ITEM 1. BUSINESS
General
S&T Bancorp, Inc. (Company) 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. The Company 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, 1995, the Company had $1.4 billion in total assets, $167 million in total shareholders' equity and $980 million in total deposits. Deposits are insured by the Federal Deposit Insurance Corporation to the full extent provided by law.
Total trust assets were approximately $416 million at December 31, 1995. 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 thirty-four offices located in Armstrong, Allegheny, Indiana, Jefferson, 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, 1995, S&T Bank had a total of 572 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
The Company is under the jurisdiction of the Securities and Exchange Commission and of state securities commissions for matters relating to the offering and sale of its securities. The Company is subject to the Securities and Exchange Commission's rules and regulations relating to periodic reporting to its shareholders, insider trading and proxy solicitation.
The Company is also subject to the provisions of the Bank Holding Company Act of 1956 (the Act), as amended and to supervision by the Federal Reserve Board. The Act requires the company to secure the prior approval of the Federal Reserve Board before it can acquire more than 5% of the voting shares of any bank other than its existing subsidiary. The Act also prohibits acquisition by the Company of more than 5% of the voting shares of, or interest in, or all or substantially all of the assets of any bank located outside Pennsylvania unless such an acquisition is specifically authorized by the laws of the state in which such bank is located.
BUSINESS --Continued
A bank holding company is prohibited under the Act from engaging in, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in nonbanking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making determinations, the Federal Reserve Board considers whether the performance of these activities by a bank holding company would offer benefits to the public which outweigh possible adverse effects. See Permitted NonBanking Activities.
As a bank holding company, the Company is required to file with the Federal Reserve Board annual reports or any additional information as the Federal Reserve Board may require pursuant to the Act. The Federal Reserve Board also makes regular examinations of the Company and its subsidiaries.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Act on any extension of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries, and on the taking of such stock or securities as collateral for loans to any borrower.
Permitted NonBanking Activities
The Federal Reserve Board permits bank holding companies to engage in nonbanking activities so closely related to banking or managing or controlling banks so as to be a proper incident thereto. The types of permissible activities are subject to change by the Federal Reserve Board.
The Company is presently engaged in two nonbanking activities. The first one is S&T Investment Company, Inc., which is an investment holding company incorporated in the state of Delaware. S&T Investment Company, Inc. was formed in June 1988 for the purpose of holding and managing a group of investments which were previously owned by S&T and to give the Company additional latitude to purchase other investments, such as corporate preferred stocks. The second is Commonwealth Trust Credit Life Insurance Company which is located in Phoenix, Arizona. The company, which is a joint venture with a local financial institution, acts as a reinsurer for credit life, accident and health insurance policies sold by the respective banks. At December 31, 1995, S&T's share of the company's total assets and net income for the year was $2,346,223 and $346,532, respectively.
Federal Reserve Board approval is required before the Company or a nonbank subsidiary of the Company may begin to engage in any of the above activities and before any such business may be acquired. The Federal Reserve Board is empowered to differentiate between activities which are initiated by a bank holding company or a subsidiary and activities commenced by acquisition of a going concern.
Legislation
As a state chartered bank, S&T is subject to regulations of the Federal Deposit Insurance Corporation (FDIC) and the Pennsylvania Department of Banking (PADB). As an insured bank under the Federal Deposit Insurance Act, S&T is also regulated by the FDIC. Some of the aspects of the lending and deposit business of S&T which are regulated include personal lending, mortgage lending, and interest rates, both as they relate to lending and interest paid on deposits and reserve requirements. Representatives of the FDIC and PADB regularly conduct examinations of S&T's affairs and records, and S&T must furnish quarterly reports to the FDIC and the PADB.
BUSINESS--Continued
Competition
All phases of S&T Bank's business are highly competitive. S&T Bank's market area is western Pennsylvania, with a representation in Indiana, Armstrong, Allegheny, Jefferson, 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 National Bank of the Commonwealth, headquartered in Indiana, Pennsylvania; PNC Bank, N.A. headquartered in Pittsburgh, Pennsylvania; Laurel Bank, headquartered in Johnstown, Pennsylvania; People's Bank, headquartered in Ford City, Pennsylvania; Indiana First Savings Bank headquartered in Indiana, Pennsylvania; Deposit Bank, headquartered in DuBois, Pennsylvania; Clearfield Bank and Trust Company, headquartered in Clearfield, Pennsylvania and Marion Center National Bank, headquartered in Marion Center, Pennsylvania. 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.
Under the Community Reinvestment Act of 1977, the FDIC is required to assess the records of all financial institutions regulated by it to determine if these institutions meet the credit needs of the community (including low and moderate income neighborhoods) served by them and to take this record into account in its evaluation of any application made by any such institution for, among other things, approval of a branch or other deposit facility, office relocation, or the merger with or acquisition of assets of another bank.
As a consequence of the extensive regulation of commercial banking activities in the United States, S&T's business is particularly susceptible to being affected by federal and state legislation and regulations which may have the effect of increasing the costs of doing business.
A subsidiary bank of a bank holding company, such as S&T, is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or any of its subsidiaries, on investment in the stock or other securities of the bank holding company or its subsidiaries, and on the taking of such stock or securities as collateral for loans to any borrower. Federal Reserve Board regulations also place certain limitations and reporting requirements on extensions of credit by a bank to principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a principal shareholder of a bank holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship. Furthermore, federal legislation prohibits acquisition of control of a bank holding company without prior notice to the Federal Reserve Board.
Monetary Policy
The earnings of S&T are affected by the policies of regulatory authorities including the Board of Governors of the Federal Reserve System, the FDIC and PADB. An important function of the Federal Reserve System is to provide an environment that is conducive to stable economic growth. Among the instruments used to implement these objectives are open market operations in U.S. Government securities, changes in reserve requirements against bank deposits and limitations on interest rates that banks may pay on time and savings deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid deposits.
The policies and regulations of the Federal Reserve Board have had and will probably continue to have a significant effect on S&T's deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect S&T's operations in the future. The effect of such policies and regulations upon the future business and earnings of S&T cannot accurately be predicted.
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 Bancorp, Inc. and subsidiaries (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, municipalities 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 1995, 1994 and 1993. The following table demonstrates the amount that has been added to interest income per the summary of operations.
BUSINESS - Continued
Average Balance Sheet and Net Interest Income Analysis
(1) For the purpose of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. Loan fees are included in the interest amounts and are not material.
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:
(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.
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 function, S&T is positioned to cope with changing interest rates and inflationary trends.
Interest rate risk at a given point in time is portrayed by the interest rate sensitivity position ("gap"). The cumulative gap represents the net position of assets and liabiities subject to repricing in specified time periods. The gap presented at any point in time is one measure of the risk inherent in the existing balance sheet structure as it relates to potential changes in net interest income. Gap alone does not accurately measure the magnitude of changes in net interest income since changes in interest rates do not affect all categories of assets and liabilities equally or simultaneously. The following table shows the Company's gap position at December 31, 1995.
Interest Rate Sensitivity
Item 1. BUSINESS-- Continued
During the fourth quarter of 1995, management reclassified the securities portfolio allowed by the "one time" amnesty per Financial Accounting Standards Board Statement No. 115. The reclassified securities were from the held to maturity category to the available for sale category. The transfered securities had an amortized cost of $154.2 million and a market value of $159.5 million. The resulting net of tax effect of the reclassification to S&T's equity was $3.4 million.
The following table sets forth the maturities of securities at December 31, 1995, 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 1995 have been made in calculating yields on obligations of state and political subdivisions.
Item 1. BUSINESS-- Continued
Loan Portfolio
The following table shows the Company's loan distribution at the end of each of the last five years:
The following table shows the maturity of loans (excluding residential mortgages of 1-4 family residences and installment loans) outstanding as of December 31, 1995. Also provided are the amounts due after one year classified according to the sensitivity to changes in interest rates.
Item 1. Business - Continued
The following table summarizes the Company's nonaccrual, past due and restructured loans:
December 31 1995 1994 1993 1992 1991 (In thousands of dollars)
Nonaccrual loans $2,844 $1,922 $2,481 $2,983 $3,915
Accruing loans past due 90 days or more $0 $0 $323 $605 $1,178
At December 31, 1995, $2,844,000 of nonaccrual loans were secured. Interest income that would have been recorded under original terms totaled $242,000. No interest income was recorded on these loans. It is the Company's policy to place loans on nonaccrual status when the interest and principal is 90 days or more past due. There are no foreign loan amounts required to be included in this table. There were no restructured loans in the periods presented.
Potential Problem Loans
At December 31, 1995, the Company had no known mataerial loans where payments were presently current or less than 90 days past due, yet the borrowers were experiencing severe financial difficulties. Management continues to review and evaluate all loans with Senior Loan Committee on an ongoing basis so that potential problems can be addressed immediately.
BUSINESS--Continued Summary of Loan Loss Experience
This table summarizes the Company's loan loss experience for each of the five years ended December 31:
Management evaluates the degree of loss exposure based on continuous detailed reviews of commercial and real estate loans. Problem loans which are identified are monitored very closely by S&T management. Installment and mortgage loans are monitored using delinquency levels, nonaccrual loan balances and current charge-offs. These analyses and continuous monitoring of other risk elements such as nonaccrual and past due loans are factors considered in determining the amount of the allowance for loan losses.
Management completes the aforementioned review and analysis to determine the adequacy of the allowance for loan losses on a quarterly basis. The provision for loan losses represents an amount that is sufficient to maintain the reserve at a level necessary to meet present and potential risk characteristics of the loan portfolio. Based on continual evaluation of loan quality and assessment of risk characteristics, management believes that the allowance for loan losses is adequate to absorb probable loan losses.
Item 1. BUSINESS--Continued
This table shows allocation of the allowance for loan losses as of the end of each of the last five years:
Deposits
The daily average amount of deposits and rates paid on such deposits is summarized for the periods indicated in the following table:
Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 1995, are summarized as follows:(In thousands of dollars)
Item 1. BUSINESS--Continued
Return on Equity and Assets
The table below shows consolidated operating and capital ratios of the Company for each of the last three years:
Short-Term Borrowings
The following table shows the distribution of the Company'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.
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.
Item 1. BUSINESS-Continued
CAPITAL
The leverage ratio of total equity to total assets and allowance for loan losses, one measure of capital adequacy, was 10.4% in 1995 and 10.2% in 1994. The 1995 regulatory minimum guideline leverage ratio is 3.0%. S&T's risk based capital Tier I and Tier II ratios were 13.7% and 15.0%, respectively, at December 31, 1995, which places S&T well above the Federal Reserve Board's risk-based capital guidelines of 4.0% and 8.0% for Tier I and Tier II, respectively. In addition, management believes that S&T has the ability to raise additional capital if necessary.
S&T sponsors an Employee Stock Ownership Plan (ESOP). The ESOP shares are allocated to employees as part of S&T's contribution to its employee thrift and profit sharing plans. At December 31, 1995, 34,000 unallocated shares were held by the ESOP. During the fourth quarter of 1994, S&T announced a program to annually acquire up to 3% of its common stock as treasury shares. In 1995, S&T acquired 97,689 treasury shares on the open market and used 74,820 treasury shares to fund the employee stock option plan, its dividend reinvestment plan for shareholders and other general corporate purposes. The stock repurchase program was also reaffirmed in the fourth quarter of 1995 for 1996.
S&T adopted an Incentive Stock Plan in 1992 (Stock Plan) that provides for for granting incentive stock options, nonstatutory stock options and stock appreciation rights (SARs). On October 17, 1994, the Stock Plan was amended to include outside directors. The Stock Plan covers a maximum of 600,000 shares of S&T stock and expires ten years from the date of board approval. The following table summarizes the changes in nonstatutory stock options outstanding during 1995, 1994, 1993 and 1992:
As of December 31, 1995, 165,000 nonstatutory stock options are not excercisable.
Risk-Based Capital and Leverage Ratios (as defined by federal regulators) (In thousands of dollars) December 31:
Item 2.
Item 2. PROPERTIES
The Company operates thirty-four banking offices in Indiana, Armstrong, Allegheny, Jefferson, Clearfield, Westmoreland and surrounding counties in Pennsylvania. The Company owns land and banking offices at the following locations: 800 Philadelphia Street, 645 Philadelphia Street and 2175 Route 286, South in Indiana; Route 119 South & Lucerne Road and 34 North Main Street in Homer City; 539 West Mahoning Street, 100 West Mahoning Street and 232 North Hampton Avenue in Punxsutawney; 133 Philadelphia Street in Armagh; Route 119 South in Black Lick; 256 Main Street and Route 36 & I-80 in Brookville; 456 Main Street in Brookway; Route 28 & Carrier Street in Summerville; 602 Salt Street in Saltsburg; 12-14 West Long Avenue, 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 Chestnut Street in Derry; Second Avenue and Hicks Street in Leechburg; 109 Grant Avenue in Vandergrift and 100 South Fourth Street in Youngwood. Land is leased where the Company owns the banking office at 1107 Wayne Avenue and remote ATM building at 435 South Seventh Street and 1176 Grant Street, all in Indiana. In addition, the Company leases land and banking offices at the following locations: Chestnut Ridge Plaza in Blairsville; 324 North Fourth Street and 2850 Route 286 South in Indiana; the Mall Office in DuBois, 229 Westmoreland Mall; 2320 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.
Item 3. LEGAL PROCEEDINGS
The nature of the Company'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 the Company is a party or to which its property is subject, which, if detemined 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 the Company by governmental authorities or other parties.
Item 4.
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 of otherwise.
PART II Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Stock Prices and Dividend Information on page 47 and Dividend and Loan Restrictions on page 40 of the Annual Report for the year ended December 31, 1995, are incorporated herein by reference.
Item 6.
Item 6. SELECTED FINANCIAL DATA
Selected Financial Data on page 47 of the Annual Report for the year ended December 31, 1995, is incorporated herein by reference.
Item 7.
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 49 through 58 of the Annual Report for the year ended December 31, 1995, is incorporated herein by reference.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Report of Independent Auditors and Quarterly Selected Financial Data on pages 28 through 46 and 48 of the Annual Report for the year ended December 31, 1995, are incorporated herein by reference.
Item 9.
Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
There have been no changes in accountants or disagreements with accountants on accounting and financial disclosures.
PART III
Item 10.
Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Election of Directors on pages 12 through 13 of the proxy statement for the April 15, 1996 annual meeting of shareholders are incorporated herein by reference.