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Edited Transcript of STBA earnings conference call or presentation 18-Jul-19 5:00pm GMT

Q2 2019 S&T Bancorp Inc Earnings Call

INDIANA Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of S&T Bancorp Inc earnings conference call or presentation Thursday, July 18, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David G. Antolik

S&T Bancorp, Inc. - President, Chief Lending Officer & Director

* Mark Kochvar

S&T Bancorp, Inc. - Senior EVP & CFO

* Patrick J. Haberfield

S&T Bancorp, Inc. - Senior EVP & Chief Credit Officer

* Todd D. Brice

S&T Bancorp, Inc. - CEO & Director

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Conference Call Participants

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* Collyn Bement Gilbert

Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst

* Daniel Edward Cardenas

Raymond James & Associates, Inc., Research Division - Research Analyst

* Matthew M. Breese

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* Russell Elliott Teasdale Gunther

D.A. Davidson & Co., Research Division - VP & Senior Research Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the S&T Bancorp, Inc. Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

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Mark Kochvar, S&T Bancorp, Inc. - Senior EVP & CFO [2]

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Thank you. 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 second 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'll provide an overview of S&T's results.

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Todd D. Brice, S&T Bancorp, Inc. - CEO & Director [3]

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Well, thank you, Mark, and good afternoon, everybody. We're pleased to announce net income of $0.76 per share or $26.1 million. This represents a 25% increase in earnings per share over last year's second quarter results of $0.61 per share or $21.4 million and a 15% increase in EPS over first quarter results of $0.66 per share or $22.9 million. Operating metrics for the quarter were very strong with ROA of 1.44%, return on equity of 11% and return on tangible of 15.89%.

In addition to our overall performance, we're extremely excited about our recent announcement regarding the acquisition of DNB Financial. As we discussed on our merger announcement call, DNB is based in the rapidly expanding Chester, Philadelphia and Delaware County markets, which will provide significant growth opportunities as we move forward. We've made all the necessary regulatory filings, and we anticipate closing in the fourth quarter of 2019.

For the quarter, balance sheet growth is the big story as portfolio loans increased $98 million or 6.6% annualized. Deposits were up $23 million. However, we did elect to let $50 million of brokered CDs run off. Netting brokered out, customer deposits increased by $74 million or 5.6% annualized, and they were mostly in the money market and noninterest-bearing DDA accounts. This is a result of targeted geography promotions and increased deposits with existing customers. Compared to 1 year ago, portfolio loans were up $247 million or 4.3%, and deposits were up $463 million or 8.6%. We do continue to see nice activity in both our lending and deposit gathering efforts across all of our 5 markets.

Net interest margin was 3.68% for the quarter, which was down 3 basis points from Q1 but approximately 4 basis points higher than what we were anticipating. We did experience heavy quarter in loan payoffs, which positively impacted the margin through the acceleration of some of the origination fees and prepayment fees.

Our asset quality metrics showed nice improvements as well. We recorded a provision expense of $2.2 million, which compares favorably to $9.3 million in the second quarter last year and $5.6 million in the first quarter of this year. Nonperforming assets decreased by $4.3 million or 8.4% to $46.5 million and represent 0.63% of total assets. And finally, total delinquency declined by 9 basis points and now stands at 0.92%.

Expenses were slightly higher than expected but were impacted by some merger-related costs as well as several other unusual items. As a result, our efficiency ratio did increase to 54%. And Mark is going to explain some of the variances in a few minutes, but we will work diligently to drive that number down into the low 50% range.

We are also seeing nice results from some of our recent investments to grow our various lines of business. Our small business lending group and our mortgage division had record quarters. Our new retail branches in Central and Northeast Ohio are experiencing nice loan and deposit activity in both commercial and retail areas. And the bankers that we've added to our commercial banking, business banking and mortgage teams across our footprint are building their pipelines. We continue to see robust economic activity across our footprint and like our staff from a talent perspective, to continue to grow the business.

And finally, our Board of Directors declared a quarterly dividend of $0.27 per share payable on August 15. This represents an 8% increase over the dividend that was paid in the same period last year.

So thank you for your continued support of S&T Bancorp. Now I'd like to turn the program over to our President and Chief Lending Officer, Dave Antolik.

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David G. Antolik, S&T Bancorp, Inc. - President, Chief Lending Officer & Director [4]

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Thank you, Todd, and good afternoon, everyone. We're pleased to report loan growth of 6.6% annualized for the second quarter. That's in line with our expectations and guidance. For the quarter, we experienced growth in all loan categories. In the commercial portfolio, our investments in personnel and our strategy to expand our C&I capabilities into all of our markets under the leadership of our managing directors of C&I banking yielded growth of $47 million in Q2.

Revolving utilization rates declined from 42% to 41% quarter-over-quarter. Offsetting this decline was an increase in total revolving commitments of $19 million and an increase in the total number of commitments. With regard to our CRE activities, balances grew modestly by $5 million. And as Todd mentioned, we continue to experience an elevated level of property sales and competitive pressure causing higher levels of payoffs. We expect this pressure to continue in the future quarters.

Our commercial construction balances grew by nearly $22 million, and our unfunded construction commitments grew by $27 million quarter-over-quarter. Unlike the first quarter, balances were not heavily impacted by project completions and subsequent transfers from construction to the permanent category. We continue to see very positive results from our business banking group, which focuses on relationships up to $1.5 million. In this space, we've seen year-over-year originations increase by over $20 million, and year-to-net loan -- year-to-date net loan growth for this business line is approximately 8%.

With regard to consumer loans, we saw growth of $24 million, driven primarily by residential mortgages. Year-to-date, we have added 4 mortgage loan originators and have closed nearly $100 million, up 45% over the first half of last year. Based on our current pipeline and the rate environment, we expect this level of production to continue through the balance of this year.

Under the leadership of our market presidents, our market-based growth platform has become the primary driver of growth for our organization. For the quarter, we saw particularly strong loan and deposit growth in both Central and Western Pennsylvania. Based on our current commercial pipeline, which is over 40% larger than at this point last year, and the previously mentioned retail mortgage pipeline, we continue to remain comfortable with our mid-single-digit full year loan growth guidance.

And now Mark will provide you with some additional details.

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Mark Kochvar, S&T Bancorp, Inc. - Senior EVP & CFO [5]

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Thanks, Dave. Net interest income improved by about $0.5 million due to higher average loan balances of $44.5 million and 1 additional day in the quarter. The second quarter net interest margin rate was supported again by higher-than-typical prepayment activity, similar to what we experienced in the first quarter, which added about 4 basis points. We therefore continue to expect net interest margin contraction from lower prepaid fees along with additional pressure in the events that Fed lowers rate at the end of the month. The combined impact of more normal prepaid and a 25 basis point cut would likely put net interest margin rate in the lower 3.60% range in Q3. The $1.5 million increase in noninterest income is driven by higher commercial-related fees of almost $800,000. We had a very busy month with swaps, which shows up in the other category.

We also saw seasonally better activity in debit card and merchant fees, combined up over $500,000 compared to the first quarter. The $1.4 million increase in noninterest expense was in part due to $618,000 or about $0.01, $0.015 per share of merger-related expenses. The other category, which is up, includes higher OREO lossesalong with higher collection and legal costs related to some ongoing loan workouts.

Going forward in 2019, we expect fee income to be approximately $12 million per quarter and expenses to be approximately $39 million per quarter, not including merger-related expenses. Merger expenses will be heaviest in Q4 when the transaction is expected to close and in the first quarter of 2020 when the systems conversion takes place. Our tax rate in the second quarter was in line with our full year expectation of an effective rate of around 16.5%. Our risk-based capital ratios were essentially unchanged in the second quarter due to improved loan growth.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Matthew Breese with Piper Jaffray.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [2]

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Just sticking with the NIM, maybe just wanted some color on -- I know we're weeks -- potentially weeks away from a Fed cut, but just some color on the market and how things are progressing in terms of your ability to cut deposit costs. It was encouraging to hear that you relieved yourselves from brokered deposits. Is that opportunity still there?

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Mark Kochvar, S&T Bancorp, Inc. - Senior EVP & CFO [3]

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Opportunity on the brokereds or just cutting of the rates.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [4]

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It was 2 questions in 1 there, really. Just one, color on the deposit market and competition. And then two, is that opportunity to continue to wind down some of the higher cost deposits? Is that still there, the brokered stuff?

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Mark Kochvar, S&T Bancorp, Inc. - Senior EVP & CFO [5]

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I think we still have -- we realized we have some decent amount of floating rate assets, and so we've tried to match that up at least in part with some floating rate items on the liability side. We have a -- our -- the biggest money market account is tied to the fed funds rate. So that will go down automatically when the Fed moves. And then we also have -- most of our brokered deposits are tied to LIBOR. So those will reduce in rate as well. And then almost all of our wholesale borrowings are also either very short or LIBOR-based. So we do have a decent amount of costing liabilities that we'll reprice. I mean, there still is a gap, and so we'll work hard on some of the exception pricing items that we've done on the deposit side to review those and make some cuts. And then we'll be looking at other things like growth and the fee and expense areas to try to make up the rest of the difference.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [6]

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Right. Understood. Now were you saying that the money market bucket in general is closely tied to the Fed funds? Or are you saying that you have a specific amount tied to Fed funds and -- or index and if it's the latter?

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Mark Kochvar, S&T Bancorp, Inc. - Senior EVP & CFO [7]

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I'm sorry. About half of the money market is tied to Fed funds.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [8]

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Got it. Okay. And then just thinking about, going forward, if we are in an environment where the Fed is more apt to cut beyond just the first one, any color on impact to NIM per Fed cut? Is that something you could provide?

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Mark Kochvar, S&T Bancorp, Inc. - Senior EVP & CFO [9]

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Roughly -- I mean, on this first cut, we're looking at about 3 to 4 basis points. So I'd expect that about -- probably about the same amount for each one as they kept on going.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [10]

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Okay. And then it sounds like a more -- it was definitely a more positive quarter on the loan growth front. Just curious, what are you seeing out there in terms of competition, spreads, duration, structure? Are things any better or worse? And just thinking about, beyond 2019 with 2020, how the landscape looks.

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David G. Antolik, S&T Bancorp, Inc. - President, Chief Lending Officer & Director [11]

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Yes. Matt, this is Dave Antolik. We continue to see pressure particularly in the CRE space, as I mentioned, payout pressure from both property sales and competitive offers, particularly on pricing. So spreads from the competition have decreased. We continue to compete with 30-year amortizations, and we're starting to see some longer IO periods on CRE products. We don't -- I don't anticipate that -- any relief in that space. So that's why we're looking at diversified growth. And you see good diversified growth this quarter with residential mortgage continuing down the path to grow our C&I capabilities and construction lending as well.

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Todd D. Brice, S&T Bancorp, Inc. - CEO & Director [12]

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With the yield curve, we're seeing more requests for maybe longer-term fixed rates because I think, quite frankly, they're cheaper than some of the floating rate options that we can do. That's why the swap numbers were up significantly this quarter because we've been able to roll them into swap products. We're not taking that rate risk on the balance sheet.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [13]

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Right. Right. That makes sense. Okay. And then, Todd, just following up on one of your comments, the goal of getting to that low kind of 50% efficiency range. What time frame do you set that target?

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Todd D. Brice, S&T Bancorp, Inc. - CEO & Director [14]

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Well, we look at it continually, Matt. Now if we get some pressure with rates down, that will impact the ability to kind of cut that. But like I said, there were some, what we call, unusual items in one time, so it probably might have bumped it up 1% or maybe 1.5%. But -- and we look at that every day on where can we be more efficient and how can we control our expenses while, at the same time, making investments and grow the business. Like I said, we opened up some branches in Q1. We added some people. But we're really starting to see the results from making those investments in pipelines and overall activity as well.

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Mark Kochvar, S&T Bancorp, Inc. - Senior EVP & CFO [15]

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You also should see some improvement. Once the DNB is integrated, there is some improvements in the efficiency ratio. I think we'll see from that as well.

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Operator [16]

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

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [17]

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I appreciate your thoughts around the margin and the Fed cut scenario. Just curious what you guys are assuming internally for Fed actions and how you're positioning the balance sheet as a result.

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Mark Kochvar, S&T Bancorp, Inc. - Senior EVP & CFO [18]

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I mean, we don't have a formal review, so we'll take a -- we'll do modeling with various assumptions. I mean, just from the press, the consensus certainly seems like at least 1, maybe 2. So we're planning ahead to at least be prepared for those events but haven't modeled anything beyond that -- beyond 2 at this point.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [19]

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Okay. Great. And then just switching gears to the loan growth. I heard you guys say Central and Western PA particularly strong this quarter. Maybe just any color you could share on what drove the strength this quarter and then expectations going forward. I understand you recommitted to that kind of mid-single-digit guide, but where that growth would be coming from.

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David G. Antolik, S&T Bancorp, Inc. - President, Chief Lending Officer & Director [20]

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Some of it was staffing, so making sure we have the right folks in the right markets where we see opportunity. Some of it was sharpening our pens on some pricing, on some deals that we really like, particularly in the legacy Western Pennsylvania market. And most consistently, the business banking segment that I mentioned, that has been our most consistent provider of asset growth, and the numbers aren't as large as a traditional commercial banking area. But if we can get outsized growth, 8%, 9% in that book of business, that's helped to drive a lot of growth as well.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [21]

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And like you said, the pipeline is up. What was the update...

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David G. Antolik, S&T Bancorp, Inc. - President, Chief Lending Officer & Director [22]

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The commercial pipeline is up about 40% over last year at this time, and that's spread throughout the 5 markets. So making sure that we have the capabilities in all 5 markets, rolling our C&I platform, recruiting to support that growth is a big part of what's driven our success.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [23]

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That's very helpful. And then just last one for me. Anything you could update us on as to where you stand in the CECL implementation process and any early indications of that?

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Mark Kochvar, S&T Bancorp, Inc. - Senior EVP & CFO [24]

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This is Mark. I mean we continue to work with our -- the vendor that we had used prior to CECL for our ALLL activity, and we've been working with them to work through the different changes to our pooling and also looking at different options to calculate the historical loss. We're looking at that data right now and are getting close to trying to make a selection of which model makes the most sense for us. We don't have any guidance on the impact of that yet but don't anticipate any problems internally with the implementation of CECL.

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Operator [25]

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(Operator Instructions) Our next question comes from the line of Collyn Gilbert with KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [26]

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Just wanted to start on the fee side. So I know you had indicated, Mark, where your -- the outlook for quarterly fees going forward. But just the -- sort of a composition of that and how you sort of see mortgage banking trending. And then I know, obviously, the debit and credit card fees were up big this quarter. Anything that you guys are doing strategically different? Or just trying to dig into some of the trends within the fee lines a little bit more.

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Mark Kochvar, S&T Bancorp, Inc. - Senior EVP & CFO [27]

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Probably the biggest change in the competition are the swap fees that we alluded to, and those have really been a lot higher than usual. There's a little bit of a rate play in there. So those may or may not last or maybe not as repeatable as some of the other fees. We have seen continued good activity so far this quarter, so that looks positive. But there's some risk if the Fed moves and we get slope back into the curve, that some of the swap fees might reduce a little bit or come back to a more normal level. Mortgage -- on the mortgage banking side, Dave?

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David G. Antolik, S&T Bancorp, Inc. - President, Chief Lending Officer & Director [28]

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Yes. So on the mortgage banking side, we've been portfolio-ing about 60% of the activity. I guess it's really a matter of what point do we decide to retain and what point do we decide to sell. So as you saw in the quarter, we had pretty nice balance sheet growth in that segment, and of course, that comes to the detriment of the mortgage banking fees.

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Todd D. Brice, S&T Bancorp, Inc. - CEO & Director [29]

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On the debit, too, I think it's a combination of just increased utilization from existing clients. And we're also seeing some nice household growth in our retail book. So just more people are swiping the plastic than what we had a year ago.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [30]

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Okay. Okay. That's helpful. And then on the buybacks, you guys didn't buy back any shares this quarter, did you?

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Mark Kochvar, S&T Bancorp, Inc. - Senior EVP & CFO [31]

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Very small amount, maybe I think -- at the very beginning of the quarter, we picked up around 72,000 shares.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [32]

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Okay. And do we -- should we assume that, that buyback activity is going to be limited now in the wake of DNB?

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Mark Kochvar, S&T Bancorp, Inc. - Senior EVP & CFO [33]

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We'll probably be more selective given that we do have the acquisition out there. We still have about $23 million or so of room in the current authorization. But it's something we'll kind of evaluate as we go. But it might be a little bit lower than we saw in Q1.

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Todd D. Brice, S&T Bancorp, Inc. - CEO & Director [34]

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There are some constraints on what we can -- we do as well.

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Mark Kochvar, S&T Bancorp, Inc. - Senior EVP & CFO [35]

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Right. And there's some -- with S-4s and the timing of all that, there's a lot of blackout periods.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [36]

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Yes. Got it. Okay. And then just finally, can you offer us any updates on DNB? I mean how things are going so far? Any changes to how the construct of their balance sheet or growth trends or anything like that since you guys announced it?

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Todd D. Brice, S&T Bancorp, Inc. - CEO & Director [37]

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Yes. No. I mean we're really -- again, really, really positive. And we're in, we made the regulatory filings. We've had meetings with employees. And all the feedback so far is very good. The more we get in and working with them, the more apparent the culture is really aligned. We think that will bode well for -- when we get into the transition and integration period. But both teams are working very diligently and very well with each other right now. So we're starting to begin the mapping processes on the IT and everything. And -- so we're all -- all good things so far.

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Operator [38]

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Our next question comes from the line of Daniel Cardenas with Raymond James.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [39]

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So in your prepared comments, I think you guys mentioned that your line utilizations were down 41% versus 42% last quarter. Is that just kind of seasonal? Is that something that we see every quarter? Or is there something behind that, that maybe you can point to, to explain why we saw a modest decrease linked quarter?

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David G. Antolik, S&T Bancorp, Inc. - President, Chief Lending Officer & Director [40]

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Yes. I think that's just seasonality. We've tracked this for many years, and it's surprisingly consistent. It runs between 41% and 43%. If we get outside of that range, then we might start looking a little more heavily. We did see some reduction in floor plan balances and floor plan utilization this quarter. So that drove some of that number.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [41]

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Okay. So we shouldn't read into it that, perhaps, borrowers are stepping back on the sideline and...

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David G. Antolik, S&T Bancorp, Inc. - President, Chief Lending Officer & Director [42]

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No. No. I think the big story for us is that the overall revolving commitments were up, and the number of commitments, meaning number of customers, has increased as well.

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Todd D. Brice, S&T Bancorp, Inc. - CEO & Director [43]

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Yes. I mean conversations with customers are still very positive. There's a lot of activity. I think the big constraint that we're hearing from -- I don't care what sector we're going into, is just trying to find people to fill some of the positions. So -- and every day, they're looking for talent. But with unemployment rates, where they are, it's been very difficult. So I think you'll see probably some pressure on some wage, wage pressures across various industries right now.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [44]

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Okay. Good, good. And then maybe, Mark, if you can remind me just the percentage of your loan portfolio that's tied to LIBOR.

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Mark Kochvar, S&T Bancorp, Inc. - Senior EVP & CFO [45]

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It's kind of mid-40%. That's LIBOR and prime.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [46]

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Okay. LIBOR and prime. Right. And then maybe just on the credit quality front, any color you can give on kind of watch list trends in 30- to 90-day past dues? Is there anything out there that's causing you concern right now? I mean everything seems pretty manageable, but just kind of wondering if you're seeing anything on the horizon that's making you lose a little sleep at night.

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Patrick J. Haberfield, S&T Bancorp, Inc. - Senior EVP & Chief Credit Officer [47]

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Yes, Dan. This is Pat. What we're seeing in our trends is those numbers staying relatively stable. Obviously, we have decrease in delinquency, in the NPAs and really in the substandard categories, all the categories we like to see. We still have a few credits in that workout bucket that we talked about in previous quarters that are going to be there for a little while. So I don't necessarily see all the levels changing dramatically. But I would say that going forward on our loss expectations, exactly what we said last quarter, and I would look for more just stabilization.

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Operator [48]

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There are no further questions at this time. I would like to turn the call back over to Mr. Brice for any closing remarks.

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Todd D. Brice, S&T Bancorp, Inc. - CEO & Director [49]

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Okay. I just want to thank everybody for participating in today's call. Mark, Dave and I and Pat appreciate the opportunity to discuss this quarter's results and look forward to hearing from you on our next conference call. Hope you all have a great day.

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Operator [50]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.