SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 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 (I.R.S. EMPLOYER incorporation or organization) Identification No.) 43 South Ninth 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 periods 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. 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 - 26,984,512 shares as of October 06, 2000 PAGE 1 INDEX S&T BANCORP, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements Condensed consolidated balance sheets - September 30, 2000 and December 31, 1999 3 Condensed consolidated statements of income - three months ended September 30, 2000 and 1999, and nine months ended September 30, 2000 and 1999 4 Condensed consolidated statements of cash flows - nine months ended September 30, 2000 and 1999 5 Notes to condensed consolidated financial Statements 6-9 Item 2. Management's discussion and analysis of financial condition and results of operations 10-18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20 PAGE 2 S&T BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS [CAPTION] September 30, December 31, 2000 1999 (000's omitted except per share data) ASSETS Cash and due from banks $38,759 $38,663 Interest-earning deposits with banks 52 54 Federal funds sold 15,400 Securities: Available for sale 575,911 557,994 Held to maturity (market value $15,471 in 2000 and $17,527 in 1999) 15,292 17,230 Total Securities 591,203 575,224 Loans, net of allowance for loan losses of $30,030 in 2000 and $27,134 in 1999 1,564,306 1,469,143 Premises and equipment 20,417 20,678 Other assets 81,531 74,911 TOTAL ASSETS $2,296,268 $2,194,073 LIABILITIES Deposits: Noninterest-bearing $234,519 $219,202 Interest-bearing 1,259,546 1,215,863 Total Deposits 1,494,065 1,435,065 Securities sold under repurchase agreements 99,183 116,009 Long term borrowings 384,868 364,062 Other liabilities 53,345 39,237 TOTAL LIABILITIES 2,031,461 1,954,373 SHAREHOLDERS' EQUITY Preferred stock, without par value, 10,000,000 shares authorized and none outstanding - - Common stock ($2.50 par value) Authorized - 50,000,000 shares in 2000 and 1999 Issued - 29,714,038 shares in 2000 and 1999 74,285 74,285 Additional paid in capital 21,053 21,070 Retained earnings 195,733 179,129 Accumulated other comprehensive income 25,161 16,410 Treasury stock (2,728,526 shares at September 30, 2000 and 2,715,221 at December 31,1999, at cost) (51,425) (51,194) TOTAL SHAREHOLDERS' EQUITY 264,807 239,700 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,296,268 $2,194,073 See Notes to Condensed Consolidated Financial Statements PAGE 3 S&T BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME [CAPTION] For three months ended For nine months ended September 30, September 30, 2000 1999 2000 1999 INTEREST INCOME Loans, including fees $35,503 $30,402 $101,497 $88,557 Deposits with banks 2 1 6 3 Federal funds sold 466 76 1,186 335 Investment securities: Taxable 8,087 8,133 23,930 22,829 Tax-exempt 189 221 599 729 Dividends 1,080 997 3,224 2,955 Total Interest Income 45,327 39,830 130,442 115,408 INTEREST EXPENSE Deposits 14,655 11,936 41,364 35,002 Securities sold under repurchase agreements 1,172 1,786 4,314 5,085 Federal funds purchased 60 93 80 214 Long-term borrowings 6,555 4,111 17,592 10,522 Total Interest Expense 22,442 17,926 63,350 50,823 NET INTEREST INCOME 22,885 21,904 67,092 64,585 Provision for loan losses 1,000 1,000 3,000 3,000 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 21,885 20,904 64,092 61,585 NONINTEREST INCOME Security gains, net 961 1,017 2,424 2,843 Trust fees 911 955 2,767 2,888 Service charges on deposit Accounts 1,787 1,613 4,987 4,588 Other 2,058 1,822 6,272 4,846 Total Noninterest Income 4,756 4,390 14,026 12,322 NONINTEREST EXPENSE Salaries and employee benefits 5,967 6,003 17,826 17,065 Occupancy, net 775 697 2,230 2,195 Furniture and equipment 644 534 1,977 2,017 Other taxes 426 398 1,242 1,142 Data processing 572 564 1,839 1,648 FDIC assessment 74 58 221 178 Other 3,272 2,980 8,884 8,319 Total Noninterest Expense 11,730 11,234 34,219 32,564 INCOME BEFORE INCOME TAXES 15,872 15,076 46,323 44,186 Applicable income taxes 4,459 4,592 12,980 13,418 NET INCOME $11,413 $10,484 $33,343 $30,768 PER COMMON SHARE Net Income - Basic $0.42 $0.39 $1.24 $1.13 Net Income - Diluted 0.42 0.38 1.23 1.12 Dividends 0.21 0.19 0.62 0.56 Average Common Shares Outstanding - Basic 26,987 27,086 26,994 27,236 Average Common Shares Outstanding - Diluted 27,071 27,273 27,078 27,448 See Notes to Condensed Consolidated Financial Statements PAGE 4 S&T BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS [CAPTION] Nine Months Ended September 30 2000 1999 (ooo's omitted) Operating Activities Net Income $33,343 $30,768 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,000 3,000 Provision for depreciation and amortization 1,707 1,645 Net amortization of investment security premiums 266 479 Net accretion of loans and deposit discounts (204) Net gains on sales of securities available for sale (2,424) (2,843) Deferred income taxes (1,969) 1,142 Increase in interest receivable (2,944) (2,496) Increase (decrease) in interest payable 886 (213) Increase in other assets (2,388) (25,332) Increase in other liabilities 1,441 383 Net Cash Provided by Operating Activities 30,714 6,533 Investing Activities Net decrease in interest-earning deposits with banks 2 1 Net decrease in federal funds sold 15,400 19,300 Proceeds from maturities of investment securities 1,930 3,058 Proceeds from maturities of securities available for sale 11,280 93,528 Proceeds from sales of securities available for sale 61,155 212,517 Purchases of securities available for sale (74,721) (348,080) Net increase in loans (114,572) (117,669) Proceeds from the sale of loans 16,613 18,535 Purchases of premises and equipment (1,483) (1,599) Other, net 37 (75) Net Cash Used in Investing Activities (84,359) (120,484) Financing Activities Net increase in demand, NOW, MMI, and savings deposits 9,226 21,391 Net increase in certificates of deposit 49,774 10,771 Net decrease in repurchase agreements (16,826) (39,880) Net increase in federal funds purchased 7,750 5,000 Proceeds from long-term borrowing 116,075 163,844 Repayments on long-term borrowing (95,269) (25,000) Acquisition of treasury stock (326) (19,143) Sale of treasury stock 96 1,030 Cash dividends paid to shareholders (16,759) (15,032) Net Cash Provided by Financing Activities 53,741 102,981 Increase (decrease) in Cash and Cash Equivalents 96 (10,970) Cash and Cash Equivalents at Beginning of Period 38,663 48,736 Cash and Cash Equivalents at End of Period $38,759 $37,766 See Notes to Condensed Consolidated Financial Statements PAGE 5 S&T BANCORP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instrucitons to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K for the year ended December 31, 1999. Basic earnings per share is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Options, warrants and other potentially dilutive securities are excluded from the basic calculation, but are included in diluted earnings per share. Average shares outstanding for computing basic earnings per share were 26,994,403 and 27,236,036 for the nine month period ending September 30, 2000 and 1999. Average shares outstanding for computing dilutive earnings per share were 27,078,208 and 27,447,842 for the nine month period ending September 30, 2000 and 1999. In computing dilutive earnings per share, average shares outstanding have been increased by the common stock equivalents relating to S&T's available stock options. Components of comprehensive income for S&T include net income and unrealized gains or losses on S&T's available-for-sale securities. During the nine months ended September 30, 2000 and 1999, total comprehensive income amounted to $42,094,000 and $15,100,000. Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement No. 133), as amended by Financial Accounting Standards Board Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of Statement No. 133" (Statement No. 137), is effective in 2001, and requires measuring and recording the change in fair value of derivative instruments. S&T is currently in the process of evaluating the impact of Statement No. 133. Statement No. 133 is not expected to materially affect S&T's financial position or results of operations. PAGE 6 S&T BANCORP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE B--SECURITIES The amortized cost and estimated market value of securities as of September 30 are as follows: [CAPTION] 2000 Available for Sale Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value (000's omitted) Obligations of U.S. government corporations and agencies $352,369 $788 ($5,719) $347,438 Mortgage-backed securities 5,580 61 (2) 5,639 U.S. treasury securities 13,597 466 (1) 14,062 Corporate securities 63,667 8 (1,321) 62,354 Debt securities available for sale 435,213 1,323 (7,043) 429,493 Marketable equity securities 61,736 47,142 (2,713) 106,165 Other securities 40,253 40,253 Total $537,202 $48,465 ($9,756) $575,911 2000 Held to Maturity Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value (000's omitted) Obligation of states and political subdivisions $13,292 $162 ($2) $13,452 Corporate securities 2,000 19 2,019 Total $15,292 $181 ($2) $15,471 The amortized cost and estimated market value of securities as of December 31 are as follows: 1999 Available for Sale Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value (000's omitted) Obligations of U.S. government corporations and agencies $345,329 $86 ($9,474) $335,941 Mortgage-backed securities 6,179 12 (21) 6,170 U.S. treasury securities 13,709 417 14,126 Corporate securities 66,395 11 (1,880) 64,526 Debt securities available for sale 431,612 526 (11,375) 420,763 Marketable equity securities 61,635 42,073 (5,979) 97,729 Other securities 39,502 39,502 Total $532,749 $42,599 ($17,354) $557,994 1999 Held to Maturity Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value (000's omitted) Obligation of states and political Subdivisions $15,231 $235 ($3) $15,463 Corporate securities 1,999 65 2,064 Total $17,230 $300 ($3) $17,527 PAGE 7 S&T BANCORP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE B--SECURITIES Continued During the period ended September 30, 2000, there were $2,424,278 in realized gains relative to securities available for sale. The amortized cost and estimated market value of debt securities at September 30, 2000, by contractual maturity, are shown below. [CAPTION] Estimated Amortized Market Available for Sale Cost Value (000's omitted) Due in one year or less $13,501 $13,467 Due after one year through five years 259,376 256,285 Due after five years through ten years 162,336 159,741 Total $435,213 $429,493 Estimated Amortized Market Held to Maturity Cost Value (000's omitted) Due in one year or less $5,278 $5,301 Due after one year through five years 10,014 10,170 Total $15,292 $15,471 At September 30, 2000 and December 31, 1999 investment securities with a principal amount of $347,286,000 and $317,979,000, respectively, were pledged to secure repurchase agreements and public and trust fund deposits. NOTE C--LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of the loan portfolio was as follows: [CAPTION] September 30, December 31, 2000 1999 (000's omitted) Real estate - construction $126,226 $94,786 Real estate - mortgages: Residential 468,261 466,881 Commercial 566,447 527,970 Commercial - industrial and agricultural 340,560 302,877 Consumer installment 92,842 103,763 Gross Loans 1,594,336 1,496,277 Allowance for loan losses (30,030) (27,134) Total Loans $1,564,306 $1,469,143 PAGE 8 S&T BANCORP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE C--LOANS AND ALLOWANCE FOR LOAN LOSSES Continued Changes in the allowance for loan losses for the nine months ended September 30 were as follow [CAPTION] 2000 1999 (000's omitted) Balance at beginning of period $27,134 $26,677 Charge-offs (2,814) (3,870) Recoveries 2,710 2,598 Net (charge-offs) (104) (1,272) Provision for loan losses 3,000 3,000 Balance at end of period $30,030 $28,405 The following table represents S&T's investment in loans considered to be impaired and related information on those impaired loans at September 30, 2000 and December 31, 1999. [CAPTION] 2000 1999 Recorded investment in loans considered to be impaired $14,566,000 $11,602,000 Loans considered to be impaired that were on a nonaccrual basis 5,187,000 - Allowance for loan losses related to loans considered to be impaired - 73,000 Average recorded investment in impaired loans 13,445,000 5,948,000 Total interest income recognized on impaired loans 1,346,000 1,271,000 Interest income on impaired loans recognized on a cash basis. 640,000 1,107,000 NOTE D--FINANCIAL INSTRUMENT S&T, in the normal course of business, commits to extend credit and issue standby letters of credit. The obligations are not recorded in S&T's financial statements. Loan commitments and standby letters of credit are subject to S&T's normal credit underwriting policies and procedures and generally require collateral based upon management's evaluation of each customer's financial conditionand ability to satisfy completely the terms of the agreement. S&T's exposure to credit loss in the event the customer does not satisfy the terms of agreement equals the notional amount of the obligation less the value of any collateral. Unfunded loan commitments totaled $421,216,000 and obligations under standby letters of credit totaled $154,858,000 at September 30, 2000. At September 30, 2000, S&T had marketable equity securities, totaling $727,310 at amortized cost and $2,534,025 at estimated market value, that were subject to covered call option contracts. The purpose of these contracts was to generate fee income for S&T. NOTE E--LITIGATION S&T, in the normal course of business, is subject to various legal proceedings in which claims for monetary damages are asserted. No material losses are anticipated by management as a result of these legal proceedings. PAGE 9 S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is presented so that shareholders may review in further detail the financial condition and results of operations of S&T Bancorp, Inc. and subsidiaries (S&T). This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the selected financial data presented elsewhere in this report. Financial Condition Total assets averaged $2.2 billion in the first nine months of 2000, a $115.8 million increase from the 1999 full year average. Average loans increased $110.1 million and average securities and federal funds increased $22.3 million in the first nine months of 2000 compared to the 1999 full year average. Funding for this loan and security growth was primarily provided by a $70.3 million increase in average deposits and a $69.3 million increase in average borrowings, offset by a decrease of $2.8 million in average retained earnings. Lending Activity Average loans increased $110.1 million, or 8% to $1.5 billion for the nine months ended September 30, 2000 from the 1999 full year average. Changes in the composition of the average loan portfolio during 2000 included increases of $21.3 million of commercial loans, $106.5 million of commercial real estate loans, offset by decreases of $6.6 million of residential mortgages and $11.1 million in installment loans. Commercial real estate loans comprise 36% of the loan portfolio. Although commercial real estate loans can be an area of higher risk, management believes these risks are mitigated by limiting the percentage amount of portfolio composition, a rigorous underwriting review by loan administration and the fact that many of the commercial real estate loans are owner-occupied or rental properties and many are seasoned properties. During 2000, S&T sold $12.8 million of participation's of originated commercial real estate loans. The purpose of these sales was to diversify credit risk on larger loans and to generate fee income from servicing. Residential mortgage lending continued to be a strategic area of focus during the first nine months of 2000 through a centralized mortgage origination department, ongoing product redesign, the utilization of commission compensated originators and the implementation of a mortgage banking function. Management believes that if a downturn in the local residential real estate market occurs, the impact of declining values on the real estate loan portfolio will be negligible because of S&T's conservative mortgage lending policies. These policies generally PAGE 10 S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS require, for portfolio loans, a maximum term of twenty years for fixed rate mortgages and private mortgage insurance for loans with less than a 20% down payment. At September 30, 2000 the residential mortgage portfolio had a 20% composition of adjustable rate mortgages. Much of the decline in average residential loans is due to more active participation in the secondary mortgage markets. S&T periodically originates to sell longer-term, lower-yielding 1-4 family mortgages to the Federal National Mortgage Association (FNMA). The rationale for these sales is to mitigate interest rate risk associated with holding long-term residential mortgages in the loan portfolio, to generate fee revenue from servicing, and still maintain the primary customer relationship. During the first nine months of 2000, S&T sold $3.8 million of 1-4 family mortgages to FNMA. S&T will continue to sell longer-term loans to FNMA in the future on a selective basis, especially during periods of lower interest rates. Installment loan decreases are primarily associated with significantly lower volumes in the indirect auto loan category and S&T's strategy to continue to focus resources toward originations of direct installment loans and home equity loans. Pricing pressures have been unusually intense in the indirect auto loan market during recent years and the decision was made to exit this line of business and allow the portfolio to liquidate via normal paydowns and pay-off activities. Direct loans and home equity loans increased $9.5 million for the nine months ending September 30, 2000 as compared to the 1999 full year average. Loan underwriting standards for S&T are established by a formal policy administered by the S&T Bank Credit Administration Department, and subject to the periodic review and approval of the S&T Bank Board of Directors. Rates and terms for commercial real estate and equipment loans normally are negotiated, subject to such variables as economic conditions, marketability of collateral, credit history of the borrower and future cash flows. The loan to value policy guideline for commercial real estate loans is generally 75-80%. The residential, first lien, mortgage loan to value policy guideline is 80%. Higher loan to value loans can be approved with the appropriate private mortgage insurance coverage. Second lien positions are sometimes incurred with home equity loans, but normally only to the extent that the combined credit exposure for both first and second liens do not exceed 100% of loan to value. A variety of unsecured and secured installment loan and credit card products are offered by S&T. However, the bulk of the consumer loan PAGE 11 S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS portfolio is automobile loans. Loan to value guidelines for direct loans are 90%-100% of invoice for new automobiles and 80%-90% of "NADA" value for used automobiles. Management intends to continue to pursue quality loans in a variety of lending categories within our market area in order to honor our commitment to provide the best service possible to our customers. S&T's loan portfolio primarily represents loans to businesses and consumers in our market area of Western Pennsylvania rather than to borrowers in other areas of the country or to borrowers in other nations. S&T has not concentrated its lending activities in any industry or group. During the past several years, management has concentrated on building an effective credit and loan administration staff which assists management in evaluating loans before they are made and identifies problem loans early. Security Activity Average securities increased by $7.8 million in the first nine months of 2000 compared to the 1999 full year average. The average increase was comprised of $11.8 million of corporate securities, $4.2 million of corporate equity securities and $9.7 million of Federal Home Loan Bank (FHLB) stock. Offsetting these increases were average decreases of $7.2 million in U.S. treasury securities, $6.9 million in U.S. government agency securities, $1.0 million of mortgage-backed securities and $2.8 million of states and political subdivisions. The equity securities portfolio is primarily comprised of bank holding companies, as well as preferred and utility stocks to take advantage of the dividends received deduction for corporations. During 2000, the equity portfolio yielded 9.4% on a fully taxable equivalent basis and had unrealized gains, net of nominal unrealized losses, of $44.4 million. The equity securities portfolio consists of securities traded on the various stock markets and are subject to change in market value. The FHLB capital stock is a membership and borrowing requirement and is acquired and sold at stated value. S&T's policy for security classification includes U.S. treasuries, U.S. government agencies, mortgage-backed securities and corporate equities as available for sale. Municipal securities and other debt securities are classified as held to maturity. At September 30, 2000, unrealized gains, net of unrealized losses, for securities classified as available for sale were $38.7 million. Allowance for Loan Losses The balance in the allowance for loan losses was $30.0 million or 1.88% PAGE 12 S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of total loans at September 30, 2000 as compared to $27.1 million or 1.81% of total loans at December 31, 1999. The adequacy of the allowance for loan losses is determined by management through evaluation of the loss potential on individual nonperforming, delinquent and high-dollar loans; review of economic conditions and business trends; historical loss experience; and growth and composition of the loan portfolio, as well as other relevant factors. A quantitative analysis is utilized to support the adequacy of the allowance for loan losses. This analysis includes review of the high and low historical charge-off rates for loan categories, fluctuations and trends in the amount of classified loans and economic factors. Economic factors consider the level of S&T's historical charge-offs that have occurred within the credits' economic life cycle. Significant to this analysis is the shift in the loan portfolio composition to an increased mix of commercial loans. These loans are generally larger in size and, due to our continuing growth, many are not well seasoned and could be more vulnerable to an economic slowdown. Management relies on its risk rating process to monitor trends which may be occurring relative to commercial loans to assess potential weaknesses within specific credits. Current economic factors and trends in risk ratings are considered in the determination of the allowance for loan losses. Net loan charge-offs totaled $0.1 million and $1.3 million in the first nine months of 2000 and 1999, respectively. Net charge-offs for the first nine months of 2000 were reduced by the proceeds received on a previously charged-off floor plan loan in 1998. The balance of nonperforming loans, which included nonaccrual loans past due 90 days or more, at September 30, 2000, was $7.8 million or 0.49% of total loans. This compares to nonperforming loans of $3.0 million or 0.20% of total loans at December 31, 1999. The increase is primarily attributable to two commercial real estate credits where the real estate is presently for sale. Asset quality is a major corporate objective at S&T, and management believes that the allowance for loan losses is adequate to absorb probable loan losses. Deposits Average total deposits increased by $70.3 million, or 5% for the nine months ended September 30, 2000 as compared to the 1999 full year average. Changes in the average deposit mix included a $24.7 million increase in money market accounts, a $12.7 million increase in demand accounts and a $45.5 million increase in time deposits, offset by a $2.4 PAGE 13 S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS million decrease in NOW accounts, and a $10.2 million decrease in savings accounts. Some of the changes can be partially explained by strategic initiatives to increase demand accounts and cash management services. In addition, a successful strategy for money market account pricing was implemented in order to make these accounts more competitive with money funds offered at brokerage firms. Management believes that the S&T deposit base is stable and that S&T has the ability to attract new deposits, mitigating a funding dependency on volatile liabilities. Special rate deposits of $100,000 and over were 8% and 6% of total deposits at September 30, 2000 and December 31, 1999, respectively, and primarily represent deposit relationships with local customers in our market area. In addition, S&T has the ability to access both public and private markets to raise long-term funding if necessary. During the first quarter of 2000, S&T joined National CD Rateline which is a firm that trades institutional CD's on the Internet. At September 30, 2000, there were $3.5 million of these brokered and institutional retail certificates of deposit outstanding. Borrowings Average borrowings increased $51.7 million for the first nine months ended September 30, 2000 compared to the 1999 full year average and were comprised of retail repurchase agreements (REPO's), wholesale REPO's, federal funds purchased and long-term borrowings. S&T defines repurchase agreements with its local, retail customers as retail REPOS; wholesale REPOS are those transacted with other banks and brokerage firms with terms normally ranging from 1 to 14 days. The average balance in retail REPOS decreased approximately $5.8 million for the first nine months of 2000 compared to the full year 1999 average. S&T views retail REPOS as a relatively stable source of funds since most of these accounts are with local, long-term customers. Average wholesale REPOS and federal funds decreased by $32.4 million for the first nine months of 2000 compared to the full year 1999 average. The increase in core deposits and the availability of reasonably priced long-term borrowings from the FHLB decreased the usage of these types of fundings in 2000. Average long-term borrowings have increased $89.9 million in the first nine months of 2000 as compared to the full year 1999 average. At September 30, 2000, S&T had long-term borrowings outstanding of $265.6 million at a fixed rate and $7.1 million at an adjustable rate with the FHLB. The purpose of these borrowings was to provide matched, fixed rate fundings for newly originated loans, to mitigate the risk associated with volatile liability fundings, to take advantage of lower PAGE 14 S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS cost funds through the FHLB's Community Investment Program and to fund stock buy-backs. Capital Resources Shareholders' equity increased $25.1 million at September 30, 2000, compared to December 31, 1999. Net income was $33.3 million and dividends paid to shareholders were $16.8 million for the nine months ended September 30, 2000. Also affecting capital is a increase of $8.7 million related to the available for sale securities portfolio. There were 18,400 shares of S&T common stock repurchased during the first nine months of 2000. An authorization is in effect to buy-back up to 1,000,000 shares until December 31, 2000. S&T paid 50% of net income in dividends, equating to an annual dividend rate of $0.84 per share during the first nine months of 2000. The book value of S&T's common stock increased from $8.88 at December 31, 1999 to $9.81. The market price of S&T's common stock was $19.00 per share at September 30, 2000, compared to $23.19 per share at December 31, 1999. S&T continues to maintain a strong capital position with a leverage ratio of 10.3% as compared to the minimum regulatory guideline of 3.0%. S&T's risk-based capital Tier I and Total ratios were 12.2% and 14.5% respectively, at September 30, 2000. These ratios place S&T well above the Federal Reserve Board's risk-based capital guidelines of 4.0% and 8.0% for Tier I and Total, respectively. RESULTS OF OPERATIONS Nine months ended September 30, 2000 compared to Nine months ended September 30, 1999 Net Income Net income increased to $33.3 million or $1.23 per diluted earnings per share in the first nine months of 2000 from $30.8 million or $1.12 per diluted earnings per share for the same period of 1999, representing a 10% improvement. The significant improvement during the first nine months of 2000 was the result of higher net interest income and noninterest income, offset by normal increases in operating expenses. PAGE 15 S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net Interest Income On a fully taxable equivalent basis, net interest income increased $2.5 million or 4% in the first nine months of 2000 compared to the same period of 1999. The net yield on interest-earning assets was 4.40% in the first nine months of 1999 as compared to 4.59% in the same period of 1999. The decline in the net yield on interest earning assets during 2000 was primarily attributable to the implementation of a bank owned life insurance program in the second quarter of 1999, higher borrowing costs and funding for the stock buy-back program. Partially offsetting these negative factors for the net yield on net interest income rate was a program to reduce cash and due from balances and growth in low cost core deposits. In the first nine months of 2000, average securities increased $13.7 million and average loans increased $128.4 million. The yields on average securities increased by 30 basis points during the period and the yield on average loans increased 41 basis points. In the first nine months of 2000, average interest-bearing deposits provided $64.6 million of the funds for the growth in the loan and security portfolios; cost of deposits totaled 4.44%, an increase of 47 basis points from 1999 due to increased rates paid on money market and time deposits. The cost of REPOS and other borrowed funds increased 97 basis points to 6.10%. Borrowed funds costs were affected by a restructuring program directed toward more longer term fixed rate borrowings. Also positively affecting net interest income was a $24.3 million increase to average net free funds. Average net free funds are the excess of demand deposits, other non-interest bearing liabilities and shareholders' equity over non-earning assets. Demand deposit growth and the initiative to reduce branch cash are primarily responsible for the increase. This increase is net of the reduction to shareholders' equity resulting from stock buy-backs during the first nine months of 1999 and the aforementioned $25 million bank owned life insurance program. Maintaining consistent spreads between earning assets and costing liabilities is very significant to S&T's financial performance since net interest income comprises 80% of operating revenue. A variety of asset/liability management strategies were successfully implemented within prescribed ALCO risk parameters that enabled S&T to maintain a net interest margin reasonably consistent with historical levels. The level and mix of funds is monitored by ALCO in order to mitigate the interest rate sensitivity and liquidity risks of the balance sheet. Provision for Loan Losses The provision for loan losses was $3.0 million for the first nine months of 2000 and 1999. The provision is the result of management's assessment of economic conditions, credit quality statistics, loan administration effectiveness and other factors that would have an impact on probable losses in the loan portfolio. Also affecting the amount of provision expense is loan growth, portfolio composition and trends within risk ratings. Credit quality statistics are an important factor in determining the amount of provision expense. Net loan charge-offs totaled $0.1 million for the first nine months of 2000 compared to $1.3 million for the same period 1999. The decrease in net charge-offs for the first nine months of 2000 is primarily due to proceeds received on a previously charged-off floor plan loan in 1998. Nonperforming loans to total loans was 0.49% at September 30, 2000 compared to 0.24% in the same period of 1999. The increase is attributable to two commercial real estate credits where that real estate is presently for sale. Also affecting the amount of provision expense is the amount and types of loan growth and portfolio composition. Most of the loan growth in 2000 and 1999 is attributable to larger-sized commercial loans. Noninterest Income Noninterest income increased $1.7 million or 14% in the first nine months of 2000 as compared to the same period of 1999. Increases included $0.4 million in service charges and fees, $1.4 million in other income, offset by a decrease of $0.1 million in trust income. Security gains decreased $0.4 million in the first nine months of 2000 as compared to the same period of 1999. The $0.4 million increase in service charges on deposit accounts was primarily the result of management's continual effort to implement reasonable fees for services performed, and to manage closely the collection of these fees. The $1.4 million increase in other income was primarily a result of higher performance levels for brokerage activities, merchant and debit card income, loan related fees as well as bank owned life insurance income from a transaction entered into in the second quarter of 1999. These areas were the focus of several strategic initiatives and product enhancements implemented in order to expand this source of revenue. S&T recognized $2.4 million of gains on available for sale securities in the first nine months of 2000 as compared to $2.8 million in the same period of 1999. The security gains were taken on available for sale securities in the first nine months of 2000 and 1999 in order to maximize returns in the portfolio by taking advantage of market opportunities when PAGE 16 S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS presented. Unrealized gains, net of unrealized losses, in the available for sale portfolio totaled $38.7 million at September 30, 2000. Noninterest Expense Noninterest expense increased by $1.7 million or 5% at September 30, 2000 compared to September 30, 1999. Staff expense increased $0.8 million or 4% primarily attributable to normal merit increases and higher incentive payouts. Other expenses increased $0.7 million or 7% as compared to September 30, 1999. This increase included $0.1 million in telephone expense relating to the implementation of a wide area computer communications network and $0.6 million in legal fees related to increased activity in loan collections as well as the formation of S&T Insurance Group, LLC. Data processing expense increased $0.2 million due to a refund received from our third party processor in the second quarter of 1999. Average full-time equivalent staff was 660 at September 30, 2000 and 658 at September 30, 1999. S&T's efficiency ratio, which measures noninterest expense as a percent of recurring noninterest income plus net interest income on a fully taxable equivalent basis, was 41% at September 30, 2000 and September 30, 1999. Federal Income Taxes Federal income tax expense decreased $0.4 million at September 30, 2000 as compared to September 30, 1999 primarily as a result of a lower effective tax rate. The effective tax rate for the first nine months of 2000 was 28% and 30% in 1999, which is below the 35% statutory rate due to benefits resulting from tax-exempt interest, excludable dividend income and low income housing tax credits (LIHTC). RESULTS OF OPERATIONS Three months ended September 30, 2000 compared to Three months ended September 30, 1999 Net Income Net income increased to $11.4 million or $0.42 per diluted earnings per share in the third quarter of 2000 from $10.5 million or $0.38 per diluted earnings per share for the same period of 1999. This significant improvement is due to higher net interest income, higher noninterest income, offset by relatively normal increases in operating expenses. PAGE 17 S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net Interest Income On a fully taxable equivalent basis, net interest income increased $1.0 million or 4% in the third quarter of 2000 compared to the same period of 1999. This improvement in net interest income resulted from a higher level of earning assets while maintaining fairly consistent spreads. Average earning assets increased by $140.1 million as compared to the third quarter of 1999, primarily as a result of $127.8 million of loan growth. Funding for this asset growth was provided by available for sale securities sales, deposit growth, increased borrowings and earnings retained. Net interest margin on a fully taxable equivalent basis was 4.40 for the third quarter of 2000, as compared to 4.50 for the same period of 1999. Provision for Loan Losses The provision for loan losses was $1.0 million in the third quarter of 2000 and 1999. Net loan charge-offs totaled $0.9 million for the third quarter of 2000 compared to $0.8 million for the same period of 1999. The provision expense in 2000 and 1999 is the result of an effort to maintain S&T's allowance for loan losses to total loans at a relatively consistent level with charge-offs, loan growth, a continuing mix change in the loan portfolio to a greater percentage of commercial loans and management's assessment of economic conditions, credit quality statistics, loan administration effectiveness and other factors that would have an impact on future probable losses in the loan portfolio. Noninterest Income Noninterest income increased $0.4 million or 8% in the third quarter of 2000 as compared to 1999. Increases included $0.2 million in service charges and $0.2 million in other income during the third quarter of 2000. Security gains decreased $0.1 million in the third quarter of 2000 as compared to the same period of 1999. The 11% increase in service charges on deposit accounts was primarily the result of management's continual effort to implement reasonable fees for services performed, and to manage closely the collection of these fees. The 13% increase in other income was primarily a result of increased performance for brokerage activities, loan related fees, merchant and debit card income. These areas were the focus of several strategic initiatives and product enhancements implemented in order to expand this source of revenue. During the third quarter of 2000, S&T realized equity security gains of $1.6 million offset by $0.6 million in losses from the available for sale bond portfolio. The available for sale equity security gains were taken in order to maximize returns by taking advantage of market opportunities when presented. The available for sale bond portfolios were part of a balance sheet restructuring effort. Noninterest Expense Noninterest expense increased $0.5 million or 4% in the third quarter of 2000 as compared to the third quarter of 1999. The increase is primarily attributable to increased occupancy expense and other expenses. Occupancy expense increased $0.2 million due to a new support facility, a new branch and a change in timing of maintenance contracts with various vendors. Other expenses increased $0.3 million primarily due to normal organizational expansion, fee increases from vendors and legal fees due to increased collection activities. Federal Income Taxes Federal income tax expense decreased $0.1 million in the third quarter of 2000 as compared to the third quarter of 1999. The decrease is primarily attributable to a lower effective tax rate. The effective tax rate for the third quarter of 2000 was 28% and 30% for the third quarter of 1999, which is below the 35% statutory rate due to benefits resulting from tax- exempt interest, excludable dividend income and low income housing tax credits (LIHTC). Year 2000 During 1999, S&T completed the process of preparing for the Year 2000 date change. This process involved identifying and remediating date recognition problems in computer systems, software and other operating equipment, working with third parties to address their Year 2000 issues, and developing contingency plans to address potential risks in the event of Year 2000 failures. To date, S&T has successfully managed the transition. Although considered unlikely, unanticipated problems in S&T's core business processes, including problems associated with non-compliant third parties and disruptions to the economy in general, could still occur despite efforts to date to remediate affected systems and develop contingency plans. Management will continue to monitor all business processes, including interaction with S&T's business customers, vendors and other third parties, throughout 2000 to address any issues and ensure all processes continue to function properly. Through third quarter of 2000, the cost of the Year 2000 project totaled approximately $0.3 million. Purchased hardware and software was capitalized in accordance with normal policy. Personnel and all other costs related to the project was expensed as incurred. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 The statements in this Annual Report, which are not historical fact, are forward looking statements that involve risks and uncertainties, including, but not limited to, the interest rate environment, the effect of federal and state banking and tax regulations, the effect of economic conditions, the impact of competitive products and pricings, and other risks detailed in S&T's Securities and Exchange Commission filings. PAGE 18 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None PAGE 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. S&T Bancorp, Inc. (Registrant) Date: November 8, 2000 /s/ Robert E. Rout Robert E. Rout Executive Vice President & Chief Financial Officer PAGE 20