S&T Bancorp, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania-based bank holding company operating in Pennsylvania and Ohio through retail and commercial banking, cash management, trust and brokerage services. The filing covers the three and six months ended June 30, 2023. Total assets were $9.3 billion at quarter-end.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $88.1 million | $75.2 million | $176.9 million | $142.9 million |
| Net interest income, FTE | $88.8 million | $75.7 million | $178.1 million | $143.9 million |
| Provision for credit losses | $10.5 million | $3.2 million | $11.5 million | $2.7 million |
| Noninterest income | $14.2 million | $12.6 million | $27.4 million | $27.9 million |
| Noninterest expense | $49.6 million | $48.4 million | $101.3 million | $95.8 million |
| Net income | $34.5 million | $28.9 million | $74.3 million | $58.0 million |
| Diluted EPS | $0.89 | $0.74 | $1.91 | $1.48 |
| FTE net interest margin | 4.22% | 3.56% | 4.27% | 3.35% |
| Return on average assets | 1.51% | 1.25% | 1.64% | 1.25% |
| Return on average equity | 11.23% | 9.83% | 12.29% | 9.85% |
Net income increased 19.4% year over year in the second quarter and 28.0% for the first six months. Higher interest income and loan growth more than offset substantially higher deposit and borrowing costs, credit-loss provisions, and operating expenses.
Balance sheet, liquidity, capital, and asset quality
- Total assets increased $142.4 million, or 1.6%, from December 31, 2022 to $9.25 billion.
- Portfolio loans increased $135.6 million, or 1.9%, to $7.32 billion. Consumer loans increased $155.6 million, while commercial loans declined $19.9 million. Commercial loans represented 71.4% of portfolio loans; 68% of total loans were variable rate.
- Deposits declined $78.8 million, or 1.1%, to $7.14 billion. Certificates of deposit increased $398.6 million, partly reflecting migration from other deposit categories and $100.0 million of brokered certificates of deposit. Uninsured deposits were $2.2 billion, or 30% of total deposits.
- Total borrowings increased $184.8 million to $624.0 million, primarily to support loan growth and deposit declines.
- Cash and due from banks totaled $227.9 million. Available borrowing capacity was $3.82 billion, including $2.35 billion from the FHLB, $776.4 million through the Federal Reserve Borrower-in-Custody program, and $698.2 million through the Federal Reserve Bank Term Funding Program. No BTFP balance was outstanding.
- Highly liquid assets totaled $886.7 million, or 9.6% of total assets.
- Common Equity Tier 1, total capital, and leverage ratios were 13.07%, 15.06%, and 11.12%, respectively, at the holding-company level; management reported the company and bank as well-capitalized.
- The allowance for credit losses was $105.8 million, or 1.44% of portfolio loans, compared with $101.3 million, or 1.41%, at year-end 2022. The allowance for unfunded commitments was $9.9 million.
- Net loan charge-offs were $11.0 million in the second quarter and $5.9 million year to date. Management attributed the second-quarter charge-offs primarily to two commercial and industrial relationships totaling $11.0 million.
- Nonperforming assets declined to $18.0 million from $22.1 million at year-end; nonaccrual loans were $14.3 million, or 0.20% of portfolio loans, and OREO was $3.7 million.
Material changes versus the prior comparable periods
- FTE net interest margin increased 66 basis points in the quarter and 92 basis points year to date, primarily due to higher interest rates.
- Interest expense increased $26.8 million in the quarter and $46.5 million year to date as deposit and borrowing costs rose. Average interest-bearing deposit costs and average borrowing costs increased materially.
- Credit-loss provision increased $7.3 million in the quarter and $8.8 million year to date, reflecting higher net charge-offs and increased quantitative reserves related to loan growth and risk-rating changes.
- Mortgage banking income declined 38.0% in the quarter and 60.2% year to date because of lower loan-sale activity and the decision to retain more originated mortgage loans.
- Noninterest expense increased 2.5% in the quarter and 5.7% year to date, driven largely by salaries and employee benefits, loan-related expenses, and other operating costs.
- Shareholders’ equity increased $28.2 million to $1.21 billion despite $24.9 million of dividends, $20.0 million of common-stock repurchases, and $1.9 million of other comprehensive loss. The company repurchased 739,426 shares during the first six months at an average price of $27.06; $9.8 million remained under the repurchase authorization at June 30.
- Available-for-sale securities declined $32.4 million to $970.4 million and had net unrealized losses of $102.5 million, primarily attributable to interest-rate changes. Management stated the securities were investment grade and that it did not intend, and was not required, to sell them before recovery.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide explicit quantitative earnings guidance. Management’s stated 2023 strategic priorities are the deposit franchise, core profitability, asset quality, and talent and engagement. Management described liquidity and the balance sheet as strong despite industry volatility, but noted that higher rates are increasing funding costs and driving deposit competition.
- Key risks include deposit outflows, reliance on wholesale or contingent funding, rapidly changing interest rates, unrealized securities losses, regional economic weakness, commercial real estate and commercial credit risk, cybersecurity and operational risks, regulatory changes, competition, and potential disruption in the U.S. banking system.
- The company’s balance sheet is asset-sensitive. A rising-rate environment may benefit net interest income, while falling rates may reduce it; modeled rate shocks show increasingly negative effects on economic value of equity in higher-rate scenarios.
- On June 12, 2023, the company notified holders of the planned redemption of $5.0 million of trust preferred securities; the redemption occurred July 25, 2023.
- The company adopted ASU 2022-02 on January 1, 2023. Adoption increased the allowance for credit losses by approximately $0.6 million and reduced retained earnings by the same amount.
- Management reported no material litigation, no material changes to internal control over financial reporting, and no material changes to previously disclosed risk factors other than the banking-industry and liquidity risks described in the filing.
Important facts for investors to verify
- Whether deposit trends stabilize and whether the shift toward higher-cost certificates of deposit and borrowings continues.
- Whether net interest margin remains resilient as funding costs catch up with asset yields.
- Commercial and industrial charge-offs, risk-rating downgrades, special mention and substandard loans, and adequacy of the allowance for credit losses.
- Exposure to commercial real estate, construction, and other regional economic stresses.
- Realized losses or liquidity effects from the $102.5 million unrealized loss in the available-for-sale securities portfolio.
- Use and cost of the $3.82 billion of available borrowing capacity, including FHLB and Federal Reserve facilities.
- Capital ratios after dividends, repurchases, loan growth, and the July 2023 trust-preferred redemption.
- Future mortgage-banking performance and the effect of retaining more consumer mortgage loans on balance-sheet growth and liquidity.