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 September 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 -- 26,972,407 shares as of October 31, 1999
PAGE 1
INDEX
S&T BANCORP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION Page No.
Item Financial Statements
Condensed consolidated balance sheets - September 30, 1999
and December 31, 1998 3
Condensed consolidated statements of income - three months
ended September 30, 1999 and 1998, and nine months ended 4
September 30, 1999 and 1998
Condensed consolidated statements of cash flows - nine months
ended September 30, 1999 and 1998 5
Notes to condensed consolidated financial statements 6-9
Item Management's discussion and analysis of financial condition
and results of operations 10-18
PART II. OTHER INFORMATION
Item Exhibits and Reports on Form 8-K 19
SIGNATURES 20
PAGE 2
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(000's omitted except per share data)
<S> <C> <C>
ASSETS
Cash and due from banks $37,766 $48,736
Interest-earning deposits with banks 52 53
Federal funds sold - 19,300
Securities:
Available for sale 585,444 565,141
Held to maturity (market value $23,702
in 1999 and $27,161 in 1998) 23,279 26,345
Total Securities 608,723 591,486
Loans, net of allowance for loan losses
of $28,405 in 1999 and $26,677 in 1998 1,435,365 1,339,232
Premises and equipment 20,961 20,932
Other assets 77,298 49,872
TOTAL ASSETS $2,180,165 $2,069,611
LIABILITIES
Deposits:
Noninterest-bearing $217,578 $215,659
Interest-bearing 1,194,646 1,164,404
Total Deposits 1,412,224 1,380,063
Securities sold under repurchase agreements 98,946 138,825
Long term borrowings 378,912 240,068
Federal funds purchased 5,000 -
Other liabilities 43,645 51,018
TOTAL LIABILITIES 1,938,727 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 21,186 21,234
Retained earnings 173,856 158,274
Accumulated other comprehensive income 24,293 39,961
Treasury stock (2,774,929 shares at September 30,
1999 and 2,038,459 at December 31, 1998,
at cost) (52,182) (34,117)
TOTAL SHAREHOLDERS' EQUITY 241,438 259,637
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,180,165 $2,069,611
</TABLE>
See Notes to Condensed Consolidated Financial Statements
PAGE 3
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1999 1998 1999 1998
INTEREST INCOME
Loans, including fees $30,402 $29,263 $88,557 $85,791
Deposits with banks 1 1 3 5
Federal funds sold 76 39 335 218
Investment securities:
Taxable 8,133 7,816 22,829 23,262
Tax-exempt 221 371 729 1,253
Dividends 997 855 2,955 2,537
Total Interest Income 39,830 38,345 115,408 113,066
INTEREST EXPENSE
Deposits 11,936 12,502 35,002 37,000
Securities sold under repurchase agreements 1,786 2,183 5,085 7,316
Federal funds purchased 93 68 214 305
Long term borrowings 4,111 2,822 10,522 7,028
Other borrowed funds - 2 - 7
Total Interest Expense 17,926 17,577 50,823 51,656
NET INTEREST INCOME 21,904 20,768 64,585 61,410
Provision for loan losses 1,000 2,000 3,000 8,050
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 20,904 18,768 61,585 53,360
NONINTEREST INCOME
Securities gains, net 1,017 719 2,843 8,168
Trust fees 955 870 2,888 2,614
Service charges on deposit accounts 1,613 1,386 4,588 3,993
Other 1,822 1,352 4,846 3,325
Total Noninterest Income 4,390 3,608 12,322 9,932
NONINTEREST EXPENSE
Salaries and employee benefits 6,003 5,292 17,065 16,537
Occupancy, net 697 695 2,195 2,074
Furniture and equipment 534 624 2,017 2,168
Other taxes 398 369 1,142 1,091
Data processing 564 541 1,648 1,934
FDIC assessment 58 59 178 172
Other 2,980 2,043 8,319 7,282
Total Noninterest Expense 11,234 9,623 32,564 31,258
INCOME BEFORE INCOME TAXES 15,076 13,472 44,186 40,201
Applicable income taxes 4,592 3,971 13,418 12,012
NET INCOME $10,484 $9,501 $30,768 $28,189
PER COMMON SHARE (1)
Net Income - Basic $0.39 $0.35 $1.13 $1.02
Net Income - Diluted $0.38 $0.34 $1.12 $1.00
Dividends 0.19 0.17 0.56 0.48
Average Common Shares Outstanding - Basic 27,086 27,621 27,236 27,805
Average Common Shares Outstanding - Diluted 27,273 27,895 27,448 28,131
(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.
</TABLE>
See Notes to Condensed Consolidated Financial Statements
PAGE 4
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30
1999 1998
(000's omitted)
<S> <C> <C>
Operating Activities
Net Income $30,768 $28,189
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3,000 8,050
Provision for depreciation and amortization 1,645 1,598
Net amortizaton of investment security premiums 479 466
Net gains on sales of securities available for sale (2,843) (8,168)
Deferred income taxes 1,142 (814)
Increase in interest receivable (2,496) (1,095)
(Decrease) increase in interest payable (213) 611
Increase in other assets (25,332) (5,697)
Increase (decrease) in other liabilities 383 (4,128)
Net Cash Provided by Operating Activities 6,533 19,012
Investing Activities
Net redemption of interest-earning
deposits with banks 1 52
Net decrease in federal funds sold 19,300 0
Proceeds from maturities of investment securities 3,058 14,094
Proceeds from maturities of securities available
for sale 93,528 136,711
Proceeds from sales of securities available for
sale 212,517 76,626
Purchases of securities available for sale (348,080) (259,425)
Net increase in loans (117,669) (94,379)
Proceeds from the sale of loans 18,535 21,146
Purchases of premises and equipment (1,599) (2,226)
Other, net (75) 23
Net Cash Used by Investing Activities (120,484) (107,378)
Financing Activities
Net increase in demand, NOW, MMI, and
savings deposits 21,391 58,279
Net increase in certificates of deposit 10,771 28,509
Net decrease in repurchase agreements (39,880) (32,758)
Net increase (decrease) in federal funds purchased 5,000 (9,325)
Proceeds from long-term borrowing 163,844 84,850
Repayments from long-term borrowing (25,000) 0
Acquisition of treasury stock (19,143) (27,975)
Sale of treasury stock 1,030 6,354
Cash dividends paid to shareholders (15,032) (12,969)
Net Cash Used by Financing Activities 102,981 94,965
(Decrease) increase in Cash and Cash Equivalents (10,970) 6,599
Cash and Cash Equivalents at Beginning of Period 48,736 35,951
Cash and Cash Equivalents at End of Period $37,766 $42,550
</TABLE>
See Notes to Condensed Consolidated Financial Statements
PAGE 5
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 inform-
ation 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
nine month period ended September 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 share-
holders of record on October 15,1998. This increased the out-
standing 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 calcul-
ation, but are included in diluted earnings per share. Average
shares outstanding for computing basic earnings per share were
27,236,036 and 27,805,228 for the period ending September 30, 1999
and 1998. Average shares outstanding for computing dilutive earn-
ings per share were 27,447,842 and 28,130,976 for the period ending
September 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 Comprehen-
sive 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 share-
holders' equity, to be included in comprehensive income. During the
third quarter of September 30, 1999 and 1998, total comprehensive
income amounted to $2,927,000 and $7,743,000. During the nine months
ended September 30, 1999 and 1998, total comprehensive income amounted
to $15,100,000 and $25,984,000.
NOTE B--SECURITIES
The amortized cost and estimated market value of securities as of
September 30 are as follows:
<TABLE>
<CAPTION>
1999 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 $371,402 $373 ($5,197) $366,578
Mortgage-backed securities 6,485 88 6,573
U.S. treasury securities 19,748 684 20,432
Corporate securities 62,220 64 (1,262) 61,022
Debt securities available for sale 459,855 1,209 (6,459) 454,605
Marketable equity securities 59,468 46,001 (3,377) 102,092
Other securities 28,747 28,747
Total $548,070 $47,210 ($9,836) $585,444
1999 Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
Obligations of states and political
subdivisions $15,540 $333 ($1) $15,872
Corporate securities 1,999 91 2,090
Debt securities held to maturity 17,539 424 (1) 17,962
Other securities 5,740 5,740
Total $23,279 $424 ($1) $23,702
</TABLE>
PAGE 6
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Continued
NOTE B-SECURITIES
The amortized cost and estimated market value of securities as of
December 31 are as follows:
<TABLE>
<CAPTION>
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 $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
</TABLE>
During the period ended September 30, 1999, there were $2,843,128 in
realized gains relative to securities available for sale.
The amortized cost and estimated market value of debt securities at
September 30, 1999, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Available for Sale Cost Value
(000's omitted)
<S> <C> <C>
Due in one year or less $140,171 $138,909
Due after one year through five years 287,433 283,297
Due after five years through ten years 29,701 29,829
Due after ten years 2,550 2,570
Total $459,855 $454,605
</TABLE>
PAGE 7
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Continued
NOTE B-SECURITIES
<TABLE>
<CAPTION>
Estimated
Amortized Market
Held to Maturity Cost Value
(000's omitted)
<S> <C> <C>
Due in one year or less $6,652 $6,706
Due after one year through five years 10,887 11,256
Total $17,539 $17,962
</TABLE>
At September 30, 1999 and December 31, 1998 investment securities
with a principal amount of $365,180,000 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:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
(000's omitted)
<S> <C> <C>
Real estate - construction $93,094 $87,246
Real estate - mortgages:
Residential 467,478 492,570
Commercial 487,574 407,445
Commercial - industrial and agricultural 310,537 265,297
Consumer installment 105,087 113,351
Gross Loans 1,463,770 1,365,909
Allowance for loan losses (28,405) (26,677)
Total Loans $1,435,365 $1,339,232
</TABLE>
Changes in the allowance for loan losses for the nine months ended
September 30 were as follows:
<TABLE>
<CAPTION>
1999 1998
(000's omitted)
<S> <C> <C>
Balance at beginning of period $26,677 $20,427
Charge-offs (3,870) (4,787)
Recoveries 2,598 1,101
Net charge-offs (1,272) (3,686)
Provision for loan losses 3,000 8,050
Balance at end of period $28,405 $24,791
</TABLE>
PAGE 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
September 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Recorded investment in loans considered to be
impaired $4,015,000 $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 3,896,000 2,927,000
Total interest income recognized on impaired loans 550,000 674,000
Interest income on impaired loans recognized on a
cash basis 433,000 605,000
</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 $397,714,000 and obligations
under standby letters of credit totaled $116,630,000 at September
30, 1999.
At September 30, 1999, S&T had marketable equity securities,
totaling $1,341,631 at amortized cost and $2,606,856 at estimated
market value, that were subject to covered call option contracts.
The purpose of these contracts was to generate fee income for S&T.
NOTE E - LITIGATION
S&T, in the normal course of business, is subject to various legal
proceedings in which claims for monetary damages are asserted.
No material losses are anticipated by management as a result of
these legal proceedings.
PAGE 9
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is presented so that
shareholders may review in further detail the financial
condition and results of operations of S&T Bancorp, Inc.
and subsidiaries (S&T). This discussion and analysis should
be read in conjunction with the condensed consolidated financial
statements and the selected financial data presented elsewhere
in this report.
Financial Condition
Total assets averaged $2.1 billion in the first nine months of
1999, a $100.6 million increase from the 1998 full year average.
Average loans increased $88.6 million and average securities and
federal funds increased $9.1 million in the first nine months of
1999 compared to the 1998 full year average. Funding for this
loan and security growth was primarily provided by a $61.9 million
increase in average deposits and a $48.2 million increase in
average borrowings offset by a decrease of $4.6 million in average
retained earnings.
Lending Activity
Average loans increased $88.6 million, or 7% to $1.4 billion for
the nine months ended September 30, 1999 from the 1998 full year
average. Changes in the composition of the average loan portfolio
during 1999 included increases of $22.0 million of commercial
loans and $105.4 million of commercial real estate loans, offset
by decreases of $26.1 million of residential mortgages and $12.7
million of installment loans.
Commercial real estate loans comprise 33% 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 under-
writing review by loan administration and the fact that many of
the commercial real estate loans are owner-occupied or rental
properties and many are seasoned properties. During 1999, S&T
sold $4.5 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 nine months of 1999 through a centralized
mortgage origination department, ongoing product redesign, the
utilization of commission compensated originators and the implement-
ation 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 September
30, 1999 the residential mortgage portfolio had a 21% 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 period-
ically 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 nine months of 1999, S&T sold $14.0
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 and S&T's stategy to
continue to focus resources toward originations of direct installment
loans and home equity loans. 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 liquidate via normal paydowns and pay-off activities.
Direct loans and home equity loans increased $33.8 million for the
nine months ending September 30, 1999 as compared to the 1998 full year
average.
Loan underwriting standards for S&T are established by a formal
policy administered by the S&T Bank Credit Administration Department,
and subject to the periodic review and approval of the S&T Bank Board
of Directors.
PAGE 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 guide-
line for commercial real estate loans is generally 75%.
The residential, first lien, mortgage loan to value policy guide-
line 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.
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 concentr-
ated 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 ident-
ifies problem loans early.
Security Activity
Average securities increased by $5.7 million in the first nine
months of 1999 compared to the 1998 full year average. During
the second quarter of 1999, S&T's bond portfolio was restruct-
ured by selling $137.6 million of U.S. government agency and
treasury securities, and reinvesting the proceeds. The restruct-
uring was implemented in order to extend potential call maturities
and to take advantage of higher interest rates. The average
increase was comprised of $34.7 million of corporate securities,
$11.9 million of corporate equity securities and $4.0 million of
Federal Home Loan Bank (FHLB) stock. Offsetting these increases
were average decreases of $9.4 million in U.S. treasury securities,
$20.8 million in U.S. government agency securities, $3.9 million
of mortgage-backed securities and $10.8 million of states and
political subdivisions.
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 $42.6 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 September
30, 1999, unrealized gains, net of unrealized losses, for securities
classified as available for sale were $37.4 million.
Allowance for Loan Losses
The balance in the allowance for loan losses was $28.4 million
or 1.94% of total loans at September 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.
PAGE 11
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A quantitative analysis is utilized to support the adequacy of
the allowance for loan losses. This analysis includes review
of the high and low historical charge-off rates for loan
categories, fluctuations and trends in the amount of classified
loans and economic factors. Economic factors consider the level
of S&T's historical charge-offs that have occurred within the
credits' economic life cycle.
Significant to this analysis is the shift in the loan portfolio
composition to an increased mix of commercial loans. These loans
are generally larger in size and, due to our continuing growth,
many are not well seasoned and could be more vulnerable to an
economic slowdown. Management relies on its risk rating process
to monitor trends which may be occurring relative to commercial
loans to assess potential weaknesses within specific credits.
Current economic factors and trends in risk ratings are considered
in the determination of the allowance for loan losses.
Net loan charge-offs totaled $1.3 million in the first nine months
of 1999, as compared to $3.7 million in the same period of 1998.
The balance of nonperforming loans, which included nonaccrual loans
past due 90 days or more, at September 30, 1999, was $3.5 million
or 0.24% 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 $61.9 million, or 5% for the
nine months ended September 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 $38.1 million of the average increase. Changes in the average
deposit mix included a $53.5 million increase in money market
accounts, a $24.4 million increase in demand accounts and a $8.1
million increase in NOW accounts offset by a $21.1 million decrease
in time deposits, and a $3.0 million decrease in savings accounts.
Some of the changes can be partially explained by strategic initi-
atives 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 compet-
itive 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 September 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 September 30, 1999, there were $11.6 million of these
brokered retail certificates of deposit outstanding.
Borrowings
Average borrowings increased $48.2 million for the first nine months
ended September 30, 1999 compared to the1998 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.
PAGE 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 $2.5
million for the first nine 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 $22.7 million
for the first nine months of 1999 compared to the full year 1998
average. The increase in core deposits 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 $73.4 million in the
first nine months of 1999 as compared to the full year 1998 average.
At September 30, 1999, S&T had long-term borrowings outstanding of
$60.6 million at a fixed rate and $209.6 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 advant-
age of lower cost funds through the FHLB's Community Investment
Program and to fund stock buy-backs.
Capital Resources
Shareholders' equity decreased $18.2 million at September 30, 1999,
compared to December 31, 1998. Net income was $30.8 million and
dividends paid to shareholders were $15.0 million for the nine months
ended September 30, 1999. The decrease is attributable to the
repurchase of 796,000 shares of S&T common stock during the first
nine months 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 nine months of
1999. The book value of S&T's common stock decreased slightly from
$9.38 at December 31, 1998 to $8.96 at September 30,1999, primarily
due to the stock buy-backs during the first nine months of 1999.
Equity associated with the available for sale securities portfolio
decreased $15.7 million during the first nine months of 1999.
The market price of S&T's common stock was $22.75 per share at
September 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 9.8% as compared to the minimum regulatory
guideline of 3.0%. S&T's risk-based capital Tier I and Total
ratios were 12.6% and 15.0% respectively, at September 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
Nine months ended September 30, 1999 compared to
Nine months ended September 30, 1998
Net Income
Net income increased to $30.8 million or $1.12 per diluted
earnings per share in the first nine months of 1999 from
$28.2 million or $1.00 per diluted earnings per share for
the same period of 1998, a 12% improvement. The significant
improvement during the first nine months of 1999 was the
result of higher net interest income and noninterest income
offset by slight increases in operating expenses.
Net Interest Income
On a fully taxable equivalent basis, net interest income
increased $3.2 million or 5% in the first nine months of
1999 compared to the same period of 1998. The net yield
on interest-earning assets was 4.59% in the first nine
months of 1998 as compared to 4.64% 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 and debt restructuring,
implemetnation of a bank owned life insurance program in
the second quarter of 1999 and stock buybacks during the
first nine months of 1999, offset by growth in low cost
core deposits.
PAGE 13
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the first nine months of 1999, average securities
increased $5.7 million and average loans increased
$88.6 million. The yields on average securities decreased
by 11 basis points during the period and the yield on average
loans decreased 31 basis points.
In the first nine months of 1999, average interest-bearing
deposits provided $37.5 million of the funds for the growth
in the loan and security portfolios; 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 25 basis points to
5.13%.
Also positively affecting net interest income was a $12.1
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 the $19.1 million of stock buy-backs and
the aforementioned $25 million bank owned life insurance program.
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 was $3.0 million for the first
nine months of 1999 as compared to $8.1 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
$1.3 million for the first nine months of 1999 compared to $3.7
million for the same period 1998. Nonperforming loans to total
loans was 0.24% at September 30, 1999 compared to 0.27% 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 $2.4 million or 24% in the first
nine months of 1999 compared to the same period of 1998.
Increases included $0.6 million in service charges and fees,
$0.3 million in trust fees and $1.5 million in other income.
Security gains decreased $5.3 million in the first nine months
of 1999 as compared to the same period of 1998.
The 15% or $0.6 million 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
46% increase in other income was primarily a result of a
$0.4 million increase in letter of credit fees related to
secondary market placements of commercial real estate.
Other significant increases included increased performance
for brokerage activities, insurance activities, merchant
and debit card income, equity call options, mortgage
servicing revenues as well as a full quarter of bank owned
life insurance income from a transaction entered into in
the second quarter of 1999. These areas were the focus of
several strategic initiatives and product enhancements
implemented in order to expand this source of revenue.
PAGE 14
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
S&T recognized $2.8 million of gains on available for sale
securities in the first nine months of 1999 as compared to
$8.1 million in the same period of 1998. The security gains
were taken on available for sale securities in the first nine
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 $1.5 million in losses
from the aforementioned restructuring of the available for sale
bond portfolio. Unrealized gains, net of unrealized losses, in
the available for sale portfolio totaled $37.4 million at
September 30, 1999.
Noninterest Expense
Noninterest expense increased by $1.3 million or 4% at
September 30, 1999 compared to September 30, 1998.
Other expenses increased $1.0 million or 13% as compared
to September 30, 1998. This increase included $0.3
million of goodwill related to a branch purchase in the
third quarter of 1998, $0.3 million for the implementation
of new inceptive plans $0.2 million of consulting fees
relating to an operational efficiency initiative, $0.2
million in telephone expense relating to the implement-
ation of a wide area computer communications network
offset by $0.3 million recovery of a previously charged-
off fraud loss in 1998. Average full-time equivalent staff was
658 at September 30, 1999 and 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 41% at September 30, 1999 as
compared to 42% at September 30, 1998.
Federal Income Taxes
Federal income tax expense increased $1.4 million at September
30, 1999 as compared to September 30, 1998 primarily as a
result of higher pre-tax income in 1999. The effective tax
rate for the first nine 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 September 30, 1999 compared to
Three months ended September 30, 1998
Net Income
Net income increased to $10.5 million or $0.38 per diluted
earnings per share in the third quarter of 1999 from $9.5
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
offset by an increase in operating expenses.
Net Interest Income
On a fully taxable equivalent basis, net interest income
increased $1.1 million or 5% in the third 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 reasonably consistent spreads.
Average earning assets increased by $135.5 million as
compared to the third quarter of 1998, primarily as a
result of $109.9 million of loan growth and $22.6 million
of security growth. Funding for this asset growth was
provided by deposit growth and increased borrowings.
Net interest margin on a fully taxable equivalent basis
was 4.50% for the third quarter of 1999, as compared to
4.58% for the same period of 1998, a 8bp decrease from
the year ago period. The decrease is attributable to
stock buy-backs, Bank owned insurance investment and
restructuring of borrowings to longer terms in anticip-
ation of higher interest rates in the future.
PAGE 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 third quarter of 1999 as compared to $2.0 million
in the same period of 1998. Net loan charge-offs totaled
$0.8 million for the third quarter of 1999 compared to
$2.3 million for the same period of 1998. In the third
quarter of 1998, S&T experienced a $2.0 million charge-off
related to a floor plan fraud with one auto dealership.
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 $0.8 million or 22% in the
third quarter of 1999 as compared to 1998. Increases included
$0.2 million in service charges and fees, $0.1 million in
trust fees and $0.5 million in other income during the third
quarter of 1999. Security gains increased $0.3 million in the
third quarter of 1999 as compared to the same period of 1998.
The 16% 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 10% 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 35% 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, mortgage servicing revenues as
well as a full quarter of bank owned life insurance income from a
transaction entered into in the second quarter of 1999. These
areas were the focus of several strategic initiatives and product
enhancements implemented in order to expand this source of revenue.
During the third quarter of 1999, S&T realized equity security
gains of $1.0 million. 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 increased $1.6 million or 17% in the third
quarter of 1999 as compared to the third quarter of 1998.
Salaries and employee benefits increased $0.7 million or 13%
as compared to September 30, 1998. The increase is attributable
to normal merit increases, the implementation of new sales incentive
programs in 1999 as well as restructuring of employee benefit plans
during the third quarter of 1998. Other expense increased $1.0
million or 40 % as compared to the third quarter of 1998. The
increase is primarily attributable to a $0.3 million partial
recovery of a previously charged-off fraud loss during the
third quarter of 1998, $0.2 million of consulting fees relating
to an operational efficiency initiative, $0.1 million in telephone
expense relating to the delivery of a wide area network as well as
normal operational increases. S&T's efficiency ratio, which measures
noninterest expense as a percent of recurring noninterest income plus
net interest income on a fully taxable equivalent basis, was 42% for
the quarter ending September 30, 1999 as compared to 40% for the
quarter ending September 30, 1998.
Federal Income Taxes
Federal income tax expense increased $0.6 million in the third
quarter of 1999 as compared to the third 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).
PAGE 16
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 miscalcul-
ations 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 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
the modifications made to and replacement of existing hardware
and software, the Year 2000 Issue will 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 five phases; assessment, remediation, testing,
implementation and monitoring. 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 itsassessment 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. 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. The total cost of
the project is approximately $0.3 million and is not expected to
materially impact future operations. Purchased hardware and software
was capitalized in accordance with normal policy. Personnel and
all other costs related to the project was expensed as incurred.
The Y2K Task Force reports to the S&T Board of Directors each quarter.
PAGE 17
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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&Ts Securities and Exchange Commission
filings.
PAGE 18
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
PAGE 19
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 November 8, 1999 /s/ Robert E. Rout
Robert E. Rout
Principal Accounting Officer
PAGE 20
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<PERIOD-TYPE> YEAR
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