S&T Bancorp (STBA) Q1 2025 Earnings Call

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DATE

Thursday, Apr 17, 2025

CALL PARTICIPANTS

Chris McComish: Chief Executive Officer

Mark Kochvar: Chief Financial Officer

Dave Antolik: President

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EPS: 87¢, exceeding Q4 2024, Q1 2024, and consensus estimates

Net Income: $33 million for Q1 2025, surpassing both the previous quarter and the year-ago period

Customer Deposit Growth: 7.23% annualized in Q1 2025, marking the seventh consecutive quarter of expansion

Loan Growth: 4.89% annualized in Q1 2025, driven by growth in commercial real estate and construction

Net Interest Margin: Expanded by 4 basis points to 3.81% in Q1 2025

Allowance for Credit Losses: Declined by approximately $2.5 million to 1.26% of total loans in Q1 2025

Commercial Loan Pipeline: Increased by nearly 40% since year-end 2024

SUMMARY

S&T Bancorp reported strong Q1 2025 results with growth across key metrics, maintaining asset quality while positioning for future expansion. Management expressed confidence in mid-single-digit loan growth for H1 2025, with potential acceleration to high mid-single digits in H2 2025 as newly hired bankers' pipelines materialize.

Deposit growth primarily stemmed from consumer activities, leveraging a proprietary customer relationship sales process introduced in early 2024, resulting in customer deposit growth of $135 million or 7.23% annualized in Q1 2025.

C&I loan balances declined by $20 million during Q1 2025, reflecting reduced automobile floor plan borrowings and reductions in the owner-occupied real estate category

The company completed $193.6 million in bond restructurings, which are projected to increase 2025 net interest income by approximately $5 million.

We expect a quarterly run rate of $55.5 million to $57 million for the remainder of the year.

Management anticipates crossing the $10 billion asset threshold organically in the second half of 2025

INDUSTRY GLOSSARY

TCE ratio: Tangible Common Equity ratio, a measure of a bank's capital strength

AOCI: Accumulated Other Comprehensive Income, reflecting unrealized gains or losses in the securities portfolio

Full Conference Call Transcript

Mark Kochvar: Welcome to the S&T Bancorp First Quarter 2025 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 Kochvar. Please go ahead. Thank you, and good afternoon, everybody. Thanks for participating in today's earnings call.

Mark Kochvar: Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements or 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 first 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 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 McComish, S&T's CEO, and Dave Antolik, S&T's president. I'd now like to turn the program over to Chris. Chris?

Chris McComish: Great. Mark, thank you. And I'm going to begin my comments on page three. Mark, appreciate kicking us off, and I want to welcome everybody to the call. I certainly appreciate our analysts being with us, and we look forward to your questions. I also want to thank our employees and shareholders and others listening onto the call. To our leadership team and employees, thank you for all you do. As we've discussed before, these results are yours, and you should be very proud. Before we discuss the numbers, I do want to touch on a couple of highlights that made Q1 so energizing and important for us. A few weeks ago, we wrapped up our third annual road trip with our executive team that in small groups with all 1,275 of our employees in sessions focused on our shared future. From Central Ohio to Eastern Pennsylvania, the energy, commitment, and engagement of our employees showed for us and proved that S&T's PeopleForward purpose really set the tone for all that we're doing in 2025. And we believe this engagement is a direct connection to the results that we're going to discuss with you today. It further reinforces our commitment to our performance drivers of focusing on our talent and engagement, building and enhancing our deposit franchise, maintaining top quartile for profitability, and a focus on top-tier asset quality. Additionally, in the quarter, we received recognition from organizations like Forbes, S&P, and USA Today for strong financial performance and superior employee engagement. Obviously, that makes us very proud. All of this combined with the strong results we'll discuss for Q1 gives our leadership team great confidence in our ability to move S&T forward despite some of the market uncertainty we are currently seeing. As I turn to the quarter on Page three, it was strong across the board. EPS of 87¢ and net income of $33 million were both ahead of Q4 2024 and Q1 2024 and meaning above consensus estimates. Our return metrics were also strong while balance sheet growth was solid both on the loan and customer deposit fronts. Customer deposit growth was over 7% annualized, the seventh straight quarter of customer deposit growth. We also saw a NIM expansion of four basis points as funding costs decreased and the positioning of our balance sheet to a more neutral stance delivered results. We had another strong asset quality quarter, which allowed us to put additional dollars towards our bond portfolio restructure program. Mark will provide more color on this later. Turning to our balance sheet, customer deposit growth, as I said, was very strong. Wholesale borrowings and deposits were reduced, and loan growth led by commercial banking was solid. I'm going to turn it over to Dave Antolik, our president. And I don't want to steal his thunder, but he's going to discuss further our balance sheet activities, customer activities, and the external environment as well as asset quality.

Dave Antolik: Thank you, Chris, and good morning, everyone or good afternoon, everyone. If I could direct your attention to page four, you'll see the positive growth trends that Chris just talked about. Customer deposit growth of $135 million or 7.23% annualized, which as Chris mentioned, was the seventh consecutive quarter of customer deposit growth. You also see the total loan growth of $93 million or 4.89% annualized, which is consistent with our previous guidance. Focusing for a moment on deposits, the majority of our growth came from our consumer activities. It is driven by our bankers using a proprietary customer relationship sales process that we introduced in early 2024. That has matured to the point where it's having a meaningful impact on our results. We also continue to leverage our deposit exception pricing platform which aligns frontline staff and our treasury function in a customer and deposit cost-friendly way. From a product perspective, the overwhelming majority of our deposit growth was in the money market and included a mix of consumer, private banking, and municipal customer activities. We also saw a shift from CD and checking balances into the money market this quarter. Digging into loan activity, we saw consumer loan growth of $12 million, which was driven by residential mortgage and home equity. As anticipated, our residential pipeline has tapered over the past few quarters and has now stabilized. Meanwhile, our home equity pipeline has grown since year-end. And as mentioned last quarter, we expect balanced growth between these two categories for the remainder of the year. Turning to our commercial activities, total loan growth of over $81 million was driven by increases in our commercial real estate and commercial construction segments of $74 million and $27 million, respectively. Underlying categories of growth include flex, mixed-use, multifamily, and retail space. C&I balances declined by $20 million during the quarter, reflecting reduced automobile floor plan borrowings and reductions in our owner-occupied real estate category. Overall, pipelines are up nearly 40% since year-end, primarily in our commercial and consumer segments. We are closely monitoring macroeconomic impacts on our pull-through rates and continue to feel confident in our short-term mid-single-digit loan growth guidance increasing to high mid-single-digit growth in the back half of 2025. It's important to note that much of the second-half growth is expected to be driven by newly hired bankers as they build their pipelines in the first half of the year. Turning to asset quality on page five, we continued to see improvement in Q1. Our allowance for credit losses declined by approximately $2.5 million and ended the quarter at 1.26% of total loans. This was primarily the result of the release of a specific reserve related to one workout credit. In addition, criticized and classified loans remained stable for the quarter. We see loan growth and economic uncertainty as primary factors impacting our provision expense in coming quarters. Finally, I'd like to take a moment to discuss our portfolio management and monitoring activities as they relate to macroeconomic and more particularly international trade factors. First, from an information gathering and data analysis perspective, our C&I portfolio includes a group of loans that require at a minimum reporting of all accounts receivable and accounts payable. This group represents approximately $750 million of exposure and loan balances of $490 million or 28% of our total C&I commitments and 32% of C&I balances. From this information, we've been able to extract international exposure to better understand our credit risk and inform customer conversations about their plans moving forward. Second, and in a more general sense, we've added additional underwriting focus on foreign trade exposure and potential impacts to our commercial loan portfolio, including impacts on construction costs, construction contingencies, inventory levels, raw material sourcing, just to name a few. At its core, our approach to managing credit risk relies upon a combination of data collection and a deep understanding by our bankers and credit teams of each individual customer's circumstance. I'll now turn it over to Mark for further commentary.

Mark Kochvar: Great. Thanks, Dave. The first quarter net interest margin rate increased four basis points to 3.81%, with flat net interest income despite two fewer days in the quarter. The earning asset yield decline of eight basis points was more than offset by a decline in the cost of funds of 12 basis points. Our balance sheet interest rate risk position is close to neutral and we believe that we can maintain a relatively stable margin over the next several quarters even if the Fed gets more aggressive on rate cuts. Support for the net interest margin stability comes from favorable fixed and ARM loan and securities repricing opportunities, our $450 million receipt fixed swap ladder that is starting to roll off, a short duration $1.8 billion CDE portfolio, and our ability to implement nonmaterial rate cuts and manage deposit exceptions if needed. A more stable net interest margin combined with our growth outlook should translate into net income improvement going forward. Next, noninterest income declined in the first quarter by $700,000 primarily due to seasonally lower customer activity in debit and NSF. We have been able to take advantage of strong earnings and asset quality improvements over the last four quarters with a series of bond restructurings that cumulatively now totals $193.6 million and will increase 2025 net interest income by about $5 million. Our core noninterest income run rate, excluding security losses, is flat year over year at about $12.7 million. Our expectations for fees going forward remain at approximately $13 to $14 million a quarter. Noninterest expenses were down slightly in the first quarter compared to the fourth quarter. Salaries and benefits are the main driver due to lower medical, which is typical in the first quarter. The quarterly variances in other taxes and the other category offset on a related set of Pennsylvania shares tax credit programs. We expect a quarterly run rate of $55.5 to $57 million for the remainder of the year. We continue to invest in production capacity and the customer experience. Capital, the TCE ratio increased by 34 basis points this quarter with AOCI improvement contributing a little over half of that at 18 basis points. Our TCE and regulatory capital level positions us well for the environment and will enable us to take advantage of organic or inorganic growth opportunities. Thanks. At this time, I'd like to turn it back over to the operator to provide instructions for asking questions.

Operator: And the floor is now open for questions. If you have any questions, please press 1 on your phone. And we ask that while asking your question, please pick up your phone and turn off speakerphone for enhanced audio quality. Please hold while we poll for questions. And our first question comes from the line of Tyler Cacciatore with Stephens. Please go ahead.

Tyler Cacciatore: Good afternoon. This is Tyler on from Ambrise. Hi, Tyler. I just wanted to start on your thoughts on deals in this environment and the timing on crossing $10 billion without a deal.

Chris McComish: You're talking about M&A?

Tyler Cacciatore: Yes. Okay. Just want to make sure your deal has a lot of meaning behind it. You know, I think our response would be in line with what you're seeing publicly in the market as a whole. There still remain many conversations in the marketplace. But, you know, stock prices being what they are, valuations look different. We continue to have conversations and are actively in with, you know, planning for the future, be it focused on both inorganic as well as organic growth. You know, crossing over $10 billion, we would anticipate, as Dave talked about, given our loan pipelines and our activity levels and, you know, growth in kind of that high mid-single-digit range, you know, that would put us sometime in the second half of the year. Crossing over $10 billion. As we've talked about on this call before, fully prepared for it. I've done a ton of work internally to make sure that any additional requirements from a regulatory standpoint happen, we will be prepared.

Tyler Cacciatore: Okay. Great. And then if I could ask one more. I was wondering what you guys were seeing in terms of spreads on C&I and CRE and how competitive it is right there?

Dave Antolik: Yes. Spreads in the C&I space haven't expanded or necessarily contracted in Q1. And what we've seen is kind of hesitancy, and that's what I referred to in my commentary, you know, the lack of growth in C&I is just folks waiting for more certainty in the economic outlook. But these conversations that we're having with customers about particularly around raw material sourcing and finished goods, you know, maybe drop ship to customers, etcetera. Understanding what that looks like. A lot of folks are trying to better understand, you know, without guessing necessarily, but position themselves to take advantage of certain trade situations, you know, tariffs particularly, by reducing inventory or, you know, depending on how they feel about the direction of tariffs, moving inventory in different directions between different countries. So there's just a lot of uncertainty that's driven the kind of the lack of growth in the C&I space in Q1. On the CRE side, we have seen some of the more regional banks, of the larger banks, a little more aggressive in terms of their participation in commercial real estate. That's where we've seen some pressure on spreads in Q1.

Tyler Cacciatore: Okay. Great. That was helpful. That'll be all for me. Thanks for taking my questions.

Chris McComish: Thank you. Thanks, Tyler.

Operator: And your next question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.

Daniel Tamayo: Hey, guys. Good afternoon.

Dave Antolik: Hey, Dan. Hi.

Daniel Tamayo: So I jumped on a few minutes late. I apologize if you guys covered this already, but just curious if you've been able to wrap your hands around the impact of tariffs on your borrower base from a credit perspective. If there's anywhere that you're looking at as potentially most at risk or kind of zeroing in on focusing on over the next few quarters. And then kind of more broadly, you know, credit trends have been improving over the last few quarters. We've seen that in reserves coming down and early-stage loans improving. Just curious where you guys think you are in that story. I know in the last quarter, I think you talked about you thought you were pretty close to normalizing there, but just curious about updated thoughts.

Dave Antolik: Yeah. I think some of that normalization hit this quarter, as I mentioned, the criticized and classified loans remain stable from last quarter. In terms of how we're managing risk at the customer level, you know, I mentioned earlier in the call that we have this group of loans. It's about $750 million in exposure. These tend to be our largest loans. And as such have more significant reporting requirements on a monthly basis at a minimum. We get accounts receivable and accounts payable. From that information, we can extract international exposure that informs conversations that we have with these customers. We can break it down by country. So it's really a combination of data gathering and having deep conversations at the individual customer level. And we have seen things like in the floor plan space. We had pay downs in Q1 because that was driven by consumer activity. In anticipation of prices going up as a result of tariffs impacting the ultimate retail price of cars. So it's really information gathering and reacting as quickly as possible. We feel really good about our ability to manage given the risk management credit risk management practice that we have in place and the data that we gather.

Daniel Tamayo: Okay. Great. And in terms of reserves, I mean, it's a real, I mean, it's I know a point in time always is appropriate. But, you know, given the trend down over the last several quarters, you feel like you're there now? Absent any kind of recession or that could still come down more from here?

Dave Antolik: There might be a little bit of room, but it would depend it would be contingent on a little bit better outlook than we have today. Just to remind us, the decrease in the reserve that we saw quarter over quarter was really related to the release of a specific reserve that we had. Had it not been for that, we would have been up about a million and a half dollars of reserve. So, you know, we think we're probably closer to the bottom of that given the current environment.

Chris McComish: As well as our loan growth expectations. Yes.

Dave Antolik: Yeah. Ex that. But I'll keep the rate relatively constant. Yeah.

Daniel Tamayo: Got it. Okay. And then I did catch the commentary on the margin, Mark. But maybe if you have some detail on loan yields, new loan yields in the first quarter relative to what was coming off and any commentary on securities cash flows what the expectations are for investment there, relative to what you're seeing on the funding side where I expect you're close to a terminal beta if not.

Mark Kochvar: Yeah. We made on the deposit side, we continue to make some changes but they were mostly done by the close of last year, so we still benefited from those in Q1. But haven't made any significant changes. We still benefit from the CD repricing that's still left to go. It's the first half into the summer. On the loan side, we're seeing overall new yield in the, like, in the 6.75% range in there. Beating the paid level by about 25 basis points. We're still seeing some kind of net a little bit of net improvement on the loan book. So that's helping to provide some support to the margin. And securities, you know, we typically are seeing anywhere from $50 to $75 million mature every quarter or so, and we're still picking up at least 150 basis points there. That'll continue for several more quarters. So and then we also have the received swap book where we have about $50 million a quarter coming off. And there, the pickup is in the 2% range. So those things will continue to benefit us we think for the remainder of '25. So that's you know, helps give us the confidence that the margin can be relatively stable throughout this year because we kind of have those support areas even if the Fed were to move down.

Daniel Tamayo: Is that yeah. I guess that was my next question is just the is that kind of the offset? Because that underlying sensitivity you said you're mostly neutral to rates, but underlying sensitivity, you're still asset sensitive, right, with the variable rate loans there? I mean, like, if this were a you know, once we get past, I guess, the swap the pickup from swaps, if you we had a rate cut, you would expect that to be at least somewhat dilutive to the margin?

Mark Kochvar: Yes. We're positioned now. So, I mean, if I fast-forward it, you know, maybe a year from now, once we get through a lot of that repricing, if we don't take any action, we'll return to some level of asset sensitivity. But we're monitoring that closely, and depending on the environment, there's some things we can do relative, like, on the swap side. To counteract that and continue to have a more neutral IRR position. So for now, we can rely on what's already in place on the balance sheet, but we'll have to be more active as that burns off over the course of this year.

Daniel Tamayo: Got it. And if and we don't get the cuts then this year, would you expect margin expansion then given the you know, kind of the fundamental tailwinds that you've got the rest of the year?

Mark Kochvar: Yeah. So to a limited degree, we think there might be a few basis points there as well. So that would be a prior positive for us if that were to be on hold the rest of the year.

Daniel Tamayo: Got it. Okay. Alright. Thanks for all that color. Appreciate it, guys.

Dave Antolik: See that in the queue.

Operator: And once again, if you would like to ask a question, please press star one. Your next question comes from the line of Manuel Navas with D.A. Davidson. Please go ahead.

Sharanjit Cheema: Hello. This is Sharanjit on for Manuel. You guys talked about pipeline being up 40% from year-end, and kind of that growth acceleration expectation throughout the year with, like, the new hire pipeline building in the first half for that second-half growth? And then what are your hiring expectations for this year compared to maybe 2024? And do you see any additional opportunity to add teams or pick up potential producers from here?

Dave Antolik: Yeah. We're currently in the process of recruiting C&I bankers. These would be adds to staff. So last quarter, we talked about a 15% increase in calling officers and that we've achieved. It'll be more onesie-twosie kind of fill-ins this year. And that is really what is supporting the pipeline expansion. Based on the pipelines that we have, the addition of these bankers, again, we're comfortable with the guidance that we've given in the first half of the year. And expanding growth in the second half of the year. All that being said, you know, till we have a better view on these macroeconomic issues, you know, there may be an impact on the pull-through rates that we're watching from the pipeline, you know, end up becoming customers and those balances being booked onto our balance sheet. So there's a lot of moving factors, but we're certainly focusing in on organic growth by adding to staff, making sure the staff has the appropriate tools that they need in order to support growth.

Sharanjit Cheema: That's great. Thank you.

Dave Antolik: Mhmm.

Operator: And I'm showing no further questions at this time. I would like to turn the call over to the chief executive officer, Chris McComish, for closing remarks.

Chris McComish: Okay. Thanks, everybody, for joining us this afternoon. As I said, we're very proud of the performance across the board in Q1 and we're optimistic for the rest of the year. We certainly appreciate your time and interest in our company, and have a great rest of the day.

Operator: Thank you. And this concludes today's conference call. Thank you for joining. You may now disconnect.

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