Earnings Call Transcript - STBA Q3 2025

Operator, Operator

Welcome to the S&T Bancorp Third Quarter 2025 Conference Call. I would now like to hand the call over to Chief Financial Officer, Mark Kochvar. Please proceed.

Mark Kochvar, CFO

Great. Thank you, and good afternoon, everyone, and 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 third quarter 2025 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 the 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 David Antolik, S&T's President. I'd now like to turn the call over to Chris.

Christopher McComish, CEO

Mark, thank you, and good afternoon, everyone. I want to start my comments on Page 3 and welcome all of you to our call, especially our analysts. We appreciate your presence and look forward to your questions. I also want to express gratitude to our employees, shareholders, and everyone else listening. To our leadership team and employees, thank you for your hard work. These results belong to you, and you should be proud. Before discussing our performance, I’d like to take a moment to congratulate and thank Christine Toretti, our former Board Chair, for her service at S&T. As you may know, Christine is now our U.S. ambassador to Sweden—a well-deserved recognition for her years of dedication to our country. I also want to welcome and congratulate Jeff Grube, a long-standing S&T Board member, as he steps into the role of Lead Independent Director of our Board. We look forward to collaborating closely with Jeff as we advance the company. Overall, we're very pleased with the quarter, reflecting the work and strategic focus of our team over the past few years and positioning S&T for future success. You'll see this focus in today's numbers. Firstly, by strategically repositioning our balance sheet in recent years to reduce asset sensitivity, we have improved our ability to consistently grow net interest income throughout the interest rate cycle. Secondly, although total deposits were essentially flat at the quarter's end, our ongoing investment in our deposit franchise yielded a solid deposit mix, with noninterest-bearing deposits accounting for 28% of total deposits. Additionally, average DDA growth in the quarter exceeded $50 million compared to Q2, driving our net interest margin expansion, which is already at a healthy level. Finally, while we observed an increase in NPAs during the quarter, it was from a very low base, and the final figures are still very manageable. Collectively, these strategic initiatives have established a strong foundation for current performance and instilled confidence in our future. From a capital perspective, our earnings have led to an increase in tangible book value of over 3% this quarter, maintaining our already strong capital levels. This capital position provides us with significant flexibility for acquisitions and share buybacks. I want to emphasize that we have a clear pathway to exceeding $10 billion through organic growth in the upcoming quarters. In summary, I'm excited about our execution, delivery for our customers, and the future growth of our company. In looking at the quarter, Q3 demonstrated strong earnings and returns with EPS of $0.91, net income of $35 million, ROA at 1.42%—a 10 basis point increase from Q2—and PPNR at a solid 1.89%, up 16 basis points. PPNR benefited from NIM expansion, which rose to a strong 3.93%, an increase of 5 basis points linked quarter, while net interest income grew by more than 3%. Asset growth was somewhat lighter than Q2 due to higher payoffs, and NPAs did increase from a low base. Charges remained low and the ACL saw a decrease of 1 basis point linked quarter. Dave Antolik is with us and will provide additional insights on asset growth and quality shortly. While customer deposit growth was a bit modest, DDA balances were impressive at 28%, contributing significantly to our net interest income and margin improvement. Expenses were well managed, and along with revenue growth, the efficiency ratio fell to 54.4%, another positive result. I’ll stop there and turn it over to Dave and Mark for more details, and I look forward to your questions.

Dave Antolik, President

Great. Thank you, Chris, and good afternoon, everyone. Continuing on Slide 4. Total loan balances grew by $47 million or 2.3% annually during the quarter. This growth was largely driven by CRE activities, resulting in $133 million of increased balances in that category. Much of this growth was the result of construction loans converting to permanent commercial real estate loans as projects were completed during the quarter. As a result, commercial construction balances declined by $78 million. Looking forward, unfunded construction commitments grew by $37 million during the quarter, pointing towards continued growth in CRE for the balance of the year and beyond. Asset classes experiencing the most growth during the quarter included multifamily, flex mixed-use, manufacturing, and retail. Offsetting our CRE growth were declines in our C&I balances of $46 million. These declines were driven by a combination of modest seasonal utilization reductions coupled with higher-than-anticipated payoffs as Chris mentioned, and credits that we chose to exit. During Q3, total commercial loan payouts were higher than the previous 2 quarters and higher than Q3 of 2024. Turning to consumer loan activity. We saw overall growth in line with our expectations at $37 million or approximately 6% annualized. Consumer pipelines were down slightly from Q2 to Q3, but still in line with our forecast and in support of continued growth at the pace that we've seen in recent quarters. Commercial pipelines continue to grow and sit at the highest point in 5 quarters. Given our experience in Q3, and anticipated new loan and payoff activity in Q4, we are guiding to mid-single-digit loan growth in Q4. Turning to asset quality on Page 5. Our allowance for credit losses decreased by 1 basis point and remains appropriate for the level of credit risk in our loan book. Overall, criticized and classified assets were up moderately quarter-over-quarter and are in a range where we expect them to remain for the foreseeable future. During the quarter, NPAs increased to 62 basis points of total loans. It's important to note that this level of NPL follows a period of exceptionally low levels and is well within an acceptable range. I'll also note that we do not have concern with any particular asset class, geography, or industry. The increase was primarily a result of 2 CRE credits and 1 C&I credit that migrated during the quarter. We have asset resolution strategies in place for several NPLs and in support of those strategies, recognized charges of $2.4 million in the quarter and established additional specific reserve of $2.7 million. Looking forward, we expect NPLs to stabilize and potentially reduce over the balance of 2025 and into the first quarter of 2026. Taking a broader look at leading credit risk indicators, we see nothing in our credit risk rating stack, credit scoring, or delinquency that points to additional downward pressure on our credit results. I'll now turn it over to Mark.

Mark Kochvar, CFO

Thanks, Dave. In the third quarter, net interest income increased by $2.6 million, or 3%, compared to the second quarter, and the net interest margin grew by 5 basis points. When combined with loan growth, this reflects strong quarterly revenue growth. The improvement in net interest margin resulted from a slight increase in earning assets and a decrease in the cost of funds, primarily due to CD repricing rather than the higher average DDA balances of $50 million that Chris mentioned. The Fed's rate change occurred very late in the quarter, so we did not see any significant impact in these results. We anticipate that our balanced interest rate risk position and pricing discipline will help cushion any negative effects from rate decreases, both those that have already occurred and those expected in the coming quarters. Moving on to noninterest income, we experienced a minor increase of $0.3 million in Q3, with small gains in major customer fee categories. We project fees will remain around $13 million to $14 million per quarter moving forward. On the expense front, expenses aligned more closely in the third quarter, decreasing by $1.7 million from the second quarter. Favorable variances were mainly in salaries and benefits, particularly in incentives and medical, while professional services dropped by about $0.5 million, mostly due to project timing. Our expected quarterly expense run rate is approximately $57 million to $58 million for the next few quarters. The capital to TCE ratio rose by 31 basis points this quarter, with AOCI improvement contributing about 7 basis points. Our regulatory ratios increased by around 15 basis points due to strong growth in retained earnings. Our TCE and regulatory capital ratios position us well for the current environment, allowing us to capitalize on both organic and inorganic growth opportunities. Additionally, we have a share repurchase authorization of $50 million in place. Thank you. Now, I will turn the call back over to the operator for question instructions.

Operator, Operator

Your first question comes from the line of Justin Crowley with Piper Sandler.

Justin Crowley, Analyst

Wanted to start out on loan growth in the quarter and kind of looking forward. I know you went through some of this, but could you give more of a sense for the puts and takes here between origination activity? And then maybe how impactful paydowns were, which I think you called out?

Dave Antolik, President

Yes. Paydowns increased compared to the previous quarter and were also higher than what we saw in Q3 of last year. As a result, the overall outcome was slightly lower than our expectations. CRE activity remains robust. As I mentioned, construction commitments rose during the quarter, indicating potential for stronger growth in Q4 and into Q1. We anticipate consumer growth to stay in the mid-single digits, similar to the 6% we saw in Q3. We're actively working to enhance C&I growth. Previously, we discussed our recruitment efforts, and teams are becoming established and translating opportunities into results. Therefore, we believe that mid-single-digit growth is a suitable target for us, especially considering the expansion of our deposit franchise. We aim to align our growth with our funding sources, and we feel that level of growth is appropriate for our bank.

Justin Crowley, Analyst

Okay. And like taking that mid-single-digit versus maybe the mid- to high that's been discussed before, is that a function of the paydowns? Is that primarily what that is? Or is it also what you're seeing on the deposit side, maybe the combination of the 2?

Dave Antolik, President

It's a combination of all those factors, plus demand in the market. There's still a fair amount of uncertainty. If you think about the budget impasse in Washington, we have the double whammy here in Pennsylvania because we've got a state budget impasse as well. So until some of those things get settled out I think the interest rate environment is helping us, and we're hoping to tell that story to our customers around fixed rate borrowings, but there's still enough uncertainty out there that mid-single-digit growth feels more appropriate for us from both a credit and funding perspective.

Justin Crowley, Analyst

Okay. Got it. That's helpful. And then shifting a little bit on the margin. And I hear you on the NIM being able to hold relatively stable. But as we get into next year with more Fed cuts on the way, how do you see that playing out over more the intermediate term in terms of the effect on NIM? Maybe also just any color on flexibility with things like swaps continuing to roll off or anything else?

Mark Kochvar, CFO

Yes. I believe that for the upcoming quarters, likely through the first half of next year, we are well positioned to manage any potential rate cuts due to our funding mix, our capacity to lower deposit rates, ongoing CD repricings, and the fixed receive swap book that will continue maturing in the next few quarters. If the Federal Reserve wraps up by mid-summer, it may serve as a reset point, and we will need to closely examine how customer behavior, particularly on the deposit side, normalizes and how the curve shapes up. These factors could create some pressure on margins in a more stable rate environment moving forward, but there are many elements that need to be clarified before that. For the next three quarters, we feel confident in our ability to manage lower rates if necessary.

Justin Crowley, Analyst

Okay. And then regarding deposits, as we continue to receive these cuts, do you have any funding or deposits that are directly linked to Fed funds and would adjust immediately?

Mark Kochvar, CFO

Not on the deposit side. We have been proactive and maintain good discipline regarding the exception pricing with our customers. We respond quickly to those, but we do not have any contractually indexed deposits.

Justin Crowley, Analyst

Okay. Helpful.

Mark Kochvar, CFO

We have a small amount tied to the like a 3-month T-bill, but that's maybe $150 million, very small.

Justin Crowley, Analyst

Okay. And then I know we talk about it a lot, but on M&A and the higher levels of activity we're seeing, Chris, could you give us an update just on that side of things for you folks? Are a lot more conversations taking place? Or how has that all been trending from your side?

Christopher McComish, CEO

Yes. The conversations in the market is still active. Pennsylvania and Ohio maybe not as much as other geographies, but there's still a good number of conversations that are going on, and it's a key part of the ongoing outreach and engagement that we have.

Justin Crowley, Analyst

Okay. And you hit on the geographies. And I know you've cast somewhat of a wide net in terms of what could make sense. But does that leave areas like in the Mid-Atlantic or D.C., Maryland, is that...

Christopher McComish, CEO

Exactly. I would think about Mid-Atlantic, West through Ohio. Our marketplace today is Pennsylvania and Ohio, but we certainly are interested in places further south and east.

Operator, Operator

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

Daniel Tamayo, Analyst

Could you provide an update on the deposit side? You mentioned your expectation to maintain margins over the next few quarters. I'm interested in hearing about the competitive landscape you've observed in recent months and your thoughts on the betas for the September cut and any future cuts.

Mark Kochvar, CFO

After the first cut in September, we noticed more competitive pressure than we anticipated, especially regarding CDs. Many competitors seem hesitant to lower their short-term rates as much as we expected. As a result, we adjusted our approach to exception pricing. We believe that with several cuts, we will eventually catch up. There's also a psychological aspect related to customers wanting that 4-handle rate, which we think will improve if the Fed continues with multiple cuts. Our overall loan beta is around 40%, and we aim to maintain or slightly improve that over time, factoring in the CD repricing. This is crucial for achieving a more stable net interest margin.

Daniel Tamayo, Analyst

Great. Appreciate that. And on the $10 billion threshold, with the slower growth in the quarter, it seems like you should be able to stay under $10 billion next quarter and then, organically, if that's the way you pass, it would be sometime next year?

Christopher McComish, CEO

That's correct. Yes.

Daniel Tamayo, Analyst

Okay. And then maybe a question for you, Chris, about profitability. You have been consistently above 1.40 for the last few quarters. It seems like that level should be relatively sustainable with credit in a good position. Do you believe you can maintain that level above 1.40?

Christopher McComish, CEO

Yes. I think in that range is certainly the way we're targeting things. To your point, Danny, as credit continues to behave, and we stay focused on that. And then as Mark talked about, if margins hold up as we expected in this down rate environment, that's certainly a reasonable number and is something that we are staying focused on.

Operator, Operator

Your next question comes from the line of David Bishop with Hovde Group.

David Bishop, Analyst

I appreciate the color regarding the operating expense forecast. I'm curious as you budget out into next year, any prospects or plans to recruit or add additional bankers? I'm just curious how much is baked into the numbers and how much of a lift that may influence that on an inflationary basis, if you are successful?

Dave Antolik, President

Well, we certainly expect to add bankers and the expectation is that those bankers pay for themselves. So there's a real focus internally on improving productivity, so things like leveraging artificial intelligence, making sure that we have processes streamlined, become really important to managing operating expenses, but we certainly do expect to add in the customer-facing roles.

David Bishop, Analyst

Got it. And then I think you mentioned capacity for the share buyback. Just curious appetite for share repurchases at the current valuation?

Mark Kochvar, CFO

Yes. I mean, we think there might be some better opportunities. We've seen a downdraft in bank stocks overall, and us in particular, over the past months. So we certainly think that, that's something that we're going to look a lot closer at here as we get into the rest of the quarter.

David Bishop, Analyst

Got it. And 1 final sort of housekeeping question. I know there's been a lot of chatter about loans to the NDFI sector. Just curious if there's any exposure you wanted to call out?

Dave Antolik, President

No.

Mark Kochvar, CFO

Yes, nothing material. We do have some exposure to some REITs that are technically NDFIs, but nothing that looks like where the problems have surfaced in some of the larger regional banks. That's a space we don't play in.

Operator, Operator

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

Kelly Motta, Analyst

Most of mine have been asked and answered at this point, but I guess piggybacking on the credit question, you did have the migration, although it sounds like you feel levels are low and you feel overall good. Is there any specific areas understanding you guys don't really have exposure to NDFIs that you would direct analysts to watch more carefully either at S&T or just in the bank space more broadly?

Dave Antolik, President

No. I think, in fact, Kelly, beyond what I mentioned relative to kind of budget crisis, credit is performing as we would have expected. And here in Western Pennsylvania, there are things like a big data center that's being built outside of Indiana here in Homer City, Pennsylvania, that should add additional opportunity for growth and improving credit health in the region as some very large investments are made. And we obviously look through our concentrations relative to commercial real estate. We're very comfortable with where we stand from a diversification perspective, both construction versus permanent, and all the asset classes. And then we are closely managing our C&I book to make sure that we're not getting too far out on our risk scale. So that's some of what led to the decline in C&I balances in Q3 where decisions that we made relative to exiting credit. So I don't know that there's any 1 thing that I would point you towards other than kind of general economic and political environment, specifically the budget impasses in Pennsylvania and at the national level.

Kelly Motta, Analyst

Got it. That's helpful. My last question is about the funding side. Your loan-to-deposit ratio is just above 100%. Can you provide some insight into the loan outlook? Looking ahead, where do you see opportunities to raise core funding and what are the key drivers for that?

Christopher McComish, CEO

Yes. Kelly, it's Chris. As we've talked about, building the growth of our deposit franchise is a key driver of our performance and the area of focus and that entails everything from incentive plans to product mix to adding staff. Dave earlier asked about bankers that includes treasury management professionals and teams. And so it's a critical part of who we are. And we feel really good about our deposit mix, and we feel very good about the process that we use around being proactive relative to exception pricing in ensuring that our bankers are able to be responsive, both in the branches with consumers as well as our commercial and business bankers. So it's a core part of what we think about and focus on every day. And we know improving that loan-to-deposit ratio is really important to us as we move forward to capitalize on our growth opportunities. As Mark talked about, we did see, with the most recent rate cut, some increase in competitive intensity, and we'll have to be able to respond to those things as well.

Operator, Operator

Your next question comes from Matthew Breese with Stephens.

Matthew Breese, Analyst

The first 1 for me, is it fair to think that the $10 billion crossing will happen either in the first quarter of '26 or second quarter '26 without having to manage the balance sheet below that too strenuously, or is there room to kind of push even further out?

Mark Kochvar, CFO

No, I don't think so. I believe it will definitely happen in the first half of next year. We should be close to the end of the year, and I don’t think we will need to exert much effort to keep below that at the end of the year, but we’re not planning to maintain that long term. So, I think we will proceed after we get past '25.

Christopher McComish, CEO

The other thing we are monitoring is some of the changes or proposed changes in Washington regarding regulatory relief concerning changes and thresholds. That won't affect the Durbin cost, which we've discussed is in the $6 million to $7 million range, but it certainly makes us feel good that regardless, we're prepared, and it might provide us with some additional flexibility to operate the company.

Matthew Breese, Analyst

Got it. Okay. I'm sorry to keep bringing up the net interest margin, but with the recent cuts, it seems like we could see another two to three cuts in 2025 soon. As of the last update, you have around 39% to 40% floating rate loans. How do you view the margin? My instinct is that the margin could have short-term downside until deposits catch up and you regain some of that margin. I'm curious about the timing difference between floating rate loans and your ability to adjust on deposits; could you provide some insight on the net interest margin?

Mark Kochvar, CFO

Yes, our floating has decreased somewhat, particularly when considering our swap exposure, bringing it down to around 30% net. This provides us with a bit of relief. We have analyzed the models, and while there is some risk if competition on the deposit side extends beyond CDs and starts to impact money markets and interest-bearing demand accounts, our current modeling does not indicate any significant risks. We believe we can maintain our position fairly well with the changes from the Fed.

Matthew Breese, Analyst

Okay. The credits that went nonperforming, could you just give us some insight as to what business lines were behind the C&I credit and what sectors the commercial real estate credits were attached to? And any kind of underlying factor? Was it higher rates and just kind of a strain that way? Or was it more idiosyncratic?

Dave Antolik, President

Matt, I don't want to get into specific details on these credits because they are active workouts. The C&I credit was a manufacturer. The 2 CRE credits were really a function of kind of construction-related risk. But as I mentioned, we've got asset resolution plans in place that we hope to execute on over the next couple of quarters. And again, we don't see anything generally or specifically tied to any industry, geography, or asset class that gives us kind of additional heartburn in terms of more downside risk.

Matthew Breese, Analyst

Okay. I appreciate that. Chris, maybe last 1 for you. On M&A, you had mentioned kind of geographic preferences. I guess beyond that, what, to you, makes an attractive target? What business lines or deposit composition are you looking for? I guess I'm looking for some color on the strategy component to M&A beyond geography.

Christopher McComish, CEO

Yes. Strategically, I believe that acquisitions should primarily focus on enhancing our deposit franchise. This kind of opportunity would improve our funding mix and provide us with a solid customer base to build relationships with. We consider a couple of factors: first, there's the potential for geographical expansion into faster-growing regions compared to where we currently operate, and second, there are geographical overlaps that could offer us efficiencies. Both aspects are significant for us, but the main focus remains on strengthening the deposit franchise. There might also be business lines that could enhance our commercial and industrial capabilities or our attention to small businesses, which can vary depending on the specific transaction. Therefore, we prioritize the composition of the company's balance sheet, emphasizing deposits, assessing credit risk, and determining whether this can lead to faster growth for the company.

Operator, Operator

I would like to turn the call over to Chief Executive Officer, Chris McComish, for closing remarks.

Christopher McComish, CEO

Okay. Well, listen, thanks, everybody, for your good questions and your engagement. We really appreciate it and your interest in our company and all you're doing to support what we're trying to do. We look forward to being with you again next quarter. In the meantime, we're going to go back to work and see what we can do to grow the bank. Have a great day.

Operator, Operator

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.