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] <TABLE> Year Ended December 31 1998 1997 1996 (In thousands of dollars) <S> <C> <C> <C> 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 </TABLE> PAGE 6 Item 1. BUSINESS -- Continued Average Balance Sheet and Net Interest Income Analysis [CAPTION] <TABLE> 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 <S> <C> >C> <C> <C> <C> <C> <C> <C> <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% </TABLE> (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] <TABLE> 1998 Compared to 1997 1997 Compared to 1996 Increase (Decrease) Due to (1) Increase (Decrease) Due to (1) Volume Rate Net Volume Rate Net <S> <C> <C> <C> <C> <C> <C> (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 </TABLE> (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] <TABLE> Interest Rate Sensitivity December 1998 (thousands of dollars) GAP 1-6 Months 7-12 Months 13-24 Months >2 Years <S> <C> <C> <C> <C> 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 </TABLE> <TABLE> Immediate Rate Sensitive Assets/Rate Current Policy Core Deposits Sensitive Liabilities Month Guideline Repricing <S> <C> <C> <C> Cumulative 6 months 1.00 .85-1.15 0.72 Cumulative 12 months 1.07 .85-1.15 0.85 </TABLE> 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] <TABLE> December 31 1998 1997 1996 (In thousands of dollars) <S> <C> <C> <C> 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 </TABLE> 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. <TABLE> 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) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> 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% </TABLE> 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] <TABLE> December 31 1998 1997 1996 1995 1994 (In thousands of dollars) <S> <C> <C> <C> <C> <C> 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 </TABLE> 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] <TABLE> Maturing After One Within But Within After One Year Five Years Five Years Total <in thousands of dollars) <S> <C> <C> <C> <C> 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 </TABLE> 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] <TABLE> December 31 1998 1997 1996 1995 1994 (IN THOUSANDS OF DOLLARS) <S> <C> <C> <C> <C> <C> 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 </TABLE> 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] <TABLE> Year Ended December 31 1998 1997 1996 1995 1994 (In thousands of dollars) <S> <C> <C> <C> <C> <C> 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% </TABLE> PAGE 15 Item 1. BUSINESS -- Continued [CAPTION] <TABLE> 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) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> 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% </TABLE> 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 <TABLE> 1998 1997 1996 Amount Rate Amount Rate Amount Rate (In thousands of dollars) <S> <C> <C> <C> <C> <C> <C> 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 </TABLE> 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] <TABLE> <S> <C> 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 </TABLE> 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] <TABLE> Year Ended December 31 1998 1997 1996 <S> <C> <C> <C> 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% </TABLE> 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. <TABLE> Executive Officers Number of Shares For the Officer Beneficially Name Corporation Since Owned (1) Age <S> <C> <C> <C> <C> 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 </TABLE> 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