Earnings Call Transcript - STBA Q2 2025

Operator, Operator

Welcome to the S&T Bancorp Second Quarter 2025 Conference Call. I will now hand the call over to Chief Financial Officer Mark Kochvar. Please proceed.

Mark Kochvar, CFO

All right. 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 2025 earnings release as well as this earnings supplement slide deck can be obtained by clicking on the Materials button in the lower right section of your screen. This will open up a panel on the right, where you can download these items. You can also obtain a copy of these materials by visiting our Investor Relations website at stbancorp.com. With me today are Chris McComish, S&T's CEO; and Dave Antolik, S&T's President. Now I'd like to turn the program over to Chris. Chris?

Christopher J. McComish, CEO

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 in on 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 discuss 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 throughout the interest rate cycle. Second, our focus on improving asset quality has 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 noninterest-bearing deposits representing 28% of our total deposits and 8 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 level 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 linked quarter, while net interest income rose almost 4%. Asset quality and asset growth were both solid as loans increased 5%, while the ACL dropped 2 basis points linked quarter. While 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 is going to get into that detail. I'm going to stop right now, turn it over to both Dave and Mark. I don't want to steal their thunder. Dave is going to talk a little bit more about the balance sheet as well as asset quality. Dave?

David G. Antolik, President

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 multifamily 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 4 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 eighth 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 mix 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 noninterest-bearing DDA 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 team's focus on maintaining reduced levels of NPAs as depicted on this slide as well as maintaining a lower level of C&Cs. In total, C&Cs 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 base. Customer conversations relative to this issue have quieted recently, and businesses continue to focus on managing the variables that they can directly control. Finally, our credit risk management practices rely heavily upon the collection of data and analysis of pertinent industry and customer-specific information. That data informs these 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 now turn it over to Mark.

Mark Kochvar, CFO

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. The net interest margin improvement came from earning asset repricing in both loans and securities combined with a 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 mix changes along with some but more limited deposit exception pricing. We expect net interest margin to stay fairly stable if the Fed cuts rates twice this year as expected. There's some limited upside for us in a higher for longer scenario. Next slide on noninterest income, increased by $3.1 million in the second quarter, primarily due to the securities repositioning related 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 remain at approximately $13 million 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 two-thirds 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 our 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 expense increased by about $1.2 million. While we typically see an increase in medical expense 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 offset and are related to Pennsylvania shares tax credit programs. And finally, professional services increased by about $500,000, mostly due to the timing of various projects. While 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 $57 million to $58 million for the second half of the year. Next, in capital. The TCE 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, Operator

It looks like our first question comes from Justin Crowley with Piper Sandler. Justin, please go ahead.

Justin Crowley, Analyst

I just wanted 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 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?

Mark Kochvar, CFO

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.

Justin Crowley, Analyst

Okay. Understood. Could you please clarify your earlier statement about potential upside in a higher for longer environment? It would be helpful if you could quantify that further and discuss the factors involved if that scenario arises.

Mark Kochvar, CFO

We've been experiencing benefits from repricing on both the security and loan sides, in addition to the maturation of our fixed swap book, which is around $50 million each time. In a flat environment, we gain more from this compared to having to be more aggressive with deposit repricing if rates decrease. However, the impact will likely be minimal, probably only a couple of basis points per cut or as time progresses if there are no cuts.

Justin Crowley, Analyst

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, 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 are you giving much thought to managing below that level? How do you think about that?

Mark Kochvar, CFO

If we achieve the numbers we anticipate, it will be close. We'll take it as it comes and evaluate the situation at the end. There are a few strategies we can employ to keep our total under $10 billion for another year, but we won't do that for an extended period; it would only be a temporary measure.

Justin Crowley, Analyst

Okay. Got it. And then if I could just maybe sneak one last one in. 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, 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.

Christopher J. McComish, CEO

Yes, thank you for the question. These are all exercises focused on building long-term relationships, and we are very committed to that with the companies we are interested in. The relationships are continuing to develop. I agree that there is significantly less uncertainty in the market now compared to three or four months ago. Therefore, people are eager to move forward, and we expect to be involved. Overall, there are positive discussions taking place.

Justin Crowley, Analyst

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

Christopher J. McComish, CEO

We are still very focused on defining our core markets today, which include Pennsylvania and Ohio, and we are also expanding a bit further south and east into the Virginia, Maryland, and D.C. markets, all of which we find attractive.

Operator, Operator

And our next question comes from the line of Daniel Tamayo with Raymond James.

Daniel Tamayo, Analyst

Maybe first on credit. That's been a very good story for you guys for the last several quarters as kind of the early-stage stuff has come down and then really the net charge-offs have been almost nothing. Curious kind of where you guys see it going from here with reserves down to 124 of loans and net charge-offs bouncing around kind of at the near 0 levels. So if you've got thoughts on kind of a more normalized rate now that you're down to these levels?

David G. Antolik, President

Yes. 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 you know. And if we can continue to keep C&C in new formation of NPL, if we can ward that off. We saw a little bit of rotation in and out of C&C during the quarter. And of course, 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 C&Cs. But really, we're looking at trying to stabilize and maintain our asset quality at this point.

Christopher J. McComish, CEO

Dan, you were absolutely correct. This represents three years of effort from our team, focusing on assets that didn't align with our long-term strategy. The team has done an exceptional job. As I mentioned earlier, since about the middle of last year, we have primarily concentrated on growth rather than just replacing what was being phased out.

Daniel Tamayo, Analyst

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 do you think that there maybe still a little bit left?

Christopher J. McComish, CEO

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

Mark Kochvar, CFO

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

Daniel Tamayo, Analyst

Got it. Okay. And then maybe just a cleanup question related to the $10 billion crossing that was asked earlier. Could you remind us what the Durbin impact is? I have just over $6 million as an annualized number in my notes, but has that changed at all? And is there any other kind of impact from crossing $10 billion that you would expect?

Mark Kochvar, CFO

It's around between $6 million and $7 million, the Durbin. 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 we grow, but nothing else meaningful that's specific to the cross.

Daniel Tamayo, Analyst

Great. All right. That's all I had. I appreciate the color.

Operator, Operator

And our next question comes from the line of Kelly Motta with KBW. Kelly, please go ahead.

Kelly Ann Motta, Analyst

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?

Christopher J. McComish, CEO

I'll let Dave take that one.

David G. Antolik, President

Yes. 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 and our pipelines would tell us that we can, as well as the home equity and mortgage growth, which has been kind of 5%-ish, maintain that growth. We've seen essentially no growth in C&I. So that C&I growth that will come from the pipeline that I spoke of would augment total growth and get us to a number that is above what we saw in the first 2 quarters. We've seen commercial construction commitments increase during the past 2 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 2 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 in each of the categories.

Kelly Ann Motta, Analyst

I understand you have brought on some commercial producers or teams. I'm curious if you are planning to continue this approach or if you feel that, for now, your team is sufficient. Any insights on this as a potential driver would be appreciated.

David G. Antolik, President

Yes. 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 pipeline. That's really what we saw in 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.

Kelly Ann Motta, Analyst

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

David G. Antolik, President

Hopefully, we'll be the live horse.

Kelly Ann Motta, Analyst

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

Christopher J. McComish, CEO

Mark previously mentioned that the primary impact on the $10 billion threshold is the revenue loss associated with Durbin. We have expanded our team from an infrastructure perspective and have collaborated closely with regulators to prepare for these changes. Therefore, there is nothing significant from an infrastructure or staffing perspective that would increase our operational expenses since we exceed the $10 billion mark. The revenue loss of about $6 million to $7 million could potentially be offset by growth through mergers and acquisitions. However, we hope that any M&A activity will yield significantly more benefits than just offsetting this revenue loss. We are currently evaluating opportunities based on geographic presence and are particularly focused on targets in the $1 billion to $5 billion range, which aligns with our overall strategy.

Operator, Operator

And our next question comes from the line of Manuel Navas with D.A. Davidson.

Sharanjit Cheema, Analyst

Everyone, this is Sharanjit, filling in for Manuel. For my first question, I noticed a seasonally weaker performance in deposits this quarter. Could you discuss what the outlook for deposit growth looks like as we move into the second half of this year?

David G. Antolik, President

Yes. The pipeline at this point is similar to what we saw in Q2. We're focusing activities particularly in the business space. The bankers I've mentioned and some of the treasury management officers we've recently added are really concentrating on that area. Historically, Q3 has consistently benefited from public funds and deposits, especially in the municipal sector, as fall taxes come in. So we can expect some support in Q3 due to seasonal activities. Our primary aim is to build that pipeline and drive more growth. The deposit growth in Q2 was predominantly fueled by consumer activities, and I'm very proud of our performance there. The vast majority of that balance growth stemmed from these efforts. We are placing more emphasis on business and treasury management while continuing our focus on consumer banking.

Sharanjit Cheema, Analyst

Great. And then could you speak a little bit about 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?

David G. Antolik, President

Yes. I'll address the competitive landscape, which remains a fascinating topic and varies by region. We have a presence in Eastern Pennsylvania and a strong position in Western Pennsylvania where we hold significant market share. In Ohio, we function more as a disruptor. Our focus is on balancing customer conversations with the exception pricing process we've implemented to stay competitive. That said, we are pleased to have achieved deposit growth this quarter when many others have not. However, we recognize the potential for improvement, and we have ambitious goals set for the remainder of the year. Mark, would you like to address the yield question?

Mark Kochvar, CFO

Yes. Overall, the weighted average for new loans was approximately 6.52%, compared to a payment or payoff rate of 6.36%. This means we gained about 16 basis points, especially in the mortgage area where we are seeing over 100 basis points. The commercial side, much of which is floating, remains fairly stable. Replacement rates are close since most activity occurs on the floating side. On the business side, we continue to gain about 50 basis points on turnover. Overall, it's around 16% for the quarter.

Operator, Operator

And our next question comes from the line of Matthew Breese with Stephens. Matt, please go ahead.

Matthew Breese, Analyst

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

Mark Kochvar, CFO

We expected net interest margin to remain stable with a few cuts, so we anticipate it will hold in the mid-3.80s.

Matthew Breese, Analyst

Got it. Okay. And then on the securities front, you've mentioned the increase in yield 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?

Mark Kochvar, CFO

The new securities we're adding are likely yielding between 4.5% and 5%. We maintain a conservative approach to our securities portfolio, focusing mainly on agency-backed CMOs. We aim for solid structuring and look for lockout periods to manage our exposure, as we still see some risk related to potential interest rate declines. Currently, we’re positioned in the 4.5% to 5% range for new investments. Excluding any restructurings, we anticipate receiving about $50 million in maturities and cash flow each quarter, which presents our replacement opportunities going forward. Most of these cash flows come from securities yielding around 3% or lower, so while there are still some opportunities for better yields, they are becoming less frequent.

Matthew Breese, Analyst

Okay. And then I wanted to talk about excess 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 quickly.

Mark Kochvar, CFO

Yes. I mean that's one of the reasons we talk a lot about opportunity on the inorganic side. We think that, that capital that we have at over 11% is well more than we need to run the bank. So we are actively looking for ways to deploy that. We, at this juncture, don't have the internal growth opportunities to be able to use that effectively. So that is part and parcel of the focus on the M&A. But we've got more comfortable with something in the 9% area or even lower in terms of tangible.

Matthew Breese, Analyst

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. Talk about...

David G. Antolik, President

I was there about...

Matthew Breese, Analyst

Yes. 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?

Christopher J. McComish, CEO

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 number of customers that are involved in various aspects of things. So it's generated a great deal of enthusiasm here throughout all of Western Pennsylvania and obviously, Pittsburgh is important. But right here in the more community markets in Western Pennsylvania are 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.

Operator, Operator

And our final question today comes from the line of David Bishop with Hovde Group.

David Jason Bishop, Analyst

Yes, 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 trended.

David G. Antolik, President

Yes, I know the payouts were down slightly, but very similar to last quarter, just down very slightly.

David Jason Bishop, Analyst

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

David G. Antolik, President

Yes. Production was up quarter-over-quarter, similar to Q4 of last year. But Q4 of last year, we saw higher payoff levels. So slightly lower payoffs, better production resulting in the nearly $100 million in growth that we saw.

Christopher J. McComish, CEO

And the good news is the pipeline was effectively replaced as well.

Operator, Operator

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?

Christopher J. McComish, CEO

Thank you all for your engagement and the great dialogue. We really appreciate your interest in our company, and we look forward to talking to you before next quarter's call. We know we'll connect then. Thanks so much. Goodbye.