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S&T Bancorp (STBA) delivered a big second-quarter earnings beat on July 23, prompting analysts to revise their estimates significantly higher for both 2013 and 2014. This sent the stock to a Zacks Rank No. 1 (Strong Buy). Along with strong earnings momentum and favorable industry tailwinds its valuation also looks attractive, and the bank pays a dividend that yields a solid 2.5%. This provides investors with strong total return potential.

S&T Bancorp, Inc. is a holding company for S&T Bank, which provides a full range of financial services to individuals and businesses primarily in Pennsylvania. It has assets of more than $4.5 billion and is headquartered in Indiana, Penn.

Second-Quarter Results

S&T delivered a big second-quarter earnings beat on July 23. Earnings per share jumped 57% year over year to 47 cents, crushing the Zacks Consensus Estimate of 36 cents. Net interest income before the provision for loan losses rose 2% as solid loan growth more than offset a contraction in the net interest margin. The company also experienced strong operating leverage in the quarter as the efficiency ratio improved 344 basis points to 58.4%.

Credit quality improved substantially as non-accrual loans as a percentage of total loans declined from 2.16% to 1.10%. This led management to take a significantly lower provision for loan losses in the quarter, which boosted net income substantially.

Estimates Soar

Analysts revised their estimates significantly higher for S&T following the big second-quarter beat. This sent the stock to a Zacks Rank No. 1 (Strong Buy). The Zacks Consensus Estimate for 2013 is now $1.66, up from $1.45 before the earnings beat. The 2014 consensus is currently $1.67, up from $1.50 over the same period. Rising estimates have been seen throughout the small-cap banking industry. In fact, the "Banks - Northeast" industry ranks in the top 20% of all industries that Zacks ranks.

One reason for this strong earnings momentum is a steepening yield curve. Talk of the Federal Reserve tapering quantitative easing later this year has sent longer-term interest rates higher (which has driven loan rates higher), while shorter-term interest rates remain near record lows (which has kept the interest banks pay on deposits low).

Reasonable Valuation

The valuation picture looks reasonable for S&T. Shares trade at just 1.9x tangible book value, well below its 10-year median of 2.7x and the industry median of 2.2x. The company also pays a dividend that yields a solid 2.5%.

The Bottom Line

With strong earnings momentum, favorable industry tailwinds, reasonable valuation, and a solid dividend yield, S&T offers investors attractive total return potential.

S&T Bancorp: Free Stock Analysis Report (email registration required)

Source: Bull Of The Day: S&T Bancorp