Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            To             

Commission file number 000-12508

 

 

S&T BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   25-1434426

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

800 Philadelphia Street, Indiana, PA   15701
(Address of principal executive offices)   (zip code)

800-325-2265

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, $2.50 Par Value - 28,107,287 shares as of October 31, 2011

 

 

 


Table of Contents

INDEX

S&T BANCORP, INC. AND SUBSIDIARIES

 

             Page No.      

PART I. FINANCIAL INFORMATION

  

Item 1.

  Financial Statements   
  Consolidated Balance Sheets – September 30, 2011 and December 31, 2010      3      
  Consolidated Statements of Income – Three and Nine Months Ended September 30, 2011 and 2010      4      
  Consolidated Statements of Changes in Shareholders’ Equity – Nine Months Ended September 30, 2011 and 2010      5      
  Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2011 and 2010      6      
  Notes to Consolidated Financial Statements      7-28      

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      28-44      

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      45-46      

Item 4.

  Controls and Procedures      46      

PART II. OTHER INFORMATION

  

Item 1.

  Legal Proceedings      47      

Item 1A.

  Risk Factors      47      

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      47       

Item 3.

  Defaults Upon Senior Securities      47      

Item 4.

  Removed and Reserved      47      

Item 5.

  Other Information      47      

Item 6.

  Exhibits      47      
  Signatures      48      

 

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Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     September 30, 2011     December 31, 2010  
(in thousands, except share and per share data)    (Unaudited)     (Audited)  

ASSETS

    

Cash and due from banks, including interest-bearing deposits of $203,898 and $61,260, respectively

   $ 262,406      $ 108,196   

Securities available-for-sale, at fair value

     340,123        288,025   

Federal Home Loan Bank stock, at cost

     19,175        22,365   

Loans held for sale

     3,959        8,337   

Portfolio loans, net of unearned income

     3,132,183        3,355,590   

Allowance for loan losses

     (51,533     (51,387
                  

Portfolio loans, net

     3,080,650        3,304,203   

Premises and equipment, net

     38,729        39,954   

Goodwill

     165,273        165,273   

Other intangibles, net

     6,142        7,465   

Bank owned life insurance

     56,220        54,924   

Other assets

     119,293        115,597   
                  

Total Assets

   $ 4,091,970      $ 4,114,339   
                  

LIABILITIES

    

Deposits:

    

Noninterest-bearing demand

   $ 817,518      $ 765,812   

Interest-bearing demand

     291,726        295,246   

Money market

     255,058        262,683   

Savings

     772,653        753,813   

Certificates of deposit

     1,134,476        1,239,970   
                  

Total Deposits

     3,271,431        3,317,524   

Securities sold under repurchase agreements

     42,409        40,653   

Long-term borrowings

     32,319        29,365   

Junior subordinated debt securities

     90,619        90,619   

Other liabilities

     51,518        57,513   
                  

Total Liabilities

     3,488,296        3,535,674   

SHAREHOLDERS’ EQUITY

    

Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value, $1,000 per share liquidation preference 10,000,000 preferred shares authorized in 2011 and 2010 108,676 shares issued and outstanding in 2011 and 2010

     106,733        106,137   

Common stock, $2.50 par value 50,000,000 shares authorized in 2011 and 2010 29,714,038 shares issued in 2011 and 2010 28,106,451 shares and 27,951,689 shares outstanding at September 30, 2011 and December 31, 2010, respectively

     74,285        74,285   

Additional paid-in capital

     52,400        51,570   

Retained earnings

     416,616        401,734   

Accumulated other comprehensive loss

     (1,919     (6,334

Treasury stock (1,607,587 shares and 1,762,349 shares at September 30, 2011 and December 31, 2010, respectively, at cost)

     (44,441     (48,727
                  

Total Shareholders’ Equity

     603,674        578,665   
                  

Total Liabilities and Shareholders’ Equity

   $ 4,091,970      $ 4,114,339   
                  

See Notes to Consolidated Financial Statements

 

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S&T BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months  Ended
September 30,
     Nine Months  Ended
September 30,
 
(in thousands, except per share data)    2011     2010      2011     2010  

INTEREST INCOME

         

Loans, including fees

   $ 38,103      $ 42,718       $ 116,720      $ 127,598   

Investment securities:

         

Taxable

     2,054        1,803         5,944        6,041   

Tax-exempt

     525        683         1,678        2,204   

Dividends

     163        121         478        366   
                                   

Total Interest Income

     40,845        45,325         124,820        136,209   
                                   

INTEREST EXPENSE

         

Deposits

     5,745        7,014         17,764        22,115   

Short-term borrowings and securities sold under repurchase agreements

     13        38         43        196   

Long-term borrowings and junior subordinated debt securities

     1,218        1,300         3,734        4,386   
                                   

Total Interest Expense

     6,976        8,352         21,541        26,697   
                                   

NET INTEREST INCOME

     33,869        36,973         103,279        109,512   

Provision for loan losses

     1,535        8,278         13,272        21,835   
                                   

Net Interest Income After Provision for Loan Losses

     32,334        28,695         90,007        87,677   
                                   

NONINTEREST INCOME

         

Service charges on deposit accounts

     2,683        2,842         7,356        8,706   

Insurance fees

     2,192        2,125         6,505        6,457   

Debit and credit card fees

     2,132        1,951         6,221        5,615   

Wealth management fees

     1,965        1,861         6,159        5,761   

Securities (losses) gains, net

     (81     6         (124     263   

Mortgage banking

     (447     1,573         424        2,150   

Other

     1,899        1,977         5,942        6,256   
                                   

Total Noninterest Income

     10,343        12,335         32,483        35,208   
                                   

NONINTEREST EXPENSE

         

Salaries and employee benefits

     11,741        11,887         37,632        36,263   

Data processing

     1,743        1,547         4,928        4,601   

Occupancy, net

     1,653        1,674         5,248        5,317   

Furniture and equipment

     1,263        1,176         3,805        3,562   

Other taxes

     864        739         2,669        2,626   

Joint venture amortization

     839        627         2,428        1,964   

FDIC assessment

     749        1,359         2,892        4,058   

Legal

     577        511         1,794        3,715   

Amortization of intangibles

     414        463         1,323        1,483   

Other

     4,350        4,965         14,517        15,026   
                                   

Total Noninterest Expense

     24,193        24,948         77,236        78,615   
                                   

Income Before Provision for Income Taxes

     18,484        16,082         45,254        44,270   

Provision for Income Taxes

     4,681        3,600         10,246        11,080   
                                   

Net Income

     13,803        12,482         35,008        33,190   

Preferred stock dividends and discount amortization

     1,559        1,551         4,672        4,648   
                                   

Net Income Available to Common Shareholders

   $ 12,244      $ 10,931       $ 30,336      $ 28,542   
                                   

Common earnings per share—basic

   $ 0.44      $ 0.39       $ 1.08      $ 1.03   

Common earnings per share—diluted

   $ 0.44      $ 0.39       $ 1.08      $ 1.03   

Dividends declared per common share

   $ 0.15      $ 0.15       $ 0.45      $ 0.45   

Average common shares outstanding—basic

     28,003        27,800         27,971        27,767   

Average common shares outstanding—diluted

     28,025        27,813         27,991        27,790   
                                   

See Notes to Consolidated Financial Statements

 

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S&T BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

(in thousands, except per share data)    Comprehensive
Income
    Preferred
Stock
     Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Treasury
Stock
    Total  

Balance at January 1, 2010

     $ 105,370       $ 74,285       $ 51,158      $ 383,118      $ (6,214   $ (54,399   $ 553,318   

Net income for nine months ended September 30, 2010

   $ 33,190                33,190            33,190   

Other Comprehensive Income

                  

Change in unrealized gains on available-for-sale securities, net of tax of $1,351

     2,509                  2,509          2,509   

Reclassification adjustment for net gains on securities available-for-sale included in net income, net of tax of $142

     (263               (263       (263

Adjustment to funded status of employee benefit plans, net of tax of $240

     446                  446          446   
  

 

 

                 

Total Comprehensive Income

   $ 35,882                   

Preferred stock dividends and discount amortization

       572              (4,648         (4,076

Cash dividends declared ($0.45 per share)

               (12,505         (12,505

Treasury stock issued (102,617 shares)

               (1,191       2,838        1,647   

Recognition of restricted stock compensation expense

             341              341   

Tax benefits from stock-based compensation

             4              4   

Forfeitures of nonstatutory stock options

             (104           (104
                                                                    

Balance at September 30, 2010

     $ 105,942       $ 74,285       $ 51,399      $ 397,964      $ (3,522   $ (51,561   $ 574,507   
                                                                    
                                                                    

Balance at January 1, 2011

     $ 106,137       $ 74,285       $ 51,570      $ 401,734      $ (6,334   $ (48,727   $ 578,665   

Net income for nine months ended September 30, 2011

   $ 35,008                35,008            35,008   

Other Comprehensive Income

                  

Change in unrealized gains on available-for-sale securities, net of tax of $2,100

     3,901                  3,901          3,901   

Reclassification adjustment for net losses on securities available-for-sale included in net income, net of tax of $43

     81                  81          81   

Adjustment to funded status of employee benefit plans, net of tax of $233

     433                  433          433   
  

 

 

                 

Total Comprehensive Income

   $ 39,423                   

Preferred stock dividends and discount amortization

       596              (4,672         (4,076

Cash dividends declared ($0.45 per share)

               (12,614         (12,614

Treasury stock issued (156,419 shares)

             (10     (2,840       4,325        1,475   

Recognition of restricted stock compensation expense

             830              830   

Forfeitures of restricted stock (1,657 shares)

             10            (39     (29
                                                                    

Balance at September 30, 2011

     $ 106,733       $ 74,285       $ 52,400      $ 416,616      $ (1,919   $ (44,441   $ 603,674   
                                                                    

See Notes to Consolidated Financial Statements

 

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S&T BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended September 30  
(in thousands)    2011     2010  

OPERATING ACTIVITIES

    

Net income

   $ 35,008      $ 33,190   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     13,272        21,835   

Provision for unfunded loan commitments

     (1,015     (1,555

Depreciation and amortization

     4,858        4,951   

Net amortization (accretion) of discounts and premiums

     844        632   

Stock-based compensation expense

     636        227   

Securities losses (gains), net

     124        (263

Deferred income taxes

     (142     (3,652

Tax benefits from stock-based compensation

     0        (4

Mortgage loans originated for sale

     (49,477     (71,650

Proceeds from the sale of loans

     54,557        73,652   

Gain on the sale of loans, net

     (544     (866

Net decrease in interest receivable

     1,216        2,996   

Net decrease in interest payable

     (179     (1,719

Net decrease (increase) in other assets

     3,135        (17,062

Net (decrease) increase in other liabilities

     (3,941     14,480   
                  

Net Cash Provided by Operating Activities

     58,352        55,192   

INVESTING ACTIVITIES

    

Proceeds from maturities, prepayments and calls of securities available-for-sale

     51,069        128,525   

Proceeds from sales of securities available-for-sale

     70        2,566   

Purchases of securities available-for-sale

     (98,080     (50,863

Proceeds from the redemption of Federal Home Loan Bank stock

     3,190        0   

Net decrease in loans

     189,730        4,512   

Proceeds from sale of loans not originated for resale

     8,595        0   

Purchases of premises and equipment

     (2,288     (1,942

Proceeds from the sale of premises and equipment

     285        111   
                  

Net Cash Provided by Investing Activities

     152,571        82,909   

FINANCING ACTIVITIES

    

Net increase (decrease) in core deposits

     59,401        (644

Net (decrease) increase in certificates of deposit

     (105,580     569   

Net decrease in short-term borrowings

     0        (51,300

Net increase in securities sold under repurchase agreements

     1,756        3,254   

Proceeds from long-term borrowings

     4,192        9,663   

Repayments of long-term borrowings

     (1,238     (65,708

Purchase of treasury shares

     (29     0   

Sale of treasury shares

     1,475        1,647   

Cash dividends paid to preferred shareholder

     (4,076     (4,076

Cash dividends paid to common shareholders

     (12,614     (12,505

Tax benefits from stock-based compensation

     0        4   
                  

Net Cash Used in Financing Activities

     (56,713     (119,096

Net increase in cash and cash equivalents

     154,210        19,005   

Cash and cash equivalents at beginning of period

     108,196        69,152   
                  

Cash and Cash Equivalents at End of Period

   $ 262,406      $ 88,157   

Supplemental Disclosures

    

Transfers to other real estate owned and other repossessed assets

   $ 6,942      $ 8,608   

Interest paid

   $ 21,720      $ 28,416   

Income taxes paid

   $ 9,900      $ 11,192   
                  

See Notes to Consolidated Financial Statements

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

 

Principals of Consolidation

The interim Consolidated Financial Statements include the accounts of S&T Bancorp, Inc. and subsidiaries (“S&T”) and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Investments of 20 percent to 50 percent of the outstanding common stock of investees are accounted for using the equity method of accounting.

Basis of Presentation

The accompanying unaudited interim Consolidated Financial Statements of S&T have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 16, 2011. In the opinion of management, the accompanying interim financial information reflects all adjustments, including normal recurring adjustments, necessary to present fairly S&T’s financial position and results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year’s presentation. These reclassifications did not have a material impact on S&T’s consolidated financial condition or results of operations.

Acquisition of Mainline Bancorp, Inc.

On September 14, 2011, S&T announced the signing of a definitive merger agreement to acquire Mainline Bancorp, Inc. (“Mainline”), a bank holding company based in Ebensburg, Pennsylvania. Mainline, with approximately $242 million in assets, maintains eight offices in Cambria and Blair counties of Pennsylvania. Under the terms of the merger agreement, shareholders of Mainline will have the opportunity to elect to receive $69.00 per share in cash, or between 3.6316 and 4.3125 shares of S&T common stock, with the precise number of shares based on the average of the high and low sale prices of S&T for a 10 trading day period ending 5 days prior to the business day preceding the merger vote by Mainline shareholders. The transaction, valued at approximately $21 million, is expected to be completed in the first quarter of 2012, pending regulatory approvals, the approval of shareholders of Mainline, and other closing conditions.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

Recently Adopted Accounting Standards Updates

A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring

In April 2011, the FASB issued ASU No. 2011-02, which amends the guidance for evaluating whether the restructuring of a receivable by a creditor is a troubled debt restructuring (“TDR”). In evaluating whether a restructuring constitutes a TDR both for purposes of recording an impairment loss and for disclosure purposes, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. For S&T, the new guidance was effective July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. S&T is also required to disclose the activity based information that was previously deferred by ASU No. 2011-01. The adoption of this ASU did not have a material impact on S&T’s results of operations or financial position.

When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts

In December 2010, the FASB issued ASU No. 2010-28, which reflects the decision reached in EITF Issue No. 10-A. This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, this ASU was effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of this ASU did not have a material impact on S&T’s results of operations or financial position.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

Recently Issued Accounting Standards Updates

Testing Goodwill for Impairment

In September 2011, the FASB issued ASU No. 2011-08, which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not, it need not perform the two-step impairment test. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on S&T’s results of operations or financial position.

Presentation of Comprehensive Income

In June 2011, the FASB issued ASU No. 2011-05, the provisions of which allow an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively and is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this ASU will only impact S&T’s presentation of comprehensive income and is not expected to have an impact on S&T’s results of operations or financial position.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs

In May 2011, the FASB issued ASU No. 2011-04, which represents the convergence of the FASB’s and the IASB’s guidance on fair value measurement. ASU 2011-04 reflects the common requirements under U.S. GAAP and IFRS for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning for the term “fair value.” The new guidance does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it is already required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS 13. A public company is required to apply the ASU prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted for a public company. The adoption of this ASU is not expected to have a material impact on S&T’s results of operations or financial position.

Reconsideration of Effective Control for Repurchase Agreements

In April 2011, the FASB issued ASU No. 2011-03, which is intended to improve financial reporting of repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. When an entity enters into a typical repo arrangement, it transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. Current guidance prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to a repo agreement. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets. This ASU improves the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets and focuses the assessment on the transferor’s contractual rights. This guidance is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of this ASU is not expected to have a material impact on S&T’s results of operations or financial position.

NOTE 2. CAPITAL PURCHASE PROGRAM

 

On January 16, 2009, S&T, as a participant in the U.S. Treasury Capital Purchase Program (“CPP”), issued to the U.S. Treasury 108,676 shares of its Series A Preferred Stock and a Warrant to purchase 517,012 shares of common stock at an exercise price of $31.53 per share, in exchange for proceeds of $108.7 million. The Series A Preferred Stock pays cumulative dividends at a rate of five percent per year for the first five years and thereafter at a rate of nine percent per year. The Warrant provides for the adjustment of the exercise price and the number of shares of S&T’s common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of S&T’s common stock and upon certain issuances of S&T’s common stock at or below a specified price relative to the initial exercise price. The U.S. Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant. The Warrant expires ten years from date of issuance.

 

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Under changes made to the CPP by the American Recovery and Reinvestment Act of 2009 (“ARRA”), S&T can redeem the Series A Preferred Stock, plus any accrued and unpaid dividends, subject to approval by banking regulatory agencies, at any time. If S&T only redeems part of the CPP investment, then it must pay a minimum of 25 percent of the issuance price, or $27.2 million. The consent of the U.S. Treasury will be required for S&T to increase its common stock dividend (above the dividend amount prior to S&T’s participation in the CPP) or repurchase its common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances through January 16, 2012. The consent of the U.S. Treasury will not be required if S&T has redeemed the Series A Preferred Stock or the U.S. Treasury has transferred the Series A Preferred Stock to a third party. In addition, the Series A Preferred Stock issuance includes certain restrictions on executive compensation that could limit the tax deductibility of compensation S&T pays to executive management.

NOTE 3. FAIR VALUE MEASUREMENTS

 

S&T uses fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures. Securities available-for-sale, trading assets and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, S&T may be required to record other assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans, other real estate owned (“OREO”), mortgage servicing rights (“MSR”) and certain other assets.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, S&T uses various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed, based on market data obtained from sources independent of S&T. Unobservable inputs reflect S&T’s estimate of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.

Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.

Level 3: valuation is derived from other valuation methodologies including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. S&T’s policy is to recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred.

The following are descriptions of the valuation methodologies that S&T uses for financial instruments recorded at fair value on either a recurring or nonrecurring basis.

Recurring Basis

Securities Available-for-Sale

Securities available-for-sale include both debt and equity securities.

S&T obtains estimated fair values for debt securities from a third-party pricing service, which utilizes several sources for valuing fixed-income securities. The market evaluation sources for debt securities include observable inputs rather than significant unobservable inputs and are classified as Level 2. The service provider utilizes evaluated pricing models that vary by asset class and include available trade, bid and other market information. Generally, the methodologies include broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

Marketable equity securities that have an active, quotable market are classified in Level 1. Marketable equity securities that are quotable, but are thinly traded or inactive, are classified as Level 2 and securities that are not readily traded and do not have a quotable market are classified as Level 3.

Trading Assets

S&T uses quoted market prices to determine the fair value of its trading assets. S&T’s trading assets are held in a Rabbi Trust under a deferred compensation plan and are invested in two readily quoted mutual funds. Accordingly, these assets are classified as Level 1.

 

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Derivative Financial Instruments

S&T calculates the fair value for derivatives using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity and uses observable market based inputs, such as interest rate curves and implied volatilities. Accordingly, derivatives are classified as Level 2.

S&T incorporates credit valuation adjustments into the valuation models to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in calculating fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, S&T has considered the impact of netting and any applicable credit enhancements and collateral postings.

Nonrecurring Basis

Loans Held for Sale

Loans held for sale consist of 1-4 family residential loans originated for sale in the secondary market and from time to time, certain loans transferred from the loan portfolio to loans held for sale, all of which are carried at the lower of cost or fair value. The fair value of 1-4 family residential loans is based on the price secondary markets are currently offering for similar loans using observable market data. The fair value of the loans transferred from the loan portfolio is based on the amounts offered for these loans in currently pending sales transactions. Loans held for sale carried at fair value are classified as Level 2.

Impaired Loans

Impaired loans are carried at the lower of carrying value or fair value. Fair value is determined as the recorded investment balance less any specific reserve. S&T establishes a specific reserve based on the following three impairment methods: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate, 2) the loan’s observable market price or 3) the fair value of the collateral less estimated selling costs when the loan is collateral dependent. Collateral values are generally based upon appraisals by approved, independent state certified appraisers.

Appraisals may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation or management’s knowledge of the borrower and the borrower’s business. Because not all valuation inputs are observable, impaired loans are classified as Level 2 or Level 3 based on the lowest level of input that is significant to the fair value measurement.

OREO and Other Repossessed Assets

OREO and other repossessed assets obtained in partial or total satisfaction of a loan are recorded at the lower of recorded investment in the loan or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or estimated fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Like impaired loans, appraisals on OREO may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation or other information available to management. Because not all valuation inputs are observable, OREO and other repossessed assets are classified as Level 2 or Level 3 based on the lowest level of input that is significant to the fair value measurement.

Mortgage Servicing Rights

The fair value of MSR is determined by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rate of mortgage loan prepayments is the most significant factor driving the value of MSR. If the carrying value of MSR exceeds fair value, they are considered impaired. As the valuation model includes significant unobservable inputs, MSR are classified as Level 3 within the fair value hierarchy.

Other Assets

In accordance with GAAP, S&T measures certain other assets at fair value on a nonrecurring basis. Fair value is based on the application of lower of cost or fair value accounting, or write downs of individual assets. Valuation methodologies used to measure fair value are consistent with overall principles of fair value accounting and consistent with those described above.

Financial Instruments

In addition to financial instruments recorded at fair value in S&T’s financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of S&T’s assets and liabilities are considered financial instruments as defined in the guidance. Many of these instruments lack an available trading market as characterized by a willing buyer and willing seller engaged in an exchange transaction. Also, it is S&T’s general practice and intent to hold its financial instruments to maturity and to not engage in trading or sales activities. For fair value disclosure

 

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purposes, S&T substantially utilized the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, S&T uses present value methods to determine the fair value of its financial instruments.

Cash and Cash Equivalents and Other Short-Term Assets

The carrying amounts reported in the Consolidated Balance Sheets for cash and due from banks and interest-bearing deposits with banks approximate fair value.

Loans

The fair value of variable rate performing loans is based on carrying values adjusted for credit risk. The fair value of fixed rate performing loans is estimated using discounted cash flow analyses, utilizing interest rates currently being offered for loans with similar terms, adjusted for credit risk. The fair value of nonperforming loans is based on their carrying values less any specific reserve. The carrying amount of accrued interest approximates fair value.

Bank Owned Life Insurance

Fair value approximates net cash surrender value.

Deposits

The fair values disclosed for deposits without defined maturities (e.g., noninterest and interest-bearing demand, money market and savings accounts) are by definition equal to the amounts payable on demand. The carrying amounts for variable rate, fixed-term time deposits approximate their fair values. Estimated fair values for fixed rate and other time deposits are based on discounted cash flow analysis, using interest rates currently offered for time deposits with similar terms. The carrying amount of accrued interest approximates its estimated fair value.

Short-Term Borrowings

The carrying amounts of federal funds purchased, securities sold under repurchase agreements and other short-term borrowings approximate their fair values.

Long-Term Borrowings

The fair values disclosed for fixed rate long-term borrowings are determined by discounting their contractual cash flows using current interest rates for long-term borrowings of similar remaining maturities. The carrying amounts of variable rate long-term borrowings approximate their fair values.

Junior Subordinated Debt Securities

The variable rate junior subordinated debt securities reprice quarterly and fair values are based on carrying values.

Loan Commitments and Standby Letters of Credit

Off-balance sheet financial instruments consist of commitments to extend credit and letters of credit. Except for interest rate lock commitments, estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

 

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The following tables present assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy level at September 30, 2011 and December 31, 2010. There were no transfers between Level 1 and Level 2 during the periods presented.

 

     September 30, 2011  
(in thousands)    Level 1      Level 2      Level 3      Total  
                                     

ASSETS

           

Securities available-for-sale:

           

Obligations of U.S. government corporations and agencies

   $ 0       $ 153,213       $ 0       $ 153,213   

Collateralized mortgage obligations of U.S. government corporations and agencies

     0         69,799         0         69,799   

Mortgage-backed securities of U.S. government corporations and agencies

     0         52,410         0         52,410   

Obligations of states and political subdivisions

     0         53,263         0         53,263   

Marketable equity securities

     2,438         7,337         1,663         11,438   
                                     

Total securities available-for-sale

     2,438         336,022         1,663         340,123   

Trading securities held in a Rabbi Trust under a deferred compensation plan

     1,697         0         0         1,697   
                                     

Total securities

     4,135         336,022         1,663         341,820   

Derivative financial assets:

           

Interest rate swaps

     0         24,327         0         24,327   

Interest rate lock commitments

     0         370         0         370   
                                     

Total Assets

   $ 4,135       $ 360,719       $ 1,663       $ 366,517   
                                     

LIABILITIES

           

Derivative financial liabilities:

           

Interest rate swaps

   $ 0       $ 24,217       $ 0       $ 24,217   

Forward sale contracts

     0         163         0         163   
                                     

Total Liabilities

   $ 0       $ 24,380       $ 0       $ 24,380   
                                     

 

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     December 31, 2010  
(in thousands)    Level 1      Level 2      Level 3      Total  
                                     

ASSETS

           

Securities available-for-sale:

           

Obligations of U.S. government corporations and agencies

   $ 0       $ 125,675       $ 0       $ 125,675   

Collateralized mortgage obligations of U.S. government corporations and agencies

     0         41,491         0         41,491   

Mortgage-backed securities of U.S. government corporations and agencies

     0         43,991         0         43,991   

Obligations of states and political subdivisions

     0         65,772         0         65,772   

Marketable equity securities

     1,528         7,980         1,588         11,096   
                                     

Total securities available-for-sale

     1,528         284,909         1,588         288,025   

Trading securities

     2,089         0         0         2,089   
                                     

Total securities

     3,617         284,909         1,588         290,114   

Derivative financial assets:

           

Interest rate swaps

     0         17,518         0         17,518   

Interest rate lock commitments

     0         217         0         217   

Forward sale contracts

     0         412         0         412   
                                     

Total Assets

   $ 3,617       $ 303,056       $ 1,588       $ 308,261   
                                     

LIABILITIES

           

Derivative financial liabilities:

           

Interest rate swaps

   $ 0       $ 17,355       $ 0       $ 17,355   
                                     

Total Liabilities

   $ 0       $ 17,355       $ 0       $ 17,355   
                                     

The following table presents the changes in assets classified as Level 3 in the fair value hierarchy that are measured at fair value on a recurring basis using significant unobservable inputs.

 

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
(in thousands)    2011     2010     2011      2010  
                                   

Balance at beginning of period

   $ 1,669      $ 1,628      $ 1,588       $ 1,138   

Total (losses) gains included in other comprehensive income

     (6     (15     75         (15

Transfers into Level 3

     0        0        0         490   
                                   
                                   

Balance at end of period

   $ 1,663      $ 1,613      $ 1,663       $ 1,613   
                                   

Changes in the fair market value of available-for-sale securities are recorded in accumulated other comprehensive loss, while realized gains and losses from sales are recorded in securities (losses) gains, net in the Consolidated Statements of Income.

There were no purchases, sales, issuances, settlements, or transfers out of Level 3 financial instruments during the periods presented.

 

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The following tables present assets that are measured at fair value on a nonrecurring basis by fair value hierarchy level. There were no liabilities measured at fair value on a nonrecurring basis during the periods presented.

 

     September 30, 2011  
(in thousands)    Level 1      Level 2      Level 3      Total  
                                     

ASSETS

           

Impaired loans

   $ 0       $ 31,891       $ 4,737       $ 36,628   

OREO

     0         5,379         0         5,379   

Mortgage servicing rights

     0         0         1,872         1,872   
                                     

Total Assets

   $ 0       $ 37,270       $ 6,609       $ 43,879   
                                     

 

     December 31, 2010  
(in thousands)    Level 1      Level 2      Level 3      Total  
                                     

ASSETS

           

Loans held for sale

   $ 0       $ 3,185       $ 0       $ 3,185   

Impaired loans

     0         10,968         1,478         12,446   

OREO

     0         5,820         0         5,820   

Mortgage servicing rights

     0         0         2,510         2,510   
                                     

Total Assets

   $ 0       $ 19,973       $ 3,988       $ 23,961   
                                     

In addition to financial instruments recorded at fair value in S&T’s financial statements, fair value accounting guidance requires disclosure of fair value of all of an entity’s assets and liabilities considered to be financial instruments. For fair value disclosure purposes, S&T substantially utilized the fair value measurement criteria as required and discussed above. These estimates of fair value are significantly affected by the assumptions made and, accordingly, do not necessarily indicate amounts that could be realized in a current market exchange. The following table presents the estimated fair value of financial instruments as of:

 

     September 30, 2011      December 31, 2010  
(in thousands)    Fair Value      Carrying
Value
     Fair Value      Carrying
Value
 
                                     

ASSETS

           

Cash and due from banks, including interest-bearing deposits

   $ 262,406       $ 262,406       $ 108,196       $ 108,196   

Securities available-for-sale

     340,123         340,123         288,025         288,025   

Federal Home Loan Bank stock

     19,175         19,175         22,365         22,365   

Portfolio loans

     3,119,933         3,132,183         3,328,084         3,355,590   

Loans held for sale

     4,137         3,959         8,337         8,337   

Bank owned life insurance

     56,220         56,220         54,924         54,924   

Trading securities

     1,697         1,697         2,089         2,089   

Mortgage servicing rights

     1,872         1,872         2,510         2,510   

Interest rate swaps

     24,327         24,327         17,518         17,518   

Interest rate lock commitments

     370         370         217         217   

Forward sale contracts

     0         0         412         412   

LIABILITIES

           

Deposits

   $ 3,280,824       $ 3,271,431       $ 3,328,864       $ 3,317,524   

Securities sold under repurchase agreements

     42,409         42,409         40,653         40,653   

Long-term borrowings

     34,760         32,319         31,345         29,365   

Junior subordinated debt securities

     90,619         90,619         91,460         90,619   

Interest rate swaps

     24,217         24,217         17,355         17,355   

Forward sale contracts

     163         163         0         0   
                                     

 

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NOTE 4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

Interest Rate Swaps

Interest rate swaps are contracts in which a series of interest rate flows (fixed and variable) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged. S&T utilizes interest rate swaps for commercial loans. These derivative positions relate to transactions in which S&T enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, S&T agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a same notional amount at a fixed rate. At the same time, S&T agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows S&T’s customer to effectively convert a variable rate loan to a fixed rate loan with S&T receiving a variable yield. These agreements could have floors or caps on the contracted interest rates.

Pursuant to S&T’s agreements with various financial institutions, S&T may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of swap transactions. Based upon S&T’s current positions and related future collateral requirements relating to them, S&T believes any affect on its cash flow or liquidity position to be immaterial. Derivatives contain an element of credit risk, the possibility that S&T will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by S&T’s Asset and Liability Committee (“ALCO”) and derivatives with customers may only be executed with customers within credit exposure limits. Interest rate swaps are considered derivatives, but are not accounted for using hedge accounting. As such, changes in the fair value of the derivatives are recorded in current earnings and included in other noninterest income in the Consolidated Statements of Income.

Interest Rate Lock Commitments and Forward Sale Contracts

In the normal course of business, S&T sells originated mortgage loans into the secondary mortgage loan market. S&T offers interest rate lock commitments to potential borrowers. Whenever a customer desires these products, a mortgage originator quotes a secondary market rate guaranteed for that day by the investor. The commitments are generally for 60 days and guarantee a specified interest rate for a loan if underwriting standards are met, but the commitment does not obligate the potential borrower to close on the loan. Accordingly, some commitments expire prior to becoming loans. However, if the borrower accepts the guaranteed rate, S&T can encounter pricing risk if interest rates increase significantly before the loan can be closed and sold. S&T may utilize forward sale contracts in order to mitigate this pricing risk. The rate lock is executed between the mortgagee and S&T, and generally these rate locks are bundled. A forward sale contract is then executed between S&T and the investor. Both the interest rate lock commitment bundle and the corresponding forward sale contract are considered derivatives, but are not accounted for using hedge accounting. As such, changes in the fair value of the derivatives during the commitment period are recorded in current earnings and included in mortgage banking in the Consolidated Statements of Income.

 

    

Derivatives

(included in Other Assets)

    

Derivatives

(included in Other Liabilities)

 
(in thousands)    September 30, 2011      December 31, 2010      September 30, 2011      December 31, 2010  
                                     

Derivatives not Designated as Hedging Instruments

           

Interest Rate Swap Contracts - Commercial Loans

           

Fair value

   $ 24,327       $ 17,518       $ 24,217       $ 17,355   

Notional amount

     191,842         211,078         191,842         211,078   

Collateral posted

     0         0         19,698         13,928   

Interest Rate Lock Commitments - Mortgage Loans

           

Fair value

     370         217         0         0   

Notional amount

     10,763         17,033         0         0   

Forward Sale Contracts - Mortgage Loans

           

Fair value

     0         412         163         0   

Notional amount

     0         21,785         10,959         0   
                                     

 

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     Amount of Gain (Loss) Recognized in Income on Derivatives  
     Three Months Ended September 30,      Nine Months Ended September 30,  
(in thousands)    2011     2010      2011     2010  
                                   

Derivatives not Designated as Hedging Instruments

         

Interest rate swap contracts - commercial loans

   $ 13      $ 139       $ (53   $ 136   

Interest rate lock commitments - mortgage loans

     132        712         153        886   

Forward sale contracts - mortgage loans

     (152     8         (575     (378
                                   

Total Derivatives not Designated as Hedging Instruments

   $ (7   $ 859       $ (475   $ 644   
                                   

NOTE 5. SECURITIES AVAILABLE-FOR-SALE

 

The following tables present the amortized cost and fair value of available-for-sale securities for the periods shown:

 

     September 30, 2011  
(in thousands)    Amortized Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
   

Fair

Value

 
                                    

Obligations of U.S. government corporations and agencies

     148,719         4,580         (86)        153,213   

Collateralized mortgage obligations of U.S. government corporations and agencies

     67,005         2,794         0        69,799   

Mortgage-backed securities of U.S. government corporations and agencies

     48,776         3,634         0        52,410   

Obligations of states and political subdivisions

     51,295         1,986         (18     53,263   
                                    

Total Debt Securities

     315,795         12,994         (104)        328,685   

Marketable equity securities

     10,152         1,822         (536     11,438   
                                    

Total

     $325,947         $14,816         $(640)        $340,123   
                                    
     December 31, 2010  
(in thousands)    Amortized Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
   

Fair

Value

 
                                    

Obligations of U.S. government corporations and agencies

   $ 123,812       $ 2,078       $ (215   $ 125,675   

Collateralized mortgage obligations of U.S. government corporations and agencies

     39,790         1,701         0        41,491   

Mortgage-backed securities of U.S. government corporations and agencies

     41,373         2,618         0        43,991   

Obligations of states and political subdivisions

     64,651         1,357         (236     65,772   
                                    

Total Debt Securities

     269,626         7,754         (451     276,929   

Marketable equity securities

     10,347         1,010         (261     11,096   
                                    

Total

   $ 279,973       $ 8,764       $ (712   $ 288,025   
                                    

There were no significant gross realized gains and $0.1 million and $0.1 million, respectively, in gross realized losses for the three and nine months ended September 30, 2011. For the three and nine months ended September 30, 2010 there were $0.1 million and $0.4 million, respectively, in gross realized gains and $0.1 million in gross realized losses for both the three and nine month periods. Realized gains and losses on the sale of securities are determined using the specific-identification method.

Net unrealized gains of $14.2 million, net of tax of $5.0 million and net unrealized gains of $8.0 million, net of tax of $2.8 million were included in accumulated other comprehensive loss at September 30, 2011 and December 31, 2010, respectively.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

The following tables present investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for more than 12 months:

 

 

     September 30, 2011  
     Less than 12 Months     12 Months or More     Total  
(in thousands)    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 
                                                     

Obligations of U.S. government corporations and agencies

   $ 10,331       $ (86   $ 0       $ 0      $ 10,331       $ (86

Obligations of states and political subdivisions

     924         (18     0         0        924         (18
                                                     

Total Debt Securities

     11,255         (104     0         0        11,255         (104

Marketable equity securities

     5,079         (536     0         0        5,079         (536
                                                     

Total Temporarily Impaired Securities

   $ 16,334       $ (640   $ 0       $ 0      $ 16,334       $ (640
                                                     
     December 31, 2010  
     Less than 12 Months     12 Months or More     Total  
(in thousands)    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 
                                                     

Obligations of U.S. government corporations and agencies

   $ 20,558       $ (215   $ 0       $ 0      $ 20,558       $ (215

Obligations of states and political subdivisions

     13,167         (194     917         (42     14,084         (236
                                                     

Total Debt Securities

     33,725         (409     917         (42     34,642         (451

Marketable equity securities

     2,068         (261     0         0        2,068         (261
                                                     

Total Temporarily Impaired Securities

   $ 35,793       $ (670   $ 917       $ (42   $ 36,710       $ (712
                                                     

S&T does not believe any individual unrealized loss as of September 30, 2011 represents an other-than-temporary impairment (“OTTI”). S&T performs a review of its securities for OTTI on a quarterly basis to identify securities that may indicate an OTTI. Generally, S&T records an impairment charge when an equity security within the marketable equity securities portfolio has been in a loss position for 12 consecutive months, unless facts and circumstances suggest the need for an OTTI prior to that time. S&T’s policy for recording an OTTI within the debt securities portfolio is based upon a number of factors, including but not limited to, the length of time and the extent to which fair value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of a security recovering from any decline in fair value and whether management intends to sell the security or if it is more likely than not that management will be required to sell the security prior to it recovering.

As of September 30, 2011, the unrealized losses on three debt securities were primarily attributable to changes in interest rates. The unrealized losses on four marketable equity securities as of September 30, 2011 were attributable to temporary declines in fair value. S&T does not intend to sell and it is not likely that S&T will be required to sell any of the securities referenced in the table above in an unrealized loss position before recovery of its amortized cost.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

The amortized cost and fair value of available-for-sale securities at September 30, 2011, by contractual maturity, are included in the table below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     September 30, 2011  
(in thousands)   

Amortized

Cost

     Fair Value  
                   

Obligations of U.S. government corporations and agencies, and obligations of states and political subdivisions

     

Due in one year or less

   $ 12,245       $ 12,333   

Due after one year through five years

     143,865         147,863   

Due after five years through ten years

     18,872         20,148   

Due after ten years

     25,032         26,132   
                   
     200,014         206,476   

Collateralized mortgage obligations of U.S. government corporations and agencies

     67,005         69,799   

Mortgage-backed securities of U.S. government corporations and agencies

     48,776         52,410   
                   

Total Debt Securities

     315,795         328,685   

Marketable equity securities

     10,152         11,438   
                   

Total

   $ 325,947       $ 340,123   
                   

At September 30, 2011 and December 31, 2010, securities with principal amounts of $254.2 million and $209.3 million, respectively, were pledged to secure repurchase agreements, public funds, trust fund deposits and derivatives.

NOTE 6. LOANS AND LOANS HELD FOR SALE

 

The following table presents the composition of loans for the periods stated:

 

(in thousands)    September 30, 2011          December 31, 2010  
                       

Consumer:

       

Home equity

   $    423,166          $    441,096    

Residential mortgage

     350,619            359,536   

Installment and other consumer

     68,049            74,780   

Consumer construction

     3,111            4,019    
                       

Total Consumer Loans

     844,945            879,431   
                       

Commercial:

       

Commercial real estate

     1,414,398            1,494,202    

Commercial and industrial

     681,866            722,359    

Commercial construction

     190,974            259,598    
                       

Total Commercial Loans

     2,287,238            2,476,159   
                       

Total Portfolio Loans

     3,132,183            3,355,590   

Allowance for loan losses

     (51,533        (51,387
                       

Total Portfolio Loans, net

     3,080,650            3,304,203   

Loans held for sale

     3,959            8,337   
                       

Total Loans, Net

   $ 3,084,609         $ 3,312,540   
                       

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

S&T attempts to limit its exposure to credit risk by diversifying its loan portfolio and actively managing concentrations. When concentrations exist in certain classes, S&T mitigates this risk by monitoring relevant economic indicators and internal risk rating trends, and through stress testing of the loans in those classes. Commercial loans represent 73 percent and 74 percent of total portfolio loans at September 30, 2011 and December 31, 2010, respectively. Within the commercial portfolio, the commercial real estate (“CRE”) and commercial construction portfolios combined comprise 70 percent of commercial loans and 51 percent of total loans and 71 percent of commercial loans and 53 percent of total loans at September 30, 2011 and December 31, 2010, respectively. Further segmentation of the CRE and commercial construction portfolios by industry and collateral type reveal no concentration in excess of nine percent of total loans.

The vast majority of both commercial and consumer loans are made to businesses and individuals in S&T’s western Pennsylvania market, resulting in a geographic concentration. The conditions of the local and regional economies are monitored closely through publicly available data as well as information supplied by our customers. Only the CRE and commercial construction portfolios combined have any significant out-of-state exposure, with 19 percent of the combined portfolio and ten percent of total loans being out-of-state loans at September 30, 2011 and 21 percent of the combined portfolio and 11 percent of total loans being out of state loans at December 31, 2010. Management believes underwriting guidelines and ongoing review by credit administration mitigates the concentration risk present in the loan portfolio.

The following table presents a summary of nonperforming assets for the periods stated:

 

(in thousands)    September 30, 2011           December 31, 2010  
                        

Nonperforming loans

   $ 59,239          $ 63,883   

OREO

     5,992            5,820   
                        

Total Nonperforming Assets

   $ 65,231          $ 69,703   
                        

OREO and other repossessed assets, which are included in other assets in the Consolidated Balance Sheets consists of 27 properties, with three properties comprising $4.2 million or 70 percent of the balance.

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a troubled debt restructuring (“TDR”). Management strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. S&T individually evaluates all substandard commercial loans that experienced a forbearance or change in terms, as well as all substandard consumer and residential mortgage loans that entered into an agreement to modify their existing loan. Once a loan is classified as a TDR, it retains both TDR and impaired loan status for the life of the loan, whether or not is has resumed accrual status, unless the restructuring was done at a market rate.

The following table presents restructured loans for the periods presented:

 

             September 30, 2011                      December 31, 2010          
(in thousands)    Performing
TDRs
     Nonperforming
TDRs
     Total
TDRs
     Performing
TDRs
     Nonperforming
TDRs
     Total
TDRs
 
                                                       

Commercial real estate

   $ 19,057       $ 14,585       $ 33,642       $ 1,194       $ 29,636       $ 30,830   

Commercial and industrial

     783         0         783         37         1,000         1,037   

Commercial construction

     480         3,460         3,940         0         2,143         2,143   

Residential mortgage

     1,140         4,079         5,219         908         0         908   
                                                       

Ending Balance

   $ 21,460       $ 22,124       $ 43,584       $ 2,139       $ 32,779       $ 34,918   
                                                       

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

The following tables include the number of TDRs, as well as both the pre-restructuring and post-restructuring recorded investments, by loan class, of those loans restructured during the three and nine months ended September 30, 2011.

 

     Nine Months Ended September 30, 2011  
(in thousands)    Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
     Total Difference
in Recorded
Investment
 
                                     

Commercial real estate

     4       $ 4,107       $ 4,607       $ 500   

Commercial and industrial

     2         921         921         0   

Commercial construction

     2         1,776         1,776         0   

Residential mortgage

     7         4,330         4,330         0   
                                     

Total

     15       $ 11,134       $ 11,634       $ 500   
                                     
     Three Months Ended September 30, 2011  
(in thousands)    Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
     Total Difference
in Recorded
Investment
 
                                     

Commercial real estate

     1       $ 1,297       $ 1,297       $ 0   

Residential mortgage

     5         3,994         3,994         0   
                                     

Total

     6       $ 5,291       $ 5,291       $ 0   
                                     

The concessions granted included reductions in interest rates and payment extensions. Note 7 includes the methodology to determine the allowance for these TDRs. During the nine months ended September 30, 2011, there were no previously restructured loans that defaulted.

NOTE 7. ALLOWANCE FOR LOAN LOSSES

 

S&T maintains an allowance for loan losses (“ALL”) at a level determined to be adequate to absorb estimated probable credit losses inherent in the loan portfolio as of the balance sheet date. S&T develops and documents a systematic ALL methodology based on the following portfolio classes: 1) CRE, 2) Commercial and Industrial (“C&I”), 3) Commercial Construction, 4) Consumer Real Estate and 5) Other Consumer. The following discusses the key risks associated with each portfolio class:

CRE—Loans secured by commercial purpose real estate, including both owner occupied properties and investment properties for various purposes such as hotels, strip malls and apartments. Individual projects as well as global cash flows are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business prospects of the lessee, if the project is not owner occupied.

C&I—Loans made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the company is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the company. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.

Commercial Construction—Loans made to finance the construction or building of structures as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer.

Consumer Real Estate—Loans secured by first and second lien home equity loans, home equity lines of credit and 1-4 family residences, including purchase money mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this class. The state of the local housing market can also have a significant impact on this portfolio because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

Other Consumer—Loans made to individuals that may be secured by assets other than 1-4 family residences as well as unsecured loans. This class includes auto loans, unsecured lines of credit and credit cards. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this class. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

Management further assesses risk within each portfolio class using the key inherent risk differentiators. For the commercial loan classes, the most important indicator of risk is the internally assigned risk rating, including pass, special mention and substandard. Impaired loans are considered in the ALL model separately and are individually evaluated for impairment. As mentioned in Note 6, TDR’s are included in the impaired category of loans, and are therefore evaluated individually. S&T’s internal risk rating system is consistent with definitions found in current regulatory guidelines. A simplified data migration technique is used to calculate the historic average losses over the defined loss emergence period.

Loans in the consumer classes are not individually risk rated; therefore, the most important indicators of risk are the existence of collateral, the type of collateral, and for consumer real estate loans, whether the bank has a first or second lien position. A simplified data migration technique is used to calculate the historic average losses over the defined loss emergence period.

Management monitors various credit quality indicators for both the commercial and consumer loan portfolios, including delinquency, nonperforming status and changes in risk ratings on a monthly basis.

The following tables present the age analysis of past due loans segregated by class of loans for the periods stated:

 

                     September 30, 2011                  
(in thousands)    Current      30-59 Days
    Past Due    
     60-89 Days
    Past Due    
     Non-
performing
     Total Past
Due
     Total Loans  
                                                       

Commercial real estate

   $ 1,374,747       $ 4,019       $ 1,109       $ 34,523       $ 39,651       $ 1,414,398   

Commercial and industrial

     672,538         1,948         1,377         6,003         9,328         681,866   

Commercial construction

     181,371         900         0         8,703         9,603         190,974   

Home equity

     417,893         1,734         444         3,095         5,273         423,166   

Residential mortgage

     341,299         1,239         1,362         6,719         9,320         350,619   

Installment and other consumer

     67,468         451         115         15         581         68,049   

Consumer construction

     2,930         0         0         181         181         3,111   
                                                       

Totals

   $ 3,058,246       $ 10,291       $ 4,407       $ 59,239       $ 73,937       $ 3,132,183   
                                                       

 

                     December 31, 2010                  
(in thousands)    Current      30-59 Days
    Past Due    
     60-89 Days
    Past Due    
     Non-
performing
     Total Past
Due
     Total Loans  
                                                       

Commercial real estate

   $ 1,445,521       $ 3,135       $ 1,236       $ 44,310       $ 48,681       $ 1,494,202   

Commercial and industrial

     717,078         975         739         3,567         5,281         722,359   

Commercial construction

     250,776         99         736         7,987         8,822         259,598   

Home equity

     437,212         1,744         707         1,433         3,884         441,096   

Residential mortgage

     352,194         930         416         5,996         7,342         359,536   

Installment and other consumer

     74,373         275         67         65         407         74,780   

Consumer construction

     3,494         0         0         525         525         4,019   
                                                       

Totals

   $ 3,280,648       $ 7,158       $ 3,901       $ 63,883       $ 74,942       $ 3,355,590   
                                                       

Management continually monitors the commercial loan portfolio through its internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower. Loan risk ratings are reviewed on an ongoing basis according to internal policies. Loans within the pass rating generally have a lower risk of loss than loans risk rated as special mention and substandard, which generally have an increasing risk of loss.

S&T’s risk ratings are consistent with regulatory guidance and are as follows:

Pass—The loan is currently performing and is of high quality.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

Special Mention—A special mention loan has potential weaknesses that warrant management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects or in the institution’s credit position at some future date. Economic and market conditions, beyond the customer’s control, may in the future necessitate this classification.

Substandard—A substandard loan is not adequately protected by the net worth and/or paying capacity of the obligor or by the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

The following tables present the recorded investment in commercial loan classes by internally assigned risk ratings for the periods presented:

 

             September 30, 2011          
(in thousands)    Commercial
Real Estate
     Commercial
& Industrial
     Commercial
Construction
     Totals  
                                     

Pass

   $ 1,201,955       $ 601,552       $ 148,084       $ 1,951,591   

Special mention

     89,164         19,450         10,432         119,046   

Substandard

     123,279         60,864         32,458         216,601   
                                     

Total

   $ 1,414,398       $ 681,866       $ 190,974       $ 2,287,238   
                                     

 

             December 31, 2010          
(in thousands)    Commercial
Real Estate
     Commercial
& Industrial
     Commercial
Construction
     Totals  
                                     

Pass

   $ 1,297,242       $ 619,011       $ 221,492       $ 2,137,745   

Special mention

     86,653         76,158         16,308         179,119   

Substandard

     110,307         27,190         21,798         159,295   
                                     

Total

   $ 1,494,202       $ 722,359       $ 259,598       $ 2,476,159   
                                     

Management monitors the delinquent status of the consumer portfolio on a monthly basis. Loans are considered nonperforming when interest and principal are 90 days or more past due or management has determined that a material deterioration in the borrower’s financial condition exists. The risk of loss is generally highest for nonperforming loans.

The following tables present the recorded investment in consumer loan classes by performing and nonperforming status for the periods stated:

 

     September 30, 2011  
(in thousands)    Home
Equity
     Residential
Mortgage
     Installment
and other
consumer
     Consumer
Construction
     Totals  
                                              

Performing

   $ 420,071       $ 343,900       $ 68,034       $ 2,930       $ 834,935   

Nonperforming

     3,095         6,719         15         181         10,010   
                                              

Total

   $ 423,166       $ 350,619       $ 68,049       $ 3,111       $ 844,945   
                                              

 

     December 31, 2010  
(in thousands)    Home
Equity
     Residential
Mortgage
     Installment
and other
consumer
     Consumer
Construction
     Totals  
                                              

Performing

   $ 439,663       $ 353,540       $ 74,715       $ 3,494       $ 871,412   

Nonperforming

     1,433         5,996         65         525         8,019   
                                              

Total

   $ 441,096       $ 359,536       $ 74,780       $ 4,019       $ 879,431   
                                              

 

22


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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

S&T individually evaluates all substandard commercial loans greater than $0.5 million for impairment as well as all TDRs, whether in accrual or nonaccrual status. Loans are considered to be impaired when based upon current information and events it is probable that S&T will be unable to collect all interest and principal payments due according to the original contractual terms of the loan agreement.

The following table presents S&T’s investment in loans considered to be impaired and related information on those impaired loans for the periods presented:

 

           

September 30, 2011

 
    

September 30, 2011

     Nine Months Ended     

Three Months Ended

 
(in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 
                                                                

With a related allowance recorded:

                    

Commercial real estate

   $ 7,123       $ 7,431         $  1,537       $ 13,043         $  112         $7,123         $    40   

Commercial and industrial

     213         213         213         3,261         0         213         0   

Commercial construction

     4,053         4,053         1,008         3,776         7         4,053         7   

Consumer real estate

     692         692         120         231         4         692         2   

Total with a related allowance recorded

     12,081         12,389         2,878         20,311         123         12,081         49   
                                                                

Without a related allowance recorded:

                    

Commercial real estate

     43,472         49,583         0         32,935         576         43,472         165   

Commercial and industrial

     4,549         4,549         0         2,909         1         4,549         0   

Commercial construction

     4,338         4,795         0         3,800         15         4,338         9   

Consumer real estate

     4,527         4,778         0         1,509         51         4,527         38   

Total without a related allowance recorded

     56,886         63,705         0         41,153         643         56,886         212   
                                                                

Total:

                    

Commercial real estate

     50,595         57,014         $  1,537         45,978         688         50,595         205   

Commercial and industrial

     4,762         4,762         213         6,170         1         4,762         0   

Commercial construction

     8,391         8,848         1,008         7,576         22         8,391         16   

Consumer real estate

     5,219         5,470         120         1,740         55         5,219         40   

Total

   $ 68,967       $ 76,094         2,878       $ 61,464         $  766         $68,967         $261   
                                                                
    

December 31, 2010

     Year Ended December 31, 2010  
(in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
                                              

With a related allowance recorded:

              

Commercial real estate

   $ 10,152       $ 11,466         $  1,992       $   21,023         $  489   

Commercial and industrial

     1,263         1,263         337         1,623         22   

Commercial construction

     4,662         4,662         1,302         7,165         0   

Total with a related allowance recorded

     16,077         17,391         3,631         29,811         511   
                                              

Without a related allowance recorded:

              

Commercial real estate

     29,788         37,567         0         28,074         442   

Commercial and industrial

     1,491         3,280         0         1,370         0   

Commercial construction

     3,325         4,853         0         7,202         20   

Total without a related allowance recorded

     34,604         45,700         0         36,646         462   
                                              

Total:

              

Commercial real estate

     39,940         49,033         1,992         49,097         931   

Commercial and industrial

     2,754         4,543         337         2,993         22   

Commercial construction

     7,987         9,515         1,302         14,367         20   

Total

   $ 50,681       $ 63,091         $  3,631       $   66,457         $  973   
                                              

 

23


Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

The following tables detail activity in the ALL for the periods presented:

 

     Three Months Ended September 30, 2011     Three Months Ended
September 30, 2010
 

(in thousands)

   Commercial
Real Estate
    Commercial &
Industrial
    Commercial
Construction
    Consumer
Real Estate
    Other
Consumer
    Total
Loans
    Total Loans  

Beginning at July 1:

   $ 36,041      $ 12,956      $ 4,759      $ 3,275      $ 973      $ 58,004      $ 53,968   

Charge-offs

     (1,532     (6,651     0        (175     (218     (8,576     (6,889

Recoveries

     172        109        116        87        86        570        924   

 

   

 

 

 

Net (Charge-offs) /Recoveries

     (1,360     (6,542     116        (88     (132     (8,006     (5,965

Provision for loan losses

     (2,665     4,110        (211     237        64        1,535        8,278   

 

   

 

 

 

Balance at End of Period

   $ 32,016      $ 10,524      $ 4,664      $ 3,424      $ 905      $ 51,533      $ 56,281   

 

   

 

 

 

 

 

     Nine Months Ended September 30, 2011     Nine Months Ended
September 30, 2010
 

(in thousands)

   Commercial
Real Estate
    Commercial &
Industrial
    Commercial
Construction
    Consumer
Real Estate
    Other
Consumer
    Total
Loans
    Total Loans  

Beginning at January 1:

   $ 30,425      $ 9,777      $ 5,904      $ 3,962      $ 1,319      $ 51,387      $ 59,580   

Charge-offs

     (5,989     (8,390     (878     (1,805     (697     (17,759     (27,553

Recoveries

     750        232        2,463        912        276        4,633        2,419   

 

   

 

 

 

Net (Charge-offs) /Recoveries

     (5,239     (8,158     1,585        (893     (421     (13,126     (25,134

Provision for loan losses

     6,830        8,905        (2,825     355        7        13,272        21,835   

 

   

 

 

 

Balance at End of Period

   $ 32,016      $ 10,524      $ 4,664      $ 3,424      $ 905      $ 51,533      $ 56,281   

 

   

 

 

 

 

     September 30, 2011      December 30, 2010  

(in thousands)

   Commercial
Real Estate
     Commercial &
Industrial
     Commercial
Construction
     Consumer
Real Estate
     Other
Consumer
     Total
Loans
     Total Loans  

Allowance for loan losses

                    

For Loans individually evaluated for impairment

   $ 1,537       $ 213       $ 1,008       $ 120       $ 0       $ 2,878       $ 3,631   

For Loans collectively evaluated for impairment

     30,479         10,311         3,656         3,304         905         48,655         47,756   

 

    

 

 

 

Total Allowance for Loan Losses

   $ 32,016       $ 10,524       $ 4,664       $ 3,424       $ 905       $ 51,533       $ 51,387   

 

    

 

 

 

Portfolio Loans:

                    

Individually evaluated for impairment

   $ 50,595       $ 4,762       $ 8,391       $ 5,219       $ 0       $ 68,967       $ 50,681   

Collectively evaluated for impairment

     1,363,803         677,104         182,583         771,677         68,049         3,063,216         3,304,909   

 

    

 

 

 

Total Portfolio Loans

   $ 1,414,398       $ 681,866       $ 190,974       $ 776,896       $ 68,049       $ 3,132,183       $ 3,355,590   
                                                                

 

24


Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

NOTE 8. BORROWINGS

 

Short-term borrowings are for original terms under one year and may be comprised of retail repurchase agreements (“REPOs”), wholesale REPOs, federal funds purchased and FHLB advances. S&T defines repurchase agreements with its local retail customers as retail REPOs; short-term wholesale REPOs are those transacted with other banks and brokerage firms. Securities pledged as collateral under these REPO financing arrangements cannot be sold or repledged by the secured party and are therefore accounted for as a secured borrowing. The estimated fair value of collateral provided to a third party is continually monitored and additional collateral is obtained or requested to be returned as appropriate. Federal funds purchased are unsecured overnight borrowings with other financial institutions. FHLB advances are for various terms secured by a blanket lien on residential mortgages, other real estate secured loans and FHLB stock with the FHLB of Pittsburgh.

At September 30, 2011 and December 31, 2010, the only short-term borrowings that S&T had outstanding were comprised of REPOs totaling $42.4 million and $40.7 million, respectively.

Long-term debt instruments are for original terms greater than one year and may be comprised of wholesale REPOs, FHLB advances and junior subordinated debt securities. Long-term REPOs and FHLB advances have the same collateral requirements as their short-term equivalents.

The following is a summary of long-term debt for the periods presented:

 

(in thousands)    September 30, 2011      December 31, 2010  
                   

Long-term borrowings

   $ 32,319       $ 29,365   

Junior subordinated debt securities

     90,619         90,619   
                   

Total

   $ 122,938       $ 119,984   
                   

S&T had total long-term debt outstanding of $29.0 million at a fixed rate and $93.7 million at a variable rate at September 30, 2011. Included in long-term borrowings is a capital lease of $0.2 million.

S&T had total borrowings at September 30, 2011 and December 31, 2010 at the FHLB of Pittsburgh of $32.1 million and $29.1 million, respectively, all of which were long-term borrowings. As of September 30, 2011 there were no short-term borrowings at the FHLB of Pittsburgh. At September 30, 2011, S&T had a maximum borrowing capacity of $1.1 billion with the FHLB of Pittsburgh.

NOTE 9. EMPLOYEE BENEFITS

 

S&T Bank maintains a defined benefit pension plan (“Plan”) covering substantially all employees hired prior to January 1, 2008. The benefits are based on years of service and the employee’s compensation for the highest five consecutive years in the last ten years of employment. Contributions are intended to provide for benefits attributed to employee service to date and for those benefits expected to be earned in the future. S&T made no contributions to its pension plan in 2010 and no contributions are required to be made for 2011 at this time. The expected long-term rate of return on plan assets is 8.00 percent. Changes to the Plan have been approved and will be implemented beginning January 1, 2012. These changes include a lump sum distribution option for active participants and the eventual elimination of the Pension Purchase Option.

The following table summarizes the components of net periodic pension expense for the periods presented:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
(in thousands)    2011     2010     2011     2010  
                                  

Service cost—benefits earned during the period

   $ 470      $ 456      $ 1,778      $ 1,684   

Interest cost on projected benefit obligation

     1,035        979        3,121        3,013   

Expected return on plan assets

     (1,344     (1,261     (4,033     (3,661

Amortization of prior service cost

     (2     (2     (5     (5

Recognized net actuarial loss

     207        179        580        617   
                                  

Net Periodic Pension Expense

   $ 366      $ 351      $ 1,441      $ 1,648   
                                  

 

25


Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

NOTE 10. COMMITMENTS AND CONTINGENCIES

 

Commitments

S&T, in the normal course of business, offers off-balance sheet credit arrangements to enable its customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. S&T’s exposure to credit loss, in the event a customer does not satisfy the terms of their agreement, equals the contractual amount of the obligation less the value of any collateral. S&T applies the same credit policies in making commitments and standby letters of credit that are used for the underwriting of loans to customers. Commitments generally have fixed expiration dates, annual renewals or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. S&T’s allowance for lending-related commitments totaled $1.6 million at September 30, 2011 and $2.7 million at December 31, 2010. The allowance for lending-related commitments is included in other liabilities in the Consolidated Balance Sheets.

Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the customers.

The following table sets forth the commitments and letters of credit for the periods presented:

 

(in thousands)    September 30, 2011      December 31, 2010  
                   

Commitments to extend credit

   $ 826,316       $ 836,042   

Standby letters of credit

     121,947         135,489   
                   

Total

   $ 948,263       $ 971,531   
                   

Litigation

S&T, in the normal course of business, is subject to various legal and administrative proceedings and claims. While any type of litigation contains a level of uncertainty, S&T believes that the outcome of such proceedings or claims will not have a material adverse effect on its consolidated financial position.

NOTE 11. EARNINGS PER COMMON SHARE

 

The following table reconciles the numerator and denominator of basic earnings per share with that of diluted earnings per share:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
(in thousands, except shares and per share data)    2011      2010      2011      2010  
                                     

Numerator for Both Basic and Diluted Earnings per Common Share:

           

Net Income

   $ 13,803       $ 12,482       $ 35,008       $ 33,190   

Less: Preferred dividends and discount amortization

     1,559         1,551         4,672         4,648   
                                     

Net Income Available to Common Shareholders

   $ 12,244       $ 10,931       $ 30,336       $ 28,542   
                                     

Denominator:

           

Total average basic common shares outstanding

     28,002,957         27,799,992         27,971,291         27,767,068   

Dilutive potential common shares

     22,462         12,645         19,619         22,842   
                                     

Total Diluted Average Common Shares Outstanding

     28,025,419         27,812,637         27,990,910         27,789,910   
                                     

Earnings per common share—basic

   $ 0.44       $ 0.39       $ 1.08       $ 1.03   

Earnings per common share—diluted

   $ 0.44       $ 0.39       $ 1.08       $ 1.03   
                                     

Warrants considered anti-dilutive excluded from dilutive potential common shares

     517,012         517,012         517,012         517,012   

Stock options considered anti-dilutive excluded from dilutive potential common shares

     902,722         1,012,909         902,722         1,012,909   
                                     

Restricted stock considered anti-dilutive excluded from dilutive potential common shares

     64,978         19,025         48,893         8,828   
                                     

 

26


Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

NOTE 12. SEGMENTS

 

S&T operates in three reportable operating segments: Community Banking, Wealth Management and Insurance.

The Community Banking segment offers services which include accepting demand deposit accounts, savings, money market, certificates of deposit, and originating commercial and consumer loans, providing letters of credit and credit card services.

The Wealth Management segment offers discount brokerage services, services as executor and trustee under wills and deeds, guardian and custodian of employee benefit plan assets and other trust and brokerage services, as well as a registered investment advisor that manages private investment accounts for individuals and institutions.

The Insurance segment includes a full-service insurance agency offering commercial property and casualty insurance, group life and health coverage, employee benefit solutions and personal insurance lines.

The following represents total assets by reportable segment:

 

(in thousands)    September 30, 2011      December 31, 2010  
                   

Community Banking

   $ 4,082,540       $ 4,103,898   

Insurance

     8,075         8,461   

Wealth Management

     1,355         1,980   
                   

Total Assets

   $ 4,091,970       $ 4,114,339   
                   

The following tables provide financial information for S&T’s three operating segments. The information provided under the caption “Eliminations” represents operations not considered to be reportable segments and/or general operating expenses and eliminations and adjustments, which are necessary for purposes of reconciling to the Consolidated Financial Statements.

 

     Three Months Ended September 30, 2011  
(in thousands)    Community
Banking
     Wealth
Management
     Insurance     Eliminations     Consolidated  
                                            

Interest income

   $ 40,782       $ 66       $ —        $ (3   $ 40,845   

Interest expense

     6,955         —           73        (52     6,976   
                                            

Net interest income (expense)

     33,827         66         (73     49        33,869   

Provision for loan losses

     1,535         —           —          —          1,535   

Noninterest income

     7,158         2,003         1,444        (262     10,343   

Noninterest expense

     19,435         1,785         1,427        55        22,702   

Depreciation expense

     1,056         7         14        —          1,077   

Amortization of intangible assets

     385         16         13        —          414   

Provision (benefit) for income taxes

     4,884         94         (29     (268     4,681   
                                            

Net Income (Loss)

   $ 13,690       $ 167       $ (54   $ —        $ 13,803   
                                            

 

     Three Months Ended September 30, 2010  
(in thousands)    Community
Banking
     Wealth
Management
    Insurance     Eliminations     Consolidated  
                                           

Interest income

   $ 45,300       $ 108      $ 1      $ (84   $ 45,325   

Interest expense

     8,371         —          74        (93     8,352   
                                           

Net interest income (expense)

     36,929         108        (73     9        36,973   

Provision for loan losses

     8,278         —          —          —          8,278   

Noninterest income

     8,649         1,894        1,284        508        12,335   

Noninterest expense

     19,096         2,343        1,317        677        23,433   

Depreciation expense

     1,032         8        12        —          1,052   

Amortization of intangible assets

     431         18        14        —          463   

Provision (benefit) for income taxes

     3,931         (125     (46     (160     3,600   
                                           

Net Income (Loss)

   $ 12,810       $ (242   $ (86   $ —        $ 12,482   
                                           

 

27


Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

     Nine Months Ended September 30, 2011  
(in thousands)    Community
Banking
     Wealth
Management
     Insurance     Eliminations     Consolidated  
                                            

Interest income

   $ 124,630       $ 225       $ —        $ (35   $ 124,820   

Interest expense

     21,505         —           218        (182     21,541   
                                            

Net interest income (expense)

     103,125         225         (218     147        103,279   

Provision for loan losses

     13,272         —           —          —          13,272   

Noninterest income

     22,041         6,271         4,171        —          32,483   

Noninterest expense

     60,985         5,220         3,931        2,485        72,621   

Depreciation expense

     3,225         24         43        —          3,292   

Amortization of intangible assets

     1,234         50         39        —          1,323   

Provision (benefit) for income taxes

     12,146         459         (21     (2,338     10,246   
                                            

Net Income (Loss)

   $ 34,304       $ 743       $ (39   $ —        $ 35,008   
                                            

 

     Nine Months Ended September 30, 2010  
(in thousands)    Community
Banking
     Wealth
Management
     Insurance     Eliminations     Consolidated  
                                            

Interest income

   $ 136,132       $ 365       $ 1      $ (289   $ 136,209   

Interest expense

     26,798         —           219        (320     26,697   
                                            

Net interest income (expense)

     109,334         365         (218     31        109,512   

Provision for loan losses

     21,835         —           —          —          21,835   

Noninterest income

     24,768         5,865         4,002        573        35,208   

Noninterest expense

     61,676         5,870         3,706        2,705        73,957   

Depreciation expense

     3,101         26         48        —          3,175   

Amortization of intangible assets

     1,384         57         42        —          1,483   

Provision (benefit) for income taxes

     13,053         132         (4     (2,101     11,080   
                                            

Net Income (Loss)

   $ 33,053       $ 145       $ (8   $ —        $ 33,190   
                                            

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis (“MD&A”) represents an overview of the consolidated results of operations and financial condition of S&T Bancorp, Inc. and subsidiaries (“S&T”) and highlights material changes in its financial condition and results of operations at and for the three and nine months ended September 30, 2011 and 2010. Our MD&A should be read in conjunction with the consolidated financial statements and notes thereto. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods.

Important Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains or incorporates statements that S&T believes are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to S&T’s financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to” or other similar words. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to, those described in this Form 10-Q or the documents incorporated by reference. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to us at that time. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

These forward-looking statements are based on current expectations, estimates and projections about S&T’s business, management’s beliefs and assumptions made by management. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”), which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements.

 

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Future Factors include:

   

changes in interest rates, spreads on earning assets and interest-bearing liabilities, the shape of the yield curve and interest rate sensitivity;

   

a prolonged period of low interest rates;

   

credit losses;

   

financial resources in the amounts, at the times and on the terms required to support our future businesses;

   

legislation affecting the financial services industry as a whole, and/or S&T in particular, including the effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act;

   

regulatory supervision and oversight, including required capital levels, and public policy changes, including environmental regulations;

   

increasing price and product/service competition, including new entrants;

   

rapid technological developments and changes;

   

the ability to continue to introduce competitive new products and services on a timely, cost-effective basis;

   

continued deterioration of the housing market and reduced demand for mortgages;

   

containing costs and expenses;

   

reliance on large customers;

   

the outcome of pending and future litigation and governmental proceedings;

   

managing our internal growth and acquisitions;

   

the possibility that our proposed acquisition of Mainline Bancorp, Inc. will not be completed within the proposed timeframe, or at all;

   

the possibility that the anticipated benefits from our proposed acquisition of Mainline Bancorp, Inc. cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or costly than anticipated;

   

general economic or business conditions, either nationally or regionally in western Pennsylvania, may be less favorable than expected, resulting in among other things, a reduced demand for credit and other services;

   

a decline in market capitalization to common book value, which could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge to net income; and

   

a continuation of recent turbulence in significant portions of the global financial and real estate markets could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities and indirectly, by affecting the economy generally.

These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general economic conditions, including interest rate and currency exchange rate fluctuations and other Future Factors.

Critical Accounting Policies and Estimates

S&T’s critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of September 30, 2011 have remained unchanged from the disclosures presented in S&T’s Annual Report on Form 10-K for the year ended December 31, 2010 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Overview

S&T is a bank holding company headquartered in Indiana, Pennsylvania with assets of $4.1 billion at September 30, 2011. S&T provides a full range of financial services through offices located in Allegheny, Armstrong, Blair, Butler, Cambria, Clarion, Clearfield, Indiana, Jefferson and Westmoreland counties of Pennsylvania. S&T provides full service retail and commercial banking products as well as cash management services, insurance, estate planning and administration, employee benefit plan investment management and administration, corporate services and other fiduciary services.

S&T earns revenue primarily from interest on loans, securities investments and fees charged for financial services provided to its customers. Offsetting these revenues are the cost of deposits and other funding sources, provision for loan losses and other operating costs such as: salaries and employee benefits, occupancy, data processing expenses and tax expense. S&T’s strategic plan to deliver profitable growth to its shareholders includes: increasing loans and core deposits with sufficient interest rate spreads, controlling loan delinquency and loan losses, controlling operating expenses, expanding the business through organic growth and acquisitions, introducing new products and services and expanding the products and services provided to its existing customers. S&T’s common stock trades on the Nasdaq Global Select Market under the symbol “STBA.”

 

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Earnings Summary

Net income available to common shareholders for the quarter ended September 30, 2011 was $12.2 million as compared to $10.9 million for the third quarter of 2010, while diluted earnings per common share were $0.44, as compared to $0.39 diluted earnings per common share for the third quarter of 2010. For the nine month period, net income available to common shareholders was $30.3 million or $1.08 diluted earnings per common share, while for the same period in 2010, net income was $28.5 million or $1.03 diluted earnings per common share.

The increase in net income available to common shareholders for the quarter ended September 30, 2011 was primarily due to a decrease in the provision for loan losses of $6.8 million for the quarter as compared to the same period in 2010. The provision decrease was partially offset by a decline of $3.1 million in net interest income as well as a decline of $2.0 million in noninterest income. The decrease in the provision for loan losses is a result of improving asset quality over the past year. Common return on average assets was 1.20 percent for the quarter ended September 30, 2011, compared to 1.06 percent for the quarter ended September 30, 2010. Common return on average equity was 8.12 percent for the quarter ended September 30, 2011 compared to 7.61 percent for the same period in 2010.

Year-to-date net income available to common shareholders increased primarily due to an $8.6 million decline in the provision for loan losses which was partially offset by a $6.2 million dollar decline in net interest income. Common return on average assets was 1.00 percent for the nine months ended September 30, 2011 as compared to 0.92 percent for the nine months ended September 30, 2010. Common return on average equity was 6.90 percent for the nine months ended September 30, 2011 as compared to 6.78 percent for the same period in 2010.

Acquisition of Mainline Bancorp, Inc.

On September 14, 2011, S&T entered into a definitive agreement to acquire Mainline Bancorp, Inc. (“Mainline”), a bank holding company based in Ebensburg, Pennsylvania. Mainline has approximately $242 million in assets and maintains eight offices in Cambria and Blair counties of Pennsylvania. The transaction is expected to add approximately $141.1 million in gross loans and $210.3 million in deposits to S&T’s Consolidated Balance Sheet. S&T expects the merger to be accretive to earnings in the first full year, excluding one-time costs. The transaction, valued at approximately $21 million, is expected to close in the first quarter of 2012, after satisfaction of customary closing conditions, including regulatory approvals and the approval of the shareholders of Mainline.

Explanation of Use of Non-GAAP Financial Measures

In addition to the results of operations presented in accordance with U.S. generally accepted accounting principles (“GAAP”), management uses, and this quarterly report contains or references, certain non- GAAP financial measures, such as net interest income on a fully taxable equivalent basis and operating revenue. Management believes these non-GAAP financial measures provide information useful to investors in understanding S&T’s underlying operational performance and its business and performance trends as they facilitate comparisons with the performance of others in the financial services industry. Although management believes that these non-GAAP financial measures enhance investors’ understanding of S&T’s business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.

Management believes the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis in the table below for the three months ended September 30, 2011 and 2010, and on page 34 for the nine months ended September 30, 2011 and 2010.

Operating revenue is the sum of net interest income and noninterest income less securities losses/gains. In order to understand the significance of net interest income to S&T’s business and operating results, management believes it is appropriate to evaluate the significance of net interest income as a component of operating revenue.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2011 Compared to

Three Months Ended September 30, 2010

Net Interest Income

Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the average balance of interest-earning assets and interest-bearing liabilities and changes in interest rates and spreads. Maintaining consistent spreads between interest-earning assets and interest-bearing liabilities is significant to S&T’s financial performance because net interest income comprised 76 percent of operating revenue (net interest income plus noninterest income, excluding securities losses/gains) in the third quarters of 2011 and 2010. The level and mix of interest-earning assets and interest-bearing liabilities are continually monitored by S&T’s Asset and Liability Committee (“ALCO”), in order to mitigate interest rate and liquidity risks of the balance sheet.

 

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The following table reconciles interest income per the Consolidated Statements of Income to net interest income on a fully taxable equivalent basis:

 

     Three Months Ended September 30,  
(in thousands)    2011      2010  

Interest income

   $ 40,845       $ 45,325   

Taxable equivalent adjustment to interest income

     1,002         1,137   
                   

Interest Income on a Fully Taxable Equivalent Basis

     41,847         46,462   

Interest expense

     6,976         8,352   

Net Interest Income on a Fully Taxable Equivalent Basis

   $ 34,871       $ 38,110   
                   

Average Balance Sheet and Net Interest Income Analysis

The following table provides information regarding the average balances and yields earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities:

 

    

Three Months Ended

September 30, 2011

   

Three Months Ended

September 30, 2010

 
(in thousands)    Balance      Income      Rate     Balance      Income      Rate  
                                                      

ASSETS

                

Loans (1)

   $ 3,171,379       $ 38,790         4.85   $ 3,377,607       $ 43,442         5.10

Securities/other (1)

     510,575         3,057         2.39     315,823         3,020         3.82
          

Total Interest-earning Assets

     3,681,954         41,847         4.51     3,693,430         46,462         4.99

Noninterest-earning assets

     376,077              412,247         
                                                      

TOTAL

   $ 4,058,031            $ 4,105,677         
                                                      

LIABILITIES AND SHAREHOLDERS’ EQUITY

                

NOW/money market/savings

   $ 1,287,489       $ 445         0.14   $ 1,250,278       $ 762         0.24

Certificates of deposit

     1,159,557         5,300         1.81     1,309,880         6,252         1.89

Borrowed funds < 1 year

     41,257         12         0.12     62,011         38         0.24

Borrowed funds > 1 year

     123,103         1,219         3.93     121,218         1,300         4.26
                                                      

Total Interest-bearing Liabilities

     2,611,406         6,976         1.06     2,743,387         8,352         1.21

Noninterest-bearing liabilities:

                

Demand deposits

     799,247              743,265         

Shareholders’ equity/other

     647,378              619,025         
                                                      

TOTAL

   $ 4,058,031            $ 4,105,677         
                                                      

Net Interest Margin(1)

           3.76           4.09
     

 

 

         

 

 

    

Net Interest Income(1)

      $ 34,871            $ 38,110      
     

 

 

         

 

 

    

(1) Net interest margin is presented on a fully taxable equivalent (“FTE”) and annualized basis. Net interest income is presented on a FTE basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35 percent for each period presented. S&T believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

Net interest income and net interest margin on a fully taxable equivalent basis decreased $3.2 million and 33 basis points, respectively in the third quarter of 2011 as compared to the same period in the prior year. The decline in net interest margin is a result of loans repricing, replacement volume at lower rates and an unfavorable shift in asset mix, offset in part by a better funding mix between deposits, including noninterest-bearing demand deposits and borrowings.

Average loans decreased by $206.2 million and the fully taxable-equivalent yield decreased by 25 basis points. The decline in loan balances is a result of the current economic environment, resulting in borrowers being cautious and leading to weak loan demand

 

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coupled with significant loan principal pay-downs. Average securities/other increased by $194.8 million and the fully taxable-equivalent yield decreased by 143 basis points. The average securities/other balance increased primarily due to the aforementioned loan principal pay-downs leading to an increase in funds held at the Federal Reserve. The comparatively low yield on funds held at the Federal Reserve is the primary driver behind the decline in the yield on average securities/other. Overall, the fully taxable-equivalent yield on interest-earning assets decreased 48 basis points to 4.51 percent.

Average NOW/money market/savings increased by $37.2 million and the rate decreased by 10 basis points. Average certificates of deposits decreased by $150.3 million, which includes a $72.6 million decline in brokered certificates of deposit and CDARS. The cost of interest-bearing deposits decreased due to lower rates paid on deposits. Average borrowings decreased by $18.9 million. Overall, the rate on interest-bearing liabilities decreased 15 basis points to 1.06 percent.

Net interest income was positively impacted by a $120.5 million increase in average net free funds. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The increase in net free funds was mostly driven by an increase of $56.0 million in average noninterest-bearing demand deposits, a decrease of $36.1 million in noninterest-earning assets and an increase of $28.4 million in average shareholders’ equity.

The following table sets forth for the periods indicated a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:

 

    

Three Months Ended September 30, 2011

Compared to September 30, 2010  (2)

 
(in thousands)    Volume     Rate     Net  
                          

Interest earned on:

      

Loans (1)

   $ (2,653   $ (1,999   $ (4,652

Securities/other (1)

     1,862        (1,825     37   
                          

Total Interest-earning Assets

     (791     (3,824     (4,615
                          

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

NOW/money market/savings

     23        (340     (317

Certificates of deposit

     (717     (235     (952

Borrowed funds < 1 year

     (13     (13     (26

Borrowed funds > 1 year

     20        (101     (81
                          

Total Interest-bearing Liabilities

     (687     (689     (1,376
                          

Net Interest Income (1)

   $ (104   $ (3,135   $ (3,239
                          

(1) Tax-exempt income is on a fully taxable equivalent basis using the statutory federal corporate income tax rate of 35 percent for 2011 and 2010.

(2) The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Provision for Loan Losses

The provision for loan losses is the amount to be added to the allowance for loan losses (“ALL”) after adjusting for charge-offs and recoveries to bring the ALL to a level considered appropriate to absorb probable losses inherent in the loan portfolio. The provision for loan losses decreased $6.8 million to $1.5 million for the third quarter of 2011 as compared to $8.3 million for the same period in the prior year. The decrease in the provision for loan losses is a result of improving asset quality over the past year. Although there are many factors that can impact the ALL, an important factor is the amount of new impaired loans requiring a specific reserve. New impaired loans requiring specific reserves have slowed in 2011 compared to 2010. In the three months ended September 30, 2010 new impaired loans requiring $5.9 million of specific reserves were identified. In the three months ending September 30, 2011 no new significant impaired loans requiring a specific reserve were identified. This decrease in new specific reserves is the primary reason for the decrease in provision. Refer to the ALL section of this MD&A for additional disclosure.

 

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Noninterest Income

 

     Three Months Ended September 30  
(in thousands)    2011     2010      $ Change  
                           

Service charges on deposit accounts

   $ 2,683      $ 2,842       $ (159

Insurance fees

     2,192        2,125         67   

Debit and credit card fees

     2,132        1,951         181   

Wealth management fees

     1,965        1,861         104   

Securities (losses) gains, net

     (81     6         (87

Mortgage banking

     (447     1,573         (2,020

Other

     1,899        1,977         (78
                           

Total Noninterest Income

   $ 10,343      $ 12,335       $ (1,992
                           

Noninterest income decreased $2.0 million to $10.3 million in the third quarter of 2011 as compared to the third quarter of 2010. The decrease is primarily due to a decrease of $2.0 million for the quarter in mortgage banking fees and a $0.2 million decrease in service charges on deposit accounts, offset by a $0.2 million increase in debit and credit card fees.

Mortgage banking includes fee income related to loans sold in the secondary market, mortgage servicing income, mortgage servicing rights amortization and impairment and fair value adjustments associated with valuing mortgage derivatives. Although interest rates continue to be at historic lows, the volume of loan sales in the secondary market has decreased compared to the same period last year. Further, in the second quarter of 2011, S&T began to retain within the loan portfolio 10 and 15 year mortgages that had been priced and underwritten for sale within the secondary market. S&T sold $11.2 million of mortgages in the current quarter, compared to $16.2 million in the third quarter of 2010 resulting in a mortgage servicing asset established on newly sold loans of $0.1 million in the current period compared to $0.3 million in the same period last year. In the third quarter of 2011, a $0.8 million impairment charge was recorded for mortgage servicing rights compared to an insignificant impairment charge in the third quarter of 2010. This impairment charge reflects a decline in the value of the remaining mortgage servicing rights due to increased prepayment speeds resulting from decreases in interest rates. Further contributing to the decline in mortgage banking was a $0.7 million net gain for mortgage derivatives in the third quarter of 2010 compared to an insignificant loss in the current quarter. The significant change is a result of more customers taking advantage of refinancing existing mortgages in 2010 resulting in reduced demand for mortgage refinancing in 2011.

Service charges on deposits for the three months ended September 30, 2011 decreased $0.2 million as compared to the same period in the prior year primarily due to a $0.4 million decline in overdraft fees resulting from the impact of the regulatory changes (“Regulation E”) that were implemented on August 15, 2010. The regulatory change requires customers to opt in for overdraft coverage of debit card transactions. The decline was partially offset by $0.3 million in new deposit fees in the third quarter of 2011, including paper statement fees and various other increases in deposit fees. Debit and credit card fees increased approximately $0.2 million due to increased volume of signature based transactions as a result of increased marketing in this area.

Noninterest Expense

 

     Three Months Ended September 30  
(in thousands)    2011      2010      $ Change  
                            

Salaries and employee benefits

   $ 11,741       $ 11,887       $ (146

Data processing

     1,743         1,547         196   

Occupancy, net

     1,653         1,674         (21

Furniture and equipment

     1,263         1,176         87   

Other taxes

     864         739         125   

Joint venture amortization

     839         627         212   

FDIC assessment

     749         1,359         (610

Legal

     577         511         66   

Amortization of intangibles

     414         463         (49

Other noninterest expense

     4,350         4,965         (615
                            

Total Noninterest Expense

   $ 24,193       $ 24,948       $ (755
                            

 

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Noninterest expense decreased $0.8 million in the third quarter of 2011 compared to the third quarter of 2010. The decrease was primarily driven by a $0.6 million decrease in the FDIC assessment and a $0.6 million decrease in other noninterest expense, partially offset by a $0.2 million increase in joint venture amortization and a $0.2 million increase in data processing expense.

The decrease in the FDIC assessment is the result of the FDIC changing the methodology used to calculate the assessment as of April 1, 2011 and expiration of the FDIC’s Transaction Account Guarantee Program on December 31, 2010. S&T expects to benefit from savings in future quarters according to the new methodology. Other noninterest expense decreased $0.6 million primarily related to a $0.9 million write-off of an uncollectible receivable in the third quarter of 2010. The receivable related to expenses for a mutual fund advised by an affiliate that was deemed to be uncollectible. The increase of $0.2 million in joint venture amortization reflects the additional amortization on two low income housing projects in 2011. The $0.2 million increase in data processing costs relate to one-time charges for the implementation of mobile banking and other conversion fees.

Provision for Income Taxes

The provision for income taxes increased $1.1 million to $4.7 million for the third quarter of 2011 as compared to $3.6 million for the same period in the prior year. The increase is primarily due to a $2.4 million increase in pre-tax income and a higher effective tax rate for the quarter due to a change in estimated 2011 pre-tax income.

RESULTS OF OPERATIONS

Nine Months Ended September 30, 2011 Compared to

Nine Months Ended September 30, 2010

Net Interest Income

The following table reconciles interest income per the Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis:

 

     Nine Months Ended September 30,  
(in thousands)    2011      2010  

Interest income

   $ 124,820       $ 136,209   

Taxable equivalent adjustment to interest income

     3,054         3,552   
                   

Interest Income on a Fully Taxable Equivalent Basis

     127,874         139,761   

Interest expense

     21,541         26,697   

Net Interest Income on a Fully Taxable Equivalent Basis

   $ 106,333       $ 113,064   
                   

 

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Average Balance Sheet and Net Interest Income Analysis

The following table provides information regarding the average balances and yields earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities:

 

    

Nine Months Ended

September 30, 2011

   

Nine Months Ended

September 30, 2010

 
(in thousands)    Balance      Income      Rate     Balance      Income      Rate  
                                                      

ASSETS

                

Loans (1)

   $ 3,247,433       $ 118,753         4.89   $ 3,394,635       $ 129,825         5.11

Securities/other (1)

     451,824         9,121         2.69     337,031         9,936         3.93
          

Total Interest-earning Assets

     3,699,257         127,874         4.62     3,731,666         139,761         5.01

Noninterest-earning assets

     374,278              394,069         
                                                      

TOTAL

   $ 4,073,535            $ 4,125,735         
                                                      

LIABILITIES AND SHAREHOLDERS’ EQUITY

                

NOW/money market/savings

   $ 1,283,571       $ 1,521         0.16   $ 1,260,214       $ 2,549         0.27

Certificates of deposit

     1,197,426         16,243         1.81     1,311,698         19,566         1.99

Borrowed funds < 1 year

     42,430         43         0.14     89,357         196         0.29

Borrowed funds > 1 year

     122,139         3,734         4.09     138,037         4,386         4.25
                                                      

Total Interest-bearing Liabilities

     2,645,566         21,541         1.09     2,799,306         26,697         1.28

Noninterest-bearing liabilities

                

Demand deposits

     790,459              718,885         

Shareholders’ equity/other

     637,510              607,544         
                                                      

TOTAL

   $ 4,073,535            $ 4,125,735         
                                                      

Net Interest Margin(1)

           3.84           4.05
     

 

 

         

 

 

    

Net Interest Income(1)

        $106,333              $113,064      
                

(1) Net interest margin is presented on a fully taxable equivalent (“FTE”) and annualized basis. Net interest income is presented on a FTE basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35 percent for each period presented. S&T believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

Net interest income and net interest margin on a fully taxable equivalent basis decreased $6.7 million and 21 basis points, respectively for the nine months ended September 30, 2011 as compared to the same period in the prior year. The decline in the net interest margin is a result of loan repricing, replacement volume at lower rates and an unfavorable shift in asset mix, offset in part by lower rates paid on deposits and a better funding mix between deposits, including noninterest-bearing demand deposits and borrowings.

Average loans decreased by $147.2 million and the fully taxable-equivalent yield decreased by 22 basis points. The decline in loan balances is a result of the current economic environment, resulting in borrowers being cautious and leading to weak loan demand coupled with significant loan principal pay-downs. Average securities/other increased by $114.8 million and the fully taxable-equivalent yield decreased by 124 basis points for the nine months ended September 30, 2011 as compared to the same period in the prior year. The average securities/other balance increased primarily due to the aforementioned loan principal pay-downs leading to an increase in funds held at the Federal Reserve. The comparatively low yield on funds held at the Federal Reserve is the primary driver behind the decline in the yield on average securities/other. Overall, the fully taxable-equivalent yield on interest-earning assets decreased 39 basis points to 4.62 percent for the nine months ended September 30, 2011 as compared to the same period in the prior year.

Average NOW/money market/savings increased by $23.4 million and the rate decreased by 11 basis points for the nine months ended September 30, 2011 as compared to the same period in the prior year. Average certificates of deposits decreased by $114.3 million, which includes a $73.7 million decline in brokered certificates of deposit and CDARS for the nine months ended September 30, 2011 as compared to the same period in the prior year. The cost of interest-bearing deposits decreased due to lower rates paid on

 

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deposits. Average borrowings decreased by $62.8 million. Overall, the rate on interest-bearing liabilities decreased 19 basis points to 1.09 percent for the nine months ended September 30, 2011 as compared to the same period in the prior year.

Net interest income was positively impacted by a $121.3 million increase in average net free funds. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The increase in net free funds was driven by an increase of $71.6 million in average noninterest-bearing demand deposits, an increase of $30.0 million in average shareholders’ equity, and a decrease of $19.7 million in noninterest-earning assets.

The following table sets forth for the periods indicated a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:

 

    

Nine Months Ended September 30, 2011

Compared to September 30, 2010(2)

 
(in thousands)    Volume     Rate     Net  
                          

Interest earned on:

      

Loans (1)

   $ (5,629   $ (5,443   $ (11,072

Securities/other (1)

     3,384        (4,199     (815
                          

Total Interest-earning Assets

     (2,245     (9,642     (11,887
                          

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

NOW/money market/savings

     47        (1,075     (1,028

Certificates of deposit

     (1,704     (1,619     (3,323

Borrowed funds < 1 year

     (103     (50     (153

Borrowed funds > 1 year

     (505     (147     (652
                          

Total Interest-bearing Liabilities

     (2,265     (2,891     (5,156
                          

Net Interest Income (1)

   $ 20      $ (6,751   $ (6,731
                          

(1) Tax-exempt income is on a fully taxable equivalent basis using the statutory federal corporate income tax rate of 35 percent for 2011 and 2010.

(2) The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Provision for Loan Losses

The provision for loan losses is the amount to be added to the ALL after adjusting for charge-offs and recoveries to bring the allowance to a level considered appropriate to absorb probable losses inherent in the loan portfolio. The provision for loan losses decreased $8.5 million to $13.3 million for the nine months ended September 30, 2011 as compared to $21.8 million for the same period in the prior year. The decrease in the provision for loan losses is a result of improving asset quality over the past year. New impaired loans requiring specific reserves have slowed in 2011 compared to 2010. Net charge-offs have decreased $12.0 million to $13.1 million for the first nine months of 2011 compared to $25.1 for the first nine months of 2010. The ALL decreased $4.8 million from $56.3 million at September 30, 2010 to $51.5 million at September 30, 2011. Refer to the ALL section of this MD&A for additional disclosure.

 

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Noninterest Income

 

     Nine Months Ended September 30  
(in thousands)    2011     2010      $ Change  
                           

Service charges on deposit accounts

   $ 7,356      $ 8,706       $ (1,350

Insurance fees

     6,505        6,457         48   

Debit and credit card fees

     6,221        5,615         606   

Wealth management fees

     6,159        5,761         398   

Mortgage banking

     424        2,150         (1,726

Securities (losses) gains, net

     (124     263         (387

Other

     5,942        6,256         (314
                           

Total Noninterest Income

   $ 32,483      $ 35,208       $ (2,725
                           

Noninterest income decreased $2.7 million to $32.5 million during the first nine months of 2011 compared to the first nine months of 2010. The decrease is due primarily to a decrease of $1.7 million in mortgage banking, $1.4 million in service charges on deposits, a $0.4 million decrease in securities (losses) gains and a $0.3 million decrease in other noninterest income.

Although interest rates continue to be at historic lows, the volume of loan sales in the secondary market has decreased compared to the same period last year. In the second quarter of 2011, S&T began to retain within the loan portfolio 10 and 15 year mortgages that had been priced and underwritten for sale within the secondary market. During 2010, S&T was selling most conforming loans, regardless of term, in the secondary market. S&T sold $52.3 million of mortgages in the current nine month period compared to $65.1 million sold during the same period in 2010, resulting in a total mortgage servicing asset of $0.5 million established on newly sold loans, compared with $0.7 million last year. During the current nine month period, $0.7 million impairment charge was recorded for mortgage servicing rights compared to $0.3 in the same period of 2010. This impairment charge reflects a decline in the value of the remaining mortgage servicing rights due to increased prepayment speed resulting from decreased interest rates. Further contributing to the decline in mortgage banking was a $0.5 million net gain for mortgage derivatives during 2010 compared to a $0.4 net loss during 2011. The significant change is a result of more customers taking advantage of refinancing existing mortgages in 2010 resulting in reduced demand for mortgage refinancing in 2011.

Service charges on deposits for the nine months ended September 30, 2011 decreased $1.4 million as compared to the same period in the prior year primarily due to a $1.8 million decline in overdraft fees resulting from the impact of the regulatory changes (“Regulation E”) that were implemented on August 15, 2010. The regulatory change requires customers to opt in for overdraft coverage of certain banking activities. The decline was partially offset with $0.3 million in new deposit fees, including increased paper statement and various other increases in deposit fees. The $0.4 million change in securities (losses) gains net is primarily due to net gains in 2010 on equity securities sold, coupled with impairment write-downs on equity securities of $0.1 million in 2011. Other noninterest income decreased by $0.3 million due to a $0.2 million commercial rate swap valuation charge and reduced fee income related to commercial loan swaps. Partially offsetting these decreases were increases of $0.6 million in debit and credit card fees and $0.4 million in Wealth Management fees. Debit and credit card fees increased due to increased volume of signature based transactions as a result of increased marketing in this area. Wealth Management fees increased year-to-date as compared to the same period in the prior year primarily due to higher fixed annuity commissions and an increase in brokerage commissions.

 

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Noninterest Expense

 

     Nine Months Ended September 30  
(in thousands)    2011      2010      $ Change  
                            

Salaries and employee benefits

   $ 37,632       $ 36,263       $ 1,369   

Occupancy, net

     5,248         5,317         (69

Data processing

     4,928         4,601         327   

Furniture and equipment

     3,805         3,562         243   

FDIC assessment

     2,892         4,058         (1,166

Other taxes

     2,669         2,626         43   

Joint venture amortization

     2,428         1,964         464   

Legal

     1,794         3,715         (1,921

Amortization of intangibles

     1,323         1,483         (160

Other noninterest expense

     14,517         15,026         (509
                            

Total Noninterest Expense

   $ 77,236       $ 78,615       $ (1,379
                            

Noninterest expense decreased $1.4 million during the first nine months of 2011 as compared to the first nine months of 2010. The decrease was driven primarily by a $1.9 million decrease in legal expense and a $1.2 million decrease in FDIC assessment, as well as a $0.5 million decrease in other noninterest expense. Partially offsetting these decreases were increases in salaries and employee benefits of $1.4 million, joint venture amortization of $0.5 million and data processing of $0.3 million.

The decrease in legal expense is attributable to the incurrence of $2.3 million of one-time legal settlement costs that occurred in the first and second quarter of 2010. The decrease in the FDIC assessment of $1.2 million is the result of the FDIC changing the methodology used to calculate the assessment as of April 1, 2011 and expiration of the FDIC’s Transaction Account Guarantee Program on December 31, 2010. S&T expects to benefit from savings in future quarters according to the new methodology. Other noninterest expense decreased $0.5 million primarily related to a $1.2 million write-off of an uncollectible receivable in the third quarter of 2010. The receivable related to expenses for a mutual fund advised by an affiliate that was deemed to be uncollectible. Additionally, the decrease can be attributed to a $0.5 million change in the unfunded loan commitments reserve due to a reversal of the reserve for unfunded commitments of $1.0 million for the nine months ended September 30, 2010 compared to $1.5 million reversal of reserve for the nine months ended 2010. Approximately $0.8 million of the reserve reversal in 2011 related to an expense recognized in 2008 for a letter of credit that S&T was contractually obligated to fulfill. During the third quarter of 2011, the letter of credit was drawn upon and funded and a corresponding loan charge-off was recorded. These increases in other noninterest expense were offset by $1.0 million decrease in loan collection fees from the prior year. Overall, asset quality metrics have been improving, resulting in lower expenses on troubled loans. The $1.4 million increase in salaries and employee benefits reflects the full nine month impact of the annual merit increase effective July 1, 2010 resulting in additional salary expense of $1.1 million. Additionally, restricted stock expense increased $0.5 million related to restricted stock issued for the 2010 incentive plan and long-term incentive plan. These increases were offset by a decrease in the pension plan of $0.2 million due to a change in the number of participants of the plan. The increase of $0.5 million in joint venture amortization reflects the additional amortization on two low income housing projects in 2011. The $0.3 million in additional data processing costs relate to one-time charges for the implementation of mobile banking and other conversion fees. The increase of $0.2 million in furniture and equipment expense relates to increases in maintenance fees due to implementation of new software and an increase in the ATM maintenance costs, as well as increased depreciation expense in general.

Provision for Income Taxes

The provision for income taxes decreased $0.9 million to $10.2 million for the nine months ended September 30, 2011 as compared to $11.1 million for the same period in the prior year. Although pretax income increased by $1.0 million, the decrease was due to a decline in the estimated annual effective tax rate applied to pretax income for the nine months ended September 30, 2011. The decrease in the estimated annual effective tax rate from 25.0 percent to 22.6 percent is due to a projected increase in low income housing tax credits for 2011. Additionally, the effective rate was impacted by the recognition of certain discrete items.

Financial Condition

Total assets were $4.1 billion at both September 30, 2011 and at December 31, 2010. The loan portfolio decreased $223.4 million from December 31, 2010, offset by an increase in interest-bearing amounts due from banks of $142.6 million and securities of $52.1 million. The decline in portfolio loans is a result of higher than expected loan pay-downs and soft loan demand. Total commercial loans decreased $188.9 million from December 31, 2010, including declines in commercial real estate of $79.8 million, commercial and industrial of $40.5 million and commercial construction of $68.6 million. Total consumer loans declined $34.5 million from December 31, 2010. Total deposits decreased $46.1 million from December 31, 2010, primarily due to a decrease in certificates of

 

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deposit of $105.5 million, offset by an increase in noninterest demand deposits of $51.7 million. Total Shareholders’ Equity increased $25.0 million from December 31, 2010 primarily due to net income available to common shareholders of $30.3 million for the nine months ended September 30, 2011 and increased unrealized gains of $3.1 million related to the investment portfolio, offset by dividends paid to common shareholders of $12.6 million.

Securities Activity

 

(in thousands)    September 30, 2011      December 31, 2010      $ Change  

Obligations of U.S. government corporations and agencies

   $ 153,213       $ 125,675       $ 27,538   

Collateralized mortgage obligations of U.S. government corporations and agencies

     69,799         41,491         28,308   

Mortgage-backed securities of U.S. government corporations and agencies

     52,410         43,991         8,419   

Obligations of states and political subdivisions

     53,263         65,772         (12,509
                            

Debt Securities Available-for-Sale

     328,685         276,929         51,756   

Marketable equity securities (primarily bank stocks)

     11,438         11,096         342   
                            

Total Securities Available-for-Sale, at Fair Value

   $ 340,123       $ 288,025       $ 52,098   
                            

S&T invests in various securities in order to provide a source of liquidity, to satisfy various pledging requirements, increase net interest income and as a tool of the ALCO to reposition the balance sheet for interest rate risk purposes. Securities are subject to market risks that could negatively affect the level of liquidity available to S&T. Risks associated with various securities portfolios are managed and monitored by investment policies approved annually by S&T’s Board of Directors and administered by the ALCO and the Treasury function of S&T Bank. The net increase in securities of $52.1 million resulted from the reinvestment of a portion of the proceeds from loan principal pay-downs. The new investments in 2011 included purchases of $40.0 million in U.S. government agency bonds, $38.0 million in collateralized mortgage obligations of U.S. government corporations and agencies and $19.2 million in mortgage-backed securities. These additions to the securities portfolio were partially offset by $15.0 million in U.S. government agency bond calls, $13.4 million in municipal bond calls and maturities and $22.9 million in mortgage-backed security pay-downs. The remaining difference consisted of FHLB stock redemptions, unrealized gains and losses, and mark-to-market and impairment adjustments.

On a quarterly basis, management evaluates the securities portfolios for OTTI in accordance with the applicable accounting guidance for investments reported at fair value. An impairment charge of less than $0.2 million for equity securities was recorded in each of the nine month periods ending September 30, 2011 and 2010.

Loan Composition

 

     September 30, 2011     December 31, 2010  
(in thousands)    Amount     % of Loans     Amount     % of Loans  

Consumer

        

Home equity

   $ 423,166        13.5   $ 441,096        13.2

Residential mortgage

     350,619        11.2     359,536        10.7

Installment and other consumer

     68,049        2.2     74,780        2.2

Construction

     3,111        0.1     4,019        0.1
                                  

Total Consumer Loans

     844,945        27.0     879,431        26.2
                                  

Commercial

        

Commercial real estate

     1,414,398        45.1     1,494,202        44.5

Commercial and industrial

     681,866        21.8     722,359        21.5

Construction

     190,974        6.1     259,598        7.8
                                  

Total Commercial Loans

     2,287,238        73.0     2,476,159        73.8
                                  

Total Portfolio Loans

     3,132,183        100.0     3,355,590        100.0
                                  

Allowance for loan losses

     (51,533       (51,387  
                                  

Total Portfolio Loans, net

     3,080,650          3,304,203     

Loans Held for Sale

     3,959          8,337     
                                  

Total Loans

   $ 3,084,609        $ 3,312,540     
                                  

 

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The loan portfolio represents the most significant source of interest income for S&T. The risk that borrowers will be unable to pay such obligations is inherent in the loan portfolio. Other conditions such as the overall economic climate can significantly impact a borrower’s ability to pay. In order to mitigate such risk, loan underwriting standards for S&T are established by a formal policy and are subject to periodic review and approval by S&T’s Board of Directors.

Total loans decreased by $227.9 million between December 31, 2010 and September 30, 2011, with the largest decline occurring in the commercial loan portfolio. Given the current economic environment and corresponding weak loan demand, the proceeds from commercial loan prepayments and pay-downs have not consistently been reinvested in new loans.

Although commercial loans, including commercial real estate (“CRE”), commercial and industrial (“C&I”) and construction loans can have a relatively higher risk profile, management believes these risks are mitigated through active portfolio management, underwriting and continuous review. The loan-to-value policy guidelines for CRE loans are generally 65-85 percent.

Residential mortgage lending continues to be a strategic focus through a centralized mortgage origination department, ongoing product redesign, secondary market activities and the utilization of commission compensated originators. The loan-to-value policy guideline is 80 percent for residential first lien mortgages. Higher loan-to-value loans may be approved with the appropriate private mortgage insurance coverage. Second lien positions are assumed with home equity loans, but normally only to the extent that the combined credit exposure for both the first and second liens does not exceed 100 percent of the estimated fair value of the property.

Management believes the downturn in the local residential real estate market and the impact of declining values on the real estate loan portfolio will be mitigated because of S&T’s conservative mortgage lending policies for portfolio loans, which require a maximum term of 20 years for fixed rate mortgages. Balloon mortgages are also offered in the portfolio. The maximum balloon term is 15 years with a maximum amortization term of 30 years. Balloon mortgages with terms of 10 years or less may have a maximum amortization term for up to 40 years. Combo mortgage loans consisting of a residential first mortgage and a home equity second mortgage are also available to creditworthy borrowers.

S&T also originates and prices loans for sale into the secondary market, primarily to Federal National Mortgage Association (“FNMA”). The rationale for these sales is to mitigate interest-rate risk associated with holding lower rate, long-term residential mortgages in the loan portfolio, generate fee revenue from sales and servicing and maintain the primary customer relationship. During the second quarter of 2011, S&T began to retain within the loan portfolio 10 and 15 year mortgages that had been priced and underwritten for sale in the secondary market. During the nine months ended September 30, 2011 and 2010, S&T sold $52.3 million and $65.1 million, respectively, of 1-4 family mortgages of which $48.6 and $65.1, respectively, were sold to FNMA. The decrease in loan sales over prior year is a result of the change in strategy to sell only longer term mortgages coupled with less refinance activity as many customers refinanced earlier in the cycle when rates declined. S&T currently services $333.0 million of secondary market mortgage loans for FNMA as of September 30, 2011 as compared to $293.3 million as of September 30, 2010. S&T intends to continue to sell longer-term loans to FNMA, especially during periods of lower interest rates.

Allowance for Loan Losses

S&T maintains an ALL at a level determined to be adequate to absorb estimated probable credit losses inherent in the loan portfolio as of the balance sheet date. Management reviews the adequacy of the allowance on a quarterly basis to ensure that the allowance level is appropriate based on a reasonable assessment of probable estimated losses. The methodology employed consists of several key elements. Management assesses various risks of the loan portfolio as a whole, as well as individual risks specific within each loan class. Management further evaluates risk by looking at key inherent risk differentiators, such as internally assigned risk ratings, as well as changes in these ratings. Management also monitors various credit quality indicators, including delinquency and performing vs nonperforming status. Each of these elements is discussed in greater detail below.

An inherent risk to the loan portfolio as a whole is the condition of the local economy. In addition, each loan class carries with it risks specific to the class. The CRE loan class, comprised of loans secured by commercial purpose real estate, has both collateral risk and cash flow risk, as well as risks based on the business prospects of the lessee if the property is not owner occupied. The C&I loan class is comprised of loans made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. The collateral for this type of loan often does not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt, and aside from that risk, loan repayment based on cash flow from the operations of the company is generally dependent on the health of the company’s industry. The Commercial Construction class includes loans made to finance the construction or building of structures as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. There are also various risks depending on the type of project and the experience and resources of the developer. The Consumer Real Estate class, comprised of loans secured by 1-4 family residences, looks to the income and assets of the borrower as the primary source of loan repayment, so both the local unemployment rate, as well as the state of the local housing market, have a significant impact on the risk determination. The Other Consumer loan class includes loans made to individuals that may be secured by assets other than 1-4 family residences, as well as unsecured loans. This class includes auto loans, unsecured lines and credit cards. The primary source of repayment for these loans is again the income and assets of the borrower, so the local unemployment rate once more is an important indicator of risk for this loan class. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

 

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Significant to the ALL is a higher mix of commercial loans. These loans are generally larger in size and many are not seasoned and may be more vulnerable to an economic slowdown. Management relies on its loan review process to ensure the integrity of loan risk ratings and to assess potential weaknesses within specific credits. Current risk factors, trends in risk ratings and historical charge-off experiences are considered in the determination of the ALL.

Consumer unsecured loans and secured loans that are not real estate secured are evaluated for charge-off after the loan becomes 90 days past due. At that time, unsecured loans are fully charged-off and secured loans are charged-off to the estimated fair value of the collateral less the cost to sell. Consumer loans secured by real estate are evaluated for charge-off after the loan balance becomes 90 days past due and are charged down to the estimated fair value of the collateral less cost to sell.

The charge-off policy for commercial loans requires that loans and other obligations that are not collectible be promptly charged-off in the month the loss becomes probable, regardless of the delinquency status of the loan. S&T may elect to recognize a partial charge-off when management has determined that the value of collateral is less than the remaining investment in the loan. A loan or obligation does not need to be charged-off, regardless of delinquency status, if (i) management has determined there exists sufficient collateral to protect the remaining loan balance and (ii) there exists a strategy to liquidate the collateral. Management may also consider a number of other factors to determine when a charge-off is appropriate. These factors may include, but are not limited to:

 

   

The status of a bankruptcy proceeding

   

The value of collateral and probability of successful liquidation

   

The status of adverse proceedings or litigation that may result in collection

The components of the ALL as of September 30, 2011 and December 31, 2010 are as follows:

 

     September 30, 2011           December 31, 2010  
(in thousands)    Commercial
Real Estate
     Commercial &
Industrial
     Commercial
Construction
     Consumer
Real Estate
     Other
Consumer
     Total
Allowance
          Total Allowance  

Allowance for loan losses:

                       

For Loans individually evaluated for impairment

     1,537         213         1,008         120         0         2,878            3,631   

For Loans collectively evaluated for impairment

     30,479         10,311         3,656         3,304         905         48,655            47,756   

 

 

Total Allowance for Loan Losses

   $ 32,016       $ 10,524       $ 4,664       $ 3,424       $ 905       $ 51,533            $ 51,387   

 

     September 30, 2011     December 31, 2010  
                  

Ratio of net charge-offs to average loans outstanding (annualized)

     0.54     1.11

Allowance for loan losses to total loans

     1.64     1.53

Allowance for loan losses to nonperforming loans

     87     80
                  

The ALL at September 30, 2011 remained relatively flat, increasing only $0.1 to $51.5 million from $51.4 million at December 31, 2010. The small increase is comprised of a $0.9 million increase in the general reserve and $0.8 million decrease in the specific reserve. The $0.9 million increase in the general reserve is the result of a $5.3 million increase in the first quarter of 2011 due to the downgrade of a significant number of credits, primarily in the CRE portfolio, offset by second and third quarter decreases in the general reserve of $4.4 million related to decreases in historic loss rates and outstanding loan balances. The specific reserve decreased $0.8 million as a result of a $4.9 million increase in the first quarter of 2011, primarily attributable to two large relationships, offset by second and third quarter decreases totaling $5.7 million relating to charge-offs during the quarter, offset by additional specific reserves on impaired loans.

S&T’s allowance for lending-related commitments is computed using a methodology similar to that used to determine the ALL. Amounts are added to the allowance for lending-related commitments through a charge to current earnings through noninterest expense. The balance in the allowance for lending-related commitments decreased to $1.6 million at September 30, 2011 as compared to $2.7 million at December 31, 2010. Approximately $0.8 million of the decline related to an expense recognized in 2008 for a letter of credit that S&T was contractually obligated to fulfill. During the third quarter of 2011, the letter of credit was drawn upon and funded and a corresponding loan charge-off was recorded. The remainder of the decrease is related to a reduction in construction commitments. The volume of construction commitments has declined significantly as a result of the current economic environment.

 

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The allowance for lending-related commitments is included in other liabilities in the Consolidated Balance Sheets of the financial statements included elsewhere in this Quarterly Report on Form 10-Q.

The following table represents nonperforming assets for the periods presented:

 

(in thousands)    September 30, 2011     December 31, 2010     $ Change  
                          

Nonaccrual Loans

      

Commercial real estate

   $ 19,938      $ 14,674      $ 5,264   

Commercial and industrial

     6,003        2,567        3,436   

Commercial construction

     5,243        5,844        (601

Home equity

     3,095        1,433        1,662   

Residential mortgage

     2,640        5,996        (3,356

Installment and other consumer

     15        65        (50

Consumer construction

     181        525        (344
                          

Total Nonaccrual Loans

     37,115        31,104        6,011   
                          

Nonaccrual TDRs

      

Commercial real estate

     14,585        29,636        (15,051

Commercial and industrial

     0        1,000        (1,000

Commercial construction

     3,460        2,143        1,317   

Residential mortgage

     4,079        0        4,079   
                          

Total Nonaccrual TDRs

     22,124        32,779        (10,655
                          

Total Nonperforming Loans

     59,239        63,883        (4,644
                          

OREO

     5,992        5,820        172   
                          

Total Nonperforming Assets

   $ 65,231      $ 69,703      $ (4,472
                          

Asset Quality Ratios:

      

Nonperforming loans as a percent of total loans

     1.89     1.90  

Nonperforming assets as a percent of total loans + OREO

     2.08     2.07  

S&T’s policy is to place loans in all categories on nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due. Restructured loans or troubled debt restructuring (TDRs) can be returned to accruing status, if the following criteria are met: (1) the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and, (2) there is a period of satisfactory payment performance by the borrower either immediately before or after the restructuring of six months. There are no loans 90 days or more past due and still accruing.

TDRs are loans that S&T, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. A concession is considered to have been granted if any of the following occur: a reduction of contractual interest rates below the market interest rate for new debt with similar characteristics, acceptance of other assets or an equity interest in the debtor in partial satisfaction of the debt, a reduction or forgiveness of principal, a reduction or forgiveness of accrued interest, a reduction or deferral of principal, or an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. Once a loan is classified as a TDR, it retains both TDR and impaired loan status for the life of the loan, whether or not it has resumed accrual status, unless the restructuring was done at a market rate.

Deposits

 

(in thousands)    September 30, 2011      December 31, 2010      $ Change  
                            

Noninterest-bearing demand

   $ 817,518       $ 765,812       $ 51,706   

Interest-bearing demand

     291,726         295,246         (3,520

Money market

     255,058         262,683         (7,625

Savings

     772,653         753,813         18,840   

Certificates of deposit

     1,134,476         1,239,970         (105,494
                            

Total Deposits

   $ 3,271,431       $ 3,317,524       $ (46,093
                            

 

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S&T BANCORP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

Deposits are a primary source of funds for S&T. Management believes that S&T’s core deposit base is stable and that it has the ability to attract new deposits, mitigating a funding dependency on other more volatile sources. While total deposits at the end of the third quarter of 2011 were down $46.1 million compared to December 31, 2010, S&T’s core deposit base remained stable. The decline was driven by a decrease in brokered certificates of deposit. Non-brokered certificates of deposit of $100,000 and over were 11 percent and 12 percent of total deposits at September 30, 2011 and December 31, 2010, respectively, and primarily represent deposit relationships with local customers in our market area. S&T had $16.8 million and $63.0 million of brokered retail certificates of deposit, including the Certificate of Deposit Account Registry Services (“CDARS”) reciprocal deposits outstanding at September 30, 2011 and December 31, 2010, respectively.

S&T participates in the CDARS program. The reciprocal program allows S&T customers to receive expanded FDIC coverage by placing multiple certificates of deposit at other CDARS member banks. S&T maintains deposits by accepting certificates of deposits from customers of CDARS member banks in the exact amount as S&T customers placed. S&T can also access the CDARS network to accept brokered certificates of deposit that are not part of the reciprocal CDARS program. As of September 30, 2011, CDARS certificates of deposit totaling $16.8 were reciprocal deposits. The issuance of brokered retail certificates of deposit and participation in the CDARS program is an ALCO strategy to increase and diversify funding sources.

Borrowings

 

(in thousands)    September 30, 2011      December 31, 2010      $ Change  
                            

Securities sold under repurchase agreements

   $ 42,409       $ 40,653       $ 1,756   

Long-term borrowings

     32,319         29,365         2,954   

Junior subordinated debt securities

     90,619         90,619         0   
                            

Total Borrowings

   $ 165,347       $ 160,637       $ 4,710   
                            

S&T has significant funds held at the Federal Reserve and given current weak loan demand and sufficient liquidity does not have a need at this time to borrow additional funds. Additional funds of $4.2 million were borrowed in the second quarter of 2011 from the FHLB to support a long-term investment in low income housing partnerships.

Liquidity and Capital Resources

Liquidity refers to the ability to satisfy the financial needs of depositors who want to withdraw funds, or of borrowers needing to access funds to meet their credit needs. The ALCO is responsible for establishing and monitoring liquidity guidelines, policies and procedures.

The principal sources of asset liquidity are cash and due from banks, interest-earning deposits with banks, federal funds sold, unpledged securities available-for-sale, maturing and amortizing loans and earnings. Liability liquidity sources include a stable core deposit base, the ability to renew maturing certificates of deposit, borrowing availability at the FHLB of Pittsburgh (“FHLB”), fed funds lines with other financial institutions, access to the brokered certificates of deposit market including CDARS, and the ability to raise debt and equity. A stable core and certificates of deposit base provided by S&T customers is an important source of liquidity. A stable deposit base is achieved by maintaining a strong capital position and the protection provided by FDIC insurance. ALCO uses a variety of methods to monitor the liquidity position of S&T. These include a liquidity gap, which measures potential sources and uses of funds over future time periods out to one year. Policy guidelines require S&T to maintain a positive liquidity gap, meaning sources greater than uses, in the 30 day time period. In addition, ratios including net noncore funding dependence, net loans and standby letters of credit to assets, and net loans to deposits are reviewed and monitored. ALCO also performs contingency funding analyses to determine S&T’s ability to meet potential liquidity needs under stress scenarios that cover varying time horizons ranging from immediate to long-term. Policy guidelines require coverage ratios of potential sources greater than uses depending on the scenario and time horizon.

Shareholders’ equity increased $25.0 million to $603.7 million at September 30, 2011 as compared to $578.7 million at December 31, 2010. During the nine months ended September 30, 2011, S&T generated net income of $35.0 million and recognized $3.9 million of unrealized gains on securities available-for-sale, which are included in other comprehensive income. These increases to shareholders’ equity were offset by the payment of dividends of $4.1 million and $12.6 million to preferred and common shareholders, respectively. S&T sold treasury shares which resulted in a net increase in shareholders equity of $1.5 million. Other increases to shareholders’ equity included a $0.4 million adjustment to the funded status of S&T’s employee benefit plan and the $0.8 million impact of issuing restricted shares under stock-based compensation plans.

Management believes that the bank has sufficient asset and liability liquidity to fund all outstanding commitments and letters of credit, while maintaining proper levels of liquidity. Management believes that S&T has the ability to raise additional debt or equity, if necessary.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

The following summarizes risk-based capital amounts and ratios for S&T Bancorp, Inc. and S&T Bank:

 

(dollars in thousands)   

Adequately

Capitalized (1)

    

Well-

Capitalized (2)

     September 30, 2011      December 31, 2010  
         Amount      Ratio      Amount      Ratio  
                                                       

S&T Bancorp, Inc.

                 

Tier 1 leverage

             4.00%         5.00%       $ 457,235         11.80%       $ 435,823         11.07%   

Tier 1 capital to risk-weighted assets

     4.00%         6.00%         457,235         14.95%         435,823         13.28%   

Total capital to risk-weighted assets

     8.00%         10.00%         566,230         18.51%         547,336         16.68%   

S&T Bank

                 

Tier 1 leverage

     4.00%         5.00%       $ 313,259         8.12%       $ 294,113         7.50%   

Tier 1 capital to risk-weighted assets

     4.00%         6.00%         313,259         10.30%         294,113         9.02%   

Total capital to risk-weighted assets

     8.00%         10.00%         421,519         13.87%         405,049         12.42%   
                                                       

(1) For an institution to qualify as “adequately capitalized” under regulatory guidelines, total risk-based capital, Tier I risk-based capital and Tier I capital to average asset ratios must be at least 8 percent, 8 percent and 4 percent respectively. At September 30, 2011, S&T exceeded those requirements.

(2) For an institution to qualify as “well capitalized” under regulatory guidelines, total risk-based capital, Tier I risk-based capital and Tier I capital to average asset ratios must be at least 10 percent, 6 percent and 5 percent respectively. At September 30, 2011, S&T exceeded those requirements.

In August 2009, S&T filed a shelf registration statement on Form S-3 under the Securities Act of 1933 as amended, with the SEC for the issuance of up to $300 million of a variety of securities including, debt and capital securities, preferred and common stock and warrants. S&T may use the proceeds from the sale of its securities for general corporate purposes, which could include investments at the holding company level, investing in, or extending credit to its subsidiaries, possible acquisitions and stock repurchases. As of September 30, 2011, S&T had not issued any securities pursuant to the shelf registration statement.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ALCO monitors and manages interest rate sensitivity through gap, rate shock analyses, simulations and economic value of equity in order to avoid unacceptable earnings fluctuations due to interest rate changes. S&T’s gap model includes certain management assumptions based upon past experience and the expected behavior of customers. The assumptions include principal prepayments for fixed rate loans, collateralized mortgage obligations, and mortgage-backed securities and classifying the demand, savings and money market balances by degree of interest rate sensitivity.

The gap and cumulative gap represent the net position of assets and liabilities subject to repricing in specific time periods, as measured by a ratio of rate sensitive assets to rate sensitive liabilities. The table below shows the amount and timing of repricing assets and liabilities as of September 30, 2011.

 

     GAP  
(in thousands)    1-6 Months      7-12 Months     13-24 Months      >2 Years  
                                    

Repricing Assets:

          

Cash and due from banks and interest-bearing deposits with banks

   $ 203,898       $ 0      $ 0       $ 58,508   

Securities available-for-sale

     40,068         48,526        53,961         197,568   

Federal Home Loan Bank stock, at cost

     0         0        0         19,175   

Loans, net

     1,485,894         271,275        465,997         861,443   

Other assets

     0         0        0         385,657   
                                    

Total Assets

   $ 1,729,860       $ 319,801      $ 519,958       $ 1,522,351   

Repricing Liabilities:

          

Noninterest-bearing demand

   $ 0       $ 0      $ 0       $ 817,518   

Interest-bearing demand

     36,466         36,466        72,932         145,862   

Money market

     255,058         0        0         0   

Savings

     509,831         37,546        75,092         150,184   

Certificates of deposit

     378,635         312,537        244,727         198,577   

Securities sold under repurchase agreements and short-term borrowings

     42,409         0        0         0   

Long-term borrowings and junior subordinated debt securities

     94,612         909        11,868         15,549   

Other liabilities and shareholders’ equity

     0         0        0         655,192   
                                    

Total Liabilities and Shareholders’ Equity

     1,317,011         387,458        404,619         1,982,882   
                                    

GAP

     412,849         (67,657     115,339         (460,531
                                    

Cumulative GAP

   $ 412,849       $ 345,192      $ 460,531       $ 0   
                                    

 

Rate Sensitive Assets / Rate Sensitive Liabilities    September 30, 2011      December 31, 2010  
                   

Cumulative 6 Months

     1.31         1.25   

Cumulative 12 Months

     1.20         1.18   

S&T’s one-year repricing gap at September 30, 2011 indicates an asset sensitive position. This means that more assets than liabilities will reprice during the measured time frames. The implications of an asset sensitive position will differ depending upon the change in market interest rates. For example, with an asset sensitive position in a declining interest rate environment, more assets than liabilities will decrease in rate. This situation could result in a decrease in interest rate spreads, net interest income and operating income. Conversely, with an asset sensitive position in a rising interest rate environment, more assets than liabilities will increase in rate. This situation could result in an increase in interest rate spreads, net interest income and operating income.

In addition to the gap analysis, S&T performs rate shock analyses on a static balance sheet to estimate the effect that specific interest rate changes would have on 12 months of pretax net interest income. Rate shock analyses assume an immediate parallel shift of +/-300 basis points in market interest rates. S&T has modified assumptions in the -300 basis point rate shock analysis due to the very low level of interest rates. Rate shock analyses also incorporate management assumptions regarding the level of interest rate changes on non-maturity deposit products (noninterest-bearing demand, interest-bearing demand, money market and savings) and changes in the prepayment behavior of fixed rate loans and securities with optionality. Inclusion of these assumptions makes rate shock analyses more useful than gap analysis alone. S&T’s policy is to limit the change in pretax net interest income over a one-year horizon to -20 percent given changes in rates using shocks up to +/- 300 basis points.

The table below shows the percent change to pretax net interest income with a rate shock of +/- 300 basis points.

 

     +300 bps     -300 bps  
                  

September 30, 2011

     14.32     (9.05 )% 

December 31, 2010

     11.67     (10.76 )% 

 

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S&T BANCORP, INC. AND SUBSIDIARIES

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK – continued

The impact to pretax net interest income in the +/-300 basis point rate shocks for September 30, 2011 is consistent with having an asset sensitive balance sheet. Both September 30, 2011 rate shock results have improved in comparison to those of December 31, 2010. The +300 results have improved due to a shift in the asset mix from loans with varying repricing ability to immediately repricing excess funds at the Federal Reserve. The -300 results have improved because a flattened yield curve has caused more loans to reprice to their floors, mitigating any further downward repricing.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2011, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Information required by this item is set forth in Note 10 of the Notes to Unaudited Consolidated Financial Statements included in Item 1 of this report and incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes to the risk factors that we have previously disclosed in Item 1A – “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on March  16, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Removed and Reserved

Item 5. Other Information

Not Applicable

Item 6. Exhibits

 

2.1    Agreement and Plan of Merger, dated as of September 14, 2011, between S&T Bancorp, Inc. and Mainline Bancorp, Inc. incorporated herein by reference to the Registrant’s Form 8-K Current Report filed on September 16, 2011.
31.1    Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2    Rule 13a-14(a) Certification of the Chief Financial Officer.
32    Rule 13a-14(b) Certification of the Chief Executive Officer and Chief Financial Officer.
101    The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 is formatted in eXtensible Business Reporting Language (XBRL): (i) Unaudited Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) Unaudited Consolidated Statements of Income for the Three and Nine Months ended September 30, 2011 and 2010, (iii) Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months ended September 30, 2011 and 2010 and (iv) Unaudited Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2011 and 2010 and (iv) Notes to Unaudited Consolidated Financial Statements (tagged as blocks of text).*

 

* This exhibit is furnished and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

S&T Bancorp, Inc.

(Registrant)

Date: November 4, 2011

 

/s/ Mark Kochvar

 

Mark Kochvar

Senior Executive Vice President and

Chief Financial Officer

(Principal Financial Officer and Duly Authorized Signatory)

 

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