SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q [CAPTION] (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-12508 S&T BANCORP, INC. (Exact name of registrant as specified in its charter) Pennsylvania 25-1434426 (State or other jurisdiction of (I.R.S.EMPLOYER incorporation or organization) Identification No.) 800 Philadelphia Street, Indiana, PA 15701 (Address of principal executive offices) (Zip Code) (412) 349-2900 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $2.50 Par Value - 11,030,506 shares as of May 10, 1996 INDEX S&T BANCORP, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements Condensed consolidated balance sheets - March 31, 1996 and December 31, 1995 3 Condensed consolidated statements of income - Three months ended March 31, 1996 and 1995 4 Condensed consolidated statements of cash flows - Three months ended March 31, 1996 and 1995 5 Notes to condensed consolidated financial statements 6-9 Item 2. Management's discussion and analysis of financial condition and results of operations 10-16 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 S&T BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, December 31, 1996 1995 (000's omitted except share data) ASSETS Cash and due from banks $33,365 $39,852 Interest-earning deposits with banks 51 51 Securities available for sale 333,044 315,343 Investment securities 33,405 34,997 Total loans 969,125 976,819 Less allowance for loan losses (15,985) (15,938) Net Loans 953,140 960,881 Premises and equipment 14,727 14,795 Other assets 35,859 34,783 TOTAL ASSETS $1,403,591 $1,400,702 LIABILITIES Deposits: Noninterest-bearing demand $106,011 $116,054 Interest-bearing demand 95,450 96,577 Money market 134,748 123,121 Savings 127,144 123,606 Time 519,745 520,267 Total Deposits 983,098 979,625 Securities sold under repurchase agreements 132,438 122,794 Federal funds purchased 10,975 325 Other borrowed funds 260 340 Long-term borrowing 81,614 96,618 Other liabilities 33,533 34,053 TOTAL LIABILITIES 1,241,918 1,233,755 SHAREHOLDERS' EQUITY Preferred stock Common stock $2.50 par value, 25,000,000 shares authorized and 11,820,944 issued 29,552 29,552 Additional paid in capital 11,282 11,009 Retained earnings 115,240 111,980 Net unrealized holding gains on securities available for sale 19,758 21,928 Treasury stock (802,880 shares at March 31, 1996 and 578,092 (13,899) (7,182) at December 31, 1995) Deferred compensation (260) (340) TOTAL SHAREHOLDERS' EQUITY 161,673 166,947 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,403,591 $1,400,702 See Notes to Condensed Consolidated Financial Statements S&T BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME For Three Months Ended March 31, 1996 1995 (000's omitted except share data) INTEREST INCOME Loans, including fees $21,359 $20,488 Deposits with banks 2 69 Federal funds sold 27 Investment securities: Taxable 4,553 3,928 Tax-exempt 453 470 Dividends 699 633 Total Interest Income 27,093 25,588 INTEREST EXPENSE Deposits Interest-bearing demand 347 377 Money market 1,276 1,074 Savings 741 817 Time 7,231 6,221 Securities sold under repurchase agreements 1,671 2,390 Federal funds purchased 78 173 Long term borrowing 1,265 628 Other borrowed funds 5 8 Total Interest Expense 12,614 11,688 NET INTEREST INCOME 14,479 13,900 Provision for loan losses 975 750 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 13,504 13,150 NONINTEREST INCOME: Trust fees 692 617 Service charges on deposit accounts 808 643 Net securities/nonrecurring gains/(losses) 475 182 Other 707 447 Total Noninterest Income 2,682 1,889 NONINTEREST EXPENSE Salaries and employee benefits 4,743 4,364 Occupancy expense, net 568 527 Equipment expense, net 619 606 Data processing 395 359 FDIC assessment 97 510 Other 2,275 1,979 Total Noninterest Expense 8,697 8,345 INCOME BEFORE INCOME TAXES 7,489 6,694 Applicable income taxes 1,913 1,773 NET INCOME $5,576 $4,921 PER COMMON SHARE Net Income $0.50 $0.44 Dividends 0.21 0.17 Average Common Shares Outstanding 11,163 11,260 See Notes to Condensed Consolidated Financial Statements S&T BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31 1996 1995 (000's omitted) Operating Activities Net Income $5,576 $4,921 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 975 750 Provision for depreciation and amortization 323 318 Net amortizaton of investment security premiums 148 225 Net accretion of loan and deposit discounts (134) (269) Net gains on sales of securities available for sale (475) 37 Net investment security gains Decrease in deferred income taxes (49) (144) Increase in interest receivable (1,122) (41) (Decrease) increase in interest payable (743) 685 (Decrease) increase in other assets 200 (1,105) Increase (decrease) in other liabilities 1,408 (3,207) Net Cash Provided by Operating Activities 6,107 2,170 Investing Activities Net redemption of interest-earning deposits with banks 733 Proceeds from maturities of investment securitie 501 7,654 Proceeds from maturities of securities available for sale 28,038 2,000 Proceeds from sales of securities available for sale 3,894 10,640 Purchases of investment securities (683) (13,520) Purchases of securities available for sale (50,874) (1,337) Net decrease (increase) in loans 1,411 (19,084) Proceeds from the sale of loans 5,489 11,200 Purchases of premises and equipment (313) (479) Proceeds from the sale of premises and equipment (28) 17 Net Cash Used by Investing Activities (12,565) (2,176) Financing Activities Net increase (decrease) in demand, NOW and savings deposits 3,996 (9,642) Net (decrease) increase in certificates of depos (522) 15,630 Net increase (decrease) in repurchase agreements 9,644 (26,272) Net increase (decrease) in federal funds purchas 10,650 (8,340) (Decrease) increase in long-term borrowing (14,991) 24,996 Acquisition of treasury stock (7,034) (983) Sale of treasury stock 589 387 Cash dividends paid to shareholders (2,361) (1,916) Net Cash Used by Financing Activities (29) (6,140) Decrease in Cash and Cash Equivalents (6,487) (6,146) Cash and Cash Equivalents at Beginning of Period 39,852 38,791 Cash and Cash Equivalents at End of Period $33,365 $32,645 See Notes to Condensed Consolidated Financial Statements S&T BANCORP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 1996 NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K for the year ended December 31, 1995. Earnings per common share are based on the average number of shares of common stock outstanding during the periods presented. Financial Accounting Standards Board Statement No.123 Accounting for Stock- Based Compensation is effective in 1996 and allows companies the choice of either changing their accounting for stock-based awards by recognizing compensation cost in earnings for such plans or providing supplemental pro forma footnote disclosures. For year end 1996, S&T is expecting to continue its current accounting treatment of stock-based compensation and provide the supplemental pro forma disclosures related to the fair value approach. As provided in Statement No. 123, pro forma disclosure is not required in interim financial statements. NOTE B--SECURITIES The amortized cost and estimated market value of securities as of March 31 are as follows: 1996 Available for Sale Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value (000's omitted) Marketable equity securities $36,535 $27,539 ($145) $63,929 Obligations of U.S. government corporations and agencie 195,267 2,904 (1,228) 196,943 Collateralized mortgage obligations of U.S. government corporations and agencies 9,880 135 10,015 U.S. Treasury securities 51,152 1,192 52,344 Corporate Securities 190 190 293,024 31,770 (1,373) 323,421 Other securities 9,623 9,623 $302,647 $31,770 ($1,373) $333,044 1996 Investment Securities Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value (000's omitted) Obligations of states and political subdivisions $30,910 $716 ($13) $31,613 Corporate securities 2,495 265 2,760 Total $33,405 $981 ($13) $34,373 S&T BANCORP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued NOTE B-SECURITIES The amortized cost and estimated market value of securities as of December 31 are as follows: 1995 Available for Sale Gross Gross Estimated Amortized UnrealizedUnrealized Market Cost Gains Losses Value (000's omitted) Marketable equity securities $37,573 $26,926 ($276) $64,223 Obligations of U.S. government corporations and agencies 172,612 5,113 (143) 177,582 Collateralized mortgage obligations of U.S. government corporations and agencies 10,911 124 11,035 U.S. Treasury securitie 51,205 1,993 53,198 Corporate Securities 190 190 272,491 34,156 (419) 306,228 Other securities 9,115 9,115 Total $281,606 $34,156 ($419) $315,343 1995 Investment Securities Gross Gross Estimated Amortized UnrealizedUnrealized Market Cost Gains Losses Value (000's omitted) Obligations of states and political subdivisions 31,412 949 (12) 32,349 Corporate securities 2,493 350 2,843 33,905 1,299 (12) 35,192 Other securities 1,092 1,092 Total $34,997 $1,299 ($12) $36,284 During the period ended March 31, 1996, there were $475,076 in realized gains relative to securities available for sale. The amortized cost and estimated market value of securities at March 31, 1996, by contractual maturity, are shown below: Estimated Amortized Market Available for Sale Cost Value (000's omitted) Due in one year or less $60,324 $60,424 Due after one year through five years 185,289 187,631 Due after five years through ten years 8,556 9,086 Due after ten years 2,321 2,351 Total $256,490 $259,492 S&T BANCORP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued NOTE B-SECURITIES Estimated Amortized Market Held to Maturity Cost Value (000's omitted) Due in one year or less $9,626 $9,720 Due after one year through five years 18,622 19,285 Due after five years through ten years 5,157 5,368 Total $33,405 $34,373 At March 31, 1996 and December 31, 1995 investment securities with a principal amount of $208,028,000 and $203,063,000 respectively, were pledged to secure repurchase agreements and public and trust fund deposits. NOTE C--LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of the loan portfolio was as follows: March 31, 1996 December 31, 1995 (000's omitted) Real estate - construction $20,636 $23,712 Real estate - mortgages: Residential 379,162 377,258 Commercial 196,819 191,885 Commercial - industrial and agricultural 226,923 234,779 Consumer installment 145,585 149,185 Total Loans $969,125 $976,819 Changes in the allowance for loan losses for the three months ended March 31 were as follows: 1996 1995 (000's omitted) Balance at beginning of period $15,938 $14,331 Charge-offs (1,176) (411) Recoveries 248 206 Net charge-offs (928) (205) Provision for loan losses 975 750 Balance at end of period $15,985 $14,876 At March 31, 1996, the recorded investment in loans that are considered to be impaired under Statement No. 114 was $7,400,000 of which $835,000 were on a nonaccrual basis. The allowance for loan losses related to these impaired investments was $3,002,000. S&T BANCORP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued NOTE D--FINANCIAL INSTRUMENTS S&T, in the normal course of business, commits to extend credit and issue standby letters of credit. The obligations are not recorded in S&T's financial statements. Loan commitments and standby letters of credit are subject to 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 satisify the terms of agreement equals the notional amount of the obligation less the value of any collateral. Unfunded loan commitments totaled $190,226,000 and obligations under standby letters of credit totaled $59,498,000 at March 31, 1996. At March 31, 1996, S&T had marketable equity securities totaling $339,140 at amortized cost and $776,200 at estimated market value, that were subject to covered call option contracts. The purpose of these contracts was to generate fee income for S&T. NOTE E - LITIGATION S&T, in the normal course of business, is subject to various legal proceedings in which claims for monetary damages are asserted. No material losses are anticipated by management as a result of these legal proceedings. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None. (b) Reports on Form 8-K None. S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is presented so that shareholders may review in further detail the financial condition and results of operations of S&T Bancorp, Inc. and subsidiaries (S&T). This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the selected financial data presented elsewhere in this report. Financial Condition Total assets at March 31, 1996 were $1.4 billion, the same as December 31, 1995. Total assets averaged $1.4 billion in the first three months of 1996, a $61.2 million increase from the 1995 full year average. Average loans and average securities increased $21.2 million and $17.3 million, respectively, in the first three months of 1996 compared to the 1995 full year averages. Funding for this loan and security growth was primarily provided by a $41.4 million increase in average deposits, a $5.6 million increase in average retained earnings, offset by a $9.3 million decrease in average borrowings. Lending Activity Total loans at March 31, 1996 were $969.1 million, a 1% or $7.7 million decrease from December 31, 1995. Average loans increased $21.2 million, or 2% to $971.1 million for the three months ended March 31, 1996 from the 1995 full year average. Changes in the composition of the loan portfolio during 1996 included increases of $4.9 million of commercial real-estate loans, $1.9 million of residential mortgages, offset by decreases of $3.6 million of installment loans and $7.9 million of commercial loans. The slight decline in overall loan volumes for the first three months of 1996 can be attributed to higher level of prepayments and refinancings. Borrowers perceived the first quarter of 1996 to be the bottom of the interest rate cycle and significantly increased refinancing activities in order to lock in lower loan rates. At the same time, competitive pressures in the market pushed new loan rates to levels that were sometimes below the risk adjusted yields that could be obtained from investment securities with similar duration. Commercial real estate loans comprise 20% of the loan portfolio. Although real estate loans can be an area of higher risk, management believes these risks are mitigated by limiting the percentage amount of portfolio composition, a rigorous underwriting review by loan administration and the fact the many of the commercial real estate loans are owner-occupied and/or S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS seasoned properties that were refinanced from other banks. Residential mortgage lending continued to be a strategic area of focus during the first quarter of 1996 through the establishment of a centralized mortgage origination department, product redesign 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. These policies generally require a maximum term of twenty years for fixed rate mortgages and private mortgage insurance for loans with less than a 20% down payment. At March 31, 1996 the residential mortgage portfolio had a 36% composition of adjustable rate mortgages. Installment loan decreases are primarily associated with significantly lower volumes in the indirect auto loan category. Pricing pressures were unusually intense in this market during the quarter and the decision was made to temporarily deploy investable funds into other, higher yielding and lower risk earning assets. In addition to prepayment and refinancing activity, the decrease in commercial loan volumes for the quarter can be partially attributed to $5.5 million of loan participations during the quarter. S&T began to expand the participation of select commercial loans in 1995 and has developed a network of banks seeking to participate in larger commercial loans. Total commercial loan participations sold in 1995 were $32.3 million. The rationale for these participations included credit risk diversification, servicing income generation and the development of alternative funding sources. Management intends to continue to pursue quality loans in all lending categories within our market area in order to honor our commitment to provide the best service possible to our customers. S&T's loan portfolio primarily represents loans to businesses and consumers in our market area of Western Pennsylvania rather than to borrowers in other areas of the country or to borrowers in other nations. S&T has not concentrated its lending activities in any industry or group. During the past several years, management has concentrated on building an effective credit and loan administration staff which assists management in evaluating loans before they are made and identifies problem loans early. S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Security Activity Average securities increased $17.3 million in the first three months of 1996 compared to the 1995 full year average. Security yields during the period offered reasonable investment alternatives to the depressed yields in the market for new loans. The change in composition of the average investment portfolio was all related to increases in average taxable securities; tax-exempt state and municipal securities average balances were relatively unchanged. The increase in average taxable investment securities was principally comprised of $29.5 million of U.S. government agencies securities, $3.2 of common stocks and $1.6 million of Federal Home Loan Bank (FHLB) stock. Offsetting these increases were average decreases of $8.6 million in U.S. Treasury securities, $7.2 million in collateral mortgage obligations (CMO's) and $1.2 in other corporate securities. Equity purchases of common stocks were made in order to take advantage of the higher yields and the dividends received deduction for corporations; the FHLB stock is a membership and borrowing requirement. The equities portfolio is currently yielding 10.6% on a fully taxable equivalent (FTE) basis and has $27.4 million of unrealized gains net of nominal unrealized losses. Allowance for Loan Losses The allowance for loan losses increased to $16.0 million or 1.65% of total loans at March 31, 1996, essentially the same as December 31, 1995. 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, growth and composition of the loan portfolio as well as other relevant factors. The balance of nonperforming loans, at March 31, 1996 which includes nonaccrual loans past due 90 days or more, was $2.9 million, or 0.30% of total loans. This compares to nonperforming loans of $2.8 million or 0.29% of total loans at December 31, 1995. Asset quality is the major corporate objective at S&T and management believes that the total allowance for loan losses is adequate to absorb probable loan losses. Deposits Average total deposits increased by $41.4 million, or 4% for the three months ended March 31, 1996 as compared to the 1995 average. Changes in the average S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS deposit mix included a $34.6 million increase in time deposits and a $15.6 million increase in money market accounts, offset by a $9.0 million decrease savings accounts. During the second half of 1995, S&T issued $25.0 million of retail certificates of deposits through two brokerage firms, further broadening the availability of reasonably priced deposit funds. Demand and NOW average balances were essentially flat. In addition, money market accounts were recently repriced in order to be more competitive with money funds offered by brokerage firms. Special rate deposits of $100 thousand and over were 7% of total deposits at March 31, 1996 and December 31, 1995 and primarily represent deposit relationships with local customers in our market area. Management believes that the S&T deposit base is stable and that S&T has the ability to attract new deposits, mitigating a funding dependency on volatile liabilities. In addition, S&T has the ability to access both public and private markets to raise long-term funding if necessary. Borrowings Average borrowings decreased $9.3 million for the three months ended March 31, 1996 compared to the 1995 annual average and were comprised of retail repurchase agreements (REPO's), wholesale REPO's, federal funds purchased and long-term borrowings. S&T defines repurchase agreements with its local, retail customers as retail REPOS; wholesale REPOS are those transacted with other banks and brokerage firms with terms normally ranging from 1 to 14 days. The average balance in retail and wholesale REPOS decreased approximately $25.9 million for the first three months of 1996 compared to the full year 1995 average. Some retail REPO funds have shifted back to deposits as a result of the Federal Deposit Insurance Corporation (FDIC) insurance premium reduction; more comparable rates can now be offerred on deposits. In addition, core deposit increases and more moderate loan growth have decreased the usage of wholesale REPO fundings. Average long-term borrowings have increased $16.7 million in the first quarter of 1996 as compared to the full year 1995 average. At March 31, 1996, S&T had long-term borrowings outstanding of $8.1 million at a fixed rate and $73.5 million at an adjustable rate with the FHLB. The purpose of these borrowings was to provide matched, fixed rate fundings for newly originated loans, to mitigate the risk associated with S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS volatile liability fundings and to take advantage of lower cost funds through the FHLB's Community Investment Program. All other long-term borrowings are related to the funding of the S&T Employee Stock Ownership Plan (ESOP) loan. The loan was used by the ESOP to acquire treasury stock from S&T. This loan is recorded in the financial statements as other borrowed funds, offset by a reduction in shareholders' equity to reflect S&T's guarantee of the ESOP borrowing. The balance of the ESOP loan at March 31, 1996 was $0.3 million. The terms of this loan require annual principal payments and quarterly interest payments at a rate equal to 80% of the lender's prime rate. Capital Resources Shareholders' equity decreased $5.3 million at March 31, 1996, compared to December 31, 1995. The bulk of this decrease is related to a program announced in the fourth quarter of 1995 to annually acquire up to 350,000 shares, or approximately 3%, of S&T's common stock as treasury shares. In the first quarter of 1996, S&T acquired 249,019 treasury shares on the open market in order to fund the employee stock option plan, the dividend reinvestment plan for shareholders and other general corporate purposes. This treasury stock activity caused a $6.4 million decline in shareholders equity. Net income was $5.6 million and dividends to shareholders were $2.3 million for the three months ended March 31, 1996. During the first three months of 1996, S&T paid 41% of 1996 net income in dividends, equating to an annual dividend rate of 0.84 per share. The book value of S&T's common stock decreased slightly from $14.85 at December 31, 1995 to $14.67 at March 31,1996 due to a decrease in shareholders' equity from the stock buyback and the effect of Financial Accounting Standards Board Statement No. 115, "Statement on Accounting for Certain Investments in Debt and Equity Securities" (FAS 115). Equity associated with FAS 115 decreased $2.2 during the first quarter of 1996 due to rising interest rates and the resulting decline in values of the available for sale securities portfolio. The market price of S&T's common stock was relatively unchanged at $30.75 per share at March 31, 1996 as compared to $30.50 per share at December 31, 1995. S&T continues to maintain a strong capital position with a leverage ratio of 10.1% as compared to the minimum regulatory guideline of 3.0%. S&T's risk-based capital Tier I and Total ratios were 13.3% and 14.5% respectively, at March 31, 1996. These S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ratios place S&T well above the Federal Reserve Board's risk-based capital guidelines of 4.0% and 8.0% for Tier I and Total, respectively. RESULTS OF OPERATIONS Three months ended March 31, 1996 compared to Three months ended March 31, 1995 Net Income Net income increased to $5.6 million or $0.50 per share in the first three months of 1996 from $4.9 million or $0.44 per share for the same period of 1995. The significant improvement during the first three months of 1996 was the result of higher net interest income, increased noninterest income, partially offset by higher provision and operating expense. Net Interest Income On a fully taxable equivalent basis, net interest income increased $.6 million or 4% in the first three months of 1996 compared to the same period of 1995. The net yield on interest-earning assets decreased slightly from 4.81% to 4.71%. Net interest income was positively affected by a $61.8 million, or 3% increase in average earning assets. Maintaining consistent spreads between earning assets and costing liabilities is very significant to S&T's financial performance since net interest income comprises 87% of operating revenue. A variety of asset/liablity management strategies were successfully implemented, within prescribed ALCO risk parameters, that enabled S&T to maintain a net interest margin consistent with historical levels. During the same period, earning assets increased primarily through both new loan originations and securities purchases. The bulk of funding for this asset growth was provided by deposits, borrowings and retained earnings. The level and mix of funds is continually monitored by ALCO in order to mitigate the interest rate sensitivity and liquidity risks of the balance sheet. Provision for Loan Losses The provision for loan losses increased to $1.0 million for the first three months of 1996 compared to $0.8 million in the same period of 1995. The increase was the result of management's assessment of economic S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS conditions, credit quality statistics, loan administration effectiveness and other factors that would have an impact on future probable losses in the loan portfolio. Net loan charge-offs totaled $0.9 million for the first three months of 1996 compared to $0.2 million for the same period of 1995. S&T's allowance for loan losses at March 31, 1996 was $16.0 million, or 1.65% or total loans compared to $14.9 million, or 1.60% of total loans at March 31, 1995. Nonperforming loans to total loans increased slightly, by 6 bp to 0.30% at March 31, 1996. Noninterest Income Noninterest income increased 29% in the first three months of 1996 compared to the same period of 1995. Increases included $0.1 million or 12% in trust income, $0.2 million or 26% in service charges and fees, $0.3 million or 58% in other income and a $0.3 million in security gains. The increase in trust income was attributable to a bank wide incentive program and expanded marketing efforts designed to develop new trust business. The increase in service charges on deposit accounts was primarily the result of the introduction of new cash management services and management's continual effort to implement reasonable fees for services performed and to manage closely the collection of these fees. Other income increases included insurance sales, brokerage, equity call fees and letters of credit. Security gains were taken on available for sale equities securities in the first quarter of 1996 in order to maximize returns by taking advantage of market opportunities when presented. Unrealized gains, net of unrealized losses in the available for sale equities portfolio totaled $27.4 million at March 31, 1996. Noninterest Expense Noninterest expense increased $0.4 million or 4% at March 31, 1996 compared to March 31, 1995. The increase is primarily attributable to employment and other expense, offset by the reduction in FDIC insurance premium. The $0.4 million increase in employment expense resulted from normal merit increases, higher incentive payouts relative to commercial loan volume and trust sales, and lower deferral of loan origination costs, resulting from a first quarter slowdown in new installment loan activity. Average full-time equivalent staff increased from 555 to 564 as compared to the same period of 1995. S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other expense increased $0.3 million primarily due to higher legal, postage, loan related costs and partnership losses from low income housing tax credit (LIHTC) projects. LIHTC partnership losses are offset by tax credits. During 1995, FDIC premiums were eliminated resulting in expense savings of $0.4 million for the quarter. Currently, S&T has $183 million of Oakar deposits subject to the Savings Association Insurance Fund (SAIF) rate of 23 basis points, and a possible surcharge of 80 basis points, or $1.5 million in 1996 if legislation is passed for recapitalization of the SAIF fund. Federal Income Taxes Federal income tax expense increased $0.2 million or 7% at March 31, 1996 as compared to March 31, 1995 as a result of higher pre-tax income in 1995. The first quarter effective tax rate of 26% was below the 35% statutory rate due to benefits resulting from tax exempt interest, excludable dividend income and LIHTC's. RESULTS OF OPERATIONS Three months ended March 31, 1995 compared to Three months ended March 31, 1994 Net Income Net income increased to $4.9 million or $0.44 per share in the first three months of 1995 from $4.5 million or $0.39 per share for the same period of 1994. The significant improvement during the first three months of 1995 was the result of higher net interest income and increased noninterest income, partially offset by higher provision expense. Net Interest Income On a fully taxable equivalent basis, net interest income increased $1.2 million or 9% in the first three months of 1995 compared to the same period of 1994. The net yield on interest-earning assets improved 6 basis points to 4.81%. Net interest income was also positively affected by a $83.8 million or 7% increase in average earning assets. Active management by the Asset Liability Committee (ALCO) during a period of substantial and unprecedented rate changes in 1994 enabled S&T to maintain consistent spreads. The earning asset S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS increase is primarily attributable to a $122 million or 16% loan growth over the past 12 months. New market penetration in the Allegheny and Westmoreland counties has been particularly successful. Provision for Loan Losses The provision for loan losses increased to $0.8 million for the first three months of 1995 compared to $0.6 million in the same period of 1994. The increase was the result of management's assessment of economic conditions, credit quality statistics, loan administration effectiveness and other factors that would have an impact on future probable losses in the loan portfolio. Net loan charge-offs totaled $0.2 million for the first three months of 1995 compared to $0.3 million for the same period of 1994. S&T's allowance for loan losses at March 31, 1995 was $14.9 million, or 1.60% of total loans compared to $13.8 million, or 1.70% of total loans at March 31, 1994. Nonperforming loans to total loans decreased 14 bp or 37% since March 31, 1994 to 0.24% at March 31, 1995. Noninterest Income Noninterest income increased slightly in the first three months of 1995 compared to the same period of 1994. Increases included $0.1 million or 14% in trust income and $0.1 million or 17% in service charges and fees, offset by a $0.1 million or 21% decrease in other income. The increase in trust income was attributable to a bank wide incentive program and expanded marketing efforts designed to develop new trust business. The increase in service charges on deposit accounts was primarily the result of management's continual effort to implement reasonable fees for services performed and to manage closely the collection of these fees. The decrease in other income was attributable to decreased performance for the relatively new fee based businesses of mutual funds and annuities sales and lower volumes for credit insurance sales in the first quarter of 1995. Security/nonrecurring gains were relatively unchanged for the two quarters. Security losses were taken on available for sale securities in the first quarter of 1995 in order to reinvest in higher-yielding investment securities. These losses were almost offset by gains from the sale of various equity securities that were made in order to take advantage S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of market opportunities. Included in this category is a $219 thousand gain from the aforementioned sale of student loans. Noninterest Expense Noninterest expense increased $0.2 million or 2% at March 31, 1995 compared to March 31, 1994. The increase is primarily attributable to employment costs which increased 4% or $0.2 million in the first three months of 1995 compared to the same period of 1994. The increase resulted from normal merit increases and higher incentive payouts relative to commercial loan volume, offset by higher deferral of loan origination costs, also resulting from commercial loan activity. Average full-time equivalent staff increased from 537 to 555 as compared to the same period of 1994. Federal Income Taxes Federal income tax expense increased $0.4 million or 32% at March 31, 1995 as compared to March 31, 1994 as a result of higher pre-tax income in 1995. The first quarter effective tax rate of 26% was below the 35% statutory tax rate due to the tax benefits resulting from tax exempt interest, excludable dividend income and low income housing tax credits. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. S&T Bancorp, Inc. (REGISTRANT) Date: May 10, 1996 Robert E. Rout Principal Accounting Officer