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Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2011

OR

 

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

For the transition period from             To             

Commission file number 0-12508

 

 

S&T BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   25-1434426

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

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

800-325-2265

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

 

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Stock, $2.50 Par Value - 28,055,914 shares as of April 30, 2011

 

 

 


Table of Contents

INDEX

S&T BANCORP, INC. AND SUBSIDIARIES

 

             Page No.      
PART I. FINANCIAL INFORMATION   

Item 1.

  Financial Statements   
 

Consolidated Balance Sheets – March 31, 2011 and December 31, 2010

     3      
 

Consolidated Statements of Income – Three Months Ended March 31, 2011 and 2010

     4      
 

Consolidated Statements of Changes in Shareholders’ Equity – Three Months Ended March 31, 2011 and 2010

     5      
 

Consolidated Statements of Cash Flows – Three Months Ended March 31, 2011 and 2010

     6      
 

Notes to Consolidated Financial Statements

     7-28      

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      28-39      

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      40-41      

Item 4.

  Controls and Procedures      41      
PART II. OTHER INFORMATION   

Item 1.

  Legal Proceedings      42      

Item 1A.

  Risk Factors      42      

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      42      

Item 3.

  Defaults Upon Senior Securities      42      

Item 4.

  Removed and Reserved      42      

Item 5.

  Other Information      42      

Item 6.

  Exhibits      42      
  Signatures      43      

 

2


Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

(in thousands, except share and per share data)   

March 31, 2011

(Unaudited)

   

December 31, 2010

(Audited)

 

ASSETS

    

Cash and due from banks

   $ 50,185      $ 46,936   

Interest-bearing deposits with banks

     58,670        61,260   

Securities available-for-sale, at fair value

     331,536        288,025   

Federal Home Loan Bank stock, at cost

     21,247        22,365   

Loans held for sale

     2,305        8,337   

Portfolio loans

     3,302,016        3,355,590   

Allowance for loan losses

     (61,663     (51,387
                  

Portfolio loans, net

     3,240,353        3,304,203   
                  

Premises and equipment, net

     39,642        39,954   

Goodwill

     165,273        165,273   

Other intangibles, net

     7,002        7,465   

Bank owned life insurance

     55,427        54,924   

Other assets

     118,414        115,597   
                  

Total Assets

   $ 4,090,054      $ 4,114,339   
                  

LIABILITIES

    

Deposits:

    

Noninterest-bearing demand

   $ 802,748      $ 765,812   

Interest-bearing demand

     286,111        295,246   

Money market

     240,375        262,683   

Savings

     755,311        753,813   

Certificates of deposit

     1,221,294        1,239,970   
                  

Total Deposits

     3,305,839        3,317,524   
                  

Securities sold under repurchase agreements

     38,270        40,653   

Long-term borrowings

     28,974        29,365   

Junior subordinated debt securities

     90,619        90,619   

Other liabilities

     46,237        57,513   
                  

Total Liabilities

     3,509,939        3,535,674   

SHAREHOLDERS’ EQUITY

    

Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value

$1,000 per share liquidation price

10,000,000 shares authorized in 2011 and 2010

108,676 shares issued and outstanding in 2011 and 2010

     106,333        106,137   

Common stock, $2.50 par value

50,000,000 shares authorized in 2011 and 2010

29,714,038 shares issued in 2011 and 2010

28,033,757 shares and 27,951,689 shares outstanding at March 31, 2011 and December 31, 2010, respectively

     74,285        74,285   

Additional paid-in capital

     51,837        51,570   

Retained earnings

     400,501        401,734   

Accumulated other comprehensive loss

     (6,389     (6,334

Treasury stock (1,680,281 and 1,762,349 shares in 2011 and 2010, respectively, at cost)

     (46,452     (48,727
                  

Total Shareholders’ Equity

     580,115        578,665   
                  

Total Liabilities and Shareholders’ Equity

   $ 4,090,054      $ 4,114,339   
                  

See Notes to Consolidated Financial Statements

 

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Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

     Three Months Ended March 31,  
(in thousands, except per share data)    2011      2010  

INTEREST INCOME

     

Loans, including fees

   $ 39,649       $ 42,219   

Investment Securities:

     

Taxable

     1,812         2,177   

Tax-exempt

     598         796   

Dividends

     133         132   
                   

Total Interest Income

     42,192         45,324   
                   

INTEREST EXPENSE

     

Deposits

     6,062         7,608   

Securities sold under repurchase agreements

     15         43   

Long-term borrowings and junior subordinated debt securities

     1,243         1,759   
                   

Total Interest Expense

     7,320         9,410   
                   

NET INTEREST INCOME

     34,872         35,914   

Provision for loan losses

     10,640         4,430   
                   

Net Interest Income After Provision for Loan Losses

     24,232         31,484   
                   

NONINTEREST INCOME

     

Securities gains, net

     13         153   

Service charges on deposit accounts

     2,404         2,971   

Wealth management fees

     2,050         1,984   

Letters of credit fees

     254         353   

Insurance fees

     2,132         2,368   

Mortgage banking

     625         410   

Debit and credit card fees

     2,012         1,381   

Other

     1,536         1,723   
                   

Total Noninterest Income

     11,026         11,343  
                   

NONINTEREST EXPENSE

     

Salaries and employee benefits

     13,320         12,565   

Occupancy, net

     1,857         1,984   

Furniture and equipment

     1,191         1,088   

Other taxes

     902         945   

Data processing

     1,504         1,603   

Amortization of intangible assets

     463         524   

Legal

     466         2,216   

Joint venture amortization

     740         628   

FDIC assessment

     1,226         1,301   

Other

     5,780         5,076   
                   

Total Noninterest Expense

     27,449         27,930   
                   

Income Before Provision for Income Taxes

     7,809         14,897   

Provision for income taxes

     1,514         3,593   
                   

Net Income

     6,295         11,304   

Preferred stock dividends and amortization of discount

     1,555         1,547   
                   

Net Income Available to Common Shareholders

   $ 4,740       $ 9,757   
                   

Common earnings per share—basic

   $ 0.17      $ 0.35  

Common earnings per share—diluted

     0.17         0.35   

Dividends declared per common share

     0.15         0.15   

Average common shares outstanding—basic

     27,937         27,724   

Average common shares outstanding—diluted

     27,957         27,753   
                   

See Notes to Consolidated Financial Statements

 

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Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

(in thousands, except per share data)    Comprehensive
Income
   

Preferred

Stock

    

Common

Stock

    

Additional

Paid-in

Capital

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Loss

   

Treasury

Stock

    Total  

Balance at January 1, 2010

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

Net income for three months ended March 31, 2010

   $ 11,304                11,304            11,304  

Other Comprehensive Income, Net of Tax

                  

Change in unrealized gains on securities of $1,642 net of reclassification adjustment for gains included in net income of ($153) and tax expense of ($521)

     968                  968          968   

Adjustment to funded status of employee benefit plans, net of tax expense $81

     151                  151          151   
                        

Total Comprehensive Income

   $ 12,423                   

Preferred stock dividends and amortization of discount

       188              (1,547         (1,359

Cash dividends declared ($0.15 per share)

               (4,163         (4,163

Treasury stock issued (34,939 shares)

               (421       863        442   

Recognition of restricted stock compensation expense

             186              186   

Forfeitures of nonstatutory stock options

             (104           (104
                                                                    

Balance at March 31, 2010

     $ 105,558       $ 74,285       $ 51,240      $ 388,291      $ (5,095   $ (53,536   $ 560,743   
                                                                    
                                                                    

Balance at January 1, 2011

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

Net income for three months ended March 31, 2011

   $ 6,295                6,295            6,295   

Other Comprehensive Income, Net of Tax

                  

Change in unrealized gains on securities of ($281) net of reclassification adjustment for gains included in net income of ($13) and tax benefit of $103

     (191               (191       (191

Adjustment to funded status of employee benefit plans, net of tax benefit $73

     136                  136          136   
                        

Total Comprehensive Income

   $ 6,240                   

Preferred stock dividends and amortization of discount

       196              (1,555         (1,359

Cash dividends declared ($0.15 per share)

               (4,193         (4,193

Treasury stock issued (83,605 shares)

               (1,780       2,312        532   

Recognition of restricted stock compensation expense

             267              267   

Forfeitures of restricted stock (1,537 shares)

                   (37     (37
                                                                    

Balance at March 31, 2011

     $ 106,333       $ 74,285       $ 51,837      $ 400,501      $ (6,389   $ (46,452   $ 580,115   
                                                                    

See Notes to Consolidated Financial Statements

 

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Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

     Three Months Ended March 31,  
(in thousands)    2011     2010  

OPERATING ACTIVITIES

    

Net income

   $ 6,295      $ 11,304   

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

    

Provision for loan losses

     10,640        4,430   

Provision for unfunded loan commitments

     265        (240

Depreciation and amortization

     1,465        1,713   

Net amortization (accretion) of discounts and premiums

     318        184   

Stock-based compensation expense

     181        172   

Securities gains, net

     (13     (153

Deferred income taxes

     (2,042     (1,083

Mortgage loans originated for sale

     (23,109     (21,524

Proceeds from the sale of loans

     29,510        24,488   

Gain on the sale of loans, net

     (369     (244

Net (increase) decrease in interest receivable

     (54     934   

Net increase (decrease) in interest payable

     160        (530

Net decrease in other assets

     753        1,785   

Net (decrease) increase in other liabilities

     (11,442     6,006   
                  

Net Cash Provided by Operating Activities

     12,558        27,242   
                  

INVESTING ACTIVITIES

    

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

     13,065        56,778   

Proceeds from sales of securities available-for-sale

     70        1,387   

Purchases of securities available-for-sale

     (56,127     (30,576

Net decrease in loans

     50,965        1,063   

Purchases of premises and equipment

     (613     (123

Proceeds from the sale of premises and equipment

     253        26   
                  

Net Cash Provided by Investing Activities

     7,613        28,555   
                  

FINANCING ACTIVITIES

    

Net increase (decrease) in core deposits

     6,991        (48,475

Net (decrease) increase in certificates of deposit

     (18,708     89,713   

Net decrease in short-term borrowings

     —          (51,300

Net (decrease) increase in securities sold under repurchase agreements

     (2,384     3,061   

Repayments of long-term borrowings

     (391     (40,263

Sale of treasury stock

     532        442   

Cash dividends paid to preferred shareholder

     (1,359     (1,359

Cash dividends paid to common shareholders

     (4,193     (4,163
                  

Net Cash Used in Financing Activities

     (19,512     (52,344
                  

Net increase in cash and cash equivalents

     659        3,453   

Cash and cash equivalents at beginning of period

     108,196        69,152   
                  

Cash and Cash Equivalents at End of Period

   $ 108,855      $ 72,605   
                  

Supplemental Disclosures

    

Transfers of other real estate owned and other repossessed assets

   $ 2,677      $ 2,425   

Interest paid

     7,159        7,940   

Income taxes paid (1)

     —          —     

(1) There were no taxes paid during either of the quarters presented above due to the carryforward of prior year overpayments.

See Notes to Consolidated Financial Statements

 

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Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

 

Principals of Consolidation

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

Basis of Presentation

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

Use of Estimates

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

Recently Adopted Accounting Standards Updates

Disclosures about Credit Quality and the Allowance for Credit Losses

In July 2010, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”) that significantly increases disclosures about the credit quality of financing receivables and the allowance for credit losses, and requires additional information, such as aging information and credit quality indicators disaggregated by portfolio segment and class. The disaggregated information is based on how a company develops its allowance for credit losses and how it manages its credit exposure. Required disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010, while required disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. Required disclosures specifically related to troubled debt restructurings were deferred in an ASU issued in January 2011. The effect of this update is included in the notes to the consolidated financial statements. The adoption of this ASU did not have a material impact on S&T’s consolidated financial statements.

Fair Value Measurements

In January 2010, the FASB issued an ASU requiring new disclosures on transfers into and out of Level 1 and 2 fair value measurements of the fair value hierarchy and requiring separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures relating to the level of disaggregation and inputs and valuation techniques used to measure fair value. It was effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which was effective for fiscal years beginning after December 15, 2010. The additional Level 3 disclosures that are now required have been included in the notes to the consolidated financial statements. The adoption of this ASU did not have a material impact on S&T’s consolidated financial statements.

Goodwill Impairment

In December 2010, the FASB issued an ASU that modifies step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of this ASU did not have a material impact on S&T’s consolidated financial position.

 

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Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

Recently Issued Accounting Standards Updates not yet Adopted

Troubled Debt Restructurings

In April 2011, the FASB issued an ASU clarifying when a loan modification or restructuring is considered a troubled debt restructuring. The guidance is effective for the first interim period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment on newly-considered impaired receivables an entity should apply the guidance prospectively in the first interim period beginning on or after June 15, 2011. The disclosures relating to troubled debt restructurings will be required in the first interim period beginning on or after June 15, 2011. The adoption of this ASU is not expected to have a material impact on S&T’s consolidated financial statements.

Reclassification

Certain prior period amounts have been reclassified to conform to the current year’s presentation. The reclassifications had no significant effect on S&T’s financial condition or results of operations.

NOTE 2. 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 (“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. The Series A Preferred Stock pays cumulative dividends at a rate of five percent per year for the first five years and thereafter at a rate of nine percent per year. 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.

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

The Warrant expires ten years from the issuance date. In addition, the U.S. Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.

NOTE 3. FAIR VALUE MEASUREMENTS

 

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

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

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

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

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

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

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

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

The following is a description of the valuation methodologies that S&T uses for financial instruments recorded at estimated fair value on either a recurring or nonrecurring basis:

Recurring Basis

Securities Available-for-Sale

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

S&T obtains estimated fair values for debt securities from a third-party pricing service, which utilizes several sources for valuing fixed-income securities. The market evaluation sources for debt securities include observable inputs rather than significant unobservable inputs and are classified as Level 2.

S&T’s collateralized mortgage obligations and mortgage-backed securities of U.S. government corporations and agencies are valued based on market data. The service provider utilizes evaluated pricing models that vary by asset class and include available trade, bid and other market information. Generally, the methodologies include broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs. All mortgage-backed securities are residential.

S&T’s obligations of states and political subdivisions portfolio is valued using proprietary valuation matrices from the service provider. The market evaluation model includes a separate curve structure for the bank-qualified versus general market municipals. For the bank-qualified municipals, the source is the service provider’s own trading desk. Securities are further broken down according to insurer, credit support, state of issuance and rating to incorporate additional spreads and municipal curves.

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

Trading Assets

When available, S&T uses quoted market prices to determine the fair value of trading assets. S&T’s only trading asset is a Rabbi Trust for deferred compensation plans, which is invested in two readily quoted mutual funds. The assets within the Rabbi Trust are classified as Level 1.

Derivative Financial Instruments

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

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

Nonrecurring Basis

Loans Held for Sale

Loans held for sale consist of 1-4 family residential loans originated for sale in the secondary market and carried at the lower of cost or fair value. Periodically, it may be necessary to record fair value adjustments under lower of cost or fair value. S&T determines fair value based on reference to quoted market prices for similar assets and liabilities. As a result, such estimates of fair value are classified as Level 2.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

Impaired Loans

A loan is considered impaired when it is probable that S&T will be unable to collect all interest and principal payments due according to the original contractual terms of the loan agreement. S&T individually evaluates all substandard and doubtful commercial loans greater than $0.5 million for impairment and any other commercial loans greater than $0.5 million identified by management that show signs of impairment. S&T establishes a specific reserve based on the following three impairment methods: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate, 2) the loan’s observable market price or 3) the fair value of the collateral less estimated selling costs when the loan is collateral dependent. Collateral values are generally based upon appraisals from approved, independent state certified appraisers. Fair value is determined as the recorded investment balance less any specific reserve.

Appraisals may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation or management’s knowledge of the borrower and the borrower’s business. Since not all valuation inputs are observable, S&T classifies these nonrecurring fair value determinations as Level 2 or Level 3 based on the lowest level of input that is significant to the fair value measurement.

OREO and Other Repossessed Assets

OREO and other repossessed assets are comprised of commercial construction and commercial and residential real estate properties obtained in partial or total satisfaction of loan obligations. OREO acquired in settlement of indebtedness is recorded at estimated fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of carrying value or current estimated fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. OREO and other repossessed assets are classified as Level 2.

Mortgage Servicing Rights

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

Other Assets

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

Financial Instruments

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

Cash and Cash Equivalents and Other Short-Term Assets

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

Loans

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

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

Bank Owned Life Insurance

Fair value approximates net cash surrender value.

Deposits

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

Short-Term Borrowings

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

Long-Term Borrowings

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

Junior Subordinated Debt Securities

For the variable rate junior subordinated debt securities that reprice quarterly, fair values are based on carrying values. For the $25.0 million junior subordinated debt issued with a fixed rate period of five years which then converts to a variable rate, fair valued is based on discounted cash flows at current interest rates during the fixed rate period.

Loan Commitments and Standby Letters of Credit

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

Other

Estimates of fair value have not been made for items that are not defined as financial instruments, including such items as S&T’s core deposit intangibles and the value of its trust operation.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

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

 

     March 31, 2011  
(in thousands)    Level 1      Level 2      Level 3      Total  
                                     

ASSETS

           

Securities available-for-sale:

           

Obligations of U.S. government corporations and agencies

   $ -       $ 124,719       $ -       $ 124,719   

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

     -         73,877         -         73,877   

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

     -         58,640         -         58,640   

Obligations of states and political subdivisions

     -         62,400         -         62,400   

Marketable equity securities

     2,004         8,240         1,656         11,900   
                                     

Total securities available-for-sale

     2,004         327,876         1,656         331,536   

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

     2,050         -         -         2,050   
                                     

Total securities

     4,054         327,876         1,656         333,586   

Derivative financial assets:

           

Interest rate swaps

     -         15,033         -         15,033   

Interest rate lock commitments

     -         244         -         244   
                                     

Total Assets

   $ 4,054       $ 343,153       $ 1,656       $ 348,863   
                                     

LIABILITIES

           

Derivative financial liabilities:

           

Interest rate swaps

   $ -       $ 14,970       $ -       $ 14,970   

Forward sale contracts

     -         48         -         48   
                                     

Total Liabilities

   $ -       $ 15,018       $ -       $ 15,018   
                                     
     December 31, 2010  
(in thousands)    Level 1      Level 2      Level 3      Total  
                                     

ASSETS

           

Securities available-for-sale:

           

Obligations of U.S. government corporations and agencies

   $ -       $ 125,675       $ -       $ 125,675   

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

     -         41,491         -         41,491   

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

     -         43,991         -         43,991   

Obligations of states and political subdivisions

     -         65,772         -         65,772   

Marketable equity securities

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

Total securities available-for-sale

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

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

     2,089         -         -         2,089   
                                     

Total securities

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

Derivative financial assets:

           

Interest rate swaps

     -         17,518         -         17,518   

Interest rate lock commitments

     -         217         -         217   

Forward sale contracts

     -         412         -         412   
                                     

Total Assets

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

LIABILITIES

           

Derivative financial liabilities:

           

Interest rate swaps

   $ -       $ 17,355       $ -       $ 17,355   
                                     

Total Liabilities

   $ -       $ 17,355       $ -       $ 17,355   
                                     

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

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

 

(in thousands)    March 31, 2011      March 31, 2010  
                   

Balance at beginning of period

   $ 1,588       $ 1,138   

Total gains (losses) included in other comprehensive loss

     68         -   
                   

Balance at end of period

   $ 1,656       $ 1,138   
                   

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

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

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

 

     March 31, 2011  
(in thousands)    Level 1      Level 2      Level 3      Total  
                                     

ASSETS

           

Loans held for sale

   $ -       $ 2,305       $ -       $ 2,305   

Impaired loans

     -         18,911         3,310         22,221   

Other real estate owned

     -         7,374         322         7,696   

Mortgage servicing rights

     -         -         2,869         2,869   
                                     

Total Assets

   $ -       $ 28,590       $ 6,501       $ 35,091   
                                     

 

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

ASSETS

           

Loans held for sale

   $ -       $ 8,337       $ -       $ 8,337   

Impaired loans

     -         10,968         1,478         12,446   

Other real estate owned

     -         5,820         -         5,820   

Mortgage servicing rights

     -         -         2,510         2,510   
                                     

Total Assets

   $ -       $ 25,125       $ 3,988       $ 29,113   
                                     

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

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

The following table presents the estimated fair value of financial instruments as of:

 

     March 31, 2011      December 31, 2010  
(in thousands)    Fair Value      Carrying
Value
(1) 
     Fair Value      Carrying
Value
(1) 
 
                                     

ASSETS

           

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

   $ 108,855       $ 108,855       $ 108,196       $ 108,196   

Securities available-for-sale

     331,536         331,536         288,025         288,025   

Federal Home Loan Bank stock, at cost

     21,247         21,247         22,365         22,365   

Loans

     3,264,323         3,304,321         3,336,421         3,363,927   

Bank owned life insurance

     55,427         55,427         54,924         54,924   

Trading securities

     2,050         2,050         2,089         2,089   

Mortgage servicing rights

     2,869         2,869         2,510         2,510   

Interest rate swaps

     15,033         15,033         17,518         17,518   

Interest rate lock commitments

     244         244         217         217   

Forward sales contracts

     -         -         412         412   

LIABILITIES

           

Deposits

   $ 3,319,035       $ 3,305,839       $ 3,328,864       $ 3,317,524   

Securities sold under repurchase agreements

     38,270         38,270         40,653         40,653   

Long-term borrowings

     30,318         28,974         31,345         29,365   

Junior subordinated debt securities

     91,165         90,619         91,460         90,619   

Interest rate swaps

     14,970         14,970         17,355         17,355   

Forward sales contracts

     48         48         -         -   
                                     

(1) As reported in the Consolidated Balance Sheets

NOTE 4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

Interest Rate Swaps

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

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

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

Interest Rate Lock Commitments and Forward Sales Contracts

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

 

    

Derivatives

(included in Other Assets)

    

Derivatives

(included in Other Liabilities)

 
(in thousands)    March 31, 2011      December 31, 2010      March 31, 2011      December 31, 2010  
                                     

Derivatives not Designated as Hedging Instruments

           

Interest Rate Swap Contracts - Commercial Loans

           

Fair value

   $ 15,033       $ 17,518       $ 14,970       $ 17,355   

Notional amount

     209,100         211,078         209,100         211,078   

Collateral posted

     -         -         13,795         13,928   

Interest Rate Lock Commitments - Mortgage Loans

           

Fair value

     244         217         -         -   

Notional amount

     8,296         17,033         -         -   

Forward Sale Contracts - Mortgage Loans

           

Fair value

     -         412         48         -   

Notional amount

     -         21,785         7,850         -   
                                     

 

     Amount of (Loss) Gain Recognized in Income on  Derivatives  
(in thousands)    March 31, 2011     March 31, 2010  
                  

Derivatives not Designated as Hedging Instruments

    

Interest rate swap contracts - commercial loans

     $(100     $ 105   

Interest rate lock commitments - mortgage loans

     27        47   

Forward sale contracts - mortgage loans

     (460     (200
                  

Total Derivatives not Designated as Hedging Instruments

     $(533     $  (48
                  

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

NOTE 5. SECURITIES AVAILABLE-FOR-SALE

 

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

 

     March 31, 2011  
(in thousands)    Amortized Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
   

Fair

Value

 
                                    

Obligations of U.S. government corporations and agencies

   $ 123,509       $ 1,512       $ (302   $ 124,719   

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

     72,878         1,479         (480     73,877   

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

     56,127         2,513         -        58,640   

Obligations of states and political subdivisions

     60,974         1,489         (63     62,400   
                                    

Debt Securities

     313,488         6,993         (845     319,636   

Marketable equity securities

     10,290         1,758         (148     11,900   
                                    

Total

   $ 323,778       $ 8,751       $ (993   $ 331,536   
                                    

 

     December 31, 2010  
(in thousands)    Amortized Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
   

Fair

Value

 
                                    

Obligations of U.S. government corporations and agencies

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

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

     39,790         1,701         -        41,491   

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

     41,373         2,618         -        43,991   

Obligations of states and political subdivisions

     64,651         1,357         (236     65,772   
                                    

Debt Securities

     269,626         7,754         (451     276,929   

Marketable equity securities

     10,347         1,010         (261     11,096   
                                    

Total

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

There were no significant gross realized gains or losses for the three months ended March 31, 2011. There were $0.2 million in gross realized gains and no significant gross realized losses for the three months ended March 31, 2010. Realized gains and losses on the sale of securities are determined using the specific-identification method.

Net unrealized gains of $5.0 million and $5.2 million were included in accumulated other comprehensive loss, net of tax, at March 31, 2011 and December 31, 2010, respectively.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

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

 

     March 31, 2011  
     Less than 12 Months     12 Months or More     Total  
(in thousands)    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 
                                                     

Obligations of U.S. government corporations and agencies

   $ 31,589       $ (302   $ -       $ -      $ 31,589       $ (302

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

     37,435         (480     -         -        37,435         (480

Obligations of states and political subdivisions

     7,503         (46     941         (17     8,444         (63
                                                     

Debt Securities Available-for-Sale

     76,527         (828     941         (17     77,468         (845

Marketable equity securities

     657         (148     -         -        657         (148
                                                     

Total Temporarily Impaired Securities

   $ 77,184       $ (976   $ 941       $ (17   $ 78,125       $ (993
                                                     

 

     December 31, 2010  
     Less than 12 Months     12 Months or More     Total  
(in thousands)    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 
                                                     

Obligations of U.S. government corporations and agencies

   $ 20,558       $ (215   $ -       $ -      $ 20,558       $ (215

Obligations of states and political subdivisions

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

Debt Securities Available-for-Sale

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

Marketable equity securities

     2,068         (261     -         -        2,068         (261
                                                     

Total Temporarily Impaired Securities

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

S&T does not believe any individual unrealized loss as of March 31, 2011 represents an other-than-temporary impairment (“OTTI”). S&T performs a review of its securities for OTTI on a quarterly basis to identify securities that may indicate an OTTI. Generally, S&T records an impairment charge when an equity security within the marketable equity securities portfolio has been in a loss position for 12 consecutive months, unless facts and circumstances suggest the need for an OTTI prior to that time. S&T’s policy for recording an OTTI within the debt securities portfolio is based upon a number of factors, including but not limited to, the length of time and the extent to which fair value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of a security recovering from any decline in fair value and whether management intends to sell the security or if it is more likely than not that management will be required to sell the security prior to the it recovering.

As of March 31, 2011, the unrealized losses on 30 debt securities were primarily attributable to changes in interest rates. The unrealized losses on 7 marketable equity securities as of March 31, 2011 were attributable to temporary declines in fair value. S&T does not intend to sell and it is not likely that S&T will be required to sell any of the securities, referenced in the table above, in an unrealized loss position before recovery of its amortized cost.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

The amortized cost and fair value of available-for-sale securities at March 31, 2011, by contractual maturity, are included in the table below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(in thousands)    Amortized
Cost
     Fair Value  
                   

Due in one year or less

   $ 14,096       $ 14,412   

Due after one year through five years

     132,345         133,992   

Due after five years through ten years

     9,934         10,126   

Due after ten years

     28,108         28,589   
                   
     184,483         187,119   

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

     72,878         73,877   

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

     56,127         58,640   
                   

Total Debt Securities

     313,488         319,636   
                   

Marketable equity securities

     10,290         11,900   
                   

Total

   $ 323,778       $ 331,536   
                   

At March 31, 2011 and December 31, 2010, securities with principal amounts of $218.6 million and $209.3 million, respectively, were pledged to secure repurchase agreements, public funds and trust fund deposits.

NOTE 6. RESTRICTED INVESTMENT IN BANK STOCK

 

S&T is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh. The FHLB requires member banks to purchase and hold FHLB stock based on their “Member Asset Value,” as defined and calculated by the FHLB on an annual basis, and their level of activity with the FHLB, including, among other things, advances and letters of credit. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Members do not purchase stock in the FHLB for the same reasons that traditional equity investors acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to the low-cost products and services offered by the FHLB. Unlike equity securities of traditional for-profit enterprises, FHLB stock does not provide its holders with an opportunity for capital appreciation because, by regulation, it can only be purchased, redeemed and transferred at par value.

At March 31, 2011 and December 31, 2010, S&T’s FHLB stock totaled $21.2 million and $22.4 million, respectively. This investment is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value.

In December 2008 the FHLB suspended the payment of dividends and the repurchase of excess capital stock until further notice. On October 28, 2010 the FHLB announced that it would partially lift its suspension on the repurchase of excess capital stock and would review future excess capital stock repurchases on a quarterly basis. Management reviewed the FHLB’s Form 10-K for the period ended December 31, 2010 filed with the SEC on March 18, 2011 to support their conclusion around OTTI of FHLB stock.

S&T believes its holdings in the stock are ultimately recoverable at par value as of March 31, 2011 and, therefore, determined that the FHLB stock was not OTTI. In addition, S&T has sufficient liquidity and does not require redemption of its FHLB stock in the foreseeable future. On October 29, 2010, S&T received $1.2 million from the FHLB to redeem 11,771 shares of capital stock, $1.1 million for the redemption of 11,183 shares on February 24, 2011 and an additional $1.1 million for the redemption of 10,624 shares on April 29, 2011.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

NOTE 7. LOANS AND LOANS HELD FOR SALE

 

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

 

(in thousands)    March 31, 2011             December 31, 2010  
                            

Consumer:

        

Home equity

   $    436,357           $    441,096    

Residential mortgage

     342,904             359,536    

Installment and other consumer

     70,573             74,780    

Consumer construction

     4,322             4,019    
                            

Total Consumer Loans

     854,156             879,431    
                            

Commercial:

        

Commercial real estate

     1,488,700             1,494,202    

Commercial and industrial

     713,683             722,359    

Commercial construction

     245,477             259,598    
                            

Total Commercial Loans

     2,447,860             2,476,159    
                            

Total Portfolio Loans

     3,302,016             3,355,590    

Allowance for loan losses

     (61,663)            (51,387)   
                            

Total Portfolio Loans, net

     3,240,353             3,304,203    

Loans held for sale

     2,305             8,337    
                            

Total Loans

   $ 3,242,658           $ 3,312,540    
                            

S&T attempts to limit its exposure to credit risk by diversifying its loan portfolio and actively managing concentrations. When concentrations exist in certain segments, S&T mitigates this risk by monitoring relevant economic indicators and internal risk rating trends, and through stress testing of the loans in those segments. Since S&T is primarily a lender to businesses in western Pennsylvania, there is a concentration in commercial loans as well as a geographic loan concentration in Pennsylvania. Commercial loans represent 74 percent of total portfolio loans at both March 31, 2011 and December 31, 2010. Within the commercial portfolio, the commercial real estate (“CRE”) and commercial construction portfolios combined comprise 71 percent of commercial loans and 53 percent of total loans at both March 31, 2011 and December 31, 2010. Further segmentation of the CRE and commercial construction portfolios by industry and collateral type reveal no concentration in excess of 9 percent of total loans.

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

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

 

(in thousands)    March 31, 2011             December 31, 2010  
                            

Nonperforming loans

   $ 80,846          $ 63,883   

OREO

     7,696            5,820   
                            

Total Nonperforming Assets

   $ 88,542          $ 69,703   
                            

OREO and other repossessed assets, which are included in other assets in the Consolidated Balance Sheets consists of 28 properties with three properties comprising $4.6 million or 59 percent of the balance.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

The following table presents restructured loans for the periods presented:

 

     March 31, 2011      December 31, 2010  
(in thousands)    Performing
Restructured
Loans
     Nonperforming
Restructured
Loans
     Total
Restructured
Loans
     Performing
Restructured
Loans
     Nonperforming
Restructured
Loans
     Total
Restructured
Loans
 
                                                       

Commercial real estate

   $ 1,806       $ 29,470       $ 31,276       $ 1,194       $ 29,636       $ 30,830   

Commercial and industrial

     903         940         1,843         37         1,000         1,037   

Commercial construction

     -         4,103         4,103         -         2,143         2,143   

Home equity

     -         -         -         -         -         -   

Residential mortgage

     601         430         1,031         908         -         908   

Installment and other consumer

     -         -         -         -         -         -   

Consumer construction

     -         -         -         -         -         -   
                                                       

Ending Balance

   $ 3,310       $ 34,943       $ 38,253       $ 2,139       $ 32,779       $ 34,918   
                                                       

Restructured loans are loans that S&T, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. A concession is considered to have been granted if any of the following occur: a reduction of contractual interest rates below the market interest rate for new debt with similar characteristics, acceptance of other assets or an equity interest in the debtor in partial satisfaction of the debt, a reduction or forgiveness of principal, a reduction or forgiveness of accrued interest, a reduction or deferral of principal, or an extension of the maturity date at a stated interest rate lower than the current market rate for the new debt with similar risk.

NOTE 8. ALLOWANCE FOR LOAN LOSSES

 

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

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

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

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

Consumer Real Estate—Loans secured by 1st and 2nd lien home equity loans, home equity lines of credit and 1-4 family residences, including purchase money mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this portfolio since low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.

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

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

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

Loans in the consumer segments are not individually risk rated; therefore, the most important indicators of risk are the existence of collateral, the type of collateral, and for consumer real estate loans, whether the bank has a 1st or 2nd lien position. A simplified data migration technique is used to calculate the historic average losses over the defined loss emergence period.

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

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

 

     March 31, 2011  
(in thousands)    Current     

30-59 Days

Past Due

    

60-89 Days

Past Due

    

Non-

performing

     Total Past
Due
     Total Loans  
                                                       

Commercial real estate

   $ 1,423,351       $ 4,726       $ 3,434       $ 57,189       $ 65,349       $ 1,488,700   

Commercial and industrial

     695,782         7,815         1,005         9,081         17,901         713,683   

Commercial construction

     236,622         1,297         202         7,356         8,855         245,477   

Home equity

     431,411         2,165         923         1,858         4,946         436,357   

Residential mortgage

     332,489         4,199         879         5,337         10,415         342,904   

Installment and other consumer

     70,219         297         32         25         354         70,573   

Consumer construction

     4,322         -         -         -         -         4,322   
                                                       

Totals

   $ 3,194,196       $ 20,499       $ 6,475       $ 80,846       $ 107,820       $ 3,302,016   
                                                       

 

     December 31, 2010  
(in thousands)    Current     

30-59 Days

Past Due

    

60-89 Days

Past Due

    

Non-

performing

     Total
Past Due
     Total Loans  
                                                       

Commercial real estate

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

Commercial and industrial

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

Commercial construction

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

Home equity

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

Residential mortgage

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

Installment and other consumer

     74,373         275         67         65         407         74,780   

Consumer construction

     3,494         -         -         525         525         4,019   
                                                       

Totals

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

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

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

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

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

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

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

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

 

     March 31, 2011  
(in thousands)    Commercial
Real Estate
     Commercial
& Industrial
     Commercial
Construction
 
                            

Pass

   $ 1,250,149       $ 610,750       $ 201,984   

Special mention

     98,780         57,460         10,534   

Substandard

     139,771         45,473         32,959   
                            

Total

   $ 1,488,700       $ 713,683       $ 245,477   
                            

 

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

Pass

   $ 1,297,242       $ 619,011       $ 221,492   

Special mention

     86,653         76,158         16,308   

Substandard

     110,307         27,190         21,798   
                            

Total

   $ 1,494,202       $ 722,359       $ 259,598   
                            

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

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

 

     March 31, 2011  
(in thousands)    Home
Equity
     Residential
Mortgage
     Installment
and other
consumer
     Consumer
Construction
 
                                     

Performing

   $ 434,499       $ 337,567       $ 70,548       $ 4,322   

Nonperforming

     1,858         5,337         25         -   
                                     

Total

   $ 436,357       $ 342,904       $ 70,573       $ 4,322   
                                     

 

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

Performing

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

Nonperforming

     1,433         5,996         65         525   
                                     

Total

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

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

S&T individually evaluates all substandard commercial loans greater than $0.5 million for impairment and any other commercial loans greater than $0.5 million identified by management that show signs of impairment. Loans are considered to be impaired when based upon current information and events it is probable that S&T will be unable to collect all interest and principal payments due according to the original contractual terms of the loan agreement.

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

 

     March 31, 2011  
(in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
                                              

With a related allowance recorded:

              

Commercial real estate

   $ 22,839       $ 24,250       $ 5,266       $ 16,041       $ 69   

Commercial and industrial

     3,998         3,998         2,907         2,377         -   

Commercial construction

     3,938         3,938         381         5,569         -   
                                              

Total with a related allowance recorded

     30,775         32,186         8,554         23,987         69   
                                              

Without a related allowance recorded:

              

Commercial real estate

     30,511         35,593         -         30,029         154   

Commercial and industrial

     3,934         5,719         -         2,240         22   

Commercial construction

     3,309         4,828         -         5,388         4   
                                              

Total without a related allowance recorded

     37,754         46,140         -         37,657         180   
                                              

Total:

              

Commercial real estate

     53,350         59,843         5,266         46,070         223   

Commercial and industrial

     7,932         9,717         2,907         4,617         22   

Commercial construction

     7,247         8,766         381         10,957         4   
                                              

Total

   $ 68,529       $ 78,326       $ 8,554       $ 61,644       $ 249   
                                              

 

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

With a related allowance recorded:

              

Commercial real estate

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

Commercial and industrial

     1,263         1,263         337         1,623         22   

Commercial construction

     4,662         4,662         1,302         7,165         -   
                                              

Total with a related allowance recorded

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

Without a related allowance recorded:

              

Commercial real estate

     29,788         37,567         -         28,074         442   

Commercial and industrial

     1,491         3,280         -         1,370         -   

Commercial construction

     3,325         4,853         -         7,202         20   
                                              

Total without a related allowance recorded

     34,604         45,700         -         36,646         462   
                                              

Total:

              

Commercial real estate

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

Commercial and industrial

     2,754         4,543         337         2,993         22   

Commercial construction

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

Total

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

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

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

 

     March 31, 2011     March 31, 2010  

(in thousands)

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

Allowance for loan losses:

              

Beginning at January 1

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

Charge-offs

     (464     (272     (673     (924     (207     (2,540     (2,140

Recoveries

     524        95        711        746        100        2,176        1,153   
           

Net Charge-offs

     60        (177     38        (178     (107     (364     (987
           

Provision for loan losses

     9,201        1,091        922        (558     (16     10,640        4,430   
           

Balance at End of Period

   $ 39,686      $ 10,691      $ 6,864      $ 3,226      $ 1,196      $ 61,663      $ 63,023   
           

Allowance for credit losses:

              

For Loans individually evaluated for impairment

     5,266        2,907        381        -        -        8,554        20,252   

For Loans collectively evaluated for impairment

     34,420        7,784        6,483        3,226        1,196        53,109        42,771   
           

Total Allowance for Loan Losses

     39,686        10,691        6,864        3,226        1,196        61,663        63,023   

Portfolio Loans:

              

Individually evaluated for impairment

     53,350        7,932        7,247        -        -        68,529        87,774   

Collectively evaluated for impairment

     1,435,350        705,751        238,230        783,583        70,573        3,233,487        3,307,520   
           

Total Portfolio Loans

   $ 1,488,700      $ 713,683      $ 245,477      $ 783,583      $ 70,573      $ 3,302,016      $ 3,395,294   
                                                          

NOTE 9. MORTGAGE SERVICING RIGHTS

 

The value of servicing loans is recognized as part of the interest rate lock derivative value when commitments to fund a loan to be sold are made. Upon sale of the loan, the value of the MSR, is recognized as a separate asset, which represents the then current estimated fair value of future net cash flows expected to be realized for performing the servicing activities. The estimated fair value of MSR is determined by calculating the present value of estimated future net servicing cash flows, considering expected prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rates of prepayments are the most significant factor driving the value of MSR. Increases in prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced. In determining the estimated fair value of MSR, mortgage interest rates, which are used to determine prepayment rates and discount rates, are held constant over the estimated life of the portfolio. MSR are reported in other assets in the Consolidated Balance Sheets and are amortized into mortgage banking in the Consolidated Statements of Income in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage loans.

MSR are regularly evaluated for impairment based on the estimated fair value of those rights. MSR are stratified by certain risk characteristics, primarily loan term and note rate. If temporary impairment exists within a risk stratification tranche, a valuation allowance is established through a charge to income equal to the amount by which the carrying value exceeds the estimated fair value. If it is later determined all or a portion of the temporary impairment no longer exists for a particular tranche, the valuation allowance is reduced.

MSR are also reviewed for OTTI. OTTI exists when the recoverability of a recorded valuation allowance is determined to be remote, taking into consideration historical and projected interest rates and loan pay-off activity. When this occurs, the unrecoverable portion of the valuation allowance is applied as a direct write-down to the carrying value of the MSR. Unlike a valuation allowance, a direct write-down permanently reduces the carrying value of the MSR and the valuation allowance, precluding subsequent recoveries.

For the three months ended March 31, 2011 and 2010, 1-4 family mortgage loans that were sold to Fannie Mae amounted to $26.4 million and $22.2 million, respectively. At March 31, 2011 and 2010, S&T’s servicing portfolio totaled $331.5 million and $270.9 million, respectively.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

The following tables present MSR and the net carrying values for the three months ended March 31, 2011 and 2010:

 

(in thousands)   

Servicing

Rights

   

Valuation

Allowance

   

Net Carrying

Value

 
                          

Balance at beginning of period

   $ 3,292      $ (825   $ 2,467   

Additions/(reductions)

     256        270        526   

Amortization

     (124     -        (124
                          

Ending Balance at March 31, 2011

   $ 3,424      $ (555   $ 2,869   
                          
(in thousands)   

Servicing

Rights

   

Valuation

Allowance

   

Net Carrying

Value

 
                          

Balance at beginning of period

   $ 2,692      $ (592   $ 2,100   

Additions/(reductions)

     232        (9     223   

Amortization

     (118     -        (118
                          

Ending Balance at March 31, 2010

   $ 2,806      $ (601   $ 2,205   
                          

NOTE 10. BORROWINGS

 

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

At March 31, 2011 and December 31, 2010, the only short-term borrowings that S&T had outstanding were comprised of REPOs totaling $38.3 million and $40.7 million, respectively.

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

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

 

(in thousands)    March 31, 2011      December 31, 2010  
                   

Long-term borrowings

   $ 28,974       $ 29,365   

Junior subordinated debt securities

     90,619         90,619   
                   

Total

   $ 119,593       $ 119,984   
                   

S&T had total long-term debt outstanding of $50.6 million at a fixed rate and $68.7 million at a variable rate at March 31, 2011. Included in long-term borrowings is a capital lease of $0.3 million.

S&T had total borrowings at March 31, 2011 and December 31, 2010 at the FHLB of Pittsburgh of $28.7 million and $29.1 million, respectively. There were no short-term borrowings at the end of the current period. At March 31, 2011, S&T had a maximum borrowing capacity of $1.3 billion with the FHLB of Pittsburgh.

NOTE 11. EMPLOYEE BENEFITS

 

S&T Bank maintains a defined benefit pension plan (“Plan”) covering substantially all employees hired prior to January 1, 2008. The benefits are based on years of service and the employee’s compensation for the highest five consecutive years in the last ten years of employment. Contributions are intended to provide for benefits attributed to employee service to date and for those benefits expected to be earned in the future. S&T made no contributions to its pension plan in 2010 and no contributions are required to be made for 2011 at this time. The expected long-term rate of return on plan assets is 8.00 percent.

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

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

 

     Three Months Ended March 31,  
(in thousands)        2011              2010      
                   

Service cost—benefits earned during the period

   $      654        $      614    

Interest cost on projected benefit obligation

     1,043          1,016    

Expected return on plan assets

     (1,344)         (1,200)   

Amortization of prior service cost

     (2)         (2)   

Recognized net actuarial loss

     187         220   
                   

Net Periodic Pension Expense

   $ 538        $ 648    
                   

NOTE 12. COMMITMENTS AND CONTINGENCIES

 

Commitments

S&T, in the normal course of business, offers off-balance sheet credit arrangements to enable its customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. S&T’s exposure to credit loss, in the event a customer does not satisfy the terms of their agreement, equals the contractual amount of the obligation less the value of any collateral. S&T applies the same credit policies in making commitments and standby letters of credit that are used for the underwriting of loans to customers. Commitments generally have fixed expiration dates, annual renewals or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. S&T’s allowance for lending-related commitments totaled $2.9 million at March 31, 2011 and $2.7 million at December 31, 2010. The allowance for lending-related commitments is included in other liabilities in the Consolidated Balance Sheets.

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

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

 

(in thousands)    March 31, 2011      December 31, 2010  
                   

Commitments to extend credit

   $ 860,710       $ 836,042   

Standby letters of credit

     130,508         135,489   
                   

Total

   $ 991,218       $ 971,531   
                   

Litigation

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

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

NOTE 13. EARNINGS PER COMMON SHARE

 

Basic earnings per common share (“EPS”) is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Potentially dilutive securities are excluded from the basic calculation, but are included in diluted EPS. In computing diluted EPS, average common shares outstanding have been increased by the dilutive common stock equivalents relating to S&T’s outstanding stock options and restricted stock. Excluded from the calculation were anti-dilutive stock options of 746,435 and 1,082,706 shares and anti-dilutive restricted stock of 11,954 and 3,557 shares for the three months ended March 31, 2011 and 2010, respectively. Further 517,012 common stock warrants were anti-dilutive at both March 31, 2011 and 2010.

The following table reconciles the weighted average common shares outstanding used to calculate basic EPS to the weighted average common shares used to calculate diluted EPS:

 

     Three Months Ended March 31,  
     2011      2010  
                   

Weighted average common shares outstanding (basic)

     27,936,723         27,724,495   

Effect of dilutive stock options and restricted stock

     20,279         28,889   
                   

Weighted Average Common Shares Outstanding (Diluted)

     27,957,002        27,753,384   
                   

NOTE 14. SEGMENTS

 

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

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

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

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

The following represents total assets by reportable segment:

 

(in thousands)    March 31, 2011      December 31, 2010  
                   

Community Banking

   $ 4,081,027       $ 4,103,898   

Insurance

     7,658         8,461   

Wealth Management

     1,369         1,980   
                   

Total Assets

   $ 4,090,054       $ 4,114,339   
                   

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

 

(in thousands)    Three Months Ended March 31, 2011  
  

Community

Banking

    

Wealth

Management

     Insurance     Eliminations     Consolidated  
                                            

Interest income

   $ 42,141       $ 92       $ -      $ (41   $ 42,192   

Interest expense

     7,325         -         73       (78     7,320   
                                            

Net interest income (expense)

     34,816         92         (73     37       34,872   

Provision for loan losses

     10,640         -         -        -        10,640   

Noninterest income

     7,382         2,086         1,333       225       11,026   

Noninterest expense

     21,516         1,726         1,263       1,384       25,889   

Depreciation expense

     1,074         9         14       -        1,097   

Amortization of intangible assets

     431         18         14       -        463   

Provision for income taxes

     2,480         167         (11     (1,122     1,514   
                                            

Net Income (Loss)

   $ 6,057       $ 258       $ (20   $ -      $ 6,295   
                                            

 

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

 

(in thousands)    Three Months Ended March 31, 2010  
  

Community

Banking

     Wealth
Management
     Insurance     Eliminations     Consolidated  
                                            

Interest income

   $ 45,300       $ 132       $ -      $ (108   $ 45,324   

Interest expense

     9,453         -         73       (116     9,410   
                                            

Net interest income (expense)

     35,847         132         (73     8       35,914   

Provision for loan losses

     4,430         -         -        -        4,430   

Noninterest income

     7,490         2,019         1,525       309       11,343   

Noninterest expense

     22,013         1,591         1,154       1,577       26,335   

Depreciation expense

     1,039         9         24       -        1,072   

Amortization of intangible assets

     489         20         14       -        523   

Provision for income taxes

     4,555         205         93       (1,260     3,593   
                                            

Net Income

   $ 10,811       $ 326       $ 167     $ -      $ 11,304   
                                            

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

Management’s Discussion and Analysis (“MD&A”) represents an overview of the consolidated results of operations and financial condition of S&T and highlights material changes in its financial condition and results of operations at and for the three months ended March 31, 2011 and 2010. MD&A should be read in conjunction with the consolidated financial statements and notes thereto. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods.

Important Note Regarding Forward-Looking Statements

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

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

Future Factors include:

 

   

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

   

a prolonged period of low interest rates;

   

credit losses;

   

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

   

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

   

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

   

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

   

rapid technological developments and changes;