Release Date: July 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- S&T Bancorp Inc (STBA, Financial) reported a net income of $34 million, equating to $0.89 per share, up $0.08 from Q1.
- Return metrics were strong with a 15% ROTCE and a PPNR of 1.82%, while the efficiency ratio was below 55% at 54.94%.
- Net interest margin (NIM) improved to 3.85%, driven by solid customer deposit growth and a favorable mix shift in deposits.
- Credit quality remains stable to improving, with a 12% quarter-over-quarter decline in criticized and classified assets.
- Customer deposit growth was robust, with more than $150 million in the quarter, allowing a reduction in wholesale deposits and borrowings by $85 million.
Negative Points
- Allowance for credit losses grew by $1.3 million, representing a modest increase from 1.37% to 1.38% of total loans.
- Higher-than-normal medical expenses were experienced, particularly in Q2, impacting non-interest expenses.
- The competitive environment for deposits remains challenging, with customers still being rate-sensitive.
- Non-interest income improvements were primarily due to seasonal changes and a one-time gain from Visa Class B-1 shares, which may not be sustainable.
- The company has significant exposure to floating rate loans, which could lead to net interest margin compression if the Federal Reserve cuts rates.
Q & A Highlights
Q: Can you repeat your guidance on the net interest margin (NIM) before discussing rate cuts?
A: We expect some cost of funds pressure, but we believe the NIM is close to the bottom, with potential for minor fluctuations either way.
Q: What are the balances of brokered deposits at the quarter end, and what are the opportunities to reduce these and FHLB borrowings?
A: At quarter end, we had $300 million in brokered deposits and $200 million in the BTFP program. We expect to reduce brokered deposits by over $100 million in Q3, depending on the balance sheet dynamics.
Q: Can you provide more color on the commercial loan pipeline and what is driving the increased activity?
A: The pipeline is strengthening across all regions, driven by a mix of activities. There is pent-up demand due to anticipated rate cuts, and customers are showing more optimism.
Q: How are you feeling about commercial real estate (CRE) credit quality, and are there any pockets of weakness to watch?
A: We manage risk by re-underwriting to current conditions and maintaining conservative underwriting standards. The main challenge in CRE is construction costs, but we are seeing good results and continue to support strong projects.
Q: What are the new loan yields for fixed rate and ARM portfolios, and how does this impact the NIM outlook?
A: New yields on the mortgage side are just under 7%, and ARMs are around 7%. This repricing dynamic helps the NIM outlook, especially as we head into a potential rate-cutting cycle.
Q: Can you provide some color on the provision outlook for the back half of the year and your comfort level with the current reserve?
A: We are comfortable with the 1.38% reserve level. The quantitative part of our model indicates a lower needed reserve as criticized and classified assets improve. We expect this trend to continue barring any macroeconomic surprises.
Q: What is your preference for crossing the $10 billion asset threshold, organically or through M&A?
A: Our focus is on organic growth, aiming to cross the threshold through this means. However, we are also open to inorganic growth opportunities and are preparing for both scenarios.
Q: Can you discuss the deposit pipeline and competition, and how this impacts your NIM outlook?
A: We are seeing widespread deposit growth across all divisions, focusing on growing wallet share with existing customers. The competitive environment is stabilizing, allowing us to have more favorable rate and fee structures.
Q: Has the better-than-expected NIM performance changed your outlook on where it could bottom next year?
A: We believe the NIM bottomed around 10 basis points higher than anticipated. Our expectations for the impact of rate cuts remain unchanged, so the bottom could be slightly higher than previously expected.
Q: Can you provide details on the criticized and classified asset levels at the end of the quarter?
A: Criticized and classified assets are down 12% quarter over quarter and 29% year over year, with a $38 million reduction for the quarter and $107 million year over year.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
