Welcome to the S&T Bancorp's Fourth Quarter Earnings Conference Call. After management's remarks, there will be a question-and-answer session. Now, I would turn the call over to Chief Financial Officer, Mark Kochvar. Please go ahead..

Thank you, and 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 2. 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 earnings materials button in the lower right button 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 Web site at stbancorp. 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. And Mark, thanks for the introduction. Welcome everyone to the call. I certainly appreciate the analysts being here with us this afternoon and we certainly -- we absolutely look forward to your questions.

I also want to 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 and these results are yours and you should be very proud.

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.

Now let me turn to Page 3 and give you -- talk a little bit about the quarter as well as the year, and then I'm going to turn it over to Dave to talk about the balance sheet.

But as you can see on Page 3, we had record earnings of $1.03, that's an 8% increase link quarter, it drove -- was driven by a 29 basis point increase in our NIM, achieving 4.33%, obviously, aided by the higher interest rates as well as our -- the asset sensitive nature of our balance sheet.

The return metrics were extremely strong with the $20.36 ROTE and a PPNR of $2.36, 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 4.

Again, a record year $3.46 earnings per share and $136 million of net income, approximately $25 million more than a year ago at this time. Again, 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.

Again, it was -- 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 can direct you to Slide 5, 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 to continue 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%.

And growing the home equity customer segment is incredibly important to us as it 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 '23 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 6.

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 7 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 is up 130 basis points ex PPP compared to the fourth quarter of '21 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 short term CPEs, especially in the one to two year area.

Half of our loan portfolio is [either] short term rates, which continues to be a big driver of the net interest income and net interest margin improvement.

As part of our ALCO strategy to protect the net interest income and margin in a declining rate environment, we have hedged that floating rate loan concentration to approximately 42% which receive fixed swaps. We continue to evaluate the right level of hedging and -- 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 '23 as deposit betas catch up and the Fed increase has slowed down. And then with the Fed pause, we would expect some NIM compression in the back half of '23.

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 8, noninterest 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. So 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 and contributed to the loan growth we had in that category. Our quarterly fee outlook is approximately $14 million. On Page 9, 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. Also 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 '23 are in the $52 million to $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 and that had $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 the smaller securities portfolio as a percent of assets, 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..

[Operator Instructions] Your first question will come from the line of Daniel DeMille with Raymond James..

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 a mid to high 20s.

Is that still the thought there?.

Yes..

And then another just clarification on the noninterest expense and income guidance, the $14 million and then the $52 million to $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..

So not too much growth throughout the year essentially. Okay, terrific. And then I guess, just if we could dig into the -- sorry, to bounce around here, but back on the margin. If you could -- 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?.

And these are -- a lot of assumptions, a lot of modeling going on.

But in our sense, given the expectations from the Fed of maybe one, maybe two more smaller increases in the first quarter to maybe early second quarter, we would look for maybe just a slight expansion of the margin in the first half of the year sort of leveling off, likely peak margin in the second quarter.

And then with the Fed maybe being on the sidelines, we expect continued -- some continued pressure offset some by a better replacement rate on loan maturities. And also on the liability side, some of the growth there that might offset some of our higher cost borrowings.

But we'd expect maybe in the 5 basis point per quarter range of compression, if all assumptions sort of happen as we would expect..

So maybe a little bit lower than we are here at the fourth quarter level or 33% by the fourth quarter of 2023?.

Kind of about in the same place approximately by the time we get to the end of the year..

It's just going to rise from here early and then in the fall....

Your next question will come from the line of Michael Perito with KBW..

Chris, I wanted to start, you know really productive year kind of about the help for you guys, and that's got a lot done. Curious what's the agenda look like for '23 here? I mean, obviously, the macro backdrop is uncertain, but we always charge on anyway.

Curious where you guys are focused and just what we should be mindful of as the year progresses just from a strategic standpoint?.

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.

So as I said we really took advantage of this past year of all centered around this 120th year celebration and there's distinctive and unique things about this company and it's what engaged me and excited me to come here 18 months ago.

And it all starts with this employee engagement and customer experience, engagement and reputation of the company in the marketplace. And that's a great place to grow from.

And so we spent a lot of time 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.

The industry changes, what we do, how we deliver for customer changes, customers change, right, digitally and so forth, but there's a relationship aspect and there's an emotional tie that people have to their bank.

And so 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 the marketplace, and then what is winning -- how do we define winning. And we reinvigorated.

You may say it's all the rate environment, but I'll tell you we were talking about this a year ago before rates started increasing, and that is the whole health of our deposit franchise and the focus of that deposit franchise on customer relationships. So 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.

So 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.

So 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. And then we're doing things that are important like ensuring incentive plans are aligned around things that are important like that deposit franchise.

And why isn't it important because that's how our customer defines who their bank is, is where that deposit business is. And so 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 an asset growth oriented company, and we're never going to stop making loans, and 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 want to play, how we want to win and then attacking things strategically that way.

The [433] net interest margin is something that we're really proud of, but to give it back -- with inferior credit quality does not represent moving forward. And 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 going to continue to stay in that range, but we also know that we need to invest well. But all of that, Mike, is underpinned by the engagement level and the talent level of our team.

And so 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..

And then just a couple of financial questions, follow-up for me. Mark, on the efficiency ratio being sub-50%, I actually asked this to another one of my banks this morning.

I mean is that -- it feels like as we invest in technology and trying to get more efficient here and branches become less necessary that that's almost becoming kind of table stakes. So I'm curious how you're thinking about it.

So just feel kind of arbitrarily low just given the NIM where it is kind of structurally to your peak highs, or are you guys hopeful that this range of efficiency is suitable for you guys as we move forward?.

I mean, we think it is sustainable. Part of that, though, is we're much more focused on maintaining the margin stability, and that's going to be the key to maintaining that that type of efficiency ratio..

And then just on fees, I think it was $14 million of the quarterly outlook.

Is that correct?.

Yes..

So basically not much growth from where you were on a core basis this quarter.

And so I'm curious what -- can you break that down another layer? I mean, is that assuming pretty stable mortgage environment, pretty stable wealth investment environment because of market volatility and just anything where you maybe could be too conservative in that bucket as you think to next year?.

I mean the one thing that could potentially change is on the mortgage side, if we were to see the 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. So 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 does not assume a big increase in the stock market, which would help us out as well. If AUM sort of naturally grew just because the market is up, that would be beneficial for us as well. 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.

So those are the things that I can think of that would….

And then I would say on the commercial side, the treasury management business, I mean it's a growth focus for us, and we're going to be intensely focused on that as we move forward. The counter, the offset to that is the earnings credit rate in environment.

And then as the earnings credit rates increase through the year, there's an offset some of that on your service charge. So we're trying to measure it in absolute terms of growth and not so much look at the net relative to the earnings credit..

Just kind of Mike, on a year-over-year basis, we had about $3 million worth of OREO gains in this year. We don't expect that to repeat itself next year..

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 product into that customer and provide a service that they desperately need.

So design the product, supporting it with the people and we believe is going to drive some better treasury management results..

Your next question will come from the line of Matthew Breese with Stephens..

I was hoping to hone in on the noninterest bearing deposit line item. Look, your deposit beta cycle to date and your ability to hold the mix shift of deposits together has been far better than I would have thought at this point in the cycle and just given some of the results in the fourth quarter.

Maybe give us a better sense for what's within that noninterest bearing deposit bucket.

How much of it is retail versus business, how have account growth -- how has account growth gone versus kind of balanced growth? And 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, and that's in the business side is where we've seen a lot of the growth over the past several years. So in essence, we're sort of doubling down on that business side. We think that's where a lot of the opportunity is.

When we look at some other banks that have similar loan mixes to us, heavily on the commercial side, they have even greater, a greater mix towards the commercial side. So we think there's some opportunity.

And as Dave talked about and Chris talked about focusing on the treasury management, both from the -- for the commercial book but also for the small business.

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..

And 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 the right in front of me for the quarter end..

Last one for me, just thoughts….

The other thing on the consumer side, remember, we're very much a mass market consumer bank. So we don't have -- 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 significant declines kind of through the cycle, and that represents some stability..

Last one is just thoughts around the projected outlook and then the $10 billion threshold, timing on crossing $10 billion, potential expenses from crossing and then the updated loss driven amount?.

I'll let Mark speak to the timing. But this is something I've been focused on over the last 18 months that I've been here, and 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.

So we -- and so there's a fair amount of this expense or from a people standpoint is embedded in our run rate today because we're building for the future, and 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.

So it's everything from spending time in seminars, talking to peers that have gone through it, working with accountants and advisers and others as well as talent in the industry that have been through this sort of work.

So it's important to us but it's really -- whether it's $10 billion or $15 billion, it's all about building a foundation for growth and ensuring that we're not only generating the growth from a top line standpoint, but we're doing things in a compliant way in line with the regulations..

And then from a timing perspective, we're just right around $9 billion now based on sort of mid-single-digit or a little bit higher loan growth. We're probably a couple of years away from sort of an organic cross on the $10 billion.

And then when it comes to the [Durbin], we look at it -- once a while, the last time we looked at it, I looked at it, it's about half of our debit card, which is about -- ends up being about $7 million on a full year basis..

[Operator Instructions]..

Operator, we did have one question in the queue, it was regarding outlook for loan growth for 2023. And 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.

And on the commercial side, kind of back half of the year, focused growth, and we do understand, and as Mark and Chris described, we expect the NIM expansion to temper and stop at some point. So we do understand that growth, in terms of revenue, will have to be driven by some asset growth. And 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..

Could you give me a little bit of color as to -- maybe break down 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?.

So in total for Q4, our kind of start -- our new loan yields were around [6.25] range and that compared to the kind of roll off, both payments and payoffs of about [5.60]. So we had about a 60, 65 basis points improvement based on that..

And what were paydowns and payoffs like this quarter?.

They were, I mean, in line. We didn't see heavy path by any stretch. So they were kind of more normal of what we'd expect both on the consumer and the commercial side..

And then maybe for Chris, thoughts on M&A, what's the environment looking like right now for you guys?.

Well, as I said, my job from the day I got here is to prepare for growth and build a foundation for growth. And we control -- we have a lot more control over the organic growth than we do to the inorganic growth. But 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 that's -- it will happen in the future, but it's certainly something, again, that we're very focused on from a preparation standpoint..

So as the foundation is laid, I mean, what kind of -- in terms of parameters, what size of institution are you guys most interested in?.

Some of it is whether it's size or make up is probably a better answer. We talk about the health of the deposit franchise and the importance for that being a foundation for our growth. The geographies that we're in and the adjacent markets culturally are very attractive to us.

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. But that being said, it's almost is -- you're really well aware, is very event driven.

So it's about building relationships and understanding that there is the right strategic and cultural fit, while at the same time, the financial opportunity is there for growth..

And last question for 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 we're going to be focusing a lot on mix and developing the relationships that Dave and Chris were talking about. So we would expect, especially on the business side, a decent improvement in the DDA quality.

We might not see the largest increase in the balances but the quality of that DDA should be better, but a lot of shifting. We would expect to see some higher CD balances by the end of the year, but some of that's going to come just from migration from other areas of the bank. So net-net, we're not looking for huge deposit increases.

We'd consider that successful given the rate pressure that we expect..

We're very focused on -- as we talk about the quality of the franchise and the mix and tying it back to customer relationships..

Your next question will come from the line of Manuel Navas with D.A. Davidson..

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 and what level are you trying to protect?.

So we're trying -- when we look at the protection, there's kind of 2 pieces of that. One is on the -- just on rates down protection should the Fed reverse course. So that's primarily the hedging that we've done is more meant to protect that.

So we have certain internal parameters that we look at to just shop type analysis and ramp type analysis and we're trying to limit that net income decline to a percentage we can live with. And so that that additional hedging, combined with the structure of the deposit book and the borrowings that we have, factors in that.

So the fact that we're actually borrowing a little bit now on the short end works in some ways is some additional rates down protection. So 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. So we limit -- we're trying to limit that.

On the maintenance side, it's more about this back to 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 our hot money.

So 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 would see..

I'd now like to turn the call over to Chief Executive Officer, Christopher McComish, for closing remarks..

Okay. Well, 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 and we thank you for that. So we're off into the new year. And again, we're very proud of 2022 and we're moving forward into 2023. So thanks.

Look forward to talking to you again soon..

That does conclude today's meeting. Thank you all for joining. You may now disconnect..