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EX-23 - CONSENT OF KPMG LLP - S&T BANCORP INCdex23.htm
EX-32 - SECTION 906 CERTIFICATION FOR THE CEO & CFO - S&T BANCORP INCdex32.htm
EX-21 - SUBSIDIARIES OF THE REGISTRANT - S&T BANCORP INCdex21.htm
EX-24 - POWER OF ATTORNEY - S&T BANCORP INCdex24.htm
EX-99.1 - CERTIFICATION OF THE CEO PURSUANT TO 31 C.F.R. 30.15 - S&T BANCORP INCdex991.htm
EX-31.1 - SECTION 302 CERTIFICATION FOR THE CEO - S&T BANCORP INCdex311.htm
EX-31.2 - SECTION 302 CERTIFICATION FOR THE CFO - S&T BANCORP INCdex312.htm
EX-99.2 - CERTIFICATION OF THE CFO PURSUANT TO 31 C.F.R. 30.15 - S&T BANCORP INCdex992.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

x    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the fiscal year ended December 31, 2009

 

Commission file number 1-12508

 

S&T BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Pennsylvania   25-1434426
(State or other jurisdiction of incorporation of organization)   (I.R.S. Employer Identification No.)
800 Philadelphia Street, Indiana, PA   15701
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code (800) 325-2265

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Common Stock, par value $2.50 per share   The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)

 

Securities registered pursuant to Section 12(g) of the Act: None

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

    Yes  ¨    No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

    Yes  ¨    No  x

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this form 10-K.  ¨

 

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 (§ 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  ¨    No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions 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 Act).

    Yes  ¨    No  x

 

The aggregate estimated fair value of the voting and non-voting common equity held by nonaffiliates of the registrant as of June 30, 2009:

 

Common Stock, $2.50 par value – $325,556,871

 

The number of shares outstanding of the issuer’s classes of common stock as of February 9, 2010:

Common Stock, $2.50 par value – 27,753,407 shares

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the annual shareholders meeting to be held April 19, 2010 are incorporated by reference into Part III.


Part I     
Item 1.    Business    3
Item 1A.    Risk Factors    11
Item 1B.    Unresolved Staff Comments    17
Item 2.    Properties    17
Item 3.    Legal Proceedings    18
Item 4.    Submission of Matters to a Vote of Security Holders    18
Part II   
Item 5.    Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities    19
Item 6.    Selected Financial Data    21
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    22
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk    57
Item 8.    Financial Statements and Supplementary Data    59
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosures    113
Item 9A.    Controls and Procedures    113
Item 9B.    Other Information    113
Part III   
Item 10.    Directors, Executive Officers and Corporate Governance    114
Item 11.    Executive Compensation    114
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    114
Item 13.    Certain Relationships and Related Transactions, and Director Independence    114
Item 14.    Principal Accounting Fees and Services    114
Part IV   
Item 15.    Exhibits, Financial Statement Schedules    115
   Signatures    118

 

PAGE 2


PART I

 

Item 1.  BUSINESS

 

 

General

 

S&T Bancorp, Inc. (“S&T”; references to “we” or “us” refers to S&T, including on a consolidated basis with our subsidiaries where appropriate) was incorporated on March 17, 1983 under the laws of the Commonwealth of Pennsylvania as a bank holding company and has two wholly owned subsidiaries, S&T Bank and 9th Street Holdings, Inc. S&T also owns a one-half interest in Commonwealth Trust Credit Life Insurance Company (“CTCLIC”). S&T is registered as a financial holding company with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended (“BHCA”).

As of December 31, 2009, S&T had approximately $4.2 billion in total assets, $553.3 million in total shareholder’s equity and $3.3 billion in total deposits. S&T Bank deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the maximum extent provided by law.

S&T Bank is a full service bank with its Main Office at 800 Philadelphia Street, Indiana, Pennsylvania, providing services to its customers through a branch network of 55 offices located in Allegheny, Armstrong, Blair, Butler, Cambria, Clarion, Clearfield, Indiana, Jefferson and Westmoreland counties of Pennsylvania.

S&T Bank’s services include accepting time and demand deposit accounts, originating commercial and consumer loans, providing letters of credit, offering discount brokerage services, personal financial planning, credit card services and insurance products. Management believes that S&T Bank has a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of depositors (including federal, state and local governments). S&T Bank has not experienced significant fluctuations in deposits.

Total wealth management assets under management were approximately $1.3 billion at December 31, 2009. Wealth management services include services as executor and trustee under wills and deeds, guardian and custodian of employee benefits and other trust and brokerage services.

S&T Bank has four wholly owned subsidiaries, S&T Insurance Group, LLC; S&T Bancholdings, Inc.; S&T Professional Resources Group, LLC; and Stewart Capital Advisors, LLC. S&T Insurance Group, LLC, through its subsidiaries, offers a variety of insurance products. S&T Professional Resources Group, LLC markets software developed by S&T Bank; S&T Bancholdings, Inc. is an investment holding company; and Stewart Capital Advisors, LLC, is a registered investment advisor that manages private investment accounts for individuals and institutions and advises the Stewart Capital Mid Cap Fund.

 

Capital Purchase Program

 

On January 16, 2009, S&T completed a $108.7 million capital raise as a participant in the U.S. Treasury Capital Purchase Program (the “CPP”). In conjunction with S&T’s participation in the CPP, S&T issued to the U.S. Treasury 108,676 shares of S&T’s Series A Preferred Stock, having a liquidation amount per share equal to $1,000, for a total price of $108.7 million. The Series A Preferred Stock pays cumulative dividends at a rate of 5 percent per year for the first five years and thereafter at a rate of 9 percent per year. S&T calculated the estimated fair value of the preferred stock with a discounted cash flow model using a 10 percent discount rate determined by comparison to a group of similarly rated preferred securities in the banking sector. The level yield method is used to amortize the discount on the preferred stock over a period of five years. The Series A Preferred Stock is generally non-voting. Under changes made to the CPP by the American Recovery and Reinvestment Act of 2009 (“ARRA”), subject to approval by banking regulatory agencies, S&T can redeem the Series A Preferred Stock, plus any accrued and unpaid dividends, 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

 

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Item 1.  BUSINESS — continued

 

 

stock dividend (above the dividend amount prior to the 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.

As part of its purchase of the Series A Preferred Stock, the U.S. Treasury received a Warrant to purchase 517,012 shares of S&T’s common stock at an initial per share exercise price of $31.53. 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 Warrant expires ten years from the issuance date. Management engaged an outside expert to calculate the estimated fair value of the common stock warrants issued by S&T on January 16, 2009. A binomial pricing model was used resulting in an estimated fair value of $4.0 million.

 

Employees

 

As of December 31, 2009, S&T and its subsidiaries had 937 full-time equivalent employees. S&T provides a variety of employment benefits and considers its relationship with its employees to be good.

 

Access to United States Securities and Exchange Commission Filings

 

All reports filed electronically by S&T with the United States Securities and Exchange Commission (“SEC”), including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and our annual proxy statements, as well as any amendments to those reports, are accessible at no cost on our website at www.stbancorp.com. These filings are also accessible on the SEC’s website at www.sec.gov. You may read and copy any material S&T files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. S&T’s charters of the Audit Committee, the Compensation and Benefits Committee, the Nominating and Corporate Governance Committee, the Shareholder Communications Policy and the General Code of Conduct are also available on S&T’s website.

 

Supervision and Regulation

 

General

 

S&T and S&T Bank are each extensively regulated under federal and state law. The following describes certain aspects of that regulation and does not purport to be a complete description of all regulations that affect S&T and S&T Bank or all aspects of those regulations.

To the extent statutory or regulatory provisions are described, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions. Proposals to change the laws and regulations governing the banking industry are frequently raised in Congress, in state legislatures and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on S&T or S&T Bank is impossible to determine with any certainty.

Any change in applicable laws or regulations, or in the way such laws or regulations are interpreted by regulatory agencies or courts, may have a material impact on our business, operations and earnings.

 

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Item 1.  BUSINESS — continued

 

 

S&T

 

S&T is a bank holding company subject to regulation under the BHCA and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than 5 percent of the voting shares or substantially all of the assets of any additional bank, or merge or consolidate with another bank holding company, without the prior approval of the Federal Reserve Board. S&T has received such approvals from the Federal Reserve Board for passive ownership positions in Allegheny Valley Bancorp, Inc. (currently 14.78 percent) and CBT Financial Corporation (currently 5.37 percent).

As a bank holding company, S&T is expected under Federal Reserve Board regulation to serve as a source of financial and managerial strength to its subsidiary bank. A bank holding company is also expected to commit resources, including capital and other funds, to support its subsidiary bank in circumstances where it might not do so absent such a policy.

S&T elected to become a financial holding company under the BHCA in 2001 and thereby engage in a broader range of financial and other activities than are permissible for traditional bank holding companies. In order to qualify and maintain its status as a financial holding company, the depository institutions controlled by S&T must remain “well capitalized” and “well managed” (as defined in federal law) and have at least a “satisfactory” Community Reinvestment Act (“CRA”) rating. Refer to Item 8, Note 20 Regulatory Matters, for information concerning the current capital ratios of S&T and S&T Bank. No prior regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The BHCA identifies several activities as “financial in nature” including, among others, securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and sales agency; investment advisory activities; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking or a proper incident thereto. Banks may also engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is “well capitalized”, “well managed” and has at least a “satisfactory” CRA rating.

If S&T Bank ceases to be “well capitalized” or “well managed,” S&T will not be in compliance with the requirements of the BHCA regarding financial holding companies. If a financial holding company is notified by the Federal Reserve Bank of such a change in the ratings of any of its subsidiary banks, it must take certain corrective actions within specified time frames. Furthermore, if S&T Bank were to receive a CRA rating of less than “satisfactory,” then S&T would be prohibited from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations until the rating is raised to “satisfactory” or better.

S&T is presently engaged in nonbanking activities through the following six entities:

 

   

9th Street Holdings, Inc. was formed in June 1988 to hold and manage a group of investments previously owned by S&T Bank and to give S&T additional latitude to purchase other investments.

   

S&T Bancholdings, Inc. was formed in August 2002 to hold and manage a group of investments previously owned by S&T Bank and to give S&T additional latitude to purchase other investments.

   

CTCLIC is a joint venture with another financial institution, acting as a reinsurer of credit life, accident and health insurance policies sold by S&T Bank and the other institution.

   

S&T Insurance Group, LLC distributes high-quality life insurance and long-term disability income insurance products. During 2001, S&T Insurance Group, LLC and Attorneys Abstract Company, Inc. entered into an agreement to form S&T Settlement Services, LLC (“STSS”), with respective ownership interests of 55 percent and 45 percent. STSS is a title insurance agency servicing

 

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Item 1.  BUSINESS — continued

 

 

 

commercial customers. During 2002, S&T Insurance Group, LLC expanded into the property and casualty insurance business with the acquisition of Evergreen Insurance Associates, LLC.

   

S&T Professional Resources Group, LLC markets software developed by S&T Bank.

   

Stewart Capital Advisors, LLC was formed in August 2005 and is a registered investment advisor that manages private investment accounts for individuals and institutions and advises the Stewart Capital Mid Cap Fund.

 

S&T Bank

 

As a state-chartered, commercial bank, the deposits of which are insured by the FDIC, S&T Bank is subject to the supervision and regulation of the Pennsylvania Department of Banking (“PADB”) and the FDIC. S&T Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types, amount and terms and conditions of loans that may be granted and limits on the type of other activities in which S&T Bank may engage and the investments it may make.

S&T Bank is also subject to federal laws that limit the amount of transactions between itself and S&T or S&T’s nonbank subsidiaries. Under these provisions, transactions between a bank and its parent company or any single nonbank affiliate generally are limited to 10 percent of the bank subsidiary’s capital and surplus, and with respect to all transactions with affiliates, are limited to 20 percent of the bank subsidiary’s capital and surplus. Further, loans and extensions of credit from a bank to an affiliate generally are required to be secured by eligible collateral in specified amounts. Federal law also imposes similar restrictions on transactions between a bank and its financial subsidiaries. A bank, such as S&T Bank, also is prohibited from purchasing any “low-quality” asset from an affiliate. S&T Bank is in compliance with these provisions.

 

Insurance of Accounts; Depositor Preference

 

The deposits of S&T Bank are insured up to applicable limits per insured depositor by the FDIC. In October 2008, the FDIC increased FDIC deposit insurance coverage per separately insured depositor for all account types to $250,000. While initially stipulated to be in effect through December 31, 2009, this increase has been subsequently extended through December 31, 2013 (at which point it will revert to $100,000 thereafter for most accounts other than IRAs and certain other types of retirement accounts up to a maximum of $250,000, if not extended by Congress). Also, in October 2008, the FDIC introduced the Temporary Liquidity Guarantee Program (“TLGP”), which is designed to improve the functions of the credit markets and to strengthen confidence in the financial system. The TLGP has two components (both of which involve participation fees to be paid by the participating institution): (i) a transaction account guarantee program, providing a full guaranty through June 2010 of noninterest-bearing deposit transaction accounts, such as business payroll accounts, regardless of the amount on deposit and (ii) a debt guarantee program, providing a guarantee of certain newly issued senior unsecured debt of the Bank. S&T has elected to participate in the transaction account guarantee program.

As an FDIC-insured bank, S&T Bank is also subject to FDIC insurance assessments, which are imposed based upon the risk the institution poses to the Deposit Insurance Fund (“DIF”). Under this assessment system, risk is defined and measured using an institution’s supervisory ratings with certain other risk measures, including certain financial ratios. The annual rates for institutions in 2009 range from 12 basis points for “well managed,” “well capitalized” banks with the highest ratings, to 45 basis points for institutions posing the most risk to the DIF. The FDIC may raise or lower these assessment rates on a quarterly basis based on various factors to achieve a reserve ratio, which the FDIC currently has set at 1.25 percent of insured deposits. Due to recent bank failures and contingent loss reserves established by the FDIC against potential future bank failures, the reserve ratio is currently significantly below its target balance. Thus, in February 2009, the FDIC adopted a Final

 

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Item 1.  BUSINESS — continued

 

 

Rule on Assessments under which the quarterly initial base assessment rates increased substantially beginning in the second quarter of 2009. The FDIC then adopted a Final Rule on Special Assessment in May 2009, which imposed a 5 basis point special assessment on each institution’s assets minus Tier 1 capital as reported on the report of condition as of June 30, 2009, but capped the special assessment at 10 basis points times the institution’s assessment base for the second quarter 2009 risk-based assessment. On November 12, 2009, the FDIC Board of Directors adopted a final rule that required insured depository institutions to prepay, on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012, along with their quarterly risk-based assessment for the third quarter of 2009. The continued decline in the DIF balance may convince the FDIC to impose additional special emergency assessments in the future that could have a significant impact on S&T Bank’s capital levels and earnings. During 2009, the increase in FDIC annual rates and the special assessment, at 10 basis points, impacted S&T’s pretax earnings by $6.0 million and $2.0 million, respectively. The prepayment for S&T’s quarterly assessments amounted to $21.1 million and will be recognized as expense over a 3 year period.

In October 2008, in order to restore its reserve ratio and ensure that the DIF will be able to adequately cover losses from future bank failures, the FDIC proposed amendments to its deposit insurance rules to alter the way the assessment system differentiates risk among insured institutions and to change assessments rates, including base assessment rates. A uniform assessment increase for the first quarter of 2009 was adopted as a final rule in December 2008. The FDIC also proposed further base rate assessment adjustments effective April 1, 2009.

In addition to DIF assessments, the FDIC assesses all insured deposits a special assessment to fund the repayment of debt obligations of the Financing Corporation (“FICO”). FICO is a government-sponsored entity that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation in the 1990s. As of January 1, 2010, the annualized rate established by the FDIC for the FICO assessment was 1.06 basis points per $100 of insured deposits.

Under federal law, deposits and certain claims for administrative expenses and employee compensation against insured depository institutions are afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by any receiver appointed by regulatory authorities. Such priority creditors would include the FDIC.

 

Capital

 

The Federal Reserve Board and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to banking organizations they supervise. Under the risk-based capital requirements, both S&T and S&T Bank generally are required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8.00 percent. At least half of the total capital must be comprised of common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles, (“Tier 1 capital”). The remainder may consist of certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock, and a limited amount of the loan loss allowance (“Tier 2 capital” and, together with Tier 1 capital, “Total capital”). At December 31, 2009, S&T’s Tier 1 capital and Total capital ratios were 12.10 percent and 15.43 percent, respectively, and the ratios of Tier 1 capital and Total capital for S&T Bank were 8.05 percent and 11.39 percent, respectively.

In addition, each of the federal bank regulatory agencies has established minimum leverage capital ratio requirements for banking organizations. These requirements provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets equal to 3.00 percent for bank and bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing significant growth or expansion. All other banks and bank holding

 

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Item 1.  BUSINESS — continued

 

 

companies generally are required to maintain a leverage ratio of at least 100 to 200 basis points above the stated minimum. At December 31, 2009, S&T’s leverage ratio was 10.26 percent and S&T Bank’s leverage ratio was 6.81 percent.

Both the Federal Reserve Board and the FDIC’s risk-based capital standards explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by the agency in assessing an institution’s overall capital adequacy. The capital guidelines also provide that an institution’s exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a bank’s capital adequacy. The Federal Reserve Board has also issued additional capital guidelines for certain bank holding companies that engage in trading activities. S&T does not believe that consideration of these additional factors will affect the regulators’ assessment of S&T or S&T Bank’s capital position.

Federal regulators periodically propose amendments to the risk-based capital guidelines and the related regulatory framework and consider changes to the capital standards that could significantly increase the amount of capital needed to meet applicable standards. The timing of adoption, ultimate form and effect of any such proposed amendments cannot be predicted.

 

Payment of Dividends

 

S&T is a legal entity separate and distinct from its banking and other subsidiaries. A substantial portion of S&T’s revenues consist of dividend payments it receives from S&T Bank. S&T Bank, in turn, is subject to state laws and regulations that limit the amount of dividends it can pay to S&T. In addition, both S&T and S&T Bank are subject to various general regulatory policies relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The Federal Reserve Board has indicated that banking organizations should generally pay dividends only if (i) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. Thus, under certain circumstances based upon S&T’s financial condition, S&T’s ability to declare and pay quarterly dividends may require consultation with the Federal Reserve and may be prohibited by applicable Federal Reserve regulations. If S&T were to pay a dividend in contravention of Federal Reserve regulations, the Federal Reserve could raise supervisory concerns. In addition, prior to January 16, 2012, unless 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, the consent of the U.S. Treasury is required for S&T to increase its common stock dividend (above the dividend amount prior to the 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. During the year ended December 31, 2009, S&T Bank paid $25.4 million in cash dividends to S&T for dividends paid to common shareholders.

 

Other Safety and Soundness Regulations

 

There are a number of obligations and restrictions imposed on bank holding companies such as S&T and its depository institution subsidiary by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution becomes in danger of default or in default. Under current federal law for example, the federal banking agencies possess broad powers to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” as defined by the law. Under regulations established by the federal banking agencies, a “well capitalized” institution must have a Tier 1 capital ratio of at least 6.00 percent, a Total capital ratio of at least

 

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10.00 percent and a leverage ratio of at least 5.00 percent and must not be subject to a capital directive or order. An “adequately capitalized” institution must have a Tier 1 capital ratio of at least 4.00 percent, a Total capital ratio of at least 8.00 percent and a leverage ratio of at least 4.00 percent. The most highly-rated financial institutions minimum requirement for the leverage ratio is 3.00 percent. As of December 31, 2009, S&T and S&T Bank were classified as “well capitalized.” The classification of depository institutions is primarily for the purpose of applying the federal banking agencies’ prompt corrective action provisions and is not intended to be and should not be interpreted as a representation of overall financial condition or prospects of any financial institution.

The federal banking agencies’ prompt corrective action powers (which increase depending upon the degree to which an institution is undercapitalized) can include, inter alia, requiring an insured depository institution to adopt a capital restoration plan which cannot be approved unless guaranteed by the institution’s parent company; placing limits on asset growth and restrictions on activities, including restrictions on transactions with affiliates; restricting the interest rates the institution may pay on deposits; prohibiting the payment of principal or interest on subordinated debt; prohibiting the holding company from making capital distributions without prior regulatory approval; and, ultimately, appointing a receiver for the institution. For example, only a “well capitalized” depository institution may accept brokered deposits without prior regulatory approval.

The federal banking agencies have also adopted guidelines prescribing safety and soundness standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the guidelines require appropriate systems and practices to identify and manage specified risks and exposures. The guidelines prohibit excessive compensation as an unsafe and unsound practice and characterize compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the agencies have adopted regulations that authorize, but do not require an agency to order an institution that has been given notice by an agency that it is not in compliance with any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an “undercapitalized” institution is subject under the prompt corrective action provisions described above.

 

Regulatory Enforcement Authority

 

The enforcement powers available to federal banking agencies are substantial and include, among other things and in addition to other powers described herein, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banks and bank holding companies and “institution affiliated parties,” as defined in the Federal Deposit Insurance Act (“FDIA”). In general, these enforcement actions may be initiated for violations of laws and regulations, as well as engagement in unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

At the state level, the PADB also has broad enforcement powers over S&T Bank, including the power to impose fines and other civil and criminal penalties and to appoint a conservator or receiver.

 

Interstate Banking and Branching

 

The BHCA currently permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including certain nationwide and state-imposed deposit concentration limits. S&T Bank has the ability, subject to certain restrictions, to acquire by acquisition or merger, branches of banks located outside of Pennsylvania, its home state. The establishment of de novo interstate branches is also possible in those states where expressly permitted. Once a bank has established branches in a state through an

 

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Item 1.  BUSINESS — continued

 

 

interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law.

 

Community Reinvestment and Consumer Protection Laws

 

In connection with its lending activities, S&T Bank is subject to a number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. These include, among other laws, the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act and the CRA. In addition, rules developed by the federal banking agencies pursuant to federal law require disclosure of privacy policies to consumers and in some circumstances, allow consumers to prevent the disclosure of certain personal information to nonaffiliated third parties.

The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank’s record in meeting the credit needs of the communities served by the bank, including low and moderate-income neighborhoods. Furthermore, such assessment also is required of any bank that has applied, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch office. In the case of a bank holding company (including a financial holding company) applying for approval to acquire a bank or bank holding company, the Federal Reserve Board will assess the record of each subsidiary bank of the applicant bank holding company in considering the application. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve” or “unsatisfactory.” S&T Bank was rated “satisfactory” in its most recent CRA evaluation.

 

Anti-Money Laundering Rules

 

S&T Bank is subject to the Bank Secrecy Act, its implementing regulations and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001. Among other things, these laws and regulations require S&T Bank to take steps to prevent the use of S&T Bank to facilitate the flow of illegal or illicit money, to report large currency transactions and to file suspicious activity reports. S&T Bank is also required to develop and implement a comprehensive anti-money laundering compliance program. Banks must also have in place appropriate “know your customer” policies and procedures. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act of 2001 require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.

 

Government Actions and Legislation

 

The Emergency Economic Stabilization Act of 2008 (the “EES Act”), effective October 2008, allocated up to $700 billion towards purchasing and insuring assets held by financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Pursuant to authority granted under the EES Act, the U.S. Treasury announced the CPP whereby the U.S. Treasury agreed to purchase senior preferred shares from qualifying U.S. financial institutions. Each participating institution may sell to the U.S. Treasury an amount of senior preferred shares ranging from 1.0 percent to 3.0 percent of its September 30, 2008 risk-weighted assets. The preferred shares are generally nonvoting and pay an initial dividend rate of 5.0 percent per year for the first five years, increasing to 9.0 percent per year after year five. As part of the consideration for the shares, the U.S. Treasury requires the receipt of Warrants to acquire common stock from the participating institution having an aggregate market price equal to 15.0 percent of the amount of capital invested by the U.S. Treasury in the senior preferred shares, at an exercise price equal to the average trailing 20-trading day market price of the institution’s common stock at the time of issuance. Participating institutions must agree to certain limitations on executive compensation, repurchases of junior preferred or

 

PAGE 10


Item 1.  BUSINESS — continued

 

 

common stock and increases in common stock dividend payments. S&T applied to participate in the CPP and was approved to receive $108.7 million in exchange for the U.S. Treasury purchase of S&T senior preferred stock. The transaction closed on January 16, 2009.

Subsequently, the ARRA, signed into law in February 2009, allowed financial institutions such as S&T to redeem Series A Preferred Stock issued in the CPP, plus any accrued and unpaid dividends, at any time, without increasing common equity, subject to approval by banking regulatory agencies. If S&T only redeems a portion of the CPP investment, it must pay a minimum of 25 percent of the issuance price, or $27.2 million.

The government has also implemented the Homeowner Affordability and Stability Plan (“HASP”), a $75 billion federal program intended to support recovery in the housing market and ensure that eligible homeowners are able to continue to fulfill their mortgage obligations. HASP includes the following initiatives: (i) a refinance option for homeowners that are current in their mortgage payments and whose mortgages are owned by Fannie Mae or Freddie Mac; (ii) a homeowner stability initiative to prevent foreclosures and help eligible borrowers stay in their homes by offering loan modifications that reduce mortgage payments to more sustainable levels; and (iii) an increase in U.S. Treasury funding to Fannie Mae and Freddie Mac to allow them to lower mortgage rates. HASP also offers monetary incentives to mortgage servicers and mortgage holders for certain modifications of at-risk loans and would establish an insurance fund designed to reduce foreclosures.

Regulation of the financial services industry could undergo substantial changes in the near future. Legislation has been passed in the U.S. House of Representatives (“the House Bill”), and the U.S. Senate is expected to consider its version of the financial reform legislation (“the Senate Bill”) shortly. Such legislation would further increase regulation and oversight of the financial services industry and impose restrictions on the ability of firms within the industry to conduct business consistent with historical practices. For example, under the House Bill, a Consumer Financial Protection Agency would be established to regulate any person engaged in a “financial activity” in connection with a consumer financial product or service, including those that process financial services products and services. Although it is unclear at this time whether the Senate Bill would provide for such an agency, it is expected that the Senate Bill would include some consumer protection measures. Federal and state regulatory agencies also consistently propose and adopt changes to their regulations or change the manner in which existing regulations are applied. We cannot predict the substance or impact of pending or future legislation or regulation, or the application thereof, although enactment of the proposed legislation could affect how S&T and S&T Bank operate and could significantly increase costs, impede the efficiency of internal business processes, or limit our ability to pursue business opportunities in an efficient manner, any of which could materially and adversely affect our business, financial condition and results of operations.

 

Competition

 

S&T Bank competes with other local, regional and national financial service providers, such as other financial holding companies, commercial banks, savings associations, credit unions, finance companies and brokerage and insurance firms. Some of our competitors are not subject to the same level of regulation and oversight that is required of banks and bank holding companies, and are thus able to operate under lower cost structures. The financial service industry is likely to become more competitive as further technological advances enable more companies to provide financial services on a more efficient and convenient basis.

 

Item 1A. RISK FACTORS

 

 

Investments in S&T common stock involve risk. The following discussion highlights the risks management believe are material for our company, but do not necessarily include all risks that S&T may face.

 

PAGE 11


Item 1A.  RISK FACTORS — continued

 

 

The market price of S&T common stock may fluctuate significantly in response to a number of factors.

 

Our quarterly and annual operating results have varied significantly in the past and could vary significantly in the future, which makes it difficult for us to predict our future operating results. Our operating results may fluctuate due to a variety of factors, many of which are outside of our control, including the changing and recently volatile U.S. economic environment and changes in the residential and commercial real estate market, any of which may cause our stock price to fluctuate. If our operating results fall below the expectations of investors or securities analysts or below any guidance we may provide to the market, as has occurred in the past, the price of our common stock could decline substantially. Such a stock price decline could occur, and has occurred in the past, even when we have met our publicly stated earnings guidance. Stock price volatility may make it more difficult for an investor to resell our common stock when desired and at attractive prices. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:

 

   

changes in analysts’ estimates of financial performance

   

volatility of stock market prices and volumes

   

changes in market valuations of similar companies

   

changes in conditions in credit markets

   

new products or services offered in the banking and/or financial services industries

   

variations in quarterly or annual operating results

   

new litigation

   

changes in accounting policies or procedures as required by the Financial Accounting Standards Board (“FASB”) or other regulatory agencies

   

new legislation and/or regulatory changes

 

Recent legislation enacted in response to market and economic conditions may significantly affect S&T’s operations, financial condition and earnings.

 

Disruptions in the financial system during 2009 have resulted in significantly reduced business activity throughout the global and U.S. economies, which have the potential to significantly affect financial institutions. The EES Act was enacted to respond to this financial crisis, giving the U.S. Treasury the authority to purchase up to $700 billion of financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Several programs have since been initiated by the U.S. Treasury, the Federal Reserve Board and the FDIC to stabilize the financial system. The U.S. Treasury’s Program was created to invest up to $250 billion (of the $700 billion) into banks and savings institutions of all sizes. The FDIC is also temporarily providing a 100 percent guarantee of the senior debt of all FDIC insured institutions, as well as deposits in noninterest-bearing transaction deposit accounts under its TLGP. The Federal Reserve is operating various asset-based secured loan programs to provide liquidity to various consumer and commercial credit markets. S&T and S&T Bank are participating in the U.S. Treasury’s CPP and the FDIC’s TLGP.

As noted previously, legislation recently passed in the U.S. House of Representatives and under consideration by the U.S. Senate would further increase regulation and oversight of the financial services industry, imposing restrictions on the ability of institutions within the industry to conduct business consistent with historical practices, including aspects such as compensation, consumer protection regulations and mortgage regulation, among others. While the House Bill differs from what is expected to be passed by the U.S. Senate, the House Bill, if enacted, would eliminate the federal savings association charter, merge the Office of Thrift Supervision (“OTS”) into the Office of the Comptroller of the Currency (“OCC”), create a Consumer Financial Protection Agency and result in other significant regulatory restructuring.

 

PAGE 12


Item 1A.  RISK FACTORS — continued

 

 

It is not clear what impact the expected Congressional action will have on the financial markets or on the U.S. banking and financial services industries and the broader U.S. and global economies. These new laws, regulations and changes may increase our costs of regulatory compliance and of doing business and otherwise affect our operations. They may significantly affect the markets in which we do business, the markets for and value of our investments and our ongoing operations, costs and profitability.

 

Future governmental regulation and legislation could limit our growth.

 

S&T is subject to extensive state and federal regulation, supervision and legislation that govern nearly every aspect of our operations. The regulations are primarily intended to protect depositors, customers and the banking system as a whole, and not for the protection of shareholders. Failure to comply with applicable regulations could lead to penalties and damage to our reputation. Furthermore, the regulatory environment is constantly undergoing change and the impact of changes to laws and regulations, the interpretation of such laws or regulations or other actions by regulatory agencies could make regulatory compliance more difficult or expensive, and thus could affect S&T’s ability to deliver or expand services, or it could diminish the value of S&T’s business. The ramifications and uncertainties of the recent increase in government intervention in the U.S. financial system could also adversely affect S&T. See “Supervision and Regulation” within Item 1 for additional information.

 

Increases in FDIC insurance premiums may adversely affect our earnings.

 

During 2008 and continuing in 2009, higher levels of bank failures have dramatically increased resolution costs of the FDIC and depleted the DIF. In addition, the FDIC instituted two temporary programs to further insure customer deposits at FDIC insured banks: deposit accounts are now insured up to $250,000 per customer (up from $100,000) and noninterest-bearing transactional accounts are currently fully insured (unlimited coverage). These programs have placed additional stress on the DIF.

In order to maintain a strong funding position and restore reserve ratios of the DIF, the FDIC has increased assessment rates of insured institutions. In addition, on November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years’ worth of premiums to replenish the depleted insurance fund.

We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels. These announced increases and any future increases or required prepayments of FDIC insurance premiums may adversely impact our earnings.

 

We may experience increased delinquencies and credit losses.

 

Like other lenders, we face the risk that our customers will not repay their loans. Rising losses or leading indicators of rising losses (such as higher delinquencies, non-performing loans, or bankruptcy rates; lower collateral values; rising unemployment rates) may require us to increase our allowance for loan losses, which may degrade our profitability if we are unable to raise revenue or reduce costs to compensate for higher losses. In particular, we face the following risks in this area:

 

   

Missed payments. Our customers may miss payments. Loan charge-offs (including from bankruptcies) are generally preceded by missed payments or other indications of worsening financial condition. Our reported delinquency levels measure these trends. Customers are more likely to miss payments during an economic downturn. In addition, we face the risk that

 

PAGE 13


Item 1A.  RISK FACTORS — continued

 

 

 

consumer and commercial customer behavior may change (i.e. an increased unwillingness or inability to repay debt), causing a long-term rise in delinquencies and charge-offs.

   

Estimates of inherent losses. The credit quality of our portfolio can have a significant impact on our earnings. We allow for and reserve against credit risks based on our assessment of credit losses inherent in our loan portfolios. This process, which is critical to our financial results and condition, requires complex judgments, including forecasts of economic conditions, which may no longer be capable of accurate estimation. We may underestimate our inherent losses and fail to hold a loan loss allowance sufficient to account for these losses. Incorrect assumptions could lead to material underestimates of inherent losses and inadequate allowance for loan losses. In addition, our estimate of inherent losses impacts the amount of allowances we build to account for those losses. The increase or release of allowances impacts our current financial results.

   

Underwriting. Our ability to assess the credit worthiness of our customers may diminish. If the models and approaches we use to select, manage and underwrite our consumer and commercial customers become less predictive of future charge-offs (due, for example, to rapid changes in the economy, including the unemployment rate), our credit losses and returns may deteriorate.

   

Business mix. Our business mix could change in ways that could adversely affect credit losses. We participate in a mix of businesses with a broad range of credit loss characteristics. Consequently, changes in our business mix may change our charge-off rate.

   

Charge-off recognition. The rules governing charge-off recognition could change. We record charge-offs according to accounting and regulatory guidelines and rules. These guidelines and rules, including the Federal Financial Institutions Examination Council (“FFIEC”) Account Management Guidance, could require changes in our account management or loss allowance practices and cause our charge-offs to increase for reasons unrelated to the underlying performance of our portfolio. Such changes could have an adverse impact on our financial condition or results of operation.

   

Industry practices. Our charge-off and delinquency rates may be negatively impacted by industry developments, including new regulations applicable to our industry.

   

Collateral. Collateral could be insufficient to compensate us for loan losses. When customers default on their loans and we have collateral, we attempt to seize it. However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from our customers. Particularly with respect to our commercial lending and mortgage activities, decreases in real estate values could adversely affect the value of property used as collateral for our loans and investments. Thus, the recovery of such property could be insufficient to compensate us for the value of these loans.

   

Western Pennsylvania concentration. Although our lending is geographically diversified, in general, our commercial loan portfolio is concentrated in western Pennsylvania. The regional economic conditions in the western Pennsylvania area affect the demand for our commercial products and services as well as the ability of our customers to repay their commercial loans and the value of the collateral securing these loans. A prolonged decline in the general economic conditions of the region in which we operate could have a material adverse effect on the performance of our commercial loan portfolio and our results of operations.

 

Current levels of market volatility are unprecedented.

 

Dramatic declines in the U.S. housing market over the past two years, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by other financial institutions, including government-sponsored enterprises, as well as major commercial

 

PAGE 14


Item 1A.  RISK FACTORS — continued

 

 

and investment banks. Many lenders and institutional investors have reduced, and in some cases, ceased providing funding to borrowers, including other financial institutions, reflecting concern about the stability of financial markets, generally, and the strength of counterparties, specifically. This market turmoil and tightening of credit has led to an increased level of commercial and consumer delinquencies for financial institutions, a lack of confidence in the financial sector and increased volatility in the financial markets. The resulting economic pressure on consumers and lack of confidence in the financial markets may adversely affect S&T’s business, financial condition and results of operations. Specifically, the difficult market conditions may result in, among other things, deterioration in credit quality and/or a reduced demand for credit, which may have a resultant effect on S&T’s loan portfolio and allowance for loan losses.

 

Downturn in the local economies may adversely affect our business.

 

S&T’s business is concentrated in the western Pennsylvania area. As a result, its financial condition, results of operations and cash flows are subject to changes if there are changes in the economic conditions in this geographic region. A prolonged period of economic recession or other adverse economic conditions in this area could have a negative impact on S&T. S&T can provide no assurance that conditions in its market area economies will not deteriorate further in the future and that such deterioration would not have a material adverse effect on S&T.

 

The securities purchase agreement between S&T and the U.S. Treasury limits our ability to pay dividends on and repurchase our common stock.

 

The securities purchase agreement between S&T and the U.S. Treasury provides that prior to the earlier of (i) January 16, 2012 or (ii) the date on which all of the shares of the Series A Preferred Stock have been redeemed by S&T or transferred by the U.S. Treasury to third parties, we may not, without the consent of the U.S. Treasury: (a) increase the cash dividend on our common stock (above the dividend amount prior to the participation in the CPP), or (b) subject to limited exceptions, redeem, repurchase or otherwise acquire shares of our common stock or preferred stock other than the Series A Preferred Stock. In addition, we may only pay dividends on our common stock if we are current in our dividend payments on the Series A Preferred Stock. These restrictions, together with the potentially dilutive impact of the Warrant as described in the risk factor below, could have a negative effect on the value of our common stock. Moreover, holders of our common stock are entitled to receive dividends only when, as, and if declared by our Board of Directors. Although we have historically paid cash dividends on our common stock, we are not required to do so and our Board of Directors could reduce or eliminate our common stock dividend in the future.

 

We may be required to raise capital in the future, but that capital may not be available or may not be on acceptable terms when it is needed.

 

We are required by federal regulatory authorities to maintain adequate capital levels to support operations. Our ability to raise additional capital is dependent on capital market conditions at that time and on our financial performance. Current market conditions have made it harder to access capital, due to both decreased stock prices and the general decrease in available credit. If we cannot raise additional capital when needed, our ability to further expand operations through internal growth, acquisitions and deposit gathering could be materially impaired.

 

The Series A Preferred Stock impacts net income available to our common shareholders and earnings per common share, and the Warrant we issued to the U.S. Treasury may be dilutive to holders of our common stock.

 

The dividends declared on the Series A Preferred Stock will reduce the net income available to common shareholders and our earnings per common share. The Series A Preferred Stock will also

 

PAGE 15


Item 1A.  RISK FACTORS — continued

 

 

receive preferential treatment in the event of liquidation, dissolution or winding up of S&T. Additionally, the ownership interest of the existing holders of our common stock will be diluted to the extent the Warrant we issued to the U.S. Treasury in conjunction with the sale to the U.S. Treasury of the Series A Preferred Stock is exercised. The shares of common stock underlying the Warrant represent approximately 1.8 percent of the shares of our common stock outstanding as of February 9, 2010 (including the shares issuable upon exercise of the Warrant in total shares outstanding). Although the U.S. Treasury has agreed not to vote any of the shares of common stock it receives upon exercise of the Warrant, a transferee of any portion of the Warrant or of any shares of common stock acquired upon exercise of the Warrant is not bound by this restriction.

 

If S&T does not adjust to changes in the financial services industry, its financial performance may suffer.

 

S&T’s future financial performance will depend in part on its ability to adjust to the changes in the financial services industry that are expected as a result of the financial crisis. These adjustments may include expanding its scope of available financial services to its customers, and in adjusting products and services to meet current economic conditions, comply with new federal laws and regulations. In addition to other banks, competitors include security dealers, brokers, mortgage bankers, investment advisors, finance and insurance companies. The current environment is, in part, a result of the overall decline in economic activity, the absence of liquidity in the markets, changes in regulation, changes in technology and product delivery systems and continued consolidation among financial service providers.

 

Interest rate movements impact the earnings of S&T.

 

S&T is exposed to interest rate risk, through the operations of its banking subsidiary, since substantially all of S&T Bank’s assets and liabilities are monetary in nature. Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and value of financial instruments. S&T Bank’s earnings, like that of most financial institutions, largely depend on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings. In an increasing interest rate environment, the cost of funds sometimes increases more rapidly than the interest earned on the loans and securities because the primary source of funds are deposits with generally shorter maturities than the maturities on loans and investment securities. This could cause the net interest rate spread to compress and negatively impact S&T Bank’s profitability.

 

S&T’s business strategy includes growth plans through internal growth and acquisitions. Our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

 

S&T intends to continue pursuing a profitable growth strategy. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in growth stages of development. We cannot assure you that we will be able to expand our market presence in our existing markets or successfully enter new markets or that any such expansion will not adversely affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations and could adversely affect our ability to successfully implement our business strategy. Also, if we grow more slowly than anticipated, our operating results could be materially adversely affected.

Our ability to grow successfully will depend on a variety of factors, including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth. There can be no assurance that growth opportunities will be available or that growth will be successfully managed.

 

PAGE 16


Item 1B.  UNRESOLVED STAFF COMMENTS

 

 

There were no unresolved comments received from the SEC regarding S&T’s periodic or current reports within the last 180 days prior to December 31, 2009.

 

Item 2. PROPERTIES

 

 

S&T operates 55 banking offices in Allegheny, Armstrong, Blair, Butler, Cambria, Clarion, Clearfield, Indiana, Jefferson and Westmoreland counties of Pennsylvania.

 

S&T owns land and banking offices at the following 39 locations:

 

133 Philadelphia Street
Armagh, PA 15920
   111 Resort Plaza Drive
Blairsville, PA 15717
   205 East Market Street
Blairsville, PA 15717
   456 Main Street
Brockway, PA 15824
209 Allegheny Boulevard
Brookville, PA 15825
   256 Main Street
Brookville, PA 15825
   410 Main Street
Clarion, PA 16214
   650 Main Street
Clarion, PA 16214
85 Greensburg Street
Delmont, PA 15626
   100 South Chestnut Street
Derry, PA 15627
   35 West Scribner Avenue
DuBois, PA 15801
   614 Liberty Boulevard
DuBois, PA 15801
200 Patchway Road
Duncansville, PA 16635
   196 Industrial Park
Ebensburg, PA 15931
  

420 Pleasantview Drive &
Armstrong Street

Ford City, PA 16226

   920 Fifth Avenue
Ford City, PA 16226
701 East Pittsburgh Street
Greensburg, PA 15601
   34 North Main Street
Homer City, PA 15748
  

354 North Ave

Indiana, PA 15701

   355 North Fifth Street
Indiana, PA 15701
501 Philadelphia Street
Indiana, PA 15701
   800 Philadelphia Street
Indiana, PA 15701
   2175 Route 286 South
Indiana, PA 15701
   4021 Route 130
Irwin, PA 15642
9350 Lincoln Highway
Irwin, PA 15642
   30 Towne Center Drive
Leechburg, PA 15656
   225 Lucerne Road
Lucernemines, PA 15754
   4385 Old Wm. Penn Hwy
Monroeville, PA 15146
4251 Old Wm. Penn Hwy
Murrysville, PA 15668
   628 Broad Street New
Bethlehem, PA 16242
   301 Unity Center Road
Pittsburgh, PA 15239
   7660 Saltsburg Road
Pittsburgh, PA 15239
12262 Frankstown Road
Pittsburgh, PA 15235
  

232 North Hampton

Avenue

Punxsutawney, PA 15767

   539 West Mahoning Street
Punxsutawney, PA 15767
   418 Main Street
Reynoldsville, PA 15851

602 Salt Street

Saltsburg, PA 15681

   2190 Hulton Road
Verona, PA 15147
   100 South Fourth Street
Youngwood, PA 15697
  

 

S&T leases land where S&T owns the banking offices and remote ATM buildings at the following 11 locations:

 

1100 Logan Boulevard
Altoona, PA 16602
   220 New Castle Road
Butler, PA 16001
   8th & Merle Street
Clarion, PA 16214
   229 Westmoreland Drive,
Route 30 Greensburg,
PA 15601
835 Hospital Road
Indiana, PA 15701
   1107 Wayne Avenue
Indiana, PA 15701
   4580 Broadway Boulevard
Monroeville, PA 15146
   1077 Freeport Road
Pittsburgh, PA 15238
2320 Route 286
Pittsburgh, PA 15239
   12550 Perry Highway
Wexford, PA 15090
   2003 Lincoln Way
White Oak, PA 15131
  

 

PAGE 17


Item 2. PROPERTIES — continued

 

 

S&T leases land and banking offices at the following 15 locations:

 

Coral Reef & Crooked

Island Roads

DuBois, PA 15801

  

DuBois Mall

5522 Shaffer Road,
Suite 99
DuBois, PA 15801

  

20 North Pennsylvania
Avenue

Greensburg, PA 15601

   4589 Route 136
Greensburg, PA 15601

2388 Route 286

Holiday Park, PA 15239

   324 North Fourth Street
Indiana, PA 15701
   3100 Oakland Avenue
Indiana, PA 15701
   309 Main Street
Irwin, PA 15642
2000 Penny Lane
Jeannette, PA 15644
   12 Hilltop Plaza
Kittanning, PA 16201
   3884 Route 30 East
Latrobe, PA 15650
   Two Gateway Center
603 Stanwix Street,
Suite 125
Pittsburgh, PA 15222

Shadyside Village

820 South Aiken Avenue
Pittsburgh, PA 15232

   6306 Forbes Avenue
Pittsburgh, PA 15217
   2001 Lincoln Way
White Oak, PA 15131
  

 

Item 3. LEGAL PROCEEDINGS

 

 

The nature of our business generates a certain amount of litigation involving matters arising in the ordinary course of business. However, in management’s opinion, there are no proceedings pending to which S&T is a party or to which our property is subject, which, if determined adversely to S&T, would be material in relation to our shareholders’ equity or financial condition. In addition, no material proceedings are pending nor are known to be threatened or contemplated against us by governmental authorities or other parties.

 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

 

There were no matters during the fourth quarter of the fiscal year covered by this report that were submitted to a vote of our shareholders through solicitation of proxies or otherwise.

 

PAGE 18


PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

 

Stock Prices and Dividend Information

 

S&T’s common stock is listed on the NASDAQ Global Select Market System (“NASDAQ”) under the symbol STBA. The range of sale prices for the years 2009 and 2008 is set forth in the table below and is based upon information obtained from NASDAQ. As of the close of business on February 9, 2010, there were 3,177 shareholders of record of S&T. Dividends paid by S&T are primarily provided from S&T Bank’s dividends to S&T. The payment of dividends by S&T Bank to S&T is subject to the restrictions described in Item 8, Note 14 Dividend and Loan Restrictions. The cash dividends declared shown below represent the historical per share amounts for S&T common stock.

 

     Price Range of
Common Stock
   Cash
Dividends
Declared
 
2009    Low    High   

Fourth quarter

   $ 12.15    $ 17.82    $ 0.00 (1) 

Third quarter

     10.49      18.25      0.15   

Second quarter

     11.62      25.24      0.15   

First quarter

     17.55      35.54      0.31   
2008                    

Fourth quarter

   $ 25.37    $ 38.22    $ 0.31   

Third quarter

     25.00      47.09      0.31   

Second quarter

     29.04      35.58      0.31   

First quarter

     25.78      34.09      0.31   
(1)

S&T’s Board of Directors (the “Board”) approved a change in timing of the declaration and payment of dividends to provide better alignment with quarterly earnings beginning in the fourth quarter 2009. The Board declared a $0.15 per common share cash dividend at its meeting held January 18, 2010. The dividend is payable February 25, 2010 to common shareholders of record on February 1, 2010.

 

PAGE 19


Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES — continued

 

 

Five-Year Cumulative Total Return

 

The following chart compares the cumulative total shareholder return on S&T common stock with the cumulative total shareholder return of the NASDAQ Composite Index and NASDAQ Bank Index(1) assuming a $100 investment in each on December 31, 2004.

 

LOGO

 

            2004    2005    2006    2007    2008    2009

STBA

      $ 100    $ 101    $ 98    $ 81    $ 108    $ 54

Nasdaq Composite Index

        100      101      111      122      72      104

Nasdaq Bank Index

        100      96      106      83      63      51

 

(1)

The NASDAQ Bank Index contains securities of NASDAQ-listed companies classified according to the Industry Classification Benchmark as Banks. These companies include banks providing a broad range of financial services, including retail banking, loans and money transmissions.

 

During 2009 and 2008, S&T’s Board did not authorize any additional buyback programs. On June 18, 2007, S&T’s Board authorized a buyback program of one million shares until June 30, 2008. During 2007, S&T repurchased 971,400 shares at an average cost of $32.74 per share. During 2009, S&T reissued 113,626 shares primarily through restricted stock awards and shares sold for the dividend reinvestment and thrift plans. During 2008, S&T reissued 2,751,749 shares to the former IBT shareholders and issued 330,092 shares through the exercise of employee stock options.

 

PAGE 20


Item 6.  SELECTED FINANCIAL DATA

 

 

CONSOLIDATED STATEMENTS OF INCOME

 

Years Ended December 31    2009     2008    2007    2006    2005
(dollars in thousands, except per share data)                          

Interest income

   $ 195,087      $ 216,118    $ 215,605    $ 204,702    $ 172,122

Interest expense

     49,105        72,171      99,167      91,584      59,514

Provision for loan losses

     72,354        12,878      5,812      9,380      5,000

Net Interest Income After Provision for Loan Losses

     73,628        131,069      110,626      103,738      107,608

Noninterest income

     38,580        37,452      40,605      40,390      37,386

Noninterest expense

     108,126        83,801      73,460      69,279      62,464

Income Before Taxes

     4,082        84,720      77,771      74,849      82,530

(Benefit) provision for income taxes

     (3,869     24,517      21,627      21,513      24,287

Net Income

     7,951        60,203      56,144      53,336      58,243

Preferred stock dividends and amortization of discount

     5,913                      

Net Income Available to Common Shareholders

   $ 2,038      $ 60,203    $ 56,144    $ 53,336    $ 58,243

Per Share Data

                                   

Common earnings per share—basic

   $ 0.07      $ 2.30    $ 2.27    $ 2.07    $ 2.21

Common earnings per share—diluted

     0.07        2.28      2.26      2.06      2.18

Dividends declared per common share

     0.61        1.24      1.21      1.17      1.13

Common book value

     16.14        16.24      13.75      13.37      13.41

 

CONSOLIDATED BALANCE SHEETS

 

December 31    2009    2008    2007    2006    2005
(dollars in thousands)                         

Total assets

   $ 4,170,475    $ 4,438,368    $ 3,407,621    $ 3,338,543    $ 3,194,979

Securities available-for-sale

     354,860      452,713      358,822      432,045      481,257

Goodwill

     165,167      163,546      50,087      49,955      49,073

Net loans

     3,344,827      3,526,027      2,762,594      2,633,071      2,454,934

Total deposits

     3,304,541      3,228,416      2,621,825      2,565,306      2,418,884

Securities sold under repurchase agreements and federal funds purchased

     44,935      113,419      100,258      133,021      137,829

Short-term borrowings

     51,300      308,475      80,000      55,000      150,000

Long-term borrowings

     85,894      180,331      201,021      171,941      83,776

Junior subordinated debt securities

     90,619      90,619      25,000      25,000     

Total shareholders’ equity

     553,318      448,694      337,560      339,051      352,421

 

 

PAGE 21


Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

Management’s Discussion and Analysis represents an overview of the consolidated results of operations and financial condition of S&T. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes presented in Item 8 of this Report. Results of operations for the periods included in this review are not necessarily indicative of results to be obtained during any future periods.

 

IMPORTANT NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K 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-K 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 then actually known to us. 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.

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;

   

credit losses;

   

sources of liquidity;

   

legislation affecting the financial services industry as a whole and/or S&T and its subsidiaries individually or collectively;

   

regulatory supervision and oversight, including required capital levels;

   

increasing price and product/service competition by competitors, 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;

   

the mix of products and services;

   

containing costs and expenses;

   

governmental and public policy changes, including environmental regulations;

   

reliance on large customers;

   

technological, implementation and cost and financial risks in large, multi-year contracts;

   

the outcome of pending and future litigation and governmental proceedings;

   

continued availability of financing;

   

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

   

changes in the local economy in the western Pennsylvania area;

   

managing our internal growth and acquisitions;

 

PAGE 22


Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

   

general economic or business conditions, either nationally or regionally, 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 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 JUDGMENTS

 

S&T’s Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Certain policies inherently are based to a greater extent on estimates, assumptions and judgments of management and, as such, have a greater possibility of producing results that could be materially different than originally reported.

The most significant accounting policies followed by S&T are presented in Note 1 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements, which is included in Item 8 of the Report. These policies, along with the disclosures presented in the Notes to Consolidated Financial Statements, provide information on how significant assets and liabilities are valued in the Consolidated Financial Statements and how those values are determined.

Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions and where changes in those estimates and assumptions could have a significant impact on the Consolidated Financial Statements. Management currently views the determination of the securities valuation, allowance for loan losses, goodwill and other intangible assets and income taxes to be critical accounting policies.

 

Securities Valuation

 

Management determines the appropriate classification of securities at the time of purchase. All securities, including both debt and equity securities, are classified as available-for-sale securities. Such securities are carried at estimated fair value with net unrealized gains and losses deemed to be temporary reported separately as a component of other comprehensive income, net of tax. Realized gains and losses on the sale of available-for-sale securities and other-than-temporary impairment (“OTTI”) charges are recorded within noninterest income in the Consolidated Statements of Income. Realized gains and losses on the sale of securities are determined using the specific-identification method.

Management systematically evaluates securities for OTTI on a quarterly basis. S&T’s policy for OTTI within the marketable equity securities portfolio generally requires an impairment charge when the security is in a loss position for 12 consecutive months, unless facts and circumstances would suggest the need for an OTTI prior to that time. S&T’s policy for OTTI within the debt securities

 

PAGE 23


Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

portfolio is based upon a number of factors, including but not limited to, the length of time and extent to which the estimated 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 the security’s ability to recover any decline in its estimated fair value, whether management intends to sell the security and it is more likely than not that management will be required to sell the investment security prior to the security recovery. If the financial markets continue to experience deterioration, additional charges to income could occur in future periods.

 

Allowance for Loan Losses

 

The allowance for loan losses addresses credit losses inherent in the existing loan portfolio and is presented as a reserve against loans on the Consolidated Balance Sheets. The liability for loss on loan commitments represents management’s estimate of probable losses associated with future advances against loan commitments. Determination of an adequate allowance for loan losses and liability for loss on loan commitments is inherently subjective, as it requires estimations of occurrence of future events, as well as timing of such events.

The allowance is increased by a provision charged to expense and reduced by charge-offs, net of recoveries. S&T’s periodic evaluation of the adequacy of the allowance for loan losses is determined by management through evaluation of the loss exposure on individual impaired, nonperforming, delinquent and high-dollar loans; review of risk conditions and business trends; historical loss experience and; growth and composition of the loan portfolio, as well as other relevant factors.

A quantitative analysis is utilized to support the adequacy of the allowance for loan losses. This analysis includes a review of the historical charge-offs that have occurred within segmented portfolios over the last five years. Management also assesses qualitative factors such as unemployment, non-accrual, loan growth, vacancy, classified loan, bank loss/recovery, delinquency and out of state risk trends. The allowance established for individual impaired loans reflects expected losses resulting from analyses developed through specific credit allocations for individual loans. The specific credit allocations are based on regular analysis of all loans over a fixed dollar amount, where the internal credit rating is at or below a predetermined classification. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific impaired loans, including estimating the amount and timing of future cash flows, current estimated fair value of the loan and collateral values. The evaluation of these components of the allowance requires considerable judgment in order to estimate inherent loss exposures. Current risk factors, trends in risk ratings and historical charge-off experiences are considered in the determination of the allowance for loan losses.

The allowance for loan losses at December 31, 2009 includes $50.8 million or 85 percent of the allowance allocated to commercial and industrial and commercial real estate loans. These loans are generally larger in size and more vulnerable to an economic slowdown. The ability for customers to repay commercial loans is more dependent upon the success of their business, continuing income and general economic conditions. Accordingly, the risk of loss is higher on such loans than on residential real estate loans, which generally incur lower losses in the event of foreclosure as the collateral value typically exceeds the loan amounts.

There are many factors affecting the allowance for loan losses; some are quantitative, while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all of the factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses could be required and could adversely affect S&T’s earnings or financial position in future periods.

 

PAGE 24


Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

Goodwill and Other Intangible Assets

 

As of December 31, 2009, S&T had $9.4 million of core deposit and other intangible assets subject to amortization. S&T determined the amount of identifiable intangible assets at the time of acquisition based upon independent core deposit and insurance contract analyses. Intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. No triggering events occurred during the years ended December 31, 2009, 2008 and 2007, requiring an impairment analysis.

S&T’s goodwill relates to value inherent in the banking and insurance businesses and the value is dependent upon S&T’s ability to provide quality, cost-effective services in the face of free competition from other market participants on a regional basis. This ability relies upon continuing investments in processing systems, the development of value-added service features and the ease of use of S&T’s services. As such, goodwill value is supported ultimately by revenue that is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill, which could adversely impact earnings in future periods.

The carrying value of goodwill is tested annually for impairment each October 1 or more frequently if indicators of impairment are present. The evaluation for impairment involves comparing the current estimated fair value of each reporting unit to its carrying value, including goodwill. S&T has three reporting units including: a Community Bank, Wealth Management and an Insurance Agency. At December 31, 2009, S&T had goodwill of $165.2 million, including $161.1 million at the Community Bank, representing 98 percent of total goodwill and $4.1 million at the Insurance Agency, representing 2 percent of total goodwill. If the current estimated fair value of a reporting unit exceeds its carrying value, no additional testing is required and an impairment loss is not recorded. If the estimated fair value of a reporting unit is less than the carrying value, further valuation procedures are performed and could result in an impairment of goodwill being recorded. Further valuation procedures would include allocating the estimated fair value to all assets and liabilities of the reporting unit to determine an implied goodwill value. If the implied goodwill value of a reporting unit is less than the carrying amount of that goodwill, an impairment loss is recognized in an amount equal to that excess. During the year, and on October 1, management’s analysis concluded that the estimated fair value exceeded the carrying value. As such, no goodwill impairment was recorded.

The current economic climate significantly impacted S&T’s business beginning in the first quarter of 2009. S&T reported an unprecedented net loss, primarily due to a significant deterioration in our loan portfolio. Concurrently, S&T experienced a significant decline in our market capitalization and our stock traded below common book value. Such events triggered a need to perform a step 1 valuation of goodwill impairment. Accordingly, S&T engaged a qualified third party valuation expert to perform a valuation of S&T’s Community Bank reporting unit as of April 30, 2009.

The third party expert utilized a valuation methodology consistent with current accounting literature to determine the estimated fair value of the reporting units. The valuation used both a market and income approach. The methodology consisted of techniques using comparable transactions, comparable peer analysis and a discounted future earnings analysis. The discounted future earnings analysis considered the costs of equity and weighted-average costs of capital to determine an appropriate discount rate. Further, the model assumed estimates of future growth rates that if not achieved could significantly impact the valuation. The valuation model is based upon estimates and is highly judgmental. The valuation resulted in the fair value of the Community Banking reporting unit exceeding carrying value by approximately 51 percent.

During the fourth quarter, management engaged the third party valuation expert to update the previous valuation model as our market capitalization was 3.5 percent above our carrying value. Further, certain assumptions used in the previous report may have changed, including the financial

 

PAGE 25


Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

forecast and the overall economic climate. The valuation techniques used were consistent with those described above and resulted in the estimated fair value of the Community Bank reporting unit exceeding its carrying value by approximately 10 percent. As such, no goodwill impairment was recorded.

The financial services industry and securities markets continue to be adversely affected by declining values of nearly all asset classes. If current economic conditions continue to result in a prolonged period of economic weakness, S&T’s business segments, including the Community Banking segment, may be adversely affected. This may result in impairment of goodwill and other intangible assets in the future. Any resulting impairment loss could have a material adverse impact on S&T’s financial condition and its results of operations.

 

Income Taxes

 

S&T estimates income tax expense based on amounts expected to be owed to the tax jurisdictions where S&T conducts business. On a quarterly basis, management assesses the reasonableness of its effective tax rate based upon its current estimate of the amount and components of net income, tax credits and the applicable statutory tax rates expected for the full year.

Deferred income tax assets and liabilities are determined using the asset and liability method and are reported in the Consolidated Balance Sheets. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities and recognizes enacted changes in tax rate and laws. Deferred tax assets are recognized to the extent they exist and are subject to a valuation allowance based on management’s judgment that realization is more likely than not.

Accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in other liabilities in the Consolidated Balance Sheets. S&T evaluates and assesses the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information and maintains tax accruals consistent with its evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance. These changes, when they occur, can affect deferred taxes and accrued taxes, as well as the current period’s income tax expense and can be significant to the operating results of S&T.

Tax positions are recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

 

RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS

 

Note 1 Summary of Significant Accounting Policies, Recently Issued Accounting Pronouncements in the Notes to the Consolidated Financial Statements, which is included in Item 8 of this Report, discusses new accounting pronouncements adopted by S&T and the expected impact of accounting pronouncements recently issued or proposed, but not yet required to be adopted.

 

EXECUTIVE OVERVIEW

 

S&T is a financial holding company with its headquarters located in Indiana, Pennsylvania with assets of approximately $4.2 billion at December 31, 2009. S&T provides a full range of financial services through a branch network of 55 offices located in Allegheny, Armstrong, Blair, Butler, Cambria, Clarion, Clearfield, Indiana, Jefferson and Westmoreland counties of Pennsylvania. S&T provides full

 

PAGE 26


Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

service retail and commercial banking products as well as cash management services; insurance; estate planning and administration; employee benefit investment management and administration; corporate services; and other fiduciary services. S&T earns revenue primarily from interest on loans, security investments and fees charged for financial services provided to our customers. Offsetting these revenues are the cost of deposits and other funding sources, provision for loan losses as well as 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 our shareholders includes: increasing loans and core deposits with sufficient interest rate spreads, controlling loan delinquency and loan losses, controlling operating expenses and expanding the business through new de novo branching, mergers and acquisitions, introduction of new products and services and expansion of our products and services provided to our existing customers. S&T’s common stock trades on the Nasdaq Global Select Market under the symbol “STBA.”

Recent turbulence in significant portions of the global financial and real estate markets has adversely impacted our performance, primarily due to higher provision for loan losses, which resulted from the significant increase in loan charge-offs and the general deterioration of the credit quality of the loan portfolio. The area of commercial loans has been and continues to be the subject of considerable management focus and review. During 2009, S&T implemented or enhanced various new policies and procedures including: monitoring, funding, risk ratings, stress testing and compliance for the area of commercial loans. Nonperforming assets totaled $95.4 million or 2.29 percent of total assets at December 31, 2009 as compared to $43.3 million or 0.98 percent at December 31, 2008.

Earnings assets have decreased $262.2 million over the past 12 months, driven by a $164.3 million decrease in loans and $97.9 million decrease in investment securities. The loan decrease is primarily due to reduced demand for commercial real estate financing and development in the market and less credit demand and utilization by businesses responding to the recessionary economic environment. A significant portion of maturing investment securities were not replaced in 2009 as the risk and reward for leveraging activities was significantly reduced in a volatile interest rate environment.

Investment security losses for 2009 were $5.1 million compared to $1.7 million of losses during 2008. Included in the 2009 results is $5.3 million of OTTI charges on 17 bank equity holdings. The equity securities portfolio currently has an estimated fair value of $12.2 million at December 31, 2009, as compared to $14.9 million at December 31, 2008. During the past two years, S&T has implemented a strategy to methodically sell holdings in this portfolio and only retain strategic positions in bank holding companies within our market area.

On January 16, 2009, S&T completed a $108.7 million capital raise as a participant in the U.S. Treasury Capital Purchase Program (the “CPP”). See Item 1. Business, Capital Purchase Program for additional information.

During 2009, S&T has reduced borrowings since participation in the CPP provided increased liquidity. The decrease in borrowings is also the result of decreased loan demand as consumers and businesses react to the economic slowdown, as well as maturing investment securities that were not replaced as an S&T Asset Liability Committee (“ALCO”) strategy to mitigate interest rate and liquidity risk. As a result, total assets at December 31, 2009 decreased from total assets at December 31, 2008 from $4.4 billion to $4.2 billion. S&T plans to obtain regulatory approval for repayment of these funds once a positive direction in the economy becomes clearer and S&T returns to more normalized earnings levels.

There are many uncertainties regarding the economy as S&T enters 2010. S&T continually strives to be well positioned for changes in both the economy and interest rates, regardless of the timing or direction of these changes. Management continually assesses our balance sheet, capital, liquidity and operation infrastructures in order to be positioned to take advantage of internal or acquisition growth

 

PAGE 27


Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

opportunities. During 2009 liquidity improved due to participation in the CPP, decreases in loan and security balances, stable deposit levels and a larger borrowing capacity at the FHLB which resulted from reduced borrowings. At December 31, 2009, S&T is in an asset sensitive position which will well position us for any potential increase in interest rates in the future.

There are many factors that could influence our results, both positively and negatively, in 2010. Because the majority of our revenue comes from net interest income, internally generated loan and deposit growth and the mix of that growth are major factors on our operations and financial condition. S&T has directed a fair amount of focus and resources in planning for 2010 to improve our generation and retention of low cost core deposits. On the other hand, a continuation of the economic slowdown, regionally or nationally, could cause deterioration in the asset quality measurements. S&T recognizes that our shift to a greater dependence on commercial loans in recent years exposes us to larger credit risks and greater swings in nonperforming loans and loan charge-offs when problems do occur.

 

RESULTS OF OPERATIONS

Year Ended December 31, 2009

 

Net Income

 

S&T had net income available to common shareholders of $2.0 million or $0.07 diluted earnings per share for 2009 as compared to net income available to common shareholders of $60.2 million or $2.28 diluted earnings per share for 2008. The decrease in net income for 2009 compared to 2008 was primarily the result of higher provision for loan losses, which was necessitated by the significant increase in loan charge-offs and the general deterioration of the credit quality in the loan portfolio, increased Federal Deposit Insurance Corporation (“FDIC”) premiums and surcharges and OTTI for equity investments.

 

Return on Equity and Assets

 

The table below presents consolidated operating and capital ratios of S&T for each of the last three years:

 

     Years Ended December 31  
      2009     2008     2007  

Common return on average assets

   0.05   1.52   1.68

Common return on average equity

   0.37   14.77   16.97

Dividend payout ratio

   12.48   53.66   53.06

Common equity to asset ratio

   10.74   10.11   9.91

 

Net Interest Income

 

     Years Ended December 31
      2009    2008    2007
(dollars in thousands)               

Interest income per Consolidated Statements of Income

   $ 195,087    $ 216,118    $ 215,605

Adjustment to fully taxable-equivalent basis

     5,202      5,147      4,727

Interest income adjusted to fully taxable-equivalent basis

     200,289      221,265      220,332

Interest expense

     49,105      72,171      99,167

Net Interest Income Adjusted to Fully Taxable-equivalent Basis

   $ 151,184    $ 149,094    $ 121,165

 

PAGE 28


Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

Average Balance Sheet and Net Interest Income Analysis

 

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

 

    December 31  
     2009     2008     2007  
  Average
Balance
    Interest   Yield/
Rate
    Average
Balance
    Interest   Yield/
Rate
    Average
Balance
    Interest   Yield/
Rate
 
(dollars in thousands)                                                

ASSETS

                 

Loans(1)(2)

  $ 3,473,169      $ 182,767   5.26   $ 3,230,791      $ 201,547   6.24   $ 2,731,807      $ 202,032   7.40

Taxable investment securities

    286,295        11,897   4.16     303,442        13,651   4.50     301,115        13,576   4.51

Tax-exempt investment securities(2)

    103,832        5,624   5.42     105,781        5,429   5.13     81,200        4,001   4.93

Federal Home Loan Bank

    23,542              20,733        636   3.07     12,144        687   5.66

Federal funds sold

    258        1   0.25     124        2   1.90     728        36   4.92

Total Interest-earning Assets(3)

    3,887,096        200,289   5.15     3,660,871        221,265   6.04     3,126,994        220,332   7.05

Noninterest-earning assets:

                 

Cash and due from banks

    67,405            60,636            53,702       

Premises and equipment, net

    41,915            41,702            36,320       

Other assets

    320,857            246,895            154,158       

Less allowance for loan losses

    (57,985                 (39,102                 (35,072            

Total

  $ 4,259,288                  $ 3,971,002                  $ 3,336,102               

LIABILITIES AND SHAREHOLDERS’ EQUITY

             

Interest-bearing liabilities:

                 

NOW/Money market accounts

  $ 485,742      $ 1,616   0.33   $ 395,629      $ 3,022   0.76   $ 295,099      $ 3,524   1.19

Savings deposits

    758,216        3,465   0.46     865,839        11,692   1.35     922,333        33,956   3.68

Certificates of deposit

    1,367,372        33,358   2.44     1,102,717        37,650   3.41     934,673        42,106   4.51

Federal funds purchased

    115        1   0.79     4,886        122   2.52     14,485        786   5.42

Securities sold under repurchase agreements

    86,616        140   0.16     124,005        1,627   1.31     81,686        3,446   4.22

Short-term borrowings

    104,217        544   0.52     227,918        4,263   1.87     44,214        2,325   5.26

Long-term borrowings

    127,045        5,568   4.38     196,901        9,416   4.78     211,347        11,329   5.36

Subordinated debt

    90,619        4,413   4.87     69,872        4,379   6.27     25,000        1,695   6.78

Total Interest-bearing Liabilities(3)

    3,019,942        49,105   1.63     2,987,767        72,171   2.42     2,528,837        99,167   3.92

Noninterest-bearing liabilities:

                 

Demand deposits

    637,434            533,096            441,647       

Other

    57,377            42,478            34,866       

Shareholders’ equity

    544,535                    407,661                    330,752               

Total

  $ 4,259,288                  $ 3,971,002                  $ 3,336,102               

Net interest income

          $ 151,184                 $ 149,094                 $ 121,165      

Net yield on interest-earning assets

                3.89                 4.07                 3.87
(1) For the purpose of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.
(2) Tax-exempt income is on a fully taxable-equivalent basis, including the dividend-received deduction for equity securities, using the statutory federal corporate income tax rate of 35 percent for 2009, 2008 and 2007.
(3) Yields are calculated using historical cost basis.

 

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The following tables present a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:

 

      2009 Compared to 2008
Increase (Decrease) Due to(1)
    2008 Compared to 2007
Increase (Decrease) Due to(1)
 
   Volume     Rate     Net     Volume     Rate     Net  
(dollars in thousands)                                     

Interest earned on:

            

Loans(2)

   $ 15,120      $ (33,900   $ (18,780   $ 36,903      $ (37,388   $ (485

Taxable investment securities

     (771     (983     (1,754     105        (30     75   

Tax-exempt investment securities(2)

     (100     295        195        1,211        217        1,428   

Other investments

     86        (722     (636     486        (537     (51

Federal funds sold

     3        (4     (1     (30     (4     (34

Total Interest-earning Assets

     14,338        (35,314     (20,976     38,675        (37,742     933   

Interest paid on:

            

NOW/Money market accounts

     688        (2,094     (1,406     1,201        (1,703     (502

Savings deposits

     (1,453     (6,774     (8,227     (2,080     (20,184     (22,264

Certificates of deposit

     9,036        (13,328     (4,292     7,570        (12,026     (4,456

Federal funds purchased

     (119     (2     (121     (521     (143     (664

Securities sold under repurchase agreements

     (491     (996     (1,487     1,785        (3,604     (1,819

Short-term borrowings

     (2,314     (1,405     (3,719     9,660        (7,722     1,938   

Long-term borrowings

     (3,341     (507     (3,848     (774     (1,139     (1,913

Subordinated debt

     1,300        (1,266     34        3,042        (358     2,684   

Total Interest-bearing Liabilities

     3,306        (26,372     (23,066     19,883        (46,879     (26,996

Change in Net Interest Income

   $ 11,032      $ (8,942   $ 2,090      $ 18,792      $ 9,137      $ 27,929   
(1) 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.
(2) Tax-exempt income is on a fully taxable-equivalent basis using the statutory federal corporate income tax rate of 35 percent for 2009, 2008 and 2007.

 

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 volume of interest-earning assets and interest-bearing liabilities and changes in interest yields and rates. Therefore, maintaining consistent spreads between earning assets and interest-bearing liabilities is very significant to our financial performance because net interest income comprised 78 percent and 79 percent of operating revenue (net interest income plus noninterest income, excluding security gains) in 2009 and 2008, respectively. The level and mix of earning assets and funds are continually monitored by ALCO in order to mitigate the interest-rate sensitivity and liquidity risks of the balance sheet. A variety of ALCO strategies were successfully implemented, within prescribed ALCO risk parameters, to maintain an acceptable net interest margin given the challenges of the current interest rate environment.

On a fully taxable-equivalent basis, net interest income increased $2.1 million or 1 percent in 2009 compared to 2008. Net interest income increases in 2009 are primarily the result of a $226.2 million increase in average interest-earning assets, primarily driven by $425.8 million average

 

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interest-earning assets acquired through the IBT acquisition in the second quarter 2008. The net interest margin on a fully taxable-equivalent basis was 3.89 percent in 2009 as compared to 4.07 percent in 2008. The net interest margin was negatively affected in 2009 by higher delinquent interest, lower repricing spreads in 2009 on variable rate loans and the inability to reduce core deposit rates by the same level of reduction in other short-term rates. During 2009, S&T implemented an ALCO strategy to deleverage the balance sheet from a securities perspective. A decrease in loans and securities, along with funds received in the CPP, has provided a significant opportunity to pay down borrowings and reduce the need to aggressively solicit deposits. Average borrowings have decreased $215.0 million from December 31, 2008.

For 2009, average loans increased $242.4 million and average securities and federal funds sold decreased $16.2 million as compared to 2008. S&T acquired $278.5 million of average loans and $147.3 million of average securities with the IBT acquisition. As previously mentioned, our strategy has been to not replace maturing investment securities as the risk and reward for leveraging activities has been significantly reduced in a volatile interest rate environment. The yields on average loans decreased 98 basis points and the yield on average securities decreased 35 basis points from 2008. Overall yields on interest-earning assets were 5.15 percent and 6.04 percent for the years ended December 31, 2009 and 2008, respectively.

For 2009, balances of average interest-bearing deposits increased by $247.1 million as compared to 2008. S&T acquired $326.0 million of average deposits with the IBT acquisition. The cost of deposits totaled 1.18 percent, a decrease of 62 basis points from 2008 due to lower rates paid on both core and certificates of deposit. The cost of REPOs and other borrowed funds decreased 57 basis points to 2.61 percent as a result of lower short-term rates as compared to 2008. Overall funding costs decreased 79 basis points to 1.63 percent at December 31, 2009 as compared to December 31, 2008. Positively affecting net interest income was a $194.0 million increase in average net free funds during the year ended December 31, 2009 as compared to 2008. Average net free funds are the excess of demand deposits, other noninterest-bearing liabilities and shareholders’ equity over nonearning assets. The increase is primarily due to successful marketing of new demand accounts and corporate cash management services and increased equity due to the participation in the CPP.

Interest on loans to and obligations of state, municipalities and other public entities are not subject to federal income tax. As such, the stated (pre-tax) yield on these assets is lower than the yields on taxable assets of similar risk and maturity. In order to make the pre-tax income and resultant yields comparable to taxable loans and investments, a taxable-equivalent adjustment was added to interest income in the tables below. This adjustment is calculated using the U.S. federal statutory corporate income tax rate of 35 percent for 2009, 2008 and 2007.

 

Provision for Loan Losses

 

The provision for loan losses was $72.4 million and $12.9 million for 2009 and 2008, respectively. The $72.4 million provision for 2009 is primarily a result of net charge-offs of $55.5 million, a $9.9 million increase in specific reserves and a $7.0 million increase in general reserves.

The increase in specific reserves is primarily a result of the commercial credits that are discussed in detail below. The increase in general reserves is primarily the result of an increase in overall risk (both macroeconomic and specific portfolio risks) combined with enhancements in methodology. Specifically, the increased macroeconomic risks were unemployment and commercial real estate vacancy trends and the increased specific portfolio risks were nonaccrual loans, delinquent loans, classified loans, net charge-offs and delinquency trends and out-of-state loans. All of these increases were partially offset by a decrease in loan growth during 2009.

During 2009 S&T introduced three enhancements in its methodology. The first enhancement was the addition of an out-of-state risk factor, which increased the general reserves for commercial real

 

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estate loans. The second enhancement was the expansion of the risk rating scale assigned for the qualitative factors in response to the current economic environment, which also had the effect of increasing general reserves. The third enhancement was a change in the baseline for loss history from a seven year absolute high to a five year average combined with the qualitative adjusted factors. Management believes that these enhancements are more indicative of the loan losses over the economic life cycle of the loan segments.

The provision is the result of management’s assessment of credit quality statistics and other factors that would have an impact on probable losses in the loan portfolio and the model used for determination of the adequacy of the allowance for loan losses. Enhancements within the allowance for loan loss model are directionally consistent with the increase in nonperforming loans and classified loan trends, loan charge-off levels and the impact of the troubled commercial loan relationships during 2009. Credit quality is the most important factor in determining the amount of the allowance for loan losses and the resulting provision.

During 2009, S&T had an increase in delinquencies, classified and nonperforming loan levels, primarily due to the commercial credits discussed below and an overall slowdown in the economy that is affecting all segments of the loan portfolio. Nonaccrual loans to total loans increased to 2.67 percent at December 31, 2009 as compared to 1.19 percent at December 31, 2008. Also affecting the amount of the allowance for loan losses and resulting provision, are increases in several qualitative risk factors within the loan loss reserve model based on observations regarding both economic conditions and changes in overall asset quality. For 2009, net loan charge-offs were $55.5 million compared to net loan charge-offs of $10.0 million for 2008. The most significant net charge-offs in 2009 were a $26.5 million charge-off for a $30.3 million commercial relationship with an energy exploration and drilling company with a remaining exposure of $2.7 million, $8.2 million for three Florida lot development projects with a remaining exposure in Florida of $3.3 million, $5.0 million for two commercial real estate projects in New York and Connecticut with a remaining exposure of $3.9 million, $7.7 million for a mixed use commercial property that lost a major tenant with a remaining exposure of $3.7 million, $2.5 million for a commercial and industrial loan secured by assignment of partnership interests which are uncertain due to legal issues among the partners, $1.1 million for a $2.4 million office building that was foreclosed and sold during the first quarter of 2009, $1.1 million for a regional restaurant that entered into bankruptcy, $0.6 million for a multi-family development project in western Pennsylvania, $0.6 million for a retail sales company which discontinued operations and $0.6 million for condominium construction loans in western Pennsylvania.

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

Noninterest Income

 

Years Ended December 31    2009     2008     $ Change     % Change  
(dollars in thousands)                         

Security losses, net

   $ (5,088   $ (1,651   $ (3,437   (208 )% 

Service charges on deposit accounts

     12,942        12,322        620      5

Wealth management fees

     7,500        7,967        (467   (6 )% 

Letter of credit fees

     1,721        1,761        (40   (2 )% 

Insurance fees

     7,751        8,096        (345   (4 )% 

Mortgage banking

     2,727        (305     3,032      994

Debit and credit card fees

     6,921        5,910        1,011      17

Other income:

        

Derivative fee income

     406        1,050        (644   (61 )% 

Commercial loan rate swap valuation

     (616     98        (714   (729 )% 

Rabbi trust

     643        (1,602     2,245      140

Other

     3,673        3,806        (133   (3 )% 

Total Other Noninterest Income

     4,106        3,352        754      22 % 

Total Noninterest Income

   $ 38,580      $ 37,452      $ 1,128      3

 

Noninterest income increased $1.1 million or 3 percent, to $38.6 million in 2009 as compared to 2008. Increases included $0.6 million or 5 percent in service charges on deposit accounts, $3.0 million in mortgage banking fees, $1.0 million in debit and credit card revenues and $0.8 million in other noninterest income, offset by decreases of $0.5 million or 6 percent in wealth management fees and $0.1 million or 2 percent in letter of credit fees and $0.3 million or 4 percent in insurance commissions. The increase of $0.6 million or 5 percent in service charges on deposit fees is primarily related to the increased customer base resulting from the IBT acquisition, as well as the organic expansion of demand deposit accounts. Decreases of $0.5 million in wealth management fees and are primarily attributable to current market conditions for these lines of business, $0.1 million in letter of credit fees is attributable to customer preferences for this type of product and $0.3 million in insurance commissions due to the current soft market. The increase of $3.0 million in mortgage banking fees is a result of record origination levels in mortgage banking activities during the year ended December 31, 2009 as consumers sought to refinance existing loans at lower interest rates. The increase of $1.0 million in debit and credit card revenues is a result of an increased customer base from the IBT acquisition. The increases of $0.8 million in other noninterest income are primarily related to the deferred compensation plan valuations, offset by a $0.6 million charge for the additional credit exposure on an exited commercial swap asset as well decreased derivative fee income during the year.

S&T recognized $5.1 million of net losses primarily on available-for-sale equity securities in the year ended December 31, 2009 as compared to $1.7 million of net losses in 2008. The investment security losses for the year ended December 31, 2009 are primarily OTTI charges on 17 bank equity holdings totaling $5.3 million. S&T has implemented a strategy to methodically sell equity holdings in the available-for-sale equity portfolio and only retain strategic positions in bank holding companies within our market area.

 

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Noninterest Expense

 

Years Ended December 31    2009    % of
Noninterest
Expense
    2008     % of
Noninterest
Expense
    $ Change     % Change  
(dollars in thousands)                                    

Salaries and employee benefits

   $ 48,848    45.2   $ 42,708      51.0   $ 6,140      14

Occupancy, net

     6,819    6.3     6,416      7.7     403      6

Furniture and equipment

     5,067    4.7     4,479      5.3     588      13

Other taxes

     3,733    3.4     3,017      3.6     716      24

Data processing

     6,048    5.6     5,488      6.6     560      10

Amortization of intangibles

     2,308    2.1     1,055      1.3     1,253      119

FDIC assessment

     8,388    7.8     409      0.5     7,979      1951

Other operating expenses:

             

Unfunded loan commitments

     2,888    2.7     1,025      1.2     1,863      182

Joint venture impairment and amortization

     4,393    4.1     2,795      3.3     1,598      57

Loan collection fees

     1,325    1.2     261      0.3     1,064      407

Professional consulting

     1,897    1.8     1,374      1.6     523      38

Other real estate owned

     759    0.7     (294   (0.3 )%      1,053      358

Legal

     2,323    2.1     1,211      1.4     1,112      92

Marketing

     2,751    2.5     3,180      3.8     (429   (14 )% 

Other

     10,579    9.8     10,677      12.7     (98   1

Total Other Operating Expenses

     26,915            20,229              6,686      33

Total Noninterest Expense

   $ 108,126    100.0   $ 83,801      100.0   $ 24,325      29

 

Noninterest expense increased by $24.3 million or 29 percent during 2009 compared to 2008. Salaries and employee benefit expense increased $6.1 million or 14 percent primarily attributable to the addition of 56 full-time equivalent staff, due to the addition of IBT retained staff, normal year-end merit increases and increased pension expenses as a result of market declines in the portfolio and increased medical plans expenses. Salaries and employee benefits were positively affected by reduced accruals for incentives as a result of decreased earnings performance for 2009 as well as a reduction in employee stock appreciation rights valuation expense resulting from a decrease in S&T stock estimated fair value.

S&T’s net periodic defined benefit plan cost is based primarily on three assumptions: the discount rate for plan liabilities, the expected return on plan assets and the rate of compensation increase. Net periodic pension expense of $3.1 million and $0.1 million was recorded for S&T’s defined benefit plan for 2009 and 2008, respectively. Net periodic pension expense is expected to approximate $2.6 million for the year 2010, assuming no significant changes in plan assumptions or contributions.

Occupancy, furniture and equipment expense increased $1.0 million or 9 percent during 2009 as compared to 2008, as a result of the net acquisition of new branches with the IBT acquisition. Other tax expense increased $0.7 million or 24 percent primarily as a result of increased Pennsylvania shares tax due to the IBT acquisition. Data processing expense increased $0.6 million or 10 percent as compared to 2008 as a result of changes in data communication processes and an increased customer base as a result of the IBT acquisition. Amortization of intangibles increased $1.3 million due to the IBT acquisition. FDIC assessments increased by $8.0 million due to the special assessment

 

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charged to all banks in the second quarter of 2009, an increased premium ratio and a higher deposit base during 2009. Other noninterest expense increased $6.7 million or 33 percent during 2009 and is primarily attributable to a $1.9 million increase in the provision for unfunded loan commitments, a $1.6 million increase in the amortization and impairment for affordable housing limited partnerships, $1.1 million in loan collection expenses primarily associated with troubled loans, a $0.5 million increase in consulting, a $1.1 million increase in other real estate owned expense and $1.1 million in legal fees due to troubled loans. Increases were offset by a decrease of $0.4 million in marketing due to special promotions related to the IBT acquisition in 2008 and $0.1 million of other expenses. S&T’s efficiency ratio, which measures noninterest expense as a percent of noninterest income plus net interest income on a fully taxable-equivalent basis, excluding security gains, was 55 percent for 2009 and 45 percent for 2008.

 

Federal Income Taxes

 

A federal income tax benefit of $3.9 million was recognized in 2009 attributable to the pretax income of $4.1 million for the year, compared to expense of $24.5 million on pretax income of $84.7 million for 2008. Included in the 2009 tax benefit is tax expense approximating $0.4 million attributable to interest and penalties on a settled IRS examination, an increase in unrecognized tax benefits and return to provision adjustments.

The effective tax rate for 2009 was negative 95 percent and 29 percent in 2008. S&T ordinarily generates an annual effective tax rate that is less than the statutory rate of 35 percent due to benefits resulting from tax-exempt interest, excludible dividend income, from tax-exempt interest, excludible dividend income and tax benefits associated with Low Income Housing Tax Credit (“LIHTC”) and Federal Historic Tax Credit Projects, which are relatively consistent regardless of the level of pretax income.

The consistent level of tax benefits that reduce S&T’s tax rate below the 35 percent statutory rate, coupled with relatively low level of annual pretax income, produced a negative annual effective tax rate.

 

RESULTS OF OPERATIONS

Year Ended December 31, 2008

 

Net Income

 

Net income was $60.2 million in 2008, a 7 percent increase from the $56.1 million in 2007. Earnings per share increased 1 percent from $2.26 diluted earnings per share in 2007 to $2.28 diluted earnings per share in 2008. The differences between percentage changes for net income and earnings per share is primarily due to the 2,751,749 shares issued to the former IBT shareholders as partial payment for the IBT acquisition in the second quarter 2008. The increase in net income was primarily the result of increases in net interest income and noninterest income, offset by a higher loan loss provision, lower security gains and an increase in noninterest expense. The return on average assets was 1.52 percent for 2008, as compared to 1.68 percent for 2007. The return on average equity was 14.77 percent for 2008 compared to 16.97 percent for 2007.

 

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 volume of interest-earning assets and interest-bearing liabilities and changes in interest yields and rates. Therefore, maintaining consistent spreads between earning assets and interest-bearing liabilities is very significant to our financial performance because net interest income comprised 79 percent and 76 percent of operating revenue (net interest income plus noninterest income, excluding security gains) in 2008 and 2007, respectively. The level and mix of earning assets

 

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and funds are continually monitored by ALCO in order to mitigate the interest-rate sensitivity and liquidity risks of the balance sheet. A variety of ALCO strategies were successfully implemented, within prescribed ALCO risk parameters, to maintain an acceptable net interest margin given the challenges of the current interest rate environment.

On a fully taxable-equivalent basis, net interest income increased $27.9 million or 23 percent in 2008 compared to 2007. Net interest income increases in 2008 are primarily attributable to growth in earning assets, primarily loans, as well as the IBT acquisition. The net yield on interest earning assets increased to 4.07 percent in 2008 as compared to 3.87 percent in 2007.

This consistency in the net yields on earning assets is primarily the result of effective asset liability strategies in a sometimes volatile interest rate environment. S&T’s balance sheet at December 31, 2008 is slightly liability sensitive, with funding costs decreasing faster than asset yields in a declining interest rate environment.

In 2008, average loans increased $499.0 million and average securities, other investments and federal funds sold increased $34.9 million. S&T acquired $278.5 million of average loans and $147.3 million of average securities with the IBT acquisition. The yields on average loans decreased by 116 basis points and the yields on average securities slightly decreased by 5 basis point. Overall earning asset yields decreased 101 basis points.

Average interest-bearing deposits provided $212.1 million of the funds for the growth in average earning assets, at a cost of 2.21 percent in 2008 as compared to 3.70 percent in 2007. S&T acquired $326.0 million of average deposits with the IBT acquisition. The cost of repurchase agreements and other borrowed funds decreased 202 basis points to 3.18 percent. Overall funding costs decreased 150 basis points.

Positively affecting net interest income was a $74.9 million increase in average net free funds during 2008 compared to 2007. Average net free funds are the excess of demand deposits, other noninterest-bearing liabilities and shareholders’ equity over nonearning assets. The increase is primarily due to successful marketing of new demand accounts and corporate cash management services and increased retained earnings.

 

Provision for Loan Losses

 

The provision for loan losses is an amount added to the allowance against which loan losses are charged. The provision for loan losses was $12.9 million and $5.8 million for 2008 and 2007, respectively. The provision is the result of management’s assessment of credit quality statistics and other risk factors that would have an impact on probable losses in the loan portfolio and the model used to determine the adequacy of the allowance for loan losses. A model is used to assist in the determination of the adequacy of the allowance for loan losses. Changes in the risk factors within the allowance for loan loss model are consistent with a decline in asset quality, which includes a significant increase in net loan charge-offs and nonaccrual loans.

Current credit quality and historical charge-offs are the most important factors in determining the amount of the allowance and the resulting provision. Also affecting the amount of the allowance and resulting provision is loan growth and portfolio composition. Most of the loan growth in 2008 and 2007 is attributable to larger commercial loans. Net loan charge-offs totaled $10.0 million or 0.31 percent of average loans for 2008 and $4.7 million or 0.17 percent of average loans for 2007. The most significant charge-offs for 2008 were the sales and service company charge-off of $1.1 million in the second quarter of 2008, a $0.9 million charge-off on a construction company loan during the third quarter of 2008 and a $4.6 million charge-off in the fourth quarter of 2008 related to the commercial customer that was misappropriating construction funds. These charge-offs during 2008 were offset by a $0.8 million recovery on the aforementioned construction company loan. The most significant charge-offs for 2007 were $1.4 million for a construction servicing company, an additional charge-off

 

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of $1.2 million related to a workers compensation letter of credit draw for a heavy construction company and a $0.8 million commercial loan relationship for a security distribution and installation company, all of which were previously considered in the analysis for the adequacy of the allowance for loan losses. Nonaccrual loans to total loans increased to 1.19 percent at December 31, 2008 as compared to 0.60 percent at December 31, 2007.

 

Noninterest Income

 

Noninterest income, excluding net security gains, increased $2.3 million, or 6 percent in 2008 compared to 2007. Increases included $2.2 million or 22 percent in service charges and fees on deposit accounts, $0.8 million or 11 percent in insurance activities and $0.5 million or 7 percent in wealth management fees. Offsetting these increases were decreases of $0.9 million or 148 percent in mortgage banking and $0.3 million or 13 percent in letter of credit fees.

The increase of $2.2 million or 22 percent in service charges and fees is primarily related to fees charged for insufficient funds and account analysis fees incurred during the year and were positively affected by an increased customer base resulting from the IBT acquisition. Insurance commissions increased $0.8 million or 11 percent primarily as a result of stronger overall sales volume. Wealth management fees increased $0.5 million or 7 percent primarily related to increased brokerage and annuity commissions. Offsetting these increases were decreases of $0.9 million in mortgage banking due to impairment in the portfolio as a result unprecedented prepayment speeds and current low interest rates and $0.3 million or 13 percent in letter of credit fees due to lower customer demand for this product.

S&T recognized $1.7 million of losses on the sale of available-for-sale securities in 2008. These losses included $4.3 million of realized losses taken for OTTI on seven bank equity investment holdings and $0.7 million of realized losses from restructuring the IBT available-for-sale securities portfolio during the second quarter of 2008. These losses were partially offset by $3.3 million of realized equity security gains for 2008. S&T has implemented a strategy to methodically sell equity holdings in the available-for-sale equity portfolio and only retain strategic positions in bank holding companies within our market area.

 

Noninterest Expense

 

Noninterest expense increased $10.3 million or 14 percent in 2008 compared to 2007. S&T’s efficiency ratio, which measures noninterest expense as a percent of noninterest income, excluding security gains plus net interest income on a fully taxable-equivalent basis, was 45 percent in 2008 and 47 percent in 2007.

Staff expense increased 6 percent or $2.3 million in 2008. This increase is primarily attributable to the addition of 93 average full-time equivalent staff, primarily due to the IBT acquisition and normal annual merit increases, offset by a $1.9 million decrease in incentive plan accruals based on 2008 award levels. The majority of S&T incentive plan awards are based upon growth in earnings per share.

Occupancy and furniture and equipment expense increased 14 percent or $1.3 million as compared to 2007 due to the net acquisition of nine new branches with the IBT acquisition and the addition of one de novo branch opening during the year. Data processing expense increased $0.6 million or 12 percent as compared to 2007 as a result of conversion expenses related to the IBT acquisition, partially offset by a favorable renegotiation of the current contract and a change in data communication processes. Marketing expenses increased $0.5 million or 17 percent as compared to 2007 as a result of additional promotions and new customer account packages associated with the IBT acquisition. Amortization of intangibles increased $0.8 million or 252 percent due to the IBT acquisition.

 

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Other noninterest expense increased $4.6 million as compared to 2007 primarily due to a $1.4 million increase in the reserve for unfunded loan commitments, a $1.4 million impairment charge for affordable housing limited partnerships, $0.7 million in increased amortization for affordable housing projects and $1.1 million of nonrecurring merger expenses.

 

Federal Income Taxes

 

Federal income tax expense increased $2.9 million to $24.5 million in 2008 as compared to 2007. This increase is primarily attributable to an increase in pre-tax income. The effective tax rate of 29 percent in 2008 and 28 percent in 2007 was below the 35 percent statutory tax rate due to the tax benefits resulting from tax-exempt interest, excludable dividend income and the tax benefits associated with LIHTC and Federal Historic Tax Credit projects. S&T currently does not incur any alternative minimum tax.

 

FINANCIAL CONDITION

 

Average earning assets increased by $226.2 million in 2009 primarily driven by $425.8 million average earnings assets acquired through the IBT acquisition in the second quarter 2008. Average loan balances increased by $242.4 million and average securities and other investments decreased $16.2 million as compared to the 2008 full year average. Average deposits increased $351.5 million and average borrowings decreased $215.0 million as compared to the 2008 full year average. S&T acquired $452.3 million in average assets, $147.3 million in average securities, $278.5 million in average loans and $326.0 million in average deposits in the IBT acquisition consummated on June 6, 2008.

 

Securities Activity

 

S&T invests in various securities in order to provide a source of liquidity, 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 interest rate risk similar to loans. In addition, 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 annually approved by the S&T Board of Directors and administered through ALCO and the Treasury function of S&T Bank.

Average securities, other investments and federal funds sold decreased by $16.2 million in 2009 compared to the 2008 full year average. In 2008, S&T acquired $147.3 million of average securities with the IBT acquisition, offset by an average decrease of $163.5 million in securities, which is attributable to an ALCO strategy to limit the replacement of matured investment securities with borrowings to mitigate interest rate risk.

The components of the decrease are attributable to the sale and maturity of $22.6 million in U.S. government agency securities, $2.0 million in corporate securities and $0.1 million of states and political subdivisions. Further, marketable equity securities decreased $16.1 million. These decreases were offset by increases in mortgage-backed securities of U.S. government corporations and agencies of $21.8 million and other investments of $2.8 million

Average other investments are recorded at historical cost and are comprised of FHLB stock which is a membership and borrowing requirement based upon S&T’s borrowing availability and level from the FHLB.

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

The following table sets forth the carrying value of securities at the dates indicated:

 

December 31    2009    2008    2007
(dollars in thousands)               

Available-for-Sale

        

Obligations of U.S. government corporations and agencies

   $ 127,971    $ 169,251    $ 145,322

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

     60,229      63,900      58,996

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

     61,521      78,952      27,572

Obligations of state and political subdivisions

     92,928      122,478      81,089

Marketable equity securities

     12,211      14,918      41,311

Other securities

          3,214      4,532

Total Available-for-Sale Securities

     354,860      452,713      358,822

FHLB of Pittsburgh capital stock, at cost

     23,542      23,542      13,833

Total

   $ 378,402    $ 476,255    $ 372,655

 

S&T’s policy for security classification includes U.S. government corporations and agencies, collateralized mortgage obligations of U.S. government corporations and agencies, mortgage-backed securities of U.S. government corporations and agencies, obligations of state and political subdivisions, marketable equity securities and other securities as available-for-sale. The marketable equity securities portfolio is primarily comprised of stock of bank holding companies. On a quarterly basis, management evaluates the securities portfolios for OTTI according to the respective accounting literature requiring investments to be reported at estimated fair value. During 2009, S&T recorded $5.3 million of realized losses for OTTI relating to securities of 17 bank equity holdings. The performance of the equities and debt securities markets could generate further impairment in future periods requiring realized losses to be reported.

At December 31, 2009, net unrealized gains on securities classified as available-for-sale were approximately $7.6 million as compared to $3.3 million at December 31, 2008. Net unrealized gains related to S&T’s debt securities portfolio totaled $8.1 million at December 31, 2009 and $6.9 million unrealized gains at December 31, 2008. The marketable equity securities portfolio had net unrealized losses of $0.5 million at December 31, 2009 compared to net unrealized losses of $3.6 million at December 31, 2008. S&T does not intend to sell and it is not more likely than not that it will be required to sell any of the securities in an unrealized loss position before recovery of its amortized cost.

S&T was notified in December 2008 by the FHLB that they have suspended the payment of dividends and the repurchase of excess capital stock until further notice. FHLB stock is viewed as a long-tem investment, which is carried at cost. S&T management reviewed and evaluated the FHLB capital stock for OTTI at December 31, 2009, which is determined based on the ultimate recoverability of the par value rather than by temporary declines in value or dividend fluctuations. Management considered the suspension of dividends and the repurchase of excess capital stock by the FHLB Board of Directors in a letter to member banks dated December 23, 2008. Management reviewed the FHLB’s Form 10-Q for the period ended September 30, 2009 filed with the Commission on November 12, 2009.

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

Management considered the following matters when evaluating FHLB stock for OTTI:

 

   

Significance and severity of the decline in the net assets of the FHLB (including its investment portfolio) as compared to the capital stock amount of the FHLB and the length of time this situation has persisted.

   

Ability of the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB. FHLB is meeting their debt obligations. Although the responsibility to repay debt may be shared among FHLB’s in the event that one FHLB cannot pay, to date, a FHLB has never been required to pay the consolidated obligation of another FHLB.

   

Impact of legislative and regulatory changes on the institution and, accordingly, on the customer base of the FHLB. With the exception of the Housing Act, enacted July 20, 2008, there are no pending legislative or regulatory changes that would impact the customer base of the FHLB’s.

   

Liquidity position of the FHLB.

 

Management considered the following items from the September 30, 2009 Form 10-Q of the FHLB:

 

   

The total capital of the FHLB decreased to $3.6 billion at September 30, 2009 from $4.1 billion at December 31, 2008, due primarily to unrealized losses on investments.

   

The net income of the FHLB for the nine months ended September 30, 2009 decreased to a net loss of $31.9 million from $207.4 million in the comparable period in 2008, due primarily to an OTTI impairment charge.

   

The FHLB exceeded all required capital ratios as of September 30, 2009 and December 31, 2008. In addition, permanent capital of $4.4 billion and $4.2 billion at September 30, 2009 and December 31, 2008, respectively, exceeded its risk-based capital requirement by $1.2 billion and $233.8 million, respectively.

   

The gross unrealized losses on its private label mortgage-backed securities (“MBS”) decreased to $0.5 billion at September 30, 2009 from $2.1 billion at December 31, 2008. However, management also noted the following:

 

   

The FHLB concluded that these securities were not OTTI as of September 30, 2009.

   

The FHLB Management’s Discussion and Analysis disclosed that all MBS continue to pay principal and interest in accordance with their contractual terms.

   

30 percent of these securities were rated AAA by external credit agencies.

   

The FHLB had minimal subprime exposure in its private label MBS portfolio.

 

   

The liquidity position of the FHLB (defined as cash and due from banks, interest-earning deposits and federal funds sold) decreased to $4.5 billion at September 30, 2009 as compared to $6.4 billion at December 31, 2008.

 

S&T believes its holdings in the stock are ultimately recoverable at par value as of December 31, 2009 and, therefore, determined that FHLB stock was not OTTI. In addition, S&T has ample liquidity and does not require redemption of its FHLB stock in the foreseeable future.

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

The following table sets forth the maturities of securities at December 31, 2009 and the weighted average yields of such securities. Taxable-equivalent adjustments (using a 35 percent federal income tax rate) for 2009 have been made in calculating yields on obligations of state and political subdivisions.

 

    Maturing
  Within
One Year
    After
One But Within
Five Years
    After
Five But Within
Ten Years
    After
Ten Years
    No Fixed
Maturity
     Amount   Yield     Amount   Yield     Amount   Yield     Amount   Yield     Amount
(dollars in thousands)                                            

Available-for-Sale

                 

Marketable equity securities

  $        $        $        $        $ 12,211

Obligations of U.S. government corporations and agencies

    40,703   4.26     87,268   2.30                      

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

                      23,372   4.72     36,857   4.83    

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

    1,152   4.13     7,188   4.33     20,593   4.55     32,588   5.50    

Obligations of state and political subdivisions

    10,910   4.54     33,187   5.06     13,553   5.44     35,278   5.81    
Total   $ 52,765         $ 127,643         $ 57,518         $ 104,723         $ 12,211

Weighted Average Rate

        4.32         3.13         4.83         5.37      

 

Lending Activity

 

     2009     2008     2007  
Loans    Average
Loan
Balance
   Average
Loan
Balance
Percentage
    Average
Loan
Balance
   Average
Loan
Balance
Percentage
    Average
Loan
Balance
   Average
Loan
Balance
Percentage
 
(dollars in millions)                                  

Commercial, mortgage and industrial

   $ 2,541.6    73   $ 2,393.5    74   $ 2,064.6    75

Residential real estate

     849.8    25     757.8    23     592.4    22

Consumer

     81.8    2     79.5    3     74.8    3

Total

   $ 3,473.2    100   $ 3,230.8    100   $ 2,731.8    100

 

Average loans for the year ended December 31, 2009 were $3.5 billion, a $242.4 million or 8 percent increase from the year ended December 31, 2008. S&T acquired $278.5 million of average loans with the IBT acquisition. The composition of the acquired average loan portfolio included $125.8 million of

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

commercial real estate loans, $26.7 million of commercial and industrial loans, $119.2 million of residential mortgages and home equity loans and $6.8 million of consumer loans. Changes in the composition of the average loan portfolio during 2009 included increases of $148.0 million in commercial loans, $92.1 million in residential mortgage loans and $2.3 million in consumer loans. Total loans at December 31, 2009 decreased $164.3 million from December 31, 2008.

Average real estate construction and commercial loans, including commercial and industrial, comprised 73 and 74 percent of the loan portfolio in 2009 and 2008, respectively. Commercial loan activity decreased for 2009 as businesses are reacting to the current economic environment. The commercial portfolio has experienced stress in all categories during 2009. The commercial real estate portfolio had $384.5 million or 11 percent of total loans that involved projects outside of western Pennsylvania. Generally, these loans are with existing local customers. The decline in the economic environment has been significantly higher in various parts of the country as compared to western Pennsylvania. Accordingly, the out of state portfolio is experiencing higher credit stress and has been the subject of considerable management focus and review. Rates and terms from commercial real estate, equipment loans and lines of credit are normally negotiated, subject to such variables as the financial condition of the borrower, economic conditions, marketability of collateral, credit history of the borrower and projected future cash flows. The loan to value policy guidelines for commercial real estate loans is generally 65-85 percent. At December 31, 2009, variable rate commercial loans were 50 percent of the commercial loan portfolio as compared to 49 percent at December 31, 2008.

Average residential mortgage loans comprised 25 percent of the loan portfolio in 2009 and 23 percent in 2008. During 2009, S&T sold $133.5 million of 1–4 family mortgage loans to Fannie Mae. Residential mortgage lending reached record levels during 2009 as consumers took advantage of lower interest rates. S&T expects the 1-4 family mortgage loans sold to FNMA to return to more normalized levels in 2010. 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 30 percent of residential mortgages and are sometimes 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 mortgage 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 generally require a maximum term of 20 years for fixed rate mortgages. Balloon payment 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. Private mortgage insurance is generally required for loans with less than a 20 percent down payment. Combo mortgage loans consisting of S&T residential first mortgage and home equity second mortgage are also available to credit worthy borrowers. Adjustable-rate mortgages are no longer offered, but comprised 10 percent of the residential mortgage portfolio in 2009 and 9 percent in 2008. Home equity loans increased $20.3 million during 2009 and $144.0 million in 2008 and totaled $458.7 million at December 31, 2009 and $438.4 million at December 31, 2008. The increase in home equity loans is primarily attributable to successful marketing programs during 2009 and 2008 and $116.8 million of home equity loans that were acquired in the IBT acquisition in 2008.

S&T periodically designates specific loan originations, generally longer-term, lower-yielding, 1–4 family mortgages as held for sale to sell to Fannie Mae. The rationale of these sales is to mitigate interest-rate risk associated with holding long-term residential mortgages in the loan portfolio,

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

generate fee revenue from servicing and maintain the primary customer relationship. During 2009, S&T sold $133.5 million of 1–4 family mortgage loans to Fannie Mae and currently services $255.9 million of secondary market mortgage loans. Fees and gains from mortgage servicing activities were $2.7 million in 2009 and fees and losses were $0.3 million in 2008. During 2009, S&T experienced record levels of mortgage banking activities, including but not limited to refinancing, as consumers took advantage of low interest rates. This increase in mortgage banking activities resulted in significantly higher sales of 1-4 family mortgages to Fannie Mae in 2009 as compared to 2008. Management intends to continue to sell longer-term loans to Fannie Mae in the future on a selective basis, especially during periods of lower interest rates.

Average consumer loans comprised 2 percent of the loan portfolio in 2009 and 3 percent in 2008. The balance of consumer loans at December 31, 2009 was $81.1 million compared to $84.1 million at December 31, 2008.

Loan underwriting standards for S&T are established by a formal policy and are subject to the periodic review and approval by the Board of Directors. During 2009, S&T implemented or enhanced various new policies and procedures including: monitoring, funding, risk ratings, stress testing and compliance for the area of commercial lending.

S&T offers a variety of unsecured and secured consumer loan and credit card products. Loan to value policy guidelines for direct loans are 90–100 percent of invoice for new automobiles and 80–90 percent of National Automobile Dealer Association (NADA) value for used automobiles.

The following table summarizes S&T’s loan distribution at the end of each of the last five years:

 

     December 31
      2009    2008    2007    2006    2005
(dollars in thousands)                         

Domestic Loans:

              

Commercial, mortgage and industrial

   $ 2,129,979    $ 2,262,743    $ 1,781,076    $ 1,677,173    $ 1,566,331

Real estate—construction

     371,178      374,925      329,875      352,482      339,179

Residential real estate

     822,109      846,983      611,149      563,496      517,780

Consumer

     81,141      84,065      74,839      73,140      68,216

Total Loans

   $ 3,404,407    $ 3,568,716    $ 2,796,939    $ 2,666,291    $ 2,491,506

 

The following table presents the maturity of loans (excluding residential mortgages of 1-4 family residences and consumer loans) outstanding as of December 31, 2009. Also provided are the amounts due after one year classified according to the sensitivity to changes in interest rates.

 

     Maturing
      Within One
Year
   After One But
Within Five Years
   After Five
Years
   Total
(dollars in thousands)                    

Commercial, mortgage and industrial

   $ 555,121    $ 657,794    $ 917,064    $ 2,129,979

Real estate—construction

     126,303      142,842      102,033      371,178

Total

   $ 681,424    $ 800,636    $ 1,019,097    $ 2,501,157

Fixed interest rates

      $ 262,320    $ 153,721   

Variable interest rates

            538,316      865,376       

Total

          $ 800,636    $ 1,019,097       

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

Allowance for Loan Losses

 

The balance in the allowance for loan losses increased to $59.6 million or 1.75 percent of total loans at December 31, 2009 as compared to $42.7 million or 1.20 percent of total loans at December 31, 2008. During 2009, the increase in the allowance is primarily a result of an increase of $9.9 million of specific reserves and an increase of $7.0 million in general reserves. S&T’s allowance for lending-related commitments is computed using a methodology similar to that used to determine the allowance for loan losses. 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 increased to $4.2 million at December 31, 2009 as compared to $1.3 million at December 31, 2008. The allowance for lending-related commitments is included in other liabilities.

The following table summarizes the allowance for loan losses for each of the last five years as indicated:

 

     December 31
      2009    2008    2007    2006    2005
(dollars in thousands)                         

General reserves

   $ 42,577    $ 35,574    $ 31,426    $ 30,593    $ 26,635

Specific reserves

     17,003      7,115      2,919      2,627      9,937

Total Allowance for Loan Losses

   $ 59,580    $ 42,689    $ 34,345    $ 33,220    $ 36,572

 

Problem loans are identified and continually monitored through detailed reviews of specific commercial loans and the analysis of delinquency and charge-off levels of consumer loan portfolios. Management evaluates the degree of loss exposure for loans on a continuous basis through a formal allowance for loan loss policy as administered by S&T Bank’s Loan Administration Department and various management and director committees. Updates are presented to the S&T Board of Directors as to the status of loan quality. Charged-off and recovered loan amounts are applied to the allowance for loan losses. The allowance for loan losses is increased through a charge to current earnings through the provision for loan losses, based upon management’s assessment of the adequacy of the allowance for loan losses. A quantitative analysis is utilized to support the adequacy of the allowance for loan losses. This analysis includes a review of the historical charge-off rates for all loan categories as well as fluctuations and trends in various risk factors that have occurred within the portfolios economic life cycle. The analysis includes assessment of qualitative factors such as credit trends, unemployment trends, vacancy trends, loan growth and the degree of variable interest rate risk. Should any of the factors considered by management in evaluating the adequacy of the allowance for loan losses change, S&T’s estimate of loan losses could also change.

Significant to this analysis and assessment is the loan portfolio composition of 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 risk rating process 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 allowance for loan losses.

During 2009, the risk rating profile of the portfolio was impacted by the following commercial loan relationships:

 

   

The first relationship consists of $30.3 million of commercial and industrial loans with an exploration and drilling company comprised of five different facilities and three legal entities. Decreases in commodity prices created cash flow difficulties for this company and a $9.3 million specific reserve had been established for the loans in the first quarter of 2009.

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

 

Continued decreases in energy commodity prices created going concern issues for the company resulting in a collateral liquidation strategy. A charge-off of $26.5 million was taken on this relationship in the second quarter of 2009. This relationship was originated in September of 2002 and was placed into nonaccrual status in February of 2009. The underlying collateral for this relationship consists of assignments of partnership interests in energy production companies, assignments of brokerage accounts, personal residences and an aircraft. The brokerage accounts were liquidated in the second quarter of 2009 and the proceeds of $2.0 million were applied to loan balances. The balance of $0.6 million on the aircraft was transferred to other assets in the second quarter of 2009. The aircraft was sold in the third quarter of 2009 for $1.1 million and the proceeds were applied to satisfy the balance of the other asset owned and reduce other remaining loan balances. The residual exposure estimate is $2.7 million and is supported with a value completed in June of 2009.

   

The second relationship has an aggregate residual balance of $11.4 million and is comprised of three projects in the New York and Connecticut regions. The first project is a $7.5 million real estate development participation loan that has delayed construction pending better economic conditions, for which a $2.0 million specific reserve has been established. The relationship was originated in January of 2006 and was placed into nonaccrual status in January of 2009. The underlying collateral for this relationship is a mortgage on an undeveloped parcel of real estate. The last appraisal was completed in March of 2009. The second project is $3.9 million for new condominiums construction. A specific reserve of $2.1 million that had previously been established for this project was increased to $4.2 million during the second quarter of 2009 based on the current appraisal. The last appraisal was completed in June of 2009. The underlying collateral for this relationship is the commercial real estate. A charge-off of $5.0 million was taken on this relationship in the fourth quarter of 2009. The third project is a $0.8 million residual balance for a mixed-use commercial property previously charged down by $2.7 million in the first quarter of 2009. The last appraisal was completed in June of 2009. The underlying collateral for this relationship is the real estate. A charge-off of $0.8 million was taken on this relationship in the fourth quarter of 2009.

   

The third relationship is a $2.5 million commercial and industrial loan secured by assignment of partnership interests. Unresolved legal issues among the partners make the valuation of the assigned partnership interests very difficult to ascertain. During the second quarter of 2009, management negotiated additional collateral that may mitigate future potential losses. As a result, specific reserves of $2.5 million previously established were reduced to $2.1 million during the second quarter of 2009. The relationship originated in October of 2006 and was placed into nonaccrual status in March of 2009. A charge-off of $2.5 million was taken on this relationship in the fourth quarter of 2009.

   

The fourth relationship has an aggregate residual balance of $1.1 million and is comprised of real estate loans on three distinct projects, the largest of which is a $1.0 million condominium project that has experienced slow absorption due to a downturn in the housing market. Specific reserves of $0.5 million had been established for the loans. The relationship originated in February of 2005 and was placed into nonaccrual status in February of 2009. The primary collateral consists of a completed condominium development project. The last appraisal was completed in February 2009. During 2009, six condominium units have been sold and 4 units are remaining to be sold. A charge-off of $0.3 million was taken on this relationship in the fourth quarter of 2009.

   

The fifth relationship is a $3.7 million multi-unit residential property that has experienced slow absorption due to the downturn in the housing market. A specific reserve of $0.2 million was established based on appraisal value. The relationship originated in October of 2003 and was placed into nonaccrual status in January of 2009. The last appraisal was completed in

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

 

March of 2009. The underlying collateral for this relationship is the condominium development and the unimproved land. During the third quarter of 2009, the relationship was transferred to other real estate owned resulting in a charge of $0.6 million to adjust the balance to the appraisal value less costs to sell of $2.7 million. During the first quarter of 2010, S&T consummated the sale of this property at a price equal to the fair value recorded at December 31, 2009.

   

The sixth relationship is a $7.5 million commercial real estate project consisting primarily of a retail project in the western Pennsylvania region that did not fully stabilize or develop. Specific reserves of $0.6 million had been established for the loans and were increased to $2.7 million in the fourth quarter of 2009 as a result of updated valuations. The relationship originated in March of 1999 and was placed into nonaccrual status in September of 2008. The last appraisal was completed in June of 2009. The primary collateral for this relationship is the commercial real estate. The commercial real estate of $3.5 million is under contract and is expected to close in the first half of 2010.

   

The seventh relationship consists of several lot development projects in Pennsylvania and Florida. The exposure in Florida originally consisted of five projects totaling $12.5 million. Local real estate conditions in Florida resulted in slow lot sales and ultimately the developer’s global cash flow was unable to absorb the carrying costs associated with the Florida loans. In the second quarter of 2009, the Florida loans were split into an $8.8 million nonperforming tranche (3 loans) and a $3.7 million performing tranche (2 loans). S&T recognized a $5.3 million charge on the nonperforming loans during the second quarter of 2009 and developed a strategy to liquidate the nonperforming loans and complete the development associated with the performing loans. During the third quarter of 2009, it became evident that global cash flows were insufficient to execute on the original restructure plan. Accordingly, S&T recognized an additional charge of $2.9 million and liquidated a $0.6 million cash collateral account. The resulting Florida exposure is $3.7 million, $3.3 million of which is nonperforming as of December 31, 2009. The relationship originated in March of 2004 and was placed into nonaccrual status in May of 2009. The last appraisal was completed in March of 2009. The underlying collateral for this relationship is undeveloped and developed single family lots. The Florida properties are scheduled for auction in second quarter of 2010.

   

The eighth relationship is a $1.8 million regional restaurant that entered into bankruptcy and subsequently closed. A $1.1 million charge was taken in the second quarter of 2009. The loan originated in September of 2005 and was placed into nonaccrual status in January of 2008. The underlying collateral for this relationship is a leasehold mortgage on the building. The remaining balance $0.7 million is in other repossessed assets owned as of December 31, 2009. During the first quarter of 2010, S&T consummated the sale of this asset at a price equal to the fair value recorded at December 31, 2009.

   

The ninth relationship is a $10.8 million mixed-use redevelopment project in Pennsylvania which was placed into nonperforming status during the third quarter of 2009. The project is complete, but is not stabilized. The loan originated in August of 2007. The underlying collateral for this relationship includes real estate, a United States Department of Agriculture guaranty, a letter of credit from another financial institution and personal guarantees of the developer. A specific reserve of $1.5 million had been established for this relationship and was increased to $2.2 million in the fourth quarter of 2009 as a result of an updated appraisal. In addition, S&T terminated certain interest rate derivatives resulting in counterparty fees of $1.4 million. This claim was recorded as a receivable and a decrease in noninterest income of $0.6 million was recognized on the under secured portions of this receivable. In the fourth quarter of 2009, S&T drew on two letters of credit. Proceeds were applied to the remaining swap receivables and loan balances.

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

   

The tenth relationship is a $9.7 million resort in central Pennsylvania that has experienced a decline in bookings and cash flows. The loan originated in May of 2004 and was placed in to nonaccrual status in December of 2009. The underlying collateral for this relationship includes real estate and a partial United States Department of Agriculture guarantee. A current appraisal has been ordered and no specific reserve has been established as of December 31, 2009.

   

The eleventh relationship is a $5.2 million loan for an industrial warehouse property located in the southeast United States. Slowness in achieving target occupancy has created cash shortfalls that historically have been supplemented by the owners. The loan originated in February of 2000 and was placed into nonaccrual status in December of 2009. The underlying collateral is the warehouse property. Because continued owners’ support is uncertain, a specific reserve of $1.5 million was established based upon a fourth quarter appraisal. The property is scheduled for auction during the second quarter of 2010.

Specific reserves increased to $17.0 million and are primarily the result of the commercial loans discussed above as well as expanding the scope of loans subject to analysis. Management believes these commercial loans have been adequately reserved as determined by the quarterly impairment analysis and risk-rating process performed by the Loan Administration Department.

The allowance for loan losses is established based on management’s assessment of the factors noted above along with the growth in the loan portfolio. The additions to the allowance for loan losses charged to operating expense has maintained the allowance as a percent of loans at the following levels at the end of each year presented below:

 

Years Ended December 31
2009       2008       2007       2006       2005

1.75%

   1.20%    1.23%    1.25%    1.47%

 

We have considered impaired loans in our determination of the allowance for loan losses. The specific reserves for impaired loans were $17.0 million and $7.1 million at December 31, 2009 and 2008, respectively.

S&T has a charge-off policy within its general lending policy. The charge-off policy is broken down into two components – retail and commercial.

The charge-off policy for retail loans is broken down into two types. The first type is unsecured or secured with non real estate. These loans are evaluated for a charge at 90 days past due. Unsecured loans are fully charged off. If the loan is secured with non real estate, it will be charged down to the value of the collateral less the estimated cost to sell. If the collateral is repossessed and remains unsold for 120 days the carrying value will be completely charged-off. The second type is loans secured by real estate. These loans will be evaluated for a charge at 90 days past due. The loan will be charged down to the value of the collateral less the estimated 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. The bank may elect to recognize a partial charge-off when management has determined that the value of collateral is less than the then remaining ledger balance. 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

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

Net loan charge-offs totaled $55.5 million or 1.60 percent of average loans for 2009 as compared to $10.0 million or 0.31 percent of average loans for 2008. Net loan charge-offs for 2009 were primarily impacted by a $26.5 million charge-off for the aforementioned $30.3 million commercial relationship with an energy exploration and drilling company which had a specific reserve of $9.3 million, $8.2 million for three Florida lot development projects with a remaining exposure in Florida of $3.3 million, $4.2 million for two commercial real estate projects in New York and Connecticut with a remaining exposure of $3.9 million, $3.5 million for a mixed use commercial property that lost a major tenant with a remaining exposure of $3.7 million, $2.5 million for a commercial and industrial loan secured by assignment of partnership interests which are uncertain due to legal issues among the partners, $1.1 million for a $2.4 million office building that was foreclosed and sold during the first quarter of 2009, $1.1 million for a regional restaurant that entered into bankruptcy, $0.6 million for a multi-family development project in western Pennsylvania, $0.6 million for a retail sales company which discontinued operations, $0.6 million for condominium construction loans in western Pennsylvania. The most significant charge-offs for 2008 was a sales and service company charge-off of $1.1 million in the second quarter of 2008, a $0.9 million charge-off on a construction company loan during the third quarter of 2008 and a $4.6 million charge-off in the fourth quarter of 2008 related to the commercial customer that was misappropriating construction funds. These charge-offs during 2008 were offset by a $0.8 million recovery on the aforementioned construction company loan.

This table summarizes our loan loss experience for each of the five years presented below:

 

     Years Ended December 31  
      2009     2008     2007     2006     2005  
(dollars in thousands)                               

Balance at January 1:

   $ 42,689      $ 34,345      $ 33,220      $ 36,572      $ 34,262   

Charge-offs:

          

Commercial, mortgage and industrial

     (38,553     (5,943     (5,648     (12,575     (2,260

Residential real estate

     (16,955     (5,086     (515     (394     (529

Consumer

     (1,354     (1,141     (917     (1,069     (1,140

Total

     (56,862     (12,170     (7,080     (14,038     (3,929

Recoveries:

          

Commercial, mortgage and industrial

     878        1,774        1,640        640        1,699   

Residential real estate

     276        157        256        201        235   

Consumer

     245        285        497        465        274   

Total

     1,399        2,216        2,393        1,306        2,208   

Net Charge-offs

     (55,463     (9,954     (4,687     (12,732     (1,721

Provision for loan losses

     72,354        12,878        5,812        9,380        5,000   

Acquired loan loss reserve

            5,420                        

Allowance for lending-related commitments

                                 (969

Balance at December 31:

   $ 59,580      $ 42,689      $ 34,345      $ 33,220      $ 36,572   

Ratio of net charge-offs to average loans outstanding

     1.60     0.31     0.17     0.49     0.07

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

The following table summarizes net charge-offs as a percentage of average loans:

 

     December 31  
      2009     2008     2007     2006     2005  
(dollars in thousands)                               

Net charge-offs as a percentage average loans

          

Commercial, mortgage and industrial

   1.48   0.18   0.19   0.61   0.03

Residential real estate

   1.97   0.65   0.04   0.04   0.06

Consumer

   1.34   1.13   0.56   0.87   1.26

Total Loan Charge-offs

   1.60   0.31   0.17   0.49   0.07

Allowance for loan losses as a percentage of total loans

   1.75   1.20   1.23   1.25   1.47

Allowance for loan losses to total non-performing loans

   66   101   204   167   328

Provision for loan losses as a percentage of net loan charge-offs

   130   184   124   74   234

 

This table shows allocation of the allowance for loan losses as of the end of each of the last five years:

 

    December 31  
    2009     2008     2007     2006     2005  
     Amount   Percent
of Loans
in Each
Category
to Total
Loans
    Amount   Percent
of Loans
in Each
Category
to Total
Loans
    Amount   Percent
of Loans
in Each
Category
to Total
Loans
    Amount   Percent
of Loans
in Each
Category
to Total
Loans
    Amount   Percent
of Loans
in Each
Category
to Total
Loans
 
(dollars in
thousands)
                                                 

Commercial, mortgage and industrial

  $ 50,804   63   $ 38,951   64   $ 31,274   64   $ 28,540   63   $ 32,053   63

Real estate-construction

    5,919   11     73   10     51   11     379   13     532   14

Residential real estate

    501   24     660   24     543   22     536   21     613   21

Consumer

    2,356   2     3,005   2     2,477   3     3,765   3     3,374   2

Total

  $ 59,580   100   $ 42,689   100   $ 34,345   100   $ 33,220   100   $ 36,572   100

 

The balance of nonperforming loans, which included loans past due 90 days or more, at December 31, 2009 was $90.8 million or 2.67 percent of total loans. This compares to nonperforming loans of $42.5 million or 1.19 percent of total loans at December 31, 2008. Nonperforming assets totaled $95.4 million or 2.29 percent of total assets at December 31, 2009 and $43.3 million or 0.98 percent of total assets at December 31, 2008. There are no loans 90 days past due and still accruing interest. The increase of $48.3 million in nonperforming loans in 2009 as compared to 2008 was considered within the assessment of qualitative factors in the determination of the allowance for loan losses.

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

The provision for loans losses was $72.4 million for 2009, as compared to $12.9 million for 2008. The provision was the result of management’s detailed analysis of the adequacy of the allowance for loan losses and is consistent with the increase in nonperforming loans and classified loan trends, loan charge-off levels and the impact of the troubled commercial loan relationships during 2009.

The following table summarizes our nonaccrual and past due loans:

 

     December 31
      2009    2008    2007    2006    2005
(dollars in thousands)                         

Nonaccrual loans

   $ 90,807    $ 42,466    $ 16,798    $ 19,852    $ 11,166

Accruing loans past due 90 days or more

                        

 

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. There are no loans 90 days or more past due and still accruing. For the years ended December 31, 2009 and 2008, interest that would have been recorded had the nonaccrual loans performed in accordance with the original loan terms was $6.1 million and $3.2 million, respectively. At December 31, 2009 and 2008, there was $74.1 million and $27.9 million, respectively, of impaired loans that were on nonaccrual. There is no foreign loan amounts required to be included in this table in the periods presented and one troubled debt restructuring in 2009 of $1.4 million.

 

Noninterest Earning Assets

 

Average noninterest earning assets increased $62.1 million in 2009 and $101.0 million in 2008. The 2009 increase was primarily attributable to goodwill recorded in the merger with IBT, bank owned life insurance acquired from the merger, as well as increases in cash and due from banks and higher accrued interest receivable on a higher earning asset balance.

 

Deposits

 

      December 31  
   2009    2008    $ Change     % Change  
(dollars in thousands)                       

Deposits

          

Noninterest-bearing deposits

   $ 712,120    $ 600,282    $ 111,838      18.6

Interest-bearing deposits

     260,554      229,229      31,325      13.7

Money market

     289,367      283,290      6,077      2.1

Savings deposits

     752,130      821,805      (69,675   (8.5 )% 

Certificates of deposit

     1,290,370      1,293,810      (3,440   (0.3 )% 

Total Deposits

   $ 3,304,541    $ 3,228,416    $ 76,125      2.4

 

Average total deposits increased by $351.5 million, or 12 percent in 2009 as compared to 2008. Changes in the average deposit mix include increases of $264.7 million in certificates of deposit, $111.7 million in money market accounts, $48.1 million in NOW accounts and $34.6 million in demand deposits. Offsetting these increases is a decrease of $107.6 million in savings accounts. As a result of the IBT acquisition in June of 2008, average deposits increased $326.0 million. The composition of these IBT deposits included $159.4 million in certificates of deposit, $79.2 million in demand and NOW accounts, $46.2 million of money market accounts and $41.2 million of savings accounts. Average organic deposit growth, or average deposit increases not associated with the IBT

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

acquisition was $17.9 million. During 2009, the average increase in certificates of deposits of $264.7 million is primarily attributable to the $159.4 million acquired in the IBT acquisition as well as an increase $125.9 of brokered certificates of deposit. The average decrease of $107.6 million in savings accounts is primarily attributable to S&T being less aggressive with external competitive pricing strategies. Other important strategies include providing cash management services to commercial customers to increase transaction related deposits and enhanced delivery services such as electronic banking. Core deposit growth is an important strategic initiative for S&T, through the expansion of retail facilities, promotions and new products.

Management believes that the S&T deposit base is stable and that S&T has the ability to attract new deposits, mitigating a funding dependency on other more volatile sources. Certificates of deposit of $100,000 and over were 12 percent of total deposits at December 31, 2009 and 2008, respectively and primarily represent deposit relationships with local customers in our market area. S&T had $109.8 million and $59.0 million of brokered retail certificates of deposit outstanding at December 31, 2009 and 2008, respectively.

Maturities of certificates of deposit of $100,000 or more outstanding at December 31, are summarized as follows:

 

      2009
(dollars in thousands)     

Three months or less

   $ 128,767

Over three through six months

     55,790

Over six through twelve months

     51,973

Over twelve months

     175,371

Total Certificates of Deposit

   $ 411,901

 

During the first quarter of 2009, S&T began participation in the Certificate of Deposit Account Registry Services (“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 December 31, 2009, S&T had $65.7 million of reciprocal deposits and $5.9 million of brokered CDARS certificates of deposit. Both programs are classified as part of brokered retail certificates of deposit. The issuance of brokered retail certificates of deposits and participation in the CDARS program is an ALCO strategy to increase and diversify funding sources.

The daily average amount of deposits and rates paid on such deposits is summarized for the periods indicated in the following table:

 

      Years Ended December 31  
   2009     2008     2007  
   Amount    Rate     Amount    Rate     Amount    Rate  
(dollars in thousands)                                  

Noninterest-bearing demand deposits

   $ 637,434      $ 533,096      $ 441,647   

NOW/Money market accounts

     485,742    0.33     395,629    0.76     295,099    1.19

Savings deposits

     758,216    0.46     865,839    1.35     922,333    3.68

Certificates of deposit

     1,367,372    2.44     1,102,717    3.41     934,673    4.51

Total

   $ 3,248,764          $ 2,897,281          $ 2,593,752       

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

Borrowings

 

The daily average amount of borrowings is summarized for the periods indicated in the following table:

 

     Years Ended December 31  
      2009    2008    $ Change     %
Change
 
(dollars in thousands)                       

FHLB borrowings

   $ 223,704    $ 424,804    $ (201,100   -47.34

Other short-term borrowings

     114,908      145,580      (30,672   -21.07

Junior subordinated debt

     90,619      69,872      20,747      29.69
Total Borrowings    $ 429,231    $ 640,256    $ (211,025   -32.96

 

Average borrowings by S&T decreased $215.0 million in 2009 as compared to 2008. During 2009, S&T reduced borrowings since participation in the CPP provided increased liquidity. The decrease in borrowings is also the result of decreased loan demand as consumers and businesses react to the economic slowdown and an ALCO strategy to not replace maturing investment securities to mitigate interest rate risk. Borrowings are comprised of retail repurchase agreements (“REPOs”), wholesale REPOs, federal funds purchased, FHLB advances and long-term borrowings. S&T defines REPOs with our local retail customers as retail REPOs; wholesale REPOs are those transacted with other banks and brokerage firms.

The largest decreases in average borrowings in 2009 was a $131.0 million decrease in FHLB advances and $70.1 million in FHLB long term borrowings compared to 2008. The decrease in FHLB advances was a strategic initiative in order to develop a better diversified mix of wholesale funding sources. The average balance in retail REPOs decreased by $37.4 million in 2009. Wholesale REPOs, federal funds purchased and FHLB advances averaged $104.3 million in 2009, a decrease of $128.5 million from the 2008 average.

During 2009, average long-term borrowings decreased $49.1 million as compared to December 31, 2008. At December 31, 2009, S&T had long-term borrowings outstanding of $82.5 million at a fixed rate and $93.7 million at a variable rate.

During the third quarter of 2006, S&T Bank issued $25.0 million of junior subordinated debentures through a pooled transaction at an initial fixed rate of 6.78 percent. On September 15, 2011 and quarterly thereafter, S&T Bank has the option to redeem the subordinated debt, subject to a 30 day written notice and prior approval by the FDIC. If S&T chooses not to exercise the option for early redemption on September 15, 2011 or subsequent quarters, the subordinated debt will convert to a variable rate of 3-month LIBOR plus 160 basis points. The subordinated debt qualifies as Tier 2 capital under regulatory guidelines and will mature on December 15, 2036.

During the first quarter of 2008, S&T completed a private placement to a financial institution of $20.0 million of floating rate trust preferred securities. The trust preferred securities mature in March 2038 and are callable at S&T’s option, after five years and bear interest initially at a rate of 6.44 percent per annum and quarterly adjusts with the three-month LIBOR plus 350 basis points. S&T made interest payments to the trustee beginning on June 15, 2008 and quarterly thereafter. The proceeds from the sale of the trust preferred securities was used to partially finance the acquisition of IBT. The trust preferred securities qualifies as Tier 1 capital under regulatory guidelines.

During the second quarter of 2008, S&T Bank issued $20.0 million of junior subordinated debt through a private placement with three financial institutions at an initial rate of 6.40 percent and floats quarterly with 3-month LIBOR plus 350 basis points. If all or any portion of the subordinated debt ceases to be deemed to be Tier 2 Capital due to a change in applicable capital regulations, S&T

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

will have the right to redeem, on any interest payment date, subject to a 30 day written notice and prior approval by the FDIC, the subordinated debt at the applicable redemption rate which starts at a high of 102.82 percent at June 15, 2009 and decreases yearly to 100 percent on June 15, 2013 and thereafter and can be called after five years. The subordinated debt qualifies as Tier 2 capital under regulatory guidelines and will mature on June 15, 2018.

Also during the second quarter of 2008, S&T Bank issued $25.0 million of junior subordinated debt through a private placement with a financial institution at an initial rate of 5.15 percent and floats quarterly with 3-month LIBOR plus 250 basis points. At any time after May 30, 2013, S&T will have the right to redeem all or a portion of the subordinated debt, subject to a 30-day written notice and prior approval by the FDIC. The subordinated debt qualifies as Tier 2 capital under regulatory guidelines and will mature on May 30, 2018. The proceeds from the sale of these two subordinated debt issuances were also used to partially finance the acquisition of IBT.

The following table shows the distribution of our short-term borrowings and the weighted average interest rates thereon at the end of each of the last three years. Also provided are the maximum amount of borrowings and the average amounts of borrowings as well as weighted average interest rates for the last three years.

 

Securities Sold Under Repurchase Agreements, Federal Funds Purchased and
Term Auction Facility
   2009     2008     2007  
(dollars in thousands)                   

Balance at December 31

   $ 44,935      $ 113,419      $ 100,258   

Average balance during the year

     94,019        128,890        96,171   

Average interest rate during the year

     0.17     1.36     4.40

Maximum month-end balance during the year

   $ 129,835      $ 197,045      $ 118,918   

Average interest rate at year-end

     0.13     0.39     3.58

 

Short-term Federal Home Loan Bank Advances    2009     2008     2007  
(dollars in thousands)                   

Balance at December 31

   $ 51,300      $ 308,475      $ 80,000   

Average balance during the year

     96,929        227,918        44,214   

Average interest rate during the year

     0.54     1.87     5.26

Maximum month-end balance during the year

   $ 195,150      $ 377,850      $ 100,000   

Average interest rate at year-end

     0.27     0.59     4.46

 

WEALTH MANAGEMENT ASSETS

 

As of December 31, 2009, the estimated fair value of the S&T Bank wealth management assets under management, which are not accounted for as part of the assets of S&T, decreased 0.6 percent to $1.3 billion, with $911.7 million in wealth management services and $380.0 million in brokerage services. The decrease in 2009 is primarily attributable to decreased performance in the stock markets.

 

EXPLANATION OF USE OF NON-GAAP FINANCIAL MEASURES

 

In addition to the results of operations presented in accordance with GAAP, S&T management uses and this annual report contains or references, certain non-GAAP financial measures, such as net interest income on a fully taxable-equivalent basis, operating revenue and the efficiency ratio. S&T believes these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance and our business and performance trends as they facilitate comparisons with the performance of others in the financial services industry. Although S&T 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.

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

We believe 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 on page 28.

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

The efficiency ratio is recurring noninterest expense divided by recurring noninterest income plus net interest income, on a fully taxable-equivalent basis, which ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.

 

CAPITAL RESOURCES

 

Shareholders’ equity increased $104.6 million at December 31, 2009 compared to December 31, 2008. The increase is primarily due to a $108.7 million capital raise as a participant in the CPP. Net income available to common shareholders was $2.0 million and dividends declared to shareholders were $16.9 million for 2009 or $0.61 per share. Also, affecting capital was an increase of $5.0 million in the funded status of pension and $2.8 million in unrealized gains on securities available-for-sale, net of tax, which is included in other comprehensive income.

S&T continues to maintain a strong capital position with a leverage ratio of 10.26 percent as compared to the 2009 minimum regulatory guideline of 4.00 percent. S&T’s risk-based capital Tier 1 and Total ratios were 12.10 percent and 15.43 percent, respectively, at December 31, 2009, which places S&T well above the Federal Reserve Board’s risk-based capital guidelines of 4.00 percent and 8.00 percent for Tier 1 and Total capital. Management believes that S&T has the ability to raise additional capital if necessary.

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 $300.0 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 any 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 December 31, 2009, S&T had not issued any securities pursuant to the shelf registration statement.

On January 16, 2009, S&T completed a $108.7 million capital raise as a participant in the CPP. S&T temporarily used the funds received from the issuance of the Series A Preferred Stock and warrants to reduce S&T’s overnight borrowings at the FHLB of Pittsburgh which had the effect of increasing S&T’s liquidity for lending activities. See Item 1. Business, Capital Purchase Program for additional information.

In April 1993, shareholders approved the S&T Incentive Stock Plan (“Stock Plan”) authorizing the issuance of a maximum of 1.2 million shares of S&T’s common stock to assist in attracting and retaining employees of outstanding ability and to align their interests with those of the shareholders of S&T. On October 17, 1994, the Stock Plan was amended to include outside directors. On April 21, 1997, shareholders approved an amendment to the Stock Plan increasing the number of authorized shares to 3.2 million. As of December 31, 2002, 3,180,822 nonstatutory stock options and 35,600 restricted stock awards had been granted to key employees and outside directors under the Stock Plan; 318,850 of these awards are currently exercisable. In April 2003, shareholders approved the 2003 S&T Incentive Stock Plan (“2003 Stock Plan”) authorizing the issuance of 1.5 million shares, subject to capital adjustments as provided in the 2003 Stock Plan. The purpose of the 2003 Stock Plan is to promote the long-term interests of S&T and its shareholders by attracting and retaining

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

directors, officers and key employees. S&T believes that directors, officers and employees who own shares of its common stock will have a closer identification with S&T and a greater motivation to work for S&T’s success, because, as shareholders, they will participate in S&T’s growth and earnings. As of December 31, 2006, 937,500 nonstatutory stock options had been granted under the 2003 Stock Plan to employees and directors; 730,075 of these awards are currently exercisable. On December 19, 2005, S&T also granted 206,900 cash appreciation rights under the 2005 Cash Appreciation Rights (“CARs”) Plan to employees, with 179,175 of these awards currently exercisable. No corporate-wide stock option grants were awarded in 2006. On April 21, 2008 and April 16, 2007, 7,787 and 7,761, respectively, restricted stock awards were granted to outside directors. On December 15, 2008 and December 17, 2007, 3,224 and 35,199, respectively, restricted stock awards were granted to senior management. The restricted stock awards to outside directors vest in one year. The awards to senior management were granted in accordance with 2008 and 2007 performance levels and primarily based on earnings per share growth. The restricted stock awards to senior management have a vesting schedule of 25 percent in each of the next four years.

S&T has various financial obligations, including contractual obligations and commitments that may require future cash payments. The following table presents as of December 31, 2009, significant fixed and determinable contractual obligations to third parties by payment date:

 

     Payments Due In
      2010    2011-2012    2013-2014    Later Years    Total
(dollars in thousands)                         

Deposits without a stated maturity(1)

   $ 2,014,171    $    $    $    $ 2,014,171

Certificates of deposit(1)

     671,430      488,408      120,905      9,627      1,290,370

Federal funds purchased and securities sold under repurchase agreements(1)

     44,935                     44,935

Short-term borrowings(1)

     51,300                     51,300

Long-term borrowings(1)

     65,787      1,161      11,223      7,723      85,894

Junior subordinated debt securities(1)

                    90,619      90,619

Operating and capital leases

     1,562      3,023      3,087      36,307      43,979

Purchase obligations

     6,239      6,519      123           12,881

Total

   $ 2,855,424    $ 499,111    $ 135,338    $ 144,276    $ 3,634,149
(1) Excludes interest

 

Operating lease obligations represent short and long-term lease arrangements as described in Item 8, Note 9 Premises and Equipment, in the Consolidated Financial Statements. Purchase obligations represent obligations under agreement with Metavante, S&T’s third party data processing servicer, for operational services outsourced. The Metavante obligation has a buyout provision of 40 percent of the remaining payments under the original term of the contract.

In the normal course of business, S&T commits to extend credit and issue standby letters of credit. These obligations are not recorded in our financial statements. Loan commitments and standby letters of credit are subject to S&T’s normal credit underwriting policies and procedures and generally require collateral based upon management’s evaluation of each customer’s financial condition and ability to satisfy completely the terms of the agreement and are renewed on an annual basis. S&T’s exposure to credit loss in the event the customer does not satisfy the terms of the agreement equals the notional amount of the obligation less the value of any collateral. Unfunded commercial loan

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

commitments totaled $710.9 million and $765.6 million at December 31, 2009 and 2008, respectively. Unfunded other loan commitments totaled $256.0 million and $198.6 million at December 31, 2009 and 2008, respectively; and obligations under standby letters of credit totaled $156.3 million and $146.7 million at December 31, 2009 and 2008, respectively.

 

REGULATORY MATTERS

 

S&T and S&T Bank are subject to periodic examinations by the Pennsylvania Department of Banking (“PADB”), the FDIC and the Federal Reserve Bank of Cleveland (“Federal Reserve”). During 2009, the PADB conducted a Safety and Soundness examination that included, but was not limited to, a review of S&T Bank’s capital adequacy, asset quality, board of director and management oversight, earnings, liquidity, sensitivity to market risk and compliance with the Bank Secrecy Act. In addition, the PADB conducted stand alone Trust Department and Information Technology examinations. No comments were received from the PADB that would have a material effect on S&T’s liquidity, capital resources, operations or its overall compliance with laws and regulations.

 

LIQUIDITY

 

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 securities and earnings. Liability liquidity sources include a stable core deposit base, the ability to renew maturing certificates of deposits, borrowing availability at the FHLB, fed funds lines with other financial institutions, access to the brokered CD market including CDARS, and the ability to raise debt and equity. Customer deposits are an important source of liquidity which depends on the confidence of those customers in S&T supported by its 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.

During 2009 liquidity improved due to participation in the CPP, decreases in loan and security balances, stable deposit levels and a larger borrowing capacity at the FHLB which resulted from reduced borrowings.

 

INFLATION

 

Management is aware of the significant effect inflation has on interest rates and can have on financial performance. S&T’s ability to cope with this is best determined by analyzing its capability to respond to changing interest rates and its ability to manage noninterest income and expense. S&T monitors its mix of interest-rate sensitive assets and liabilities through ALCO in order to reduce the impact of

 

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

 

 

inflation on net interest income. Management also controls the effects of inflation by reviewing the prices of its products and services, by introducing new products and services and by controlling overhead expenses.

 

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

Because the assets and liabilities of S&T are primarily monetary in nature, the presentation and analysis of cash flows in formats prescribed by accounting principles generally accepted in the United States are less meaningful for managing bank liquidity than for non-financial companies. Funds are typically provided from current earnings, maturity and sales of securities available-for-sale, loan repayments, deposits and borrowings. The primary uses of funds include new loans, repayment of borrowings, the purchase of securities and dividends to shareholders. The level and mix of sources and uses of funds are constantly monitored and adjusted by ALCO in order to maintain credit, liquidity and interest-rate risks within prescribed policy guidelines while maximizing earnings.

ALCO monitors and manages interest-rate sensitivity through gap, rate shock and rate ramp analyses, economic value of equity (“EVE”) and simulations in order to avoid unacceptable earnings fluctuations due to interest rate changes. Interest rate sensitivity analyses are highly dependent on assumptions, which have been developed based upon past experience and the expected behavior of customers under various rate scenarios. The assumptions include principal prepayments for fixed rate loans, mortgage-backed securities of U.S. government corporations and agencies and collateralized mortgage obligations and classifying the demand, savings and money market balances by degree of interest-rate sensitivity.

The gap and cumulative gap represents the net position of assets and liabilities subject to repricing in specified 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 December 31, 2009.

 

Interest Rate Sensitivity

December 31, 2009

 

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

Repricing Assets:

           

Cash/due from banks

   $    $    $    $ 69,152   

Securities available-for-sale

     66,294      42,865      71,718      173,983   

Other investments

     23,542                  

Net loans

     1,574,862      306,522      466,955      996,488   

Other assets

                    378,094   

Total

     1,664,698      349,387      538,673      1,617,717   

Repricing Liabilities:

           

Demand

                    712,120   

NOW

     32,569      32,569      65,138      130,278   

Money market

     289,367                  

Savings

     544,230      29,700      59,400      118,800   

Certificates/clubs

     398,434      273,063      203,450      415,423   

Repos & short-term borrowings

     96,235                  

Long-term borrowings

     123,956      10,550      25,592      16,415   

Other liabilities/equity

                    593,186   

Total

     1,484,791      345,882      353,580      1,986,222   

GAP

   $ 179,907    $ 3,505    $ 185,093    $ (368,505

Cumulative GAP

   $ 179,907    $ 183,412    $ 368,505    $   

 

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Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — continued

 

 

Rate Sensitive Assets/Rate Sensitive Liabilities    December 31,
2009
   December 31,
2008

Cumulative 6 months

   1.12    0.87

Cumulative 12 months

   1.10    0.92

 

S&T’s one-year gap position at December 31, 2009 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 to our interest rate spreads, net interest income and operating spreads. Conversely, with an asset sensitive position in a rising interest rate environment more assets than liabilities will increase in rates. This situation could result in an increase to our interest rate spreads, net interest income and operating spreads.

In addition to the gap analysis, S&T performs rate shock and rate ramp analyses on a static balance sheet to estimate the effect that a +/- 100, +/-200 and +/-300 basis point instantaneous and gradual parallel shift in the yield curve would have on 12 months of pretax net interest income. The rate shocks incorporate assumptions regarding the level of interest rate changes on non-maturity deposit products (savings, money market, NOW and demand deposits) and changes in the prepayment behavior of fixed rate loans and securities with optionality. Inclusion of these assumptions makes rate shock and rate ramp 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 or rate ramps up to +/- 300 basis points. Although +/-100 and +/-200 basis point changes for the rate shock and rate ramp analyses are not policy guidelines, these analyses are performed to ensure directional consistency of the +/-300 basis point analysis.

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

 

      +300 bps     -300 bps  

December 31, 2009

   8.16   (6.93 )% 

December 31, 2008

   (.72 )%    .73

 

When comparing December 2009 to December 2008, the impact on pretax net interest income in the –300 basis point rate shock scenario deteriorated and the impact on the pretax net interest income in the +300 basis point rate improved. The deterioration/improvement is a result of the balance sheet becoming asset sensitive. The balance sheet became asset sensitive as loan and security volume declined and participation in the CPP resulted in a significant reduction in short-term borrowings.

In order to monitor interest rate risk beyond the one-year time horizon of shocks and rate ramps, S&T also performs (“EVE”) an Economic Value of Equity analysis. EVE represents the present value of all asset cash flows minus the present value of all liability cash flows. As with rate shock analysis, EVE incorporates management assumptions regarding prepayment behavior of fixed rate loans and securities with optionality and core deposit behavior. S&T’s policy is to limit the change in EVE to –35 percent given changes in rates up to +/-300 basis points. The December 2009 results reflect a 20.41 percent decrease and 6.22 percent increase to EVE given a –300 and +300 basis point change in interest rates respectively.

 

PAGE 58


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

Consolidated Financial Statements

 

Consolidated Balance Sheets

   60

Consolidated Statements of Income

   61

Consolidated Statements of Changes in Shareholders’ Equity

   62

Consolidated Statements of Cash Flows

   63

Notes to Consolidated Financial Statements

   64

Report of Management

   110

Report of KPMG LLP, Independent Registered Public Accounting Firm on Effectiveness of Internal Control Over Financial Reporting

   111

Report of KPMG LLP, Independent Registered Public Accounting Firm on Consolidated Financial Statements

   112

 

PAGE 59


CONSOLIDATED BALANCE SHEETS

S&T Bancorp, Inc. and Subsidiaries

 

December 31    2009     2008  
(dollars in thousands, except share and per share data)             

ASSETS

    

Cash and due from banks

   $ 69,152      $ 69,780   

Securities available-for-sale

     354,860        452,713   

Federal Home Loan Bank stock, at cost

     23,542        23,542   

Loans held for sale

     6,073        737   

Portfolio loans

     3,398,334        3,567,979   

Allowance for loan losses

     59,580        42,689   

Portfolio loans, net

     3,338,754        3,525,290   

Premises and equipment, net

     40,990        45,304   

Goodwill

     165,167        163,546   

Other intangibles, net

     9,408        11,713   

Bank owned life insurance

     52,863        51,254   

Other assets

     109,666        94,489   

Total Assets

   $ 4,170,475      $ 4,438,368   

LIABILITIES

    

Deposits:

    

Noninterest-bearing demand

   $ 712,120      $ 600,282   

Interest-bearing demand

     260,554        229,229   

Money market

     289,367        283,290   

Savings

     752,130        821,805   

Certificates of deposit

     1,290,370        1,293,810   

Total Deposits

     3,304,541        3,228,416   

Securities sold under repurchase agreements and federal funds purchased

     44,935        113,419   

Short-term borrowings

     51,300        308,475   

Long-term borrowings

     85,894        180,331   

Junior subordinated debt securities

     90,619        90,619   

Other liabilities

     39,868        68,414   

Total Liabilities

     3,617,157        3,989,674   

SHAREHOLDERS’ EQUITY

    

Fixed rate cumulative perpetual preferred stock, series A, no par value, $1,000 per share liquidation preference

Authorized—10,000,000 shares in 2009 and 2008

Issued and outstanding—108,676 in 2009 and none in 2008

     105,370          

Common stock ($2.50 par value)

Authorized—50,000,000 shares in 2009 and 2008

Issued—29,714,038 shares in 2009 and 2008

Outstanding—27,746,554 shares in 2009 and 27,632,928 shares in 2008

     74,285        74,285   

Additional paid-in capital

     51,158        43,327   

Retained earnings

     383,118        402,608   

Accumulated other comprehensive loss

     (6,214     (13,986

Treasury stock (1,967,484 shares in 2009 and 2,081,110 shares in 2008, at cost)

     (54,399     (57,540

Total Shareholders’ Equity

     553,318        448,694   

Total Liabilities and Shareholders’ Equity

   $ 4,170,475      $ 4,438,368   

See Notes to Consolidated Financial Statements

 

PAGE 60


CONSOLIDATED STATEMENTS OF INCOME

S&T Bancorp, Inc. and Subsidiaries

 

Years Ended December 31    2009     2008     2007
(dollars in thousands, except per share data)                 

INTEREST INCOME

      

Loans, including fees

   $ 179,774      $ 198,754      $ 199,387

Investment Securities:

      

Taxable

     11,020        12,630        11,807

Tax-exempt

     3,655        3,529        2,601

Dividends

     638        1,205        1,810

Total Interest Income

     195,087        216,118        215,605

INTEREST EXPENSE

      

Deposits

     38,438        52,363        79,587

Securities sold under repurchase agreements and federal funds purchased

     142        1,750        4,231

Short-term borrowings

     544        4,263        2,325

Long-term borrowings and junior subordinated debt securities

     9,981        13,795        13,024

Total Interest Expense

     49,105        72,171        99,167

NET INTEREST INCOME

     145,982        143,947        116,438

Provision for loan losses

     72,354        12,878        5,812

Net Interest Income After Provision for Loan Losses

     73,628        131,069        110,626

NONINTEREST INCOME

      

Security (losses) gains, net

     (5,088     (1,651     3,844

Service charges on deposit accounts

     12,942        12,322        10,124

Wealth management fees

     7,500        7,967        7,470

Letter of credit fees

     1,721        1,761        2,013

Insurance fees

     7,751        8,096        7,285

Mortgage banking

     2,727        (305     641

Debit and credit card fees

     6,921        5,910        4,819

Other

     4,106        3,352        4,409

Total Noninterest Income

     38,580        37,452        40,605

NONINTEREST EXPENSE

      

Salaries and employee benefits

     48,848        42,708        40,387

Occupancy, net

     6,819        6,416        5,846

Furniture and equipment

     5,067        4,479        3,737

Other taxes

     3,733        3,017        2,906

Data processing

     6,048        5,488        4,880

Amortization of intangibles

     2,308        1,055        300

FDIC assessment

     8,388        409        302

Other

     26,915        20,229        15,102

Total Noninterest Expense

     108,126        83,801        73,460

Income Before Taxes

     4,082        84,720        77,771

(Benefit) provision for income taxes

     (3,869     24,517        21,627

Net Income

     7,951