SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period to
Commission file number 0-12508
S&T BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1434426
(State or other jurisdiction (I.R.S.EMPLOYER
incorporation or organization) Identification No.)
800 Philadelphia Street, Indiana, PA 15701
(Address of principal executive offices) (Zip Code)
(724) 349-2900
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $2.50 Par Value -- 13,868,354 shares as of April 22, 1998
1
INDEX
S&T BANCORP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed consolidated balance sheets - March 31, 1998
and December 31, 1997 3
Condensed consolidated statements of income - Three months
ended March 31, 1998 and 1997 4
Condensed consolidated statements of cash flows - Three months
ended March 31, 1998 and 1997 5
Notes to condensed consolidated financial statements 6-9
Item 2. Management's discussion and analysis of financial condition
and results of operations 10-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(000's omitted except share data)
ASSETS
Cash and due from banks $51,910 $35,951
Interest-earning deposits with banks 105 102
Securities:
Available for sale 580,120 521,117
Held to maturity (market value $36,968
in 1998 and $48,101 in 1997) 36,070 47,103
Total Securities 616,190 568,220
Loans, net of allowance for loan
losses of $21,734 in 1998 and 1,269,079 1,253,326
$20,427 in 1997
Premises and equipment 20,841 20,613
Other assets 43,999 42,079
TOTAL ASSETS $2,002,124 $1,920,291
LIABILITIES
Deposits:
Noninterest-bearing $182,329 $165,727
Interest-bearing 1,137,245 1,118,931
Total deposits 1,319,574 1,284,658
Securities sold under repurchase 210,527 170,124
agreements
Federal funds purchased 22,850 9,325
Long-term borrowings 144,218 144,218
Other borrowed funds 130 130
Other liabilities 53,502 51,718
TOTAL LIABILITIES 1,750,801 1,660,173
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 1998
and 1997
Issued-14,857,019 shares in 1998 37,142 37,142
and 1997
Additional paid-in capital 20,909 19,369
Retained earnings 180,788 175,707
Accumulated other comprehensive income 43,204 40,524
Treasury stock (989,165 shares at
March 31, 1998 and 715,864 at
December 31, 1997, at cost) (30,590) (12,494)
Deferred compensation (130) (130)
TOTAL SHAREHOLDERS' EQUITY 251,323 260,118
TOTAL LIABILITIES AND SHAREHOLDERS' EQUTIY $2,002,124 $1,920,291
See Notes to Condensed Consolidated Financial Statements
3
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For The Three Months Ended
March 31,
1998 1997
(000's omitted except per share data)
INTEREST INCOME
Loans, including fees $28,061 $26,265
Deposits with banks 2 2
Federal funds sold 64 131
Investment securities:
Taxable 7,721 6,597
Tax-exempt 485 610
Dividends 839 786
Total Interest Income 37,172 34,391
INTEREST EXPENSE
Deposits 12,153 11,419
Securities sold under repurchase 2,292 1,616
agreements
Federal funds purchased 154 175
Long term borrowings 2,231 1,817
Other borrowed funds 2 10
Total Interest Expense 16,832 15,037
NET INTEREST INCOME 20,340 19,354
Provision for loan losses 2,050 1,550
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,290 17,804
NONINTEREST INCOME
Service charges on deposit accounts 1,260 1,053
Trust fees 870 632
Security gains, net 2,317 1,501
Other 999 833
Total Noninterest Income 5,446 4,019
NONINTEREST EXPENSE
Salaries and employee benefits 5,670 5,708
Occupancy, net 685 703
Furniture and equipment 745 736
Other taxes 356 321
Data processing 512 487
FDIC assessment 55 56
Other 2,563 2,935
Total Noninterest Expense 10,586 10,945
INCOME BEFORE INCOME TAXES 13,150 10,878
Applicable income taxes 3,909 3,137
NET INCOME $9,241 $7,741
PER COMMON SHARE
Net Income - Basic $0.66 $0.55
Net Income - Diluted 0.65 0.54
Dividends Declared 0.30 0.25
Average Common Shares Outstanding 14,038 14,124
See Notes to Condensed Consolidated Financial Statements
4
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31
1998 1997
(000's omitted)
Operating Activities
Net Income $9,241 $7,741
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,050 1,550
Provision for depreciation and amortization 520 506
Net amortizaton of investment security premiums 145 123
Deferred income taxes (443) (239)
Security gains, net (2,317) (1,501)
Increase in interest receivable (1,149) (840)
Increase (decrease) in interest payable 577 (99)
(Increase) decrease in other assets (493) 553
Decrease in other liabilities 11 3,196
Net Cash Provided by Operating Activities 8,142 10,990
Investing Activities
Net (increase) decrease in interest-earning deposits (3) 5
with banks
Net (increase) in federal funds sold 0 (14,090)
Proceeds from maturities of investment securities 11,047 2,386
Proceeds from maturities of securities available 51,589 17,389
for sale
Proceeds from sales of securities available 5,191 21,978
for sale
Purchases of securities available for sale (109,503) (21,482)
Net (increase) in loans (18,752) (19,167)
Proceeds from sale of loans 949 3,086
Purchases of premises and equipment (748) (599)
Net Cash Used by Investing Activities (60,230) (10,494)
Financing Activities
Net increase in demand, NOW and savings deposits 33,477 1,850
Net increase (decrease) in certificates of deposit 1,439 (23,504)
Net increase in federal funds purchased 13,525 24,125
Net increase in repurchase agreements 40,403 30,031
Decrease in obligation under capital lease 0 (79)
Repayments from FHLB long-term borrowings 0 (25,000)
Acquisition of treasury stock (21,541) 0
Excercise of stock options and related tax benefit 4,985 607
Cash dividends paid to shareholders (4,241) (2,779)
Net Cash Used by Financing Activities 68,047 5,251
Decrease in Cash and Cash Equivalents 15,959 5,747
Cash and Cash Equivalents at Beginning of Period 35,951 40,710
Cash and Cash Equivalents at End of Period $51,910 $46,457
See Notes to Condensed Consolidated Financial Statements
5
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results
for the three month period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the annual report on
Form 10-K for the year ended December 31, 1997.
Basic earnings per share is calculated by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. Options, warrants and other potentially dilutive securities are
excluded from the basic calculation, but are included in diluted earnings per
share. Average shares outstanding for computing basic earnings per share were
14,038,321 and 14,124,341 for the period ending March 31, 1998 and 1997.
Average shares outstanding for computing dilutive earnings per share were
14,189,885 and 14,283,194 for the period ending March 31, 1998 and 1997. In
computing dilutive earnings per share, average shares outstanding have been
increased by the common stock equivalents relating to S&T's available
stock options.
As of January 1, 1998, S&T adopted Statement 130, Reporting Comprehensive
Income. Statement 130 establishes new rules for the reporting and display
of comprehensive income and its components; however, the adoption of this
Statement had no impact on S&T's net income or shareholders' equity.
Statement 130 requires unrealized gains or losses on S&T's available-for-
sale securities, which prior to adoption were reported seperately in share-
holders' equity to be included in comprehensive income. Prior period financial
statements have been reclassified to conform to the requirements of Statement
130. During the first quarter of 1998 and 1997, total comprehensive income
amounted to $11,921,000 and $5,508,000.
NOTE B--SECURITIES
The amortized cost and estimated market value of securities as of March 31
are as follows:
1998 Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
Obligations of U.S. government
corporations and agencies $396,875 $2,662 ($326) $399,211
Mortgage-backed securities 13,097 346 13,443
U.S. treasury securities 35,003 1,341 36,344
Corporate securities 10,845 239 11,084
Debt securities available 455,820 4,588 (326) 460,082
for sale
Marketable equity securities 42,450 62,383 (179) 104,654
Other securities 15,384 15,384
Total $513,654 $66,971 ($505) $580,120
1998 Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
Obligations of states and
political subdivisions $32,377 $699 ($1) $33,075
Corporate securities 1,998 200 2,198
Debt securities held to 34,375 899 (1) 35,273
maturity
Other securities 1,695 1,695
Total $36,070 $899 ($1) $36,968
6
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Continued
NOTE B-SECURITIES
The amortized cost and estimated market value of securities as of December 31
are as follows:
1997 Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
Obligations of U.S. government
corporations and agencies $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 401,916 4,646 (195) 406,367
for sale
Marketable equity securities 43,745 58,060 (166) 101,639
Other securities 13,111 13,111
Total $458,772 $62,706 ($361) $521,117
1997 Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
Obligations of states and
political subdivisions $37,497 $794 ($5) $38,286
Corporate securities 1,998 209 2,207
Debt securities held to 39,495 1,003 (5) 40,493
maturity
Other securities 7,608 7,608
Total $47,103 $1,003 ($5) $48,101
During the period ended March 31, 1998, there were $2,316,756 in realized
gains relative to securities available for sale.
The amortized cost and estimated market value of debt securities at
March 31, 1998, by contractual maturity, are shown below.
Estimated
Amortized Market
Available for Sale Cost Value
(000's omitted)
Due in one year or less $22,439 $22,605
Due after one year through five years 172,053 173,409
Due after five years through ten years 253,738 256,265
Due after ten years 7,590 7,803
Total $455,820 $460,082
7
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Continued
NOTE B-SECURITIES
Estimated
Amortized Market
Held to Maturity Cost Value
(000's omitted)
Due in one year or less $6,464 $6,501
Due after one year through five years 16,686 17,162
Due after five years through ten years 9,140 9,443
Due after ten years 2,085 2,167
Total $34,375 $35,273
At March 31, 1998 and December 31, 1997 investment securities with a principal
amount of $303,059,000 and $274,350,000 respectively, were pledged to secure
repurchase agreements and public and trust fund deposits.
NOTE C--LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio was as follows:
March 31, 1998 December 31, 1997
(000's omitted)
Real estate-construction $53,317 $47,967
Real estate-mortgages:
Residential 502,998 512,417
Commercial 340,817 327,384
Commercial-industrial and agricultural 269,760 255,017
Consumer installment 123,921 130,968
Gross Loans 1,290,813 1,273,753
Allowance for loan losses (21,734) (20,427)
Net Loans $1,269,079 1,253,326
Changes in the allowance for loan losses for the three months ended
March 31 were as follows:
1998 1997
(000's omitted)
Balance at beginning of period $20,427 $18,729
Charge-offs (1,166) (537)
Recoveries 423 208
Net charge-offs (743) (329)
Provision for loan losses 2,050 1,550
Balance at end of period $21,734 $19,950
8
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Continued
The following table represents S&T's investment in loans considered to be
impaired and related information on those impaired loans at March 31, 1998
and December 31, 1997.
1998 1997
Recorded investment in loans considered to be impaired $5,126,213 $1,869,000
Loans considered to be impaired that were on a
nonaccrual basis - -
Allowance for loan losses related to loans considered
to be impaired 808,000 914,000
Average recorded investment in impaired loans 3,497,607 6,329,000
Total interest income recognized on impaired loans 219,246 656,000
Interest income on impaired loans recognized on a
cash basis - -
NOTE D--FINANCIAL INSTRUMENTS
S&T, in the normal course of business, commits to extend credit and issue
standby letters of credit. The obligations are not recorded in S&T's
financial statements. Loan commitments and standby letters of credit are
subject to 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 agreement equals the notional amount of the
obligation less the value of any collateral. Unfunded loan committments
totaled $319,856,000 and obligations under standby letters of credit totaled
$59,444,000 at March 31, 1998.
At March 31, 1998, S&T had marketable equity securities, totaling $1,786,406
at amortized cost and $3,652,588 at estimated market value, that were subject
to covered call option contracts. The purpose of these contracts was to
generate fee income for S&T.
NOTE E - LITIGATION
S&T, in the normal course of business, is subject to various legal
proceedings in which claims for monetary damages are asserted. No material
losses are anticipated by management as a result of these legal proceedings.
9
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is presented so
that shareholders may review in further detail the
financial condition and results of operations of S&T
Bancorp, Inc. and subsidiaries (S&T). This discussion
and analysis should be read in conjunction with the
condensed consolidated financial statements and the
selected financial data presented elsewhere in this
report. All prior period amounts have been restated
to reflect the pooling of interest transaction with
Peoples Bank of Unity (Peoples) which closed on May 2,
1997
Financial Condition
Total assets averaged $1.9 billion in the first three
months of 1998, a $132.5 million increase from the
1997 full year average. Average loans increased $47.2
million and average securities and federal funds
increased $64.1 million in the first three months of
1998 compared to the 1997 full year averages. Funding
for this loan and security growth was primarily
provided by a $23.3 million increase in average
deposits, a $16.1 million increase in average retained
earnings and a $86.8 million increase in average
borrowings.
Lending Activity
Total loans at March 31, 1998 were $1.3 billion, a
$17.1 million or 1.3% increase from December 31, 1997.
Average loans increased $47.2 million, or 4% to $1.3
billion for the three months ended March 31, 1998 from
the 1997 full year average. Changes in the
composition of the loan portfolio during 1998 included
increases of $14.7 million of commercial loans, $18.3
million of commercial real estate loans, offset by a
decrease of $8.9 million of residential mortgages and
and $7.0 million of installment loans.
Commercial real estate loans comprise 26% of the loan
portfolio. Although real estate loans can be an area
of higher risk, management believes these risks are
mitigated by limiting the percentage amount of
portfolio composition, a rigorous underwriting review
by loan administration and the fact that many of the
commercial real estate loans are owner-occupied and/or
seasoned properties that were refinanced
from other banks.
Residential mortgage lending continued to be a
strategic area of focus during the first three months
of 1998 through a centralized mortgage origination
department, ongoing product redesign, the
utilization of commission compensated originators
and the implementation of a mortgage banking function.
Management believes that if a downturn in the local
residential real estate market occurs, the impact of
declining values on the real estate loan portfolio
will be negligible because of S&T's conservative
mortgage lending policies. These policies generally
require, for portfolio loans, maximum term of twenty
years for fixed rate mortgages and private mortgage
insurance for loans with less than a 20% down payment.
At March 31, 1998 the residential mortgage portfolio
had a 26% composition of adjustable rate mortgages.
Beginning in the fourth quarter of 1997, S&T sold $12.7 million
of long-term, lower-yielding 1-4 family mortgages,
acquired from the Peoples merger, to the Federal National
Mortgage Association (FNMA). S&T retained ongoing servicing
rights on the mortgages 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. S&T will continue
to sell loans to FNMA in the future on a selective basis,
especially during periods of lower interest rates.
Installment loan decreases are primarily associated
with significantly lower volumes in the indirect auto
loan category. Pricing pressures have been unusually
intense in the indirect market during the last two
years 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 $4.3 million of outstanding auto leases.
Installment loans have also decreased due to recent
changes in government regulations which have
significantly decreased the profit potential of
10
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
guaranteed student loans. 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%.
The residential, first lien, mortgage loan to value
policy guideline is 80%. Higher loan to value loans
can be approved with the appropriate private mortgage
insurance coverage. Second lien positions are
sometimes incurred with home equity loans, but
normally only to the extent that the combined credit
exposure for both first and second liens do not exceed
100% of loan to value.
A variety of unsecured and secured installment loan
and credit card products are offered by S&T. However,
the bulk of the consumer loan 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 increased $69.0 million in the
first three months of 1998 compared to the 1997 full
year average. The increase in the average investment
portfolio was related to an increase in average
taxable securities of $76.0 million, offset by a
decrease in tax-exempt state and municipal securities
average balances of $7.0 million. This increase was
comprised of $78.9 million in U.S. government agency
securities, $2.2 million of mortgage-backed
securities, $0.5 million of corporate securities and
$3.8 million of Federal Home Loan Bank (FHLB) stock.
Offsetting these increases were average decreases of
$9.4 million of U.S. treasury securities.
During 1998 S&T purchased $105.2 million of intermediate-
term U.S. government agency securities classified as
available for sale. These purchases were made as part
of a balance sheet leveraging strategy to maximize net
interest income by taking advantage of low, short-
term funding rates. Proceeds from the sale of available
for sale securities were $5.2 million, including
equity securities sales of $3.2 million which 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 1998, the
equity portfolio yielded 11.0% on a fully taxable
equivalent basis and had unrealized gains net of
nominal unrealized losses, of $62.2 million. The
equity securities portfolio consists of securities
traded on the various stock markets and are subject to
change in market value. The FHLB capital stock is a
membership and borrowing requirement and is acquired
and sold at stated value.
11
S&T BANCORP , INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
S&T's policy for security classification included U.S.
treasuries, U.S. government agencies, mortgage-backed
securities, CMOs and corporate equities as available
for sale. Municipal securities and other debt
securities are classified as held to maturity. At
March 31, 1998, unrealized gains, net of unrealized
losses for securities classified as available for sale
were $66.5 million.
Allowance for Loan Losses
The allowance for loan losses increased to $21.7
million or 1.68% of total loans at March 31, 1998, as
compared to $20.4 million or 1.60% of total loans at
December 31, 1997. The adequacy of the allowance for
loan losses is determined by management through
evaluation of the loss potential on individual
nonperforming, delinquent and high-dollar loans,
review of economic conditions and business trends,
historical loss experience, growth and composition of
the loan portfolio as well as other relevant factors.
The balance of nonperforming loans at March 31, 1998,
which includes nonaccrual loans past due 90 days or
more, was $3.2 million, or 0.25% of total loans. This
compares to nonperforming loans of $3.6 million or
0.28% of total loans at December 31, 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.
Deposits
Average total deposits increased by $23.3 million, or
2% for the three months ended March 31, 1998 as
compared to the 1997 average. Changes in the average
deposit mix included a $9.6 million increase in time
deposits, $22.2 million increase in money market
accounts and a $5.6 million increase in demand
accounts, offset by a $12.4 million decrease in
savings accounts and a $1.7 million decrease in NOW
accounts.
Special rate deposits of $100 thousand and over were
7% of total deposits at March 31, 1998 and December
31, 1997 and primarily represent deposit relationships
with local customers in our market area. Retail time
deposit increases of $9.6 million were the result of
expanded promotional programs.
During the second half of 1995, S&T issued $25.0
million of retail certificates of deposits through two
brokerage firms, further broadening the availability
of reasonably priced deposit funds. At March 31,
1998, there were $26.6 million of these brokered
retail certificates of deposits outstanding. Money
market accounts were recently repriced in order to be
more competitive with money funds offered by brokerage
firms. As a result of this repricing and proactive
sales activities to high-balance deposit customers,
S&T has experienced a significant shift in funds from
savings to money market accounts. Although this
strategy tends to increase cost of funds, management
believes it is necessary for customer retention and
the development of long-term relationships.
The decrease in NOW balances is attributable to the
implementation of a NOW/money market sweep product on
the accounts acquired from Peoples that reduces the
amount of Federal Reserve Requirements.
Management believes that the S&T deposit base is
stable and that S&T has the ability to attract new
deposits, mitigating a funding dependency on volatile
liabilities. In addition, S&T has the ability to
access both public and private markets to raise
long-term funding if necessary.
12
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Borrowings
Average borrowings increased $86.8 million for the
three months ended March 31, 1998 compared to the 1997
annual average and were comprised of retail repurchase
agreements (REPO's), wholesale REPO's, federal funds
purchased and long-term borrowings. S&T defines
repurchase agreements with its local, retail customers
as retail REPOS; wholesale REPOS are those transacted
with other banks and brokerage firms with terms
normally ranging from 1 to 14 days.
The average balance in retail REPOS increased
approximately $7.1 million for the first three months
of 1998 compared to the full year 1997 average.
This increase is primarily attributable to new REPO
sweep relationships in our cash management department.
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 increased $40.4
million for the first three months of 1998 compared to
the full year 1997 average. The aforementioned
balance sheet leveraging strategy has increased the
usage of wholesale REPO fundings in 1998.
Average long-term borrowings have increased $39.3
million in the first three months of 1998 as compared
to the full year 1997 average. At March 31, 1998, 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, fixed rate fundings for newly
originated loans, to mitigate the risk associated
with volatile liability fundings and to take advantage
of lower cost funds through the FHLB's Community
Investment Program.
Capital Resources
Shareholders' equity decreased $8.8 million at March
31, 1998, compared to December 31, 1997. Net income
was $9.2 million and dividends paid to shareholders
were $4.2 million for the three months ended March 31,
1998. The decrease is attributable to the conclusion
of the Modified Dutch Auction in which S&T repurchased
approximately 440,000 shares of its common stock.
During the first three months of 1998, S&T paid 46%
of net income in dividends, equating to an annual
dividend rate of $1.20 per share.
The book value of S&T's common stock decreased
slightly from $18.39 at December 31, 1997 to $18.12 at
March 31,1998, primarily due to the stock buy-backs
during the first quarter of 1998. Equity associated
with the available for sale securities portfolio
increased $2.3 million during the first three months
of 1998 due to stabilized interest rates and the
resulting increase in values of debt and equity
securities. The market price of S&T's common stock
was $55.38 per share at March 31, 1998, an increase
from $43.25 per share at December 31, 1997.
S&T continues to maintain a strong capital position
with a leverage ratio of 10.7% as compared to the
minimum regulatory guideline of 3.0%. S&T's risk-based
capital Tier I and Total ratios were 15.8% and 17.0%
respectively, at March 31, 1998. These ratios place
S&T well above the Federal Reserve Board's risk-based
capital guidelines of 4.0% and 8.0% for Tier I and
Total, respectively.
13
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OFOPERATIONS
RESULTS OF OPERATIONS
Three months ended March 31, 1998 compared to
Three months ended March 31, 1997
Net Income
Net income increased to $9.2 million or $0.65 per
diluted earnings per share in the first three months
of 1998 from $7.7 million or $0.54 per diluted
earnings per share for the same period of 1997. The
significant improvement during the three months of
1998 was the result of higher net interest income,
increased noninterest income, higher security gains
and reduced operating expenses due to the Peoples
merger related costs incurred in the first
quarter of 1997 and post merger restructurings.
Net Interest Income
On a fully taxable equivalent basis, net interest
income increased $0.9 million or 5% in the first three
months of 1998 compared to the same period of 1997.
The net yield on interest-earning assets was 4.70% in
the first three months of 1998 as compared to 4.91% in
the same period of 1997.
Net interest income was affected by a change in the
mix of funds as S&T implemented the aforementioned
balance sheet leveraging strategy. This balance sheet
leveraging strategy, combined with the first quarter
stock buy-backs from the Modified Dutch Tender Offer,
contributed to the 21 basis point decline in the net
yield on interest-earning assets. Net interest income,
was positively affected by the strategy and the growth
in loan and deposit volumes. The level and mix
of funds is continually monitored by ALCO in order to
mitigate the interest rate sensitivity and liquidity
risks of the balance sheet.
In the three months of 1998, average securities
increased $70.0, comprising most of the earning asset
growth, and average loans increased $47.2 million.
The yields on average securities increased by 32 basis
points during the period and the yield on average
loans increased by 5 basis points. The yield
increase for securities is a result of the
aforementioned balance sheet leveraging strategy.
Average interest bearing deposits provided $17.6
million of the funds for the growth in securities and
loans; cost of deposits totaled 4.38%, an increase of
5 basis points from 1997. The cost of REPOS and other
borrowed funds decreased 4 basis points to 5.49%.
More longer-term borrowings were utilized in 1998 in
order to take advantage of low, long-term funds rates
and to mitigate interest rate risk.
Also positively affecting net interest income was a
$6.8 million increase to average net free funds.
Average net free funds are the excess of demand
deposits, other non-interest bearing liabilities and
shareholders' equity over non-earning assets.
Maintaining consistent spreads between earning assets
and costing liabilities is very significant to S&T's
financial performance since net interest income
comprises 87% of operating revenue. A variety of
asset/liablity management strategies were successfully
implemented within prescribed ALCO risk parameters
that enabled S&T to maintain a net interest margin
consistent with historical levels.
Provision for Loan Losses
The provision for loan losses increased to $2.1
million for the first three months of 1998 as compared
to $1.6 million in the same period of 1997. The
increase was the result of management's assessment of
economic conditions, credit quality statistics, loan
administration effectiveness and other factors that
would have an impact on future probable losses in the
loan portfolio.
14
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Credit quality statistics are an important factor in
determining the amount of provision expense. Net loan
charge-offs totaled $0.7 million for the first three
months of 1998 compared to $0.3 million for the same
period 1997. Nonperforming loans to total loans was
0.25% at March 31, 1998 and 0.62% in the same period
of 1997.
Also affecting the amount of provision expense is loan
growth. Despite a $47.2 or 4% increase in average
loans, S&T's allowance for loan losses to total loans
remained relatively constant at 1.68% at March 31,
1998 compared to 1.64% at March 31, 1997.
Noninterest Income
Noninterest income increased $1.4 million or 35% in
the first three months of 1998 compared to the same
period of 1997. Increases included $0.2 million or
20% in service charges and fees, $0.2 million in trust
income, $0.8 million in security gains and $0.2
million in other income.
The increase in service charges on deposit accounts
was primarily the result of expanding new cash
management relationships and 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 trust fees is attributable to expanded
marketing efforts to develop new trust business and to
develop new relationships within the Allegheny County
market. 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 strategic
initiatives and product enhancements implemented in
order to expand this source of revenue.
Security gains were taken on available for sale
equities securities in the first three months of 1998
in order to maximize returns by taking advantage of
market opportunities when presented. Unrealized
gains, net of unrealized losses, in the available for
sale equities portfolio totaled $62.2 million at March
31, 1998.
Noninterest Expense
Noninterest expense decreased $0.4 million or 3% at
March 31, 1998 compared to March 31, 1997. The
decrease is primarily attributable to $0.4 million of
merger related and other nonrecurring expenses
associated with the acquisition of Peoples during the
first quarter of 1997, and reduction in
full-time-equivalent staff levels. Merger related and
other nonrecurring expenses included legal, accounting
and investment banker expenses.
Recurring expenses were relatively flat during the
first quarter of 1998 as compared to the first quarter
of 1997. Average full-time equivalent staff decreased
from 673 to 652. Severance and early retirement
programs were implemented in May 1997 in order to
eliminate duplicate positions following post merger
restructuring and consolidation of operations. 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,
improved to 43.64% at March 31, 1998 as compared to
46.63% at March 31, 1997.
Federal Income Taxes
Federal income tax expense increased $0.8 million at
March 31, 1998 as compared to March 31, 1997
primarily as a result of higher pre-tax income in
1998. The effective tax rate for the first three
months of 1998 was 30% and 29% during the same period of
1997, which is below the 35% statutory rate due to
benefits resulting from tax-exempt interest,
excludable dividend income and low income housing
tax credits (LIHTC).
15
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 and customers 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 estimated the total cost of the project to be
$250,000 and 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.
Safe Harbor "Statement under the Private Securities
Litigation Reform Act of 1995"
The statements in this Form 10-Q 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 pricing, and other risks
detailed in S&T's Securities and Exchange Commission
filings.
16
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
S&T Bancorp, Inc.
(Registrant)
Date: May 13, 1998
/S/ Robert E. Rout
(Senior Vice President and
Chief Financial Offiicer)
18