S&T Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania-based regional bank holding company operating in Western and Eastern Pennsylvania, Ohio, and Upstate New York. It provides retail and commercial banking, cash management, trust, brokerage, and related financial services. This report covers the quarter and nine months ended September 30, 2020. The DNB Financial Corporation acquisition closed November 30, 2019, with DNB results included beginning December 1, 2019.
Financial performance and condition
| Metric | Three months ended September 30, 2020 | Nine months ended September 30, 2020 | Comparable period |
|---|---|---|---|
| Net interest income | $69.3 million | $209.5 million | $61.2 million and $182.4 million |
| Net interest margin, FTE | 3.29% | 3.37% | 3.62% and 3.67% |
| Provision for credit losses | $17.5 million | $124.3 million | $4.9 million and $12.8 million |
| Noninterest income | $16.5 million | $44.1 million | $13.1 million and $37.3 million |
| Noninterest expense | $48.2 million | $138.1 million | $37.7 million and $116.9 million |
| Net income | $16.7 million | $(3.1) million | $26.9 million and $76.0 million |
| Diluted EPS | $0.43 | $(0.08) | $0.79 and $2.21 |
- Total assets were $9.19 billion, compared with $8.76 billion at December 31, 2019.
- Portfolio loans were $7.39 billion, up $257.7 million from year-end; excluding $550.1 million of Paycheck Protection Program loans, portfolio loans declined $292.4 million.
- Deposits were $7.63 billion, up $597.2 million, driven primarily by customer deposits related to PPP funding, stimulus payments, and precautionary cash holdings.
- Total borrowings were $238.9 million, down $177.5 million from year-end. Long-term borrowings and junior subordinated debt totaled $113.1 million.
- Cash and due from banks were $308.5 million. Management reported $670.1 million of highly liquid assets, equal to 7.3% of total assets, and $2.5 billion of remaining FHLB borrowing availability.
- Net cash used in operating activities was $3.0 million; investing activities used $260.9 million; financing activities provided $374.6 million. Cash increased $110.7 million to $308.5 million.
- The allowance for credit losses on loans was $121.0 million, or 1.64% of portfolio loans, compared with 0.87% at December 31, 2019. Excluding PPP loans, the ratio was 1.77%.
- Nonperforming assets were $86.4 million, or 1.17% of total loans plus OREO, compared with $57.6 million, or 0.81%, at year-end. Nonperforming loans were $84.1 million.
- Regulatory capital ratios remained above well-capitalized thresholds: S&T Bancorp’s CET1 ratio was 11.05%, Tier 1 leverage ratio was 9.11%, and total capital ratio was 13.18%.
Material changes versus prior comparable periods
- Third-quarter net income declined 38.0% because the higher credit-loss provision and increased operating expenses more than offset higher net interest and noninterest income.
- Nine-month results shifted to a net loss, primarily because of a $58.7 million pretax customer-fraud loss from a check-kiting scheme recognized in the second quarter. Management stated that the fraud reduced nine-month net income by $46.3 million, or $1.19 per diluted share.
- Net interest income increased, but FTE net interest margin declined 33 basis points in the quarter and 30 basis points year to date because of lower short-term interest rates. The company describes its balance sheet as asset sensitive.
- Mortgage banking income increased $3.4 million in the quarter and $6.1 million year to date, benefiting from refinancing activity and lower mortgage rates. Service charges on deposits declined because of reduced customer activity.
- Noninterest expense increased 28.1% in the quarter and 18.1% year to date, reflecting the DNB merger, higher personnel and pension costs, technology and occupancy expenses, legal costs, and FDIC insurance expense.
- The company adopted CECL on January 1, 2020, increasing the loan allowance by $27.4 million and reducing retained earnings by $22.6 million.
- Net charge-offs were $12.9 million in the quarter and $92.1 million year to date, compared with $4.3 million and $11.6 million in the respective 2019 periods.
- Common-stock repurchases were suspended in March 2020. The company repurchased 411,430 shares for $12.6 million during the first nine months but none during the third quarter; $37.4 million remained available under the repurchase plan.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide formal earnings or revenue guidance. Management expects continued uncertainty from COVID-19 and plans to evaluate goodwill impairment quarterly in the current environment.
- Management reported no goodwill impairment as of September 30, 2020. Goodwill totaled $373.4 million.
- COVID-19-related payment deferrals covered $1.4 billion of commercial loans, with $350.0 million still deferred at September 30. Consumer and mortgage deferrals totaling $69.0 million had ended by quarter-end.
- The $243.0 million hotel portfolio presented heightened risk: 95% was on deferral, with $92.9 million classified as special mention and $126.6 million as substandard. Management expected to update loss estimates after obtaining fourth-quarter appraisals.
- Management identified a $10.1 million third-quarter charge-off on a deteriorating CRE relationship and a $3.4 million specific reserve related to collateral liens in the customer-fraud lending relationship.
- Key stated risks include additional COVID-19-related credit losses, deterioration in hospitality and commercial real estate, low interest rates and margin pressure, fraud and operational risk, liquidity and capital impacts, regulatory changes, economic weakness, cybersecurity, third-party service interruptions, and the uncertain transition from LIBOR.
- Management stated that internal stress testing showed adequate capital cushions and that the company remained well capitalized. Litigation disclosed in the filing was not expected to have a material adverse effect.
- A November 2, 2020 severance agreement with Ernest J. Draganza provides one year of base salary and COBRA benefits upon termination without cause. A separate agreement with former executive David P. Ruddock provides specified payments, benefits, and transfer of certain property.
Important facts for investors to verify
- Whether hotel, CRE, and other COVID-19-affected borrowers generate additional downgrades, charge-offs, or CECL provisions after September 30, 2020.
- The recoverability of the $58.7 million fraud loss and the remaining $10.9 million nonperforming lending relationship associated with the customer.
- Fourth-quarter appraisals and resulting allowance requirements for the hotel portfolio.
- The sustainability of deposit growth, PPP-related balances, liquidity levels, and the $2.5 billion of reported FHLB availability.
- The effect of prolonged low interest rates on the asset-sensitive balance sheet, net interest margin, and future earnings.
- Whether the DNB acquisition produces expected cost and revenue synergies while merger-related and integration expenses decline.
- The status of the $50 million share-repurchase authorization and any changes to capital-management decisions.
- The filing’s non-GAAP FTE net interest margin reconciliation and the comparability of reported results following CECL adoption and the DNB acquisition.