Greetings and welcome to the S&T Bancorp Second 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, Senior Executive Vice President and Chief Financial Officer. Thank you, Mr. Kochvar, you may begin.

Great. Thanks very much. Good afternoon and thanks 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 President and CEO, who will provide an overview of S&T’s second quarter results.

Well, thank you, Mark, and good afternoon, everyone. Overall, we’re pleased with our core operating performance this quarter and have announced net income of $21.4 million or $0.61 per share versus $22.8 million or $0.65 per share in the second quarter of 2017, and $26.2 million or $0.75 per share in the first quarter of this year. Our performance metrics for return on asset, return on equity and return on tangible common equity were 1.22%, 9.52% and 14.14%, respectively. The big variance in net income this quarter was primarily impacted by a $5.2 million loss on a single commercial credit due to fraudulent activity and that impact to the EPS was approximately $0.12 per share. For the quarter, portfolio loans increased by $55.5 million or just under 4% annualized, and we’re also experiencing higher yields in our portfolio due to the recent fed moves and higher rates on new business. As a result, our net interest margin increased by five basis points compared to the first quarter. And our strategic focus on controlling expenses was also evident as our efficiency ratio declined from – to 50.09% versus 51.48% in the second quarter of 2017. We continue to evaluate all areas of the organization for opportunities to control expenses. One item of note in Q3 is, we’re closing our location in York, PA, but we do expect to maintain a large portion of the deposits associated with the branch. Credit metrics for the quarter were mixed with net charge-offs of $7.8 million of which $5.2 million, again, is attributed to the fraud that was previously disclosed in our 8-K filing. Total delinquency declined by one basis point for the quarter from 0.53% to 0.52% and also non-performing loans of $21.4 million were essentially flat for the quarter and represent 0.37% of the total portfolio. We are moving forward with our efforts to remediate the material weakness that was disclosed in our 10-K. An independent third party has been engaged and Phase I of the review has been completed. This encompasses a review of our policies, procedures and processes as well as an in-depth examination of the support for judgments applied to risk-rating conclusions. We anticipate the rest of the work to be completed by the end of July and receive the final report by the end of August. Any recommendations will be addressed and completed by the end of the third quarter. And I also want to mention that we’re in the final stages of selecting a new external audit firm and we will file an 8-K announcing our decision in conjunction with the filing of our 10-Q on August 1st. So before I turn the call over to our Chief Lending Officer, David Antolik, I also want to mention that our Board of Directors declared a $0.25 per share dividend payable on August 16, which is a 25% increase over the same period last year. So now, I’d like to turn the program over to David Antolik.

Well, thank you, Todd, and good afternoon, everyone. We’re pleased to report loan growth in line with our expectations for the second quarter. We continue to experience positive results from our efforts to diversify our commercial loan portfolio and grow our C&I book. During the quarter, C&I balances increased by $49 million, driven by solid new customer acquisitions along with an increase in utilization from 39% to 42%. We continue to dedicate resources in order to expand this segment and during the second quarter, we added two experienced C&I bankers to our teams. We also continue to see very positive results from our business banking segment, where we saw a 21% year-over-year increase in originations. During the quarter, we added two experienced business bankers and are now at optimal staffing levels in this division. As a reminder, our business bankers manage commercial loan relationships up to $1.5 million. With regards to our CRE activities, balances grew modestly as a result of a $28 million increase in the permanent portfolio that was partially offset by a $24 million reduction in the construction category. Activity in our newer markets remain solid, particularly in Ohio, where we saw loan balances increase by $32 million during the quarter, primarily from growth in Central Ohio. We are very excited to move forward with our plans for our full-service branch location in Hilliard, a rapidly growing Columbus suburb with regulatory application submission and construction to begin very soon. We also plan to expand our presence in Northeast Ohio by establishing an LPO in Independence, Ohio, which will allow us to better serve the Cleveland market. We continue to experience and anticipate elevated payoff levels, particularly in our CRE portfolio, but have used this activity as an opportunity to improve margin as loan rates on new originations have increased. Moving forward, we anticipate loan growth in the low to mid-single digits, as we remain disciplined in our pricing and structural lending. Before I turn the call – I’m sorry, and now, Mark will provide you with additional details on our financial results.

Okay, great. Thanks, Dave. The net interest margin improvement of five basis points compared to the first quarter resulted from Fed rate interest moves combined with our asset sensitivity on the front end of the curve. We experienced another quarter with better new versus paid loan rate activity with a favorable difference of over 40 basis points in both the first and second quarters this year. Although interest-bearing deposit betas accelerated, they were outpaced in the second quarter by strong loan betas. Deposit pricing continues to be very competitive in most sectors with CD and money market specials for consumers and aggressive exception pricing off the rate sheet for large customers, including public funds. Net interest income improved by $1.5 million due to a net interest margin rate expansion, an increase in average earning assets and one extra day in the quarter. Looking ahead, we expect the NIM rate to improve modestly in the second quarter – or in third quarter due to the Fed increase in June. We do think deposit betas will lag, so there will likely be likely be some catch-up and net interest margin compression should the Fed pause as we move into the fourth quarter and beyond. Noninterest income declined by $1.5 million, primarily due to the gain on sale of a majority interest in our insurance business last quarter that was for $1.9 million. Our card fees improved 9% compared to the same period last year and mortgage banking improved from a seasonally slow first quarter. Also going forward, we expect fee income to be approximately $12 million per quarter. Noninterest expense, again, exhibited good control this quarter with overall expenses essentially flat. It’s a strength and focus for us as we continually look for efficiencies. Attention to expenses is a big contributor to our efficiency ratio declines to just about 50% this quarter. We expect quarterly expense levels of approximately $37 million for the remainder of the year. With tax reform, our expected effective tax rate in 2018 is in the low to mid-16% area. It was higher in the first quarter due to some one-time discrete items, mostly related to the sale of the insurance business and a bit lower in the second quarter as we adjusted our full-year expectations due to this quarter’s higher-than-expected provision. Subsequent quarters, we expect the effective rate to return to low 16% areas. Our regulatory capital ratios improved by 15 basis points to 20 basis points as earnings were accompanied by only modest increases in our risk-weighted assets. We remain comfortable with our capital levels. 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. [Operator Instructions]. Our first question comes from the line of Varun Bhandari with Piper Jaffray. Please proceed with your question.

Good afternoon everyone.

Good morning.

So, can you guys give a little bit of a color on the deposit competition you guys are seeing?

What I’ve said is in CD area; I’d say two years and under, there continue to be a lot of specials on the public fund side. We get a lot of competition from some of the state-related organizations that are back in the game, especially on the money markets. And then also, anecdotally, we see a lot of off – as I mentioned in the prepared remarks, kind of off rate sheet quotes to customers both to lure our customers away and to retain their other banks current customers. So a lot of activity off the rate sheets.

Okay. Thanks. And then just one the higher utilization rates, are you seeing that kind of across all of your geographies? Or are there any particular areas that are – you’re seeing a little bit of pickup there?

I think a lot of the – if you look historically, it’s kind of seasonal. Utilization rates pickup in the second quarter. We’ve onboarded some new relationships too that have higher utilization rates.

Okay. And then has there been any increase in M&A discussions in recent months or kind of stayed the same levels?

It’s kind of quiet in our various markets right now. We continue to have dialogue with folks on our end just to keep the doors open if someone should choose to do so. But right now, I think it’s pretty quiet across our footprint.

Okay. Thank you. I’ll get back.

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

Thanks. Good afternoon, guys.

Hi, Collyn.

Just a follow-up on the deposit question. So it looks like, I guess, maybe for, like, the last six quarters, you guys have seen savings balances decline. Is that a function of kind of what you’re describing, Mark, in just a competitive environment and you’re choosing not to compete on some of the pricing of those? Or just maybe talk a little bit about the dynamic that you’re seeing in some of those – some of your deposit buckets?

Yeah. I mean that, that’s just threatening right now our main promotion on the liquid side for deposits is a money market product. And from the consumer side, I don’t think there is a lot of difference that subscribe to having whether it’s a – for the customer, whether it is in the savings or a money market. So we’ve just seen the more rate-sensitive money moving out of some savings products that we had promoted maybe in the previous – back in the previous cycle to the money market product, which is our – where our best liquid rate is. So that’s really what’s behind that shift.

Okay, okay. That’s helpful. And then just, Mark, on your OpEx guidance, I know you kind of gave it at least for the remainder of this year, that $37 million or so. I presume that the LPO opening and the other new construction, the new branch is in those targets. Is that right?

Yes.

Okay. And do you – I mean, you guys have really done, to your point, kind of kept it – done a good job of keeping expenses very well controlled. Do you think you can still do that kind of longer term? Or do you get to a point where you sort of have been maybe putting off investments that you may need to start to make? Or how are you thinking about that trajectory of expenses maybe next year and beyond?

No, Collyn, we think we made the appropriate investments on an ongoing basis and we just continue to look for ways to run a little bit more efficient. And if you – we can pick up some efficiency in certain areas, we’ll reallocate those dollars into other areas maybe to promote growth. I think a good example is the Ohio situation, where we’re going to move. So we’ll be exiting a lease, so there will be a little bit of an incremental increase in cost, but not a significant amount. The people are already there. So it’s kind a trade-off. But we’re going to manage to try and keep that efficiency ratio in the low-50s is consistent with where we are.

Right. And you also have the – mentioned the closure – forthcoming closure of the York branch compared to the opening of the LPO in Ohio. So it’s really reallocation of resources, the expenses will be similar.

Okay, okay. That’s helpful. And then just on the loan side, the – you guys saw good C&I growth this quarter. Would – did you see – I know you had, had elevated paydowns in the first quarter. Did that start to subside a little bit? Or just kind of how are you seeing the rate of paydowns trending?

Unfortunately, we did see elevated payoffs this past quarter as well.

Okay.

The last three quarters, we’ve seen payoffs above their historical levels.

Okay, okay. And then your outlook for loan growth, does that include that the payoffs sort of stay at this elevated level? Or do you think they come down?

Correct. Yeah. We see some softness in the third quarter and better activity in the fourth quarter.

Okay, okay. And then just on the consumer side, what are you – are you guys seeing any pattern or behavior within the consumer segment either on the home equity or resi mortgage or deleveraging that’s happening on the consumer side? I’m just curious what might be going on in your markets there?

On the mortgage side, I mean, there has been with the rate moves, there has been a pretty significant shift away from the refi. So most of our business has been purchase money and that has some suppression on the volume, especially in the first quarters where without the refi business the seasonality comes through more. We have seen the pipeline improve as you move into the second quarter and expect the back half or at least the third quarter to be better.

The other thing to that point, Mark, is we have added some sales people over on the – some production people over on the mortgage side, too. So we expect that to start to hit the pipeline as well in Q3 and Q4.

Okay.

On the consumer side, we have seen some softer home equity lending. We’re still looking into that, whether that’s related to people reassessing their tax situation or just rates being higher. But then from a new – from a production standpoint, new volume, that’s the biggest decrease we’ve seen is from home equity.

Okay, okay. That’s helpful. And then just, Todd, on the M&A comment, just curious, how small of a deal would you guys do? And do you see opportunities? Would you place a greater likelihood on kind of the small types of transactions versus the larger ones in terms of what might be out there?

I think we’ve kind of – our thoughts are going up the food chain a little bit, Collyn, probably in that $750 million range on the bottom end. You might look at something in the $500 million range if it really had a good strategic fit. But the small $100 million, $200 million, $250 million franchises are probably just not of interest to us. And then on the upper end, probably up to the $2 billion or so in that range.

Okay, okay. I’ll leave it there. Thank you.

Okay.

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

Hey, good afternoon guys.

Hi, Dan.

Hi, Dan.

So, a quick question on the margin. Thanks for the color and the guidance. But as I look at this quarter, this quarter’s margin, to what degree, if any, did prepayment penalties help the margin in the second quarter?

Quarter-over-quarter there, those kind of other elements were essentially flat for us. So it was really rate, loan rate and deposit rate-driven this quarter.

Okay. Good. And then maybe, just a quick question on CECL where are you guys in terms of preparation and just kind of what you – how are you thinking about it right now?

Dan, on the implementation side, we have internal committees formed. We have a relationship with the software vendor that we’ve had for several years that we’ve been working with to do our model prior to CECL and they have a good CECL plan and product and we’ve engaged them and have been working for a couple of months now on the earlier stages of developing our approach to that. So we feel like we’re on track. We anticipate running a parallel for most of 2019 and feel like we’ll be ready to hit the ground running when we get to 2020 implementation.

Okay, good. And then my last question just in terms of deposit growth, I mean, do you think you can kind of mirror loan growth in the back half of the year? Or is that going to be a challenge?

I think it will be a challenge. The environment still remains very competitive. So, I think we’ll get our share, but it will be a battle.

Great. All right. That’s all I have right now. Thanks guys.

Thanks, Dan.

We have a follow-up question from the line of Collyn Gilbert. Please proceed with your question.

Hi. Sorry, just one more. Do you, Mark, have an update at all as to where things stand on the new – on the hiring of a new auditor?

Right. We expect to make that announcement about the same time we do the 10-Q.

Okay, perfect. All right. Thank you.

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

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 at our next conference call in October. Hope you all have a great day.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.