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 June 30, 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 -- 27,116,894 shares as of July 30, 1999
1
INDEX
S&T BANCORP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed consolidated balance sheets -
June 30, 1999 and December 31, 1998 3
Condensed consolidated statements of income -
three months ended June 30, 1999 and 1998,
and six months ended June 30, 1999 and 1998 4
Condensed consolidated statements of cash flows -
six months ended June 30, 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 10-17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
[CAPTION]
June 30, December 31,
1999 1998
(000's omitted except share data)
ASSETS
Cash and due from banks $37,399 $48,736
Interest-earning deposits with banks 51 53
Federal funds sold 12,700 19,300
Securities:
Available for sale 576,795 565,141
Held to maturity (market value $22,348
in 1999 and $27,161 in 1998) 21,846 26,345
Total Securities 598,641 591,486
Loans, net of allowance for loan losses
of $28,224 in 1999 and $26,677 in 1998 1,386,257 1,339,232
Premises and equipment 21,135 20,932
Other assets 75,765 49,872
TOTAL ASSETS $2,131,948 $2,069,611
LIABILITIES
Deposits:
Noninterest-bearing $214,321 $215,659
Interest-bearing 1,178,330 1,164,404
Total Deposits 1,392,651 1,380,063
Securities sold under repurchase
agreements 206,186 138,825
Long term borrowings 240,068 240,068
Other liabilities 45,464 51,018
TOTAL LIABILITIES 1,884,369 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 21,231 21,234
Retained earnings 168,509 158,274
Accumulated other comprehensive income 31,850 39,961
Treasury stock (2,604,144 shares at
June 30, 1999 and 2,038,459 at
December 31, 1998, at cost) (48,296) (34,117)
TOTAL SHAREHOLDERS' EQUITY 247,579 259,637
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,131,948 $2,069,611
See Notes to Condensed Consolidated Financial Statements
3
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
[CAPTION]
For Three Months Ended For Six Months Ended
June 30, June 30,
1999 1998 1999 1998
INTEREST INCOME
Loans, including fees $29,453 $28,467 $58,155 $56,528
Deposits with banks 1 2 2 4
Federal funds sold 106 115 259 179
Investment securities:
Taxable 7,452 7,725 14,696 15,446
Tax-exempt 240 397 508 882
Dividends 986 842 1,958 1,681
Total Interest Income 38,238 37,548 75,578 74,720
INTEREST EXPENSE
Deposits 11,494 12,370 23,066 24,523
Securities sold under repurchase
agreements 1,851 2,841 3,299 5,133
Federal funds purchased 67 83 121 237
Long term borrowings 3,225 1,975 6,411 4,206
Other borrowed funds - 3 - 5
Total Interest Expense 16,636 17,272 32,897 34,104
NET INTEREST INCOME 21,602 20,276 42,681 40,616
Provision for loan losses 1,000 4,000 2,000 6,050
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 20,602 16,276 40,681 34,566
NONINTEREST INCOME:
Securities gains, net 407 5,126 1,826 7,443
Trust fees 1,051 874 1,933 1,744
Service charges on deposit accounts 1,537 1,347 2,975 2,607
Other 1,487 1,004 3,024 2,003
Total Noninterest Income 4,075 3,225 7,932 6,354
NONINTEREST EXPENSE
Salaries and employee benefits 5,482 5,575 11,062 11,245
Occupancy, net 729 694 1,498 1,379
Furniture and equipment 627 799 1,483 1,544
Other taxes 347 366 744 722
Data processing 492 881 1,084 1,393
FDIC assessment 59 58 120 113
Other 2,778 2,676 5,339 5,239
Total Noninterest Expense 10,514 11,049 21,330 21,635
INCOME BEFORE INCOME TAXES 14,570 13,579 29,110 26,728
Applicable income taxes 4,422 4,131 8,826 8,040
NET INCOME $10,148 $9,448 $20,284 $18,688
PER COMMON SHARE (1)
Net Income-Basic $0.37 $0.34 $0.74 $0.67
Net Income-Diluted $0.37 $0.34 $0.74 $0.66
Dividends 0.19 0.17 0.37 0.32
Average Common Shares Outstanding-Basic 27,128 27,723 27,312 27,899
Average Common Shares Outstanding-Diluted 27,346 28,021 27,542 28,213
(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
4
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[CAPTION]
Six Months Ended June 30
1999 1998
(000's omitted)
Operating Activities
Net Income $20,284 $18,688
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,000 6,050
Provision for depreciation and amortization 1,096 1,052
Net amortizaton of investment security premiums 339 328
Net gains on sales of securities available for sale (1,826) (7,449)
Deferred income taxes 116 (627)
Decrease in interest receivable 462 552
Decrease in interest payable (365) (380)
(Increase) decrease in other assets (26,107) 466
Decrease in other liabilities (1,354) (1,863)
Net Cash Provided by Operating Activities (5,355) 16,817
Investing Activities
Net redemption of interest-earning
deposits with banks 2 1
Net decrease in federal funds sold 6,600 0
Proceeds from maturities of investment securities 4,495 15,079
Proceeds from maturities of securities available
for sale 79,162 113,765
Proceeds from sales of securities available for
sale 207,663 67,328
Purchases of securities available for sale (309,466) (215,068)
Net increase in loans (63,089) (44,825)
Proceeds from the sale of loans 14,064 11,682
Purchases of premises and equipment (1,224) (1,127)
Other, net (75) 21
Net Cash Used by Investing Activities (61,868) (53,144)
Financing Activities
Net increase in demand, NOW, MMI,and
savings deposits 26,930 27,965
Net (decrease) increase in certificates of
deposit (14,341) 1,513
Net increase in repurchase agreements 67,360 40,386
Net decrease in federal funds purchased 0 (4,675)
Acquisition of treasury stock (14,922) (25,685)
Sale of treasury stock 740 5,560
Cash dividends paid to shareholders (9,881) (8,404)
Net Cash Used by Financing Activities 55,886 36,660
(Decrease) increase in Cash and Cash Equivalents (11,337) 333
Cash and Cash Equivalents at Beginning of Period 48,736 35,951
Cash and Cash Equivalents at End of Period $37,399 $36,284
See Notes to Condensed Consolidated Financial Statements
5
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjust-
ments consisting of normal recurring accruals considered necessary for a fair
presentation have been included. Operating results for the six month period
ended June 30, 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 outstanding during
the period. Options, warrants and other potentially dilutive securities are
excluded from the basic calculation, but are included in diluted earnings per
share. Average shares outstanding for computing basic earnings per share were
27,312,231 and 27,898,822 for the period ending June 30, 1999 and 1998. Average
shares outstanding for computing dilutive earnings per share were 27,541,958
and 28,213,353 for the period ending June 30, 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 compre-
hensive income. During the second quarter of June 30, 1999 and 1998, total
comprehensive income amounted to $8,395,000 and $6,320,000. During the six
months ended June 30, 1999 and 1998, total comprehensive income amounted to
$12,173,000 and $18,241,000.
NOTE B--SECURITIES
The amortized cost and estimated market value of securities as of June 30
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 $359,466 $546 ($2,412) $357,600
Mortgage-backed securities 6,818 123 (1) 6,940
U.S. Treasury securities 21,291 793 22,084
Corporate securities 62,271 126 (947) 61,450
Debt securities available for sale 449,846 1,588 (3,360) 448,074
Marketable equity securities 58,778 52,261 (1,490) 109,549
Other securities 19,172 19,172
Total $527,796 $53,849 ($4,850) $576,795
1999 Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
Obligations of states and political
subdivisions $16,374 $388 ($1) $16,761
Corporate securities 1,999 115 2,114
Debt securities held to maturity 18,373 503 (1) 18,875
Other securities 3,473 3,473
Total $21,846 $503 ($1) $22,348
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 June 30, 1999, there were $1,826,338 in realized gains
relative to securities available for sale.
The amortized cost and estimated market value of debt securities at June 30,
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 $16,254 $16,418
Due after one year through five years 279,364 277,109
Due after five years through ten years 151,530 151,818
Due after ten years 2,698 2,729
Total $449,846 $448,074
7
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Continued
NOTE B-SECURITIES
[CAPTION]
Estimated
Amortized Market
Held to Maturity Cost Value
(000's omitted)
Due in one year or less $2,135 $2,151
Due after one year through five years 12,599 12,982
Due after five years through ten years 3,639 3,742
Due after ten years 0 0
Total $18,373 $18,875
At June 30, 1999 and December 31, 1998 investment securities with a principal
amount of $409,727,000 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
The composition of the loan portfolio was as follows:
[CAPTION]
June 30, 1999 December 31, 1998
(000's omitted)
Real estate - construction $107,533 $87,246
Real estate - mortgages:
Residential 469,995 492,570
Commercial 433,140 407,445
Commercial - industrial and agricultural 295,744 265,297
Consumer installment 108,069 113,351
Gross Loans 1,414,481 1,365,909
Allowance for loan losses (28,224) (26,677)
Total Loans $1,386,257 $1,339,232
Changes in the allowance for loan losses for the six months ended June 30
were as follows:
[CAPTION]
1999 1998
(000's omitted)
Balance at beginning of period $26,677 $20,427
Charge-offs (2,700) (2,154)
Recoveries 2,247 753
Net charge-offs (453) (1,401)
Provision for loan losses 2,000 6,050
Balance at end of period $28,224 $25,076
8
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Continued
The following table represents S&T's investment in loans considered to be
impaired and related information on those impaired loans at June 30, 1999
and December 31, 1998.
[CAPTION]
1999 1998
Recorded investment in loans considered to be
impaired $4,557,000 $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 - 133,000
Average recorded investment in impaired loans 3,856,000 2,927,000
Total interest income recognized on impaired loans 364,000 674,000
Interest income on impaired loans recognized on a
cash basis 251,000 605,000
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
are subject to S&T's normal credit underwriting policies and procedures
and generally require collateral based upon management's evaluation of
each customer's financial condition and ability to satisfy completely the
terms of the agreement. S&T's exposure to credit loss in the event the
customer does not satisfy the terms of agreement equals the notional
amount of the obligation less the value of any collateral. Unfunded loan
commitments totaled $385,322,000 and obligations under standby letters of
credit totaled $115,237,000 at June 30, 1999.
At June 30, 1999, S&T had marketable equity securities, totaling $1,502,272
at amortized cost and $3,803,197 at estimated market value, that were subject
to covered call option contracts. The purpose of these contracts was to
generate fee income for S&T.
NOTE E - LITIGATION
S&T, in the normal course of business, is subject to various legal proceedings
in which claims for monetary damages are asserted. No material losses are
anticipated by management as a result of these legal proceedings.
9
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is presented so that
shareholders may review in further detail the financial condition
and results of operations of S&T Bancorp, Inc. and subsidiaries
(S&T). This discussion and analysis should be read in conjunction
with the condensed consolidated financial statements and the
selected financial data presented elsewhere in this report.
Financial Condition
Total assets averaged $2.1 billion in the first six months of
1999, a $73.7 million increase from the 1998 full year average.
Average loans increased $73.7 million in the first six months of
1999 compared to the 1998 full year averages. Funding for this
loan growth was primarily provided by a $51.9 million increase in
average deposits and a $27.8 million increase in average
borrowings offset by decreases of $1.7 million in average
securities and federal funds sold and a $2.3 million decrease in
average retained earnings.
Lending Activity
Average loans increased $73.7 million, or 6% to $1.4 billion for
the six months ended June 30, 1999 from the 1998 full year
average. Changes in the composition of the average loan
portfolio during 1999 included increases of $15.5 million of
commercial loans and $92.5 million of commercial real estate
loans, offset by decreases of $22.6 million of residential
mortgages and $11.7 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 $4.4 million of
participations 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 six 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 June 30, 1999 the residential mortgage
portfolio had a 22% composition of adjustable rate mortgages.
Much of the decline in average residential loans is due to more
active participation in the secondary mortgage markets. 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 six
months of 1999, S&T sold $9.6 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.
10
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Rates and terms for commercial real estate and equipment loans
normally are negotiated, subject to such variables as economic
conditions, marketability of collateral, credit history of the
borrower and future cash flows. The loan to value policy
guideline for commercial loans is generally 75%.
The residential, first lien, mortgage loan to value policy
guideline is 80%. Higher loan to value loans can be approved with
the appropriate private mortgage insurance coverage. Second lien
positions are sometimes incurred with home equity loans, but
normally only to the extent that the combined credit exposure for
both first and second liens do not exceed 100% of loan to value.
A variety of unsecured and secured installment loan and credit
card products are offered by S&T. However, the bulk of the
consumer loan portfolio is automobile loans. Loan to value
guidelines for direct loans are 90%-100% of invoice for new
automobiles and 80%-90% of "NADA" value for used automobiles.
Loan to value policy guidelines for automobile loans purchased
from dealers on a third party basis were 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 slightly by $6.9 million in the first
six months of 1999 compared to the 1998 full year average.
During the second quarter of 1999, S&T's bond portfolio was
restructured by selling $137.6 million of U.S. government agency
and treasury securities, and reinvesting the proceeds. The
restructuring was implemented in order to extend potential call
maturities and to take advantage of higher interest rates. The
average decrease was comprised of $8.5 million in U.S. treasury
securities, $27.8 million in U.S. government agency securities,
$3.6 million of mortgage-backed securities and $9.9 million of
states and political subdivisions. Offsetting these decreases
were average increases of $28.1 million of corporate securities,
$11.9 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 $50.8 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
June 30, 1999, unrealized gains, net of unrealized losses, for
securities classified as available for sale were $49.0 million.
11
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Allowance for Loan Losses
The balance in the allowance for loan losses was $28.2 million or
2.00% of total loans at June 30, 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.
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 $0.5 million in the first six months
of 1999, as compared to $1.4 million in the same period of 1998.
The balance of nonperforming loans, which included nonaccrual
loans past due 90 days or more, at June 30, 1999, was $3.8
million or 0.27% 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 $51.9 million, or 4% for the
six months ended June 30, 1999 as compared to the 1998 full year
average. In September 1998, S&T purchased a branch in Clarion,
Pennsylvania and assumed $39.0 million of deposits which
accounted for $37.8 million of the average increase. Changes in
the average deposit mix included a $66.2 million increase in
money market accounts and a $21.6 million increase in demand
accounts, offset by a $24.6 million decrease in time deposits, a
$3.3 million decrease in savings accounts and a $8.0 million
decrease in NOW 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.
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 June 30, 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 June 30, 1999, there were
$11.6 million of these brokered retail certificates of deposit
outstanding.
Borrowings
Average borrowings increased $27.8 million for the first six
months ended June 30, 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.
12
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The average balance in retail REPOS decreased approximately $1.9
million for the first six 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.
Average wholesale REPOS and federal funds decreased $24.2 million
for the first six months of 1999 compared to the full year 1998
average. The increase in core deposits, funds from the sales and
maturities of available for sale 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 $54.0 million in the
first six months of 1999 as compared to the full year 1998
average. At June 30, 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 $12.1 million at June 30, 1999,
compared to December 31, 1998. Net income was $20.3 million and
dividends paid to shareholders were $9.9 million for the six
months ended June 30, 1999. The decrease is attributable to the
repurchase of 607,000 shares of S&T common stock during the
first half of 1999. An authorization to buy-back up to 1,000,000
shares remains in effect until December 31, 1999.
S&T paid 49% of net income in dividends, equating to an annual
dividend rate of $0.76 per share during the first six months of
1999. The book value of S&T's common stock decreased slightly
from $9.38 at December 31, 1998 to $9.13 at June 30,1999,
primarily due to the stock buy-backs during the first half of
1999. Equity associated with the available for sale securities
portfolio decreased $8.1 million during the first six months of
1999. The market price of S&T's common stock was $25.25 per
share at June 30, 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 10.0% as compared to the minimum regulatory
guideline of 3.0%. S&T's risk-based capital Tier I and Total
ratios were 12.9% and 15.6% respectively, at June 30, 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
Six months ended June 30, 1999 compared to
Six months ended June 30, 1998
Net Income
Net income increased to $20.3 million or $0.74 per diluted
earnings per share in the first six months of 1999 from $18.7
million or $0.66 per diluted earnings per share for the same
period of 1998, a 12% improvement. The significant improvement
during the first six months of 1999 was the result of higher net
interest income and noninterest income and by a decrease in
operating expenses.
Net Interest Income
On a fully taxable equivalent basis, net interest income increased
$2.1 million or 5% in the first six months of 1999 compared to
the same period of 1998. The net yield on interest-earning
assets was 4.64% in the first six months of 1998 as compared to
4.67% in the same period of 1998. The decline in the net yield
on interest earning assets during 1999 was primarily attributable
to the aforementioned bond portfolio restructuring and stock buy-backs
during the first six months of 1999.
13
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In the first six months of 1999, average securities decreased $6.9
million and average loans increased $73.7 million. The yields on
average securities decreased by 8 basis points during the period
and the yield on average loans decreased 29 basis points.
Average interest-bearing deposits provided $30.3 million of the
funds for the growth in the loan portfolio; cost of deposits
totaled 3.97%, a decrease of 37 basis points from 1998 due to an
improved mix in the composition of deposits. The cost of REPOS
and other borrowed funds decreased 32 basis points to 5.06%.
Also positively affecting net interest income was a $13.8 million
increase to average net free funds. Average net free funds are
the excess of demand deposits, other non-interest bearing
liabilities and shareholders' equity over non-earning assets.
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 $2.0 million for the first six
months of 1999 as compared to $6.1 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
$0.5 million for the first six months of 1999 compared to $1.4
million for the same period 1998. Nonperforming loans to total
loans was 0.27% at June 30, 1999 and 0.24% 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 increased $1.6 million or 25% in the first six
months of 1999 compared to the same period of 1998. Increases
included $0.4 million in service charges and fees, $0.2 million
in trust fees and $1.0 million in other income. Security gains
decreased $5.6 million in the first half of 1999 as compared to
the same period of 1998.
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 51% increase in other income was
primarily a result of increased performance for brokerage
activities, insurance activities, letters of credit fees,
merchant and debit card income, equity call options and mortgage
servicing revenues. These areas were the focus of several
strategic initiatives and product enhancements implemented in
order to expand this source of revenue.
14
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
S&T recognized $1.8 million of gains on available for sale
securities in the first six months of 1999 as compared to $7.4
million in the same period of 1998. The security gains were
taken on available for sale securities in the first six months of
1999 and 1998 in order to maximize returns in the portfolio by
taking advantage of market opportunities when presented.
Offsetting these gains were $1.4 million in losses, in the
second quarter, from the aforementioned restructuring of the
available for sale bond portfolio. Unrealized gains, net of
unrealized losses, in the available for sale portfolio totaled
$49.0 million at June 30, 1999.
Noninterest Expense
Noninterest expense decreased by $0.3 million or 1% at June 30,
1999 compared to June 30, 1998. Recurring expenses were
relatively flat during the first six months of 1999 as compared
to the first six months of 1998. Average full-time equivalent
staff increased slightly from 651 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 41% at June 30, 1999 as
compared to 43% at June 30, 1998.
Federal Income Taxes
Federal income tax expense increased $0.8 million at June 30,
1999 as compared to June 30, 1998 primarily as a result of higher
pre-tax income in 1999. The effective tax rate for the first six
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).
RESULTS OF OPERATIONS
Three months ended June 30, 1999 compared to
Three months ended June 30, 1998
Net Income
Net income increased to $10.1 million or $0.37 per diluted
earnings per share in the second quarter of 1999 from $9.4
million or $0.34 per diluted earnings per share for the same
period of 1998. This significant improvement is due to higher
net interest income, higher noninterest income and relatively
flat operating expenses.
Net Interest Income
On a fully taxable equivalent basis, net interest income increased
$1.3 million or 6% in the second quarter of 1999 compared to the
same period of 1998. This improvement in net interest income
resulted from a higher level of earning assets while maintaining
fairly consistent spreads.
Average earning assets increased by $110.9 million as compared to
the second quarter of 1998, primarily as a result of $106.8
million of loan growth and $3.5 million of security growth.
Funding for this asset growth was provided by available for sale
securities sales, deposit growth, increased borrowings and
earnings retained.
Net interest margin on a fully taxable equivalent basis was 4.61%
for the second quarter of 1999, as compared to 4.59% for the same
period of 1998, relatively unchanged from the year ago period.
15
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Loan Losses
The provision for loan losses decreased to $1.0 million for the
second quarter of 1999 as compared to $4.0 million in the same
period of 1998. Net loan charge-offs totaled $0.2 million for
the second quarter of 1999 compared to $0.7 million for the same
period of 1998. The lower provision expense in 1999 was a result
of an effort to maintain S&T's allowance for loan losses to total
loans at a relatively consistent level with charge-offs, loan
growth, a continuing mix change in the loan portfolio to a
greater percentage of commercial loans and management's
assessment of economic conditions, credit quality statistics,
loan administration effectiveness and other factors that would
have an impact on future probable losses in the loan portfolio.
Noninterest Income
Noninterest income increased $0.9 million or 28% in the second
quarter of 1999 as compared to 1998. Increases included $0.2
million in service charges and fees, $0.2 million in trust fees
and $0.5 million in other income during the second quarter of
1999. Security gains decreased $4.7 million in the second
quarter of 1999 as compared to the same period of 1998.
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 20% increase in trust fees is
attributable to expanded marketing efforts to develop new trust
business and to develop new relationships within the Allegheny
County market, and increased market performance of clients'
portfolios. The 53% increase in other income was primarily a
result of increased performance for brokerage activities,
insurance activities, letters of credit fees, merchant and debit
card income, equity call options and mortgage servicing revenues.
These areas were the focus of several strategic initiatives and
product enhancements implemented in order to expand this source
of revenue.
During the second quarter of 1999, S&T realized equity security
gains of $1.8 million offset by $1.4 million in losses from
restructuring the available for sale bond portfolio. The
available for sale equity security gains were taken in order to
maximize returns by taking advantage of market opportunities when
presented.
Noninterest Expense
Noninterest expense decreased $0.5 million or 5% in the second
quarter of 1999 as compared to the second quarter of 1998. The
decrease is attributable to nonrecurring expenses provided for
during the second quarter of 1998 for projected costs of the Year
2000 computer issue, consulting fees for reengineering of branch
delivery services and conversion costs for a branch purchase.
Recurring expenses were relatively flat during the second
quarter of 1999 as compared to the second quarter of 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, improved to 40% for the
quarter ending June 30, 1999 as compared to 42% for the quarter
ending June 30, 1998.
Federal Income Taxes
Federal income tax expense increased $0.3 million in the second
quarter of 1999 as compared to the second quarter of 1998
primarily as a result of higher pre-tax income in 1999. The
effective tax rate for the second quarter 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.
16
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Based on recent assessments, S&T determined that it would 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 made to and replacement of existing hardware and software,
the Year 2000 Issue can be mitigated. However, if such
modifications and replacements were 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
involved 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 involved 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 efforts.
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 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 completed 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.
17
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
18
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: August 6, 1999 \s\ Robert E. Rout
Robert E. Rout
Principal Accounting Officer
19