Mark Kochvar - Chief Financial Officer Todd Brice - President and Chief Executive Officer David Antolik - Chief Lending Officer.

Matthew Breese - Piper Jaffray Matt Schultheis - Boenning & Scattergood Collyn Gilbert - KBW Daniel Cardenas - Raymond James.

Greetings and welcome to the S&T Bancorp Inc. First Quarter 2018 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..

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 the cautionary language required by the Securities and Exchange Commission for forward-looking statements that maybe 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 President and CEO who will provide an overview of S&T’s results..

Well, thank you Mark and good afternoon everyone. We are pleased to report record net income of $26.2 million or $0.75 per share and this is a 44% increase over the first quarter of 2017 results of $18.2 million or $0.52 per share.

Performance metrics were also very strong with an ROA of 1.51%, return on equity of 11.92%, return on tangible common equity of 17.83% and an efficiency ratio of 50.35%.

Net income for the first quarter versus ‘17 was positively impacted by increased revenues, which were up 6.3%; controlled expenses, which declined by 2%; improved credit cost, which declined by 52%; and a reduction in taxes due to the decrease in the federal corporate tax rate from 35% to 21%.

For the quarter, balance sheet growth was muted as we experienced declines in our loans and deposit portfolios. Market conditions were again somewhat challenging in Q1 as we experienced higher than normal payoffs in both our commercial and consumer portfolios.

We are seeing a nice lift however in our underwriting pipelines and expect to meet our overall growth objectives for the year. We continue to focus on protecting our net interest margin through increased spreads on new loan originations and letting some higher costing deposits runoff.

As a result, our net interest margin did expand by 1 basis point to 3.59% even with the negative impact of the FTE adjustment from a lower statutory tax rate. Controlled expense discipline continues to be a focus throughout the organization.

Compared to first quarter last year, expenses were down $720,000 due in large part to the sale of majority interest in our Evergreen Insurance division and a state college branch. These expenses were included in first quarter numbers last year. Pre-tax, the gain on Evergreen was $1.9 million. However, the net gain after-tax was approximately $500,000.

Overall, credit metrics for the quarter were very strong. Total delinquency declined to 0.53% and we had net recoveries for the quarter of $184,000. Non-performing loans also declined by $2.6 million or 10.9% and now stand at $21.3 million or 0.37% of the total loans.

Our OREO category did increase by $2.5 million, but the main driver is attributed to two properties that were originally purchased for branch locations in York, PA. We have made a management decision not to build new locations in that market and we are now currently marketing the properties for sale.

And as a result, regulations necessitate the move into OREO. I do want to bring to your attention an issue that occurred during the course of our year end audit. We did disclosed this in our 10-K that was filed on March 1.

We disclosed the material weakness in our financial controls and the issue relates to how we are internally validating risk ratings in our special mention and sub-loan categories in some instances, where we had performing borrowers and performing loans, but they did experience a deteriorating financial position on cash flows.

Our internal loan review department relied on credit risk mitigants, including guarantor support and interim financial statements to support the loan rating. The controlled efficiency did not result in any restatements to our financial statements. And again, I do want to stress that all these loans are performing.

We are monitoring the financial performance very closely. We did perform an in-depth analysis and review of our classifications with penetration rates of 87% and special mention at 69% in substandard accounts.

In addition, we are taking immediate steps to remediate the issue and we would engage an independent third-party to evaluate our current activities related to loan review risk rating assessments and we do expect to have the matter resolved in Q3.

And filing with our increased earnings levels and confidence moving forward our Board of Directors has approved 13.6% or $0.03 per share increase in our quarterly dividend to $0.25 per share. And this does represent a 25% increase in the dividend over the same period of last year. So again, we appreciate your continued support in S&T Bancorp.

And now I would like to turn the program over to David Antolik..

Thank you, Todd and good afternoon everyone. I would like to start by adding some details to Todd’s comments regarding higher than full payoffs in the first quarter. In total, payoffs were approximately 25% higher than the quarterly run rate that we experienced through the third quarter of last year.

As our payoff rates were anticipated and were the result of several factors including the customer directed sale of four operating businesses that contributed to C&I balances – balance reductions of $26 million.

Also adding to the C&I reduction in Q1 was an $18 million decline in tax free loans based on our decision to protect the net interest margin and the impact of tax reform on the revenue drive on these assets. C&I utilization rates remained stable at 39% versus Q4.

And we continued to see solid growth in treasury management revenue and the total number of business households. During the quarter, we experienced some modest growth in our commercial real estate portfolio.

The permanent CRE portfolio increased by $75 million while our construction balances declined by $60 million resulting in net growth of $15 million. During the first quarter, we saw $99 million of construction projects that were completed and transferred from the construction category to the permanent category.

We also experienced several large property sales that resulted in higher than historical payoff levels. It’s worth noting that this is the first quarter and over a year that our unfunded construction commitments increased indicating more stable balances in the construction portfolio moving forward.

Consumer loan balances declined by $19 million during the quarter due primarily to home equity declines. Our residential mortgage pipeline has grown by approximately 33% over the last quarter and we are launching a construction loan promotion that we believe will help to grow consumer loan balances.

From a regional perspective, our newer markets and LPOs continued to perform very well. During the quarter we saw a loan growth of $22 million in Western New York, $8 million in Ohio, $6 million in Central Pennsylvania and $27 million from our North Shore Pittsburgh C&I team. In conclusion, activity levels have increased.

Our pipelines expanded and we continued to recruit and attract highly motivated bankers in order to meet our long-term growth objectives. Our forecast for full year loan growth of mid single-digits remains and we anticipate improved origination activity for the remainder of the year.

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

Okay, great. Thanks Dave. The net interest rate margin improvement of 1 basis point compared to the fourth quarter had some non-recurring help from an increase in the Federal home loan bank dividend and some payoffs from our acquired loan portfolio that resulted in favorable purchase accounting adjustments.

We also benefited from Fed increases in December and March and we experienced better new versus paid loan at rate activity with a favorable difference of over 40 basis points in the first quarter.

Net interest income was down primarily to two less days in the quarter as the net positive impact I just described offset a decline in average earning assets. Looking ahead, we expect the NIM rate to be relatively stable with modest increases should the Fed rate hikes continue.

We do continued to experience light increases in our deposit betas, so there will likely be some catch up in NIM compression should the Fed pause.

Non-interest income included some one-time items in the last two quarters, the gain on the sale of the majority interest in our insurance this quarter for $1.9 million and the gain on the branch sale in the fourth quarter of ‘17 of $1 million. Going forward, we expect fee income to be approximately $12 million per quarter.

Non-interest expense again exerted the control this quarter. Overall expenses are down as expected without insurance business in our financials. This is most noticeable intelligent benefits as the insurance business had approximately 35 employees.

Other taxes are elevated this quarter and to a lesser degree in the fourth quarter of ‘17 due to assessments from a Pennsylvania State sales tax audit. We continue to expect quarterly expense levels in $36 million to $37 million range for the remainder of the year. With tax reform, our expected effective tax rate in 2018 is in the mid-16% area.

It was higher in the first quarter due to some one-time discrete items mostly related to the sale of the majority interest in our insurance business. In subsequent quarters, we expect the effective rates of returns in the mid-16% area.

Our capital ratios improved by 25 to 30 basis points or more as strong earnings accompanied a relatively flat balance sheet. Our TCE ratio exceeded 9% for the first time since 2014.

Our board authorized a $50 million buyback program in March of this year that will give us some flexibility to manage our capital position depending on growth and also the performance of the stock. Thanks very much. At this time, I’d like to turn it back over to the operator to provide instructions for asking questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matthew Breese with Piper Jaffray. Please proceed with your question..

Good morning, everybody..

Hi, Matt. Afternoon..

Yes, good afternoon. I am sorry.

I do appreciate all the color in the comments on fee income and expenses, but just one follow-up on the expense guidance, does that include any corrective actions necessary to take care of some of the occurrences in the 10-K that you alluded to?.

Yes, it does..

Okay, okay.

And where will see that show up?.

So, you would see anything, it would end up there in the consulting line..

Okay..

Professional services, I think we call it in the press release..

Got it. Okay. And then if I think about getting back to that kind of mid single-digit loan growth area for the year considering overall profitably levels I still feel like capital will grow and that’s with the increased dividend as well.

So as we think about capital management throughout the remainder of the year until ‘19, what are some of the other options and to what extent are you considering that the buyback that you mentioned?.

Right. Well, so we did put the buyback in place to provide us some flexibility there, we are evaluating at what level of our stock price that makes sense to do buybacks. We are still actively interested in M&A opportunities should they arise and those tend to use some capital as well.

And then also on the growth side if that were to pickup as well beyond our expectations..

Got it.

And on the M&A front, how have conversations developed since tax reform was enacted, has there been any meaningful increase in the conversation levels from some of the relationships you developed?.

I haven’t really noticed any, Matt. And again, if you look at our history too was we are going to stay pretty disciplined and we want to make sure that they check the boxes that we look for enhancing franchise value and being accretive to our existing shareholder base..

Okay. That’s all I had guys. Thank you very much..

Thanks, Matt..

Our next question comes from the line of Matt Schultheis with Boenning & Scattergood. Please proceed with your question..

Good afternoon..

Hi, Matt..

So with regard to your decision to not build these branches should we look at this as a larger strategic view – your view of the branch network or more a commentary on this particular market?.

I think probably, Matt, it’s a little bit of both. I mean the bulk of our franchise in Central Pennsylvania and the other three counties that we operate in, in Dauphin, Lancaster and Cumberland. We have one branch over in York and we have gone slow on new branch construction throughout the footprint.

If you look at our overall deposits per branches 95 millionish and so again, it’s expensive to develop branches and it takes a while to payback on them. So, I think the thinking by far is we are evaluating couple of options on where we have made the investments and resources.

It looks like we may do something in Columbus, but they are going to be a whole different model, a smaller scale, that they are probably less costly and you don’t need the real estate footprint that these particular two branches had..

Okay, thank you..

Thanks, Matt..

Our next question comes from the line of Collyn Gilbert with KBW. Please proceed with your question..

Thanks. Good afternoon, guys..

Hi, Collyn..

Mark, just wanted to get a little bit more color on what’s going on the deposit side, you guys had a big jump in money market that looks like I think this quarter and then so just was curious if there was a motion running there or kind of how you guys are thinking about just the pricing and growth trends within some of those deposit categories?.

With our money market, Collyn our most competitive product is money market accounts that’s tied to the Fed funds, it runs at 75% of the Fed funds rate, so it would commonly price out at 131. And so that’s in where we – I think we have seen any growth, that’s where it is and to the extent we have seen some disintermediation that is also where it goes.

We frankly have some competitors especially in certain pockets like public funds and some of the larger businesses that have well liquidity. And also we are seeing some in the CD – on the CD side and with rates kind of in the low to mid 2% also even 3% when you get out to 5 years. So the competition has been across the Board.

We have been competing mostly with – recently with on the money market side..

Right. And as Mark alluded to Collyn, it’s that growth in that money market account has predominately come on the retail side. We did experience some declines in the commercial banking group and in our public funds as Mark said.

And in some of that there is some seasonality to that and we already started to see some of the monies flow back on the public fund side and we would expect to see some on the commercial banking side as well..

Okay, that’s helpful, that’s good. Thank you.

And then just Dave your comment on the mortgage pipeline, up 33% over the last quarter, just maybe talk a little bit about and Mark if this overlays with you, but just how you are thinking about kind of the outlook for mortgage and also mortgage banking, I know, Mark you gave that $12 million quarterly run-rate on CEs, but just curious how the outlook for mortgage banking and mortgage in general fits into your overall strategy and outlook?.

Yes. Well, we did hire some new folks. We have a new manager in that area. He is building staff in order to help drive some volume there. We do expect the balances to remain relatively flat..

Okay.

And then on the mortgage banking, sorry go ahead?.

I was just going to say probably consistent with kind of the levels where were last year Collyn is where our expectation is..

Actually the decline in origination that we saw this quarter was mostly on the portfolio side. So from a fee perspective, we wouldn’t expect even if volumes pick back up I don’t think where we expect large increases on the fee income line for mortgages if I show up on the balance sheet..

Okay.

And then the reserve built a fair bit this quarter more than what I think guys have kind of been running at for the last few quarters, was that tied to the identification within the sort of the risk assessments or is that something different that led to that?.

That was it Collyn, we still had some shift in some classifications, so that flow back through our provision and ultimately into provision expense..

Okay.

So that was kind of one-time do you – should we not expect that kind of build?.

That’s our expectation, yes..

Okay, that’s all I had. Thank you..

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

Good afternoon guys..

Hi Dan..

So just kind of jumping back to the capital quickly with TCE at 9%, I mean ideally where would you like to see that ratio and how long do you think it would take you to kind to an ideal tangible common equity number?.

That’s probably at closer to the top end of where we would like to see it and where we think we need at least to be..

We are going to like to stay in that, yes talk about staying in that 8% to 9% range Dan and then like Mark said its low on the upper end. So we did jump the dividend this quarter just to kind of be consistent on a payout ratio with where we are in the past.

And as Mark alluded to we will look at all options going forward, whether we like to move forward with some of the buybacks that we recently had authorized or down the road that you do something more on dividend or on the M&A front. So, we are evaluating all the different levers you could pull on capital..

Right. Got it, okay.

And then on the lending front on the commercial side what were line utilizations looking like this quarter and how is that compared to the last quarter last quarter?.

Yes. They were flat at 39% equal to the fourth quarter, which was down a little bit a percentage point or two from the earlier part of 2017. Now, if you look at the first quarter, it was kind of a tale of two quarters, so January and February were slow, March was pretty strong.

So, our originations in March equaled what we have done in January and February combined. So, we think that momentum will carry into the second quarter. And as I stated in my comments, we have seen some increase in our pipeline as well..

The other thing I want to mention regarding the commercial side is we have made a conscious decision to drive focus on the margin as opposed to just volume and getting bigger growth for growth’s sake. So, there have been some transactions, where we have just elected not to participate on from a spreads standpoint.

I think our bankers really have a comfort level now in pushing out some increased spreads and it’s showing up and last quarter, our new loans that we are originating were, I think about 50 basis points higher than the…..

Fourth quarter..

40 basis points higher than loans that we are paying off. So, that’s starting to make a meaningful impact on the overall net interest margin..

And mentioned maybe I understood you incorrectly, but it sounded like you guys had some additional hires in the quarter, was that correct on the lending side?.

Yes. We added a few business bankers and we added one net commercial banker as well and we are constantly recruiting primarily to build our C&I staff to drive better growth in that area..

But some of it is just reallocating resources too that maybe we have had some folks that have left for whatever reasons and we can take those dollars and move those move our attention to some areas, where we feel we have some higher growth prospects..

Alright.

And then how about in terms of the outlook for the remainder of the year I mean do you have a number in mind as to how many more folks you would like to add in 2018 on the lending side?.

Our ability to recruit in it is determined by what the market availability of bankers is. So, we are constantly looking at again the opportunity in a market and whether we can recruit there and moving resources from one area to another, where there is greater opportunity.

We don’t have necessarily a number in mind, but we know we have put out there, our goal is to grow loans in the mid single-digit area. So, if we need to dedicate more resources to an area where there is fair opportunity to meet that goal, we are going to do it..

Okay, great.

And then last question maybe just a little bit of color in terms of the construction loan product that you had mentioned that you were launching?.

Yes, that’s a rate special essentially..

Okay, got it. Okay, perfect. Great. I will step back. Thanks guys..

Thanks, Dan..

There are no further questions in the queue. I’d like to hand the call back over to management for closing comments..

Well, again thank you for participating in today’s conference call. Mark, Dave and I appreciate the opportunity to discuss this quarter’s results and look forward to hearing from you at our next conference call. Hope you all have a good day..