when you receive feedback like this from those that are talking to our customers on an independent basis. And it's something that we do not take lightly, but it's certainly something that we have great pride in. We obviously want to thank our customers for the confidence that they show in us and certainly congratulate our teammates for this achievement. It gives us great optimism and confidence as we move forward. As you see on slide -- on the first slide, titled First Quarter Overview. We had a very nice quarter. From a numbers perspective, we posted $0.74 a share, up from $0.57 a share, and that totaled about 9 -- a little over $29 million in net income. We saw improvements in both margins and credit quality in the quarter. Credit quality improvement is in line with our focus on achieving a better balance of growth, underpinned by a focus on safety and soundness. The margin improvement was aided by better deposit mix as well as the asset-sensitive nature of our balance sheet and a rising rate environment. As we look forward, this asset sensitive nature of our balance sheet really does give us optimism as we move through the year and for continued improvement in both net interest income as well as net interest margins. I also want to take a note around our dividend increase for the quarter. We increased the dividend by 3.4% to $0.30 a share. This is the second increase that we've delivered in the last 3 quarters, and it is a reflection of the value that we have in those that are investing in our company and our desire to give back to them as well. Turning on to the next page, titled Balance Sheet. I'm going to turn it over for -- to Dave Antolik to give us more details. But a couple of notes here one, as we talked about, and this is really a reflection of customer relationships, and that is our deposits remain stable. And actually, the mix shows some improvement in the quarter as low-cost core deposit growth remains in great shape, and we migrated some higher cost deposits off the balance sheet. Our securities portfolio also increased in the quarter, which will help improve NIM and yields, deploying about $117 million from cash into higher-yielding assets. Lots to be proud of in the loan book over the quarter, particularly in the consumer space. This was a strategic work that we've been doing within our customer base that we believe that there are opportunities with those customers and good solid execution, not only in this quarter but over the past few months has resulted in that growth. I'm going to turn it over to Dave and allow him to give us more details.

Well, thanks, Chris. And good afternoon, everyone. I'd like to continue with some additional details relating to Page 4. As you may recall, in Q4, we saw broad-based loan growth. That growth allowed us to enjoy a $54 million increase in average loan balances here in Q1. In our consumer segment, as Chris mentioned, absolute net loan growth continued at an annualized rate of 9.8%, also evidenced by increases in all consumer segments. We continue to see success in all regions with our home equity and first lien residential mortgage and construction products. I'm very pleased with the progress our consumer team has made post pandemic and fully engaging our Eastern Pennsylvania branch network. That region has seen significant increases in activity and pipeline. We carried improved consumer pipelines into Q2 and anticipate balanced growth to continue at a slightly higher annualized level, low double-digit growth rate in the coming quarters. Supporting this growth is the addition of 3 new mortgage loan officers year-to-date. On the commercial side, production in Q1 met our expectations and exceeded Q1 of 2021 by 13%. Growth was dampened in Q1 by elevated payoffs. The primary reason for this was based on our strategic decision to allow certain loans to pay off due to structural pricing. Pipeline in Q2 on the commercial side are similar in size as compared to Q1, and we have seen increases in our revolving C&I utilization rates quarter-over-quarter, and they are now nearing pre-pandemic levels. Based on the decisions that we made to allow for certain C&I payoffs, our total revolving commitments reduced in the quarter by approximately 3%. We continue to closely monitor activities in the commercial segment. And based upon the current pipeline levels, we anticipate similar results in Q2 and low to mid-single-digit annualized growth rates in the second half of the year. Slide 5 provides some details regarding our asset quality trends. As you can see, our NPAs declined by 25% when compared to Q4. Our special assets team was able to complete the full liquidation of 2 significant and long-lasting workout credits. And we also saw a positive movement of several hospitality credits as they return to accrual. There were no meaningful NPA inflows in Q1. We also experienced a 12% reduction in CMC assets in Q1 and primarily related to the hospitality portfolio. I'll now turn it over to Mark to continue the conversation.

Great. Thanks, Dave. On the left-hand side of the asset quality sheet on Page 5, where we detail some of the movement in the allowance for credit losses between the quarters. The ACL increased by about 2 basis points or $1.3 million. The lower quantitative reserves came as a result of rating upgrades and better loss experience that was offset by higher specific reserves and a somewhat more cautious forecast given the rising macro uncertainty. Moving on to Page 6 on net interest income. Core net interest income, excluding PPP, increased $0.7 million compared to the fourth quarter as short rate increase at the very end of the quarter and we saw a better asset mix with higher average loans and securities and a decrease in cash. Total net interest income declined by $0.7 million due to the headwinds from lower PPP income, which decreased by $1.4 million compared to the fourth quarter and with 2 fewer days. NIM rate, excluding PPP, increased 7 basis points, primarily due to the improved asset mix. We're well positioned to benefit from rising rates with over 50% of our loans indexed to LIBOR, SOFR or PRIME, favorable impact was only about $0.5 million in Q1, but we expect that to expand as we had a full quarter of 25 basis point move from March and with the anticipated additional rate moves this quarter. Our interest income was improved by at least $7 million annualized for every 25 basis point increase. We expect early deposit beta to be muted, and we have not experienced significant pressure to date. While that is likely to change as the pace of Fed moves quicken and competition reacts. Moving to Slide 7. Noninterest income, which decreased by $0.9 million in the first quarter compared to the fourth quarter, primarily due to valuation changes, deferred compensation plan, which shows up in the other category. This has no net P&L impact as there is an offset in lower expenses. Debit and credit card activity was strong, improved further this quarter, up [$0.7 million]. Offsetting that is moderating mortgage banking income as refis have slowed and more of origination volume is moving to the portfolio. We still expect the run rate to be in the $15 million to $16 million per quarter range. Slide 8, noninterest expense declined by $2.8 million from last quarter. The biggest improvement came in salaries and benefits where we had much higher incentives payouts in the fourth quarter. This decrease was partially offset by increased OREO expense, which shows up in the other categories. We still expect expenses to be in the $49 million to $50 million range for the quarter going forward as we continue to make investments in our business and fee expenses being under some pressure, particularly due to the tight labor market. And finally, on Slide 9, capital. We have strong capital levels and are well positioned for growth. Our Board extended our share repurchase plan through March of 2023, there's about $37.4 million available in that plan. While we have no immediate plans for buybacks, we continue to evaluate the situation given recent stock price changes. Our preference is certainly to remain -- remains to deploy the capital for organic growth and strategic investments. [Indiscernible] tangible book value dilution of about 2.6% this quarter, owing to a relatively smaller securities portfolio at less than 11% of assets. Our TCE declined by just 17 basis points and stands currently at the end of the quarter at 8.91%. Thanks very much. At this time, I'd like to turn the call over to the operator to provide instructions for asking questions.

[Operator Instructions] And the first question is coming from Daniel Tamayo from Raymond James.

Maybe we can start on the loan growth. I got your guidance on the low double-digit growth in the consumer book and then the low to mid-single-digit annualized on the commercial I think you said that second quarter is going to be similar to the first quarter in commercial. But putting that all together, is there a kind of a range that you would point us towards for loan growth for the rest of the year?

Yes. The growth is going to be concentrated in the second half of the year, and we would guide to mid-single-digit growth on an annualized basis for the remainder of the year.

Got it. All right. I appreciate that. And then maybe we can talk about the margin a little bit and the net interest income outlook with all the changing -- the change in the REIT outlook. So you talked about the $7 million annualized on the asset side being the initial benefit, I think last quarter, you mentioned that may build up to $9 million over time as floors are reached. Just wanted to get your updated thoughts there. And then just thinking through how the excess cash assumptions are factored in there as well?

Yes, for the margin, those numbers haven't changed. We still -- that first 25 basis points is that the $7 million by the time we get to about 100 basis points, we worked through our floors and should be closer to $9 million. And again, that's interest income as before the any increases on the deposit side. What was the second part of your question? I'm sorry.

Just what any excess cash deployment assumptions --

Yes. On the cash -- we did put some cash to work here in the first quarter. We're taking another look at that given the changing outlook in loans. It's a little bit different than what we had anticipated earlier in the year with more uncertainty in the macro-outlook. So we may look to deploy a little bit more in security as we move throughout the year depending on how the loan growth materialize.

And the next question is coming from Michael Perito from KBW.

A quick clarification question. I'm wondering on the $15 million to $16 million quarterly noninterest income target. I'm curious, Mark, what you guys are assuming around the mortgage piece. I mean, on one hand, it sounds like you're adding some producers there. But on the other hand, you hear kind of supply issues that are starting to bake into the run rate here. I'm just curious where you have that pipeline and that overall kind of fee line trending off of this kind of low point we saw this quarter over the last 2 years.

Yes. That mortgage number is closer to about $1.25 million or so that includes the servicing, which is more stable. It's probably about half and half between servicing and fees for origination. We are seeing more activity in the -- on the mortgage side, billing because they are larger loans going to the portfolio and also an increase in home equity activity and the refi boom kind of stopping the people looking to take advantage of equity in their homes are looking more at the on equity side to fund those activities. But in the fee side, it's maybe probably $1 million of that per quarter or related

So it's fair to say then that with that $1 million in hand to maintain in this run rate, you guys are expecting some of the debit and credit card and other deposit fees and things that have kind of ramped up nicely over the last few quarters to remain at these levels?

Yes, Mike, this is Chris. That's exactly right. I mean we look at the -- we kind of bifurcate that fee income line item, and there's lots of variability in the mortgage piece and watching and monitoring and focusing on growth on the true customer activity when you think about debit card treasury management fee income, those sorts of things, that sort of activity level is an important one for us and the key metrics that we're focused on. And that's what we'd like to see a lot more continued growth there to offset the variability on the mortgage side.

Got it. And then just 2 more quick ones. First on credit. Anything else of -- obviously, the 12-month comps look great, but anything else of size or consequence near term that we should be mindful of in terms of stuff that might repair itself or be offloaded or just anything else that you have visibility on today?

Nothing beyond what we commented on, Mike. I think broadly, if you look at delinquency, NPL, TDRs, special mention, substandard, everything is trending in the right direction for Q1. And as Mark mentioned, with regard to the reserve, we did add a little bit to the reserve in order to anticipate upcoming potential macroeconomic changes that might impact credit performance, but there's nothing specifically that I would point to beyond what we mentioned.

Got it. And then just lastly, with the impacts on the balance sheet from AOCI this quarter and the margin reflecting, I mean, we could theoretically be a kind of at a low point from a capital standpoint. I mean I think you guys could build from here pretty materially. And with the non-performance, it's such a smaller percentage now. Do you think there could be a bit more of an aggressive posture around capital deployment outside of the M&A and organic stuff that you've been considering all along?

As we're looking at that, that's also the function about how our stock price is at. And we get quarter above the math and the return starts to get less attractive to us. So that is something we're looking at. But again, our preference is growth and strategic initiatives. So we're reluctant to spend that in light of improvements in earnings coming from the REIT side -- you know, just spend that on capital side at this point in time.

Got it. And actually, just one last one, sorry. Just on that point. Do you think it's fair and comfortable to say that with the growth pipeline you have today and with some excess cash still likely be normalized that you could stay under $10 billion without kind of materially altering your strategy for the duration of this year or next? Or do you think that you think about it differently?

Yes. Again, we're not targeting a specific time frame to hit, but I think you're right, we still have $750 million of cash and even and with a little bit lighter loan outlook, we're looking at potentially up to 2 years at that pace before we would naturally cross.

And the next question is coming from Russell Gunther from D.A. Davidson.

Do you have a view internally in terms of number of rate hikes you're budgeting for? And if so, how are you guys thinking about deposit betas in the early innings of a high cycle versus later. I know you expect it to be viewed near term. But as we move through a rate hike cycle potentially pretty quickly this year, has anything structurally changed in your view as to how deposit betas will perform in this cycle versus prior?

Well, that's a really interesting question. I mean 1 thing, I'm not very good at predicting what the debt will do. So we tend to run a lot of different scenarios just to understand where our pressure points are on the beta side, the one thing that is different for us last time around versus this time is, one, just our balance sheet mix is different, especially on the liability side where last cycle, we had almost $1 billion worth of short borrowing debt and we were a net borrower. That is split to where we have is the cash position. So liquidity is much better than it was last cycle. So I guess a different view on how we handle deposit pricing. The second thing is that in the last rate cycle, we had also a deposit product tied to Fed funds. And that had almost $1 billion close to $1.5 billion, $1.4 billion in it. We have restructured that product so that it's no longer directly indexed to the Fed funds. So it gives management and the bank much more control over the timing of that pricing potential piping increase. So we think on the beta side that there's just a different outlook that we have. It will still depend on how competition, how customers react to this, but we feel like we can manage that a little bit better in the cycle.

That's really helpful. I appreciate it. And then just back to the asset quality discussion, so certainly a good quarter in terms of how things have trended? Are you able to provide any additional color in terms of the increase -- the specific increase in the reserve this quarter that you mentioned the $2.7 million? And then any additional thoughts on what that qualitative adjustment attempts to capture for and where that conservatism might manifest itself on the balance sheet.

So on the specific reserve, there are a couple of credits that we are watching closely that resulted in that add to specific reserves. We do expect resolution of that, possibly in the second quarter, but I would expect also no way in the third quarter. So that one will hopefully get cleaned up without significant additional P&L impact because we believe we have that mostly covered, if not, all covered. And then on the reserve side, on the forecast side more generally, our primary indicators are unemployment and those look pretty good. So we only looked at unemployment as indicator for the forecast. We probably would not make any adjustments, but looking beyond that, which we have the ability to do in our model. That's where some of the uncertainty comes in that just a character and type that, and in the way unemployment and that dynamic works in this round of how the economy and how the macro is playing out, may not be as predictive as maybe it has in the past. So we're [indiscernible] that. But there's no specific area that, that applies to.

Yes, it's not necessarily a specific portfolio or bucket. But Russell, it doesn't take long to turn on the news to talk about kind of all things inflation, from rates or to the commodities, cost to people costs, those sorts of things. So we know we've got to be diligent, pay attention and do the stress testing necessary within the portfolio. We like all financial institutions are proactively monitoring.

I appreciate that, guys. Thank you. last one for me is you answered the kind of organic $10 billion in asset question. I'd just be curious to get an update in terms of M&A, your appetite geographic and business model set that you're particularly interested in? And any thoughts on the pace of those conversations.

Yes. We continue to have active discussions. And this is Chris, it's a big reason why we gained -- I came to be part of this team. And we got a foundation that we're building. And when you build a foundation that's focused on customers saying good things about here as it relates to J.D. Power and building the process is necessary to put in place to focus on things like credit quality and safety and soundness and then adding talent to the team, both internally and externally, all of those things represent the foundation for growth that we're optimistic about. We like this area of the country a lot that you put a pin in the map here. and throw a 200-mile circle around Pittsburgh, you end up with, I think, around 60% of the population of this country, lots of middle market businesses, which is where we've been core to for a long time, relationship-based markets that are -- that meet with our culture and who we are as a company. So all those things give us optimism for the future, but our job is to execute every day and every quarter and deliver performance more similar to what we've done this quarter. And that's going to give us the opportunity for those inorganic opportunities. So when it happens, we can't control, but we certainly are going to work hard every day to control the execution and delivery of performance, and that's where we're focused.

And the next question is coming from Matthew Breese from Stephens.

I wanted to go back to the deposit cost discussion, not specifically betas. But have you changed your core rates at all or promotional rates? And maybe are you seeing customers start to get eager and asked for -- more often asking for exception-based pricing?

We've mostly lowered ours as far as we could lower them over -- in the second half of last year. So there was not a lot of room. I think mentioned the restructuring that we did on these floating indexed accounts that only took -- that took place in the first -- during the first quarter, at the end of the first quarter and did result in a modest decrease in the overall rate of that book of business. As far as exceptions go, it's -- we're meeting very frequently on that. We've had less than a handful of outright requests from people to -- for rate increases. Now we -- again, we do expect that to increase it. So far it is very light.

And I think where we're seeing some of it is we've got a little bit of municipal business. So you see the challenge in the cities and the municipalities looking for things that look like transactional rates. But outside of that, there's not much of it at all. And you can see the decline in that interest-bearing quarter-over-quarter is reflective of that.

On the growth front, it sounds like in the near term, we should expect more consumer heavy growth versus commercial. And I was curious, beyond just the near term, how much of that change in mix shift of growth that's coming in the door is strategic versus taking what the market gives you? Should we expect more consumer base growth from S&T.

I mean we are at our foundation of a commercial bank and a middle market commercial bank and a middle market, commercial real estate bank, and we're really good at it. We've had an opportunity within our consumer book. There was latent business there. This is Chris. The thing that I'm so pleased with is -- this is representative of expansion of customer relationships that do not look like -- does not look like transactional business. But really, this is taking that deposit book that we have and providing more product and service to those customers when they need it. So -- from a strategy standpoint, it certainly was strategic in finding an opportunity and working hard and executing every day on that opportunity. But it shouldn't in any way lead you to believe that we're shifting our focus away from the commercial business. Our commercial middle market and business banking business is critically important to us. We have gone through some changes over the past few months from ensuring that we understand clearly what our credit risk appetite is and what the returns need to look like in our businesses, and that gave us the opportunity to look at a couple of opportunities and make proactive decisions there on some transactions that just didn't meet our hurdles. Our teams are highly engaged. As Dave said, we produced as much commercial business this quarter as we did and actually year-over-year more commercial business that just ended up with the makeup of the balance sheet looking a little bit different.

Got it. And maybe just to follow up on that, Chris. In the spirit of learning a bit more about, how you are going to change the direction of S&T.? Can you give us a sense for the types of projects or how you've been most using your time since entering the CEOC? What are the top 3 or 4 priorities for you over the next -- not the near term but for the next 12, 24 months?

So some of it has been building the team. You may look and see one of our last decks that were out there, just the amount of change we've had in the kind of a broader C-suite and executive levels within the company, and we'll continue to bring in and enhance talent there. We're very focused on -- we have a transition in our Chief Credit Officer role with a retirement coming up. We're very focused on that role. So everything around kind of building the talent and the level and effectiveness of the team. We spent a lot of time focused on kind of all things commercial banking, particularly the loan origination and portfolio management process. We've got a project underway that's been going on for the past couple of months that we've defined internally as steel curtain, and it gives us an idea of doing all things right from a portfolio management and a credit risk management standpoint. But at the same time, working, it seems to be more proactively engaged with our customers to improve turn times and improve effectiveness around the credit origination process. That work has gone really well from the standpoint of bringing our teams together and connecting them. Dave talked earlier about growth in the eastern part of the state of Pennsylvania and operating in a more of a consistent and effective way across our network. So some pure foundation building relative to execution effectiveness and then thinking more strategically about what growth could look like and where it could come from. That's still relatively early days, but we know that that's the work that's happening now and exploiting opportunities there. We're doing work to continue to enhance our digital capabilities and digital effectiveness. So things like online banking and those sorts of things that will be -- that is to come, but we're very, very focused there. And then getting the name out in the marketplace. This -- I've talked to the team about that we need to be more bold. The idea of -- the JD Power award is a great example. We didn't have anything to do with who the customers were that they surveyed or when they were we're surveying them or any of those sorts of things. But our customers said better things about us than our competitors' customers said about them. And I think we've been a little too humble and we have an opportunity to be more forceful, particularly here in Western Pennsylvania in places like Pittsburgh, we've got great name recognition from the team, who the people are on the field. I think there's an opportunity to take advantage of that. So a little bit of forceful outward approach relative to who we are in the market and how we're going to win a lot of work foundationally on being more effective in the way that we execute and then building some talent of the team. Thanks for the question. I'd like to talk about it.

And the next question is coming from Daniel Cardenas from Boenning and Scattergood.

A quick question on, I guess, in regards to the securities portfolio, the growth we saw this quarter and expectations for perhaps some additional growth. I mean does a rising rate environment really -- is that going to impact the timing of the growth in the securities portfolio.

The timing for me is more about the loan growth trajectory than rates per se.

Okay. Good. And then any thoughts of moving some of that available-for-sale portfolio into a held-to-maturity component to maybe smooth out the ups and downs of OCI.

No. I mean, we do have a smaller security portfolio. So I still have -- we still have liquidity in the back of our minds, never leave. So with a small security book, I feel like there's a little bit less room for us to park -- to move that and try to take advantage of that. So we don't have plans right now to do anything along those lines.

And what's your duration on that portfolio?

That's around 3.5 years, 3.5 to 4.

All right. And then as we look at operating expenses, and thank you for the guidance on that, will the majority of the increases going forward be primarily in compensation line items? Or are there other items that we could see significant growth as you continue to grow the footprint.

I would expect the [indiscernible] expense. That's probably where I see the largest dollar increase. But we also have several initiatives underway that on the system side. So we'll see some expense increase in the equipment and both the equipment and data processing line. So those are probably 2 or 3 primary areas where we see the expense increase.

Okay. And then last question, just for modeling purposes, how should I think about your tax rate for the remainder of the year?

We're staying right around 19 or so. To the extent that we have a better pretax from the rate increases and how that materializes that 19 could tripped up by 0.25 point or so paying on the amount of additional pretax that we have. That 19 is result of kind of a fixed amount of permanent items and tax credits and things like that. So those aren't going to change much, so the rate will fluctuate depending on that. So kind of incremental from here, any additional pretax would be at the 21% and then factored it that way.

Okay. Good. Good. And then any comments from customers regarding inflationary pressures impacting their ability to meet their lending obligations like borrowing obligations, I should say?

Yes. I don't know that there has been. I've been out in the market quite a bit recently, Dan. I think there is continued turnover supply chain and labor costs, access to capital has not been at the forefront of those conversations. But I would expect that to become more of a topic in the coming quarters. I think it's a reasonable conclusion to ask that question given the current environment with its inflation.

Yes. Certainly, you think that in our portfolio, reviewed our processes with our customers. Those are the exact questions we're asking, how are you planning for those things? What do you see happening?

And how much more -- or I guess, how many more rate increases do we have to see before you begin to get -- maybe dig a little bit deeper into the loan portfolio than what you have done so far?

Well, we're doing that now. We're looking at all of our deals on the front end and through the portfolio management process, quarterly review process to see what impact increasing rates will have from a stress perspective, on EBITDA or NOI on real estate deals. So we've built that into our processes.

Thank you. And there were no other questions from queue at this time.

Well, listen, thanks for the great dialogue and your interest in our organization. And again, we're very proud of the performance we delivered this quarter. We're certainly proud of the recognition we received, and we look forward to talking again soon. And in the meantime, we're going to go back to work. So thank you.

Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.