S&T Bancorp, Inc. (NASDAQ:STBA) Q4 2022 Earnings Call Transcript

S&T Bancorp, Inc. (NASDAQ:STBA) Q4 2022 Earnings Call Transcript January 26, 2023

Operator: Welcome to the S&T Bancorp’s Fourth Quarter Earnings Conference Call. After management’s remarks, there will be a question-and-answer session. Now, I would turn the call over to Chief Financial Officer, Mark Kochvar. Please go ahead.

Mark Kochvar: Thank you, and good afternoon, everyone. 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 advance button at the bottom of your 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 2. 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 fourth quarter 2022 earnings release as well as this earnings supplement slide deck can be obtained by clicking on the earnings materials button in the lower right button of your screen.

This should 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 Web site at stbancorp. With me today are Chris McComish, S&T’s CEO; and Dave Antolik, S&T’s President. I’d now like to turn the call over to Chris.

Chris McComish: Good afternoon, everybody. And Mark, thanks for the introduction. Welcome everyone to the call. I certainly appreciate the analysts being here with us this afternoon and we certainly — we absolutely look forward to your questions. I also want to take a moment to thank our employees, shareholders and others listening in on the call, your commitment and engagement is what drives these financial results and these results are yours and you should be very proud. 2022 was an historic year for S&T and in many ways was an inflection point for the company, both strategically and historically. We started the year by celebrating our 120th anniversary, which provided a great opportunity to not only celebrate our past but to think strategically about our future.

During the year, we made significant enhancements and additions to our leadership team, all focused on building for the future while ensuring we delivered performance today. Our leadership team took this opportunity to also engage with all of our teammates to define our purpose for the next 120 years, all around building a future that’s people focused, a people forward future. This purpose supported our values and provided the roadmap and blueprint for our growth and our impact and differentiation as we move forward in the market. While building for tomorrow, we certainly stayed focused on today as evidenced not only by the numbers we’ll talk about in a few minutes but also by the achievement we had in the marketplace around things critically important to us around employee engagement and customer experience.

We have multiple instances of market leading recognition from third parties and we are quite proud of these results also. We define them as our trophies and there’s many of them. And we look forward to continuing success there as it’s so foundational for everything that we’re trying to do financially. In addition, we delivered a 13% shareholder return on our stock, which significantly outpaced our peer median. This return was aided over the past year by three separate dividend increases, equaling more than 10% growth in our dividend to the current $0.32 level that we announced yesterday. Now let me turn to Page 3 and give you — talk a little bit about the quarter as well as the year, and then I’m going to turn it over to Dave to talk about the balance sheet.

But as you can see on Page 3, we had record earnings of $1.03, that’s an 8% increase link quarter, it drove — was driven by a 29 basis point increase in our NIM, achieving 4.33%, obviously, aided by the higher interest rates as well as our — the asset sensitive nature of our balance sheet. The return metrics were extremely strong with the $20.36 ROTE and a PPNR of $2.36, numbers that we feel very good about. What’s not on here we will talk about later is also an efficiency ratio of 49% for the quarter. This efficiency ratio is important to us. While you’ll see some expense growth, that expense growth is all around investing for the future and having a starting point at an efficiency ratio like that gives us the flexibility needed to make the investments and move our company forward.

Moving to Page 4. Again, a record year $3.46 earnings per share and $136 million of net income, approximately $25 million more than a year ago at this time. Again, very solid return metrics aided, obviously, and driven by NIM expansion, while at the same time continuing to see improved credit costs. We’ll talk about those in a few minutes. Again, it was — been a heck of a year from a performance standpoint. We feel very good about the opportunities as we head into 2023, not only on the strength of our financial performance, but as I said, the engagement level of our team, the clarity of how we’re moving forward together and the opportunities in the marketplace. With that, I’ll turn it over to Dave.

Dave Antolik: Well, thank you, Chris, and good afternoon, everyone. And thank you again for your support of our company and interest in our company. If I can direct you to Slide 5, which depicts balance sheet changes for the quarter. Total portfolio loans increased by $87 million or 4.9% annually, driven primarily by consumer activity. We continue to book residential mortgage production to our balance sheet versus selling, which has supported the majority of this growth. We also continue to experience growth in our home equity balances. In the home equity space, we have seen consistent growth through the year to continue into Q4. This includes increases in the number of customer commitments, total commitments and outstandings.

We’ve seen very consistent utilization from this customer base at 47%. And growing the home equity customer segment is incredibly important to us as it represents the manifestation of our focus on customer relationship banking and is clearly focused on growing the value of our deposit franchise. Moving forward, our pipelines indicate the ability to maintain home equity growth and some moderate pressure on our residential mortgage activity. Turning to the commercial book. Total balances increased slightly in our C&I and commercial real estate construction categories. We’ve seen commercial revolving utilization rates stabilize at 46%. Calling activities in both CRE and C&I spaces have increased during Q4, and we anticipate growth to remain stable for the first half of ’23 in the low to mid single digit area.

Our commercial banking efforts are focused on growing with and supporting our existing customer base and continuing to improve and develop more consistent asset quality results, particularly given the current economic pressures that exist. Deposits for the quarter were down $191 million as we continue to experience runoff due primarily to competitive rate environment. We are focused on building upon our strong legacy as a consumer relationship driven bank, and recently, we hired a consumer deposit product manager to help lead our strategy and go to market efforts. Turning to Page 6. We are very happy with the progress being made in reducing our NPLs, both in Q4 and for the full year. The graph at the bottom of the page illustrates the outcomes of our efforts in support of our desire to reduce problem assets.

We’re also very pleased that much of this reduction came via the execution of individual customer exit strategies and not as a result of excessive charges. We continue to closely monitor all of our portfolios for potential economic impact that could result in future credit losses and added to the qualitative segment of our reserve during the quarter. We feel that our level of reserve supports our business strategy and positions us well to manage through any potential downturn. I’ll now turn the program over to Mark.

Mark Kochvar: Well, thanks, Dave. Slide 7 shows that net interest income increased by $5.3 million or 6.3% compared to the third quarter. The net interest margin rate in the fourth quarter was 4.33%, that’s up 29 basis points from the third quarter and is up 130 basis points ex PPP compared to the fourth quarter of ’21 before this rate cycle began. Loan yields improved this quarter by 69 basis points and the cost of total deposits, including DDA, increased by 33 basis points to 60 basis points. Interest bearing deposits increased by 50 basis points compared to the last quarter. We have seen increased interest in short term CPEs, especially in the one to two year area. Half of our loan portfolio is short term rates, which continues to be a big driver of the net interest income and net interest margin improvement.

As part of our ALCO strategy to protect the net interest income and margin in a declining rate environment, we have hedged that floating rate loan concentration to approximately 42% which receive fixed swaps. We continue to evaluate the right level of hedging and — which will depend on the rate environment and our deposit pricing experience. Our funding base is very different now than it was during the last rates up cycle, with a much better mix, including over $1 billion more in DDA, a money market product that no longer reprices immediately with Fed rate changes and lower wholesale borrowing levels. We do expect that net interest margin improvement to moderate in the first half of ’23 as deposit betas catch up and the Fed increase has slowed down.

And then with the Fed pause, we would expect some NIM compression in the back half of ’23. However, based on the better funding mix I described earlier, we expect to see lower through the cycle deposit betas compared to the prior and most importantly, for us, better net interest margin betas. On Slide 8, noninterest income increased by about $883,000 in the fourth quarter compared to the third. The largest item is a gain on the sale of an OREO property for $2 million, which shows up in the other line. We also had an OREO gain in the third quarter of about $0.6 million as we have had some success in resolving some credit issues. So net, that accounts for most of the favorable variance in fees. Mortgage banking was essentially flat compared to the third quarter.

As Dave mentioned, almost all of our production went to the portfolio and contributed to the loan growth we had in that category. Our quarterly fee outlook is approximately $14 million. On Page 9, expenses were up $1.7 million compared to the third quarter. Salary and benefits increased primarily due to higher incentives of about $1 million related to our performance. Also within salaries and benefits, pension expense was higher by $0.6 million due to settlement accounting from lump sum payments for some retirees. Improved revenue drove the efficiency ratio to below 50%. Our quarterly expense expectations going into ’23 are in the $52 million to $53 million range as we invest in people and infrastructure. Page 10 shows our capital levels, which are strong and well positioned for the environment.

We extended our buyback authorization through March of 2024 and that had $29.8 million remaining. We’ll continue to look for opportunities depending on economic conditions, our financial performance and the price of our stock. With the smaller securities portfolio as a percent of assets, strong earnings and a more efficient balance sheet, we have seen stability in our TCE ratio over the course of the year despite AOCI adjustments. Thanks very much. At this time, I’d like to turn the call over to the operator to provide instructions for asking questions.

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Q&A Session

Operator: Your first question will come from the line of Daniel DeMille with Raymond James.

Daniel DeMille: Just wanted to start, just a clarification on the NIM path and then deposit beta assumptions you mentioned, still expecting lower than prior cycle. I think, last quarter, you talked about a mid to high 20s. Is that still the thought there?

Chris McComish: Yes.

Daniel DeMille: And then another just clarification on the noninterest expense and income guidance, the $14 million and then the $52 million to $53 million. Is that to be taken as kind of first quarter guidance to build off of, or is that more of a range that you’re looking at for the year?

Mark Kochvar: More the latter, range for the year.

Daniel DeMille: So not too much growth throughout the year essentially. Okay, terrific. And then I guess, just if we could dig into the — sorry, to bounce around here, but back on the margin. If you could — if you have any more color on kind of how you think that the margin might play in terms of when it would peak. I know you mentioned pressure in the back half, but if you’re thinking peak in the first or the second quarter and where that level may be and then kind of the degree of compression you’re looking at in your budget?

Mark Kochvar: And these are — a lot of assumptions, a lot of modeling going on. But in our sense, given the expectations from the Fed of maybe one, maybe two more smaller increases in the first quarter to maybe early second quarter, we would look for maybe just a slight expansion of the margin in the first half of the year sort of leveling off, likely peak margin in the second quarter. And then with the Fed maybe being on the sidelines, we expect continued — some continued pressure offset some by a better replacement rate on loan maturities. And also on the liability side, some of the growth there that might offset some of our higher cost borrowings. But we’d expect maybe in the 5 basis point per quarter range of compression, if all assumptions sort of happen as we would expect.

Daniel DeMille: So maybe a little bit lower than we are here at the fourth quarter level or 33% by the fourth quarter of 2023?

Mark Kochvar: Kind of about in the same place approximately by the time we get to the end of the year.

Chris McComish: It’s just going to rise from here early and then in the fall…

Operator: Your next question will come from the line of Michael Perito with KBW.

Michael Perito: Chris, I wanted to start, you know really productive year kind of about the help for you guys, and that’s got a lot done. Curious what’s the agenda look like for ’23 here? I mean, obviously, the macro backdrop is uncertain, but we always charge on anyway. Curious where you guys are focused and just what we should be mindful of as the year progresses just from a strategic standpoint?

Chris McComish: Thanks a lot for asking that question. I can talk for a long time about it because it’s the work that we’ve been doing as a team as I try to allude to. So as I said we really took advantage of this past year of all centered around this 120th year celebration and there’s distinctive and unique things about this company and it’s what engaged me and excited me to come here 18 months ago. And it all starts with this employee engagement and customer experience, engagement and reputation of the company in the marketplace. And that’s a great place to grow from. And so we spent a lot of time dialing back, understanding where did all that come from and where is it, it’s highly focused on our people and our people relationships and the fact that this whole idea that we have around being people forward.

The industry changes, what we do, how we deliver for customer changes, customers change, right, digitally and so forth, but there’s a relationship aspect and there’s an emotional tie that people have to their bank. And so we’ve been able to kind of extract that and simplify it for all of us to say who are we, how are we going to win and differentiate in the marketplace, and then what is winning — how do we define winning. And we reinvigorated. You may say it’s all the rate environment, but I’ll tell you we were talking about this a year ago before rates started increasing, and that is the whole health of our deposit franchise and the focus of that deposit franchise on customer relationships. So we’ve built out — we’ve started with building teams and building talent.

We’ve hired a Head of Commercial Deposits that came out of a very significant national bank that’s running that business for us. We’ve recently hired a Head of our Consumer Deposit business that also came out of a very large bank, all very interested in being part of this company and what we have to to deliver going forward. So a lot of work around the people and understanding where the opportunities are within our customer base as well as our prospects. We’re working on product capability. So from a treasury management standpoint, our digital banking offerings, all of those things, understanding the importance of ensuring that we have the product to deliver to our customers. And then we’re doing things that are important like ensuring incentive plans are aligned around things that are important like that deposit franchise.

And why isn’t it important because that’s how our customer defines who their bank is, is where that deposit business is. And so we’re highly focused on it. I would say the intensity of that focus is different than it had been here at S&T. We’ve historically been an asset growth oriented company, and we’re never going to stop making loans, and loan growth is important to us. But we know the health of that deposit franchise gives us every opportunity to put capital in the market and deploy it that way. You’ve seen the improvement in credit quality and that’s an intense focus around the things that Dave talked about, making clear on what we think where we want to play, how we want to win and then attacking things strategically that way. The net interest margin is something that we’re really proud of, but to give it back — with inferior credit quality does not represent moving forward.

And so we’re very focused there. Obviously, the efficiency ratio and the way we drive profitability at this company is something that I’m really proud of, I inherited and we’re going to continue to stay in that range, but we also know that we need to invest well. But all of that, Mike, is underpinned by the engagement level and the talent level of our team. And so those four big pillars are the things where we’re focused, and we’re spending a lot of time individually with our 1,100 employees talking about those things.

Michael Perito: And then just a couple of financial questions, follow-up for me. Mark, on the efficiency ratio being sub-50%, I actually asked this to another one of my banks this morning. I mean is that — it feels like as we invest in technology and trying to get more efficient here and branches become less necessary that that’s almost becoming kind of table stakes. So I’m curious how you’re thinking about it. So just feel kind of arbitrarily low just given the NIM where it is kind of structurally to your peak highs, or are you guys hopeful that this range of efficiency is suitable for you guys as we move forward?

Mark Kochvar: I mean, we think it is sustainable. Part of that, though, is we’re much more focused on maintaining the margin stability, and that’s going to be the key to maintaining that that type of efficiency ratio.

Michael Perito: And then just on fees, I think it was $14 million of the quarterly outlook. Is that correct?

Mark Kochvar: Yes.