S&T Bancorp - 10-Q quarterly report FY

See Notes to Condensed Consolidated Financial Statements

See Notes to Condensed Consolidated Financial Statements

S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE A--BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 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 month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K for the year ended December 31, 2000.

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 diluted earnings per share. Average shares outstanding for computing basic earnings per share were 26,966,164 and 26,999,959 for the three-month period ending March 31, 2001 and 2000. Average shares outstanding for computing dilutive earnings per share were 27,120,228 and 27,092,954 for the three-month period ending March 31, 2001 and 2000. In computing dilutive earnings per share, average shares outstanding have been increased by the common stock equivalents relating to S&T's available stock options.

Components of comprehensive income for S&T include net income and unrealized gains or losses on S&T's available-for-sale securities. During the three months ended March 31, 2001 and 2000, total comprehensive income amounted to $13,291,000 and $7,612,000.

As of January 1, 2001, S&T adopted Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement No. 133), as amended by Financial Accounting Standards Board Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (Statement No. 138) which requires measuring and recording the change in fair value of derivative instruments. S&T does not extensively use derivative financial instruments. Historically, the only type that S&T utilizes is interest rate swaps. At March 31, 2001, S&T had no swaps outstanding. The adoption of these statements did not materially affect S&T's financial position or results of operations.

S&T BANCORP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SECURITIES
Continued

During the period ended March 31, 2001, there were $1,423,676 in realized gains relative to securities available for sale.

At March 31, 2001 and December 31, 2000 investment securities with a principal amount of $296,592,000 and $321,549,000, respectively, were pledged to secure repurchase agreements and public and trust fund deposits.

S&T BANCORP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SECURITIES
Continued

The following table represents S&T's investment in loans considered to be impaired and related information on those impaired loans at March 31, 2001 and December 31, 2000.

NOTE D--FINANCIAL INSTRUMENTS

S&T, in the normal course of business, commits to extend credit and issue standby letters of credit. The obligations are not recorded in S&T's financial statements. Loan commitments and standby letters of credit are subject to S&T's normal credit underwriting policies and procedures and generally require collateral based upon management's evaluation of each customer's financial condition and ability to satisfy completely the terms of the agreement. S&T's exposure to credit loss in the event the customer does not satisfy the terms of agreement equals the notional amount of the obligation less the value of any collateral. Unfunded loan commitments totaled $406,867,000 and obligations under standby letters of credit totaled $188,815,000 at March 31, 2001.

At March 31, 2001, S&T had marketable equity securities, totaling $1,567,940 at amortized cost and $1,985,920 at estimated market value, that were subject to covered call option contracts. The purpose of these contracts was to generate fee income for S&T.

NOTE E--LITIGATION

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

S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 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 selected financial data presented elsewhere in this report.

Financial Condition

Total assets averaged $2.3 billion in the first three months of 2001, a $59.2 million increase from the 2000 full year average. Average loans increased $71.1 million and average securities and federal funds decreased $42.2 million in the first three months of 2001 compared to the 2000 full year average. Funding for this loan growth was primarily provided by a $55.2 million increase in average deposits, the $42.2 million decrease in average securities and an increase of $31.0 million in average earnings retained, offset by a $36.5 million decrease in average borrowings.

Lending Activity

Average loans increased $71.1 million, or 5% to $1.6 billion for the three months ended March 31, 2001 from the 2000 full year average. Changes in the composition of the average loan portfolio during 2001 included increases of $41.2 million of commercial loans and $43.7 million of commercial real estate loans, offset by decreases of $5.8 million of residential mortgages and $8.0 million of installment loans.

Average commercial mortgage and industrial loans currently comprise 66% of the loan portfolio. Although commercial loans can be an area of higher risk, management believes these risks are mitigated by underwriting guidelines and ongoing review by loan administration. During 2001, S&T sold $0.9 million of participations of originated commercial real estate loans. The purpose of these sales was to diversify credit risk on larger loans and to generate fee income from servicing.

Average residential mortgage loans comprise 28% of the loan portfolio and are originated through a centralized mortgage origination department and the utilization of commission compensated originators. Management believes that if a downturn in the local residential real estate market occurs, the impact of declining values on the real estate loan portfolio will be negligible because of S&T's conservative mortgage lending policies. These policies generally require, for portfolio loans, a maximum term of twenty years for fixed rate mortgages and private mortgage insurance for loans with less than a 20% down payment. At March 31, 2001 the residential mortgage portfolio had a 19% composition of adjustable rate mortgages.

Much of the decline in average residential loans is due to more active participation in the secondary mortgage markets. S&T periodically sells longer-term, lower-yielding 1-4 family mortgages to the Federal National Mortgage Association (FNMA). The rationale for these sales is to mitigate interest rate risk associated with holding long-term residential mortgages in the loan portfolio, to generate fee revenue from servicing, and still maintain the primary customer relationship. During the first three months of 2001, S&T sold $0.7 million of 1-4 family mortgages to FNMA. S&T will continue to sell longer-term loans to FNMA in the future on a selective basis, especially during periods of lower interest rates.

Installment loan decreases are primarily associated with significantly lower volumes in the indirect auto loan category. Pricing pressures have been unusually intense in the indirect auto loan market during recent years and the decision was made to exit this line of business and allow the portfolio to liquidate via normal paydowns and pay-off activities. Direct loans and home equity loans decreased $3.3 million for the three months ending March 31, 2001 as compared to the 2000 full year average due to lower origination and higher payoff activity.

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

Loan underwriting standards for S&T are established by a formal policy administered by the S&T Bank Credit Administration Department, and subject to the periodic review and approval of the S&T Bank Board of Directors. Rates and terms for commercial real estate and equipment loans normally are negotiated, subject to such variables as economic conditions, marketability of collateral, credit history of the borrower and future cash flows. The loan to value policy guideline for commercial real estate loans is generally 75-80%.

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

A variety of unsecured and secured installment loan and credit card products are offered by S&T. However, the bulk of the consumer loan portfolio is automobile loans. Loan to value guidelines for direct loans are 90%-100% of invoice for new automobiles and 80%-90% of "NADA" value for used automobiles.

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

Security Activity

Average securities decreased by $48.7 million in the first three months of 2001 compared to the 2000 full year average. The average decrease was comprised of $3.2 million in U.S. treasury securities, $39.8 million in U.S. government agency securities, $4.0 million of states and political subdivisions, $2.0 million of corporate securities and $2.4 million of Federal Home Loan Bank (FHLB) stock. Offsetting these decreases were average increases of $2.5 million of corporate equity securities and $0.2 million of mortgage-backed securities.

The equity securities portfolio is primarily comprised of bank holding companies, as well as preferred and utility stocks to take advantage of the dividends received deduction for corporations. During 2001, the equity portfolio yielded 8.6% on a fully taxable equivalent basis and had unrealized gains, net of nominal unrealized losses, of $43.8 million. The equity securities portfolio consists of securities traded on the various stock markets and are subject to change in market value. The FHLB capital stock is a membership and borrowing requirement and is acquired and sold at stated value.

S&T's policy for security classification includes U.S. treasuries, U.S. government agencies, mortgage-backed securities and corporate equities as available for sale. Municipal securities and other debt securities are classified as held to maturity. At March 31, 2001, unrealized gains, net of unrealized losses, for securities classified as available for sale were $52.5 million.

Allowance for Loan Losses

The balance in the allowance for loan losses was $28.0 million or 1.71% of total loans at March 31, 2001 as compared to $27.4 million or 1.71% of total loans at December 31, 2000. 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; growth and composition of the loan portfolio, as well as other relevant factors.

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

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

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 not well seasoned and could be more vulnerable to an economic slowdown. Management relies on its risk rating process to monitor trends which may be occurring relative to commercial loans to assess potential weaknesses within specific credits. Current economic factors and trends in risk ratings are considered in the determination of the allowance for loan losses.

Net loan charge-offs totaled $0.4 million in the first three months of 2001 compared to a net recovery of $1.3 million in the first quarter of 2000. Net charge-offs for the first three months of 2000 were reduced by the proceeds received on a previously charged-off floor plan loan in 1998. The balance of nonperforming loans, which included nonaccrual loans past due 90 days or more, at March 31, 2001, was $3.7 million or 0.23% of total loans. This compares to nonperforming loans of $2.9 million or 0.18% of total loans at December 31, 2000. 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.

Deposits

Average total deposits increased by $55.2 million, or 4% for the three months ended March 31, 2001 as compared to the 2000 full year average. Changes in the average deposit mix included a $13.8 million increase in money market and NOW accounts and a $50.7 million increase in time deposits, offset by a $9.1 million decrease in savings accounts and a slight decrease of $0.2 million in demand accounts. A successful strategy for money market account pricing was implemented in order to make these accounts more competitive with money funds offered at brokerage firms. Time deposit increases reflect successes in promotional programs.

Management believes that the S&T deposit base is stable and that S&T has the ability to attract new deposits, mitigating a funding dependency on volatile liabilities. Special rate deposits of $100,000 and over were 8% of total deposits at March 31, 2001 and December 31, 2000, respectively, and primarily represent deposit relationships with local customers in our market area. In addition, S&T has the ability to access both public and private markets to raise long-term funding if necessary.

Borrowings

Average borrowings decreased $36.5 million for the first three months ended March 31, 2001 compared to the 2000 full year average and were comprised of retail repurchase agreements (REPO's), wholesale REPO's, federal funds purchased and long-term borrowings. S&T defines repurchase agreements with its local, retail customers as retail REPOS; wholesale REPOS are those transacted with other banks and brokerage firms with terms normally ranging from 1 to 14 days.

The average balance in retail REPOS decreased approximately $17.4 million for the first three months of 2001 compared to the full year 2000 average. S&T views retail REPOS as a relatively stable source of funds since most of these accounts are with local, long-term customers. Average wholesale REPOS and federal funds decreased by $19.8 million for the first three months of 2001 compared to the full year 2000 average. The increase in core deposits decreased the usage of REPO type fundings in 2001.


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

Average long-term borrowings have increased slightly by $0.7 million in the first three months of 2001 as compared to the full year 2000 average. At March 31, 2001, S&T had long-term borrowings outstanding of $265.6 million at a fixed rate with the FHLB. The purpose of these borrowings was to provide matched, fixed rate fundings for newly originated loans, to mitigate the risk associated with volatile liability fundings, to take advantage of lower cost funds through the FHLB's Community Investment Program and to fund stock buy-backs.

Capital Resources

Shareholders' equity increased $7.5 million at March 31, 2001, compared to December 31, 2000. Net income was $11.7 million and dividends paid to shareholders were $5.9 million for the three months ended March 31, 2001. Also affecting capital is a slight decrease of $0.2 million in unrealized gains on securities available for sale. There were 18,800 shares of S&T common stock repurchased during the first three months of 2001. An authorization is in effect to buy-back up to 1,000,000 shares until December 31, 2001.

S&T paid 51% of net income in dividends, equating to an annual dividend rate of $0.88 per share during the first three months of 2001. The book value of S&T's common stock increased slightly from $10.28 at December 31, 2000 to $10.56 at March 31, 2001. The market price of S&T's common stock was $23.14 per share at March 31, 2001, compared to $21.63 per share at December 31, 2000.

S&T continues to maintain a strong capital position with a leverage ratio of 10.6% as compared to the minimum regulatory guideline of 3.0%. S&T's risk-based capital Tier I and Total ratios were 12.3% and 14.5% respectively, at March 31, 2001. These ratios place S&T well 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

Three months ended March 31, 2001 compared to

Three months ended March 31, 2000

Net Income

Net income increased to $11.7 million or $0.43 per diluted earnings per share in the first three months of 2001 from $10.8 million or $0.40 per diluted earnings per share for the same period of 2000, representing an 8% improvement. The significant improvement during the first three months of 2001 was the result of higher net interest income and noninterest income, offset by normal increases in operating expenses.

Net Interest Income

On a fully taxable equivalent basis, net interest income increased $0.6 million or 3% in the first three months of 2001 compared to the same period of 2000. The net yield on interest-earning assets was 4.41% in the first three months of 2001 was comparable to the 4.43% in the same period of 2000.

In the first three months of 2001, average loans increased $71.1 million and average securities decreased $48.7 million. The yields on average securities increased by 65 basis points during the period and the yield on average loans decreased slightly by 4 basis points.

In the first three months of 2001, average interest-bearing deposits provided $55.5 million of the funds for the growth in the loan portfolio; cost of deposits totaled 4.58%, an increase of 7 basis points from 2000 due to increased rates paid on money market and time deposits. The cost of REPOS and other borrowed funds increased 1 basis point to 6.17%.
S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Also positively affecting net interest income was a $9.8 million increase to average net free funds. Average net free funds are the excess of demand deposits, other non-interest bearing liabilities and shareholders' equity over non-earning assets.

Maintaining consistent spreads between earning assets and costing liabilities is very significant to S&T's financial performance since net interest income comprises 78% of operating revenue. A variety of asset/liability management strategies were successfully implemented within prescribed ALCO risk parameters that enabled S&T to maintain a net interest margin reasonably consistent with historical levels. The level and mix of funds is monitored by ALCO 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 $1.0 million for the first three months of 2001 and 2000. 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 probable losses in the loan portfolio. Also affecting the amount of provision expense is loan growth, portfolio composition and trends within risk ratings.

Credit quality statistics are an important factor in determining the amount of provision expense. Net loan charge-offs totaled $0.4 million for the first three months of 2001 compared to a net recovery of $1.3 million for the same period of 2000. Net recoveries for the first three months of 2000 was primarily due to proceeds received on a previously charged-off floor plan loan in 1998. Nonperforming loans to total loans was 0.23% at March 31, 2001 compared to 0.55% in the same period of 2000. The decrease is attributable to two commercial real estate credits which were sold in the fourth quarter of 2000. Also affecting the amount of provision expense is the amount and types of loan growth and portfolio composition. Most of the loan growth in 2001 and 2000 is attributable to larger-sized commercial loans.

Noninterest Income

Noninterest income increased $0.7 million or 15% in the first three months of 2001 as compared to the same period of 2000. Increases included $0.3 million in service charges and fees, $0.2 million in other income and $0.2 million in wealth management income. Security gains increased $0.5 million in the first three months of 2001 as compared to the same period of 2000.

The $0.3 million increase in service charges on deposit accounts was primarily the result of management's continual effort to implement reasonable fees for services performed, and to manage closely the collection of these fees. The $0.2 million increase in wealth management income was primarily attributable to increased performance levels for brokerage and insurance activities. The $0.2 million increase in other income was primarily a result of higher performance levels for merchant and debit card income and equity call option fees. These areas were the focus of several strategic initiatives and product enhancements implemented in order to expand this source of revenue.

S&T recognized $1.4 million of gains on available for sale securities in the first three months of 2001 as compared to $0.9 million in the same period of 2000. The security gains were taken on available for sale securities in the first three months of 2001 and 2000 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 portfolio totaled $52.5 million at March 31, 2001.




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

Noninterest Expense

Noninterest expense increased by $0.4 million or 3% at March 31, 2001 compared to March 31, 2000. Staff expense increased $0.4 million or 7% primarily attributable to normal merit increases and higher benefit plan costs. Other expenses decreased $0.2 million or 7% as compared to March 31, 2000. This decrease included $0.1 million in legal fees related to decreased activity in collections as well costs associated with the formation of S&T Insurance Group, LLC in 2000. Other expense increases of $0.1 million were not significant and reflect normal activity changes. Occupancy expense increased $0.1 million or 12% as compared to the same period of 2000. The increase is attributable to the opening of a new branch office in Allegheny County and higher energy and maintenance costs. Average full-time equivalent staff was 656 at March 31, 2001 and 657 at March 31, 2000. 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 41% and 42% at March 31, 2001 and March 31, 2000, respectively.

Federal Income Taxes

Federal income tax expense increased $0.5 million at March 31, 2001 as compared to March 31, 2000 primarily as a result of higher pre-tax income and a higher effective tax rate. The effective tax rate for the first three months of 2001 was 29% and 28% in 2000, which is below the 35% statutory rate due to benefits resulting from tax-exempt interest, excludable dividend income and low income housing tax credits (LIHTC).

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995

The statements in this Annual Report, which are not historical fact, are forward looking statements that involve risks and uncertainties, including, but not limited to, the interest rate environment, the effect of federal and state banking and tax regulations, the effect of economic conditions, the impact of competitive products and pricings, and other risks detailed in S&T Securities and Exchange Commission filings.