S&T Bancorp Inc Q4 FY2024 Earnings Call

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

Great. 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 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&T's President. I'd now like to turn the call 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. 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&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. 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 1,300 S&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 fourth quarter, our $33 million in net income equated to about $0.86 per share, up slightly from Q3. Again, our return metrics were excellent with a 13.25% ROTCE, 1.37% ROA and our PPNR remains solid at 1.72%. Our net interest income showed slight contraction versus Q3, while our net interest margin at 3.77% 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 growth pipeline. 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 million produced over 4% growth annualized and this is the sixth 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. 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 at record levels. Earnings were strong, results and metrics look very good, pipelines are strong and we feel very confident about 2025. So with that, I'm going to turn it over to Dave to talk a little bit more about the balance sheet.

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. We fully expect originations in quarter 1 and quarter 2 of 2025 to continue at higher levels than experience 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 2024 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. Turning to consumer loans; much of the quarters and the full year growth was driven by our residential mortgage activities. We've 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. We continue to see improvement in Q4. Our allowance for credit losses declined by almost $3 million and declined from 1.36% to 1.31% of total loans. Influencing these results are several factors, including a decline in nonperforming assets of $4 million. NPAs remain relatively low at 36 basis points of total loans. We also saw continued declines in our criticized and classified loans of 16% during the quarter. This represents the fifth consecutive quarter of C&C declines. And in total, C&C assets declined by 31% in 2024. In addition, we saw a net recovery of $100,000 for the quarter compared to a $2.1 million net charge-off in Q3. Finally, with the previously mentioned improvement in pipelines, hiring, customer demand and customer confidence, we anticipate mid-single-digit growth in the first half of 2025 and high mid-single-digit growth for the full year of 2025. I'll now turn the call over to Mark.

Great. Thanks, Dave. Here on Slide 7, fourth quarter net interest margin rate at 3.77%, down about 5 basis points from the third quarter, with a decrease in net interest income of $1.2 million compared to last quarter. Both of those are in line with our expectations. Our earning asset yield declined by 15 basis points in response to a 60 basis point decline in average Fed funds rate in the fourth quarter compared to the third. This was mostly offset by a decline in interest-bearing liability costs of 14 basis points in the fourth quarter, driven by exceptions and normal non-maturity deposit repricing, 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 better security yields from normal replacements combined with the bond restructurings we have done over the past 3 quarters, now totaling about $143 million and cumulatively improving net interest income by approximately $1 million per quarter as we move into 2025. Looking ahead, we believe that we are within a couple of basis points at 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-3.70% area will hold even if rate cuts materialize later in 2025. Support from the net interest margin stability comes from favorable fixed and ARM loan and securities repricing with a steeper curve, our $500 million received fixed swap ladder beginning to mature in the first quarter, a short duration of $1.5 billion CD portfolio that will price mostly in the first half of '25 and an improving ability to implement non-maturity rate cuts and manage deposit exceptions should short rates move lower. 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 second quarter of '25. On the next slide, noninterest income which declined by about $0.8 million in the fourth quarter, as I mentioned, we executed a third securities repositioning. This one was about $45 million, we took a loss of $2.6 million with an earn-back of just about 2 years. Our core noninterest income run rate remains approximately $13 million to $14 million per quarter. Next, Slide 9, non-interest expense. Expenses were overall unchanged in the fourth quarter compared to the third. 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. 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 a quarterly run rate of approximately $55 million to $56 million in the first half of the year and closer to $57 million 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. 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.

Your first question comes from the line of Daniel Tamayo of Raymond James.

Maybe one for you, Chris, regarding the loan growth outlook. It appears quite positive, especially as we approach the latter half of the year. So, if you're starting the year in the mid-single digits and ending in the mid- to high single digits for the full year, does that suggest you will be closer to the high single-digit level in the second half of the year? And is that a reasonable rate to consider as we progress, given all the hiring you’ve done over the past year?

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. And we come into the year with double the size of pipeline that we had going into last year. And last year, our first quarter 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.

Dan, it's Chris. I'll just add to that. 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 and 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.

That's terrific. Maybe switching over to credit. That's certainly been a positive story for you guys for a while now through 2024. We continue to see those criticized and classified 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?

Yes, it's Dave again, Dan. First of all, it's challenging to predict charges. Our responsibility is to ensure that we maintain the asset quality improvements we've achieved while accelerating growth. We expect provisioning in 2025 to support that growth. However, we do not see any particular loan, industry, or segment that raises concerns that would result in significant charges in 2025. Furthermore, our criticized and classified assets have decreased from nearly 6% two years ago to 2.75% of total loans. We are satisfied with our current position. While there is potential for improvement in the criticized and classified area, we are approaching the lower end. In comparison to our peers, we believe there is still some room for improvement, but not much. What we accomplished in 2024 is unlikely to be replicated in 2025.

Understood. Yes. And from a reserves perspective, around 130 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?

Yes. You could see there's still some additional improvement that could come 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 '24 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 that dollars still be higher.

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

I'm glad to be part of this call. The trends regarding organic growth and the development of the pipeline are very encouraging as we see acceleration throughout the year. Given the new talent you've recruited and your future outlook, I'm curious if there are additional opportunities to expand your teams or bring in new producers. Alternatively, do you feel confident with your current setup and plan to maintain your current course? I'm interested in your perspective on this.

Yes. We're planning to recruit through the year; Kelly to continue to grow those teams, '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. So we'll continue to add to customer-facing staff in 2025.

And Kelly, it's Chris. I'll add to that. If you, again, kind of go back over the past 3 years, what we've been doing is building this foundation for growth. So we, in total, have call it, 75-ish to 100-ish more employees in the company today than we had 3 years ago. Vast majority of those employees are 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 billion as we continue to grow 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 will continue to look to be opportunistic.

Got it. That's helpful. And then it feels like M&A may be 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 potentially?

Yes, I just returned from a significant industry conference this week, where there were numerous discussions and insights. We currently have record levels of capital within the company, and we recognize the importance of deploying that capital wisely. This will primarily take the form of organic asset growth. We feel very well positioned based on our internal resources, the customer loyalty and employee engagement we have, and our company's reputation in the marketplace. We believe we make for a strong partner in this environment. Therefore, we are eager to seize opportunities at the right moments, and it seems those opportunities are becoming more visible.

Next question comes from the line of Manuel Navas of D.A. Davidson.

This is Sharanjit on behalf of Manuel. For my first question, I wanted to discuss the stable net interest margin around 3.70%. How would that change if there are additional rate cuts this year?

Yes. Based on current expectations, we believe we can maintain that margin rate relatively stable even with potential additional cuts from the Fed. As we delve deeper into lower rates within the deposit stack, we see more opportunities to align whatever occurs on the short end with the Fed through additional repricing of our deposit book. We feel we're in a solid position. We've taken significant steps to better insulate the balance sheet from rate changes. Therefore, we don’t anticipate as much pressure if rates continue to decline.

And how is the December cut versus prior cuts perceived for you? And then is there a little bit of deposit cost cuts coming in the first quarter from the December Fed cut?

Yes, we should experience some benefits, although there is still a slight overhang on a quarter-over-quarter basis due to the timing of the cuts. We've already aligned our deposit cuts with similar timings, so we expect some positive effects there. A significant change occurring in the first quarter is the repricing of CDs, which began on a smaller scale in the fourth quarter. We're now repricing over $100 million per month as we enter the first half of the year, so we anticipate a much greater impact from that activity.

Awesome. You mentioned that the pipelines were really strong coming into the first quarter. What is the pricing for those loans coming in and what are your thoughts on price or yield competition?

The pricing will be similar to what we saw in the fourth quarter. The growth is not due to more aggressive pricing. It is primarily driven by the additional bankers we have hired and the demand from customers.

Your next question comes from the line of Matthew Breese of Stephens Inc.

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

I don't believe it's tied to a specific geography or industry. Looking back to this time last year, we observed that as confidence grew in the direction of short-term interest rates, customers began to wait and see what would happen with inflation and interest rates. Once things became clearer, people could plan more effectively based on those factors. Additionally, going through the election and having a clearer view of the overall environment gave our customers some advantages, as they understood where things stood. It wasn't restricted to any particular industry or region; it reflected the general sentiment across our customer base.

Got it. I understand the near-term outlook for the net interest margin. As we approach the end of 2025, do you anticipate the margin to trend upwards again as your fixed assets reprice and there is still some capability to lower deposit costs? I'm curious what you expect the exit net interest margin to look like as we enter 2026, assuming there are no unexpected changes, particularly considering the Fed's stance on interest rate cuts.

There is a possibility of that. Ultimately, it comes down to the competitiveness of deposit pricing, which is a key factor for us in terms of outcome. As Dave mentioned, we have higher expectations for loan growth. To support this growth, we must continue the strategies we've implemented with our deposit franchise. This could mean making adjustments depending on what other institutions are doing and the overall deposit environment. We're prepared to potentially be more aggressive on the deposit side to ensure we can properly fund our growth. Therefore, there may be some changes in our performance, which could be either improved or slightly less favorable, depending on the competitiveness of the deposit landscape.

Maybe you can help me out on NII then. What is your expectation for NII growth in '25 versus '24?

It's still 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 change. Year-over-year.

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

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

Ladies and gentlemen, that concludes your conference call. We thank you for participating and ask that please disconnect your lines.