Financial Highlights
S&T Bancorp, Inc. and Subsidiaries
(dollars in thousands, except per share data)
[CAPTION]
1997 1996 Change Change
For the Year
Net Income $33,414 $28,241 $5,173 18%
Return on Average Assets 1.84% 1.65% .19% 12
Return on Average Equity 13.71 13.01 0.70 5
Per Share:
Net Income-Basic $2.36 $2.00 $0.36 18%
Net Income-Diluted 2.34 1.99 0.35 18
Dividends Declared 1.11 0.94 0.17 18
Book Value at December 31 18.39 16.02 2.37 15
Market Value at December 31 43.25 30.75 12.50 41
At Year End
Assets $ 1,920,291 $ 1,787,045 $ 133,246 7%
Net Loans 1,253,326 1,181,407 71,919 6
Deposits 1,284,658 1,270,367 14,291 1
Shareholders' Equity 260,118 226,118 34,000 15
Trust Assets 578,670 465,249 113,421 24
Allowance for Loan Losses/
Total Loans 1.60% 1.56% .04% 3
Nonperforming Loans/
Total Loans 0.28 0.86 (0.58) (67)
inside front cover
Management's Discussion and Analysis of
Financial Condition and Results of Operations
S&T Bancorp, Inc. and Subsidiaries
Financial Condition
The $91.1 million growth of average earning assets in
1997 was primarily the result of an excellent lending
year for S&T Bancorp, Inc. (S&T). Average loan
balances increased by $103.5 million during 1997. The
bulk of funding for this loan growth was primarily
provided by a $39.0 million increase in average
deposits, an $18.9 million increase in average
earnings retained, a $28.5 million increase in average
borrowings and a $16.0 million decrease in average
securities.
Lending Activity
Total loans at December 31, 1997 were $1.3 billion, a
$73.6 million or 6.1% increase from December 31, 1996.
Increases in average loans for 1997 and 1996 were
$103.5 million and $67.9 million, respectively.
Changes in the composition of the loan portfolio
during 1997 included increases of $96.7 million of
commercial loans and $0.3 million of residential
mortgages, offset by a $23.4 million decrease in
installment loans. Composition changes include
decreases from the effects of $12.7 million of 1-4
family mortgage loans, $3.0 million of commercial
loans and $7.0 million of student loans that were sold
or participated in 1997.
Commercial real estate loans currently comprise 25.7%
of the loan portfolio. Although commercial real estate
loans can be an area of higher risk, management
believes these risks are mitigated by limiting the
percentage amount of portfolio composition, a rigorous
underwriting review by loan administration and the
fact that many of the commercial real estate loans are
owner occupied and/or seasoned properties that were
refinanced from other banks. Residential mortgage
lending continued to be a strategic focus for 1997
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 which generally require a
maximum term of 20 years for fixed 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
27% of the residential mortgage portfolio in 1997.
During the fourth quarter of 1997, S&T sold $12.7
million of long-term, lower-yielding 1-4 family
mortgages, acquired from the Peoples Bank of Unity
(Peoples) merger, to the Federal National Mortgage
Association (FNMA). S&T retained the ongoing servicing
rights on the mortgages sold and will originate 1-4
family mortgages in the future to be sold to FNMA. The
rationale for these sales is to mitigate interest rate
risk associated with holding long-term residential
mortgages in the loan portfolio, to generate fee
revenue from servicing, and still maintain the primary
customer relationship.
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 and third quarter of 1997.
Pricing pressures were unusually intense in the
indirect market during 1997 and 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 $4.4
million of outstanding auto leases. Also during the
second and third quarter of 1997, $7.0 million of the
student loan portfolio was sold because of newly
issued government regulations and restrictions that
significantly reduced much of the profit potential
associated with the product. S&T will continue to
distribute student loan applications for customer
convenience, but will not fund or hold the loans.
Loan underwriting standards for S&T are established by
a formal policy administered by the S&T Bank Credit
Administration Department, and subject to the periodic
review and approval of the S&T Bank Board of
Directors.
Rates and terms for commercial real estate and
equipment loans normally are negotiated, subject to
such variables as economic conditions, marketability
of collateral, credit history of the borrower and
future cash flows. The loan to value policy guideline
for commercial loans is generally 75%.
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.
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A variety of unsecured and secured installment loan
and credit card products are offered by S&T. However,
the bulk of the consumer loan portfolio is automobile
loans. Loan to value guidelines for direct loans are
90%-100% of invoice for new automobiles and 80%-90% of
"NADA" value for used automobiles. Loan to value
policy guidelines for automobile loans purchased from
dealers on a third party basis are 90%-125% of invoice
for new automobiles and 100%-125% of "Black Book"
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 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 decreased $16.0 million in 1997 and
increased $9.7 million in 1996. The 1997 decrease is
attributable to utilizing funds from the maturities
and sales of securities to fund loan growth and
balance sheet repositioning activities following the
Peoples merger. The 1996 increase is attributable to
security yields being reasonable investment alternatives
to the depressed yields in the market for new loans during
the first half of 1996. Loans typically provide higher
yields and have the potential of developing other
banking relationships. The largest components of the
1997 decrease included $36.3 million of U.S. treasury
securities, $44.0 million of mortgage-backed
securities, $10.2 million of tax-exempt state and
municipal securities and $1.6 million in other
corporate securities offset by increases of $68.4
million in U.S. government agency securities, $4.8
million in corporate equities and $2.9 million in
Federal Home Loan Bank (FHLB) stock. The FHLB capital
stock is a membership and borrowing requirement.
During 1997, S&T sold $27.9 million of mortgage-
backed securities and $6.0 million of U.S. agency
securities classified as available for sale. These
sales were made as part of a balance sheet
repositioning in order to integrate the investment and
asset/liability management strategies of S&T and
Peoples following the merger. The equity security
sales of $10.7 million were made in order to maximize
returns when market opportunities are presented.
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 1997, the
equity portfolio yielded 10.5% on a fully taxable
equivalent basis and had unrealized gains at December
31, 1997, net of nominal unrealized losses, of $57.9
million.
S&T's policy for security classification includes U.S.
treasuries, U.S. government agencies, collaterized
mortgage obligations (CMOS), mortgage-backed
securities and marketable equity securities as
available for sale. Municipal securities and other
corporate debt securities are classified as held to
maturity. At December 31, 1997, unrealized gains, net
of nominal unrealized losses, for securities
classified as available for sale were approximately
$62.3 million.
Nonearning Assets
Average nonearning assets increased $2.0 million in 1997 and
$0.7 million in 1996. The 1997 and 1996
increases can be primarily attributed to an increase
in accrued interest receivable on a higher earning
asset balance.
Allowance for Loan Losses
The year-end balance in the allowance for loan losses
increased to $20.4 million or 1.60% of total loans at
December 31, 1997 as compared to $18.7 million or
1.56% of total loans at December 31, 1996. 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. The balance of
nonperforming loans, which includes nonaccrual loans
past due 90 days or more, at December 31, 1997, was
$3.6 million or 0.28% of total loans. This compares to
nonperforming loans of $10.3 million or 0.86% of total
loans at December 31, 1996. The decrease in
nonperforming loans is primarily related to one
commercial real estate loan which paid current in
1997. 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.
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Deposits
Average total deposits increased by $39.0 million in
1997 and $62.8 million in 1996. The mix of average
deposits in 1997 changed with time deposits and money
market accounts increasing $20.5 million and $30.6
million, respectively, while interest-bearing demand
and savings accounts decreased $21.6 million.
Noninterest-bearing deposits increased by $9.5 million
or 6.2% in 1997 and were approximately 13% and 12% of
total deposits during 1997 and 1996, respectively.
Some of these changes can be partially explained by
customers shifting funds to higher-yielding,
longer-term certificates of deposit. In addition, a
new, successful strategy for money market account
pricing was implemented in order to make these
accounts more competitive with money funds offered at
brokerage firms.
Management believes that the S&T deposit base is
stable and that S&T has the ability to attract new
deposits, mitigating a funding dependency on volatile
liabilities. Special rate deposits of $100,000 and
over were 7% and 8% of total deposits during 1997 and
1996, respectively, and primarily represent deposit
relationships with local customers in our market area.
In addition, S&T has the ability to access both public
and private markets to raise long-term funding if
necessary. During 1995, S&T issued $25.0 million of
retail certificates of deposit through two brokerage
firms, further broadening the availability of
reasonably priced funding sources. At December 31,
1997, there were $26.6 million of these brokered
retail certificates of deposit outstanding.
Borrowings
Average borrowings increased $28.5 million in 1997 and
were comprised of securities sold under repurchase
agreements (REPOS), federal funds purchased and
long-term borrowings. 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
approximately $11.3 million for 1997 and $18.1 million
for 1996. 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
$53.1 million in 1997, a decrease of $17.5 million
from the 1996 averages. The increase in core deposits
and the availability of reasonably priced long-term
borrowings from the FHLB decreased the usage of these
types of fundings in 1997.
The interest rate risk of various funding strategies
is managed through S&T's Asset Liability Committee
(ALCO). During 1997, ALCO authorized four additional
long-term borrowings of $11.5 million at a fixed rate
and $57.1 million at an adjustable rate with the FHLB.
At December 31, 1997, S&T had long-term borrowings
outstanding of $49.6 million at a fixed rate and $94.6
million at an adjustable rate with the FHLB. The
purpose of these borrowings was to provide matched
fundings for newly originated loans and to mitigate
the risk associated with volatile liability fundings.
Another ALCO strategy used to manage interest rate
risk is the use of interest rate swaps. At December
31, 1997, S&T had notional values totaling $25.0
million in interest rate swaps. S&T pays a fixed rate
of 5.3% on these instruments and receives a variable
rate based upon the London Interbank Offer Rate. The
purpose of these off-balance sheet arrangements is to
lock-in funding costs of fixed rate loans.
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 December 31, 1997 and 1996 was $0.1
million and $0.2 million, respectively. 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.
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, increased 24% in 1997
and 11% in 1996. These increases were a result of
management's effort to expand the marketing of trust
products and services and general increases in the
debt and equity markets during the periods.
23
Results of Operations
Year Ended December 31, 1997
Net Income
Net income was a record $33.4 million or $2.34 per
diluted earnings per share in 1997, representing an
18% increase from the $28.2 million or $1.99 per
diluted earnings per share in 1996. The return on
average assets increased to 1.84% for 1997, as
compared to 1.65% for 1996. The return on average
equity increased to 13.71% for 1997, compared to
13.01% for 1996. 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 $4.8 million or 6% for 1997 compared
to 1996. The net yield on interest-earning assets was
essentially unchanged, increasing by two basis points
to 4.85%. Net interest income was positively affected
by the $91.1 million or 6% increase in average earning
assets.
In 1997, average loans increased $103.5 million,
offset by an average securities decrease of $16.0
million, comprising most of the earning asset growth.
The yields on average loans increased by two basis
points while the yields on average securities remained
constant.
Average interest-bearing deposits provided $39.0
million of the funds for the growth in average loans,
at a cost of 4.33%, relatively unchanged from 1996.
The yields of REPOS and other borrowed funds increased
12 basis points during 1997. During 1997, more longer-term
borrowings were utilized in order to mitigate interest
rate risk.
Also positively affecting net interest income was a
$33.1 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 non-earning assets.
Maintaining consistent spreads between earning assets
and costing liabilities is very significant to S&T's
financial performance since net interest income
comprised 88% of operating revenue. The level and mix
of earning assets and funds is 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
were 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 $5.0 million for
1997 compared to $5.2 million in 1996. 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 $3.3 million for 1997 compared to
$3.5 million for 1996. Nonperforming loans to total
loans decreased to 0.28% at December 31, 1997.
Also affecting the amount of provision expense is loan
growth. Despite a $103.5 million or 9% increase in
average loans, S&T's allowance for loan losses to
total loans was 1.60% at December 31, 1997, as
compared to 1.56% at December 31, 1996.
Noninterest Income
Noninterest income increased $4.4 million or 37% in
1997 compared to 1996. Increases included $0.3 million
or 12% in trust income, $0.5 million or 14% in service
charges and fees, a $0.2 million or 5% increase in
other income and a $3.4 million or 147% increase in
security and nonrecurring gains.
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
continual effort to implement reasonable fees for
services performed and to manage closely the
collection of these fees, as well as the
implementation of foreign ATM service charges in the
fourth quarter of 1997. The increase in other income
was a result of increased performance for brokerage
activities, letters of credit and fees on covered call
options. These areas were the focus of several 1997
strategic initiatives and product enhancements
implemented in order to expand this source of revenue.
24
Security and nonrecurring gains were primarily
attributable to the sales of equity securities in
order to maximize returns by taking advantage of
market opportunities when presented. These security
gains helped to offset the $2.2 million of merger
expenses related to the acquisition of Peoples. Also
included is $0.5 million of gains related to the
donation of appreciated equity securities to the S&T
Charitable Foundation. Nonrecurring gains included
$0.3 million of gains from the aforementioned student
loan and residential mortgage loan sales.
Noninterest Expense
Noninterest expense increased $0.8 million or 2% in
1997 compared to 1996. The increase is primarily
attributable to increased employment, occupancy, data
processing and other expenses associated with the
acquisition of Peoples during the second quarter of
1997, offset by higher Federal Deposit Insurance
Corporation (FDIC) insurance expense in 1996 relating
to the one-time surcharge on any financial institution
holding Savings Association Insurance Fund (SAIF)
deposits. 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 44.27% and 47.61% in
1997 and 1996, respectively.
Staff expense increased 5% or $1.1 million in 1997.
The increase resulted from normal merit increases, and
costs for severance and early retirement programs
related to the acquisition of Peoples that eliminated
38 duplicate positions. Average full-time equivalent
staff decreased from 677 to 665 in 1997. Severance and
early retirement programs were implemented in May
1997; therefore, the full effect of these programs is
not yet fully reflected in the year-to-date full-time
equivalent staff averages.
Occupancy and equipment expense, data processing and
other expenses increased 4% or $0.7 million in 1997 as
compared to 1996. The increase is primarily
attributable to a $0.8 million funding of S&T's
Charitable Foundation, and to accounting, professional
consulting and legal fees related to the acquisition
of Peoples, offset by reduced FDIC insurance costs.
The donation to the S&T Charitable Foundation will
allow S&T to fund community contributions well into
the future and help control future costs. Expense
increases to occupancy, equipment, marketing and data
processing include merger costs. These costs and other
changes were not significant and reflect normal
activity increases, organization expansion and fee
increases from vendors. Offseting these costs was a
$0.3 million reduction of goodwill amortization
relating to a 1991 branch acquisition.
FDIC premium expense decreased by 80% during 1997 as a
result of recapitalization legislation passed in
September 1996. S&T Bank pays an annual premium of
$.013 per $100 in Bank Insurance Fund (BIF) deposits
and $.0648 per $100 on SAIF deposits, the lowest
premium possible under the FDIC's risk assessment
program for determining deposit insurance premiums.
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 an expense of $0.9 million during the
third quarter of 1996. S&T Bank has $168.1 million
of deposits subject to the SAIF. These deposits are
related to a thrift institution and branches acquired
from the Resolution Trust Corporation in 1991.
Federal Income Taxes
Federal income tax expense increased $3.6 million to
$13.6 million in 1997 as a result of higher pretax
income in 1997 and nondeductible merger related
expenses. The 1997 effective tax rate of 29% 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.
25
Results of Operations
Year Ended December 31, 1996
Net Income
Net income was a record $28.2 million or $1.99 per
diluted earnings per share in 1996, representing a 15%
increase from the $24.8 million or $1.73 per diluted
earnings per share in 1995. The return on average
assets increased to 1.65% for 1996, as compared to
1.53% for 1995. The return on average equity increased
to 13.01% for 1996, compared to 12.51% for 1995.
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 $5.3 million or 4% for 1996 compared
to 1995. The net yield on interest-earning assets
increased by five basis points to 4.83%. Net interest
income was also positively affected by the $75.0
million or 5% increase in average earning assets.
In 1996, average loans increased $67.9 million and
average securities increased $9.7 million, comprising
most of the earning asset growth. The yields on
average loans and average securities decreased by 21
basis points and increased by 12 basis points,
respectively, during this period. The bulk of funding
for this loan and security growth was provided by
deposits and retained earnings.
Average interest-bearing deposits provided $52.9
million of the funds for the growth in average loans
and average securities, at a cost of 4.28%, relatively unchanged
from 1995. However, the effects of declines
in average loan yields were partially offset by a 23
basis points decrease in the cost of repos and other
borrowed funds.
Also positively affecting net interest income was a
$24.1 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 non-earning assets.
Maintaining consistent spreads between earning assets
and costing liabilities is very significant to S&T's
financial performance since net interest income
comprised 86% of operating revenue. The level and mix
of earning assets and funds is 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
were 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 $5.2 million for
1996, compared to $4.2 million in 1995. The increased
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 $3.5 million for 1996, compared to
$2.3 million for 1995. The increase in net charge-offs
is primarily related to partial charge-offs for two
problem commercial loans. The partial charge-offs were
made in order to reflect the net loan balances closer
to the market value of collateral for these loans.
Nonperforming loans to total loans increased to 0.86%
at December 31, 1996.
Also affecting the amount of provision expense is loan
growth. Despite a $67.9 million or 6% increase in
average loans, and a $1.2 million increase in net
charge-offs, S&T's allowance for loan losses to total
loans was 1.56% at December 31, 1996 and 1.55% at
December 31, 1995.
Noninterest Income
Noninterest income increased $2.9 million or 31% in
1996 compared to 1995. Increases included $0.4 million
or 18% in trust income, $0.7 million or 21% in service
charges and fees, a $0.5 million or 20% increase in
other income, and a $1.2 million or 114% increase in
security and nonrecurring gains.
The increase in trust income was attributable to
bankwide incentive programs 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, management's continual effort to
implement reasonable fees for services performed, and
to manage the collection of these fees. The increase
in other income was a result of increased performance
for brokerage activities, letters of credit and fees
on covered call options. These areas were the focus of
several 1996 strategic initiatives and product
enhancements implemented in order to expand this
source of revenue.
26
Security and nonrecurring gains were primarily
attributable to the sales of equity securities in
order to maximize returns by taking advantage of
market opportunities when presented, and a $0.1
million gain from the sale of $8.2 million of student
loans.
Noninterest Expense
Noninterest expense increased $2.1 million or 5% in
1996 compared to 1995. 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 47.61% and 49.61% in
1996 and 1995, respectively.
Staff expense increased 3% or $0.6 million in 1996.
The increase resulted from normal merit increases,
higher incentive payments relative to commercial loan
activity and several new hires relating to the opening
of the new Greensburg office. Offsetting these
increases is a higher deferral of loan origination
costs resulting from increased commercial loan
activity and lower benefit costs. Average full-time
equivalent staff increased from 673 to 677 in 1996.
Other expenses increased 17% or $1.5 million in 1996
as compared to 1995. The increase is primarily
attributable to a $1.3 million increase in accounting,
professional consulting and legal fees. These
increases in legal, as well as increases in accounting
and professional consulting fees are a result of the
additional services related to merger negotiations
with Peoples. A definitive agreement for the merger
was signed on November 25, 1996 and consummated in the
second quarter 1997. Expense increases to occupancy,
equipment, marketing, data processing and other were
expenses not significant and reflect normal changes
due to activity increases, organization expansion and
fee increases from vendors.
During 1995, FDIC premiums were eliminated resulting
in expense savings of $1.1 million for the first half
of 1996. However, S&T had $168.0 million of Oakar
deposits subject to the 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 an 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 $0.9 million to
$10.0 million in 1996 as a result of higher pretax
income in 1996. The 1996 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 the tax benefits
associated from LIHTC projects. S&T currently does not
incur any alternative minimum tax.
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 the market value of securities
available for sale. At December 31, 1997, the total of
such assets was approximately $798.8 million or 42% 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 7% of deposits at December 31, 1997 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.
27
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, net alternative funding resources, net loans to
assets, net loans to deposits, volatile liabilities
and liquidity ratio. As of December 31, 1997, 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 SFAS
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 CMOs, 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 twelve-month
intervals ended December 31, 1997 of 0.93% and 1.04%,
respectively. Assuming immediate repricings for
interest-bearing demand, savings and money market
accounts, these ratios would be 0.68% and 0.83%,
respectively.
In addition to the gap analysis, the Company 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 twelve 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 twelve-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.
S&T's policy objective is to limit the change in
annual pretax earnings to $2.3 million from an
immediate and sustained parallel change in interest
rates of 200 basis points. As of December 31, 1997,
S&T had the following estimated earnings sensitivity
profile:
[CAPTION]
(in millions) Immediate Change in Rates
+200bp -200bp
Pretax earnings change $1.2 $(0.8)
Based on the results of the simulation model as of
December 31, 1997, S&T would expect an increase in net interest
income of $0.5 million and an increase in net
interest income of $0.2 million if interest rates
gradually increase or decrease, respectively, from
current rates by 200 basis points over a twelve-month
period.
Capital Resources
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.
Shareholders' equity increased $34.0 million at
December 31, 1997 compared to December 31, 1996.
Net income was $33.4 million and dividends declared to
shareholders were $15.7 million for 1997. S&T paid 43%
of 1997 net income in dividends, equating to an annual
dividend rate of $1.11 per share. Also affecting
capital was an increase of $15.3 million in unrealized
gains on securities available for sale.
The book values of S&T's common stock increased 14.8%
from $16.02 at December 31, 1996 to $18.39 at December
31, 1997, primarily due to the increase in
shareholders' equity from retained earnings and the
increase in unrealized holding gains on securities
available for sale.
28
S&T continues to maintain a strong capital position
with a leverage ratio of 11.7% as compared to the 1997
minimum regulatory guideline of 3.0%. S&T's risk-based
capital Tier 1 and Total ratios were 17.0% and 18.2%,
respectively, at December 31, 1997, which places S&T
well above the Federal Reserve Board's risk-based
capital guidelines of 4.0% and 8.0% for Tier 1 and
Total, respectively. In addition, management believes
that S&T has the ability to raise additional capital
if necessary. S&T sponsors an ESOP. The ESOP shares
are allocated to employees as part of S&T's
contributions to its employee thrift and profit
sharing plans. At December 31, 1997, 13,000
unallocated shares were held by the ESOP for future
allocation to employees.
In April 1993, shareholders approved the S&T Incentive
Stock Plan authorizing the issuance of a maximum of
600,000 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
1,600,000. As of December 31, 1997, 729,411
nonstatutory stock options had been granted to key
employees and outside directors; 543,000 of these
options are currently exercisable.
Year 2000
In June 1997, S&T management formed a committee to
evaluate the process of preparing its computer systems
and applications for the Year 2000. This process
involves modifying or replacing certain hardware and
software maintained by S&T, as well as communicating
with external service providers to ensure that they
are taking the appropriate action to remedy their Year
2000 issues. Management and the committee expect to
have substantially all of the system and application
changes completed and tested by the end of 1998 and
believe that its level of preparedness is appropriate.
S&T has not yet determined the total cost of the
project; however, it is not expected to materially
impact future operations. Purchased hardware and
software will be capitalized in accordance with normal
policy. Personnel and all other costs related to the
project will be expensed as incurred.
Regulatory Matters
S&T and S&T Bank are subject to periodic examinations
by one or more of the various regulatory agencies.
During 1997, an examination was conducted by the FDIC.
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 FDIC 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.
Business Uncertainties
Due to the static economy in S&T's mature market area
and the potential for decline, management believes
that values of loan collateral and the ability of
borrowers to repay could be adversely affected in an
economic downturn. 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. In addition, S&T's recent acquisitions
provide expanded market opportunities in areas with
better growth potential.
"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.
29
Consolidated Balance Sheets
S&T Bancorp, Inc. and Subsidiaries
December 31 1997 1996
(dollars in thousands, except per share data)
Assets
Cash and due from banks $ 35,951 $ 40,710
Interest-earning deposits with banks 102 109
Federal funds sold 0 6,465
Securities:
Available for sale 521,117 449,801
Held to maturity (market value $48,101
in 1997 and $51,343 in 1996) 47,103 50,260
Total Securities 568,220 500,061
Loans, net of allowance for loan losses
of $20,427 in 1997 and $18,729 in 1996 1,253,326 1,181,407
Premises and equipment 20,613 20,038
Other assets 42,079 38,255
Total Assets $1,920,291 $1,787,045
Liabilities
Deposits:
Noninterest-bearing $ 165,727 $ 159,268
Interest-bearing 1,118,931 1,111,099
Total Deposits 1,284,658 1,270,367
Securities sold under repurchase agreements 170,124 114,205
Federal funds purchased 9,325 775
Long-term borrowings 144,218 136,618
Other borrowed funds 130 230
Other liabilities 51,718 38,732
Total Liabilities 1,660,173 1,560,927
Shareholders' Equity
Preferred stock, without par value, 10,000,000
shares authorized and none outstanding _ _
Common stock ($2.50 par value)
Authorized-25,000,000 shares in 1997 and 1996
Issued-14,857,019 shares in 1997 and 1996 37,142 37,142
Additional paid-in capital 19,369 19,044
Retained earnings 175,707 157,982
Net unrealized holding gains
on securities available for sale 40,524 25,197
Treasury stock (715,864 shares in 1997
and 746,003 shares in 1996, at cost) (12,494) (13,017)
Deferred compensation (130) (230)
Total Shareholders' Equity 260,118 226,118
Total Liabilities and Shareholders' Equity $1,920,291 $1,787,045
See Notes to Consolidated Financial Statements
30
Consolidated Statements of Income
S&T Bancorp, Inc. and Subsidiaries
[CAPTION]
Year Ended December 31 1997 1996 1995
(dollars in thousands, except per share data)
Interest Income
Loans, including fees $108,891 $ 99,493 $ 95,570
Deposits with banks 8 5 143
Federal funds sold 523 330 406
Investment securities:
Taxable 25,421 26,349 24,736
Tax-exempt 2,250 2,834 3,127
Dividends 4,008 3,431 3,038
Total Interest Income 141,101 132,442 127,020
Interest Expense
Deposits 47,966 46,125 44,277
Securities sold under repurchase
agreements 6,602 7,006 8,482
Federal funds purchased 472 319 474
Long-term borrowings 7,227 5,071 4,326
Other borrowed funds 17 68 118
Total Interest Expense 62,284 58,589 57,677
Net Interest Income 78,817 73,853 69,343
Provision for Loan Losses 5,000 5,175 4,220
Net Interest Income After Provision
for Loan Losses 73,817 68,678 65,123
Noninterest Income
Service charges on deposit accounts 4,603 4,039 3,327
Trust fees 3,181 2,839 2,401
Security gains, net 5,446 2,227 850
Other 3,211 2,892 2,569
Total Noninterest Income 16,441 11,997 9,147
Noninterest Expense
Salaries and employee benefits 22,816 21,763 21,147
Occupancy, net 2,583 2,886 2,561
Furniture and equipment 3,170 2,447 2,581
Other taxes 1,320 1,201 1,121
Data processing 2,154 1,955 1,887
Amortization of intangibles 0 314 343
FDIC assessment 240 1,199 1,526
Other 10,915 10,633 9,110
Total Noninterest Expense 43,198 42,398 40,276
Income Before Income Taxes 47,060 38,277 33,994
Applicable Income Taxes 13,646 10,036 9,152
Net Income $ 33,414 $ 28,241 $ 24,842
Per Common Share:
Net Income-Basic $ 2.36 $ 2.00 $ 1.74
Net Income-Diluted 2.34 1.99 1.73
Dividends Declared 1.11 0.94 0.74
See Notes to Consolidated Financial Statements.
31
Consolidated Statements of Changes in Shareholders' Equity
S&T Bancorp, Inc. and Subsidiaries
[CAPTION]
Net Unrealized
Additional Gains on
Common Paid-In Retained Securities Treasury Deferred
Stock Capital Earnings Available Stock Compensation
for Sale
(dollars in thousands, except per share data)
Balance at January 1, 1995 $37,142 $17,328 $125,938 $ 8,840 $(5,982) $(430)
Net income for 1995 24,842
Cash dividends declared
($0.74 per share) (9,204)
Treasury stock acquired
(97,689 shares) (2,076)
Treasury stock sold
(74,820 shares) 792 876
Deferred ESOP
benefits expense 90
Net change in unrealized
holding gains on securities
available for sale 15,898
Balance at December 31, 1995 37,142 18,120 141,576 24,738 (7,182) (340)
Net income for 1996 28,241
Cash dividends declared
($0.94 per share) (11,835)
Treasury stock acquired
(257,525 shares) (7,287)
Treasury stock sold
(89,614 shares) 924 1,452
Deferred ESOP
benefits expense 110
Net change in unrealized
holding gains on securities
available for sale 459
Balance at December 31, 1996 37,142 19,044 157,982 25,197 (13,017) (230)
Net income for 1997 33,414
Cash dividends declared
($1.11 per share) (15,689)
Treasury stock acquired
(138 shares) (5)
Treasury stock sold
(30,277 shares) 325 528
Deferred ESOP
benefits expense 100
Net change in unrealized
holding gains on securities
available for sale 15,327
Balance at December 31, 1997 $37,142 $19,369 $175,707 $40,524 $(12,494) $(130)
See Notes to Consolidated Financial Statements.
32
Consolidated Statements of Cash Flows
S&T Bancorp, Inc. and Subsidiaries
[CAPTION]
Year Ended December 31 1997 1996 1995
(dollars in thousands)
Operating Activities
Net Income $ 33,414 $ 28,241 $ 24,842
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 5,000 5,175 4,220
Provision for depreciation and
amortization 2,163 2,445 2,028
Net amortization of investment security
premiums 675 543 775
Net accretion of loan and deposit discounts 0 (343) (896)
Deferred income taxes (756) (613) (535)
Securities gains, net (5,446) (2,227) (850)
(Increase) decrease in interest
receivable (1,601) 449 (552)
Increase (decrease) in interest payable 395 (271) 3,063
Decrease (increase) in other assets 819 (458) (1,236)
Increase (decrease) in other liabilities 531 3,170 (2,975)
Net Cash Provided by Operating Activities 35,194 36,111 27,884
Investing Activities
Net decrease (increase) in interest-earning
deposits with banks 7 (58) 3,773
Net decrease in federal funds sold 6,465 875 785
Proceeds from maturities of investment
securities 3,146 11,361 28,774
Proceeds from maturities of securities
available for sale 127,344 90,214 20,264
Proceeds from sales of securities
available for sale 77,826 40,855 67,943
Purchases of investment securities 0 (4,231) (26,255)
Purchases of securities available for
sale (248,077) (148,259) (93,722)
Net increase in loans (76,919) (99,741) (79,023)
Purchases of premises and equipment (2,042) (3,020) (1,913)
Other, net (696) 303 108
Net Cash Used in Investing Activities (112,946) (111,701) (79,266)
Financing Activities
Net increase in demand, NOW and savings
deposits 9,105 23,761 3,689
Net increase in certificates of deposit 5,186 30,060 70,286
Net increase (decrease) in federal funds
purchased 8,550 450 (19,265)
Net increase (decrease) in repurchase
agreements 55,919 (8,589) (47,077)
Increase in obligation under capital lease 0 (294) (264)
Proceeds from FHLB long-term borrowings 68,600 55,000 53,200
Repayments from FHLB long-term borrowings (61,000) (14,987) 0
Acquisition of treasury stock (5) (7,287) (2,076)
Sale of treasury stock 853 2,376 1,668
Cash dividends paid to shareholders (14,215) (10,667) (8,757)
Net Cash Provided by Financing Activities 72,993 69,823 51,404
(Decrease) increase in Cash and Cash
Equivalents (4,759) (5,767) 22
Cash and Cash Equivalents at Beginning of
Year 40,710 46,477 46,455
Cash and Cash Equivalents at End of Year $ 35,951 $ 40,710 $46,477
See Notes to Consolidated Financial Statements.
33
Notes to Consolidated Financial Statements
S&T Bancorp, Inc. and Subsidiaries
Note A
Accounting Policies
The financial statements of S&T Bancorp, Inc. and
subsidiaries (S&T) have been prepared in accordance
with generally accepted accounting principles. In
preparing the financial statements, management is
required to make estimates and assumptions 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 and its subsidiaries. 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.
Acquisitions
On May 2, 1997, S&T completed the merger of Peoples
Bank of Unity (Peoples) into its principal subsidiary,
S&T Bank (Bank). Peoples had assets of $288.0 million,
and operated six offices in the eastern suburbs of
Pittsburgh, including Plum Borough, Penn Hills,
Monroeville, Oakmont, Unity, and Holiday Park. All of
these offices now operate under the S&T Bank name.
Under the terms of the merger agreement, Peoples
shareholders received 26.25 S&T common shares for each
of the 115,660 outstanding Peoples common shares.
This resulted in a tax-free exchange, and the merger
was accounted for as a pooling-of-interests. The
financial statements are presented as if the merger
had been consummated for all the periods presented.
The following financial information presents the
combined results of S&T and Peoples as if the
acquisition had occurred as of the beginning of the
years presented:
[CAPTION]
S&T as
For the Periods Ended previously
presented Peoples S&T
(dollars in thousands)
Net interest income:
March 31, 1997 $15,655 $3,699 $19,354
December 31, 1996 59,887 13,966 73,853
December 31, 1995 57,019 12,324 69,343
Net income:
March 31, 1997 $ 6,248 $ 1,493 $ 7,741
December 31, 1996 23,249 4,992 28,241
December 31, 1995 20,469 4,373 24,842
Securities
Management determines the appropriate classification
of securities at the time of purchase. If management
has the positive 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 corporate securities are
classified in this category. 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, collateralized mortgage
obligations, mortgage-backed securities, and
marketable equity securities are classified in this
category. 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.
34
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 or 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 homogeneous 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 allow-ance. 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
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.
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 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.
35
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
Financial Accounting Standards Board Statement No.
128, "Earnings Per Share" (Statement No. 128), is
effective in 1997 and provides a simpler calculation
called basic Earnings Per Share (EPS) which replaces
primary EPS under APB Opinion 15. Basic EPS is
calculated by dividing income available to common
shareholders by the weighted average number of common
shares outstanding during the period. Options,
warrants and other potentially dilutive securities are
excluded from the basic calculation, but are included
in diluted EPS. All prior periods have been restated
and recorded in accordance with Statement No. 128.
Average shares outstanding for computing basic EPS
were 14,131,518, 14,108,617 and 14,279,507 for 1997,
1996 and 1995, respectively. Average shares
outstanding for computing dilutive EPS were
14,309,182, 14,220,422 and 14,318,799 for 1997, 1996
and 1995, respectively. In computing dilutive EPS,
average shares outstanding have been increased by the
common stock equivalents relating to S&T's available
stock options.
Cash Flow Information
S&T considers cash and due from banks as cash and cash
equivalents. For the years ended December 31, 1997,
1996 and 1995, cash paid for interest was $60,825,000,
$58,860,000 and $54,615,000, respectively. Cash paid
during 1997 for income taxes was $14,190,000 compared
to $11,014,000 for 1996 and $8,961,000 for 1995.
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. In November 1997, $12.7
million of 1-4 family mortgage loans were sold
to the Federal National Mortgage Association (FNMA),
and $187,000 of mortgage servicing rights were
capitalized and recorded in other assets. Servicing
assets are amortized in proportion to, and over the
period of, estimated net servicing revenues.
New Accounting Pronouncements
Financial Accounting Standards Board Statement No.
125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities"
(Statement No. 125), is effective in 1997 and provides
accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of
liabilities. Statement No. 125 as amended by FASB
Statement No. 127, "Deferral of Effective Date of
Certain Provisions of Statement No. 125," is generally
to be applied to transactions occurring after December
31, 1996 with certain provisions having been delayed
until 1998. Statement No. 125 is not expected to
materially affect S&T's financial position or results
of operations.
Financial Accounting Standards Board Statement
No. 130, "Accounting for Comprehensive Income," is
effective for years beginning after December 15, 1997
and establishes standards for the reporting and
display of comprehensive income and its components in
a full set of general purpose financial statements.
Statement No. 130 is not expected to materially affect
S&T's financial position or results of operations.
36
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 deposit 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 Committments and
Standby Letters of Credit
Estimates of the fair value of these off-balance sheet
items were not made because of the short-term 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 impracticable to estimate a representational fair
value for these types of assets, which represent
significant value to S&T.
37
[CAPTION]
The following table indicates the estimated fair
value of S&T's financial instruments as of December 31:
1997 1996
Estimated Carrying Estimated Carrying
Fair Value Value Fair Value Value
(dollars in thousands)
Assets
Cash $ 36,053 $ 36,053 $ 47,284 $ 47,284
Securities:
Available for sale 521,117 521,117 449,801 449,801
Held to maturity 48,101 47,103 51,343 50,260
Loans 1,279,802 1,273,753 1,194,344 1,200,136
Liabilities
Deposits $1,287,497 $1,284,658 $1,275,480 $1,270,367
Securities sold under repurchase
agreements 170,126 170,124 114,205 114,205
Federal funds purchased 9,325 9,325 775 775
Long-term borrowings 145,049 144,218 136,518 136,618
Other borrowed funds 130 130 230 230
Off-Balance Sheet
Interest rate swaps $ 192 $ 0 $ 362 $ 0
Note C
Derivative Financial Instruments
S&T does not extensively use derivative financial
instruments. The only type of instrument that S&T
utilizes is interest rate swaps.
S&T has three interest rate swaps at notional values
totaling $25.0 million, paying a fixed rate and
receiving a variable rate. The purpose of these
transactions is to provide matched, fixed rate funding
for newly originated loans, and to mitigate the risk
associated with volatile liability funding. The
effective rate of these combined swaps was 5.28% at
December 31, 1997. Interest rate swaps are not
reported in the consolidated balance sheets.
Differences between interest received and interest
paid are reported as a component of borrowing expense
in the consolidated income statement.
Note D
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 $11,681,000 during 1997.
38
Securities
[CAPTION]
The following table indicates the composition of the
securities portfolio at December 31:
Available for Sale
Gross Gross
Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Value
(dollars in thousands)
Obligations of U.S. government
corporations and agencies $338,855 $ 2,616 $ (183) $341,288
Mortgage-backed securities 14,169 373 14,542
U.S. treasury securities 38,044 1,429 39,473
Corporate securities 10,848 228 (12) 11,064
Debt securities available for sale 401,916 4,646 (195) 406,367
Marketable equity securities 43,745 58,060 (166) 101,639
Other securities 13,111 13,111
Total $458,772 $62,706 $ (361) $521,117
Held to Maturity
Obligations of states and $ 37,497 $ 794 $ (5) $38,286
political susbdivisions
Corporate securities 1,998 209 2,207
Debt securities held to maturity 39,495 1,003 (5) 40,493
Other securities 7,608 7,608
Total $ 47,103 $ 1,003 $ (5)$ 48,101
Available for Sale
Gross Gross
Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Value
(dollars in thousands)
Obligations of U.S. government
corporations and agencies $234,632 $ 2,408 $(1,116)$235,924
Collateralized mortgage obligations of U.S.
government corporations and agencies 4,176 7 (1) 4,182
Mortgaged-backed securities 47,327 401 (266) 47,462
U.S. treasury securities 57,187 1,555 58,742
Corporate securities 14,463 143 (56) 14,550
Debt securities available for sale 357,785 4,514 (1,439) 360,860
Marketable equity securities 40,161 35,868 (224) 75,805
Other securities 13,136 13,136
Total $411,082 $40,382 $(1,663)$449,801
Held to Maturity
Obligations of states and $ 46,334 $ 919 $ (52)$ 47,201
and political subdivisions
Corporate securities 1,998 216 2,214
Debt securities held to maturity 48,332 1,135 (52) 49,415
Other securities 1,928 1,928
Total $ 50,260 $ 1,135 $ (52)$ 51,343
39
There were $6,031,000, $2,528,000 and $1,956,000 in
gross realized gains and $585,000, $305,000 and
$1,114,000 in gross realized losses in 1997, 1996
and 1995, respectively, relative to securities
available for sale.
The amortized cost and estimated market value
of debt securities at December 31, 1997, 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 $ 23,992 $ 24,159
Due after one year through five years 96,246 97,815
Due after five years through ten years 273,750 276,241
Due after ten years 7,928 8,152
Total $ 401,916 $ 406,367
Amortized Market
Held to Maturity Cost Value
Due in one year or less $ 5,680 $ 5,723
Due after one year through five years 18,288 18,800
Due after five years through ten years 12,585 12,939
Due after ten years 2,942 3,031
Total $ 39,495 $ 40,493
At December 31, 1997 and 1996, securities with
principal amounts of $274,350,000 and $181,489,000,
respectively, were pledged to secure repurchase
agreements and public and trust fund deposits.
Note F
Loans
[CAPTION]
The following table indicates the composition
of the loan portfolio at December 31:
1997 1996
(dollars in thousands)
Real estate-construction $ 47,967 $ 35,508
Real estate-mortgages:
Residential 512,417 513,424
Commercial 327,384 250,132
Commercial-industrial and agricultural 255,017 246,731
Consumer installment 130,968 154,341
Gross Loans $1,273,753 $1,200,136
Allowance for loan losses (20,427) (18,729)
Net Loans $1,253,326 $1,181,407
40
The following table presents changes in the allowance
for loan losses for the year ended December 31:
[CAPTION]
1997 1996 1995
(dollars in thousands)
Balance at beginning of year $18,729 $17,065 $15,169
Charge-offs (4,481) (5,536) (3,039)
Recoveries 1,179 2,025 715
Net charge-offs (3,302) (3,511) (2,324)
Provision for loan losses 5,000 5,175 4,220
Balance at end of year $20,427 $18,729 $17,065
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
$41,130,000 and $33,713,000 at December 31, 1997
and 1996, respectively. During 1997, $36,495,000 of
new loans were funded and repayments totaled $29,078,000.
During 1997, S&T Bank acquired automobile loans and
leases on a third-party basis from companies owned by
two directors of S&T totaling $3,793,000. These loans
were acquired on substantially the same terms as those
prevailing at the time for comparable transactions with
others.
The principal balances of loans on nonaccrual were
$3,602,000 and $10,268,000 at December 31, 1997 and
December 31, 1996, respectively. At December 31, 1997,
there were no commitments to lend additional funds on
nonaccrual loans. Other real estate owned, which is
included in other assets, was $647,000 at December 31,
1997 and $483,000 at December 31, 1996.
The following table represents S&T's investment in
loans considered to be impaired and related information
on those impaired loans at December 31:
[CAPTION]
1997 1996
(dollars in thousands)
Recorded investment in loans
considered to be impaired $1,869,000 $10,687,000
Loans considered to be impaired
that were on a nonaccrual basis _ 6,487,000
Allowance for loan losses related to
loans considered to be impaired 914,000 2,605,000
Average recorded investment in
impaired loans 6,329,000 4,256,000
Total interest income recognized on 656,000 1,103,000
impaired loans
Interest income on impaired loans
recognized on a cash basis _ 1,103,000
41
Note G
Premises and Equipment
The following table is a summary of the premises and
equipment accounts at December 31:
[CAPTION]
1997 1996
(dollars in thousands)
Land $ 3,037 $ 2,568
Premises 18,498 18,340
Furniture and equipment 12,152 14,806
Leasehold improvements 2,483 2,510
36,170 38,224
Accumulated depreciation (15,557) (18,186)
Total $ $20,613 $20,038
Certain banking facilities and equipment are leased
under short-term lease arrangements expiring at
various dates to the year 2007. All such leases are
accounted for as operating leases. Rental expense
for premises and equipment amounted to $1,215,000,
$1,136,000 and $1,104,000 in 1997, 1996 and 1995,
respectively. Minimum annual rentals for each of the
years 1998-2002 are approximately $413,000, $308,000,
$296,000, $241,000 and $133,000, respectively, and
$586,000 for the years thereafter. Included in the
above are leases entered into with two directors of
S&T for which rental expense totaled $348,497, $325,709
and $318,984 in 1997, 1996 and 1995, respectively.
Note H
Deposits
The following table indicates the composition of
deposits at December 31:
[CAPTION]
1997 1996
(dollars in thousands)
Noninterest-bearing demand $ 165,727 $ 159,268
Interest-bearing demand 33,582 52,658
Money market 274,874 230,143
Savings 175,187 198,068
Time deposits 635,288 630,230
Total $1,284,658 $1,270,367
The aggregate of all time deposits over $100,000
amounted to $95,678,000 and $101,461,000 for
December 31, 1997 and 1996, respectively.
42
The following table indicates the scheduled
maturities of time deposits at December 31:
[CAPTION]
1997 1996
(dollars in thousands)
Due in one year $306,278 $360,191
Due in one to two years 187,257 107,836
Due in two to three years 83,395 89,595
Due in three to four years 16,434 32,330
Due in four to five years 26,751 15,273
Due after five years 15,173 25,005
Total $635,288 $630,230
Note I
Long-Term Borrowings
The following table is a summary of long-term borrowings
with the Federal Home Loan Bank (FHLB):
[CAPTION]
1997 1996
Balance Average Balance Average
Rate Rate
(dollars in thousands)
Due in one year $25,000 5.97% $36,000 5.43%
Due in one to two years _ 25,000 5.60
Due in two to three years 12,500 5.70 _ _
Due in three to four years 30,000 6.02 12,500 5.32
Due in four to five years 57,100 5.25 55,000 5.52
Due after five years 19,618 6.48 8,118 6.63
Total $144,218 5.74% $136,618 5.56%
The purpose of these borrowings was to match fund
selected new loan originations, to mitigate interest
rate sensitivity risks and take advantage of discounted
borrowing rates through the FHLB for community investment
projects.
S&T maintains a Flexline of credit for 10% of total assets
with the FHLB which expires December 31, 1998. S&T pledged
all 1-4 family and multi-family mortgage loans as collateral
for any current or future FHLB advances. The total carrying
amount of these loans was $458,308,000 at December 31, 1997.
Note J
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.
43
Information concerning federal funds purchased and REPOS
is summarized as follows:
[CAPTION]
1997 1996
(dollars in thousands)
Average balance during the year $134,851 $141,012
Average interest rate during the year 5.31% 5.24%
Maximum month-end balance during the year $195,024 $180,776
Average interest rate at year end 5.82% 5.68%
Note K
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 $112,155,000 at December
31, 1997. 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 the
subsidiaries 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, 1997, the maximum
amount available for transfer from S&T Bank to S&T in
the form of loans and dividends approximated 45% of
consolidated net assets.
Note L
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.
Note M
Financial Instruments and Credit Risk
S&T, in the normal course of business, commits to extend
credit and issue standby letters of credit. The obligations
are not recorded in S&T's financial statements. Loan
commitments and standby letters of credit are subject to
S&T's normal credit underwriting policies and procedures
and generally require collateral based upon management's
evaluation of each customer's financial 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 $294,144,000
and $250,394,000 at December 31, 1997 and 1996, respectively;
and obligations under standby letters of credit totaled
$54,439,000 and $63,553,000 at December 31, 1997 and 1996,
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. However,
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
six-county market area in western Pennsylvania.
44
Note N
Income Taxes
Income tax expense (credits) for the year ended
December 31 are comprised of:
[CAPTION]
1997 1996 1995
(dollars in thousands)
Current $14,402 $10,649 $9,687
Deferred (756) (613) (535)
Total $13,646 $10,036 $9,152
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 year ended
December 31 is as follows:
[CAPTION]
1997 1996 1995
(dollars in thousands)
Statutory tax rate 35% 35% 35%
Tax-exempt interest income
and dividend exclusion (4) (6) (7)
Low income housing tax credits (2) (3) (1)
Effective tax rate 29% 26% 27%
Income taxes applicable to security gains were $1,906,000
in 1997, $779,000 in 1996 and $296,000
in 1995.
45
Significant components of S&T's temporary
differences were as follows at December 31:
[CAPTION]
1997 1996
(dollars in thousands)
Deferred tax liabilities:
Net unrealized holding gains
on securities available for sale $(21,821) $(13,521)
Fixed assets (683) (740)
Accretion on acquired loans (326) (363)
Prepaid pension (514) (447)
Prepaid hospitalization (102) (102)
Point recognition (933) (688)
Total deferred tax liabilities (24,379) (15,861)
Deferred tax assets:
Allowance on loan losses 6,939 6,206
Loan fees 377 376
Interest expense on increasing rate CDs 128 171
Deferred compensation 771 462
Goodwill 352 392
Other 174 160
Total deferred tax assets 8,741 7,767
Net deferred tax liability $(15,638) $ (8,094)
Note O
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]
1997 1996 1995
(dollars in thousands)
Service cost-benefits earned $1,103 $1,032 $811
during the period
Interest cost on projected benefit 1,378 1,274 1,180
benefit obligation
Actual return on plan assets (3,767) (2,447)(3,710)
Net amortization and deferral 1,977 893 2,479
Net periodic pension expense $691 $752 $760
46
The following table sets forth the plan's funded status
at December 31:
[CAPTION]
1997 1996
(dollars in thousands)
Actuarial present value of the accumulated benefit
obligation, including vested benefits of $16,766
in 1997 and $13,618 in 1996 $(18,339) $(14,838)
Actuarial present value of projected benefit
obligation $(23,385) $(19,593)
Plan assets at fair value 26,043 22,189
Plan assets in excess of projected benefit
obligation 2,658 2,596
Unrecognized net gain from past experience
different from that assumed and effects of changes
in assumptions (2,475) (2,062)
Unamortized prior service cost 104 226
Balance of initial unrecognized net liability (72) (94)
Accrued pension cost included in other liabilities $ 215 $ 666
Below are actuarial assumptions used in accounting
for the plan:
[CAPTION]
1997 1996 1995
(dollars in thousands)
Weighted-average discount rate 6.5% 7.0% 6.5%
Rate of increase in future compensation levels 5.0 5.0 6.0
Expected long-term rate of return on plan assets 8.0 8.0 8.0
S&T also has a supplemental retirement plan (SERP) for
certain key employees. The SERP is unfunded. The balance
of actuarial present value of projected benefit obligations
related to the SERP are $2,110,000 and $1,332,000 at
December 31, 1997 and 1996, respectively. Accrued pension
cost related to the SERP was $1,779,000 and $1,320,000 at
December 31, 1997 and 1996, respectively. Net periodic
pension cost related to the SERP was $499,000, $238,000
and $201,000 at December 31, 1997, 1996 and 1995,
respectively. The actuarial assumptions are the same as
those used in the previous table.
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 contributions as limited by the Plan.
Contributions to the Plan are cash or unallocated
Employee Stock Option Plan (ESOP) shares. Expense related
to these contributions amounted to $990,000, $950,000 and
$856,000 in 1997, 1996 and 1995, respectively.
On December 30, 1988, S&T sold 280,000 shares of common
stock, which were held in treasury, to its newly created
ESOP for $2,800,000. The funds were obtained by the ESOP
through a loan from a bank. S&T has guaranteed the loan,
which has a maximum term of ten years and bears interest
at 80% of the lender's prime rate. The loan terms require
quarterly interest and annual principal payments. The balance
of this loan was $130,000 and $230,000 on December 31, 1997
and 1996, respectively, and was included in other borrowed
funds with an offsetting reduction in shareholders' equity
shown as deferred compensation in the accompanying consolidated
balance sheets. At December 31, 1997, the ESOP held 13,000
shares of S&T common stock that were unearned or unallocated,
with a fair market value of $562,000. These unearned shares
are released upon reduction of the ESOP debt and must be fully
allocated by December 31, 1998.
47
The ESOP covers substantially all regular full-time employees.
S&T is obligated to make annual contributions sufficient to
enable the ESOP to repay the loan, including interest.
Interest expense totaled $17,000 in 1997, $19,000 in 1996
and $30,000 in 1995. Dividends received by the ESOP from
S&T for unallocated shares amounted to $24,000 in 1997,
$24,000 in 1996 and $33,000 in 1995, which were used for
debt service. Dividends on allocated shares are paid to
the participants' accounts in the Plan. Deferred
compensation arising from the guarantee of the ESOP
borrowing will be charged to operations as contributions
are made to the ESOP.
Since the ESOP was established prior to the issuance of
SOP 93-6, "Employers' Accounting for Employee Stock
Ownership Plans," ESOP compensation expense is currently
based upon the cost of unearned shares as prescribed by
SOP 76-3, "Accounting Practices for Certain Employee Stock
Ownership Plans." The earnings per share effects of unearned
ESOP shares are not material. The expense associated with
the release of ESOP shares in 1997, 1996 and 1995 was
$100,000, $110,000 and $90,000, respectively. No allocated
ESOP shares are subject to repurchase obligations.
Note P
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 1,600,000 shares of S&T common stock and
expires ten years from the date of board approval.
S&T grants stock options at exercise prices not less
than the greater of the fair market value of S&T
common stock. SARs may be granted concurrently with the
grant of nonstatutory stock options (Related SARs) or
independently. SARs entitle the holder to receive either
cash or shares of S&T common stock equal to the excess of
the fair market value of the shares subject to the option
over the fair market value of a share of common stock on
the grant date.
Stock options and SARs granted under the Stock Plan are
not exercisable before the six-month vesting period from
the date of grant. There were no SARs or Related SARs
issued or outstanding at December 31, 1997 and 1996. The
following table summarizes the changes in the incentive
stock options outstanding during 1997, 1996 and 1995:
[CAPTION]
1997 1996 1995
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 556,000 $24.12 411,500 $20.90 250,500 $17.27
Granted 186,411 40.75 166,500 30.88 165,000 26.25
Exercised (13,000) 21.32 (22,000) 15.10 (4,000) 13.63
Outstanding at end of year 729,411 $28.42 556,000 $24.12 411,500 $ 20.90
Exercisable at end of year 543,000 $24.19 389,500 $21.23 246,500 $17.33
The grant price of all options is equal to the fair
market value of S&T common stock at the grant date.
48
The following table summarizes the range of exercise
prices at December 31:
[CAPTION]
1997 1996 1995
Contractual Contractual Contractual
Remaining Remaining Remaining
Shares Excercise Life Shares Excercise Life Shares Excercise Life
Outstanding Price (Years) Outstanding Price (Years) Outstanding Price (Year)
1992 40,000 $13.63 5 40,000 $13.63 5 54,000 $13.63 5
1993 62,000 17.25 6 64,000 17.25 6 70,000 17.25 6
1994 113,500 19.00 7 120,500 19.00 7 122,500 19.00 7
1995 162,000 26.25 8 165,000 26.25 8 165,000 26.25 8
1996 165,500 30.88 9 166,500 30.88 9 _ _ _
1997 186,411 40.75 10 _ _ _ _ _ _
Total 729,411 $28.42 8.2 556,000 $24.12 7.6 411,500 $20.90 7.0
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. (Disclosure is not
required for options granted prior to 1995). The
estimated fair value of the options is amortized to
expense over the option and 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 1997 and 1996,
respectively: risk-free interest rates of 5.77%
and 6.12%; a dividend yield of 3.0%; volatility
factors of the expected market price of S&T's
common stock of 0.182 and 0.161; a weighted-average
expected life of five years.
1997 1996 1995
[CAPTION]
(dollars in thousands except per share data)
Proforma net income-Basic $32,845 $27,741 $24,807
Proforma earnings per share_Basic 2.32 1.97 1.74
Proforma earnings per share_Diluted 2.30 1.95 1.73
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.
Chase Mellon Shareholder Services, the plan administrator
and transfer agent, purchases the shares on the open
market to fulfill the Plan's needs.
49
Note Q
S&T Bancorp, Inc. (parent company only)
Condensed Financial Information
[CAPTION]
Balance Sheets at December 31:
1997 1996
(dollars in thousands)
Assets
Cash $ 19 $ 2,526
Investments in:
Bank subsidiary 169,281 157,603
Nonbank subsidiaries 95,198 68,995
Total Assets $264,498 $229,124
Liabilities
Dividends payable $ 4,243 $ 2,769
Other borrowed funds 130 230
Other liabilities 7 7
Total Liabilities 4,380 3,006
Total Shareholders' Equity 260,118 226,118
Total Liabilities and Shareholders' Equity $264,498 $229,124
Statements of Income for the year ended December 31:
1997 1996 1995
(dollars in thousands)
Dividends from bank subsidiary $15,689 $ 11,835 $ 9,204
Investment income 60 64 38
Income before equity in undistrib-
uted net income of subsidiaries 15,749 11,899 9,242
Equity in undistributed net income of:
Bank subsidiary 13,316 11,949 12,239
Nonbank subsidiaries 4,349 4,393 3,361
Net Income $33,414 $ 28,241 $ 24,842
50
Statements of Cash Flows for the year ended December 31:
1997 1996 1995
(dollars in thousands)
Operating Activities
Net Income $33,414 $28,241 $24,842
Equity in undistributed
net income of subsidiaries (19,640) (17,102) (15,602)
Change in other assets/liabilities (408) (445)
Total Provided by Operating
Activities 13,774 10,731 8,795
Investing Activities
Distributions (to) from bank
subsidiaries (2,914) 7,100 550
Total Used in Investing Activities (2,914) 7,100 550
Financing Activities
Dividends (14,215) (10,667) (8,757)
Sale (acquisition) of treasury
stock 848 (4,911) (408)
Total Used in Financing Activities (13,367) (15,578) (9,165)
(Decrease) increase in Cash (2,507) 2,253 180
Cash at Beginning of Year 2,526 273 93
Cash at End of Year $ 19 $ 2,526 $ 273
Note R
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 the 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,
1997 and 1996, S&T meets all capital adequacy requirements
to which it is subject.
51
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 forth in the table below:
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, 1997:
Total Capital $235,825 18.22% $103,538 8.00% $129,422 10.00%
(to Risk Weighted Assets)
Tier I Capital 219,594 16.97 51,769 4.00 77,653 6.00
(to Risk Weighted Assets)
Tier I Capital 219,594 11.70 75,094 4.00 93,867 5.00
(to Average Assets)
As of December 31, 1996:
Total Capital 215,699 18.01 95,832 8.00 119,790 10.00
(to Risk Weighted Assets)
Tier I Capital 200,921 16.77 47,916 4.00 71,874 6.00
(to Risk Weighted Assets)
Tier I Capital 200,921 11.45 70,216 4.00 87,770 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, 1997, S&T Bank's Tier I and
Total capital ratios were 13.12% and 14.37%,
respectively, and Tier I capital to average assets was
9.24%. At December 31, 1996, S&T Bank's Tier I and
Total capital ratios were 14.8% and 16.04%, respectively,
and Tier I capital to average assets was 10.17%.
52
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, 1997 and 1996, 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, 1997. 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 did not audit the 1996 and 1995
financial statements of Peoples Bank of Unity which statements
reflect total assets constituting 16.0% of the related
consolidated totals as of December 31, 1996, and net interest
income constituting 18.4% of the related consolidated totals
for each of the years ended December 31, 1996 and 1995. Those
statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion, insofar
as it relates to data included for Peoples Bank of Unity,
is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. 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, based on our audits and the reports
of other auditors, 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, 1997 and 1996 and the consolidated results of
their operations and their cash flows for each of three years
in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/Ernst & Young LLP
Pittsburgh, Pennsylvania
January 16, 1998
53
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 1997 and 1996 are as follows and are based
upon information obtained from Nasdaq. As of the close of
business January 19, 1998, there were 3,004 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.'s common stock.
Price Range of Common Stock
1997 Low High Cash Dividends Declared
Fourth Quarter $38.50 $44.50 $0.30
Third Quarter 33.25 38.75 0.28
Second Quarter 29.50 36.88 0.28
First Quarter 29.75 36.75 0.25
1996
Fourth Quarter $30.00 $31.75 $0.25
Third Quarter 29.75 31.50 0.24
Second Quarter 29.50 31.00 0.24
First Quarter 28.00 30.75 0.21
Selected Financial Data
Year Ended December 31: 1997 1996 1995 1994 1993
(dollars in thousands,
except per share data)
Income Statement
Interest income $141,101 $132,442 $127,020 $112,559 $107,147
Interest expense 62,284 58,589 57,677 46,643 44,444
Provisions for loan losses 5,000 5,175 4,220 3,600 3,665
Net interest income after
provision for loan losses 73,817 68,678 65,123 62,316 59,038
Noninterest income 16,441 11,997 9,147 7,611 7,136
Noninterest expense 43,198 42,398 40,276 38,679 37,129
Income before income taxes 47,060 38,277 33,994 31,248 29,045
Applicable income taxes 13,646 10,036 9,152 8,276 7,631
Net income $ 33,414 $ 28,241 $ 24,842 $ 22,972 $ 21,414
Per share data
Net income-Basic $ 2.36 $ 2.00 $ 1.74 $ 1.60 $ 1.50
Net income-Diluted 2.34 1.99 1.73 1.59 1.49
Dividends declared 1.11 0.94 0.74 0.61 0.50
Book value 18.39 16.02 14.99 12.78 11.07
54
Selected Financial Data
Quarterly Selected Financial Data
S&T Bancorp, Inc. and Subsidiaries
Selected Financial Data
Balance Sheet Totals (period end):
[CAPTION]
Year Ended December 31: 1997 1996 1995 1994 1993
(dollars in thousands)
Total assets $1,920,291 $1,787,045 $1,689,728 $1,580,252 $1,487,528
Securities 568,220 500,061 492,236 466,875 509,960
Net loans 1,253,326 1,181,407 1,086,317 1,011,165 876,961
Total deposits 1,284,658 1,270,367 1,216,547 1,142,571 1,151,926
Securities sold under
repurchase agreements 170,124 114,205 122,794 169,871 127,731
Other liabilities 205,391 176,355 136,333 84,974 49,681
Total shareholders' equity 260,118 226,118 214,054 182,836 158,190
Quarterly Selected Financial Data
[CAPTION]
1997 1996
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 Statement:
Interest income $ 36,412 $ 35,488 $ 34,808 $ 34,391 $ 33,944 $ 33,548 $ 32,730 $ 32,216
Interest expense 16,465 15,748 15,034 15,037 15,025 14,792 14,384 14,390
Provision for loan
losses 1,900 750 800 1,550 1,300 1,225 1,600 1,050
Net interest income
after provision for
loan losses 18,047 18,990 18,974 17,804 17,619 17,531 16,746 16,776
Noninterest income 4,725 3,224 4,473 4,020 3,000 3,231 2,881 2,874
Noninterest expense 10,605 9,991 11,655 10,946 11,184 10,929 10,035 10,234
Income before income
taxes 12,167 12,223 11,792 10,878 9,435 9,833 9,592 9,416
Applicable income
taxes 3,456 3,575 3,478 3,137 2,500 2,586 2,471 2,479
Net income $ 8,711 $ 8,648 $ 8,314 $ 7,741 $ 6,935 $ 7,247 $ 7,121 $ 6,937
Per Share Data
Net income_Basic $ 0.62 $ 0.61 $ 0.59 $ 0.55 $ 0.49 $ 0.51 $ 0.51 $ 0.49
Net income_Diluted 0.61 0.60 0.58 0.54 0.49 0.51 0.50 0.48
Dividends declared 0.30 0.28 0.28 0.25 0.25 0.24 0.24 0.21
Book value 18.39 17.69 16.89 16.19 16.02 15.47 14.95 14.88
Average Balance Sheet Totals
Total assets $1,877,348 $1,815,999 $1,774,740 $1,784,502 $1,754,003 $1,721,004 $1,695,540 $1,676,964
Securities 484,187 436,882 419,737 449,542 453,793 471,898 471,753 456,922
Net loans 1,241,063 1,227,670 1,200,365 1,192,592 1,160,182 1,120,897 1,089,873 1,081,246
Total deposits 1,286,784 1,291,130 1,254,535 1,244,384 1,250,372 1,239,645 1,223,706 1,202,593
Securities sold under
repurchase agreements 136,540 114,583 127,487 127,346 134,260 143,382 136,539 126,536
Other liabilities 196,308 162,738 155,884 179,736 142,584 122,253 123,146 131,663
Total shareholders'
equity 257,715 247,548 236,834 232,245 226,497 215,725 212,147 216,166
55