Good day ladies and gentlemen, and welcome to your S&T Bancorp Inc. Third Quarter Earnings Conference Call. All lines have been placed in a listen-only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host, Mark Kochvar. Sir, the floor is yours.

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 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. We will be reviewing an earnings supplement slide deck as part of this presentation. You can obtain a copy of those slides on our website under Events and Presentations Third Quarter 2020 Earnings Conference Call, click on the Third Quarter 2020 Earnings Supplement. With me today are Todd Brice, the CEO of S&T; and Dave Antolik, S&T's President. I'd now like to turn the program over to Todd, who will begin today's presentation.

Well thank you, Mark, and good afternoon, everybody. We appreciate you taking time to join us for our third quarter earnings update. As announced in our press release this morning, we reported net income of $16.7 million or $0.43 per share compared to $26.9 million or $0.79 per share in the third quarter of 2019. Operating metrics for the quarter included a return on asset of 0.72%; a return on equity of 5.8%; and a return on tangible common equity of 8.96% and a pre-provision number of $37.5 million or 1.61% of average assets. Results this quarter continued to be impacted by the effects that COVID-19 is having on the overall economy. As for the quarter, loans contracted by $154 million as economic uncertainty is still causing customers and businesses to pay down debt and they're being very cautious on credit requests. Our deposits also decreased by $234 million, so we made a strategic decision to let $269 million of brokered CDs run off, but our customer deposits were up $29 million, and we also saw a nice shift in the mix with an increase in DDA accounts at $121 million, a reduction in the higher cost CDs of $92 million. Mortgage banking was a bright spot generating $3.9 million in fees for the quarter, which was a $1.3 million increase over the second quarter of this year. On the credit front, we did record a provision of $17.5 million, which increased the allowance to $121 million, or 1.77% of total loans excluding PPP versus an allowance of $115 million in Q2 or 1.64% of total loans excluding PPP. Charges for the quarter totaled $12.9 million, which included a $10 million charge on the commercial real estate property that ceased operations for the time being due to COVID. Loan deferrals at the end of the quarter have declined significantly from $1.36 billion or 20% of loans to $350 million or 5% of loans. The hotel portfolio comprises about $230 million or 65% of the overall deferral balances. Customers whose deferral periods have expired have gone back to contractual payments of principal and interest, so we are seeing a nice lift on that. We also increased specific reserves by $6.2 million for the quarter and these were impacted primarily by two credits. $2.9 million is associated with a commercial and industrial credit whose operations have been impacted by COVID. The company is still operational, and they're making payments, but we are negotiating the restructuring agreement on their debt. $3.4 million is associated with the real estate related to the check kiting customer that we disclosed last quarter. We did identify additional liens against the property. We have signed a sale agreement and the auction process will begin in a few days and we expect to have a final agreement in place in Q4. And finally, I'm quite pleased to report that our Board of Directors has declared a dividend of $0.28 payable November 19, 2020 to shareholders of record on November 5, 2020. I want to thank you for your continued support of S&T Bancorp. Now, I'd like to turn the program to our President, David Antolik.

Well, thank you, Todd and good afternoon, everyone. As Todd mentioned, total loans reduced by $154 million in the quarter driven by declines in all categories with the exception of construction. Our commercial real estate balances were impacted by the active permanent market, which has influenced payoffs along with slower demand in Q3. In addition, our commercial and industrial borrowers continue to conserve liquidity, positively impacting their balances while further reducing loan balances. Our revolving utilization rates continued to decline in the quarter ending the quarter at 34%, down from 42% at year-end and 37% at the end of Q2. Our consumer lending efforts have been primarily focused on residential mortgage activity. We've seen a 94% increase in production year-over-year as a result of our enhanced efforts, particularly in our newer markets of Eastern Pennsylvania and Central Ohio. Todd mentioned the impact we’ve had on fee income in the quarter, and Mark will discuss other fee income categories in his presentation. Looking forward, our commercial banking pipeline bottomed in July and since rebounded nicely at its highest point since March in the pre-COVID era. We still see significant improvements that will need to occur particularly in the supply chain in order for our commercial and industrial customers to gain better momentum in order to grow revenues and return to more normal borrowing levels. We have seen our deferrals reduce steadily as commercial borrowers slowly normalize and return to pre-COVID contractual payments. On Page 8, we have detailed the number and average size of the modified hotel loans along with details on our run rate into these assets. We are working with these borrowers to provide additional credit enhancements, which represent significant commitment by these owners as performance begins to show improvement. Average occupancy rate declined from a low of the high teens in May of this year, to just over 40% in August. I'll now turn the program over to Mark for additional details on our financial results.

Thanks, Dave. Slide 9 has a little more detail on the progression of the allowance for credit losses. We are a FICO adopter and had fairly significant reserve builds in the first quarter and the second quarter, mostly in the economic forecasts and qualitative factor part of the model due to the pandemic. As some of the credit issues in our portfolio became more apparent in the third quarter, in particular in hotels with the downgrades discussed, the allowance in that part of the model increased. However, the overall economic outlook did improve in the third quarter compared to the second quarter with the decline in the expected future unemployment rate that resulted in a decrease in our economic and qualitative factor components. On balance, we did see a reserve build of about $6 million to $121 million. Moving to the next slide, net interest income declined by about $870,000 compared to the second quarter, mostly due to lower loan balances, which are down by about $150 million at quarter end and also on average. The net interest margin rate was relatively stable, down 2 basis points as the remaining LIBOR drop overhang in the second quarter was mostly offset by aggressive deposit re-pricing. Excluding PPP, the NIM rate was flat at 3.36% compared to Q2. We anticipate a relatively stable quarterly net interest margin rate for the next couple of quarters. Some volatility could come with the forgiveness timing of PPP along with any asset quality impact. Slide 10 also shows that we do have almost $900 million of liabilities re-pricing over the next nine months to help offset lower new paid versus new rates on the loans side. The deposits in the second quarter came mostly from lower-cost core deposits with the average balance mix improving further into the third quarter. Total period end decline in deposits was due, as Todd mentioned, to a reduction in brokered deposits. Non-interest income in the third quarter increased by $1.3 million compared to the second quarter, which resulted in a total revenue increase of about $400,000. We received $1.3 million as a result of mortgage banking fees due to refinancing activity. We also saw a modest rebound in some items most impacted by the pandemic, including service charges on deposit accounts, particularly overdraft fees, and also debit and credit card fees. Commercial loan swap activity continues to lag as originations have been muted. We do expect a better run rate in the non-interest income, especially with mortgage volumes closer to $50 million per quarter. Non-interest expense was elevated in the third quarter, but we do expect some moderation in the coming quarters, probably closer to around $47 million a quarter. But the largest part of the increase compared to the second quarter came in the salaries and benefits line item. Salary expense deferrals related to the PPP originations in the second quarter accounted for about $1.3 million of the variance. Another $700,000 came from higher pension expense triggered by more retirements than we had expected. Also in salaries and benefits medical expenses were up about $770,000 with higher claims as restrictions lead to the pandemic eased up. FDIC expense is up due to the impact of our recent performance on the assessment calculation. Finally, capital on Slide 11, improved by 20 basis points to 40 basis points depending ratio, primarily due to earnings retention and lower risk weighted average. All capital ratios are in excess of regulatory well-capitalized levels. Our capital cushion continues to expand. We are comfortable with our ability to absorb losses based on initial stress tests that we have completed, including COVID-related scenarios. Both the leverage and TCE ratios are impacted by the PPP loans. Thank you very much. At this time, I'd like to turn the program back over to the operator who will provide instructions for asking questions.

Thank you. And our first question comes from Russell Gunther with D.A. Davidson. Please go ahead.

Good afternoon, guys.

Hey, good afternoon Russell.

Just appreciate your comments on the dynamics within the loan portfolio this quarter and, you know, potential green shoots for the fourth regarding commercial real estate and commercial and industrial, if I heard that correctly. So, could you comment on, you know, organic growth expectations in the near term? I know longer terms are a little tougher, but how do you see that translating to being able to generate positive loan growth?

Yes. We think it's going to be another quarter before we see any kind of meaningful growth. You know, the pipeline has grown. We're starting to see some operating leverage on some of our commercial and industrial borrower’s balance sheets, but we're still having conversations around supply chain issues. We did see a modest increase in floor planning borrowing, which is a good leading indicator and we're having a much more robust preview conversation, which is kind of the first step in looking at new commercial loans. As all of those things will point towards growth, I think we're another quarter out before we start to see, you know, incremental growth.

Got it. Thanks, Dave. And switching gears to the expenses. Mark, I think I heard you say 47 for the coming quarter. Two things, first, could you just touch on the trajectory of the FDIC insurance expense going forward? Is this a good run rate? Are there other puts and takes I should be thinking about? That would be my first question.

With the increase this quarter, we did have a little bit of a catch-up from the prior quarter, so we’d expect to see that moderate by a couple of hundred thousand going forward on the FDIC.

Okay. Got it. Thank you for that. And then, just, you know, bigger picture as we look at a still very challenging revenue outlook near-term, potentially longer-term, are there any wholesale changes to the expense run rate being contemplated, whether it's branch rationalization or opportunities on vendor contracts, just curious as to what the opportunity there might be?

I don’t believe there is much room for us to adjust our branch strategy. We currently operate 72 branches with an average size of $90 million. While there might be some considerations in 2021, we are conducting a thorough review of all our vendor contracts to optimize them. This review could involve renegotiating or terminating contracts that are not efficient as we progress. We are taking a proactive stance in this assessment, which could encompass everything from system contracts to leases on physical locations; we are examining all possibilities.

Got it. Okay. Appreciate the thoughts there, Dave. And then, finally for me, you know, you provided the breakdown of sort of the special mentions of standards within the hotel portfolio, but I was hoping you could comment on the migration in general within criticized and classified this quarter?

So, yes, in general, the bulk of the downgrades were in the hotel portfolio into the criticized and classified. There were a couple of, you know, other, you know, some operating companies that we did see downgrades in as well, but out of the amounts that went over, the bulk were in the hotel portfolio.

Okay, and just a follow-up, do you guys have the total amount of criticized and classified this quarter versus last?

I think the percent right now is a little bit under 8%. I think that went from a little under 5% last quarter.

Okay, so 8% today includes both criticized and classified from 5% last quarter. Got it.

Yes.

And our next question comes from Collyn Gilbert with KBW. Please go ahead.

Thanks. Good afternoon, guys.

Hey, Collyn.

Dave, maybe just staying on the credit topic for a minute, how did you sort of see, given, you know, among kind of within the hotel book and the leisure book, and just any of the credits criticized and classified, the whole bucket, how do you sort of see the resolution of these credits working through in terms of potential, you know, further loan restructurings or, you know, as you may see net charge-offs migrate through the year? Just trying to get a sense of kind of the timing and magnitude of what – how some of these credits could work through the system?

Yes, sure. So, you know – and Mark mentioned, the overwhelming majority of the downgrades into the criticized and classified bucket were in the hotel portfolio. We’re tackling that by having robust conversations about credit enhancement, and using that as a tool to retain a better risk rating, but we are going to have to go through the process of evaluating some of these for non-performing loans as we move forward. So, we do anticipate some migration into the non-performing loan bucket. You know, we're evaluating each one of these on an individual basis and determining our strategy.

And we're in the process of having the ones that are in the classified bucket reviewed. So, you probably start to see some migration in Q4 and Q1, that would be the timing for when you’re starting to see some of the negative downgrades into the non-performing loan bucket.

Yes, so the second round of deferrals were released, and we offered those customers will expire at the end of Q1 of next year and into the early part of Q2.

Okay. So, given that then how should you – how are you guys thinking about the reserve level? So, does it sort of say then elevated for the next couple quarters? And then does it – do you foresee 2021 being an opportunity to kind of let the reserve level bleed a little bit lower as you think about the positioning?

Yes. I mean, as the criticized and classified decline, it actually takes some pressure off the overall reserve levels as long as the overall portfolio quality declines as well.

Okay, okay. And then, just lastly, how to – are buybacks coming into the conversation? And also you guys as you think about kind of capital deployment and as capital builds, if not, is there a catalyst or is there something that you would need to see happen before you started kind of engaging in buybacks?

I think we need to go with it farther past, you know, the worst part of the pandemic and see some recovery and feel better about the prospects for credit losses going forward before we entertain buybacks again.

Yes. I mean, you know, we're talking about a second wave call and, you know, do they start shutting this down again. So, some of those things, we just want to see some further clarity on.

Okay, okay. All right. That's all I have. Thanks, guys.

And we move next to Matthew Breese with Stephens Inc.

Hey, good afternoon.

Hi, Matthew.

Just a couple of quick follow-up questions. First, I think I missed it, what was the outlook for non-interest income next quarter?

Around 15.

15, okay. And then, in terms of all-in PPP income for the quarter, what was that?

It's about $2 million, including the interest.

Okay. And then, Todd, you mentioned that as loans go into the classified bucket, you go through the process of reappraisal. Curious, you know, for the hotel loans that have made that jump, what has been the change in the appraisal valuation? What's been the new versus old LTV?

We’re just in the process of determining that, so we don't really have any indication on where those are at this point.

Okay. And then, lastly for me, just on the commercial real estate loan that required a charge-off this quarter, could you remind us of what the underlying business was there? What sector was it in? And what happened there?

Yes. We do not disclose that because they're still working through, you know, a potential sale. So, you know, we want to respect their ability. I mean, they were making payments until they just decided, you know, they have to close the door, so they're still working through trying to liquidate it on their end. So, we have not disclosed what that business is.

Okay. All right, very good. That's all I had. Thank you.

Thanks, Matt.

And there appear to be no further questions at this time. So, I'll turn it back over to management for any closing remarks.

I think we had a question that came in on the Internet, an update on the fraud. So, you know, we are still pursuing collection activities as we discussed last quarter. The principal did plead guilty yesterday and charges were filed by the Department of Justice, so they're going through their discovery on assets to see what may be available for forfeiture. And as I mentioned earlier, we're in the process of beginning the auction process on the underlying real estate collateral. And, you know, we would hope to have that wrapped up in 14 to 15 days and, you know, under contract in Q4. So that's kind of where we're at this point in time. I think that was the only other one that we had, right? So, again I want to thank you everybody for participating in the call today. And Mark and David, I appreciate your opportunity to discuss this quarters results and look forward to hearing from you in our next conference call.

Thank you.

That concludes today’s conference call. We appreciate your attendance. You may disconnect your lines at this time and have a great day.