Greetings, and welcome to the S&T Bancorp, Inc. First Quarter 2012 Earnings Conference Call. [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 for S&T Bancorp. Thank you. Mr. Kochvar, you may begin.

Thank you. Good afternoon everybody, 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 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. As we announced in yesterday's press release, we reported net income of $3.5 million or $0.12 per share for the quarter. Obviously, we are disappointed in our results, which were impacted by volatility in our loan loss provision and the one-time charges associated with the Mainline Bank conversion. Mark and Pat Haberfield are going to provide more color on these areas in a few moments, but -- and we also know that we have had some difficulty with our organic loan growth and it's been a challenge. But the balance sheet was positively impacted by the consummation of the Mainline Bank transaction on March 9 this quarter. And so far, things are going as planned with the integration, as we are on track with expected cost synergies and operating results to date have been positive through the expanded mix of products and services that we can now offer to Mainline customers. Both retention and new product sales are meeting, in some cases exceeding, our expectations. We're also extremely pleased with the announcement of the partnership with Gateway Bank, and we expect to close on that transaction in Q3. As you know, Gateway has 2 locations, one in Washington County and one in Cranberry, which are 2 very dynamic markets. One of our strategic initiatives this year was to expand our presence in Washington County, where we didn't have any kind of a retail presence, and the partnership with Gateway will help to accelerate our growth objectives in this market. Gateway does have a seasoned team of bankers who have developed a very nice book of business, and we feel that with access to a larger balance sheet, they will be able to ramp up lending, wealth management, insurance and retail opportunities. In…

Thanks, Todd, and good afternoon, everyone. Provision expense for the first quarter 2012 was $9.3 million, resulting in an ending balance in the loan loss reserve of $47.8 million or 1.49% of total loans. This compares to a provisional expense of $10.6 million with a loan-loss reserve balance of $61.7 million or 1.8% at March 31, 2011. Included in the March 2012 allowance is $6 million in specific reserves as compared to $5.5 million over year-end 2011, our reserve to NPL coverage is 74%, which just compares to 76% in March 31 in '11. Non-performing assets at the end of the quarter, $67.9 million or 2.12% of total loans plus OREO as compared to $60 million or 1.92% of total loans plus OREO at December 31 and $88.5 million or 2.67% at March 31, 2011. Our non-performing assets increased due to receiving several updated appraisals, exhibiting stressed valuations causing a reaction to take impairment charges against the collateral value to loan balance and thus, moving these credits into a non-accrual status. Each of the credits reviewed have workout plans, and it is believed that resolution of these credits will occur over time. The majority of these credits are stalled construction projects, whereby we have gone through this additional round of revaluing the assets and reacting to the market values that have been established. During the fourth quarter of 2011 -- I'm sorry, during the first quarter of 2012, the bank experienced net charge-offs of $10.3 million, which compares to $5 million in the linked-quarter and $400,000 in the year-ago quarter. As previously discussed, a number of our charge-offs were due to receiving an annual appraisal on the collateral, securing the substandard loans and our loans classified as troubled debt restructures. Approximately 1/2 of our charge-offs for the quarter were a…

Thanks, Pat. Our performance in the first quarter was impacted by one-time merger-related expenses and the higher-than-anticipated provision for loan losses that was just discussed. The merger-related expenses for the quarter were $3.9 million or about $0.11 a share, including severance and other personnel-related expenses of $1.7 million, data processing of $1.6 million and other, primarily professional fees, of $500,000. Since the merger did not close until March 9, there was limited ongoing benefit from the merger realized in this quarter. Going forward, we expect approximately one $0.02 per share improvement per quarter. In addition to the merger-related expenses, we also experienced higher salaries and benefits due to merit increases that took effect on January 1 of about $400,000, higher pension expense for the quarter of $500,000, which will be higher throughout 2012 and payroll tax of about $700,000, which is typically seasonally high in the first quarter. Given the announced merger with Gateway Bank of Pennsylvania, which is expected to close in the third quarter this year, we do anticipate some additional merger-related expenses in that third quarter. However, since the systems conversion is not expected until the first quarter of 2013, some of these expenses may not be incurred until then. We're still working through the details of timing but expect the total one-time expenses to be approximately $3.3 million. Non-interest income showed improvement over last quarter, primarily in wealth management and insurance, where we've added resources over the past year, security gains related to a position we had in a financial institution that was sold, and the transaction closed in the first quarter. We sold this position after that merger closed. The net interest margin, which was down 10 basis points from last quarter, continues to be challenged by loan runoff, which impacts the asset mix, loan resets and new loan replacement volume at lower rates than what is paying off. While we anticipate continued pressure on the margin rate, it should stabilize as long as net loan runoff flows. Not included in the addition of Mainline loans, we were down about $60 million in loans from year end. Funding costs were down as CDs repriced and the mix change with some additional borrowings utilized to maintain liquidity. Going forward, we have limited repricing opportunities in core rates, but we do have about $128 million of higher-priced CDs maturing this summer that should provide some relief. Capital ratios remained essentially unchanged from yearend due to the merger and no retained earnings growth. We did, however, enjoy our first quarter without any preferred dividends. Thank you very much. At this time, I'd like to turn it over to the operator to provide instructions for asking questions.

[Operator Instructions] Our first question comes from Damon DelMonte with KBW.

With regards to the increase in the NPLs, is any of that related to a regulatory review?

No, it was not.

It was not. It was all driven by the appraisal process that you, guys, conduct internally?

That's right.

And did the majority of the appraisals happen at the end of the calendar year and it just took time to come in? Or it's an ongoing basis?

No, that's on an ongoing basis, very fluid. These all occurred and received in the first quarter.

Okay. Are you currently doing another round of appraisals or are you up-to-date on everything right now?

We're as up-to-date as you can be. I think it's kind of a fluid process, Damon, where you're going to have some come in, in the first quarter, you're going to have some come in second, third quarter. As I stated, we're doing our analysis on that substandard portfolio, trying to determine any type of valuation mix and coming up with our answers from there. But again, it's more of a fluid process.

Yes, I just like to comment a little bit on this because, obviously, this is a subject that needs drilled down into a little bit. But about $6 million of the provision expense was attributed to maybe 4 projects, where they were construction loans where we had new appraisals in the normal course that came in significantly lower. And there was some distress, so they were in the substandard bucket. All of them were current at the time and -- but when we go in and whether you have an extension or whatever you have to do, you got to then -- becomes the TDR, goes into a parent analysis, and so that's what happened. But I would say that there is movement on these accounts. I just think the appraisers in the market are being very conservative. I mean one of the projects in particular is there is a Letter of Intent out to sell a chunk of the ground at a value 3x higher than the appraised value. So I think some of it's a timing issue on how we have to treat it from an accounting perspective, but we do anticipate to continue to work with the clients and maximize our long-term value on these things. And the other one, there are active workout plans in place. If we deem that the project, if it looks like it's stalled and it's not going anywhere, then we're going to be a little bit more aggressive and push to come up with maybe more active workout or foreclosure plans. But in these cases, we still feel that there are viable strategies in place to move the properties and kind of work through them. So I hope that provide some color for everybody.

Yes, Damon, if I could just add real quick too is that Todd's exactly on the valuations lease. We did the write-downs solely based on the value of the assets; not determine anything about collectability.

Okay. And so those write-downs came through in the form of charge-offs this quarter then?

Yes, well it’s been sufficient [ph] .

Well, I guess, how much of the charge-off -- yes, so definitely, how much of the charge-offs this quarter were related to those 4 construction projects?

About 4, about 1/2, yes.

And was the other 1/2 just other items in the portfolio that are making their way through?

I would say the other 1/2's normal course.

That was some of the specific reserves that we had allocated or identified in prior quarters.

Okay. And then last question, were these construction projects in market in Pennsylvania or in your general lending area or are they out of market?

Kind about 1/2 that were in and 1/2 that were are out.

Okay. And then one -- some more quick question for Mark. You said about $128 million of CDs are repricing over the summer.

That's right.

What are they currently costing you right now?

About $210 million [ph] .

$210 million [ph] . And do you think you can to reprice them to...

Well, they are current -- it depends on where they go. If they reprice in the same bucket, they'd be about 70 basis points, it might be a little -- touch lower than that depending on what people hop for.

Damon, the other thing too is I don't want to be too specific on the nature of the projects. I just want to say they are construction. But again, the folks are still actively marketing the property, putting development plans in place. And so I certainly don't want to hinder any of their efforts in any way, shape or form.

Our next question comes from Mike Shafir with Sterne Agee.

Just a quick question on the timing. The deal closed right at the beginning of March, correct?

It was March 9.

So from average earnings asset standpoint, we should see a lift just as a function of you, guys, actually having the assets from the deal for a full quarter?

Right. For the -- on the average, balanced basis loans was a little over $30 million, deposits were about $52 million on a -- using the quarterly average.

I'm sorry, could you just repeat that?

Just about $32 million, about -- just over $30 million of loans on average for the quarter and about $52 million of deposits.

Right. So I mean so we should see those numbers from an average earning asset base grow just as a function of you, guys, having the deal for a full quarter?

That's correct, into next quarter.

And then on -- along those same lines on non-interest expense line, specifically with the salaries and employee benefits, we should see a full quarter of Mainline's expenses running through next quarter as well?

Right. I mean, this quarter, and same thing with fees, I mean this quarter, we had maybe only about $40,000 of fees from Mainline, about $250,000 of expenses. Again, that's for 23 days out of the quarter. So it supposed to ramp up as well.

So as we kind of think about, if you're talking about operating expenses this quarter x the merger expenses, call it, $29 million, would it be fair to say that we're probably going to exceed that level next quarter or are you going to be able to kind of keep that relatively flat as a function of getting some of the expense saved out next quarter?

We're expecting that our expenses on a quarterly run rate basis to be around $28 million to $28.5 million.

Okay. And then as the deal closes with Gateway, obviously, some of that will ramp and then come back down as you extract cost saves there?

Right, there, we mean, that gets much of the cost saves really until 2013 because that's when the systems conversion is going to happen. So we probably won't see any expense synergies at all in 2012, because we'll have to operate them as a bank subsidiary for a couple of quarters.

Okay. And then just on the margin. I know that you, guys, you said you're going to be able to get some relief from the CD repricing over the summer. That will be, I guess, towards the back end of the second quarter, maybe going into the third quarter. What about the asset yields? I mean those have continued to come down. I know that the stagnant loan growth has kind of helped or caused some of that. But just from a loan perspective, as you're putting on new CRE, new C&I product, where is that coming on the book?

Yes. I mean we're seeing pricing come in between $225 million and $275 million over cost of funds.

Our next question comes from David Darst with Guggenheim Securities.

So Mark, on the margin and on the earning asset mix, do you foresee over the next year that you'll be able to begin the shift back and rebuild the loan portfolio and kind of improve the earning asset yield from a mix standpoint?

That's certainly our hope, and we have seen some positive developments on the pipeline. But as we saw this quarter, the loan payout is still been heavier than we expected. So until that turns, and we have those new loans coming in a little bit faster, we still may see some pressure there.

The other thing, I think, is positive is in the first quarter, we booked about $90 million in commitments. And when you compare it to the past couple of quarters, it's up maybe -- that amount is probably double where we were for the past couple of quarters, so -- and we think that bodes well as people initially take them down and then as their expansion plans kind of come to fruition, they start to get into the lines a little bit and take down balances.

So from that perspective, Todd, do you think you’re at a point where your balance or loans will at least be stable?

I mean, David, as Mark said, that would be the hope, but there's still some -- there are some payout risk out there and just some projects in the normal course. So I can't -- the thing I can say is like our pipelines are up 3x where they were last year and we booked -- we have bookings and commitments the first quarter. The activity is there, so just from a timing perspective, when it's going to occur, I can't really sit here and say that it's going to be this quarter. The other thing last year, we experienced -- even though it was kind of small, we experienced runoff in our consumer portfolios. We're seeing those reverse the trends a little bit this year. So even if we can kind of stem the runoff in those, that helps. And as we revamped our small-business lending units last year and in the first quarter, we're pretty much double on accounts that we booked, balances that have been booked in the first quarter year-over-year. So the trends are there. And like I say, we're having a lot of -- I spent a lot of time over the last month having conversations with a very diverse group of our customer base. And everybody is pretty positive right now, and I think it's going to start to translate into some activities. So I think people are just getting ready to hire people, which helps us on lines and the insurance side, on compensation, of insurances that we sell and automotive's been good. There's just been a lot of different industries that are really, really good in the region right now.

Okay. So I guess is most of the paydown activity related to the out-of-state portfolio?

There was some significant pay down in the out-of-state portfolio. But just to give you an example, in March, we had $22 million worth of CRE loans that were refi'd into the perm market. And then as Todd mentioned, there was this one $10 million shared national credit that we were taken out on, so it all happened kind of at the end of the quarter. But about 1/2 of that, 1/2 -- well, to take that back, about 17 of that 22 is in the out-of-state portfolio.

Okay. And then Todd, could you kind of run over the Washington County strategy? I guess that's the market where you have most of the Marcellus drilling activity and a lot of the headquarters are related there for companies that have come into the region. Do you have plans to build out the commercial lending effort around South Point?

We do. I mean if you look -- I think what's unique even though this bank is small, the lenders that they have on their team down there are well-seasoned bankers that had very successful careers at larger institutions and managed significant $300 million-plus portfolios with people working for them. So the intent is with our balance is to kind of turn them loose and let them go on and recruit talent, number one, and then go out and do deals. And they don't have mortgage -- already, we're having discussions and nothing's finalized, but they have a $4 million opportunity that's a little bit larger than they can handle at this point in time. And I think where -- there's a pretty good chance that we're going to get involved with it. They have some mortgage opportunities on the residential side. Already, we're having our mortgage originators discuss with the clients. So I think that's really, David, is where we want to be. We want to go in. And someone had asked about the cost synergies, there's not a lot of cost synergies out of this deal. I mean they only have 23 or 24 employees. But where we want to view this thing is really a growth strategy from a revenue standpoint. And we think, again, we think with the resources that we come to bear, we can attract and build out a nice team in that market and then add on not only on lending side, but again, the activity on the shale side, there'll be wealth management opportunities and also insurance and the like. So we're really, really, really excited and -- just from the firm, the talent that we're going to be able to partner up with down there, we really have a high regard for.

Our next question comes from Collyn Gilbert with Stifel, Nicolaus.

The residential construction credits that were obviously reappraised this quarter, when where they originated?

They were originated anywhere from 2008, '09 periods, all within that cycle, the upswing in that cycle.

Okay. Do you know what the vintage is, in general, of your NPLs? I mean, how much was originated during that period versus after...

We have that access and information, I don't have it on my fingertips, memorized. Just to give you a sense, Collyn, though, if you look at our construction bucket, we have about $160 million out on that. $32 million of that is in the substandard category, and we've probably -- impairment testings on a good chunk of that, and then you have another $14 million or so that are in special mention. So I mean we scrub this stuff up and monitor pretty closely, but you're still just subject to risk and -- or if something goes sideways. And it's not all residential either, so just to clarify that point too, so.

Okay, okay. But Todd, just your point on the appraisals, this is -- it's not a phenomenon that we're seeing only with you, guys. I mean there's -- banks are coming out -- well, in your part of the region, which we're just trying to get our heads around with some revised appraisals much lower. I mean, do you think it really isn't -- it's an issue more with the appraisers than it is with the market values and is there any way you can kind of approach it somewhat differently or quantify how much you think is really just been overly written down or compare write-down to market values? Or just -- I mean it seems, taking your comments, and correct me if I'm wrong, but it seems like this has been -- these appraisals have been pushed down to a level, just unjustifiably so.

They're fairly conservative, we feel and -- but I do think the appraisers are taking a look at it. In one of these situations the -- for whatever reason. Again, I don't want to get into it, but the developer just decided he made the right business decision to put a project on hold for a period of time. So then they're looking at, "Okay, what's the absorption or what activity have you had over the last 12 to 18 months?" And if they don't see any, they're going to be pretty aggressive on the marks. But we look more kind of forward-looking basis and again, with some of the activities that we know that in discussions that they're having, there's going to be, I would say that we're going to see some recoveries on some. I just can't tell you when -- and but I -- like I said, if we didn't think there was a good resolution at the end the day, we’d probably accelerate things and try and minimize our loss at this point in time.

Okay, that's helpful. And just in your earlier comments Todd, you said 30% increase, I think, if I heard you right, in introductions?

Yes, that's kind of our referrals across lines of business, whether it's some insurance to the retail side or the retail to the small business. But we kind of divided our company up into 6 different regions, and it's really been working well for us. We have a lot of good collaboration along lines of business, and I think some of that's apparent in if you look at both insurance and wealth management, they're up about $400,000 year-over-year from Q1 to Q1. So a lot of good positive trends.

Our next question comes from Rick Weiss with Janney Montgomery Scott.

Is there any change in terms of the competition regarding lending?

I'll let David Antolik handle that one, Rick.

Yes. I don't know that there -- I mean the players are the same but pricing is getting skinnier. I think everyone is facing the same pressures with regard to trying to build assets, so we're seeing very aggressive pricing and terms as well.

Is that from some of the larger banks or smaller banks or general, everybody?

It's kind of across-the-board. Yes, I mean the smaller banks tend to get more aggressive with terms, larger banks tend to get more aggressive with pricing.

Okay. And I guess, just specifically, the $3.5 million merger charges this quarter, was that built into the other expense line or is some falling into salaries, benefits?

It was spread out over all the categories, but $1.7 million in salaries and benefits, $1.6 million in data processing and about $0.5 million in other.

Okay. How much was in data processing, I'm sorry?

$1.6 million.

Okay. And I guess my last question is what sort of tax rate would you use to model forward?

Probably in the low-20s.

There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Okay, thank you, operator. Again, I just want to thank everybody for participating in today's conference call. We do appreciate the opportunity to discuss the quarterly results and look forward to hearing from you on our next conference call, and hope everyone has a good day.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.