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S & T Bancorp Inc  (NASDAQ:STBA)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 1:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Greetings, and welcome to the S&T Bancorp Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instruction) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Mark Kochvar, Chief Financial Officer. Thank you sir, you may begin.

Mark Kochvar -- Senior Executive Vice President, Finance Division Manager and Chief Financial Officer

Thank you very much. Good afternoon everyone and thank you for participating in today's conference call. Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors, which is on the screen in front of you.

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 fourth quarter and full year 2018 earnings release can be obtained by clicking on the Press Release link on your screen or by visiting our Investor Relations website at www.stbancorp.com.

I'd now like to introduce Todd Brice, S&T's Chief Executive Officer, who will provide an overview of S&T's results.

Todd Brice -- Chief Executive Officer

Well, thank you, Mark and good afternoon everyone. We are pleased to once again announce very solid quarter and full year results. For the quarter ending 12/31 of 2018. We reporting net income of $26.9 million or $0.77 per share versus $9.3 million or $0.27 per share in the fourth quarter 2017 and $30.9 million or $0.88 per share in the third quarter of 2018.

Remember, 2017 results were negatively impacted by a $13.4 million or 38% share adjustment as a result of the deferred tax remeasurement related to the Tax and Jobs Act. In addition, Q3 results were positively impacted by a one-time tax reduction of $2.9 million or $0.08 per share, attributed to our pension contribution. Operating metrics for the quarter were again very, very strong with the return on asset of 1.5%, return on equity of 11.5% and return on tangible equity of 16.82% and the efficiency ratio also improved to 50.64% versus 51.33% in Q3.

For the full year, net income was a record $105.3 million or $3.01 per share versus $73 million or $2.09 per share. When you back out the effect of the deferred tax remeasurement last year, non-GAAP earnings were in 2017 were $86.4 million or $2.47 per share. And again, for the full year, the operating metrics were very, very strong with a return on asset of 1.5%, return on equity of 11.6% and return on tangible common equity of 17.14%.

One of the highlights for the quarter was strong balance sheet growth in both loans and deposits. On a linked quarter basis, portfolio loans increased $139 million or 9.5% annualized. And the growth was spread out across all of our markets and segments of our portfolios. Deposits again were another bright spot, increasing $206 million, or 15% annualized and most of the growth was in the money market and CD categories, which increased $114.9 million and $102.6 million, respectively.

With the volatility of financial stocks in December, we did make the decision to repurchase shares under our previously authorized share buyback program. For the quarter, we repurchased 321,731 shares are slightly less than 1% or total shares outstanding at an average price of $38.10 which totaled $12.3 million. Tangible common equity at the end of the quarter was essentially flat at 9.28% versus 9.25% on a linked quarter basis. And looking forward, we may repurchase additional shares at opportunistic times when market conditions dictate. Our target range for TCE is in the 8% to 9% set range.

From a credit metric standpoint, the provision expense for the quarter was in line with previous guidance. Net charges for the year were 18 basis points and in line with our expectations. Non-performing assets did increase by $25.3 million and is attributed to three commercial credits that have experience deteriorating financial trends. Consistent with our past conservative practices we have obtained current asset valuations and have recognized the appropriate charges and reserves in Q4. Finally, our Board of Directors approved a $0.27 per share dividend payable on February 28 which is an increase of $0.05 or 22.7% over the same period last year.

I'm now going to turn the program over to David Antolik, our Chief Lending Officer and newly named President. Dave and I have had the pleasure of working together for 29 years and in his capacity as our Chief Lending Officer for the past 15 years. He has been instrumental in leading our lending activities, which have been a big contributor to our overall success.

Dave will continue in his current capacity as Chief Lending Officer. And in his new role, he is going to coordinate our new market-based approach by providing leadership to our newly appointed market presidents in our five markets. This is a significant shift from how we managed the company in the past. However, it's going to enhance the already great job that we do in building long-standing relationships. Moving forward, our market presidents will continue to promote the S&T brand in their respective markets to broaden our customer engagement. So, I'm excited about this new initiative and look forward to working with Dave for many years. I'm confident under Dave's leadership that it will only enhance the returns that we will deliver for shareholders.

And now I'd like to turn the program over to our new S&T Bank President, Dave Antolik.

David Antolik -- President & Chief Lending Officer

Good afternoon, everyone. I want to start by thanking Todd and our Board of Directors for providing me the opportunity to serve as the Bank's president. Underlying my appointment is a fundamental change in our strategy to a true market-based growth platform. As you know, we serve five distinct markets Western Pennsylvania, Central Pennsylvania, Northeast Ohio, Central Ohio and Upstate New York. And we recently promoted market presidents for each in support of our strategy. We recognize that each market is unique and that all provide opportunities for growth.

By driving strategic decisions into each market and by integrating all of our business lines, we believe our ability to take advantage of these opportunities and build upon a long history of success will be greatly enhanced and support our long-term vision for our company.

I now like to provide some highlights of very successful fourth quarter that capped a record year for net income at S&T. We experienced strong net loan growth in Q4 with an increase of $139 million in total loans or 9.5% annualized. Several factors impacted this positive result, including the following: $28 million in consumer loan growth, driven primarily by solid residential mortgage activity. We added five mortgage loan originators during 2018 and we enter 2019 with an expanded pipeline versus the same period last year. A $95 million in commercial real estate growth that was partially offset by a $27 million decline in commercial construction balances. We did see a $28 million increase in unfunded commercial construction commitments during the quarter. C&I growth of $42 million that is the result of solid customer acquisition activity. This is reflected in expansion of total commitments during the quarter.

We also saw utilization rates increase from 40% to 41% quarter-over-quarter. Our business banking division had its strongest quarter in recent history with approximately half of its net loan growth for the year coming in the fourth quarter. Additionally, payouts were approximately $45 million lower than levels experienced in the prior three quarters. We continue to reinvest in order to grow the bank and during the quarter booked our first deals in Berks County, Pennsylvania, which is an extension of our Central Pennsylvania market.

We also look forward to relocating our Columbus LPO to a full-service office in late February and the opening of an additional branch location to serve the Akron market this spring. Based on current and planned activity levels, we anticipate mid-single digit loan growth for 2019 with seasonality and balanced growth favoring the second half of the year.

And now Mark will provide some additional details on our financial results.

Mark Kochvar -- Senior Executive Vice President, Finance Division Manager and Chief Financial Officer

Right. Thanks, Dave. Net interest income improved by about $600,000 due to strong average balance sheet growth. The net interest margin rate declined by 2 basis points compared to the third quarter due to competitive pricing environment and also due to the strong growth which came in at a lower incremental spread compared to the NIM rate. The increase in interest bearing liability rate at 18 basis points outpaced earning asset rate improvement of 10 basis points.

We are now expecting a net interest margin compression of 1 basis points or 2 basis points in the first quarter as deposit betas accelerate and balance sheet growth returns. We are actively managing specials and exceptional pricing to find the right balance between growth and revenue.

With a Fed pause and further balance sheet growth, we would expect similar NIM compression to continue into the second quarter followed by stabilization as we work through the deposit beta lags. Both fees and expenses this quarter -- were impacted in the fourth quarter by the stock market decline. We have a deferred compensation plan that is accounted for as an offsetting asset and liability on the balance sheet, quarterly market value changes result in offsetting fees and expenses. This is P&L neutral and typically is not large enough to show up in our results. However, due to significant market declines in the fourth quarter, we experienced an $856,000 decrease in both fees and expenses.

Also in fees, we had a $500,000 decline in the value of our equity holdings that are marked to the income statement. On the expense side, overall levels remain well controlled with no other large notable variances. Going forward into 2019, we expect fee income to range between $11.5 million and $12.5 million per quarter and expenses to range between $37.5 million and $38.5 million per quarter. We expect our tax rate to settle in the 16.5% to 17% range in 2019. Our risk-based capital ratios declined slightly in the fourth quarter as loan growth was strong and we did do some share repurchases.

Thanks very much at this time I'd like to turn it over to the operator to provide instructions for asking questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Collyn Gilbert with KBW. Please proceed with your question.

Collyn Gilbert -- KBW -- Analyst

Thanks. Good afternoon, guys.

David Antolik -- President & Chief Lending Officer

Hi Collyn.

Collyn Gilbert -- KBW -- Analyst

Just wanted to kind of talk about the loan growth. Obviously came in really strong in this quarter and David, it sounds like your outlook is pretty favorable going forward. Can you just talk a little bit more about that? I mean again I know you gave some color, but I guess just in the wake of maybe a slowing economic environment, you seem to still feel optimistic about your ability to grow loans and just wanted to care a little bit more about that?

David Antolik -- President & Chief Lending Officer

Yeah, I mean the combination of factors that I mentioned, so we did see a utilization rate increase and commitments in the C&I book increase as well. So, good C&I activity particularly coming out of North Shore group. And then from a geographic perspective, we saw growth in all of our markets, and some of the additions to staff in all of our segments, the B2B space we added a few bankers and saw really, really strong results in that segment as well. And then with regard to consumer loans, the hires that we made at the MLO -- in the MLO space have paid off as well. So, it's pretty good growth across the board and in all of our markets.

Collyn Gilbert -- KBW -- Analyst

Okay. Do you think -- I mean what would be your outlook as to what you guys could potentially deliver in terms of loan growth in 2019?

David Antolik -- President & Chief Lending Officer

Yes. I think mid-single digit loan growth is doable. We did see it accelerate in the fourth quarter because payouts were down by about $45 million relative to the first three quarters, so we did have that wind at our back.

Collyn Gilbert -- KBW -- Analyst

Okay. And then just in terms of the pricing that you're seeing on these new originations and maybe on the pipeline, I know, Mark, you had indicated the spread was coming on lesser than your current NIM rate, but thinking that's more deposit base driven than it is asset yield driven. So just curious as to what you're seeing on kind of new loan origination yields.

Mark Kochvar -- Senior Executive Vice President, Finance Division Manager and Chief Financial Officer

Yes, so overall new loan in the fourth quarter on the commercial side was about 5.16%, which is up about 20 basis points from the prior couple of quarters. So, we have seen some decent loan pricing.

Collyn Gilbert -- KBW -- Analyst

Okay. That's helpful. And then just your new -- for the new incremental deposits that are coming in the door Mark, what are you having to pay on those? I know it's going to range on...

Mark Kochvar -- Senior Executive Vice President, Finance Division Manager and Chief Financial Officer

I'm sorry, on CD side, the new ones are coming around 2.5 on average. We do have -- we did see some growth in our money market accounts that is indexed to the Fed funds rate, that's at a 1.88% (ph) rates, but we're also seeing some repricing within the book as some of the lower price deposits come in for a better deal basically.

Collyn Gilbert -- KBW -- Analyst

Yes. Okay, OK. And then just lastly, can you just give a little bit of color as to the kind of the history there on the three credits that went into the nonperforming book this quarter? When they originated and then also kind of what you think the resolution timeline and costs might be to those?

Todd Brice -- Chief Executive Officer

So, they're all three kind of one-offs. So, one's a CRE, one was a construction and one's a C&I credit. As far as the -- I mean, they -- we've had them on the books for probably three plus years call in and then the resolution probably late second quarter is somewhere near maybe, might bleed in over into third. But as in the past, we try and work through them as quickly as we can and come to a favorable resolution. Again, we have taken the -- we had current valuations done in Q4 and consistent with our past practices we've taken the marks off the levels that we were carrying them at. And if that...

Mark Kochvar -- Senior Executive Vice President, Finance Division Manager and Chief Financial Officer

It's all -- yes, I just -- I think it is important to understand these were three really distinct and different situations and different pieces of our portfolio. So there is nothing point here to anything that is inherent in any certain portion of our portfolio or anything.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay. That's helpful. Okay. I'll leave it there. Thanks, guys.

Todd Brice -- Chief Executive Officer

Thanks, Collyn.

Operator

Our next question comes from the line of Matthew Breese with Piper Jaffray. Please proceed with your question.

Matthew Breese -- Piper Jaffray -- Analyst

Good afternoon.

Todd Brice -- Chief Executive Officer

Hi, Matt

Matthew Breese -- Piper Jaffray -- Analyst

Maybe just following up on the margin question. You did note that the incremental spread was coming in. And so, I was just curious to what extent is the first quarter spread shaking out relative to 4Q? What's that compression look like?

David Antolik -- President & Chief Lending Officer

My best estimate right now is 1 basis points to 2 basis points, that's assuming that, that curve stays about where it is. We have some -- we'd have additional flattening here in the last couple days. So, the last model runs were before that. Doesn't have a huge impact on us. But we're not factoring in any additional Fed changes really for the rest of the year. So, absent all that and with the growth that we have -- that we anticipate, I'd expect couple of basis points.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. Okay. Okay. And then, and then maybe turning to loan growth, I know you mentioned that prepaid slowed down a bit. As you expect -- expectation that they pick up again to get you down to a lower annual page for 2019? Or was there -- was there some sort of rush toward the end of the year to close deals until the ...

Mark Kochvar -- Senior Executive Vice President, Finance Division Manager and Chief Financial Officer

There wasn't at the end of 2017. So relative to the prior year we saw a significant rush. 2018, they slowed. But I would not anticipate the same low level that we saw in the fourth quarter as we move into 2019. I think there's still some sense among the customer base that they need to react, particularly in the CRE space to move to a permanent long-term fixed rate deal. Although we did see nice activity from a swap perspective that drove -- helped drive better fee income in Q4, where we were able to retain some clients and provide them with fixed rates.

Matthew Breese -- Piper Jaffray -- Analyst

Got it. Okay. And then just on the compensation front. I'm assuming that we should add-back that nearly a million or 0.8 -- $800,000 to salaries and benefits for a good run rate in first quarter?

Todd Brice -- Chief Executive Officer

Yes. That's correct.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. Okay. And then lastly just on the three credits. Were those syndicated loans or just yours?

Todd Brice -- Chief Executive Officer

They were ours.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. And then geographically, how are they spread out?

Todd Brice -- Chief Executive Officer

They're across -- two of them in one market and one's in the -- two are in one specific market and one's in our Western PA market.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. And are there personal guarantees or what are the sources of repayment?

Todd Brice -- Chief Executive Officer

Yes. So, one you have real estate and so you have some leases and Pat you want to provide ...

Patrick Haberfield -- Senior Executive Vice President, Chief Credit Officer

Yes. So obviously to one structure, you're going to have some real estate. There's guarantees on those to a certain extent. On the more C&I-related credit obviously we have assets that we're looking potential ongoing concern. And on the real estate one obviously there is value in leases and any new lease up activity.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. And how are they performing post quarter end. Is that gotten better or worse?

Todd Brice -- Chief Executive Officer

About the same..

Patrick Haberfield -- Senior Executive Vice President, Chief Credit Officer

Yes. I don't think -- yes, I don't think they're any better or any worse.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. Okay. Okay. I guess the last one is just in regards to M&A, chatter activity, interest, all the above.

Patrick Haberfield -- Senior Executive Vice President, Chief Credit Officer

Yes. We like where the valuations of the stock are, so it makes our currency strong, but it's been kind of quiet. I mean, to be honest with you, there haven't been not been a lot of books that we've seen. Last year, there was one that was a smaller one that we just weren't interested in. But we're still having conversations with potential targets and folks that we would have an interest in. It's just I think, overall earnings are good right now for financials and you don't see a lot of movement on people who are willing to -- rushing to sell their companies.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. All right. Understood. That's all I had. Thanks for taking my questions.

Todd Brice -- Chief Executive Officer

Thanks, Matt.

Operator

Our next question comes from the line of Russell Gunther with D.A. Davidson. Please proceed with your question.

Russell Gunther -- D.A. Davidson -- Analyst

Afternoon guys.

Todd Brice -- Chief Executive Officer

Hi, Russell.

Russell Gunther -- D.A. Davidson -- Analyst

I appreciate your comments on the loan growth strength this quarter being broad based both within the verticals and geographically. Could you maybe share what's your outlook for '19 at the mid-single digits? How would you expect that mix to shake out from a loan vertical perspective, as well as any particular geographies that are a more of a source of strength for you right now?

Mark Kochvar -- Senior Executive Vice President, Finance Division Manager and Chief Financial Officer

Yeah, I mean, in terms of geographies, Central Pennsylvania, and Central Ohio certainly drive a lot of the incremental growth. They're newer markets relatively speaking, but they are markets that we have been in for three to five years and we have very strong teams and we're adding to our banker base.

So, as I mentioned in Central Pennsylvania, we booked our first deals in Berks County, which is a new market for us. And I anticipate good activity as we move eastward. And Central Ohio has just been a strong platform for us and Central Ohio and Central PA, we've gotten a pretty good mix of CRE and C&I. And then with the introduction of our new C&I manager, Brian Dobis, I anticipate that we'll continue to see pretty decent growth in the C&I space. So, we anticipate 60-40 kind of split between CRE and C&I as we move forward. The other bright spot as I mentioned was our business banking segments where we've seen good solid growth and continue to see good opportunities as well.

Russell Gunther -- D.A. Davidson -- Analyst

Great. Thanks for the color. They're very helpful. And then last one for me, circling back to Matt's question on the M&A front. You mentioned it had been quiet talking to folks who are interested in. Could you just give us a reminder as to sort of an ideal partner for you right now?

Todd Brice -- Chief Executive Officer

Yeah, so probably, company in the $500 million to $700 million range on the low end and maybe up to a couple billion dollars on the upper end in assets. As you know Ohio, certainly would have some appeal with the offices that we have out there. There is some certainly some candidates in Western Pennsylvania that would have a lot of appeal. And maybe some fill-in opportunities out in Central Pennsylvania, which are kind of that geographic areas we would look at.

Russell Gunther -- D.A. Davidson -- Analyst

Great. Thanks guys for taking my questions. That's it for me.

Todd Brice -- Chief Executive Officer

Okay. Russell.

Mark Kochvar -- Senior Executive Vice President, Finance Division Manager and Chief Financial Officer

See you, Russell.

Operator

Our next question comes from a line of Daniel Cardenas with Raymond James. Please proceed with your question.

Daniel Cardenas -- Raymond James -- Analyst

Hi, good afternoon, guys.

Todd Brice -- Chief Executive Officer

Hi Dan. (inaudible)

Daniel Cardenas -- Raymond James -- Analyst

Not too bad. It's -- I think it's going to warm up to zero by the end of the day. Maybe a little bit of color on deposit growth kind of how you see that shaping up throughout 2019. Do you think it's -- is it goal to kind of keep up with loan growth expected during the year or is that going to lag a little bit?

David Antolik -- President & Chief Lending Officer

Our goal is that deposits will be a little bit behind the loan side, but not too far. We continue to probably see most of the net growth in money markets and CDs, but also on the -- especially on the consumer side some -- some DA growth some program or targeted programs that we've been running.

Daniel Cardenas -- Raymond James -- Analyst

Do you see any benefit from the shale deposits? Is that helping out any?

David Antolik -- President & Chief Lending Officer

Not to any great degree for us.

Daniel Cardenas -- Raymond James -- Analyst

Okay, fair enough. And then how should I be thinking about charge-off levels for you guys for 2019. I mean you've been -- they've been fairly well behaved, I think overall for the last couple of years, but are you beginning to see kind of any cracks in the foundation or anything that's given you pause for concern right now as it applies to credit quality?

Patrick Haberfield -- Senior Executive Vice President, Chief Credit Officer

This is Pat. No, we're not seeing any or feeling any cracks as you asked. And you know I guess the guidance would be looking forward we're looking at about the same basis point level that we've experienced over the last couple of years.

Daniel Cardenas -- Raymond James -- Analyst

Kind of in that 20 basis points little bit less than that range.

Patrick Haberfield -- Senior Executive Vice President, Chief Credit Officer

(inaudible) range.

Daniel Cardenas -- Raymond James -- Analyst

Great. And then I think on the three credits that popped up, the construction credit was that kind of single family home related or was that multifamily. What kind of construction lending was that?

Patrick Haberfield -- Senior Executive Vice President, Chief Credit Officer

Yes. No, it did not have anything to do with any type of residential. It was commercial.

Daniel Cardenas -- Raymond James -- Analyst

Commercial. Okay. All right. And collateral levels, you feel comfortable for minimal loss expectations on these three credits, is that your assumption?

Patrick Haberfield -- Senior Executive Vice President, Chief Credit Officer

Yeah, again on these three credits we went through our full impairment analysis and we put them the appropriate charges in, also with the specific reserves on them as well. So, as of today, we're real comfortable where we are.

Daniel Cardenas -- Raymond James -- Analyst

Okay. Great. All my other questions have been asked and answered. Thanks guys.

Patrick Haberfield -- Senior Executive Vice President, Chief Credit Officer

All right, Dan.

David Antolik -- President & Chief Lending Officer

Thank you.

Operator

Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Todd Brice -- Chief Executive Officer

I just want to thank everybody for participating in today's conference call and Mark and Dave and I appreciate the opportunity to discuss this quarter's results and look forward to hearing from you at our next conference call. Have a great day.

Operator

Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Duration: 28 minutes

Call participants:

Mark Kochvar -- Senior Executive Vice President, Finance Division Manager and Chief Financial Officer

Todd Brice -- Chief Executive Officer

David Antolik -- President & Chief Lending Officer

Collyn Gilbert -- KBW -- Analyst

Matthew Breese -- Piper Jaffray -- Analyst

Patrick Haberfield -- Senior Executive Vice President, Chief Credit Officer

Russell Gunther -- D.A. Davidson -- Analyst

Daniel Cardenas -- Raymond James -- Analyst

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