Greetings, and welcome to the S&T Bancorp, Inc. third quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mark Kochvar, Chief Financial Officer.

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 cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the third quarter earnings release can be obtained by clicking on the press release link on your screen or by visiting our Investor Relations website at 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 $30.9 million or $0.88 per share for the quarter, which is a 35% increase over 2017 third quarter results of $22.7 million or $0.65 per share and a 44% increase over second quarter results of this year, of $21.4 million or $0.61 per share. Our operating metrics were extremely strong with an ROA of 1.75%, a return on equity of 13.41% and return on tangible common equity of 19.73%. Our results this quarter were positively impacted by a onetime reduction to tax expense of $2.9 million or $0.08 per share, related to tax-deductible pension contribution. Our Chief Financial Officer, Mark Kochvar will provide more color on his comments, but on the core operating basis, we're on $0.80 per share, and again, performance metrics were still very strong with a return on asset of 1.95%, return on equity of 12.17%, and return on tangible of 17.91%. Balance sheet growth for the quarter was a bit mixed, deposits were a bright spot as they increased $74 million or 5.4% annualized. And loans increased $22 million or 1.5% annualized, our loan volumes continue to be impacted by higher-than-normal payoffs. Maintaining our net interest margin continues to be a strategic focus in this quarter, the net interest margin increased by 3 basis points to 3.67% as our loan book is being positively impacted by the increase in short-term rates. Credit metrics were a positive this quarter as well as net charge-offs were $420,000, delinquency remain flat at 52 basis points, nonperforming assets declined to -- by $560,000, and now represent 0.34% of total assets. Provision expense for the quarter was $460,000, which is $2.4 million lower than the third quarter in 2017 and $8.9 million lower than last quarter. Our Chief Lending Officer, Dave Antolik will provide more color on our lending activities, but I do want to mention that activity levels are increasing, we've shifted some resources around by adding production folks in higher growth markets, and the economies in our 5 markets continue to be very robust. Before I turn the program over to Dave, I do want to mention that our Board of Directors approved the $0.02 increase in our quarterly dividend to $0.27 per share payable on November 15. This is a second increase in 2018, and represents an 8% increase over last quarter's dividend and a $0.05 or 23% increase over the same period last year. So at this point, I am going to turn the program over to Chief Lending Officer, David Antolik.

Hey, thank you, Todd. And good afternoon, everyone. Total loan growth for the quarter was modest at $22 million, our commercial real estate balances grew by $38 million and were partially offset by a reduction in commercial construction category of $16 million. An aggressive permit loan market for this category continue to drive higher payoff levels, however, our new deal pipeline has expanded recently and is showing positive momentum. We experienced a $4 million decline in C&I balances during the quarter. This was in part due to our decision to sell down or exit several credits based on hold limits and competitive pricing, coupled with the reduction in line utilization rates from 42% to 40%. We have seen our C&I customers managing liquidity in a more active way as short-term rates increase. As a result, our treasury management fees have increased by nearly 10% year-over-year. Overall, payoffs during the quarter remained at elevated levels, similar to the first and second quarter. We continue to maintain our disciplined approach to loan structure and pricing, which helped our net interest margin expand by 3 basis points this quarter, results in our new markets continue to be positive with Western New York, Central Ohio and Northeast Ohio all posting net loan growth for the quarter. Our growth strategies are focused on market expansion and talent acquisition, we recently added new commercial bankers who will focus their efforts on the Buffalo, New York and Berks County, Pennsylvania markets. Both of these markets display attractive demographics, and this strategy has been planned over the last year. Our investment, and our business banking team has yielded a year-over-year origination growth of nearly 30%, and we plan to further develop this business line as evidenced by the addition of 2 new business bankers in Ohio. We now have 23 dedicated business bankers calling on customers with credit needs of up to $1.5 million. In total, our pipeline is approximately 40% larger than at this point last year, and we are very well-positioned for a return to more consistent growth in the future quarters. Finally, we recently opened our LPO in Independence, Ohio, which is located between our retail office in Akron and the city of Cleveland. We're also excited to move forward with our plan to open a full service office in Hilliard, Ohio at Columbus suburb, and an additional retail office location in the Akron market. And now Mark will provide you with an overview of our financial results.

All right. Thanks, Dave. The net interest margin rate improvement of 3 basis points compared to second quarter resulted from the Fed rate moves, combined with our asset sensitivity on the front end of the curve. Both bearing asset and interest-bearing liability rates increased by 11 basis points compared to last quarter. Deposit beta is accelerated as deposit pricing continues to be competitive for most factors. Net interest income improved by $900,000, due to the rate expansion and one extra day in the quarter. Looking ahead, we expect the net interest margin rate to be relatively stable with modest increases should the Fed rate hikes continue. Deposit betas will be the lag, so there will be some catchup and net interest margin compression after the Fed pauses. Noninterest income was essentially flat compared to last quarter, down by just over $200,000, going forward, we will expect the income to be approximately $12 million per quarter. Although in line with our expectation, noninterest expense increased by about $1.2 million compared to last quarter, the increase in salaries and benefits is mostly in incentives, which were comparatively low in the second quarter, and also in medical where we saw higher claim activity. Data processing increased by about $500,000 compared to the second quarter. During the second quarter, we began an 18-month implementation of the outsourcing of many of our IT network and support functions. The expenses of that outsourcing show up in the data processing line item, but the offsetting savings are distributed in salaries and benefits, consulting and equipment and software. Once fully implemented, we expect the outsourcing arrangement to cost about $500,000 more annually, however, it does provide us with enhanced security capabilities, our leverage ability to stay current and an improved capacity to grow the bank without incremental expenses. We expect quarterly noninterest expense to remain at approximately $17 million -- excuse me, $37 million. In the third quarter, as part of the tax and pension risk reduction strategy, we made a contribution to our frozen defined benefit pension plan that still qualifies for a deduction at the pretax reformer 35% rate. This resulted in a onetime tax benefit of $2.9 million or $0.08 per share this quarter. Our tax rate in the third quarter is just 8.5%, but in subsequent quarters, we expect the effective rate to return to approximately 16% to 17%. Our capital ratio has improved by 15 to 25 basis points, a strong earnings were accompanied with only modest increases in our risk-weighted assets. Also impacting capital this quarter was the repurchase of our capital purchase program related warrants, that were issued in 2009, and were set to expire in January 2019. We repurchased those for a $7.7 million. The warrant was for 517,000 shares and the strike price was $31.53. Thanks very much. At this time, I'd like to turn it back over to the operator, who will provide instructions for asking questions.

[Operator Instructions]. Our first question comes from Matthew Breese, Piper Jaffray.

Just wanted to start on the loan portfolio, the loan growth outlook. It sounded like the construction book might see some expansion here after a few quarters of shrinking there. What's the outlook for that item and then for the overall book?

Yes. So we still think that low- to mid single digit growth is achievable. We continue to see this aggressive permanent market for construction loans and CRE, that's kind of a wildcard. Although our -- as I mentioned, our pipeline for construction deals and in general has grown over the last quarter or 2. So we're seeing some decent activity.

Where are you seeing that activity, and if you could compare and contrast some of your markets, Ohio, Pittsburgh, Upstate New York? Where does the strength lie?

Yes, most of the activity is coming in the newer markets. So Western New York, it's one of the reasons that we are opening -- or looking to open an office in Buffalo. We have a legacy booked at about $170 million in that market. So we've seen opportunities there, as well as Columbus, Central Pennsylvania and Northeast Ohio.

Got it. Okay. And then even with that kind of growth outlook, it still seems like capital is heading higher. What might we see you do with the excess capital? Or should we just expect to see it grow a little bit?

Although price will grow a little bit, but we are taking a look at all our options. There's still an interest in our part in M&A, should that come up. But we also do have an authorization for buybacks that looks attractive at some point.

Okay. And then maybe just touching on M&A. I mean, your currency is held up quite a bit better than a lot of your peers. Are there conversations in the market, how robust are they and where might we see ahead next?

Yes, I mean, we've had continual conversations with people, Matt. But I think the market, what we're seeing is pretty, it's not real active right now. So I think, overall, conditions are pretty good for -- throughout the industry and -- but again, our role is to keep that currency up to the extent that we can. And so we're positioned if and when an opportunity would arise.

Our next question comes from Russell Gunther, D.A. Davidson.

Just circling back to the some of the loan growth conversation. I appreciate the pipelines are up and you guys have got momentum there, and you touched on what some of the quarterly specific headwinds were to C&I. But just give us a sense for what your outlook is with that loan bucket in particular with some of the drivers there might be?

Yes, well, we hired a group and open office in the North Shore of Pittsburgh, and they've seen some really nice activity. So -- and kind of spreading that word throughout our entire footprint. We've seen some nice activity in Columbus in central PA from a C&I perspective. And I think some of the things we saw this past quarter in terms of the payouts were decisions that we made to reduce exposure based on hold limits, as well as not to compete on some very -- with some very aggressive pricing. That being said, the pipeline is good, and I think we will see some modest growth here in the fourth quarter in the C&I bucket.

Yes. I think it's important, Russ, is, again, it's one thing for growth, but from our perspective, we are trying to maintain that spread to the extent that we can, so we're asking the bankers to -- ask for a little bit more or negotiate a little bit more on spread than we were a year ago. And it's showing up, so last 2 or 3 quarters we had an uptick, certainly, we've been helped by the rising rate environment, but we're trying not to give up all that by just being real aggressive on pricing. As David said, there's been deals that 150 basis point spread, 125 basis point spreads, and we just elected not to compete on.

The other item worth noting is one that I mentioned in my comments, is utilization rates did decline in the quarter and these customers are much more actively managing their liquidity. So as the short-term rates rise, they are paying down debt where appropriate and just more actively management -- managing cash. So that has translated into some increased strategy management fees, but has been to the detrimental outstandings.

Got it. I appreciate all the color there. You are right, you're seeing that in the margin. Maybe sticking with that line of question. You guys commented, you would expect to be kind of flat up as the Fed continues to raise. Do you think you can hold onto that if we get the actual set glide path that's been laid out there with each move? Or with the next one or two, would you expect kind of deposited betas to catch up in a way that might eat into that? Or on the flip side, can you keep, kind of, 1z, 2z margin expansion from here?

I think we'll still be able to keep the couple of basis points every move. If they spread out more, it might make it little more difficult depending on how the deposit beta lags work. But when we get them every quarter, I think, we can kind of maintain a little bit of a lead on that. But on the pause, or on a longer pause or on a stop, we would expect maybe a 5 basis point or so contraction.

Our next question comes from Collyn Gilbert, KBW.

Maybe if you could just go back to the loan growth discussion and kind of initiatives that you guys have in place. So if we just look -- so last year, you guys look like you grew loans about 2.7% maybe on pace to grow or similar level this year -- is the -- and I know, Mark, you had indicated low to mid-single digits, but is there -- I mean, should we be thinking about it more in this -- that range, like that 2% to 3% range versus much higher, I guess? The initiatives that you have in terms of adding folks, but do you see that more filling the hole on paydowns versus seeing material acceleration from what you've done over the last 2 years or so?

One of the things that impacted last year, Collyn, was that at the end of the year we had sold the State College branch, so if you look at it on a point-to-point basis, that was about...

About $43 million.

$44 million -- or $43 million, $44 million. But...

Yes. So the first step in analyzing this is kind of determining what the payoff run rate is going to be moving forward. So we seem pretty consistent, elevated over historical levels, but pretty consistent payoff levels the last 3 quarters. So if we can make out that difference, the focus will be getting back to $50 million to $60 million net growth per quarter, which gets us into that 3% to 5% growth range.

Okay. And then tying to that, so obviously, the great credit quality this quarter and then no loan growth allowed for the provision to be so modest. Should we be thinking then if you think growth sort of rebounds a bit, a little bit more of a normalized provision, although, I don't know what that necessarily would be if that's in the $2 million range or $3 million range, or how we should be thinking about the provision going forward?

We update our model every quarter, but in general, we're going to be covering charges, I would imagine, and then providing for growth. So that comes like you said, we would be in that $2 million range. Net charge-offs were on the low side, we would, on a normalized basis, expect them to be a little bit higher, so that -- you could role up in that -- end up in that $2 million to $3 million per quarter, range per provision.

Okay. That's helpful. And then, again, just sort of tying back to the balance sheet outlook and growth and the desire to preserve the NIM. Do you -- are there targets that you're trying to achieve on a net interest income growth level? Or what is it that you are managing to -- or do you want to manage to preserve the ROA? Or just kind of thinking about what your top-down goals are for some of these financial targets that's causing you guys to be much more disciplined or just discipline period on the balance sheet growth plans?

When we look at all of those things, we probably are looking at return on tangible, as well as return on assets, both. So -- and we're aware of all those. With the Fed increasing rates, we've been able to increase the net interest income without a lot of growth, as I said, if the Fed pauses, we are going to need to have that growth back in order to get the revenue expansion. So I would expect Dave to be able to help out on that end as we move into the 2019.

Right. And that area that we focus in pretty extensively on is on our efficiency ratios and maintaining that expense control.

Yes. Yes. Well, and -- actually another sort of question I had. So Mark, in your expense guidance of that $37 million, I presume that includes kind of the run rate of all these additional hires and build-outs of some of these bankers that you have got?

Yes, that's right.

Our next question comes from Matt Schultheis, Boenning and Scattergood.

So I'm a little rusty on repurchasing tarp warrants. Just haven't seen it in a while, and was wondering does that -- does that trigger any type of gain for you guys or not? And does that affect your share count going forward?

There's no gain associated with it, it's all on the balance sheet. But it does have, in fact, a small impact on the share count, those warrants because they were in the money, were being included in the diluted EPS calculation historically. So we will see a small decline, since the transaction happened near the end of the quarter, third quarter didn't have much of an impact, but going to the fourth quarter, we should see everything else be equal, a drop-off of maybe about 150,000 share on a diluted basis in Q4.

[Operator Instructions]. Our next question comes from Daniel Cardenas, Raymond James.

Just a couple of quick questions here. On the deposit side, the growth that we saw this quarter. Can you give us maybe a little bit of color as to what market is that coming from, is that coming from the newer markets or from your legacy markets?

I mean, it's primary in the legacy markets, we did see a little bit of increase in the Northeast Ohio, but it's primarily in Western Pennsylvania.

Okay. Is there a noticeable difference in terms of pricing in the old markets versus the new markets, or the established markets I should say?

Yes, I think, I mean, because we are the new player in some of the newer markets, it tends to be a little bit more expensive there because we are needing to steal customers and we don't have the network for the footprint that we have in the legacy markets.

Okay. So then as we think about loan growth and deposit growth, should your deposit growth kind of mirror the growth expected on the lending side, or will there be a little bit of a lag?

We usually are a little bit slower on the deposit side, or we have been little bit slower on the deposit side, so continue to probably expect that going forward too.

All right. Fair enough. And last question, in terms of your margin outlook, how many rate increases do you guys have baked into that outlook?

Well, we don't specifically do that. I mean, when we model that out, we model out a couple of different ways. We model it out flat and then with the forward-looking information we get from the Fed or from the futures market. So we look at all those ways and try to manage it that way. So we don't -- we tend not to put them into our absolute planned numbers. So I guess, none from a client perspective.

Ladies and gentlemen, we have reached the end of the question-and-answer session. Now I would like to turn the call back to Todd Brice for closing remarks.

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

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.