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

S&T Bancorp, Inc. (NASDAQ:STBA) Q4 2023 Earnings Call Transcript January 25, 2024

S&T Bancorp, Inc. beats earnings expectations. Reported EPS is $0.96, expectations were $0.86. S&T Bancorp, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the S&T Bancorp Fourth Quarter 2023 Conference Call. After the management’s 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.

Mark Kochvar: Thank you. Good afternoon, everyone. Thank you 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 fourth quarter and full year 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 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 stbancorp.com. With me today are Chris McComish, S&T’s CEO; and Dave Antolik, S&T’s President. I’d now like to turn the program over to Chris. Chris?

Chris McComish: Mark, thank you. And good afternoon, everybody. I certainly appreciate the analysts being here with us this afternoon and we look forward to your questions. I also want to take a minute to thank our employees, shareholders, customers that are also listening to the call. To our leadership team and employees, your commitment and engagement is what drives these financial results and these results are yours and you should be very, very proud of them. 2023 was an historic year for S&T in many ways. As for the second year in a row, we produced record net income and earnings per share. For a company that is almost 122 years old, we certainly feel very good about these results. Before we get into the numbers, I also want to express how good I feel about the progress that we’ve made centered on S&T’s people-forward purpose and guided by the values that define who we aspire to be as a company.

This purpose and these values connected to our core drivers of performance, the health of our deposit franchise and growth of our deposit franchise, solid credit quality and best-in-class core profitability are where we are focused to deliver for our shareholders, not just in any one quarter or year but over the long term. I’m going to begin my remarks on the numbers on Page 3 and into the fourth quarter and in 2023, we saw great progress on all of our drivers of performance. For the year, net income was just under $144 million with an EPS, again, a record EPS of $3.74. We achieved excellent return metrics with an ROTCE above 17 and profitability metrics, including our top tier PPNR and efficiency of 2.12% and 51% respectively. Our net interest margin remained above 4% for the year and we delivered an excellent efficiency ratio, as I said, of just over 51%.

Turning to Page 4, and for the quarter, we made $0.96 a share or $37 million, which was up $0.09 from Q3 and up more than 10% on a linked quarter basis. Our return metrics were again excellent with a 17% ROTCE, while our PPNR remained relatively flat, again, at a very strong 1.97% for Q3. Our NIM did see some contraction. However, our net interest income remained above $85 million for the quarter, and Mark is going to provide some additional color here. Net charge-offs at 19 basis points were flat while our efficiency ratio did rise, but still remains quite strong. Moving to Page 5. We saw solid loan growth of over 7% annualized with both our commercial and consumer lines of business contributing. On the deposit side, our customer deposit growth of just under $100 million produced 5.5% growth annualized, which is a number we feel very good about in the quarter.

While the mix shift continued, we do see a slowing rate of decline in DDA balances, while also the stabilization of the NIM during the quarter. Mark is going to again provide a lot more details on that. Next, I’m going to turn it over to Dave to talk a little bit more about the loan book and certainly about credit quality. And then Mark will come in and talk about the income statement and capital further. I also look forward to your questions following their remarks. Dave, over to you.

Dave Antolik: Thank you, Chris, and good afternoon, everyone. Further reviewing our balance sheet, we saw loans increase by $137 million or 7.25% during Q4. This growth was driven by commercial real estate and residential mortgage activities. Growth in our CRE book was primarily a result of increased multifamily and storage facility balances. We continue to experience declines in our hotel, office and healthcare balances as we manage through the changing economic landscape that has impacted these segments. We are confident that the progress we have made in managing segment exposure and our overall approach to portfolio management will serve us well in future quarters. In our C&I book, we didn’t experience meaningful changes in any of our key performance indicators relative to utilization or collateral advance rates with the exception of our floor plan utilization, which increased from 43% to 52% and resulted in balance growth of around $21 million.

A continuing theme in our commercial book is reduced demand for and exposure to construction related borrowings in both the CRE and C&I books. Conversely, in our residential mortgage book, we continue to see demand for our construction related products as well as purchase activity. Based on our current pipelines and some adjustments to our residential mortgage strategy to further enhance and support our deposit franchise, we anticipate total annualized loan growth of low to mid single digits for 2024. I’d also mention that, as in the past years, we would expect there to be some seasonality in this growth with the majority of that growth coming in the back half of the year. Also that growth will be focused on commercial and small business lending.

Turning to asset quality, on the next page, our ACL remained relatively stable at 1.41% of gross loans, reflecting some moderate improvement in the rating stack, and accommodating the loan growth that we saw in the quarter. Net charges were $3.6 million or 0.19% annualized and NPAs increased $6.6 million to $23 million, and remain at what we believe is a very manageable 30 basis points at year end. I’ll now turn the call over to Mark.

Mark Kochvar: Okay. Thanks Dave. We are now on Slide 7, net interest income. Before rates started moving higher back in the fourth quarter of 2021, our quarterly net interest income was about $68.4 million and the margin stood at 3.12%. While there has been and will continue to be some pressure on funding costs, our asset sensitive balance sheet has provided significant revenue improvements over the past eight quarters. In the fourth quarter of 2023, the net interest margin remained 80 basis points higher and we are generating at 24.4% or $16.7 million of additional revenue per quarter compared to the beginning of this rate cycle. The fourth quarter net interest margin rate of 3.92% is down 17 basis points from the third quarter as earning asset yield improvement of 7 basis points did not keep pace with 33 basis points increase in costing liability.

The cost of total deposits, including DDA, increased by 38 basis points to 1.76%, bringing the cycle to-date beta to 31%. We did shift about $200 million of wholesale borrowings to broker deposits. While these were at about the same cost and had no impact on the net interest margin, it did account for about 10 basis points of the 38 basis point increase in the total deposit cost. Our deposit mix remains much improved compared to the end of the last rate cycle in 2019 when we had just 24% of deposits in DDA compared to just under 30% today. Customers continue to see higher rates but the pace has moderated. We expect funding cost pressure continue in the first half of the year with the net interest margin bottoming out in the 3.70% range by mid year.

We saw a more stable monthly net margins in the fourth quarter. All three individual months were fairly consistent in the low 3.90s. The first quarter of 2024 though will be challenging from a funding cost perspective as we along with many other competitors have a higher than normal amount of repricing CDs. Next on non-interest income. We saw an increase of $5.9 million in the fourth quarter compared to the third. Most of the variances in the other category, the largest impact was from a $2.3 million OREO gain. We also benefited from favorable non-cash valuation adjustments of $2.2 million, a little over half of this is due to the transition from LIBOR to SOFR and its impact on our back to back customer swap program. We had a negative adjustment in the third quarter of $850,000 and a positive adjustment in Q4 of about $300,000, resulting in a quarter-over-quarter favorable variance of about $1.1 million.

The remainder of the valuation adjustment is related to changes in the value of the deferred benefit plan, which accounts for an additional $1 million of a favorable variance. That is offset as higher expenses and is P&L neutral. Remaining fee category line items are fairly consistent quarter-over-quarter. Our recurring fee outlook going into 2024 is approximately $13 million per quarter. Next slide is expenses, which were somewhere elevated in fourth quarter, up $3.5 million compared to the third quarter. The increase in expenses came primarily in salaries and benefits. We do operate a self-funded medical plan and saw expenses in the fourth quarter about $1 million higher than in the third quarter. While some of that is seasonal due to the timing of participants reaching their deductibles, we did experience unusually higher claim activity.

Incentives were also higher by about $800,000 due to better full year performance than expected given strong earnings and activity levels in the fourth quarter. And finally, the offset of the change in the value of deferred benefit plan I mentioned in fees accounted for another $1 million of the increase. After all that, we expect expenses to normalize in the first quarter of ’24 as these three items aren’t likely to repeat at nearly the same levels, leaving us with a run rate in the $53 million to $54 million per quarter range. Next slide is capital. The TCE ratio increased by 57 basis points this quarter. About 37 basis points of that increase was due to lower AOCI. TCE remains quite strong due to good earnings and relatively small securities portfolio.

All of our securities are classified as AFS. Our capital levels position us well for the environment and will enable us to take advantage of organic or inorganic growth opportunities that may come our way. And lastly, the Board of Directors authorized a new share repurchase program of $50 million. We will cautiously look for opportunities for repurchases depending on the economic conditions, our financial performance and outlook and the price of our stock. Thanks very much. At this time, I’d like to turn the call back over to the operator to provide some instructions for asking questions. Thanks.

See also 15 Tax-Friendly Countries for High-Net-Worth Individuals and 22 Countries Where Americans Live Long Term Without a Visa.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Daniel Tamayo from Raymond James.

Daniel Tamayo: Maybe we start just on the NIM and NII outlook. So I appreciate the color you gave on the NIM expected to bottom in the $370 million range midyear. What is the rate outlook or the rate cut outlook that you have baked into that? And then just curious how you expect the margin to react to each 25 basis point rate cut?

Mark Kochvar: So in our forecast in that we don’t have a lot of impact from Fed decreases, that will increase us negatively. We still have some exposure to the front end of the curve. We were — as we look at it, every 100 basis points on an annualized basis will impact our net interest income by about 4% to 4.5%. So sorry if I don’t have that 25 basis point impact. But depending on the pace and the timing of the Fed increase, we do have some sensitivity rate downs that’s $370 million outlook midyear is pre any Fed increases just due to the uncertainty that we see with the progression there.

Daniel Tamayo: And the 100 basis point impact, is that kind of an immediate impact or a gradual, or what’s baked into that assumption?

Mark Kochvar: That would be like an immediate but annualized. For example, if you go by the one of the recent paths take us down 125 basis points that would average for the year of like 55 basis points. So we would expect about half of that 4.5% impact on margin or net income for the calendar year.

Daniel Tamayo: I’m sorry to keep digging here, but just curious. I mean, some of the regulatory disclosures don’t account for what you might do in that actual situation were it to occur. Is that something you think is realistic, or would you be managing the balance sheet differently in that scenario?

Mark Kochvar: What do you mean by regulatory disclosures?

Daniel Tamayo: Just the sensitivity disclosures that are in regulatory filings that give the 100 basis point down scenarios or up?

Mark Kochvar: I mean, the assumptions I’m giving you is, it would be kind of reflective of those. We do — I mean the actual outcome is going to be dependent on how well we are able to pass those rate declines onto our customers in the form of interest expense. We have assumptions built in and how well we will be able to do that, and that those are also built-in with betas in that sensitivity analysis. So at the end of the day, it will depend on how will we perform against those assumptions. Not sure if I’m getting at your question.

Daniel Tamayo: I think it’s a good answer. I appreciate it. Secondly, just on the asset side. So appreciate the low to mid single-digit loan growth forecast. Are you assuming the — I think securities have essentially bottomed that you’re going to be growing that portfolio with loan growth from here on out?

Mark Kochvar: It’ll be modest though. Like as Dave mentioned, our loan growth assumptions are pretty low. So we would expect not a lot of change on the size of securities book.

Daniel Tamayo: I guess lastly, just on the buyback that you established the $50 million. I appreciate the color there. But maybe if you have any thoughts on what you are thinking about in terms of using that, what would drive utilization either on normalized or a greater use of that within the $50 million?

Mark Kochvar: I mean, our preference for using capital, we think we’re in a good position where we have a very robust capital position to work from. Our preference is for organic and inorganic. So the buybacks would be really our third choice when it comes to that, but we look for kind of price action that we don’t think is warranted over the long term. So I mean, in the event that the significant recession that cause oil prices to go down, we would probably be cautious about buybacks given the need for potential capital to protect equity given a higher loss scenario. But short of that if we fell it was just market dislocation that would be a place where we would probably jump in and look at the opportunities to repurchase.

Operator: Your next question comes from the line of Michael Perito from KBW.

Michael Perito: Just a couple of clarification comments around or questions rather around some of the guidance commentary. On the loan growth, you provided a little context. I wonder if you guys take it a layer deeper, the low single digits. Is that pipeline, competitive response, kind of just taking into consideration the increased funding costs, all three, just kind of how do you guys get to that level based on what you’re seeing today?

Mark Kochvar: Primarily the pipelines, at this point, right. And we’re also looking at where we want to participate in the residential mortgage space and making sure that it complements our desire to enhance the deposit franchise. So we’re looking hard at those activities and make sure that they make sense and that they’re profitable, and it’s not just growth for the sake of growth. So our focus is really going to be on commercial small business growth. We’ve got the teams in place, we’ve got pipelines that are building. So I feel pretty confident that we can get there. But as you’ve seen historically our growth tends to come in the back half of the year and that’s where the commercial activity generally comes from.

Chris McComish: Mike, there’s some real seasonality the way we’ve analyzed the growth in our balance sheet. And typically, the first quarter is little bit slower than the remaining quarters. And we see good activity and good opportunities in the marketplace but we certainly don’t want to guide to something that’s unreasonable relative to the growth rates in the economy and what we’re seeing in the general marketplace. So that kind of lower part of the mid side of loan growth makes a lot of sense. We feel really good about the past quarter and the growth that we’ve had in past couple of quarters, and that’s the range that makes a lot of sense right now.

Michael Perito: And then on the deposit cost side and NIM bottoming out in the midpoint of the year. How far along — I mean, how much is that like on the edges like trying to grow deposits or — versus kind of legacy customers that are still coming to you guys and looking to reprice higher on things? Where are you guys kind of at in that cycle?