S&T Bancorp, Inc. (STBA) Earnings Call Transcript & Summary

Thank you. Welcome to the S&T Bancorp second quarter 2026 earnings conference call. After the management's remarks, there will be a question and answer session. Now, I would like to turn the call over to Chief Financial Officer Mark Kovacic.

Please go ahead. 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. The statement provides cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the second quarter 2026 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. Also 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 stbankcorp.com. With me today are Chris McCommish, S&T's CEO, and Dave Antolik, S&T's President,.

I'd now like to turn the call over to Chris. Chris? Chris Baird, CFO Alphabet and Google, Mark, thank you. And good afternoon, everyone, and thank you for joining us today. We appreciate the analysts and investors being with us. And as always, we look forward to your questions. Before I get into the quarter, I did want to take a minute to recognize the broader momentum we are seeing across S&T. Our financial performance is one important measure of that momentum, but we also continue to see it reflected in the strength of our customer relationships and the trust customers place in our company. That was reinforced this quarter when S&T was named to the Forbes America's Best in-State Banks 2026 list. This is a recognition based upon direct customer feedback across areas such as trust, customer service, financial advice, digital experiences, and overall satisfaction. Also during the quarter we celebrated our 124th year, which means we begin celebrating S&T's 125th year legacy this quarter. This recognition is a timely reminder that our long-term success has been built on those same fundamentals. Serving customers well. investing in our communities and delivering value for our shareholders over time. These commitments have helped us navigate change, strengthen our culture, and position the bank to thrive for the next 125 years and beyond. Now, turning to our financial results, I'll start on slide three. Turning to the quarter, we delivered a very strong performance. Net income was $36.6 million, or $1.2 per diluted share, up 8.5% from the first quarter of 26 and 22.9% from the second quarter of last year. Return metrics were also solid. We reported ROA of 149, ROE of 10.375, and a ROTCE of over 14. These results reflected the benefit of higher earnings, continued discipline across the company, and the impact of our share repurchase. activity. Our operating performance was also strong. Net interest margin expanded seven basis points from the linked quarter to 399, supported by both higher loan yields and a better funding mix. Net interest income increased to $90.4 million compared to $88.4 million in the first quarter and $86.6 million a year ago. Importantly, we're seeing positive year-to-date operating leverage. Through the first six months of the year, revenue growth has outpaced Fence growth meaningfully and our efficiency ratio improved to 55.38% compared to 57% for the first six months of 2025. As is noted, asset quality showed improvement during the quarter with low net charge offs of just a million dollars and non-performing assets decreased by almost $10 to 0.5% of total loans in Oreo. On page four, loan growth was $99 million or 5% annualized. On the deposit side, customer deposits were stable in the second quarter after very strong growth in the first quarter. Year to date deposits are up approximately 8% annualized. At the same time, we reduced broker deposits $100 million during the quarter and $180 million year-to-date, which again improved the quality of our funding mix. DDA levels remain at an industry-leading 28% of total deposits, highlighting the value of our late relationship based model and the quality of our core deposit base. We continue to actively manage capital also. As you know, over the past three quarters, we repurchased almost 3.2 million shares, representing 8% of outstanding shares for a total of $133 million. We also got board approval. yesterday for reauthorization of another $100 million opportunity. Our strong capital position gives us the flexibility to continue to support organic growth, remain disciplined around capital returns and evaluating strategic opportunities as they arise. In summary, this was a very good quarter for our bank. We delivered meaningful EPS growth, solid returns, favorable asset quality, positive to date operating leverage and continued capital management through share repurchases. I'm going to stop right there, turn it over to Dave. He can talk about asset growth, pipelines, and asset quality. Great. Thank you, Chris. And as Chris mentioned in referring to page four, total loans increased by $99 million during Q2.

to representing approximately 5% annualized growth, driving balances over $8 billion. We're encouraged by both the composition and the quality of this growth. As discussed on previous calls, we are strategically focused on building our C&I capabilities and our investment in talent is beginning to pay off. During the quarter, we increased our C&I banker count. They've increased our total commercial banking team by approximately 20% year to date, with a goal of reaching 30% by year end. These hires strengthen our ability to deepen customer relationships, expand our presence in attractive markets, and support long term loan and deposit growth. The results can be seen in our C&I portfolio. During the quarter, C&I balances increased by $79 million. We saw encouraging signs from our C&I customer base with revolving line utilization increasing from 41 to 44% quarter over quarter. And at the same time, total C&I revolving commitment grew at 6% annualized, demonstrating continued demand from our customers along with increased banker productivity. Permanent commercial real estate balances declined by $46 million, primarily driven by loans that were paid off by non-bank lenders. While this created a headwind to the portfolio growth, it also reflects the continued quality of our borrower base and the attractiveness of these projects to the permanent market. to support well-capitalized developers within our footprint. As a result, commercial construction balances increased by $71 million during the quarter. Additionally, total construction commitments increased by $65 million, and the total number of commitments increased by nearly 19% in Q2, providing further evidence of solid customer activity. Looking ahead, our CRE and C&I pipeline activities remain solid and support our expectation for annualized mid-single-digit loan growth for the balance of 2026. Turning to asset quality on page 5, our portfolio continues to perform in line with our expectations, demonstrating our disciplined underwriting approach and ongoing portfolio management efforts. Non-performing assets declined by $9.7 million during the quarter to $40.2 million or 0.5% of total loans plus Oreo. Criticized and classified assets remained stable during the quarter while losses were very low. total just $1 million during Q2, resulting in a modest provision expense of $1.1 million. Given the continued stability of the loan portfolio, the allowance for credit losses remained essentially unchanged at 1.16% of total loans compared to 1.17 at the end of Q1. and I'll turn the program over to Mark. Hey, thanks Dave. Second quarter net interest income increased by $2 million due to an additional day, combined with improvements on both the yield on earning assets, which dropped four basis points with better commercial performance, and the cost of funding, which was down four basis points due to lower interest bearing deposit rates, and also a better funding mix. We expect relative net interest margin stability around the current high 390s level to continue for the next several quarters, and believe we are well positioned should interest rate conditions change. A tailwind from our maturing receipts fixed swaps along with some remaining security fixed rate loan and CD repricing all contribute to stability in the face of heightened loan and deposit pricing competition. Net interest income growth will be supported by improved loan growth. Average loan balances were actually down in the second quarter due to the timing of the growth in the first half, but we expect average balance loan balance growth going forward. Customer deposit growth momentum remains good even in the face of this increased competition, which should contribute to maintaining spreads and at interest margin rates. Next, on non-interest income, we saw an increase of $1.3 million in the second quarter. Increases were broad-based with improvements in really every category. Debit and credit card activity was higher after a seasonally slower first quarter. Investment services is up with better customer activity and market improvements. The gain on sale is the net of a $1.9 million gain on the conversion of Visa Class B2 shares. We offset that for the most part with a $1.7 million loss on a small $34 million bond portfolio repositioning. The bond repositioning has an earn back of about 1.4 years. per quarter to identify interest income for the next several quarters. The other category variance is due to one-time items. We had some partnership income and an unrealized gain on some equities that we own. Our expectations for fees in the second half of 2026 is approximately $14 million per quarter. On to non-expenses, which increased by $2 million in Q2, the largest variance was in salaries and benefits. And within that, salaries were up due to merit increases going into effect in April. And we also had some higher medical costs as deductibles were met during the first part of the year. Occupancy improvement was impacted by higher seasonal snow removal and utility costs in the first quarter. Marketing reflects just the timing of various promotional efforts. Other variances include tax-related contributions, which are offset by a favorable variance in other taxes. We had some higher T&E and employee recognition. along with some recruiting fees. We expect to manage our 2026 non-interest expense year over year to a maximum around 3% increase, which implies a quarterly run rate of around 58 million. For capital, the TCE ratio decreased by 28 basis points this quarter, primarily due to the share repurchases we completed in the second quarter. Again, for the quarter, we repurchased about 1.1 million shares, average price of $44.24, with a total of $47.6 million. Regulatory ratios continue to be very strong with significant excess capital. We are evaluating next steps with respect to our capital management strategy and further buybacks. We're comfortable that even considering additional repurchases that were recently authorized by the Board, we have more than sufficient capital currently and the generation capabilities that will position us well. for the environment and enable us to take advantage of organic or inorganic growth opportunities should they arise. At this time, I'd like to turn the call back over to the operator to provide instructions for asking questions.

The floor is now open for questions. If you have a question, please press star 1 on your device. We ask that while asking your question, please pick up your phone and turn off speakerphone for enhanced audio quality. Please remember to unmute your device. Please hold while we poll for questions. Your first question comes from the line of Daniel Tomeo with Raymond James. Your line is now open. Please go ahead. Thank you. Good afternoon, everybody.

How's it going? I apologize if you gave this already. But the loan growth guy, did we get a, was it mid single digit again?.

looking for the rest of the year. Exactly, Dan, mid single digits.

Okay, all right, great. And in terms of the deposits, I know you called out it's been strong year to date. still thinking that kind of full year will fund the loan growth? Or are you thinking through the deposit? Yes. Yes.

Yes, we fully anticipate, yes, based on pipelines activity we've seen year to date, we'll be able to sell funds through DepositCross.

Okay, great. And then I appreciate the commentary on the buybacks, but maybe just if you could just put a little more clarity around kind of how you're thinking about that other than, you opportunistic like you know you got the 100 million um re-up there and then you know is that so assuming kind of a stable stock price or stable growth in the stock price, you think that's something that you expect to use on a somewhat regular basis over the next several quarters? You know, Obviously, it's dependent in part on the loan growth that comes through. I get that. But just your thoughts on your intention to use that over the next year, I guess, is the authorization.

Yes, I mean, it does last for a while. I mean, with the stock price moving higher, I mean, the calculus does change. So we are taking a closer look at that. I think it is something that we'll have opportunity to use over the next year. But again, the dynamics have changed.

as the prices move higher. So based on like today's price, I mean, do you think that's something you're still interested in utilizing?.

Probably not to the same degree as we've been. We've been pretty active. last three quarters. So we would consider or look more closely at potentially stepping that back somewhat.

at current levels. Okay. And if that happens and maybe the stock goes higher and it becomes less attractive, what do you think you would do with the capital at that point, absent kind of looking for other M&A opportunities? Yes.

Yes, I think we're all we haven't stopped looking for M&A opportunities and other things to do both organically. So we would continue on that as you know, with the 5x that we've made, you know, the improvements to returns, you know, are meaningful. But again, the kind of incremental improvement that we get from the buybacks begins to get a little bit more constrained. So I think that's one of the things as we go into our planning process for the year, that's something that we'll have to look a lot closer at over the next year.

quarter or so. All right, understood. Well, thanks for the call, guys. Appreciate it. Nice quarter. Okay, thank you.

Your next call comes from the line of David Bishop with Hovde Group. Your line is now open. Please go ahead.

Yes, good afternoon. Hey, Chris, you mentioned the ability to attract new commercial bankers, and you called out the C&I growth. Just maybe some color on the increase there, how much represented maybe new client penetration versus existing customers getting more aggressive? and utilizing lives and getting more optimistic on lending. Thanks. Yes.

Hey, Dave. Dave Antolik. So the majority of the growth was related to utilization rates increasing. But as I mentioned, we've seen the total revolving commitment growth as well, which would represent additional credit extended to existing clients as well as new customers. So it's a good mix. But the growth in CNI was outsized and a little more than what we'd expected from the quarter because of the increased utilization rates. Which was interesting because utilization had dropped a little bit in Q1. came back some in 2Q, pushed a little bit higher. So the math becomes keep the utilization rate, because it's now at a level where it was prior to Q1, keep that consistent, grow the overall customer base, which is the purpose behind hiring these new CNI bankers.

Got it. Then I'm not sure if I missed it during the preamble, but positioning for potential rate hikes here in terms of the margin. Just curious thoughts on the puts and takes there as we head into the second half of the year. Thanks.

Yes, I think with respect to our rate sensitivity, we feel like within 20, 30 years, we're going 2550 basis for points early, even a little bit more either way that we're fairly neutrally positioned right now. You know, we still have some tailwinds that I mentioned with the swaps and some of the back book repricing that just support us over the next several quarters. So It's hard to know what the Fed's going to do, but we think that we can hold on the margin for the next several quarters at least, in spite of any rate changes that might happen.

Great. Thank you. Your next call comes from the line of Kelly Mata with KBW. Your line is now open. Please go ahead.

Hi, good afternoon. Maybe sticking on the point of the margin, it was really nice to see deposit costs come down in the quarter, including the rate on CDs. I'm wondering, as you look out from here, is that tailwind kind of leveling off with the of the upcoming maturities coming up and can you provide any spot color on deposit costs or what the incremental cost of new funding is coming in at? Thank you.

Yes, so I mean you're right, the seat we still got some repricing benefit on the CD book that has, you know, maybe a couple more months to run. So we might see a little bit more benefit in Q3, but after that we're pretty much leveled off and replace it replacing at the same cost because that book is fairly short. We're still highly concentrated. in that six-month timeframe. So that's why we'll start to see some uptick potentially after Q3 in deposit costs as there's still some repricing and some exception pricing being made. So to the extent we can hold on to the good mix that we have,.

We shouldn't see it move too much going forward. Got it. That's helpful. Maybe one last question from me, just refreshing Durbin. It looks like you're 9.94 billion in assets, very flat quarter over quarter. It seems like given your kind of mid single digit growth outlook on loans, you will potentially run through that. Is that still a good assumption or do you have some levers here that if you don't get a deal, you can plan to navigate on to a run on an organic basis? Thank you.

I mean, given given the trajectory that you know they've described on loan side, you know, if we're successful with that, you know, we would anticipate across here in the second half. So as long as that comes through, we will go. In the first half of the year, we saw a decrease in loan balances in the first quarter. That sat in cash for the most part at the end of the first quarter. So in the second quarter, even though we had loan growth, we got a right side of the cash balance. So it looked like we were flat. It's really back to the balance sheet actually being probably down under the hood in the first quarter, and it's just kind of bounced back here in the second quarter. But our trajectory should take us over $10 billion in the second half.

Got it. Thank you so much. Your next... Kelly is Chris. As we've talked about before, we're talking about a little over $6 million doesn't impact us for, assuming we went over at 1231, it wouldn't impact, half of that would hit in 27, the other full amount of that would hit in 28, and our job is to lead the company through that, and we feel very confident that we can.

Your next call comes from the line of Daniel Cardenas with Breen Capital. Your line is now open. Please go ahead.

So just kind of following up on Kelly's question with the crossing of the $10 billion threshold and the $6 million gap that would be created there. How long do you think it would take your new hires to kind of fill that gap? Do you think that can kind of happen in 28 or is that going to take a little bit longer?.