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S & T Bancorp Inc (STBA -2.02%)
Q1Â 2019 Earnings Call
April 18, 2019, 1:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to the S&T Bancorp Inc. First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mark Kochvar, Chief Financial Officer for S&T Bancorp. Thank you, Mr. Kochvar. You may begin.
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
Okay. Thanks very much. Good afternoon 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 cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation.
A copy of the first quarter 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 would now like to introduce Todd Brice, S&T's CEO, who will provide an overview of S&T's results.
Todd Brice -- Chief Executive Officer
Thank you, Mark, and good afternoon, everyone. For the first quarter of 2019, we've announced net income of $22.9 million or $0.66 per share versus $26.2 million or $0.75 per share in the first quarter of 2018 and $26.9 million or $0.70 per share in the fourth quarter. For the quarter, the return on assets were 1.29%, return on equity was 9.84% and return on tangible common equity was 14.27%. Growth in deposits was particularly strong as balances increased by $159.5 million or 11% annualized and this enabled us to pay down higher cost borrowed funds and also reduce some of our broker deposits.
We did run some special promotions in select markets and really had a positive response. I think more importantly, we were able to bring 1,000 new households in through these efforts and now will work diligently to convert these to long-term clients.
Total loans were essentially flat, down $11 million. However, average balances were up approximately $75 million for the quarter as a result of robust loan activity at the end of Q4. Dave Antolik will provide more color on loan activity in his comments, but I do want to mention that we are seeing positive momentum throughout our regions and our various revenue producing lines of business.
Our net interest margin was a bright spot for the quarter, increasing 6 basis points to 3.71% versus 3.65% at year-end. As a result, net interest income increased by $500,000 in the first quarter. Charge-offs and loan loss provision were higher than anticipated with net charge-offs of $5.2 million and a provision expense of $5.6 million.
Charge-offs were impacted by two credits. First, a $4 million charge-off for a C&I borrower in our Northeast Ohio market and we still have remaining exposure about $6 million and the borrower is in the construction business and he's been a customer since 2003, but he did experience financial distress due to a loss on a large contract. We restructured our credit facility and the remaining balance is performing.
The second credit is a $1.1 million charge-off for a C&I borrower in our Western Pennsylvania market with the remaining exposure about $3 million. This loan was non-performing at the end of Q4. The borrower's an automotive related entity that's been a customers since 2007. In Q1, they experienced further deterioration in operations due to external pressures, which led to a point to a court-appointed receiver to negotiate the sale of the assets, which we expect to close in Q3. Our expectation for full-year net charge-offs is around 20 basis points.
In the first quarter, we continued to take advantage of our strong capital position and repurchased 314,000 shares or approximately $12.3 million. Total shares repurchased including Q4 of last year now total 680,000 shares, or about $26.3 million under our previously disclosed $50 million share repurchase program. We will continue to monitor market conditions and look for opportunities for future purposes.
I'm pleased to announce that we recently opened our new retail banking location in Columbus, Ohio, which will complement the activities of our commercial banking team. Our results for the first three weeks that we've been open have been very encouraging, and on April 22nd, we are also opening a new retail location in our Northeast Ohio market in Cuyahoga Falls to capitalize on the momentum that we're experiencing in our Akron office, which opened about 18 months ago and has generated $70 million in deposits. Both of these locations will offer a full suite of retail products and services as well as business banking and mortgage offerings.
And finally, I want to mention that our Board of Directors approved a $0.27 per share dividend that we paid on May 16th, and this represents an 8% increase over a dividend that was paid in the first quarter of last year. So I want to thank you for your continued support of S&T Bancorp. And now I'd like to turn the program over to our President and Chief Lending Officer, David Antolik.
David G. Antolik -- President and Chief Lending Officer
Thanks, Todd, and good afternoon everyone. Similar to last year, loan growth slowed in the first quarter, following a strong finish to 2018, resulting in a $75.3 million increase in average loan balances in Q1. We experienced solid C&I growth of nearly $20 million in the quarter. This is the result of new customer acquisition activity and is reflected in an increase in our revolving commitments for each of the last four quarters.
These commitments stand at their highest point at least five years, this success is also a reflection of the investments that we've made by adding five additional C&I bankers in the past year, all while keeping commercial banking FTE count flat. We also saw utilization rates rise by 1% during the quarter, that rate now stands at 42%. Offsetting this growth was an $11 million decline in the construction segment, commercial construction balances reduced by $20 million or a $20 million reduction in the permanent CRE segment. The construction balance decline was anticipated as projects completed and move to the CRE category. Unfunded construction commitments were relatively unchanged when compared to year-end 2018. But we have seen an uptick in activity and March was a particularly strong month for new commitments as we head into the 2019 construction season. With regard to the permanent CRE category, we saw slower new loan volume and a combination of sales and permanent market payoffs driving balances lower.
Consumer loan balances were flat for the quarter. The implementation of our market based growth platform has supported positive results in several ways, including the strong deposit growth experienced in Q1. Additionally, much of the focus of our market presidents has been turned to loan, pipeline growth and management. As a result, we have seen pipeline improvement in all categories when compared to one year ago. This improvement allows us to remain comfortable with our mid-single-digit full year loan growth forecast.
As Todd mentioned, we recently celebrated the opening of our new location in Hilliard, Ohio, a Columbus suburb and look forward to the opening of our Cuyahoga Falls retail location, which is just outside of Akron. Each of these new locations represents the continuing evolution and expansion of the S&T brand in Central Ohio and Northeast Ohio. We also look forward to the opening of our newest LPO location in Buffalo, New York in May.
In conclusion, new customer acquisition activity remains our focus and is solid in all categories. Our pipeline has expanded and we continue to build our new markets and hire highly qualified and motivated bankers in support of our market based growth platform and in order to drive revenue growth.
And now Mark will provide you with some additional details on our financial results.
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
Thanks, Dave. Net interest income improved by $0.5 million despite two fewer days in the quarter due to average loan growth of $75 million, primarily from loans book late in 2018, combined with about $630,000 of higher prepayment fees and interest adjustments. The fees and adjustments contributed about 4 basis points to the net interest margin rate, which improved overall by 6 basis points compared to the fourth quarter.
Strong deposit growth was also a contributing factor to net interest margin rate improvement as we were able to pay down more expensive borrowings, reducing our loan deposit ratio and improving our funding mix. We continue to expect some margin compression, a little bit more in the second quarter, which is unlikely to have the same level of prepayments and adjustments as we had in the first quarter. This should bring the rate down by at least the 4 basis points in the second quarter.
And on top of that, cumulative deposit base will continue to increase, although at a slower pace and balance sheet growth should return, which combined will pressure NIM by an additional 1 to 2 basis points. Beyond the second quarter, we continue to expect that the net interest margin rate will stabilize. Both fees and expenses were again impacted in the first quarter by deferred compensation plan that is accounted for as an offsetting asset 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 the market rebound in the first quarter, we experienced a $574,000 increase in both fees and expenses.
Last quarter, we saw an $856,000 decline in both fees and expenses, which combined resulted in a $1.4 million change when comparing the fourth quarter of '18 to the first quarter of '19. This shows up in other and non-interest income and salaries and benefits and non-interest expense. Taking this P&L neutral compensation plan impact out of non-interest income leaves a decrease of about $1.2 million and a non-interest expense increase of about $1.1 million, both of those are compared to the fourth quarter.
So the $1.2 million decline in non-interest income is in several credit (ph) categories, most significant being lower customer swap fees, which shows up in Other, we have some lower debit and credit card fees due to fewer days and some seasonality and lower wealth fees due to the overall market being down and reduced financial services activity.
On the expense side, we had the $1.1 million increase, which is also in several categories, most significant being higher incentives and seasonally higher payroll taxes in salaries and benefits, some seasonally higher branch maintenance expense and a new location in occupancy and some cost associated with the new loan system in the equipment line. Going forward into 2019, we expect fee income to be approximately $11.5 million to $12 million per quarter and expenses to range between $37.5 million and $38.5 million per quarter.
Our tax rate in the first quarter was a little lower than expected due to some discrete items, and we expect our effective tax rate to be approximately 16.5% for the full year 2019. Our risk-based capital ratios were essentially unchanged in the first quarter, primarily due to the share repurchases mentioned earlier. 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) Our first question comes from the line of Russell Gunther with DA Davidson. Please proceed with your question.
Russell Gunther -- DA Davidson -- Analyst
Hey, good afternoon guys.
Todd Brice -- Chief Executive Officer
Hi, Russell.
Russell Gunther -- DA Davidson -- Analyst
Appreciate the comments on the loan growth outlook, I was just wondering if you could give us a bit of a finer sense for what the drivers of growth will be from a loan vertical perspective as well as any regional pockets of strength you'd expect to contribute to that mid-single digit number for '19?
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
Yeah, geographically, the two markets that have shown the best growth are Central Ohio and Central Pennsylvania. We've also seen pipeline growth in Western Pennsylvania as well. The first quarter was relatively flat for Central Ohio and Northeast Ohio. We expect Upstate New York to grow as well. So there were some soft markets in the first quarter. Most of the growth in the first quarter came out of Central Pennsylvania.
In terms of the verticals, C&I continues to perform well. Our Business Banking segment has performed very well. It's been the most consistent grower for our Company. Where we've seen some noise is, the payoffs in the CRE and the construction, but those pipelines are growing as well.
Todd Brice -- Chief Executive Officer
And then the mortgage activity is about 25% higher at the end of the quarter versus where it was at the end of the first quarter last year.
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
Last year, correct.
Russell Gunther -- DA Davidson -- Analyst
Okay, great. No, that's helpful color there guys. And then on the expectation for the margin in the back half of the year to stabilize, post the step down you talked about for 2Q. Yeah. Could you just let us know, are you assuming anything in the way of rate hikes this year? And then if not, is that stabilization really you think you're going to be able to defend spreads on the asset side or not so much of a deposit beta ramp-up? Just kind of help me understand what your stabilization guidance really reflects?
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
Well, we don't have any Fed increases in there. So that all assumes a Fed pause. I think on the loan side, we expect the spreads to hold up and stabilize in there. We do have a little bit of improved pricing from some arms that reprice throughout the year. So we pick up a little bit there. And on the deposit side, we should expect the betas to begin to moderate. We have repriced a lot of our accounts and expect that to slow. So we might see a basis point here or there, but we do expect that once we get through second quarter with the easing off of some of the one-time benefits we got in the first quarter along with some additional compression in second quarter, that should slow down as long as the rates stabilize.
Russell Gunther -- DA Davidson -- Analyst
Got it. Okay, great. Thanks for the help. That's it for me.
Todd Brice -- Chief Executive Officer
Thanks, Russell.
David G. Antolik -- President and Chief Lending Officer
Thanks, Russell.
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.
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
Hi, Matt.
Todd Brice -- Chief Executive Officer
Hi, Matt.
Matthew Breese -- Piper Jaffray -- Analyst
Just wanted to follow that line of question just for a second. So as we think about deposit competition, could you characterize kind of how things have played out since the Fed essentially announced they were on pause here.
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
We still find the kind of money market that front-end, still pretty competitive, haven't seen really much let up there. We have seen some easing on the CD side, they still tend to be relatively short. But we've seen the rates start to come down somewhat and somewhat easing on the pricing on the CDs. But the front end is still competitive, but we haven't seen it increase anymore. I think we've kind of stopped in terms of how big the offers are on rate.
Matthew Breese -- Piper Jaffray -- Analyst
Right. And I know there's going to be a lag here, deposit costs will continue to creep, but where's the peak if things stay exactly as they are today? At what point, what quarter do we see deposit costs essentially top off?
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
I think they'll increased slightly first for several more quarters because we, at least for us, we still have probably another two to three quarters of CD repricing to go. but that book had gotten so short over the last several years that almost all of it reprices within within 15 months or so, 15 to 18 months. So if I have a couple more quarters of CD but to counteract that, the CD book has shrunk relative to the size of the portfolio. So it doesn't have the impact that it did 10 years ago, so we would probably have another couple of quarters on the CD side, the money market rates should begin to slow down as we've repriced a lot of those. So the wild card still is, we do still have some lower-priced folks in some older savings and money markets. To the extent that they continue to wake up and demand a higher rate or move to other products. We still could see some leakage, but I guess I would guess the peak is third or fourth quarter.
Matthew Breese -- Piper Jaffray -- Analyst
Understood. Okay. And then thinking about the pipeline, excluding mortgage maybe as we think about what's driving the consistent growth outlook for the year and you know it implies some acceleration of growth. Is that due to market dynamics? Are you seeing a pickup in activity, where you're seeing some of the new hires really kick in, or how to kind of break those two apart?
David G. Antolik -- President and Chief Lending Officer
It's a combination of the new hires and some of our activities in the new markets. So as we enter Buffalo, that'll be a new market for us, as we expand in Central Ohio, as we expand in Central Pennsylvania as well. So it's a combination of staff and market.
Todd Brice -- Chief Executive Officer
So as Dave mentioned that we've been able to kind of keep the headcount flat, so we've had some retirements or some exits in some of our more mature markets, and then you reallocate some of those dollars into the higher growth market. So it's been a nice trade for us.
Matthew Breese -- Piper Jaffray -- Analyst
Understood. Okay. And then the last one is just in regards to CECL, I know we're still a ways away. But do you have any preliminary thoughts on how that first stage for reserve could shake out?
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
Yeah, Matt, this is Mark. We're still working through the modeling. We're making a lot of good progress. But we don't have an estimate as of today.
Matthew Breese -- Piper Jaffray -- Analyst
Okay. I mean if you had to shake out the margin, is the reserves going higher or lower? Where would you --?
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
I'd definitely say higher. We're not going to do a whoever that was well (ph) . So I guess it's higher, but I'm not really sure how much at this point.
Matthew Breese -- Piper Jaffray -- Analyst
Understood. Understood. Okay, that's all I had. I appreciate taking my questions.
Todd Brice -- Chief Executive Officer
Sure. Thanks, Matt.
Operator
Our next question comes from the line of Collyn Gilbert with KBW. Please proceed with your question.
Collyn Gilbert -- KBW -- Analyst
Thanks. Good afternoon, guys.
Todd Brice -- Chief Executive Officer
Hi, Collyn.
Collyn Gilbert -- KBW -- Analyst
Mark, I just wanted to clarify on the NIM guidance that you gave. So is it collectively then are we looking closer to like 6 basis points of decline to the 4 because of the prepays and then 1 to 2 because of deposit pricing pressure?
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
That's correct.
Collyn Gilbert -- KBW -- Analyst
Okay. Okay. And then just on the credit outlook, I apologize, I missed the beginning of your comments, Todd, as you kind of were running through some of these credits and I think you gave what you are anticipating the net charge-off ratio to be going forward. Can you just say what that is again? And then, just sort of what your assumptions are going into those numbers or just how you're seeing credit in general sort of trending after these couple quarters here?
Todd Brice -- Chief Executive Officer
Yes. Sure. Thanks, Collyn. Pat Haberfield is here. So I'm going to let him weigh in.
Patrick J. Haberfield -- Senior Executive Vice President and Chief Credit Officer
Yeah, Collyn. Well, it's Pat. I think the full year net charge-off ratio, we believe is going to be around 20 basis points. Again, these credits -- and we've kind of gone back through and looked at the portfolio. And I think we've been saying in that 20 basis point range for the last couple of quarters for this year. And right now, we don't see anything that really change our mind from coming off of that number.
Collyn Gilbert -- KBW -- Analyst
Okay. And then just kind of broadly, so these couple issues, and you had indicated kind of when the customers came into the bank, Todd. But is there anything else that you're seeing sort of structurally or areas that you're a little bit cautious on or if you are thinking that when credit cracks, is there anything that you would point to as sort of a catalyst for that or just kind of curious how you're thinking about that cycle?
Todd Brice -- Chief Executive Officer
So, right now, these are kind of one-offs, and it was just an operating company got into a bad contract and so it caused some distress on their financials, they still have business coming in the door. And so we just kind of had to restructure the debt. They signed a note. We get paid down, down the road on it. But -- so it'd been different markets, different industries. So we're not seeing anything systemic through the portfolio. Is that right?
Patrick J. Haberfield -- Senior Executive Vice President and Chief Credit Officer
That's right. And Collyn, it seems like every time we run into a situation, it's kind of, I don't want to say unique, I don't want to call it a one-off. But it's just something else that was going on in that particular industry or with that particular business. And again, from having these on the books from anywhere from five years to well over 10 years, I think someone just experienced some stress within their own business model maybe.
Todd Brice -- Chief Executive Officer
But just in various conversations, Collyn, with clients across the different markets, business conditions are good right now and people have positive outlook, and they're hiring, if they can find people. I think that's probably the one area that's a little bit tougher. Everybody, no matter what industry you're looking at right now is finding qualified people to fill the open positions. But manufacturing seems to be steady and auto businesses are steady, and real estate has been active. So some of the different buckets that we lend into right now are still in the growth mode.
Collyn Gilbert -- KBW -- Analyst
Okay. Okay, that's helpful. And then just on the capital deployment. So you talked about kind of your repurchase appetite. But, I guess, Mark, as you're looking at -- you guys are sitting with a very robust capital structure, how aggressive or how do you want to manage -- sort of foresee managing that capital ratio down and then how are you going to sort of prioritize some of those capital management tools?
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
We look at our TCE ratio, and our comfort zone is 8 to 9, so kind of low 9 fits there, so we're managing in that general neighborhood. And our first priority would be for loan growth. So we'll let that guide us first. And then secondly, we would use the buyback to help us manage that. But with an eye toward the price and the paybacks that we get from that. If the price seems a little too much, regardless of what our TCE is, we would back away from that. And then we always want to have a little bit of capital ready in case an M&A opportunity were to present itself.
Collyn Gilbert -- KBW -- Analyst
Okay. And that leads me to my final question, just in terms of how you're seeing the environment out there as it relates to M&A? Is there more chatter happening, is there -- do you feel like you could -- the probability of pulling off a deal this year is high? Just maybe talk a little bit about M&A.
Todd Brice -- Chief Executive Officer
Yes. I mean, I don't think it's really changed a lot over the last couple quarters; it's been kind of quiet. Again, we would have an interest in rounding out something out in the Ohio markets if we would find something out there or adding something to the Central PA franchise. And there would be some names in Western Pennsylvania, if they would come to market, we would definitely have an interest. So we continue to have conversations and just be prepared for if and when an opportunity would present itself.
Collyn Gilbert -- KBW -- Analyst
\Okay. Okay. All right, great. I'll leave it there. Thanks, guys.
Todd Brice -- Chief Executive Officer
Thanks, Collyn.
Patrick J. Haberfield -- Senior Executive Vice President and Chief Credit Officer
Thank you.
Operator
There are no further questions in the queue. I'd like to hand the call back to management for closing comments.
Todd Brice -- Chief Executive Officer
I just want to thank everybody for participating in today's conference call. Mark and Dave and I appreciate the opportunity to discuss our quarterly 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. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
Duration: 27 minutes
Call participants:
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
Todd Brice -- Chief Executive Officer
David G. Antolik -- President and Chief Lending Officer
Russell Gunther -- DA Davidson -- Analyst
Matthew Breese -- Piper Jaffray -- Analyst
Collyn Gilbert -- KBW -- Analyst
Patrick J. Haberfield -- Senior Executive Vice President and Chief Credit Officer
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