S&T BANCORP INC quarterly report, Q2 FY2011

S&T Bancorp, Inc. 2011 Second-Quarter Form 10-Q Summary

Business context and reporting period

S&T Bancorp, Inc. is a Pennsylvania bank holding company headquartered in Indiana, Pennsylvania. It provides community banking, wealth management, insurance, commercial and consumer lending, deposit, mortgage, fiduciary and related financial services through 50 Pennsylvania branches. The filing covers the unaudited three and six months ended June 30, 2011, compared with the corresponding 2010 periods; balance-sheet comparisons are primarily with December 31, 2010.

Financial performance and key metrics

Metric	Three months ended June 30, 2011	Three months ended June 30, 2010	Six months ended June 30, 2011	Six months ended June 30, 2010
Net interest income	$34.5 million	$36.6 million	$69.4 million	$72.5 million
Provision for loan losses	$1.1 million	$9.1 million	$11.7 million	$13.6 million
Noninterest income	$11.1 million	$11.5 million	$22.1 million	$22.9 million
Noninterest expense	$25.6 million	$25.7 million	$53.0 million	$53.7 million
Net income	$14.9 million	$9.4 million	$21.2 million	$20.7 million
Net income available to common shareholders	$13.4 million	$7.9 million	$18.1 million	$17.6 million
Diluted EPS	$0.48	$0.28	$0.65	$0.63

The fully taxable-equivalent net interest margin was 3.85% in the second quarter and 3.88% for the first six months, compared with 4.05% and 4.03%, respectively, in the prior-year periods. Common return on average assets was 1.31% for the quarter and 0.89% year to date; common return on average equity was 9.15% and 6.26%, respectively.

Total assets were $4.06 billion at June 30, 2011, down $56.0 million from year-end 2010.
Portfolio loans were $3.19 billion, down $163.7 million from year-end; commercial loans represented 73.4% of portfolio loans.
The allowance for loan losses was $58.0 million, or 1.81% of total loans, compared with $51.4 million and 1.53% at December 31, 2010.
Nonperforming loans were $62.5 million, or 1.95% of total loans, and nonperforming assets were $69.9 million, or 2.18% of loans plus other real estate owned.
Total deposits were $3.25 billion, down $63.5 million from year-end, principally because certificates of deposit declined $61.8 million. Noninterest-bearing demand deposits increased $35.7 million.
Total borrowings were $164.5 million, including $41.1 million of repurchase agreements, $32.8 million of long-term borrowings and $90.6 million of junior subordinated debt securities.
Shareholders’ equity was $592.5 million, up $13.8 million from year-end.

Cash flow, liquidity and capital

For the six months ended June 30, 2011, operating activities provided $30.7 million, investing activities provided $101.9 million and financing activities used $69.9 million. Cash and cash equivalents increased $62.6 million to $170.8 million. Investing cash flow benefited primarily from a $148.3 million net decrease in loans, partly offset by $77.6 million of securities purchases.

Management stated that cash flows, available liquidity and borrowing capacity were sufficient to fund commitments and letters of credit. S&T had approximately $1.2 billion of maximum borrowing capacity with the Federal Home Loan Bank of Pittsburgh. At June 30, 2011, the company and bank exceeded regulatory “well-capitalized” thresholds; the bank reported a Tier 1 leverage ratio of 7.91% and total risk-based capital ratio of 13.38%.

Material changes versus prior comparable periods

Second-quarter common earnings increased 70% year over year, primarily because the provision for loan losses declined $8.0 million and net charge-offs fell to $4.8 million from $18.2 million.
Six-month common earnings increased modestly despite a $3.1 million decline in net interest income, reflecting lower loan-loss provisions and a $1.9 million decrease in income-tax expense.
Net interest income and margin declined because loan repricing and replacement volume occurred at lower rates, loan balances fell and more funds were held at the Federal Reserve at low yields. Lower deposit and borrowing costs partly offset these pressures.
Noninterest income decreased $0.4 million in the quarter and $0.7 million year to date. Regulation E-related reductions in overdraft fees were the principal factor affecting service-charge income.
Noninterest expense was broadly stable in the quarter and declined $0.6 million year to date. Lower legal expense and FDIC assessments offset higher salaries, data processing and joint-venture amortization.
Commercial loan balances declined $135.3 million from year-end, including a $51.5 million decrease in commercial construction loans. Management attributed the decline to loan paydowns, prepayments and weak demand.
Nonperforming loans declined $1.4 million from year-end, but other real estate owned increased $1.6 million, leaving total nonperforming assets approximately unchanged.

Outlook, commentary, risks and unusual items

The filing does not provide specific earnings or revenue guidance. Management’s strategy emphasizes profitable loan and core-deposit growth, credit-quality control, expense management, new products and organic growth or acquisitions.

Key risks include prolonged low interest rates, margin compression, credit losses, continued weakness in housing and commercial real estate, weak regional loan demand, competition, regulatory changes, technology and litigation risks.
The loan portfolio is concentrated in western Pennsylvania and heavily weighted toward commercial real estate, commercial and industrial and construction lending. Management identified commercial real estate and construction exposure as important credit-risk areas.
Restructured loans totaled $46.0 million at June 30, 2011, including $26.2 million classified as nonperforming. The allowance covered 93% of nonperforming loans, compared with 80% at year-end.
Off-balance-sheet commitments to extend credit and standby letters of credit totaled $989.6 million. The related allowance for lending-related commitments was $2.8 million.
S&T continued to hold $106.5 million of Series A preferred stock issued to the U.S. Treasury under the Capital Purchase Program. The preferred stock pays a 5% dividend for the first five years and 9% thereafter; redemption requires regulatory approval, and Treasury consent restrictions on certain dividends and repurchases remained relevant through January 16, 2012 unless the investment was redeemed or transferred.
The filing identifies one-time legal expenses in the 2010 comparison period, lower 2011 FDIC assessments, and tax benefits from projected low-income housing tax credits as notable period-comparison factors.
The company’s balance sheet was asset sensitive: a 300-basis-point rate increase was estimated to increase pretax net interest income by 11.91%, while a 300-basis-point decrease was estimated to reduce it by 10.59%. Actual results could differ because of management assumptions regarding deposits, prepayments and customer behavior.
Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting. Management also stated that pending litigation was not expected to have a material adverse effect.

Investor verification items

Verify whether the reduction in loan-loss provisions and charge-offs is sustainable and whether the $58.0 million allowance remains adequate for commercial real estate and construction exposures.
Monitor loan demand, loan balances, nonperforming loans, restructured loans, OREO and commercial-loan risk ratings.
Assess the effect of continued low interest rates, loan paydowns and Federal Reserve cash balances on net interest margin and earnings.
Review deposit trends, especially certificates of deposit and brokered or CDARS funding, as well as the company’s reliance on FHLB and other borrowings.
Confirm regulatory capital levels, CPP preferred-stock redemption plans and related restrictions on dividends or share repurchases.
Reconcile non-GAAP fully taxable-equivalent measures with GAAP results and evaluate the sustainability of tax credits and other discrete tax items.