S&T Bancorp Inc (STBA) 2021 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the S&T Bancorp Fourth Quarter Earnings Conference Call. (Operator Instructions)

It is now my pleasure to turn the call over to your host, Mark Kochvar. Sir, the floor is yours.

All right. Thank you very much. Good afternoon, everyone, and thank you for participating in today's conference call. 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 the screen in front of you. 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 2021 earnings release can be obtained by clicking on the press release link on your screen or by visiting our Investor Relations website at www.stbancorp.com. We will be reviewing an earnings supplement slide deck as part of this presentation. You can obtain a copy of those slides by clicking on the link on your screen or on our website under Events & Presentations, 4th Quarter 2021 Earnings Conference Call, click on the Fourth Quarter 2021 Earnings Supplement.

With me today is Chris McComish, S&T's CEO; Dave Antolik, S&T's President is under weather today and won't be joining the call.

I'd now like to turn the call over to -- the program over to Chris.

Thanks, Mark, and good afternoon, everybody, and thanks for joining the call. And certainly, thank you for your interest in our company. Before we get into the discussion of the numbers and then take your questions, I want to take a couple of minutes and have some statements and talk about all that's going on with the company. And we'll get into both the first quarter -- the fourth quarter and the full year.

I completed my first full quarter as CEO. And I can tell you this has been a great experience over the past few months. First, this has been a year of significant change in S&T. I'm so pleased with what I've been a part of and certainly have witnessed over the past few months.

Our leadership team and employee base has showed an incredible commitment to accept and embrace change and transition and to move our company forward toward a goal of delivering consistent and superior financial performance. While the work of building a team and ensuring clarity of strategic direction doesn't happen over a few short months, we've made great progress together in a relatively short period of time.

We're emphasizing a focus on delivering consistent profitable growth built on a foundation of safety and soundness in all that we do. We know that this business is a people business first, which means that the leadership team were very focused on delivering the capabilities needed to ensure high levels of employee engagement. Our engaged, skilled and committed employee base, delivering our bank to our customers, whether it be face to face, voice to voice or digitally, is what will win the day here at S&T.

As we enter into 2022 and coincidentally, as we celebrate our 120th anniversary later this spring, I'm very optimistic about our future and our ability to deliver results for our shareholders.

Now let me turn to the numbers. Let's go to Slide 3, and you can see a great fourth quarter overview. For the quarter, revenue was flat and margins were stable. Great news is loan growth was broad-based represented in both commercial and consumer portfolios and associated and focused with some of our strategic areas, including our asset-based lending group, our REIT team and on the consumer side, our home equity lending business. That's 2 solid consecutive quarters of broad-based loan growth for the team.

Additionally, in a subject that's not talked about a lot nowadays is another positive, and that has been both in our growth of and the source of our deposit growth. Our deposit mix continued to improve and overall deposit growth was up $50 million linked quarter, highlighted by strong noninterest-bearing demand growth. It's a great reflection of the loyalty of our customer base and their engagement with our company.

While we did have expense growth in the quarter, it was associated with investments in our business, in technology and infrastructure. Also with some proactive decisions made by me and our executive leadership team with the full support of the Board related primarily to incentive and bonuses.

As I mentioned, our team has been through a significant amount of change this year. They've showed an incredible commitment to each other, our customers and our communities all the while navigating a pandemic and at the end of the day, delivering the highest net income on an annual basis in the history of the company.

For everyday employees, being able to provide additional incentive pay is a great and important way to say thank you, we believe in you, and we have high expectations of you going forward. Approximately 43% of our employees earn less than $19 an hour. We made a proactive decision to increase our minimum base pay rate in December. While those numbers are not in this quarter, the incentive pay is. And it's met with a great level of satisfaction with our employee base and will serve as momentum for us in the future as we move forward as an organization.

On the credit quality front, while we are disappointed in a couple of charges, I am pleased with the overall improvement in the quality of our loan book. Safety and soundness is a big part of who I am, and we are ensuring that the culture exists throughout our company focused not only on profitable growth but doing everything we do in a safe and sound way. We've made leadership changes and elevated people within the company and added new talent to the organization, all with this focus of consistent profitable growth underpinned by safety and soundness.

As we move forward into the fourth quarter, you'll see, as I mentioned -- I'm sorry, into the full year, $110 million of record net income. Another highlight that I want to mention to everybody is our customer fee income growth. This is a reflection of, again, our proactive customer engagement. This is activity that includes things like debit card and interchange revenue, treasury management fee income growth, growth in our wealth management business, as defined as a sticky fee income representative of healthy customer engagement.

Turning to Slide 5. Again, we'll talk a little bit about the balance sheet. We mentioned the broad-based loan growth that you see on the last screen up, both in our commercial businesses as well as in our consumer business, 7% annualized for the second consecutive quarter.

Again, a little more detail on the deposit mix. You see DDA is up almost -- a little over $96 million, offset by a decrease in CDs of over $100 million.

As it relates to the loan book, one thing that I know will be of interest to those on the line is two things. One, what we're seeing in utilization, line of credit utilization. It was up a little bit in the quarter of about 3 percentage point into the mid-30% of the line amount. This is actually consistent with the same increase that we saw last year, Q3 to Q4. So we believe that there's still a latent borrowing capacity and activity within our customer base as we work -- as the economy works through the pandemic, supply chain issues and other opportunities for growth. We certainly see getting back into that mid- to low 40% utilization rate would lead to growth in our loan portfolio by itself of over $100 million.

As it relates to 2022, on the loan side, we've guided toward and very confident on an annual basis of looking at loan growth into the high single digit range. There is seasonality in that number. We had a very strong Q4. Our pipelines are building lots of good activity right now, but we're probably looking something closer into the mid-single digits in Q1 as we move forward with an annualized and an annual growth rate in that high single-digit range.

I'll stop there, turn it over to Mark and a lot of things to keep going.

Great. Thanks, Chris. Slide 6, core net interest income, excluding PPP, improved by $0.8 million compared to the third quarter. Total net interest income declined by $0.3 million, as the contribution from PPP decreased by $1.1 million to $3.1 million in the fourth quarter. Average loan balances, excluding PPP, increased by $128.8 million. We have about $88 million of PPP loans remaining representing approximately $2.8 million in remaining fees. The headline net interest margin rate decreased just 2 basis points with slight compression in loan and security yields.

Looking ahead and not including any short-term rate increases, with loan growth returning, we expect to begin to deploy the higher cash levels on the balance sheet, including a modest amount of additional security purchases. This should offset any loan yield pressure with stable -- and stabilize the net interest margin rate in the first half and allow for modest improvement in the second half with higher net interest income. Any meaningful influence of PPP should end after the first quarter when forgiveness is expected to be essentially completed.

We're well positioned for short rates moving higher. Our balance sheet is asset-sensitive on the front of the curve with over 50% floating to LIBOR or prime. Our liabilities are better positioned for rate-up with about $110 million indexed to short rates. And like the rest of the industry, we have more liquidity to work with than in prior rate cycles.

Next, noninterest income in the fourth quarter increased by $0.3 million compared to the third quarter. Over the course of the year, we've seen solid growth, as Chris mentioned, in core customer deposit fees, including cards, service charges and wealth. Combined, these 3 categories are up almost 19% this quarter compared to a year ago.

Mortgage banking decreased in the fourth quarter due to lower refi volume and a shift to more portfolio lending, where we saw loan balances in mortgages increased by about $12 million. The other category was favorably impacted by better swap income and market value adjustments. We expect the run rate in noninterest income to be $15 million to $16 million per quarter in '22.

Noninterest expense increased by $3 million compared to the third quarter. Higher salary and benefits of $1.9 million came mainly through higher incentives as Chris described. Data processing increased due in part to timing but also due to higher customer activity, expanded product offerings and some additional outsourcing.

Marketing increased due to campaigns in the quarter. And going forward, with a tighter labor market and investments we are making in talent and systems, we expect our expense run rate to be in the $49 million to $50 million range in 2022.

Our ACL for loans decreased from 1.55% in the third quarter to 1.41% in the fourth quarter, primarily as a result of charging off the $9.3 million specific reserve we set aside on C&I credit in the third quarter, combined with a charge on a second C&I relationship. Net charge-offs then were $17.7 million for the fourth quarter. These charges, along with return to accrual of over $22 million of hotel loans, contributed to a 40% or $45 million reduction in NPLs.

Our risk-based capital ratios were down slightly in the fourth quarter due to higher risk-weighted assets combined with lower Tier 2 capital from a small sub debt payoff and the ACL release that we just discussed. We remain in excess of regulatory well-capitalized levels, and our capital cushion stands at about $270 million. While we have a $37.4 million remaining on our buyback authorization, we have no immediate plans for buybacks, although we're monitoring valuations and we are prepared to respond should conditions warrant. Our preference is utilize capital to support the loan growth organically that we're seeing or through M&A should the opportunity arrive.

Thank you very much. At this time, I'd like to turn the call over to the operator to provide instructions for asking questions.

(Operator Instructions) Your first question is coming from Daniel Tamayo.

Maybe we could just dig into the NIM guidance a little bit in terms of what the assumptions are. And I apologize if you provided this, I missed it, but what your assumptions are for the deployment of excess cash with the rate hike assumptions are in there? And then what the -- how much the bank would benefit for each individual rate hike?

Okay. So I'll start with what's in our forecasted numbers. Right now, we haven't -- in the guidance I just gave, there's not any increases baked into that for the Fed even though you -- based on last -- yesterday's meeting, it certainly sounds like things are coming. So we don't have anything baked into those numbers yet.

In terms of how much we benefit, as I said, we have about $3.6 billion of loans that we would expect to reprice immediately or fairly close immediately within a month of the rate increase. So approximately, in the first 25 basis points, there's about $900 million that won't move right away because of floors, so that restricts it a little bit. But on the other side of the ledger on the liability side, we have very little in repricing liabilities. So we should see most of the benefit -- benefit that right way. I don't expect that at least initially, there will be a lot of pressure on deposit rates. Is there a third part of that, that I missed?

No. Just trying to get a handle on how much the marginal move, which is helpful. The information you gave, which is helpful. I appreciate that. I guess, yes, the last part was just on the excess cash. I'm not sure if you addressed. What's the assumptions are for the deployment there? And how much is there?

Well, as Chris mentioned, we expect kind of high single-digit loan growth. So that, over the course of the year, should absorb some of that. We do have some plans and have it moving a little bit into securities early in the year. And then it will allow that to catch up at the end of the year, depending on how things go and not replace those things. So if everything goes as planned, we would expect cash flows to be more normalized by the end of the year, mostly being replaced net by loans a year from -- or at the end of this year.

Okay. And then on the other side of the balance sheet, I mean you've talked about it, but I don't think put a number on it or a percentage. How are you thinking about the growth of kind of the earning asset base overall, in terms of how big the security portfolio gets?

Yes. I think we're looking at the securities, maybe adding a couple of hundred million from where we're at right now. But [headlining] that, assuming the loan growth materializes as we expect that we would then kind of let that go in the back half of the year.

Your next question is coming from Tim Switzer.

I'm on for Mike Perito. Thanks for the pretty detailed guide you guys gave on the $15 million to $16 million quarterly run rate for noninterest income. You talked about the really strong customer fees you've been seeing. Could you kind of go through how you expect those line items to move in 2022? Which will be like kind of the primary drivers of that?

Great. So we do expect the debit card to continue. So that's the debit and credit card area, that's where we do see some improvement continuing. Another area of continuation is also the service charges. Chris mentioned the treasury management. We're very active and have been working hard with our small business group and our commercial side, and we expect continued improvement there. And then also on the wealth management side is the third area where we see double-digit growth again year-over-year.

Okay. And then on the expense as you...

Just to be clear, the wealth management, the fee income is impacted by 2 things. Obviously, flows in assets under management growing, so new customers and expansion of relationships, but then changes in the market could have an impact because we're -- it's not a transaction-based business. It's an assets under management business. So if markets were to go down significantly, those are headwinds, but that -- everybody faces those same things.

Right. And is your wealth management business that priced off of the beginning of the quarter? So like the end of Q4 is going to dictate kind of the level of income you get for this quarter?

A large part of it. There is some that's based on flows or activity during the quarter, but there's a significant part of it based on the asset -- size of assets under management, as you described.

Okay. I got you. And then with the expenses, you were talking about some of the tech and infrastructure investments you've been making and that led to some of the expense growth. Could you outline what some of the most impactful investments are that you're doing? And then if they're more directed towards either bringing efficiencies and savings or kind of revenue drivers?

It's a mix. There's -- on the FTE side, a number of the ads there and the higher expenses are related to enhancing our production capacity, both in the fee areas and also on the loan side. But there's also, within there, support for the risk structures as well in our credit area and then also in our operations area. So that's kind of a mix between production and sort of more interest-based infrastructure.

On the kind of FF&E where a lot of that is software, there's some additional expenses that we anticipate with the potential rollout of CRM-type software that will help our teams to be more productive. But also there's some risk programs that are being implemented as well that will support the safety and soundness that Chris was talking about.

So there's a mix of customer-facing revenue-generating enhancements. Mark talked to the CRM capability. We're working on some opportunities throughout 2022 around enhancing our digital online mobile banking offering, as an example. The treasury management discussion that we have represents continued investment in the business. This is not products that we're building, but it is -- we're availing ourselves new capabilities that our core systems providers have, for example, that we may not have capitalized on in the past. Some of that then represents additional activity within our customer base, which could lead to expenses, but there's -- lots of that also has revenue offset associated with it.

Your next question is coming from Russell Gunther.

I wanted to start, Mark, just a clarification on the margin guide. So did you begin your comments with expectations for the reported margin of 3.12% to improve absent rate hikes due to the average earning asset remix you're expecting?

Yes, that's correct. We would expect over the course of the year to see improvement. We think we've kind of bottomed out on the new rate.

Okay. And then you guys called out the asset sensitivity of the bank in the prepared remarks. So I was just hoping you could give us a sense for whatever 25 basis point hike means either from a basis point perspective, NII perspective and what you guys are assuming in terms of deposit betas within the first couple of moves?

Yes. I guess just to hit the last one first. On the deposit beta, we would expect those to be lower than they have been in the past. We've seen a much different -- we see a much different mix than we had in the prior rate-up cycle with a lot more in DDA, a lot more in management price, money market accounts. And with the liquidity, both at the bank and in the system, we would expect at least initially the deposit competition to be somewhat lower so that we would have a better ability than in the past, at least, initially again to hold back on the rates.

In terms of that -- so that's going to play into how much of that net interest income that we'd be able to keep depending on how well that pricing goes. The other thing that helps us out is that in the past, because of the -- we typically have been a net borrower, we would have a lot of floating rate debt that was repriced. Right now, we have essentially 0 floating rate debt. So more of that asset improvement goes to the bottom line more directly.

So all that being said, with rates up of a quarter on approximately $3.6 billion of loans, that starts us out at about a $9 million or so number annualized for net interest income. Now some of that maybe get me enough [by the kinks] that we would see with at least the first 25 basis points. But all in, we're looking at, again, top line without any deposit repricing, about a $6 million number for the first 25.

And then on the loan growth expectation, I appreciate the order of magnitude. I was hoping you could comment in terms of expectations for the mix and particularly an appetite to continue portfolio in single-family around current levels or does commercial kind of take over?

Yes. From a mix standpoint, Russell, you're obviously seeing in the marketplace the refi boom is over. And so there's a lot more purchase activity, some construction activity that we're involved with, which ends up some higher level average mortgage size, which could potentially take you out of the Fannie and Freddie conforming guidelines, which gives us the ability to put those mortgages on the balance sheet. So we do see some balance sheet growth because of the change of mix.

On the mortgage side of things, we have shown some ability to work within our customer base on the home equity side of things. And that is something that's been attractive to us, and we've got some growth there, continued focus on small business. There's growth, but that portfolio, the average life and amortization of that portfolio, it turns pretty quickly. So you've got -- your production is basically offsetting that which is amortizing in the small business area. And we're very focused within our small business employee base and customer base on the other side of the balance sheet, and that's the treasury management and activity levels that we've spoken out there. We believe there is a lot of latent capability that customers need. The deposit customer in the small business world is talking to us every day somehow, and they need the capabilities that we have and then the loan opportunities are more event-driven, but still a really important business to us on both sides.

And then on the C&I side of things, we'll continue to invest. You saw the growth that we've talked about in some of our specialty lines, ABL, our REIT group. We've got a very active real estate group that will remain that way. So it's fairly broad-based. But again, through the year, we're expecting that high single-digit number is what we're talking about.

And then just last one for me, if I could. Just broadly speaking, how would you characterize the loss content that was recognized this quarter in terms of -- was this trying to take a big chunk at remaining problem assets? Would you expect charge-offs in 2022 to remain above a normalized level for you as you continue to work through what would be remaining? Just would like to get your thoughts on the outlook there. And that's it.

Yes. That's a difficult one to predict. We certainly expect charges to be lower in '22 than in '20 as the NPLs have come down and the outlook for the economy continues to improve. So we do expect those numbers would be lower. I mean the losses that we had in the fourth quarter had expressed or had shown some stress prior to COVID. And then COVID coming in, it really made their situations more difficult. We're seeing fewer of those situations as exemplified by the improvement that we see in the hotel book. And also, there are some other categories that we've seen similar improvement. But again, it is dependent on the curve or the arc that we would see with the pandemic as well.

I mean, going into the new year, as we said, the nonperforming loans, down a little north of $40 million, $50 million. Look at that compared to 4Q of '20, much higher levels. So we're going in to the year in better shape. And the only thing I can tell you from -- this is Chris speaking, this is -- safety and soundness and all that we do is critically important to me and to our leadership team. And we've done a lot to both bring talent into the company as well as elevate talent that was already here to ensure that we have the right focus on producing consistent profitable growth with the foundation of safety and soundness. And that's my commitment to our employees, our Board and those that are investing in our company.

We have no further questions from the lines at this time.

Okay. We do have 1 question that came in online. And that was asking for a clarification on the guide for the NIM being stable in the first half and then grow in the second half versus the net interest income.

So actually, with earning assets making the shift between cash and loans and securities, earning assets stay relatively stable throughout the year. So that guidance is really for both. We do expect that both the NIM and the net interest income to show improvement over the course of the year, given the stability of the average earning asset number.

Okay. Thanks very much. Chris?

Thank you, all. Greatly appreciate you taking the time to spend time with us, your interest in our company, and we look forward to further dialogue as we head into 2022 and stay warm. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference call. You may disconnect at this time and have a wonderful day. Thank you for your participation.