S&T Bancorp - 10-Q quarterly report FY

See Notes to Condensed Consolidated Financial Statements

See Notes to Condensed Consolidated Financial Statements

At March 31, 2002 and December 31, 2001 investment securities with a principal amount of $343,274,000 and $315,287,000, respectively, were pledged to secure repurchase agreements, public funds and trust fund deposits.

The following table represents S&T's investment in loans considered to be impaired and related information on those impaired loans at March 31, 2002 and December 31, 2001.

NOTE D--FINANCIAL INSTRUMENTS

S&T, in the normal course of business, commits to extend credit and issue standby letters of credit. The obligations are not recorded in S&T's financial statements. Loan commitments and standby letters of credit are subject to S&T's normal credit underwriting policies and procedures and generally require collateral based upon management's evaluation of each customer's financial condition and ability to satisfy completely the terms of the agreement. S&T's exposure to credit loss in the event the customer does not satisfy the terms of agreement equals the notional amount of the obligation less the value of any collateral. Unfunded loan commitments totaled $466,667,000 and obligations under standby letters of credit totaled $191,310,000 at March 31, 2002.

At March 31, 2002, S&T had marketable equity securities, totaling $6,533,012 at amortized cost and $9,480,394 at estimated market value, that were subject to covered call option contracts. The purpose of these contracts was to generate fee income for S&T.

NOTE E--LITIGATION

S&T, in the normal course of business, is subject to various legal proceedings in which claims for monetary damages are asserted. No material losses are anticipated by management as a result of these legal proceedings.

S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

The following discussion and analysis is presented so that shareholders may review in further detail the financial condition and results of operations of S&T Bancorp, Inc. and subsidiaries (S&T). This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the selected financial data presented elsewhere in this report.

Financial Condition

Total assets averaged $2.3 billion in the first three months of 2002 and for the 2001 full year average. Average loans decreased $19.4 million and average securities and federal funds decreased $21.1 million in the first three months of 2002 compared to the 2001 full year average. Average deposits increased $21.5 million and average borrowings decreased $19.7 million.

Lending Activity

Average loans decreased $19.4 million, or 1% to $1.6 billion for the three months ended March 31, 2002 from the 2001 full year average. Changes in the composition of the average loan portfolio during 2002 included increases of $6.0 million of commercial loans and $15.4 million of commercial real estate loans, offset by decreases of $35.1 million of residential mortgages and $5.7 million of installment loans.

Real estate construction and commercial loans, including mortgage and industrial, currently comprise 70% of the loan portfolio. Although commercial loans can be an area of higher risk, management believes these risks are mitigated by limiting concentrations and a rigorous underwriting review by loan administration.

Residential mortgage loans currently comprise 25% of the loan portfolio. Residential mortgage lending continued to be a strategic focus for the first quarter of 2002 through our centralized mortgage origination department, product redesign, secondary market activities and the utilization of commission compensated originators. Management believes that S&T is fairly well insulated from the impact of potential future declines in its local real estate market due to its past conservative mortgage lending policies. These policies generally require, for portfolio loans, a maximum term of twenty years for fixed rate mortgages and private mortgage insurance for loans with less than a 20% down payment. At March 31, 2002 the residential mortgage portfolio had a 17% composition of adjustable rate mortgages.

Much of the decline in average residential loans is due to more active participation in the secondary mortgage markets. S&T periodically sells longer-term, lower-yielding 1-4 family mortgages to the Federal National Mortgage Association (FNMA). The rationale for these sales is to mitigate interest rate risk associated with holding long-term residential mortgages in the loan portfolio, to generate fee revenue from servicing, and still maintain the primary customer relationship. During the first three months of 2002, S&T sold $28.6 million of 1-4 family mortgages to FNMA. S&T will continue to sell longer-term loans to FNMA in the future on a selective basis, especially during periods of lower interest rates.

Consumer installment loans currently comprise 5% of the loan portfolio. Direct auto loans decreased $3.3 million for the three months ending March 31, 2002 as compared to the 2001 full year average due to lower origination and higher payoff activity.

Loan underwriting standards for S&T are established by a formal policy administered by the S&T Bank Credit Administration Department, and subject to the periodic review and approval of the S&T Bank Board of Directors.

Rates and terms for commercial real estate and equipment loans normally are negotiated, subject to such variables as economic conditions, marketability of collateral, credit history of the borrower and future cash flows. The loan to value policy guideline for commercial real estate loans is generally 75-80%.

The residential, first lien, mortgage loan to value policy guideline is 80%. Higher loan to value loans can be approved with the appropriate private mortgage insurance coverage. Second lien positions are sometimes incurred with home equity loans, but normally only to the extent that the combined credit exposure for both first and second liens do not exceed 100% of loan to value.

A variety of unsecured and secured installment loan and credit card products are offered by S&T. However, the majority 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 National Automobile Dealer Association "NADA" value for used automobiles.

Management intends to continue to pursue quality loans in a variety of lending categories within our market area in order to honor our commitment to provide the best service possible to our customers. S&T's loan portfolio primarily represents loans to businesses and consumers in our market area of Western Pennsylvania rather than to borrowers in other areas of the country or to borrowers in other nations. S&T has not concentrated its lending activities in any industry or group. During the past several years, management has concentrated on building an effective credit and loan administration staff, which assists management in evaluating loans before they are made and identifies problem loans early.

Security Activity

Average securities increased by $48.4 million in the first three months of 2002 compared to the 2001 full year average. The average increase was comprised of $4.6 million of corporate equity securities, $8.7 million of states and political subdivisions and $102.9 million of mortgage-backed securities. Offsetting these increases were average decreases of $3.7 million in U.S. treasury securities, $52.3 million in U.S. government agency securities, $4.4 million of corporate securities and $7.4 million of Federal Home Loan Bank (FHLB) stock. Average federal funds decreased by $27.3 million during the first three months of 2002 as compared to the same period of 2001.

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 2002, the equity portfolio yielded 7.2% on a fully taxable equivalent basis and had unrealized gains, net of nominal unrealized losses, of $42.3 million. The equity securities portfolio consists of securities traded on the various stock markets and are subject to change in market value. The FHLB capital stock is a membership and borrowing requirement and is acquired and sold at stated value.

S&T's policy for security classification includes U.S. treasuries, U.S. government agencies, mortgage-backed securities, collateralized mortgage obligations, municipal securities, corporate securities and marketable equity securities as available for sale. Fifteen municipal securities are classified as held to maturity. At March 31, 2002, unrealized gains, net of unrealized losses, for securities classified as available for sale were $47.3 million.

Allowance for Loan Losses

The balance in the allowance for loan losses was $27.9 million or 1.72% of total loans at March 31, 2002 as compared to $26.9 million or 1.64% of total loans at December 31, 2001. The adequacy of the allowance for loan losses is determined by management through evaluation of the loss potential on individual nonperforming, delinquent and high-dollar loans; review of economic conditions and business trends; historical loss experience; and growth and composition of the loan portfolio, as well as other relevant factors.

A quantitative analysis is utilized to support the adequacy of the allowance for loan losses. This analysis includes review of the high and low historical charge-off rates for loan categories, fluctuations and trends in the amount of classified loans and economic factors. Economic factors consider the level of S&T's historical charge-offs that have occurred within the credits' economic life cycle.

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 at March 31, 2002 and December 31, 2001, 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.

Borrowings

Average borrowings decreased $19.7 million for the first three months ended March 31, 2002 compared to the 2001 full year average and were comprised of retail repurchase agreements (REPO's), wholesale REPO's, federal funds purchased and long-term borrowings. S&T defines repurchase agreements with its local, retail customers as retail REPOS; wholesale REPOS are those transacted with other banks and brokerage firms with terms normally ranging from 1 to 14 days.

The average balance in retail REPOS increased approximately $0.5 million for the first three months of 2002 compared to the full year 2001 average. S&T views retail REPOS as a relatively stable source of funds since most of these accounts are with local, long-term customers. Average wholesale REPOS and federal funds increased by $62.3 million for the first three months of 2002 compared to the full year 2001 average.

Average long-term borrowings have decreased by $82.4 million in the first three months of 2002 as compared to the full year 2001 average. At March 31, 2002, S&T had long-term borrowings outstanding of $160.6 million at a fixed rate with the FHLB. The purpose of these borrowings was to provide matched, fixed rate fundings for newly originated loans, to mitigate the risk associated with volatile liability fundings, to take advantage of lower cost funds through the FHLB's Community Investment Program and to fund stock buy-backs.

Capital Resources

Shareholders' equity decreased $0.7 million at March 31, 2002, compared to December 31, 2001. Net income was
$11.5 million and dividends paid to shareholders were $6.4 million for the three months ended March 31, 2002. Also affecting capital is a decrease of $2.7 million in unrealized gains on securities available for sale and stock buybacks of 166,500 shares during the quarter. Authorization for repurchasing up to 1,000,000 shares remains in effect for 2002.

On March 20, 2002, S&T announced a pending acquisition of Peoples Financial Corporation (Peoples), a $322 million community bank headquartered in Ford City, PA. Under the terms of the agreement, the shareholders of Peoples will receive $52.50 in cash for each share of Peoples for an aggregate transaction value of $87.4 million. S&T views the acquisition as an opportunity to leverage existing capital and operations infrastructure. The transaction will be funded with borrowings and by restructuring the PFC bond and equities portfolios.

S&T paid 56% of net income in dividends, equating to an annual dividend rate of $0.96 per share during the first three months of 2002. The book value of S&T's common stock increased from $11.01 at December 31, 2001 to $11.03 at March 31, 2002. The market price of S&T's common stock was $25.45 per share at March 31, 2002, compared to $24.28 per share at December 31, 2001.

S&T continues to maintain a strong capital position with a leverage ratio of 11.0% as compared to the minimum regulatory guideline of 3.0%. S&T's risk-based capital Tier I and Total ratios were 12.8% and 15.0% respectively, at March 31, 2002. These ratios place S&T above the Federal Reserve Board's risk-based capital guidelines of 4.0% and 8.0% for Tier I and Total, respectively.

RESULTS OF OPERATIONS