Ladies and gentlemen, good day and thank you all for joining us for this S&T Fourth Quarter 2019 Earnings Call. [Operator Instructions] And now to get us started with opening remarks and introductions, I am pleased to turn the floor over to our host, Mr. Mark Kochvar. Welcome, Mark..

Thank you very much. Good afternoon, everyone and thank you for participating in today’s conference call. Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors which should be 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 fourth quarter and full year 2019 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 Chief Executive Officer, who will provide an overview of S&T’s results..

Well, thank you, Mark, and good afternoon, everybody. I am very pleased to announce that our fourth quarter results were strong and capped off a very successful 2019. For the quarter, we are reporting net income of $22.3 million or $0.62 per share, which includes merger-related expenses of $10.2 million or $0.23 per share.

Excluding merger-related expenses, core EPS was $0.85 per share, which compares favorably to $0.77 per share in the fourth quarter of last year and $0.80 per share in the third quarter of 2019. Our core performance metrics were very solid, with a return on asset of 1.53%, return on equity of 11.38% and a return on tangible common equity of 16.46%.

For the full year, we recorded net income of $98.2 million or $2.82 per share, which includes $11.4 million of merger-related expenses. Core EPS for 2019 were $3.09 versus $3.01 per share in 2018. And for the full year, core ROA, ROE and ROTCE were 1.45%, 10.92% and 15.76% respectively.

2019 was a busy year as we made significant investments throughout our footprint to position ourselves for future growth, all while maintaining our efficiency ratio at 51.39% for the full year. The big news was the consummation of our merger with DNB Financial in Eastern PA which closed on November 30.

We added 14 branches and approximately $1.1 billion in assets in markets with very favorable demographics and significant growth opportunities. While the integration is still ongoing, our results are very promising as overall client retention in all lines of business remain positive.

In our commercial banking division, we have been able to expand customer relationships through additional lending limits, treasury and swap products and also wealth management and insurance capabilities.

We are extremely excited about the prospects at our business banking division as that pipeline is growing nicely and also our retail mortgage activity has picked up and the average loan size is almost double of what we are seeing in our Western PA markets.

S&T signage will go up on February 10 when the systems conversion is complete and we look forward to extending the S&T brand as one organization in these new markets post-conversion.

The individual market based structure that we introduced at the beginning of 2019 is coming together very nicely and will continue to drive growth throughout our footprint.

Under the leadership of our five market Presidents, we are seeing enhanced collaboration across lines of business and are able to tailor products and services specific to each market to improve our client experience.

We have also made investments in our commercial banking division to expand our international banking capabilities and asset-based lending platform to broaden our products and services to meet client needs and have recently on-boarded our first two asset-based lending customers.

The retail division expanded the footprint last year with new offices in Columbus, Ohio and Cuyahoga Falls, which now have $78 million and $18 million in deposits respectively. These markets are developing nice business banking, mortgage and consumer banking opportunities as well.

We also opened two loan production offices, one in Buffalo and one in Berks County that will focus on commercial and business banking activities. And also over the course of 2019, investments have been made in production talent. Commercial banking welcomed five new members to their team.

Our mortgage banking division added five mortgage loan officers and the business banking group increased by four officers. In our wealth management division, we recruited a new sales director who has an extensive and proven track record in that space.

And in a short period of time, he was able to bring on a seasoned investment advisor to his team as well. Expanding our digital marketing platform is another area that we are investing to extend our brand and enhance our customer experience.

We have made investments in talent and advisors to improve capabilities in this important space and then redesign of our stbank.com website is in process and will be rolled out at the end of Q2.

So in summary, we are very pleased about the investments that we made in 2019 to position our company for future growth and we have been able to do it while maintaining our low efficiency ratio, which is very important to us. We are excited about our prospects for 2020 and look forward to expanding our franchise and rewarding our shareholders.

So now I am going to turn the program over to our President, Dave Antolik..

Thanks, Todd and good afternoon, everyone. As I complete my first full year as President of S&T Bank, I cannot be more enthusiastic about the progress we have made under our market-based growth platform and the opportunities that lie ahead.

2019 saw record years for production in commercial banking and business banking where we saw a 20% increase in total originations as well as retail mortgage and consumer where we experienced 56% and 48% increases respectively. This robust activity offset by increased payoffs resulted in full year loan growth of 5%.

We are very pleased with the diversification of this growth both by category and geography. For the year, organic growth in commercial banking was 4%; business banking, 6.5%; retail mortgage, 13%; and consumer, 3.5%.

Additionally, each of our five markets saw positive loan growth demonstrating the advantages of our operating model and the value of our market expansion. This is further illustrated by higher percentage loan growth in Northeast Ohio, Central Ohio and Upstate New York. We believe that Eastern Pennsylvania provides similar opportunities.

For the quarter, loan growth was challenged by the highest quarterly payoffs experienced in 2019. Total payoffs in Q4 increased by nearly 100% over Q3 and exceeded each of the previous four quarters by over $100 million. In total, organic loan growth for the quarter was $42.1 million or 2.7% annualized.

Q4 growth was driven primarily by business banking, retail mortgage and consumer lending activities with commercial banking remaining flat. Revolving C&I utilization rates decreased slightly from 42% to 41% in Q4.

However, new customer acquisition activity and the resulting increase in total commitments offset this utilization decline and resulted in a balance increase of $5 million. Looking forward, our pipelines remained solid with both commercial and business banking showing year-over-year growth of 30% and retail mortgage up by 20%.

We have also seen an increase in unfunded construction commitments of $110 million year-over-year pointing towards a steady growth in commercial construction outstandings during 2020 after bottoming in the second quarter of 2019. In total, we anticipate mid single-digit loan growth for 2020.

Deposit growth for 2019 was strong at $372 million or 6.6% excluding the DNB merger. For the year, organic demand deposit growth exceeded $100 million and the overwhelming majority of the remaining deposit balance growth was driven by money market. Similar to our experience with loans, all deposit gathering markets saw a positive growth.

Improvement in non-interest income for the quarter was mainly the result of higher commercial loan swap fees of $900,000 and for the year, total commercial loan swap fees exceeded $5.5 million. And now, Mark will provide you with additional details on our financial results..

Thanks, Dave. With the closing of the DNB merger on November 30, we have 1 month of activity in the fourth quarter numbers, along with the one-time expenses that Todd discussed.

The net interest income improvement of $3.2 million compared to the third quarter was primarily related to the merger as average balance growth, excluding the merger, was $116.5 million that was offset by a lower net interest margin rate of about 7 basis points.

This margin compression was in line with our expectations as we had the effective impact quarter-over-quarter of almost two Fed rate declines. Included in net interest income in the fourth quarter is approximately $360,000 or about 2 basis points of purchase accounting accretion for the DNB transaction.

We expect the NIM to be relatively stable in 2020 in the 3.55% area, assuming no further rate changes. This includes about 5 basis points of benefit from purchase accounting, which of course could fluctuate quarter-to-quarter depending on prepayment activity.

Non-interest income was strong in the fourth quarter or particularly in commercial swap fees as Dave talked about. This is likely to moderate some as we move into 2020 as the activity is driven by the shape of the yield curve and we worked through refi opportunities on loans that are already on the books.

Fee income from the acquisition and growth in other areas will offset some of this normalization in swap fees, bringing us to a run-rate of about $13.5 million to $14.5 million per quarter. The systems conversion Todd mentioned will result in the last of our merger-related expenses here in the first quarter of ‘20.

We expect a little bit less than $2 million. We should see the expense synergies really starting in the second quarter.

Factoring out some unusual items that helped us in 2019, including FDIC credits in the third and fourth quarter of ‘19 that totaled about $1.8 million and also a state sales tax adjustment of $2.3 million here in the fourth quarter, net of all that, we expect our expense run-rate to be in the $45 million to $46 million range per quarter in 2020.

We expect the tax rate in 2020 to be a little bit higher, around 18% than we experienced in 2019 that was due to higher pre-tax income and the expiration of some tax credits. Our capital ratios all improved compared to the third quarter due to modest point to point legacy S&T asset growth and relatively neutral capital impact of the merger.

We are in the final stages of validation and review of CECL. We expect the Day 1 impact on the legacy S&T portfolio to be between $7.5 million and $9 million, that’s about 12% to 14%. The acquired loans from the DNB merger carry no reserve as of 12/31/19.

Net accounts for our loan loss reserve dropping from 1% in the third quarter to 0.87% in the fourth quarter. The Day 1 impact of the acquired portfolio is expected to add an additional $9.5 million to $11 million. So combined, the reserve is expected to increase by between $17 million and $20 million, that’s about 27% to 32%.

This will put our reserve ratio between 1.11% and 1.15%. We should see tangible book value dilution per share of between $0.34 and $0.40 or less than 2% and we will see a reduction in the TCE ratio of 16 to 18 basis points.

The impact on regulatory capital ratios is muted by the 3-year phase-in and the ability to include the reserve up to 1.25% in Tier 2 capital.

These ranges are subject to revision as we complete our final reviews and purchase accounting work and will change when we report Q1 results putting on loan balances, risk ratings and the economic outlook as of 3/31/2020. So thanks very much.

At this time, I would like to turn things back over to the operator who will provide instructions for asking questions..

Thank you, sir. [Operator Instructions] We’ll take our first question from Russell Gunther with D.A. Davidson..

Hi, good afternoon, guys..

Hi, Russell..

Hi, Russell..

I appreciate your comments on the growth outlook and the guide at mid single-digits.

I was hoping to just parse that a bit and as you are looking out for 2020 get a sense for what the loan mix drivers of that growth would be, some commentary on kind of geographic contributions as well and would be particularly interested in how the newer markets with DNB are budgeted to track with 2020?.

Yes. So, geographically, Russell, we are looking to the Central PA and Southeastern Pennsylvania markets to have outsized growth, particularly in the business banking and retail mortgage categories. We also expect the new ABL platform and to continue to help us grow our C&I outstandings. CRE growth has been muted by payoffs.

But as I mentioned, we have a pretty significant increase year-over-year in construction commitments, which should help provide some stability in that category. We see less growth in Western Pennsylvania, although we do anticipate growth in 2020 and the newer markets will continue to drive higher incremental volumes..

Very good. Thanks, Dave.

And then Mark, following up on your expense guide, just want to get a sense for how you would expect that to trend, I mean, should we kind of start higher and then end towards the $45 millionish range given the conversion scheduled for earlier in the year or how do you anticipate the glide path?.

Yes. So, Q1 will be a little bit higher because of the one-time, but also a lot of the synergies won’t start until Q2..

After conversion..

Yes, after the conversion in mid-February. Offsetting that though, we typically don’t do our salary increases and things like that until the start of the second quarter. So that helps to keep the first quarter more inline. So, excluding the one-time expenses, it actually should be relatively consistent over the course of the year..

But our goal is still to maintain that efficiency ratio in the low 50s as we have in the past..

That’s great. That’s very helpful. Thanks, Todd and thanks, Mark.

My last question guys would be with regard to capital and with the deal now closed thoughts on putting some excess to work via the buyback?.

Right. So we still have a $50 million authorization from the board. It doesn’t expire until 2021. So depending on the market outlook and pricing and our own thoughts on growth, we may pull that trigger. We may get active in that space..

Alright. Very good. Guys thanks so much. That’s it for me..

Thank you..

Thanks, Russell..

Thank you, Mr. Gunther. [Operator Instructions] We’ll move next to the line of Collyn Gilbert with KBW..

Thanks. Good morning, guys or afternoon, sorry. It’s been a long week. Just quickly first question, to follow-up on Mark to comment on Russell’s question about the buyback and you said you may pull that trigger.

What would be a circumstance that would cause you to be more active in a buyback?.

I think as long as we felt good about our performance, it’d be what our prices did. So if we saw some decline in the price of our stock that we didn’t think was warranted specific to us or was broadly market driven that would probably cause us to be more active..

Okay, okay. And then just a question on the LPOs that you guys are opening in Buffalo and Berks County.

Todd would love to hear just sort of what went into the strategy or what are you seeing in those markets either competitively or from an economic standpoint that’s causing you to setup LPOs in each of those two markets?.

Yes, we have an operation, an LPO over in Rochester, Collyn that we have had since ‘15 and they were serving the Buffalo market and we had some decent activity over there and we were able to kind of land some pretty good bankers with some pretty good C&I experience in those markets. So, they came on board.

We also put a business banker in place in Buffalo and that was probably – we did that earlier in the year, I think in the spring. And then we opened up one in Berks and again, it’s kind of a market extension from our Central Pennsylvania and Eastern Pennsylvania markets. And again, it just comes down to having been able to attract good people.

And so we have some folks over there. We also – I know we have a mortgage banker in the Berks office and again, we probably have out of Berks, I know it’s about $50 million or so in outstandings out of that market. I am not quite sure what Buffalo is off the top of my head. But again, we are seeing business banking and mortgage-related activities.

And so we are more opportunistic rather than just saying, hey, we need to be in a market. It’s if the right talent comes up, we will certainly consider it. And that’s where we have made the investments in production across the different business lines last year.

So we think with those investments that we have made will carry into 2020 to drive some – continue to drive growth..

Okay, that’s helpful.

And then, Dave, just maybe if you could talk about – or Todd either one, just on the ABL initiative sort of how you see that growing or how big of a component of the overall business you expect it to be kind of in the near and long-term and just kind of frame sort of your strategic outlook there a bit?.

Yes. So, Collyn, it’s Dave. When we looked at the opportunity as we grew our C&I book, we were running in the situation and potential clients who needed that kind of service and we didn’t have the internal expertise. So we went to the market. We were able to recruit a team of bankers who came to us and had done a startup ABL in the past.

So, it’s about attracting new clients and also in a potentially difficult economy, it gives us a soft landing spot for some clients who might be struggling and need closer monitoring from a risk perspective, but we do think it’s going to be incremental to our growth and provide additional opportunities that come with full services – treasury services, all the banking services that we offer in addition to just extending credit..

Okay. That’s helpful. Thank you.

And then, Mark, just on the pickup in NPLs in the quarter, can you just give a little bit more color as to what was going on there and then also just kind of walk us through the sort of the reserve methodology or just the fact that there was a lower provision despite the uptick there in those credits, just to understand what’s going on?.

Hey, Collyn, this is Pat. So, on the NPL movement, throughout the quarter, the NPL movement in and out, inflows and outflows, was pretty fluid obviously based on certain customer events and our active portfolio management.

I would tell you that all items and everything from the movement in there have been addressed and is reflected in our provision – in our reserve. We are addressing each situation constantly continue to work with all parties that maybe involved. And I think we are just really taking these on which is consistent with our past practices.

I can also tell you too that obviously our net charge-offs were down considerably, but our – we had a pretty large decrease in our C&C portion of the portfolio as well. So, you can see how fluid things are moving through there for the quarter..

Okay.

So the reduction in the reserve was just a function of that whatever rolled off was maybe carrying a higher reserve than what was coming on?.

Yes..

Okay..

Some of the excess, they go and because of the separate valuation, you actually end up reserving potentially less for them..

Okay. And then just broadly in the outlook for credit, is there anything that you guys see on the horizon or areas that you are cautious on? I mean, I think it seems like you get asked the question every quarter and everything still seems really good.

So, I am asking it again and you would probably give the same answer, but just curious as to your thoughts there?.

Yes. I mean, I would say today, but like as Pat indicated, Collyn, we did see some nice downward trends in our criticized and classified buckets, which are usually some of your leading indicators. They were down about 8 – or $23 million and we have a lot of discussions out with clients in all of our markets.

And they still seem to be optimistic and we have talked a little bit earlier when – at the meeting you guys had in December. The big constraint I think right now or impact is workforce.

The customers in, I don’t care what industry you are in are having a challenge finding qualified people to be able to grow their business or serve their existing client base..

Okay. Alright. I will leave it there. Thanks, everyone..

Thanks, Collyn..

Thanks, Collyn..

[Operator Instructions].

Hey, Jim, we did get an online question that I would like to take..

Sure. Please, go ahead..

So the question was what will be a good diluted share count for the first quarter ‘20 to use in calculation to EPS. We would expect that it would be in the range of what the shares outstanding were at the end of the period, so it’s about $39.6 million right around there would probably be a good number. Thanks, Jim. Go ahead..

Excellent. Thank you for that insight. And at this time, we have no signals from the audience. I will turn it back to our leadership team for any additional or closing remarks..

Well, thank you Jim. And I just want to thank everybody for participating in today’s call. Mark, Dave and I appreciate the opportunity to discuss this quarter’s results and look forward to hearing from you in our next conference call. So hope you all have a good day..