S&T Bancorp, Inc. 2021 Third-Quarter Form 10-Q Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania-based bank holding company operating in Western and Eastern Pennsylvania, Northeast and Central Ohio, and Upstate New York. It provides commercial and retail banking, cash management, trust, brokerage, and related financial services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the same periods in 2020 and to December 31, 2020 for balance-sheet data.
Key financial metrics
| Metric | Three months ended September 30, 2021 | Nine months ended September 30, 2021 | Comparable period |
|---|---|---|---|
| Net interest income | $68.7 million | $207.7 million | $69.3 million and $209.5 million |
| Net interest income, FTE | $69.3 million | $209.5 million | $70.1 million and $211.9 million |
| FTE net interest margin | 3.14% | 3.25% | 3.29% and 3.37% |
| Provision for credit losses | $3.4 million | $9.1 million | $17.5 million and $124.3 million |
| Net income | $27.6 million | $87.9 million | $16.7 million and $(3.1) million |
| Diluted EPS | $0.70 | $2.24 | $0.43 and $(0.08) |
| Noninterest income | $15.8 million | $48.5 million | $16.5 million and $44.1 million |
| Noninterest expense | $47.2 million | $138.7 million | $48.2 million and $138.1 million |
Total assets were $9.4 billion at September 30, 2021, up $468.2 million from year-end 2020. Portfolio loans were $7.0 billion, down $255.8 million, while loans excluding PPP loans increased $28.7 million. Securities were $870.1 million, up $96.4 million. Total deposits increased $524.6 million to $7.9 billion, and total borrowings decreased $68.5 million to $159.4 million.
Cash and due from banks increased to $934.4 million from $229.7 million at year-end. For the nine months, operating activities provided $171.7 million, investing activities provided $110.1 million, and financing activities provided $422.8 million, producing a $704.7 million increase in cash and cash equivalents.
Shareholders’ equity increased $47.0 million to $1.2 billion. The company declared dividends of $0.28 per share in the third quarter and $0.84 per share for the nine-month period. Regulatory capital remained well above “well-capitalized” thresholds; S&T Bancorp’s total risk-based capital ratio was 14.06% and its Tier 1 leverage ratio was 9.65%.
Material changes versus prior periods
- Net income increased 65.2% in the third quarter and reversed the prior-year nine-month loss, primarily because credit-loss provisions fell substantially.
- The provision decline reflected the absence of the 2020 customer check-kiting fraud charge-off and improved economic forecasts. The 2020 fraud resulted in a $58.7 million charge-off.
- Net interest income declined modestly, and FTE net interest margin fell 15 basis points in the quarter and 12 basis points for the nine-month period, reflecting lower rates, lower average loan balances, and higher cash balances.
- Noninterest income declined 3.9% in the quarter but increased 10.0% for the nine-month period. Quarterly mortgage banking and commercial loan swap income were lower, while debit and credit card, deposit service-charge, and wealth-management income improved.
- Noninterest expense declined 2.1% in the quarter and increased 0.4% year to date. Year-to-date results benefited from the absence of $2.3 million of merger-related expenses recorded in 2020, but salaries and employee benefits increased $5.7 million.
- PPP loans declined to approximately $181.0 million from approximately $465 million at year-end 2020, contributing to the decrease in reported commercial and industrial loans.
- Asset quality improved overall: nonperforming loans declined to $111.3 million from $146.8 million, and nonperforming assets declined to $124.7 million from $148.9 million. However, OREO increased to $13.4 million from $2.2 million.
Outlook, commentary, risks, and unusual items
Management reported improving loan-growth trends late in the second quarter and during the third quarter but remained cautious regarding COVID-19 effects, particularly on commercial borrowers and the hotel portfolio. PPP forgiveness, stimulus payments, and customer liquidity preferences drove significant deposit and cash growth. Management stated that the balance sheet is asset sensitive and that the prolonged low-rate environment negatively affects net interest income and margin.
The allowance for credit losses on loans was $108.3 million, or 1.55% of portfolio loans, compared with 1.63% at year-end 2020. Net charge-offs were $3.6 million in the quarter and $16.9 million year to date. A $21.7 million commercial and industrial relationship became nonperforming during the quarter and carried a $9.3 million specific reserve. Management continues to pursue recovery of losses associated with the 2020 customer fraud.
COVID-19, regional economic conditions, commercial real estate and hotel exposure, interest-rate changes, deposit stability, liquidity, credit losses, cybersecurity, operational risks, regulatory changes, LIBOR transition, competition, acquisitions, and litigation remain material risks. The company is transitioning away from LIBOR and does not expect the related accounting update to have a material impact.
Christopher J. McComish became CEO effective August 23, 2021. The company identified successful CEO transition and integration as an additional business risk. A pension settlement charge of approximately $0.4 million in the quarter and $1.3 million year to date affected pension expense and other comprehensive income. No legal proceeding was identified as expected to have a material adverse effect.
The company extended its $50 million share-repurchase authorization through March 31, 2022, with $37.4 million remaining at September 30, 2021. No shares were repurchased during the quarter or nine months.
Important facts for investors to verify
- Whether the improvement in earnings remains after the unusually low credit-loss provision and the absence of the 2020 fraud charge-off.
- Trends in nonperforming loans, OREO, hotel and commercial real estate exposure, the new $21.7 million nonperforming C&I relationship, and the adequacy of the $108.3 million loan allowance.
- The sustainability of deposit growth and the unusually high cash balance as PPP proceeds, stimulus effects, and customer liquidity preferences normalize.
- The effect of continued low rates or a rapid rate increase on the asset-sensitive balance sheet, net interest margin, securities valuations, and capital.
- Progress and costs associated with the CEO transition, LIBOR replacement, cybersecurity, and compliance with potential COVID-19 vaccination or testing requirements.
- Future mortgage banking, commercial loan swap, wealth-management, and card-income trends, as well as operating-expense discipline.