S&T Bancorp Q4 2024 Earnings Call Transcript

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Provided by Quartr
January 30, 2025

There are 8 speakers on the call.

Operator

Welcome to the S&T Bancorp Fourth Quarter and Full Year 2024 Conference Call. After the 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.

Speaker 1

Great. Thank you very much. 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.

Speaker 1

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 Q4 and full year 2024 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 and T's President.

Speaker 1

I'd now like to turn the call

Speaker 2

over to Chris. Thank you, Mark, and welcome and good afternoon, everybody. I want to thank the analysts for being on the call. We really appreciate you being here with us and we look forward to your questions. As always, I want to thank our employees, shareholders and others also listening to the call.

Speaker 2

To our leadership team and employees, your commitment and engagement is what drives these financial results. These results are yours and you should be very proud. Before we discuss Q4 specifically, I would like to take a few minutes to discuss and wrap up 2024. Overall, S and T navigated a very dynamic environment in 2024 exceptionally well. Following 2 straight years of record financial results, we produced $3.41 per share in earnings while delivering excellent returns and building to record levels of capital.

Speaker 2

Additionally, we made great progress on our asset quality initiatives and our efforts to grow and enhance our customer deposit franchise were significant. None of this could have happened without the commitment of almost 1300 S and T employees who as defined by organizations like the American Banker and EnerGage are some of the most engaged, loyal and talented employees in the industry. Our performance, capital levels, balance sheet strength and business activity levels give us great optimism as we head into 2025. Now turning to the quarter, the 4th quarter, our $33,000,000 in net income equated to about $0.86 per share, up slightly from Q3. Again, our return metrics were excellent with a 13.25 percent ROTCE, 1.37% ROA and our PPNR remained solid at 1.72%.

Speaker 2

Our net interest income showed slight contraction versus Q3, while our net interest margin at 3.77 percent also declined slightly, but remained very strong. Mark will be able to provide more details on both our net interest income and our net interest margin in a few minutes. Asset quality continued to improve as we had another quarter of declining or improving ACL. And Dave is going to dive more deeply in here in a few minutes. He'll also touch on the meaningful pickup we are seeing in our loan pipeline.

Speaker 2

Moving to Page 4, loan growth was just under 3% for the quarter because of very strong new loan production in the quarter. Payoffs were also higher in the quarter. However, some of this provided a contribution to the asset quality improvements you see on the page. Notably on the deposit side, customer deposit growth of more than $75,000,000 produced over 4% growth annualized and this is the 6th consecutive quarter of meaningful deposit growth for our company. While deposit growth was broad based, we are particularly pleased with our DDA and NOW performance with overall DDA balances growing to a very strong level of 29% of total balances.

Speaker 2

In a minute, I'm going to turn it over to Dave and he'll talk more about the loan book and credit quality and then Mark will provide more color on the income statement and the capital. But let me reiterate again how good we feel about all that we navigated in 2024. As I said, capital levels are record levels. Earnings were strong. Results and metrics look very good.

Speaker 2

Pipelines are strong and we feel very confident in about 2025. So with that, I'm going to turn it over to Dave to talk a little bit more about the balance sheet. Sheet.

Speaker 3

Great. Thank you, Chris, and good afternoon, everyone. Continuing on Slide 5 with our discussion of the balance sheet for Q4. We experienced solid loan growth in both commercial and consumer loans, totaling 2.8% annualized. Focusing on commercial for a minute, Q4 was our strongest loan production quarter in 3 years.

Speaker 3

We fully expect originations in quarter 1 and quarter 2 of 2025 to continue at higher levels than experienced for those quarters in recent years. We've seen expanded pipelines in both our Business Banking and Commercial segments, leading to a doubling of those pipelines year over year. We've been actively recruiting business and commercial bankers and expanded our business and commercial banking teams by 15% in the past year. These additions along with increased demand and renewed customer confidence are positively impacting our results. Pressuring growth, as Chris mentioned, were higher payoffs in Q4 than experienced in 20 24's earlier quarters as we successfully exited several credits, which led to the continued improvement in our asset quality profile and has allowed our bankers, most importantly, to focus more on growth.

Speaker 3

Turning to consumer loans. Much of the quarters and the full year growth was driven by our residential mortgage activities. We refined our residential mortgage strategy to better align it with our deposit franchise and focus on supporting our branch network and communities. As an outcome, our pipeline has reduced in residential mortgage and we expect consumer growth in 2025 to be more balanced between residential mortgage and our home equity products. Turning to asset quality on Slide 6.

Speaker 3

We continue to see improvement in Q4. Our allowance for credit losses declined by almost $3,000,000 and declined from 1.36% to 1.31% of total loans. Influencing these results were several factors, including a decline in non performing assets of $4,000,000 NPAs remain relatively low at 3 basis points to 6 basis points of total loans. We also saw continued declines in our criticized and classified loans of 16% during the quarter. This represents the 5th consecutive quarter of C and C declines.

Speaker 3

And in total, C and C assets declined by 31% in 2024. In addition, we saw a net recovery of $100,000 for the quarter compared to a $2,100,000 charge off net charge off in Q3. Finally, with the previously mentioned improving improvement in pipelines, hiring, customer demand and customer confidence, we anticipate mid single digit growth in the first half of twenty twenty five and high mid single digit growth for the full year of 2025. I'll now turn the call over to Mark.

Speaker 1

Great. Thanks, Dave. Here on Slide 7, 4th quarter net interest margin rate at 3.77 percent, down about 5 basis points from the 3rd quarter with a decrease in net interest income of $1,200,000 compared to last quarter. Both of those are in line with our expectations. Our earning asset yields declined by 15 basis points in response to a 60 basis point decline in average fed funds rate in the Q4 compared to the 3rd.

Speaker 1

This is mostly offset by a decline in interest bearing liability costs of 14 basis points in the 4th quarter, driven by exception and normal non maturity deposit repricing at the beginning of a repricing of a relatively short CD book and lower borrowing amounts and rates. The net interest margin and net interest income were also supported by a better security yields from normal replacements combined with the bond restructurings we have done over the past 3 quarters, now totaling about $143,000,000 and cumulatively improving net interest income by approximately $1,000,000 per quarter as we move into 2025. Looking ahead, we believe that we are within a couple of basis points of the bottom for the net interest margin rate, especially given the reduced Fed rate cut expectations. We anticipate that the current net interest margin level in the mid-three seventy area will hold even if rate cuts materialize later in 2025. Support for the net interest margin stability comes from favorable fixed and armed loan and securities repricing with a steeper curve, our $500,000,000 received fixed swap ladder beginning to mature in the Q1, a short duration $1,500,000,000 CD portfolio that will price mostly in the first half of twenty twenty five and an improving ability to implement non maturity rate cuts and manage deposit exceptions should short rates move lower.

Speaker 1

A more stable net interest margin rate combined with our better asset growth outlook should translate into net interest income growth as we move into the Q2 of 2025. On the next slide, non interest income, which declined by about $8,800,000 in the Q4. We as I mentioned, we executed a 3rd securities repositioning. This one was about $445,000,000 We took a loss of $2,600,000 with an earn back of just about 2 years. Our core non interest income run rate remains approximately $13,000,000 to $14,000,000 per quarter.

Speaker 1

Next Slide 9, non interest expense. Expenses were overall unchanged in the 4th quarter compared to 3rd. Salaries and benefits are lower due to a decline in incentives. Data processing is higher due to the timing of some technology investments. And the other taxes increase relates to our Pennsylvania state tax, which is based on the level of capital.

Speaker 1

We expect expenses to increase in 2025 overall by approximately 3% compared to 24% as we continue to invest in our production capacity and our customer experience. We expect quarterly run rate of approximately $55,000,000 to $56,000,000 in the first half of the year and closer to $57,000,000 per quarter in the back half. And finally, on Slide 10, capital. The TCE ratio decreased slightly by 4 basis points this quarter due to the AOCI impact of higher rates. Our TCE and regulatory capital levels position us very well for the environment and will enable us to take advantage of organic or inorganic growth opportunities as they arise.

Speaker 1

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

Operator

The floor is now open for questions. Your first question comes from the line of Daniel Tamayo of Raymond James. Please go ahead.

Speaker 4

Thank you. Good afternoon, guys.

Speaker 1

Hi, Daniel.

Speaker 4

Yes, maybe one for you, Chris, on the loan growth outlook. Looks pretty bullish, especially as we get into the back half of the year here. So I guess you're starting the year mid single digit and I'm sorry, if you're starting the year where are we? Yes, mid single digit and ending mid to high single digit for the full year. Does that mean you're going to be kind of towards that high single digit level in the back half of the year?

Speaker 4

And is that a good run rate to think about as we move forward given all these hirings you've made over the last 12 months?

Speaker 3

Yes. Dan, this is Dave. I'll take that question. But yes, you're describing it accurately. As we hire through the year, add to both our Business Banking and Commercial Banking customer facing staffs, we anticipate growth to follow that trajectory.

Speaker 3

And we come into the year with double the size of pipeline that we had going into last year. And last year, our Q1 was not a good one in terms of loan growth. So we feel much better about that. We also feel much better about what we're hearing from our customers in terms of demand and confidence in the economy. So all those things combined, on top of the fact that we've had these asset quality improvements that give us significant confidence in our ability to grow at a more rapid pace.

Speaker 2

Dan, it's Chris. I'll just add to this. This is a reflection of the past 3 years and the effort that we've been under to build this foundation for growth. We're spending much more time proactively, many more people in the market and combine that with the reputation that we have as a company and the following in loyalty that we have from our employee base, we feel very good about where we're sitting today given the environment that we're in.

Speaker 4

That's terrific. Thanks for that Dave and Chris. Maybe switching over to credit, that's certainly been a positive story for you guys for a while now through 2024, continue to see those criticized and classified in particular numbers come down. Curious if you think we're kind of close to a bottom there and as we think about the new credit profile of the bank, where you think net charge offs would be on a more normalized basis going forward?

Speaker 3

Yes. It's Dave again, Dan. I think, first, charges are difficult to forecast. And we know our job is to ensure that we don't give back the asset quality improvements that we've worked so hard to achieve as we accelerate growth. So we would anticipate provisioning in 2025 to be in support of that growth.

Speaker 3

All that being said, we don't see any particular loan or industry or segment that gives us concern that would lead to outsized charges in 2025. And the fact of the matter is our C and C assets are down from nearly 6% 2 years ago to 2.75% of total loans. So we feel good about where we are. Is there room for improvement in the C and C area? Yes, we're nearing the bottom, right?

Speaker 3

I think that if you look at our goals relative to C and Cs, relative to our peer group, We feel like there's room to go, but not a lot. I mean, what we achieved in 2024, certainly we're not going to be able to repeat in 2025.

Speaker 4

Understood. Yes. And from a reserves perspective, around $130,000,000 of loans seems like a pretty fair level for you guys. Is it fair to say that that's likely to be stable ish going forward?

Speaker 1

Yes, we could you could see there's still some additional improvement that could come on within the model on a qualitative basis, depending on the economy and how some of the metrics work out. So you could see some further decrease in there, but probably not to the extent that we saw, as Dave mentioned, in 2024, but you could still see that go lower on a percent basis, although the dollar could if we're successful in the loan growth that Dave talked about, you could see the dollars still be higher.

Speaker 4

Understood. All right, great. Well, thanks for the color guys. Appreciate it.

Speaker 1

Thank you, Dan. Thanks, Dan.

Operator

Your next question comes from the line of Kelly Motta of KBW. Please go ahead.

Speaker 5

Hi, good morning or good afternoon. Thanks for the question.

Speaker 2

It's been a long earnings season for you Kelly. We understand.

Speaker 5

Yes. Don't know what time it is, don't know what day it is, but I'm still standing and happy to be on your call. It sounds like the organic growth story, trends are really encouraging with the pipeline, the acceleration throughout the year. I'm wondering, given the talent you brought on and your outlook ahead, just and where you stand, if there's additional opportunities to add teams or pick up potential producers here? Or if you feel like with the outlook ahead, you've got what you need and are kind of holding firm here.

Speaker 5

Wondering just kind of how you're looking at that.

Speaker 3

Yes. We're planning to recruit through the year, Kelly, to continue to grow those teams. May 25 may look like 24 in terms of the 15% addition. I think we have room to do that. And there's certainly opportunity in the market to do that given our strength and the story that we have to tell prospective bankers.

Speaker 3

So we'll continue to add to customer facing staff in 2025.

Speaker 2

And Kelly, it's Chris. I'll add to that. Again, kind of go back over the past 3 years, what we've been doing is building this foundation for growth. So we may we in total have, call it, 75 ish, 100 ish more employees in the company today than we had 3 years ago. The vast majority of those employees are in the kind of in our control functions, credit, risk management, audit, finance, BSA, AML, all of that foundation that we need as we cross over $10,000,000,000 as we continue to grow.

Speaker 2

And we really had not added a lot to our customer facing employees. We made a very firm decision back earlier last year that we feel good about where we stand the foundation of the company. And so our attention has been turned to much more towards revenue facing employees and teams and we'll continue to look to be opportunistic.

Speaker 5

Got it. That's helpful. And then it feels like M and A maybe thawing out a bit. Just wondering if you could give us an update on the pace of conversations and kind of how you're positioning here and potential opportunities?

Speaker 2

Sure. Yes, I just got back from one of the big industry conferences this week and lots of discussions and talk. And again, we have record levels of capital in the company today and we know we need to be deploying that capital in a smart way. It will obviously go in the form of organic asset growth. But we believe we're very well positioned from both what we have from resources within our company, the customer loyalty and employee engagement that we have, the reputation that our company has in the marketplace, we believe we're a very good partner in this environment.

Speaker 2

So we're looking forward to being opportunistic at the right time, and I think it's becoming those things are becoming more active.

Speaker 5

Great. I will step back. Thank you so much.

Speaker 3

Thank you. Thanks, Kelly.

Operator

Next question comes from the line of Manuel Neves of D. A. Davidson. Please go ahead.

Speaker 6

Good afternoon. This is Sharon Gee on for Manuel.

Operator

Hi, Sharon. Hi, Sharon. Hi, Sharon.

Speaker 6

Thank you for taking my questions. So for my first question, I wanted to talk a little bit about, so you mentioned a stable NIM around $370,000,000 And so how does that change if there are more like more rate cuts in the

Operator

year? Yes. I mean based on

Speaker 1

the current expectations, we think we can keep that margin rate relatively stable even if we do see some additional cuts from the Fed. We think we have as we get deeper into the lower rates, into the deposit stack, there's more opportunities for us to match whatever happens on the short end with the Fed with additional re pricings of our deposit book. So we think we're at a good place. We've done a lot to neutralize the balance sheet a little bit more from rate changes. So we had a better spot from that perspective so that we don't expect there to be as much pressure as if rates continue to go down.

Speaker 6

Thank you. And how is the December cut versus prior cuts proceed for you? And then is there still a little bit of deposit cost cuts coming in the Q1 from the December Fed cut?

Speaker 1

Yes. We should there's still a little bit of overhang on a quarter over quarter basis just based on the timing of the cuts. But we've already made those similar timings influenced our deposit cuts as well. So we'll see some benefit there. One of the other things that's changing is more impactful in the Q1 is the CD repricing.

Speaker 1

It started to a much smaller degree in the Q4, but we're repricing well over $100,000,000 per month as we move into the first half of the year, Q1 of the year. So we'll have a much better impact from that activity.

Speaker 6

Awesome. And then you mentioned that your pipeline is really strong coming into the Q1. And so what is the pricing for those loans coming on and thoughts on price or yield competition?

Speaker 3

In terms of pricing will be similar to what we saw in Q4. The growth is not coming through us being more aggressive in pricing. It's really the additional bankers that we've added and the customer demand.

Speaker 6

Okay. Thank you. That was all.

Operator

Thank you. Your next question comes from the line of Matthew Breese of Stephens Incorporated. Please go ahead.

Speaker 7

Hey, good afternoon.

Speaker 3

Hi, Matt. Hi, Matt.

Speaker 7

A couple of quick ones for me. A lot has been answered. The optimism on the pipeline and you said the optimism from your customers. Can you just talk a little bit about that? What's driving that optimism?

Speaker 7

Do you think it's the general kind of environment and kind of a more stable outlook or something geography specific? We'd love to hear more there.

Speaker 2

Yes. I don't think it's necessarily geographic specific or industry specific. I think if you can if you go back to say this time last year, we noticed as there was more confidence in the direction of interest rates, short term interest rates. There were customers waiting to see what was going to happen relative to inflation and interest rates and all those sorts of things. And as things started to become clearer as far as the direction, people were able to be more planful in their execution based upon those things.

Speaker 2

So one less variable in the equation for our customers. And then just getting through the election and having some clarity around the general environment also provided I think some tailwinds simply because people had clarity on where things stood. So that's it wasn't specific to any industry or any geography. It was just kind of the overall general tone within our customer base.

Operator

Got it. And then understanding

Speaker 7

kind of the near term outlook for the NIM, but as we get towards the end of 2025, do you expect the margin to kind of be on an upward trajectory again as your fixed assets reprice and there's still some room to reprice deposit costs lower? I'm just curious, as we get towards the end of this year, what do you expect kind of the exit NIM to look like entering 2026, barring anything that I know where the Fed stands, staying 1 or 2 cuts, barring anything outside of that?

Operator

Right. I think there's some possibility of that.

Speaker 1

I think at the end of the day, it comes down to the competitiveness of the deposit pricing. That's kind of the one variable that has the biggest delta for us from an end result. And we do have, as Dave mentioned, higher loan growth expectations. So in order to keep pace with that, we're going to have to continue to implement the things that we've done on the deposit franchise. Some of that could involve rate and depending on how other institutions and just the general environment that deposit.

Speaker 1

So we're leaving room for potentially need to be a little bit more aggressive on the deposit side to make sure that we can fund that growth appropriately.

Operator

So I think there's a little bit of

Speaker 1

a change in their potential to do better or perhaps a little bit below that thing on how competitive that environment is in deposits.

Operator

Maybe you can help me

Speaker 7

out on NII then. What is your expectation for NII growth in 'twenty five versus 'twenty four?

Speaker 1

It's still it's relatively modest. Over the course of the year, we still think that Q1 is probably relatively flat. We should see a pickup starting in Q2, but it's probably in the low single digit percent

Operator

change. Understood. Okay. And year over year okay? I'm sorry,

Speaker 7

I didn't mean to cut you off. Year over year, what were you going to say?

Speaker 1

Yes. I'm just saying on over year over year because we were coming down over the course of 2024. So we have to kind

Operator

of make that back up on

Speaker 1

a year over year basis.

Speaker 7

Understood. Thank you.

Speaker 3

Thanks.

Operator

There are no further questions at this time. I would now like to turn the call back over. My apologies. I would now like to turn the call over to Chief Executive Officer, Chris McComish for closing remarks. Please go ahead.

Speaker 2

Okay. Great. Well, thank you all for your time. I know it's been, as I said earlier, busy earning season for all of you and we certainly appreciate your interest in your company and the dialogue. So hope everybody has a great afternoon.

Speaker 2

Thank you.

Operator

Ladies and gentlemen, that concludes your conference call. Thank you for participating and at this, please disconnect your lines.

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