-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RDCAWawl0MBZf5LkwsDfKuXAMRAouH9EZF4ogTdFsuC1LI9rymcAKzq4jX1E4y07 PlUP/Ea8Cm8rgxlEbUOokQ== 0000719220-98-000010.txt : 19980324 0000719220-98-000010.hdr.sgml : 19980324 ACCESSION NUMBER: 0000719220-98-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980323 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: S&T BANCORP INC CENTRAL INDEX KEY: 0000719220 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 251434426 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12508 FILM NUMBER: 98570983 BUSINESS ADDRESS: STREET 1: 800 PHILADELPHIA ST STREET 2: P O BOX 190 CITY: INDIANA STATE: PA ZIP: 15701 BUSINESS PHONE: 4123492900 MAIL ADDRESS: STREET 1: 800 PHILADELPHIA STREET CITY: INDIANA STATE: PA ZIP: 15701 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended December 31, 1997 Commission file number 0-12508 S&T BANCORP, INC. (Exact name of registrant as specified in its charter) Pennsylvania (State or other jurisdiction of incorporation of organization) 25-1434426 (I.R.S. Employer Identification No.) 800 Philadelphia Street, Indiana, PA 15701 (Address of principal executive offices)(Zip Code) Registrant's telephone number, including(724)-349-2900 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $2.50 per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this form 10-K. { } The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 27, 1998: Common Stock, $2.50 par value - $663,641,104 The number of shares outstanding of the issuer's classes of common stock as of February 27, 1998: Common Stock, $2.50 par value - 13,831,604 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual shareholders report for the year ended December 31, 1997 are incorporated by reference into Part II. Portions of the proxy statement for the annual shareholders meeting to be held April 20, 1998 are incorporated by reference into Part III. 1 PART I ITEM 1. BUSINESS General S&T Bancorp, Inc. ("S&T") was incorporated on March 17, 1983 under the laws of the Commonwealth of Pennsylvania as a bank holding company and has two wholly owned subsidiaries, S&T Bank and S&T Investment Company, Inc. S&T is registered as a bank holding company with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act, as amended. As of December 31, 1997, S&T had $1.9 billion in total assets, $260 million in total shareholders' equity and $1.3 billion in total deposits. Deposits are insured by the Federal Deposit Insurance Corporation to the full extent provided by law. Total trust assets were approximately $579 million at December 31, 1997. Trust services include services as executor and trustee under wills and deeds, and as guardian and custodian of employee benefit trusts. S&T Bank is a full service bank with its main office at 800 Philadelphia Street, Indiana, Pennsylvania, providing service to its customers through a branch network of thirty-seven offices located in Armstrong, Allegheny, Indiana, Jefferson, Clearfield and Westmoreland counties. S&T Bank's services include accepting time and demand deposit accounts, making secured and unsecured commercial and consumer loans, providing letters of credit, and offering discount brokerage services, personal financial plan- ning and credit card services. S&T Bank has a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of depositors (including federal, state and local governments). S&T Bank does not experience significant fluctuations in deposits. Employees As of December 31, 1997, S&T Bank had a total of 664 full-time equivalent employees. S&T provides a variety of employment benefits and considers its relationship with its employees to be good. Supervision and Regulation General S&T and S&T Bank are each extensively regulated under both federal and state law. The following information describes certain aspects of that regulation applicable to S&T and S&T Bank and does not purport to be complete. To the extent statutory or regulatory provisions or proposals are described, the description is qualified in its entirety by reference to the particular statutory of regulatory provisions or proposals. S&T As a bank holding company, S&T is subject to regulation under the Bank Holding Company Act of 1956 ("BHCA") and the examination and reporting requirements of the Federal Reserve Board. Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than five percent of the voting shares or substantially all of the assets of any additional bank, or merge or consolidate with another bank holding company, without the prior approval of the Federal Reserve Board. 2 ITEM 1. BUSINESS- continued The BHCA also generally limits the activities of a bank holding company to that of banking, managing or controlling banks, or any other activity which is determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. S&T is presently engaged in two nonbanking activities: S&T Investment Company, Inc., which is an investment holding company, and Commonwealth Trust Credit Life Insurance Company ("CTCLIC"). S&T Investment Company, Inc. was formed in June 1988 to hold and manage a group of investments previously owned by S&T Bank and to give S&T additional latitude to purchase other investments. CTCLIC, which is a joint venture with another financial institution, acts as a reinsurer of credit life, accident and health insurance policies sold by S&T Bank and the other institution. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution becomes in danger of default or in default. For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. S&T Bank As a state-chartered commercial bank, the deposits of which are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corpor- ation ("FDIC"), S&T Bank is subject to the supervision and regulation of the Pennsylvania Department of Banking ("PADB") and the FDIC. S&T Bank also is subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types, amount and terms and conditions of loans that may be granted, and limits on the type of other activities in which S&T Bank may engage and the investments it may make. Various consumer and compliance laws and regul- ations also affect S&T Bank's operations. S&T Bank also is subject to federal laws that limit the amount of transactions between itself and S&T or S&T's nonbank subsidiaries. Under these provisions, transactions by a bank subsidiary to any one of its parent company or any nonbank affiliate generally are limited to ten percent of the bank subsidiary's capital and surplus, or twenty percent in the aggregate. Further, loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. A bank, such as S&T Bank, is prohibited from purchasing any "low quality" asset from an affiliate. S&T Bank is in compliance with these provisions. As an FDIC-insured bank, S&T Bank also is subject to FDIC insurance assessments. Currently, the amount of FDIC assessments paid by individual insured depository institutions ranges from zero to $.27 per $100 of insured deposits, based on their relative risk to the deposit insurance funds, as measured by the institutions' regulatory capital position and other supervisory factors. S&T Bank currently pays the lowest premium rate based upon this risk assessment. However, because legislation enacted in 1996 requires that all insured deposits pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation, the FDIC is assessing BIF-insured deposits an additional $.013 per $100 of deposits to cover those obligations. 3 ITEM 1. BUSINESS- continued Capital The Federal Reserve Board and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to banking organizatons they supervise. Under the risk-based capital requirements, S&T and S&T Bank each generally is required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit), of eight percent. At least half of the total capital is to be composed of common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles ("Tier 1 capital"). The remainder may consist of certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock, and a limited amount of the loan loss allowance ("Tier 2 capital") and, together with Tier 1 capital, ("Total capital"). At December 31, 1997, S&T's Tier 1 and Total capital ratios were 16.97 percent and 18.22 percent, respectively, and the ratios of Tier 1 capital and Total capital to total risk-adjusted assets for S&T Bank were 13.12 percent and 14.37 percent, respectively. In addition, each of the federal bank regulatory agencies has established minimum leverage capital ratio requirements for banking organizations. These requirements provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets equal to three percent for bank and bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing significant growth or expansion. All other banks and bank holding companies will generally be required to maintain a leverage ratio of at least 100 to 200 basis points above the stated minimum. S&T's leverage ratio at December 31, 1997 was 11.70 percent, and S&T Bank's leverage ratio was 9.24 percent. Both the Federal Reserve Board's and the FDIC's risk-based capital standards explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution's ability to manage these risks, as important factors to be taken into account by the agency in assessing an institution's overall capital adequacy. The capital guidelines also provide that an institution's exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a bank's capital adequacy. The Federal Reserve Board also has recently issued additional capital guidelines for certain bank holding companies that engage in trading activities. S&T does not believe that consideration of these additional factors will affect the regulators' assessment of S&T's or S&T Bank's capital position. Payment of Dividends S&T is a legal entity separate and distinct from its banking and other subsidiaries. A major portion of the revenues of S&T result from amounts paid as dividends to S&T by S&T Bank. S&T Bank, in turn, is subject to state laws and regulations that limit the amount of dividends it can pay to S&T. In addition, both S&T and S&T Bank are subject to various general regulatory policies relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The Federal Reserve Board has indicated that banking organizations should generally pay dividends only if (1) the organization's net income available to common shareholders over the past year has been sufficient to fund fully the dividends and (2) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality and overall financial condition. S&T does not expect that any of these laws, regulations or policies will materially impact its ability or the ability of S&T Bank to pay dividends. During the year ended December 31, 1997, S&T Bank paid $14.2 million in cash dividends to S&T. 4 ITEM 1. BUSINESS- continued Other Safety and Soundness Regulations The federal banking agencies possess broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized," as defined by the law. As of December 31, 1997, S&T Bank was classified as "well capitalized." The classification of depository institutions is primarily for the purpose of applying the federal banking agencies' prompt corrective action provisions and is not intended to be, and should not be interpreted as, a representation of overall financial condition or prospects of any financial institution. The agencies' prompt corrective action powers can include, among other things, requiring an insured depository institution to adopt a capital restoration plan which cannot be approved unless guaranteed by the institution's parent company; placing limits on asset growth and restrictions on activities, including restrictions on transactions with affiliates; restricting the interest rates the institution may pay on deposits; prohibiting the payment of principal or interest on subordinated debt; prohibiting the holding company from making capital distributions without prior regulatory approval and, ultimately, appointing a receiver for the institution. Among other things, only a "well capitalized" depository institution may accept brokered deposits without prior regulatory approval. The PADB also has broad enforcement powers over S&T Bank, including the power to impose fines and other civil and criminal penalties, and to appoint a conservator or receiver. Interstate Banking and Branching The BHCA currently permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including certain nation-wide and state-imposed concentration limits. Effective June 1, 1997, S&T Bank will have the ability, subject to certain restrictions, including state opt-out provisions, to acquire by acquisition or merger, branches of banks located outside of Pennsylvania, its home state. States may affirmatively opt-in to permit these transactions earlier, which Pennsylvania, among other states, has done. The establishment of de novo interstate branches also will be possible in those states that expressly permit it. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law. Competition All phases of S&T Bank's business are highly competitive. S&T Bank's market area is western Pennsylvania, with a representation in Indiana, Armstrong, Allegheny, Jefferson, Clearfield and Westmoreland counties. S&T Bank competes with those local commercial banks which have branches and customer calling programs in its market area. S&T Bank considers its major competitors to be First Commonwealth Bank headquartered in Indiana, Pennsylvania; People's Bank headquartered in Ford City, Pennsylvania; Indiana First Savings Bank headquartered in Indiana, Pennsylvania; Clearfield Bank and Trust Company, headquartered in Clearfield, Pennsylvania and Marion Center National Bank, headquartered in Marion Center, Pennsylvania. The proximity of Indiana to metropolitan Pittsburgh results in a significant impact on the S&T market because of media influence and penetration by larger financial institutions, such as Mellon Bank, National City Bank and PNC Bank. 5 BUSINESS--Continued Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential. 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. This discussion and analysis should be read in conjunction with the consolidated financial statements, selected financial data and management's discussion and analysis incorporated by reference. References to assets and liabilities and changes thereto represent daily average balance for the periods discussed, unless otherwise noted. Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the volume of interest-earning assets and interest-bearing liabilities and changes in interest yields and rates. Interest on loans to and obligaions of state, municipalities and other public entities is not subject to federal income tax. As such, the stated (pre-tax) yield on these assets is lower than the yields on taxable assets of similar risk and maturity. In order to make the pre-tax income and resultant yields comparable to taxable loans and investments, a taxable equivalent adjustment was added to interest income in the tables below. This adjustment has been calculated using the U.S. federal statutory income tax rate of 35% for 1997, 1996 and 1995. The following table demonstrates the amount that has been added to interest income per the summary of operations. [CAPTION] Year Ended December 31 1997 1996 1995 (In thousands of dollars) Interest income per consolidated statements of income $141,101 $132,442 $127,020 Adjustment to fully taxable equivalent basis 3,333 3,469 3,550 Interest income adjusted to fully taxable equivalent basis 144,434 135,911 130,570 Interest expense 62,284 58,589 57,677 Net interest income adjusted to fully taxable equivalent basis $82,150 $77,322 $72,893
6 BUSINESS - Continued Average Balance Sheet and Net Interest Income Analysis [CAPTION] December 31 1997 1996 1995 Average Yield Average Yield Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate (In thousands of dollars) ASSETS Interest-earning assets: Loans (1)(2) $1,234,733 $109,779 8.89% $1,131,186 $100,373 8.87% $1.063.276 $96,501 9.08% Taxable investment securities (2) 405,733 30,663 7.56% 411,560 30,871 7.50% 397,545 28,739 7.23% Tax-exempt investment securities (2) 41,850 3,461 8.27% 52,026 4,332 8.33% 56,386 4,781 8.48% Interest-earning deposits with banks 218 8 3.67% 73 5 6.85% 1,744 143 8.20% Federal funds sold 9,528 523 5.49% 6,097 330 5.41% 6,976 406 5.82% Total interest-earning assets (3) 1,692,062 144,434 8.54% 1,600,942 135,911 8.49% 1,525,927 130,570 8.56% Noninterest-earning assets: Cash and due from banks 36,185 38,741 38,584 Premises and equipment, net 19,752 19,419 19,444 Market value appreciation of securities available for sale 46,626 33,524 23,164 Other assets 38,971 36,972 36,277 Less allowance for loan losses (19,802) (17,630) (15,977) $1,813,794 $1,711,968 $1,627,419 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Demand deposits $111,097 $1,383 1.24% $113,795 $1,723 1.51% $114,177 $1,899 1.66% Money market accounts 183,259 7,389 4.03% 152,692 5,905 3.87% 128,661 4,926 3.83% Savings deposits 187,394 4,340 2.32% 206,287 5,049 2.45% 227,712 6,037 2.65% Time deposits 626,192 34,854 5.57% 605,693 33,448 5.52% 555,035 31,415 5.66% Federal funds purchased 8,369 472 5.64% 5,812 319 5.49% 7,851 474 6.04% Securities sold under agreements to repurchase 126,481 6,602 5.22% 135,199 7,006 5.18% 150,221 8,482 5.65% Long-term borrowings 123,722 7,227 5.84% 88,613 5,071 5.72% 73,154 4,326 5.91% Other borrowed funds 230 17 7.39% 641 68 10.61% 1,042 118 11.32% Total interest-bearing liabilities (3) 1,366,744 62,284 4.56% 1,308,732 58,589 4.48% 1,257,853 57,677 4.59% Noninterest-bearing liabilities: Demand deposits 161,339 151,863 141,966 Other 42,048 34,235 29,086 Shareholders' equity 243,663 217,138 198,514 $1,813,794 $1,711,968 $1,627,419 Net interest income $82,150 $77,322 $72,893 Net yield on interest-earning assets 4.85% 4.83% 4.78%
(1) For the purpose of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. (2) Tax-exempt income is on an FTE basis, including the dividend received deduction for equity securities, using the statutory federal income tax rate of 35% for 1997, 1996 and 1995. (3) Yields are calculated using historical cost basis. 7 Item 1. BUSINESS--Continued The following tables set forth for the periods indicated a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates: [CAPTION] 1997 Compared to 1996 1996 Compared to 1995 Increase (Decrease) Due to (1) Increase (Decrease) Due to (1) Volume Rate Net Volume Rate Net (In thousands of dollars) Interest earned on: Loans (2) $9,188 $218 $9,406 $6,097 ($2,225) $3,872 Taxable investment securities (2) (437) 229 (208) 1,262 870 2,132 Tax-exempt investment securities (2) (847) (24) (871) (363) (86) (449) Interest-earning deposits 10 (7) 3 (137) (1) (138) Federal funds sold 186 7 193 (40) (36) (76) Total interest-earning assets $8,100 $423 $8,523 $6,819 ($1,478) $5,341 Interest paid on: Demand deposits ($41) ($299) ($340) ($5) ($171) ($176) Money market accounts 1,182 302 1,484 990 (11) 979 Savings deposits (462) (247) (709) (728) (260) (988) Time deposits 1,132 274 1,406 2,852 (819) 2,033 Securities sold under agreements to repurchase (452) 48 (404) (848) (628) (1,476) Federal funds purchased 140 13 153 (123) (32) (155) Long-term borrowings 2,009 147 2,156 914 (169) 745 Other borrowed funds (44) (7) (51) (47) (3) (50) Total interest-bearing liabilities $3,464 $231 $3,695 $3,005 ($2,093) 912 Change in net interest income $4,828 $4,429
(1) The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Tax-exempt income is on an FTE basis using the statutory federal income tax rate of 35% for 1997, 1996 and 1995. 8 Item 1. BUSINESS--Continued INFLATION AND CHANGING INTEREST RATES The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventory. Fluctuations in interest rates and the efforts of the Federal Reserve Board to regulate money and credit conditions have a greater effect on a financial institution's profitability than do the effects of higher costs for goods and services. Through its asset/liability management committee ("ALCO"), S&T is positioned to cope with changing interest rates and inflationary trends. ALCO monitors and manages interest rate sensitivity through gap, simulation and duration analysis. The schedule below presents S&T's interest rate sensitivity at December 31, 1997 using gap analysis. The gap and cumulative gap represents the net position of assets and liabilities subject to repricing in specified time periods, as measured by a ratio of rate sensitive assets to rate sensitive liabilities. ALCO policy guidelines for cumulative gap in the six and twelve month time frames, annually approved by the S&T Board of Directors, is currently a .85 to 1.15 range. Management believes this range provides an acceptable and manageable level of interest rate risk for S&T. Significant to gap analysis is the expected rate of asset prepayment, calls on securities and the behavior of depositors during periods of changing interest rates. For example, in periods of declining interest rates, borrowers can be expected to accelerate loan prepayments and refinancings; depositors will tend to hold those certificates of deposits with rates currently higher than the market. Conversely, in a rising interest rate scenario, borrower refinancings and prepayments typically decrease, while deposit shifting and early withdrawals tend to accelerate as depositors position funds to earn higher yields. ALCO continually monitors these historical behavior patterns through periods of changing interest rates, and uses this information to develop loan prepayments and decay rates for Core Deposits (demand, NOW, savings). The gap analysis below incorporates a flat rate scenario, and the following significant assumptions: [CAPTION] Monthly loan prepayments above contractual requirements 5 year ARM - Commercial Real Estate 0.50 % Fixed Rate - Commercial Real Estate 1.25 Residential Real Estate 1.00 New Indirect Auto Loans 2.00 Other Installment Loans 2.25 Deposit behavioral patterns/decay rate assumptions NOW and Savings - Year #1 25.00 % NOW and Savings - Year #2 25.00 NOW and Savings - beyond Year #2 50.00 Money market pricing is indexed and tiered to market interest rates. NA S&T has not historically experienced fluctuations in demand deposit balances during periods of interest rate fluctuations. NA
Swaps Reflects that portion of borrowings whose interest rate risk is reduced due to the effects of interest rate swaps. 9 Interest Rate Sensitivity December 1997 (thousands of dollars) [CAPTION] GAP 1-6 Months 7-12 Months 13-24 Months >2 Years Repricing Assets: Cash/Due From Banks $0 $0 $0 $35,951 Securities 120,604 121,097 122,250 204,371 Net Loans 499,365 132,772 168,825 452,353 Other Assets 0 0 0 61,192 Total $619,969 $253,869 $291,075 $753,867 Repricing Liabilities: Demand $0 $0 $0 $165,727 NOW 13,954 13,954 27,908 55,817 Money Market 196,823 0 0 0 Savings/Clubs 21,898 21,898 43,796 87,594 Certificates 185,473 120,806 187,257 141,755 Repos & Short-term Borrowings 153,660 532 0 258 Long-term Borrowings 94,730 0 0 49,618 Swaps 0 15,000 0 10,000 Other Liabilities/Equity 0 0 0 310,322 Total $666,538 $172,190 $258,961 $821,091 GAP ($46,569) $81,679 $32,114 ($67,224) Cumulative GAP ($46,569) $35,110 $67,224 $0
Immediate Current Policy Core Deposit Rate Sensitive Assets/Rate Sensitive Liabilities Month Guideline Repricing Cumulative 6 months 0.93 .85-1.15 0.68 Cumulative 12 months 1.04 .85-1.15 0.83
S&T's six month gap position at December 31, 1997 is liability sensitive; the one year gap is asset sensitive. Liability sensitive means that more liabilities than assets of S&T will reprice during the measured time frames; asset sensitivety has the opposite meaning. The implications of a liability sensitive position, or an asset sensitive position, will differ depending upon the current trend of market interest rates. For example, a liability sensitive position in a declining interest rate environment, the cost of S&T repricing liabilities can theoretically be expected to decline more quickly than the yields on repricing assets. This situation would cause an increase to S&T's interest rate spreads, net interest income and to operating income. Liquidity impacts would not be material in the short-term; in the long-term, improved operating income is always beneficial to liquidity issues. Conversely, a liability sensitive gap position in a rising interest rate scenario would theoretically have a negative impact to interest rate spreads, net income and to operating income. Liquidity impacts in this scenario, other than increased costs, would not be material unless serious ongoing declines in operating results caused depositors, lenders and investors to lose confidence. Gap analysis usefulness as a measurement of interest rate risk is limited because the time period measured is static. Simulation provides a more dynamic modeling tool for interest rate risk since this technique can incorporate future assumptions about interest rates, volume fluctuations and customer behaviors. ALCO uses simulation to measure changes in net interest income during a 2%, plus or minus, change in current market interest rates (Rate Shock Analysis). Current ALCO policy guidelines require that declines in forecasted net interest income do not exceed 3% as a result of Rate Shock Analysis. Duration techniques are a relatively new addition to S&T's interest rate risk monitoring tools. Duration modeling is primarily used to assist in match fundings for large commercial loans, security purchases and segments of the installment loan portfolios. 10 Item 1. BUSINESS-- Continued Securities S&T invests in various securities in order to provide a source of liquidity, increase net interest income and as an ALCO tool to quickly reposition the balance sheet for interest rate risk purposes. Securities are subject to similar interest rate and credit risks as loans. In addition, by their nature, securities classified as available for sale are also subject to market value risks that could negatively affect the level of liquidity available to S&T, as well as equity. Risks associated with various securities portfolio are managed and monitored by investment policies annually approved by the S&T Board of Directors, and administered through ALCO and the Chief Investment Officer. As of December 31, 1997, management is not aware of any risk associated with securities that would be expected to have a significant, negative effect to S&T's statement of condition or statement of operations. The following table sets forth the carrying amount of securities at the dates indicated: [CAPTION] December 31 1997 1996 1995 (In thousands of dollars) Available for Sale Marketable equity securities $101,639 $75,805 $65,873 Obligations of U.S. government corporations and agencies 341,288 235,924 178,579 Collateralized mortgage obligations of U.S. government corporations and agencies 0 4,182 11,035 Mortgage-backed securities 14,542 47,462 38,843 U.S. Treasury securities 39,473 58,742 107,763 Corporate securities 11,064 14,550 21,648 Other securities 13,111 13,136 9,115 TOTAL $521,117 $449,801 $432,856 Held to Maturity Obligations of states and political subdivisions $37,497 $46,334 $55,795 Corporate securities 1,998 1,998 2,493 Other securities 7,608 1,928 1,092 TOTAL $47,103 $50,260 $59,380
11 Item 1. BUSINESS-- Continued The following table sets forth the maturities of securities at December 31, 1997, and the weighted average yields of such securities (calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security). Tax-equivalent adjustments (using a 35% federal income tax rate) for 1997 have been made in calculating yields on obligations of state and political subdivisions. [CAPTION] Maturing Within After One But After Five But After No Fixed One Year Within Five Years Within Ten Years Ten Years Maturity Amount Yield Amount Yield Amount Yield Amount Yield Amount (in thousands of dollars) Available for Sale Marketable equity securities $101,639 Obligations of U.S. government corporations and agencies $9,078 7.31% $66,243 6.87% $265,967 7.23% Mortgage-backed securities 3,474 7.62% 364 7.82% 2,552 7.76% $8,152 7.50% U.S. Treasury securities 11,606 7.43% 21,364 7.25% 6,503 7.81% Corporate securities 9,844 7.39% 1,220 7.16% Other securities 13,111 TOTAL $24,158 $97,815 $276,242 $8,152 $114,750 Weighted Average Rate 7.41% 7.01% 7.25% 7.50% Held to Maturity Obligations of states and political subdivisions $5,680 8.46% $16,290 7.93% $12,585 8.57% $2,942 8.56% Corporate securities 1,998 7.53% Other securities $7,608 TOTAL $5,680 $18,288 $12,585 $2,942 $7,608 Weighted Average Rate 8.46% 7.89% 8.57% 8.56%
12 Item 1. BUSINESS-- Continued Loan Portfolio The following table shows S&T's loan distribution at the end of each of the last five years: [CAPTION] December 31 1997 1996 1995 1994 1993 (in thousands of dollars) Domestic Loans: Commercial, financial and agricultural $255,017 $246,731 $242,854 $205,862 $185,656 Real estate-construction 47,967 35,508 30,191 35,660 26,338 Real estate-mortgage 839,801 763,556 669,900 623,707 529,231 Installment 130,968 154,341 160,437 161,105 149,978 TOTAL LOANS $1,273,753 $1,200,136 $1,103,382 $1,026,334 $891,203
The following table shows the maturity of loans (excluding residential mortgages of 1-4 family residences and installment loans) outstanding as of December 31, 1997. Also provided are the amounts due after one year classified according to the sensitivity to changes in interest rates. [CAPTION] Maturing Within After One But After One Year Within Five Years Five Years Total (in thousands of dollars) Commercial, financial and agricultural $172,999 $65,051 $16,967 $255,017 Real estate-construction 14,668 12,495 20,804 47,967 Real estate-mortgage 52,156 117,556 157,672 327,384 TOTAL $239,823 $195,102 $195,443 $630,368 Fixed interest rates $75,942 $42,037 Variable interest rates 119,160 153,406 TOTAL $195,102 $195,443
13 Item 1. BUSINESS--Continued Nonaccrual, Past Due and Restructured Loans The following table summarizes S&T's nonaccrual, past due and restructured loans: [CAPTION] December 31 1997 1996 1995 1994 1993 (In thousands of dollars) Nonaccrual loans $3,602 $10,268 $4,748 $3,894 $2,577 Accruing loans past due 90 days or more $0 $0 $0 $0 $1,254
At December 31, 1997, $3,602,000 of nonaccrual loans were secured. Interest income that would have been recorded under original terms totaled $368,000. No interest income was recorded on these loans. It is S&T's policy to place loans on nonaccrual status when the interest and principal is 90 days or more past due. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. At December 31, 1997, there were no impaired loans that were on nonaccrual. There are no foreign loan amounts required to be included in this table. There were no restructured loans in the periods presented. Summary of Loan Loss Experience Management evaluates the degree of loss exposure for loans on a continuous basis through a formal loan policy as administered by the Loan Administration Department and various management and director committees. Problem loans are identified and continually monitored through detailed reviews of specific large dollar loans, and the analysis of delinquency and charge-off levels of consumer loan portfolios. Quarterly updates are presented to the S&T Board of Directors as to the status of loan quality. Charged-off and recovered loan amounts are applied to the allowance for loan losses. Additional amounts are added through a charge to current earnings through the provision for loan losses, based upon management's assessment about the adequacy of the allowance for loan losses for probable loan losses. In addition to the identification and monitoring of problem loans, management also assesses other subjective factors such as economic conditions and business trends, concentrations, growth and composition of the loan portfolio and effect- iveness of the Loan Administration Department. This assessment results in an allowance for loan losses consisting of two components, allocated and unallocated. The allocated component of the allowance for loan losses reflects expected losses resulting from the analysis of individual loans developed through specific ratings and allocations, and historical loss experience for categories of loans. The specific allocations are based upon regular analysis of loans and commitments over a fixed dollar amount and the internal credit rating for the loan or commitment. Categories of smaller individual loans are allocated based upon historical losses and current delinquency levels. 14 Item 1.BUSINESS--Continued The unallocated component is primarily subjective based upon management's assessment of nonquantifiable factors that make historical trend analyses difficult: Loan concentration in western Pennsylvania. Significant commercial loan volume increases in the last three years in new markets with new customers. The introduction of several new consumer products. Increased commercial real estate lending. Recent increases in charged-off, nonperforming and delinquent loans. Peer analysis. The provision for loan losses in each of the years presented below considered management's assessment of the factors noted above along with the growth in the loan portfolio. The additions to the allowance charged to operating expense has maintained the allowance as a percent of loans at the following levels at the end of each year presented. Year Ended December 31 1997 1996 1995 1994 1993 1.60% 1.56% 1.55% 1.48% 1.60% The Company has considered impaired loans in its determination of the allowance for loan losses. The allowance for loan losses for all impaired loans totaled $914,000 and $2,605,000 at December 31, 1997 and 1996, respectively, and is included in the allowance allocated specifically to commercial loans. Based on the evaluation of loan quality and assessment of risk characteristics, management believes that the allowance for loan losses is adequate to absorb probable loan losses. This table summarizes S&T's loan loss experience for each of the five years ended December 31: [CAPTION] Year Ended December 31 1997 1996 1995 1994 1993 (In thousands of dollars) Balance at January 1: $18,729 $17,065 $15,169 $14,242 $12,786 Charge-offs: Commercial, financial and agricultural 1,363 1,572 1,054 2,290 1,186 Real estate-mortgage 1,347 1,819 407 239 690 Installment 1,771 2,145 1,578 1,258 890 4,481 5,536 3,039 3,787 2,766 Recoveries: Commercial, financial and agricultural 512 1,409 288 505 245 Real estate-mortgage 226 287 113 188 201 Installment 441 329 314 421 111 1,179 2,025 715 1,114 557 Net charge-offs 3,302 3,511 2,324 2,673 2,209 Provision for loan losses 5,000 5,175 4,220 3,600 3,665 Balance at December 31: $20,427 $18,729 $17,065 $15,169 $14,242 Ratio of net charge-offs to average loans outstanding 0.27% 0.31% 0.22% 0.28% 0.27%
15 Item 1. BUSINESS--Continued This table shows allocation of the allowance for loan losses as of the end of each of the last five years: [CAPTION] December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993 Percent of Percent of Percent of Percent of Percent of Loans in Loans in Loans in Loans in Loans in Each Each Each Each Each Category to Category to Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans (In thousands of dollars) Commercial, financial and agricultural $13,556 20% $9,605 21% $8,579 22% $9,578 20% $9,419 21% Real estate-construction 0 4% 0 3% 0 3% 0 3% 0 3% Real estate-mortgage 763 66% 1,680 63% 1,321 61% 1,215 61% 1,087 59% Installment 1,865 10% 1,859 13% 1,803 14% 1,510 16% 1,291 17% Unallocated 4,243 0% 5,585 0% 5,362 0% 2,866 0% 2,445 0% TOTAL $20,427 100% $18,729 100% $17,065 100% $15,169 100% $14,242 100%
In 1995, S&T adopted Financial Accounting Standards Board Statement No. 114, "Accounting by Creditors for Impairment of a Loan," (as amended by Financial Accounting Standards Board Statement No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures"). The adoption of these accounting pronouncements did not have a material impact on the comparability for the table of loan loss experience or the table for allocation of the allowance for loan losses presented above. Deposits The daily average amount of deposits and rates paid on such deposits is summarized for the periods indicated in the following table: [CAPTION] Year Ended December 31 1997 1996 1995 Amount Rate Amount Rate Amount Rate (In thousands of dollars) Noninterest-bearing demand deposits $161,339 $151,863 $141,966 Interest-bearing demand deposits 111,097 1.24% 113,795 1.51% 114,177 1.66% Money market accounts 183,259 4.03% 152,692 3.87% 128,661 3.83% Savings deposits 187,394 2.32% 206,287 2.45% 227,712 2.65% Time deposits 626,192 5.57% 605,693 5.52% 555,035 5.66% TOTAL $1,269,281 $1,230,330 $1,167,551
Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 1997, are summarized as follows: [CAPTION] (In thousands of dollars) 3 Months or less $28,507 Over 3 through 6 months 18,195 Over 6 through 12 months 12,682 Over 12 months 36,294 TOTAL $95,678
Return on Equity and Assets The table below shows consolidated operating and capital ratios of S&T for each of the last three years: [CAPTION] Year Ended December 31 1997 1996 1995 Return on average assets 1.84% 1.65% 1.53% Return on average equity 13.71% 13.01% 12.51% Dividend payout ratio 42.54% 37.77% 35.25% Equity to asset ratio 13.55% 12.65% 12.67%
16 Short-Term Borrowings The following table shows the distribution of the Company's short-term borrowings and the weighted average interest rates thereon at the end of each of the last three years. Also provided are the maximum amount of borrowings and the average amounts of borrowings as well as weighted average interest rates for the last three years. [CAPTION] Federal Funds Purchased and Securities Sold Under Agreements to Repurchase (In thousands of dollars) Balance at December 31 1997 $179,449 1996 114,980 1995 123,119 Weighted average interest rate at year end: 1997 5.82% 1996 5.68% 1995 5.57% Maximum amount outstanding at any month's end: 1997 $195,024 1996 180,776 1995 195,811 Average amount outstanding during the year: 1997 $134,851 1996 141,012 1995 158,072 Weighted average interest rate during the year: 1997 5.31% 1996 5.24% 1995 5.79%
S&T defines repurchase agreements with its 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. 17 Item 2. PROPERTIES The Company operates thirty-seven banking offices in Indiana, Armstrong, Allegheny, Jefferson, Clearfield, Westmoreland and surrounding counties in Pennsylvania. The Company owns land and banking offices at the following locations: 800 Philadelphia Street, 645 Philadelphia Street and 2175 Route 286 South in Indiana; Route 119 South & Lucerne Road and 34 North Main Street in Homer City; 539 West Mahoning Street and 232 North Hampton Avenue in Punxsutawney; 133 Philadelphia Street in Armagh; Route 119 South in Black Lick; 256 Main Street and Route 36 & I-80 in Brookville; 456 Main Street in Brockway; Route 28 & Carrier Street in Summerville; 602 Salt Street in Saltsburg; 35 West Scribner Avenue, Treasure Lake and 614 Liberty Boulevard in DuBois; 418 Main Street in Reynoldsville; 205 East Market Street in Blairsville; 85 Greensburg Street in Delmont; 100 Chestnut Street in Derry; 109 Grant Avenue in Vandergrift; 100 South Fourth Street in Youngwood; 701 East Pittsburgh Street in Greensburg; 2190 Hulton Road in East Oakmont; 4385 Old William Penn Highway in Monroeville; 7660 Saltsburg Road in Plum; 12262 Frankstown Road in Penn Hills; and 301 Unity Center Road in Unity. Land is leased where the Company owns the banking offices at 1107 Wayne Avenue and remote ATM buildings at 435 South Seventh Street and 1176 Grant Street, all in Indiana. In addition, the Company leases land and banking offices at the following locations: Chestnut Ridge Plaza in Blairsville; 324 North Fourth Street and 2850 Route 286 South Indiana; the Mall Office in DuBois; 229 Westmoreland Mall; 2388 Route 286 in Holiday Park; Route 268 Hilltop Plaza in Kittanning and a remote ATM location at the Main Street Mall in DuBois. Item 3. LEGAL PROCEEDINGS The nature of the Company's business generates a certain amount of litigation involving matters arising in the ordinary cource of business. However, in the opinion of management, there are no proceedings pending to which the Company is a party or to which its property is subject, which, if determined adverse, would be material in relation to its shareholders' equity or financial condition. In addition, no material proceedings are pending nor are known to be threatened or contemplated against the Company by governmental authorities or other parties. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters during the fourth quarter of the fiscal year covered by this report that were submitted to a vote of the security holders through solicitation of proxies of otherwise. PART II Item 5. MARKET TO REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS Stock Prices and Dividend Information on page 54 and Dividend and Loan Restrictions on page 44 of the Annual Report for the year ended December 31, 1997, incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA Selected Financial Data on pages 54 and 55 of the Annual Report for the year ended December 31, 1997, incorporated herein by reference. 18 Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 21 through 29 of the Annual Report for the year ended December 31, 1997, incorporated herein by reference. Item 7(A) QUANITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quanitative and Qualitative Disclosures about Market Risk on page 28 of the Annual Report for the year ended December 31, 1997, incorporated herein by reference Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, Report of Independent Auditors and Quarterly Selected Financial Data on pages 30 through 53 and 55 of the Annual Report for the year ended December 31, 1997, incorporated herein by reference. Item 9.CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES There have been no changes in accountants or disagreements with accountants on accounting and financial disclosures. PART III Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Election of Directors on pages 4 through 5 of the proxy statement for the April 20, 1998, annual meeting of share- holders are incorporated herein by reference. [CAPTION] Executive Officers Number of Shares For the Officer Beneficially Name Corporation Since Owned (2) Age Robert D. Duggan (1) Chairman 1983 118,783 65 and Director James C. Miller (1) President, Chief 1983 79,543 52 Executive Officer and Director James G. Barone Executive Vice 1992 41,086 50 President, Secretary and Treasurer Robert E. Rout Senior Vice 1993 27,940 45 President and Chief Financial Officer Bruce W. Salome Executive Vice 1991 40,908 51 President Edward C. Hauck Executive Vice 1991 25,111 45 President
19 Executive Officers (continued) Number of Shares For the Officer Beneficially Name Corporation Since Owned (2) Age David L. Krieger Executive Vice 1984 43,299 54 President J. Jeffrey Smead Executive Vice 1992 30,542 46 President William H. Klumpp Senior Vice 1994 22,409 54 President Edward A. Onderick Senior Vice 1989 29,022 53 President
(1) On January 2, 1998 Mr. Duggan retired as President and Chief Executive Officer. He will continue as chairman and director of S&T. Mr. Miller, previously Executive Vice President and Chief Operating Officer, was appointed President and Chief Executive Officer. (2) May include shares held by family members, as trustee and nonstatutory stock options vesting within 60 days of the date of this 10-K Report. 20 Item 11. EXECUTIVE COMPENSATION Remuneration of Executive Officers on pages 7 through 9 of the proxy statement for the April 20, 1998, annual meeting of share- holders, incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Principal Beneficial Owners of Common Stock on page 3 of the proxy statement for the April 20, 1998, annual meeting of share- holders, incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions with Management and Others on page 11 and 12 of the proxy statement for April 20, 1998, annual meeting with shareholders, incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K List of financial statements and financial statement schedules (1) The following Consolidated Financial Statements and Report of Independent Auditors of S&T Bancorp, Inc. and subsidiaries included in the annual report of the registrant to its shareholders for the year ended December 31, 1997, are incorporated by reference in Part II, Item 8: Page Reference Report of Ernst & Young LLP, Independent Auditors 53 Consolidated Balance Sheets December 31, 1997 and 1996 30 Consolidated Statements of Income Years ended December 31, 1997, 1996, and 1995 31 Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1997, 1996, and 1995 32 Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996, and 1995 33 Notes to Consolidated Financial Statements December 31, 1997 34-52 Quarterly Selected Financial Data 55 21 Item 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (2) Schedules to the consolidated financial statements required by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted. (3) Listings of Exhibits - See Item 14 (c) below Reports on Form 8-K Form 8-K dated May 2, 1997 was filed as S&T Bancorp, Inc. (S&T) completed the merger of Peoples Bank of Unity into its principal subsidiary, S&T Bank. Peoples Bank of Unity, had assets of $288 million and operated six offices in the eastern suburbs of Pittsburgh. Form 8-K dated September 12, 1997 was filed as S&T Bancorp, Inc. (S&T) announcing Robert D. Duggan's retirement and James C. Miller's appointment as President and Chief Executive Officer. The Form 8-K also included the announcement of two new directors, Jeffrey D. Grube and Alan Papernick. Exhibits (3.1) Articles of Incorporation of S&T Bancorp, Inc. filed as Exhibit B to Registration Statement (No. 2-83565) on Form S-4 of S&T Bancorp, Inc., incorporated herein by reference. (3.2) Amendment to Articles of Incorporation of S&T Bancorp, Inc. filed as Exhibit 3.2 to Form S-4 Registration Statement dated January 15, 1986, incorporated herein by reference. (3.3) By-laws of S&T Bancorp, Inc., as amended, filed as Exhibit 3.3 to Form S-4 Registration Statement dated January 15, 1986, incorporated herein by reference. (10.1) Deferred compensation arrangement with former director filed as Exhibit 10.1 to Form 10-K dated December 31, 1983, incorporated herein by reference. (10.3) Employment Agreement dated December 9, 1985 between S&T Bancorp, Inc. and Waid H. Nevins filed as Exhibit 10.1 to Form S-4 Registration Statement dated January 15, 1986, incorporated herein by reference. (10.5) Sixth amendment to the Thrift Plan for Employees of S & T Bank to be effective December 31, 1988, approved by the Board of Directors at the November 21, 1988 meeting, incorporated herein by reference. (13) Annual Report for the year ended December 31, 1997, incorporated herein by reference. (22) Subsidiaries of the Registrant - filed herewith S&T Bank, a bank incorporated under the laws of Pennsylvania. S&T Investment Company, Inc., an investment holding company incorporated under the laws of Delaware. (23.1) Consent of Ernst & Young LLP, Independent Auditors - filed herewith. (23.2) Consent of S.R. Snodgrass, A.C., Independent Auditors - filed herewith. Financial Statement Schedules None (99) Report of S.R. Snodgrass, A.C., Independent Auditors - filed herewith. 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. S&T BANCORP, INC. (Registrant) /s/ James C. Miller 03/16/98 James C. Miller, Date President and Chief Executive Officer (Principal Executive Officer) /s/ Robert E. Rout 03/16/98 Robert E. Rout, Date Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/Thomas A. Brice 03/16/98 /s/Herbert L. Hanna 03/16/98 Thomas A. Brice, Herbert L. Hanna, Director Date Director Date /s/ Forrest L. Brubaker 03/16/98 /s/Frank W. Jones 03/16/98 Forrest L. Brubaker, Frank W. Jones, Director Date Director Date /s/ James L. Carino 03/16/98 /s/Joseph A. Kirk 03/16/98 James L. Carino, Joseph A. Kirk, Director Date Director Date /s/ John J. Delaney 03/16/98 03/16/98 John J. Delaney, Samuel Levy, Director Date Director Date /s/Robert D. Duggan 03/16/98 /s/James C. Miller 03/16/98 Robert D. Duggan, James C. Miller, Chairman Date President, Chief Executive Officer and Director Date /s/ Thomas W. Garges,Jr.03/16/98 /s/ Alan Papernick 03/16/98 Thomas W. Garges, Jr., Alan Papernick, Director Date Director Date /s/William J. Gatti 03/16/98 03/16/98 William J. Gatti, W. Parker Ruddock, Director Date Director Date /s/ Ruth M. Grant 03/16/98 /s/ Myles D. Sampson 03/16/98 Ruth M. Grant, Myles D. Sampson, Director Date Director Date /s/Jeffrey D. Grube 03/16/98 /s/Charles A. Spadafora 03/16/98 Jeffrey D. Grube, Charles A. Spadafora, Director Date Director Date /s/Christine J. Torretti 03/16/98 Christine J. Toretti, Director Date 24 EX-13 2 Financial Highlights S&T Bancorp, Inc. and Subsidiaries (dollars in thousands, except per share data) [CAPTION] 1997 1996 Change Change For the Year Net Income $33,414 $28,241 $5,173 18% Return on Average Assets 1.84% 1.65% .19% 12 Return on Average Equity 13.71 13.01 0.70 5 Per Share: Net Income-Basic $2.36 $2.00 $0.36 18% Net Income-Diluted 2.34 1.99 0.35 18 Dividends Declared 1.11 0.94 0.17 18 Book Value at December 31 18.39 16.02 2.37 15 Market Value at December 31 43.25 30.75 12.50 41 At Year End Assets $ 1,920,291 $ 1,787,045 $ 133,246 7% Net Loans 1,253,326 1,181,407 71,919 6 Deposits 1,284,658 1,270,367 14,291 1 Shareholders' Equity 260,118 226,118 34,000 15 Trust Assets 578,670 465,249 113,421 24 Allowance for Loan Losses/ Total Loans 1.60% 1.56% .04% 3 Nonperforming Loans/ Total Loans 0.28 0.86 (0.58) (67)
inside front cover Management's Discussion and Analysis of Financial Condition and Results of Operations S&T Bancorp, Inc. and Subsidiaries Financial Condition The $91.1 million growth of average earning assets in 1997 was primarily the result of an excellent lending year for S&T Bancorp, Inc. (S&T). Average loan balances increased by $103.5 million during 1997. The bulk of funding for this loan growth was primarily provided by a $39.0 million increase in average deposits, an $18.9 million increase in average earnings retained, a $28.5 million increase in average borrowings and a $16.0 million decrease in average securities. Lending Activity Total loans at December 31, 1997 were $1.3 billion, a $73.6 million or 6.1% increase from December 31, 1996. Increases in average loans for 1997 and 1996 were $103.5 million and $67.9 million, respectively. Changes in the composition of the loan portfolio during 1997 included increases of $96.7 million of commercial loans and $0.3 million of residential mortgages, offset by a $23.4 million decrease in installment loans. Composition changes include decreases from the effects of $12.7 million of 1-4 family mortgage loans, $3.0 million of commercial loans and $7.0 million of student loans that were sold or participated in 1997. Commercial real estate loans currently comprise 25.7% of the loan portfolio. Although commercial real estate loans can be an area of higher risk, management believes these risks are mitigated by limiting the percentage amount of portfolio composition, a rigorous underwriting review by loan administration and the fact that many of the commercial real estate loans are owner occupied and/or seasoned properties that were refinanced from other banks. Residential mortgage lending continued to be a strategic focus for 1997 through the establishment of a centralized mortgage origination department, product redesign and the utilization of commission compensated originators. 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 which generally require a maximum term of 20 years for fixed rate mortgages, and private mortgage insurance for loans with less than a 20% down payment. Adjustable rate mortgages with repricing terms of one, three and five years comprised 27% of the residential mortgage portfolio in 1997. During the fourth quarter of 1997, S&T sold $12.7 million of long-term, lower-yielding 1-4 family mortgages, acquired from the Peoples Bank of Unity (Peoples) merger, to the Federal National Mortgage Association (FNMA). S&T retained the ongoing servicing rights on the mortgages sold and will originate 1-4 family mortgages in the future to be sold to FNMA. The rationale for these sales is to mitigate interest rate risk associated with holding long-term residential mortgages in the loan portfolio, to generate fee revenue from servicing, and still maintain the primary customer relationship. Installment loan decreases are primarily associated with significantly lower volumes in the indirect auto loan category and the sale of the student loan portfolio in the second and third quarter of 1997. Pricing pressures were unusually intense in the indirect market during 1997 and 1996, and the decision was made to temporarily deploy investable funds into other, higher yielding and lower risk earning assets. In the second quarter of 1996, S&T implemented an indirect auto leasing program and currently has $4.4 million of outstanding auto leases. Also during the second and third quarter of 1997, $7.0 million of the student loan portfolio was sold because of newly issued government regulations and restrictions that significantly reduced much of the profit potential associated with the product. S&T will continue to distribute student loan applications for customer convenience, but will not fund or hold the loans. Loan underwriting standards for S&T are established by a formal policy administered by the S&T Bank Credit Administration Department, and subject to the periodic review and approval of the S&T Bank Board of Directors. Rates and terms for commercial real estate and equipment loans normally are negotiated, subject to such variables as economic conditions, marketability of collateral, credit history of the borrower and future cash flows. The loan to value policy guideline for commercial loans is generally 75%. 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 does not exceed 100% loan to value. 21 A variety of unsecured and secured installment loan and credit card products are offered by S&T. However, the bulk of the consumer loan portfolio is automobile loans. Loan to value guidelines for direct loans are 90%-100% of invoice for new automobiles and 80%-90% of "NADA" value for used automobiles. Loan to value policy guidelines for automobile loans purchased from dealers on a third party basis are 90%-125% of invoice for new automobiles and 100%-125% of "Black Book" value for used automobiles. Management intends to continue to pursue quality loans in all lending categories within our market area in order to honor our commitment to provide the best service possible to our customers. S&T's loan portfolio primarily represents loans to businesses and consumers in our market area of western Pennsylvania rather than to borrowers in other areas of the country or to borrowers in other nations. S&T has not concentrated its lending activities in any industry or group. During the past several years, management has concentrated on building an effective credit and loan administration staff which assists management in evaluating loans before they are made and identifies problem loans early. Security Activity Average securities decreased $16.0 million in 1997 and increased $9.7 million in 1996. The 1997 decrease is attributable to utilizing funds from the maturities and sales of securities to fund loan growth and balance sheet repositioning activities following the Peoples merger. The 1996 increase is attributable to security yields being reasonable investment alternatives to the depressed yields in the market for new loans during the first half of 1996. Loans typically provide higher yields and have the potential of developing other banking relationships. The largest components of the 1997 decrease included $36.3 million of U.S. treasury securities, $44.0 million of mortgage-backed securities, $10.2 million of tax-exempt state and municipal securities and $1.6 million in other corporate securities offset by increases of $68.4 million in U.S. government agency securities, $4.8 million in corporate equities and $2.9 million in Federal Home Loan Bank (FHLB) stock. The FHLB capital stock is a membership and borrowing requirement. During 1997, S&T sold $27.9 million of mortgage- backed securities and $6.0 million of U.S. agency securities classified as available for sale. These sales were made as part of a balance sheet repositioning in order to integrate the investment and asset/liability management strategies of S&T and Peoples following the merger. The equity security sales of $10.7 million were made in order to maximize returns when market opportunities are presented. 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 1997, the equity portfolio yielded 10.5% on a fully taxable equivalent basis and had unrealized gains at December 31, 1997, net of nominal unrealized losses, of $57.9 million. S&T's policy for security classification includes U.S. treasuries, U.S. government agencies, collaterized mortgage obligations (CMOS), mortgage-backed securities and marketable equity securities as available for sale. Municipal securities and other corporate debt securities are classified as held to maturity. At December 31, 1997, unrealized gains, net of nominal unrealized losses, for securities classified as available for sale were approximately $62.3 million. Nonearning Assets Average nonearning assets increased $2.0 million in 1997 and $0.7 million in 1996. The 1997 and 1996 increases can be primarily attributed to an increase in accrued interest receivable on a higher earning asset balance. Allowance for Loan Losses The year-end balance in the allowance for loan losses increased to $20.4 million or 1.60% of total loans at December 31, 1997 as compared to $18.7 million or 1.56% of total loans at December 31, 1996. 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. The balance of nonperforming loans, which includes nonaccrual loans past due 90 days or more, at December 31, 1997, was $3.6 million or 0.28% of total loans. This compares to nonperforming loans of $10.3 million or 0.86% of total loans at December 31, 1996. The decrease in nonperforming loans is primarily related to one commercial real estate loan which paid current in 1997. Asset quality is a major corporate objective at S&T, and management believes that the total allowance for loan losses is adequate to absorb probable loan losses. 22 Deposits Average total deposits increased by $39.0 million in 1997 and $62.8 million in 1996. The mix of average deposits in 1997 changed with time deposits and money market accounts increasing $20.5 million and $30.6 million, respectively, while interest-bearing demand and savings accounts decreased $21.6 million. Noninterest-bearing deposits increased by $9.5 million or 6.2% in 1997 and were approximately 13% and 12% of total deposits during 1997 and 1996, respectively. Some of these changes can be partially explained by customers shifting funds to higher-yielding, longer-term certificates of deposit. In addition, a new, successful strategy for money market account pricing was implemented in order to make these accounts more competitive with money funds offered at brokerage firms. Management believes that the S&T deposit base is stable and that S&T has the ability to attract new deposits, mitigating a funding dependency on volatile liabilities. Special rate deposits of $100,000 and over were 7% and 8% of total deposits during 1997 and 1996, 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 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 December 31, 1997, there were $26.6 million of these brokered retail certificates of deposit outstanding. Borrowings Average borrowings increased $28.5 million in 1997 and were comprised of securities sold under repurchase agreements (REPOS), federal funds purchased and long-term borrowings. S&T defines REPOS with its retail customers as retail REPOS; wholesale REPOS are those transacted with other banks and brokerage firms with terms normally ranging from one to 14 days. The average balance in retail REPOS decreased approximately $11.3 million for 1997 and $18.1 million for 1996. S&T views retail REPOS as a relatively stable source of funds since most of these accounts are with local, long-term customers. Wholesale REPOS and federal funds purchased averaged $53.1 million in 1997, a decrease of $17.5 million from the 1996 averages. 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 1997. The interest rate risk of various funding strategies is managed through S&T's Asset Liability Committee (ALCO). During 1997, ALCO authorized four additional long-term borrowings of $11.5 million at a fixed rate and $57.1 million at an adjustable rate with the FHLB. At December 31, 1997, S&T had long-term borrowings outstanding of $49.6 million at a fixed rate and $94.6 million at an adjustable rate with the FHLB. The purpose of these borrowings was to provide matched fundings for newly originated loans and to mitigate the risk associated with volatile liability fundings. Another ALCO strategy used to manage interest rate risk is the use of interest rate swaps. At December 31, 1997, S&T had notional values totaling $25.0 million in interest rate swaps. S&T pays a fixed rate of 5.3% on these instruments and receives a variable rate based upon the London Interbank Offer Rate. The purpose of these off-balance sheet arrangements is to lock-in funding costs of fixed rate loans. All other long-term borrowings are related to the funding of the S&T Employee Stock Ownership Plan (ESOP) loan. The loan was used by the ESOP to acquire treasury stock from S&T. This loan is recorded in the financial statements as other borrowed funds, offset by a reduction in shareholders' equity to reflect S&T's guarantee of the ESOP borrowing. The balance of the ESOP loan at December 31, 1997 and 1996 was $0.1 million and $0.2 million, respectively. The terms of this loan require annual principal payments and quarterly interest payments at a rate equal to 80% of the lender's prime rate. Trust Assets The year-end market value balance of the S&T Bank trust department assets, which are not accounted for as part of the assets of S&T, increased 24% in 1997 and 11% in 1996. These increases were a result of management's effort to expand the marketing of trust products and services and general increases in the debt and equity markets during the periods. 23 Results of Operations Year Ended December 31, 1997 Net Income Net income was a record $33.4 million or $2.34 per diluted earnings per share in 1997, representing an 18% increase from the $28.2 million or $1.99 per diluted earnings per share in 1996. The return on average assets increased to 1.84% for 1997, as compared to 1.65% for 1996. The return on average equity increased to 13.71% for 1997, compared to 13.01% for 1996. Increases to the net interest margin and other revenue contributed significantly to this enhanced earnings performance. Net Interest Income On a fully taxable equivalent basis, net interest income increased $4.8 million or 6% for 1997 compared to 1996. The net yield on interest-earning assets was essentially unchanged, increasing by two basis points to 4.85%. Net interest income was positively affected by the $91.1 million or 6% increase in average earning assets. In 1997, average loans increased $103.5 million, offset by an average securities decrease of $16.0 million, comprising most of the earning asset growth. The yields on average loans increased by two basis points while the yields on average securities remained constant. Average interest-bearing deposits provided $39.0 million of the funds for the growth in average loans, at a cost of 4.33%, relatively unchanged from 1996. The yields of REPOS and other borrowed funds increased 12 basis points during 1997. During 1997, more longer-term borrowings were utilized in order to mitigate interest rate risk. Also positively affecting net interest income was a $33.1 million increase to average net free funds. Average net free funds are the excess of demand deposits, other noninterest-bearing liabilities and shareholders' equity over non-earning assets. Maintaining consistent spreads between earning assets and costing liabilities is very significant to S&T's financial performance since net interest income comprised 88% of operating revenue. The level and mix of earning assets and funds is continually monitored by ALCO in order to mitigate the interest rate sensitivity and liquidity risks of the balance sheet. 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 consistent with historical levels. Provision for Loan Losses The provision for loan losses is an amount added to the allowance against which loan losses are charged. The provision for loan losses was $5.0 million for 1997 compared to $5.2 million in 1996. The provision expense 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. Credit quality statistics are an important factor in determining the amount of provision expense. Net loan charge-offs totaled $3.3 million for 1997 compared to $3.5 million for 1996. Nonperforming loans to total loans decreased to 0.28% at December 31, 1997. Also affecting the amount of provision expense is loan growth. Despite a $103.5 million or 9% increase in average loans, S&T's allowance for loan losses to total loans was 1.60% at December 31, 1997, as compared to 1.56% at December 31, 1996. Noninterest Income Noninterest income increased $4.4 million or 37% in 1997 compared to 1996. Increases included $0.3 million or 12% in trust income, $0.5 million or 14% in service charges and fees, a $0.2 million or 5% increase in other income and a $3.4 million or 147% increase in security and nonrecurring gains. The increase in trust income was attributable to bankwide incentive programs and expanded marketing efforts designed to develop new trust business and to develop new relationships within the Allegheny County market. The 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, as well as the implementation of foreign ATM service charges in the fourth quarter of 1997. The increase in other income was a result of increased performance for brokerage activities, letters of credit and fees on covered call options. These areas were the focus of several 1997 strategic initiatives and product enhancements implemented in order to expand this source of revenue. 24 Security and nonrecurring gains were primarily attributable to the sales of equity securities in order to maximize returns by taking advantage of market opportunities when presented. These security gains helped to offset the $2.2 million of merger expenses related to the acquisition of Peoples. Also included is $0.5 million of gains related to the donation of appreciated equity securities to the S&T Charitable Foundation. Nonrecurring gains included $0.3 million of gains from the aforementioned student loan and residential mortgage loan sales. Noninterest Expense Noninterest expense increased $0.8 million or 2% in 1997 compared to 1996. The increase is primarily attributable to increased employment, occupancy, data processing and other expenses associated with the acquisition of Peoples during the second quarter of 1997, offset by higher Federal Deposit Insurance Corporation (FDIC) insurance expense in 1996 relating to the one-time surcharge on any financial institution holding Savings Association Insurance Fund (SAIF) deposits. 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 44.27% and 47.61% in 1997 and 1996, respectively. Staff expense increased 5% or $1.1 million in 1997. The increase resulted from normal merit increases, and costs for severance and early retirement programs related to the acquisition of Peoples that eliminated 38 duplicate positions. Average full-time equivalent staff decreased from 677 to 665 in 1997. Severance and early retirement programs were implemented in May 1997; therefore, the full effect of these programs is not yet fully reflected in the year-to-date full-time equivalent staff averages. Occupancy and equipment expense, data processing and other expenses increased 4% or $0.7 million in 1997 as compared to 1996. The increase is primarily attributable to a $0.8 million funding of S&T's Charitable Foundation, and to accounting, professional consulting and legal fees related to the acquisition of Peoples, offset by reduced FDIC insurance costs. The donation to the S&T Charitable Foundation will allow S&T to fund community contributions well into the future and help control future costs. Expense increases to occupancy, equipment, marketing and data processing include merger costs. These costs and other changes were not significant and reflect normal activity increases, organization expansion and fee increases from vendors. Offseting these costs was a $0.3 million reduction of goodwill amortization relating to a 1991 branch acquisition. FDIC premium expense decreased by 80% during 1997 as a result of recapitalization legislation passed in September 1996. S&T Bank pays an annual premium of $.013 per $100 in Bank Insurance Fund (BIF) deposits and $.0648 per $100 on SAIF deposits, the lowest premium possible under the FDIC's risk assessment program for determining deposit insurance premiums. The SAIF fund was recapitalized by imposing a one-time surcharge of 65.6 basis points on any financial institution holding SAIF deposits. This surcharge resulted in an expense of $0.9 million during the third quarter of 1996. S&T Bank has $168.1 million of deposits subject to the SAIF. These deposits are related to a thrift institution and branches acquired from the Resolution Trust Corporation in 1991. Federal Income Taxes Federal income tax expense increased $3.6 million to $13.6 million in 1997 as a result of higher pretax income in 1997 and nondeductible merger related expenses. The 1997 effective tax rate of 29% was below the 35% statutory tax rate due to the tax benefits resulting from tax-exempt interest, excludable dividend income and the tax benefits associated with Low Income Housing Tax Credit (LIHTC) projects. S&T currently does not incur any alternative minimum tax. 25 Results of Operations Year Ended December 31, 1996 Net Income Net income was a record $28.2 million or $1.99 per diluted earnings per share in 1996, representing a 15% increase from the $24.8 million or $1.73 per diluted earnings per share in 1995. The return on average assets increased to 1.65% for 1996, as compared to 1.53% for 1995. The return on average equity increased to 13.01% for 1996, compared to 12.51% for 1995. Increases to the net interest margin and other revenue contributed significantly to this enhanced earnings performance. Net Interest Income On a fully taxable equivalent basis, net interest income increased $5.3 million or 4% for 1996 compared to 1995. The net yield on interest-earning assets increased by five basis points to 4.83%. Net interest income was also positively affected by the $75.0 million or 5% increase in average earning assets. In 1996, average loans increased $67.9 million and average securities increased $9.7 million, comprising most of the earning asset growth. The yields on average loans and average securities decreased by 21 basis points and increased by 12 basis points, respectively, during this period. The bulk of funding for this loan and security growth was provided by deposits and retained earnings. Average interest-bearing deposits provided $52.9 million of the funds for the growth in average loans and average securities, at a cost of 4.28%, relatively unchanged from 1995. However, the effects of declines in average loan yields were partially offset by a 23 basis points decrease in the cost of repos and other borrowed funds. Also positively affecting net interest income was a $24.1 million increase to average net free funds. Average net free funds are the excess of demand deposits, other noninterest-bearing liabilities and shareholders' equity over non-earning assets. Maintaining consistent spreads between earning assets and costing liabilities is very significant to S&T's financial performance since net interest income comprised 86% of operating revenue. The level and mix of earning assets and funds is continually monitored by ALCO in order to mitigate the interest rate sensitivity and liquidity risks of the balance sheet. 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 consistent with historical levels. Provision for Loan Losses The provision for loan losses is an amount added to the allowance against which loan losses are charged. The provision for loan losses was $5.2 million for 1996, compared to $4.2 million in 1995. The increased provision expense 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. Credit quality statistics are an important factor in determining the amount of provision expense. Net loan charge-offs totaled $3.5 million for 1996, compared to $2.3 million for 1995. The increase in net charge-offs is primarily related to partial charge-offs for two problem commercial loans. The partial charge-offs were made in order to reflect the net loan balances closer to the market value of collateral for these loans. Nonperforming loans to total loans increased to 0.86% at December 31, 1996. Also affecting the amount of provision expense is loan growth. Despite a $67.9 million or 6% increase in average loans, and a $1.2 million increase in net charge-offs, S&T's allowance for loan losses to total loans was 1.56% at December 31, 1996 and 1.55% at December 31, 1995. Noninterest Income Noninterest income increased $2.9 million or 31% in 1996 compared to 1995. Increases included $0.4 million or 18% in trust income, $0.7 million or 21% in service charges and fees, a $0.5 million or 20% increase in other income, and a $1.2 million or 114% increase in security and nonrecurring gains. The increase in trust income was attributable to bankwide incentive programs and expanded marketing efforts designed to develop new trust business. The increase in service charges on deposit accounts was primarily the result of the introduction of new cash management services, management's continual effort to implement reasonable fees for services performed, and to manage the collection of these fees. The increase in other income was a result of increased performance for brokerage activities, letters of credit and fees on covered call options. These areas were the focus of several 1996 strategic initiatives and product enhancements implemented in order to expand this source of revenue. 26 Security and nonrecurring gains were primarily attributable to the sales of equity securities in order to maximize returns by taking advantage of market opportunities when presented, and a $0.1 million gain from the sale of $8.2 million of student loans. Noninterest Expense Noninterest expense increased $2.1 million or 5% in 1996 compared to 1995. The increase is primarily attributable to increased employment and other expenses. 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 47.61% and 49.61% in 1996 and 1995, respectively. Staff expense increased 3% or $0.6 million in 1996. The increase resulted from normal merit increases, higher incentive payments relative to commercial loan activity and several new hires relating to the opening of the new Greensburg office. Offsetting these increases is a higher deferral of loan origination costs resulting from increased commercial loan activity and lower benefit costs. Average full-time equivalent staff increased from 673 to 677 in 1996. Other expenses increased 17% or $1.5 million in 1996 as compared to 1995. The increase is primarily attributable to a $1.3 million increase in accounting, professional consulting and legal fees. These increases in legal, as well as increases in accounting and professional consulting fees are a result of the additional services related to merger negotiations with Peoples. A definitive agreement for the merger was signed on November 25, 1996 and consummated in the second quarter 1997. Expense increases to occupancy, equipment, marketing, data processing and other were expenses not significant and reflect normal changes due to activity increases, organization expansion and fee increases from vendors. During 1995, FDIC premiums were eliminated resulting in expense savings of $1.1 million for the first half of 1996. However, S&T had $168.0 million of Oakar deposits subject to the SAIF rate of 23 basis points. On September 30, 1996, legislation was passed for recapitalization of the SAIF fund. The SAIF fund was recapitalized by imposing a one-time surcharge of 65.6 basis points on any financial institution holding SAIF deposits. This surcharge resulted in an expense of $0.9 million to S&T. For future years, the insurance rate for SAIF deposits is expected to be lower, significantly reducing future expense. Federal Income Taxes Federal income tax expense increased $0.9 million to $10.0 million in 1996 as a result of higher pretax income in 1996. The 1996 effective tax rate of 26% was below the 35% statutory tax rate due to the tax benefits resulting from tax-exempt interest, excludable dividend income and the tax benefits associated from LIHTC projects. S&T currently does not incur any alternative minimum tax. Liquidity and Interest Rate Sensitivity Liquidity refers to the ability to satisfy the financial needs of depositors who want to withdraw funds or borrowers needing access to funds to meet their credit needs. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance net interest income through periods of changing interest rates. ALCO is responsible for establishing and monitoring the liquidity and interest rate sensitivity guidelines, procedures and policies. The principal sources of asset liquidity are cash and due from banks, interest-earning deposits with banks, federal funds, investment securities that mature in one year or less and the market value of securities available for sale. At December 31, 1997, the total of such assets was approximately $798.8 million or 42% of consolidated assets. However, liability liquidity is much more difficult to quantify, but is further enhanced by a stable core deposit base, access to credit lines at other financial institutions and S&T's ability to renew maturing deposits. Certificates of deposit in denominations of $100,000 or more represented 7% of deposits at December 31, 1997 and were outstanding primarily to local customers. S&T's ability to attract deposits and borrowed funds depends primarily on continued rate competitiveness, profitability, capitalization and overall financial condition. 27 Beyond the issue of having sufficient sources to fund unexpected credit demands or deposit withdrawals, liquidity management also is an important factor in monitoring and managing interest rate sensitivity issues through ALCO. Through forecast and simulation models, ALCO is also able to project future funding needs and develop strategies for acquiring funds at a reasonable cost. ALCO uses a variety of measurements to monitor the liquidity position of S&T. These include liquidity gap, net alternative funding resources, net loans to assets, net loans to deposits, volatile liabilities and liquidity ratio. As of December 31, 1997, all of these measurements were in compliance with ALCO policy limitations. Because the assets and liabilities of S&T are primarily monetary in nature, the presentation and analysis of cash flows in formats prescribed by SFAS No. 95 are less meaningful for managing bank liquidity than for other non-financial companies. Funds are typically provided from current earnings, maturity and sales of securities available for sale, loan repayments, deposits and borrowings. The primary uses of funds include new loans, repayment of borrowings, the purchase of securities and dividends to shareholders. The level and mix of sources and uses of funds are constantly monitored and adjusted by ALCO in order to maintain credit, liquidity and interest rate risks within prescribed policy guidelines while maximizing earnings. ALCO monitors and manages interest rate sensitivity through gap, simulation and duration analyses in order to avoid unacceptable earnings fluctuations due to interest rate changes. S&T's gap model includes certain management assumptions based upon past experience and the expected behavior of customers during various interest rate scenarios. The assumptions include principal prepayments for mortgages, installment loans and CMOs, and classifying the demand, savings and money market balances by degree of interest rate sensitivity. Utilizing the above assumptions results in ratios of interest rate sensitive assets to interest rate sensitive liabilities for the six-month and twelve-month intervals ended December 31, 1997 of 0.93% and 1.04%, respectively. Assuming immediate repricings for interest-bearing demand, savings and money market accounts, these ratios would be 0.68% and 0.83%, respectively. In addition to the gap analysis, the Company performs an earnings sensitivity analysis to identify more dynamic interest rate risk exposures. An earnings simulation model is used to estimate the effect that specific interest rate changes would have on twelve months of pretax earnings. Derivative financial instruments are included in this exercise. The model incorporates management assumptions regarding the level of interest rate or balance changes on indeterminate maturity deposit products (savings, money market, NOW and demand deposits) for a given level of market rate changes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Interest rate caps and floors on all products are included to the extent that they become effective in the twelve-month simulation period. Additionally, changes in prepayment behavior of the residential mortgage portfolio in each rate environment are captured using management estimates. Finally, the impact of planned growth and anticipated new business activities is factored into the simulation model. S&T's policy objective is to limit the change in annual pretax earnings to $2.3 million from an immediate and sustained parallel change in interest rates of 200 basis points. As of December 31, 1997, S&T had the following estimated earnings sensitivity profile: [CAPTION] (in millions) Immediate Change in Rates +200bp -200bp Pretax earnings change $1.2 $(0.8) Based on the results of the simulation model as of December 31, 1997, S&T would expect an increase in net interest income of $0.5 million and an increase in net interest income of $0.2 million if interest rates gradually increase or decrease, respectively, from current rates by 200 basis points over a twelve-month period. Capital Resources The primary source of equity growth for S&T is earnings retention. Hence, capital growth is a function of net income less dividends paid to shareholders, and treasury stock activities. Shareholders' equity increased $34.0 million at December 31, 1997 compared to December 31, 1996. Net income was $33.4 million and dividends declared to shareholders were $15.7 million for 1997. S&T paid 43% of 1997 net income in dividends, equating to an annual dividend rate of $1.11 per share. Also affecting capital was an increase of $15.3 million in unrealized gains on securities available for sale. The book values of S&T's common stock increased 14.8% from $16.02 at December 31, 1996 to $18.39 at December 31, 1997, primarily due to the increase in shareholders' equity from retained earnings and the increase in unrealized holding gains on securities available for sale. 28 S&T continues to maintain a strong capital position with a leverage ratio of 11.7% as compared to the 1997 minimum regulatory guideline of 3.0%. S&T's risk-based capital Tier 1 and Total ratios were 17.0% and 18.2%, respectively, at December 31, 1997, which places S&T well above the Federal Reserve Board's risk-based capital guidelines of 4.0% and 8.0% for Tier 1 and Total, respectively. In addition, management believes that S&T has the ability to raise additional capital if necessary. S&T sponsors an ESOP. The ESOP shares are allocated to employees as part of S&T's contributions to its employee thrift and profit sharing plans. At December 31, 1997, 13,000 unallocated shares were held by the ESOP for future allocation to employees. In April 1993, shareholders approved the S&T Incentive Stock Plan authorizing the issuance of a maximum of 600,000 shares of S&T's common stock in order to assist in attracting and retaining employees of outstanding ability and to promote the identification of their interests with those of the shareholders of S&T. On October 17, 1994, the Stock Plan was amended to include outside directors. On April 21, 1997, shareholders approved an amendment to the plan increasing the number of authorized shares to 1,600,000. As of December 31, 1997, 729,411 nonstatutory stock options had been granted to key employees and outside directors; 543,000 of these options are currently exercisable. Year 2000 In June 1997, S&T management formed a committee to evaluate the process of preparing its computer systems and applications for the Year 2000. This process involves modifying or replacing certain hardware and software maintained by S&T, as well as communicating with external service providers to ensure that they are taking the appropriate action to remedy their Year 2000 issues. Management and the committee expect to have substantially all of the system and application changes completed and tested by the end of 1998 and believe that its level of preparedness is appropriate. S&T has not yet determined the total cost of the project; however, it is not expected to materially impact future operations. Purchased hardware and software will be capitalized in accordance with normal policy. Personnel and all other costs related to the project will be expensed as incurred. Regulatory Matters S&T and S&T Bank are subject to periodic examinations by one or more of the various regulatory agencies. During 1997, an examination was conducted by the FDIC. This examination included, but was not limited to, procedures designed to review lending practices, credit quality, liquidity, operations and capital adequacy of S&T and its subsidiaries. No comments were received from the FDIC which would have a material effect on S&T's liquidity, capital resources or operations. S&T's current capital position and results of regulatory examination allow it to pay the lowest possible rate for FDIC deposit insurance. Inflation Management is aware of the significant effect inflation has on interest rates and can have on financial performance. S&T's ability to cope with this is best determined by analyzing its capability to respond to changing interest rates and its ability to manage noninterest income and expense. S&T monitors its mix of interest rate sensitive assets and liabilities through ALCO in order to reduce the impact of inflation on net interest income. Management also controls the effects of inflation by reviewing the prices of its products and services, by introducing new products and services and by controlling overhead expenses. Business Uncertainties Due to the static economy in S&T's mature market area and the potential for decline, management believes that values of loan collateral and the ability of borrowers to repay could be adversely affected in an economic downturn. However, because of S&T's adequate allowance for loan losses, earnings strength and strong capitalization, as well as the strength of other businesses in our market area, management does not expect a decline in S&T's ability to satisfactorily perform if further decline in our economy occurs. In addition, S&T's recent acquisitions provide expanded market opportunities in areas with better growth potential. "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. 29 Consolidated Balance Sheets S&T Bancorp, Inc. and Subsidiaries
December 31 1997 1996 (dollars in thousands, except per share data) Assets Cash and due from banks $ 35,951 $ 40,710 Interest-earning deposits with banks 102 109 Federal funds sold 0 6,465 Securities: Available for sale 521,117 449,801 Held to maturity (market value $48,101 in 1997 and $51,343 in 1996) 47,103 50,260 Total Securities 568,220 500,061 Loans, net of allowance for loan losses of $20,427 in 1997 and $18,729 in 1996 1,253,326 1,181,407 Premises and equipment 20,613 20,038 Other assets 42,079 38,255 Total Assets $1,920,291 $1,787,045 Liabilities Deposits: Noninterest-bearing $ 165,727 $ 159,268 Interest-bearing 1,118,931 1,111,099 Total Deposits 1,284,658 1,270,367 Securities sold under repurchase agreements 170,124 114,205 Federal funds purchased 9,325 775 Long-term borrowings 144,218 136,618 Other borrowed funds 130 230 Other liabilities 51,718 38,732 Total Liabilities 1,660,173 1,560,927 Shareholders' Equity Preferred stock, without par value, 10,000,000 shares authorized and none outstanding _ _ Common stock ($2.50 par value) Authorized-25,000,000 shares in 1997 and 1996 Issued-14,857,019 shares in 1997 and 1996 37,142 37,142 Additional paid-in capital 19,369 19,044 Retained earnings 175,707 157,982 Net unrealized holding gains on securities available for sale 40,524 25,197 Treasury stock (715,864 shares in 1997 and 746,003 shares in 1996, at cost) (12,494) (13,017) Deferred compensation (130) (230) Total Shareholders' Equity 260,118 226,118 Total Liabilities and Shareholders' Equity $1,920,291 $1,787,045 See Notes to Consolidated Financial Statements
30 Consolidated Statements of Income S&T Bancorp, Inc. and Subsidiaries [CAPTION] Year Ended December 31 1997 1996 1995 (dollars in thousands, except per share data) Interest Income Loans, including fees $108,891 $ 99,493 $ 95,570 Deposits with banks 8 5 143 Federal funds sold 523 330 406 Investment securities: Taxable 25,421 26,349 24,736 Tax-exempt 2,250 2,834 3,127 Dividends 4,008 3,431 3,038 Total Interest Income 141,101 132,442 127,020 Interest Expense Deposits 47,966 46,125 44,277 Securities sold under repurchase agreements 6,602 7,006 8,482 Federal funds purchased 472 319 474 Long-term borrowings 7,227 5,071 4,326 Other borrowed funds 17 68 118 Total Interest Expense 62,284 58,589 57,677 Net Interest Income 78,817 73,853 69,343 Provision for Loan Losses 5,000 5,175 4,220 Net Interest Income After Provision for Loan Losses 73,817 68,678 65,123 Noninterest Income Service charges on deposit accounts 4,603 4,039 3,327 Trust fees 3,181 2,839 2,401 Security gains, net 5,446 2,227 850 Other 3,211 2,892 2,569 Total Noninterest Income 16,441 11,997 9,147 Noninterest Expense Salaries and employee benefits 22,816 21,763 21,147 Occupancy, net 2,583 2,886 2,561 Furniture and equipment 3,170 2,447 2,581 Other taxes 1,320 1,201 1,121 Data processing 2,154 1,955 1,887 Amortization of intangibles 0 314 343 FDIC assessment 240 1,199 1,526 Other 10,915 10,633 9,110 Total Noninterest Expense 43,198 42,398 40,276 Income Before Income Taxes 47,060 38,277 33,994 Applicable Income Taxes 13,646 10,036 9,152 Net Income $ 33,414 $ 28,241 $ 24,842 Per Common Share: Net Income-Basic $ 2.36 $ 2.00 $ 1.74 Net Income-Diluted 2.34 1.99 1.73 Dividends Declared 1.11 0.94 0.74
See Notes to Consolidated Financial Statements. 31 Consolidated Statements of Changes in Shareholders' Equity S&T Bancorp, Inc. and Subsidiaries [CAPTION] Net Unrealized Additional Gains on Common Paid-In Retained Securities Treasury Deferred Stock Capital Earnings Available Stock Compensation for Sale (dollars in thousands, except per share data) Balance at January 1, 1995 $37,142 $17,328 $125,938 $ 8,840 $(5,982) $(430) Net income for 1995 24,842 Cash dividends declared ($0.74 per share) (9,204) Treasury stock acquired (97,689 shares) (2,076) Treasury stock sold (74,820 shares) 792 876 Deferred ESOP benefits expense 90 Net change in unrealized holding gains on securities available for sale 15,898 Balance at December 31, 1995 37,142 18,120 141,576 24,738 (7,182) (340) Net income for 1996 28,241 Cash dividends declared ($0.94 per share) (11,835) Treasury stock acquired (257,525 shares) (7,287) Treasury stock sold (89,614 shares) 924 1,452 Deferred ESOP benefits expense 110 Net change in unrealized holding gains on securities available for sale 459 Balance at December 31, 1996 37,142 19,044 157,982 25,197 (13,017) (230) Net income for 1997 33,414 Cash dividends declared ($1.11 per share) (15,689) Treasury stock acquired (138 shares) (5) Treasury stock sold (30,277 shares) 325 528 Deferred ESOP benefits expense 100 Net change in unrealized holding gains on securities available for sale 15,327 Balance at December 31, 1997 $37,142 $19,369 $175,707 $40,524 $(12,494) $(130) See Notes to Consolidated Financial Statements.
32 Consolidated Statements of Cash Flows S&T Bancorp, Inc. and Subsidiaries [CAPTION] Year Ended December 31 1997 1996 1995 (dollars in thousands) Operating Activities Net Income $ 33,414 $ 28,241 $ 24,842 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 5,000 5,175 4,220 Provision for depreciation and amortization 2,163 2,445 2,028 Net amortization of investment security premiums 675 543 775 Net accretion of loan and deposit discounts 0 (343) (896) Deferred income taxes (756) (613) (535) Securities gains, net (5,446) (2,227) (850) (Increase) decrease in interest receivable (1,601) 449 (552) Increase (decrease) in interest payable 395 (271) 3,063 Decrease (increase) in other assets 819 (458) (1,236) Increase (decrease) in other liabilities 531 3,170 (2,975) Net Cash Provided by Operating Activities 35,194 36,111 27,884 Investing Activities Net decrease (increase) in interest-earning deposits with banks 7 (58) 3,773 Net decrease in federal funds sold 6,465 875 785 Proceeds from maturities of investment securities 3,146 11,361 28,774 Proceeds from maturities of securities available for sale 127,344 90,214 20,264 Proceeds from sales of securities available for sale 77,826 40,855 67,943 Purchases of investment securities 0 (4,231) (26,255) Purchases of securities available for sale (248,077) (148,259) (93,722) Net increase in loans (76,919) (99,741) (79,023) Purchases of premises and equipment (2,042) (3,020) (1,913) Other, net (696) 303 108 Net Cash Used in Investing Activities (112,946) (111,701) (79,266) Financing Activities Net increase in demand, NOW and savings deposits 9,105 23,761 3,689 Net increase in certificates of deposit 5,186 30,060 70,286 Net increase (decrease) in federal funds purchased 8,550 450 (19,265) Net increase (decrease) in repurchase agreements 55,919 (8,589) (47,077) Increase in obligation under capital lease 0 (294) (264) Proceeds from FHLB long-term borrowings 68,600 55,000 53,200 Repayments from FHLB long-term borrowings (61,000) (14,987) 0 Acquisition of treasury stock (5) (7,287) (2,076) Sale of treasury stock 853 2,376 1,668 Cash dividends paid to shareholders (14,215) (10,667) (8,757) Net Cash Provided by Financing Activities 72,993 69,823 51,404 (Decrease) increase in Cash and Cash Equivalents (4,759) (5,767) 22 Cash and Cash Equivalents at Beginning of Year 40,710 46,477 46,455 Cash and Cash Equivalents at End of Year $ 35,951 $ 40,710 $46,477 See Notes to Consolidated Financial Statements.
33 Notes to Consolidated Financial Statements S&T Bancorp, Inc. and Subsidiaries Note A Accounting Policies The financial statements of S&T Bancorp, Inc. and subsidiaries (S&T) have been prepared in accordance with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The more significant accounting policies are described below. Principles of Consolidation The consolidated financial statements include the accounts of S&T and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The investment in the subsidiaries is carried at S&T's equity in the underlying net assets. Acquisitions On May 2, 1997, S&T completed the merger of Peoples Bank of Unity (Peoples) into its principal subsidiary, S&T Bank (Bank). Peoples had assets of $288.0 million, and operated six offices in the eastern suburbs of Pittsburgh, including Plum Borough, Penn Hills, Monroeville, Oakmont, Unity, and Holiday Park. All of these offices now operate under the S&T Bank name. Under the terms of the merger agreement, Peoples shareholders received 26.25 S&T common shares for each of the 115,660 outstanding Peoples common shares. This resulted in a tax-free exchange, and the merger was accounted for as a pooling-of-interests. The financial statements are presented as if the merger had been consummated for all the periods presented. The following financial information presents the combined results of S&T and Peoples as if the acquisition had occurred as of the beginning of the years presented: [CAPTION] S&T as For the Periods Ended previously presented Peoples S&T (dollars in thousands) Net interest income: March 31, 1997 $15,655 $3,699 $19,354 December 31, 1996 59,887 13,966 73,853 December 31, 1995 57,019 12,324 69,343 Net income: March 31, 1997 $ 6,248 $ 1,493 $ 7,741 December 31, 1996 23,249 4,992 28,241 December 31, 1995 20,469 4,373 24,842
Securities Management determines the appropriate classification of securities at the time of purchase. If management has the positive intent and S&T has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity and are stated at cost adjusted for amortization of premiums and accretion of discounts. All obligations of states and political subdivisions and corporate securities are classified in this category. Securities to be held for indefinite periods of time are classified as available for sale and are recorded at market value. All U.S. treasury securities, U.S. government corporations and agencies, collateralized mortgage obligations, mortgage-backed securities, and marketable equity securities are classified in this category. Gains or losses on the disposition of securities are based on the specific identification method. S&T does not engage in any securities trading activity. 34 Loans Interest on loans is accrued and credited to operations based on the principal amount outstanding. Accretion of discount on loans is included in interest income. Loan origination fees and direct loan origination costs are deferred and amortized as an adjustment of loan yield over the respective lives of the loans. Loans are placed on nonaccrual and interest is discontinued when collection of interest or principal is doubtful, or generally when interest or principal are 90 days or more past due. Impaired loans are defined by management as commercial and commercial real estate loans for which it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Residential real estate mortgages and consumer installment loans are large groups of smaller balance homogeneous loans and are separately measured for impairment collectability. Factors considered by management in determining impairment include payment status and underlying collateral value. All impaired loans are classified as substandard for risk classification purposes. Impaired loans are charged-off, to the estimated value of collateral associated with the loan, when management believes principal and interest are deemed uncollectible. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet the payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent that cash payments are received. The allowance for loan losses is established through provisions for loan losses charged against income. Loans considered to be uncollectible are charged against the allowance, and recoveries, if any, are credited to the allow-ance. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio, past loan loss experience, current economic conditions, volume, growth and composition of the loan portfolio and other relevant factors. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. The provision for depreciation is computed generally by the straight-line method for financial reporting purposes and by accelerated methods for federal income tax purposes. Other Real Estate Other real estate is included in other assets and is comprised of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure and loans classified as in-substance foreclosure. These properties are carried at the lower of cost or fair value less cost of resale. Loan losses arising from the acquisition of such property are charged against the allowance for loan losses. Gains or losses realized subsequent to acquisition are recorded in the results of operations. Income Taxes Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. Trust Assets and Income Assets held in a fiduciary capacity by the Bank are not assets of the Bank and are therefore not included in the consolidated financial statements. Trust fee income is reported on the accrual basis. Pensions Pension expense for the Bank's defined benefit pension plan is actuarially determined using the projected unit credit actuarial cost method. The funding policy for the plan is to contribute amounts to the plan sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, plus such additional amounts as may be appropriate, subject to federal income tax limitations. 35 Treasury Stock The purchase of S&T common stock is recorded at cost. At the time of reissue, the treasury stock account is reduced using the average cost method. Earnings Per Share Financial Accounting Standards Board Statement No. 128, "Earnings Per Share" (Statement No. 128), is effective in 1997 and provides a simpler calculation called basic Earnings Per Share (EPS) which replaces primary EPS under APB Opinion 15. Basic EPS 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 EPS. All prior periods have been restated and recorded in accordance with Statement No. 128. Average shares outstanding for computing basic EPS were 14,131,518, 14,108,617 and 14,279,507 for 1997, 1996 and 1995, respectively. Average shares outstanding for computing dilutive EPS were 14,309,182, 14,220,422 and 14,318,799 for 1997, 1996 and 1995, respectively. In computing dilutive EPS, average shares outstanding have been increased by the common stock equivalents relating to S&T's available stock options. Cash Flow Information S&T considers cash and due from banks as cash and cash equivalents. For the years ended December 31, 1997, 1996 and 1995, cash paid for interest was $60,825,000, $58,860,000 and $54,615,000, respectively. Cash paid during 1997 for income taxes was $14,190,000 compared to $11,014,000 for 1996 and $8,961,000 for 1995. Mortgage Loan Servicing Mortgage servicing assets are recognized as separate assets when servicing rights are acquired through purchase or loan originations, when there is a definitive plan to sell the underlying loan. Capitalized mortgage servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage loans. Capitalized mortgage servicing rights are evaluated for impairment based on the fair value of those rights. In November 1997, $12.7 million of 1-4 family mortgage loans were sold to the Federal National Mortgage Association (FNMA), and $187,000 of mortgage servicing rights were capitalized and recorded in other assets. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues. New Accounting Pronouncements Financial Accounting Standards Board Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (Statement No. 125), is effective in 1997 and provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Statement No. 125 as amended by FASB Statement No. 127, "Deferral of Effective Date of Certain Provisions of Statement No. 125," is generally to be applied to transactions occurring after December 31, 1996 with certain provisions having been delayed until 1998. Statement No. 125 is not expected to materially affect S&T's financial position or results of operations. Financial Accounting Standards Board Statement No. 130, "Accounting for Comprehensive Income," is effective for years beginning after December 15, 1997 and establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Statement No. 130 is not expected to materially affect S&T's financial position or results of operations. 36 Note B Fair Values of Financial Instruments S&T utilized quoted market values, where available, to assign fair value to its financial instruments. In cases where quoted market values were not available, S&T used present value methods to estimate the fair value of its financial instruments. These estimates of fair value are significantly affected by the assumptions made and, accordingly, do not necessarily indicate amounts which could be realized in a current market exchange. S&T does not expect to realize the estimated amounts disclosed. The following methods and assumptions were used by S&T in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents and Other Short-Term Assets The carrying amounts reported in the consolidated balance sheet for cash and due from banks, interest-earning deposits with banks and federal funds sold approximate those assets' fair values. Securities Fair values for investment securities and securities available for sale are based on quoted market prices. Loans For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers as measured by net credit losses and the loss of interest income from nonaccrual loans. The carrying amount of accrued interest approximates its fair value. Deposits The fair values disclosed for demand deposits (e.g., noninterest and interest-bearing demand, money market and savings accounts) are, by definition, equal to the amount payable on demand. The carrying amounts for variable-rate, fixed-term certificates of deposit and other time deposits approximate their fair value at year end. Fair values for fixed-rate certificates of deposit and other time deposits are based on the discounted value of contractual cash flows, using interest rates currently being offered for deposits of similar remaining maturities. Short-Term Borrowings and Other Borrowed Funds The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other borrowings approximate their fair values. Long-Term Borrowings The fair values disclosed for long-term borrowings are estimated using current interest rates for long-term borrowings of similar remaining maturities. Loan Committments and Standby Letters of Credit Estimates of the fair value of these off-balance sheet items were not made because of the short-term of these arrangements and the credit standing of the counterparties. Also, unfunded loan commitments relate principally to variable rate commercial loans, and fees are not normally assessed on these balances. Estimates of fair value have not been made for items which are not defined as financial instruments, including such items as S&T's core deposit intangibles and the value of its trust operation. S&T believes it is impracticable to estimate a representational fair value for these types of assets, which represent significant value to S&T. 37 [CAPTION] The following table indicates the estimated fair value of S&T's financial instruments as of December 31: 1997 1996 Estimated Carrying Estimated Carrying Fair Value Value Fair Value Value (dollars in thousands) Assets Cash $ 36,053 $ 36,053 $ 47,284 $ 47,284 Securities: Available for sale 521,117 521,117 449,801 449,801 Held to maturity 48,101 47,103 51,343 50,260 Loans 1,279,802 1,273,753 1,194,344 1,200,136 Liabilities Deposits $1,287,497 $1,284,658 $1,275,480 $1,270,367 Securities sold under repurchase agreements 170,126 170,124 114,205 114,205 Federal funds purchased 9,325 9,325 775 775 Long-term borrowings 145,049 144,218 136,518 136,618 Other borrowed funds 130 130 230 230 Off-Balance Sheet Interest rate swaps $ 192 $ 0 $ 362 $ 0
Note C Derivative Financial Instruments S&T does not extensively use derivative financial instruments. The only type of instrument that S&T utilizes is interest rate swaps. S&T has three interest rate swaps at notional values totaling $25.0 million, paying a fixed rate and receiving a variable rate. The purpose of these transactions is to provide matched, fixed rate funding for newly originated loans, and to mitigate the risk associated with volatile liability funding. The effective rate of these combined swaps was 5.28% at December 31, 1997. Interest rate swaps are not reported in the consolidated balance sheets. Differences between interest received and interest paid are reported as a component of borrowing expense in the consolidated income statement. Note D Restrictions on Cash and Due from Bank Accounts The Board of Governors of the Federal Reserve Bank impose certain reserve requirements on all depository institutions. These reserves are maintained in the form of vault cash or as a noninterest-bearing balance with the Federal Reserve Bank. Required reserves averaged $11,681,000 during 1997. 38 Securities [CAPTION] The following table indicates the composition of the securities portfolio at December 31: Available for Sale Gross Gross Amortized Unrealized Unrealized Market 1997 Cost Gains Losses Value (dollars in thousands) Obligations of U.S. government corporations and agencies $338,855 $ 2,616 $ (183) $341,288 Mortgage-backed securities 14,169 373 14,542 U.S. treasury securities 38,044 1,429 39,473 Corporate securities 10,848 228 (12) 11,064 Debt securities available for sale 401,916 4,646 (195) 406,367 Marketable equity securities 43,745 58,060 (166) 101,639 Other securities 13,111 13,111 Total $458,772 $62,706 $ (361) $521,117 Held to Maturity Obligations of states and $ 37,497 $ 794 $ (5) $38,286 political susbdivisions Corporate securities 1,998 209 2,207 Debt securities held to maturity 39,495 1,003 (5) 40,493 Other securities 7,608 7,608 Total $ 47,103 $ 1,003 $ (5)$ 48,101 Available for Sale Gross Gross Amortized Unrealized Unrealized Market 1996 Cost Gains Losses Value (dollars in thousands) Obligations of U.S. government corporations and agencies $234,632 $ 2,408 $(1,116)$235,924 Collateralized mortgage obligations of U.S. government corporations and agencies 4,176 7 (1) 4,182 Mortgaged-backed securities 47,327 401 (266) 47,462 U.S. treasury securities 57,187 1,555 58,742 Corporate securities 14,463 143 (56) 14,550 Debt securities available for sale 357,785 4,514 (1,439) 360,860 Marketable equity securities 40,161 35,868 (224) 75,805 Other securities 13,136 13,136 Total $411,082 $40,382 $(1,663)$449,801 Held to Maturity Obligations of states and $ 46,334 $ 919 $ (52)$ 47,201 and political subdivisions Corporate securities 1,998 216 2,214 Debt securities held to maturity 48,332 1,135 (52) 49,415 Other securities 1,928 1,928 Total $ 50,260 $ 1,135 $ (52)$ 51,343
39 There were $6,031,000, $2,528,000 and $1,956,000 in gross realized gains and $585,000, $305,000 and $1,114,000 in gross realized losses in 1997, 1996 and 1995, respectively, relative to securities available for sale. The amortized cost and estimated market value of debt securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of the underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments. [CAPTION] Amortized Market Available for Sale Cost Value (dollars in thousands) Due in one year or less $ 23,992 $ 24,159 Due after one year through five years 96,246 97,815 Due after five years through ten years 273,750 276,241 Due after ten years 7,928 8,152 Total $ 401,916 $ 406,367 Amortized Market Held to Maturity Cost Value Due in one year or less $ 5,680 $ 5,723 Due after one year through five years 18,288 18,800 Due after five years through ten years 12,585 12,939 Due after ten years 2,942 3,031 Total $ 39,495 $ 40,493
At December 31, 1997 and 1996, securities with principal amounts of $274,350,000 and $181,489,000, respectively, were pledged to secure repurchase agreements and public and trust fund deposits. Note F Loans [CAPTION] The following table indicates the composition of the loan portfolio at December 31: 1997 1996 (dollars in thousands) Real estate-construction $ 47,967 $ 35,508 Real estate-mortgages: Residential 512,417 513,424 Commercial 327,384 250,132 Commercial-industrial and agricultural 255,017 246,731 Consumer installment 130,968 154,341 Gross Loans $1,273,753 $1,200,136 Allowance for loan losses (20,427) (18,729) Net Loans $1,253,326 $1,181,407
40 The following table presents changes in the allowance for loan losses for the year ended December 31: [CAPTION] 1997 1996 1995 (dollars in thousands) Balance at beginning of year $18,729 $17,065 $15,169 Charge-offs (4,481) (5,536) (3,039) Recoveries 1,179 2,025 715 Net charge-offs (3,302) (3,511) (2,324) Provision for loan losses 5,000 5,175 4,220 Balance at end of year $20,427 $18,729 $17,065
The Bank has granted loans to certain officers and directors of S&T as well as certain affiliates of the officers and directors in the ordinary course of business. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and did not involve more than normal risk of collectibility. The aggregate dollar amounts of these loans were $41,130,000 and $33,713,000 at December 31, 1997 and 1996, respectively. During 1997, $36,495,000 of new loans were funded and repayments totaled $29,078,000. During 1997, S&T Bank acquired automobile loans and leases on a third-party basis from companies owned by two directors of S&T totaling $3,793,000. These loans were acquired on substantially the same terms as those prevailing at the time for comparable transactions with others. The principal balances of loans on nonaccrual were $3,602,000 and $10,268,000 at December 31, 1997 and December 31, 1996, respectively. At December 31, 1997, there were no commitments to lend additional funds on nonaccrual loans. Other real estate owned, which is included in other assets, was $647,000 at December 31, 1997 and $483,000 at December 31, 1996. The following table represents S&T's investment in loans considered to be impaired and related information on those impaired loans at December 31: [CAPTION] 1997 1996 (dollars in thousands) Recorded investment in loans considered to be impaired $1,869,000 $10,687,000 Loans considered to be impaired that were on a nonaccrual basis _ 6,487,000 Allowance for loan losses related to loans considered to be impaired 914,000 2,605,000 Average recorded investment in impaired loans 6,329,000 4,256,000 Total interest income recognized on 656,000 1,103,000 impaired loans Interest income on impaired loans recognized on a cash basis _ 1,103,000
41 Note G Premises and Equipment The following table is a summary of the premises and equipment accounts at December 31: [CAPTION] 1997 1996 (dollars in thousands) Land $ 3,037 $ 2,568 Premises 18,498 18,340 Furniture and equipment 12,152 14,806 Leasehold improvements 2,483 2,510 36,170 38,224 Accumulated depreciation (15,557) (18,186) Total $ $20,613 $20,038
Certain banking facilities and equipment are leased under short-term lease arrangements expiring at various dates to the year 2007. All such leases are accounted for as operating leases. Rental expense for premises and equipment amounted to $1,215,000, $1,136,000 and $1,104,000 in 1997, 1996 and 1995, respectively. Minimum annual rentals for each of the years 1998-2002 are approximately $413,000, $308,000, $296,000, $241,000 and $133,000, respectively, and $586,000 for the years thereafter. Included in the above are leases entered into with two directors of S&T for which rental expense totaled $348,497, $325,709 and $318,984 in 1997, 1996 and 1995, respectively. Note H Deposits The following table indicates the composition of deposits at December 31: [CAPTION] 1997 1996 (dollars in thousands) Noninterest-bearing demand $ 165,727 $ 159,268 Interest-bearing demand 33,582 52,658 Money market 274,874 230,143 Savings 175,187 198,068 Time deposits 635,288 630,230 Total $1,284,658 $1,270,367
The aggregate of all time deposits over $100,000 amounted to $95,678,000 and $101,461,000 for December 31, 1997 and 1996, respectively. 42 The following table indicates the scheduled maturities of time deposits at December 31: [CAPTION] 1997 1996 (dollars in thousands) Due in one year $306,278 $360,191 Due in one to two years 187,257 107,836 Due in two to three years 83,395 89,595 Due in three to four years 16,434 32,330 Due in four to five years 26,751 15,273 Due after five years 15,173 25,005 Total $635,288 $630,230
Note I Long-Term Borrowings The following table is a summary of long-term borrowings with the Federal Home Loan Bank (FHLB): [CAPTION] 1997 1996 Balance Average Balance Average Rate Rate (dollars in thousands) Due in one year $25,000 5.97% $36,000 5.43% Due in one to two years _ 25,000 5.60 Due in two to three years 12,500 5.70 _ _ Due in three to four years 30,000 6.02 12,500 5.32 Due in four to five years 57,100 5.25 55,000 5.52 Due after five years 19,618 6.48 8,118 6.63 Total $144,218 5.74% $136,618 5.56%
The purpose of these borrowings was to match fund selected new loan originations, to mitigate interest rate sensitivity risks and take advantage of discounted borrowing rates through the FHLB for community investment projects. S&T maintains a Flexline of credit for 10% of total assets with the FHLB which expires December 31, 1998. S&T pledged all 1-4 family and multi-family mortgage loans as collateral for any current or future FHLB advances. The total carrying amount of these loans was $458,308,000 at December 31, 1997. Note J Short-Term Debt Federal funds purchased and securities sold under repurchase agreements (REPOS) generally mature within one to 14 days from the transaction date. S&T defines REPOS with its retail customers as retail REPOS and wholesale REPOS are those transacted with other financial institutions. 43 Information concerning federal funds purchased and REPOS is summarized as follows: [CAPTION] 1997 1996 (dollars in thousands) Average balance during the year $134,851 $141,012 Average interest rate during the year 5.31% 5.24% Maximum month-end balance during the year $195,024 $180,776 Average interest rate at year end 5.82% 5.68%
Note K Dividend and Loan Restrictions Certain restrictions exist regarding the ability of S&T Bank to transfer funds to S&T in the form of dividends and loans. Dividends that may be paid by S&T Bank to S&T are limited to the retained earnings of S&T Bank which amounted to $112,155,000 at December 31, 1997. The amount of dividends that may be paid to S&T is further restricted by regulatory guidelines concerning minimum capital requirements. Federal law prohibits S&T from borrowing from the subsidiaries unless such loans are collateralized by specific obligations. Further, such loans are limited to 10% of S&T Bank's capital and additional paid-in capital, as defined. At December 31, 1997, the maximum amount available for transfer from S&T Bank to S&T in the form of loans and dividends approximated 45% of consolidated net assets. Note L 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. Note M Financial Instruments and Credit Risk 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 the agreement equals the notional amount of the obligation less the value of any collateral. Unfunded loan commitments totaled $294,144,000 and $250,394,000 at December 31, 1997 and 1996, respectively; and obligations under standby letters of credit totaled $54,439,000 and $63,553,000 at December 31, 1997 and 1996, respectively. S&T attempts to limit its exposure to concentrations of credit risk by diversifying its loan portfolio. S&T defines concentrations of credit risk as loans to a specific industry or group in excess of 10% of total loans. S&T has no concentration of credit risk by industry or group. However, geographic concentrations exist because S&T provides a full range of banking services including commercial, consumer and mortgage loans to individuals and corporate customers in its six-county market area in western Pennsylvania. 44 Note N Income Taxes Income tax expense (credits) for the year ended December 31 are comprised of: [CAPTION] 1997 1996 1995 (dollars in thousands) Current $14,402 $10,649 $9,687 Deferred (756) (613) (535) Total $13,646 $10,036 $9,152
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. The statutory to effective tax rate reconciliation for the year ended December 31 is as follows: [CAPTION] 1997 1996 1995 (dollars in thousands) Statutory tax rate 35% 35% 35% Tax-exempt interest income and dividend exclusion (4) (6) (7) Low income housing tax credits (2) (3) (1) Effective tax rate 29% 26% 27%
Income taxes applicable to security gains were $1,906,000 in 1997, $779,000 in 1996 and $296,000 in 1995. 45 Significant components of S&T's temporary differences were as follows at December 31: [CAPTION] 1997 1996 (dollars in thousands) Deferred tax liabilities: Net unrealized holding gains on securities available for sale $(21,821) $(13,521) Fixed assets (683) (740) Accretion on acquired loans (326) (363) Prepaid pension (514) (447) Prepaid hospitalization (102) (102) Point recognition (933) (688) Total deferred tax liabilities (24,379) (15,861) Deferred tax assets: Allowance on loan losses 6,939 6,206 Loan fees 377 376 Interest expense on increasing rate CDs 128 171 Deferred compensation 771 462 Goodwill 352 392 Other 174 160 Total deferred tax assets 8,741 7,767 Net deferred tax liability $(15,638) $ (8,094)
Note O Employee Benefits The Bank maintains a defined benefit pension plan covering substantially all employees. The benefits are based on years of service and the employee's compensation during the last ten years of employment. Contributions are intended to provide for benefits attributed to employee service to date and for those benefits expected to be earned in the future. Trustee pension plan assets consist primarily of equity and fixed income securities and short-term investments. The following table summarizes the components of net periodic pension expense for the Bank's defined benefit plan: [CAPTION] 1997 1996 1995 (dollars in thousands) Service cost-benefits earned $1,103 $1,032 $811 during the period Interest cost on projected benefit 1,378 1,274 1,180 benefit obligation Actual return on plan assets (3,767) (2,447)(3,710) Net amortization and deferral 1,977 893 2,479 Net periodic pension expense $691 $752 $760
46 The following table sets forth the plan's funded status at December 31: [CAPTION] 1997 1996 (dollars in thousands) Actuarial present value of the accumulated benefit obligation, including vested benefits of $16,766 in 1997 and $13,618 in 1996 $(18,339) $(14,838) Actuarial present value of projected benefit obligation $(23,385) $(19,593) Plan assets at fair value 26,043 22,189 Plan assets in excess of projected benefit obligation 2,658 2,596 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (2,475) (2,062) Unamortized prior service cost 104 226 Balance of initial unrecognized net liability (72) (94) Accrued pension cost included in other liabilities $ 215 $ 666
Below are actuarial assumptions used in accounting for the plan: [CAPTION] 1997 1996 1995 (dollars in thousands) Weighted-average discount rate 6.5% 7.0% 6.5% Rate of increase in future compensation levels 5.0 5.0 6.0 Expected long-term rate of return on plan assets 8.0 8.0 8.0
S&T also has a supplemental retirement plan (SERP) for certain key employees. The SERP is unfunded. The balance of actuarial present value of projected benefit obligations related to the SERP are $2,110,000 and $1,332,000 at December 31, 1997 and 1996, respectively. Accrued pension cost related to the SERP was $1,779,000 and $1,320,000 at December 31, 1997 and 1996, respectively. Net periodic pension cost related to the SERP was $499,000, $238,000 and $201,000 at December 31, 1997, 1996 and 1995, respectively. The actuarial assumptions are the same as those used in the previous table. The Bank maintains a Thrift Plan (Plan) in which substantially all employees are eligible to participate. The Bank makes matching contributions to the Plan up to 3% of participants' eligible compensation and may make additional contributions as limited by the Plan. Contributions to the Plan are cash or unallocated Employee Stock Option Plan (ESOP) shares. Expense related to these contributions amounted to $990,000, $950,000 and $856,000 in 1997, 1996 and 1995, respectively. On December 30, 1988, S&T sold 280,000 shares of common stock, which were held in treasury, to its newly created ESOP for $2,800,000. The funds were obtained by the ESOP through a loan from a bank. S&T has guaranteed the loan, which has a maximum term of ten years and bears interest at 80% of the lender's prime rate. The loan terms require quarterly interest and annual principal payments. The balance of this loan was $130,000 and $230,000 on December 31, 1997 and 1996, respectively, and was included in other borrowed funds with an offsetting reduction in shareholders' equity shown as deferred compensation in the accompanying consolidated balance sheets. At December 31, 1997, the ESOP held 13,000 shares of S&T common stock that were unearned or unallocated, with a fair market value of $562,000. These unearned shares are released upon reduction of the ESOP debt and must be fully allocated by December 31, 1998. 47 The ESOP covers substantially all regular full-time employees. S&T is obligated to make annual contributions sufficient to enable the ESOP to repay the loan, including interest. Interest expense totaled $17,000 in 1997, $19,000 in 1996 and $30,000 in 1995. Dividends received by the ESOP from S&T for unallocated shares amounted to $24,000 in 1997, $24,000 in 1996 and $33,000 in 1995, which were used for debt service. Dividends on allocated shares are paid to the participants' accounts in the Plan. Deferred compensation arising from the guarantee of the ESOP borrowing will be charged to operations as contributions are made to the ESOP. Since the ESOP was established prior to the issuance of SOP 93-6, "Employers' Accounting for Employee Stock Ownership Plans," ESOP compensation expense is currently based upon the cost of unearned shares as prescribed by SOP 76-3, "Accounting Practices for Certain Employee Stock Ownership Plans." The earnings per share effects of unearned ESOP shares are not material. The expense associated with the release of ESOP shares in 1997, 1996 and 1995 was $100,000, $110,000 and $90,000, respectively. No allocated ESOP shares are subject to repurchase obligations. Note P Incentive Stock Plan and Dividend Reinvestment Plan S&T adopted an Incentive Stock Plan in 1992 (Stock Plan) that provides for granting incentive stock options, nonstatutory stock options, and stock appreciation rights (SARs). On October 17, 1994, the Stock Plan was amended to include outside directors. The Stock Plan covers a maximum of 1,600,000 shares of S&T common stock and expires ten years from the date of board approval. S&T grants stock options at exercise prices not less than the greater of the fair market value of S&T common stock. SARs may be granted concurrently with the grant of nonstatutory stock options (Related SARs) or independently. SARs entitle the holder to receive either cash or shares of S&T common stock equal to the excess of the fair market value of the shares subject to the option over the fair market value of a share of common stock on the grant date. Stock options and SARs granted under the Stock Plan are not exercisable before the six-month vesting period from the date of grant. There were no SARs or Related SARs issued or outstanding at December 31, 1997 and 1996. The following table summarizes the changes in the incentive stock options outstanding during 1997, 1996 and 1995: [CAPTION] 1997 1996 1995 Weighted Weighted Weighted Average Average Average Number Option Number Option Number Option of shares price of shares price of shares price Outstanding at beginning of year 556,000 $24.12 411,500 $20.90 250,500 $17.27 Granted 186,411 40.75 166,500 30.88 165,000 26.25 Exercised (13,000) 21.32 (22,000) 15.10 (4,000) 13.63 Outstanding at end of year 729,411 $28.42 556,000 $24.12 411,500 $ 20.90 Exercisable at end of year 543,000 $24.19 389,500 $21.23 246,500 $17.33
The grant price of all options is equal to the fair market value of S&T common stock at the grant date. 48 The following table summarizes the range of exercise prices at December 31: [CAPTION] 1997 1996 1995 Contractual Contractual Contractual Remaining Remaining Remaining Shares Excercise Life Shares Excercise Life Shares Excercise Life Outstanding Price (Years) Outstanding Price (Years) Outstanding Price (Year) 1992 40,000 $13.63 5 40,000 $13.63 5 54,000 $13.63 5 1993 62,000 17.25 6 64,000 17.25 6 70,000 17.25 6 1994 113,500 19.00 7 120,500 19.00 7 122,500 19.00 7 1995 162,000 26.25 8 165,000 26.25 8 165,000 26.25 8 1996 165,500 30.88 9 166,500 30.88 9 _ _ _ 1997 186,411 40.75 10 _ _ _ _ _ _ Total 729,411 $28.42 8.2 556,000 $24.12 7.6 411,500 $20.90 7.0
Options are granted in December and have a six- month vesting period and a ten-year contractual life. S&T accounts for stock options in accordance with APB 25. The following proforma information regarding net income and earnings per share assumes the adoption of Statement No. 123 for stock options granted subsequent to December 31, 1994. (Disclosure is not required for options granted prior to 1995). The estimated fair value of the options is amortized to expense over the option and vesting period. The fair value was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997 and 1996, respectively: risk-free interest rates of 5.77% and 6.12%; a dividend yield of 3.0%; volatility factors of the expected market price of S&T's common stock of 0.182 and 0.161; a weighted-average expected life of five years. 1997 1996 1995 [CAPTION] (dollars in thousands except per share data) Proforma net income-Basic $32,845 $27,741 $24,807 Proforma earnings per share_Basic 2.32 1.97 1.74 Proforma earnings per share_Diluted 2.30 1.95 1.73
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because S&T's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. S&T also sponsors a dividend reinvestment plan (Dividend Plan) whereby shareholders may purchase shares of S&T common stock at market value with reinvested dividends and voluntary cash contributions. Chase Mellon Shareholder Services, the plan administrator and transfer agent, purchases the shares on the open market to fulfill the Plan's needs. 49 Note Q S&T Bancorp, Inc. (parent company only) Condensed Financial Information [CAPTION] Balance Sheets at December 31: 1997 1996 (dollars in thousands) Assets Cash $ 19 $ 2,526 Investments in: Bank subsidiary 169,281 157,603 Nonbank subsidiaries 95,198 68,995 Total Assets $264,498 $229,124 Liabilities Dividends payable $ 4,243 $ 2,769 Other borrowed funds 130 230 Other liabilities 7 7 Total Liabilities 4,380 3,006 Total Shareholders' Equity 260,118 226,118 Total Liabilities and Shareholders' Equity $264,498 $229,124
Statements of Income for the year ended December 31: 1997 1996 1995 (dollars in thousands) Dividends from bank subsidiary $15,689 $ 11,835 $ 9,204 Investment income 60 64 38 Income before equity in undistrib- uted net income of subsidiaries 15,749 11,899 9,242 Equity in undistributed net income of: Bank subsidiary 13,316 11,949 12,239 Nonbank subsidiaries 4,349 4,393 3,361 Net Income $33,414 $ 28,241 $ 24,842
50 Statements of Cash Flows for the year ended December 31: 1997 1996 1995 (dollars in thousands) Operating Activities Net Income $33,414 $28,241 $24,842 Equity in undistributed net income of subsidiaries (19,640) (17,102) (15,602) Change in other assets/liabilities (408) (445) Total Provided by Operating Activities 13,774 10,731 8,795 Investing Activities Distributions (to) from bank subsidiaries (2,914) 7,100 550 Total Used in Investing Activities (2,914) 7,100 550 Financing Activities Dividends (14,215) (10,667) (8,757) Sale (acquisition) of treasury stock 848 (4,911) (408) Total Used in Financing Activities (13,367) (15,578) (9,165) (Decrease) increase in Cash (2,507) 2,253 180 Cash at Beginning of Year 2,526 273 93 Cash at End of Year $ 19 $ 2,526 $ 273
Note R Regulatory Matters S&T is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on S&T's financial statements. Under capital guidelines and the regulatory framework for prompt corrective action, S&T must meet specific capital guidelines that involve quantitative measures of the S&T's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. S&T's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require S&T to maintain minimum amounts and ratios of Tier I and Total capital to risk-weighted assets and of Tier I capital to average assets. As of December 31, 1997 and 1996, S&T meets all capital adequacy requirements to which it is subject. 51 To be classified as well capitalized, S&T must maintain minimum Tier I risk-based, Total risk-based and Tier I leverage ratios as set forth in the table below:
To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio (dollars in thousands) As of December 31, 1997: Total Capital $235,825 18.22% $103,538 8.00% $129,422 10.00% (to Risk Weighted Assets) Tier I Capital 219,594 16.97 51,769 4.00 77,653 6.00 (to Risk Weighted Assets) Tier I Capital 219,594 11.70 75,094 4.00 93,867 5.00 (to Average Assets) As of December 31, 1996: Total Capital 215,699 18.01 95,832 8.00 119,790 10.00 (to Risk Weighted Assets) Tier I Capital 200,921 16.77 47,916 4.00 71,874 6.00 (to Risk Weighted Assets) Tier I Capital 200,921 11.45 70,216 4.00 87,770 5.00 (to Average Assets)
The most recent notification from the Federal Deposit Insurance Corporation categorized S&T Bank as well capitalized under the regulatory framework for corrective action. At December 31, 1997, S&T Bank's Tier I and Total capital ratios were 13.12% and 14.37%, respectively, and Tier I capital to average assets was 9.24%. At December 31, 1996, S&T Bank's Tier I and Total capital ratios were 14.8% and 16.04%, respectively, and Tier I capital to average assets was 10.17%. 52 Shareholders and Board of Directors S&T Bancorp, Inc. We have audited the accompanying consolidated balance sheets of S&T Bancorp, Inc. and subsidiaries (S&T) as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of S&T's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1996 and 1995 financial statements of Peoples Bank of Unity which statements reflect total assets constituting 16.0% of the related consolidated totals as of December 31, 1996, and net interest income constituting 18.4% of the related consolidated totals for each of the years ended December 31, 1996 and 1995. Those statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to data included for Peoples Bank of Unity, is based solely on the reports of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of S&T Bancorp, Inc. and subsidiaries at December 31, 1997 and 1996 and the consolidated results of their operations and their cash flows for each of three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/Ernst & Young LLP Pittsburgh, Pennsylvania January 16, 1998 53 Stock Prices and Dividend Information Selected Financial Information S&T Bancorp, Inc. and Subsidiaries Stock Prices and Dividend Information S&T Bancorp, Inc.'s common stock is listed on the Nasdaq National Market System (Nasdaq). The range of sales prices for the years 1997 and 1996 are as follows and are based upon information obtained from Nasdaq. As of the close of business January 19, 1998, there were 3,004 shareholders of record of S&T Bancorp, Inc. Dividends paid by S&T are provided from the Bank's dividends to S&T. In addition, the payment of dividends by the Bank to S&T is subject to the restrictions described in Note K to the Consolidated Financial Statements. The cash dividends declared shown below represent the historical per share amounts for S&T Bancorp, Inc.'s common stock. Price Range of Common Stock 1997 Low High Cash Dividends Declared Fourth Quarter $38.50 $44.50 $0.30 Third Quarter 33.25 38.75 0.28 Second Quarter 29.50 36.88 0.28 First Quarter 29.75 36.75 0.25 1996 Fourth Quarter $30.00 $31.75 $0.25 Third Quarter 29.75 31.50 0.24 Second Quarter 29.50 31.00 0.24 First Quarter 28.00 30.75 0.21
Selected Financial Data Year Ended December 31: 1997 1996 1995 1994 1993 (dollars in thousands, except per share data) Income Statement Interest income $141,101 $132,442 $127,020 $112,559 $107,147 Interest expense 62,284 58,589 57,677 46,643 44,444 Provisions for loan losses 5,000 5,175 4,220 3,600 3,665 Net interest income after provision for loan losses 73,817 68,678 65,123 62,316 59,038 Noninterest income 16,441 11,997 9,147 7,611 7,136 Noninterest expense 43,198 42,398 40,276 38,679 37,129 Income before income taxes 47,060 38,277 33,994 31,248 29,045 Applicable income taxes 13,646 10,036 9,152 8,276 7,631 Net income $ 33,414 $ 28,241 $ 24,842 $ 22,972 $ 21,414 Per share data Net income-Basic $ 2.36 $ 2.00 $ 1.74 $ 1.60 $ 1.50 Net income-Diluted 2.34 1.99 1.73 1.59 1.49 Dividends declared 1.11 0.94 0.74 0.61 0.50 Book value 18.39 16.02 14.99 12.78 11.07
54 Selected Financial Data Quarterly Selected Financial Data S&T Bancorp, Inc. and Subsidiaries Selected Financial Data Balance Sheet Totals (period end): [CAPTION] Year Ended December 31: 1997 1996 1995 1994 1993 (dollars in thousands) Total assets $1,920,291 $1,787,045 $1,689,728 $1,580,252 $1,487,528 Securities 568,220 500,061 492,236 466,875 509,960 Net loans 1,253,326 1,181,407 1,086,317 1,011,165 876,961 Total deposits 1,284,658 1,270,367 1,216,547 1,142,571 1,151,926 Securities sold under repurchase agreements 170,124 114,205 122,794 169,871 127,731 Other liabilities 205,391 176,355 136,333 84,974 49,681 Total shareholders' equity 260,118 226,118 214,054 182,836 158,190
Quarterly Selected Financial Data [CAPTION] 1997 1996 Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter (dollars in thousands, except per share data) Summary of Operations Income Statement: Interest income $ 36,412 $ 35,488 $ 34,808 $ 34,391 $ 33,944 $ 33,548 $ 32,730 $ 32,216 Interest expense 16,465 15,748 15,034 15,037 15,025 14,792 14,384 14,390 Provision for loan losses 1,900 750 800 1,550 1,300 1,225 1,600 1,050 Net interest income after provision for loan losses 18,047 18,990 18,974 17,804 17,619 17,531 16,746 16,776 Noninterest income 4,725 3,224 4,473 4,020 3,000 3,231 2,881 2,874 Noninterest expense 10,605 9,991 11,655 10,946 11,184 10,929 10,035 10,234 Income before income taxes 12,167 12,223 11,792 10,878 9,435 9,833 9,592 9,416 Applicable income taxes 3,456 3,575 3,478 3,137 2,500 2,586 2,471 2,479 Net income $ 8,711 $ 8,648 $ 8,314 $ 7,741 $ 6,935 $ 7,247 $ 7,121 $ 6,937 Per Share Data Net income_Basic $ 0.62 $ 0.61 $ 0.59 $ 0.55 $ 0.49 $ 0.51 $ 0.51 $ 0.49 Net income_Diluted 0.61 0.60 0.58 0.54 0.49 0.51 0.50 0.48 Dividends declared 0.30 0.28 0.28 0.25 0.25 0.24 0.24 0.21 Book value 18.39 17.69 16.89 16.19 16.02 15.47 14.95 14.88 Average Balance Sheet Totals Total assets $1,877,348 $1,815,999 $1,774,740 $1,784,502 $1,754,003 $1,721,004 $1,695,540 $1,676,964 Securities 484,187 436,882 419,737 449,542 453,793 471,898 471,753 456,922 Net loans 1,241,063 1,227,670 1,200,365 1,192,592 1,160,182 1,120,897 1,089,873 1,081,246 Total deposits 1,286,784 1,291,130 1,254,535 1,244,384 1,250,372 1,239,645 1,223,706 1,202,593 Securities sold under repurchase agreements 136,540 114,583 127,487 127,346 134,260 143,382 136,539 126,536 Other liabilities 196,308 162,738 155,884 179,736 142,584 122,253 123,146 131,663 Total shareholders' equity 257,715 247,548 236,834 232,245 226,497 215,725 212,147 216,166
55 EX-23.1 3 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8, No. 33-60530 and Form S-3, No. 3-44164) pertaining to the 1992 Incentive Stock Option Plan and the Dividend Reinvestment Plan of S&T Bancorp, Inc. and subsidiaries, respectively, and the related Prospectuses of our report dated January 16, 1998, with respect to the consolidated financial statements of S&T Bancorp, Inc. and subsidiaries incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ Ernst & Young LLP Pittsburgh, Pennsylvania March 23, 1998 EX-23.2 4 Consent of Independent Auditors We consent to the use in the Annual Report on Form 10-K under the Securities Exchange Act of 1934 of S&T Bancorp, Inc. for the year ended December 31, 1997, of our report dated February 10, 1997 insofar as such report relates to the financial statements of Peoples Bank of Unity for the years ended December 31, 1996 and 1995. /s/S.R. Snodgrass, A.C. Wexford, Pennsylvania March 23, 1998 EX-99 5 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Peoples Bank of Unity We have audited the accompanying balance sheet of Peoples Bank of Unity as of December 31, 1996 and 1995, and the related statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as, evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Peoples Bank of Unity as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As explained in the notes to the financial statements, effective January 1, 1995, the Bank changed its method of accounting for the impairment of loans and related allowance for loan losses, and effective January 1, 1994, changed its method of accounting for investment securities. /s/ S.R. Snodgrass, A. C. Wexford, Pennsylvania February 10, 1997 EX-27 6
9 "THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS." YEAR DEC-31-1997 DEC-31-1997 35,951 102 0 0 521,117 47,103 48,101 1,253,326 20,427 1,920,291 1,284,658 179,449 51,718 144,348 0 0 37,142 222,976 1,920,291 108,891 31,679 531 141,101 47,966 14,318 78,817 5,000 5,446 43,198 47,060 47,060 0 0 33,414 2.36 2.34 4.85 3,602 0 0 0 18,729 4,481 1,179 20,427 20,427 0 4,243
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