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spk01: Welcome to the SMT Bancorp second 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.
spk05: Thank you, and good afternoon, everyone. Thanks for participating in today's earnings 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 second 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 where you can download these items. You can also obtain a copy of these materials by visiting our investor relations website at stbankcorp.com. With me today are Chris McCommish, S&T's CEO, and Dave Antolik, S&T's President. I would now like to turn the program over to Chris.
spk00: Chris? Mark, thank you, and good afternoon, everybody, and welcome all of you to the call. We appreciate the analysts being here with us, and we look forward to your questions. I'm going to begin my remarks on page three, but before I do, I do want to take a minute to thank our employees, shareholders, and others listening and on the call. To our leadership team and our employees, your commitment and engagement is what drives these financial results that we're going to discuss. These results are yours, and you should be very proud. Our performance this quarter reflects our continued progress centered on S&T's People Forward purpose, and more specifically, how our focus on this purpose is delivering for our customers, shareholders, and the communities we serve. As we've discussed before on this call, this purpose defines who we are, and our values define how we do our work. All of this is connected to the four core drivers of our performance, the health and growth of our customer deposit franchise, delivering consistent, solid credit quality, best-in-class core profitability, all of this underpinned by the talent and engagement level of our teams. This is where we are focused, and this focus is what's delivering for our shareholders. To sum it up, we made strong progress on all four of our performance drivers as they've shown great progress and they've produced the results that you will see in this deck. Turning to the quarter, our $34 million in net income equated to $0.89 per share, up $0.08 from Q1. Our return metrics were excellent with a 15% ROTCE, while our PPNR remained strong at 1.82, and the efficiency ratio was below 55 at 54.92. Our NIM and NEE both improved versus Q1, as our net interest margin was at 385, which is very strong. This is a direct result of very solid customer deposit growth and mixed shift in our deposits, which led to a moderating cost of funds. Mark will provide more detail here. Our credit quality remains stable to improving, and Dave is going to dive more deeply here in a few minutes. He will also have additional detail provided on our multifamily and office CRE exposure, and will also touch on the pickup we're seeing in our loan pipelines. Moving to page four, while loan growth was in line with previous guidance, while we saw meaningful deposit growth. On the deposit side, customer deposit growth was more than $150 million in the quarter. This was after $75 million of growth in Q1 and produced over 8.5% annualized growth. While mixed shift continued $17 million in DBA balance growth, resulted in strong performance, and overall DDA balances remain strong at 29% of total balances. The customer deposit growth allowed us to reduce wholesale deposits and borrowings by $85 million, which obviously has a positive impact on our net interest margin. I'm going to stop right there and turn it over to Dave, and he can spend a little bit more time on the loan book and credit quality. Then Mark will provide more color on the income statement and capital. I look forward to your questions.
spk04: Well, thanks, Chris, and good afternoon, everyone. If I can direct your attention to slide five in order to walk you through our asset quality results for Q2. As presented, our allowance for credit losses grew by $1.3 million in the quarter, which represents a modest increase from 1.37% to 1.38% of total loans. A number of factors influence this outcome. We are actively executing on our exit strategy with the one Western Pennsylvania relationship that I mentioned last quarter and have established a specific reserve for that credit of $2.9 million during Q2. Second, we continue to see improvement in our rating stack through reductions in our criticized and classified assets. Those CNC assets declined by 12% quarter over quarter and are down 29% year over year, That equates to a $107 million reduction in the past four quarters. Finally, we experienced a net recovery of $400,000 during Q2. In addition, NPLs remain at a manageable 45 basis points of total loans plus OREO. During this period of modest loan growth, our efforts continue to be focused on improving asset quality as a fundamental driver of our financial performance. Looking forward, we expect loan growth for Q3 to be in the low single digits, driven primarily by consumer and retail mortgage activities. As our pipelines for commercial and business banking grow, we do expect that that will point towards increased growth in Q4. Turning to pages six and seven, we've included updates relative to our office and multifamily CRE portfolios. Starting with office, we saw a reduction in balances of $20 million and the total number of loans in this portfolio quarter over quarter as loans in this category continue to amortize and payoffs occur. Highlights include small average loan size, diverse geography, manageable maturity concentrations, and limited CBD exposure. Moving to multifamily CRE, where we continue to have a positive outlook for this segment and the markets that we serve. As a reminder, that includes Pennsylvania and the contiguous states of Ohio, Maryland, and Delaware, and performance of these assets continues to meet our expectations. During Q2, outstandings in this portfolio increased by approximately $25 million, primarily the result of construction loans converting to permanent loans. In addition, we added new construction commitments of $15 million. It's important to note that these new construction loans are underwritten to current credit standards, including 25% to 30% equity, LTVs below 65%, and debt service coverage ratios in excess of 120 at 25-year amortizations and using current interest rates. We anticipate the construction completion and stabilization cycle to continue to put downward pressure on these balances as permanent financing options for these loans are available and include favorable financing terms, including 30-year amortizations and extended interest-only periods. And I'll turn the program over to Mark. Mark?
spk05: Thanks, Dave. Next slide, the second quarter net interest margin rate of 3.85% is up one basis point from the first quarter, and net interest income increased as well, which represents an improvement from the last several quarters of declines. Strong customer deposit growth allowed to pay downs of broker CDs and wholesale borrowings. Mixed changes continue to moderate with an increase in DDA for the quarter, both point in time and average. This resulted in the slowing of the increase in the cost of funds shown on the bottom left to just five basis points in the second quarter. We expect funding cost pressure to continue to moderate with net interest margin at or close to bottom now, not factoring any Fed increases. We are still asset sensitive on the front of the curve, And should the Fed decide to move rates lower, we would expect two to three basis points of net interest margin compression for each of the first couple of 25 basis point cuts. Moving on to non-interest income, we saw improvement here, but it was primarily due to some seasonal changes in debit and credit card fees. We did recognize a $3.1 million gain related to Visa Class B1 shares that we own. That is in the other category here. We took the opportunity to sell about $49 million of lower-yielding securities, picking up about 370 basis points with an earned back of just over two years. Non-issue expenses on the next slide declined $0.9 million in the second quarter compared to first. That's in line with our expectations. Most of the favorable variances here are timing-related. We are experiencing higher-than-normal medical expense this year, especially in the second quarter. As a self-funded plan, we have seen some higher claims. We expect our run rate, though, on the expense side to continue to be approximately $54 million per quarter moving ahead. Lastly, on capital, the TCE ratio increased by 18 basis points this quarter. 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 as well for the environment and will enable us to take advantage of organic or inorganic growth opportunities as we look forward and move into the latter part of this year. I would like to add a question that came in prior to this call. It was related to the amount of pure floating rate loans that we have currently on the balance sheet and the yield on those loans. So right now, our balance sheet on the loan side, we have about 39% of our loans are tied to Prime or SOFR loans. An additional 25% are arms, and the remaining 36% are fixed. In addition to that, we do have about $500 million of swaps. If you factor that in, those are received fixed swaps, that would bring kind of that floating exposure down to about 33% of kind of the net loan book if you factor that in. The yield on those on the floating side is right at 8% on a blended basis. Arms are at about a 536, and the fixed rate is about a 518. So with that, I'll turn the call over to the operator to allow for other questions to be asked.
spk01: The floor is open for questions. If you have any questions, please press star 1 on your phone, and we ask that while asking your questions, please pick up your phone and turn off speakerphone for enhanced studio quality. Please hold while we poll for questions. Thank you. Your first question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.
spk03: Thank you. Good afternoon, guys. Thanks for taking my questions. Yeah, so I apologize. most of your guidance, especially on Mark's side, but I think I missed the NIM before you talked about the rate cuts. Can you just repeat what you said about where you expect the NIM to go from here?
spk05: Yeah, we do expect some cost of funds pressure, but the NIM, we think we're really pretty close to the bottom here. So it might be plus or minus a couple of basis points either way, but we think that's kind of stabilized a little bit sooner than we had thought.
spk03: So, you know, I guess it was a bit of a surprise to see the margin expand in the quarter, and that was, you know, driven by the good performance on the funding side. And it seems like you were able to lower broker deposits and FHLB. So, I guess, first, where are broker deposits in terms of balances at the quarter end? And then, second, What do you think your abilities or opportunities to reduce those as well as the FHLB going forward are?
spk05: Yep. So at quarter end, we had an additional $300 million of brokered, and we still have about $200 million in that BTFP program. That one doesn't mature until January. And it has a little bit of a favorable rate. It'd take a couple of cuts before it would make sense to pay that off. It has a sub-five rate. The brokerage, you know, we'll look at, you know, depending on how the deposit and loan books go over the quarter, we have some maturing, I think over $100 million maturing in Q3 that we should be able to reduce. We also have some floating rate brokers that are not CDs. They're money markets. Those we could reduce at any time, just depending on how the rest of the balance sheet looks.
spk03: Okay, perfect. And then lastly, the balance sheet repositioning in the second quarter, when did that take place, and then what was sold and what was purchased if you have used those funds already?
spk05: Yeah, so it was done in the latter part of June, so late in the quarter, so there's not a whole lot of impact of that. in the margin. We sold $49 million, primarily a couple of treasuries and a few mortgage-backed agency CMOs that we have, or excuse me, commercial-backed mortgages that we have. We've repurchased similar CMBS-related assets and CMOs farther out the curve, kind of with a 5-6 duration level. and picked up about 370 basis points on that trade.
spk03: 370 basis points. Okay, great. Okay, I'll step back. Thanks for all the detail.
spk08: Sure.
spk01: Your next question comes from the line of Kelly Motta with KBW. Please go ahead.
spk02: Hey, good afternoon. Great quarter. Thanks, Kelly. I was hoping, thanks for the commentary about the loan pipeline, the commercial pipeline strengthening. Just wondering if you could give us additional color on what you're seeing with that. Is there any particular area where the pipeline is strengthening, either by region or loan type? And what are you attributing that to? Is it the expectation of rate cuts? Is that impacting borrowers starting to come back with more demand, economic activity, just any qualitative color on that would be excellent.
spk04: Yeah, it's a mix of activity, and it's throughout our regions. I think there is some pent-up demand relative to rates moving downward, so I think folks are, with that anticipation of rates down, They're looking at the possibility of refinancing or moving forward with projects now that there's some better visibility amongst our customers relative to rates.
spk00: And Kelly, I'll just add to Dave's comments. This is Chris. I've had a number of conversations with our team leaders, as have Dave, commercial banking team leaders throughout the geography over the last, as we were heading into the end of the quarter. And they're They're seeing a lot more activity in the marketplace. I would agree with Dave that it's across the board probably a little more CNI than CRE, obviously, given the state of CRE and our business banking pipeline continues to grow. I just think there's a sense almost of a little bit more optimism out in the marketplace from a customer-based standpoint as part of it.
spk02: Got it. That's super helpful. And then on the commercial real estate side, you know, I appreciate that it was excellent here and you actually had net recoveries this quarter. But how are you feeling? It seems like the tone, not just on growth, but also on credit, might be a bit more optimistic than last quarter. I'm hoping, you know, what are you still watching closely? Any... you know, pockets of weakness that we should keep in our sites here.
spk04: The way we manage that risk is to look at what those results look like for those customers relative to current financing options, right? So if you have something that's in the midst of a five-year arm, maybe you're two years in, We re-underwrite that to the current conditions and see what that cash flow looks like to get ahead of potential issues. And our performance relative to that kind of stress testing has been good. So we're happy with the results. And as I mentioned in my prepared comments, our underwriting standards have moved to be a little more conservative relative to loan to value And we always have a kind of a plan B relative to refinancing of these assets or the sale of these assets. That's why we've stuck to things like 25 year amortizations in the multifamily space to give ourselves room in the event that we need to reposition an asset. The challenge in the CRE space is really construction costs and the borrowers and developers ability to get a decent cash on cash return. given the cash flows that these assets and projects can produce. So the good ones will find a way to get a project done with additional equity and get a return, and that's what we're seeing relative to the movement I described in our multifamily construction portfolio. And we'll continue to support them because we like the results that we see.
spk02: Awesome. Thanks so much. I'll step back.
spk04: Sure. Thanks, Kelly.
spk01: Your next question comes from the line of Matthew Reese with Stevens Incorporation.
spk09: Hey, good afternoon, everybody. Hey, Matt. Hey, Matt. Hey. Mark, I appreciate the color on the floating rate, floating rate exposure and the yields. You know, what was interesting there was how low the fixed rate and the ARM portfolios are in the low 5% range. I guess my first question there is, you know, one, what are the new loan yields for those books? I'm assuming they're a good 250 to 300, 250 basis points higher. Yeah, that's the first one.
spk05: Yep. So new yields on the mortgage side, they're just under seven, probably about a 680 around there. And on the mortgage, Other kind of arm books, they're also right around seven.
spk09: Okay. And as we think about that dynamic of the fives, the five, you know, low 5% rates resetting into the high 60s, is that helping the NIM outlook as we think about rate cuts later this year into 2025? I mean, you know, cycle to date, your loan beta is kind of knocking on about 50%. Would you expect that to be better as we head into the next rate cutting cycle?
spk05: Yeah, so we generally see and expect to continue to see around four to five basis points on the loan side of repricing benefit before you get to any type of rate cuts. And that's just kind of the natural repricing of the fixed book and those arm resets. The other thing that will begin to help us in 25 starting at the end of the first quarter is that the $500 million that we have in swaps, those are laddered out, pretty much $50 million a quarter starting in the first quarter of 25. And so those will have a repricing or a maturity opportunity for us. Those are kind of in a negative a position by anywhere from 250 to 350 basis points. So we'll have an opportunity to reset those starting in late Q1.
spk09: Great.
spk05: So that will support later.
spk09: Very helpful. You know, one of the things that was really nice this quarter was the provision with the net recoveries. You know, I was hoping you could provide some color on how you think the provision will shake out for the back half of the year and if you can't answer that directly. you know, how comfortable you feel with the overall reserve level at 138 here.
spk05: I think overall, I mean, we're, you know, by definition comfortable with that 138. What we are seeing, and Dave alluded to that, is, you know, over the past several years, we've been working with a much higher relative to peer amount of criticized and classified, you know, special mentioned substandard loans. That has, you know, forced us essentially to have a higher than peer ACL level. Those are improving quite a bit, you know, as Dave mentioned, over $100 million this year to date. So as that moves through that pipeline, the need for reserve, you know, begins to moderate. So we're seeing that already where that kind of the quantitative part of our model is directing us to a lower level of needed reserve. We do expect that to continue barring, you know, any, anything unexpected on the macro front. So that will provide continued support just from an ACL need standpoint. On the charge-off standpoint, you know, we're not, we don't have anything on our site other than the one significant credit that Dave mentioned. But that, you know, again, can change at any time. But, you know, we're feeling pretty good about asset quality at this juncture.
spk09: Okay, great. I appreciate that. And then, you know, With the balance sheet at $9.6 billion, I know in past quarters you guys have provided plenty of detail on the Durban impacts. One thing I was curious on is just the preference on how you cross. Is there a preference to do it organically or through M&A? Just love some color there.
spk00: Yeah, all of our plans are to focus on that which we have direct control over, which is our organic growth. And so we're preparing... to cross over as the result of organic growth. And you think we had approximately $100 million a quarter of assets that would take us between now and this time next year, right? And so over the past three years, we've been firmly focused on building the foundation of our company, building the infrastructure to move through that level. so that we're in compliance with rules and regs and all the additional standards that are required. That being said, we believe the marketplace is becoming many more discussions relative to inorganic growth opportunities, and that's a key component of our future and our desire to be a bigger player in the markets that we serve and in this general geography. it's an and both. We're not going to slow down organic growth to wait for something that could happen down the future. By the same token, we're preparing for that event should it happen for us.
spk09: Okay. And then just my last one tied to M&A is just, you know, what is your preference in terms of geography for deals or types of banks that you look to partner with?
spk00: Yeah. So we're very focused on kind of the the geography that we're in in kind of contiguous states. And so you could look as far south of here into the Maryland, West Virginia, Virginia area, east into Ohio, and then obviously here in Pennsylvania and the markets that we're in in Pennsylvania and looking to expand there.
spk09: Great.
spk00: I'll leave it there.
spk09: Thank you for taking all my questions. Appreciate it. Sure thing.
spk01: Again, to ask a question, please press star one, and your next question comes from the line of Manuel Navas with DA Davidson. Please go ahead.
spk06: Hey, good afternoon. Can you talk about deposit pipelines a bit more and the competition there? It seems like you might have a little bit increase in deposit costs, but you're still getting some nice flows. You could just talk through that a bit.
spk00: Yeah, I'll start and then have Dave jump in because it's just so core to what we believe as a company and it was long before this, you know, dramatic rise in interest rates. We believe that, you know, the customers define themselves as to where they bank from their deposit relationship and the customer experience, customer loyalty that we have along with, you know, we're big enough to have the product capabilities that we need. It's been a strategic focus of ours. over the past few years, and it's starting to pay dividends. So we've developed products. You may have, I mean, we've talked about some of the work we've done on the treasury management side, not just with more people, but also product capability. That's both for our commercial customers and business banking customers. That's been a big focus of ours. We also have been very focused on our existing customer relationships. and recognizing that we've got tremendous customer loyalty. And during a time of rate disruption, our proactive outreach pays dividends for us. And so what we've seen is expansion of customer relationships throughout the company, our retail consumer customers, our business banking customers, and our commercial customers, all getting a greater share of wallet with those relationships due to our focus as well as the alignment with the loyalty. I think Dave can talk about activity levels and pipelines and things like that.
spk04: Just to add to Chris's comments, if you look at Q2, the growth was really widespread across all of our divisions, the commercial, the treasury management that supports commercial and business banking, as well as consumer. So the focus has been and will continue to be growing wallet share with the existing customer base. That being said, we are also in the business of attracting new clients as well. You know, that activity has been, I'll call it consistent, for the last six months. You know, we're seeing new opportunities. Those tend to be more rate competitive opportunities, so we feel that, you know, continuing to focus on the existing customer base, building out capabilities from a product and service perspective is going to propel us forward, and we still believe there's ample opportunity within the existing customer base to move the needle and continue to grow deposits.
spk00: The other part of your question, Manuel, I think related to kind of what's the competitive environment look like. And customers are still rate sensitive, but it's not at a kind of a fever pitch as it was as rates were moving up very quickly. I think there's more stability in the market. And therefore, we have the ability to go through our proactive outreach to have conversations that give us a better chance of winning versus losing and doing it at a rate in a fee structure that makes sense.
spk06: That's really a great color. In terms of the deposit flows, is that kind of where with the NIM kind of bottoming and maybe some stability here before rate cuts, Is that a kind of where there could be a wild card? Do you have borrowing pay down in your guidance or any excess deposit growth that pays down broker, that pays down borrowing? Could that offer a little bit of upside on NII and then?
spk05: Perhaps a little bit. I mean, we still have wholesale levels of around half a billion dollars. So there's still some opportunity to replace those higher cost funds. That is somewhat built into where we're headed over the next several quarters.
spk06: Okay, great. And if there's extreme excess, that would be where it could potentially be some upside. I'd love to have that problem. Has this changed this better NIM? Has this changed your evaluation of where it could bottom out? at some point next year, you know, we are going to have some, I believe we're going to have some rate cuts. Where do you think it could bottom? Could that be a little bit higher than maybe expectations previously?
spk05: Yeah, I think, I mean, overall, I think we landed at a bottom that's, you know, maybe around 10 basis points higher than we had anticipated. So our expectations for the impact on a per cut basis haven't changed So all is equal, you know, it would be like 10 higher, I think, depending on how many cuts there are.
spk06: That's great. That's transformative. Do you have, can you have a little color on the recovery? This is my last kind of question.
spk05: I think it was more about that there weren't any charges. We typically have a certain, you know, small level of recoveries that the, our special assets folks are working on, but the fact that there was no significant charges at all in the quarter.
spk06: Perfect. I appreciate that. Thank you. No further questions. Thank you.
spk01: Your next question comes from the line of Daniel Cardenas with Jamie. Please go ahead.
spk07: Good afternoon, guys. Hey, Daniel. Mark, I'm sorry, I missed your comments on the criticized and classified levels that you made earlier. Can you maybe just kind of repeat those for me? I'm just trying to get a sense as to, you know, where those levels were at the end of the quarter versus last quarter.
spk04: Yeah, so we're down 12% quarter over quarter and 29% year over year. I think the dollar amount for the quarter was about 38. It was about 38 for the quarter and $107 million year over year. And we think there's still some room to improve there as well.
spk00: And that goes right back to that, you know, we talk about our four drivers and that number two is asset quality. And the entire team is focused on it and we're really working proactively to enhance and build relationships that represent long-term opportunities for us and those that don't necessarily fit our either credit profile or where we're where we're headed long term that's those are those that we're moving out and the results are going to speak for themselves so far gotcha gotcha okay perfect um and then um on on the fee income side so the core number that we saw this this quarter backing out the visa
spk07: transaction and the securities uh the offsets on security side uh is that kind of a good run rate to build off of here for the back half of 24. yes we expect you know right around that 13 million a quarter level okay perfect um and then uh what was your aoci number for this quarter it's a 93 million Okay. All right. Perfect. Perfect. So, so then, you know, given, given, I think it was Dave's comments that, you know, you're kind of looking for low single digit growth in Q3, does that trend kind of carry into Q4? Maybe not so much, you know, mortgage driven, do maybe more commercially driven?
spk04: Yeah. I think that's accurate, Dan.
spk00: That's what we talked about relative to the growth in the pipeline and what we're seeing. There's seasonality to it, and there's better activity. Okay, great.
spk08: All right, that's all I have right now. All my other questions have been asked and answered, so thank you, guys. Thank you. Thank you.
spk01: I would like to turn the call over to Chief Executive Officer Chris McCommish for closing remarks.
spk00: OK, well again to the group on the phone. Great questions. Really appreciate the dialogue and your engagement with us. If you've got other follow up, feel free to reach out. We're we're darn proud of this quarter and the most importantly for me and Dave and Mark and everybody. It's the continued trends that we're seeing the engagement level of our teams, the commitment that they have to our customers. All of that represents a lot of positivity for us and We appreciate your interest in our company. So have a great rest of the day.
spk01: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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