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 September 30, 2000
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.)
43 South Ninth Street, Indiana, PA 15701
(Address of principal executive offices) (zip code)
800-325-2265
(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 - 26,984,512 shares as of October 06, 2000
PAGE 1
INDEX
S&T BANCORP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed consolidated balance sheets -
September 30, 2000 and December 31, 1999 3
Condensed consolidated statements of income -
three months ended September 30, 2000 and 1999,
and nine months ended September 30, 2000 and 1999 4
Condensed consolidated statements of cash
flows - nine months ended September 30, 2000
and 1999 5
Notes to condensed consolidated financial
Statements 6-9
Item 2. Management's discussion and analysis of
financial condition and results of operations 10-18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
PAGE 2
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
[CAPTION]
<TABLE>
September 30, December 31,
2000 1999
(000's omitted except per share data)
<S> <C> <C>
ASSETS
Cash and due from banks $38,759 $38,663
Interest-earning deposits with banks 52 54
Federal funds sold 15,400
Securities:
Available for sale 575,911 557,994
Held to maturity (market value $15,471
in 2000 and $17,527 in 1999) 15,292 17,230
Total Securities 591,203 575,224
Loans, net of allowance for loan losses
of $30,030 in 2000 and $27,134 in 1999 1,564,306 1,469,143
Premises and equipment 20,417 20,678
Other assets 81,531 74,911
TOTAL ASSETS $2,296,268 $2,194,073
LIABILITIES
Deposits:
Noninterest-bearing $234,519 $219,202
Interest-bearing 1,259,546 1,215,863
Total Deposits 1,494,065 1,435,065
Securities sold under repurchase agreements 99,183 116,009
Long term borrowings 384,868 364,062
Other liabilities 53,345 39,237
TOTAL LIABILITIES 2,031,461 1,954,373
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 2000 and 1999
Issued - 29,714,038 shares
in 2000 and 1999 74,285 74,285
Additional paid in capital 21,053 21,070
Retained earnings 195,733 179,129
Accumulated other comprehensive income 25,161 16,410
Treasury stock (2,728,526 shares at
September 30, 2000 and 2,715,221 at
December 31,1999, at cost) (51,425) (51,194)
TOTAL SHAREHOLDERS' EQUITY 264,807 239,700
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,296,268 $2,194,073
</TABLE>
See Notes to Condensed Consolidated Financial Statements
PAGE 3
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
[CAPTION]
<TABLE>
For three months ended For nine months ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $35,503 $30,402 $101,497 $88,557
Deposits with banks 2 1 6 3
Federal funds sold 466 76 1,186 335
Investment securities:
Taxable 8,087 8,133 23,930 22,829
Tax-exempt 189 221 599 729
Dividends 1,080 997 3,224 2,955
Total Interest Income 45,327 39,830 130,442 115,408
INTEREST EXPENSE
Deposits 14,655 11,936 41,364 35,002
Securities sold under
repurchase agreements 1,172 1,786 4,314 5,085
Federal funds purchased 60 93 80 214
Long-term borrowings 6,555 4,111 17,592 10,522
Total Interest Expense 22,442 17,926 63,350 50,823
NET INTEREST INCOME 22,885 21,904 67,092 64,585
Provision for loan losses 1,000 1,000 3,000 3,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN
LOSSES 21,885 20,904 64,092 61,585
NONINTEREST INCOME
Security gains, net 961 1,017 2,424 2,843
Trust fees 911 955 2,767 2,888
Service charges on deposit
Accounts 1,787 1,613 4,987 4,588
Other 2,058 1,822 6,272 4,846
Total Noninterest Income 4,756 4,390 14,026 12,322
NONINTEREST EXPENSE
Salaries and employee
benefits 5,967 6,003 17,826 17,065
Occupancy, net 775 697 2,230 2,195
Furniture and equipment 644 534 1,977 2,017
Other taxes 426 398 1,242 1,142
Data processing 572 564 1,839 1,648
FDIC assessment 74 58 221 178
Other 3,272 2,980 8,884 8,319
Total Noninterest Expense 11,730 11,234 34,219 32,564
INCOME BEFORE INCOME TAXES 15,872 15,076 46,323 44,186
Applicable income taxes 4,459 4,592 12,980 13,418
NET INCOME $11,413 $10,484 $33,343 $30,768
PER COMMON SHARE
Net Income - Basic $0.42 $0.39 $1.24 $1.13
Net Income - Diluted 0.42 0.38 1.23 1.12
Dividends 0.21 0.19 0.62 0.56
Average Common Shares
Outstanding - Basic 26,987 27,086 26,994 27,236
Average Common Shares
Outstanding - Diluted 27,071 27,273 27,078 27,448
</TABLE>
See Notes to Condensed Consolidated Financial Statements
PAGE 4
S&T BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[CAPTION]
<TABLE>
Nine Months Ended September 30
2000 1999
(ooo's omitted)
<S> <C> <C>
Operating Activities
Net Income $33,343 $30,768
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3,000 3,000
Provision for depreciation and amortization 1,707 1,645
Net amortization of investment security
premiums 266 479
Net accretion of loans and deposit discounts (204)
Net gains on sales of securities available
for sale (2,424) (2,843)
Deferred income taxes (1,969) 1,142
Increase in interest receivable (2,944) (2,496)
Increase (decrease) in interest payable 886 (213)
Increase in other assets (2,388) (25,332)
Increase in other liabilities 1,441 383
Net Cash Provided by Operating Activities 30,714 6,533
Investing Activities
Net decrease in interest-earning
deposits with banks 2 1
Net decrease in federal funds sold 15,400 19,300
Proceeds from maturities of investment
securities 1,930 3,058
Proceeds from maturities of securities
available for sale 11,280 93,528
Proceeds from sales of securities
available for sale 61,155 212,517
Purchases of securities available for sale (74,721) (348,080)
Net increase in loans (114,572) (117,669)
Proceeds from the sale of loans 16,613 18,535
Purchases of premises and equipment (1,483) (1,599)
Other, net 37 (75)
Net Cash Used in Investing Activities (84,359) (120,484)
Financing Activities
Net increase in demand, NOW, MMI,
and savings deposits 9,226 21,391
Net increase in certificates of deposit 49,774 10,771
Net decrease in repurchase agreements (16,826) (39,880)
Net increase in federal funds purchased 7,750 5,000
Proceeds from long-term borrowing 116,075 163,844
Repayments on long-term borrowing (95,269) (25,000)
Acquisition of treasury stock (326) (19,143)
Sale of treasury stock 96 1,030
Cash dividends paid to shareholders (16,759) (15,032)
Net Cash Provided by Financing
Activities 53,741 102,981
Increase (decrease) in Cash and
Cash Equivalents 96 (10,970)
Cash and Cash Equivalents at Beginning
of Period 38,663 48,736
Cash and Cash Equivalents at End
of Period $38,759 $37,766
</TABLE>
See Notes to Condensed Consolidated Financial Statements
PAGE 5
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2000
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
instrucitons to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
consisting of normal recurring accruals considered necessary for a fair
presentation have been included. Operating results for the three and nine
month periods ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. 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, 1999.
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 26,994,403 and 27,236,036 for
the nine month period ending September 30, 2000 and 1999. Average shares
outstanding for computing dilutive earnings per share were 27,078,208 and
27,447,842 for the nine month period ending September 30, 2000 and 1999.
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.
Components of comprehensive income for S&T include net income and
unrealized gains or losses on S&T's available-for-sale securities. During
the nine months ended September 30, 2000 and 1999, total
comprehensive income amounted to $42,094,000 and $15,100,000.
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (Statement No. 133), as
amended by Financial Accounting Standards Board Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of Statement No. 133" (Statement No. 137), is
effective in 2001, and requires measuring and recording the change in
fair value of derivative instruments. S&T is currently in the process
of evaluating the impact of Statement No. 133. Statement No. 133 is
not expected to materially affect S&T's financial position or results
of operations.
PAGE 6
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE B--SECURITIES
The amortized cost and estimated market value of securities as of
September 30 are as follows:
[CAPTION]
<TABLE>
2000 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 $352,369 $788 ($5,719) $347,438
Mortgage-backed securities 5,580 61 (2) 5,639
U.S. treasury securities 13,597 466 (1) 14,062
Corporate securities 63,667 8 (1,321) 62,354
Debt securities available
for sale 435,213 1,323 (7,043) 429,493
Marketable equity securities 61,736 47,142 (2,713) 106,165
Other securities 40,253 40,253
Total $537,202 $48,465 ($9,756) $575,911
2000 Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
Obligation of states and
political subdivisions $13,292 $162 ($2) $13,452
Corporate securities 2,000 19 2,019
Total $15,292 $181 ($2) $15,471
The amortized cost and estimated market value of securities
as of December 31 are as follows:
1999 Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
Obligations of U.S. government
corporations and agencies $345,329 $86 ($9,474) $335,941
Mortgage-backed securities 6,179 12 (21) 6,170
U.S. treasury securities 13,709 417 14,126
Corporate securities 66,395 11 (1,880) 64,526
Debt securities available
for sale 431,612 526 (11,375) 420,763
Marketable equity securities 61,635 42,073 (5,979) 97,729
Other securities 39,502 39,502
Total $532,749 $42,599 ($17,354) $557,994
1999 Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(000's omitted)
Obligation of states and political
Subdivisions $15,231 $235 ($3) $15,463
Corporate securities 1,999 65 2,064
Total $17,230 $300 ($3) $17,527
</TABLE>
PAGE 7
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE B--SECURITIES
Continued
During the period ended September 30, 2000, there were $2,424,278 in
realized gains relative to securities available for sale.
The amortized cost and estimated market value of debt securities at
September 30, 2000, 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 $13,501 $13,467
Due after one year through five years 259,376 256,285
Due after five years through ten years 162,336 159,741
Total $435,213 $429,493
Estimated
Amortized Market
Held to Maturity Cost Value
(000's omitted)
Due in one year or less $5,278 $5,301
Due after one year through five years 10,014 10,170
Total $15,292 $15,471
</TABLE>
At September 30, 2000 and December 31, 1999 investment securities
with a principal amount of $347,286,000 and $317,979,000,
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>
September 30, December 31,
2000 1999
(000's omitted)
<S> <C> <C>
Real estate - construction $126,226 $94,786
Real estate - mortgages:
Residential 468,261 466,881
Commercial 566,447 527,970
Commercial - industrial and agricultural 340,560 302,877
Consumer installment 92,842 103,763
Gross Loans 1,594,336 1,496,277
Allowance for loan losses (30,030) (27,134)
Total Loans $1,564,306 $1,469,143
</TABLE>
PAGE 8
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE C--LOANS AND ALLOWANCE FOR LOAN LOSSES
Continued
Changes in the allowance for loan losses for the nine months ended
September 30 were as follow
[CAPTION]
<TABLE>
2000 1999
(000's omitted)
<S> <C> <C>
Balance at beginning of period $27,134 $26,677
Charge-offs (2,814) (3,870)
Recoveries 2,710 2,598
Net (charge-offs) (104) (1,272)
Provision for loan losses 3,000 3,000
Balance at end of period $30,030 $28,405
</TABLE>
The following table represents S&T's investment in loans
considered to be impaired and related information on those
impaired loans at September 30, 2000 and December 31, 1999.
[CAPTION]
<TABLE>
2000 1999
<S> <C> <C>
Recorded investment in loans considered
to be impaired $14,566,000 $11,602,000
Loans considered to be impaired that
were on a nonaccrual basis 5,187,000 -
Allowance for loan losses related to
loans considered to be impaired - 73,000
Average recorded investment in impaired
loans 13,445,000 5,948,000
Total interest income recognized on
impaired loans 1,346,000 1,271,000
Interest income on impaired loans
recognized on a cash basis. 640,000 1,107,000
</TABLE>
NOTE D--FINANCIAL INSTRUMENT
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 conditionand 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 $421,216,000 and obligations under standby letters of credit totaled
$154,858,000 at September 30, 2000.
At September 30, 2000, S&T had marketable equity securities, totaling
$727,310 at amortized cost and $2,534,025 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 $2.2 billion in the first nine months of 2000, a
$115.8 million increase from the 1999 full year average. Average loans
increased $110.1 million and average securities and federal funds
increased $22.3 million in the first nine months of 2000 compared to the
1999 full year average. Funding for this loan and security growth was
primarily provided by a $70.3 million increase in average deposits and a
$69.3 million increase in average borrowings, offset by a decrease of
$2.8 million in average retained earnings.
Lending Activity
Average loans increased $110.1 million, or 8% to $1.5 billion for the
nine months ended September 30, 2000 from the 1999 full year average.
Changes in the composition of the average loan portfolio during 2000
included increases of $21.3 million of commercial loans, $106.5 million
of commercial real estate loans, offset by decreases of $6.6 million of
residential mortgages and $11.1 million in installment loans.
Commercial real estate loans comprise 36% 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 or rental properties and many are seasoned
properties. During 2000, S&T sold $12.8 million of participation's of
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 2000 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
PAGE 10
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2000 the residential mortgage
portfolio had a 20% composition of adjustable rate mortgages.
Much of the decline in average residential loans is due to more active
participation in the secondary mortgage markets. S&T periodically
originates to sell 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 2000, S&T sold $3.8 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 strategy 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 recent 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 $9.5
million for the nine months ending September 30, 2000 as compared to the
1999 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.
Rates and terms for commercial real estate and equipment loans normally
are negotiated, subject to such variables as economic conditions,
marketability of collateral, credit history of the borrower and future cash
flows. The loan to value policy guideline for commercial real estate
loans is generally 75-80%.
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
PAGE 11
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
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 by $7.8 million in the first nine months of
2000 compared to the 1999 full year average. The average increase was
comprised of $11.8 million of corporate securities, $4.2 million of
corporate equity securities and $9.7 million of Federal Home Loan Bank
(FHLB) stock. Offsetting these increases were average decreases of $7.2
million in U.S. treasury securities, $6.9 million in U.S. government
agency securities, $1.0 million of mortgage-backed securities and $2.8
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 2000, the
equity portfolio yielded 9.4% on a fully taxable equivalent basis and had
unrealized gains, net of nominal unrealized losses, of $44.4 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, 2000, unrealized gains,
net of unrealized losses, for securities classified as available for sale were
$38.7 million.
Allowance for Loan Losses
The balance in the allowance for loan losses was $30.0 million or 1.88%
PAGE 12
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of total loans at September 30, 2000 as compared to $27.1 million or
1.81% of total loans at December 31, 1999. The adequacy of the
allowance for loan losses is determined by management through
evaluation of the loss potential on individual nonperforming, delinquent
and high-dollar loans; review of economic conditions and business
trends; historical loss experience; and growth and composition of the
loan portfolio, as well as other relevant factors.
A quantitative analysis is utilized to support the adequacy of the
allowance for loan losses. This analysis includes review of the high and
low historical charge-off rates for loan categories, fluctuations and trends
in the amount of classified loans and economic factors. Economic
factors consider the level of S&T's historical charge-offs that have
occurred within the credits' economic life cycle.
Significant to this analysis is the shift in the loan portfolio composition to
an increased mix of commercial loans. These loans are generally larger
in size and, due to our continuing growth, many are not well seasoned
and could be more vulnerable to an economic slowdown. Management
relies on its risk rating process to monitor trends which may be occurring
relative to commercial loans to assess potential weaknesses within
specific credits. Current economic factors and trends in risk ratings are
considered in the determination of the allowance for loan losses.
Net loan charge-offs totaled $0.1 million and $1.3 million in the first
nine months of 2000 and 1999, respectively. Net charge-offs for the first
nine months of 2000 were reduced by the proceeds received on a
previously charged-off floor plan loan in 1998. The balance of
nonperforming loans, which included nonaccrual loans past due 90 days
or more, at September 30, 2000, was $7.8 million or 0.49% of total
loans. This compares to nonperforming loans of $3.0 million or 0.20%
of total loans at December 31, 1999. The increase is primarily
attributable to two commercial real estate credits where the real estate is
presently for sale.
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 $70.3 million, or 5% for the nine
months ended September 30, 2000 as compared to the 1999 full year
average. Changes in the average deposit mix included a $24.7 million
increase in money market accounts, a $12.7 million increase in demand
accounts and a $45.5 million increase in time deposits, offset by a $2.4
PAGE 13
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
million decrease in NOW accounts, and a $10.2 million decrease in
savings accounts. Some of the changes can be partially explained by
strategic initiatives to increase demand accounts and cash management
services. In addition, a successful strategy for money market account
pricing was implemented in order to make these accounts more
competitive with money funds offered at brokerage firms.
Management believes that the S&T deposit base is stable and that S&T
has the ability to attract new deposits, mitigating a funding dependency
on volatile liabilities. Special rate deposits of $100,000 and over were
8% and 6% of total deposits at September 30, 2000 and December 31,
1999, respectively, and primarily represent deposit relationships with
local customers in our market area. In addition, S&T has the ability to
access both public and private markets to raise long-term funding if
necessary. During the first quarter of 2000, S&T joined National CD
Rateline which is a firm that trades institutional CD's on the Internet. At
September 30, 2000, there were $3.5 million of these brokered and
institutional retail certificates of deposit outstanding.
Borrowings
Average borrowings increased $51.7 million for the first nine months
ended September 30, 2000 compared to the 1999 full year average and
were comprised of retail repurchase agreements (REPO's), wholesale
REPO's, federal funds purchased and long-term borrowings. S&T
defines repurchase agreements with its local, retail customers as retail
REPOS; wholesale REPOS are those transacted with other banks and
brokerage firms with terms normally ranging from 1 to 14 days.
The average balance in retail REPOS decreased approximately $5.8
million for the first nine months of 2000 compared to the full year 1999
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 by $32.4 million
for the first nine months of 2000 compared to the full year 1999 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 2000.
Average long-term borrowings have increased $89.9 million in the first
nine months of 2000 as compared to the full year 1999 average. At
September 30, 2000, S&T had long-term borrowings outstanding of
$265.6 million at a fixed rate and $7.1 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
PAGE 14
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
cost funds through the FHLB's Community Investment Program and to
fund stock buy-backs.
Capital Resources
Shareholders' equity increased $25.1 million at September 30, 2000,
compared to December 31, 1999. Net income was $33.3 million and
dividends paid to shareholders were $16.8 million for the nine months
ended September 30, 2000. Also affecting capital is a increase of $8.7
million related to the available for sale securities portfolio. There were
18,400 shares of S&T common stock repurchased during the first nine
months of 2000. An authorization is in effect to buy-back up to
1,000,000 shares until December 31, 2000.
S&T paid 50% of net income in dividends, equating to an annual
dividend rate of $0.84 per share during the first nine months of 2000.
The book value of S&T's common stock increased from $8.88 at
December 31, 1999 to $9.81. The market price of S&T's common stock was
$19.00 per share at September 30, 2000, compared to $23.19 per share at
December 31, 1999.
S&T continues to maintain a strong capital position with a leverage ratio
of 10.3% as compared to the minimum regulatory guideline of 3.0%.
S&T's risk-based capital Tier I and Total ratios were 12.2% and 14.5%
respectively, at September 30, 2000. 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, 2000 compared to
Nine months ended September 30, 1999
Net Income
Net income increased to $33.3 million or $1.23 per diluted earnings per
share in the first nine months of 2000 from $30.8 million or $1.12 per
diluted earnings per share for the same period of 1999, representing a
10% improvement. The significant improvement during the first nine
months of 2000 was the result of higher net interest income and
noninterest income, offset by normal increases in operating expenses.
PAGE 15
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 $2.5
million or 4% in the first nine months of 2000 compared to the same
period of 1999. The net yield on interest-earning assets was 4.40% in the
first nine months of 1999 as compared to 4.59% in the same period of
1999. The decline in the net yield on interest earning assets during 2000
was primarily attributable to the implementation of a bank owned life
insurance program in the second quarter of 1999, higher borrowing costs
and funding for the stock buy-back program. Partially offsetting these
negative factors for the net yield on net interest income rate was a
program to reduce cash and due from balances and growth in low cost
core deposits.
In the first nine months of 2000, average securities increased $13.7
million and average loans increased $128.4 million. The yields on
average securities increased by 30 basis points during the period and the
yield on average loans increased 41 basis points.
In the first nine months of 2000, average interest-bearing deposits
provided $64.6 million of the funds for the growth in the loan and
security portfolios; cost of deposits totaled 4.44%, an increase of 47 basis
points from 1999 due to increased rates paid on money market and time
deposits. The cost of REPOS and other borrowed funds increased 97
basis points to 6.10%. Borrowed funds costs were affected by a
restructuring program directed toward more longer term fixed rate borrowings.
Also positively affecting net interest income was a $24.3 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. Demand deposit growth and the
initiative to reduce branch cash are primarily responsible for the increase.
This increase is net of the reduction to shareholders' equity resulting
from stock buy-backs during the first nine months of 1999 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 80% of operating revenue. A variety of
asset/liability management strategies were successfully implemented
within prescribed ALCO risk parameters that enabled S&T to maintain a
net interest margin reasonably consistent with historical levels. The level
and mix of funds is 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 2000 and 1999. The provision is the result of management's
assessment of economic conditions, credit quality statistics, loan
administration effectiveness and other factors that would have an impact
on probable losses in the loan portfolio. Also affecting the amount of
provision expense is loan growth, portfolio composition and trends
within risk ratings.
Credit quality statistics are an important factor in determining the amount
of provision expense. Net loan charge-offs totaled $0.1 million for the
first nine months of 2000 compared to $1.3 million for the same period
1999. The decrease in net charge-offs for the first nine months of 2000
is primarily due to proceeds received on a previously charged-off floor
plan loan in 1998. Nonperforming loans to total loans was 0.49% at
September 30, 2000 compared to 0.24% in the same period of 1999. The
increase is attributable to two commercial real estate credits where that
real estate is presently for sale. Also affecting the amount of provision
expense is the amount and types of loan growth and portfolio
composition. Most of the loan growth in 2000 and 1999 is attributable to
larger-sized commercial loans.
Noninterest Income
Noninterest income increased $1.7 million or 14% in the first nine
months of 2000 as compared to the same period of 1999. Increases
included $0.4 million in service charges and fees, $1.4 million in other
income, offset by a decrease of $0.1 million in trust income. Security
gains decreased $0.4 million in the first nine months of 2000 as
compared to the same period of 1999.
The $0.4 million increase in service charges on deposit accounts was
primarily the result of management's continual effort to implement
reasonable fees for services performed, and to manage closely the
collection of these fees. The $1.4 million increase in other income was
primarily a result of higher performance levels for brokerage activities,
merchant and debit card income, loan related fees as well as 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.
S&T recognized $2.4 million of gains on available for sale securities in
the first nine months of 2000 as compared to $2.8 million in the same
period of 1999. The security gains were taken on available for sale
securities in the first nine months of 2000 and 1999 in order to maximize
returns in the portfolio by taking advantage of market opportunities when
PAGE 16
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
presented. Unrealized gains, net of unrealized losses, in the available for
sale portfolio totaled $38.7 million at September 30, 2000.
Noninterest Expense
Noninterest expense increased by $1.7 million or 5% at September 30,
2000 compared to September 30, 1999. Staff expense increased $0.8
million or 4% primarily attributable to normal merit increases and higher
incentive payouts. Other expenses increased $0.7 million or 7% as
compared to September 30, 1999. This increase included $0.1 million in
telephone expense relating to the implementation of a wide area
computer communications network and $0.6 million in legal fees related
to increased activity in loan collections as well as the formation of S&T
Insurance Group, LLC. Data processing expense increased $0.2 million
due to a refund received from our third party processor in the second
quarter of 1999. Average full-time equivalent staff was 660 at
September 30, 2000 and 658 at September 30, 1999. 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 41% at September 30, 2000 and September 30, 1999.
Federal Income Taxes
Federal income tax expense decreased $0.4 million at September 30,
2000 as compared to September 30, 1999 primarily as a result of a lower
effective tax rate. The effective tax rate for the first nine months of 2000
was 28% and 30% in 1999, 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, 2000
compared to Three months ended September 30, 1999
Net Income
Net income increased to $11.4 million or $0.42 per diluted earnings per
share in the third quarter of 2000 from $10.5 million or $0.38 per diluted
earnings per share for the same period of 1999. This significant
improvement is due to higher net interest income, higher noninterest
income, offset by relatively normal increases in operating expenses.
PAGE 17
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 $1.0
million or 4% in the third quarter of 2000 compared to the same period
of 1999. This improvement in net interest income resulted from a higher
level of earning assets while maintaining fairly consistent spreads.
Average earning assets increased by $140.1 million as compared to the
third quarter of 1999, primarily as a result of $127.8 million of loan
growth. Funding for this asset growth was provided by available for sale
securities sales, deposit growth, increased borrowings and earnings
retained.
Net interest margin on a fully taxable equivalent basis was 4.40 for the
third quarter of 2000, as compared to 4.50 for the same period of 1999.
Provision for Loan Losses
The provision for loan losses was $1.0 million in the third quarter of
2000 and 1999. Net loan charge-offs totaled $0.9 million for the third
quarter of 2000 compared to $0.8 million for the same period of 1999.
The provision expense in 2000 and 1999 is the 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 $0.4 million or 8% in the third quarter of
2000 as compared to 1999. Increases included $0.2 million in service
charges and $0.2 million in other income during the third quarter of
2000. Security gains decreased $0.1 million in the third quarter of 2000
as compared to the same period of 1999.
The 11% increase in service charges on deposit accounts was primarily
the result of management's continual effort to implement reasonable fees
for services performed, and to manage closely the collection of these
fees. The 13% increase in other income was primarily a result of
increased performance for brokerage activities, loan related fees,
merchant and debit card income. 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 2000, S&T realized equity security gains of
$1.6 million offset by $0.6 million in losses from the available for sale
bond portfolio. The available for sale equity security gains were taken in
order to maximize returns by taking advantage of market opportunities
when presented. The available for sale bond portfolios were part of a
balance sheet restructuring effort.
Noninterest Expense
Noninterest expense increased $0.5 million or 4% in the third quarter of
2000 as compared to the third quarter of 1999. The increase is primarily
attributable to increased occupancy expense and other expenses.
Occupancy expense increased $0.2 million due to a new support facility,
a new branch and a change in timing of maintenance contracts with
various vendors. Other expenses increased $0.3 million primarily due to
normal organizational expansion, fee increases from vendors and legal
fees due to increased collection activities.
Federal Income Taxes
Federal income tax expense decreased $0.1 million in the third quarter of
2000 as compared to the third quarter of 1999. The decrease is primarily
attributable to a lower effective tax rate. The effective tax rate for the
third quarter of 2000 was 28% and 30% for the third quarter of 1999,
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
During 1999, S&T completed the process of preparing for the Year 2000
date change. This process involved identifying and remediating date
recognition problems in computer systems, software and other operating
equipment, working with third parties to address their Year 2000 issues,
and developing contingency plans to address potential risks in the event
of Year 2000 failures. To date, S&T has successfully managed the
transition.
Although considered unlikely, unanticipated problems in S&T's core
business processes, including problems associated with non-compliant
third parties and disruptions to the economy in general, could still occur
despite efforts to date to remediate affected systems and develop
contingency plans. Management will continue to monitor all business
processes, including interaction with S&T's business customers, vendors
and other third parties, throughout 2000 to address any issues and ensure
all processes continue to function properly.
Through third quarter of 2000, the cost of the Year 2000 project totaled
approximately $0.3 million. Purchased hardware and software was
capitalized in accordance with normal policy. Personnel and all other
costs related to the project was expensed as incurred.
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995
The statements in this Annual Report, which are not historical fact, are
forward looking statements that involve risks and uncertainties,
including, but not limited to, the interest rate environment, the effect of
federal and state banking and tax regulations, the effect of economic
conditions, the impact of competitive products and pricings, and other
risks detailed in S&T's Securities and Exchange Commission filings.
PAGE 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, 2000 /s/ Robert E. Rout
Robert E. Rout
Executive Vice President &
Chief Financial Officer
PAGE 20
