Greetings, and welcome to the S&T Bancorp Third Quarter 2012 Earnings Conference Call. [Operator instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your host Mr. Mark Kochvar, Senior Executive Vice President and Chief Financial Officer for S&T Bancorp. Thank you; you may begin.

Good afternoon, and thank you all 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. As we announced in this morning’s earnings release we reported net income of $12.6 million or $0.43 per share versus $8.6 million or $0.30 per share in the second quarter. I would say that all-in-all we’re pleased with our performance this quarter as we’ve seen some improvement in our asset quality metrics. We did complete the Gateway Bank acquisition in mid-August and we’re getting our Akron loan production office ramped up. I think the partnership with Gateway Bank is an exciting opportunity as it provides an interest into a vibrant Washington County market. More importantly, Gateway has a very experienced team of bankers who are going to benefit from an expanded product mix and a bigger balance sheet that will enable them to meet credit needs of their customer base. Today, we are seeing a nice increase in both commercial and residential mortgage activity in this market and we expect to continue to see both of these pipelines grow in the coming months as we increase our presence. While we once again experienced a decline in our loan portfolio from an organic perspective, we are finally seeing some positive trends in our portfolio which did have positive growth in both August and September. Unfortunately in July we did experience some pretty significant payoffs but we were able to make a lot of that back up. I think furthermore the commercial volumes in our pipeline is up 35% from the end of Q2 and we also have now over $100 million in expected funding, primarily from construction commitments which is a $40 million increase from the beginning of the year. Residential mortgage lending continues to be robust as closings were approximately $55 million in Q3 and going into Q4 the pipeline remains solid.…

Hi, thanks Todd, and good afternoon everyone. As Todd said, the provisional expense for third quarter 2012 is $2.3 million, which resulted in an ending balance in the loan loss reserve of $46.3 million or 1.41% of total loans. This compares to a provision expense of $7 million with a loan loss reserve balance of $46.7 million or 1.46% at June 30, 2012. Included in the September, 2012, allowance is $2.9 million of specific reserves as compared to $1.4 million as of June 30, 2012. Nonperforming assets ended the quarter at $67.6 million or 2.06% of total loans plus OREO as compared to $72 million or 2.25% of total loans plus OREO at June 30, 2012; and $65.2 million or 2.08% at September 30, 2011. We continue to self-identify any potential weaknesses in our classified asset categories and have had some success in reducing our nonperforming loans during the quarter across all avenues of NCL reduction activities; meaning payoffs, pay downs and improved asset quality ratings, which is showing a reduction in this category and a lower level of charge-offs for the quarter. Coupled with these items we were able to outrun out inflows into the NPA category and saw a dramatic decrease in our inflows, essentially seeing a slowdown during the quarter of about 50% of new nonperforming loans. The strategic plans in place for targeted reduction in this category of our portfolio are continuing. Also during Q3 2012 the Bank did experience net charge-offs of $2.7 million which compares to $8.2 million in the linked quarter and $8 million in the year-ago quarter. Of the $2.7 million in charge-offs in the current quarter we previously established $1.4 million of specific reserves. Our TDR portfolio is $60.5 million, of which $37 million are on accrual status and performing and…

Okay, thanks Pat. Our performance in third quarter included 1/2 of the quarter with our recent acquisition of Gateway Bank. Gateway added $100 million of loans and $107 million of deposits at the time of the merger or about $53 million of loans and $56 million of deposits on average for the quarter. Incremental expenses related to Gateway totaled about $1.1 million split between one-time and some ongoing expenses. We anticipate a first quarter 2013 bank level merger and systems conversion. Interest income for the quarter was essentially unchanged as the increase in earning assets from the Gateway merger was partially offset by a decrease in S&T Loans of $29 million on average, $14 million on a point-to-point basis; and a decline in the net interest margin rate of 7 basis points. We continue to see assets re-pricing faster than our ability to update those changes through liability re-pricing or loan growth. With lengthening expectations for low interest rates and slower loan growth, we did add modestly to the securities portfolio this quarter. We expect the margin rate compression to continue for the next few quarters although at a somewhat slower pace. Security gains of about $2.2 million included the sale of a position in a local financial institution that we sold after an increase in value from a recent merger announcement. Todd and Pat already discussed the improvement in provision which did have a significant impact this quarter. Managed income was flat with the prior quarter but was up over 20% from last year due to strong performance in both mortgage banking and wealth management, as well as improvement in insurance and card-related income. Noninterest expense is up primarily due to the previously mentioned impact of the merger. Also the provision for unfunded commitments in the quarter was just over $1 million, a $400,000 increase from the prior quarter as construction commitments have grown. 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 the line of Damon DelMonte of KBW.

I was wondering if you guys could quantify the amount of loan runoff that you saw during the quarter versus the amount of origination that came on excluding the acquired loans from Gateway?

Yes, just give us a moment. We don’t have that at our fingertips, but we can get it for you.

For the quarter, total loans were approximately over $200 million of new loans, but we saw paid of approximately the same amount. So that was about flat. And then on the line basis we had growth of about maybe $23 million and then that gets offset by just scheduled amortization of about $20 million. So that left us with down about $14 million or $15 million for the quarter from an organic basis, just S&T’s portfolio.

Okay, but kind of as you come out of the third quarter and head into the fourth quarter of the year you’re feeling more comfortable that the pace of the pay-downs is slowing?

Yes, Damon -- this is David Antolik. What we’ve seen over the last 2 quarters is the pace of the decline has reduced. At the same time we’ve seen an increase in our construction commitments which would point towards further fundings in the fourth quarter and first quarter next year along with a significant increase in our pipeline of newly-approved loans.

Okay. With construction commitments, what areas are they in?

Yes, the areas of growth that we’ve seen is some student housing projects, there’s some government-related municipal-type deals as well as a few healthcare-related deals.

And a couple of office deals, too, that have fully leased and lot development. The total construction portfolios in the $200 million range, Damon, and the lot development, which was a big component of that 1 year, maybe 2 years ago is down to maybe about 20% of that portfolio now. So it’s a lot more diverse. And as Dave alluded to, we’re sitting on about $100 million in expected fundings out of that portfolio over the next 6 to 9 months.

Okay, great. And then switching over to expenses, how much of the Gateway expenses account for this quarter’s $31 million? Well, I should say $30.4 million when you look at core operating.

About $1.1 million. That’s one-time and some ongoing.

Okay. So what should we look at for a targeted core run rate going forward? Something in the low $30 million a quarter level?

Yes, it shouldn’t be a whole lot more than $30 million if not a little bit below.

But we also have a little bit of a lift in the unfunded construction reserve which gets expensed because of the growth that we’ve had in that portfolio. So that was how much, Mark, this quarter.

This quarter was down $1 million so again, it depends on what the net growth of that portfolio is.

Okay, got it, thanks. And then this is my final question. I think you mentioned there was a larger loan that got downgraded to special mention during the quarter?

Yes, it was a relationship of about 4 or 5 different projects but it’s a temporary cash flow issue so we did downgrade it. We’ve gone in and looked at valuations; had current appraisals performed on them and then from a loan-to-value it’s really low, low leverage and again, it’s temporary. So we would expect that to reverse itself out at some point maybe mid-year next year.

Okay, and what was the size of that relationship?

Collectively it’s about $24 million or $26 million.

Yes, Damon, it really was. We scrubbed this thing. It really is a temporary issue for this borrower and we fully expect to have this thing returned out of that category next year.

But again, it was spread out over about 6 different projects.

That’s right. I’m not losing sleep over it, Damon.

Okay, that’s good to hear. So that’s just in special mention, though, it hasn’t flipped over into nonperforming, correct?

No, and again we don’t expect it to further deteriorate at all.

Our next question comes from the line of David Darst with Guggenheim Securities.

Todd, as you ran through your numbers on the loan production you indicated the $55 million loan, was that residential originations?

Yes, that was just what we originated on the residential side, and that’s comprised probably about 50/50 of what we would sell and what we would put on the balance sheet.

Okay. Have you decided to hold more for the balance sheet given just the need to maybe stabilize your earning assets base?

We did start to hold some 10-year and 15-year paper earlier this year so that number was up about $40 million for the year.

Yes, we’ve been looking at a lot more of just ones we’re keeping and we’re thinking about expanding that potentially.

Okay. And Mark, I think in the past you’d talked about maybe you had liquidated the mainline securities portfolio and then reinvested it. Have you done anything similar to Gateway? And then as a result, are we going to see a more stable securities yield from you going forward?

Gateway had very little in the way of securities. They had a fairly high loan-to-deposit ratio so they only had about $8 million worth of securities. And they still remain a separate subsidiary bank so they have retained for now those securities, so we don’t anticipate any changes with the securities portfolio relative to the Gateway acquisition. We are looking, just because of the way the loan book has gone and with the rate environment as it is in putting some of the cash that we have sitting at the Fed into the securities portfolio.

So that should help on just the pace of the yield decline?

Right, it’ll help extend that.

Okay. On the credit side, and I guess other than the special mention that you highlighted, everything is I think improving but it continues, I guess, you're used to seeing a lot more volatility than your peers in charge-offs and provision MPAs. Are you at a point where you feel like you’re getting back to more of a historical loss rate for the next couple quarters? And are you more comfortable with the balance sheet risk today or do you think there’ll still be things that’ll generate some volatility?

David, this is Pat. I can tell you that I’m encouraged with the quarter we had. I’m liking what I’m seeing better. With having a commercial real estate portfolio, of course there’s going to be some volatility in there but I think we’ve come a long way and I think our numbers are starting to show that. And I can answer you by saying I’m feeling more comfortable today and liking what I’m seeing in the portfolio, and I think our balance sheet, even as Todd and Dave were talking about the construction commitment as you can see is much more diverse; we’re spread out more evenly.

Yes, the trends are heading in the right direction, David. I mean when you look at delinquencies we’re down; the substandard category was down about $27 million for the quarter. We did have a little bit of an increase into the five graded [ph] category but it’s something that we’re monitoring very closely. So it’s not that we can jump up and hitch it but we’re scrubbing this stuff up pretty extensively, so we’re just trying to be wary if something would jump up. And like I said, we like the direction of where it’s going right now.

Okay. And then can you give us a little guidance on the tax rate? I know it was up one quarter and it also went down a little bit lower than I thought it might be.

We can. It looks like it should be in the kind of low- to mid-teens for the year.

Our next question comes from the line of Collyn Gilbert with Stifel Nicolaus.

Thanks, good afternoon guys. Just to follow up on David’s question about the credit. So if we think about the progress you guys have made and where you think the portfolio and the risk can go from here, where do you think then that the reserve should also settle out -- the reserve to loans?

Mark, do you want to give some color on the reserve?

I think it’s really hard to tell because there’s so many things that go into that, but our best guess is that the charges and the provision will at least be close to where they are going forward.

I mean we wouldn’t anticipate any further kind of deterioration in that.

No. We had a small release in the reserve but it was still fairly minimal this quarter.

Okay, so you think that charge-offs should more or less match provisions at least in the foreseeable quarters you think?

Right, absent any deterioration. I mean what’s driving our model quite a bit is the ratings stack, how much special mention and substandard loans we have. So that has a pretty significant impact, so as long as that is relatively stable or declining we wouldn’t expect to see a big increase in the reserve need when we calculate that. So in the absence of that change causing a big reserve need we wouldn’t expect that we’d have to do anything more, but cover the charges.

Okay. And then just shifting to the balance sheet with the commentary on the pipeline and some resurgence in construction, can you guys tie that to further loan growth expectation? It seems like while you’ve spoken to some decent originations obviously the challenge has been the pay-downs which has really kept balances more or less flat. But do you think that this can translate into single-digit loan growth numbers for next year or how are you thinking about just the totality of the balance sheet?

Yes, Collyn, we need to kind of walk before we run so we’re really looking at just getting back to break even; and then perhaps midway through next year start to see some growth as these trends continue. Obviously we can’t control the payoffs as well as we’d like so you’re always at risk -- if a customer sells a project or they sell their business or something is refinanced into the permanent market. But based on what we see in the construction portfolio and the growth in the pipeline, we’re confident that we can get back to seeing some organic growth next year.

Okay, that’s helpful. And then I guess it’s sort of maybe a final question to Todd, to you or Mark, but do you guys have an efficiency ratio in mind that you’d like to sort of target? I mean historically you guys have run such an efficient shop in the 55% range; do you think that’s reasonable to get back to that level? Or how are you thinking about the efficiency ratio if at all?

Yes, so as Mark just kind of said how are we thinking about it? Lower. [laughter] But it’s interesting. We’ve been spending a lot of time looking for ways to run a more efficient organization. It’s been a hallmark of our company so we are looking at different strategies, whether it be branch rationalization or just other areas where we can become more efficient. But it’s a constant focus of the organization so we’ll be looking at a lot of different levers to pull to try and drive that down.

Collyn, for us the increase in that has really been driven more by the margin issues that we’ve had as opposed to the expenses that we’ve had. It has an expense component so it’s really going to hinge more on recovery of the margin rate and that gets back to loan growth.

Yes, okay, and then just on that point, Mark, you had said expect compression maybe a little bit less than what you saw this quarter in the next couple quarters. Are you only speaking to the next couple of quarters because that’s only as far as you’re comfortable going or do you anticipate a further change in the balance sheet that could start to see longer-term margin stabilization?

I think it should stabilize more going forward. I mean I think what we would hope for is that as the loan growth returns David had mentioned possibly later next year that we could hopefully see it go the other way as we shift more to loan. So it’s not thinking that it’s going to start to go down even more again.

Okay. And does that assumption mean that the loan yields that you guys are seeing on your new originations are higher than what the blended yield is of the current portfolio?

They’re getting unfortunately much closer but the totality of the book is still higher than the new, but that difference has been shrinking. It’s maybe closer to 75 basis points now, where it used to be almost 2%.

Okay, and sorry, just one other thing on the NIM. The compression is coming I presume from primarily on the asset side, so is there more room? I mean just when I look at the CD rates of you guys, it looks like your average CD rates are running in like a 35 basis points to 45 basis points, so well below what you posted this quarter. Do you think you could eventually roll that portfolio that low or should we not even be thinking about that as a re-pricing option?

There’s a little bit of room on the funding side but not like they’re used to be. We still have a few older CD tranches from specials from years ago that we'll re-price in the coming couple quarters, but it’s not going to be enough to offset what we see from the next couple quarters essentially in terms of the loan stuff.

[Operator instructions] Our next question comes from the line of Matthew Breese with Sterne Agee.

I guess I wanted to start my questions following up on the margin discussion. What are some of the new yields you’re seeing out there on the securities front?

On securities? Well, I mean depending on how far at the curve, the agency paper is sub-1% insomuch on the past 5 years. We have looked [indiscernible] at some longer municipals that we think offer some value. Those, before you do the tax adjustments can run in the low 2.0% to 2.5% and then some types of CMOs or mortgage-backed paper that we like are maybe in the 1.60% to 1.70% range.

Okay, so it sounds like there’s going to be a little more emphasis on the securities portfolio?

I think so, and just the impression we’re getting and forecasts from economists and the Fed certainly point to this rate environment lasting quite a while yet.

Okay, so if I’m thinking about the balance sheet over the last 18 months or so you guys have built up an increasingly large liquidity position, so you now have $350 million in cash and due from banks. How much of that do you perceive going into the securities portfolio and how much of that do you think can go into loans over the next year?

I think we’re still working through our planning, we’re still working through those numbers so we wouldn’t want to commit to anything quite yet.

Okay. Do you anticipate having a liquidity position of this magnitude going into 2013?

In terms of cash probably not. I mean we’ll probably reduce that, but the securities that we’d end up purchasing would be still fairly liquid and we would give up some liquidity for that but we’d still retain those as being unpledged and available as either being pledged to borrow or to be sold if needed.

Okay. And what portion of the balance sheet do you think you’re willing to let the securities run up to?

I think we haven’t come to a final conclusion on that yet.

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

I guess if I can start with some color behind your loan pipeline. Is this some business coming from existing customers or are you seeing new business relationships?

It’s a combination of the 2. There’s a lot of new customer contact being made but at the same time we’ve seen some existing clients look at new projects. The other thing we’ve seen on the C&I front is an increase in line utilization over the last few quarters so we are seeing some signs of life in terms of demand from the current customer base.

Okay. And how is the competition from at least on the eastern part of the state? Everybody says it’s been fierce in pricing. Is that what you see on the western side of the state too?

Yes, yes.

Okay. And what’s kind of your take on just the Western PA economy and what impact if any from Marcellus shale? Is that increasing or is it staying about the same?

Well, the Western PA economy continues to be fairly stable. We’re fairly lucky that it hasn’t been as volatile as many regions in the country. The Marcellus impact, what’s kind of happened I think has happened. There’s a lot of new activity. We’ve seen a lot of the drilling moving to Eastern Ohio where they’re drilling for oil, but the long-term impact is going to happen because they’ve drilled a lot of wells -- those wells need to be serviced, transmission lines need to be developed in order to get that gas to market and I think in the future we will see a significant impact when prices increase.

I would say all-in-all too, Rick, in addition to the Marcellus it’s still a pretty diverse region. And if you look at housing it’s still pretty solid. The sales have been good. Unemployment has been below state averages and national averages and some of the manufacturing sectors are pretty strong right now. So I think Western Pennsylvania is holding its own relative to the overall national economy.

Got it. And I guess finally I’d be curious on your take on what’s going on in the M&A market in general, not specifically for you.

Yes, I mean I think obviously you’re seeing some more activity, and I think everybody’s sitting around and trying to look at the impact of the reduced, the margin pressures that you’re going to have next year and some of the other increased operating costs. So we were able to do 2 mergers this year and I think you’re going to continue to see activity; and I think we’re well-positioned to select the right partner for our organization.

There are no further questions at this time. I’d like to go ahead and turn it back over to management for closing comments.

We did have one other question that came in on an email and that was related to noninterest expense versus the third quarter of 2011. I just want to go through some of the major increase there: we had mentioned the impact of the Gateway merger, both one-time and ongoing expenses, that was about $1.1 million. Then also versus a year ago we had the Mainline acquisition that we did in the first part of the year. Their ongoing operating expenses are about $1.25 million so that added about $1 million. Another large item is this unfunded commitments and on a quarter-over-quarter comparison that adds about $2.3 million of expense. The pension this year versus last has increased due to the lower discount rate that we have to use, that’s about $700,000 this quarter; and then we had some joint venture projects for low-income tax housing projects that we participate in. Those are higher this year by about $250,000. And the other question was related to a similar question that was asked about the efficiency ratio.

Well thanks, Mark, and thank you everybody for participating in today’s conference call. We do appreciate the opportunity to discuss our quarter’s results and we look forward to hearing from you at year end. So thank you.

Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.