S&T Bancorp Inc
NASDAQ:STBA
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S&T Bancorp Inc
Earnings Call Analysis
Q4-2023 Analysis
S&T Bancorp Inc
The company's recent earnings call painted a picture of operational excellence, with executives discussing adjustments and the positive impact on their customer swap program, attributing a quarter-over-quarter favorable variance of $1.1 million and additional favorable variances in other financial metrics. These operational improvements provide a solid foundation for the future and speak to the company's focus on strategic financial management.
Expense management emerged as a critical focus during the earnings call. A detail-oriented approach led to a temporary increase in expenses, primarily in salaries and benefits due to high-performance incentives and seasonal medical claims. However, the company anticipates a normalization of expenses in the upcoming quarter with an expected run rate between $53 million to $54 million, augmenting their ability to control costs and enhance profitability.
The company has maintained a robust capital position marked by a Tangible Common Equity (TCE) ratio increase, allowing for strategic growth opportunities. The Board of Directors has authorized a new $50 million share repurchase program, which reflects confidence in the company's financial health and a commitment to returning value to shareholders.
The company is nearing the $10 billion asset threshold, reflecting strong and consistent asset growth. Management is prepared for the associated regulatory changes and has built the required infrastructure to handle this growth. Focused on organic growth yet open to inorganic opportunities, they have positioned themselves for strategic market expansion within their core geographical regions, indicating a stable yet assertive growth strategy.
Executives expressed plans to maintain, if not increase, their relatively small securities portfolio to preserve asset liquidity levels. Cash flows of approximately $30 million to $40 million per quarter from the securities portfolio will likely be reinvested back into the bond portfolio, ensuring that the company remains liquid and ready for opportunistic acquisitions, particularly ones that can enhance their deposit franchise and overall customer base quality.
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Welcome to the S&T Bancorp Fourth Quarter 2023 Conference Call. [Operator Instructions]
Now I would like to turn the call over to Chief Financial Officer, Mark Kochvar. Please go ahead.
Thank you very much, and 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?
Mark, thank you, and good afternoon, everyone. I certainly appreciate the analysts being here with us on the call, 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 in these -- these results are yours and you should be very, very proud of them.
2023 was a 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 in the fourth quarter end of 2023 and in '23, 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 in 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.
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 the result of increased multifamily and storage facility balances.
We continue to experience declines in our hotel, office and health care balances, as we manage through the changing economic landscape that has impacted these segments. We are confident that the progress we've 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 an 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 growth -- loan growth of low to mid-single digits for 2024. And 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.
Great. Thanks, Dave. We're now on Slide 7, net interest income.
Before rates started moving higher back in the fourth quarter of '21, 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 8 quarters.
In the fourth quarter of 2023, the net interest margin remained 80 basis points higher, and we are generating a 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 to 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 brokered 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 up cycle in 2019, when we had just 24% of deposits in DDA compared to just under 30% today.
Customers continue to seek higher rates, but the pace has moderated. We expect funding cost pressure to continue in the first half of the year, with the net interest margin bottoming out in the [ 3.70% ] range by midyear.
We saw a more stable monthly net interest 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, noninterest 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 noncash 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 accounted for an additional $1 million of 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 the 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 stock 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 to the 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 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, up 37 basis points of that increase was due to lower AOCI. Our TCE remains quite strong due to good earnings and a 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.
The floor is now open for questions. [Operator Instructions] Your first question comes from the line of Daniel Tamayo from Raymond James.
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 3.70% range mid-year. 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?
So in our [indiscernible] in that, we don't have a lot of impact from that 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 a 25 basis point impact. But depending on the pace and the timing of the Fed increase, we do have some sensitivity to rate down, that 3.70% outlook midyear is pre any Fed increases just due to the uncertainty that we see with that -- with the progression there.
Okay. And the 100 basis point impact, is that kind of an immediate impact or gradual? Or what's baked into that assumption?
That would be like an immediate but annualized. So for example, if you go by the -- one of the recent past, take us down 125 basis points, that would average for the year, like 55 basis points. So we would expect about half of that 4.5% impact on margin for the -- or net interest income for the calendar year.
Okay. Sorry to keep digging here. But just curious, I mean is some of the regulatory disclosures don't account for what you might do in that actual situation were to occur. Is that something you think is realistic? Or would you be managing the balance sheet differently in that scenario?
What do you mean by regulatory disclosures?
Just the sensitivity disclosures that are in regulatory filings that give the 100 basis point down scenarios.
I mean the assumptions I'm giving you would be kind of reflective of those. We do -- I mean the actual outcome is going to be dependent on how we are able to pass those rate declines on to our customers in the form of interest expense.
We have assumptions built in how well we'll be able to do that. And that's -- those are also built in with betas in that sensitivity analysis. So at the end of the day, it will depend on how well we perform against those assumptions. I'm not sure if I'm getting at your question.
Yes. No, I think it's a good answer. I appreciate it.
Secondly, just on the asset side. So I appreciate the low to mid-single-digit loan growth forecast is -- are you assuming the, I think, securities substantially bottomed, you're going to be growing that portfolio with loan growth from here on out?
Right. It will be modest. As Dave mentioned, our loan growth assumptions are pretty low. So we would expect not a lot of change on the securities -- size of the securities book.
Okay. Great. 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 would -- what you're thinking about in terms of using that? What would drive utilization, either on a normalized or a greater use of that within the $50 million.
Yes. I mean our preference for using capital, we think we're in a good position. We have -- I think 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 has [ worned ] over the long term.
So I mean in the event that of a significant recession that caused oil prices to go down, we'd 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 felt it was just market dislocation, that would be a place where we would probably jump in and look at the opportunities to repurchase.
Understood.
Your next question comes from the line of Michael Perito from KBW.
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 could just take 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?
Yes, primarily the pipeline 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.
Yes, Mike, there's some real seasonality to the way we've analyzed the growth in our balance sheet. And typically, the first quarter is a 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 the past couple of quarters, and that's the range that makes a lot of sense right now.
Got it. Helpful.
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? Like where are you guys kind of at in that cycle?
Yes. I would say that if you look through the year of 2023, Mike, as Fed funds got to that [ 4 ] handle is when the competitive intensity for rates in the marketplace really picked up, and that was significant all the way through the third quarter.
We took the approach of being proactively working very closely with our customers to retain and grow deposits as they make sense. We built a very efficient pricing process to be able to be -- to be beneficial to our customers, while at the same time, doing everything we could to manage the margin. We feel very good about that performance, and we're seeing it in our customer experience surveys and how we manage through that.
We will continue to stay focused on customer retention and as well as expansion of wallet within our customer base as well as new customers out there.
There's -- the deposit intensity is still there. I would say it's a notch lower than it may have been earlier in the year, that $100 million worth of customer deposit growth -- that's the best quarter we've had in a while, and it's representative of a couple of things.
One, just day-to-day, everyday outreach. But two, some of the work we've been doing particularly in the commercial business around development of some treasury products -- treasury management products and capabilities and distribution networks that's helped increase a lot of activity.
Great. And then just lastly for me. You guys -- even tougher market performance today for the bank group side. I mean you guys still have a pretty decent relative currency here. Any updated thoughts, Chris, on where the M&A market kind of stands here? I mean it feels like there's -- were close to maybe turning the page a little bit and at least seeing some smaller cycle activity? Would love to hear what you're actually...
Yes, I would tell you that -- I would characterize it, you're using a little bit different words than I would. But the way I've described it as people seem to be talking about, talking about it, where earlier in the year, they weren't talking about it.
And so yes, we absolutely expect to and desire to participate in consolidation and lead those opportunities. And it's the work we've done.
Mark talked a little bit of the expense growth that we've had and a lot of that's been built on adding talent and infrastructure, both within the front line, to be able to support the growth of the company, but also in risk management areas and other functions of the company to be able to build that foundation for growth.
That's -- I've been here now just almost 2.5 years, and that's been 2 years of solid work, and I feel great about where we are from a foundational standpoint, and we think the opportunities are going to be more attractive as we move forward into '24 and '25.
I appreciate it.
[Operator Instructions] Your next question comes from the line of Manuel Navas from D.A. Davidson.
In the past, you've talked a little bit about some NIM protection, with rate cuts kind of a little bit more closer to happening. Have you added more since last time we talked, what some -- added more swaps? What are you kind of thinking on how the NIM can perform on the way down?
We haven't had any more swaps, but we've continued to add some fixed rate loan exposure. And unfortunately, depending on how you look at it, the increase in our cost of deposits, especially those that are non-CD, gives us something to reduce on the way down.
So in the last cycle, from the last cycle to now, we've reduced our sensitivity to rates by about half. So even though we still have the exposure that I talked about before, that is about half of what it was in previous cycles due to the things -- due to the better mix of deposits that we have and the swaps and better loan mix from a fixed to float standpoint.
I appreciate that. Your -- Chris was excited about the 5.5% core deposit growth. Is that -- and you talked about some of the initiatives that you're doing. Is that kind of all tied up to like keeping the loan-to-deposit ratio where it is? Do you see it improving? Just -- can you talk a little bit about deposit trends on the volume side?
Yes. So it is -- whether it's to keep the loan-to-deposit ratio at a certain level or not, we firmly believe that the absence of a customer relationship stops and starts with their deposit relationship.
It's been the focus that we've had for a while. And so we've added talent. We've built product. And we've done a lot of work within our company from a data and customer analytics standpoint, which is allowing us to be a lot more targeted from the standpoint of spending time with those customers, we believe, have more opportunities. And a lot of proactive customer outreach and that's a positive thing for our company.
If you look at our Net Promoter Scores and some of the things we have from a customer experience standpoint, we've got really strong relationships, and that gives us an expansion opportunity.
So the team is their focus, their skill set, the product capability that we have, the data and information that we've got backing us up, all of those things factor into some of that -- or that deposit growth that you're seeing, and our goal is to continue on those trends.
I appreciate that. My last question is on like loan growth speed. I understand there's some seasonality, but do you need rates to -- rates improve that pace if they come down? Like how do rates kind of impact your -- kind of your appetite for [ loan ]?
I'll ask Dave to jump in, but one argument could be if rates go down really fast, I might tell you there's a slowdown in the economy, in which might be a slowdown in loan demand for our entire industry.
I don't -- we have a lot of conversations with customers. They're certainly attuned to the rate environment. But for the most part, they've worked through this rate cycle, and it's really more of being with the right companies at the right time that are looking for growth and being able to deliver for them. And that's where the work that David and the team have done to add talent to the company and stay focused.
I don't know, Dave, do you want to add?
Yes. I don't see the growth being impacted significantly by changes in rates, unless there is a dramatic reduction in term rates, which might cause some refinance activity.
I think we understand our customers. We know where they're headed. Our job is to help them achieve their goals. And then adding to the team and making sure that we're focused on rounding out the relationships is what we're focused on.
So I wouldn't put 2 and 2 together and get 4, relative to loan growth and a reduction in rates.
Perfect.
Your next question comes from the line of Matthew Breese from Stephens Inc.
Just a few follow-ups for me. The first one is just what proportion of the loan portfolio and what proportion of deposits reprice immediately?
On the loan side, it's kind of low 40s that would reprice immediately. On the deposit side, on the most -- on the immediate side, there really isn't -- there isn't very much at all.
We -- at one point, we had a product that was tied to Fed funds, but we suspended that or changed that going into this cycle.
So we have, as Dave had alluded to, made a lot of -- we've done some exception pricing. So a lot of those, we feel like are -- will reprice down as rates go down, but it's more on a one-by-one basis that we'll go through and work through that book.
Got it. Okay.
Most of our abilities are going to be a -- we do have a fair amount of brokered deposits. And all of our borrowings, all of those, there's $800 million of that, that will reprice down pretty much immediately though.
Okay. And then excluding the broker, what are expectations for core deposit betas as rates decline?
As rates decline?
Yes, on the way down.
Yes. I mean we haven't fully modeled that out. I think we still have a little bit of ways to go. Even if ever rates were to move down, there's probably going to be a little bit of a push and pull and not -- certainly not all of our customers have gotten higher rates from where they were yet.
So I think we'll be -- the response from the net deposit side on that initial rate down. The first couple of cuts will probably have not a very high down beta, I would expect.
Got it. All right. And then last one for me. Every incremental quarter, we get a little closer to that $10 billion threshold. And I was curious -- is it in your budget to cross $10 billion this year or 2025? And then just remind us all the kind of necessary details in terms of expenses, Durbin and whether you planned to cross organically or through a deal?
Well, you could just map out our expected asset growth, and you could see it would -- could be within 2024, but certainly by the end of 2025. Mark has the Durbin number that we've calculated in the past, $6 million, $7 million approximately.
I would say that a lot of the work that we've done on the expense side from a people standpoint has been to build out the infrastructure for the expectation of just that. So you don't cross and then you go do the work, you prepare to do that from an additional regulatory oversight, three lines of defense, risk management standpoint, all those things that are there. And I would tell you, we're essentially there. We've got the teams in place. We've got the infrastructure in place. So there's no big investment that's needed from the standpoint of how we run the place on a daily, weekly, monthly basis is going to change dramatically.
As it relates to organically or inorganic, we have a lot more control over the organic growth, and that's where we're focused, while at the same time, doing everything we can to prepare for inorganic opportunities.
Got it. Okay. That's all I had it there.
Your next question comes from the line of Daniel Cardenas from Janney Montgomery Scott.
Can you remind me how much cash flow is generated each quarter from your securities portfolio, and is that going to be put back into the securities portfolio? Or are you going to use that to fund expected loan growth?
Probably keep that securities portfolio, at least where it's at and if -- depending on the asset growth, we might add a little bit to keep that level, just to maintain our asset liquidity levels. We do have a relatively small securities portfolio, so we don't see that going any lower.
On a quarterly basis, I think we're in kind of the $30 million to $40 million per quarter range of cash flow coming back. But as I said, we'll probably -- we'll reinvest that into the bond portfolio.
Okay. And then -- and maybe just going back to the M&A question that you had earlier. Geographically, and I know you guys are opportunistic, but where would the focus be? Would it remain in Pennsylvania? Would you go outside of the state?
No. We've talked about our, Dan, our core and contiguous markets. So we love the geography that we're in, which is inclusive of the State of Pennsylvania and Ohio, and the marketplace is one that we know very well. And so that's kind of that general geography relative to our headquarters here and would be where we're focused.
And would this be more for deposit place? Will you be looking for like a deposit-heavy institution?
Yes, whether it's deposit place or deposit heavy, I think typically, in an acquisition, the franchise stops and starts with the deposit franchise and the quality thereof that if a customer defines their relationship by where they have their deposits, that's where you need to start to understand the customer base that you're picking up. It may be additional infill in geography or expansion into a geography that would -- an area that we already know well. We just want greater share or greater presence. Those things would go into it, strategic fit with our organization, that would make a lot of sense.
And then obviously, a good understanding of the asset quality would be a driver as well. But most opportunities like this do start on the deposit side of things because, again, that represents the quality of the potential long-term earnings power and the additive nature of -- for the enterprise to our company.
Got it. Okay. Good. All my other questions have been asked and answered. I'll step back.
Okay.
There are no further questions at this time. I would like to turn the call over to Chief Executive Officer, Chris McComish for closing remarks.
Okay. Well, thanks. And listen, we really appreciate everybody's attention and your thoughtful questions and engagement. We certainly are available if you've got any follow-up at all and want to dialogue further.
Again, we're really, really proud of in '23 and those record earnings and record earnings per share. That's 2 years in a row that this performance has been achieved and we're quite optimistic about as we head into 2024 and everything that we're doing to execute on and deliver.
So I hope everybody has a great rest of the day, and thank you for your time.
This concludes today's conference call. Thank you for your participation. You may now disconnect.