Management's Discussion and Analysis of
Financial Condition and Results of Operations
S&T Bancorp, Inc. and Subsidiaries
Financial Condition
The $143.5 million growth of average earning assets in 2000 was
primarily the result of an excellent lending year for S&T Bancorp,
Inc.(S&T), combined with increases in the investment portfolio.
During 2000, average loan balances increased by $127.0 million,
and average securities and federal funds increased $16.4 million.
The funding for this loan and security growth was provided by a
$78.6 million increase in average deposits, a $52.0 million
increase in average borrowings and an increase of $3.0 million in
average earnings retained.
[CAPTION]
2000 1999
Average Loan Average Loan
Loan Balance Loan Balance
(in millions) Balance Percentage Balance Percentage
Commercial, mortgage and
industrial $ 983.7 64% $ 841.6 59%
Residential real estate
mortgage 470.3 30 472.9 33
Installment 94.9 6 107.4 8
Total Loans $1,548.9 100% $1,421.9 100%
Lending Activity
Average loans at December 31, 2000 were $1.5 billion, a $127.0 million or
8.9% increase from December 31, 1999. The increases in average loans for
1999 were $106.9 million. Changes in the composition of the average loan
portfolio during 2000 included increases of $142.1 million of commercial
loans and $10.3 million of home equity loans, offset by decreases of $12.9
million of residential mortgages and $12.5 million in installment loans.
Composition changes included decreases from the effects of $5.2 million of
1-4 family mortgage loans and $13.4 million of commercial loans that were
sold or participated in 2000.
Average commercial, mortgage and industrial loans currently comprise 64%
of the loan portfolio. Although commercial loans can be an area of higher
risk, management believes these risks are mitigated by underwriting
guidelines and ongoing review by loan administration.
Residential mortgage lending continued to be a strategic focus for 2000
through the establishment of a centralized mortgage origination department,
product redesign, secondary market activities and the utilization of
commission compensated originators. 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 for portfolio
loans which generally require a maximum term of 20 years for fixed rate
mortgages, a maximum term of 30 years for adjustable rate mortgages and
private mortgage insurance for loans with less than a 20% down payment.
Adjustable rate mortgages with repricing terms of one, three and five years
comprised 19% of the residential mortgage portfolio in 2000.
Much of the decline in average residential loans was due to more active
participation in the secondary mortgage markets and reduced market
demand. S&T periodically sells longer-term, lower yielding 1-4 family
mortgages to the Federal National Mortgage Association (Fannie Mae). 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 2000, S&T sold $5.2 million of 1-4 family mortgages
to Fannie Mae. Fees and gains from mortgage servicing activities were $0.3
million in 2000. S&T will continue to sell longer-term loans to Fannie Mae
in the future on a selective basis, especially during periods of lower
interest rates.
Installment loan decreases were primarily associated with significantly
lower volumes in the indirect auto loan category and S&T's strategy to
continue to focus resources toward origination's of direct installment loans
and home equity loans. Pricing pressures were unusually intense in the
indirect auto loan market during the last few years, and the decision was
made to exit this line of business and allow the portfolio to amortize
through normal payments and payoffs. Home equity loans increased $10.3
million during 2000 as compared to the 1999 full year average.
Page 22
Loan underwriting standards for S&T are established by a formal policy
administered by the S&T Bank Credit Administration Department, and are
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 does not exceed 100% loan to
value.
A variety of unsecured and secured installment loan and credit card
products is offered by S&T. However, the majority of the installment loan
portfolio is automobile loans. Loan to value guidelines for direct loans are
90%-100% of invoice for new automobiles and 80%-90% of National
Automobile Dealer Association (NADA) value for used automobiles.
Management intends to continue to pursue quality loans in all lending
categories within our market area in order to honor our commitment to
provide comprehensive financial services 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. 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 $5.9 million in 2000 and $11.5 million in
1999. During 2000 and 1999, S&T's bond portfolio was restructured with
sales and maturities of $78.2 million and $238.7 million, respectively, of
U.S. government agency securities classified as available for sale. The
proceeds were reinvested in order to extend potential call dates. Interest
rate risk associated with these strategies is managed and monitored through
S&T's Asset Liability Committee (ALCO).
The largest components of the 2000 increase included $11.9 million in other
corporate securities, $4.6 million in corporate equities and $9.7 million in
Federal Home Loan Bank (FHLB) stock. The FHLB stock is a membership
and borrowing requirement. Offsetting these increases are decreases of $7.6
million in U.S. treasury securities, $8.1 million of U.S. government agency
securities, $1.2 million in mortgage-backed securities and $3.4 million in
tax-exempt state and municipal securities.
During 2000, S&T sold $27.2 million of equity securities classified as
available for sale. The sales were made in order to maximize returns when
market opportunities are presented. Additionally, S&T may receive an
exchange of shares relative to mergers; gains and losses are recognized on
shares held of acquired institutions in accordance with Emerging Issues
Task Force #91-5, Nonmonetary Exchange of Cost-Method Investments
(EITF 91-5). 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 at December 31, 2000, net of unrealized losses, of $46.7
million.
S&T's policy for security classification includes U.S. treasuries, U.S.
government agencies, mortgage-backed securities, corporate debt securities
and marketable equity securities as available for sale. Municipal securities
and one corporate debt security are classified as held to maturity. At
December 31, 2000, unrealized gains, net of unrealized losses, for securities
classified as available for sale were approximately $50.0 million.
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Nonearning Assets
Average noninterest earning assets increased $9.1 million in 2000 and $21.6
million in 1999. The 2000 and 1999 increase can be primarily attributed to a
$25.0 million bank-owned life insurance (BOLI) investment entered into
during June of 1999, which provides S&T with other income through
increases in the cash surrender value of the BOLI. The 2000 increase is
offset by a decrease in vault cash.
[CAPTION]
2000 1999
Loan Loan
Allowance Balance Allowance Balance
Allowance for Loan Losses Balance Percentage Balance Percentage
(in millions)
Commercial, mortgage and
industrial $18.8 64% $20.1 59%
Residential real estate mortgage 0.9 30 0.9 33
Installment 2.8 6 2.5 8
Unallocated 4.9 - 3.6 -
Total $27.4 100% $27.1 100%
Allowance for Loan Losses
The year-end balance in the allowance for loan losses increased slightly to
$27.4 million or 1.71% of total loans at December 31, 2000 as compared to
$27.1 million or 1.81% of total loans at December 31, 1999. Net loan
charge-offs totaled $3.7 million for 2000 compared to $3.5 million for 1999.
Included in the net loan charge-offs for 2000 is a $1.7 million recovery
received on a previously charged-off floor plan loan in 1998, and a $3.8
million charge-off to one commercial real estate borrower.
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
or 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 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.
Management relies on its risk rating process to monitor trends which may
be occurring relative to commercial loans to assess potential weaknesses
within the credit. Current economic factors and trends in risk ratings are
considered in the determination of the allowance for loan losses.
The balance of nonperforming loans, which includes nonaccrual loans past
due 90 days or more, at December 31, 2000, was $2.9 million or 0.18% of
total loans. This compares to nonperforming loans of $3.0 million or 0.20%
of total loans at December 31, 1999.
Asset quality is a major corporate objective at S&T, and management
believes the total allowance for loan losses is adequate to absorb probable
loan losses.
Deposits
Average total deposits increased by $78.6 million in 2000 and $71.1 million
in 1999. The mix of average deposits in 2000 changed with time deposits
increasing $53.5 million, money market accounts and interest-bearing
demand deposits increased $25.3 million, offset by savings account
decreases of $13.2 million. Noninterest-bearing deposits increased by $13.0
million or 6% in 2000 and were approximately 15% of total deposits during
2000 and 1999, respectively. Some of the changes can be partially
explained by strategic initiatives to increase demand accounts and cash
management services. In addition, a competitive 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 the S&T deposit base is stable and 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 during 2000 and 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. At December 31, 2000, there were $3.5 million
of brokered retail certificates of deposit outstanding.
Page 24
Borrowings
Average borrowings increased $52.0 million in 2000 and were comprised of
securities sold under repurchase agreements (REPOS), federal funds
purchased and long-term borrowings at the FHLB. S&T defines REPOS
with its retail customers as retail REPOS; wholesale REPOS are those
transacted with other banks and brokerage firms with terms normally
ranging from one to 14 days.
The average balance in retail REPOS decreased by $7.4 million for 2000
and $0.1 million for 1999. S&T views retail REPOS as a relatively stable
source of funds since most of these accounts are with local, long-term
customers.
Wholesale REPOS and federal funds purchased averaged $21.2 million in
2000, a decrease of $30.9 million from the 1999 averages. The increase in
deposits and the availability of reasonably priced long-term borrowings
from the FHLB decreased the usage of these types of fundings in 2000.
The interest rate risk of various funding strategies is managed through
ALCO. During 2000, ALCO authorized three additional long-term
borrowings of $116.1 million at a fixed rate with the FHLB and long-term
repurchase agreement borrowings. At December 31, 2000, S&T had long-
term borrowings outstanding of $265.6 million at a fixed rate with the
FHLB and $112.4 million of long-term repurchase agreement borrowings.
The purpose of these borrowings was to provide matched fundings for
newly originated loans, to mitigate the risk associated with volatile
liability fundings, to take advantage of lower cost funds through the
FHLB's Community Investment Program and to fund stock buy-backs.
Trust Assets
The year-end market value balance of the S&T Bank Trust Department
assets, which are not accounted for as part of the assets of S&T,
decreased 1% in 2000 and 1999. The decreases were the result of
general decreases in the debt and equity markets during the year.
Results of Operations
Year Ended December 31, 2000
Net Income
Net income was a record $45.0 million or $1.66 per diluted earnings per
share in 2000, representing a 9% and 10% increase, respectively, from the
$41.4 million or $1.51 per diluted earnings per share in 1999. The return
on average assets increased to 2.00% for 2000, as compared to 1.95% for 1999.
The return on average equity increased to 17.70% for 2000, compared to
16.50% for 1999. Without the equity effects of unrealized gains in the
available for sale investment portfolio, return on average equity would have
been 19.0% and 18.7% in 2000 and 1999, respectively. Increases to the net
interest income, other revenue and a lower effective tax rate contributed
significantly to this enhanced earnings performance.
Net Interest Income
On a fully taxable equivalent basis, net interest income increased $3.3
million or 4% for 2000 compared to 1999. The net yield on interest-earning
assets decreased to 4.40% in 2000 as compared to 4.55% in 1999. The
decline in the net yield on interest-earning assets during 2000 was
primarily attributable to the competitive pressures on loan and
deposit pricing. Net interest income was positively affected by the
$143.5 million or 7% increase in average earning assets.
In 2000, average loans increased $127.0 million and average securities
increased $5.9 million, comprising most of the earning asset growth. The
yields on average loans increased by 42 basis points and the yields on
average securities increased 32 basis points. Overall funding costs
increased 142 basis points.
Average interest-bearing deposits provided $65.6 million of the funds for
the growth in average earning assets, at a cost of 4.51% in 2000 as
compared to 3.98% in 1999.
Average increases of $52.0 million in REPOS and other borrowed funds
provided additional funding. The cost of these funds increased 89 basis
points during 2000. During 2000 more longer-term borrowings were
utilized in order to better manage interest rate risk.
Also positively affecting net interest income was a $25.8 million
increase to average net free funds. Average net free funds are the
excess of demand deposits, other noninterest-bearing liabilities and
shareholders' equity over nonearning assets.
Maintaining consistent spreads between earning assets and costing
liabilities is very significant to S&T's financial performance since net
interest income comprised 80% of operating revenue. The level and mix of
earning assets and funds are continually monitored by ALCO in order to
mitigate the interest rate sensitivity and liquidity risks of the balance
sheet. A variety of asset/liability management strategies was successfully
implemented, within prescribed ALCO risk parameters, that enabled
S&T to maintain a net interest margin consistent with historical levels.
Page 25
Provision for Loan Losses
The provision for loan losses is an amount added to the allowance against
which loan losses are charged. The provision for loan losses was $4.0
million for 2000 and 1999. The provision expense 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.
Credit quality statistics are an important factor in determining the amount
of provision expense. Net loan charge-offs totaled $3.7 million for 2000
compared to $3.5 million for 1999. Included in the net loan charge-offs for
2000 is a $1.7 million recovery received on a previously charged-off floor
plan loan in 1998, and a $3.8 million charge-off to one commercial real
estate borrower. Nonperforming loans to total loans decreased slightly to
0.18% at December 31, 2000. Also affecting the amount of provision
expense is 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, excluding net security gains, increased $2.0 million or
12% in 2000 compared to 1999. Increases included $0.6 million or 9% in
service charges and fees and $1.6 million or 24% increase in other income,
offset by a decrease of $0.2 million in trust fees. Security gains were
approximately the same in 2000 compared to 1999.
The increase in service charges on deposit accounts was primarily the result
of management's continued effort to implement reasonable fees for services
performed and to manage closely the collection of these fees, as well as
expanding new cash management relationships.
The increase in other income was a result of increased performance for
brokerage and insurance commissions, letters of credit fees, covered calls,
merchant and debit card commissions as well as a full year effect of BOLI
investment income. These areas were the focus of several strategic
initiatives and product enhancements implemented in order to expand this
source of revenue.
S&T recognized $5.1 million of gains on equity securities during 2000. $0.4
million was the result of Emerging Issues Task Force #91-5, Nonmonetary
Exchange of Cost-Method Investments (EITF 91-5). This accounting
pronouncement requires the mark to market of equity securities when an
acquisition of the company in which securities are owned occurs. EITF 91-5
gains recognized were all attributable to $0.4 million from the
Keystone/M&T merger. The remaining security gains were primarily
attributable to the sales of equity securities in order to maximize returns
by taking advantage of market opportunities when presented. Offsetting these
gains were $1.8 million in losses from the aforementioned restructuring of
the available for sale bond portfolio.
Noninterest Expense
Noninterest expense increased $2.2 million or 5% in 2000 compared to
1999. The increase is primarily attributable to increased employment,
occupancy and equipment, data processing and other expenses. 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% in 2000 and 1999, respectively.
Staff expense increased 3% or $0.7 million in 2000. The increase resulted
from normal merit increases offset by lower pension funding costs in 2000.
Average full-time equivalent staff was 661 in 2000 and 659 in 1999.
Occupancy and equipment expense increased 7% or $0.4 million as
compared to 1999. This increase is primarily attributable to the opening
of a new branch office in Allegheny county and small equipment purchases.
Data processing increased 10% or $0.2 million in 2000 as compared to 1999 due
to a refund of an overbilling received from our third party processor in
1999.
Other expenses increased 6% or $0.8 million as compared to 1999. This
increase included $0.6 million in legal fees related to increased activity
in loan collections as well as the formation of S&T Insurance Group, LLC.
Other expense increases of $0.2 million were not significant and reflect
normal changes due to activity increases, organization expansion,
consulting engagements for our fee products and operations areas, and fee
increases from vendors.
Federal Income Taxes
Federal income tax expense decreased $0.4 million to $17.6 million in 2000
primarily as a result of a lower effective tax rate in 2000. The 2000
effective tax rate of 28% was below the 35% statutory tax rate due to the
tax benefits resulting from tax-exempt interest, excludable dividend income
and the tax benefits associated with Low Income Housing Tax Credit (LIHTC)
projects. S&T currently does not incur any alternative minimum tax.
Page 26
Results of Operations
Year Ended December 31, 1999
Net Income
Net income was a record $41.4 million or $1.51 per diluted earnings per
share in 1999, representing a 12% increase from the $38.0 million or $1.35
per diluted earnings per share in 1998. The return on average assets
increased to 1.95% for 1999, as compared to 1.90% for 1998. The return on
average equity increased to 16.50% for 1999, compared to 14.80% for
1998. Increases to the net interest margin and other revenue contributed
significantly to this enhanced earnings performance.
Net Interest Income
On a fully taxable equivalent basis, net interest income increased $4.6
million or 5% for 1999 compared to 1998. The net yield on interest-earning
assets decreased slightly to 4.55% in 1999 as compared to 4.61% in 1998.
The decline in the net yield on interest-earning assets during 1999 was
primarily attributed to the implementation of a BOLI investment program,
as well as our share repurchase program that repurchased approximately
834,000 shares of S&T common stock. Net interest income was positively
affected by the $123.5 million or 7% increase in average earning assets.
In 1999, average loans increased $106.9 million and average securities
increased $11.5 million, comprising most of the earning asset growth. The
yields on average loans decreased by 28 basis points and the yields on
average securities decreased 12 basis points. Overall funding costs
decreased 47 basis points.
Average interest-bearing deposits provided $71.1 million of the funds for
the growth in average earning assets, at a cost of 3.98% in 1999 as
compared to 4.34% in 1998.
Average increases of $65.8 million in REPOS and other borrowed funds
provided additional funding. The cost of these funds decreased 11 basis
points during 1999. During 1999, more longer-term borrowings were
utilized in order to mitigate interest rate risk.
Also positively affecting net interest income was a $13.3 million increase to
average net free funds. Average net free funds are the excess of demand
deposits, other noninterest-bearing liabilities and shareholders' equity over
nonearning assets.
Maintaining consistent spreads between earning assets and costing
liabilities is very significant to S&T's financial performance since net
interest income comprised 84% of operating revenue. The level and mix of
earning assets and funds are continually monitored by ALCO in order to
mitigate the interest rate sensitivity and liquidity risks of the balance
sheet. A variety of asset/liability management strategies was successfully
implemented, within prescribed ALCO risk parameters, that enabled S&T
to maintain a net interest margin consistent with historical levels.
Provision for Loan Losses
The provision for loan losses is an amount added to the allowance against
which loan losses are charged. The provision for loan losses was $4.0
million for 1999 compared to $10.6 million in 1998.
Net loan charge-offs totaled $3.5 million for 1999
compared to $4.3 million for 1998. Included in the charge-offs for 1998 is
$2.0 million related to a floor plan loan to one automobile dealership.
Nonperforming loans to total loans decreased to 0.20% at December 31,
1999. Also affecting the amount of provision expense is loan growth and
portfolio composition. Most of the loan growth in 1999 and 1998 is
attributable to larger-sized commercial loans.
Page 27
Noninterest Income
Noninterest income, excluding net security gains, increased $3.2 million or
23% in 1999 compared to 1998. Increases included $0.3 million or 8% in
trust income, $0.7 million or 12% in service charges and fees and a $2.2
million or 49% increase in other income. Security gains decreased $7.5
million or 70%.
The increase in trust income was attributable to bankwide incentive
programs and expanded marketing efforts designed to develop new trust
business and to develop new relationships within the Allegheny County
market.
The increase in service charges on deposit accounts was primarily the result
of management's continued effort to implement reasonable fees for services
performed and to manage closely the collection of these fees, as well as
expanding new cash management relationships.
The increase in other income was a result of increased performance for
brokerage and insurance commissions, letters of credit fees, covered calls,
credit and debit card commissions, mortgage servicing income, as well as
BOLI investment income. These areas were the focus of several 1999
strategic initiatives and product enhancements implemented in order to
expand this source of revenue.
S&T recognized $5.7 million of gains on equity securities during 1999. $1.3
million was the result of Emerging Issues Task Force #91-5, Nonmonetary
Exchange of Cost-Method Investments (EITF 91-5). This accounting
pronouncement requires the mark to market of equity securities when an
acquisition of the company in which securities are owned occurs. EITF 91-5
gains recognized included $0.7 million from the First Western Bancorp/Sky
Financial merger and $0.6 million from the BankBoston/Fleet Boston
merger. The remaining security gains were primarily attributable to the
sales of equity securities in order to maximize returns by taking advantage
of market opportunities when presented. Offsetting these gains were $2.5
million in losses from the aforementioned restructuring of the available for
sale bond portfolio.
Noninterest Expense
Noninterest expense increased $1.5 million or 4% in 1999 compared to
1998. The increase is primarily attributable to increased employment and
other expenses. 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% and 42% in 1999 and 1998,
respectively.
Staff expense increased 3% or $0.6 million in 1999. The increase resulted
from normal merit increases and higher incentive payouts relative to
commercial loan activity and credit insurance sales. Average full-time
equivalent staff was 659 in 1999 and 1998.
Other expenses increased 10% or $1.2 million as compared to 1998. This
increase included $0.3 million of goodwill related to a branch purchase in
the third quarter of 1998, $0.3 million in telephone expense relating to the
implementation of a wide area computer communications network and a
$0.3 million recovery of a previously charged-off fraud loss in 1998. Other
expense increases of $0.3 million were not significant and reflect normal
changes due to activity increases, organization expansion, consulting
engagements for our fee products and operations areas and fee increases
from vendors.
Federal Income Taxes
Federal income tax expense increased $1.8 million to $18.0 million in 1999
as a result of higher pretax income in 1999. The 1999 effective tax rate of
30% was below the 35% statutory tax rate due to the tax benefits resulting
from tax-exempt interest, excludable dividend income and the tax benefits
associated with Low Income Housing Tax Credit (LIHTC) projects. S&T
currently does not incur any alternative minimum tax.
Page 28
Liquidity and Interest Rate Sensitivity
Liquidity refers to the ability to satisfy the financial needs of depositors
who want to withdraw funds or borrowers needing access to funds to meet
their credit needs. Interest rate sensitivity management seeks to avoid
fluctuating net interest margins and to enhance net interest income through
periods of changing interest rates. ALCO is responsible for establishing and
monitoring the liquidity and interest rate sensitivity guidelines, procedures
and policies.
The principal sources of asset liquidity are cash and due from banks,
interest-earning deposits with banks, federal funds, investment securities
that mature in one year or less, and securities available for sale. At
December 31, 2000, the total of such assets was approximately $674.6
million or 29% of consolidated assets. However, liability liquidity is much
more difficult to quantify, but is further enhanced by a stable core deposit
base, access to credit lines at other financial institutions and S&T's ability
to renew maturing deposits. Certificates of deposit in denominations of
$100,000 or more represented 8% of deposits at December 31, 2000 and
were outstanding primarily to local customers. S&T's ability to attract
deposits and borrowed funds depends primarily on continued rate
competitiveness, profitability, capitalization and overall financial condition.
Beyond the issue of having sufficient sources to fund unexpected credit
demands or deposit withdrawals, liquidity management also is an important
factor in monitoring and managing interest rate sensitivity issues through
ALCO. Through forecast and simulation models, ALCO is also able to
project future funding needs and develop strategies for acquiring funds at a
reasonable cost.
ALCO uses a variety of measurements to monitor the liquidity position of
S&T. These include liquidity gap, liquidity forecast, net loans and standby
letters of credit to assets, net loans to deposits and net noncore funding
dependence ratio. As of December 31, 2000, all of these measurements
were in compliance with ALCO policy limitations.
Because the assets and liabilities of S&T are primarily monetary in nature,
the presentation and analysis of cash flows in formats prescribed by
Financial Accounting Standards Board Statement No. 95 "Statement of
Cash Flows" (Statement No. 95) are less meaningful for managing bank
liquidity than for other non-financial companies. Funds are typically
provided from current earnings, maturity and sales of securities available
for sale, loan repayments, deposits and borrowings. The primary uses of
funds include new loans, repayment of borrowings, the purchase of
securities and dividends to shareholders. The level and mix of sources and
uses of funds are constantly monitored and adjusted by ALCO in order
to maintain credit, liquidity and interest rate risks within prescribed policy
guidelines while maximizing earnings.
ALCO monitors and manages interest rate sensitivity through gap,
simulation and duration analyses in order to avoid unacceptable earnings
fluctuations due to interest rate changes. S&T's gap model includes certain
management assumptions based upon past experience and the expected
behavior of customers during various interest rate scenarios. The
assumptions include principal prepayments for mortgages, installment loans
and classifying the demand, savings and money market balances by degree of
interest rate sensitivity. Utilizing the above assumptions results in
ratios of interest rate sensitive assets to interest rate sensitive
liabilities for the six-month and 12-month intervals ended December 31,
2000 of 1.04% and 1.00%, respectively. Assuming immediate repricings for
interest-bearing demand, savings and money market accounts, these ratios
would be 0.78% and 0.82%, respectively.
In addition to the gap analysis, S&T performs an earnings sensitivity
analysis to identify more dynamic interest rate risk exposures.
An earnings simulation model is used to estimate the effect that specific
interest rate changes would have on 12 months of pretax earnings.
Derivative financial instruments are included in this exercise. The model
incorporates management assumptions regarding the level of interest rate or
balance changes on indeterminate maturity deposit products (savings,
money market, NOW and demand deposits) for a given level of market rate
changes. These assumptions have been developed through a combination of
historical analysis and future expected pricing behavior. Interest rate
caps and floors on all products are included to the extent that they become
effective in the 12-month simulation period. Additionally, changes in
prepayment behavior of the residential mortgage portfolio in each rate
environment are captured using management estimates. Finally, the impact
of planned growth and anticipated new business activities is factored into
the simulation model.
Page 29
S&T's policy objective is to limit the change in annual pretax earnings to
$2.8 million from an immediate and sustained parallel change in interest
rates of 200 basis points. As of December 31, 2000 and 1999, respectively,
S&T had the following estimated earnings sensitivity profile:
[CAPTION]
Immediate
Change in Rates
(in millions) +200bp -200bp
2000 Pretax earnings change $ 1.1 $(2.5)
1999 Pretax earnings change $(0.2) $(1.2)
Results of the gradual simulation model, showing changes from current
rates by 200 basis points over a 12-month period as of December 31, 2000
and 1999 are presented below.
[CAPTION]
Gradual
Change in Rates
(in millions) +200bp -200bp
2000 Pretax earnings change $ 0.4 $ (2.0)
1999 Pretax earnings change $(0.1) $ 0.4
Capital Resources
Shareholders' equity increased $37.4 million at December 31, 2000
compared to December 31, 1999. The primary source of equity growth for
S&T is earnings retention. Hence, capital growth is a function of net income
less dividends paid to shareholders and treasury stock activities.
Net income was $45.0 million and dividends declared to shareholders were
$22.7 million for 2000. S&T paid 49% of 2000 net income in dividends,
equating to an annual dividend rate of $0.84 per share. Also affecting
capital was an increase of $16.1 million in unrealized gains on securities
available for sale. During 2000, S&T repurchased 62,400 shares of its
common stock. The repurchase of up to 1,000,000 shares in 2000 was
authorized by the S&T Board of Directors. In December 2000, this
authorization was extended for 2001.
The book value of S&T's common stock increased 15.8% from $8.88 at
December 31, 1999 to $10.28 at December 31, 2000, primarily due to
earnings retention and the increase in unrealized holding gains on
securities available for sale and by the stock buy-backs during 2000.
S&T continues to maintain a strong capital position with a leverage
ratio of 10.4% as compared to the 2000 minimum regulatory guideline of 3%.
S&T's risk-based capital Tier 1 and Total ratios were 12.3% and 14.6%,
respectively, at December 31, 2000, which places S&T well above the
Federal Reserve Board's risk-based capital guidelines of 4% and 8% for
Tier 1 and Total, respectively. Included in the total ratio is 45% of the
pretax unrealized holding gains on available for sale equity securities
as prescribed by banking regulations effective October 1, 1998. In addition,
management believes that S&T has the ability to raise additional capital if
necessary.
In April 1993, shareholders approved the S&T Incentive Stock Plan (Stock
Plan) authorizing the issuance of a maximum of 1,200,000 shares of S&T's
common stock in order to assist in attracting and retaining employees of
outstanding ability and to promote the identification of their interests
with those of the shareholders of S&T. On October 17, 1994, the Stock Plan
was amended to include outside directors. On April 21, 1997, shareholders
approved an amendment to the plan increasing the number of authorized
shares to 3,200,000. As of December 31, 2000, 2,572,122 nonstatutory
stock options had been granted to key employees and outside directors;
1,415,422 of these options are currently exercisable.
Regulatory Matters
S&T and S&T Bank are subject to periodic examinations by one or more of
the various regulatory agencies. During 2000, an examination was
conducted by the Pennsylvania Department of Banking (PADB). This
examination included, but was not limited to, procedures designed to review
lending practices, credit quality, liquidity, operations and capital adequacy
of S&T and its subsidiaries. No comments were received from the PADB
which would have a material effect on S&T's liquidity, capital resources or
operations. S&T's current capital position and results of regulatory
examination allow it to pay the lowest possible rate for FDIC deposit
insurance.
Inflation
Management is aware of the significant effect inflation has on interest rates
and can have on financial performance. S&T's ability to cope with this is
best determined by analyzing its capability to respond to changing interest
rates and its ability to manage noninterest income and expense. S&T
monitors its mix of interest rate sensitive assets and liabilities through
ALCO in order to reduce the impact of inflation on net interest income.
Management also controls the effects of inflation by reviewing the prices of
its products and services, by introducing new products and services and by
controlling overhead expenses.
Page 30
Business Uncertainties
There are many uncertainties regarding the economy as S&T enters 2001.
Interest rates are expected to decline, and the economy is slowing. S&T
anticipatipats net loan growth of about 6-8 percent and deposit growth of
approximately 2-4 percent for the year. S&T also anticipatipates that our
net interest margin will decrease another 5-10 basis points for the year.
Fee income is projected to increase 10-12 percent in 2001. The $119 million
of equity securities in our S&T Investment Company should allow us to
recognize $4-6 million of equity security gains in 2001. S&T believes the
combination of these factors, along with anticipated increases in noninterest
expense, should allow us to grow earnings per share by 5-8 percent in 2001 to
a range of $1.75 to $1.79
There are many factors that could influence our results, both positively and
negatively this year. Because the majority of revenue comes from the net
interest margin, internally generated deposit growth and the mix of that
growth are major factors. S&T has directed a fair amount of focus and
resources in our planning for this year to help do a better job of generating
and retaining low cost core deposits. On the other hand, a slowing economy
could cause deterioration in the asset quality measurements; we recognize
that the shift to a greater dependence on commercial loans in recent years
exposes us to larger credit risks and greater swings in nonperforming loans
and charge-offs when problems do occur. However, because of S&T's
adequate allowance for loan losses, earnings strength and strong
capitalization, as well as the strength of other businesses in our market
area, management does not expect a decline in S&T's ability to satisfactorily
perform if further decline in our economy occurs.
While S&T believes the year ahead presents more and greater uncertainties
and challenges than other recent years, S&T has a plan in place that should
allow us to improve our earnings this year to the levels indicated above.
"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 31
FINANCIAL HIGHLIGHTS
S&T Bancorp, Inc. and Subsidiaries
[CAPTION]
(dollars in thousands, except per share data)
2000 1999 CHANGE CHANGE
FOR THE YEAR
Net Income $44,973 $41,418 $3,555 9%
Return on Average Assets 2.00% 1.95% 0.05% 3%
Return on Average Equity 17.70% 16.50% 1.20% 7%
PER SHARE
Net Income - Basic $1.67 $1.52 $0.15 10%
Net Income - Diluted 1.66 1.51 0.15 10%
Dividends Declared 0.84 0.76 0.08 11%
Book Value at December 31 10.28 8.88 1.40 16%
Market Value at December 31 21.63 23.19 (1.56) -7%
AT YEAR-END
Assets $2,310,290 $2,194,073 $116,217 5%
Net Loans 1,577,629 1,469,143 108,486 7%
Deposits 1,525,332 1,435,065 90,267 6%
Shareholder's Equity 277,097 239,700 37,397 16%
Trust Assets 649,279 655,020 (5,741) -1%
Allowance for Loan Losses/Total Loans 1.71% 1.81% -0.10% -6%
Nonperforming Loans/Total Loans 0.18 0.20 (0.02) -10%
Inside front cover of Annual Report
CONSOLIDATED BALANCE SHEETS
S&T Bancorp, Inc. and Subsidiaries
[CAPTION]
December 31 2000 1999
(dollars in thousands, except per share data)
ASSETS
Cash and due from banks $43,665 $38,663
Federal funds sold 6,655 15,454
Securities:
Available for sale 567,400 557,994
Held to maturity (market value $13,703
in 2000 and $17,527 in 1999) 13,512 17,230
Total Securities 580,912 575,224
Loans, net of allowance for loan losses
of $27,395 in 2000 and $27,134 in 1999 1,577,629 1,469,143
Premises and equipment 20,390 20,678
Other assets 81,039 74,911
Total Assets $2,310,290 $2,194,073
LIABILITIES
Deposits:
Noninterest-bearing $232,625 $219,202
Interest-bearing 1,292,707 1,215,863
Total Deposits 1,525,332 1,435,065
Securities sold under repurchase agreements 80,686 116,009
Long-term borrowings 377,997 364,062
Other liabilities 49,178 39,237
Total Liabilities 2,033,193 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 21,028 21,070
Retained earnings 201,435 179,129
Accumulated other comprehensive income 32,502 16,410
Treasury stock (2,766,626 shares in 2000
and 2,715,221 shares in 1999, at cost) (52,153) (51,194)
Total Shareholders' Equity 277,097 239,700
Total Liabilities and Shareholders' Equity $2,310,290 $2,194,073
See Notes to Consolidated Financial Statements
Page 32
CONSOLIDATED STATEMENTS OF INCOME
S&T Bancorp, Inc. and Subsidiaries
[CAPTION]
Year Ended December 31 2000 1999 1998
(dollars in thousands, except per share data)
INTEREST INCOME
Loans, including fees $137,797 $120,333 $115,081
Federal funds sold 1,347 547 314
Investment securities:
Taxable 29,623 29,377 29,984
Tax-exempt 771 942 1,557
Dividends 6,646 5,528 4,502
Total Interest Income 176,184 156,727 151,438
INTEREST EXPENSE
Deposits 56,467 47,278 49,570
Securities sold under repurchase
agreements 5,863 6,519 8,968
Federal funds purchased 139 229 383
Long-term borrowings 23,672 15,916 10,235
Total Interest Expense 86,141 69,942 69,156
NET INTEREST INCOME 90,043 86,785 82,282
Provision for Loan Losses 4,000 4,000 10,550
Net Interest Income After Provision
for Loan Losses 86,043 82,785 71,732
NONINTEREST INCOME
Security gains, net 3,260 3,240 10,722
Service charges on deposit accounts 6,810 6,234 5,548
Trust fees 3,758 3,936 3,661
Other 8,326 6,690 4,487
Total Noninterest Income 22,154 20,100 24,418
NONINTEREST EXPENSE
Salaries and employee benefits 23,466 22,726 22,086
Occupency, net 3,007 2,855 2,759
Furniture and equipment 2,689 2,445 2,688
Other taxes 1,667 1,540 1,456
Data processing 2,473 2,256 2,411
Amortization of intangibles 447 447 112
FDIC assessment 294 238 228
Other 11,615 10,983 10,248
Total Noninterest Expense 45,658 43,490 41,988
Income Before Income Taxes 62,539 59,395 54,162
Applicable Income Taxes 17,566 17,977 16,199
Net Income $44,973 $41,418 $37,963
PER COMMON SHARE:
Net Income - Basic $1.67 $1.52 $1.37
Net Income - Diluted 1.66 1.51 1.35
Dividends Declared 0.84 0.76 0.66
See Notes to Consolidated Financial Statements.
Page 33
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
S&T Bancorp, Inc. and Subsidiaries
[CAPTION]
Accumulated
Additional Other
Comprehensive Common Paid-in Retained Comprehensive Treasury Deferred
Income Stock Capital Earnings Income Stock Compensation
(dollars in thousands, except per share data)
Balance at January 1, 1998 $ - $37,142 $19,369 $175,707 $40,524 ($12,494) ($130)
Comprehensive Income:
Net income for 1998 37,963 37,963
Other comprehensive income, net of tax:
Net unrealized securities losses (563) (563)
Cash dividends declared
($0.66 per share)(1) (18,253)
Treasury stock acquired (1,117,036 shares) (27,975)
Treasury stock issued (510,305 shares) (802) 6,352
Tax Deductibility/Options 2,667
Deferred ESOP benefits expense 130
Transfer to reflect two-for-one stock split 37,143 (37,143)
Comprehensive Income $37,400
Balance at December 31, 1998 $74,285 $21,234 $158,274 $39,961 ($34,117) $ -
Comprehensive Income:
Net income for 1999 41,418 41,418
Other comprehensive income, net of tax:
Net unrealized securities losses (23,551) (23,551)
Cash dividends declared
($0.76 per share) (20,563)
Treasury stock acquired (834,207 shares) (20,007)
Treasury stock issued (157,445 shares) (684) 2,930
Tax Deductibility/Options 520
Comprehensive Income $17,867
Balance at December 31, 1999 $74,285 $21,070 $179,129 $16,410 ($51,194) $ -
Comprehensive Income:
Net income for 2000 44,973 44,973
Other comprehensive income, net of tax:
Net unrealized securities gains 16,092 16,092
Cash dividends declared
($0.84 per share) (22,667)
Treasury stock acquired (62,400 shares) (1,166)
Treasury stock issued (10,995 shares) (66) 207
Tax Deductibility/Options 24
Comprehensive Income $61,065
Balance at December 31, 2000 $74,285 $21,028 $201,435 $32,502 ($52,153) $ -
1 Per share amounts have been restated to record the effect of a
two-for-one common stock split in the form of a 100% stock dividend
distributed on October 30, 1998.
See Notes to Consolidated Financial Statements.
Page 34
CONSOLIDATED STATEMENTS OF CASH FLOWS
S&T Bancorp, Inc. and Subsidiaries
[CAPTION]
Year Ended December 31 2000 1999 1998
(dollars in thousands)
OPERATING ACTIVITIES
Net Income $44,973 $41,418 $37,963
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 4,000 4,000 10,550
Provision for depreciation and amortization 2,356 2,220 2,158
Net amortization of investment security
premiums 330 588 609
Net accretion of loans and deposit premiums (271) - -
Deferred income taxes 48 1,228 (807)
Securities gains, net (3,260) (3,240) (10,722)
(Increase) decrease in interest receivable (1,282) 451 157
Increase (decrease) in interest payable 1,628 484 (139)
(Increase) decrease in other assets (4,625) (25,338) 776
Decrease in other liabilities (1,156) (1,377) (2,214)
Net Cash Provided by Operating Activities 42,741 20,434 38,331
INVESTING ACTIVITIES
Net decrease (increase) in federal funds sold 8,799 3,899 (19,251)
Proceeds from maturities of investment securities 5,708 5,778 20,772
Proceeds from maturities of securities available
for sale 35,762 116,428 192,105
Proceeds from sales of securities available for
sale 102,219 268,230 96,233
Purchases of securities available for sale (121,689) (407,755) (323,130)
Net increase in loans (112,214) (133,911) (96,456)
Purchases of premises and equipment (2,105) (1,892) (1,933)
Other, net 37 (74) 215
Net cash acquired in branch acquisition - - 31,604
Net Cash Used in Investing Activities (83,483) (149,297) (99,841)
FINANCING ACTIVITIES
Net increase in demand, NOW and savings deposits 14,518 47,589 81,553
Net increase (decrease) in certificates of deposit 75,749 7,414 (25,213)
Net decrease in federal funds purchased - - (9,325)
Net decrease in repurchase agreements (35,323) (22,817) (31,299)
Proceeds from long-term borrowings 116,075 203,844 120,850
Payments from long-term borrowings (102,140) (79,850) (25,000)
Acquisition of treasury stock (1,025) (17,761) (27,975)
Exercise of stock options and related tax benefits 24 520 8,219
Cash dividends paid to shareholders (22,134) (20,149) (17,515)
Net Cash Provided by Financing Activities 45,744 118,790 74,295
Increase (decrease) in Cash and Cash Equivalents 5,002 (10,073) 12,785
Cash and Cash Equivalents at Beginning of Year 38,663 48,736 35,951
Cash and Cash Equivalents at End of Year $43,665 $38,663 $48,736
See Notes to Consolidated Financial Statements
Page 35
Note A
ACCOUNTING POLICIES
The financial statements of S&T Bancorp, Inc. and subsidiaries
(S&T) have been prepared in accordance with accounting principles
generally accepted in the United States. In preparing the financial
statements, management is required to make estimates and assump-
tions that affect the reported amounts of assets and liabilities
as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ from those estimates. The
more significant accounting policies are described below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of S&T
All significant intercompany transactions have been eliminated in
consolidation. The investment in the subsidiaries is carried at
S&T's equity in the underlying net assets.
SECURITIES
Management determines the appropriate classification of securities at
the time of purchase. If management has the intent and S&T has the
ability at the time of purchase to hold securities until maturity,
they are classified as held to maturity and are stated at cost
adjusted for amortization of premiums and accretion of discounts. All
obligations of states and political subdivisions and one corporate
security are classified as held to maturity. Securities to be held
for indefinite periods of time are classified as available for sale
and are recorded at market value. All U.S. treasury securities, U.S.
government corporations and agencies, mortgaged-backed securities,
all other corporate securities and marketable equity securities are
classified as available for sale. Gains or losses on the disposition
of securities are based on the specific identification method. S&T
does not engage in any securities trading activity.
LOANS
Interest on loans is accrued and credited to operations based on the
principal amount outstanding. Accretion of discount on loans is
included in interest income. Loan origination fees and direct loan
origination costs are deferred and amortized as an adjustment of loan
yield over the respective lives of the loans. Loans are placed on
nonaccrual and interest is discontinued when collection of interest
or principal is doubtful, or generally when interest and principal
are 90 days or more past due. Impaired loans are defined by management
as commercial and commercial real estate loans for which it is
probable that the Bank will not be able to collect all amounts due
according to the contractual terms of the loan agreement. Residential
real estate mortgages and consumer installment loans are large groups
of smaller balance homogenous loans and are separately measured for
impairment collectability. Factors considered by management in
determining impairment include payment status and underlying collateral
value. All impaired loans are classified as substandard for risk
classification purposes. Impaired loans are charged-off, to the estimated
value of collateral associated with the loan, when management believes
principal and interest are deemed uncollectible. The accrual of interest
on impaired loans is discontinued when, in management's opinion, the
borrower may be unable to meet the payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent that cash
payments are received.
The allowance for loan losses is established through provisions for loan
losses charged against income. Loans considered to be uncollectible are
charged against the allowance, and recoveries, if any, are credited to the
allowance. The allowance for loan losses is maintained at a level believed
adequate by management to absorb probable losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on
periodic evaluations of the loan portfolio, past loan loss experience,
current economic conditions, volume, growth and composition of the loan
portfolio and other relevant factors.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
The provision for depreciation is computed generally by the straight-
line method for financial reporting purposes and by accelerated methods
for federal income tax purposes.
OTHER REAL ESTATE
Other real estate is included in other assets and is comprised of
properties acquired through foreclosure proceedings or acceptance of
a deed in lieu of a foreclosure and loans classified as in-substance
foreclosure. These properties are carried at the lower of cost or
fair value less cost of resale. Loan losses arising from the
acquisition of such property are charged against the allowance for
loan losses. Gains or losses realized subsequent to acquisition are
recorded in the results of operations.
Page 36
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled.
TRUST ASSETS AND INCOME
Assets held in a fiduciary capacity by the subsidiary bank, S&T Bank
(Bank), are not assets of the Bank and are therefore not included in
the consolidated financial statements. Trust fee income is reported
on the accrual basis.
PENSIONS
Pension expense for the Bank's defined benefit pension plan is
actuarially determined using the projected unit credit actuarial
cost method. The funding policy for the plan is to contribute
amounts to the plan sufficient to meet the minimum funding
requirements of the Employee Retirement Income Security Act of
1974, plus such additional amounts as may be appropriate, subject
to federal income tax limitations.
TREASURY STOCK
The purchase of S&T common stock is recorded at cost. At the time
of reissue, the treasury stock account is reduced using the average
cost method.
EARNINGS PER SHARE
Basic Earnings Per Share (EPS) is calculated by dividing net income by the
weighted average number of common shares outstanding during the period.
Average shares outstanding for computing basic EPS were 26,988,541,
27,168,529, and 27,762,801 for 2000, 1999 and 1998, respectively. Options,
warrants and other potentially dilutive securities are excluded from the
basic calculation, but are included in diluted EPS. Average shares
outstanding for computing dilutive EPS were 27,073,945, 27,366,986 and
28,055,142 for 2000, 1999 and 1998, respectively. In computing dilutive EPS,
average shares outstanding have been increased by the common stock
equivalents relating to S&T's outstanding stock options.
OPERATING SEGMENTS
An operating segment is defined as a component of an enterprise that
engages in business activities that generate revenue and incur expense,
and the operating results of which are reviewed by the chief operating
decision maker in the determination of resource allocation and
performance. S&T's business activities are currently confined to one
segment which is community banking.
CASH FLOW INFORMATION
S&T considers cash and due from banks as cash and cash equivalents.
For the years ended December 31, 2000, 1999 and 1998, cash paid for
interest was $84,572,000, $69,518,000 and $69,295,000, respectively.
Cash paid during 2000 for income taxes was $18,483,000 compared to
$14,368,000 for 1999 and $15,567,000 for 1998.
MORTGAGE LOAN SERVICING
Mortgage servicing assets are recognized as separate assets when
servicing rights are acquired through purchase or loan originations,
when there is a definitive plan to sell the underlying loan.
Capitalized mortgage servicing rights are reported in other assets
and are amortized into noninterest income in proportion to, and over
the period of, the estimated future net servicing income of the
underlying mortgage loans. Capitalized mortgage servicing rights are
evaluated for impairment based on the fair value of those rights.
For the year ended December 31, 2000 and 1999, the 1-4 family mortgage
loans that were sold to the Federal National Mortgage Association
(Fannie Mae) amounted to $5.2 million and $16.1 million, respectively.
At December 31, 2000 and 1999, servicing assets were $492,000 and
$463,000, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
As of January 1, 2001, S&T adopted 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. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, "
(Statement No. 138) which requires measuring and recording the
change in fair value of derivative instruments. S&T does not
extensively use derivative financial instruments. Historically,the
only type that S&T utilizes is interest rate swaps. At December 31,
2000, S&T had no swaps outstanding. The adoption of these statements
did not materially affect S&T's financial position or results of operations.
RECLASSIFICATION
Amounts in prior years have been reclassed to conform to presentation
in 2000. The reclassification had no effect on financial condition or
results of operations.
Page 37
Note B
Fair Values of Financial Instruments
S&T utilized quoted market values, where available, to assign fair
value to its financial instruments. In cases where quoted market
values were not available, S&T used present value methods to estimate
the fair value of its financial instruments. These estimates of fair
value are significantly affected by the assumptions made and,
accordingly, do not necessarily indicate amounts which could be
realized in a current market exchange. S&T does not expect to realize
the estimated amounts disclosed.
The following methods and assumptions were used by S&T in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS AND OTHER SHORT-TERM ASSETS
The carrying amounts reported in the consolidated balance sheet for
cash and due from banks, interest-earning deposits with banks and
federal funds sold approximate those assets' fair values.
SECURITIES
Fair values for investment securities and securities available for
sale are based on quoted market prices.
LOANS
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The
fair values for other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers as measured by net credit losses and the
loss of interest income from nonaccrual loans. The carrying amount of
accrued interest approximates its fair value.
DEPOSITS
The fair values disclosed for demand deposits (e.g., noninterest and
interest-bearing demand, money market and savings accounts) are, by
definition, equal to the amount payable on demand. The carrying
amounts for variable-rate, fixed-term certificates of deposits and
other time deposits approximate their fair value at year-end. Fair
values for fixed-rate certificates of deposit and other time deposits
are based on the discounted value of contractual cash flows, using
interest rates currently being offered for deposits of similar
remaining maturities.
SHORT-TERM BORROWINGS AND OTHER BORROWED FUNDS
The carrying amounts of federal funds purchased, borrowings under
repurchase agreements and other borrowings approximate their fair
values.
LONG-TERM BORROWINGS
The fair values disclosed for long-term borrowings are estimated using
current interest rates for long-term borrowings of similar remaining
maturities.
LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT
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. Also, unfunded loan commitments
relate principally to variable-rate commercial loans, and fees are not
normally assessed on these balances.
Estimates of fair value have not been made for items which are not
defined as financial instruments, including such items as S&T's core
deposit intangibles and the value of its trust operation. S&T
believes it is impractical to estimate a representational fair value
for these types of assets, which represent significant value to S&T.
Page 38
The following table indicates the estimated fair value of S&T's
financial instruments as of December 31:
[CAPTION]
2000 1999
Estimated Carrying Estimated Carrying
Fair Value Value Fair Value Value
(dollars in thousands)
ASSETS
Cash $43,665 $43,665 $38,663 $38,663
Federal funds sold 6,655 6,655 15,454 15,454
Securities:
Available for sale 567,400 567,400 557,994 557,994
Held to maturity 13,703 13,512 17,527 17,230
Loans 1,596,566 1,605,024 1,487,385 1,496,277
LIABILITIES
Deposits $1,526,803 $1,525,332 $1,436,040 $1,435,065
Securities sold under repurchase
agreements 80,686 80,686 116,009 116,009
Long-term borrowings 381,933 377,997 356,009 364,062
OFF-BALANCE SHEET
Interest rate swaps $ - $ - $ 22 $ -
Note C
Restrictions on Cash and Due from Bank Accounts
The Board of Governors of the Federal Reserve Bank impose certain reserve
requirements on all depository institutions. These reserves are maintained
in the form of vault cash or as a noninterest-bearing balance with the
Federal Reserve Bank. Required reserves averaged $10,036,000 during 2000.
Page 39
NOTE D
Securities
The following table indicates the composition of the securities
portfolio at December 31:
[CAPTION]
Available for Sale
Gross Gross
Amortized Unrealized Unrealized Market
2000 Cost Gains Losses Value
(dollars in thousands)
Obligations of U.S. government
corporations and agencies $331,846 $3,824 ($873) $334,797
Mortgage-backed securities 5,405 158 - 5,563
U.S. treasury securities 10,564 637 - 11,201
Corporate securities 64,633 240 (636) 64,237
Debt securities available for sale 412,448 4,859 (1,509) 415,798
Marketable equity securities 67,665 50,211 (3,559) 114,317
Other securities 37,285 - - 37,285
Total $517,398 $55,070 ($5,068) $567,400
Held to Maturity
Obligations of states and subdivisions $11,512 $181 - $11,693
Corporate securities 2,000 10 - 2,010
Total $13,512 $191 $0 $13,703
Available for Sale
Gross Gross
Amortized Unrealized Unrealized Market
1999 Cost Gains Losses Value
(dollars in thousands)
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
Held to Maturity
Obligations 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 40
There were $7,086,000, $5,833,000 and $11,881,000 in gross realized gains
and $3,826,000, $2,593,000 and $1,159,000 in gross realized losses in
2000, 1999 and 1998, respectively, relative to securities available for
sale.
The amortized cost and estimated market value of debt securities at
December 31, 2000, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call
or prepayment penalties.
For purposes of the maturity table, mortgage-backed securities, which
are not due at a single maturity date, have been allocated over
maturity groupings based on the weighted-average contractual maturities
of the underlying collateral. The mortgage-backed securities may mature
earlier than their weighted-average contractual maturities because of
principal prepayments.
[CAPTION]
Amortized Market
Available for Sale Cost Value
(dollars in thousands)
Due in one year or less $12,516 $12,566
Due after one year through five years 247,101 248,884
Due after five years through 10 years 152,831 154,348
Total 412,448 $415,798
Amortized Market
Held to Maturity Cost Value
Due in one year or less $4,090 $4,107
Due after one year through five years 9,422 9,596
Total $13,512 $13,703
At December 31, 2000 and 1999, securities with principal amounts of
$321,549,000 and $317,979,000, respetively, were pledged to secure
repurchase agreements and public and trust fund deposits.
NOTE E
Loans
The following table indicates the composition of the loan
portfolio at December 31:
[CAPTION]
2000 1999
(dollars in thousands)
Real estate - construction $113,856 $94,786
Real estate - mortgages:
Residential 465,779 466,881
Commercial 589,028 527,970
Commercial and industrial 347,285 302,877
Consumer installment 89,076 103,763
Gross Loans $1,605,024 $1,496,277
Allowance for loan losses (27,395) (27,134)
Net Loans $1,577,629 $1,469,143
Page 41
The following table presents changes in the allowance for
loan losses for the year ended December 31:
[CAPTION]
2000 1999 1998
(dollars in thousands)
Balance at beginning of year $27,134 $26,677 $20,427
Charge-offs (9,000) (7,002) (5,999)
Recoveries 5,261 3,459 1,699
Net charge-offs (3,739) (3,543) (4,300)
Provision for loan losses 4,000 4,000 10,550
Balance at end of year $27,395 $27,134 $26,677
The Bank has granted loans to certain officers and directors of S&T
as well as certain affiliates of the officers and directors in the
ordinary course of business. These loans were made on substantially
the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated
persons and did not involve more than normal risk of collectibility.
The aggregate dollar amounts of these loans were $42,182,000 and
$43,478,000 at December 31, 2000 and 1999, respectively. During 2000,
$70,010,000 of new loans were funded and repayments totaled
$71,306,000.
The principal balances of loans on nonaccrual were $2,897,000 and
$2,987,000 at December 31, 2000, and 1999, respectively. At
December 31, 2000, there were no commitments to lend additional
funds on nonaccrual loans. Other real estate owned, which is
included in other assets, was $548,000 at December 31, 2000 and
$291,000 at December 31, 1999.
The following table represents S&T's investment in loans considered
to be impaired and related information on those impaired loans:
[CAPTION]
2000 1999 1998
(dollars in thousands)
Recorded investment in loans
considered to be impaired $8,142,000 $11,602,000 $3,391,000
Loans considered to be impaired
that were on a nonaccrual basis 915,000 _ _
Allowance for loan losses related
to loans considered to be impaired _ 73,000 133,000
Average recorded investment in
impaired loans 12,580,000 5,948,000 2,927,000
Total interest income per
contractual term on impaired loans 1,665,000 1,271,000 674,000
Interest income on impaired loans
recognized on a cash basis 1,507,000 1,107,000 605,000
Page 42
NOTE F
Premises and Equipment
The following table is a summary of the premises and equipment
accounts at December 31:
[CAPTION]
2000 1999
(dollars in thousands)
Land $3,084 $3,048
Premises 19,212 18,705
Furniture and equipment 16,221 15,006
Leasehold Improvements 3,049 3,015
41,566 39,774
Accumulated depreciation (21,176) (19,096)
Total $20,390 $20,678
Certain banking facilities and equipment are leased under short-
term lease arrangements expiring at various dates to the year
2010. All such leases are accounted for as operating leases.
Rental expense for premises and equipment amounted to $1,513,000,
$1,266,000 and $1,497,000 in 2000, 1999 and 1998, respectively.
Minimum annual rentals for each of the years 2001-2005 are
approximately $659,000, $375,000, $374,000, $369,000, and $344,000,
respectively, and $500,000 for the years thereafter. Included in
the above are leases entered into with two directors for which
rental expense totaled $340,041, $397,751 and $338,921 in 2000,
1999 and 1998, respectively.
NOTE G
Deposits
The following table indicates the composition of deposits at December 31:
[CAPTION]
2000 1999
(dollars in thousands)
Noninterest-bearing demand $232,625 $219,202
Interest-bearing demand 123,371 120,211
Money market 308,401 295,258
Savings 144,589 159,797
Time deposits 716,346 640,597
Total $1,525,332 $1,435,065
The aggregate of all time deposits over $100,000 amounted
to $123,299,000 and $85,649,000 for December 31, 2000 and
1999, respectively.
Page 43
The following table indicates the scheduled maturities of
time deposits at December 31:
[CAPTION]
2000 1999
(dollars in thousands)
Due in one year $356,708 $329,870
Due in one to two years 243,601 122,773
Due in two to three years 74,683 123,762
Due in three to four years 16,780 34,099
Due in four to five years 16,312 19,230
Due after five years 8,262 10,863
Total $716,346 $640,597
NOTE H
Long-Term Borrowings
The following table is a summary of long-term borrowings with the
Federal Home Loan Bank (FHLB):
[CAPTION]
2000 1999
Balance Average Rate Balance Average Rate
(dollars in thousands)
Due in one year $55,000 5.90% $19,600 5.93%
Due in one to two years 40,000 6.27% 55,000 5.90%
Due in two to three years 61,000 5.98% 40,000 6.27%
Due in three to four years 51,500 6.18% 86,000 5.75%
Due in four to five years - - 51,500 6.18%
Due after five years 58,118 4.96% 33,118 5.35%
Total $265,618 5.82% $285,218 5.89%
The purpose of these borrowings was to match-fund selected new loan
originations, to mitigate interest rate sensitivity risks and to take
advantage of discounted borrowing rates through the FHLB for community
investment projects.
S&T pledged all 1-4 family and multi-family mortgage loans as collateral
for any current or future FHLB borrowings. The total carrying amount of
these pledged loans was $400,183,000 at December 31, 2000.
At December 31, 2000 and 1999, S&T had long-term repurchase agreement
borrowings totaling $112,379,000 and $78,844,000, respectively, at a
weighted average fixed rate of 6.50% and 5.58%, respectively, which
mature in one to four years. The purpose of these borrowings was to
lock in fixed-rate fundings to mitigate interest rate risk.
Page 44
NOTE I
Short-Term Debt
Federal funds purchased and securities sold under repurchase agreements
(REPOS) generally mature within one to 14 days from the transaction date.
S&T defines REPOS with its retail customers as retail REPOS, and
wholesale REPOS are those transacted with other financial institutions.
Information concerning federal funds purchased and REPOS is summarized as
follows:
[CAPTION]
2000 1999
(dollars in thousands)
Average balance during the year $104,521 $142,852
Average interest rate during the year 5.75% 4.72%
Maximum month-end balance during the year $168,244 $212,361
Average interest rate at year-end 5.89% 5.06%
NOTE J
Dividend and Loan Restrictions
Certain restrictions exist regarding the ability of S&T Bank to transfer
funds to S&T in the form of dividends and loans. Dividends that may be
paid by S&T Bank to S&T are limited to the retained earnings of S&T Bank
which amounted to $121,501,000 at December 31, 2000. The amount of
dividends that may be paid to S&T is further restricted by regulatory
guidelines concerning minimum capital requirements.
Federal law prohibits S&T from borrowing from S&T Bank unless such loans
are collateralized by specific obligations. Further, such loans are
limited to 10% of S&T Bank's capital and additional paid-in capital, as
defined. At December 31, 2000, the maximum amount available for transfer
from S&T Bank to S&T in the form of loans and dividends approximated 46%
of consolidated equity.
NOTE K
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 45
NOTE L
Financial Instruments and Credit Risk
S&T, in the normal course of business, commits to extend credit and
issues 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 condition and 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 the
agreement equals the notional amount of the obligation less the value
of any collateral. Unfunded loan commitments totaled $450,391,000 and
$440,400,000 at December 31, 2000 and 1999, respectively; and oblig-
ations under standby letters of credit totaled $174,874,000 and
$140,642,000 at December 31, 2000 and 1999, respectively.
S&T attempts to limit its exposure to concentrations of credit risk by
diversifying its loan portfolio. S&T defines concentrations of credit
risk as loans to a specific industry or group in excess of 10% of total
loans. S&T has no concentration of credit risk by industry or group,
except for apartment rentals that comprise 12% of total loans.
Geographic concentrations exist because S&T provides a full
range of banking services including commercial, consumer and mortgage
loans to individuals and corporate customers in its seven-county market
area in western Pennsylvania. Management believes these risks are
mitigated by underwriting guidelines and ongoing review by loan
administration.
NOTE M
Income Taxes
Income tax expense (credits) for the year ended December 31 are
comprised of:
[CAPTION]
2000 1999 1998
(dollars in thousands)
Current $17,518 $16,749 $17,006
Deferred 48 1,228 (807)
Total $17,566 $17,977 $16,199
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before
income taxes. The statutory to effective tax rate reconciliation
for the years ended December 31 is as follows:
[CAPTION]
2000 1999 1998
(dollars in thousands)
Statutory tax rate 35% 35% 35%
Tax-exempt interest income
and dividend exclusion -5% -3% -3%
Low income housing tax credits -2% -2% -2%
Effective tax rate 28% 30% 30%
Income taxes applicable to security gains were $1,141,000 in 2000,
$1,134,000 in 1999 and $3,753,000 in 1998.
Page 46
Significant components of S&T's temporary differences were as follows
at December 31:
[CAPTION]
2000 1999
(dollars in thousands)
Deferred tax liabilities:
Net unrealized holding gains
on securities available for sale ($17,501) ($8,836)
Fixed assets (573) (621)
Accretion on acquired loans (92) (326)
Prepaid pension (119) (119)
Prepaid hospitalization (181) (102)
Market-to-market adjustments (2,437) (2,307)
Point recognition (2,127) (1,872)
Total deferred tax liabilities (23,030) (14,183)
Deferred tax assets:
Allowance for loan losses 9,378 9,287
Loan fees 687 627
Interest expense on increasing rate CDs - 17
Deferred compensation 888 850
Goodwill 233 273
Other 57 55
Total deferred tax assets 11,243 11,109
Net deferred tax liability ($11,787) ($3,074)
NOTE N
Employee Benefits
The Bank maintains a defined benefit pension plan covering
substantially all employees. The benefits are based on
years of service and the employee's compensation during 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.
Trustee pension plan assets consist primarily of equity and
fixed income securities and short-term investments.
The following table summarizes the components of net periodic
pension expense for the Bank's defined benefit plan:
[CAPTION]
2000 1999 1998
(dollars in thousands)
Service cost - benefits earned during the period $1,035 $1,121 $1,068
Interest cost on projected benefit obligation 1,702 1,604 1,489
Expected return on plan assets (2,747) (2,556) (2,070)
Net amortization and deferral (191) (35) (14)
Net periodic pension (income) expense ($201) $134 $473
Page 47
The following tables summarize the activity in the benefit
obligation and plan assets:
[CAPTION]
2000 1999
(dollars in thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $25,000 $25,171
Service cost 1,035 1,121
Interest cost 1,702 1,604
Plan participants' contributions 70 43
Actuarial gain (1,927) (1,884)
Benefits paid (1,138) (1,055)
Benefit obligation at end of year $24,742 $25,000
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $31,043 $28,897
Actual return on plan assets (19) 3,158
Employer contributions - -
Plan participants' contributions 70 43
Benefits paid (1,138) (1,055)
Fair value of plan assets at end of year $29,956 $31,043
The following table sets forth the plan's funded status and
the accrued pension cost in the consolidated balance sheets
at December 31:
[CAPTION]
2000 1999
(dollars in thousands)
Benefit obligation at beginning of year ($24,742) ($25,000)
Fair value of plan assets at end of year 29,956 31,043
Funded status 5,214 6,043
Unrecognized net gain (4,667) (5,683)
Unamortized prior service cost 63 70
Balance of initial unrecognized net asset (7) (29)
Prepaid pension cost included in other assets $603 $401
Below are actuarial assumptions used in accounting for the plan:
[CAPTION]
2000 1999 1998
Weighted-average discount rate 7.5% 7.0% 6.5%
Rate of increase in future compensation 5.0% 5.0% 5.0%
Expected long-term rate of return on plan
assets 9.0% 9.0% 8.0%
Page 48
S&T also has a supplemental retirement plan (SERP) for certain key
employees. The SERP is unfunded. The balances of the actuarial
present values of projected benefit obligations related to the SERP
are $2,331,000 and $2,136,000 at December 31, 2000 and 1999,
respectively. Accrued pension costs related to the SERP were
$2,196,000 and $2,114,000 at December 31, 2000 and 1999, respectively.
Net periodic pension cost related to the SERP was $263,000, $224,000
and $244,000 at December 31, 2000, 1999 and 1998, respectively. The
actuarial assumptions are the same as those used in the previous
tables.
The Bank maintains a Thrift Plan (Plan) in which substantially all
employees are eligible to participate. The Bank makes matching
contributions to the Plan up to 3% of participants' eligible
compensation and may make additional profit-sharing contributions
as limited by the Plan. Contributions to the Plan have been cash or
unallocated Employee Stock Ownership Plan (ESOP) shares. Expense
related to these contributions amounted to $1,390,000, $1,328,000 and
$813,000 in 2000, 1999 and 1998, respectively. At December 31, 2000 and
1999, the ESOP had no unallocated shares.
NOTE O
Incentive Stock Plan and Dividend Reinvestment Plan
S&T adopted an Incentive Stock Plan in 1992 (Stock Plan) that provides
for granting incentive stock options, nonstatutory stock options and
stock appreciation rights (SARs). On October 17, 1994, the Stock Plan
was amended to include outside directors. The Stock Plan covers a
maximum of 3,200,000 shares of S&T common stock and expires ten years
from the date of board approval. At December 31, 2000, 2,572,122
nonstatutory stock options had been granted under the stock plan.
Each year S&T has granted nonstatutory stock options at exercise prices
equal to the fair market value of S&T common stock on the grant date.
Stock options granted under the Stock Plan are not exercisable before
a six-month vesting period or after ten years from the date of grant.
There were no SARs issued or outstanding at December 31, 2000 and 1999.
The following table summarizes the changes in the nonstatutory stock
options outstanding during 2000, 1999 and 1998:
[CAPTION]
2000 1999 1998
Weighted Weighted Weighted
Average Average Average
Number Option Number Option Number Option
of shares Price of shares Price of shares Price
Outstanding at beginning of year 1,435,372 $20.41 1,280,572 $19.08 1,457,822 $14.21
Granted 384,700 19.81 315,800 22.88 334,800 27.75
Exercised (10,950) 12.79 (157,400) 14.64 (510,250) 10.90
Forfeited (9,000) 24.22 (3,600) 27.75 (1,800) 20.38
Outstanding at end of year 1,800,122 $20.31 1,435,372 $20.41 1,280,572 $19.08
Exercisable at end of year 1,415,422 $20.45 1,119,572 $19.72 945,772 $16.01
Page 49
The following table summarizes the range of exercise prices at December 31:
[CAPTION]
2000 1999 1998
Contractual Contractual Contractual
Shares Exercise Remaining Shares Exercise Remaining Shares Exercise Remaining
Outstanding Price Life (Years) Outstanding Price Life (Years) Outstanding Price Life (Years)
1994 83,000 $9.50 4 84,400 $9.50 5 121,650 $9.50 6
1995 171,300 13.13 5 180,650 13.13 6 214,200 13.13 7
1996 192,500 15.44 6 192,500 15.44 7 254,500 15.44 8
1997 329,422 20.38 7 331,422 20.38 8 355,422 20.38 9
1998 327,200 27.75 8 330,600 27.75 9 334,800 27.75 10
1999 312,000 22.88 9 315,800 22.88 10 - - -
2000 384,700 19.81 10 - - - - - -
Total 1,800,122 $20.31 7.7 1,435,372 $20.41 8.1 1,280,572 $19.08 8.4
Options are granted in December and have a six-month vesting period and a
ten-year contractual life.
S&T accounts for stock options in accordance with APB 25. The following
proforma information regarding net income and earnings per share assumes
the adoption of Statement No. 123 for stock options granted subsequent
to December 31, 1994. The estimated fair value of the options is amortized
to expense over the vesting period. The fair value was estimated at the
date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 2000, 1999 and 1998,
respectively: risk-free interest rates of 5.17%, 6.19% and 4.45%; a
dividend yield of 4.4%, 3.5% and 2.7%; volatility factors of the
expected market price of S&T's common stock of .265, .270 and .226; and
a weighted-average expected life of five years.
[CAPTION]
2000 1999 1998
(dollars in thousands, except per share data)
Proforma net income $44,163 $40,182 $37,030
Proforma earnings per share - Basic 1.64 1.48 1.33
Proforma earnings per share - Diluted 1.63 1.47 1.32
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because S&T's
employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of its employee stock
options.
S&T also sponsors a dividend reinvestment plan (Dividend Plan) whereby
shareholders may purchase shares of S&T common stock at market value
with reinvested dividends and voluntary cash contributions. American
Stock Transfer and Trust Company, the plan administrator and transfer
agent, purchases the shares on the open market to fulfill the Dividend
Plan's needs.
Page 50
NOTE P
S&T Bancorp, Inc. (parent company only)
Condensed Financial Information
Balance Sheets at December 31:
[CAPTION]
2000 1999
(dollars in thousands)
ASSETS
Cash $17 $23
Investments in:
Bank subsidiary 173,669 146,496
Nonbank subsidiary 106,128 95,389
Total Assets $279,814 $241,908
LIABILITIES
Dividends payable $5,929 $5,396
Other liabilities (3,212) (3,188)
Total Liabilities 2,717 2,208
Total Shareholders' Equity 277,097 239,700
Total Liabilities and Shareholders' Equity $279,814 $241,908
Statements of Income for the year ended December 31:
[CAPTION]
2000 1999 1998
(dollars in thousands)
Dividends from bank subsidiary $22,666 $20,565 $18,253
Investment income 59 60 84
Income before equity in undistributed
net income of subsidiaries 22,725 20,625 18,337
Equity in undistributed net income of:
Bank subsidiary 14,911 13,517 9,919
Nonbank subsidiary 7,337 7,276 9,707
Net Income $44,973 $41,418 $37,963
Page 51
Statements of Cash Flows for the year ended December 31:
[CAPTION]
2000 1999 1998
(dollars in thousands)
OPERATING ACTIVITIES
Net Income $44,973 $41,418 $37,963
Equity in undistributed net income
of subsidiaries (23,170) (22,208) (21,069)
Change in other assets/liabilities (23) (526) (2,662)
Total Provided by Operating Activities 21,780 18,684 14,232
INVESTING ACTIVITIES
Distribution from bank subsidiary 1,349 18,320 23,431
Total Provided in Investing Activities 1,349 18,320 23,431
FINANCING ACTIVITIES
Dividends (22,134) (20,149) (17,515)
Acquisition of treasury stock (1,001) (17,241) (19,758)
Total Used in Finanicing Activities (23,135) (37,390) (37,273)
(Decrease) increase in Cash (6) (386) 390
Cash at Beginning of Year 23 409 19
Cash at End of Year $17 $23 $409
NOTE Q
Regulatory Matters
S&T is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet the minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on S&T's financial statements. Under capital
guidelines and the regulatory framework for prompt corrective action,
S&T must meet specific capital guidelines that involve quantitative
measures of S&T's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. S&T's
capital amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require S&T to maintain minimum amounts and ratios of Tier
I and Total capital to risk-weighted assets and of Tier I capital
to average assets. As of December 31, 2000 and 1999, S&T meets all
capital adequacy requirements to which it is subject.
Page 52
To be classified as well capitalized S&T must maintain minimum Tier
I risk-based, Total risk-based and Tier I leverage ratios as set
fourth in the table below:
[CAPTION]
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
As of December 31, 2000:
Total Capital $284,265 14.61% $155,666 8.00% $194,582 10.00%
(to Risk Weighted Assets)
Tier 1 Capital 238,911 12.28% 77,833 4.00% 116,749 6.00%
(to Risk Weighted Assets)
Tier 1 Capital 238,911 10.41% 91,806 4.00% 114,757 5.00%
(to Average Assets)
As of December 31, 1999:
Total Capital $255,385 14.59% $140,057 8.00% $175,071 10.00%
(to Risk Weighted Assets)
Tier 1 Capital 217,194 12.41% 70,028 4.00% 105,043 6.00%
(to Risk Weighted Assets)
Tier 1 Capital 217,194 9.90% 87,785 4.00% 109,731 5.00%
(to Average Assets)
The most recent notification from the Federal Deposit Insurance Corporation
categorized S&T Bank as well capitalized under the regulatory framework for
corrective action. At December 31, 2000, S&T Bank's Tier I and Total capital
ratios were 9.11% and 10.37%, respectively, and Tier I capital to average
assets was 7.64%. At December 31, 1999, S&T Bank's Tier I and Total capital
ratios were 9.03% and 10.29%, respectively, and Tier I capital to average
assets was 7.08%.
Page 53
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
S&T Bancorp, Inc. and Subsidiaries
Shareholders and Board of Directors
S&T Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of S&T
Bancorp, Inc. and subsidiaries (S&T) as of December 31, 2000 and
1999, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements are
the responsibility of S&T's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of S&T Bancorp, Inc. and subsidiaries at December 31, 2000 and 1999
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
January 12, 2001
Page 54
STOCK PRICES AND DIVIDEND INFORMATION
SELECTED FINANCIAL INFORMATION
S&T Bancorp, Inc. and Subsidiaries
STOCK PRICES AND DIVIDEND INFORMATION
S&T Bancorp, Inc.'s common stock is listed on the Nasdaq National
Market System (Nasdaq). The range of sales prices for the years
2000 and 1999 are as follows and are based upon information obtained
from Nasdaq. As of the close of business January 31, 2001, there
were 3,165 shareholders of record of S&T Bancorp, Inc. Dividends
paid by S&T are provided from the Bank's dividends to S&T. In
addition, the payment of dividends by the Bank to S&T is subject to
the restrictions described in Note K to the Consolidated Financial
Statements. The cash dividends declared shown below represent the
historical per share amounts for S&T Bancorp, Inc. common stock.
[CAPTION]
Price Range of Common Stock
2000 Low High Cash Dividends Declared
Fourth Quarter $17.38 $22.94 $0.22
Third Quarter 17.75 20.00 0.21
Second Quarter 16.75 18.75 0.21
First Quarter 17.13 23.44 0.20
1999
Fourth Quarter $21.63 $24.63 $0.20
Third Quarter 21.94 26.00 0.19
Second Quarter 20.88 26.88 0.19
First Quarter 19.00 29.00 0.18
SELECTED FINANCIAL INFORMATION
[CAPTION]
Year Ended December 31: 2000 1999 1998 1997 1996
(dollars in thousands, except per share data)
INCOME STATEMENTS
Interest Income $176,184 $156,727 $151,438 $141,101 $132,442
Interest Expense 86,141 69,942 69,156 62,284 58,589
Provision for loan losses 4,000 4,000 10,550 5,000 5,175
Net interest income after
provision for loan losses 86,043 82,785 71,732 73,817 68,678
Noninterest income 22,154 20,100 24,418 16,441 11,997
Noninterest expense 45,658 43,490 41,988 43,198 42,398
Income before income taxes 62,539 59,395 54,162 47,060 38,277
Applicable income taxes 17,566 17,977 16,199 13,646 10,036
Net Income $44,973 $41,418 $37,963 $33,414 $28,241
PER SHARE DATA (1)
Net income - Basic $1.67 $1.52 $1.37 $1.18 $1.00
Net income - Diluted 1.66 1.51 1.35 1.17 1.00
Dividends declared 0.84 0.76 0.66 0.56 0.47
Book value 10.28 8.88 9.38 9.20 8.01
(1) Per share amounts have been restated to record the effect of a
two-for-one common stock split in the form of a 100% stock dividend
distributed on October 30, 1998.
Page 55
SELECTED FINANCIAL DATA
QUARTERLY FINANCIAL DATA
S&T Bancorp, Inc. and Subsidiaries
SELECTED FINANCIAL DATA
BALANCE SHEET TOTALS (PERIOD END):
[CAPTION]
Year Ended December 31: 2000 1999 1998 1997 1996
(dollars in thousands)
Total assets $2,310,290 $2,194,073 $2,069,611 $1,920,291 $1,787,045
Securities 580,912 575,224 591,486 568,220 500,061
Net loans 1,577,629 1,469,143 1,339,232 1,253,326 1,181,407
Total deposits 1,525,332 1,435,065 1,380,063 1,284,658 1,270,367
Securities sold under
repurchase agreements 80,686 116,009 138,825 170,124 114,205
Long-term borrowings 377,997 364,062 240,068 144,218 136,618
Total shareholders' equity 277,097 239,700 259,637 260,118 226,118
QUARTERLY SELECTED FINANCIAL DATA
[CAPTION]
2000 1999
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
(dollars in thousands, except per share data)
SUMMARY OF OPERATIONS
Income Statements:
Interest income $45,741 $45,328 $43,216 $41,899 $41,318 $39,829 $38,239 $37,341
Interest expense 22,790 22,442 21,043 19,866 19,119 17,926 16,636 16,261
Provision for loan losses 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
Net interest income after
provision for loan losses 21,951 21,886 21,173 21,033 21,199 20,903 20,603 20,080
Security gains, net 836 961 569 895 397 1,017 407 1,419
Noninterest income 4,867 4,755 4,910 4,361 4,540 4,390 4,074 3,856
Noninterest expense 11,438 11,730 11,178 11,312 10,927 11,234 10,513 10,816
Income before income taxes 16,216 15,872 15,474 14,977 15,209 15,076 14,571 14,539
Applicable income taxes 4,586 4,459 4,331 4,190 4,559 4,592 4,422 4,404
Net income $11,630 $11,413 $11,143 $10,787 $10,650 $10,484 $10,149 $10,135
PER SHARE DATA (1)
Net income - Diluted $0.43 $0.42 $0.41 $0.40 $0.39 $0.38 $0.37 $0.37
Dividends declared 0.22 0.21 0.21 0.20 0.20 0.19 0.19 0.18
Book value 10.28 9.81 9.19 8.96 8.88 8.96 9.13 9.02
AVERAGE BALANCE SHEET TOTALS
Total assets $2,300,826 $2,276,239 $2,239,178 $2,192,311 $2,194,619 $2,148,108 $2,093,615 $2,042,623
Securities 584,086 580,977 569,610 567,311 594,391 602,717 583,256 573,108
Net loans 1,570,290 1,530,552 1,501,081 1,476,447 1,448,496 1,404,516 1,379,703 1,342,657
Total deposits 1,500,831 1,482,129 1,477,065 1,444,314 1,425,049 1,407,878 1,390,027 1,366,708
Securities sold under
repurchase agreements 100,550 80,292 87,269 141,668 112,403 147,688 164,525 129,010
Long-term borrowings 378,579 409,890 390,888 329,681 368,553 297,680 240,068 240,068
Total shareholders' equity 273,805 260,323 248,510 239,833 248,080 248,000 250,412 257,608