SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 - 11,046,575 shares as of October 22, 1996 INDEX S&T BANCORP, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements Condensed consolidated balance sheets - September 30, 1996 and December 31, 1995 3 Condensed consolidated statements of income - Three months ended September 30, 1996 and 1995, and 4 Nine months ended September 30, 1996 and 1995 Condensed consolidated statements of cash flows - Nine months ended September 30, 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 September 30, December 31, 1996 1995 (000's omitted except share data) ASSETS Cash and due from banks $39,748 $39,852 Interest-earning deposits with banks 82 51 Securities available for sale 340,180 315,343 Investment securities 29,864 34,997 Total loans 1,011,325 976,819 Less allowance for loan losses (17,024) (15,938) Net Loans 994,301 960,881 Premises and equipment 15,374 14,795 Other assets 35,778 34,783 TOTAL ASSETS $1,455,327 $1,400,702 LIABILITIES Deposits: Noninterest-bearing demand $122,927 $116,054 Interest-bearing demand 27,999 96,577 Money market 206,966 123,121 Savings 118,379 123,606 Time 533,983 520,267 Total Deposits 1,010,254 979,625 Securities sold under repurchase agreements 144,915 122,794 Federal funds purchased 15,775 325 Other borrowed funds 230 340 Long-term borrowing 81,618 96,618 Other liabilities 33,734 34,053 TOTAL LIABILITIES 1,286,526 1,233,755 SHAREHOLDERS' EQUITY Preferred stock, without par value, 10,000,000 shares authorized and none outstanding - - Common stock $2.50 par value, 25,000,000 shares authorized and 11,820,944 issued 29,552 29,552 Additional paid in capital 11,727 11,009 Retained earnings 121,663 111,980 Net unrealized holding gains on securities available for sale 19,606 21,928 Treasury stock (774,589 shares at September 30, 1996 and 578,092 (13,517) (7,182) at December 31, 1995) Deferred compensation (230) (340) TOTAL SHAREHOLDERS' EQUITY 168,801 166,947 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,455,327 $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 For Nine Months Ended September 30, September 30, 1996 1995 1996 1995 (000's omitted except share data) INTEREST INCOME Loans, including fees $21,999 $21,694 $64,713 $63,626 Deposits with banks 5 3 136 Federal funds sold 6 18 71 32 Investment securities: Taxable 5,101 4,399 14,623 12,512 Tax-exempt 404 442 1,294 1,359 Dividends 725 619 2,136 1,880 Total Interest Income 28,235 27,177 82,840 79,545 INTEREST EXPENSE Deposits Interest-bearing demand 347 378 1,037 1,127 Money market 1,428 1,134 4,057 3,330 Savings 759 794 2,261 2,420 Time 7,337 7,159 21,770 20,121 Securities sold under repurchase agreements 1,889 2,164 5,324 6,872 Federal funds purchased 89 56 263 430 Long term borrowing 1,165 1,129 3,564 2,764 Other borrowed funds 4 7 14 23 Total Interest Expense 13,018 12,821 38,290 37,087 NET INTEREST INCOME 15,217 14,356 44,550 42,458 Provision for loan losses 825 1,100 3,250 2,600 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,392 13,256 41,300 39,858 NONINTEREST INCOME: Trust fees 738 541 2,118 1,753 Service charges on deposit accounts 950 781 2,624 2,151 Net securities/nonrecurring gains/ (losses) 592 317 1,675 676 Other 724 460 1,948 1,452 Total Noninterest Income 3,004 2,099 8,365 6,032 NONINTEREST EXPENSE Salaries and employee benefits 4,570 4,449 13,908 13,236 Occupancy expense, net 506 538 1,601 1,582 Equipment expense, net 495 404 1,534 1,506 Data processing 406 368 1,178 1,082 FDIC assessment 988 55 1,198 1,076 Other 2,388 2,347 7,055 6,601 Total Noninterest Expense 9,353 8,161 26,474 25,083 INCOME BEFORE INCOME TAXES 8,043 7,194 23,191 20,807 Applicable income taxes 2,075 1,986 5,896 5,601 NET INCOME $5,968 $5,208 $17,295 $15,206 PER COMMON SHARE Net Income $0.54 $0.46 $1.56 $1.35 Dividends 0.24 0.18 0.69 0.53 Average Common Shares Outstanding 11,041 11,233 11,077 11,244 See Notes to Condensed Consolidated Financial Statements S&T BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30 1996 1995 (000's omitted) Operating Activities Net Income $17,295 $15,206 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,250 2,600 Provision for depreciation and amortization 961 1,016 Net amortizaton of investment security premiums 417 613 Net accretion of loan and deposit discounts (343) (762) Net gains on sales of securities available for sale (1,593) (447) Net investment security gains Decrease in deferred income taxes (521) (254) Increase in interest receivable (1,501) (1,693) Increase in interest payable 488 3,376 (Decrease) increase in other assets 1,386 (627) Increase (decrease) in other liabilities 40 (5,109) Net Cash Provided by Operating Activities 19,879 13,919 Investing Activities Net (increase in) redemption of interest-earning deposits with banks (31) 3,399 Proceeds from maturities of investment securitie 6,115 18,224 Proceeds from maturities of securities available 58,444 8,000 for sale Proceeds from sales of securities available 6,685 14163 for sale Purchases of investment securities (534) (25,713) Purchases of securities available for sale (92,813) (40,338) Net increase in loans (52,318) (75,262) Proceeds from the sale of loans 15,991 34,739 Purchases of premises and equipment (1,715) (1,442) Proceeds from the sale of premises and equipment (82) 28 Net Cash Used by Investing Activities (60,258) (64,202) Financing Activities Net increase (decrease) in demand, NOW and savings deposits 16,914 (7,035) Net increase in certificates of deposits 13,716 51,341 Net increase (decrease) in repurchase agreements 22,121 (27,260) Net increase (decrease) in federal funds purchased 15,450 (7,515) (Decrease) increase in long-term borrowing (14,987) 42,201 Acquisition of treasury stock (7,289) (1,878) Sale of treasury stock 1,671 1,275 Cash dividends paid to shareholders (7,321) (5,846) Net Cash Used by Financing Activities 40,275 45,283 Decrease in Cash and Cash Equivalents (104) (5,000) Cash and Cash Equivalents at Beginning of Period 39,852 38,791 Cash and Cash Equivalents at End of Period $39,748 $33,791 See Notes to Condensed Consolidated Financial Statements S&T BANCORP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 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 nine month period ended September 30, 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 September 30 are as follows: 1996 Available for Sale Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value (000's omitted) Marketable equity securities $38,692 $29,551 ($227) $68,016 Obligations of U.S. government corporations and agencie 222,054 1,996 (1,978) 222,072 Collateralized mortgage obligations of U.S. government corporations and agencies 7,046 42 7,088 U.S. Treasury securities 34,078 778 34,856 Corporate Securities 300 300 302,170 32,367 (2,205) 332,332 Other securities 7,848 7,848 $310,018 $32,367 ($2,205) $340,180 1996 Investment Securities Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value (000's omitted) Obligations of states and political subdivisions $25,742 $544 ($10) $26,276 Corporate securities 2,496 209 2,705 28,238 753 (10) 28,981 Other securities 1,626 1,626 Total $29,864 $753 ($10) $30,607 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 Unrealized Unrealized 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 Unrealized Unrealized 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 September 30, 1996, there were $1,592,652 in realized gains relative to securities available for sale. The amortized cost and estimated market value of securities at September 30, 1996 by contractual maturity, are shown below: Estimated Amortized Market Available for Sale Cost Value (000's omitted) Due in one year or less $27,025 $27,143 Due after one year through five years 73,900 75,125 Due after five years through ten years 161,288 160,776 Due after ten years 1,265 1,272 Total $263,478 $264,316 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 $2,939 $2,954 Due after one year through five years 10,312 10,701 Due after five years through ten years 10,665 10,959 Due after ten years 4,322 4,367 Total $28,238 $28,981 At September 30, 1996 and December 31, 1995 investment securities with a principal amount of $202,104,000 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: September 30, 1996 December 31, 1995 (000's omitted) Real estate - construction $29,547 $23,712 Real estate - mortgages: Residential 398,226 377,258 Commercial 209,100 191,885 Commercial - industrial and agricultural 230,674 234,779 Consumer installment 143,778 149,185 Total Loans $1,011,325 $976,819 Changes in the allowance for loan losses for the nine months ended September 30 were as follows: 1996 1995 (000's omitted) Balance at beginning of period $15,938 $14,331 Charge-offs (3,869) (2,001) Recoveries 1,705 588 Net charge-offs (2,164) (1,413) Provision for loan losses 3,250 2,600 Balance at end of period $17,024 $15,518 At September 30, 1996, the recorded investment in loans that are considered to be impaired under Statement No. 114 was $5,200,000 of which $380,000 were on a nonaccrual basis. The allowance for loan losses related to these impaired investments was $1,619,000. 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 $230,487,000 and obligations under standby letters of credit totaled $61,297,000 at September 30, 1996. At September 30, 1996, S&T had marketable equity securities totaling $407,813 at amortized cost and $603,225 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. 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 September 30, 1996 were $1.5 billion, increasing slightly from December 31, 1995. Total assets averaged $1.4 billion in the first nine months of 1996, an $80.2 million increase from the 1995 full year average. Average loans and average securities increased $29.1 million and $31.0 million, respectively, in the first nine months of 1996 compared to the 1995 full year averages. Funding for this loan and security growth was primarily provided by a $57.8 million increase in average deposits, a $11.6 million increase in average retained earnings, offset by a $5.1 million decrease in average borrowings. Lending Activity Total loans at September 30, 1996 were $1.0 billion, a $34.4 million or 3.5% increase from December 31, 1995. Average loans increased $29.1 million, or 3% to $979.0 million for the nine months ended September 30, 1996 from the 1995 full year average. Changes in the composition of the average loan portfolio during 1996 included increases of $10.2 million of commercial loans, $24.8 million of residential mortgages, offset by a decreases of $0.9 million of installment loans and $5.0 million of commercial real estate loans. The slight increase in overall loan volumes for the first nine months of 1996 can be attributed to higher new loan activity in the third quarter. Borrowers perceived the first half 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. Loan priceings firmed somewhat in the third quarter providing better risk adjusted returns as compared to securities. S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Commercial real estate loans comprise 21% 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 that many of the commercial real estate loans are owner-occupied and/or seasoned properties that were refinanced from other banks. Residential mortgage lending continued to be a strategic area of focus during the first nine months 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 September 30, 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 and the sale of the student loan portfolio in the second quarter of 1996. Pricing pressures were unusually intense in the indirect market during the first nine months of 1996 and the decision was made to temporarily deploy investable funds into other, higher yielding and lower risk earning assets. In the second quarter of 1996, S&T implemented an indirect auto leasing program and currently has $2.5 million of outstanding auto leases. $8.2 million of the student loan portfolio was sold in the second quarter of 1996 because of newly issued government regulations and restrictions that significantly reduced much of the profit potential associated with the product. In addition to prepayment and refinancing activity, the decrease in commercial loan volumes for the period can be partially attributed to $7.8 million of loan participations during the first nine months of 1996. S&T began to expand the participation of select S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS commercial loans in 1995 and has developed a network of banks seeking to participate in larger commercial loans. 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. Security Activity Average securities increased $31.0 million in the first nine 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 decreased $1.3 million . The increase in average taxable investment securities was principally comprised of $53.8 million of U.S. government agencies securities, $3.9 of common stocks and $1.1 million of Federal Home Loan Bank (FHLB) stock. Offsetting these increases were average decreases of $16.7 million in U.S. Treasury securities, $8.6 million in collateral mortgage obligations (CMO's) and $1.1 million 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 $29.3 million of unrealized gains net of nominal unrealized losses. S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Allowance for Loan Losses The allowance for loan losses increased to $17.0 million or 1.68% of total loans at September 30, 1996, as compared to 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 September 30, 1996 which includes nonaccrual loans past due 90 days or more, was $1.9 million, or 0.18% 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 a 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 $57.8 million, or 6% for the nine months ended September 30, 1996 as compared to the 1995 average. Changes in the average deposit mix included a $39.5 million increase in time deposits, $23.0 million increase in money market accounts, and a $3.6 million increase in demand accounts offset by a $8.3 million decrease in 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. At September 30, 1996, there were $15.0 million of these brokered retail certificates of deposits outstanding. 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 8% of total deposits at September 30, 1996 and 7% of total deposits at 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 S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 $5.1 million for the nine months ended September 30, 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 $18.3 million for the first nine 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 offered 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 $13.2 million in the first nine months of 1996 as compared to the full year 1995 average. At September 30, 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 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 September 30, 1996 was $0.2 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. S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources Shareholders' equity increased $1.9 million at September 30, 1996, compared to December 31, 1995. The slight increase 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 nine months of 1996, S&T acquired 257,525 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. Net income was $17.3 million and dividends paid to shareholders were $7.3 million for the nine months ended September 30, 1996. During the first nine months of 1996, S&T paid 42% of 1996 net income in dividends, equating to an annual dividend rate of $0.96 per share. The book value of S&T's common stock increased slightly from $14.85 at December 31, 1995 to $15.28 at September 30,1996 due to the stock buyback and the effect of the unrealized gains on the available for sale portfolio. Equity associated with the available for sale securities portfolio decreased $2.3 million during the first nine months of 1996 due to rising interest rates and the resulting decline in values. The market price of S&T's common stock increased to $31.50 per share at September 30, 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 10.3% 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 September 30, 1996. These ratios place S&T well above the Federal Reserve Board's risk-based capital guidelines of 4.0% and 8.0% for Tier I and Total, respectively. RESULTS OF OPERATIONS Nine months ended September 30, 1996 compared to Nine months ended September 30, 1995 Net Income Net income increased to $17.3 million or $1.56 per S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS share in the first nine months of 1996 from $15.2 million or $1.35 per share for the same period of 1995. The significant improvement during the first nine 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 $2.2 million or 5% in the first nine months of 1996 compared to the same period of 1995. The net yield on interest-earning assets decreased slightly from 4.77% to 4.73%. Net interest income was positively affected by a $59.4 million, or 5% 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 $3.3 million for the first nine months of 1996 compared to $2.6 million in the same period of 1995. 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 $2.2 million for the first nine months of 1996 compared to $1.4 million for the same period of 1995. S&T's allowance for loan losses at September 30, 1996 was S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS $17.0 million, or 1.68% or total loans compared to $15.5 million, or 1.61% of total loans at September 30, 1995. Nonperforming loans to total loans decreased 17 bp to 0.18% at September 30, 1996. Noninterest Income Noninterest income increased $0.2 million or 39% in the first nine months of 1996 compared to the same period of 1995. Increases included $0.4 million or 21% in trust income, $0.5 million or 22% in service charges and fees, $0.5 million or 34% in other income and $1.0 million in security/nonrecurring 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 nine months 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 $29.3 million at September 30, 1996. Noninterest Expense Noninterest expense increased $1.4 million or 6% at September 30, 1996 compared to September 30, 1995. The increase is primarily attributable to employment, other expense, and FDIC insurance premium. The $0.7 million increase in employment expense resulted from normal merit increases, higher incentive payouts relative to commercial loan volume and trust sales, offset by higher deferral of loan origination costs, resulting from new loan activity. Average full-time equivalent staff increased from 567 to 571 as compared to the same period of 1995. Other expense increased $0.5 million primarily due to higher legal, consulting, postage, loan related costs. S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During 1995, FDIC premiums were eliminated resulting in expense savings of $0.8 million for the first half of 1996. However, S&T has $168 million of Oakar deposits subject to the Savings Association Insurance Fund (SAIF) rate of 23 basis points. On September 30, 1996, legislation was passed for recapitalization of the SAIF fund. The SAIF fund was recapitalized by imposing a one-time surcharge of 65.6 basis points on any financial institution holding SAIF deposits. This surcharge resulted in a expense of $0.9 million to S&T. For future years, the insurance rate for SAIF deposits is expected to be lower, significantly reducing future expense. Federal Income Taxes Federal income tax expense increased $0.3 million or 5% at September 30, 1996 as compared to September 30, 1995 as a result of higher pre-tax income in 1996. The effective tax rate for the first nine of 1996 was 25%, which is 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 September 30, 1996 compared to Three months ended September 30, 1995 Net Income Net income increased to $6.0 million or $0.54 per share for the third quarter of 1996 from $5.2 million or $0.46 per share for the third quarter of 1995, a 15% improvement. Net Interest Income On a fully taxable equivalent basis, net interest income increased $0.9 million or 6% in the third quarter of 1996 compared to the same period of 1995. This improvement in net interest income resulted from a higher level of earning assets while maintaining fairly consistent spreads. Average earning assets increased by $68.3 million as compared to the third quarter of 1995, primarily as a result of an increase in new loan originations and securities purchases. The bulk of funding for this asset growth was provided by deposits, borrowings and retained earnings. S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net interest margin on a fully taxable equivalent basis was 4.75% for the third quarter of 1996, as compared to 4.74% for the same period of 1995. Provision for Loan Losses The provision for loan losses was $0.8 million in the third quarter of 1996 compared to $1.1 million in the same period of 1995. Net loan charge-offs totaled $0.5 million for the third quarter of 1996 and $0.6 million in the third quarter of 1995. Noninterest Income Noninterest income increased $0.9 million or 43% in the third quarter of 1996 compared to the same period of 1995. Increases included $0.2 million or 36% in trust income, $0.2 million or 22% in service charges and fees, $0.3 million or 57% in other income and $0.3 million in security/nonrecurring 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 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. The increase in other income is attributable to higher insurance commissions due to low experience ratings and an increase from the sale of credit insurance. Security/nonrecurring gains increased $0.3 million in the third quarter of 1996 as compared to the same period of 1995. Security gains were taken on available for sale securities in the third quarter of 1996 in order to take advantage of market opportunities when presented. Noninterest Expense Noninterest expense increased $1.2 million or 15% at September 30, 1996 compared to September 30, 1995. The increase is primarily attributable to the aforementioned surcharge in FDIC/SAIF premiums and an increase in employment costs. S&T BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FDIC expense increased $0.9 million in the third quarter of 1996 compared to the third quarter of 1995. The increase is attributable to legislation passed on September 30, 1996 for recapitalization of the SAIF fund. S&T has $168 million of Oakar deposits subject to the surcharge of 65.6 basis points, resulting in an expense of $0.9 million in the third quarter of 1996. Employment costs increased $0.2 million or 3% in the third quarter of 1996 compared to the same period of 1995. The increase resulted from normal merit increases offset by higher deferral of loan origination costs, resulting from an increase in loan volume during the third quarter of 1996. Federal Income Taxes Federal income tax expense increased $0.1 million or 4% at September 30, 1996 as compared to September 30, 1995 as a result of higher pre-tax income in 1996. The third 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. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None 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: November 8, 1996 Robert E. Rout Principal Accounting Officer