SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
To
Commission file number
0-12508
S&T BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
25-1434426
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
43 South Ninth Street, Indiana, PA
15701
(Address of principal executive offices)
(zip code)
800-325-2265
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.
Common Stock, $2.50 Par Value - 26,355,519 shares as of July 30, 2004
INDEXS&T BANCORP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Page No.
Item 1.
Financial Statements
Condensed consolidated balance sheets - June 30, 2004 and December 31, 2003
3
Condensed consolidated statements of income - Three and six months ended June 30, 2004 and 2003
4
Condensed consolidated statements of changes in shareholders equity -Six months ended June 30, 2004 and 2003
5
Condensed consolidated statements of cash flows - Six months ended June 30, 2004 and 2003
6
Notes to condensed consolidated financial statements
7-11
Item 2.Item 3.Item 4.
Management's Discussion and Analysis of Financial Condition and Results of OperationsQuantitative and Qualitative Disclosures about Market RiskControls and Procedures
12-192020
PART II. OTHER INFORMATION
Legal Proceedings
20
Item 2.
Changes in Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
21
Item 4.
Submission of Matters to a Vote of Security Holders
Item 5.
Other Information
Item 6.
Exhibits and Reports on Form 8-K
SIGNATURES
22
Page 2
S&T BANCORP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2003
(dollars in thousands, except share data)
ASSETS
Cash and due from banks
$51,816
$52,361
Securities:
Available for sale
576,347
610,818
Held to maturity (market value $267 at June 30, 2004 and $268 at December 31, 2003)
265
Total Securities
576,612
611,083
Loans, net of allowance for loan losses of $32,792 at June 30, 2004 and $31,478 at December 31, 2003
2,213,826
2,069,142
Premises and equipment
23,313
23,037
Goodwill
48,021
Other intangibles, net
5,667
5,455
Other assets
86,948
91,173
TOTAL ASSETS
$3,006,203
$2,900,272
LIABILITIES
Deposits:
Noninterest-bearing
$376,471
$382,364
Interest-bearing
1,599,869
1,579,889
Total Deposits
1,976,340
1,962,253
Securities sold under repurchase agreements
139,723
161,370
Long-term borrowings
116,933
Short-term borrowings
402,875
270,650
Other liabilities
48,707
56,348
TOTAL LIABILITIES
2,684,578
2,567,554
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 at June 30, 2004 and December 31, 2003
Issued - 29,714,038 shares at June 30, 2004 and December 31, 2003
74,285
Additional paid-in capital
22,774
22,386
Retained earnings
284,204
271,699
Accumulated other comprehensive income
15,859
27,185
Treasury stock (3,452,269 shares at June 30, 2004 and 3,061,627 at December 31, 2003)
(75,497)
(62,837)
TOTAL SHAREHOLDERS' EQUITY
321,625
332,718
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
See Notes to Condensed Consolidated Financial Statements
Page 3
S&T BANCORP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
2004
2003
(dollars in thousands, except per share data)
INTEREST INCOME
Loans, including fees
$30,558
$32,141
$60,386
$64,000
Deposits with banks and federal funds sold
-
2
Investment securities:
Taxable
4,621
5,648
9,327
11,635
Tax-exempt
533
417
1,058
718
Dividends
527
514
1,064
1,684
Total Interest Income
36,239
38,722
71,835
78,040
INTEREST EXPENSE
Deposits
7,134
8,091
14,406
16,756
295
475
668
999
1,095
492
1,950
1,034
1,024
3,322
2,030
6,515
Total Interest Expense
9,548
12,380
19,054
25,304
NET INTEREST INCOME
26,691
26,342
52,781
52,736
Provision for loan losses
1,900
3,400
4,300
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
24,791
24,442
49,381
48,436
NONINTEREST INCOME
Security gains, net
1,708
1,206
3,228
2,211
Wealth management fees
1,525
1,429
3,042
2,724
Service charges on deposit accounts
2,359
2,268
4,591
4,460
Insurance
1,115
1,017
2,191
2,076
Other
2,474
1,645
4,522
3,807
Total Noninterest Income
9,181
7,565
17,574
15,278
NONINTEREST EXPENSE
Salaries and employee benefits
8,006
7,649
16,298
15,230
Occupancy, net
1,025
966
2,116
2,007
Furniture and equipment
685
788
1,314
1,584
Other taxes
712
610
1,344
1,211
Data processing
975
811
1,974
1,633
3,409
3,164
6,503
6,505
Total Noninterest Expense
14,812
13,988
29,549
28,170
INCOME BEFORE INCOME TAXES
19,160
18,019
37,406
35,544
Income taxes
5,588
5,243
10,878
10,230
NET INCOME
$13,572
$12,776
$26,528
$25,314
PER COMMON SHARE
Net Income - Basic
$0.51
$0.48
$1.00
$0.95
Net Income - Diluted
0.51
0.48
0.99
0.95
0.27
0.25
0.53
0.50
Average Common Shares Outstanding - Basic
26,405
26,357
26,546
26,435
Average Common Shares Outstanding - Diluted
26,644
26,614
26,797
26,668
Page 4
S&T BANCORP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY(Unaudited)
ComprehensiveIncome
CommonStock
AdditionalPaid-inCapital
RetainedEarnings
AccumulatedOtherComprehensiveIncome
TreasuryStock
Balance at January 1, 2003
$74,285
$21,673
$246,920
$26,499
$(63,263)
Net income for six months ended June 30, 2003
25,314
Other comprehensive income, net of tax: Unrealized gains on securities of $7,697 net of reclassification adjustment for gains included in net income of $1,449
6,248
Comprehensive Income
$31,562
Cash dividends declared ($0.50 per share)
(13,204)
Treasury stock acquired (266,504 shares)
(6,866)
Treasury stock issued for stock options exercised (68,417 shares)
(116)
1,397
Recognition of restricted stock compensation expense
240
Tax benefit from nonstatutory stock options exercised
215
Balance at June 30, 2003
$21,772
$259,030
$32,747
$(68,492)
Balance at January 1, 2004
$22,386
$271,699
$27,185
$(62,837)
Net income for six months ended June 30, 2004
26,528
Other comprehensive income, net of tax: Unrealized losses on securities of ($9,230) net of reclassification adjustment for gains included in net income of $2,096
(11,326)
$15,202
Cash dividends declared ($0.53 per share)
(14,023)
Treasury stock acquired (542,600 shares)
(15,970)
Treasury stock issued for stock options exercised (151,958 shares)
(194)
3,184
126
582
Balance at June 30, 2004
$22,774
$284,204
$15,859
($75,497)
See Notes to Consolidated Financial Statements
Page 5
S&T BANCORP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
(dollars in thousands)
Operating Activities
Net Income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation and amortization
1,395
1,266
Net amortization of investment security premiums
1,334
1,635
(3,228)
(2,211)
Deferred income taxes
(350)
(2,520)
Mortgage loans originated for sale
(21,896)
(33,331)
Proceeds from the sale of loans
22,534
34,198
Decrease (increase) in interest receivable
792
Increase (decrease) in interest payable
149
(428)
Decrease in other assets
3,549
2,172
Decrease in other liabilities
(1,876)
(1,528)
Net Cash Provided by Operating Activities
32,913
28,966
Investing Activities
Net decrease of interest-earning deposits with banks
10
Proceeds from maturities of securities held for sale
63
Proceeds from maturities of securities available for sale
48,420
92,780
Proceeds from sales of securities available for sale
12,037
28,751
Purchases of securities available for sale
(41,652)
(158,679)
Net increase in loans
(148,723)
(38,357)
Purchases of premises and equipment
(1,497)
(751)
Net Cash Used in Investing Activities
(131,410)
(76,183)
Financing Activities
Net (decrease) increase in demand and savings deposits
(29,343)
42,372
Net increase (decrease) in certificates of deposit
43,430
(41,456)
Net (decrease) increase in repurchase agreements
(21,647)
2,242
Net increase in short-term borrowings
132,225
18,300
Net proceeds from long-term borrowings
55,539
Net treasury stock activity
(12,854)
(5,345)
Cash dividends paid to shareholders
(13,859)
(13,254)
Net Cash Provided by Financing Activities
97,952
58,398
(Decrease) increase in Cash and Cash Equivalents
(545)
11,181
Cash and Cash Equivalents at Beginning of Period
52,361
50,258
Cash and Cash Equivalents at End of Period
$61,439
Page 6
S&T BANCORP, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2004NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete annual financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the three and six-month period ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. The condensed consolidated balance sheet as of December 31, 2003, has been extracted from the audited financial statements included in S&T's 2003 Annual Report to Shareholders. For further information, refer to the consolidated financial stat ements and footnotes thereto included in the annual report on Form 10-K for the year ended December 31, 2003.
Basic earnings per share is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Options, warrants and other potentially dilutive securities are excluded from the basic calculation, but are included in computing diluted earnings per share.
NOTE B - STOCK-BASED COMPENSATION
S&T accounts for stock options using the intrinsic value method. The following proforma information regarding net income and earnings per share assumes stock options had been accounted for under the fair value method and the estimated fair value of the options was amortized to expense over the vesting period. Compensation expense, net of related tax, of $248,000 and $156,000 for the three months ended and $495,000 and $311,000 for the six months ended June 30, 2004 and 2003, is included in the proforma net income as reported below.
Three months ended June 30,
Six months ended June 30,
Proforma net income
$13,324
$12,620
$26,033
$25,003
Proforma earnings per share - Basic
$0.50
$0.98
Proforma earnings per share - Diluted
$0.47
$0.97
$0.94
The fair value was estimated at the grant dates using a Black-Scholes option pricing model with the following assumptions at June 30, 2004 and June 30, 2003, respectively: risk-free interest rates of 3.27% and 3.03%; a dividend yield of 3.30% and 3.60%; volatility of the expected market price of S&T's common stock of .266 and .275; and a weighted-average expected life of five years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that 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. S&T's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.
Page 7
S&T BANCORP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS
On March 9, 2004, the Securities and Exchange Commission ("SEC") issued SAB 105, "Application of Accounting Principles to Loan Commitments" to inform registrants of the SEC Staff's view that the fair value of the recorded loan commitments, that are required to follow derivative accounting under Statement 133, Accounting for Derivative Instruments and Hedging Activities, should not consider the expected future cash flows related to the associated servicing of the future loan. S&T enters into such commitments with customers in connection with residential mortgage loan applications. S&T recognizes on its balance sheet the fair value of the outstanding commitments in accordance with SAB 105.
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued its Exposure Draft, Share-Based Payment, which is a proposed amendment to FASB Statement No. 123, Accounting for Stock-Based Compensation. Generally, the approach in the Exposure Draft is similar to the approach described in Statement 123. However, the Exposure Draft would require all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. FASB expects to issue a final standard late in 2004 that would be effective for fiscal years beginning after December 15, 2004. S&T is currently assessing the impact of this pending guidance, but it does not expect the adoption to have a material effect on S&T's consolidated financial statements, based on the current level of stock options granted.
NOTE D - GOODWILL AND OTHER INTANGIBLES
S&T's balance sheet includes both tangible assets (such as loans, buildings, and investments) and intangible assets (such as goodwill and core deposit intangibles). Goodwill is periodically reviewed for impairment. Other intangibles are comprised of core deposit intangibles and other mortgage servicing assets and are also reviewed for impairment on a periodic basis.
NOTE E - EMPLOYEE BENEFITS
The following table summarizes the components of net periodic pension expense for S&T's defined benefit plan:
Service cost - benefits earned during the period
$756
$604
Interest cost on projected benefit obligation
1,144
1,083
Expected return on plan assets
(1,491)
(1,133)
Net amortization and deferral
46
Net Periodic Pension Expense
$419
$600
S&T previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $3.0 million to its pension plan in 2004. As of June 30, 2004, $3.0 million of contributions have been made. No further contributions are expected to be made during 2004.
Page 8
NOTE F - SECURITIES
The amortized cost and estimated market value of securities are as follows:
Available for Sale
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
EstimatedMarket Value
Obligations of U.S. government corporations and agencies
$294,731
$3,339
$(2,418)
$295,652
Collateralized mortgage obligations of U.S. government corporations and agencies
46,108
214
(245)
46,077
Mortgage-backed securities
52,264
244
(890)
51,618
U.S. treasury securities
5,158
315
5,473
Obligations of state and political subdivisions
67,603
277
(1,029)
66,851
Corporate securities
16,247
16,857
Debt securities available for sale
482,111
4,999
(4,582)
482,528
Marketable equity securities
45,480
24,246
(728)
68,998
Other securities
24,821
Total
$552,412
$29,245
$(5,310)
$576,347
Held to Maturity
Obligations of states and political subdivisions
$265
$2
$267
$318,581
$8,020
$(698)
$325,903
43,846
452
(47)
44,251
45,325
643
(199)
45,769
5,223
521
5,744
66,428
1,247
(136)
67,539
20,286
1,178
21,464
499,689
12,061
(1,080)
510,670
42,077
30,833
(319)
72,591
27,557
$569,323
$42,894
$(1,399)
$610,818
$3
$268
Page 9
NOTE F - SECURITIES - continued
The amortized cost and estimated market value of debt securities at June 30, 2004, by contractual maturity, are as set forth 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 upon the current estimated prepayment rates. The mortgage-backed securities may mature earlier or later than their weighted-average estimated maturities because of principal prepayments.
Due in one year or less
$103,293
$103,780
Due after one year through five years
291,609
293,437
Due after five years through ten years
82,643
80,834
Due after ten years
4,566
4,477
$482,111
$482,528
At June 30, 2004 and December 31, 2003, investment securities with a principal amount of $370,511,000 and $389,922,000, respectively, were pledged to secure repurchase agreements, public funds and trust fund deposits.
NOTE G - LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio was as follows:
Real estate - construction
$221,421
$193,874
Real estate - mortgages:
Residential
485,557
499,661
Commercial
889,238
794,420
Commercial and industrial
579,591
533,958
Consumer installment
70,811
78,707
Gross Loans
2,246,618
$2,100,620
Allowance for loan losses
(32,792)
(31,478)
Total Loans
$2,213,826
$2,069,142
Page 10
S&T BANCORP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNOTE G - LOANS AND ALLOWANCE FOR LOAN LOSSES - continued
Changes in the allowance for loan losses for the six months ended June 30, were as follows:
Balance at beginning of period
$31,478
$30,138
Charge-offs
(2,638)
(3,511)
Recoveries
552
556
Net charge-offs
(2,086)
(2,955)
Balance at end of period
$32,792
$31,483
The following table represents S&T's investment in loans considered to be impaired and related information on those impaired loans as of June 30, 2004 and December 31, 2003.
Recorded investment in loans considered to be impaired
$5,570
$4,087
Loans considered to be impaired that were on a nonaccrual basis
4,865
3,392
Allowance for loan losses related to loans considered to be impaired
360
Average recorded investment in impaired loans
4,794
3,629
Total interest income per contractual terms on impaired loans
1,762
518
Interest income on impaired loans recognized on a cash basis
1,863
458
NOTE H - GUARANTEES
NOTE I - 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 S&T as a result of any current proceedings.
Page 11
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis is presented so that shareholders may review in further detail the financial condition and results of operations of S&T Bancorp, Inc. and subsidiaries ("S&T"). This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the financial data presented elsewhere in this report.
Business Summary
S&T is a financial holding company with its headquarters located in Indiana, Pennsylvania with assets of $3.0 billion at June 30, 2004. S&T provides a full range of financial services through a branch network of 49 offices located in Allegheny, Armstrong, Blair, Butler, Cambria, Clarion, Clearfield, Indiana, Jefferson and Westmoreland counties of Pennsylvania. S&T provides full service retail and commercial banking products as well as cash management services; insurance; estate planning and administration; employee benefit investment management and administration; corporate trust services and other fiduciary services.
Financial Condition
Total assets averaged $2.9 billion in the first six months of 2004. Average loans increased $140.4 million and average securities and federal funds decreased $44.2 million in the first six months of 2004 compared to the 2003 full year average. Average deposits increased $46.0 million and average borrowings increased $31.4 million during the six months ended June 30, 2004 as compared to the 2003 full year average.
Lending Activity
Average loans increased $140.4 million to $2.2 billion during the six months ended June 30, 2004 from the 2003 full year average. Changes in the composition of the average loan portfolio during the first six months of 2004 included increases of $51.9 million of commercial loans and $121.1 million of commercial real estate loans, offset by decreases of $21.3 million of residential mortgages and $11.3 million of installment loans.
Real estate construction and commercial loans, including mortgage and industrial, comprised 74% of the average loan portfolio as of June 30, 2004. 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 comprised 23% of the average loan portfolio as of June 30, 2004. Residential mortgage lending continued to be a strategic focus for the second quarter of 2004 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 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 June 30, 2004, 13% of the residential mortgage portfolio was adjustable rate mortgages.
S&T periodically sells longer-term, lower-yielding 1-4 family mortgages to Fannie Mae. 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 six months of 2004, S&T sold $22.5 million of 1-4 family mortgages to Fannie Mae compared to $34.1 million during the first six months of 2003. S&T will continue to sell longer-term loans to Fannie Mae in the future on a selective basis, especially during periods of lower interest rates.
Consumer installment loans comprised 3% of the average loan portfolio as of June 30, 2004. Direct auto loans decreased $5.0 million for the six months ending June 30, 2004 as compared to the 2003 full year average.
Loan underwriting standards for S&T are established by a formal policy administered by the S&T Bank Credit Administration Department and are 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%.
Page 12
S&T BANCORP, INC. AND SUBSIDIARIESMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND RESULTS OFOPERATIONS
The loan to value policy guideline is 80% for residential first lien mortgages. Higher loan to value loans may 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% of loan to value.
S&T offers a variety of unsecured and secured installment loan and credit card products. 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. S&T has not concentrated its lending activities in any industry or group of industries. 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 in identifying problem loans early.
Security Activity
Average securities decreased by $44.2 million in the first six months of 2004 compared to the 2003 full year average. The average decrease was comprised of $15.4 million in U.S. government agency securities, $28.9 million of mortgage-backed securities, $0.6 million of corporate equity securities and $11.9 million of other corporate securities. Offsetting these decreases were average increases of $11.9 million of states and political subdivisions and $0.7 million of Federal Home Loan Bank (FHLB) stock. The equity securities portfolio is primarily comprised of bank holding companies to take advantage of the dividends received deduction for corporations. At June 30, 2004, the equity portfolio had net unrealized gains of $23.5 million. The equity securities portfolio consists of securities traded on the various stock markets and are subject to changes 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. One municipal security is classified as held to maturity. At June 30, 2004 unrealized gains, net of unrealized losses, for securities classified as available for sale were $23.9 million.
Allowance for Loan Losses
The balance in the allowance for loan losses was $32.8 million or 1.46% of total loans at June 30, 2004 as compared to $31.5 million or 1.50% of total loans at December 31, 2003. 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 and qualitative analysis is utilized to support the adequacy of the allowance for loan losses. This analysis includes review of the high and average historical loss rates by loan categories, fluctuations and trends in the amount of impaired and classified loans and economic factors. Economic factors consider the level of S&T's historical losses that have occurred within the credits' economic life cycle, as well as inherent imprecision in the evaluation process.
Significant to this analysis is the shift in the loan portfolio composition to an increased mix of commercial loans. These loans are generally larger in size and, due to our continuing growth, many are new loan relationships. 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. At June 30, 2004, S&T's risk rating analysis of the portfolio remains relatively stable.
Net loan charge-offs totaled $2.1 million in the first six months of 2004 compared to $3.0 million in the first six months of 2003. The balance of nonperforming loans, which included nonaccrual loans past due 90 days or more, at June 30, 2004, was $13.5 million or 0.60% of total loans. This compares to nonperforming loans of $9.1 million or 0.43% of total loans at December 31, 2003. The majority of the increase in nonperforming assets relates to one credit that bears an 80% United States Department of Agriculture guarantee with no significant remaining exposure to S&T.
Page 13
In addition to loans classified as nonperforming, any other credit relationships that could develop into problem loans are also closely monitored. One such relationship at June 30, 2004, is a letter of credit for $7.2 million securing a bond financing arrangement for a hotel. The letter of credit is secured by real estate and a personal guarantee of the principal. The borrower has experienced reduced cash flows associated with the declines in hotel occupancy and is within an industry which has suffered from over-capacity and declining performance in recent years. S&T's exposure to this relationship has been appropriately considered in determining the adequacy of its reserves.
Maintaining high asset quality is a major corporate objective at S&T, and management believes that the allowance for loan losses is adequate to absorb probable loan losses. Asset quality measurements for 2004 remained relatively stable. Nonperforming assets totaled $14.0 million or 0.47% of total assets at June 30, 2004, as compared to $14.8 million or 0.56% at March 31, 2004, and $11.5 million or 0.40% at December 31, 2003.
Average total deposits increased by $46.0 million, or 2%, during the six months ended June 30, 2004 as compared to the 2003 full year average. Changes in the average deposit mix included increases of $31.2 million in demand accounts, $3.5 million in savings accounts and $34.0 million in time deposits. Partially offsetting these increases is a decrease of $22.7 million in money market and NOW accounts. The change is attributable to strategic initiatives through new products, promotions and cash management services to commercial customers to increase transaction related deposits and a shift from money market accounts to time deposits as increased interest rates became more attractive to depositors.
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. Time deposits of $100,000 and over were 9% of total deposits at June 30, 2004 and 8% at December 31, 2003, respectively, and primarily represent deposit relationships with local customers in our market area. In addition, S&T believes it has the ability to access both public and private capital markets to raise long-term funding if necessary. Periodically, S&T enters into brokered certificates of deposits with outside brokerage firms. There were $8.6 million of brokered retail certificates of deposits outstanding at June 30, 2004 and December 31, 2003.
Borrowings
Average borrowings increased $31.4 million for the first six months ended June 30, 2004 compared to the 2003 full year average and were comprised of retail repurchase agreements (REPOs), wholesale REPOs, federal funds purchased, Federal Home Loan Bank (FHLB) advances and long-term borrowings. S&T defines repurchase agreements with its local retail customers as retail REPOs; short-term wholesale REPOs are those transacted with other banks and brokerage firms with terms normally ranging from 1 to 365 days.
The average balance in retail REPOs increased approximately $13.6 million for the first six months of 2004 compared to the full year 2003 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, federal funds purchased and FHLB advances increased by $129.9 million for the first six months of 2004 compared to the full year 2003 average, in order to take advantage of low rate short-term funds and to better match commercial borrower shifts into more variable rate products.
Average long-term borrowings have decreased by $112.1 million in the first six months of 2004 as compared to the full year 2003 average. At June 30, 2004, S&T had average long-term borrowings outstanding of $116.9 million. During the fourth quarter of 2003, S&T prepaid $89.3 million of fixed-rate borrowings, with average maturities of approximately nine months and an average cost of 6.56%. The funds were replaced with short-term borrowings having an average cost of 1.25%. The interest expense savings approximated $0.5 million in 2003 and $2.9 million in the first six months of 2004. The reduction in higher-cost long-term debt was an asset/liability strategy intended to mitigate the asset sensitivity position of S&T's balance sheet and exposure to declining interest rates.
Capital Resources
Shareholders' equity decreased $11.1 million at June 30, 2004, compared to December 31, 2003. Net income was $26.5 million and dividends paid to shareholders were $13.9 million for the six months ended June 30, 2004. Also affecting capital is a decrease of $11.3 million in unrealized gains on securities available for sale, stock buybacks of 542,600 shares during 2004 at an average cost of $29.43 per share. Authorization for repurchasing an additional 457,400 shares remains in effect for 2004.
Page 14
S&T paid 51.1% of net income in dividends, equating to an annual dividend rate of $1.06 per share during the first six months of 2004. The book value of S&T's common stock decreased from $12.48 at December 31, 2003 to $12.25 at June 30, 2004. The market price of S&T's common stock was $31.98 per share at June 30, 2004, compared to $29.80 per share at December 31, 2003.
S&T continues to maintain a strong capital position with a leverage ratio of 8.8% as compared to the minimum regulatory guideline of 3.0%. S&T's risk-based capital Tier I and Total ratios were 10.1% and 11.8%, respectively, at June 30, 2004. 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
Six months ended June 30, 2004 compared toSix months ended June 30, 2003
Net income was $26.5 million or $0.99 diluted earnings per share for the first six months of 2004 as compared to $25.3 million or $0.95 diluted earnings per share for the same period of 2003. The increase during the first six months of 2004 was primarily the result of increases in noninterest income, higher security gains and lower loan loss provision, offset by an increase in noninterest expense.
Net Interest Income
Comparing the six month period of 2004 and 2003, net interest income on a fully taxable equivalent basis was relatively flat at $54.6 million. Net interest income for the first six months of 2003 included $1.5 million of commercial loan prepayment penalties and dividends that did not recur this year. Delinquent loan interest was $0.2 million higher in 2004 as compared to the same period last year. The net interest margin on a fully taxable equivalent basis was 3.97% in the first six months of 2004 as compared to the 4.14% in the same period of 2003. Tax-exempt income on a fully-taxable equivalent basis using the statutory corporate income tax rate of 35% was $1.8 million for the six months ended June 30, 2004 and 2003, respectively.
In the first six months of 2004 average loans increased $159.2 million, and average securities and federal funds sold decreased $50.9 million as compared to the same period of 2003. The yields on average securities decreased by 50 basis points from the comparable period in 2003 and the yield on average loans decreased by 82 basis points.
In the first six months of 2004 balances of average interest-bearing deposits increased by $2.4 million as compared to the same period of 2003. The cost of deposits totaled 1.82%, a decrease of 31 basis points from the comparable period in 2003 due to decreased rates paid on both core and time deposits. The cost of REPOs and other borrowed funds decreased 156 basis points to 1.59%.
Page 15
AverageBalance
Interest
AverageRate
Loans
$2,175.1
$61.3
5.66%
$2,015.9
$64.8
6.48%
Securities/Other
590.7
12.4
4.23%
641.6
15.1
4.73%
Total interest-earning assets
2,765.8
73.7
5.36%
2,657.5
79.9
6.06%
Noninterest-earning assets
178.2
179.4
TOTAL
$2,944.0
$2,836.9
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW/money market/savings
$754.3
$1.9
0.50%
$775.5
$2.9
0.76%
Time deposits
837.3
12.5
3.01%
813.7
13.9
3.43%
Borrowed funds < 1 year
470.9
2.6
1.12%
311.1
1.7
1.32%
Borrowed funds > 1 year
116.9
2.1
3.49%
235.8
6.8
5.57%
Total interest-bearing liabilities
2,179.4
19.1
1.76%
2,136.1
25.3
2.39%
Noninterest-bearing liabilities:
Demand deposits
378.3
330.6
Shareholders' equity/Other
386.3
370.2
Net yield on interest-earning assets
3.97%
4.14%
Positively affecting net interest income was a $65.0 million increase in average net free funds as compared to the six months ended June 30, 2003. Average net free funds are the excess of demand deposits, other noninterest bearing liabilities and shareholders' equity over nonearning assets. During the first half of 2003, dividend income included the impact of special dividends which did not recur in the first half of 2004.
Maintaining consistent spreads between earning assets and interest-bearing liabilities is very significant to S&T's financial performance because net interest income comprised 79% of operating revenue (net interest income plus noninterest income, excluding security gains) in the first six months of 2004. A variety of asset/liability management strategies were successfully implemented within prescribed Asset/Liability Committee risk parameters that enabled S&T to maintain a net interest margin reasonably consistent with historical levels during a volatile interest rate environment. The level and mix of funds are monitored by the Asset/Liability Committee in order to mitigate the interest rate sensitivity and liquidity risks of the balance sheet.
Provision for Loan Losses
The provision for loan losses was $3.4 million for the first six months of 2004 and $4.3 million for the same period of 2003. The provision is the result of management's on-going 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 is loan growth, portfolio composition and trends within risk ratings.
Credit quality indicators are important factors in determining the amount of the provision. Nonperforming loans to total loans was 0.60% at June 30, 2004 compared to 0.42% at June 30, 2003. Net charged-off loans were $2.1 million and $3.0 million for the first six months of 2004 and 2003, respectively. Also affecting the amount of provision expense are the amount and types of loan growth and portfolio composition. Loan growth in the first six months of 2004 and 2003 is attributable to larger-sized commercial loans, which present an inherently higher risk than other types of loans in the portfolio.
Noninterest Income
Noninterest income, excluding security gains, increased $1.3 million or 10% in the first six months of 2004 as compared to the same period of 2003, primarily due to $0.7 million or 19% increase in other income, $0.3 million or a 12% increase in wealth management income, $0.2 million or 3% increase in service charges and fees and $0.1 million or 6% increase in insurance.
Page 16
The increase of $0.7 million in other income is primarily attributable to mortgage banking activities. The fluctuations in net mortgage banking revenues are primarily a function of interest rates that effect the value of S&T's mortgage servicing rights. While the low interest rate environment during the last two years contributed to high mortgage origination volume, it also resulted in higher prepayment speed assumptions for existing serviced loans, which lowered the value of S&T's mortgage servicing rights resulting in temporary impairment of their values. During the second quarter of 2003, the value of mortgage servicing rights decreased $0.8 million during the period of low interest rates and heavy residential mortgage loan refinancing. During the second quarter of 2004, mortgage rates increased, slowing mortgage prepayments, resulting in a $0.4 million reduction of the impairment allowance. Wealth management activities increased $0.3 million or 12% as a result of new business and general market i mprovements. The increase of $0.2 million in service charges and fees and $0.1 million in insurance is a result of several strategic initiatives and product enhancements that were implemented in order to expand these sources of revenue.
S&T recognized $3.2 million of gains on available for sale equity securities in the first six months of 2004 as compared to $2.2 million in the same period of 2003. The increase is a result of better market opportunities for the equity securities portfolio during the first six months of 2004. Unrealized gains, net of unrealized losses, in the available for sale equity portfolio totaled $23.5 million at June 30, 2004.
Noninterest Expense
Noninterest expense increased by $1.4 million or 5% during the six months ended June 30, 2004 compared to the six months ended June 30, 2003. Staff expense increased $1.1 million or 7% primarily attributable to the effects of year-end merit increases, higher benefit plan costs, reduced loan origination costs as required to be deferred and increased staffing levels. Average full-time equivalent staff was 771 at June 30, 2004 and 761 at June 30, 2003. Occupancy expense decreased $0.2 million or 4% for the six months ended June 30, 2004 as compared to the same period of 2003 while data processing expense increased $0.3 million or 21% and other expense increased $0.1 million or 2%. The changes with data processing and other expense are primarily related to the reclassification of certain communication costs from other expense as well as increased organizational growth related to increased business activity, particularly in the commercial lending and credit administration areas. 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 43% for the six months ended June 30, 2004 as compared to 42% for the six months ended June 30, 2003.
Federal Income Taxes
Federal income tax expense increased $0.6 million for the six months ended June 30, 2004 as compared to the same period of 2003. The effective tax rate for the first six months of 2004 and 2003 was 29%, which is below the 35% statutory rate due to benefits resulting from tax-exempt interest, excludable dividend income, low income housing tax credits and the defined contribution retirement plan dividend deduction.
Three months ended June 30, 2004 compared toThree months ended June 30, 2003
On a fully taxable equivalent basis, net interest income increased $0.4 million or 2% in the second quarter of 2004 compared to the same period of 2003. The increase in net interest income is a result of a $129.3 million increase of average interest earning assets. Also, affecting the year-to-year comparison is $0.6 million of prepayment penalties received on commercial loans in 2003 and a $0.2 million increase in delinquent loan interest for 2004. Net interest margin on a fully taxable equivalent basis was 3.97% for the second quarter of 2004, as compared to 4.08% for the same period of 2003.
Page 17
In the second quarter of 2004 average loans increased $192.8 million, and average securities and average federal funds sold decreased $63.5 million as compared to the second quarter of 2003. The yields on average securities decreased by 9 basis points from the comparable period in 2003 and the yield on average loans decreased by 82 basis points.
In the second quarter of 2004 balances of average interest-bearing deposits increased by $16.0 million as compared to the same period of 2003. The cost of deposits totaled 1.80%, a decrease of 26 basis points from the comparable period in 2003 due to decreased rates paid on both core and time deposits. The cost of REPOs and other borrowed funds decreased 154 basis points to 1.57%.
Three Months Ended
June 30, 2003
$2,215.8
$31.0
5.63%
$2,023.0
$32.6
6.45%
583.3
6.2
4.25%
646.8
7.0
4.34%
2,799.1
37.2
5.34%
2,669.8
39.6
5.94%
180.0
180.3
$2,979.1
$2,850.1
$751.9
$0.9
0.49%
$777.9
$1.4
0.74%
845.0
2.96%
803.0
6.7
3.33%
501.1
1.4
301.3
0.7
1.29%
1.0
3.52%
253.0
3.6
5.27%
2,214.9
9.5
1.73%
2,135.2
2.33%
386.9
340.9
377.3
374.0
4.08%
The provision for loan losses was $1.9 million for the second quarter of 2004 and 2003. The provision is the result of management's assessment of economic conditions, credit quality statistics, loan administration effectiveness and other factors that would have an impact on inherent losses in the loan portfolio. Also affecting the amount of the provision are the amounts and types of loan growth, portfolio composition and trends within risk ratings.
Credit quality indicators are important factors in determining the amount of provision. Nonperforming loans to total loans was 0.60% at June 30, 2004 compared to 0.42% at June 30, 2003. Most of the loan growth in 2004 and 2003 is attributable to larger-sized commercial loans, which are inherently higher risk.
Noninterest income, excluding security gains, increased $1.1 million or 18% in the second quarter of 2004 as compared to 2003. Increases included $0.1 million in service charges and fees, $0.1 million in wealth management fees, $0.1 million in insurance and $0.8 million increase in other income. The increase of $0.8 million in other income is primarily attributable to mortgage banking activities. The fluctuations in net mortgage banking revenues are primarily a function of interest rates that effect the value of S&T's mortgage servicing rights. While the low interest rate environment during the last two years contributed to high mortgage origination volume, it also resulted in higher prepayment speed assumptions for existing serviced loans, which lowered the value of S&T's mortgage servicing rights resulting in temporary impairment of their values. During the second quarter of 2003, the value of mortgage servicing rights decreased $0.8 million
Page 18
during the period of low interest rates and heavy residential mortgage loan refinancing. During the second quarter of 2004, mortgage rates increased, slowing mortgage prepayments, resulting in a $0.4 million reduction of the impairment allowance. S&T recognized $1.7 million of gains on available for sale securities in the second quarter of 2004 as compared to $1.2 million in the same period of 2003. The equity security gains were taken on available for sale securities in the second quarter of 2004 and 2003 in order to maximize returns in the portfolio by taking advantage of market opportunities when presented. Unrealized gains, net of unrealized losses, in the available for sale equity portfolio totaled $23.5 million at June 30, 2004.
Noninterest expense increased $0.8 million or 6% in the second quarter of 2004 as compared to the second quarter of 2003. Staff expense increased $0.4 million or 5% primarily attributable to the effects of year-end merit increases, higher benefit plan costs, reduced loan origination costs deferred and increased staffing levels. Average full-time equivalent staff was 777 for the three months ended June 30, 2004 and 762 for the same period of 2003 reflecting increased business activity, particularly in the commercial lending and credit administration areas. Data processing expense increased $0.2 million or 20% as compared to the same period in 2003. Other expense increased $0.3 million or 9%.
Federal income tax expense increased $0.3 million in the second quarter of 2004 as compared to the second quarter of 2003. The effective tax rate for the second quarter of 2004 and 2003 was 29%, which is below the 35% statutory rate due to benefits resulting from tax-exempt interest, excludable dividend income and low income housing tax credits.
Critical Accounting Policies and Judgements
S&T's consolidated financial statements are prepared based upon the application of certain critical accounting policies affecting accounts such as: securities impairment, allowance for loan losses and goodwill and other intangibles. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect S&T's reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on S&T's future financial condition and results of operations. S&T's critical accounting policies are presented in Management's Discussion and Analysis of Financial Condition and Results of Operations in S&T's Annual Report on Form 10-K, filed with the SEC on March 15, 2004. There have been no material changes in S&T's critical accounting policies since December 31, 2003.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995
The statements in this Quarterly 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 Annual Report on Form 10-K, filed with the SEC on March 15, 2004, and other filings with the SEC. The statements made in this quarterly report are made as of the date of this quarterly report, and S&T undertakes no obligation to update any of the forward looking statements made herein, whether as a result of new information, future events, changes in expectations or otherwise.
Page 19
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are presented at December 31, 2003 in Item 7A of S&T's Annual Report on Form 10-K, filed with the SEC on March 15, 2004. Management believes that there have been no material changes in S&T's market risk since December 31, 2003.
CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of S&T's disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that S&T's disclosure controls and procedures were effective as of the end of the period covered by this report. There were no significant changes in internal controls over financial reporting that occurred during the second quarter of 2004 that have materially affected, or are reasonably likely to materially affect, S&T's internal control over financial reporting.
PART II
OTHER INFORMATION
Legal Proceedings.
Changes in Securities and Use of Proceeds.
The following information describes the activity that has taken place during 2004 with respect to S&T's share repurchase plan:
Period
Total Numberof Shares Purchased
Average Price Paid per Share
Total Numberof Shares Purchased as part of Publicly Announced Plans
Maximum Number of Shares that can be Purchased Under the Plan
March 16, 2004 - March 31, 2004(1)(2)(3)
110,000
$29.93
April 01, 2004 - April 30, 2004
70,000
28.85
180,000
May 01, 2004 - May 31, 2004
315,000
29.36
495,000
June 01, 2004 - June 30, 2004
47,600
29.60
542,600
29.43
1,000,000
(1) The plan was announced on December 16, 2003.(2) The plan was approved by the S&T Board of Directors for the repurchase of up to 1,000,000 shares.(3) The expiration date of the plan is December 31, 2004
Page 20
OTHER INFORMATION - continued
Defaults Upon Senior Securities.
Submission of Matters to a Vote of Security Holders.
Other Information.
(a)
The following exhibits are filed herewith.
Exhibit 31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
Exhibit 31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
Exhibit 32
Certification for James C. Miller, Chief Executive Officer, and Robert E. Rout, Chief Financial Officer, pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended.
(b)
Reports on Form 8-K
Form 8-K dated June 22, 2004
The Board of Directors of S&T Bancorp, Inc. declared a $0.27 per share cash dividend at its regular meeting held June 21, 2004. The dividend is payable on July 23, 2004 to shareholders of record on June 30, 2004. This dividend represents a 8.0 percent increase over the same period last year and a 3.6 percent annualized yield using the June 21, 2004 closing stock price of $30.25.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
S&T Bancorp, Inc.
(Registrant)
Date:
/s/ Robert E. Rout
Robert E. RoutExecutive Vice President, Secretary and Chief Financial Officer
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