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, 1998
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 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 -- 13,825,916 shares as of July 22, 1998
<PAGE>
INDEX
S&T BANCORP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed consolidated balance sheets - June 30, 1998
and December 31, 1997 3
Condensed consolidated statements of income - three
months ended June 30, 1998 and 1997, and six months
ended June 30, 1998 and 1997 4
Condensed consolidated statements of cash flows -
six months ended June 30, 1998 and 1997 5
Notes to condensed consolidated financial statements 6-9
Item 2. Management's discussion and analysis of financial
condition and results of operations 10-19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
<PAGE>
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
[CAPTION]
<TABLE>
June 30, December 31,
1998 1997
(000's omitted except share data)
<S> <C> <C>
ASSETS
Cash and due from banks $36,284 $35,951
Interest-earning deposits with banks 101 102
Securities:
Available for sale 561,513 521,117
Held to maturity (market value $32,864
in 1998 and $48,101 in 1997) 32,035 47,103
Total Securities 593,548 568,220
Loans, net of allowance for loan losses
of $25,076 in 1998 and $20,427 in 1997 1,280,419 1,253,326
Premises and equipment 20,667 20,613
Other assets 42,504 42,079
TOTAL ASSETS $1,973,523 $1,920,291
LIABILITIES
Deposits:
Noninterest-bearing $181,041 $165,727
Interest-bearing 1,133,095 1,118,931
Total Deposits 1,314,136 1,284,658
Securities sold under repurchase
agreements 210,509 170,124
Federal funds purchased 4,650 9,325
Long term borrowing 144,218 144,218
Other borrowed funds 130 130
Other liabilities 50,373 51,718
TOTAL LIABILITIES 1,724,016 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 - 14,857,019 shares in
1998 and 1997 37,142 37,142
Additional paid in capital 20,717 19,369
Retained earnings 185,669 175,707
Accumulated other comprehensive income 40,077 40,524
Treasury stock (1,038,003 shares at
June 30, 1998 and 715,864 at
December 31, 1997, at cost (33,968) (12,494)
Deferred compensation (130) (130)
TOTAL SHAREHOLDERS' EQUITY 249,507 260,118
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,973,523 $1,920,291
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
[CAPTION]
<TABLE>
For Three Months Ended For Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(000's omitted except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $28,467 $27,069 $56,528 $53,334
Deposits with banks 2 2 4 4
Federal funds sold 115 278 179 409
Investment securities:
Taxable 7,725 6,043 15,446 12,640
Tax-exempt 397 581 882 1,191
Dividends 842 835 1,681 1,621
Total Interest Income 37,548 34,808 74,720 69,199
INTEREST EXPENSE
Deposits 12,370 11,662 24,523 23,081
Securities sold under
repurchase agreements 2,841 1,688 5,133 3,304
Federal funds purchased 83 65 237 240
Long term borrowing 1,975 1,615 4,206 3,438
Other borrowed funds 3 4 5 8
Total Interest Expense 17,272 15,034 34,104 30,071
NET INTEREST INCOME 20,276 19,774 40,616 39,128
Provision for loan losses 4,000 800 6,050 2,350
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 16,276 18,974 34,566 36,778
NONINTEREST INCOME:
Trust fees 874 777 1,744 1,409
Service charges on deposit
accounts 1,347 1,090 2,607 2,143
Net securities/other gains 5,126 2,038 7,443 3,540
Other 1,004 568 2,003 1,401
Total Noninterest Income 8,351 4,473 13,797 8,493
NONINTEREST EXPENSE
Salaries and employee benefits 5,575 6,268 11,245 11,963
Occupancy, net 694 648 1,379 1,350
Furniture and equipment 799 1,285 1,544 2,022
Other taxes 366 333 722 654
Data processing 881 648 1,393 1,135
FDIC assessment 58 62 113 118
Other 2,676 2,412 5,239 5,360
Total Noninterest Expense 11,049 11,656 21,635 22,602
INCOME BEFORE INCOME TAXES 13,579 11,791 26,728 22,669
Applicable income taxes 4,131 3,478 8,040 6,615
NET INCOME $9,448 $8,313 $18,688 $16,054
PER COMMON SHARE
Net Income - Basic $0.68 $0.59 $1.34 $1.14
Net Income - Diluted $0.67 $0.58 $1.32 $1.12
Dividends 0.33 0.28 0.63 0.53
Average Common Shares Outstanding 13,861 14,130 13,949 14,127
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[CAPTION]
<TABLE>
Six Months Ended June 30
1998 1997
(000's omitted)
<S> <C> <C>
Operating Activities
Net Income $18,688 $16,054
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 6,050 2,350
Provision for depreciation and amortization 1,052 1,115
Net amortizaton of investment security
premiums 328 263
Net gains on sales of securities available
for sale (7,449) (3,438)
(Decrease) increase in deferred income
taxes (627) 93
Decrease (increase) in interest receivable 552 (24)
Decrease in interest payable (380) (252)
Decrease in other assets 466 1,321
Decrease in other liabilities (1,863) (260)
Net Cash Provided by Operating Activities 16,817 17,222
Investing Activities
Net redemption of interest-earning
deposits with banks 1 7
Net decrease in federal funds sold 0 5,665
Proceeds from maturities of investment
securities 15,079 2,731
Proceeds from maturities of securities
available for sale 113,765 67,696
Proceeds from sales of securities
available for sale 67,328 38,202
Purchases of securities available
for sale (215,068) (60,763)
Net increase in loans (44,825) (46,401)
Proceeds from the sale of loans 11,682 9,905
Purchases of premises and equipment (1,127) (114)
Other, net 21 (641)
Net Cash Used by Investing Activities (53,144) 16,287
Financing Activities
Net increase in demand, NOW and
savings deposits 27,965 11,492
Net increase (decrease) in certificates
of deposit 1,513 (1,088)
Net increase (decrease) in repurchase
agreements 40,386 (7,470)
Net decrease in federal funds purchased (4,675) (775)
Repayments of FHLB long-term borrowings 0 (25,000)
Acquisition of treasury stock (25,685) (4)
Excercise of stock options and related
tax benefit 5,560 619
Decrease in obligation under capital lease 0 (119)
Cash dividends paid to shareholders (8,404) (6,300)
Net Cash Used by Financing Activities 36,660 (28,645)
Increase in Cash and Cash Equivalents 333 4,864
Cash and Cash Equivalents at Beginning
of Period 35,951 40,710
Cash and Cash Equivalents at End of
Period $36,284 $45,574
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete
financial statements. In the opinion of management,
all adjustments consisting of normal recurring accruals
considered necessary for a fair presentation have been
included. Operating results for the six month period ended
June 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the annual report
on Form 10-K for the year ended December 31, 1997.
Basic earnings per share is calculated by dividing income
available to common shareholders by the weighted average
number of common shares outstanding during the period.
Options, warrants and other potentially dilutive securities
are excluded from the basic calculation, but are included
in diluted earnings per share. Average shares outstanding
for computing basic earnings per share were 13,949,411 and
14,127,306 for the period ending June 30, 1998 and 1997.
Average shares outstanding for computing dilutive earnings
per share were 14,104,525 and 14,285,195 for the period ending
June 30, 1998 and 1997. In computing dilutive earnings per
share, average shares outstanding have been increased by the
common stock equivalents relating to S&T's available stock
options.
As of January 1, 1998, S&T adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules
for the reporting and display of comprehensive income and
its components. The adoption of this Statement had no
impact on S&T's net income or shareholders' equity.
Statement 130 requires unrealized gains or losses on S&T's
available-for-sale securities, which prior to adoption were
reported seperately in shareholders' equity, to be included
in comprehensive income. Prior period financial statements
have been reclassified to conform to the requirements of
Statement 130. During the first half of 1998 and 1997,
total comprehensive income amounted to $18,241,000 and
$19,359,000.
NOTE B--SECURITIES
The amortized cost and estimated market value of
securities as of June 30 are as follows:
[CAPTION]
<TABLE>
1998 Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
<S> <C> <C> <C> <C>
Obligations of U.S. government
corporations and agencies $384,067 $2,756 ($141) $386,682
Mortgage-backed securities 11,557 336 (1) 11,892
U.S. Treasury securities 31,958 1,326 33,284
Corporate securities 10,842 252 11,094
Debt securities available for
sale 438,424 4,670 (142) 442,952
Marketable equity securities 46,049 57,791 (663) 103,177
Other securities 15,384 15,384
Total $499,857 $62,461 ($805) $561,513
1998 Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
Obligations of states and political
subdivisions $28,315 $641 ($1) $28,955
Corporate securities 1,998 189 2,187
Debt securities held to maturity 30,313 830 (1) 31,142
Other securities 1,722 1,722
Total $32,035 $830 ($1) $32,864
</TABLE>
<PAGE>
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]
<TABLE>
1997 Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
<S> <C> <C> <C> <C>
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
1997 Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
Obligations of states and political
subdivisions $37,497 $794 ($5) $38,286
Corporate securities 1,998 209 2,207
Debt securities held to
maturity 39,495 1,003 (5) 40,493
Other securities 7,608 7,608
Total $47,103 $1,003 ($5) $48,101
</TABLE>
During the period ended June 30, 1998, there were
$7,449,099 in realized gains relative to securites
available for sale.
The amortized cost and estimated market value of
debt securities at June 30, 1998, by contractual
maturity, are shown below.
[CAPTION]
<TABLE>
Estimated
Amortized Market
Available for Sale Cost Value
(000's omitted)
<S> <C> <C>
Due in one year or less $21,590 $21,769
Due after one year through five years 225,772 227,399
Due after five years through ten years 185,635 188,188
Due after ten years 5,427 5,596
Total $438,424 $442,952
</TABLE>
<PAGE>
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Continued
NOTE B-SECURITIES
[CAPTION]
<TABLE>
Estimated
Amortized Market
Held to Maturity Cost Value
(000's omitted)
<S> <C> <C>
Due in one year or less $5,404 $5,441
Due after one year through five years 14,353 14,781
Due after five years through ten years 8,471 8,740
Due after ten years 2,085 2,180
Total $30,313 $31,142
</TABLE>
At June 30, 1998 and December 31, 1997 investment
securities with a principal amount of $284,228,000
and $274,350,000 respectively, were pledged to secure
repurchase agreements and public and trust fund deposits.
NOTE C--LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio was as follows:
[CAPTION]
<TABLE>
June 30, 1998 December 31, 1997
(000's omitted)
<S> <C> <C>
Real estate - construction $62,562 $47,967
Real estate - mortgages:
Residential 500,044 512,417
Commercial 356,115 327,384
Commercial - industrial and agricultural 264,892 255,017
Consumer installment 121,882 130,968
Gross Loans 1,305,495 1,273,753
Allowance for loan losses (25,076) (20,427)
Total Loans $1,280,419 $1,253,326
</TABLE>
Changes in the allowance for loan losses for the
six months ended June 30 were as follows:
[CAPTION]
<TABLE>
1998 1997
(000's omitted)
<S> <C> <C>
Balance at beginning of period $20,427 $18,729
Charge-offs (2,154) (1,524)
Recoveries 753 415
Net charge-offs (1,401) (1,109)
Provision for loan losses 6,050 2,350
Balance at end of period $25,076 $19,970
</TABLE>
<PAGE>
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, 1998
and December 31, 1997.
[CAPTION]
<TABLE>
1998 1997
<S> <C> <C>
Recorded investment in loans considered
to be impaired $3,766,000 $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 333,000 914,000
Average recorded investment in impaired
loans 3,587,000 6,329,000
Total interest income recognized on
impaired loans 365,000 656,000
Interest income on impaired loans
recognized on a cash basis - -
</TABLE>
NOTE D--FINANCIAL INSTRUMENTS
S&T, in the normal course of business, commits to
extend credit and issue standby letters of credit.
The obligations are not recorded in S&T's financial
statements. Loan commitments and standby letters of
credit are subject to S&T's normal credit underwriting
policies and procedures and generally require
collateral based upon management's evaluation of each
customer's financial condition and ability to satisfy
completely the terms of the agreement. S&T's exposure
to credit loss in the event the customer does not
satisfy the terms of agreement equals the notional
amount of the obligation less the value of any
collateral. Unfunded loan commitments totaled
$360,109,000 and obligations under standby letters
of credit totaled $64,841,000 at June 30, 1998.
At June 30, 1998, S&T had marketable equity
securities, totaling $2,005,612 at amortized cost
and $3,432,725 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>
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 six
months of 1998, a $149.9 million increase from the
1997 full year average. Average loans increased $56.7
million and average securities and federal funds
increased $72.0 million in the first six months of
1998 compared to the 1997 full year averages. Funding
for this loan and security growth was primarily
provided by a $35.5 million increase in average
deposits, a $13.8 million increase in average retained
earnings and a $93.7 million increase in average
borrowings.
Lending Activity
Total loans at June 30, 1998 were $1.3 billion, a
$31.7 million or 2.5% increase from December 31, 1997.
Average loans increased $56.7 million, or 5% to $1.3
billion for the six months ended June 30, 1998 from
the 1997 full year average. Changes in the
composition of the loan portfolio during 1998 included
increases of $9.9 million of commercial loans, $42.0
million of commercial real estate loans, offset by a
decrease of $11.2 million of residential mortgages and
$9.0 million of installment loans.
Commercial real estate loans comprise 27% 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.
Residential mortgage lending continued to be a
strategic area of focus during the first six months
of 1998 through a centralized mortgage origination
department, ongoing product redesign, the utilization
of commission compensated originators and the
implementation of a mortgage banking function.
Management believes that if a downturn in the local
residential real estate market occurs, the impact of
declining values on the real estate loan portfolio
will be negligible because of S&T's conservative
mortgage lending policies. These policies generally
require, for portfolio loans, 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, 1998 the residential mortgage portfolio
had a 25% composition of adjustable rate mortgages.
Beginning in the fourth quarter of 1997, S&T sold
$12.7 million of long-term, lower-yielding 1-4 family
mortgages, acquired from the Peoples merger, to the
Federal National Mortgage Association (FNMA). S&T
retained ongoing servicing rights on the mortgages
sold to FNMA. The rationale for these sales is to
mitigate interest rate risk associated with holding
long-term residential mortgages in the loan portfolio,
to generate fee revenue from servicing, and still
maintain the primary customer relationship. During
the second quarter of 1998, S&T sold $4.2 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.
<PAGE>
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
Installment loan decreases are primarily associated
with significantly lower volumes in the indirect auto
loan category. Pricing pressures have been unusually
intense in the indirect market during the last two
years and the decision was made to temporarily deploy
investable funds into other higher yielding and lower
risk earning assets. In the second quarter of 1996,
S&T implemented an indirect auto leasing program and
currently has $4.2 million of outstanding auto leases.
Installment loans have also decreased due to recent
changes in government regulations which have
significantly decreased the profit potential of
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.
Rates and terms for commercial real estate and
equipment loans normally are negotiated, subject to
such variables as economic conditions, marketability
of collateral, credit history of the borrower and
future cash flows. The loan to value policy guideline
for commercial loans is generally 75%.
The residential, first lien, mortgage loan to value
policy guideline is 80%. Higher loan to value loans
can be approved with the appropriate private mortgage
insurance coverage. Second lien positions are
sometimes incurred with home equity loans, but
normally only to the extent that the combined credit
exposure for both first and second liens do not exceed
100% of loan to value.
A variety of unsecured and secured installment loan
and credit card products are offered by S&T. However,
the bulk of the consumer loan portfolio is automobile
loans. Loan to value guidelines for direct loans are
90%-100% of invoice for new automobiles and 80%-90%
of "NADA" value for used automobiles. Loan to value
policy guidelines for automobile loans purchased from
dealers on a third party basis are 90%-125% of
invoice for new automobiles and 100%-125% of "Black
Book" value for used automobiles.
Management intends to continue to pursue quality loans
in all lending categories within our market area in
order to honor our commitment to provide the best
service possible to our customers. S&T's loan
portfolio primarily represents loans to businesses and
consumers in our market area of Western Pennsylvania
rather than to borrowers in other areas of the country
or to borrowers in other nations. S&T has not
concentrated its lending activities in any industry or
group. During the past several years, management has
concentrated on building an effective credit and loan
administration staff which assists management in
evaluating loans before they are made and identifies
problem loans early.
Security Activity
Average securities increased $75.0 million in the
first six months of 1998 compared to the 1997 full
year average. The increase in the average investment
portfolio was related to an increase in average
taxable securities of $84.6 million, offset by a
decrease in tax-exempt state and municipal securities
average balances of $9.6 million. This increase was
comprised of $90.6 million in U.S. government agency
securities, $1.6 million of mortgage-backed
securities, $1.4 million of corporate equity
securities and $3.8 million of Federal Home Loan Bank
(FHLB) stock. Offsetting these increases were average
decreases of $11.0 million of U.S. treasury securities
and $1.8 million of corporate securities.
<PAGE>
S&T BANCORP , INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
The significant increase in U.S. government agency
securities, classified as available for sale, during
1998 was due to a balance sheet leveraging strategy
to maximize net interest income by taking advantage of
low, short-term funding rates. Interest rate risks
associated with this strategy is managed and monitored
through S&T's Asset Liability Committee (ALCO).
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 10.6% on a fully taxable
equivalent basis and had unrealized gains, net of
nominal unrealized losses, of $57.1 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 included U.S.
treasuries, U.S. government agencies, mortgage-backed
securities, CMOs and corporate equities as available
for sale. Municipal securities and other debt
securities are classified as held to maturity. At
June 30, 1998, unrealized gains, net of unrealized
losses, for securities classified as available for
sale were $61.7 million.
Allowance for Loan Losses
The adequacy of the allowance for loan losses is
determined by management through evaluation of the
loss potential on individual nonperforming, delinquent
and high-dollar loans, review of economic conditions
and business trends, historical loss experience,
growth and composition of the loan portfolio as well
as other relevant factors. 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.
The balance of nonperforming loans at June 30, 1998,
which includes nonaccrual loans past due 90 days or
more, was $3.2 million, or 0.24% of total loans. This
compares to nonperforming loans of $3.6 million or
0.28% of total loans at December 31, 1997.
S&T had a $56.7 million, or 5%, increase in average
loans during the first half of 1998 as compared to the
1997 average. All of this portfolio growth occurred
in the industrial and commercial real estate
classifications. Despite currently favorable credit
quality statistics, S&T recognizes the increased risks
of these types of loans, especially when the current
economic expansion slows or declines. Also unknown is
the effect that the Year 2000 issue will have on the
businesses of commercial customers, pending completion
of a Year 2000 risk assessment program currently in
process for major S&T commercial customers.
Therefore, S&T believed it prudent to increase the
allowance for loan losses to $25.1 million, or 1.92%
of total loans at June 30, 1998, as compared to $20.4
million, or 1.60% at December 31, 1997.
Deposits
Average total deposits increased by $35.5 million, or
2% for the six months ended June 30, 1998 as compared
to the 1997 average. Changes in the average deposit
mix included a $12.1 million increase in time
deposits, $31.2 million increase in money market
accounts and a $12.0 million increase in demand
accounts, offset by a $12.7 million decrease in
savings accounts and a $7.1 million decrease in NOW
accounts.
Special rate deposits of $100 thousand and over were
7% of total deposits at June 30, 1998 and December 31,
1997 and primarily represent deposit relationships
with local customers in our market area. Retail time
deposit increases of $12.1 million were the result of
expanded promotional programs.
<PAGE>
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
During the second half of 1995, S&T issued $25.0
million of retail certificates of deposits through two
brokerage firms, further broadening the availability
of reasonably priced deposit funds. At June 30,
1998, there were $26.6 million of these brokered
retail certificates of deposits outstanding. Money
market accounts were recently repriced in order to be
more competitive with money funds offered by brokerage
firms. As a result of this repricing and proactive
sales activities to high-balance deposit customers,
S&T has experienced a significant shift in funds from
savings to money market accounts. Although this
strategy tends to increase cost of funds, management
believes it is necessary for customer retention and
the development of long-term relationships.
The decrease in NOW balances is attributable to the
implementation of a NOW/money market sweep product on
the accounts acquired from Peoples that reduces the
amount of Federal Reserve
Requirements.
Management believes that the S&T deposit base is
stable and that S&T has the ability to attract new
deposits, mitigating a funding dependency on volatile
liabilities. In addition, S&T has the ability to
access both public and private markets to raise
long-term funding if necessary.
Borrowings
Average borrowings increased $93.7 million for the six
months ended June 30, 1998 compared to the 1997 annual
average and were comprised of retail repurchase
agreements (REPO's), wholesale REPO's, federal funds
purchased and long-term borrowings. S&T defines
repurchase agreements with its local, retail customers
as retail REPOS; wholesale REPOS are those transacted
with other banks and brokerage firms with terms
normally ranging from 1 to 14 days.
The average balance in retail REPOS increased
approximately $6.2 million for the first six months of
1998 compared to the full year 1997 average. This
increase is primarily attributable to new REPO sweep
relationships in our cash management department. S&T
views retail REPOS as a relatively stable source of
funds since most of these accounts are with local,
long-term customers.
Wholesale REPOS and federal funds increased $57.7
million for the first six months of 1998 compared to
the full year 1997 average. The aforementioned
balance sheet leveraging strategy has increased the
usage of wholesale REPO fundings in 1998.
Average long-term borrowings have increased $29.9
million in the first six months of 1998 as compared to
the full year 1997 average. At June 30, 1998, S&T had
long-term borrowings outstanding of $49.6 million at a
fixed rate and $94.6 million at an adjustable rate
with the FHLB. The purpose of these borrowings was to
provide matched, fixed rate fundings for newly
originated loans, to mitigate the risk associated
with volatile liability fundings, 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 $10.6 million at June
30, 1998, compared to December 31, 1997. Net income
was $18.7 million and dividends paid to shareholders
were $8.4 million for the six months ended June 30,
1998. The decrease is attributable to the conclusion
of the Modified Dutch Auction in which S&T repurchased
approximately 440,000 shares of its common stock. An
authorization to buy-back up to 1,060,000 shares not
acquired in the Modified Dutch Auction remains in
effect until December 31, 1998. During the second
quarter of 1998, S&T repurchased an additional 73,000
shares of its common stock.
<PAGE>
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
S&T paid 45% of net income in dividends, equating to
an annual dividend rate of $1.26 per share during the
first six months of 1998.
The book value of S&T's common stock decreased
slightly from $18.39 at December 31, 1997 to $18.06 at
June 30,1998, primarily due to the stock buy-backs
during the first half of 1998. Equity associated with
the available for sale securities portfolio decreased
$0.4 million during the first six months of 1998. The
market price of S&T's common stock was $55.25 per
share at June 30, 1998, an increase from $43.25 per
share at December 31, 1997.
S&T continues to maintain a strong capital position
with a leverage ratio of 10.7% as compared to the
minimum regulatory guideline of 3.0%. S&T's risk-based
capital Tier I and Total ratios were 15.7% and 17.0%
respectively, at June 30, 1998. These ratios place
S&T well above the Federal Reserve Board's risk-based
capital guidelines of 4.0% and 8.0% for Tier I and
Total, respectively.
RESULTS OF OPERATIONS
Six months ended June 30, 1998 compared to
Six months ended June 30, 1997
Net Income
Net income increased to $18.7 million or $1.32 per
diluted earnings per share in the first six months of
1998 from $16.1 million or $1.12 per diluted earnings
per share for the same period of 1997. The
significant improvement during the first six months of
1998 was the result of higher net interest income,
noninterest income and security gains. Operating
expenses were lower due to the People's merger related
costs and post merger restructurings incurred in the
first half of 1997.
Net Interest Income
On a fully taxable equivalent basis, net interest
income increased $1.3 million or 3% in the first six
months of 1998 compared to the same period of 1997.
The net yield on interest-earning assets was 4.64% in
the first six months of 1998 as compared to 4.92% in
the same period of 1997. The decline in the net yield
on interest earning assets during 1998 was attributed
the aforementioned balance sheet leveraging strategy
with arbitraged securities, and stock buybacks during
the first six months of 1998.
In the first six months of 1998, average securities
increased $75.0 million and average loans increased
$56.7 million. The yields on average securities
decreased by 3 basis points during the period and the
yield on average loans remained constant.
In the fourth quarter of 1997, S&T implemented a
balance sheet leveraging strategy through the purchase
of approximately $100 million of intermediate-term
U.S. government securities, funded with short-term
borrowings. The strategy provided pre-tax spreads of
100-125 basis points during the period with manageable risks,
contributing positively to net interest income, but
also causing a 21 basis points decline in the net
yield on interest earning assets.
Average interest bearing deposits provided $39.4
million of the funds for the growth in securities and
loans; cost of deposits totaled 4.26%, a decrease of
1 basis point from 1997. The cost of REPOS and other
borrowed funds increased 5 basis points to 5.47%.
More longer-term borrowings were utilized in 1998 in
order to take advantage of low, long-term funds rates
and to mitigate interest rate risk.
<PAGE>
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
Also positively affecting net interest income was a
$22.1 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 87% of operating revenue. A variety of
asset/liablity management strategies were successfully
implemented within prescribed ALCO risk parameters
that enabled S&T to maintain a net interest margin
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 increased to $6.1
million for the first six months of 1998 as compared
to $2.4 million in the same period of 1997. The
increase was the result of management's assessment of
economic conditions, credit quality statistics, loan
administration effectiveness and other factors that
would have an impact on future probable losses in the
loan portfolio.
Credit quality statistics are an important factor in
determining the amount of provision expense. Net loan
charge-offs totaled $1.4 million for the first six
months of 1998 compared to $1.1 million for the same
period 1997. Nonperforming loans to total loans was
0.24% at June 30, 1998 and 0.58% in the same period of
1997.
Also affecting the amount of provision expense is the
amount and types of loan growth. Recent loan growth
has been primarily in the commercial sectors, which
can be areas of higher risks in the event of an
economic downturn. Therefore, despite currently
favorable credit quality statistics, S&T believed that
a significant increase to the allowance for loan
losses was warranted.
Noninterest Income
Noninterest income increased $5.3 million or 62% in
the first six months of 1998 compared to the same
period of 1997. Increases included $0.5 million in
service charges and fees, $0.3 million in trust
income, $3.9 million in security gains and $0.6
million in other income.
The 22% increase in service charges on deposit
accounts was primarily the result of expanding new
cash management relationships and management's
continual effort to implement reasonable fees for
services performed, to manage closely the collection
of these fees, as well as the implementation of
foreign ATM service charges in the fourth quarter of
1997. The increase in trust fees is attributable to
expanded marketing efforts to develop new trust
business and to expand current relationships. The
People's merger presents new trust opportunites within
the Allegheny County market for trust products. The
increase in other income was a result of increased
performance for brokerage activities, credit
insurance, letters of credit 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>
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
S&T recognized $7.4 million of gains on equity
securities in the first six months of 1998. $3.0
million were the result of Emerging Issues Task Force
#91-5, Nonmonetary Exchange of Cost-Method Investments
(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. Gains recognized included $2.6 million
from the First Union/Corestates merger and $0.4
million from the CFX/Peoples Heritage merger. The
remaining security gains were taken on available for
sale equities securities in the first six months of
1998 in order to maximize returns by taking advantage
of market opportunities when presented. Unrealized
gains, net of unrealized losses, in the available for
sale equities portfolio totaled $57.1 million at
June 30, 1998.
Noninterest Expense
Noninterest expense decreased $1.0 million or 4% at
June 30, 1998 compared to June 30, 1997. The decrease
is primarily attributable to $2.2 million of merger
related and other nonrecurring expenses associated
with the acquisition of Peoples during the first half
of 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
$1.0 million were provided for during the first six
months of 1998 and included $0.3 million of consulting
fees for reengineering of retail loan delivery
services, $0.3 million for Year 2000 projected costs
and $0.4 million of costs associated with the
conversion of data processing systems for a branch
purchase.
Recurring expenses were relatively flat during the
first half of 1998 as compared to the first half 1997.
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 666
to 653. 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 42.85% at June
30, 1998 as compared to 44.84% at June 30, 1997.
Federal Income Taxes
Federal income tax expense increased $1.4 million at
June 30, 1998 as compared to June 30, 1997 primarily
as a result of higher pre-tax income in 1998. The
effective tax rate for the first six months of 1998
was 30%, and 29% during the same period of 1997,
which is below the 35% statutory rate due to benefits
resulting from tax-exempt interest, excludable
dividend income and low income housing tax credits
(LIHTC).
RESULTS OF OPERATIONS
Three months ended June 30, 1998 compared to
Three months ended June 30, 1997
Net Income
Net income increased to $9.4 million or $0.67 per
diluted earnings per share in the second quarter of
1998 from $8.3 million or $0.58 per diluted earnings
per share for the same period of 1997, a 16%
improvement. This significant improvement is due to
higher net interest income, higher noninterest income,
higher security gains and reduced operating expenses
due to the Peoples merger related costs incurred in
the second quarter of 1997.
<PAGE>
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 $0.4 million or 2% in the second
quarter of 1998 compared to the same period of 1997.
This improvement in net interest income primarily
resulted from a higher level of earning assets while
spreads decreased.
Average earning assets increased by $156.2 million as
compared to the second quarter of 1997, primarily as a
result $76.8 million of loan growth and $88.1 million
of security growth. Funding for this asset growth was
provided by available for sale securities sales,
deposits, borrowings and retained earnings.
Net interest margin on a fully taxable equivalent
basis was 4.58% for the second quarter of 1998, as
compared to 4.97% for the same period of 1997. The
decline in the net interest margin is primarily the
result of the aforementioned balance sheet leveraging
strategy utilizing securities arbitrage.
Provision for Loan Losses
The provision for loan losses increased to $4.0
million for the second quarter of 1998 compared to
$0.8 million in the same period of 1997. Net loan
charge-offs totaled $0.7 million for the second
quarter of 1998 compared to $0.8 million for the same
period 1997. The provision expense in 1998 was a
result of an effort to maintain S&T's allowance for
loan losses to total loans at a relatively consistent
level with loan growth, and the continuing change in
the loan portfolio mix to a greater percentage of
commercial loans. The provision expense also
considers 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 $3.9 million or 87% in
the second quarter of 1998 compared to the same period
of 1997. Increases included $3.1 million in
security/nonrecurring gains, $0.3 million in service
charges and fees, $0.1 million in trust income and
$0.4 million in other income during the second quarter of 1998.
S&T recognized $5.1 million of gains on equity
securities in the second quarter of 1998; $3.0
million were the result of Emerging Issues Task Force
#91-5, Nonmonetary Exchange of Cost-Method Investments
(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. Gains recognized included $2.6 million
from the FirstUnion/Corestates merger and $0.4 million
from the CFX/Peoples Heritage merger.
The remaining security gains were taken on available
for sale equities securities in the second quarter of
1998 in order to maximize returns by taking advantage
of market opportunities when presented. The 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 to manage closely the collection of these
fees, as well as the implementation of foreign ATM
service charges in the fourth quarter of 1997. The
increase in trust fees is attributable to expanded
marketing efforts to develop new trust business and
expand current relationships. The People's merger
also provides new trust opportunities within the
Allegheny County market. The increase in other income
was a result of increased performance for brokerage
activities, letters of credit fees, insurance 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>
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
Noninterest Expense
Noninterest expense decreased $0.6 million or 5% in
the second quarter of 1998 as compared to 1997. The
decrease is primarily attributable to the
aforementioned merger related and other nonrecurring
expenses associated with the acquisition of Peoples
during the second quarter of 1997, offset by other
expenses of $1.0 million which were provided for
during the second quarter of 1998. The increase in
other expense included $0.3 million of consulting fees
for reengineering of retail loan delivery services, $0.3
million for Year 2000 projected costs and $0.4 million
of costs associated with the conversion of data
processing systems for a branch purchase. Other
recurring noninterest expenses were relatively flat
during the second quarter of 1998.
Federal Income Taxes
Federal income tax expense increased $0.7 million at
June 30, 1998 as compared to June 30, 1997 primarily
as a result of higher pre-tax income in 1998. The
effective tax rate for the second quarter of 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
being 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
communication 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 Tack Force has completed
its assessment of the Year 2000 Issue with internal systems and third
party vendors. Assessment of the effect of Year 2000 Issue on
commercial business customers is still being evaluated.
Significant to S&T's data processing abilities is the services
provided by M&I Data Services (M&I) which provides the majority
of computer services for S&T customer accounts and transactions.
M&I is also currently involved in a similar Year 2000 assessment
and remediation. S&T has been notified by M&I that the project
is on target. M&I expects to be fully Year 2000 compliant in
the fourth quarter of 1998. If compliance assurance is not
received from M&I at that time, S&T will develop contingency
plans.
<PAGE>
All internal data processing systems aare 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,
70% 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 fourth quarter of 1998; the remediation of critical internal
systems is expected to be 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 cutomers as being significant to S&T's future financial
performance. Each of these significant business customers will be
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 expect to have substantially all of
the critical systems and application changes completed and tested by
the end of 1998 and believe that its level of preparedness is
appropriate. S&T has estimated the total cost of the project
to be $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 Form 10-Q which are not
historical fact are forward looking statements that
involve risks and uncertainties, including, but not
limited to, the interest rate environment, the effect
of federal and state banking and tax regulations, the
effect of economic conditions, the impact of
competitive products and pricing, and other risks
detailed in S&T's Securities and Exchange Commission
filings.
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports of Form 8-K
None
<PAGE>
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
/s/ Robert E. Rout
Principal Accounting Officer
Date: August 12, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
"THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS."
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 36284
<INT-BEARING-DEPOSITS> 101
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 561513
<INVESTMENTS-CARRYING> 32035
<INVESTMENTS-MARKET> 32864
<LOANS> 1305495
<ALLOWANCE> 25076
<TOTAL-ASSETS> 1973523
<DEPOSITS> 1314136
<SHORT-TERM> 215159
<LIABILITIES-OTHER> 50373
<LONG-TERM> 144348
0
0
<COMMON> 37142
<OTHER-SE> 212365
<TOTAL-LIABILITIES-AND-EQUITY> 1973523
<INTEREST-LOAN> 56528
<INTEREST-INVEST> 18009
<INTEREST-OTHER> 183
<INTEREST-TOTAL> 74720
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<INCOME-PRETAX> 26728
<INCOME-PRE-EXTRAORDINARY> 26728
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18688
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.32
<YIELD-ACTUAL> 4.64
<LOANS-NON> 3157
<LOANS-PAST> 3157
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 20427
<CHARGE-OFFS> 2154
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</TABLE>
