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S & T Bancorp Inc (STBA 0.39%)
Q3Â 2019 Earnings Call
Oct 24, 2019, 1:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, everyone, and thank you all for joining us. This is S&T Bancorp's Third Quarter 2019 Earnings Conference Call. [Operator Instructions] And now to get us started, I'm happy to turn the floor over to CFO, Mark Kochvar. Please go ahead, Mark.
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
Good afternoon. Thank you all 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 should be 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 third quarter earnings release can be obtained by clicking on the press release link on your screen or by visiting our Investor Relations website at stbancorp.com. I would now like to introduce Todd Brice, S&T's CEO, who'll provide an overview S&T's results. Todd?
Todd D. Brice -- President and Chief Executive Officer of S and T and S and T Bank
Well, thank you, Mark, and good afternoon everybody. We're pleased to announce net income of $26.9 million or $0.79 per share versus second quarter results of $26.1 million or $0.76 per share and third quarter of 2018 results of $30.9 million or $0.88 per share. If you recall, we did have a onetime tax benefit of $0.08 per share in the third quarter of last year that related to a pension contribution.
Performance metrics for the quarter were very strong with an ROA of 1.45%, return on equity of 10.97% and return on tangible common equity of 15.69%. I think the big highlight this quarter was the balance sheet growth as total loans increased $162.6 million or 10.7% annualized, and deposits increased by $126 million or 8.6% annualized compared to the second quarter. Both loan and deposit demand were very strong across our 5 market footprint, and we continue to see nice activity going into the fourth quarter.
Total revenue increased by over $500,000 quarter-over-quarter as net interest income increased by $369,000 as the increase in average loan balances helped to offset a 6 basis point decline in our net interest margin, which was impacted by the decrease in short-term rates. Noninterest income also increased by $162,000 quarter-over-quarter, and our efficiency ratio for the quarter was 50.09%, and it was positively impact by reduced FDIC cost. And we also incurred $552,000 in merger-related cost this quarter. Mark is going to provide some color in his comments in a few moments.
Our credit results for the quarter included net charge-offs of $4.3 million, driven by existing substandard credit that experienced annual evaluation adjustments. This compared to charge-offs of $2.1 million in the second quarter. Provision expense was $4.9 million, which was driven by the net charge-offs as well as a strong loan growth. We did experience a slight uptick in NPAs to $51.7 million. And now our NPA and total asset ratio stands at 0.68%. I also want to mention that we're on track to close our pending merger with DNB Financial.
We anticipate the effective date to be on or about November 30, and we're very excited about entering into this high-growth market. Today, things are progressing very nicely, and we anticipate a smooth transition. Conversion of the IT systems is scheduled for February, at which point we will also change over the signs to S&T Bank. I just want to mention that it's been a pleasure working with Bill Hieb and his team and it becomes more and more apparent that our cultures and how we serve our customers are very similar, so we think with our increased product set and lending capacity, we can ramp up the revenue streams fairly quickly.
And finally, I want to mention that our Board of Directors has approved a quarterly dividend of $0.28 per share, which is $0.01 higher or 3.7% increase over the same period last year, and this is the seventh consecutive year that we've increased our dividend. So at this point, I'd just like to thank you for your continued support of S&T Bancorp. And now I would like to turn the program over to our President and Chief Lending Officer, Dave Antolik.
David G. Antolik -- President and Chief Lending Officer
Well, thank you, Todd, and good afternoon, everyone. As Todd mentioned, we're very pleased with total asset growth in the third quarter, where loans grew by nearly $163 million. For the quarter, the experienced growth in both commercial and consumer loans, led by increases in C&I of $67 million, commercial construction of $48 million, residential mortgage of $20 million and commercial real estate growth of $15 million.
As you know, we operate in 5 distinct markets, Western Pennsylvania, Central Pennsylvania, Northeast Ohio, Central Ohio and upstate New York. And for the quarter, we saw a positive loan and deposit growth in each market and in each of our commercial, business banking, retail mortgage and consumer business lines. We're very proud of this accomplishment, and these results are a testament to our market-based growth platform that I spoke about and we implemented at the beginning of 2019.
During the quarter, we saw C&I revolving utilization rates increase from 41% to 42% over the second quarter, with balance growth being driven primarily by new customer acquisition that resulted in a $76 million increase in total revolving commitments. In addition to the previously mentioned $48 million in commercial construction balance growth, we saw unfunded commitments increase by $66 million for this category. Our residential mortgage balance growth was driven primarily by increased production of 52% year-over-year.
We expect to see elevated payoffs through the balance of 2019, particularly in the exceptionally competitive commercial real estate space that will temper growth in Q4 versus Q3. However, we do anticipate growth in Q4 that will allow us to achieve our full year mid-single-digit loan growth expectations.
Our commercial pipeline continues to be solid and is approximately 35% larger than at this point last year, and our retail mortgage and consumer pipeline has increased by over 40% year-over-year. Finally, as a result of the current rate environment, we are experiencing strong demand for commercial loan swaps, leading to $1.5 million of fee income in the third quarter.
Now I'll turn it over to Mark for additional details.
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
Thanks, Dave. Net interest income improved by about $400,000 despite net interest margin pressure due to higher average loan balances of $103 million and 1 additional day in the quarter. 2 of the 6 basis points decline in the margin was related to lower prepayment fees in the third quarter versus the second while the balance -- while the remaining 4 basis points primarily related to lower short-term rates. We do have good loan balance momentum going into the fourth quarter with ending period loans $118 million higher than the third quarter average.
Assuming another rate cut next week, the quarter-over-quarter decline of almost 50 basis points in the Fed funds rate will result in an estimated 8 basis point decline in the net interest margin rate in the fourth quarter. We do have approximately $1.7 billion of funding that reprices very quickly and we have also been proactive in adjusting other customer deposit rates. We did see a 4 basis point decline in total cost and liabilities and a 2 basis point decline in interest-bearing deposit costs in the third quarter compared to the second quarter. As we saw when rates were increasing, there is a lag in deposit pricing that should stabilize and then improve net interest margin rate once rate cuts stop.
Total deposit growth of $126 million included the maturity of about $52 million of brokered CDs that we did not replace. Netting brokered out, customer deposit increased by $178 million or about 12.8% annualized and are up $460 million year-to-date. The deposit growth mix was distorted in the third quarter by a change in one of our broker deposit programs. Included in money market, interest-bearing demand is $300 million of brokered funds.
At the end of the second quarter, $295 million was in money market and only $5 million was in interest-bearing demand. But at the end of the third quarter, only $100 million was in lending market and $200 million was in interest-bearing demand. So without this shift, the interest-bearing demand category increased about $7 million and the money market grew by about $114 million.
Noninterest income was in line with the second quarter and continued strong activity in the commercial back-to-back swaps that Dave mentioned. Noninterest expense included $552,000 or about $0.01 per share of merger-related expenses. We also benefited this quarter from the small bank assessment credits from the FDIC.
We both know FDIC expense in the third quarter and unwound our accrual from the second quarter, resulting in a net credit in the third quarter. This represents a quarter-over-quarter variance of almost $1.4 million. The net of merger expenses and the FDIC credit expenses were about $38.5 million, which is in line with our expectations. The closing of DNB merger in the fourth quarter will result in significant onetime items of approximately $10 million.
With an expected close at the end of November, we will also have one month of DNB revenue and expense along with the various net purchase accounting adjustments in net interest income and the CDI and the expenses. However, we don't expect the net impact of that one month of activity in the fourth quarter to be significant to EPS. Our tax rate in the third quarter was a little over than expected as we have revised our full year 2019 estimate to the 15.5% to 16% range.
And finally, our risk-based capital ratios declined by about 20 basis points, and that was due to the strong loan growth and commitment growth combined with some stock buybacks.
Thanks very much. At this time, I'd like to turn it back over to the operator to provide the instructions for asking any questions.
Questions and Answers:
Operator
[Operator Instructions] And we'll take our first question from Russell Gunther with D.A. Davidson. Please go ahead. Your line is open.
Russell Gunther -- D.A. Davidson -- Analyst
Hey, good afternoon guys. I just wanted to circle back to some of the loan growth commentary, which was very helpful. As you look out to 2020, so I understand the headwinds we've got on the paydowns in the fourth quarter, but as you're looking out into 2020, what do you expect the loan growth drivers to be, both from an asset class and geographic perspective?
David G. Antolik -- President and Chief Lending Officer
Yes. I think geographically, entering into the DNB markets will help. We've seen good growth out of Central Ohio. And we're starting to see better growth in Western Pennsylvania as well. We're rebuilding some of our construction pipeline and seeing decent activity from commercial real estate activities. The perm market is really where we're seeing some payoff pressure. Our C&I growth, we've added a fair number of bankers in the C&I space and that's what's really providing some activity in that line item as well. And we're also seeing pretty consistent -- consistently strong growth in Central Pennsylvania as well.
Todd D. Brice -- President and Chief Executive Officer of S and T and S and T Bank
And also, the small business channel continues to resonate record loans, and as Dave indicated in his comments, the mortgage pipeline is up as well.
David G. Antolik -- President and Chief Lending Officer
Yes. We've added a number of loan officers, mortgage loan officers to our ranks as well. And that's driving some nice growth. The strategy of looking at things from a market perspective and then integrating the business lines into the markets is really paying dividends for us, particularly on the consumer and retail mortgage and small business areas.
Todd D. Brice -- President and Chief Executive Officer of S and T and S and T Bank
Right. So we just kind of came out of our management planning sessions a few weeks ago, and there's a lot and lot of opportunities across our footprint to really to just drive good core organic growth, and so that will be filling in some product sets in some markets, some will be -- we've added some people that we'll start to see more tangible results in 2020. But we like our position with the markets that we're in, with the people that we're in, and we would expect to continue to hit those organic growth targets that we've talked about.
Russell Gunther -- D.A. Davidson -- Analyst
That's great color, guys. I appreciate that. And then switching gears to the margin. Mark, I appreciate your thoughts on the upcoming quarter. Could you just help us what that contemplates, if anything, from the quarter of the upcoming deal close and then how that, from a purchase accounting perspective, may factor into the reported margin going forward?
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
Right. So with -- DNB has maybe a 20 or 25 basis points lower margin than we have. That'll pretty much be offset by the anticipated purchase accounting adjustments. So we think we should kind of level back out going forward, but those 2 offset each other approximately.
David G. Antolik -- President and Chief Lending Officer
Okay. So it's, just for simplicity's sake, easy enough for us to just kind of think about the core margin trends that you laid out, about 8 basis points of compression from 2 rate cuts as something we could extrapolate going forward should the Fed continue to cut, or do you believe you have the ability for deposits to really inflect lower and begin to mitigate any incremental cuts?
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
No. I think at least for the next several cuts, if they go beyond the additional one that we expect next week, I would still expect around 4 basis points initial compression after each Fed cut. The bounce back would only come in time after they stop with the lag in the deposit pricing.
Russell Gunther -- D.A. Davidson -- Analyst
Okay. Great. And then last one for me is on the asset quality front. I appreciate the comments about charge-offs higher this quarter. But could you just give me some broad strokes outlook for how you see the environment? Is there any flashing yellow signs? Are you concerned about energy for example and what your restaurant exposure is, just some hot button issues and curious as to how you guys are feeling about those related portfolios and asset quality in general?
Todd D. Brice -- President and Chief Executive Officer of S and T and S and T Bank
Yes, Russell. I don't think it's anything systemic. I mean we had -- the charges were just different asset classes in different markets, too. Pat, you're with us, too. You may want in...
Patrick J. Haberfield -- Senior Executive Vice President and Chief Credit Officer
Yes. Russell, this is Pat. I'm not sure if there's anything, at least in our footprints, that's pointing right now to a lot of red flags. Hospitality is obviously an area where we watch carefully and I think everyone's watching carefully if we're overbuilding in certain markets. Some of that you can relate back to the energy boom that happened a few years ago. But others is just simple overbuilding that you're looking at.
And we take kind of a close look at what's going on across all the footprints and any type of diverse economic situations in each industry, so whether that'd be trucking, hospitality or things of that nature. And our exposures in a lot of those industries right now that seemed to pop up certain red flags are not extremely substantial.
Russell Gunther -- D.A. Davidson -- Analyst
Great. Well thank you all for the help. I appreciate you taking my questions.
Operator
We'll move next to the line of Collyn Gilbert with KBW. Please go ahead. Your line is open.
Collyn Gilbert -- KBW -- Analyst
Thanks Good afternoon, guys. Just wanted to inquire a little bit more into sort of your deposit strategy, how you guys are positioned. Maybe where you're seeing good growth coming in? And then also if you could talk about within your NIM guide, Mark, sort of your assumptions you're making on the deposit pricing or deposit cost side?
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
So our strategy this year, we've been a little bit more aggressive over the course of a lot of this year with some money market promotions and a little bit better pricing on the CD side and less -- prior to probably mid-last year, we were pretty strict on our CD rates for new customers. We were seeing a lot of exiting with that. So we lined up on that and that helped stem the tide on the CD side. But we have seen good both money market and CD growth over the past year or so, and that has helped our DDA growth.
The C&I push on the commercial side has also helped a lot to generate a lot of DDA balances. So we're -- with the big buildup in deposits that has shifted some of our funding mix away from the wholesale side to customer deposits, which don't react as quickly as the wholesale side, so that probably has made us maybe a tiny bit more asset-sensitive than we would've been.
So we're taking a look and we're -- with the Fed moving down, we're kind of resetting some of our product offerings and really reevaluating those, taking a little bit of a hiatus and probably come back with something, either later this year or early next year after we kind of see where -- get a better idea of where things settle, and then also in how we want to approach the DNB market with any deposit promotions.
Todd D. Brice -- President and Chief Executive Officer of S and T and S and T Bank
And some of those start -- the promotional time starts to roll off in December, so we can start to hit some of those rates in December and then...
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
Right. We have seen some -- a little bit easier comp competitively. It hasn't been as tough as it was earlier this year, for example. I think the competition has been a little bit more in line with the market or the kind of wholesale rates. So we've seen a little bit less competitive environment. And as Todd mentioned, we have -- we did put on a fair amount with this promotional money market that starts to roll off in December over the course of the next probably 10 months after that.
Collyn Gilbert -- KBW -- Analyst
Okay. Do you happen to have what kind of the blended rate is on that promotional money market slug that's set to roll off?
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
It's currently priced -- most of it is priced at 2.5, probably about 2/3 of it at 2.5 and maybe another 1/3 at about 2.15.
Collyn Gilbert -- KBW -- Analyst
Okay. Okay. And do you have a sense of how the deposit pricing in the DNB market compares to your legacy PA markets and then also what you're seeing in Ohio?
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
From what we've seen, I think the Ohio market is -- tends to be a little bit more competitive, especially up in Northeast Ohio. DNB is more similar, I think, to Central and Western PA. We haven't seen a lot of different -- there are some different players in there. There are some -- I think there's more larger institutions in that DNB market. But we haven't -- or as of yet, though, it doesn't appear that the pricing is significantly different than what we have in our Western and Central markets.
Collyn Gilbert -- KBW -- Analyst
Okay. Okay. That's helpful. And if you addressed this in your opening comments, I apologize, I was a little late hopping on. But the buyback, kind of how are you thinking about that, or a buy back and just sort of capital management at this point?
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
We did get -- we did do another authorization for $50 million that goes through March of '21. Right now, we're watching, it depends on -- we do have a lot -- there's a lot of things going on with the merger, with the implementation of CECL. And so we'll take a cautious look, but it will depend on the price and the market. So we'll continue to evaluate that.
Todd D. Brice -- President and Chief Executive Officer of S and T and S and T Bank
And some of the loan growth helped to utilize some capital this quarter as well.
Collyn Gilbert -- KBW -- Analyst
Okay. Did you give preliminary guidance on CECL, Mark?
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
No. We're still -- and we're making good progress and we have our models in place but they haven't been fully tested. And we have an independent model validation coming in. So we're going to hold off on providing any firmer guidance until we get through all that. So we don't anticipate providing any firm numbers until the fourth quarter release.
Collyn Gilbert -- KBW -- Analyst
Okay. Okay.
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
That's good. Thanks, guys.
Operator
And gentlemen, at this time, we have no signals from our group. [Operator Instructions]
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
Jim, we do have one question that came in over the email that I want to address.
Todd D. Brice -- President and Chief Executive Officer of S and T and S and T Bank
And It was just asking about the increase in accruing TDRs this quarter, so I'll let Pat.
Patrick J. Haberfield -- Senior Executive Vice President and Chief Credit Officer
Yes. Sure. This is Pat. We did have a TDR, a new TDR. It was a long-term customer, an operating company which is secured by a real estate. We have current values. The borrower had experienced some short-term cash flow issues, so we had restructured the credit. We had previously -- and I think early in 2018, had this credit downgraded and adversely rated. So therefore, continues to accrue. It's always been current, it's continued to make payments. But because of the restructuring and the problem in the risk rating, it caused them to fall into the TDR status.
Todd D. Brice -- President and Chief Executive Officer of S and T and S and T Bank
So good. So if there are no further questions, I just want to thank everybody for participating in today's call, and we look forward to talking with you in January for our fourth quarter results. You all have a good day.
Operator
[Operator Closing Remarks]
Duration: 24 minutes
Call participants:
Mark Kochvar -- Senior Executive Vice President and Chief Financial Officer
Todd D. Brice -- President and Chief Executive Officer of S and T and S and T Bank
David G. Antolik -- President and Chief Lending Officer
Patrick J. Haberfield -- Senior Executive Vice President and Chief Credit Officer
Russell Gunther -- D.A. Davidson -- Analyst
Collyn Gilbert -- KBW -- Analyst
