Executive Summary / Key Takeaways

• ST Bancorp delivered a strong first quarter in 2025, exceeding expectations with solid profitability metrics and demonstrating momentum across key strategic priorities.
• The company's focus on building its deposit franchise continues to yield significant results, driving strong customer deposit growth for the seventh consecutive quarter and enabling a reduction in higher-cost wholesale funding.
• Asset quality has shown consistent improvement, with notable reductions in criticized and classified assets and nonaccrual loans, contributing to a lower provision for credit losses in Q1 2025.
• Loan growth is gaining traction, supported by expanding pipelines and strategic investments in customer-facing bankers, with management anticipating an acceleration to high mid-single-digit growth in the latter half of 2025.
• STBA is well-positioned for its anticipated organic crossing of the $10 billion asset threshold in the second half of 2025, having built the necessary infrastructure and identified strategies to mitigate the impact of associated regulatory requirements.

A Foundation for Growth: People, Purpose, and a Disciplined Approach

ST Bancorp, Inc. (NASDAQ: STBA) operates as a community bank holding company headquartered in Indiana, Pennsylvania, with a history stretching back to the establishment of its principal subsidiary, S&T Bank, in 1902. Serving communities across Pennsylvania and Ohio, the company provides a full spectrum of financial services, including retail and commercial banking, cash management, trust, and brokerage services. At its core, STBA is guided by a "PeopleForward" purpose, emphasizing personal banking relationships built on trust – a strategic differentiator in a competitive landscape dominated by larger, more transactional institutions.

Over the past three years, STBA has embarked on a deliberate strategic evolution, laying a robust foundation for future growth. Initially, this involved bolstering critical control functions such as credit, risk management, audit, and compliance, adding approximately 75 to 100 employees to strengthen the company's infrastructure, particularly in anticipation of crossing the $10 billion asset threshold. More recently, the focus has shifted towards enhancing revenue generation capabilities, marked by a 15% expansion of business and commercial banking teams through active recruitment and the introduction of a proprietary customer relationship sales process in early 2024. This strategic pivot, underpinned by a commitment to talent and engagement, is now translating into tangible operational and financial momentum.

In the broader banking landscape, STBA competes directly with larger regional players like PNC Financial Services Group (PNC), KeyCorp (KEY), and Huntington Bancshares (HBAN), as well as smaller regional and community banks such as NB Bancorp Inc. (NBBK) and various credit unions. While larger competitors benefit from significant scale, extensive branch networks, and often more advanced digital platforms (PNC's digital platforms offer faster processing, KeyCorp utilizes AI-driven tools), STBA leverages its deep community ties and personalized service model to foster higher customer loyalty, particularly in its established markets. The company's strategic investments in operational tools like the deposit exception pricing platform and the proprietary sales process aim to enhance efficiency and customer engagement, though it acknowledges a lag in digital capabilities compared to some larger peers. This positions STBA as a stable, community-oriented alternative, seeking to grow market share (estimated at 1-2% in core markets) through relationship banking and targeted investments, rather than competing solely on scale or cutting-edge technology.

Financial Performance: Building Momentum in a Dynamic Environment

STBA's strategic focus is yielding solid financial results, as evidenced by its performance in the first quarter of 2025. The company reported net income of $33.4 million, or $0.87 per diluted share, an increase from $31.2 million, or $0.81 per diluted share, in the first quarter of 2024. This translated into a return on average assets of 1.41% and a return on average tangible shareholders equity (non-GAAP) of 13.29%.

Net interest income remained relatively stable year-over-year at $83.3 million in Q1 2025, compared to $83.5 million in Q1 2024. The net interest margin (NIM) on an FTE basis saw a slight decrease from 3.84% to 3.81%. This stability, despite a decline in the average yield on loans (down 26 basis points to 5.99%), was primarily driven by a decrease in interest expense (down $2.8 million) due to lower levels of wholesale funding and a reduction in the cost of interest-bearing liabilities (down 16 basis points to 2.87%). The average yield on securities, however, increased by 78 basis points to 3.59%, partially offsetting the lower loan yields, reflecting the company's proactive repositioning efforts.

Noninterest income decreased by $2.4 million to $10.4 million in Q1 2025, primarily due to $2.3 million of realized losses from the strategic repositioning of $49.3 million of securities into longer duration, higher-yielding assets. Excluding these losses, the core noninterest income run rate remains around $13 million to $14 million per quarter, supported by consistent performance in areas like debit and credit card fees, service charges, and wealth management.

Noninterest expense remained largely consistent at $55.1 million in Q1 2025 compared to $54.5 million in Q1 2024. Increases in salaries and employee benefits (due to merit increases, restricted stock expense, and higher incentives) and occupancy costs were largely offset by decreases in marketing, other taxes, and professional services. Management anticipates a quarterly expense run rate of $55.5 million to $57 million for the remainder of 2025, reflecting continued investments in production capacity and the customer experience.

Balance Sheet Strength and Improving Asset Quality

The balance sheet reflects the company's strategic focus, particularly on deposit growth. Total assets stood at $9.72 billion at March 31, 2025, relatively unchanged from December 31, 2024. Total portfolio loans increased by $93.4 million to $7.84 billion, driven by growth in commercial real estate ($74.2 million increase) and commercial construction ($27.3 million increase), partially offset by a decrease in commercial and industrial loans ($19.9 million decrease). Consumer loans also saw an increase of $11.8 million, primarily in consumer real estate, as the company continues to hold mortgages in its portfolio.

Deposit growth remains a significant strength. Total deposits increased by $109.8 million to $7.89 billion at March 31, 2025. This growth was entirely driven by a $134.7 million increase in customer deposits, allowing the company to reduce brokered deposits by $24.9 million. This consistent customer deposit growth has been instrumental in improving the funding mix and reducing reliance on higher-cost borrowings, which decreased by $55.0 million to $195.3 million in Q1 2025. The company maintains a strong liquidity position, with $923.1 million in highly liquid assets (interest-bearing deposits and unpledged securities) representing 9.50% of total assets, and available borrowing capacity exceeding uninsured deposits ($2.70 billion at March 31, 2025).

Asset quality continues its positive trajectory. The Allowance for Credit Losses (ACL) decreased by $2.5 million to $99.0 million, or 1.26% of total portfolio loans, at March 31, 2025, down from 1.31% at December 31, 2024. This decrease was primarily driven by a $4.2 million reduction in specific reserves for individually evaluated loans, related to the partial pay-off of a $10.7 million commercial and industrial relationship that had gone nonperforming in Q4 2024. While specific reserves decreased, the company saw an increase in its quantitative reserve due to loan growth and downgrades in the CI portfolio, and a $0.5 million increase in its qualitative reserve reflecting concerns in the economic environment. Nonperforming assets decreased by $5.6 million to $22.4 million, or 0.29% of total portfolio loans plus OREO, primarily due to the partial pay-off of the aforementioned CI relationship. Criticized and classified loans remained stable in Q1 2025, following a significant 31% reduction in 2024. Management believes they are nearing the bottom of this cycle for C&C levels, with some room for further improvement relative to peers. The company employs a disciplined credit risk management approach, including detailed data collection, proactive conversations with borrowers regarding foreign trade exposure and potential impacts, and re-underwriting adjustable-rate loans to current conditions. Their underwriting standards for new commercial real estate construction, particularly multifamily, remain conservative (25-30% equity, LTV < 65%, DSCR > 120% at 25-year amortization).

Outlook: Targeting Accelerated Growth and Stable Margins

Management expresses confidence in STBA's ability to continue its positive momentum despite market uncertainty. Strategic priorities for 2025 and beyond remain centered on growing the deposit franchise, maintaining core profitability and asset quality, and enhancing talent and engagement.

The outlook for loan growth is increasingly positive. Total pipelines were up nearly 40% since year-end as of the Q1 2025 call, primarily in the commercial and consumer segments. Management is guiding for mid-single-digit loan growth in the short term, accelerating to high mid-single-digit growth in the back half of 2025. This acceleration is expected to be driven by the newly hired bankers building their pipelines throughout the first half of the year.

The net interest margin is expected to remain relatively stable over the next several quarters, even if the Federal Reserve becomes more aggressive with rate cuts. Management believes the balance sheet is positioned close to neutral interest rate risk. Factors supporting NIM stability include favorable repricing opportunities in fixed and adjustable-rate loans and securities, the maturity of the $450 million received fixed swap ladder beginning to roll off, the short duration of the $1.8 billion CD portfolio allowing for repricing benefits, and the ability to manage non-maturity deposit rates and exceptions. Bond restructurings totaling $193.6 million over the past four quarters are projected to contribute approximately $5 million to net interest income in 2025. A stable NIM combined with the projected loan growth is expected to translate into net income improvement going forward.

Based on the anticipated high mid-single-digit loan growth, STBA expects to organically cross the $10 billion asset threshold sometime in the second half of 2025. The company has been preparing for this transition for several years, building the necessary infrastructure in control functions to meet the associated regulatory requirements. Management anticipates an initial Durbin impact of approximately $6 million to $7 million, which they plan to mitigate through continued organic growth and by deepening fee income sources, such as treasury management and potentially shifting more mortgage production to sales.

Risks to Consider

While the outlook is positive, investors should be mindful of potential risks. Macroeconomic uncertainty could impact loan demand, credit quality, and deposit flows. Although asset quality has improved significantly, loan growth and economic conditions remain primary factors influencing the provision for credit losses. Interest rate risk, while managed to a near-neutral position, could still impact profitability, particularly in a rapidly declining rate environment where asset yields might decrease faster than funding costs. Competition from larger regional banks, credit unions, and fintechs remains intense, potentially pressuring loan spreads and deposit costs. Refinancing risk exists as rates decline, although the company utilizes rate protection measures.

Conclusion

ST Bancorp is demonstrating solid execution on its strategic priorities, translating into strong recent financial performance and a positive outlook. The company's consistent success in growing its customer deposit base provides a stable and cost-effective funding source, a key advantage in the current environment. Coupled with significant improvements in asset quality, STBA is well-positioned to pursue accelerated loan growth, supported by investments in its banking teams and expanding pipelines. The anticipated organic crossing of the $10 billion asset threshold marks a significant milestone, for which the company has proactively prepared. While macroeconomic conditions and competitive pressures present ongoing challenges, STBA's disciplined approach, foundational strength, and clear strategic focus suggest continued momentum, aiming to deliver enhanced profitability and shareholder value as it executes its growth plan.