SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-12508
S&T BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1434426
(State or other jurisdiction of (I.R.S.EMPLOYER
incorporation or organization) Identification No.)
800 Philadelphia Street, Indiana, PA 15701
(Address of principal executive offices) (Zip Code)
(724) 349-2900
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Common Stock, $2.50 Par Value -- 27,131,087 shares as of April 6, 1999
PAGE 1
INDEX
S&T BANCORP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed consolidated balance sheets -
March 31, 1999 and December 31, 1998 3
Condensed consolidated statements of income -
three months ended March 31, 1999 and 1998. 4
Condensed consolidated statements of cash flows -
three months ended March 31, 1999 and 1998 5
Notes to condensed consolidated financial statements 6-9
Item 2. Management's discussion and analysis of financial
condition and results of operations 10-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
PAGE 2
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
[CAPTION]
March 31, December 31,
1999 1998
(000's omitted except share data)
ASSETS
Cash and due from banks $43,593 $48,736
Interest-earning deposits with banks 52 53
Federal funds sold - 19,300
Securities:
Available for sale 534,013 565,141
Held to maturity (market value $25,891
in 1999 and $27,161 in 1998) 25,144 26,345
Total Securities 559,157 591,486
Loans, net of allowance for loan losses
of $27,389 in 1999 and $26,677 in 1998 1,366,890 1,339,232
Premises and equipment 20,950 20,932
Other assets 50,250 49,872
TOTAL ASSETS $2,040,892 $2,069,611
LIABILITIES
Deposits:
Noninterest-bearing $207,679 $215,659
Interest-bearing 1,186,591 1,164,404
Total Deposits 1,394,270 1,380,063
Securities sold under repurchase
agreements 109,029 138,825
Federal funds purchased 3,225 -
Long term borrowing 240,068 240,068
Other liabilities 49,466 51,018
TOTAL LIABILITIES 1,796,058 1,809,974
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
Issued - 29,714,038 shares 74,285 74,285
Additional paid in capital 21,232 21,234
Retained earnings 163,509 158,274
Accumulated other comprehensive income 33,603 39,961
Treasury stock (2,584,955 shares at March
31, 1999 and 2,038,459 at December 31,
1998, at cost) (47,795) (34,117)
TOTAL SHAREHOLDERS' EQUITY 244,834 259,637
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,040,892 $2,069,611
See Notes to Condensed Consolidated Financial Statements
PAGE 3
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
[CAPTION]
For Three Months Ended
March 31,
1999 1998
INTEREST INCOME
Loans, including fees $28,702 $28,061
Deposits with banks 1 2
Federal funds sold 153 64
Investment securities:
Taxable 7,244 7,721
Tax-exempt 268 485
Dividends 972 839
Total Interest Income 37,340 37,172
INTEREST EXPENSE
Deposits 11,572 12,153
Securities sold under repurchase
agreements 1,448 2,292
Federal funds purchased 54 154
Long term borrowing 3,186 2,231
Other borrowed funds - 2
Total Interest Expense 16,260 16,832
NET INTEREST INCOME 21,080 20,340
Provision for loan losses 1,000 2,050
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 20,080 18,290
NONINTEREST INCOME:
Trust fees 882 870
Service charges on deposit accounts 1,438 1,260
Securities gains, net 1,419 2,311
Other 1,537 1,005
Total Noninterest Income 5,276 5,446
NONINTEREST EXPENSE
Salaries and employee benefits 5,580 5,670
Occupancy, net 769 685
Furniture and equipment 856 745
Other taxes 397 356
Data processing 592 512
FDIC assessment 61 55
Other 2,561 2,563
Total Noninterest Expense 10,816 10,586
INCOME BEFORE INCOME TAXES 14,540 13,150
Applicable income taxes 4,404 3,909
NET INCOME $10,136 $9,241
PER COMMON SHARE (1)
Net Income - Basic $0.37 $0.33
Net Income - Diluted $0.37 $0.33
Dividends 0.18 0.15
Average Common Shares
Outstanding - Basic 27,499 28,077
Average Common Shares
Outstanding - Diluted 27,740 28,408
(1) Per share amounts and average shares outstanding 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 Condensed Consolidated Financial Statements
PAGE 4
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[CAPTION]
Three Months Ended March 31
1999 1998
(000's omitted)
Operating Activities
Net Income $10,136 $9,241
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,000 2,050
Provision for depreciation and amortization 550 520
Net amortizaton of investment security premiums 168 145
Net gains on sales of securities available for
sale (1,419) (2,317)
Deferred income taxes (310) (443)
Decrease (increase) in interest receivable 931 (1,149)
(Decrease) increase in interest payable (978) 577
Increase in other assets (1,149) (493)
Increase in other liabilities 2,919 11
Net Cash Provided by Operating Activities 11,848 8,142
Investing Activities
Net decrease (increase) of interest-earning
deposits with banks 1 (3)
Net decrease in federal funds sold 19,300 0
Proceeds from maturities of investment
securities 1,200 11,047
Proceeds from maturities of securities
available for sale 55,895 51,589
Proceeds from sales of securities
available for sale 61,223 5,191
Purchases of securities available for sale (94,521) (109,503)
Net increase in loans (35,223) (18,752)
Proceeds from the sale of loans 6,565 949
Purchases of premises and equipment (567) (748)
Other, net (1) 0
Net Cash Used by Investing Activities 13,872 (60,230)
Financing Activities
Net increase in demand, NOW, MMI, and
savings deposits 27,190 33,477
Net (decrease) increase in certificates
of deposit (12,982) 1,439
Net (decrease) increase in repurchase
agreements (29,797) 40,403
Net increase in federal funds purchased 3,225 13,525
Acquisition of treasury stock (14,303) (21,542)
Sale of treasury stock 623 4,987
Cash dividends paid to shareholders (4,819) (4,242)
Net Cash Used by Financing Activities (30,863) 68,047
(Decrease) increase in Cash and Cash
Equivalents (5,143) 15,959
Cash and Cash Equivalents at Beginning
of Period 48,736 35,951
Cash and Cash Equivalents at End of Period $43,593 $51,910
See Notes to Condensed Consolidated Financial Statements
PAGE 5
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accetped accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments consisting of normal recurring accruals considered necessary
for a fair presentation have been included. Operating results for the three
month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the annual report on form 10-K for the year
ended December 31, 1998.
On September 21, 1998, the Board of Directors approved a two-for-one common
stock split in the form of a 100% stock dividend. The new shares were
distributed on October 30, 1998 to shareholders of record on October 15,
1998. This increased the outstanding shares by 13,789,110. All per share
amounts in the report have been restated to reflect the stock split.
Basic earnings per share is calculated by dividing income available to
common shareholders by the weighted average number of common shares out-
standing during the period. Options, warrants and other potentially
dilutive securities are excluded from the basic calculation, but are
included in diluted earnings per share. Average shares outstanding for
computing basic earnings per share were 27,498,813 and 28,076,642 for the
period ending March 31, 1999 and 1998. Average shares outstanding for
computing dilutive earnings per share were 27,739,943 and 28,408,108 for
the period ending March 31, 1999 and 1998. In computing dilutive earnings
per share, average shares outstanding have been increased by the common
stock equivalents relating to S&T's available stock options.
Beginning in 1998, S&T adopted Statement 130, Reporting Comprehensive
Income. Statement 130 establishes new rules for the reporting and display
of comprehensive income and its components. Statement 130 requires
unrealized gains or losses on S&T's available-for-sale securities, which
prior to adoption were reported seperately in shareholders' equity, to be
included in comprehensive income. During the three months ended March 31,
1999 and 1998, total comprehensive income amounted to $3,778,000 and
$11,921,000.
NOTE B--SECURITIES
The amortized cost and estimated market value of securities as of
March 31 are as follows:
[CAPTION]
1999 Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
Obligations of U.S. government
corporations and agencies $330,116 $1,716 ($195) $331,637
Mortgage-backed securities 7,581 237 7,818
U.S. Treasury securities 24,334 1,166 25,500
Corporate securities 43,900 304 (58) 44,146
Debt securities available
for sale 405,931 3,423 (253) 409,101
Marketable equity securities 57,213 50,569 (2,042) 105,740
Other securities 19,172 19,172
Total $482,316 $53,992 ($2,295) $534,013
1999 Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
Obligations of states and
political subdivisions $18,237 $601 $18,838
Corporate securities 1,999 146 2,145
Debt securities held to
maturity 20,236 747 0 20,983
Other securities 4,908 4,908
Total $25,144 $747 $0 $25,891
PAGE 6
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Continued
NOTE B-SECURITIES
The amortized cost and estimated market value of securities as of
December 31 are as follows:
[CAPTION]
1998 Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
Obligations of U.S. government
corporations and agencies $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
1998 Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
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 0 23,824
Other securities 3,337 3,337
Total $26,345 $816 $0 $27,161
During the period ended March 31, 1999, there were $1,419,140 in realized
gains relative to securities available for sale.
The amortized cost and estimated market value of debt securities at March
31, 1999, by contractual maturity, are shown below.
[CAPTION]
Estimated
Amortized Market
Available for Sale Cost Value
(000's omitted)
Due in one year or less $18,271 $18,463
Due after one year through five years 262,258 263,755
Due after five years through ten years 122,196 123,587
Due after ten years 3,206 3,296
Total $405,931 $409,101
PAGE 7
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Continued
[CAPTION]
NOTE B-SECURITIES
Estimated
Amortized Market
Held to Maturity Cost Value
(000's omitted)
Due in one year or less $2,965 $2,978
Due after one year through five years 13,632 14,209
Due after five years through ten years 3,639 3,796
Due after ten years 0 0
Total $20,236 $20,983
At March 31, 1999 and December 31, 1998 investment securities with a
principal amount of $286,515,000 and $295,286,000 respectively, were
pledged to secure repurchase agreements and public and trust fund deposits.
NOTE C--LOANS AND ALLOWANCE FOR LOAN LOSSES
[CAPTION]
The composition of the loan portfolio was as follows:
March 31, 1999 December 31, 1998
(000's omitted)
Real estate - construction $90,284 $87,246
Real estate - mortgages:
Residential 476,853 492,570
Commercial 437,333 407,445
Commercial - industrial and agricultural 281,160 265,297
Consumer installment 108,649 113,351
Gross Loans 1,394,279 1,365,909
Allowance for loan losses (27,389) (26,677)
Total Loans $1,366,890 $1,339,232
Changes in the allowance for loan losses for the three months ended
March 31 were as follows:
[CAPTION]
1999 1998
(000's omitted)
Balance at beginning of period $26,677 $20,427
Charge-offs (515) (1,166)
Recoveries 227 423
Net charge-offs (288) (743)
Provision for loan losses 1,000 2,050
Balance at end of period $27,389 $21,734
PAGE 8
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Continued
[CAPTION]
The following table represents S&T's investment in loans considered
to be impaired and related information on those impaired loans
at March 31, 1999 and December 31, 1998.
1999 1998
Recorded investment in loans considered
to be impaired $3,620,000 $3,391,000
Loans considered to be impaired that
were on a nonaccrual basis - -
Allowance for loan losses related to
loans considered to be impaired 141,000 133,000
Average recorded investment in impaired
loans 3,505,000 2,927,000
Total interest income recognized on
impaired loans 150,640 674,000
Interest income on impaired loans
recongnized on a cash basis 82,405 605,000
NOTE D--FINANCIAL INSTRUMENTS
S&T, in the normal course of business, commits to extend credit and
issue standby letters of credit. The obligations are not recorded in
S&T's financial statements. Loan commitments and standby letters of
credit are subject to S&T's normal credit underwriting policies and
and procedures and generally require collateral based upon management's
evaluation of each customer's financial condition and ability to satisfy
completely the terms of the agreement. S&T's exposure to credit loss
in the event the customer does not satisfy the terms of agreement equals
the notional amount of the obligation less the value of any collateral.
Unfunded loan commitments totaled $369,347,000 and obligations under
standby letters of credit totaled $88,930,000 at March 31, 1999.
At March 31, 1999, S&T had marketable equity securities, totaling
$1,550,738 at amortized cost and $4,250,262 at estimated market value,
that were subject to covered call option contracts. The purpose of
these contracts was to generate fee income for S&T.
NOTE E - LITIGATION
S&T, in the normal course of business, is subject to various legal
proceedings in which claims for monetary damages are asserted. No
material losses are anticipated by management as a result of these
legal proceedings.
PAGE 9
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is presented so
that shareholders may review in further detail the
financial condition and results of operations of S&T
Bancorp, Inc. and subsidiaries (S&T). This discussion
and analysis should be read in conjunction with the
condensed consolidated financial statements and the
selected financial data presented elsewhere in this
report.
Financial Condition
Total assets averaged $2.0 billion in the first three
months of 1999, a $48.1 million increase from the 1998
full year average. Average loans increased $54.6
million in the first three months of 1999 compared to
the 1998 full year averages. Funding for this loan
growth was primarily provided by a $40.2 million
increase in average deposits, a $ 7.3 million decrease
in average securities and federal funds sold, a $1.0
million increase in average retained earnings and a
$9.5 million increase in average borrowings.
Lending Activity
Average loans increased $54.6 million, or 4% to $1.4
billion for the three months ended March 31, 1999 from
the 1998 full year average. Changes in the
composition of the average loan portfolio during 1999
included increases of $2.2 million of commercial
loans and $81.2 million of commercial real estate
loans, offset by decreases of $18.2 million of
residential mortgages and $10.6 million of installment
loans.
Commercial real estate loans comprise 31% of the loan
portfolio. Although commercial real estate loans can
be an area of higher risk, management believes these
risks are mitigated by limiting the percentage amount
of portfolio composition, a rigorous underwriting
review by loan administration and the fact that many
of the commercial real estate loans are owner-occupied
and/or seasoned properties. During 1999, S&T sold
$0.5 million of participation's in originated
commercial real estate loans. The purpose of these
sales was to diversify credit risk on larger loans and
to generate fee income from servicing.
Residential mortgage lending continued to be a
strategic area of focus during the first three months
of 1999 through a centralized mortgage origination
department, ongoing product redesign, the utilization
of commission compensated originators and the
implementation of a mortgage banking function.
Management believes that if a downturn in the local
residential real estate market occurs, the impact of
declining values on the real estate loan portfolio
will be negligible because of S&T's conservative
mortgage lending policies. These policies generally
require, for portfolio loans, a maximum term of twenty
years for fixed rate mortgages and private mortgage
insurance for loans with less than a 20% down payment.
At March 31, 1999 the residential mortgage portfolio
had a 23% composition of adjustable rate mortgages.
S&T periodically sells longer-term, lower-yielding 1-4
family mortgages to the Federal National Mortgage
Association (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
the first quarter of 1999, S&T sold $6.1 million of
1-4 family mortgages to FNMA. 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. Pricing pressures have been unusually
intense in the indirect auto loan market during the
last two years and the decision was made to exit this
line of business and allow the portfolio to roll off.
Loan underwriting standards for S&T are established by
a formal policy administered by the S&T Bank Credit
Administration Department, and subject to the periodic
review and approval of the S&T Bank Board of Directors.
Rates and terms for commercial real estate and
equipment loans normally are negotiated, subject to
such variables as economic conditions, marketability
of collateral, credit history of the borrower and
future cash flows. The loan to value policy guideline
for commercial loans is generally 75%.
PAGE 10
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The residential, first lien, mortgage loan to value
policy guideline is 80%. Higher loan to value loans
can be approved with the appropriate private mortgage
insurance coverage. Second lien positions are
sometimes incurred with home equity loans, but
normally only to the extent that the combined credit
exposure for both first and second liens do not
exceed 100% of loan to value.
A variety of unsecured and secured installment loan
and credit card products are offered by S&T. However,
the bulk of the consumer loan portfolio is automobile
loans. Loan to value guidelines for direct loans are
90%-100% of invoice for new automobiles and 80%-90%
of "NADA" value for used automobiles. Loan to value
policy guidelines for automobile loans purchased from
dealers on a third party basis are 90%-125% of invoice
for new automobiles and 100%-125% of "Black Book"
value for used automobiles.
Management intends to continue to pursue quality loans
in a variety of lending categories within our market
area in order to honor our commitment to provide the
best service possible to our customers. S&T's loan
portfolio primarily represents loans to businesses and
consumers in our market area of Western Pennsylvania
rather than to borrowers in other areas of the country
or to borrowers in other nations. S&T has not
concentrated its lending activities in any industry or
group. During the past several years, management has
concentrated on building an effective credit and loan
administration staff which assists management in
evaluating loans before they are made and identifies
problem loans early.
Security Activity
Average securities decreased $14.5 million in the
first three months of 1999 compared to the 1998 full
year average. This decrease is attributable to
utilizing funds from the maturities and calls of
securities to fund loan growth. Loans typically
provide higher yields and have the potential of
developing other banking relationships. This decrease
was comprised of $7.1 million in U.S. treasury
securities, $29.7 million in U.S. government agency
securities, $3.2 million of mortgage-backed securities
and $8.8 million of states and political subdivisions.
Offsetting these decreases were average increases of
$19.4 million of corporate securities, $12.0 million
of corporate equity securities and $2.9 million of
Federal Home Loan Bank (FHLB) stock.
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 1999, the
equity portfolio yielded 9.3% on a fully taxable
equivalent basis and had unrealized gains, net of
nominal unrealized losses, of $48.5 million. The
equity securities portfolio consists of securities
traded on the various stock markets and are subject to
change in market value. The FHLB capital stock is a
membership and borrowing requirement and is acquired
and sold at stated value.
S&T's policy for security classification includes U.S.
treasuries, U.S. government agencies, mortgage-backed
securities and corporate equities as available for
sale. Municipal securities and other debt securities
are classified as held to maturity. At March 31,
1999, unrealized gains, net of unrealized losses, for
securities classified as available for sale were $61.5
million.
Allowance for Loan Losses
The balance in the allowance for loan losses was $27.4
million or 1.96% of total loans at March 31, 1999 as
compared to $26.7 million or 1.95% of total loans at
December 31, 1998.
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.
PAGE 11
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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
occurred within the credits economic life cycle.
Significant to this analysis is the shift in the 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 $0.3 million in the first
quarter of 1999, as compared to $0.7 million in the
same period of 1998. The balance of nonperforming
loans, which included nonaccrual loans past due 90
days or more, at March 31, 1999, was $3.3 million or
0.23% of total loans. This compares to nonperforming
loans of $2.9 million or 0.21% of total loans at
December 31, 1998.
Asset quality is a major corporate objective at S&T,
and management believes that the allowance for loan
losses is adequate to absorb probable loan losses.
Deposits
Average total deposits increased by $40.2 million, or
3% for the three months ended March 31, 1999 as
compared to the 1998 full year average. Changes in the
average deposit mix included a $45.8 million increase
in money market accounts, $5.3 million increase in NOW
accounts and a $16.9 million increase in demand
accounts, offset by a $23.6 million decrease in time
deposits and a $4.2 million decrease in savings
accounts. 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, Pennsylvania 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 6% of total deposits at March 31, 1999 and
7% of total deposits at December 31, 1998 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
March 31, 1999, there were $11.6 million of these
brokered retail certificates of deposit outstanding.
Borrowings
Average borrowings increased $9.5 million for the
three months ended March 31, 1999 compared to the 1998
full year average and were comprised of retail
repurchase agreements (REPO's), wholesale REPO's,
federal funds purchased and long-term borrowings. S&T
defines repurchase agreements with its local, retail
customers as retail REPOS; wholesale REPOS are those
transacted with other banks and brokerage firms with
terms normally ranging from 1 to 14 days.
The average balance in retail REPOS decreased
approximately $2.0 million for the first three months
of 1999 compared to the full year 1998 average. S&T
views retail REPOS as a relatively stable source of
funds since most of these accounts are with local,
long-term customers.
PAGE 12
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Average wholesale REPOS and federal funds decreased
$42.5 million for the first three months of 1999
compared to the full year 1998 average. The increase
in core deposits, funds from the sales and maturities
of investment securities and the availability of
reasonably priced long-term borrowings from the FHLB
decreased the usage of these types of fundings in 1999.
Average long-term borrowings have increased $54.1
million in the first three months of 1999 as compared
to the full year 1998 average. At March 31, 1999, S&T
had long-term borrowings outstanding of $60.6 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, fixed rate fundings for newly
originated loans, to mitigate the risk associated
with volatile liability fundings, to take advantage of
lower cost funds through the FHLB's Community
Investment Program and to fund stock buy-backs.
Capital Resources
Shareholders' equity decreased $14.8 million at March
31, 1999, compared to December 31, 1998. Net income
was $10.1 million and dividends paid to shareholders
were $4.9 million for the three months ended March 31,
1999. The decrease is attributable to the repurchase
of 581,000 shares of S&T common stock during the
first quarter of 1999. An authorization to buy-back
up to 1,000,000 shares remains in effect until
December 31, 1999.
S&T paid 48% of net income in dividends, equating to
an annual dividend rate of $0.72 per share during the
first three months of 1999. The book value of S&T's
common stock decreased slightly from $9.38 at December
31, 1998 to $9.02 at March 31,1999, primarily due to
the stock buy-backs during the first quarter of 1999.
Equity associated with the available for sale
securities portfolio decreased $6.4 million during
the first three months of 1999. The market price of
S&T's common stock was $19.13 per share at March 31,
1999, compared to $26.56 per share at December 31, 1998.
S&T continues to maintain a strong capital position
with a leverage ratio of 10.2% as compared to the
minimum regulatory guideline of 3.0%. S&T's risk-based
capital Tier I and Total ratios were 13.4% and 16.0%
respectively, at March 31, 1999. These ratios place
S&T well above the Federal Reserve Board's risk-based
capital guidelines of 4.0% and 8.0% for Tier I and
Total, respectively.
RESULTS OF OPERATIONS
Three months ended March 31, 1999 compared to
Three months ended March 31, 1998
Net Income
Net income increased to $10.1 million or $0.37 per
diluted earnings per share in the first three months
of 1999 from $9.2 million or $0.33 per diluted
earnings per share for the same period of 1998. The
significant improvement during the first three months
of 1999 was the result of higher net interest income
and noninterest income, offset by a 2% increase in
operating expenses.
PAGE 13
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net Interest Income
On a fully taxable equivalent basis, net interest
income increased $0.7 million or 4% in the first three
months of 1999 compared to the same period of 1998.
The net yield on interest-earning assets was 4.62% in
the first three months of 1998 as compared to 4.70% in
the same period of 1998. The decline in the net yield
on interest earning assets during 1999 was primarily
attributable to stock buy-backs during the first three
months of 1999.
In the first three months of 1999, average securities
decreased $14.5 million and average loans increased
$54.6 million. The yields on average securities
decreased by 23 basis points during the period and the
yield on average loans decreased 24 basis points.
Average interest-bearing deposits provided $23.3
million of the funds for the growth in loan portfolio;
cost of deposits totaled 4.02%, a decrease of 32 basis
points from 1998 due to an improved mix in the
composition of deposits. The cost of REPOS and other
borrowed funds increased 47 basis points to 5.09%.
Also positively affecting net interest income was a
$14.2 million increase to average net free funds.
Average net free funds are the excess of demand
deposits, other non-interest bearing liabilities and
shareholders' equity over non-earning assets. This
increase is net of the reduction to shareholders'
equity resulting from stock buy-backs. Maintaining
consistent spreads between earning assets and costing
liabilities is very significant to S&T's financial
performance since net interest income comprises 85% of
operating revenue. A variety of asset/liablity
management strategies were successfully implemented
within prescribed ALCO risk parameters that enabled
S&T to maintain a net interest margin reasonably
consistent with historical levels. The level and mix
of funds is continually monitored by ALCO in order to
mitigate the interest rate sensitivity and liquidity
risks of the balance sheet.
Provision for Loan Losses
The provision for loan losses was $1.0 million for the
first three months of 1999 as compared to $2.1 million
in the same period of 1998. The provision 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. 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 $0.3 million for the first three
months of 1999 compared to $0.7 million for the same
period 1998. Nonperforming loans to total loans was
0.23% at March 31, 1999 and 0.25% in the same period
of 1998.
Also affecting the amount of provision expense is the
amount and types of loan growth and portfolio
composition. Most of the loan growth in 1999 is
attributable to larger-sized commercial loans.
Noninterest Income
Noninterest income decreased $0.2 million or 3% in the
first three months of 1999 compared to the same period
of 1998. Increases included $0.2 million in service
charges and fees, $0.5 million in other income offset
by a decrease of $0.9 million in security gains.
The 14% increase in service charges on deposit
accounts was primarily the result of expanding new
cash management relationships, management's continual
effort to implement reasonable fees for services
performed, and to manage closely the collection of
these fees. The increase in other income was a
result of increased performance for brokerage
activities, credit insurance, letters of credit fees,
ATM fees and fees on covered call options. These
areas were the focus of several strategic initiatives
and product enhancements implemented in order to
expand this source of revenue.
PAGE 14
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
S&T recognized $1.4 million of gains on equity
securities in the first three months of 1999 as
compared to $2.3 million in the same period of 1998.
The security gains were taken on available for sale
equities securities in the first three months of 1999
and 1998 in order to maximize returns in the portfolio
by taking advantage of market opportunities when
presented. Unrealized gains, net of unrealized
losses, in the available for sale equities portfolio
totaled $48.5 million at March 31, 1999.
Noninterest Expense
Noninterest expense increased slightly by $0.2 million
or 2% at March 31, 1999 compared to March 31, 1998.
Recurring expenses were relatively flat during the
first three months of 1999 as compared to the first
three months of 1998 and reflect normal activity
increases. Average full-time equivalent staff
increased slightly from 652 to 654. S&T's efficiency
ratio, which measures noninterest expense as a
percent of recurring noninterest income plus net
interest income on a fully taxable equivalent basis,
improved to 42% at March 31, 1999 as compared to 44%
at March 31, 1998.
Federal Income Taxes
Federal income tax expense increased $0.5 million at
March 31, 1999 as compared to March 31, 1998
primarily as a result of higher pre-tax income in
1999. The effective tax rate for the first three
months of 1999 and 1998 was 30%, which is below the
35% statutory rate due to benefits resulting from
tax-exempt interest, excludable dividend income and
low income housing tax credits (LIHTC).
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 provides 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.
PAGE 15
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
All internal data processing systems have been tested
for Year 2000 compliance. The testing included
validations of third party software/hardware vendors
that have provided assurance or certifications of
compliance. To date, 100% of the testing for critical
systems has been completed and software/hardware
replacements have been scheduled where problems have
been identified. The testing of critical internal
systems was completed during the first quarter of 1999.
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 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 all
of the critical systems and application changes by the
end of the first quarter of 1999 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 alternative processing plans in
the event of system or application failure. S&T
finalized 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.
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 16
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
PAGE 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
S&T Bancorp, Inc.
(Registrant)
Date:
Robert E. Rout
Principal Accounting Officer
PAGE 18