S&T Bancorp Inc
NASDAQ:STBA
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Estee Lauder Companies Inc
NYSE:EL
|
Consumer products
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Church & Dwight Co Inc
NYSE:CHD
|
Consumer products
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
American Express Co
NYSE:AXP
|
Financial Services
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Target Corp
NYSE:TGT
|
Retail
|
| US |
|
Walt Disney Co
NYSE:DIS
|
Media
|
| US |
|
Mueller Industries Inc
NYSE:MLI
|
Machinery
|
| US |
|
PayPal Holdings Inc
NASDAQ:PYPL
|
Technology
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
27.99
45.61
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Estee Lauder Companies Inc
NYSE:EL
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Church & Dwight Co Inc
NYSE:CHD
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
American Express Co
NYSE:AXP
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Target Corp
NYSE:TGT
|
US |
|
|
Walt Disney Co
NYSE:DIS
|
US |
|
|
Mueller Industries Inc
NYSE:MLI
|
US |
|
|
PayPal Holdings Inc
NASDAQ:PYPL
|
US |
This alert will be permanently deleted.
S&T Bancorp Inc
You don't have any saved screeners yet
Welcome to the S&T Bancorp First Quarter 2023 Conference Call. After the management remarks, there will be a question-and-answer session.
Now I’d like to turn the call over to Chief Financial Officer, Mark Kochvar. Please go ahead, sir.
All right. Thank you. Good afternoon and thank you for participating in today’s conference call. You can follow along with the slide portion of the presentation by clicking on the Page Advanced button on the screen.
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 page two. This statement provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation.
A copy of the first quarter 2023 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 should open a panel on the right where you can download these items. You can also obtain a copy of these materials by visiting our Investor Relations website at stbancorp.com.
With me today are Chris McComish, S&T’s CEO; and Dave Antolik, S&T’s President.
I’d like to now turn the call over to Chris.
Thank you, Mark, and good afternoon, everybody. I will begin my remarks on page three. I want to thank you all for being on the call with us today. I certainly appreciate the analysts being here with us and we look forward to your questions.
I will mention on the front end that our remarks today may be a little longer than in previous quarters. In light of all that has occurred in our industry since early to mid-March, we wanted to take additional opportunity to provide some more information to you in our presentation around our deposit franchise, as well as our commercial real estate exposure. Our goal is to provide increased clarity and transparency around our financial performance.
It goes without saying that the quarter was a very active one for us here at S&T, not only from all that transpired since March the 10th. But for us, the work that we undertook as a leadership team at the end of February through early March with our employees.
As you may recall, we spent the last 12 months to 18 months focusing on our vision for the future and the next chapter of S&T’s performance. Defining our people forward purpose clarifying the customer and employee values that guide how we run the company and emphasizing the financial performance drivers that will deliver long-term sustainable financial results for our shareholders.
We define this work as our shared future shared between our employees, our customers, communities and shareholders. Within that shared future, we spent a lot of time focused on our financial drivers and in our discussions with our team, they center around four things; one, the health of our deposit franchise; asset quality; enhancing our already strong core profitability; and underpinned in all that we do employee talent and engagement. This strategic focus and tactical execution center around these drivers underpinned by our values and built by over 1,200 employees.
To ensure effective communication and engagement around our people forward purpose, values and these drivers of performance, we actually spent 12 days at the end of February through March 9th face-to-face with all 1,200 of our employees in 12 different sessions. It couldn’t have been timelier, because no sooner did we finish this work but the events of March 10th began.
It provided a rallying cry for our team and our people forward focus on customers, all centered around ensuring confident, stability, safety and soundness in the eyes of our employees, as well as our customers.
We believe as leaders our responsibility is not only to ensure our employees know what to do, but as probably more critically, that we help our employees understand the why. The last four weeks since March 10th have provided the perfect why behind our focus around our deposit franchise and the other drivers of our performance.
Speaking of performance, turning to page three, you can see a summary here that Mark and Dave will dive into in more detail. But for the quarter, we had earnings of $1.02. That’s the second quarter in a row with earnings over $1, net income of just under $40 million. Return metrics, as defined here is solid. We could also throw the word strong in there with an ROTCE of 19.61% and a PPNR of 2.23%.
Expenses remained well controlled with an efficiency ratio of right at around 50%, NIM down 1 basis point to 4.32% and the benefit of a net recovery leading to a recovery of 29 basis points where we will spend more time on later.
Turning to page four. We did show loan growth of just under 4% for the quarter, driven primarily in our consumer book with over $65 million of consumer loan growth. I will say that we feel very good about the level of our pipelines within our commercial business. They are the highest we have seen in a number of months that are representative of the growth and the commitment that we have made to that segment, including the attraction of talent into the company.
On the deposit side, deposits ended at just right at $7.2 billion. There was a decrease of $67 million in the quarter, but the declines occurred early in the quarter in January and then actually showed increases as the quarter went on.
We think that, that was very important in light of all the external environments and the environment and the details are actually on page five here. This is a newer slide that we provided to you all to give you an idea of what happened within the quarter to the deposit side of our balance sheet.
Again, we do want to emphasize this well-diversified deposit base to almost 230,000 customers, 60-40 mix between personal deposits and business, very granular in nature. You see the uninsured numbers there.
Within that uninsured number is about 300 -- a little over $300 million of collateralized municipal deposits. The trends, as you can see, the green line represents the events that occurred in early March and the growth that we saw the month.
I do want to -- we have a lot of employees on this call and others and I do want to recognize the great work that was done by our teams beginning really on that Monday early where we organized ourselves around very proactive outreach with customers through social media, face-to-face interaction, helping them understand what was happening in the marketplace, the safety and soundness of our institution and the options that they had available to them. We continue that focus every day and we feel -- we are proud of the growth we have seen since March 10th.
I am going to stop there. I will turn it over to Mark to provide a lot more details.
Great. Thanks, Chris. Slide six shows net interest income, which decreased by just $267,000 compared to the fourth quarter and that was with two fewer days, which negatively impacted revenue by over $1.5 million.
The net interest margin rate at 4.32% was essentially flat compared to the fourth quarter. Loan yields improved this quarter by 43 basis points and the cost of deposits -- total deposits, including DDA, increased by 25 basis points to 0.85%.
Interest-bearing deposits increased by 37 basis points compared to the fourth quarter, while costing liabilities increased by 59 basis points as the decline in deposits and the increase in loans resulted in some additional borrowings.
About half of our loan portfolio is tied to short-term rates, which has been a big driver of the net interest income and net interest margin improvement that we have had over the past year. We have seen an increase in preference from some customers year-to-date for fixed rates due to the inverted curve, which has put some additional pressure on nominal new loan yields.
As part of our ALCO strategy to protect net interest income and margin in the event of Fed rate cuts, we have hedged the floating rate loan concentration with $500 million of receive-fixed swaps. We continue to evaluate the right level of hedging, which will depend on the rate environment and how that impacts interest rate sensitivity of both deposits and loans.
Most of the net interest margin pressure this quarter came on the liability side. As like most of the industry, we experienced a high level of customer interest in seeking higher rates than we anticipated.
We believe we are past peak net interest margin a bit earlier than we expected. As you can see from the chart on the bottom left, the net interest margin rate for the month of March was lower than the full quarter. We do expect some firming of the net interest margin in the near-term as April brings the lagged repricing of our $425 million HELOC portfolio.
There is a possibility of further Fed rate hikes in May and we have and are experiencing some moderation in deposit mix changes and net deposit outflows. We expect NIM compression of approximately 5 basis points to 10 basis points per quarter for the next couple of quarters.
Next, on slide seven, we will provide a little more detail on the first quarter deposit changes. The top graph shows the quarterly point of point changes by deposit types. The bottom graph shows the migration or how much it moved from one type to another during the quarter. This is aggregated at the customer level.
So for example, overall, we saw DDA decline $120 million. That’s on the top graph. Of that decline, $88 million is from customers moving funds from DDA to other deposit types within the bank. That’s the bottom ground. The difference between the two, the $32 million is the net decrease from closed and new DD accounts, and the net DDA inflows and outflows to and from the bank.
Now within that DDA, $23 million of the $88 million DDA migration went to NOW, which is how we classify the IntraFi product, which is what provides the additional FDIC insurance coverage for our customers.
Separately, on CDs, we were up $240 million total bank. That’s the top graph, $153 million of which came from other deposit types that’s the bottom graph. Here, the $88 million CD difference is the net addition of new funds from both new and existing customers. Our liquidity, first and foremost, relies on a well-diversified deposit base.
If you turn to slide eight, you can see that to supplement that, we have access to funding the Federal Home Loan Bank of Pittsburgh and at the Federal Reserve. The Federal Reserve capacity is split between loans already pledged through the Borrower-In-Custody program or BIC, labeled here as Federal Reserve window and the newly implemented BTLF funding facilities that accepts bonds as collateral at par.
Between these two programs from the Federal Reserve, we have approximately $1.5 billion of funding capacity, of which we are using none. Including the FHLB availability, we have more than enough capacity to cover our uninsured deposits.
Next, Dave will provide some additional details on asset quality.
Great. Thank you, Mark, and good afternoon, everyone. If I could direct your attention to slide nine, where we have presented our asset quality results for the quarter. I am starting on the right-hand side of the page, we reported a $5.1 million net recovery during Q1. The largest event influencing this result was a $9.3 million recovery related to the customer fraud loss that we experienced in 2020. Offsetting this recovery were total charges of $4.5 million for the quarter, including a $3.4 million charge that was the result of a strategic note sale that we successfully executed.
Non-performing loans increased by $5.6 million, primarily as a result of one C&I relationship that migrated during the quarter, a $4.2 million specific reserve was established for this account.
On the left side of the page, you will see a detailed allowance for credit losses bridge between Q4 and Q1. We increased the overall reserve as a result of the specific reserve that I mentioned, along with growth and changes in the risk ratings that impacted the quantitative component, as well as a $1.85 million increase in the qualitative segment of the reserve that reflects changes in uncertainty in the macroeconomic environment. As a result, our overall total allowance increased from 1.41% of total loans to 1.49%.
Turning to page 10. We continue to pay significant attention to our CRE exposures. We have depicted for you an analysis of our CRE as a percentage of total loans, CRE sub-mix -- sub-segments as a percentage of total loans and our office exposure.
As depicted, this is a very diverse portfolio. This is reflected in our average loan size of $1.1 million. Furthermore, the average LTV of 63% and modest maturities over the next eight quarters position this portfolio well in the current environment.
Next we drill deeper into our office portfolio to identify central business district versus non-central business district exposure. As you can see, 83% of our office exposure is non-CBD reflecting our strategy and desire to keep this risk in this segment very granular. I will also point out that only one of our four largest office exposures matures within the next 24 months and that will occur in Q4 of 2024.
As part of our portfolio management practices, we regularly stress test each property to apply stressed net operating income assumptions and to reflect the current rate environment in order to identify potential future issues.
Turning to page 11. You will see a presentation for the entire CRE portfolio, reflecting a very granular portfolio with an average size of $1.7 million with approximately 15% of the entire CRE portfolio maturing in the next 24 months.
I will mention that the higher level of maturities in the healthcare and hotel segments reflect our strategic management of these relationships and desire to keep terms tighter on these segments that were more highly impacted by the pandemic. I will also note that we actively monitor our concentration limits and adjust as needed to reflect stress test results and as we update our credit risk appetite.
With regard to our construction loan balances, we anticipate a natural contraction as projects are completed and replacement rates have reduced. The current economic factors have shifted making underwriting new deals challenging and we have not relaxed our standards. We are paying close attention to things like reserves and contingencies.
We recently completed a review of our largest construction loans. That review identified that those projects are on average approximately 75% complete, and that the majority of the material and labor availability issues are behind us.
I will now turn the program back over to Mark to dig into some of the non-interest income issues.
Right. Thanks, Dave. On slide 12, non-interest income decreased by $2.4 million in the first quarter compared to the fourth. This primarily related to a gain on the sale of an OREO property for $2 million in the fourth quarter. That shows up in the other line item.
Mortgage banking was essentially flat compared to the fourth quarter as almost all of our production continues to go to the portfolio contributing to the loan growth that we had in that category. Our quarter fee outlook is in the $13.5 million to $14 million range.
On slide 13, expenses were well controlled up just $424,000 compared to the fourth quarter, the largest variance being the FDIC assessment, which increased across the board by 2 basis points and marketing, which is related to some seasonal promotional activity. Efficiency ratio is just over 50% and our quarterly expense expectations remain in the $52 million to $53 million range as we invest in people and infrastructure.
Slide 14 has some additional detail on our securities portfolio, which runs only about 11% of total assets. We favor well-structured products as evidenced by mix by the mix and the nominal extension of duration we have seen over the past year.
All of our securities are classified as available for sale. So the $69.4 million securities related AOCI covers the entire portfolio and is very manageable given our strong earnings and capital levels.
Those capital levels can be seen on slide 15. TCE improved due to the quarterly earnings and lower term rates, which decreased the AOCI compared to the fourth quarter. Our regulatory capital ratios are strong and well positioned for the environment with ample excess capital levels.
Our buyback authorization has $29.8 million remaining and we will look for opportunities, depending on economic conditions, our financial performance and outlook and the price of our stock.
Thank you very much at this time. I’d like to turn the call back over to the Operator to provide instructions for asking questions.
Thank you. [Operator Instructions] We will take our first question from Daniel Tamayo with Raymond James. Your line is open.
Hey. Thanks. Good afternoon, everyone.
Hi, Daniel.
Hi, Daniel.
Maybe first starting on the balance sheet. So the deposit -- loan deposit ratio is a little back over 100%. I know you guys have been there before, but deposits have come down over the last five quarters or so, and obviously, things are getting more difficult here. How are you thinking about growing deposits, what buckets do you think you are going to be able to see growth there and then where do you expect loan growth to be relative to the funding side?
Hi, Dan. This is Mark. I will start off on the deposit side. Just recently, just in the last month or so and especially since some of the bank failures, we actually have seen a firming in the deposit levels, some of the runoff that we experienced during 2022 seems to have slowed. So we think we are near the bottom there. The level of exception requests has declined here in April. So we are encouraged by that.
Category-wise, we would expect the migration to continue. So we would expect to see additional movement from some of the core deposit categories into CDs. But we expect that the overall level of deposits would start to turn around and possibly trend a little bit higher. We are not expecting huge growth, but that we would be near at least the bottom here. I will turn it over to Dave to talk about loan growth expectations.
Yeah. Thanks, Mark. So if we think about loan growth in Q1, I would expect similar loan growth in Q2 and Q3 with everything that’s happening in the micro or macroeconomic environment is noted in my prepared comments. There is some challenge with regard to getting deals to size and we are relatively concentrated in CRE and that’s where we are comfortable. So there will be a challenge there.
That being said, we have added a number of bankers that have helped us expand the pipeline. We are making really strong efforts in our business banking segment as well. Again, with that concept of keeping things granular. So more deals that are smaller in nature and perhaps less risky on an aggregate basis. So low single -- low-to-mid single-digit number that we talked about last quarter would be consistent with the remainder of the year.
Daniel, other things that we are doing is we -- in addition to bankers, we continue to enhance our leadership in the team within our treasury management business, both for our core commercial business, as well as our business banking and our branch-based customers.
And there’s a lot of demand out there for treasury management services and we are seeing meaningful activity based on the enhanced focus, all tied back to this -- the importance of our deposit franchise. So that will continue to be an important part of it and body of work for us in an area that we are going to continue to emphasize.
Okay. Terrific. Thanks for all that color. And I will let someone else tackle the margin question, maybe just a clarifying question on fee income. I was expecting the second quarter outlook to be a little bit lower from the removal of the NSF fees. Can you just remind us what that impact will be and when that will be felt?
So the annual number is about $1 million. So just that for the quarter would be about $250,000.
Okay. And that will be fully felt in the second quarter?
Yeah. We -- those changes were made right at the 1st of April.
Terrific. All right. I will step back. Thanks for the questions -- for answers.
Sure.
Thank you.
Next we will go to Michael Perito with KBW. Your line is open.
Hey, guys. Thanks for taking the questions.
Hi, Mike.
Hi, Mike.
Obviously, a pretty extraordinary month. It seems like you guys generally speaking, didn’t -- even though we kind of felt the alarm didn’t see a ton of impact on the day-to-day, but there are some things going on around like the CD growth and the remix and I just wonder has -- how sustainable is that as kind of the new norm here? I mean, are CD -- is CD growth continuing to make up the lion’s share in the start of the second quarter here and does it get to a point where if the credit environment remains this uncertain and the incremental funding is really just pretty high cost CDs where the appetite for loan growth could be impacted from you guys?
I will just say deposit part first. I mean, so far, we really -- it hasn’t really slowed the migration within the book has not slowed yet. We are still seeing that migration to the CDs. We are seeing some -- it doesn’t really impact us as much some migration on the business side from DDA to the FDIC protected product, but that’s not a huge margin impact that typically comes with either none or minimal increase in funding costs. On the loan side...
Yeah. I think that we should have sufficient funding and liquidity in order to do what we are projecting to do in terms of low-to-mid single-digit growth. Our emphasis on having the bankers focus on the entire relationship, the investments we are making in treasury management to make sure that we can capture those and safeguard those deposits and allow those customers to manage those deposits and deploy them as efficiently as they can, will help us.
If you think about the last 10 years as a commercial banker, it’s been growth focused on the asset side of the balance sheet and making a switch to focusing on deposit gathering and maintaining the relationship and building that relationship is really the opportunity that we have right now. And as Chris said, we are investing in that, and we continue to see positive results there.
We have seen some quarter-over-quarter, fourth quarter to first. We did see a pretty good increase in the borrowing portfolio, both on a -- especially on an average basis and that did have a pretty big impact on the margin. That is probably worth about 19 basis points or so. That has stabilized as we move into the second quarter.
So we are at around $450 million, $500 million of borrowing that has stayed relatively stable for the last month and a half or so. So we don’t expect the same change impact as we go into second quarter, assuming that some of those deposit rates hold. So we would be subject to the increased cost on the shifting side within the deposit book, but less so from shifting from deposits to borrowings, which is a little bit larger of a hit.
Yeah. And Mike, this is Chris. The only other thing I will add is a lot of this growth in CDs is built on our strategy and philosophy is taking care of our customers. So this is very much proactive engagement with our customer base who are looking for options and we are proactively making sure that we are doing everything we can to protect those relationships and grow them and that’s the source of some of the growth that’s potentially dollars coming from other institutions.
We are not out in the marketplace with aggressive rates that’s mass market sort of marketing to attract dollars. This is very much strategically built around customer relationships and it’s been affected to this point. We have built processes internally when employees need help with rates and things like that, they know where to go and get answers quickly and that seems to have paid dividends for us.
That’s all helpful. And then, Mark, are you able to give us some indication, as a function of that, right, I mean, NIM is obviously probably going down from here. But are you able to maybe give us some indication of where NIM was maybe towards the end of the quarter, like, in March or something like that as we think about the impact of some of this remix and the fully baking that into the NIM before we start maybe bleeding it down a little for the environment?
Right. So on the non-interest income -- the net interest income slide, I am sorry, that we had is on page six, kind of on the bottom left-hand corner, there’s a box where we showed very, very high level the major components of the net interest margin. So for the full quarter, that was 4.32%, for the month of March, that was 4.21%. So we have -- to your point, we have seen some decrease in the margin rate...
Sorry, I missed that. Yeah. No. That’s fair.
Okay.
Thank you.
We have looked at this a lot longer than you have, Mike. No issue.
No. No. I lapse aside. There -- some of the new slides are extremely helpful. So thanks for incorporating the level of detail. Just last question for me. Have you guys been doing any kind of reviews more so than normal or whatnot on the office CRE portfolio? And maybe as a follow-up, I mean, as you -- if you have done any kind of new appraisals or anything on that book, I mean, are you any kind of broad commentary you can share in terms of valuations. We had a competitor in somewhat similar markets earlier this morning say they are seeing 15% to 20% downward movements kind of broad-based across their geographies. Just curious if you guys have any color that you could add there that’s similar?
Yeah. So referring to slide 10, Mike, we tried to provide as much detail as we could around it and what you will see there is that the portfolio is extremely granular. The average size is $1.1 million.
We only have four exposures over $10 million and the LTVs are at 63% based on the most current valuation, as well as the current outstandings. And then we did take a hard look at what’s maturing over the next 12 months to 24 months. So you will see a chart there that shows the dollar amount of maturities.
So we think the -- we think that the portfolio is pretty well positioned given the current environment. We also have very limited central business district exposure where we think there is more risk. So we have dug deeply into it.
We do what we call spot reviews where we are able to target certain segments and this is a segment that we spent a lot of time digging into stress testing based on current NOIs and current rates, stress testing both tenancy rollover risk, as well as the impact of -- it’s the potential of a higher rate if these deals were to go to market today.
And so that -- down on the bottom right, Mike, you see the bridge in the LTV. So that would be the LTV based upon the most current appraisal that we have.
Got it. Okay. All right. So and those appraisal…
Let me detail…
I mean, how recent are those appraisals? Sorry, go ahead.
Mike, let me clear, the most current may be at origination.
Right. So we -- if we haven’t performed a recent appraisal, it wouldn’t be included in this.
Got it. And I know there’s no way to kind of broadly capture this. But just in any instance where you guys have had to do appraisals in the last -- in the first quarter. Do you guys have a sense of what kind of the impact was directionally to the proper valuation -- the value?
Yeah. I mean, directionally, values are down because cap rates are up. I can’t give you an exact percentage, but we have seen deals that and I am speaking particularly from underwriting new deals has become much more challenging, because the equity required to finance something today from a purchase or a construction perspective is significantly higher than it was seven months, eight months, 10 months ago, two years ago, when rates were significantly lower and values were higher.
Yeah. Does that 15 days to 20 days, though, feel reasonable or is that still heavy?
Yeah. It feels a little bit heavy for our markets, Mike. I mean, because Pittsburgh, Northeast Ohio, where a lot of our exposure is and even in Columbus, it doesn’t necessarily always feel the same impact that some of the more urban areas feel in terms of valuation. So we don’t get the highs and we don’t necessarily get the lows. But the fact of the matter is, rates are up, cap rates are up, values are down.
And that’s one of the reasons why we wanted to split out the non-CBD versus the CBD and that gains us some comfort in more of a suburban environment and smaller pieces.
Yeah. Got it. Great, guys. I really appreciate all the color. Thank you.
Thanks, Mike.
Thanks, Mike.
Next we will go to Manuel Navas with D.A. Davidson. Your line is now open.
Hey. Good afternoon. Does the NIM guide contemplate -- how does the May raise impact the NIM guide next quarter?
We would expect a little bit of help from that. I mean it comes -- you will get a couple potentially two the month on that. So that might help it be closer to the 5 versus the 10, assuming we get another quarter.
Okay. And then do you have an updated thought on kind of through-the-cycle deposit betas, you are targeting a little bit better than historical previously?
Yeah. I mean I think there’s still -- they are going to be a little bit, probably, a little bit higher than we had originally thought, but still anywhere from 7 points to 10 points better than the prior cycle, we still think based on the better starting mix and still the better ending mix that we think that we are going to have.
Okay. As you think about hedging, is there kind of and the potential for rates to come back down at some point, longer term, what do you think the NIM can settle at. Is there any structural change to that? In the past, you have been in the 360 range, just kind of big picture thoughts on where that could go long-term?
Yeah. And I think if short-term rates down, I think we can settle higher, but we will experience additional pressure if the short end of the curve moved substantially lower. So I think the status point, if it’s -- if we stay in this 5% range, is probably closer to that 4%. But if we see a significant rate down, then we will see something certainly below 4% and closer to the mid-3%s depending on how far the Fed goes.
Okay. With some of the deposit flows you have had, is the deposits that didn’t migrate that exited, were there account closures associated with it or was it just folks mainly just using funds, and if there were exits or closures, was there any consistent reason for it?
I don’t think that closures were a huge amount. It was certainly a factor. But most of the rest of the change was just existing customers changing their net balance. So there’s a lot of plus and minus in just the net of all that has decreased. So we haven’t seen significant increases in the kind of the normal closure rate on the deposit side.
That’s really helpful. And can you talk -- give a little bit more color how you have used IntraFi product and is it kind of helped you defend the deposit base even beyond what’s signed up in it, like, just any color there would be helpful?
Yeah. So, as Chris mentioned, when the events occurred on March 10th, we put together a comprehensive calling list to get out in front of our largest, particularly those that have largest depositors, particularly those that have uninsured deposits and we kind of led with that product beyond just having a conversation about retitling, because there were opportunities to simply retitle in order to expand the coverage.
So, we didn’t have an immediate reaction from customers. They wanted to understand the product, and now we are starting to onboard or move deposits into that product. And as Mark mentioned, they are showing up in the NOW balances. So it’s really helped us in order to provide protection for those customers who were concerned. So I would anticipate further growth in that category as well.
Okay.
Really it’s an important proactive conversation to be having with our large customers and that’s how we are approaching it. And they value the conversations to Dave’s point, lots of education around how it works. We have a team of treasury management professionals that work with the transition and so far it’s been received positively. But I would say the customers have reacted in a measured way.
Okay. All right. This is very helpful. I appreciate it. Thank you.
Thanks.
Okay. Next we will go to Matthew Breese with Stephens. Your line is open.
Hi. Good afternoon.
Hey, Matt.
Hi, Matt.
First, I just wanted to touch on the overall reserve. Obviously, up a little bit this quarter. Could you give us a sense for some of the macro assumptions that are contemplated there under CECL?
Yeah. So there’s a lot of different things that go in there. The biggest items that impacted us this quarter. One was one of the indices we follow that impacts the reserve is CRE Pricing Index and there was some deterioration in that, that led to some additional reserve for our -- for that portfolio, the CRE portfolio. Another one that we look at is the ISM Index. There was some -- also a little bit of deterioration there and that added some reserve on the C&I book.
And then we also look at beyond what we can quantify through those where we have identified some areas that we just don’t think the risk is captured in their certain segments like C&I, like healthcare where we have added some reserve just because of the potential weakness that we have seen in some of those portfolios.
What was the -- I am sorry, what did you say the index was to use for commercial real estate?
It’s called the CoStar Index, it’s a commercial real estate price index.
Understood. Okay. And then in the release you had mentioned in your comments as well, you had mentioned that there was a $4.2 million specific reserve set aside for a credit. I am just curious if you could provide a little bit more color on the credit, what asset class is exposed to and what kind of happened and do you expect any sort of charge-off on that in the second quarter or third quarter here?
Well, we think we are adequately reserved. We will start with that, having placed that specific reserve on this account. But it’s a C&I account involved in manufacturing that was originated out of Western Pennsylvania.
Okay. Got it. Okay. And then maybe going back to page 10 and commercial real estate. You show for the second quarter of this year, there’s $10 million of office maturing with a 65% LTV. I am assuming there was some level of office that matured this quarter and just based on the average is probably, call it, a low to mid-60s kind of LTV. So two-part question. One, you had indicated that cap rates have changed, could you give us some indication of how cap rates have changed from the time these loans were underwritten assuming 2018, 2019 to today? And then when they are being reappraised and reevaluated, what is the change in the original to the updated LTV?
Yeah. So the LTV adjustment is kind of secondary to how we underwrite, but it still fits within our standards. What we really are focused in on is making sure that the cash flow coverage ratios remain in place and that there’s no significant tenant rollover issues that have occurred.
I think, as Mike asked earlier, it’s 15% the range. I mean it depends on where the product is, what the project looks like, who the tenant is, the creditworthiness of the underlying tenant. But to-date, through Q1, we haven’t had issues being able to extend or rewrite or have these folks refinance elsewhere.
So I think that speaks again to the granular nature of the portfolio. It’s a relatively mature portfolio. Also, if you look at that LTV and those that are maturing are typically coming off of a five-year or 10-year amortization, maybe along our amortization schedule, but a five-year or 10-year maturity into a longer amortization schedule.
They have had time to season and build equity. But that has not been the major issue for us in terms of getting things at maturity to reappraise. Again, where we are running into the issues is really impacting new production where borrowers are looking for higher leverage levels in order to undertake a construction project or purchase a project, that’s what we are running into issues with values.
Right. Okay. And what are you underwriting new office loans at in terms of cap rate and yeah?
Yeah. I don’t have the cap rate off the top of my head, Matt, I want to get back to you on that.
Okay. I will leave it there. That’s all I had. Thanks for taking my questions.
Yeah.
Thank you.
Well, those are all the questions we have at this time. I will now turn the call back over to Chief Executive Officer, Chris McComish for any additional or closing remarks.
Okay. Thanks. And thanks everybody for your interest and engagement. Again, we wanted to provide additional transparency to you. We feel good about the quarter in light of the environment that we are in. We look forward to Q2. So thank you very much.
This concludes today’s conference call. You may now disconnect.