Welcome to the S&T Bancorp fourth quarter conference call. After management's remarks, there will be a question and answer session. Now, I would like to turn the call over to Chief Financial Officer, Mark Kochvar. Please go ahead.
Thank you. 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 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 fourth quarter 2022 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 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 call over to Chris.
Good afternoon, everybody. Mark, thanks for the introduction. Welcome, everyone, to the call. I certainly appreciate the analysts being here with us this afternoon, and we absolutely look forward to your questions. I also wanna 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. These results are yours, and you should be very proud. You know, 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. Let me turn to page three and talk a little bit about the quarter as well as the year, and then I'm gonna turn it over to Dave to talk about the balance sheet.
As you can see on page three, we had record earnings of $1.03. That's an 8% increase link quarter. It was driven by a 29 basis point increase in our NIM, achieving 4.33%, obviously aided by the higher interest rates as well as the asset-sensitive nature of our balance sheet. The return metrics were extremely strong with a 20.36 ROTE and a PPNR of $236, 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 four, a record year, 346 earnings per share and $136 million of net income, approximately $25 million more than a year ago at this time. 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. It's 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.
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 could direct you to slide five, 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 that continued 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%. Growing the home equity customer segment is incredibly important to us as it re-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 2023 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 six 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.
Well, thanks, Dave. Slide seven 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 it's up 130 basis points ex PPP compared to the fourth quarter of 2021 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 the shorter-term CDs, especially in the one-two year area.
Half of our loan portfolio is tied to short-term rates, which continues to be a big driver of the net interest income and net interest margin improvement. As part of our outlook strategy to protect the net interest income and margin in the declining rate environment, we have hedged that floating rate loan concentration to approximately 43% with received fixed swaps. We continue to evaluate the right level of hedging and will, 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 2023 as deposit betas catch up and the Fed increases slow down. With a Fed pause, we would expect some NIM compression in the back half of 2023. 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 eight, non-interest 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.
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, contributing to the loan growth we had in that category. Our quarterly fee outlook is approximately $14 million. On page nine, 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. 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 2023 are in the $52 million-$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. That has $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 a smaller securities portfolio as a % of assets that have 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.
The floor is now open for questions. If you have any questions, please press star one on your phone. We ask that while asking your question, please pick up your handset and turn off speakerphone for enhanced audio quality. Please hold while we poll for questions. Your first question will come from the line of Daniel Tamayo with Raymond James. Please go ahead.
Good afternoon, everyone.
Hello.
Hello.
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 mid to high 20s. Is that still the thought there?
Yes.
Okay. Another just clarification on the non-interest expense and income guidance. The $14 million and the $52 million-$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?
More the latter range for the year.
Okay. Not too much growth throughout the year, essentially. Okay. Terrific. Then I guess just if we could dig into the... Sorry to bounce around here, but back on the margin, 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. Thanks.
Sure. These are all a lot of assumptions, a lot of modeling going on. You know, our sense, you know, given the expectations from the Fed of maybe, you know, one, maybe two more smaller increases in the first quarter to maybe early second quarter. We would look for, you know, maybe just slight expansion of the margin in the first half of the year, sort of a leveling off. Likely peak margin in the second quarter. Then, you know, with the Fed maybe being on the sidelines, we would expect continued some continued deposit pressure offset some by, you know, a better replacement rate on loan maturities.
Also on the liability side, you know, some of the growth there that might offset some of our borrowing or offset some of our higher cost borrowings. We'd expect, you know, maybe in the 5 basis point per quarter range of compression if all those assumptions, sort of happen as we would expect.
Okay. Maybe a little bit lower than we are here at, in, at the fourth quarter level, $4.33 by the fourth quarter of 2023.
Right. Yeah. Kind of about in the same place approximately by the time we get to the end of the year.
It's just gonna rise from here early and then fall late.
Yes.
All right. Terrific. Thanks for taking my questions. Appreciate it.
Thank you.
Thank you.
Your next question will come from the line of Michael Perito with KBW. Please go ahead.
Hey, good afternoon, guys. Thanks for taking my questions.
Sure thing.
Hi.
Hi, Mike.
Chris, I wanted to start, you know, really productive year kind of at the helm for you guys. You guys got a lot done. Curious, you know, what's the agenda look like for 2023 here? You know, I mean, obviously the macro backdrop's uncertain, but we always charge on anyway. Curious where you guys are focused and, you know, just what we should be mindful of as the year progresses, just from a strategic standpoint.
Sure, Mike. 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. We, as I said, we really took advantage this past year of all centered around this 120th year celebration. You know, there's distinctive and unique things about this company and it's what engaged me and excited me to come here 18 months ago. It all starts with this employee engagement and customer experience engagement and reputation of the company in the marketplace. That's a great place to grow from. We spent a lot of time, you know, 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. You know, the industry changes what we do, how we deliver for customer changes. Customers change, right, digitally and so forth. There's a relationship aspect, and there's an emotional tie that people have to their bank. 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 our in the marketplace?
How do we define winning?" We reinvigorated, you know, you may say it's result of the rate environment, but I'll tell you, we were talking about this, you know, a year ago before rates started increasing, and that is the whole health of our deposit franchise and the focus of the, that deposit franchise on customer relationships. 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 deliver going forward.
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. We're, you know, 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. We're doing things that are important like ensuring incentive plans are aligned around things that are important like that deposit franchise. Why is it important? Because that's how a customer defines who their bank is where that deposit business is. 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 a asset growth-oriented company, and we're never gonna stop making loans. 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 wanna play, how we wanna win, and then attacking things strategically that way. You know, the 4.33% net interest margin is something that we're really proud of. To give it back with, you know, inferior credit quality does not represent moving forward. 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 gonna continue to stay in that range. We also know that we need to invest well. All of that, Michael Perito, is underpinned by the engagement level and the talent level of our team. 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.
Interesting. Thanks. Thanks for shedding the light on that, Chris. Just a couple of financial questions to follow up for me. You know, Mark, on the efficiency ratio being sub 50%, I actually asked this to another one of my banks this morning. I mean, it feels like, you know, as we invest in technology and try and get more efficient here and branches become less necessary that that's almost become a kind of table stakes. I'm curious how you're thinking about it. Does this feel kind of arbitrarily low, just given the NIM and where it is kind of structurally near peak highs? Are you guys hopeful that some of the, you know, this range of efficiency is suitable for you guys as we move forward?
I mean, we think it is sustainable. You know, part of that though is, you know, we're much more focused on maintaining the margin stability, and that's gonna be the key to maintaining that type of efficiency ratio.
Yeah. Okay. Then just on fees, I think it was $14 billion, the quarterly outlook. Is that correct?
Yes.
Yeah. Basically not much growth from where you were on a core basis this quarter. I'm curious, what? Can you break that down another layer? I mean, is that assuming, you know, pretty stable mortgage environment, pretty stable, you know, wealth investment environment because of market volatility? Just anything where you maybe could be too conservative in that bucket as you think to next year?
Yeah. I mean, the one thing that could potentially change is on the mortgage side, if we were to see the, you know, kind of pricing and just the way Fannie's pricing relative to what we think is a fair value for their mortgage production, that we could see some additional sales in the secondary market on the mortgage side. Right now, that $14 million assumes a pretty low level of sales, so we're kind of assuming that that market looks the same. That could change that number, but it would have an impact on the potential on the balance sheet growth as well, especially kind of in the first half.
Wealth, you know, does not assume a big increase in the stock market, which would help us out as well if, you know, AUM, you know, sort of naturally grew, just because the market's up. You know, that would be beneficial for us as well. You know, we do see some pressure that we need to overcome on the overdraft side as we look at that product and how it's positioned for the year. Those are the things I can think of that would.
I would say on the commercial side, the treasury management business, I mean, it's a growth focus for us. You know, we're gonna be intensely focused on that as we move forward. The counter, the offset to that is the earnings credit rate and environment. As earnings credit rates increase through the year, you know, there's an offset to some of that on your service charge. We're trying to measure it in absolute terms of growth and not so much look at it the net relative to the earnings credit.
Just on a, Mike, on a year-over-year basis, we had about $3 million worth of OREO gains in this year. You know, we don't expect that to repeat itself, next year as well.
Got it.
The one area where we do have opportunities within our business banking segment where we have not actively sold treasury products, we have a dedicated group who's focusing on mining that customer segment in order to drive.
A product into that customer and provide a service that they desperately need. Designing the product, supporting it with the people that we believe is going to drive some better treasury management results.
Great. Very helpful, guys. Thanks for, all the color.
Thank you.
Thanks, Mike.
Your next question will come from the line of Matthew Breese with Stephens. Please go ahead.
Hey, good afternoon.
Hi, Matt.
I was hoping to hone in on the non-interest-bearing deposit line item. Look, your deposit beta cycle to date and your ability to, you know, hold the mix shift of deposits together has been far better than I would've thought at this point in the cycle and just given some of the results in fourth quarter. Maybe give us a better sense for what's within that non-interest-bearing deposit bucket. You know, how much of it is retail versus business? You know, how has account growth gone versus kind of balance growth? Just give us some flavor for how structurally that might be maintained or some outlook as to where it might drift down to.
Well, the consumer business split is about it's about 60/40. That's i n the business side is where we've seen a lot of the growth over the past several years. In essence, we are, we're sort of doubling down on that business side. You know, we think that's where a lot of the opportunity is. You know, when we look at some other banks that have similar loan mixes to us, you know, heavily on the commercial side, they have even a greater mix towards the commercial side. We think there's some opportunity, and as Dave talked about and Chris talked about focusing on the, on the treasury management, both for the commercial book, but also for the small business.
you know, we think even though there might be some kind of runoff of existing customers, that there's a lot of opportunity with customers that we have their loan, but we have not proactively and effectively gotten their deposit relationships, and we think there's a lot of upside there.
Understood. Do you have the cost of all-in deposits at quarter end just for frame of reference what we're dealing with going into the first quarter?
At quarter end, I don't have. For the full quarter, it was 60 basis points all in. I don't have that right in front of me for the quarter end.
Okay, no worries.
The other-
Last one from me, just thoughts.
The other thing on the consumer side to remember, we're very much a mass market consumer bank, so we don't have... You know, if you look at kind of average mix, it's kind of in the median of what you would see, which therefore doesn't create huge gains or, you know, significant declines kind of through the cycle. That represents some stability.
Got it. Okay. Last one is just thoughts around the projected outlook, and then the $10 billion threshold timing on crossing $10 billion, potential expenses from crossing it and the updated loss Durbin amount.
I'll let Mark speak to the timing, but, you know, this is something I've been focused on over the last 18 months that I've been here. If you look at the talent level that we've elevated in the organization and talent we've brought in is all in preparation for that. We've and so, you know, there's a fair amount of this expense or, you know, from a people standpoint is embedded in our run rate today because we're building for the future. We're setting ourselves up for that process and recognizing even when and if we when we go over $10 billion, there's still some evolutionary time to work through there.
It's, you know, everything from spending time in seminars, talking to peers that have gone through it, working with, you know, accountants and advisors and others, as well as, you know, talent in the industry that have been through this sort of work. It's, it's important to us, but it's really, you know, whether it's 10 or 15 or. It's all about building a foundation for growth and ensuring that we're not only, you know, generating the growth from a top-line standpoint, but we're doing things in a compliant way in line with the regulations.
From a timing perspective, you know, we're just right around $9 billion now. You know, based on sort of a, you know, mid-single digit or a little bit higher loan growth. You know, we're probably a couple of years away from sort of an organic cross on the $10 billion. When it comes to the Durbin, you know, we look at it, you know, once in a while. The last time I looked at it's about half of our debit card, which ends up being about $7 million on a full year basis.
Got it. Okay. That's all I had. Thank you for taking my questions.
Okay. Thank you.
Thanks, Matt.
As a reminder, to ask a question, press star one on your telephone keypad.
Operator, we did have one question in the queue. It was regarding outlook for loan growth for 2023. The simple answer is mid-single digit loan growth. If you look at kind of what I described in my prepared comments regarding consumer activity, as I said, we continue to expect that to perform as it has. On the commercial side, kind of back half of the year focus growth. We do understand and as Mark and Chris described, we expect the NIM expansion to temper and stop at some point. We do understand that, you know, growth in terms of revenue will have to be driven by some asset growth. We're building the teams out. We have the infrastructure in place to do that, and we're very comfortable executing on that strategy.
Our next question comes from the line of Daniel Cardenas with Janney Montgomery Scott. Please go ahead.
Hey, good afternoon, guys.
Hey, Dan.
Could you give me a little bit of color as to, you know, maybe break down the on a monthly basis how the loan yields were looking for the fourth quarter and then, what's current production? What kind of yields are you seeing in current production, and what kind of yields are rolling off?
In total, for Q4 our, you know, kind of start our new loan yields were around a 6.25% range, and that compared to the kind of roll-off, you know, both payments and payoffs of about a 5.60%. We had about a 60-65 basis point improvement, you know, based on that.
Okay. what were paydowns and payoffs like this quarter?
They were, I mean, in line. We didn't see heavy payoffs by any stretch, so they were kind of more normal, what we'd expect, both on the consumer and the commercial side.
Maybe for Chris, thoughts on M&A. What's the environment looking like right now for you guys?
You know, as I said, you know, my job from the day I got here is to prepare for growth and build a foundation for growth. You know, we have a lot more control over the organic growth than we do the inorganic growth. We're, you know, we believe and our financial results would tell us that we should be a participant in future consolidations. When, where, and if, and how that happens is, you know, that's it will happen in the future. It's certainly something again that we're very focused on from a preparation standpoint.
as the foundation's laid, I mean, in terms of parameters, what size of institution are you guys most interested in?
Yeah. I, you know, some of it is whether it's size or, or makeup is probably a better answer. You know, we talk about the health of the deposit franchise and the importance for that being a foundation for our growth. You know, the geographies that we're in and the adjacent markets culturally are very attractive to us. You know, we don't see ourselves doing something kind of in that billion dollar and below range that makes a lot of work for not a lot of gain. You know, that being said, it's all of this is you're really well aware is very event-driven.
It's about building relationships and understanding that is there the right strategic and cultural fit, while at the same time, you know, the financial opportunity is there for growth.
Okay. Fair enough. One last question from me then. How should we be thinking about deposit growth in 2023 for you guys?
I mean, our expectations for growth are pretty modest on the deposit side. I think, you know, we're gonna be focusing a lot on mix, you know, and developing the relationships that Dave and Chris were talking about. We would expect, especially on the business side, you know, a decent improvement in the DDA quality. We might not see the largest increase in the balances, the quality of that DDA should be better. A lot of shifting. We'd expect to see some higher CD balances by the end of the year. Some of that's gonna come just from migration from other areas of the bank. Net-net, we're not looking for huge deposit increases.
We consider that successful given the rate pressure that we expect.
Very focused on kind of as we talk about the quality of the franchise and the mix and tying it back to customer relationships.
Got it. Okay. Thanks, guys.
Okay.
Thank you.
Your next question will come from the line of Manuel Navas with D.A. Davidson. Please go ahead.
Hey, good afternoon. Can you add a little bit more color around how you're thinking about protecting the margin? You said you brought down the floating rate to, like, 42% in general. Like, where could that go? Is it kind of opportunistic? What level are you trying to protect?
I mean, we're trying, you know, when we look at the protection, you know, there's kind of two pieces. One is on the, just on rates down protection, you know, should the Fed reverse course. That's primarily the, you know, the hedging that we've done is more meant to protect that. We have certain, you know, internal parameters that we look at to, you know, it's just, you know, shock type analysis and ramp type analysis that, you know, we're trying to limit that net interest income decline to a percentage we can live with. That additional hedging combined with the structure of the deposit book and the borrowings that we have factors into that.
The fact that we're actually borrowing a little bit now on the short end works in some ways as some additional rates down protection. You know, if rates move down actually on the Fed side, we would expect to see a little bit larger or certainly larger compression than if rates don't go. We're trying to limit that. On the maintenance side, you know, it's more about the specs of this deposit franchise and trying to maintain higher quality so that at the end of the day, we have customers that are rate a little bit less rate sensitive, that aren't as demanding for the top of the market rates and aren't hot money.
That is something that we'll continue to work on over the course of the year so that hopefully we can tell you at the end of the year that our deposit franchise is of higher quality, and that will help support reducing the amount of margin compression that we could see.
Great. That I appreciate that. Thank you.
Sure thing.
I'd now like to turn the call over to Chief Executive Officer, Christopher McComish, for closing remarks.
Well, boy, you know, thanks to all of the analysts on the call and your engagement and your questions. We greatly appreciate your interest in the company, and you help make us better. We thank you for that. We're off into the new year, and again, we're very proud of 2022, and we're moving forward into 2023. Thanks. Look forward to talking to you again soon.
That does conclude today's meeting. Thank you all for joining. You may now disconnect.