S&T Bancorp, Inc. Q3 FY2025 earnings call

• Strategically repositioned balance sheet to reduce asset sensitivity for consistent net interest income growth through the interest rate cycle.
• Continued investment in deposit franchise delivered solid deposit mix with noninterest-bearing deposits at 28% of total deposits and average DDA growth over $50 million vs Q2.
• Q3 had strong earnings with EPS $0.91, net income $35 million, ROA 1.42%, PPNR 1.89%, NIM 3.93%.
• Loan growth was driven by CRE with construction commitments growing, while C&I balances declined due to payoffs and credit exits.
• Asset quality: NPAs increased over low base but remain manageable, allowance for credit losses decreased 1 basis point linked quarter.
• Noninterest income saw slight increase, expenses well managed with efficiency ratio at 54.4%.
• Capital ratios improved with TCE and regulatory capital ratios positioning well for growth opportunities.

In the third quarter, S&T Bancorp had strong earnings and returns. EPS was $0.91, net income was $35 million. ROA was 1.42%, up 10 basis points from Q2. PPNR was 1.89%, up 16 basis points. NIM expanded to 3.93%, up 5 basis points linked quarter, and net interest income rose more than 3%. Loan balances grew by $47 million or 2.3% annually, with CRE activities driving growth while C&I balances declined. Consumer loan activity grew in line with expectations at $37 million or approximately 6% annualized. Noninterest-bearing deposits represented 28% of total deposits, and average DDA growth was over $50 million versus Q2. The efficiency ratio dropped to 54.4%.

• Guiding to mid-single-digit loan growth in Q4.
• Expect NPLs to stabilize and potentially reduce over balance of 2025 and into first quarter of 2026.
• Quarterly expense run rate expected to be approximately $57 million to $58 million for next several quarters.
• Share repurchase authorization in place for $50 million.
• Continued focus on organic growth to reach $10 billion and above.

• Higher payoffs affecting asset growth.
• Budget impasses in Pennsylvania and national level creating market uncertainty.
• Competitive pressure on deposits, especially on CD side after rate cuts.
• Credit risk related to economic and political environment, including budget impasses impacting credit health.

Q: Wanted to start out on loan growth in the quarter and kind of looking forward. I know you went through some of this, but could you give more of a sense for the puts and takes here between origination activity? And then maybe how impactful paydowns were, which I think you called out?

A: Yes. So paydowns were up quarter-over-quarter, and again, higher than what we experienced in Q3 of last year. So the end result was a little lighter than what we had expected. CRE activity remains strong. As I mentioned, the construction commitments grew during the quarter, pointing towards better growth in Q4 and into Q1. Consumer, we believe, will remain at somewhere in the mid-single digit, similar to the 6% that we experienced in Q3. And we're working hard to drive better C&I growth.

Q: Maybe first just on the deposit side. You touched on it, Mark, with your expectation for your ability to maintain the margins in the next several quarters. But just curious what you're seeing on the competition side kind of recently last few months, and what you're thinking in terms of betas for these cuts that -- the September cut and any future cuts that we have coming?

A: We did -- after the first cut here in September, we -- or last September, we did see a little bit more competitive pressure than we had expected particularly on the CD side. There seem to be a little bit of reluctance on the part of many competitors to reduce some of those short-term rates as much as we had expected. So we made some adjustments in how we handle some of the exception pricing there. We think that with several cuts will actually -- we'll catch up. I think there's a little bit of psychology going through the 4-handle and customers being attached to getting that 4-handle rate. And so I think that will improve assuming that Fed keeps on going with multiple cuts. On the beta side, our loan beta overall is kind of around 40%. So we're targeting right around there or a little bit better over time with the CD repricing included to be able to match that.

Q: Most of mine have been asked and answered at this point, but I guess piggybacking on the credit question, you did have the migration, although it sounds like you feel levels are low and you feel overall good. Is there any specific areas understanding you guys don't really have exposure to NDFIs that you would direct analysts to watch more carefully either at S&T or just in the bank space more broadly?

A: No. I think, in fact, Kelly, beyond what I mentioned relative to kind of budget crisis, credit is performing as we would have expected. And here in Western Pennsylvania, there are things like a big data center that's being built outside of Indiana here in Homer City, Pennsylvania, that should add additional opportunity for growth and improving credit health in the region as some very large investments are made. And we obviously look through our concentrations relative to commercial real estate. We're very comfortable with where we stand from a diversification perspective, both construction versus permanent, and all the asset classes. And then we are closely managing our C&I book to make sure that we're not getting too far out on our risk scale.