-----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, MQ74W+IL5hfGyMdraBoWaEehkc2/B3AdKvn+DiFb0R/4eC+ur9Kpw4KHtWaYalAX rU4KrZ0jQdRJAxe8GTHZlA== 0000719220-99-000004.txt : 19990326 0000719220-99-000004.hdr.sgml : 19990326 ACCESSION NUMBER: 0000719220-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 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: 99572590 BUSINESS ADDRESS: STREET 1: 43 SOUTH NINTH ST STREET 2: P O BOX 190 CITY: INDIANA STATE: PA ZIP: 15701 BUSINESS PHONE: 7244651466 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, 1998 Commission file number 0-12508 S&T BANCORP, INC. (Exact name of registrant as specified in its charter) Pennsylvania 25-1434426 (State or other jurisdiction of incorporation of organization) (I.R.S. Employer Identification No.) 800 Philadelphia Street, Indiana, PA 15701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (724) 349-1800 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 or 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 26, 1999: Common Stock, $2.50 par value - $660,439,670 The number of shares outstanding of the issuer's classes of common stock as of February 26, 1999: Common Stock, $2.50 par value - 27,325,493 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual shareholders report for the year ended December 31, 1998 are incorporated by reference into Part II. Portions of the proxy statement for the annual shareholders meeting to be held April 19, 1999 are incorporated by reference into Part III. PAGE 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, 1998, S&T had $2.1 billion in total assets, $260 million in total shareholders' equity and $1.4 billion in total deposits. Deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") to the full extent provided by law. Total trust assets were approximately $649 million at December 31, 1998. 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 38 offices located in Armstrong, Allegheny, Indiana, Jefferson, Clarion, 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 planning 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, 1998, S&T Bank had a total of 665 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 or 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. PAGE 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 pur- chase 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 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 regulations 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 its parent company or any nonbank affiliate generally are limited to 10% of the bank subsidiary's capital and surplus, or 20% 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. PAGE 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 organizations 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, 1998, S&T's Tier 1 and Total capital ratios were 14.18 percent and 17.09 percent, respectively, and the ratios of Tier 1 capital and Total capital to total risk-adjusted assets for S&T Bank were 10.42 percent and 11.68 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, 1998 was 10.68 percent, and S&T Bank's leverage ratio was 7.48 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, 1998, S&T Bank paid $17.5 million in cash dividends to S&T. PAG3 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," "undercapital- ized," "significantly undercapitalized," or "critically under- capitalized," as defined by the law. As of December 31, 1998, S&T Bank was classified as "well capitalized." The classific- ation 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 has 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 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 represent- ation in Indiana, Armstrong, Allegheny, Jefferson, Clarion, 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, PA; People's Bank headquartered in Ford City, PA; Indiana First Savings Bank headquartered in Indiana, PA; Clearfield Bank and Trust Company, headquartered in Clearfield, PA and Marion Center National Bank, headquartered in Marion Center, PA. 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. PAGE 5 Item 1. 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 balances 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 obligations of state, municipal- ities 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 1998, 1997 and 1996. The following table demonstrates the amount that has been added to interest income per the summary of operations. [CAPTION] Year Ended December 31 1998 1997 1996 (In thousands of dollars) Interest income per consolidated statements of income $151,438 $141,101 $132,442 Adjustment to fully taxable equivalent basis 3,048 3,335 3,469 Interest income adjusted to fully taxable equivalent basis 154,486 144,436 135,911 Interest expense 69,156 62,284 58,589 Net interest income adjusted to fully taxable equivalent basis $85,330 $82,152 $77,322
PAGE 6 Item 1. BUSINESS -- Continued Average Balance Sheet and Net Interest Income Analysis [CAPTION] December 31 1998 1997 1996 Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate (IN THOUSANDS OF DOLLARS) ASSETS >C> Interest-earning assets: Loans (1)(2) $1,314,984 $115,993 8.82% $1,234,733 $109,781 8.89% $1,131,186 $100,373 8.87% Taxable investment securities 502,889 35,784 7.12% 405,840 30,663 7.56% 411,560 30,871 7.50% Tax-exempt investment securities (2) 28,459 2,395 8.42% 41,850 3,461 8.27% 52,026 4,332 8.33% Interest-earning deposits with banks 83 6 7.23% 111 8 7.21% 73 5 6.85% Federal funds sold 5,812 308 5.30% 9,528 523 5.49% 6,097 330 5.41% Total interest-earning assets (3) 1,852,227 154,486 8.34% 1,692,062 144,436 8.54% 1,600,942 135,911 8.49% Noninterest-earning assets: Cash and due from banks 39,395 36,185 38,741 Premises and equip- ment, net 20,905 19,752 19,419 Market value appreci- ation of securities available for sale 60,811 46,626 33,524 Other assets 44,755 38,971 36,972 Less allowance for loan losses (23,562) (19,802) (17,630) $1,994,531 $1,813,794 $1,711,968 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: NOW/Money market accounts $327,851 $10,146 3.09% $294,356 $8,772 2.98% $242,838 $7,628 3.14% Savings deposits 172,525 3,914 2.27% 187,394 4,340 2.32% 206,287 5,049 2.45% Time deposits 642,681 35,510 5.53% 626,192 34,854 5.57% 605,693 33,448 5.52% Federal funds purchased 7,007 383 5.47% 8,369 472 5.64% 5,812 319 5.49% Securities sold under agreements to repurchase 170,961 8,968 5.25% 126,481 6,602 5.22% 135,199 7,006 5.18% Long-term borrowing 185,959 10,226 5.50% 123,722 7,227 5.84% 88,613 5,071 5.72% Other borrowed funds 130 9 6.92% 230 17 7.39% 641 68 10.61% Total interest-bearing liabilities (3) 1,507,114 69,156 4.59% 1,366,744 62,284 4.56% 1,285,083 58,589 4.56% Noninterest-bearing liabilities: Demand deposits 183,435 161,339 151,863 Other 47,423 42,048 34,235 Shareholders' equity 256,559 243,663 217,138 $1,994,531 $1,813,794 $1,688,319 Net interest income $85,330 $82,152 $77,322 Net yield on interest- earning assets 4.61% 4.85% 4.83%
(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 1998, 1997 and 1996. (3) Yields are calculated using historical cost basis. PAGE 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] 1998 Compared to 1997 1997 Compared to 1996 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) $7,135 ($923) $6,212 $9,188 $220 $9,408 Taxable investment securities 7,332 (2,211) 5,121 (429) 221 (208) Tax-exempt investment securities (2) (1,107) 41 (1,066) (847) (24) (871) Interest-earning deposits (2) 0 (2) 3 0 3 Federal funds sold (204) (11) (215) 186 7 193 Total interest-earning assets $13,154 ($3,104) $10,050 $8,101 $424 $8,525 Interest paid on: NOW/Money market accounts $3,597 ($2,223) $1,374 $1,141 $3 $1,144 Savings deposits (344) (82) (426) (462) (247) (709) Time deposits 918 (262) 656 1,132 274 1,406 Securities sold under agreements to repurchase 2,322 44 2,366 (452) 48 (404) Federal funds purchased (77) (12) (89) 140 13 153 Long-term borrowings 3,635 (636) 2,999 2,009 147 2,156 Other borrowed funds (7) (1) (8) (44) (7) (51) Total interest-bearing liabilities $10,044 ($3,172) $6,872 $3,464 $231 $3,695 Change in net interest income $3,178 $4,830
(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 1998, 1997 and 1996. PAGE 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, 1998 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: Monthly loan prepayments above contractual requirements 5 year ARM - Commercial Real Estate 1.50 % Fixed Rate - Commercial Real Estate 1.25 Residential Real Estate 1.75 New Indirect Auto Loans 2.00 Other Installment Loans 2.75 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. PAGE 9 Item 1. BUSINESS -- Continued [CAPTION] Interest Rate Sensitivity December 1998 (thousands of dollars) GAP 1-6 Months 7-12 Months 13-24 Months >2 Years Repricing Assets: Cash/Due From Banks $0 $0 $0 $48,789 Federal Funds 19,300 0 0 0 Securities 112,486 87,599 211,319 180,084 Net Loans 537,401 153,269 211,043 437,520 Other Assets 0 0 0 70,804 Total $669,187 $240,868 $422,362 $737,197 Repricing Liabilities: Demand $0 $0 $0 $215,666 NOW 15,424 15,424 30,846 61,694 Money Market 239,341 0 0 0 Savings/Clubs 21,060 21,060 42,122 84,243 Certificates 244,034 142,927 143,355 102,868 Repos & Short-term Borrowings 128,262 564 0 0 Long-term Borrowings 19,600 0 0 220,468 Swaps 0 0 10,000 0 Other Liabilities/Equity 0 0 0 310,656 Total $667,721 $179,975 $226,323 $995,595 GAP $1,466 $60,893 $196,039 ($258,398) Cumulative GAP $1,466 $62,359 $258,398 $0
Immediate Rate Sensitive Assets/Rate Current Policy Core Deposits Sensitive Liabilities Month Guideline Repricing Cumulative 6 months 1.00 .85-1.15 0.72 Cumulative 12 months 1.07 .85-1.15 0.85
S&T's six month and one year gap position at December 31, 1998 is asset sensitive. Asset sensitive means that more assets than liabilities of S&T will reprice during the measured time frames. The implications of an asset sensitive position will differ depending upon the current trend of market interest rates. For example, an asset sensitive position in a declining interest rate environment, the yields on repricing assets can theoretically be expected to decline more quickly than the cost of S&T repricing liabilities. This situation would cause a decrease to S&T's interest rate spreads, net interest income and to operating income. Liquidity impacts in this scenario, other than decreased yields, would not be material unless serious ongoing declines in operating results caused depositors, lenders and investors to lose confidence. Conversely, an asset sensitive gap position in a rising interest rate scenario would theoretically have a positive impact to interest rate spreads, net 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. 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. PAGE 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 portfolios 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, 1998, 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 1998 1997 1996 (In thousands of dollars) Available for Sale Marketable equity securities $115,532 $101,639 $75,805 Obligations of U.S. government corporations and agencies 357,417 341,288 235,924 Collateralized mortgage obligations of U.S. government corporations and agencies 0 0 4,182 Mortgage-backed securities 8,715 14,542 47,462 U.S. Treasury securities 27,952 39,473 58,742 Corporate securities 36,353 11,064 14,550 Other securities 19,172 13,111 13,136 TOTAL $565,141 $521,117 $449,801 Held to Maturity Obligations of states and political subdivisions $21,009 $37,497 $46,334 Corporate securities 1,999 1,998 1,998 Other securities 3,337 7,608 1,928 TOTAL $26,345 $47,103 $50,260
PAGE 11 Item 1. BUSINESS -- Continued The following table sets forth the maturities of securities at December 31, 1998, 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 1998 have been made in calculating yields on obligations of state and political subdivisions. 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 $115,532 Obligations of U.S. government corporations and agencies $10,170 7.47% $242,703 6.25% $104,545 7.39% Mortgage-backed securities 194 6.49% 4,632 7.64% $3,889 7.51% U.S. Treasury securities 12,712 7.27% 8,571 7.20% 6,669 7.81% Corporate securities 615 8.70% 26,177 6.59% 9,560 6.19% Other securities 19,172 TOTAL $23,691 $277,451 $125,406 $3,889 $134,704 Weighted Average Rate 7.39% 6.31% 7.33% 7.51% Held to Maturity Obligations of states and political subdivisions $4,934 7.46% $12,436 8.50% $3,639 8.87% Corporate securities 1,999 7.15% Other securities $3,337 TOTAL $4,934 $14,435 $3,639 $0 $3,337 Weighted Average Rate 7.46% 8.31% 8.87% 0.00%
PAGE 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 1998 1997 1996 1995 1994 (In thousands of dollars) Domestic Loans: Commercial, mortgage and industrial $672,742 $582,401 $496,863 $450,932 $416,036 Real estate-construction 87,246 47,967 35,508 30,191 35,660 Real estate-mortgage 492,570 512,417 513,424 461,822 413,533 Installment 113,351 130,968 154,341 160,437 161,105 TOTAL LOANS $1,365,909 $1,273,753 $1,200,136 $1,103,382 $1,026,334
The following table shows the maturity of loans (excluding residential mortgages of 1-4 family residences and installment loans) outstanding as of December 31, 1998. Also provided are the amounts due after one year classified according to the sensitivity to changes in interest rates. [CAPTION] Maturing After One Within But Within After One Year Five Years Five Years Total Commercial, mortgage and industrial $259,634 $204,121 $208,987 $672,742 Real estate-construction 18,199 33,849 35,198 87,246 TOTAL $277,833 $237,970 $244,185 $759,988 Fixed interest rates $92,797 $62,036 Variable interest rates 145,173 182,149 TOTAL $237,970 $244,185
PAGE 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 1998 1997 1996 1995 1994 (IN THOUSANDS OF DOLLARS) Nonaccrual loans $2,933 $3,602 $10,268 $4,748 $3,894 Accruing loans past due 90 days or more $0 $0 $0 $0 $0
At December 31, 1998, $2,933,000 of nonaccrual loans were secured. Interest income that would have been recorded under original terms totaled $337,000. No interest income was recorded on these loans. It is S&T's policy to place loans on nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal are 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, 1998, 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. Charged-off and recovered loan amounts are applied to the allowance for loan losses. Quarterly updates are presented to the S&T Board of Directors as to the status of loan quality. Additional amounts are added through a charge to current earnings through the provision for loan losses, based upon management's assess- ment about the adequacy of the allowance for loan losses for probable loan losses. A quantitative analysis is utilized to support the adequacy of the allowance for loan losses. This analysis includes review of the high and low historical charge-off rates for loan categories, fluctuations and trends in the amount of classified loans and economic factors. Economic factors consider the level of S&T's historical charge-offs that have occurrence within the credits economic life cycle. Management also assesses other subjective factors such as economic conditions and business trends, concentrations, growth and composition of the loan portfolio and effectiveness of the Loan Administration Department. Significant to this analysis and assessment is the shift in loan portfolio composition to an increased mix of commercial loans. These loans are generally larger in size and due to our continuing growth, many are not well seasoned and could be more vulnerable to an economic slowdown. Management relies on its risk rating process to monitor trends which may be occurring relative to commercial loans to assess potential weaknesses within specific credits. Current economic factors and trends in risk ratings are considered in the determination of the allowance for loan losses. This analysis and 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 commit- ment. Categories of smaller individual loans are allocated based upon historical losses and current delinquency levels. PAGE 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: Economic factors 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 and impaired loans. Peer analysis. The allowance 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 1998 1997 1996 1995 1994 1.95% 1.60% 1.56% 1.55% 1.48% S&T has considered impaired loans in its determination of the allowance for loan losses. The allowance for loan losses for all impaired loans totaled $133,000 and $914,000 at December 31, 1998 and 1997, respectively, and is included in the allowance allocated specifically to commercial loans. Asset quality is a major corporate objective at S&T. 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 1998 1997 1996 1995 1994 (In thousands of dollars) Balance at January 1: $20,427 $18,729 $17,065 $15,169 $14,242 Charge-offs: Commercial, mortgage and industrial 2,905 1,654 2,986 1,313 2,333 Real estate-mortgage 1,497 1,056 405 148 196 Installment 1,597 1,771 2,145 1,578 1,258 5,999 4,481 5,536 3,039 3,787 Recoveries: Commercial, mortgage and industrial 713 517 1,591 294 505 Real estate-mortgage 389 221 105 107 188 Installment 597 441 329 314 421 1,699 1,179 2,025 715 1,114 Net charge-offs 4,300 3,302 3,511 2,324 2,673 Provision for loan losses 10,550 5,000 5,175 4,220 3,600 Balance at December 31: $26,677 $20,427 $18,729 $17,065 $15,169 Ratio of net charge-offs to average loans outstanding 0.33% 0.27% 0.31% 0.22% 0.28%
PAGE 15 Item 1. BUSINESS -- Continued [CAPTION] This table shows allocation of the allowance for loan losses as of the end of each of the last five years: December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1994 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, mortgage and industrial $16,850 49% $13,556 46% $9,605 41% $8,579 41% $9,578 41% Real estate-construc- tion 0 7% 0 4% 0 3% 0 3% 0 3% Real estate-mortgage 1,096 36% 763 40% 1,680 43% 1,321 42% 1,215 40% Installment 2,635 8% 1,865 10% 1,859 13% 1,803 14% 1,510 16% Unallocated 6,096 0% 4,243 0% 5,585 0% 5,362 0% 2,866 0% TOTAL $26,677 100% $20,427 100% $18,729 100% $17,065 100% $15,169 100%
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 1998 1997 1996 Amount Rate Amount Rate Amount Rate (In thousands of dollars) Noninterest-bearing demand deposits $183,435 $161,339 $151,863 NOW/ Money market accounts 327,851 3.09% 294,356 2.98% 242,838 3.14% Savings deposits 172,525 2.27% 187,394 2.32% 206,287 2.45% Time deposits 642,681 5.53% 626,192 5.57% 605,693 5.52% TOTAL $1,326,492 $1,269,281 $1,206,681
Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 1998, are summarized as follows: (In thousands of dollars) [CAPTION] 3 Months or less $39,268 Over 3 through 6 months 9,887 Over 6 through 12 months 16,301 Over 12 months 25,716 TOTAL $91,172
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 1998 1997 1996 Return on average assets 1.90% 1.84% 1.65% Return on average equity 14.80% 13.71% 13.01% Dividend payout ratio 46.14% 42.54% 37.77% Equity to asset ratio 12.55% 13.55% 12.65%
PAGE 16 Item 1. BUSINESS -- Continued Short-Term Borrowings The following table shows the distribution of S&T'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. Federal Funds Purchased and Securities Sold Under Agreements to Repurchase (In thousands of dollars) Balance at December 31: 1998 $138,825 1997 179,449 1996 114,980 Weighted average interest rate at year end: 1998 4.63% 1997 5.82% 1996 5.68% Maximum amount outstanding at any month's end: 1998 $251,030 1997 195,024 1996 180,776 Average amount outstanding during the year: 1998 $177,968 1997 134,851 1996 141,012 Weighted average interest rate during the year: 1998 5.29% 1997 5.31% 1996 5.24% 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. PAGE 17 Item 2. PROPERTIES S&T operates 38 banking offices in Indiana, Armstrong, Allegheny, Jefferson, Clearfield, Clarion, Westmoreland and surrounding counties in Pennsylvania. S&T owns land and banking offices at the following locations: 800 Philadelphia Street, 2175 Route 286 South in Indiana; Route 119 South & Lucerne Road and 34 North Main Street in Homer City; 232 North Hampton Avenue in Punxsutawney; 133 Philadelphia Street in Armagh; Route 119 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 South 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; 410 Main Street in Clarion; and 301 Unity Center Road in Unity. Land is leased where S&T owns the banking offices at 1107 Wayne Avenue and remote ATM buildings at 435 South Seventh Street and 1176 Grant Street, all in Indiana; 8th and Merle Street and Gemmel Student Center in Clarion; 730 East Pittsburgh Street in Greensburg; and 523 Franklin Avenue in Vandergrift. In addition, S&T leases land and banking offices at the following locations: Chestnut Ridge Plaza in Blairsville; 324 North Fourth Street and 2850 Route 286 South and Hospital Road in 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 S&T's business generates a certain amount of litigation involving matters arising in the ordinary course of business. However, in the opinion of management, there are no proceedings pending to which S&T 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 S&T 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 or otherwise. PART II Item 5. MARKET FOR 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, 1998, 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, 1998, incorporated herein by reference. PAGE 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 30 of the Annual Report for the year ended December 31, 1998, incorporated herein by reference. Item 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and Qualitative Disclosures about Market Risk on pages 27 and 28 of the Annual Report for the year ended December 31, 1998, 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 31 through 53 and page 55 of the Annual Report for the year ended December 31, 1998, incorpor- ated herein by reference. Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES There have been no changes in accountants or disagree- ments 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 19, 1999, annual meeting of shareholders, incorporated herein by reference. Executive Officers Number of Shares For the Officer Beneficially Name Corporation Since Owned (1) Age Robert D. Duggan Chairman 1983 180,927 66 and Director James C. Miller President, Chief 1983 154,516 53 Executive Officer and Director James G. Barone Executive Vice 1992 50,682 51 President, Secretary and Treasurer Robert E. Rout Executive Vice 1993 39,014 46 President and Chief Financial Officer Bruce W. Salome Executive Vice 1991 76,773 52 President Edward C. Hauck Executive Vice 1991 47,090 46 President
PAGE 19 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -- Continued Executive Officers (continued) Number of Shares For the Officer Beneficially Name Corporation Since Owned (1) Age David L. Krieger Executive Vice 1984 22,680 55 President J. Jeffrey Smead Executive Vice 1992 53,731 47 President William H. Klumpp Senior Vice 1994 14,971 55 President Edward A. Onderick Senior Vice 1989 56,774 54 President David P. Ruddock Senior Vice 1998 6,038 37 President (1) May include shares held by spouse, other family members, as trustee or through a corporation, and nonstatutory stock options vesting within 60 days of the date of this 10-K Report. The reporting person may disclaim beneficial ownership of such shares. PAGE 20 Item 11. EXECUTIVE COMPENSATION Remuneration of Executive Officers on pages 7 and 8 of the proxy statement for the April 19, 1999, annual meeting of shareholders, 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 19, 1999, annual meeting of shareholders, incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions with Management and Others on pages 10 and 11 of the proxy statement for April 19, 1999, annual meeting with shareholders, incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 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, 1998, are incorporated by reference in Part II, Item 8: Page Reference Report of Ernst & Young LLP, Independent Auditors 53 Consolidated Balance Sheets December 31, 1998 and 1997 31 Consolidated Statements of Income Year ended December 31, 1998, 1997, and 1996 32 Consolidated Statements of Changes in Shareholders' Equity Year ended December 31, 1998, 1997, and 1996 33 Consolidated Statements of Cash Flows Year ended December 31, 1998, 1997, and 1996 34 Notes to Consolidated Financial Statements December 31, 1998 35-52 Quarterly Selected Financial Data 55 PAGE 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 (b) Reports on Form 8-K Form 8-K dated September 21, 1998 was filed by S&T Bancorp, Inc. announcing a two-for-one stock split which was effected in the form of a 100% stock dividend. (c) 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. dated May 5, 1983, 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 (No. 33-02600) dated January 15, 1986, incorporated herein by reference. (3.3) Amendment to Articles of Incorporation of S&T Bancorp, Inc. effective May 8, 1989 - filed herewith. (3.4) Amendment to Articles of Incorporation of S&T Bancorp, Inc. effective July 21, 1995 - filed herewith. (3.5) Amendment to Articles of Incorporation of S&T Bancorp, Inc. effective June 18, 1998 - filed herewith. (3.6) By-Laws of S&T Bancorp, Inc., as amended, - filed herewith. (13) Annual Report for the year ended December 31, 1998, pages 21-55 filed herewith. (21) Subsidiaries of the Registrant - filed herewith. (23.1) Consent of Ernst & Young LLP, Independent Auditors - filed herewith. (23.2) Consent of S.R. Snodgrass, A.C., Independent Auditors - filed herewith. (99) Report of S.R. Snodgrass, A.C., Independent Auditors - filed herewith. PAGE 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 03/15/99 James C. Miller, Date President and Chief Executive Officer (Principal Executive Officer) /s/ Robert E. Rout 03/15/99 Robert E. Rout, Date Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) PAGE 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 03/15/99 /s/ Joseph A. Kirk 03/15/99 Thomas A. Brice, Director Date Joseph A. Kirk, Director Date /s/ James L. Carino 03/15/99 /s/ Frank W. Jones 03/15/99 James L. Carino, Director Date Frank W. Jones, Director Date /s/ John J. Delaney 03/15/99 /s/ James C. Miller 03/15/99 John J. Delaney, Director Date James C. Miller, President, Date Chief Executive Officer and Director /s/ Robert D. Duggan 03/15/99 /s/ Alan Papernick 03/15/99 Robert D. Duggan, Chairman Date Alan Papernick, Director Date /s/ William J. Gatti 03/15/99 /s/ W. Parker Ruddock 03/15/99 William J. Gatti, Director Date W. Parker Ruddock, Director Date /s/ Ruth M. Grant 03/15/99 /s/ Myles D. Sampson 03/15/99 Ruth M. Grant, Director Date Myles D. Sampson, Director Date /s/ Jeffrey D. Grube 03/15/99 /s/ Charles A. Spadafora 03/15/99 Jeffrey D. Grube, Director Date Charles A. Spadafora, Date Director /s/ Herbert L. Hanna 03/15/99 /s/ Christine J. Toretti 03/15/99 Herbert L. Hanna, Director Date Christine J. Toretti, Date Director PAGE 24 EX-3.3 2 The first paragraph of the provisions of the Articles of Incorporation of the Corporation relating to the authorized capital stock of the Corporation, shall be amended to read as follows: Total Number of Authorized Shares. The Corporation shall be authorized to issue 15,000,000 shares of common stock, $2.50 par value per share. 9. Classification of Directors The Board of Directors of the Corporation shall be divided into three classes, the respective terms of office of which shall end in successive years. The number of directors in each class shall be specified in the By-Laws and shall be as equal as possible. The directors of each class shall be elected for terms of three (3) years and until the election and qualification of their successors or until their earlier resignation, death or removal or disqualifi- cation from office. At each annual meeting of shareholders, the directors of only one class shall be elected, except directors who may be elected to fill vacancies. Vacancies in the Board of Directors, including vacancies resulting from an increase in the number of directors, shall be filled only by a majority of the remaining members of the Board of Directors, though less than a quorum, and each person so elected shall be a director until his or her successor is elected by the shareholders or until his or her earlier death, resignation or removal or disqualification from office. Notwithstanding anything contained in the Articles of Incorporation or in the By-Laws of the Corporation to the contrary the affirmative vote of at least sixty-six and two-thirds (66 2/3) percent of the outstanding shares of common stock entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend, adopt any provision inconsistent with or repeal this Article 9. EX-3.4 3 The first paragraph of the provisions of the Articles of Incorp- oration of the Corporation relating to the authorized capital stock of the Corporation, shall be amended to read in their entirety as follows: Total Number of Authorized Shares. The Corporation shall be authorized to issue 25,000,000 shares of common stock, $2.50 par value per share, and 10,000,000 shares of preferred stock, without par value ("Preferred Stock"). Issuance and Designation of Shares of Preferred Stock. The Board of Directors of the Corporation is authorized, subject to limitaions prescribed by law and the provisions of these Articles of Incorporation, to provide for the issuance of the shares of Preferred Stock in series, and by filing a statement with the Pennsylvania Department of State pursuant to the applicable law of the Commonwealth of Pennsylvania, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualificaitons, limitations or restrictions thereof. The authority of the Board with respect to each series shall include, but not be limited to, determination of the following: (a) The number of shares constituting that series and the distinctive designation of that series; (b) The dividend rate on the shares of that series, whether dividends shall be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (c) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (d) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or date upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (f) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (g) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the relative rights of priority, if any, of payment of shares of that series; and (h) Any other relative rights, preferences and limitations of that series. Dividends on Preferred Stock. Dividends on outstanding shares of Preferred Stock shall be paid or declared and set apart for payment before any dividends shall be paid or declared and set apart for payment on the common shares with respect to the same dividend period. Liquidation Distributions to Holders of Preferred Stock. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential amounts (including unpaid cumulative dividends, if any) payable with respect thereto. EX-3.5 4 The first paragraph of the provisions of the Articles of Incorporation of the corporation, relating to the authorized capital stock of the corpor- ation, shall be amended to read as follows: Total Number of Authorized Shares. The Corporation shall be authorized to issue 50,000,000 shares of common stock, $2.50 par value per share, and 10,000,000 shares of preferred stock, without par value. EX-3.6 5 INDEX TO BY-LAWS OF S&T BANCORP, INC. ARTICLE I - MEETINGS OF SHAREHOLDERS Section 101. Place of Meetings Section 102. Annual Meetings Section 103. Special Meetings Section 104. Conduct of Shareholders' Meetings ARTICLE II - DIRECTORS AND BOARD MEETINGS Section 201. Management by Board of Directors Section 202. Nomination for Directors Section 203. Directors Must be Shareholders Section 204. Eligibility and Mandatory Retirement Section 205. Number of Directors Section 206. Classification of Directors Section 207. Vacancies Section 208. Resignations Section 209. Compensation of Directors Section 210. Regular Meetings Section 211. Special Meetings Section 212. Chairman of the Board Section 213. Vice Chairman of the Board Section 214. Reports and Records ARTICLE III - COMMITTEES Section 301. Committees Section 302. Executive Committee Section 303. Audit Committee Section 304. Appointment of Committee Members Section 305. Organization and Proceedings ARTICLE IV - OFFICERS Section 401. Officers Section 402. President Section 403. Vice President Section 404. Secretary Section 405. Treasurer Section 406. Assistant Officers Section 407. General Powers Page Two Index to S&T Bancorp, Inc. By-Laws ARTICLE V - INDEMNIFICATION Section 501. Indemnification Section 502. Insurance and Fund for Payment of Expenses Section 503. Advancement of Expenses ARTICLE VI - SHARES OF CAPITAL STOCK Section 601. Authority to Sign Share Certificates Section 602. Lost or Destroyed Certicates ARTICLE VII - GENERAL Section 701. Fiscal Year Section 702. Record Date Section 703. Absentee Participation in Meetings Section 704. Emergency By-Laws Section 705. Severability ARTICLE VIII - AMENDMENT OR REPEAL Section 801. Amendment or Repeal by the Board of Directors ARTICLE IX - PENNSYLVANIA BUSINESS CORPORATION LAW AMENDMENT Section 901. Applicability of Certain Provisions of the Pennsylvania Business Corporation Law Page BYLAWS OF S&T BANCORP, INC. These By-Laws are supplemental to the Pennsylvania Banking Code and other applicable provisions of law, as the same shall from time to time be in effect. ARTICLE I. MEETINGS OF SHAREHOLDERS. Section 101. Place of Meetings. All meetings of the shareholders shall be held at such place or places, within or without the Commonwealth of Pennsylvania, as shall be determined by the Board of Directors from time to time. A written or printed notice of every such meeting shall be mailed, charges prepaid, at least ten days before the date of the meeting, (a) in the case of an individual, to his last known residence or place of business, (b) in the case of an unincorporated association, or a corporation organized under the laws of the Commonwealth of Pennsylvania, to its principle office, and (c) in the case of a corporation incorporated under the laws of some other state, to its registered office in Pennsylvania, or if there is no registered office in Pennsylvania, to its home office in the State of its incorporation or in any other State. Section 102. Annual Meetings. The annual meeting of the shareholders for the election of Directors and the transacton of such other business as may properly come before the meeting shall be held on such day, at such hour, and at such place, consistent with applicable laws, as the Board shall from time to time designate or as may be designated at any notice from the Secretary calling the meeting. Any business which is a proper subject for shareholder action may be transacted at the annual meeting, irrespective of whether the notice of said meeting contains any reference thereto, except as otherwise provided by applicable law. Page 1 Section 103. Special Meetings. Special meetings of the shareholders may be called at any time by the Board of Directors, the President or by the shareholders entitled to cast at least one-fifth (1/5) of the vote which all shareholders are entitled to cast at the particular meeting. A written or printed notice for every special meeting, specifying the purpose and time and place thereof, shall be mailed by the Secretary to the share- holders of record, in the manner provided in Section I of this Article, at least ten (10) days before the date of such meeting. Section 104. Conduct of Shareholders' Meeting. The Chairman of the Board, a Vice Chairman, the President, or such other appropriate officer, shall preside at all shareholders' meetings. The Officer presiding over the shareholders' meeting may establish such rules and regulations for the conduct of the meeting as he/she may deem to be reasonably necessary or desirable for the orderly and expeditious conduct of the meeting. Unless the Officer presiding over the shareholders' meeting otherwise requires, shareholders need not vote by ballot on any question. ARTICLE II. DIRECTORS AND BOARD MEETINGS. Section 201. Management by Board of Directors. The business and affairs of the Corporation shall be managed by its Board of Directors. The Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, regulations, the Article of Incorporation or these By-Laws directed or required to be exercised or done by the shareholders. Section 202. Nomination for Directors. Nominations for election to the Board of Directors may be made by the Board of Directors or by any holder or holders of any outstanding class of shares of the Corporation entitled to vote for the election of directors. Nominations for directors to be elected at an annual meeting of shareholders, other than those made by the Board of Directors or authorized Committee thereof, must be submitted to the Secretary of the Corporation in writing not earlier than the close of business on the 120th day, nor later than the close of business on the 60th day, immediately preceding the date of the meeting. Such notification shall contain the following information: (a) name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the total number of shares of capital stock of the Corporation that are registered in the name of each proposed nominee; (d) the name and residence address of the notifying shareholder; (e) the number of shares of capital stock of the Corporation owned by the notifying shareholders and (f) such other information regarding the proposed nominee as would be required to be included in a proxy statement under Section 14(a) of the Securities Exchange Act of 1934, as amended (or any successor provision or statue), if proxies were solicited in connection with such proposed nominee's election. Nominations not made in accordance herewith may, in his or her discretion, be disregarded by the Presiding Officer of the meeting, and upon his or her instruction, the vote tellers may disregard all votes cast for each such nominee. In the event the same person is nominated by more than one shareholder, the nomination shall be honored, and all shares of capital stock of the Corporation shall be counted if at least one nomination for that person complies herewith. Page 2 Section 203. Directors Must be Shareholders. Every Director must be a shareholder of the Corporation and shall own in his/her own right the number of shares (if any) required by law in order to qualify as such Director. Any Director shall forthwith cease to be a Director when he/ she no longer holds such shares, which fact shall be reported to the Board of Directors by the Secretary, whereupon the Board of Directors shall declare the seat of such Director vacated. Section 204. Eligibility and Mandatory Retirement. Commencing with the annual meeting of the shareholders in 1983, no person shall be eligible to be newly elected or appointed as a Director after he/she shall have attained the age of seventy years on or prior to the date of his/her election. Any Director of this Corporation who attains the age of seventy years shall be retired as of the next Annual Meeting following the attainment of age seventy without any action on his/her part. Upon retirement from the Board of Directors due to age, as described above, said Director may be appointed by the active Board as a Director Emeritus. Page 3 Section 205. Number of Directors. The Board of Directors shall consist of not less than twelve (12) nor more than twenty-five (25) persons, the exact number to be fixed and determined from time to time by resolution of a majority of the full Board of Directors. Notwithstanding anything contained in these By-Laws or in the Certificate of Incorporation of the Corporation to the contrary, either (i) the affirmative vote of at least sixty-six and two-thirds (66 2/3) percent of the outstanding shares of Common Stock entitled to vote generally in the election of directors voting together as a single class, or (ii) the affirmative vote of a majority of the full Board of Directors shall be required to alter, amend, adopt any provision inconsistent with or repeal this Section 205. Section 206. Classification of Directors. The Directors shall be divided into three (3) classes, as equal in number as possible, known as Class 1, Class 2, and Class 3. Each class shall consist of not more than nine (9) Directors. The Directors of each class shall be elected for a term of three (3) years and, after expiration of such terms, their successors shall thereafter be elected every three (3) years for three (3) year terms. Each Director shall serve until his or her successor shall have been elected and shall qualify, even though his or her term of office has herein provided, has otherwise expired, except in the event of his/her earlier death, resignation, removal or disqualification from office. Notwithstanding anything contained in these By-Laws or in the Certificate of Incorporation of the Corporation to the contrary, either (i) the affirmative vote of at least sixty-six and two-thirds (66 2/3) percent of the outstanding shares of Common Stock entitled to vote generally in the election of directors, voting together as a single class, or (ii) the affirmative vote of a majority of the full Board of Directors shall be required to alter, amend, adopt any provision inconsistent with or repeal this Section 206. Page 4 Section 207. Vacancies. Any Director elected to fill a vacancy in the Board of Directors shall become a member of the same Class of Director in which the vacancy existed unless the vacancy is due to an increase in number of Directors, in which case a majority of the members of the Board of Directors shall designate such directorship as belonging to Class 1, Class 2, or Class 3 so as to maintain the three (3) classes of Directors as equal in number as possible. Notwithstanding anything contained in these By-Laws or in the Certificate of the Corporation to the contrary, either (i) the affirmative vote of at least sixty-six and two-thirds (66 2/3) percent of the outstanding shares of Common Stock entitled to vote generally in the election of directors, voting together as a single class, or (ii) the affirmative vote of a majority of the full Board of Directors shall be required to alter, amend, adopt any provision inconsistent with or repeal this Section 207. Section 208. Resignation. Any Director may resign at any time. Such resignations shall be in writing, but the acceptance thereof shall not be necessary to make it effective. Section 209. Compensation of Directors. No Director shall be entitled to any salary as such; but the Board of Directors may fix, from time to time, a reasonable annual fee for acting as a Director and a reasonable fee to be paid each Director for his/her services in attending meetings of the Board and meetings of committees appointed by the Board. The Corporation may reimburse Directors for expenses related to their duties as a member of the Board. Section 210. Regular Meetings. Regular meetings of the Board of Directors shall be held at such place within the Commonwealth of Pennsylvania as a majority of the directors may from time to time designate, or as may be designated in the notice calling the meeting. The Board of Directors shall meet for reorganizaiton at the first regular meeting following the annual meeting of shareholders at which the Directors are elected. Subsequent regular meetings of the Board of Directors shall be held at a time and place designated by the Board of Directors. At least two days notice of regular meetings shall be given. Page 5 A majority of the members of the Board of Directors shall constitute a quorum for the transaction of business. If at the time fixed for the meeting, including the meeting to organize the new Board following the annual meeting of shareholders, a quorum is not present, the Directors in attendance may adjoun the meeting form time to time until a quorum is obtained. Except as otherwise provided herein, a majority of those Directors present and voting at any meeting of the Board of Directors, shall decide each matter considered. A director cannot vote by proxy, or otherwise act by proxy at a meeting of the Board of Directors. Section 211. Special Meetings. Special meetings of the Board of Directors may be called by the President or at the request of three (3) or more members of the Board of Directors. A special meeting of the Board of Directors shall be deemed to be any meeting other than the regular meeting of the Board of Directors. Written or printed notice of the time and place of every special meeting, which need not specify the business to be transacted there, shall be given by the Secretary to each member of the Board at least twenty-four (24) hours before the time of such meeting excepting the Organizational Meeting following the election of Directors. Section 212. Chairman of the Board. The Chairman of the Board, a Vice Chairman, the President, or such other appropriate officer, shall preside at all meetings of the Board of Directors. Section 213. Vice Chairman of the Board. The Board of Directors may elect one (1) or more Vice Chairman of the Board as the Board of Directors may from time to time deem advisable. The Vice Chairman of the Board shall have such duties as are prescribed by the Board of Directors. Section 214. Reports and Records. The reports of Officers and Committees and the records of the proceedings of all Committees shall be filed with the Secretary of the Corporation and presented to the Board of Directors, if practical, at its next regular meeting. The Board of Directors shall keep complete records of its proceedings in a minute book kept for that purpose. When a Director shall request it, the vote of each Director upon a particular question shall be recorded in the minutes. Page 6 ARTICLE III. COMMITTEES Section 301. Committees. The following two (2) Committees of the Board of Directors shall be established by the Board of Directors in addition to any other Committee the Board of Directors may in its discretion establish: Executive, Audit Committee. Section 302. Executive Committee. The Executive Committee shall consist of the President and any three (3) or more Directors. A majority of the members of the Executive Committee shall constitute a quorum, and actions of a majority of those present at a meeting at which a quorum is present shall be actions of the Committee. Meetings of the Committee may be called at any time by the Chairman, President or Secretary of the Committee, and shall be called whenever two (2) or more members of the Committee so request in writing. The Executive Committee shall have and exercise the authority of the Board of Directors in the management of the Board. Section 303. Audit Committee. The Audit Committee shall consist of at least three (3) Directors, none of whom shall be Officers of the Corporation. Meetings of the Committee may be called at any time by the Chairman or Secretary of the Committee, and shall be called when- ever two (2) or more members of the Committee so request in writing. A majority of the members of the Committee shall constitute a quorum, and actions of a majority of those present at a meeting at which a quorum is present shall be actions of the Committee. The Committee shall supervise the audit of the books of the Corporation and recommend for approval by the Board the services of a reputable Certified Public Accounting firm to examine the affairs of the Corporation. Page 7 Section 304. Appointment of Committee Members. The President shall appoint, subject to the approval of the Board of Directors, the members of the Executive and Audit Committees, and the Chairman of such Committee, to serve for the ensuing year. The Board of Directors may appoint, from time to time, other Committees, for such purposes and with such powers as the Board may determine. Section 305. Organization and Proceedings. Each Committee of the Board of Directors shall effect its own organization by the appointment of a Secretary and such other Officers, except Chairman and Vice Chairman, as it may deem necessary. A record of proceedings of all Committees shall be kept by the Secretary of such Committee and filed and presented as provided in Section 214 of these By-Laws. ARTICLE IV. OFFICERS Section 401. Officers. The Officers of the Corporation shall be a Chairman, one (1) or more Vice Chairman, a President, one (1) or more Vice presidents, a Secretary, a Treasurer, and such other Officers and Assistant Officers as the Board of Directors may from time to time deem advisable. Except for the President, Secretary, Treasurer, the Board may refrain from filling any of the said offices at any time and from time to time. The same individual may hold any two (2) or more offices except both the offices of President and Treasurer. The following Officers shall be elected by the Board of Directors at the time, in the manner and for such terms as the Board of Directors from time to time shall determine: President, Executive Vice President, Senior Vice President, Adminstrative Vice President, Secretary, and Treasurer. The President may, subject to the change by the Board of Directors, appoint such Officers and Assistant Officers as he/she may deem advisable provided such Officers or Assistant Officers have a title not higher than Vice President, who shall hold office for such periods as the President shall determine. Any Officer may be removed at any time, with or without cause, and regardless of the term for which such Officers was elected, but without prejudice to any contract right of such Officer. Each Officer shall hold his office for the current year for which he was elected or appointed by the board unless he shall resign, becomes disqualified, or be removed at the pleasure of the Board of Directors. Page 8 Section 402. President. The President shall have general supervision of all the departments and business of the Corporation and shall prescribe the duties of the other Officers and Employees and see to the proper performance thereof. The President shall be responsible for having all orders and resolutions of the Board of Directors carried into effect. The President shall execute on behalf of the Corporation and may affix or cause to be affixed a seal to all authorized documents and instruments requiring such execution, except to the extent that signing and execution thereof shall have been delegated to some other Officer or Agent of the Corporation by the Board of Directors or by the President. The President shall be a member of the Board of Directors. In the absence or disability of the Chairman of the Board or his/her refusal to act, a Vice Chairman, the President or other appropriate officer shall preside at meetings of the Board. In general, the President shall perform all the duties and exercise all the powers and authorities incident to such officer or as prescribed by the Board of Directors. Section 403. Vice President. The Vice President shall perform such duties, do such acts and be subject to such supervision as may be prescribed by the Board of Directors or the President. In the event of the absence or disability of the President or his/her refusal to act, the Vice President, in the order of their rank, and within the same rank in the order of their authority, shall perform the duties and have the powers and authorities of the President, except to the extent inconsistent with applicable law. Section 404. Secretary. The Secretary shall act under the supervision of the President or such other Officers as the President may designate. Unless a designation to the contrary is made at a meeting, the Secretary shall attend all meetings of Board of Directors and all meetings of the shareholders and record all proceedings of such meetings in a book to be kept for that purpose, and shall perform like duties for the standing Committees when required by these By-Laws or otherwise. The Secretary shall give, or cause to be given, notice of all meetings of shareholders and of the Board of Directors. The Secretary shall keep a seal of the Corporation, and, when authorized by the Board of Directors or the President, cause it to be affixed to any documents and instruments requiring it. The Secretary shall perform such other duties as may be prescibed by the Board of Directors, President, or such other Supervising Officer as the President may designate. PAGE 9 Section 405. Treasurer. The Treasurer shall act under the supervision of the President, or such other Officer as the President may designate. The Treasurer shall have custody of the Corporation's funds and such other duties as may be prescribed by the Board of Directors, President or such other Supervising Officer as the President may designate. Section 406. Assistant Officer. Unless otherwise provided by the Board of Directors, each assistant officer shall perform such duties as shall be prescribed by the Board of Directors, the President or the Officer to whom he/she is an Assistant. In the event of the absence or disability of an Officer or his/her refusal to act, his/her Assistant Officer shall, in the order of their rank, and within the same rank in the order of their seniority, have the powers and authorities of such Officer. Section 407. General Powers. The Officers are authorized to do and perform such corporate acts as are necessary in the carrying on of the business of the Corporation, subject always to the direction of the Board of Directors. ARTICLE V. INDEMNIFICATION Section 501. Imdemnification. Each person who at any time is or shall have been a director or officer of the Corporation or any of its subsidiaries, or is serving or shall have served at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, and his or her heirs, executors and administrators, shall be indemnified by the Corporation in accordance with and to the full extent authorized or permitted by the laws of the Commonwealth of Pennsylvania as in effect at the time of such indemnification or as may hereafter be amended (but in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto). PAGE 10 The foregoing right of indemnification shall constitute a contract between the Corporation and each of such persons and shall not be deemed exclusive of any other rights to which any director, officer, employee, agent or other person may be entitled in any capacity as a matter of law or under any by-law, agreement, vote of shareholders or disinterested directors, or otherwise, and shall not be affected adversely by any amendment of these Bylaws wih respect to any action or inaction occurring prior to such amendment. The Corporation may, by action of its Board of Directors and to the extent provided in such action, indemnify employees and other persons as though they were directors and officers eligible for indemnification under this section. Section 502. Insurance and fund for Payment of Expenses. If authorized by the Board of Directors, the Corporation may purchase and maintain insurance on behalf of any person to the full extent authorized or permitted by the laws of the Commonwealth of Pennsylvania. The Corporation may create a fund of any nature which may, but need not be, under the control of a trustee, or otherwise may secure in any manner its indemnification and advancement of expenses obligation, whether arising under this Ariticle V or otherwise. Section 503. Advancement of Expenses. The right to indemnification provided in Section 501 hereof shall include the right to be paid by the Corporation in advance of final disposition the expenses (including but not limited to attorneys' fees) incurred in defending any action or proceeding for which the Corporation is providing indemnification; provided, however, that if and to the extent the laws of the Commonwealth of Pennsylvania shall require and advancement of expenses shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such person, to repay any amounts advanced if it is ultimately determined that such person is not entitled to indemnification by the Corporation pursuant to these Bylaws or otherwise. PAGE 11 ARTICLE VI. SHARES OF STOCK. Section 601. Authority to Sign Share Certificates. Every share certificate of the Corporation shall be signed by the President and Treasurer or one of the Assistant Treasurers. Certificates may be signed by a facsimile signature of the President and Treasurer or one of the Assistant Treasurers of the Corporation. Section 602. Lost or Destroyed Certificates. Any person claiming a share certificiate to be lost, destroyed or wrongfully taken shall receive a replacement certificate if such person shall have: (a) requested such replacement certificate before the Corporation has notice that the shares have been aquired by a bona fide purchaser; (b) provided the Corporation with an indemnity agreement satisfactory in form and substance to the Board of Directors, or the President or the Secretary; and (c) satisfied any other reasonable requirements (including providing an affidavit and a surety bond) fixed by the Board of Directors, or the President or the Secretary. ARTICLE VII. GENERAL Section 701. Fiscal Year. The fiscal year of the Corporation shall begin on the first (1st) day of January in each year and end on the thirty-first (31st) day of December in each year. Section 702. Record Date. The Board of Directors may fix any time whatesoever (whether or not the same is more than fifty (50) days) prior to the date of any meeting of shareholders, or the date for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or will go into effect, as a record date for the determination of the shareholders entitled to notice of, or to vote at, any such meetings, or entitled to receive payment of any such dividend or distribution, or to exercise the rights in respect to any such change, conversion or exchange of shares. Section 703. Absentee Participation in Meetings. One (1) or more Directors may participate in a meeting of the Board of Directors, or of a Committee of the Board, by means of a conference telephone or similar communication equipment, by means of which all persons participating in the meeting can hear each other. Section 704. Emergency By-Laws. In the event of any emergency resulting from a nuclear attack or similar disaster, and during the continuance of such emergency, the following Bylaw provisions shall be in effect, notwithstanding any other provisions of the Bylaws: (a) A meeting of the Board of Directors or any of any Committee thereof may be called by any Officer or Director upon one (1) hour's notice to all persons entitled to notice whom, in the sole judgment of the notifier, it is feasible to notify; (b) The Director or Directors in attendance at the meeting of the Board of Directors or of any Committee thereof shall constitute a quorum; and (c) These Bylaws may be amended or repealed, in whole or in part, by a majority vote of the Directors attending any meeting of the Board of Directors, provided such amendment or repeal shall only be effective for the duration of such emergency. Section 705. Severability. If any provision of these By-Laws is illegal or unenforceable as such, such illegality or unforceability shall not effect any other provision of these By-Laws and such other provisions shall continue in full force and effect. PAGE 13 ARTICLE VIII. AMENDMENT OR REPEAL. Section 801. Amendment or Repeal by the Board of Directors. These By-Laws may be amended or repealed, in whole or in part, by a majority vote of members of the Board of Direcotrs at any regular or special meeting of the Board duly governed. Notice need not be given of the purpose of the meeting of the Board of Direcotrs at which the amendment is to be considered. ARTICLE IX. APPLICABILITY OF CERTAIN PROVISIONS OF THE PENNSYVANIA BUSINESS CORPORATION LAW. Section 901. 1990 Anti-takeover Amendments. Subchapters G (relating to Control Share Acquisition), H (relating to Disgorgement by Certain Controlling Shareholders Following Attempts to Acquire Control), I (relating to Severance Compensaion for Employees Terminated Following Certain Control-Share Acquisitions), and J (relating to the status of Labor Contracts following certian Business Combination Transactions) of Chapter 25 of the Pennsylvania Business Corporation Law of 1988 (the "BCL") shall not be applicable to the Corporation. Section 511(d), (e), and (f), and Sections 1721(e), (f) and (g) of the BCL shall not be applicable to the Corporation. The Corporation shall be governed by Sections 1721(c) and (d) of the BCL. In adopting this paragraph of this Section 901, while intending thereby to indicate the importance of all of the shareholders' interest the Board of Directors does not intend to limit its ability to to opose a tender offer, or limit its discretion when considering whether to oppose a tender offer, in accordance with Section 8(A) of the Corporation's Articles of Incorporation or otherwise; nor does it intend to limit the factors and interests which it, committees of the Board, and individual directors may consider in considering the best interests of the Corporation, either as provided in Section 8(A) of the Corporation's Articles of Incorporation or otherwise; nor does it intend to impose limits upon the ability of the Board, committees of the Board and individual directors in considering the best interest of the Corporation or the effects of any action, to consider and to balance and weigh such factors and interest to the extent they deem appropriate, either as provided in Section 8(A) of the Corporation's Articles of Incorporation or otherwise; nor does it intend to limit the discretion of the Board, committees of the Board, or individual directors in exercising the powers vested in the Corporation, including, but not limited to, their ability to take the actions described in Section 8(B) of the Corporations Articles of Incorporation. EX-13 6 Management's Discussion and Analysis of Financial Condition and Results of Operations S&T Bancorp, Inc. and Subsidiaries Financial Condition The $160.2 million growth of average earning assets in 1998 was primarily the result of an excellent lending year for S&T Bancorp, Inc. (S&T), combined with increases in the investment portfolio to maximize net interest income by taking advantage of low, short-term funding rates and investing in U.S. government agency securities. Average loan balances increased by $80.3 million during 1998 and average securities and federal funds increased $79.9 million during 1998. The bulk of funding for this loan and security growth was provided by a $57.2 million increase in average deposits, a $12.9 million increase in average earnings retained and a $105.3 million increase in average borrowings. 1998 1997 Loan Loan Loan Balance Loan Balance Loan Portfolio (in millions) Balance Percentage Balance Percentage Commercial, Mortgage and Industrial $ 760.0 56% $ 630.4 50% Residential Real Estate Mortgage 492.6 36 512.4 40 Installment 113.3 8 131.0 10 Total Loans $1,365.9 100% $1,273.8 100%
Lending Activity Total loans at December 31, 1998 were $1.4 billion, a $92.1 million or 7.2% increase from December 31, 1997. Increases in average loans for 1998 and 1997 were $80.3 million and $103.5 million, respectively. Changes in the composition of the loan portfolio during 1998 included increases of $129.6 million of commercial loans offset by decreases of $19.8 million of residential mortgages and a $17.7 million decrease in installment loans. Composition changes include decreases from the effects of $10.9 million of 1-4 family mortgage loans and $15.2 million of commercial loans that were sold or participated in 1998. Commercial loans currently comprise 56% of the loan portfolio. Although commercial loans can be an area of higher risk, management believes these risks are properly managed by limiting the percentage amount of portfolio composition, a rigorous underwriting review by loan administration and the fact that many of the commercial loans are secured by real estate and are owner occupied. Residential mortgage lending continued to be a strategic focus for 1998 through the establishment of a centralized mortgage origination department, product redesign, secondary market activities 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 residential real estate loan portfolio will be properly managed because of S&T's conservative mortgage lending policies for portfolio loans 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 23% of the residential mortgage portfolio in 1998. 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. During 1998, S&T sold $10.9 million of 1-4 family mortgages to FNMA. Fees and gains from mortgage servicing activities were $0.3 million in 1998. S&T will continue to sell longer-term loans to FNMA in the future on a selective basis, especially during periods of lower interest rates. Installment loan decreases are primarily associated with significantly lower volumes in the indirect auto loan category. During the fourth quarter of 1998, S&T exited the indirect automobile business. Pricing pressures were unusually intense in the indirect market during 1998 and 1997, and the decision was made to deploy investable funds and staff resources into other, higher yielding and lower risk earning assets. Installment loans have also decreased due to recent changes in government regulations which have significantly decreased the profit potential of guaranteed student loans. The remaining student loan portfolio of $7.0 million was sold in 1997. S&T will continue to distribute student loan applications for customer convenience, but will not fund or hold the loans. Loan underwriting standards for S&T are established by a formal policy administered by the S&T Bank Credit Administration Department, and subject to the periodic review and approval of the S&T Bank Board of Directors. PAGE 21 Rates and terms for commercial real estate and equipment loans normally are negotiated, subject to such variables as economic conditions, marketability of collateral, credit history of the borrower and future cash flows. The loan to value policy guideline for commercial real estate loans is generally 75%. 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. A variety of unsecured and secured installment loan and credit card products are offered by S&T. However, the bulk of the consumer loan portfolio is automobile loans. Loan to value guidelines for direct loans are 90%-100% of invoice for new automobiles and 80-90% of "NADA" value for used automobiles. Loan to value policy guidelines for automobile loans purchased from dealers on a third-party basis were 90%-125% of invoice for new automobiles and 100%-125% of "Black Book" value for used automobiles. As noted previously, S&T exited the indirect automobile business in the fourth quarter of 1998 and will allow the remaining portfolio of $33.7 million to amortize through normal payments and payoffs. Management intends to continue to pursue quality loans in all lending categories within our market area in order to honor our commitment to provide the best service possible to our customers. S&T's loan portfolio primarily represents loans to businesses and consumers in our market area of western Pennsylvania rather than to borrowers in other areas of the country or to borrowers in other nations. S&T has not concentrated its lending activities in any industry or group. During the past several years, management has concentrated on building an effective credit and loan administration staff which assists management in evaluating loans before they are made and identifies problem loans early. Security Activity Average securities increased $83.8 million in 1998 and decreased $16.0 million in 1997. The 1998 increase is due to increasing the investment portfolio to maximize net interest income by taking advantage of low, short-term funding rates and investing in U.S. government agency securities, classified as available for sale. Interest rate risk associated with this strategy is managed and monitored through S&T's Asset Liability Committee (ALCO). 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 largest components of the 1998 increase included $98.9 million of U.S. government agency securities, $3.4 million in other corporate securities, $3.5 million in corporate equities and $4.8 million in Federal Home Loan Bank (FHLB) stock. The FHLB stock is a membership and borrowing requirement. Offsetting these increases are decreases of $13.2 million in U.S. treasury securities, $0.2 million in mortgage-backed securities and $13.4 million in tax-exempt state and municipal securities. During 1998, S&T sold $20.3 million of equity securities classified as available for sale. The sales were made in order to maximize returns when market opportunities are presented. Additionally, S&T may receive an exchange of shares relative to a merger; gains and losses are recognized on shares held of acquired institutions in accordance with Emerging Issues Task Force #91-5, Nonmonetary Exchange of Cost-Method Investments (EITF 91-5). The equity securities portfolio is primarily comprised of bank holding companies, as well as preferred and utility stocks to take advantage of the dividends received deduction for corporations. During 1998, the equity portfolio yielded 10.2% on a fully taxable equivalent basis and had unrealized gains at December 31, 1998, net of nominal unrealized losses, of $55.1 million. S&T's policy for security classification includes U.S. treasuries, U.S. government agencies, 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, 1998, unrealized gains, net of nominal unrealized losses, for securities classified as available for sale were approximately $61.5 million. Nonearning Assets Average nonearning assets increased $5.8 million in 1998 and $2.0 million in 1997. The 1998 and 1997 increases can be primarily attributed to an increase in cash and due from and in accrued interest receivable on a higher earning asset balance. Cash and due from growth is primarily related to increased federal reserve requirements and check clearing balances resulting from demand deposit growth and higher level of cash management activities for customers. Allowance for Loan Losses The year-end balance in the allowance for loan losses increased to $26.7 million or 1.95% of total loans at December 31, 1998 as compared to $20.4 million or 1.60% of total loans at December 31, 1997. PAGE 22 1998 1997 Loan Loan Allowance Balance Allowance Balance Allowance for Loan Loss Balance Percentage Balance Percentage (in millions) Commercial, Mortgage and Industrial $16.9 56% $13.5 50% Residential Real Estate Mortgage 1.1 36 0.8 40 Installment 2.6 8 1.9 10 Unallocated 6.1 - 4.2 - Total Allowance for Loan Losses $26.7 100% $20.4 100%
The adequacy of the allowance for loan losses is determined by management through evaluation of the loss potential on individual nonperforming, delinquent and high-dollar loans; review of economic conditions and business trends; historical loss experience; and growth and composition of the loan portfolio, as well as other relevant factors. A quantitative analysis is utilized to support the adequacy of the allowance for loan losses. This analysis includes review of the high and low historical charge-off rates for loan categories, fluctuations and trends in the amount of classified loans and economic factors. Economic factors consider the level of S&T's historical charge-offs that have occurrence within the credits economic life cycle. Significant to this analysis is the shift in loan portfolio composition to an increased mix of commercial loans. These loans are generally larger in size and, due to our continuing growth, many are not well seasoned and could be more vulnerable to an economic slowdown. Management relies on its risk rating process to monitor trends which may be occurring relative to commercial loans to assess potential weaknesses within specific credits. Current economic factors and trends in risk ratings are considered in the determination of the allowance for loan losses. Net loan charge-offs totaled $4.3 million in 1998, including $2.0 million related to a floor plan loan to an automobile dealership, compared to $3.3 million in 1997. The balance of nonperforming loans, which includes nonaccrual loans past due 90 days or more, at December 31, 1998, was $2.9 million or 0.21% of total loans. This compares to nonperforming loans of $3.6 million or 0.28% of total loans at December 31, 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. Deposits Average total deposits increased by $57.2 million in 1998 and $39.0 million in 1997. The mix of average deposits in 1998 changed, with time deposits and money market accounts increasing $16.5 million and $31.5 million, respectively, while interest- bearing demand and savings accounts decreased $12.9 million. Noninterest-bearing deposits increased by $22.1 million or 13.7% in 1998 and were approximately 14% and 13% of total deposits during 1998 and 1997, respectively. Some of the changes can be partially explained by strategic initiatives to increase demand accounts and cash management services. In addition, a new, successful strategy for money market account pricing was implemented in order to make these accounts more competitive with money funds offered at brokerage firms. In September 1998, S&T purchased a branch in Clarion, Pa. and assumed $39.0 million of deposits. 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% of total deposits during 1998 and 1997, 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, 1998, there were $11.6 million of these brokered retail certificates of deposit outstanding. Borrowings Average borrowings increased $105.3 million in 1998 and were comprised of securities sold under repurchase agreements (REPOS), federal funds purchased and long-term borrowings at the FHLB. 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 increased approximately $9.1 million for 1998 and decreased $11.3 million for 1997. The 1998 increase is primarily attributable to new REPO sweep relationships in our cash management department. S&T views retail REPOS as a relatively stable source of funds since most of these accounts are with local, long-term customers. PAGE 23 Wholesale REPOS and federal funds purchased averaged $87.1 million in 1998, an increase of $34.1 million from the 1997 averages. The aforementioned increase in the investment portfolio increased the usage of wholesale REPO fundings in 1998. The interest rate risk of various funding strategies is managed through ALCO. During 1997, ALCO authorized three additional long- term borrowings of $11.0 million at a fixed rate and $50.0 million at an adjustable rate with the FHLB. At December 31, 1998, S&T had long-term borrowings outstanding of $60.8 million at a fixed rate and $119.6 million at an adjustable rate with the FHLB. The purpose of these borrowings was to provide matched fundings for newly originated loans, to mitigate the risk associated with volatile liabilities, to take advantage of lower cost funds through the FHLB's Community Investment Program and to fund stock buy-backs. Another ALCO strategy used to manage interest rate risk is the use of interest rate swaps. At December 31, 1998, S&T had notional values totaling $10.0 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. 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 12% in 1998 and 24% in 1997. 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. Results of Operations Year Ended December 31, 1998 Net Income Net income was a record $38.0 million or $1.35 per diluted earnings per share in 1998, representing a 15% increase from the $33.4 million or $1.17 per diluted earnings per share in 1997. The return on average assets increased to 1.90% for 1998, as compared to 1.84% for 1997. The return on average equity increased to 14.80% for 1998, compared to 13.71% for 1997. 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 $3.2 million or 4% for 1998 compared to 1997. The net yield on interest-earning assets decreased to 4.61% in 1998 as compared to 4.85% in 1997. The decline in the net yield on interest-earning assets during 1998 was primarily attributed to the balance sheet growth with securities, as well as the Modified Dutch Tender Offer earlier this year that repurchased approximately 880,000 shares of S&T common stock. Net interest income was positively affected by $160.2 million or a 9% increase in average earning assets. In 1998, average loans increased $80.3 million and average securities increased $83.8 million, comprising most of the earning asset growth. The yields on average loans increased by seven basis points and the yields on average securities declined 30 basis points. Average interest-bearing deposits provided $57.2 million of the funds for the growth in average earning assets, at a cost of 4.34% in 1998 as compared to 4.33% in 1997. Average increases of $106.7 million in REPOS and other borrowed funds provided additional funding. The cost of these funds decreased 15 basis points during 1998. During 1998, more longer- term borrowings were utilized in order to mitigate interest rate risk. Also positively affecting net interest income was a $19.8 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 nonearning 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. PAGE 24 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 $10.6 million for 1998 compared to $5.0 million in 1997. The provision expense and the adequacy of the allowance for loan losses is determined based upon management's assessment of economic conditions, credit quality statistics, loan administration effectiveness and other factors that would have an impact on probable losses in the loan portfolio. Also affecting the amount of provision expense is loan growth, portfolio composition and trends within risk ratings. Credit quality statistics are an important factor in determining the amount of provision expense. Net loan charge-offs totaled $4.3 million for 1998 compared to $3.3 million for 1997. Included in the charge-offs for 1998 is $2.0 million related to a floor plan loan to one automobile dealership. Nonperforming loans to total loans decreased to 0.21% at December 31, 1998. Also affecting the amount of provision expense is loan growth and portfolio composition. Most of the loan growth in 1998 is attributable to larger-sized commercial loans. Noninterest Income Noninterest income increased $8.0 million or 49% in 1998 compared to 1997. Increases included $0.5 million or 15% in trust income, $0.9 million or 21% in service charges and fees, a $1.3 million or 40% increase in other income and a $5.3 million or 97% increase in security gains. The increase in trust income was attributable to bank-wide 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 convenience fees in the fourth quarter of 1997. The increase in other income was a result of increased performance for brokerage and insurance commissions, letters of credit fees, covered calls, debit card commissions, and mortgage servicing income, as well as $0.4 million of nonrecurring gains recognized from oil and gas producing properties that were sold during the third quarter of 1998. These areas were the focus of several 1998 strategic initiatives and product enhancements implemented in order to expand this source of revenue. S&T recognized $10.7 million of gains on equity securities during 1998. Gains of $5.2 million were the result of EITF 91-5. This accounting pronouncement requires the mark to market of equity securities when an acquisition of the company in which securities are owned occurs. EITF 91-5 gains recognized included $2.6 million from the First Union/Corestates merger, $0.4 million from the CFX/Peoples Heritage merger and $2.2 million from the First Commonwealth/Southwest merger. The remaining security gains were primarily attributable to the sale of equity securities in order to maximize returns by taking advantage of market opportunities when presented. Noninterest Expense Noninterest expense decreased $1.2 million or 3% in 1998 compared to 1997. The decrease is primarily attributable to $2.2 million of merger-related and other nonrecurring expenses associated with the acquisition of Peoples during 1997. Merger-related and other nonrecurring expenses included costs for severance and early retirement programs, the write-off and conversion of data processing systems, as well as legal, accounting and investment banker expenses. Other expenses of $0.9 million were provided for during 1998 and included $0.2 million of consulting fees for the redesigning of retail loan delivery services, $0.3 million for Year 2000 project costs and $0.3 million of costs associated with the conversion of data processing systems for a branch purchase. Recurring expenses were relatively flat during 1998 as compared to 1997 and reflect normal activity increases. Severance and early retirement programs were implemented in May 1997 in order to eliminate duplicate positions following post-merger restructuring and consolidation of operations. Average full-time equivalent staff decreased from 665 to 659 in 1998. S&T's efficiency ratio, which measures noninterest expense as a percent of recurring noninterest income plus net interest income on a fully taxable equivalent basis, was 42% and 44% in 1998 and 1997, respectively. Federal Income Taxes Federal income tax expense increased $2.6 million to $16.2 million in 1998 as a result of higher pretax income in 1998. The 1998 effective tax rate of 30% 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. PAGE 25 Results of Operations Year Ended December 31, 1997 Net Income Net income was a record $33.4 million or $1.17 per diluted earnings per share in 1997, representing a 17% increase from the $28.2 million or $1.00 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 cost 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 nonearning 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 bank-wide 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 convenience fees 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. 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. 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 student loan and residential mortgage loan sales. PAGE 26 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% and 48% 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 duplicate positions. Average full-time equivalent staff decreased from 677 to 665 in 1997. Severance and early retirement programs were implemented in May 1997. 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. Recurring costs and other charges were not significant and reflect normal activity increases, organization expansion and fee increases from vendors. Offsetting 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 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, 1998, the total of such assets was approximately $671.0 million or 32% 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, 1998 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. 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 PAGE 27 to deposits, volatile liabilities and liquidity ratio. As of December 31, 1998, 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 Financial Accounting Standards Board Statement No. 95 "Statement of Cash Flows" (Statement 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 mortgage-backed securities 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 12-month intervals ended December 31, 1998 of 1.00% and 1.07%, respectively. Assuming immediate repricings for interest- bearing demand, savings and money market accounts, these ratios would be 0.72% and 0.85%, respectively. In addition to the gap analysis, S&T performs an earnings sensitivity analysis to identify more dynamic interest rate risk exposures. The earnings simulation model is used to estimate the effect that specific interest rate changes would have on 12 months of net interest income. 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 customer behavior. Interest rate caps and floors on all products are included to the extent that they become effective in the 12- 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 net interest income to 3% from an immediate and sustained parallel change in interest rates of 200 basis points. As of December 31, 1998 and 1997, respectively, S&T had the following estimated earnings sensitivity profile: Immediate Change in Rates (in millions) +200bp -200bp 1998 Pretax earnings change $(2.1) $0.2 1997 Pretax earnings change 1.2 (0.8)
Results of the gradual simulation model, showing changes from current rates by 200 basis points over a 12-month period as of December 31, 1998 and 1997, respectively, are presented below. Gradual Change in Rates (in millions) +200bp -200bp 1998 Pretax earnings change $(1.3) $(0.9) 1997 Pretax earnings change 0.5 0.2
Capital Resources Shareholders' equity increased $0.5 million at December 31, 1998 compared to December 31, 1997. 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. Net income was $38.0 million and dividends declared to shareholders were $18.3 million for 1998. S&T paid 46% of 1998 net income in dividends, equating to an annual dividend rate of $0.66 per share. The slight increase in capital is attributable to the conclusion of the Modified Dutch Auction in which S&T repurchased approximately 880,000 shares of its common stock. During 1998, S&T repurchased an additional 238,000 shares of its common stock. An authorization to buy back up to 1,000,000 additional shares in 1999 was authorized by the S&T Board of Directors. Also affecting capital was a decrease of $0.6 million in unrealized gains on securities available for sale. On September 21, 1998, the Board of Directors of S&T approved a two-for-one common stock split which was distributed in the form of a 100% stock dividend. PAGE 28 The new shares were distributed on October 30, 1998 to shareholders of record on October 15, 1998. The split increased the number of shares outstanding to 27,578,220. The book values of S&T's common stock increased 2% from $9.20 at December 31, 1997 to $9.38 at December 31, 1998, primarily due to the increase in shareholders' equity from retained earnings, offset by the slight decrease in unrealized holding gains on securities available for sale and by the aforementioned Modified Dutch Auction. S&T continues to maintain a strong capital position with a leverage ratio of 10.7% as compared to the 1998 minimum regulatory guideline of 3%. S&T's risk-based capital Tier 1 and Total ratios were 14.2% and 17.1%, respectively, at December 31, 1998, which places S&T well above the Federal Reserve Board's risk-based capital guidelines of 4% and 8% for Tier 1 and Total, respectively. Included in the total ratio is 45% of the pretax unrealized holding gains on available for sale equity securities as prescribed by banking regulations effective October 1, 1998. In addition, management believes that S&T has the ability to raise additional capital if necessary. S&T sponsored an ESOP. The ESOP shares were allocated to employees as part of S&T's contributions to its employee thrift and profit sharing plans. At December 31, 1998, the remaining unallocated shares held by the ESOP were allocated to employees as prescribed by the plan. In April 1993, shareholders approved the S&T Incentive Stock Plan authorizing the issuance of a maximum of 1,200,000 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 3,200,000. As of December 31, 1998, 1,869,822 nonstatutory stock options had been granted to key employees and outside directors; 945,772 of these options are currently exercisable. Year 2000 The Year 2000 Issue is the result of computer programs having been written using two digits rather than four to define the applicable year. Any of S&T's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. Based on recent assessments, S&T determined that it will be required to modify or replace some portions of hardware and software so that those systems will properly utilize dates beyond December 31, 1999. S&T presently believes that with modifications and replacement of existing hardware and software, the Year 2000 Issue can be mitigated. However, if such modifications and replacements are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of S&T. S&T's plan to resolve the Year 2000 Issue involves four phases: assessment, remediation, testing and implementation. In June 1997, S&T management formed a task force (Y2K Task Force) to evaluate the process of preparing its computer systems and applications for the Year 2000. This process involves modifying or replacing certain hardware and software maintained by S&T, as well as communicating with external service providers and customers to ensure that they are taking the appropriate action to remedy their Year 2000 issues. To date, the Y2K Task Force has completed its assessment of the Year 2000 Issue with internal systems and third-party vendors. Assessment of the effect of the Year 2000 Issue on commercial business customers is still being evaluated. Significant to S&T's data processing abilities are the services provided by M&I Data Services (M&I) and Sungard Trust Services (Sungard) which provide the majority of computer services for S&T customer accounts and transactions. M&I and Sungard are also currently involved in a similar Year 2000 assessment and remediation. S&T converted to both M&I's and Sungard's Year 2000 compliant software systems in the fourth quarter of 1998. All internal data processing systems are in the process of being tested for Year 2000 compliance. The testing also includes validations of third-party software/hardware vendors that have provided assurance or certifications of compliance. To date, 95% of the testing for critical systems has been completed and software/hardware replacements have been scheduled where problems have been identified. The testing is expected to be completed in the first quarter of 1999; the remediation of critical internal systems was completed by December 31, 1998. The effect of Year 2000 on the businesses of commercial customers is unknown and is currently being evaluated as part of this risk assessment process. The assessment identified 31 high-risk commercial customers as being significant to S&T's future financial performance. Each of these significant business customers are being called PAGE 29 upon and interviewed to determine their respective company's awareness and preparedness for the Year 2000 Issue. Results of these interviews are reported to the S&T Senior Loan Committee and credit administration so that remedial action can be taken when appropriate. Communications to all commercial customers via mail and calling officers has been ongoing to ensure effective planning to meet the Year 2000 compliance requirements. Management and the Y2K Task Force have completed substantially all of the critical systems and application changes by the end of 1998 and believe that its level of preparedness is appropriate. S&T has also developed contingency plans for mission critical systems or applications which are either internal systems or services provided by external sources. These plans involve altern- ative processing plans in the event of system or application failure. S&T expects to finalize these contingency plans during the first quarter of 1999. S&T has estimated the total cost of the project to be $0.3 million and is not expected to materially impact future operations. Purchased hardware and software will be capitalized in accordance with normal policy. Personnel and all other costs related to the project will be expensed as incurred. The Y2K Task Force reports to the S&T Board of Directors each quarter. Regulatory Matters S&T and S&T Bank are subject to periodic examinations by one or more of the various regulatory agencies. During 1998, an examination was conducted by the Pennsylvania Department of Banking. 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 Pennsylvania Department of Banking 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. PAGE 30 Consolidated Balance Sheets S&T Bancorp, Inc. and Subsidiaries December 31 1998 1997 (dollars in thousands, except per share data) Assets Cash and due from banks $ 48,736 $ 35,951 Interest-earning deposits with banks 53 102 Federal funds sold 19,300 - Securities: Available for sale 565,141 521,117 Held to maturity (market value $27,161 in 1998 and $48,101 in 1997) 26,345 47,103 Total Securities 591,486 568,220 Loans, net of allowance for loan losses of $26,677 in 1998 and $20,427 in 1997 1,339,232 1,253,326 Premises and equipment 20,932 20,613 Other assets 49,872 42,079 Total Assets $2,069,611 $1,920,291 Liabilities Deposits: Noninterest-bearing $ 215,659 $ 165,727 Interest-bearing 1,164,404 1,118,931 Total Deposits 1,380,063 1,284,658 Securities sold under repurchase agreements 138,825 170,124 Federal funds purchased - 9,325 Long-term borrowings 240,068 144,218 Other liabilities 51,018 51,848 Total Liabilities 1,809,974 1,660,173 Shareholders' Equity Preferred stock, without par value, 10,000,000 shares authorized and none outstanding - - Common stock ($2.50 par value) Authorized-50,000,000 shares in 1998 and 25,000,000 in 1997 Issued-29,714,038 shares in 1998 and 14,857,019 in 1997 74,285 37,142 Additional paid-in capital 21,234 19,369 Retained earnings 158,274 175,707 Accumulated other comprehensive income 39,961 40,524 Treasury stock (2,038,459 shares in 1998 and 1,431,728 shares in 1997, at cost) (34,117) (12,494) Deferred compensation - (130) Total Shareholders' Equity 259,637 260,118 Total Liabilities and Shareholders' Equity $2,069,611 $1,920,291 See Notes to Consolidated Financial Statements
PAGE 31 Consolidated Statements of Income S&T Bancorp, Inc. and Subsidiaries Year Ended December 31 1998 1997 1996 (dollars in thousands, except per share data) Interest Income Loans, including fees $115,081 $108,891 $ 99,493 Deposits with banks 6 8 5 Federal funds sold 308 523 330 Investment securities: Taxable 29,984 25,421 26,349 Tax-exempt 1,557 2,250 2,834 Dividends 4,502 4,008 3,431 Total Interest Income 151,438 141,101 132,442 Interest Expense Deposits 49,570 47,966 46,125 Securities sold under repurchase agreements 8,968 6,602 7,006 Federal funds purchased 383 472 319 Long-term borrowings 10,226 7,227 5,071 Other borrowed funds 9 17 68 Total Interest Expense 69,156 62,284 58,589 Net Interest Income 82,282 78,817 73,853 Provision for Loan Losses 10,550 5,000 5,175 Net Interest Income After Provision for Loan Losses 71,732 73,817 68,678 Noninterest Income Service charges on deposit accounts 5,548 4,603 4,039 Trust fees 3,661 3,181 2,839 Security gains, net 10,722 5,446 2,227 Other 4,487 3,211 2,892 Total Noninterest Income 24,418 16,441 11,997 Noninterest Expense Salaries and employee benefits 22,086 22,816 21,763 Occupancy, net 2,759 2,583 2,886 Furniture and equipment 2,688 3,170 2,447 Other taxes 1,456 1,320 1,201 Data processing 2,411 2,154 1,955 Amortization of intangibles 112 - 314 FDIC assessment 228 240 1,199 Other 10,248 10,915 10,633 Total Noninterest Expense 41,988 43,198 42,398 Income Before Income Taxes 54,162 47,060 38,277 Applicable Income Taxes 16,199 13,646 10,036 Net Income $ 37,963 $ 33,414 $ 28,241 Per Common Share:1 Net Income-Basic $ 1.37 $ 1.18 $ 1.00 Net Income-Diluted 1.35 1.17 1.00 Dividends Declared 0.66 0.56 0.47
1 Per share amounts have been restated to record the effect of a two-for-one common stock split in the form of a 100% stock dividend distributed on October 30, 1998. See Notes to Consolidated Financial Statements. PAGE 32 Consolidated Statements of Changes in Shareholders' Equity S&T Bancorp, Inc. and Subsidiaries Accumulated Other Additional Compre- Comprehensive Common Paid-In Retained nsive Treasury Deferred Income Stock Capital Earnings Income Stock Compensation (dollars in thousands, except per share data) Balance at January 1, 1996 $ - $37,142 $18,120 $141,576 $24,738 $(7,182) $(340) Comprehensive Income: Net income for 1996 28,241 28,241 Other comprehensive income, net of tax Unrealized gains on securities of $1,823 net of reclassification adjustment for gains included in net income of $1,364 459 459 Cash dividends declared ($0.47 per share)1 (11,835) Treasury stock acquired (257,525 shares) (7,287) Treasury stock sold (89,614 shares) 924 1,452 Deferred ESOP benefits expense 110 Comprehensive Income 28,700 Balance at December 31, 1996 $37,142 $19,044 $157,982 $25,197 $(13,017)$(230) Comprehensive Income: Net income for 1997 33,414 33,414 Other comprehensive income, net of tax Unrealized gains on securities of $23,712 net of reclassification adjustment for gains included in net income of $8,385 15,327 15,327 Cash dividends declared ($0.56 per share)1 (15,689) Treasury stock acquired (138 shares) (5) Treasury stock sold (30,277 shares) 325 528 Deferred ESOP benefits expense 100 Comprehensive Income 48,741 Balance at December 31, 1997 $37,142 $19,369 $175,707 $40,524 $(12,494)$(130) Comprehensive Income: Net income for 1998 37,963 37,963 Other comprehensive income, net of tax Unrealized gains on securities of $6,718 net of reclassification adjustment for gains included in net income of $7,281 (563) (563) Cash dividends declared ($0.66 per share)1 (18,253) Treasury stock acquired (1,117,036 shares) (27,975) Treasury stock sold (510,305 shares) (802) 6,352 Tax Deductibility/Options 2,667 Deferred ESOP benefits expense 130 Transfer to reflect two-for-one stock split 37,143 (37,143) Comprehensive Income $37,400 Balance at December 31, 1998 $74,285 $21,234 $158,274 $39,961 $(34,117) $ - 1 Per share amounts have been restated to record the effect of a two-for-one common stock split in the form of a 100% stock dividend distributed on October 30, 1998. See Notes to Consolidated Financial Statements.
PAGE 33 Consolidated Statements of Cash Flows S&T Bancorp, Inc. and Subsidiaries [CAPTION] Year Ended December 31 1998 1997 1996 (dollars in thousands) Operating Activities Net Income $37,963 $33,414 $28,241 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 10,550 5,000 5,175 Provision for depreciation and amortization 2,158 2,163 2,445 Net amortization of investment security premiums 609 675 543 Net accretion of loan and deposit discounts - - (343) Deferred income taxes (821) (756) (613) Securities gains, net (10,722) (5,446) (2,227) Decrease (increase) in interest receivable 157 (1,601) 449 (Decrease) increase in interest payable (139) 395 (271) Decrease (increase) in other assets 790 819 (458) (Decrease) increase in other liabilities (2,214) 531 3,170 Net Cash Provided by Operating Activities 38,331 35,194 36,111 Investing Activities Net decrease (increase) in interest-earning deposits with banks 49 7 (58) Net (increase) decrease in federal funds sold (19,300) 6,465 875 Proceeds from maturities of investment securities 20,772 3,146 11,361 Proceeds from maturities of securities available for sale 192,105 127,344 90,214 Proceeds from sales of securities available for sale 96,233 77,826 40,855 Purchases of investment securities - - (4,231) Purchases of securities available for sale (323,130) (248,077) (148,259) Net increase in loans (96,456) (76,919) (99,741) Purchases of premises and equipment (1,933) (2,042) (3,020) Other, net 215 (696) 303 Net cash acquired in branch acquisition 31,604 - - Net Cash Used in Investing Activities (99,841) (112,946) (111,701) Financing Activities Net increase in demand, NOW and savings deposits 81,553 9,105 23,761 Net (decrease) increase in certificates of deposit (25,213) 5,186 30,060 Net (decrease) increase in federal funds purchased (9,325) 8,550 450 Net (decrease) increase in repurchase agreements (31,299) 55,919 (8,589) Decrease in obligation under capital lease - - (294) Proceeds from FHLB long-term borrowings 120,850 68,600 55,000 Repayments from FHLB long-term borrowings (25,000) (61,000) (14,987) Acquisition of treasury stock (27,975) (5) (7,287) Sale of treasury stock 8,219 853 2,376 Cash dividends paid to shareholders (17,515) (14,215) (10,667) Net Cash Provided by Financing Activities 74,295 72,993 69,823 Increase (decrease) in Cash and Cash Equivalents 12,785 (4,759) (5,767) Cash and Cash Equivalents at Beginning of Year 35,951 40,710 46,477 Cash and Cash Equivalents at End of Year $ 48,736 $ 35,951 $ 40,710 See Notes to Consolidated Financial Statements. PAGE 34 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. The 1996 financial information has been restated to reflect the merger of Peoples Bank of Unity on May 2, 1997. 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, 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. 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 allowance. 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. PAGE 35 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. 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), was 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 27,762,801, 28,263,036 and 28,217,234 for 1998, 1997 and 1996, respectively. Average shares outstanding for computing dilutive EPS were 28,055,142, 28,618,364 and 28,440,844 for 1998, 1997 and 1996, respectively. In computing dilutive EPS, average shares outstanding have been increased by the common stock equivalents relating to S&T's available stock options. Per Share Amounts Prior years net income and dividends per share amounts have been restated to reflect the two-for-one common stock split in the form of a 100% stock dividend distributed on October 30, 1998. Cash Flow Information S&T considers cash and due from banks as cash and cash equivalents. For the years ended December 31, 1998, 1997 and 1996, cash paid for interest was $69,295,000, $60,825,000 and $58,860,000, respectively. Cash paid during 1998 for income taxes was $15,567,000 compared to $14,190,000 for 1997 and $11,014,000 for 1996. Comprehensive Income Financial Accounting Standards Board Statement No. 130, "Accounting for Comprehensive Income" (Statement No. 130), was adopted by S&T in 1998. Statement No. 130 establishes new rules for the reporting and display of comprehensive income and its components. The adoption of this Statement had no impact on S&T's net income or shareholders' equity. Statement No. 130 requires unrealized gains or losses on S&T's available for sale securities, which prior to adoption were reported separately in shareholders' equity, to be included in comprehensive income. Prior period financial statements have been reclassified to conform to the requirements of Statement No. 130. During the years ending December 31, 1998, 1997 and 1996, comprehensive income amounted to $37,400,000, $48,741,000 and $28,700,000, respectively. 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 1998 and 1997, $10.9 million and $12.7 million, respectively, of 1-4 family mortgage loans were sold to the Federal National Mortgage Association (FNMA), and $302,000 and $187,000, respectively, of mortgage servicing rights were capitalized and recorded in other assets. PAGE 36 Reclassification Amounts in prior years have been reclassed to conform to presentation in 1998. The reclassification had no effect on S&T's financial condition or results of operations. New Accounting Pronouncements Financial Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" (Statement No. 131), is effective in 1998 and requires public companies to disclose certain information about reportable operating segments in complete sets of financial statements of the enterprise. Statement No. 131 does not materially affect S&T's financial position or results of operations as S&T management views the bank as one segment of business which is community banking. Financial Accounting Standards Board Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (Statement No. 132), is effective in 1998 and standardizes the disclosure requirements for pensions and other postretirement benefits. Statement No. 132 had no impact on S&T's financial position or results of operations. Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement No. 133), is effective in 1999 and requires measuring and recording the change in fair value of hedging activities. S&T is currently in the process of evaluating the impact of Statement No. 133. Statement No. 133 is not expected to materially affect S&T's financial position or results of operations. 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 Commitments 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. PAGE 37 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.
The following table indicates the estimated fair value of S&T's financial instruments as of December 31: 1998 1997 Estimated Carrying Estimated Carrying Fair Value Value Fair Value Value (dollars in thousands) Assets Cash $ 48,789 $ 48,789 $ 36,053 $ 36,053 Federal funds sold 19,300 19,300 - - Securities: Available for sale 565,141 565,141 521,117 521,117 Held to maturity 27,161 26,345 48,101 47,103 Loans 1,382,029 1,365,909 1,279,802 1,273,753 Liabilities Deposits $1,388,634 $1,380,063 $1,287,497 $1,284,658 Securities sold under repurchase agreements 138,825 138,825 170,126 170,124 Federal funds purchased - - 9,325 9,325 Long-term borrowings 246,397 240,068 145,049 144,218 Other borrowed funds - - 130 130 Off-Balance Sheet Interest rate swaps $ (33) $ - $ 192 $ -
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 one interest rate swap at a notional value totaling $10.0 million, paying a fixed-rate and receiving a variable-rate. The purpose of this transaction was to provide matched, fixed-rate funding for newly originated loans, and to mitigate the risk associated with volatile liability funding. The effective rate of the swap was 5.37% at December 31, 1998. 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 $16,988,000 during 1998. PAGE 38 Note E Securities The following table indicates the composition of the securities portfolio at December 31: Available for Sale Gross Gross Amortized Unrealized Unrealized Market 1998 Cost Gains Losses Value (dollars in thousands) Obligations of U.S. government corporations and agencies $353,393 $ 4,035 $ (11) $357,417 Mortgage-backed securities 8,410 305 8,715 U.S. treasury securities 26,374 1,578 27,952 Corporate securities 35,902 454 (3) 36,353 Debt securities available for sale 424,079 6,372 (14) 430,437 Marketable equity securities 60,411 55,597 (476) 115,532 Other securities 19,172 19,172 Total $503,662 $61,969 $(490) $565,141 Held to Maturity Obligations of states and political subdivisions $ 21,009 $ 647 $ 21,656 Corporate securities 1,999 169 2,168 Debt securities held to maturity 23,008 816 23,824 Other securities 3,337 3,337 Total $ 26,345 $ 816 $ - $ 27,161
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 political subdivisions $ 37,497 $ 794 $ (5) $ 38,286 Corporate securities 1,998 209 2,207 Debt securities held to maturity 39,495 1,003 (5) 40,493 Other securities 7,608 7,608 Total $ 47,103 $ 1,003 $ (5) $ 48,101
PAGE 39 There were $11,881,000, $6,031,000 and $2,528,000 in gross realized gains and $1,159,000, $585,000 and $305,000 in gross realized losses in 1998, 1997 and 1996, respectively, relative to securities available for sale. The amortized cost and estimated market value of debt securities at December 31, 1998, 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. Amortized Market Available for Sale Cost Value (dollars in thousands) Due in one year or less $ 23,367 $ 23,691 Due after one year through five years 274,025 277,451 Due after five years through 10 years 122,907 125,406 Due after 10 years 3,780 3,889 Total $ 424,079 $ 430,437 Amortized Market Held to Maturity Cost Value Due in one year or less $ 4,934 $ 4,961 Due after one year through five years 14,435 15,066 Due after five years through 10 years 3,639 3,797 Due after 10 years - - Total $ 23,008 $ 23,824
At December 31, 1998 and 1997, securities with principal amounts of $295,286,000 and $274,350,000, respectively, were pledged to secure repurchase agreements and public and trust fund deposits. Note F Loans The following table indicates the composition of the loan portfolio at December 31: [CAPTION] 1998 1997 (dollars in thousands) Real estate-construction $ 87,246 $ 47,967 Real estate-mortgages: Residential 492,570 512,417 Commercial 407,445 327,384 Commercial-industrial and agricultural 265,297 255,017 Consumer installment 113,351 130,968 Gross Loans $1,365,909 $1,273,753 Allowance for loan losses (26,677) (20,427) Net Loans $1,339,232 $1,253,326
PAGE 40 [CAPTION] The following table presents changes in the allowance for loan losses for the year ended December 31: 1998 1997 1996 (dollars in thousands) Balance at beginning of year $ 20,427 $ 18,729 $ 17,065 Charge-offs (5,999) (4,481) (5,536) Recoveries 1,699 1,179 2,025 Net charge-offs (4,300) (3,302) (3,511) Provision for loan losses 10,550 5,000 5,175 Balance at end of year $ 26,677 $ 20,427 $ 18,729
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 $40,862,000 and $41,130,000 at December 31, 1998 and 1997, respectively. During 1998, $56,514,000 of new loans were funded and repayments totaled $56,782,000. During 1998, S&T Bank acquired automobile loans and leases on a third-party basis from companies owned by two directors of S&T totaling $1,982,000. 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 $2,933,000 and $3,602,000 at December 31, 1998 and December 31, 1997, respectively. At December 31, 1998, there were no commitments to lend additional funds on nonaccrual loans. Other real estate owned, which is included in other assets, was $721,000 at December 31, 1998 and $647,000 at December 31, 1997. 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] 1998 1997 (dollars in thousands) Recorded investment in loans considered to be impaired $3,391,000 $1,869,000 Loans considered to be impaired that were on a nonaccrual basis - - Allowance for loan losses related to loans considered to be impaired 133,000 914,000 Average recorded investment in impaired loans 2,927,000 6,329,000 Total interest income recognized on impaired loans 674,000 656,000 Interest income on impaired loans recognized on a cash basis 605,000 -
PAGE 41 Note G Premises and Equipment [CAPTION] The following table is a summary of the premises and equipment accounts at December 31: 1998 1997 (dollars in thousands) Land $ 3,026 $ 3,037 Premises 18,619 18,498 Furniture and equipment 13,568 12,152 Leasehold improvements 2,973 2,483 38,186 36,170 Accumulated depreciation (17,254) (15,557) Total $ 20,932 $ 20,613
Certain banking facilities and equipment are leased under short-term lease arrangements expiring at various dates to the year 2008. All such leases are accounted for as operating leases. Rental expense for premises and equipment amounted to $1,497,000, $1,215,000 and $1,136,000 in 1998, 1997 and 1996, respectively. Minimum annual rentals for each of the years 1999-2003 are approximately $532,000, $519,000, $389,000, $168,000 and $169,000, respectively, and $620,000 for the years thereafter. Included in the above are leases entered into with two directors of S&T for which rental expense totaled $338,921, $348,497 and $325,709 in 1998, 1997 and 1996, respectively. Note H Deposits [CAPTION] The following table indicates the composition of deposits at December 31: 1998 1997 (dollars in thousands) Noninterest-bearing demand $ 215,659 $ 165,727 Interest-bearing demand 37,540 33,582 Money market 325,196 274,874 Savings 168,485 175,187 Time deposits 633,183 635,288 Total $1,380,063 $1,284,658
The aggregate of all time deposits over $100,000 amounted to $91,173,000 and $95,678,000 for December 31, 1998 and 1997, respectively. PAGE 42 The following table indicates the scheduled maturities of time deposits at December 31: [CAPTION] 1998 1997 (dollars in thousands) Due in one year $386,960 $306,278 Due in one to two years 143,355 187,257 Due in two to three years 34,499 83,395 Due in three to four years 26,005 16,434 Due in four to five years 26,430 26,751 Due after five years 15,934 15,173 Total $633,183 $635,288
Note I Long-Term Borrowings [CAPTION] The following table is a summary of long-term borrowings with the Federal Home Loan Bank (FHLB): 1998 1997 Balance Average Balance Average Rate Rate (dollars in thousands) Due in one year $ - -% $ 25,000 5.97% Due in one to two years 12,500 5.07 - - Due in two to three years 30,000 6.02 12,500 5.70 Due in three to four years 68,100 5.18 30,000 6.02 Due in four to five years 25,000 5.18 57,100 5.25 Due after five years 44,618 5.61 19,618 6.48 Total $180,218 5.42% $144,218 5.74%
The purpose of these borrowings was to match fund selected new loan originations, to mitigate interest rate sensitivity risks and to 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, 1999. 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 pledged loans was $423,761,000 at December 31, 1998, which is the maximum amount to be borrowed under the Flexline. There were no Flexline borrowings outstanding at December 31, 1998 and 1997, respectively. During 1998, S&T acquired two repurchase agreement long-term borrowings totaling $59,850,000 at a weighted average fixed rate of 6.20% which matures in five years. The purpose of this borrowing was to lock in fixed rate fundings to mitigate interest rate risk. 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 and brokerage firms. PAGE 43 [CAPTION] Information concerning federal funds purchased and REPOS is summarized as follows: 1998 1997 (dollars in thousands) Average balance during the year $177,968 $134,851 Average interest rate during the year 5.29% 5.31% Maximum month-end balance during the year $251,030 $195,024 Average interest rate at year-end 4.63% 5.82%
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 $100,142,000 at December 31, 1998. 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 S&T Bank 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, 1998, the maximum amount available for transfer from S&T Bank to S&T in the form of loans and dividends approximated 40% 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 $372,450,000 and $294,144,000 at December 31, 1998 and 1997, respectively; and obligations under standby letters of credit totaled $78,490,000 and $54,439,000 at December 31, 1998 and 1997, respectively. PAGE 44 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 seven-county market area in western Pennsylvania. Note N Income Taxes [CAPTION] Income tax expense (credits) for the year ended December 31 are comprised of: 1998 1997 1996 (dollars in thousands) Current $18,831 $14,402 $10,649 Deferred (2,632) (756) (613) Total $16,199 $13,646 $10,036
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] 1998 1997 1996 (dollars in thousands) Statutory tax rate 35% 35% 35% Tax-exempt interest income and dividend exclusion (3) (4) (6) Low income housing tax credits (2) (2) (3) Effective tax rate 30% 29% 26%
Income taxes applicable to security gains were $3,753,000 in 1998, $1,906,000 in 1997 and $779,000 in 1996. PAGE 45 Significant components of S&T's temporary differences were as follows at December 31: [CAPTION] 1998 1997 (dollars in thousands) Deferred tax liabilities: Net unrealized holding gains on securities available for sale $(21,518) $(21,821) Fixed assets (644) (683) Accretion on acquired loans (559) (326) Prepaid pension (166) (514) Prepaid hospitalization (102) (102) Point recognition (830) (933) Total deferred tax liabilities (23,819) (24,379) Deferred tax assets: Allowance on loan losses 9,127 6,939 Loan fees 558 377 Interest expense on increasing rate CDs 114 128 Deferred compensation 799 771 Goodwill 312 352 Other 206 174 Total deferred tax assets 11,116 8,741 Net deferred tax liability $(12,703) $(15,638)
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] 1998 1997 1996 (dollars in thousands) Service cost-benefits earned during the period $ 1,068 $ 1,103 $ 1,032 Interest cost on projected benefit obligation 1,489 1,378 1,274 Expected return on plan assets (2,070) (1,774) (1,546) Net amortization and deferral (14) (16) (8) Net periodic pension expense $ 473 $ 691 $ 752
PAGE 46 The following tables summarize the activitiy in the benefit obligation and plan assets. [CAPTION] 1998 1997 (dollars in thousands) Change in Benefit Obligation Benefit obligation at beginning of year $ 23,385 $ 19,593 Service cost 1,068 1,103 Interest cost 1,489 1,378 Plan participants' contributions 166 220 Special termination benefits - 463 Actuarial (gain)/loss 101 1,464 Benefits paid (1,038) (836) Benefit obligation at end of year $ 25,171 $ 23,385 Change in Plan Assets Fair value of plan assets at beginning of year $ 26,043 $ 22,189 Actual return on plan assets 2,992 3,767 Employer contributions 734 703 Plan participants' contributions 166 220 Benefits paid (1,038) (836) Fair value of plan assets at end of year $ 28,897 $ 26,043
The following table sets forth the plan's funded status and the accrued pension cost in the consolidated balance sheet at December 31: [CAPTION] 1998 1997 (dollars in thousands) Benefit obligation at beginning of year $(25,171) $(23,385) Fair value of plan assets at end of year 28,897 26,043 Funded status 3,726 2,658 Unrecognized net gain (3,216) (2,475) Unamortized prior service cost 77 104 Balance of initial unrecognized net asset (51) (72) Accrued pension cost included in other liabilities $ 536 $ 215
[CAPTION] Below are actuarial assumptions used in accounting for the plan: 1998 1997 1996 Weighted-average discount rate 6.5% 6.5% 7.0% Rate of increase in future compensation levels 5.0 5.0 5.0 Expected long-term rate of return on plan assets 8.0 8.0 8.0
PAGE 47 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 $2,249,000 and $2,110,000 at December 31, 1998 and 1997, respectively. Accrued pension cost related to the SERP was $1,971,000 and $1,779,000 at December 31, 1998 and 1997, respectively. Net periodic pension cost related to the SERP was $244,000, $499,000 and $238,000 at December 31, 1998, 1997 and 1996, respectively. The actuarial assumptions are the same as those used in the previous tables. 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 $813,000, $990,000 and $950,000 in 1998, 1997 and 1996, respectively. On December 30, 1988, S&T sold 560,000 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 had a maximum term of 10 years and bears interest at 80% of the lender's prime rate. The loan terms required quarterly interest and annual principal payments. The balance of this loan was zero and $130,000 on December 31, 1998 and 1997, 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, 1998, the ESOP had no unallocated shares remaining. 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 $10,000 in 1998, $17,000 in 1997 and $19,000 in 1996. Dividends received by the ESOP from S&T for unallocated shares amounted to $18,000 in 1998, $24,000 in 1997 and $24,000 in 1996, 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 was charged to operations as contributions were 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 1998, 1997 and 1996 was $130,000, $100,000 and $110,000, 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 3,200,000 shares of S&T common stock and expires 10 years from the date of board approval. S&T grants stock options equal to the fair market value of S&T common stock on the grant date. 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 S&T 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 grant date. There were no SARs or Related SARs issued or outstanding at December 31, 1998 and 1997. PAGE 48 The following table summarizes the changes in the incentive stock options outstanding during 1998, 1997 and 1996: [CAPTION] 1998 1997 1996 Weighted Weighted Weighted Number Average Number Average Number Average of Option of Option of Option Shares Price Shares Price Shares Price Outstanding at beginning of year 1,457,822 $14.21 1,112,000 $12.06 823,000 $10.45 Granted 334,800 27.75 372,822 20.38 333,000 15.44 Exercised (512,050) 10.90 (27,000) 10.66 (44,000) 7.55 Outstanding at end of year 1,280,572 $19.08 1,457,822 $14.21 1,112,000 $12.06 Exercisable at end of year 945,772 $16.01 1,085,000 $12.10 779,000 $10.62
The following table summarizes the range of exercise prices at December 31: [CAPTION] 1998 1997 1996 Contractual Contractual Contractual Shares Exercise Remaining Shares Exercise Remaining Shares Exercise Remaining Outstanding Price Life(Yrs) Outstanding Price Life(Yrs) Outstanding Price Life(Yrs) 1992 - - - 80,000 $ 6.82 5 80,000 $ 6.82 6 1993 - - - 124,000 8.63 6 128,000 8.63 7 1994 121,650 $ 9.50 6 227,000 9.50 7 241,000 9.50 8 1995 214,200 13.13 7 324,000 13.13 8 330,000 13.13 9 1996 254,500 15.44 8 330,000 15.44 9 333,000 15.44 10 1997 355,422 20.38 9 372,822 20.38 10 - - - 1998 334,800 27.75 10 - - - - - - Total 1,280,572 $19.08 8.4 1,457,822 $14.21 8.2 1,112,000 $12.06 8.6
Options are granted in December and have a six-month vesting period and a 10-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 grant date using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996 respectively: risk-free interest rates of 4.45%, 5.77% and 6.12%; a dividend yield of 2.7%, 3% and 3%; volatility factors of the expected market price of S&T's common stock of 0.226, 0.182 and 0.161; and a weighted-average expected life of five years. [CAPTION] 1998 1997 1996 (dollars in thousands except per share data) Proforma net income $37,030 $32,845 $27,741 Proforma earnings per share-Basic 1.33 1.16 0.99 Proforma earnings per share-Diluted 1.32 1.15 0.98
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. PAGE 49 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. American Stock Transfer and Trust Company, the plan administrator and transfer agent, purchases the shares on the open market to fulfill the Plan's needs. Note Q S&T Bancorp, Inc. (parent company only) Condensed Financial Information Balance Sheets at December 31: [CAPTION] 1998 1997 (dollars in thousands) Assets Cash $ 409 $ 19 Investments in: Bank subsidiary 159,245 169,281 Nonbank subsidiaries 102,301 95,198 Total Assets $261,955 $264,498 Liabilities Dividends payable $ 4,980 $ 4,243 Other borrowed funds - 130 Other liabilities (2,662) 7 Total Liabilities 2,318 4,380 Total Shareholders' Equity 259,637 260,118 Total Liabilities and Shareholders' Equity $ 261,955 $ 264,498
Statements of Income for the year ended December 31: [CAPTION] 1998 1997 1996 (dollars in thousands) Dividends from bank subsidiary $ 18,253 $ 15,689 $ 11,835 Investment income 84 60 64 Income before equity in undistributed net income of subsidiaries 18,337 15,749 11,899 Equity in undistributed net income of: Bank subsidiary 9,919 13,316 11,949 Nonbank subsidiaries 9,707 4,349 4,393 Net Income $ 37,963 $ 33,414 $ 28,241
PAGE 50 [CAPTION] Statements of Cash Flows for the year ended December 31: 1998 1997 1996 (dollars in thousands) Operating Activities Net Income $ 37,963 $33,414 $28,241 Equity in undistributed net income of subsidiaries (20,499) (19,640) (17,102) Change in other assets/liabilities (3,232) (408) Total Provided by Operating Activities 14,232 13,774 10,731 Investing Activities Distributions from (to) bank subsidiaries 23,431 (2,914) 7,100 Total Used in Investing Activities 23,431 (2,914) 7,100 Financing Activities Dividends (17,515) (14,215) (10,667) (Acquisition) sale of treasury stock (19,758) 848 (4,911) Total Used in Financing Activities (37,273) (13,367) (15,578) Increase (decrease) in Cash 390 (2,507) 2,253 Cash at Beginning of Year 19 2,526 273 Cash at End of Year $ 409 $ 19 $ 2,526
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 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, 1998 and 1997, S&T meets all capital adequacy requirements to which it is subject. PAGE 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: [CAPTION] 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, 1998: Total Capital $231,159 15.98% $120,163 8.00% $150,204 10.00% (to Risk Weighted Assets) Tier I Capital 212,975 14.73 60,081 4.00 90,122 6.00 (to Risk Weighted Assets) Tier I Capital 212,975 10.68 79,781 4.00 99,727 5.00 (to Average Assets) 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)
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, 1998, S&T Bank's Tier I and Total capital ratios were 10.42% and 11.68%, respectively, and Tier I capital to average assets was 7.48%. 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%. PAGE 52 Report of Ernst & Young LLP, Independent Auditors S&T Bancorp, Inc. and Subsidiaries 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, 1998 and 1997, 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, 1998. 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 financial statements of Peoples Bank of Unity which statements reflect net interest income constituting 18.4% of the related consolidated totals. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion, insofar as it relates to data included for Peoples Bank of Unity, is based solely on the report 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, for 1996, the report 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, 1998 and 1997 and the consolidated results of their operations and their cash flows for each of three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Pittsburgh, PA January 15, 1999 PAGE 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 1998 and 1997 are as follows and are based upon information obtained from Nasdaq. As of the close of business January 28, 1999, there were 3,181 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, restated to record the effect of a two-for-one common stock split in the form of a 100% stock dividend distributed on October 30, 1998. [CAPTION] Price Range of Common Stock 1998 Low High Cash Dividends Declared Fourth Quarter $24.00 $29.50 $0.18 Third Quarter 23.38 28.75 0.17 Second Quarter 25.38 28.38 0.17 First Quarter 20.88 28.88 0.15 1997 Fourth Quarter $19.25 $22.25 $0.15 Third Quarter 16.63 19.38 0.14 Second Quarter 14.75 18.44 0.14 First Quarter 14.88 18.38 0.13
Selected Financial Data [CAPTION] Year Ended December 31: 1998 1997 1996 1995 1994 (dollars in thousands, except per share data) Income Statement Interest income $151,438 $141,101 $132,442 $127,020 $112,559 Interest expense 69,156 62,284 58,589 57,677 46,643 Provisions for loan losses 10,550 5,000 5,175 4,220 3,600 Net interest income after provision for loan losses 71,732 73,817 68,678 65,123 62,316 Noninterest income 24,418 16,441 11,997 9,147 7,611 Noninterest expense 41,988 43,198 42,398 40,276 38,679 Income before income taxes 54,162 47,060 38,277 33,994 31,248 Applicable income taxes 16,199 13,646 10,036 9,152 8,276 Net income $37,963 $ 33,414 $ 28,241 $ 24,842 $ 22,972 Per Share Data1 Net income-Basic $ 1.37 $ 1.18 $ 1.00 $ 0.87 $ 0.80 Net income-Diluted 1.35 1.17 1.00 0.87 0.80 Dividends declared 0.66 0.56 0.47 0.37 0.31 Book value 9.38 9.20 8.01 7.50 6.39
1 Per share amounts have been restated to record the effect of a two-for-one common stock split in the form of a 100% stock dividend distributed on October 30, 1998. PAGE 54 Selected Financial Data Quarterly Selected Financial Data S&T Bancorp, Inc. and Subsidiaries Selected Financial Data Balance Sheet Totals (period end): Year Ended December 31: 1998 1997 1996 1995 1994 (dollars in thousands) Total assets $2,069,611 $1,920,291 $1,787,045 $1,689,728 $1,580,252 Securities 591,486 568,220 500,061 492,236 466,875 Net loans 1,339,232 1,253,326 1,181,407 1,086,317 1,011,165 Total deposits 1,380,063 1,284,658 1,270,367 1,216,547 1,142,571 Securities sold under repurchase agreements 138,825 170,124 114,205 122,794 169,871 Other liabilities 291,086 205,391 176,355 136,333 84,974 Total shareholders' equity 259,637 260,118 226,118 214,054 182,836
[CAPTION] Quarterly Selected Financial Data 1998 1997 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 $ 38,373 $ 38,345 $ 37,548 $ 37,172 $ 36,412 $ 35,488 $ 34,808 $ 34,391 Interest expense 17,500 17,577 17,247 16,832 16,465 15,748 15,034 15,037 Provision for loan losses 2,500 2,000 4,000 2,050 1,900 750 800 1,550 Net interest income after provision for loan losses 18,373 18,768 16,301 18,290 18,047 18,990 18,974 17,804 Noninterest income 6,318 4,328 8,326 5,446 4,725 3,224 4,473 4,020 Noninterest expense 10,730 9,623 11,049 10,586 10,605 9,991 11,655 10,946 Income before income taxes 13,961 13,473 13,578 13,150 12,167 12,223 11,792 10,878 Applicable income taxes 4,188 3,971 4,131 3,909 3,456 3,575 3,478 3,137 Net income $ 9,773 $ 9,502 $ 9,447 $ 9,241 $ 8,711 $ 8,648 $ 8,314 $ 7,741 Per Share Data1 Net income-Basic $ 0.35 $ 0.35 $ 0.34 $ 0.33 $ 0.31 $ 0.31 $ 0.30 $ 0.28 Net income-Diluted 0.35 0.34 0.34 0.33 0.31 0.30 0.29 0.27 Dividends declared 0.18 0.17 0.17 0.15 0.15 0.14 0.14 0.13 Book value 9.38 9.11 9.03 9.06 9.20 8.85 8.45 8.10 Average Balance Sheet Totals Total assets $2,048,886 $2,003,268 $1,980,861 $1,946,261 $1,877,348 $1,815,999 $1,774,740 $1,784,502 Securities 540,872 539,118 528,492 516,558 484,187 436,882 419,737 449,542 Net loans 1,327,705 1,297,881 1,278,235 1,261,066 1,241,063 1,227,670 1,200,365 1,192,592 Total deposits 1,368,104 1,330,045 1,316,782 1,292,547 1,286,784 1,291,130 1,254,535 1,244,384 Securities sold under repurchase agreements 141,065 162,655 209,176 171,371 136,540 114,583 127,487 127,346 Other liabilities 280,921 258,007 199,712 222,603 196,308 162,738 155,884 179,736 Total shareholders' equity 258,796 252,561 255,191 259,740 257,715 247,548 236,834 232,245
1 Per share amounts have been restated to record the effect of a two-for-one common stock split in the form of a 100% stock dividend distributed on October 30, 1998. EX-21 7 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. Commonwealth Trust Credit Life Insurance Company, a joint venture, incorporated under the laws of Arizona. EX-23.1 8 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, respect- ively, of our report dated January 15, 1999, with respect to the consolidated financial statments of S&T Bancorp, Inc. and subsidiaries incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ Ernst & Young LLP Pittsburgh, Pennsylvania March 22, 1999 EX-23.2 9 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, 1998, of our report dated February 10, 1997 insofar as such report relates to the financial statements of Peoples Bank of Unity for the year ended December 31, 1996. /s/ S.R. Snodgrass, A.C. Wexford, PA March 22, 1999 EX-99 10 REPORT OF INDEPENDENT AUDITORS Board of Director 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 statments 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 statments, 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 11
9 "This schedule contains summary financial information extracted from SEC Form 10-K and qualified to its entirety by reference to such financial statements." YEAR DEC-31-1998 DEC-31-1998 48,736 53 19,300 0 565,141 26,345 27,161 1,339,232 26,677 2,069,611 1,380,063 138,825 51,018 240,068 0 0 74,285 185,352 2,069,611 115,081 36,043 314 151,438 49,570 19,586 82,282 10,550 10,722 41,988 54,162 54,162 0 0 37,963 1.37 1.35 4.61 2,933 0 0 0 20,427 5,999 1,699 26,677 26,677 0 6,096
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