S&T Bancorp Inc (STBA) 2025 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the S&T Bancorp Fourth Quarter and Full Year 2025 Conference Call. (Operator Instructions)

Now I'd like to 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 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 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 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 David Antolik, S&T's President. I would now like to turn the program over to Chris. Chris?

Great. Thank you, Mark, and good afternoon, everybody. Thank you for joining us on the call. I'm going to begin my comments on page 3. We certainly appreciate the analysts being here, and we look forward to your questions.

Before we discuss Q4 specifically, I'd like to take a few minutes to discuss and wrap up 2025. Overall, we move forward through 2025 very well, producing strong returns, building record levels of capital with increased momentum, while receiving external recognition from both -- for both our financial performance as well as our high levels of employee engagement.

For the year, we produced $3.49 a share, just under $135 million of net income with a 3.9% net interest margin. Loan growth was over 4%, and customer deposit growth was just under 3%, while expenses were well controlled. Asset quality for the full year was well managed at 18 basis points of net charge-offs, while the ACL declined 16 basis points year-over-year, reflecting three straight years of overall improved asset quality.

None of these results would have happened without the commitment of almost 1,300 S&T employees, who are some of the most engaged and talented employees in our industry. For those that are on the -- listening on the call, we thank you for your hard work and your engagement. These numbers and results for yours, you to be very proud.

Turning to the quarter. Our $34 billion in net income equates to $0.89 per share, down slightly from Q3. Our return metrics were again strong, highlighted by a 1.37% ROA additionally, our NIM rose to 3.99%, up 6 basis points on a linked quarter basis, which is the best performance we've seen since Q2 of 2023, as our 1.95% PPNR, up 6 basis points quarter-over-quarter.

Asset quality for the quarter was mixed due to higher charge-offs associated with some NPA resolutions, while the ACL declined 8 basis points due to specific reserve releases and an overall reduction in C&C assets. Dave will provide more details here in a few minutes.

Moving to page 4. Loan growth was just under $100 million for the quarter at 4.5%, led by Commercial Banking with both growth in our C&I portfolio as well as our CRE line of business. Customer deposit growth was just under $60 million at 2.9% and the quality of our deposit mix remains very strong with DDAs representing 27% of total balances.

Before I turn it over to David to talk to provide more details on the balance sheet and credit, I wanted to bring to your attention to the other announcement that we made this morning. Announcing our new $100 million share repurchase authorization that was approved by our Board of Directors yesterday. Given the robust capital levels of the company, we are fortunate to be able to have an authorization of this size available to us. Our capital levels give us the ability to repurchase shares should the market warrant it, while not in any way impeding our ability to consider other opportunities, including M&A.

With that, I'll turn it over to Dave and I look forward to your questions.

Well, thank you, Chris. And as Chris mentioned, the loan growth for the quarter was driven primarily by commercial with C&I and CRE balances growing by $53 million and $34 million, respectively. C&I growth was a result of an increase in revolving balances and new customer acquisition. Q4 was a particularly active quarter for our asset-based lending group, who onboarded several new names. Categories of C&I growth include retail, utilities and service.

Our CRE growth was entirely driven by construction funding in the quarter, and we continue to see demand for construction facilities for multifamily, warehouse, storage and industrial asset classes. These loans typically fund over 12 to 18 months move to our permanent CRE portfolio and frequently move on to nonrecourse funding sources. Supporting growth in the coming quarters our unused commercial construction commitments increased by $78 million quarter-over-quarter.

As a result of the strong funding in Q4, our pipelines reduced slightly heading into Q1, and our focus is on rebuilding. This activity is consistent with our historical experiences. Regarding loan growth guidance for 2026, we believe that mid-single-digit growth is achievable while maintaining our asset quality profile. We expect loan growth to primarily come from C&I, where we've seen improved activity from investments we've made in team leadership and banker talent along with CRE, where we've demonstrated a long-standing ability to develop deep customer relationships in support of growth. We are also forecasting continued consumer home equity growth that is focused on complementing our deposit franchise customers.

If I could now direct your attention to slide 6 of the presentation, which provides additional details on our asset quality performance in Q4. Starting with the allowance for credit losses, we recognized a reduction relative to gross loans from 1.23% to 1.15% quarter-over-quarter, primarily as a result of two factors.

First, a reduction in specific reserves related to problem loan resolution. Second, a reduction in criticized and classified loans of $30 million or 13% in Q4. This reduction in criticized and classified loans at year-end 2025 represents our third consecutive year of successfully reducing loans in these categories.

And over that period, the three-year period, we have reduced total C&C loans by 50%. It is also a reflection of our focus on asset quality is a key driver of financial performance, robust portfolio management and an aggressive approach to problem loan resolution. As a result of aggressively addressing problem loans, we were able to fully resolve loans totaling $29 million during the quarter. These resolutions contributed to increased charges of $11 million or 54 basis points annualized in the quarter.

In addition, we recognized new NPL formations that cause overall NPAs to increase by $6 million from 62 to 69 basis points. We have appropriately reserved for these loans and have resolution strategies in place. Although an increase relative to Q3 and the first half of 2025, this NPL or this level of NPLs remains at a very manageable level.

Looking forward, we anticipate full year 2026 asset quality results to perform similarly to what we saw in 2025 with a focus on reducing NPLs and maintaining the lower level of C&C loans that I discussed earlier in my comments.

I'll now turn the call over to Mark. Mark?

Thanks, Dave. Fourth quarter net interest income improved by $1.8 million or just under 2% compared to the third quarter. That was mostly driven by the margin expansion of 6 basis points. The margin improvement came from an 11-basis-point decrease in the cost of funds, and that was offset by a modest decrease in earning asset yields of about 3 basis points. We have been able to successfully reduce exception rates and regular rates on non-maturing deposits as the Fed has reduced short-term rates.

CD rates have been somewhat more sticky, but are still coming down. We continue to expect that our more neutral interest rate risk position and pricing discipline will mitigate any rates down impact, both what has happened and what is expected in 2026. Tailwinds from our maturing received fixed swap portfolio, security and fixed loan repricing and some limited CD repricing all contribute to these tailwinds. As we look into 2026, we expect relative stability in the net interest margin in the mid- to high 3.9% range, with net interest income growth coming from earning asset growth.

Next slide, noninterest income increased by $0.5 million in the fourth quarter with small improvements in our major customer fee categories. The increase in other is timing related primarily to some letter of credit activity. Our expectations for fees in 2026 remains at approximately $13 million to $14 million per quarter. Expenses were in line in Q4 up by about $800,000 compared to the third quarter. Largest variance was in salaries and benefits. Within that, medical costs were higher and also salaries due to some hirings.

Marketing was impacted by the timing of some promotions. We expect to manage our 2026 noninterest expense year-over-year to around 3%, which implies a quarterly run rate of approximately $58 million. Lastly, on capital, the TCE ratio decreased by 29 basis points this quarter due to the share repurchases completed in the fourth quarter. We repurchased just over 948,000 shares at an average price of $38.20 for a total of $36.2 million.

Our regulatory ratios continue to be very strong with significant excess capital. Even if we complete the $100 million repurchase program announced today, we are comfortable that we will have more than sufficient capital to position us well both for the environment and to enable us to take advantage of inorganic or organic growth opportunities.

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

(Operator Instructions) Justin Crowley, Piper Sandler.

Good afternoon, everyone. Just want to start on loan growth for the quarter. It didn't really deviate from how you folks framed expectations previously. But kind of bigger picture. Curious, is there anything specific that you'd point to that's maybe holding you back from that ramping to say mid- to high single-digit pace, something more along those lines, maybe once discussed. Is that a function of the demand side of the equation? Or is there a desired pricing component to that? What, if anything, would you speak to there?

Justin, it's David. I think -- not necessarily on the demand side. It's making sure that the asset quality of the onboarded new customers meet our criteria to maintain the lower levels of CNCs, some of it is we're adding to the staff. We're adding bankers. We plan on doing that throughout the year. So making sure that we have adequate coverage in all of our markets and all of our segments.

There were certainly bright spots in Q4 as I think about the C&I growth, and as I mentioned, the ABL activity. That's relatively new. So there are some tailwinds to help us grow and hopefully get to a higher rate of growth in terms of our loan.

Justin, it's Chris. The other thing that I would add is we do think about the overall state of the economy and things are picking up and positive, but we don't want to be out there predicting something that's dramatically higher than what you see from a GDP growth rate standpoint on what we believe organically is available in the markets that we serve. Dave touched on it, too. Our desire is to continue to grow teams and bankers in the field.

Our leadership in the field knows is that -- there are no constraints around adding more folks to the team and that we'll continue to do that. But we're trying to give you our best guess based upon -- best estimate based upon all of those factors.

Okay. And you mentioned in terms of -- or both of you mentioned sort of the hiring efforts and maybe it's a mix, but how focused is that on the C&I side of things? Is that kind of the top priority in terms of looking to add new talent?

Yes. I would call that our number 1 priority in terms of moving our sales forward and accelerating growth in the commercial space. And it's not just C&I Justin, it's both CRE and C&I. We're doing an awful lot of work in our business banking space as well to focus those teams on deposit gathering and developing new relationships. So it's across the board. And the fight for talent, we think we have a really good story to tell, and we'll be able to acquire and add to the teams in order to support growth.

Okay. That's helpful. And I guess, pivoting, just one on the margin. I was pleasantly surprised with the expansion you saw this quarter and looked like some nice moves lower in deposit costs. I think the last update you gave, you were referring to some of the competitive pressures on the funding side that had been maybe a little stronger than initially expected. So curious how that has been trending as we now move through the first quarter? And I guess, how that sort of informs the mid- to high 3.9% guide on margin here looking forward?

Yes. I think with the -- as the Fed moved lower, we've seen the competitors a little bit slower than we anticipated, but bring rates down. So we're working within that framework and are pretty confident that we can hold these levels on the NIM.

Justin, if you think about the quarter itself and when rates dropped early in Q4, I would say the competitive intensity around rates was higher than as we moved through Q4 and subsequent drop in rates the market rates kind of went with it a little bit faster?

I think, it's a little bit harder for people to cross, for example, 4 on CDs that dip below 4 on CD, that short CD rate took a little bit longer than we had thought would happen. But now that through that things seem to be moving a little bit better.

Okay. And then maybe just M&A. I know we've talked a lot about it, but just curious for Chris, maybe an update there, where things stand, just sort of the pace of conversations you're having, if there's any -- or there has been any shift in preference or bias as to what geography or geographies you might be leaning towards or where you're seeing the most active discussions?

No, there's nothing significant. Just to note that we've talked about over the past couple of months. We are in active dialogue across the geographies, and we continue to make it a priority for us. But we also want to do the things that we have most direct control over, and those are the things that we're doing to execute every day. So still lots of interest, a lot of conversations, the reiterating is something I said earlier this stock repurchase authorization that we have. We're very fortunate to be able to kind of walk and chew gum at the same time that we can -- potentially, if the market avails itself to the repurchase authorization, that's great. At the same time, it doesn't inhibit us at all from an M&A standpoint.

Daniel Tamayo, Raymond James.

Yes, maybe we start on the loan growth side. But as it relates to the funding, mid-single digits, not guiding to better than that, but it sounds like it could be a good year for loan growth. Loan to deposit ratio now over 100%, I believe. So just curious if you expect to be able to kind of fully fund that loan growth with deposits or if you're going to be using alternative sources, just outlook on the deposit growth, if you will.

Yes, sure. The -- what we're forecasting is our ability to fund that internally through deposit growth. We saw a really strong Q4 -- in terms of customer deposit growth, particularly in the consumer space, was offset a little bit by some activity with some large commercial depositors that we consider more anomalous than anything. So I think that with the focus and the investments that we've made in technology, people, campaigning, we're really focused in on driving core deposit growth, and we think we can achieve a balanced loan and deposit growth trajectory.

Danny, it's Chris. If we're able to -- so the team's incentive plan, you would see very clearly where the importance of deposit growth and funding our asset growth through continued expansion of customer relationships. So -- we know in order to maximize profitable growth, the funding needs to come from the continued growth in our already strong core deposit franchise, and that's a key focus for all of us and all lines of business.

Okay. And on the cost side, I suppose, I mean, is this kind of related to that as well as what your commentary earlier about repricing the current deposits, what do you have in terms of implied or assumed deposit betas in the margin guidance?

Okay. Well, I mean we have, maybe in our plans, we have a couple more cuts sort of built in. I mean, it's complicated because there's -- on the -- on the asset side, things are moving the other way. But on the deposit side, the betas are probably in the 30% range overall.

Okay. All right. Great. And then, I guess, one last one for you, Chris. You talked about the M&A and you obviously have this buyback announcement.

From a capital perspective, but you're obviously just under $10 billion, but you've been able to kind of flatten out the asset growth over the last few quarters. I'm modeling in. I think you talked about last quarter likely crossing $10 billion next year. But is there a way or a desire to potentially keep that under $10 billion through next year and push the Durbin hit out here?

Yes. At this point, Dan, we're not thinking that way. We believe that our Durbin hit is relatively small at $6 million to $7 million. There's certainly some things that you could do, Mark and the team could do. But our focus right now is to continue to grow and show some reasonable growth. We end up with 5% loan growth for the year, 6% in that range.

You're talking about $500 million worth of loan growth, and that would put us kind of meaningfully over the $10 billion, and then we have good part of 2027 to work through that. So our focus is to continue to execute and recognize that that's a potential headwind but it's also something that we're going to -- we can also celebrate because it's been talked about too long to stay around that level.

Understood and agreed we -- we're all looking forward to not talking about that anymore.

Think about it, Danny, the call would be 10 minutes shorter.

I'll scratch that off my question for you. That's all I have. That's a lot.

Kelly Motta, KBW.

This is Charlie on for Kelly. Sure. Just to hit on asset quality quickly. Can you provide more color on the specific resolution of the NPAs that drove kind of the $11 million in charge-offs and whether that relates to the two CRE and one C&I credit you guys identified last quarter?

Directly related to those previously identified and talked about credit. We were able to bring those to resolution, recognize the charge reduced specific reserves as a result. We also had, as I mentioned, formation in the quarter that were both C&I and CRE, and we appropriately reserved for those, and we have resolution strategies in place for those credits as well.

And I want to re-emphasize the importance of the progress we've made in terms of the criticized and classified reductions over the last three years. So if you think about -- we talk a lot about loan pipeline and where is growth going that C&C bucket is the pipeline for future charges and NPLs. So having reduced that by 50% over the last three years, reduces the amount of problem loans coming into the funnel that could potentially lead to further deterioration or charges within our book. So that's why we feel good about being able to say, hey, look, asset quality in 2026 is not going to perform any worse than 2025 and our focus on reducing NPAs and the feeder pipeline of C&C has taken hold and is really our focus.

That's helpful. And then turning to expenses. It seems like growth is going to be is expected to be strong, and you guys saw 4% expense growth this year. Is that kind of a fair run rate in the years ahead? I know you mentioned adding talent in the C&I and CRE verticals and made investments already. Just so you could speak to initiatives ahead? And maybe secondly, if there's room on the efficiency ratio? Or is like the mid-50s a good sustainable place to operate from?

Sure. I'll start with the last one. I think Mid is a look for the efficiency ratio to be -- on the expense side, we don't think we have a lot of infrastructure build. We've invested a lot over the last few years on the staffing side for a lot of our support areas. So the FTE growth that we expect in this year and really for a couple of years after that will be mostly production related. So that limits the overall increase on the salary and benefit side. So we're working with about a 3% year-over-year expense increase. So we were pretty confident that we could hold to that going into this year.

That's great I'll step back. Thank you, Charlie.

Matthew Breese, Stephens.

A few more questions from me. First, long wells this quarter held up a bit better than what I was expecting. And so I'm curious what the roll-on yields are versus roll-off today? And maybe what are your -- what are expectations for back book repricing in 2026?

We're still getting a little bit of positive on the fixed side. And we're also getting benefit from this received swap book that we have. So that's been helping a lot to support the lack of declines on the asset side. Although that tailwind, if you will, starts to diminish as we get further into the into the year. So by the end of the fourth quarter, a lot of that will be gone. The replacement yields are not all that different on the floating side. I mean they're just kind of coming off and going on, but we are still picking up maybe 25 basis points on other more fixed products debt.

And do you have the maturities for fixed asset repricing or fixed loan repricing in '26?

Base dollar amounts.

Yes.

But we have more about $1 billion or so that we have to replace every year. Some of that will be our prepayments and that and also amortizing loans. So kind of a mix of that.

It's a mix of fixed and flow. Yes.

Got it. Okay. And then do you have the updated cost of funds either across deposits either at year-end or more recently. One of the things I was looking at CD costs just look a little elevated here at $386 million. I'm assuming there's quite a bit of downside as we think about rate cuts, additional rate cuts and the maturity schedule there, what CD cost could be a year from now?

Yes. So I have like a monthly margin from December, and that gets us a little bit closer for that. For that period, our CDs were about at 3.82%. And overall deposits -- we're about 2.50%.

254 interest bearing.

Yes. Yes, that doesn't include DDA.

Yes. Okay. I guess the last one for me, a lot of the questions have been exhausted. But for community Bank, what are you doing or what are you using for AI tools at this point? How are you using them? And as we look ahead, whether it's a year or five years, how do you think those tools might impact your P&L?

Yes. Obviously, in some of these areas, things are early days. But in other areas, it's work that is really important to our company. I think about in the area of BSA, AML compliance and some of the fraud protection that occurs in our company every day relative to -- primarily to our deposit book and anomalies that are happening within commercial and consumer deposit relationships.

So all of that information that's coming to our Financial Intelligence group is AI-driven and alerts are created, and it has been a big factor in our ability to find potential fraud and make sure that we're stopping things before they actually happen. And it's worth millions of dollars of savings that we see on a quarterly and annual basis. Around potential things, all coming from what you would consider some sort of AI alert.

We're also thinking about generally regulatory compliance, consumer compliance and the ability to use AI there. Within our commercial bank, the underwriting and portfolio management infrastructure that we have has increasing levels of AI support to do things like auto spreading of financial statements, support for -- will continue to mature will be support around underwriting for originations as well as portfolio management. We're also using it to enhance our communication.

Just this month, some of the work that we're doing in communicating to our Board, we're running through some AI tools to help us communicate more effectively. So it's a lot of kind of some experimentation. Obviously, there's a big level of risk management associated with it. This is our information that we have to protect, and we have to make sure that it's not available elsewhere. So we're working on that. We've got a working group that thinks about these things, but it will continue to evolve, and it is a priority for us.

We talked about expense growth in the year and the commitment that we have is all FTE growth, people expense growth will come in customer-facing and revenue-producing roles. We believe that back-office support and those sorts of things should be able to be held flat. And that's kind of a forcing mechanism to make sure that we're looking at opportunities from a technology standpoint.

How far away are we from the -- you said millions of savings. How far away are we from that actually impacting guidance and your outlook?

Well, a long way. You know, it's still early days. And when I'm talking about millions of savings, these are fraud alerts that are protecting our customers from potential losses that could have occurred otherwise. So as it relates to significant increases in operating expenses, we've got a ways to go, I think.

(Operator Instructions) Dave Bishop, Hovde Group.

Yes. Thank you. A quick question for most of my questions have been asked and answered. But -- in terms of origination, loan production this quarter versus payoffs. Just curious maybe how those compared to the fourth quarter to the back end of the third quarters?

Yes. Fourth quarter was robust. Originations were strong in Q4. We did have elevated payoffs in Q4 to talk about the kind of the construction cycle, a lot of those loans were refinanced out of the bank in Q4. And it led to some pipeline burn that we're actively rebuilding now and would hope to regain our momentum.

And as we add additional bankers incrementally add to what our experience has been over the past year or two. So we, in total, need to originate somewhere around $1.5 billion to $1.6 billion in total new loans each year to drive a 5% to 7% net loan growth number.

Got it. And in terms of the targeted banker as this year, any geographies burning a hole in your pocket more than others that you budget out this year? Thanks.

We're kind of agnostic relative to the geography and we know we need to add to the C&I teams, CRE, we're pretty well healed in terms of the legacy markets. But if we can find an additional banker who can help us grow, we're going to hire them.

As Chris mentioned, the focus of the leads of both the commercial real estate and C&I groups, our ABL group is to add additional bankers in order to further enhance customer acquisition. And that -- hopefully that translates into additional loan and more specifically deposit growth. So it might be treasury management officers. It could be CRE bankers. It could be C&I bankers. We're looking to grow all facets of our commercial teams and the products that they offer.

Daniel Cardenas, Janney Montgomery Scott.

Just -- most of my questions have been asked and answered. But maybe could you provide a little bit of color as to competitive factors on the deposit side given your goal to fund loan growth with deposits -- are there markets that you operate? Are they behaving rationally right now? Or how would you kind of describe those?

We talked a little bit about that earlier. I would say that early in Q4 as rates started coming down and that 4% number was out there when you're talking about the CD book, there was some pressure from competitors to what I would call hold on what I have and offer an elevated rate. We were a little surprised that folks kind of reacted as slowly as they did.

And I think particularly in the month of October, maybe even into early November. But second half of the quarter, things became more rational. We don't aggressively post and advertise aggressive rate in the market, generally speaking. -- we operate with what I would call a very responsive exception pricing process that kind of combines the ability for our team leaders in the field to make decisions with the proper level of oversight between Mark's teams and Dave's teams.

And that has worked really well for us, both in the ability to attract new deposits as well as to retain things from a competitive standpoint. So we feel optimistic about our ability to respond the information that we're getting to make decisions around. And that's a big reason why we believe we should be growing deposits at least at the rates that we're projecting our loan growth.

Thank you, Dan.

And with no further questions in queue, I would like to turn the call over to Chief Executive Officer, Chris McComish for closing remarks.

Well, listen, thanks all for being on the call with us, and we appreciate your engagement and your guidance. Be safe out there. There's a lot of nasty weather coming in various parts of the Midwest in particular, but we look forward to successful 2026. We're certainly very proud of 2025. We look forward to moving forward. So have a great rest of the day.

This concludes today's conference call. You may now disconnect.