S&T Bancorp, Inc. Form 10-Q Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania bank holding company headquartered in Indiana, Pennsylvania, serving Pennsylvania, Ohio, New York, West Virginia and Maryland through community banking, mortgage, insurance, wealth management and related services. This unaudited Form 10-Q covers the three months ended March 31, 2017, with comparisons to March 31, 2016 and December 31, 2016. The company discontinued separate reporting of its Insurance and Wealth Management segments because management determined they were not material to consolidated results.
Key financial metrics
| Metric | March 31, 2017 / Q1 2017 | Comparison |
|---|---|---|
| Total assets | $7.065 billion | Up 1.8% from December 31, 2016 |
| Portfolio loans, net | $5.691 billion | Up 2.4% from December 31, 2016 |
| Total deposits | $5.435 billion | Up 3.1% from December 31, 2016 |
| Shareholders’ equity | $855.2 million | Up 1.6% from December 31, 2016 |
| Net interest income | $53.9 million | Up $4.2 million, or 8.5%, year over year |
| Net interest margin | 3.38%; 3.50% on an FTE basis | FTE margin declined from 3.53% |
| Net income | $18.2 million | Up 13.0% from $16.1 million |
| Diluted EPS | $0.52 | Up from $0.46 |
| Provision for loan losses | $5.2 million | Up from $5.0 million |
| Net charge-offs | $2.1 million; 0.15% annualized of average loans | Down from $2.8 million and 0.22% |
| Noninterest income | $13.0 million | Down 17.8% year over year |
| Noninterest expense | $36.8 million | Down 4.2% year over year |
| Cash flow from operations | $30.3 million | Up from $25.7 million |
| Cash flow used in investing | $166.5 million | Driven primarily by $151.4 million of net loan growth |
| Cash flow from financing | $101.4 million | Supported by deposit growth |
| Cash and cash equivalents | $104.7 million | Down from $139.5 million at December 31, 2016 |
Material changes versus comparable periods
- Net income increased primarily because net interest income rose $4.2 million and noninterest expense declined $1.6 million. These benefits were partly offset by lower noninterest income, higher taxes and a modestly higher loan-loss provision.
- Average interest-earning assets increased $589 million, including $530 million of average loan growth. Average interest-bearing liabilities increased $500 million, causing funding costs to rise faster than asset yields and reducing the FTE net interest margin by three basis points.
- Commercial loans increased $136.8 million from year-end, led by commercial real estate growth of $116.2 million and commercial and industrial growth of $21.3 million. Commercial loans represented 78.2% of portfolio loans.
- Deposits increased $162.9 million, including a $140.8 million increase in brokered deposits. Borrowings declined $54.4 million as deposit growth helped fund asset growth.
- Noninterest income declined because the prior-year period included a $2.1 million credit-card portfolio sale gain and a $1.0 million pension curtailment gain. Q1 2017 included a $0.4 million securities gain.
- The allowance for loan losses increased to $55.8 million from $52.8 million at year-end, primarily due to higher specific reserves and loan growth. Impaired loans increased to $46.8 million from $41.9 million.
- Nonperforming assets increased to $46.9 million from $43.3 million, primarily because two commercial and industrial relationships totaling approximately $14.1 million became nonperforming, partly offset by the payoff of a $9.2 million acquired commercial real estate relationship.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management emphasized continued organic loan and deposit growth, increased fee income, expense control and close monitoring of asset quality. Management expects future increases in short-term interest rates to benefit net interest income, but noted that the low-rate environment remains challenging.
- The balance sheet is described as asset sensitive. Management’s rate-shock analysis indicated a 3.9% increase in projected pretax net interest income under an immediate 300-basis-point increase and a 4.3% decrease under a 100-basis-point decline. The filing temporarily suspended the minus-200- and minus-300-basis-point scenarios because of the low-rate environment.
- Liquidity included approximately $470 million of highly liquid assets, equal to 6.7% of total assets, and $1.5 billion of remaining FHLB borrowing availability. Capital ratios exceeded regulatory “well-capitalized” thresholds.
- Key risks include commercial real estate and commercial construction concentration, regional economic conditions, credit losses, interest-rate changes, deposit and funding costs, competition, regulatory developments, cybersecurity, litigation, acquisition integration and possible goodwill impairment.
- The company reported $1.498 billion of commitments to extend credit and standby letters of credit, with a $2.1 million allowance for unfunded commitments. Management stated that pending litigation was not expected to have a material adverse effect.
- On April 7, 2017, the company exchanged its Allegheny Valley Bancorp shares for shares of Standard AVB Financial Corp. and expects to recognize an approximately $2.7 million gain in the second quarter of 2017.
- Adopted share-based compensation and equity-method accounting updates had no material impact. The company was evaluating several future accounting standards, including CECL, revenue recognition, leases and financial-instrument changes.
Important facts for investors to verify
- Whether commercial and industrial credit deterioration, including the two $14.1 million relationships, results in additional provisions or charge-offs.
- The sustainability of loan growth and the effect of higher deposit, brokered-deposit and borrowing costs on net interest margin.
- The level and composition of brokered deposits and the company’s liquidity cushion relative to funding needs.
- Trends in nonperforming assets, impaired loans, criticized commercial loans and the allowance coverage ratio.
- The timing and final amount of the approximately $2.7 million second-quarter gain related to Standard AVB Financial Corp.
- The eventual effects of CECL and other pending accounting standards on capital, reserves and reported earnings.