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spk00: Good afternoon, ladies and gentlemen, and welcome to the S&P Bancorp Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode, and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mark Kochvar. Sir, the floor is yours.
spk03: 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 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.stbankcorp.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 and presentations, fourth quarter 2021 earnings conference call. Click on the fourth quarter 2021 earnings supplement. With me today is Chris McCommish, S&T CEO. David Hillock, S&P's president, is under the weather today and won't be joining the call.
spk02: I'd now like to turn the call, 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 minutes, have some statements, and talk about all that's going on with the company, and we'll get into the fourth quarter in the full year. I've 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 at 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 shown 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 three and you can see a brief 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 two 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 is 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 length quarter, highlighted by strong non-interest-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 these 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 talents 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, or I'm sorry, into the full year, $110 million of record net income. A 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. I've defined it as sticky fee income representative of healthy customer engagements. Turning to slide five, again, we'll talk a little bit about the balance sheet. We mentioned the broad-based loan growth that you see on the left made 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 DDAs up 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 corner 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 still is latent borrowing capacity and activity within our customer base 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. There is seasonality in that number. We had a very strong Q4. Our pipelines are building. Lots of good activity right now. But we'll probably be 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.
spk03: Slide six. 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 two 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 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 rates 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 nine inches 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 three 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 adjustment. We expect the run rate in non-niche income to be $15 to $16 million per quarter in 2022. Non-niche 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 to parts of timing, but also due to higher customer activity, some expanded product offerings, and some additional outsourcing. Marketing increased due to campaigns in the quarter. And going forward with the tire labor market and investments we are making in talent and systems, we expect our expense run rate to be in the $49 to $50 million range in 2022. Our ACLs alone. 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 CNI credits in the third quarter, combined with a charge on a second CNI 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 Our risk-based capital ratios are down slightly in the fourth quarter due to higher risk-weighted assets combined with lower tier two 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 plan although we're monitoring valuations and are prepared to respond should conditions warrant. Our preference is to utilize capital to support the loan growth organically that we're seeing or through M&A should the opportunity arise. Thank you very much. At this time, I'd like to turn the call over to the operator to provide instructions for asking questions.
spk00: Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone now. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold a moment while we poll for questions. Your first question is coming from Daniel Tamayo. Your line is live.
spk01: Hi, good afternoon, guys. Hey, Daniel. Hi. 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 and I missed it, but what your assumptions are for the deployment of excess cash, what the rate hike assumptions are in there, and then how much the bank would benefit for each individual rate hike.
spk03: Okay, so I'll start with what's in our forecast numbers. Right now we haven't, in the guidance I just gave, there's not any increase is baked into that for the Fed, even though we do, based on yesterday's meeting, certainly sounds like things are coming. So we don't have anything baked into those numbers yet. In terms of how much we benefit, we have about $3.6 billion of loans that we would expect to reprice immediately or fairly close to 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 force. 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 liability. So we should see most of that right away. I don't expect that, at least initially, there would be a lot of pressure on deposit rates. Was there a third part of that that I missed?
spk01: No, just trying to get a handle on how much the marginal move, which is helpful, the information you get, which is helpful. I appreciate that. Oh, I guess, yeah, the last part was just on the excess cash. I'm not sure if you addressed what the assumptions are for the deployment there and how much is there.
spk03: 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 been moving a little bit into securities early in the year, and then we'll 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 at the end of this year.
spk01: 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?
spk03: Yeah, I think we're looking at the security maybe adding a couple hundred million from where we're at right now, but then letting 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.
spk01: Okay, great. Well, I appreciate all that detail. Thank you.
spk02: Thank you.
spk00: Your next question is coming from Tim Switzer. Your line is live.
spk04: Hey, everyone. Good afternoon. I'm on from Mike Parita.
spk02: Okay. Hi, Tim. How are you, Jeff?
spk04: Thanks for the pretty detailed guide you guys gave on the $15 to $16 million quarterly run rate for non-interest 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?
spk03: Right, so we do expect the debit cards 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 all of 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 improvements there. And then also on the wealth management side is the third area where we see you know, double-digit growth, again, year over year.
spk04: Okay, thanks. And then on the expansion.
spk02: Yeah, just to be clear, the wealth management, you know, the income is impacted by two things. Obviously, flows in, assets under management growing. So, new customers and expansion of relationships, but then, you know, changes in the market could have an impact because it's not a transaction-based business. It's an assets under management business. So if the market were to go down significantly, those are headwinds. But everybody faces those same things.
spk04: 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?
spk03: A large part of it does. There is some that's based on flows or activity during the quarter, but there's a significant part that's based on the size of the asset under management as you described.
spk04: Okay. I got you. And then with the expenses, you were talking about some of the tech and infrastructure investments you've been making that led to some of the expense growth. Can 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.
spk03: It's a mix. You know, 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... for the risk structures as well in our credit area and also in our operations area. So that's kind of a mix between production and sort of more basic infrastructure. On the kind of FF&E, 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.
spk02: 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 we're availing ourselves to 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 lots of that also has revenue offset associated with it.
spk04: That's great detail. Thank you, guys.
spk02: Sure thing.
spk00: Your next question is coming from Russell Gunther. Your line is live.
spk02: Good afternoon, Russell.
spk05: Good afternoon, guys. Thanks for taking my question. 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 312 to improve absent rate hikes due to the average earning asset remix you're expecting?
spk03: Yes, that's correct. We would expect, you know, over the course of the year to see improvement. We think we've kind of bottomed out on on the NIM rate.
spk05: 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, you know, 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 moves.
spk03: Yeah, I guess to hit the last one first, you know, the deposit beta, we would expect those to be than they have been in the past. We've seen a much different mix than we had in the prior rates 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, this 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, that's going to play into how much of that administrative income that we would be able to keep, depending on how well that pricing goes. The other thing that helps us out is that in the past, because we typically have been a net borrower, we would have a lot of floating rates debt that would reprice. Right now, we have essentially zero floating rate debt, so more of that asset improvement goes to the bottom line more directly. All that being said, with a rate up of a quarter on approximately $3.6 billion of loans, that starts us out at about a $9 million or so number annualized or finished income. Now, some of that maybe gets eaten up by the kinks that we would see with at least the first 25 basis points. But all in, we'd be looking at, again, top line without any positive pricing, about a $6 million number for the first 25. Okay.
spk05: That is very helpful. Thank you, guys. And then on 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 portfolioing single family around current levels or this commercial kind of takeover.
spk02: Yeah, from a mix standpoint, Russell, you're obviously seeing in the marketplaces, 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, you know, some higher level average mortgage size, which could potentially take you out of the Fannie 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 a 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 to 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 of there. We believe there's 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 it's 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 a fairly broad base, but again, Through the year, we're expecting, you know, that high single-digit number is what we're talking about.
spk05: That's good color. Thank you for that. And then just last one for me, if I could. Just broadly speaking, how would you characterize the lost content that was recognized this quarter in terms of, you know, was this trying to take a big chunk at remaining problem assets? Would you expect, you know, Charge Austin 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. Thank you.
spk03: Yeah, 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 to be lower. The losses that we had in the fourth quarter had shown some stress prior to COVID, and then COVID coming in really made their situations more difficult. We're seeing fewer of those situations, That's exemplified by the improvements that we see in the hotel book. And also there's 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.
spk02: Yeah, I mean, going into the new year, as we said, the non-performing 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, this is Chris speaking, this is safety and soundness in 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.
spk05: Understood. Thank you guys for taking my questions.
spk02: Sure thing.
spk00: We have no further questions from the lines at this time.
spk03: Okay, we do have one 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 growing 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. show improvement over the course of the year, given the stability of the averaging asset number.
spk02: Okay. Thank you 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.
spk00: 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.
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