Management's Discussion and Analysis of
Financial Condition and Results of Operations
S&T Bancorp, Inc. and Subsidiaries
Financial Condition
The $160.2 million growth of average earning assets in 1998 was
primarily the result of an excellent lending year for S&T
Bancorp, Inc. (S&T), combined with increases in the investment
portfolio to maximize net interest income by taking advantage of
low, short-term funding rates and investing in U.S. government
agency securities. Average loan balances increased by $80.3
million during 1998 and average securities and federal funds
increased $79.9 million during 1998. The bulk of funding for this
loan and security growth was provided by a $57.2 million increase
in average deposits, a $12.9 million increase in average earnings
retained and a $105.3 million increase in average borrowings.
1998 1997
Loan Loan
Loan Balance Loan Balance
Loan Portfolio (in millions) Balance Percentage Balance Percentage
Commercial, Mortgage and
Industrial $ 760.0 56% $ 630.4 50%
Residential Real Estate
Mortgage 492.6 36 512.4 40
Installment 113.3 8 131.0 10
Total Loans $1,365.9 100% $1,273.8 100%
Lending Activity
Total loans at December 31, 1998 were $1.4 billion, a $92.1
million or 7.2% increase from December 31, 1997. Increases in
average loans for 1998 and 1997 were $80.3 million and $103.5
million, respectively.
Changes in the composition of the loan portfolio during 1998
included increases of $129.6 million of commercial loans offset
by decreases of $19.8 million of residential mortgages and a
$17.7 million decrease in installment loans. Composition changes
include decreases from the effects of $10.9 million of 1-4 family
mortgage loans and $15.2 million of commercial loans that were
sold or participated in 1998.
Commercial loans currently comprise 56% of the loan portfolio.
Although commercial loans can be an area of higher risk,
management believes these risks are properly managed by limiting
the percentage amount of portfolio composition, a rigorous
underwriting review by loan administration and the fact that many
of the commercial loans are secured by real estate and are owner
occupied.
Residential mortgage lending continued to be a strategic focus
for 1998 through the establishment of a centralized mortgage
origination department, product redesign, secondary market
activities and the utilization of commission compensated
originators. Management believes that if a downturn in the local
residential real estate market occurs, the impact of declining
values on the residential real estate loan portfolio will be
properly managed because of S&T's conservative mortgage lending
policies for portfolio loans which generally require a maximum
term of 20 years for fixed rate mortgages, 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 23% of the residential mortgage portfolio in 1998.
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. During 1998, S&T sold $10.9
million of 1-4 family mortgages to FNMA. Fees and gains from
mortgage servicing activities were $0.3 million in 1998. S&T will
continue to sell longer-term 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.
During the fourth quarter of 1998, S&T exited the indirect
automobile business. Pricing pressures were unusually intense in
the indirect market during 1998 and 1997, and the decision was
made to deploy investable funds and staff resources into other,
higher yielding and lower risk earning assets. Installment loans
have also decreased due to recent changes in government
regulations which have significantly decreased the profit
potential of guaranteed student loans. The remaining student loan
portfolio of $7.0 million was sold in 1997. 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.
PAGE 21
Rates and terms for commercial real estate and equipment loans
normally are negotiated, subject to such variables as economic
conditions, marketability of collateral, credit history of the
borrower and future cash flows. The loan to value policy
guideline for commercial real estate loans is generally 75%.
Residential, first lien, mortgage loan to value policy guideline
is 80%. Higher loan to value loans can be approved with the
appropriate private mortgage insurance coverage. Second lien
positions are sometimes incurred with home equity loans, but
normally only to the extent that the combined credit exposure for
both first and second liens does not exceed 100% loan to value.
A variety of unsecured and secured installment loan and credit
card products 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 were 90%-125% of invoice for new
automobiles and 100%-125% of "Black Book" value for used
automobiles. As noted previously, S&T exited the indirect
automobile business in the fourth quarter of 1998 and will allow
the remaining portfolio of $33.7 million to amortize through
normal payments and payoffs.
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 $83.8 million in 1998 and decreased
$16.0 million in 1997. The 1998 increase is due to increasing the
investment portfolio to maximize net interest income by taking
advantage of low, short-term funding rates and investing in U.S.
government agency securities, classified as available for sale.
Interest rate risk associated with this strategy is managed and
monitored through S&T's Asset Liability Committee (ALCO). 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 largest components of the 1998 increase included $98.9
million of U.S. government agency securities, $3.4 million in
other corporate securities, $3.5 million in corporate equities
and $4.8 million in Federal Home Loan Bank (FHLB) stock. The FHLB
stock is a membership and borrowing requirement. Offsetting these
increases are decreases of $13.2 million in U.S. treasury
securities, $0.2 million in mortgage-backed securities and $13.4
million in tax-exempt state and municipal securities.
During 1998, S&T sold $20.3 million of equity securities
classified as available for sale. The sales were made in order to
maximize returns when market opportunities are presented.
Additionally, S&T may receive an exchange of shares relative to a
merger; gains and losses are recognized on shares held of
acquired institutions in accordance with Emerging Issues Task
Force #91-5, Nonmonetary Exchange of Cost-Method Investments
(EITF 91-5). The equity securities portfolio is primarily
comprised of bank holding companies, as well as preferred and
utility stocks to take advantage of the dividends received
deduction for corporations. During 1998, the equity portfolio
yielded 10.2% on a fully taxable equivalent basis and had
unrealized gains at December 31, 1998, net of nominal unrealized
losses, of $55.1 million.
S&T's policy for security classification includes U.S.
treasuries, U.S. government agencies, 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, 1998, unrealized gains, net of
nominal unrealized losses, for securities classified as available
for sale were approximately $61.5 million.
Nonearning Assets
Average nonearning assets increased $5.8 million in 1998 and $2.0
million in 1997. The 1998 and 1997 increases can be primarily
attributed to an increase in cash and due from and in accrued
interest receivable on a higher earning asset balance. Cash and
due from growth is primarily related to increased federal reserve
requirements and check clearing balances resulting from demand
deposit growth and higher level of cash management activities for
customers.
Allowance for Loan Losses
The year-end balance in the allowance for loan losses increased
to $26.7 million or 1.95% of total loans at December 31, 1998 as
compared to $20.4 million or 1.60% of total loans at December 31,
1997.
PAGE 22
1998 1997
Loan Loan
Allowance Balance Allowance Balance
Allowance for Loan Loss Balance Percentage Balance Percentage
(in millions)
Commercial, Mortgage and
Industrial $16.9 56% $13.5 50%
Residential Real Estate
Mortgage 1.1 36 0.8 40
Installment 2.6 8 1.9 10
Unallocated 6.1 - 4.2 -
Total Allowance for Loan
Losses $26.7 100% $20.4 100%
The adequacy of the allowance for loan losses is determined by
management through evaluation of the loss potential on individual
nonperforming, delinquent and high-dollar loans; review of
economic conditions and business trends; historical loss
experience; and growth and composition of the loan portfolio, as
well as other relevant factors.
A quantitative analysis is utilized to support the adequacy of
the allowance for loan losses. This analysis includes review of
the high and low historical charge-off rates for loan categories,
fluctuations and trends in the amount of classified loans and
economic factors. Economic factors consider the level of S&T's
historical charge-offs that have occurrence within the credits
economic life cycle.
Significant to this analysis is the shift in loan portfolio
composition to an increased mix of commercial loans. These loans
are generally larger in size and, due to our continuing growth,
many are not well seasoned and could be more vulnerable to an
economic slowdown. Management relies on its risk rating process
to monitor trends which may be occurring relative to commercial
loans to assess potential weaknesses within specific credits.
Current economic factors and trends in risk ratings are
considered in the determination of the allowance for loan losses.
Net loan charge-offs totaled $4.3 million in 1998, including $2.0
million related to a floor plan loan to an automobile dealership,
compared to $3.3 million in 1997. The balance of nonperforming
loans, which includes nonaccrual loans past due 90 days or more,
at December 31, 1998, was $2.9 million or 0.21% 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 $57.2 million in 1998 and
$39.0 million in 1997. The mix of average deposits in 1998
changed, with time deposits and money market accounts increasing
$16.5 million and $31.5 million, respectively, while interest-
bearing demand and savings accounts decreased $12.9 million.
Noninterest-bearing deposits increased by $22.1 million or 13.7%
in 1998 and were approximately 14% and 13% of total deposits
during 1998 and 1997, respectively. Some of the changes can be
partially explained by strategic initiatives to increase demand
accounts and cash management services. 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. In September 1998, S&T
purchased a branch in Clarion, Pa. and assumed $39.0 million of
deposits.
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% of total deposits during 1998 and 1997,
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, 1998, there were $11.6 million of these
brokered retail certificates of deposit outstanding.
Borrowings
Average borrowings increased $105.3 million in 1998 and were
comprised of securities sold under repurchase agreements (REPOS),
federal funds purchased and long-term borrowings at the FHLB. S&T
defines REPOS with its retail customers as retail REPOS;
wholesale REPOS are those transacted with other banks and
brokerage firms with terms normally ranging from one to 14 days.
The average balance in retail REPOS increased approximately $9.1
million for 1998 and decreased $11.3 million for 1997. The 1998
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.
PAGE 23
Wholesale REPOS and federal funds purchased averaged $87.1
million in 1998, an increase of $34.1 million from the 1997
averages. The aforementioned increase in the investment portfolio
increased the usage of wholesale REPO fundings in 1998.
The interest rate risk of various funding strategies is managed
through ALCO. During 1997, ALCO authorized three additional long-
term borrowings of $11.0 million at a fixed rate and $50.0
million at an adjustable rate with the FHLB. At December 31,
1998, S&T had long-term borrowings outstanding of $60.8 million
at a fixed rate and $119.6 million at an adjustable rate with the
FHLB. The purpose of these borrowings was to provide matched
fundings for newly originated loans, to mitigate the risk
associated with volatile liabilities, to take advantage of lower
cost funds through the FHLB's Community Investment Program and to
fund stock buy-backs.
Another ALCO strategy used to manage interest rate risk is the
use of interest rate swaps. At December 31, 1998, S&T had
notional values totaling $10.0 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.
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 12% in 1998 and 24% in 1997. 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.
Results of Operations
Year Ended December 31, 1998
Net Income
Net income was a record $38.0 million or $1.35 per diluted
earnings per share in 1998, representing a 15% increase from the
$33.4 million or $1.17 per diluted earnings per share in 1997.
The return on average assets increased to 1.90% for 1998, as
compared to 1.84% for 1997. The return on average equity
increased to 14.80% for 1998, compared to 13.71% for 1997.
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 $3.2 million or 4% for 1998 compared to 1997. The net
yield on interest-earning assets decreased to 4.61% in 1998 as
compared to 4.85% in 1997. The decline in the net yield on
interest-earning assets during 1998 was primarily attributed to
the balance sheet growth with securities, as well as the Modified
Dutch Tender Offer earlier this year that repurchased
approximately 880,000 shares of S&T common stock. Net interest
income was positively affected by $160.2 million or a 9% increase
in average earning assets.
In 1998, average loans increased $80.3 million and average
securities increased $83.8 million, comprising most of the
earning asset growth. The yields on average loans increased by
seven basis points and the yields on average securities declined
30 basis points.
Average interest-bearing deposits provided $57.2 million of the
funds for the growth in average earning assets, at a cost of
4.34% in 1998 as compared to 4.33% in 1997.
Average increases of $106.7 million in REPOS and other borrowed
funds provided additional funding. The cost of these funds
decreased 15 basis points during 1998. During 1998, more longer-
term borrowings were utilized in order to mitigate interest rate
risk.
Also positively affecting net interest income was a $19.8 million
increase to average net free funds. Average net free funds are
the excess of demand deposits, other noninterest-bearing
liabilities and shareholders' equity over nonearning assets.
Maintaining consistent spreads between earning assets and costing
liabilities is very significant to S&T's financial performance
since net interest income comprised 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.
PAGE 24
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 $10.6 million for 1998 compared to $5.0 million in
1997. The provision expense and the adequacy of the allowance for
loan losses is determined based upon 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. Also affecting
the amount of provision expense is loan growth, portfolio
composition and trends within risk ratings.
Credit quality statistics are an important factor in determining
the amount of provision expense. Net loan charge-offs totaled
$4.3 million for 1998 compared to $3.3 million for 1997. Included
in the charge-offs for 1998 is $2.0 million related to a floor
plan loan to one automobile dealership. Nonperforming loans to
total loans decreased to 0.21% at December 31, 1998.
Also affecting the amount of provision expense is loan growth
and portfolio composition. Most of the loan growth in 1998 is
attributable to larger-sized commercial loans.
Noninterest Income
Noninterest income increased $8.0 million or 49% in 1998 compared
to 1997. Increases included $0.5 million or 15% in trust income,
$0.9 million or 21% in service charges and fees, a $1.3 million
or 40% increase in other income and a $5.3 million or 97%
increase in security gains.
The increase in trust income was attributable to bank-wide
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 convenience fees in the fourth quarter of 1997.
The increase in other income was a result of increased
performance for brokerage and insurance commissions, letters of
credit fees, covered calls, debit card commissions, and mortgage
servicing income, as well as $0.4 million of nonrecurring gains
recognized from oil and gas producing properties that were sold
during the third quarter of 1998. These areas were the focus of
several 1998 strategic initiatives and product enhancements
implemented in order to expand this source of revenue.
S&T recognized $10.7 million of gains on equity securities during
1998. Gains of $5.2 million were the result of EITF 91-5. This
accounting pronouncement requires the mark to market of equity
securities when an acquisition of the company in which securities
are owned occurs. EITF 91-5 gains recognized included $2.6
million from the First Union/Corestates merger, $0.4 million
from the CFX/Peoples Heritage merger and $2.2 million from the
First Commonwealth/Southwest merger. The remaining security gains
were primarily attributable to the sale of equity securities in
order to maximize returns by taking advantage of market
opportunities when presented.
Noninterest Expense
Noninterest expense decreased $1.2 million or 3% in 1998 compared
to 1997. The decrease is primarily attributable to $2.2 million
of merger-related and other nonrecurring expenses associated with
the acquisition of Peoples during 1997. Merger-related and other
nonrecurring expenses included costs for severance and early
retirement programs, the write-off and conversion of data
processing systems, as well as legal, accounting and investment
banker expenses. Other expenses of $0.9 million were provided for
during 1998 and included $0.2 million of consulting fees for the
redesigning of retail loan delivery services, $0.3 million for
Year 2000 project costs and $0.3 million of costs associated with
the conversion of data processing systems for a branch purchase.
Recurring expenses were relatively flat during 1998 as compared
to 1997 and reflect normal activity increases. Severance and
early retirement programs were implemented in May 1997 in order
to eliminate duplicate positions following post-merger
restructuring and consolidation of operations. Average full-time
equivalent staff decreased from 665 to 659 in 1998. 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 42% and 44% in 1998 and 1997,
respectively.
Federal Income Taxes
Federal income tax expense increased $2.6 million to $16.2
million in 1998 as a result of higher pretax income in 1998. The
1998 effective tax rate of 30% was below the 35% statutory tax
rate due to the tax benefits resulting from tax-exempt interest,
excludable dividend income and the tax benefits associated with
Low Income Housing Tax Credit (LIHTC) projects. S&T currently
does not incur any alternative minimum tax.
PAGE 25
Results of Operations
Year Ended December 31, 1997
Net Income
Net income was a record $33.4 million or $1.17 per diluted
earnings per share in 1997, representing a 17% increase from the
$28.2 million or $1.00 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 cost 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 nonearning assets.
Maintaining consistent spreads between earning assets and costing
liabilities is very significant to S&T's financial performance
since net interest income comprised 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 bank-wide
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 convenience
fees 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.
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. 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 student
loan and residential mortgage loan sales.
PAGE 26
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% and 48% 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 duplicate positions. Average full-time equivalent
staff decreased from 677 to 665 in 1997. Severance and early
retirement programs were implemented in May 1997.
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. Recurring costs and other
charges were not significant and reflect normal activity
increases, organization expansion and fee increases from vendors.
Offsetting 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 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,
1998, the total of such assets was approximately $671.0 million
or 32% 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, 1998 and were
outstanding primarily to local customers. S&T's ability to
attract deposits and borrowed funds depends primarily on
continued rate competitiveness, profitability, capitalization and
overall financial condition.
Beyond the issue of having sufficient sources to fund unexpected
credit demands or deposit withdrawals, liquidity management also
is an important factor in monitoring and managing interest rate
sensitivity issues through ALCO. Through forecast and simulation
models, ALCO is also able to project future funding needs and
develop strategies for acquiring funds at a reasonable cost.
ALCO uses a variety of measurements to monitor the liquidity
position of S&T. These include liquidity gap, net alternative
funding resources, net loans to assets, net loans
PAGE 27
to deposits, volatile liabilities and liquidity ratio. As of
December 31, 1998, all of these measurements were in compliance
with ALCO policy limitations.
Because the assets and liabilities of S&T are primarily monetary
in nature, the presentation and analysis of cash flows in formats
prescribed by Financial Accounting Standards Board Statement No.
95 "Statement of Cash Flows" (Statement No. 95), are less
meaningful for managing bank liquidity than for other non-
financial companies. Funds are typically provided from current
earnings, maturity and sales of securities available for sale,
loan repayments, deposits and borrowings. The primary uses of
funds include new loans, repayment of borrowings, the purchase of
securities and dividends to shareholders. The level and mix of
sources and uses of funds are constantly monitored and adjusted
by ALCO in order to maintain credit, liquidity and interest rate
risks within prescribed policy guidelines while maximizing
earnings.
ALCO monitors and manages interest rate sensitivity through gap,
simulation and duration analyses in order to avoid unacceptable
earnings fluctuations due to interest rate changes. S&T's gap
model includes certain management assumptions based upon past
experience and the expected behavior of customers during various
interest rate scenarios. The assumptions include principal
prepayments for mortgages, installment loans and mortgage-backed
securities and classifying the demand, savings and money market
balances by degree of interest rate sensitivity. Utilizing the
above assumptions results in ratios of interest rate sensitive
assets to interest rate sensitive liabilities for the six-month
and 12-month intervals ended December 31, 1998 of 1.00% and
1.07%, respectively. Assuming immediate repricings for interest-
bearing demand, savings and money market accounts, these ratios
would be 0.72% and 0.85%, respectively.
In addition to the gap analysis, S&T performs an earnings
sensitivity analysis to identify more dynamic interest rate risk
exposures. The earnings simulation model is used to estimate the
effect that specific interest rate changes would have on 12
months of net interest income. 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
customer behavior. Interest rate caps and floors on all products
are included to the extent that they become effective in the 12-
month simulation period. Additionally, changes in prepayment
behavior of the residential mortgage portfolio in each rate
environment are captured using management estimates. Finally, the
impact of planned growth and anticipated new business activities
is factored into the simulation model.
S&T's policy objective is to limit the change in net interest
income to 3% from an immediate and sustained parallel change in
interest rates of 200 basis points. As of December 31, 1998 and
1997, respectively, S&T had the following estimated earnings
sensitivity profile:
Immediate
Change in Rates
(in millions) +200bp -200bp
1998 Pretax earnings change $(2.1) $0.2
1997 Pretax earnings change 1.2 (0.8)
Results of the gradual simulation model, showing changes from
current rates by 200 basis points over a 12-month period as of
December 31, 1998 and 1997, respectively, are presented below.
Gradual
Change in Rates
(in millions) +200bp -200bp
1998 Pretax earnings change $(1.3) $(0.9)
1997 Pretax earnings change 0.5 0.2
Capital Resources
Shareholders' equity increased $0.5 million at December 31, 1998
compared to December 31, 1997. The primary source of equity
growth for S&T is earnings retention. Hence, capital growth is a
function of net income less dividends paid to shareholders and
treasury stock activities.
Net income was $38.0 million and dividends declared to
shareholders were $18.3 million for 1998. S&T paid 46% of 1998
net income in dividends, equating to an annual dividend rate of
$0.66 per share. The slight increase in capital is attributable
to the conclusion of the Modified Dutch Auction in which S&T
repurchased approximately 880,000 shares of its common stock.
During 1998, S&T repurchased an additional 238,000 shares of its
common stock. An authorization to buy back up to 1,000,000
additional shares in 1999 was authorized by the S&T Board of
Directors. Also affecting capital was a decrease of $0.6 million
in unrealized gains on securities available for sale.
On September 21, 1998, the Board of Directors of S&T approved a
two-for-one common stock split which was distributed in the form
of a 100% stock dividend.
PAGE 28
The new shares were distributed on October 30, 1998 to shareholders
of record on October 15, 1998. The split increased the number of
shares outstanding to 27,578,220.
The book values of S&T's common stock increased 2% from $9.20 at
December 31, 1997 to $9.38 at December 31, 1998, primarily due to
the increase in shareholders' equity from retained earnings, offset
by the slight decrease in unrealized holding gains on securities
available for sale and by the aforementioned Modified Dutch Auction.
S&T continues to maintain a strong capital position with a
leverage ratio of 10.7% as compared to the 1998 minimum
regulatory guideline of 3%. S&T's risk-based capital Tier 1 and
Total ratios were 14.2% and 17.1%, respectively, at December 31,
1998, which places S&T well above the Federal Reserve Board's
risk-based capital guidelines of 4% and 8% for Tier 1 and Total,
respectively. Included in the total ratio is 45% of the pretax
unrealized holding gains on available for sale equity securities
as prescribed by banking regulations effective October 1, 1998.
In addition, management believes that S&T has the ability to
raise additional capital if necessary. S&T sponsored an ESOP. The
ESOP shares were allocated to employees as part of S&T's
contributions to its employee thrift and profit sharing plans. At
December 31, 1998, the remaining unallocated shares held by the
ESOP were allocated to employees as prescribed by the plan.
In April 1993, shareholders approved the S&T Incentive Stock Plan
authorizing the issuance of a maximum of 1,200,000 shares of
S&T's common stock in order to assist in attracting and retaining
employees of outstanding ability and to promote the
identification of their interests with those of the shareholders
of S&T. On October 17, 1994, the Stock Plan was amended to
include outside directors. On April 21, 1997, shareholders
approved an amendment to the plan increasing the number of
authorized shares to 3,200,000. As of December 31, 1998,
1,869,822 nonstatutory stock options had been granted to key
employees and outside directors; 945,772 of these options are
currently exercisable.
Year 2000
The Year 2000 Issue is the result of computer programs having
been written using two digits rather than four to define the
applicable year. Any of S&T's computer programs or hardware that
have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on recent assessments, S&T determined that it will be
required to modify or replace some portions of hardware and
software so that those systems will properly utilize dates beyond
December 31, 1999. S&T presently believes that with modifications
and replacement of existing hardware and software, the Year 2000
Issue can be mitigated. However, if such modifications and
replacements are not made, or are not completed timely, the Year
2000 Issue could have a material impact on the operations of S&T.
S&T's plan to resolve the Year 2000 Issue involves four phases:
assessment, remediation, testing and implementation. In June
1997, S&T management formed a task force (Y2K Task Force) 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. To date, the Y2K Task Force has
completed its assessment of the Year 2000 Issue with internal
systems and third-party vendors. Assessment of the effect of the
Year 2000 Issue on commercial business customers is still being
evaluated.
Significant to S&T's data processing abilities are the services
provided by M&I Data Services (M&I) and Sungard Trust Services
(Sungard) which provide the majority of computer services for S&T
customer accounts and transactions. M&I and Sungard are also
currently involved in a similar Year 2000 assessment and
remediation. S&T converted to both M&I's and Sungard's Year 2000
compliant software systems in the fourth quarter of 1998.
All internal data processing systems are in the process of being
tested for Year 2000 compliance. The testing also includes
validations of third-party software/hardware vendors that have
provided assurance or certifications of compliance. To date, 95%
of the testing for critical systems has been completed and
software/hardware replacements have been scheduled where problems
have been identified. The testing is expected to be completed in
the first quarter of 1999; the remediation of critical internal
systems was completed by December 31, 1998.
The effect of Year 2000 on the businesses of commercial customers
is unknown and is currently being evaluated as part of this risk
assessment process. The assessment identified 31 high-risk
commercial customers as being significant to S&T's future
financial performance. Each of these significant business
customers are being called
PAGE 29
upon and interviewed to determine their respective company's
awareness and preparedness for the Year 2000 Issue. Results of
these interviews are reported to the S&T Senior Loan Committee
and credit administration so that remedial action can be taken
when appropriate. Communications to all commercial customers
via mail and calling officers has been ongoing to ensure
effective planning to meet the Year 2000 compliance requirements.
Management and the Y2K Task Force have completed substantially
all of the critical systems and application changes by the end of
1998 and believe that its level of preparedness is appropriate.
S&T has also developed contingency plans for mission critical
systems or applications which are either internal systems or
services provided by external sources. These plans involve altern-
ative processing plans in the event of system or application
failure. S&T expects to finalize these contingency plans during
the first quarter of 1999. S&T has estimated the total cost of the
project to be $0.3 million 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. The Y2K Task
Force reports to the S&T Board of Directors each quarter.
Regulatory Matters
S&T and S&T Bank are subject to periodic examinations by one or
more of the various regulatory agencies. During 1998, an
examination was conducted by the Pennsylvania Department of
Banking. 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 Pennsylvania
Department of Banking 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.
PAGE 30
Consolidated Balance Sheets
S&T Bancorp, Inc. and Subsidiaries
December 31 1998 1997
(dollars in thousands, except per share data)
Assets
Cash and due from banks $ 48,736 $ 35,951
Interest-earning deposits with banks 53 102
Federal funds sold 19,300 -
Securities:
Available for sale 565,141 521,117
Held to maturity (market value $27,161
in 1998 and $48,101 in 1997) 26,345 47,103
Total Securities 591,486 568,220
Loans, net of allowance for loan losses
of $26,677 in 1998 and $20,427 in 1997 1,339,232 1,253,326
Premises and equipment 20,932 20,613
Other assets 49,872 42,079
Total Assets $2,069,611 $1,920,291
Liabilities
Deposits:
Noninterest-bearing $ 215,659 $ 165,727
Interest-bearing 1,164,404 1,118,931
Total Deposits 1,380,063 1,284,658
Securities sold under repurchase agreements 138,825 170,124
Federal funds purchased - 9,325
Long-term borrowings 240,068 144,218
Other liabilities 51,018 51,848
Total Liabilities 1,809,974 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-50,000,000 shares in 1998 and
25,000,000 in 1997
Issued-29,714,038 shares in 1998 and
14,857,019 in 1997 74,285 37,142
Additional paid-in capital 21,234 19,369
Retained earnings 158,274 175,707
Accumulated other comprehensive income 39,961 40,524
Treasury stock (2,038,459 shares in 1998
and 1,431,728 shares in 1997, at cost) (34,117) (12,494)
Deferred compensation - (130)
Total Shareholders' Equity 259,637 260,118
Total Liabilities and Shareholders' Equity $2,069,611 $1,920,291
See Notes to Consolidated Financial Statements
PAGE 31
Consolidated Statements of Income
S&T Bancorp, Inc. and Subsidiaries
Year Ended December 31 1998 1997 1996
(dollars in thousands, except per share data)
Interest Income
Loans, including fees $115,081 $108,891 $ 99,493
Deposits with banks 6 8 5
Federal funds sold 308 523 330
Investment securities:
Taxable 29,984 25,421 26,349
Tax-exempt 1,557 2,250 2,834
Dividends 4,502 4,008 3,431
Total Interest Income 151,438 141,101 132,442
Interest Expense
Deposits 49,570 47,966 46,125
Securities sold under repurchase agreements 8,968 6,602 7,006
Federal funds purchased 383 472 319
Long-term borrowings 10,226 7,227 5,071
Other borrowed funds 9 17 68
Total Interest Expense 69,156 62,284 58,589
Net Interest Income 82,282 78,817 73,853
Provision for Loan Losses 10,550 5,000 5,175
Net Interest Income After Provision
for Loan Losses 71,732 73,817 68,678
Noninterest Income
Service charges on deposit accounts 5,548 4,603 4,039
Trust fees 3,661 3,181 2,839
Security gains, net 10,722 5,446 2,227
Other 4,487 3,211 2,892
Total Noninterest Income 24,418 16,441 11,997
Noninterest Expense
Salaries and employee benefits 22,086 22,816 21,763
Occupancy, net 2,759 2,583 2,886
Furniture and equipment 2,688 3,170 2,447
Other taxes 1,456 1,320 1,201
Data processing 2,411 2,154 1,955
Amortization of intangibles 112 - 314
FDIC assessment 228 240 1,199
Other 10,248 10,915 10,633
Total Noninterest Expense 41,988 43,198 42,398
Income Before Income Taxes 54,162 47,060 38,277
Applicable Income Taxes 16,199 13,646 10,036
Net Income $ 37,963 $ 33,414 $ 28,241
Per Common Share:1
Net Income-Basic $ 1.37 $ 1.18 $ 1.00
Net Income-Diluted 1.35 1.17 1.00
Dividends Declared 0.66 0.56 0.47
1 Per share amounts have been restated to record the effect of a
two-for-one common stock split in the form of a 100% stock
dividend distributed on October 30, 1998.
See Notes to Consolidated Financial Statements.
PAGE 32
Consolidated Statements of Changes in Shareholders' Equity
S&T Bancorp, Inc. and Subsidiaries
Accumulated
Other
Additional Compre-
Comprehensive Common Paid-In Retained nsive Treasury Deferred
Income Stock Capital Earnings Income Stock Compensation
(dollars in thousands, except per share data)
Balance at January 1, 1996 $ - $37,142 $18,120 $141,576 $24,738 $(7,182) $(340)
Comprehensive Income:
Net income for 1996 28,241 28,241
Other comprehensive income,
net of tax Unrealized gains
on securities of $1,823 net
of reclassification adjustment
for gains included in net
income of $1,364 459 459
Cash dividends declared
($0.47 per share)1 (11,835)
Treasury stock acquired
(257,525 shares) (7,287)
Treasury stock sold
(89,614 shares) 924 1,452
Deferred ESOP benefits expense 110
Comprehensive Income 28,700
Balance at December 31, 1996 $37,142 $19,044 $157,982 $25,197 $(13,017)$(230)
Comprehensive Income:
Net income for 1997 33,414 33,414
Other comprehensive income,
net of tax Unrealized
gains on securities of
$23,712 net of reclassification
adjustment for gains included in
net income of $8,385 15,327 15,327
Cash dividends declared
($0.56 per share)1 (15,689)
Treasury stock acquired
(138 shares) (5)
Treasury stock sold
(30,277 shares) 325 528
Deferred ESOP benefits expense 100
Comprehensive Income 48,741
Balance at December 31, 1997 $37,142 $19,369 $175,707 $40,524 $(12,494)$(130)
Comprehensive Income:
Net income for 1998 37,963 37,963
Other comprehensive income,
net of tax Unrealized
gains on securities of
$6,718 net of reclassification
adjustment for gains included in
net income of $7,281 (563) (563)
Cash dividends declared
($0.66 per share)1 (18,253)
Treasury stock acquired
(1,117,036 shares) (27,975)
Treasury stock sold
(510,305 shares) (802) 6,352
Tax Deductibility/Options 2,667
Deferred ESOP benefits expense 130
Transfer to reflect two-for-one
stock split 37,143 (37,143)
Comprehensive Income $37,400
Balance at December 31, 1998 $74,285 $21,234 $158,274 $39,961 $(34,117) $ -
1 Per share amounts have been restated to record the effect of a
two-for-one common stock split in the form of a 100% stock
dividend distributed on October 30, 1998.
See Notes to Consolidated Financial Statements.
PAGE 33
Consolidated Statements of Cash Flows
S&T Bancorp, Inc. and Subsidiaries
[CAPTION]
Year Ended December 31 1998 1997 1996
(dollars in thousands)
Operating Activities
Net Income $37,963 $33,414 $28,241
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 10,550 5,000 5,175
Provision for depreciation and amortization 2,158 2,163 2,445
Net amortization of investment security premiums 609 675 543
Net accretion of loan and deposit discounts - - (343)
Deferred income taxes (821) (756) (613)
Securities gains, net (10,722) (5,446) (2,227)
Decrease (increase) in interest receivable 157 (1,601) 449
(Decrease) increase in interest payable (139) 395 (271)
Decrease (increase) in other assets 790 819 (458)
(Decrease) increase in other liabilities (2,214) 531 3,170
Net Cash Provided by Operating Activities 38,331 35,194 36,111
Investing Activities
Net decrease (increase) in interest-earning
deposits with banks 49 7 (58)
Net (increase) decrease in federal funds sold (19,300) 6,465 875
Proceeds from maturities of investment securities 20,772 3,146 11,361
Proceeds from maturities of securities available
for sale 192,105 127,344 90,214
Proceeds from sales of securities available for
sale 96,233 77,826 40,855
Purchases of investment securities - - (4,231)
Purchases of securities available for sale (323,130) (248,077) (148,259)
Net increase in loans (96,456) (76,919) (99,741)
Purchases of premises and equipment (1,933) (2,042) (3,020)
Other, net 215 (696) 303
Net cash acquired in branch acquisition 31,604 - -
Net Cash Used in Investing Activities (99,841) (112,946) (111,701)
Financing Activities
Net increase in demand, NOW and savings deposits 81,553 9,105 23,761
Net (decrease) increase in certificates of deposit (25,213) 5,186 30,060
Net (decrease) increase in federal funds purchased (9,325) 8,550 450
Net (decrease) increase in repurchase agreements (31,299) 55,919 (8,589)
Decrease in obligation under capital lease - - (294)
Proceeds from FHLB long-term borrowings 120,850 68,600 55,000
Repayments from FHLB long-term borrowings (25,000) (61,000) (14,987)
Acquisition of treasury stock (27,975) (5) (7,287)
Sale of treasury stock 8,219 853 2,376
Cash dividends paid to shareholders (17,515) (14,215) (10,667)
Net Cash Provided by Financing Activities 74,295 72,993 69,823
Increase (decrease) in Cash and Cash Equivalents 12,785 (4,759) (5,767)
Cash and Cash Equivalents at Beginning of Year 35,951 40,710 46,477
Cash and Cash Equivalents at End of Year $ 48,736 $ 35,951 $ 40,710
See Notes to Consolidated Financial Statements.
PAGE 34
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. The 1996 financial information has been restated to
reflect the merger of Peoples Bank of Unity on May 2, 1997.
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, 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.
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 allowance. The allowance for loan
losses is maintained at a level believed adequate by management
to absorb probable losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on
periodic evaluations of the loan portfolio, past loan loss
experience, current economic conditions, volume, growth and
composition of the loan portfolio and other relevant factors.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. The provision for depreciation is computed
generally by the straight-line method for financial reporting
purposes and by accelerated methods for federal income tax
purposes.
Other Real Estate
Other real estate is included in other assets and is comprised of
properties acquired through foreclosure proceedings or acceptance
of a deed in lieu of foreclosure and loans classified as in-
substance foreclosure. These properties are carried at the lower
of cost or fair value less cost of resale. Loan losses arising
from the acquisition of such property are charged against the
allowance for loan losses. Gains or losses realized subsequent to
acquisition are recorded in the results of operations.
PAGE 35
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.
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), was 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
27,762,801, 28,263,036 and 28,217,234 for 1998, 1997 and 1996,
respectively. Average shares outstanding for computing dilutive
EPS were 28,055,142, 28,618,364 and 28,440,844 for 1998, 1997 and
1996, respectively. In computing dilutive EPS, average shares
outstanding have been increased by the common stock equivalents
relating to S&T's available stock options.
Per Share Amounts
Prior years net income and dividends per share amounts have been
restated to reflect the two-for-one common stock split in the
form of a 100% stock dividend distributed on October 30, 1998.
Cash Flow Information
S&T considers cash and due from banks as cash and cash
equivalents. For the years ended December 31, 1998, 1997 and
1996, cash paid for interest was $69,295,000, $60,825,000 and
$58,860,000, respectively. Cash paid during 1998 for income taxes
was $15,567,000 compared to $14,190,000 for 1997 and $11,014,000
for 1996.
Comprehensive Income
Financial Accounting Standards Board Statement No. 130,
"Accounting for Comprehensive Income" (Statement No. 130), was
adopted by S&T in 1998. Statement No. 130 establishes new rules
for the reporting and display of comprehensive income and its
components. The adoption of this Statement had no impact on S&T's
net income or shareholders' equity. Statement No. 130 requires
unrealized gains or losses on S&T's available for sale
securities, which prior to adoption were reported separately in
shareholders' equity, to be included in comprehensive income.
Prior period financial statements have been reclassified to
conform to the requirements of Statement No. 130. During the
years ending December 31, 1998, 1997 and 1996, comprehensive
income amounted to $37,400,000, $48,741,000 and $28,700,000,
respectively.
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 1998 and
1997, $10.9 million and $12.7 million, respectively, of 1-4
family mortgage loans were sold to the Federal National Mortgage
Association (FNMA), and $302,000 and $187,000, respectively, of
mortgage servicing rights were capitalized and recorded in other
assets.
PAGE 36
Reclassification
Amounts in prior years have been reclassed to conform to
presentation in 1998. The reclassification had no effect on S&T's
financial condition or results of operations.
New Accounting Pronouncements
Financial Accounting Standards Board Statement No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" (Statement No. 131), is effective in 1998 and
requires public companies to disclose certain information about
reportable operating segments in complete sets of financial
statements of the enterprise. Statement No. 131 does not
materially affect S&T's financial position or results of
operations as S&T management views the bank as one segment of
business which is community banking.
Financial Accounting Standards Board Statement No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits" (Statement No. 132), is effective in 1998 and
standardizes the disclosure requirements for pensions and other
postretirement benefits. Statement No. 132 had no impact on S&T's
financial position or results of operations.
Financial Accounting Standards Board Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(Statement No. 133), is effective in 1999 and requires measuring
and recording the change in fair value of hedging activities. S&T
is currently in the process of evaluating the impact of Statement
No. 133. Statement No. 133 is not expected to materially affect
S&T's financial position or results of operations.
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 Commitments and
Standby Letters of Credit
Estimates of the fair value of these off-balance sheet items were
not made because of the short term 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.
PAGE 37
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.
The following table indicates the estimated fair value of S&T's
financial instruments as of December 31:
1998 1997
Estimated Carrying Estimated Carrying
Fair Value Value Fair Value Value
(dollars in thousands)
Assets
Cash $ 48,789 $ 48,789 $ 36,053 $ 36,053
Federal funds sold 19,300 19,300 - -
Securities:
Available for sale 565,141 565,141 521,117 521,117
Held to maturity 27,161 26,345 48,101 47,103
Loans 1,382,029 1,365,909 1,279,802 1,273,753
Liabilities
Deposits $1,388,634 $1,380,063 $1,287,497 $1,284,658
Securities sold under
repurchase agreements 138,825 138,825 170,126 170,124
Federal funds purchased - - 9,325 9,325
Long-term borrowings 246,397 240,068 145,049 144,218
Other borrowed funds - - 130 130
Off-Balance Sheet
Interest rate swaps $ (33) $ - $ 192 $ -
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 one interest rate swap at a notional value totaling
$10.0 million, paying a fixed-rate and receiving a variable-rate.
The purpose of this transaction was to provide matched, fixed-rate
funding for newly originated loans, and to mitigate the risk
associated with volatile liability funding. The effective rate of
the swap was 5.37% at December 31, 1998. 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 $16,988,000 during 1998.
PAGE 38
Note E
Securities
The following table indicates the composition of the securities
portfolio at December 31:
Available for Sale
Gross Gross
Amortized Unrealized Unrealized Market
1998 Cost Gains Losses Value
(dollars in thousands)
Obligations of U.S. government
corporations and agencies $353,393 $ 4,035 $ (11) $357,417
Mortgage-backed securities 8,410 305 8,715
U.S. treasury securities 26,374 1,578 27,952
Corporate securities 35,902 454 (3) 36,353
Debt securities available for sale 424,079 6,372 (14) 430,437
Marketable equity securities 60,411 55,597 (476) 115,532
Other securities 19,172 19,172
Total $503,662 $61,969 $(490) $565,141
Held to Maturity
Obligations of states and political
subdivisions $ 21,009 $ 647 $ 21,656
Corporate securities 1,999 169 2,168
Debt securities held to maturity 23,008 816 23,824
Other securities 3,337 3,337
Total $ 26,345 $ 816 $ - $ 27,161
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 political
subdivisions $ 37,497 $ 794 $ (5) $ 38,286
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
PAGE 39
There were $11,881,000, $6,031,000 and $2,528,000 in gross
realized gains and $1,159,000, $585,000 and $305,000 in gross
realized losses in 1998, 1997 and 1996, respectively, relative
to securities available for sale.
The amortized cost and estimated market value of debt
securities at December 31, 1998, 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.
Amortized Market
Available for Sale Cost Value
(dollars in thousands)
Due in one year or less $ 23,367 $ 23,691
Due after one year through five years 274,025 277,451
Due after five years through 10 years 122,907 125,406
Due after 10 years 3,780 3,889
Total $ 424,079 $ 430,437
Amortized Market
Held to Maturity Cost Value
Due in one year or less $ 4,934 $ 4,961
Due after one year through five years 14,435 15,066
Due after five years through 10 years 3,639 3,797
Due after 10 years - -
Total $ 23,008 $ 23,824
At December 31, 1998 and 1997, securities with principal
amounts of $295,286,000 and $274,350,000, respectively, were
pledged to secure repurchase agreements and public and trust
fund deposits.
Note F
Loans
The following table indicates the composition of the loan
portfolio at December 31:
[CAPTION]
1998 1997
(dollars in thousands)
Real estate-construction $ 87,246 $ 47,967
Real estate-mortgages:
Residential 492,570 512,417
Commercial 407,445 327,384
Commercial-industrial and agricultural 265,297 255,017
Consumer installment 113,351 130,968
Gross Loans $1,365,909 $1,273,753
Allowance for loan losses (26,677) (20,427)
Net Loans $1,339,232 $1,253,326
PAGE 40
[CAPTION]
The following table presents changes in the allowance
for loan losses for the year ended December 31:
1998 1997 1996
(dollars in thousands)
Balance at beginning of year $ 20,427 $ 18,729 $ 17,065
Charge-offs (5,999) (4,481) (5,536)
Recoveries 1,699 1,179 2,025
Net charge-offs (4,300) (3,302) (3,511)
Provision for loan losses 10,550 5,000 5,175
Balance at end of year $ 26,677 $ 20,427 $ 18,729
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 $40,862,000 and $41,130,000 at December 31, 1998
and 1997, respectively. During 1998, $56,514,000 of new loans
were funded and repayments totaled $56,782,000.
During 1998, S&T Bank acquired automobile loans and leases on a
third-party basis from companies owned by two directors of S&T
totaling $1,982,000. 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 $2,933,000
and $3,602,000 at December 31, 1998 and December 31, 1997,
respectively. At December 31, 1998, there were no commitments to
lend additional funds on nonaccrual loans. Other real estate
owned, which is included in other assets, was $721,000 at
December 31, 1998 and $647,000 at December 31, 1997.
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]
1998 1997
(dollars in thousands)
Recorded investment in loans considered to be impaired $3,391,000 $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 133,000 914,000
Average recorded investment in impaired loans 2,927,000 6,329,000
Total interest income recognized on impaired loans 674,000 656,000
Interest income on impaired loans recognized on a
cash basis 605,000 -
PAGE 41
Note G
Premises and Equipment
[CAPTION]
The following table is a summary of the premises and
equipment accounts at December 31:
1998 1997
(dollars in thousands)
Land $ 3,026 $ 3,037
Premises 18,619 18,498
Furniture and equipment 13,568 12,152
Leasehold improvements 2,973 2,483
38,186 36,170
Accumulated depreciation (17,254) (15,557)
Total $ 20,932 $ 20,613
Certain banking facilities and equipment are leased under
short-term lease arrangements expiring at various dates to the
year 2008. All such leases are accounted for as operating leases.
Rental expense for premises and equipment amounted to $1,497,000,
$1,215,000 and $1,136,000 in 1998, 1997 and 1996, respectively.
Minimum annual rentals for each of the years 1999-2003 are
approximately $532,000, $519,000, $389,000, $168,000 and
$169,000, respectively, and $620,000 for the years thereafter.
Included in the above are leases entered into with two directors
of S&T for which rental expense totaled $338,921, $348,497 and
$325,709 in 1998, 1997 and 1996, respectively.
Note H
Deposits
[CAPTION]
The following table indicates the composition of deposits
at December 31:
1998 1997
(dollars in thousands)
Noninterest-bearing demand $ 215,659 $ 165,727
Interest-bearing demand 37,540 33,582
Money market 325,196 274,874
Savings 168,485 175,187
Time deposits 633,183 635,288
Total $1,380,063 $1,284,658
The aggregate of all time deposits over $100,000 amounted to
$91,173,000 and $95,678,000 for December 31, 1998 and 1997,
respectively.
PAGE 42
The following table indicates the scheduled maturities
of time deposits at December 31:
[CAPTION]
1998 1997
(dollars in thousands)
Due in one year $386,960 $306,278
Due in one to two years 143,355 187,257
Due in two to three years 34,499 83,395
Due in three to four years 26,005 16,434
Due in four to five years 26,430 26,751
Due after five years 15,934 15,173
Total $633,183 $635,288
Note I
Long-Term Borrowings
[CAPTION]
The following table is a summary of long-term borrowings with the
Federal Home Loan Bank (FHLB):
1998 1997
Balance Average Balance Average
Rate Rate
(dollars in thousands)
Due in one year $ - -% $ 25,000 5.97%
Due in one to two years 12,500 5.07 - -
Due in two to three years 30,000 6.02 12,500 5.70
Due in three to four years 68,100 5.18 30,000 6.02
Due in four to five years 25,000 5.18 57,100 5.25
Due after five years 44,618 5.61 19,618 6.48
Total $180,218 5.42% $144,218 5.74%
The purpose of these borrowings was to match fund selected
new loan originations, to mitigate interest rate sensitivity
risks and to take advantage of discounted borrowing rates
through the FHLB for community investment projects.
S&T maintains a Flexline of credit for 10% of total assets
with the FHLB which expires December 31, 1999. 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 pledged loans was $423,761,000 at December 31, 1998, which
is the maximum amount to be borrowed under the Flexline. There
were no Flexline borrowings outstanding at December 31, 1998 and
1997, respectively.
During 1998, S&T acquired two repurchase agreement long-term
borrowings totaling $59,850,000 at a weighted average fixed rate
of 6.20% which matures in five years. The purpose of this
borrowing was to lock in fixed rate fundings to mitigate interest
rate risk.
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 and brokerage firms.
PAGE 43
[CAPTION]
Information concerning federal funds purchased and
REPOS is summarized as follows:
1998 1997
(dollars in thousands)
Average balance during the year $177,968 $134,851
Average interest rate during the year 5.29% 5.31%
Maximum month-end balance during the year $251,030 $195,024
Average interest rate at year-end 4.63% 5.82%
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 $100,142,000 at
December 31, 1998. The amount of dividends that may be paid to
S&T is further restricted by regulatory guidelines concerning
minimum capital requirements.
Federal law prohibits S&T from borrowing from S&T Bank unless
such loans are collateralized by specific obligations. Further,
such loans are limited to 10% of S&T Bank's capital and
additional paid-in capital, as defined. At December 31, 1998, the
maximum amount available for transfer from S&T Bank to S&T in the
form of loans and dividends approximated 40% 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 $372,450,000 and
$294,144,000 at December 31, 1998 and 1997, respectively; and
obligations under standby letters of credit totaled $78,490,000
and $54,439,000 at December 31, 1998 and 1997, respectively.
PAGE 44
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 seven-county market
area in western Pennsylvania.
Note N
Income Taxes
[CAPTION]
Income tax expense (credits) for the year ended December 31 are
comprised of:
1998 1997 1996
(dollars in thousands)
Current $18,831 $14,402 $10,649
Deferred (2,632) (756) (613)
Total $16,199 $13,646 $10,036
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]
1998 1997 1996
(dollars in thousands)
Statutory tax rate 35% 35% 35%
Tax-exempt interest income
and dividend exclusion (3) (4) (6)
Low income housing tax credits (2) (2) (3)
Effective tax rate 30% 29% 26%
Income taxes applicable to security gains were $3,753,000
in 1998, $1,906,000 in 1997 and $779,000 in 1996.
PAGE 45
Significant components of S&T's temporary
differences were as follows at December 31:
[CAPTION]
1998 1997
(dollars in thousands)
Deferred tax liabilities:
Net unrealized holding gains
on securities available for sale $(21,518) $(21,821)
Fixed assets (644) (683)
Accretion on acquired loans (559) (326)
Prepaid pension (166) (514)
Prepaid hospitalization (102) (102)
Point recognition (830) (933)
Total deferred tax liabilities (23,819) (24,379)
Deferred tax assets:
Allowance on loan losses 9,127 6,939
Loan fees 558 377
Interest expense on increasing rate CDs 114 128
Deferred compensation 799 771
Goodwill 312 352
Other 206 174
Total deferred tax assets 11,116 8,741
Net deferred tax liability $(12,703) $(15,638)
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]
1998 1997 1996
(dollars in thousands)
Service cost-benefits earned during the period $ 1,068 $ 1,103 $ 1,032
Interest cost on projected benefit obligation 1,489 1,378 1,274
Expected return on plan assets (2,070) (1,774) (1,546)
Net amortization and deferral (14) (16) (8)
Net periodic pension expense $ 473 $ 691 $ 752
PAGE 46
The following tables summarize the activitiy in the benefit
obligation and plan assets.
[CAPTION]
1998 1997
(dollars in thousands)
Change in Benefit Obligation
Benefit obligation at beginning of year $ 23,385 $ 19,593
Service cost 1,068 1,103
Interest cost 1,489 1,378
Plan participants' contributions 166 220
Special termination benefits - 463
Actuarial (gain)/loss 101 1,464
Benefits paid (1,038) (836)
Benefit obligation at end of year $ 25,171 $ 23,385
Change in Plan Assets
Fair value of plan assets at beginning of year $ 26,043 $ 22,189
Actual return on plan assets 2,992 3,767
Employer contributions 734 703
Plan participants' contributions 166 220
Benefits paid (1,038) (836)
Fair value of plan assets at end of year $ 28,897 $ 26,043
The following table sets forth the plan's funded status and the
accrued pension cost in the consolidated balance sheet at
December 31:
[CAPTION]
1998 1997
(dollars in thousands)
Benefit obligation at beginning of year $(25,171) $(23,385)
Fair value of plan assets at end of year 28,897 26,043
Funded status 3,726 2,658
Unrecognized net gain (3,216) (2,475)
Unamortized prior service cost 77 104
Balance of initial unrecognized net asset (51) (72)
Accrued pension cost included in other liabilities $ 536 $ 215
[CAPTION]
Below are actuarial assumptions used in accounting
for the plan:
1998 1997 1996
Weighted-average discount rate 6.5% 6.5% 7.0%
Rate of increase in future compensation levels 5.0 5.0 5.0
Expected long-term rate of return on plan assets 8.0 8.0 8.0
PAGE 47
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 $2,249,000 and $2,110,000 at December 31, 1998 and 1997,
respectively. Accrued pension cost related to the SERP was
$1,971,000 and $1,779,000 at December 31, 1998 and 1997,
respectively. Net periodic pension cost related to the SERP was
$244,000, $499,000 and $238,000 at December 31, 1998, 1997 and
1996, respectively. The actuarial assumptions are the same as
those used in the previous tables.
The Bank maintains a Thrift Plan (Plan) in which substantially
all employees are eligible to participate. The Bank makes
matching contributions to the Plan up to 3% of participants'
eligible compensation and may make additional 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 $813,000, $990,000 and
$950,000 in 1998, 1997 and 1996, respectively.
On December 30, 1988, S&T sold 560,000 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 had a maximum
term of 10 years and bears interest at 80% of the lender's prime
rate. The loan terms required quarterly interest and annual
principal payments. The balance of this loan was zero and
$130,000 on December 31, 1998 and 1997, 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, 1998,
the ESOP had no unallocated shares remaining.
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 $10,000 in 1998, $17,000 in 1997 and $19,000 in
1996. Dividends received by the ESOP from S&T for unallocated
shares amounted to $18,000 in 1998, $24,000 in 1997 and $24,000
in 1996, 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 was charged to operations as contributions were 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 1998, 1997 and 1996
was $130,000, $100,000 and $110,000, 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 3,200,000 shares of S&T common
stock and expires 10 years from the date of board approval.
S&T grants stock options equal to the fair market value of S&T
common stock on the grant date. 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 S&T 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 grant
date. There were no SARs or Related SARs issued or outstanding at
December 31, 1998 and 1997.
PAGE 48
The following table summarizes the changes in the incentive stock
options outstanding during 1998, 1997 and 1996:
[CAPTION]
1998 1997 1996
Weighted Weighted Weighted
Number Average Number Average Number Average
of Option of Option of Option
Shares Price Shares Price Shares Price
Outstanding at beginning of
year 1,457,822 $14.21 1,112,000 $12.06 823,000 $10.45
Granted 334,800 27.75 372,822 20.38 333,000 15.44
Exercised (512,050) 10.90 (27,000) 10.66 (44,000) 7.55
Outstanding at end of year 1,280,572 $19.08 1,457,822 $14.21 1,112,000 $12.06
Exercisable at end of year 945,772 $16.01 1,085,000 $12.10 779,000 $10.62
The following table summarizes the range of exercise prices at
December 31:
[CAPTION]
1998 1997 1996
Contractual Contractual Contractual
Shares Exercise Remaining Shares Exercise Remaining Shares Exercise Remaining
Outstanding Price Life(Yrs) Outstanding Price Life(Yrs) Outstanding Price Life(Yrs)
1992 - - - 80,000 $ 6.82 5 80,000 $ 6.82 6
1993 - - - 124,000 8.63 6 128,000 8.63 7
1994 121,650 $ 9.50 6 227,000 9.50 7 241,000 9.50 8
1995 214,200 13.13 7 324,000 13.13 8 330,000 13.13 9
1996 254,500 15.44 8 330,000 15.44 9 333,000 15.44 10
1997 355,422 20.38 9 372,822 20.38 10 - - -
1998 334,800 27.75 10 - - - - - -
Total 1,280,572 $19.08 8.4 1,457,822 $14.21 8.2 1,112,000 $12.06 8.6
Options are granted in December and have a six-month vesting
period and a 10-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 grant
date using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1998, 1997 and 1996
respectively: risk-free interest rates of 4.45%, 5.77% and 6.12%;
a dividend yield of 2.7%, 3% and 3%; volatility factors of the
expected market price of S&T's common stock of 0.226, 0.182 and
0.161; and a weighted-average expected life of five years.
[CAPTION]
1998 1997 1996
(dollars in thousands except per share data)
Proforma net income $37,030 $32,845 $27,741
Proforma earnings per share-Basic 1.33 1.16 0.99
Proforma earnings per share-Diluted 1.32 1.15 0.98
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.
PAGE 49
S&T also sponsors a dividend reinvestment plan (Dividend Plan)
whereby shareholders may purchase shares of S&T common stock at
market value with reinvested dividends and voluntary cash
contributions. American Stock Transfer and Trust Company, the
plan administrator and transfer agent, purchases the shares on
the open market to fulfill the Plan's needs.
Note Q
S&T Bancorp, Inc. (parent company only)
Condensed Financial Information
Balance Sheets at December 31:
[CAPTION]
1998 1997
(dollars in thousands)
Assets
Cash $ 409 $ 19
Investments in:
Bank subsidiary 159,245 169,281
Nonbank subsidiaries 102,301 95,198
Total Assets $261,955 $264,498
Liabilities
Dividends payable $ 4,980 $ 4,243
Other borrowed funds - 130
Other liabilities (2,662) 7
Total Liabilities 2,318 4,380
Total Shareholders' Equity 259,637 260,118
Total Liabilities and Shareholders' Equity $ 261,955 $ 264,498
Statements of Income for the year ended December 31:
[CAPTION]
1998 1997 1996
(dollars in thousands)
Dividends from bank subsidiary $ 18,253 $ 15,689 $ 11,835
Investment income 84 60 64
Income before equity in undistributed
net income of subsidiaries 18,337 15,749 11,899
Equity in undistributed net income of:
Bank subsidiary 9,919 13,316 11,949
Nonbank subsidiaries 9,707 4,349 4,393
Net Income $ 37,963 $ 33,414 $ 28,241
PAGE 50
[CAPTION]
Statements of Cash Flows for
the year ended December 31:
1998 1997 1996
(dollars in thousands)
Operating Activities
Net Income $ 37,963 $33,414 $28,241
Equity in undistributed net income
of subsidiaries (20,499) (19,640) (17,102)
Change in other assets/liabilities (3,232) (408)
Total Provided by Operating Activities 14,232 13,774 10,731
Investing Activities
Distributions from (to) bank
subsidiaries 23,431 (2,914) 7,100
Total Used in Investing Activities 23,431 (2,914) 7,100
Financing Activities
Dividends (17,515) (14,215) (10,667)
(Acquisition) sale of treasury stock (19,758) 848 (4,911)
Total Used in Financing Activities (37,273) (13,367) (15,578)
Increase (decrease) in Cash 390 (2,507) 2,253
Cash at Beginning of Year 19 2,526 273
Cash at End of Year $ 409 $ 19 $ 2,526
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 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, 1998
and 1997, S&T meets all capital adequacy requirements to which
it is subject.
PAGE 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:
[CAPTION]
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
As of December 31, 1998:
Total Capital $231,159 15.98% $120,163 8.00% $150,204 10.00%
(to Risk Weighted Assets)
Tier I Capital 212,975 14.73 60,081 4.00 90,122 6.00
(to Risk Weighted Assets)
Tier I Capital 212,975 10.68 79,781 4.00 99,727 5.00
(to Average Assets)
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)
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, 1998, S&T Bank's
Tier I and Total capital ratios were 10.42% and 11.68%,
respectively, and Tier I capital to average assets was
7.48%. 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%.
PAGE 52
Report of Ernst & Young LLP, Independent Auditors
S&T Bancorp, Inc. and Subsidiaries
Shareholders and Board of Directors
S&T Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of
S&T Bancorp, Inc. and subsidiaries (S&T) as of December 31, 1998
and 1997, 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, 1998. 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
financial statements of Peoples Bank of Unity which statements
reflect net interest income constituting 18.4% of the related
consolidated totals. Those statements were audited by other
auditors whose report thereon has been furnished to us, and our
opinion, insofar as it relates to data included for Peoples Bank
of Unity, is based solely on the report 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, for 1996, the report
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, 1998 and 1997 and the consolidated results of their
operations and their cash flows for each of three years in the
period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Pittsburgh, PA
January 15, 1999
PAGE 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
1998 and 1997 are as follows and are based upon information
obtained from Nasdaq. As of the close of business January 28,
1999, there were 3,181 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, restated to record the effect of a
two-for-one common stock split in the form of a 100% stock
dividend distributed on October 30, 1998.
[CAPTION]
Price Range of Common Stock
1998 Low High Cash Dividends Declared
Fourth Quarter $24.00 $29.50 $0.18
Third Quarter 23.38 28.75 0.17
Second Quarter 25.38 28.38 0.17
First Quarter 20.88 28.88 0.15
1997
Fourth Quarter $19.25 $22.25 $0.15
Third Quarter 16.63 19.38 0.14
Second Quarter 14.75 18.44 0.14
First Quarter 14.88 18.38 0.13
Selected Financial Data
[CAPTION]
Year Ended December 31: 1998 1997 1996 1995 1994
(dollars in thousands, except per share data)
Income Statement
Interest income $151,438 $141,101 $132,442 $127,020 $112,559
Interest expense 69,156 62,284 58,589 57,677 46,643
Provisions for loan losses 10,550 5,000 5,175 4,220 3,600
Net interest income after
provision for loan losses 71,732 73,817 68,678 65,123 62,316
Noninterest income 24,418 16,441 11,997 9,147 7,611
Noninterest expense 41,988 43,198 42,398 40,276 38,679
Income before income taxes 54,162 47,060 38,277 33,994 31,248
Applicable income taxes 16,199 13,646 10,036 9,152 8,276
Net income $37,963 $ 33,414 $ 28,241 $ 24,842 $ 22,972
Per Share Data1
Net income-Basic $ 1.37 $ 1.18 $ 1.00 $ 0.87 $ 0.80
Net income-Diluted 1.35 1.17 1.00 0.87 0.80
Dividends declared 0.66 0.56 0.47 0.37 0.31
Book value 9.38 9.20 8.01 7.50 6.39
1 Per share amounts have been restated to record the effect of a
two-for-one common stock split in the form of a 100% stock
dividend distributed on October 30, 1998.
PAGE 54
Selected Financial Data
Quarterly Selected Financial Data
S&T Bancorp, Inc. and Subsidiaries
Selected Financial Data
Balance Sheet Totals (period end):
<CAPITAL>
Year Ended December 31: 1998 1997 1996 1995 1994
(dollars in thousands)
Total assets $2,069,611 $1,920,291 $1,787,045 $1,689,728 $1,580,252
Securities 591,486 568,220 500,061 492,236 466,875
Net loans 1,339,232 1,253,326 1,181,407 1,086,317 1,011,165
Total deposits 1,380,063 1,284,658 1,270,367 1,216,547 1,142,571
Securities sold under
repurchase agreements 138,825 170,124 114,205 122,794 169,871
Other liabilities 291,086 205,391 176,355 136,333 84,974
Total shareholders' equity 259,637 260,118 226,118 214,054 182,836
[CAPTION]
Quarterly Selected Financial Data
1998 1997
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 $ 38,373 $ 38,345 $ 37,548 $ 37,172 $ 36,412 $ 35,488 $ 34,808 $ 34,391
Interest expense 17,500 17,577 17,247 16,832 16,465 15,748 15,034 15,037
Provision for loan
losses 2,500 2,000 4,000 2,050 1,900 750 800 1,550
Net interest income
after provision
for loan losses 18,373 18,768 16,301 18,290 18,047 18,990 18,974 17,804
Noninterest income 6,318 4,328 8,326 5,446 4,725 3,224 4,473 4,020
Noninterest expense 10,730 9,623 11,049 10,586 10,605 9,991 11,655 10,946
Income before income
taxes 13,961 13,473 13,578 13,150 12,167 12,223 11,792 10,878
Applicable income
taxes 4,188 3,971 4,131 3,909 3,456 3,575 3,478 3,137
Net income $ 9,773 $ 9,502 $ 9,447 $ 9,241 $ 8,711 $ 8,648 $ 8,314 $ 7,741
Per Share Data1
Net income-Basic $ 0.35 $ 0.35 $ 0.34 $ 0.33 $ 0.31 $ 0.31 $ 0.30 $ 0.28
Net income-Diluted 0.35 0.34 0.34 0.33 0.31 0.30 0.29 0.27
Dividends declared 0.18 0.17 0.17 0.15 0.15 0.14 0.14 0.13
Book value 9.38 9.11 9.03 9.06 9.20 8.85 8.45 8.10
Average Balance Sheet Totals
Total assets $2,048,886 $2,003,268 $1,980,861 $1,946,261 $1,877,348 $1,815,999 $1,774,740 $1,784,502
Securities 540,872 539,118 528,492 516,558 484,187 436,882 419,737 449,542
Net loans 1,327,705 1,297,881 1,278,235 1,261,066 1,241,063 1,227,670 1,200,365 1,192,592
Total deposits 1,368,104 1,330,045 1,316,782 1,292,547 1,286,784 1,291,130 1,254,535 1,244,384
Securities sold
under repurchase
agreements 141,065 162,655 209,176 171,371 136,540 114,583 127,487 127,346
Other liabilities 280,921 258,007 199,712 222,603 196,308 162,738 155,884 179,736
Total shareholders'
equity 258,796 252,561 255,191 259,740 257,715 247,548 236,834 232,245
1 Per share amounts have been restated to record the effect of a
two-for-one common stock split in the form of a 100% stock
dividend distributed on October 30, 1998.