S&T Bancorp - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 EPS was $0.87, up from $0.86 in Q4 2024 and $0.81 in Q1 2024; EPS and “total revenue” (S&P Global framework) were above consensus, driven by a 4 bp NIM expansion to 3.81%, lower cost of funds, and excellent asset quality including net recoveries and a negative $3.0M provision.
• Loans grew $93.4M (4.89% annualized) and deposits rose $109.8M (5.72% annualized), with customer deposits up $134.7M (7.23% annualized) and reductions in brokered deposits and borrowings, reinforcing funding mix improvement.
• Management expects margin stability over the next several quarters and net interest income improvement, supported by securities repositioning ($193.6M cumulative) that should add ~$5.0M to 2025 NII, CD repricing, and swap ladder roll-offs.
• Strategic narrative remains growth-oriented: pipelines up ~40% since year-end, hiring C&I bankers, and expected asset crossover above $10B in 2H 2025; dividend maintained at $0.34 per share (up $0.01 YoY).

What Went Well and What Went Wrong

What Went Well

• “Strong customer deposit and loan growth” with customer deposits +$134.7M and loans +$93.4M; NIM rose 4 bps to 3.81% and asset quality was “excellent,” per CEO Chris McComish.
• Cost of funds fell 12 bps QoQ (2.87% vs 3.03%) while NIM improved; CFO highlighted margin stability supported by repricing levers (fixed/ARM loans, securities, swap ladder, short-duration CDs).
• Securities repositioning cumulative $193.6M expected to increase 2025 NII by ~$5.0M; capital strengthened with TCE/TA at 11.16% (up QoQ).

What Went Wrong

• Noninterest income fell $0.7M QoQ to $10.4M, reflecting seasonally lower debit/NSF activity and a $2.3M realized securities loss in the quarter (though aligned with the repositioning strategy).
• Efficiency ratio ticked up to 56.99% (from 56.93% in Q4), and management guided a higher opex run rate of ~$55.5–$57.0M for the remainder of 2025 (vs ~$54–55M prior) to support growth investments.
• C&I balances declined by ~$19.9M QoQ amid customer hesitancy and macro/trade uncertainty; spreads in CRE faced competitive pressure from larger banks.

Transcript

Operator (participant)

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.

Mark Kochvar (CFO)

Thank you, and good afternoon, everybody. Thanks 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 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 stbancorp.com. With me today are Chris McComish, S&T CEO, and Dave Antolik, S&T's president. I'd now like to turn the program over to Chris. Chris.

Chris McComish (CEO)

Great, Mark, thank you. I'm going to begin my comments on page three. Mark, I 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 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 make Q1 so energizing and important for us. A few weeks ago, we wrapped up our third annual road trip with our executive team, met in small groups with all 1,275 of our employees, and sessions focused on our shared future.

From Central Ohio to Eastern Pennsylvania, the energy, commitment, and engagement of our employees showed and proved that S&T's people-forward purpose really set the tone for all that we're doing in 2025. 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 external 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 in spite of 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 $0.87 and net income of $33 million were both ahead of Q4 2024 and Q1 2024, and meaningfully 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 (President)

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 trend 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, which 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 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 is now stabilized. Meanwhile, our home equity pipeline has grown since year-end. 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 the 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, monthly 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, and 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 (CFO)

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 receive-fixed swap ladder that is starting to roll off, a short-duration, $1.8 billion CD portfolio, and our ability to implement non-maturity rate cuts and manage deposit exceptions if needed.

A more stable net interest margin, combined with our growth outlook, should translate into net interest income improvement going forward. Next, non-interest income declined in the first quarter by $0.7 million, 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 non-interest income run rate, ex-security losses, is flat year-over-year at about $12.7 million, $12.8 million. Our expectations for fees going forward remain at approximately $13 million-$14 million a quarter. Non-interest 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 to Pennsylvania shares tax credit programs. We expect a quarterly run rate of approximately $55.5 million-$57 million for the remainder of the year as 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 operators to provide instructions for asking questions.

Operator (participant)

The floor is now open for questions. If you have any questions, please press star one on your phone. We ask that while asking your question, please speak up your phone and turn off speakerphone for enhanced audio quality. Please hold while we pull up our question. Our first question comes from the line of Tyler Cacciatori with Stephens. Please go ahead.

Tyler Cacciatori (Research Associate)

Good afternoon. This is Tyler on for Matt Breese.

Chris McComish (CEO)

Hi, Tyler.

Tyler Cacciatori (Research Associate)

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 (CEO)

You're talking about M&A?

Tyler Cacciatori (Research Associate)

Yes.

Chris McComish (CEO)

Okay. Just wanted to make sure your deal has a lot of meaning behind it. I think our response would be in line with what you're seeing publicly in the market as a whole. There still remains many conversations in the marketplace, but stock prices being what they are, valuations look different. We continue to have conversations and are actively engaged with planning for the future, be it focused on both inorganic as well as organic growth. Crossing over $10 billion, we would anticipate, as Dave talked about, given our loan pipelines and our activity levels and growth in kind of that high mid-single-digit range, 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, we're fully prepared for it.

We've done a ton of work internally to make sure that any additional requirements from a regulatory standpoint happen. We will be prepared.

Tyler Cacciatori (Research Associate)

Okay. Great. 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.

Mark Kochvar (CFO)

Yes. Spreads in the C&I space have not expanded or necessarily contracted in Q1. What we have seen is kind of hesitancy. That is what I referred to in my commentary. The lack of growth in C&I is just folks waiting for more certainty in the economic outlook. These conversations that we are having with customers about, particularly around raw material sourcing, inventory sourcing, and finished goods that maybe drop ship to customers, etc., understanding what that looks like. We have got a lot of folks kind of trying to better understand, without guessing necessarily, but position themselves to take advantage of certain trade situations, tariffs particularly, by reducing inventory or, depending on how they feel about the direction of tariffs, moving inventory in different directions between different countries. There is just a lot of uncertainty that has driven 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, some of the larger banks, get a little more aggressive in terms of their participation in commercial real estate. That is where we have seen some pressure on spreads in Q1.

Tyler Cacciatori (Research Associate)

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

Chris McComish (CEO)

Thank you.

Mark Kochvar (CFO)

Thanks, Tyler.

Operator (participant)

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

Daniel Tamayo (VP of Banking)

Hey, guys. Good afternoon.

Chris McComish (CEO)

Hey. Hey, Daniel.

Daniel Tamayo (VP of Banking)

Hi. I jumped on a few minutes late. I apologize if you guys covered this already, but just curious kind of 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. More broadly, 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 (President)

Yeah. I think some of that normalization hit this quarter, as I mentioned C&C, the criticized and classified loans remain stable from last quarter. In terms of how we're managing risk at the customer level, 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. It is really a combination of data gathering and having deep conversations at the individual customer level. Now, we have seen things like in the floor plan space. We had paydowns in Q1.

That was driven by consumer activity in anticipation of prices going up as a result of tariffs impacting the ultimate retail price of cars. It is really information gathering and reacting as quickly as possible. We feel really good about our ability to management, given the risk management, credit risk management practice that we have in place and the data that we gather.

Daniel Tamayo (VP of Banking)

Great. In terms of reserves, I mean, it's a real, I mean, I know a point in time always is appropriate, but 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?

Mark Kochvar (CFO)

There might be a little bit of room, but it would be contingent on a little bit better outlook than we have today. Just a reminder, 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 $1.5 million of reserve. We think we're probably closer to the bottom of that, given the current environment,

Chris McComish (CEO)

as well as our loan growth expectations.

Dave Antolik (President)

Yeah.

Yeah. Ex that. That would keep the rate relatively constant.

Daniel Tamayo (VP of Banking)

Got it. Okay. 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 there.

Mark Kochvar (CFO)

Yeah. I mean, on the deposit side, we continued to make some changes, but they were mostly done at the close of last year. We still benefited from those in Q1, but have not made any significant changes. We still benefit from some CD repricing that is still left to go the first half into the summer. On the loan side, we are seeing overall new yields in the 6.75% range in there, beating the paid level by about 25 basis points. We are still seeing some kind of net, a little bit of net improvement on the loan book. That is helping to provide some support to the margin. In securities, we typically are seeing anywhere from $50 million-$75 million mature every quarter or so. We are still picking up at least 100-150 basis points there. That will continue for several more quarters.

We also have a receive-fixed swap book where we have about $50 million a quarter coming off. There, the pickup is in the 2% range. Those things will continue to benefit us, we think, for the remainder of 2025. That helps, gives 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 (VP of Banking)

Yeah. I guess that was my next question, is just, is that kind of the offset? Because 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, if this were a once we get past, I guess, the pickup from swaps, if we had a rate cut, you would expect that to be at least somewhat dilutive to the margin?

Mark Kochvar (CFO)

Yeah. We're positioned now. I mean, if I fast forward to 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. We're monitoring that closely. Depending on the environment, there's some things we can do relative on the swap side to counteract that and continue to have a more neutral IRR position. 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 (VP of Banking)

Got it. If we do not get the cuts this year, would you expect margin expansion then, given the kind of the fundamental tailwinds that you have the rest of the year?

Mark Kochvar (CFO)

Yeah. To a limited degree. We think there might be a few basis points there as well. That would be probably a positive for us if the Fed were to be on hold the rest of the year.

Daniel Tamayo (VP of Banking)

Got it. Okay. All right. Thanks for all that color. Appreciate it, guys.

Mark Kochvar (CFO)

You bet.

Chris McComish (CEO)

Thank you.

Operator (participant)

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.

Sharon Gee (Research Analyst)

Hello. This is Sharon Gee on for Manuel. You guys talked about pipelines being up 40% from year-end and kind of that growth acceleration expectation throughout the year with the new hire pipelines building in first half for that second-half growth. What are your hiring expectations for this year compared to maybe 2024? Do you see any additional opportunity to add teams or pick up potential producers from here?

Mark Kochvar (CFO)

Yeah. We're currently in the process of recruiting C&I bankers, particularly. These would be adds to staff. Last quarter, we talked about a 15% increase in calling officers that we've achieved. It'll be more onesie, twosie kind of fill-ins this year. 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, until we have a better view on these macroeconomic issues, there may be an impact on the pull-through rates that we're watching from the pipeline that end up becoming customers and those balances being booked onto our balance sheet.

There is 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.

Sharon Gee (Research Analyst)

That's great. Thank you.

Operator (participant)

We have 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 (CEO)

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. Thank you.

Operator (participant)

This concludes today's conference call. Thank you for joining me. This conference.