S&T Bancorp Inc (STBA) 2025 Q2 法說會逐字稿

Welcome to the S&T Bank Corp second 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.

Alright, thank you. Good afternoon, everyone, and thank you for participating in today's earnings call. Before we begin the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors.

This 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 of 2025 earnings releases 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.

There's 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 Dave Antolik, S&T's President.

And now I turn the program over to Chris. Chris?

Mark, thank you and good afternoon everybody and thank you for being on the call. I'm going to begin my comments on page 3, and we look forward to your questions as we get to the wrapping up our comments.

Before I get started, I do want to thank our employees and shareholders and others listening onto the call. And to our leadership team, as always, thank you for your great work. These results are yours, and you should certainly be very proud.

Over the past several years we've made significant strides in positioning our company for long-term success. You will see that focus in the numbers we discussed today, including first by strategically repositioning our balance sheet to reduce asset sensitivity. We've enhanced our ability to drive consistent net interest income growth.

Through the, throughout the interest rate cycle. Second, our focus on improving asset quality is laid a strong foundation for growth, enabling our shift in our intentions to that growth. And finally, our continued investment in our deposit franchise has resulted in a solid deposit mix with non-interest bearing deposits representing 28% of our total deposits and eight straight quarters of deposit growth while maintaining a very healthy net interest margin.

Together these strategic initiatives have created a solid platform for current strong performance and our confidence in our future. Additionally, this quarter's loan growth has driven total assets to over $9.8 billion. As we've shared on previous calls, we remain very optimistic about our ability to pursue future inorganic growth opportunities. Our robust capital levels certainly gives us a lot of flexibility.

At the same time, we are committed to a disciplined approach that aligns with our long-term strategic objectives, and we have a clear path to $10 billion through organic growth in the coming quarters. In summary, I'm very excited about how we're executing, delivering for our customers, and building our company for the future.

Turning to page 3, looking at the quarter, Q2 was another quarter of strong earnings and returns. EPS of $0.83 and net income of $32 million while ROA came in at 1.32%, and our PPNR remained very solid at 1.73%.

Our PPNR was aided by both NIM expansion increasing to a robust 3.88%, up 7 basis points link quarter, while net interest income rose to almost 4%. Asset quality and asset growth were both solid as loans increased 5% while the ACL dropped 2 basis points link quarter.

Well, customer deposit growth was somewhat muted, as I said earlier, DDA balances remained very impressive at 28%. While contributing almost 2/3 of our overall deposit growth in the quarter. Expenses were a little bit higher this quarter due primarily to some incentive accrual catch up because of our performance, and Mark's going to get into that detail. I'm going to stop right now, turn it over to both Dave and Mark. Don't want to steal their thunder.

Dave's going to talk a little bit more about the balance sheet as well as asset quality. Dave.

Great. Thank you, Chris, and good afternoon, everyone. Referring to page 4 of the earnings supplement, you'll see the continuation of our organic growth trends. Evidenced by annualized loan growth of just over 5% or $98 million in Q2. This growth was driven in large part by our commercial real estate balances which experienced another solid quarter, increasing by $58 million.

Categories of commercial real estate growth include multi-family and our retail segments. We also saw solid performance from our mortgage and home equity businesses, which combined for $26 million in net growth. Although C&I balances were flat for the quarter, we've seen an increase in calling efforts and pipelines in this category.

The total commercial pipeline is now approximately 60% CRE and 40% C&I and overall remains robust. We believe that we can consistently deliver loan growth in the high mid-single digit range for the second half of 2025 by maintaining CRE mortgage and home equity activities and by executing on a strong pipeline of C&I opportunities. In support of these activities, we've added four new commercial bankers since the beginning of Q2, including a new C&I team leader in Central Ohio.

Turning to deposits, as Chris mentioned, Q2 yielded our eigth consecutive quarter of customer deposit growth as we continue to leverage our banker-driven customer relationship sales process, which is supported by a maturing and robust deposit exception pricing platform. That focuses on delivering first-class customer experience while maintaining our pricing discipline. In total, deposit balances grew by $28 million or 1.42% annualized in Q2.

As Chris mentioned from a mixed perspective, our growth in Q2 was largely driven by CD and money market activities, but we're very proud of our ability to track and maintain non-interest-bearing DD balances, and those balances represent 28%. Of total deposits and grew by $18 million in the quarter.

Turning to page 5, which provides an update on our asset quality, our allowance for credit losses declined by 2 basis points from 1.26% to 1.24% of total loans. This reduction is an outcome of our teams focused on maintaining reduced levels of MPAs as depicted on the slide, as well as maintaining a lower level of CNCs. In total, CNCs remained stable for the quarter.

Charges were modest and in line with our expectations at $1.2 million for the quarter. As mentioned last quarter, we continue to monitor the potential impact of tariffs and a changing economic landscape. To date, these issues have had no impact on our growth, including pull through rates from our pipelines, and we've heard little concern from our. Customer conversations relative to this issue have quite recently, and businesses continue to focus on managing the variables that they can directly control.

Finally, our credit credit risk management practices rely heavily upon the collection of data and analysis of pertinent industry and customer specific information. That data informs the banker led conversations that I spoke of. And we use that data and those conversations to aggregate a segment specific and overall credit risk.

I'll turn it over to Mark.

No thanks, Dave. Second-quarter net interest income improved by $3.3 million, 3.9% compared to the first quarter. The net interest margin expanded by 7 basis points and combined with loan growth of 5% to produce the best quarterly growth we have seen in this revenue item since 2022.

That marginal improvement came from earning asset pricing in both loans and securities combined with the stable cost of funds. On the asset side, we saw additional benefits in the securities book with the restructuring we executed at the very end of the first quarter, and with loans we saw overall positive repricing of about 16 basis points.

On the funding side, favorable CD pricing was offset by deposit and funding exchanges, along with some but more limited deposit exception pricing. We expect the margin to stay fairly stable if the Fed cuts rate twice this year as expected. There's some limited upside for us in a higher for longer scenario.

The next slide on that income increased by $3.1 million in the second quarter, primarily due to the security through positioning loss of $2.3 million in the first quarter that I referenced. Second quarter also saw a rebound in consumer activity from the first quarter, which is typically seasonally low for us.

Our expectations for fees going forward remains at approximately $13million to $14 million per quarter. Expenses on the next slide increased by $3 million in the second quarter compared to the first. Variances were concentrated in salaries and benefits.

Base salaries were up about $900,000. About 2/3 of that was related to the annual merit increases which became effective in the second quarter, and the rest with the new hires primarily in the production areas that Dave referenced. Incentives were up about $1.2 million, with most of that being performance related in both our long term and annual plans.

And finally, our self-funded medical expenses increased by about $1.2 million. Well, we typically see an increase in medical spends in the second quarter compared to the first. The first quarter is typically lower due to resetting of annual deductibles. The increase this year in the second quarter was about double what we typically see.

Moving on to other expense categories, the quarterly variances in other taxes and other offsets and are related to Pennsylvania shares tax credit programs. And finally, professional service services increased by about $500,000, mostly due to the timing of various projects.

Well, some of the expense increase we had in the second quarter is temporary, the base salary increase and some of the medical, we do expect to recur. Our quarterly expense run rate, we now expect to be approximately $57million to $58 million for the second half of the year.

Next, in capital, the TTE ratio increased by 18 basis points this quarter with AOCI improvement contributing 8 basis points of that strong retained earnings was offset by asset growth for the remainder. Most regulatory ratios declined slightly due to risk weighted asset growth, which also included an increase of over $80 million in loan commitments.

Our TCE and regulatory capital levels position us well for the environment and will enable us to take advantage of organic or inorganic 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.

I just want to start on some of the margin inputs here and in particular looking at funding costs where you saw things stabilize in the quarter, how do you see the progression there or from here with the idea being to ramp up the pace of loan growth, maybe just thinking about a flat rate environment for a second, could we see some upward pressure on deposit costs just given the need to, fund the forward loan growth?

Well, to the extent that, we're successful in our deposit raising efforts, over and above, we should be able to offset some of that with a decrease in borrowings which are similarly priced, but. The incremental margin that we're getting, might be a little bit lower than the 3.88%, so there could be a little bit of pressure on growth on the margins.

Okay, got it. And then just to clarify, you've mentioned perhaps, in a higher for longer, environment, there being potential upside. Could you just quantify that a little further and just talk about the drivers, in the event that unfolds.

That's the benefits that we've been seeing just in the repricing on the on the both the security side and the and the and the loans. Along with the swap book that is maturing for us to receive swap book we have about 50 million maturing each time, so we'll get a little bit more of those benefits in a flat in a flat environment versus having to be more aggressive on the deposit repricing side should rates drop down, but it'll probably be in a couple basis point range. It's not it's not that significant, a couple, maybe a basis point or two per cut or as time goes on if they don't cut.

Okay, Got it. That's helpful. And then, it sounds like there's still a lot of confidence in hitting, that mid to high single digit loan growth, but pace of growth in the back half of the year, which would seem to put you over $10 billion by December 31, is that kind of what you're planning on? Is that the most likely scenario or you, are you given much thought to, managing below that level? How do you think about that?

It'll be, I mean, if we hit the numbers that we expect it will be close, so we'll just play it by ear and see how that goes at the end. If it's close, yeah, there's a few things we can do to stay under to maintain the the under 10 billion for another year, but we're not going to do that for very long, it's just be a one time thing.

Okay, got it. And if I could just maybe sneak one last one I'm just on M&A, it seems like we're seeing more deals get announced. So just curious the pace of conversations from your standpoint, I know you mentioned in the prepared remarks, Chris, that you know that remains a critical part of the strategy, but just curious how things might be developing on that side just as we've seen, bank share prices do better here, I'm not sure how that's informed discussions and just the likelihood of getting something penned.

Yeah, these are, Justin, thanks for that question, and these are all long term relationship building exercises, and we're we're very diligent about that with those companies that we have potential interest in. So, the relations relationships continue to be built. I would agree with you that, the lots of, a lot less uncertainty today. In the market than there was back three months or four months ago. So, people are looking to move forward, and we would expect to be a participant. So overall, positive conversations.

Okay, got it. And then maybe just geographically speaking, and I know you've discussed it before, but is there any reason to think, the focus has shifted at all, there are certain areas of your footprint or contiguous markets that, look more favorable today, what's the thinking there?

So, we're still very focused on how we define, our core markets of. Today, Pennsylvania and Ohio and then stretching a little further south and east into the Virginia, Maryland and DC markets, all of that all of those are attractive to us.

Daniel Tamayo, Raymond James.

Maybe first on credit, that that's been a very good story for you guys for the last several quarters are a kind of the early-stage stuff has come down and then that really that charges have been almost nothing. Curious kind of where you guys see it going from here, with, reserves down to '124 of loans and. A net charge off bouncing around kind of at the near zero levels if you, if you've got thoughts on kind of a more normalized rate now that you're down at these levels.

Yeah, I think at this point, Dan, we've focused on stabilizing. So, if we can keep NPLs at these levels, they're exceptionally low, as and if we can continue to keep CNC a new formation of NPL, if we can ward that off, we saw a little bit of rotation in and out of CNC during the quarter.

And of course, as we as we grow, we're going to need to provision for that growth. So, I think those are the variables that are going to drive provisioning. I don't anticipate significant charge offs. There may still be some room for improvement in CNCs, but really we're looking at trying to stabilize and maintain our asset quality at this point.

And then, you were right on. I mean this is a good three years' worth of work. On our team's behalf and it was, rotation of assets that just didn't fit our long-term strategy and the team has done really good work there and as I said in my earlier remarks, since about midpoint last year, our focus has been very much on growth versus, replacement of that which we were which was running off.

Great. So I guess at the end of the day, the reserves feel like we've hit kind of a stabilization point at this point, or you think that there may be still a little bit left.

There may be a little bit of room for improvement but not a lot.

Yeah, I mean, we were in the mid '140s, now we're at '124, so, we're getting closer to the stabilization point.

Got it. Okay. And then maybe just a clean-up question, related to the $10 billion crossing that was asked earlier, just if you could remind us what the what the Durban hit is, I think I have, just over $6 million as an annualized number in my notes, but if that's changed at all and if there's any other kind of impact from crossing $10 billion that you would expect.

It's around between $6 million and $7 million, the Durban, we feel like we've done a lot of the infrastructure building, so we don't anticipate a lot of expense, tied directly to the $10 billion. There's always expenses as we grow, but nothing else meaningful that's specific to the cross.

Kelly Motta, KBW.

Maybe kicking back to loan growth, Chris, if I caught in the prepared remarks, it sounded like you're more optimistic for growth to. Potentially bump up here in the back half of the year. You've had a really strong start to the first half. Just wondering if you could go into a bit more detail as to where you're seeing the most opportunities, whether by market or specific categories, which of those would be the primary drivers of growth.

I'll take that one. Yeah, thanks Kelly, for the question. So, we saw CRE growth kind of year-to-date in the 7% range. If we can continue to maintain that growth, our pipelines would tell us that we can, as well as the home equity and mortgage growth, which has been kind of 5% maintain that growth we've seen essentially no growth in C&I, so that's C&I growth. That would come from the pipeline that I spoke of would augment total growth and get a fit to a number that is above what we saw in the first two quarters.

We've seen commercial construction commitments increase during the past two quarters, so there'll be some definite funding that comes in from that book. We've seen overall commitments rise as well, including C&I, so if we can maintain an existing utilization rate from those two books, we'll see supplemental loan growth there as well. So if you kind of blend all those things together, it's not one specific concentrated area of outsized growth. It's good consistent growth throughout all of our business lines and each of the categories.

Great, and I believe you've added some commercial producers or or teams here wondering how if that's you know something you're looking to do here or you feel like at this stage near term you have the the team in place just any any color around that as a driver would be helpful.

Yeah, so we added 4 bankers since the beginning of Q2 primarily focused on C&I. We will continue to recruit and add bankers to the commercial banking and business banking teams. That's where we see the most opportunity.

They're largely focused on, balancing their efforts between improving deposits, raising deposits, and booking loans as well. So, we think of them as bankers and in a well-rounded way we know we need to balance that deposit growth along with the loan growth.

So, we believe that those additions are benefiting us by improving our pipelines. That's really what we saw on Q2, particularly in the C&I pipeline. It takes a little bit of time, those calling processes and calling time frames take a little while, so we expect those to bear fruit in Q3 and Q4.

Got it, thanks. Last question to me, not to beat a dead horse on M&A, but obviously it's becoming more of the discussion that could be hopefully.

Hopefully we'll beat a live horse.

But can you just refresh us on kind of the size you feel you need to be to absorb the $10 billion crops and yeah, how would that be for potential partners and how large you would go?

Yeah, so the Mark touched on it a little while ago from the standpoint of. The real hit to the $10 billion cross is the revenue hit with Durbin. We have built the team out from infrastructure standpoint to, and we worked, closely with our regulators in preparation for all of this.

So, there's nothing from an infrastructure standpoint, nothing meaningful from a staff standpoint that would cause any increase in expenses and how we run the company. Because we're over $10 billion so the revenue hit of $6million or $7 billion you could say, replacing that would be a driver from a from an M&A standpoint, but hopefully an M&A transaction contributes a lot more than just the $6million or $7 million.

We're looking at our geography. We're looking at, from a size standpoint we've talked about, in that, billion dollars to $5 billion range, seems to make a lot of sense for us and that that's how we're looking at it and considering it. Got it. That's the side.

Manuel Navas, DA Davidson.

This is [Sharon G] on from Manuel. Thank you for taking my questions. For my first question, I want to seasonally weaker on deposits this quarter. Could you talk a little bit a bit about what the pipeline for deposit growth looks like going into the second half of this year?

Yeah, the pipeline at this point is similar to what we saw in in Q2. We're focusing activities on particularly in the business space, so the bankers that I spoke about and some of the treasury management officers that that we've added recently really focused on that space.

And historically Q3 has always been boosted by public funds, deposits, particularly in municipal space as you know fall taxes hit, so we'll have some tailwind in in Q3 relative to the seasonal activities, but our focus is really on building that pipeline and driving more growth.

The deposit growth in Q2 was Mainly driven by consumer activities, so I'm really proud of the job that we did there. The overwhelming majority of that balanced growth came out of those activities. So more focus on business and treasury management and a continuation with what we saw in the consumer bank.

Great, thank you. And then could you speak a little bit about to like what the competitive landscape looks like right now and potentially also what new loan yields are coming on at right now versus what's coming off.

Yeah, I, I'll just speak to the competitive landscape, it's, continues to be an interesting conversation, and geographically, different, right? So, we've got an eastern Pennsylvania. Presence we've got the presence here in western Pennsylvania where we got our core markets where we have significant market share and in Ohio, we're more of a of a disruptor.

So, for us it's about our ability to balance the customer conversation with the exception pricing process that we've put in place that allows us to be competitive. All that being said, we're really happy that we were able to drive some deposit growth this quarter where many others haven't, but we know we can do better and we've got some big bars set for ourselves in terms of goals for the for the balance of the year. And Mark, I don't know if you want to take the yield.

So overall weighted average, the new loans coming on about '652 versus a payment or payoff rate of '636, so we picked up about 16 basis points on the kind of the best replacement spreads are still coming out of the mortgage area where we're picking up over a basis over 100 basis points.

The commercial since a lot of that's, floating, that's pretty flat, so the replacement's pretty close because a lot of that activity happens on the floating side and then business side, we're still picking up about 50 basis points on the on the turnover. But overall, it's about '16 for the quarter.

Matthew Breese, Stephens.

Amen, I'm sorry if I missed this. I think you touched on it at least once or twice in a different way. What was the back half of the year in guide assuming, we follow the curve and there's a couple of cuts.

If we with a couple of cuts we expected them to stay pretty stable to where it's at right now, so in that kind of mid '380s. Should hold Got it. Okay.

And then on the securities front, you'd mentioned the increase in yields this quarter was tied to the restructuring at the end of the first quarter. Could you help me out? What are incremental securities being purchased at yield wise today?

What types of securities are interesting to you? And then if you take away the restructuring, what is kind of the normal pace of yield increase to be expected there?

Yet so. Well, the new stuff we're putting on probably between 4.5% and 5%. We run a pretty conservative security portfolio, so we stick with primarily agency backed. CMOs, we prefer to have get pretty good structure with those try and get some lockouts that help us on the we still think there's a we're a little bit tilted toward rates down risk, so we'll still buy some structure and a little bit of term on the on the security side and so we're right now in that kind of 4.5% to 5% we're putting things on with without the restructuring.

I think we're getting around probably 50 million of maturities and cash flow back per quarter, so that's our replacement opportunity going forward. That's still most of that is coming off with a three handle or lower so there's still some pickup opportunity, but it's getting thinner.

Okay. And then, I wanted to talk about access capital, your tangible common ratio, I think is over 11%. Curious what you think is, kind of the normal place you should be or ideal target. And how do you lever up because it doesn't feel like, mid-single digit growth or mid to high single digit growth levers you up very quick.

Yes, so I mean that's one of the reasons, we talk a lot about opportunities on the inorganic side. We think that that capital we have at over 11% is well more than we need to run the bank, so we are actively looking for voices. Like that, we at this juncture don't have the internal growth opportunities to be able to use that effectively, so that is, part of the of the focus on the M&A. Okay, we've got more comfortable with that, something in the nine area or even lower in terms of tangible. Okay, last one for me.

The good senator Dave McCormick was out last week, held an energy and innovation summit, right in your backyard in Pittsburgh.

I was there, Matt.

Yeah. I mean, very cool, $90 billion of infrastructure investments, data centers, energy, power, a lot of which is across your footprint. Tell me about what you learned and how good it could be for Pennsylvania.

Well, it's generating a lot of enthusiasm and optimism here, particularly here in western Pennsylvania and also very close to our headquarters here in Indiana, one of the biggest projects in the state is the power plant, the power generation facility that's being built in Homer City, Pennsylvania, which is Just down the street, it's a home market to S&T Bank, where we've been a long time.

We have meetings with lots of officials talking about everything that's going on and a number of customers that are involved in various aspects of things. So it's generated a heck of a lot of enthusiasm here throughout all of Western Pennsylvania and obviously Pittsburgh's important.

But right here in the more community markets in Western Pennsylvania critically important. So we're very involved and working hard to be engaged. I was there the entire time last week at the event and it was neat to see and Dave did a great job putting it on.

David Bishop, Hubby Group.

Most of my questions have been asked and answered, but I'm curious just in terms of overall loan originations production this quarter versus payoff this quarter versus last, I'm not sure if you have that number handy. I would be curious to hear how that how that trends.

Thanks. Yeah, I know the payoffs were down slightly, but very similar to the last quarter, just down very slightly.

Got it. Do you have the production originations? Just curious how that compared as well.

Yeah, production. Production was up quarter over quarter. Similar to four of last year, but Q4 of last year we saw higher payoff levels, so it slightly lowers payoffs, better production. Resulting in the nearly $100 million in growth that we saw.

And the good news is that the pipeline was effectively replaced as well. Got it appreciate the color. Sure thing.

And that does conclude today's Q&A session. I would now like to turn the call over to Chief Executive Officer, Chris McComish, for closing remarks. Chris?

Okay, well, thank you all for your engagement and the great dialogue. We really appreciate your interest in our company, and we look forward to, we don't talk or see you before next quarter's call, we know we'll talk to you then. Thanks so much. Bye.