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. It provides commercial and retail banking, insurance, wealth management, trust and brokerage services through operations primarily in Pennsylvania, Ohio, New York and surrounding markets. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016. Amounts are in thousands except per-share data unless otherwise stated.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net income | $20.6 million, versus $18.6 million | $53.7 million, versus $49.7 million |
| Diluted EPS | $0.59, versus $0.54 | $1.54, versus $1.48 |
| Net interest income | $51.5 million, versus $49.6 million | $150.8 million, versus $138.7 million |
| Noninterest income | $13.4 million, versus $12.5 million | $41.7 million, versus $37.9 million |
| Noninterest expense | $34.4 million, versus $33.8 million | $107.6 million, versus $102.9 million |
| Provision for loan losses | $2.5 million, versus $3.2 million | $12.4 million, versus $6.5 million |
| Net interest margin, FTE basis | 3.46%, versus 3.61% | 3.47%, versus 3.59% |
| Dividends declared per share | $0.19, versus $0.18 | $0.57, versus $0.54 |
- Total assets were $6.72 billion at September 30, 2016, up 6.3% from December 31, 2015.
- Portfolio loans were $5.42 billion, up 7.8%, led by commercial real estate and commercial and industrial lending.
- Total deposits were $5.15 billion, up 5.5%; money market accounts and certificates of deposit grew, partly due to rate promotions.
- Total borrowings were $666.9 million, up $86.1 million. Short-term borrowings increased $209.0 million, while long-term borrowings declined $101.7 million after a $100 million maturity was replaced with short-term funding.
- Shareholders’ equity was $838.7 million, up 5.9%. The allowance for loan losses was $53.8 million, or 0.99% of portfolio loans.
- Cash provided by operating activities was $72.4 million. Investing activities used $382.2 million, primarily from net loan growth, while financing activities provided $335.5 million. Cash and cash equivalents ended at $125.2 million.
- Liquidity included $437.6 million of highly liquid assets, equal to 6.5% of total assets, and $1.4 billion of remaining borrowing availability at the Federal Home Loan Bank of Pittsburgh.
- S&T Bancorp reported a 9.02% Tier 1 leverage ratio, 10.01% common equity Tier 1 ratio and 11.87% total capital ratio. S&T Bank reported an 8.45% Tier 1 leverage ratio and 11.20% total capital ratio.
Material changes versus prior comparable periods
- Third-quarter net income increased 10.4%; nine-month net income increased 8.2%. Comparability of the nine-month periods is affected by the Integrity Bancshares acquisition, because the 2015 period included approximately seven months of Integrity results.
- Net interest income increased 3.8% in the quarter and 8.8% year to date, primarily from larger average interest-earning assets and loan growth. The FTE net interest margin declined 15 basis points in the quarter and 12 basis points year to date as funding costs increased and purchase-accounting accretion declined.
- Noninterest income increased 7.7% in the quarter and 9.9% year to date. Year-to-date results included a $2.1 million gain on the sale of the credit card portfolio and a $1.0 million pension-plan curtailment gain.
- Year-to-date provision expense increased $5.9 million, reflecting higher net charge-offs, specific reserves on impaired loans and loan growth. Net charge-offs were $6.7 million versus $4.5 million in the prior-year period.
- Nonperforming assets increased to $41.0 million from $35.7 million at December 31, 2015. Nonperforming loans were $40.5 million, or 0.75% of total loans, compared with 0.70% at year-end.
- Noninterest expense increased 4.6% year to date despite the absence of the $3.2 million of merger-related expenses recorded in the 2015 period. Higher salaries, equipment, professional services, occupancy and FDIC insurance costs were partly offset by lower data processing and other expenses.
Guidance, outlook, risks and unusual items
Management did not provide formal earnings or financial guidance in the filing. Management stated that organic loan and deposit growth, market expansion and increased fee income remain strategic priorities, while the low-interest-rate environment continues to pressure net interest income. Management expects organic growth to help mitigate that pressure.
- The balance sheet is asset sensitive; management’s rate-shock analysis indicated that higher interest rates would generally benefit pretax net interest income. Downward rate scenarios showed greater pressure on net interest income and economic value of equity.
- Key risks include credit losses, deterioration in commercial real estate and construction portfolios, regional economic weakness, interest-rate and spread changes, liquidity and funding costs, regulatory capital requirements, cybersecurity, competition, technology, litigation, acquisition integration and potential goodwill impairment.
- Commercial lending represented 77% of portfolio loans. Commercial special mention, substandard and doubtful loans increased to $198.3 million from $183.5 million at December 31, 2015.
- New nonperforming loans included approximately $15.4 million of credit deterioration in the acquired portfolio and approximately $4.4 million in one originated relationship.
- The company had $1.63 billion of commitments to extend credit and standby letters of credit, supported by a $2.6 million allowance for unfunded commitments. Management stated that pending legal proceedings were not expected to have a material adverse effect.
- Recently issued accounting standards, including expected credit loss, revenue recognition, leases and financial instruments guidance, had not yet been adopted; management was evaluating their effects. The filing states that the financial instruments standard is expected to have a significant impact primarily on equity-security fair-value presentation.
- Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during the quarter.
Facts investors should verify
- Whether continued commercial loan growth, particularly in commercial real estate and construction, is accompanied by further deterioration in nonperforming loans and special mention or substandard credits.
- Whether the allowance for loan losses remains adequate as acquired-loan credit deterioration and net charge-offs develop.
- Whether deposit rate promotions and increased short-term Federal Home Loan Bank funding compress future net interest margins.
- The sustainability of reported noninterest income given the one-time credit-card-sale gain and pension curtailment gain.
- The effect of future interest-rate changes on net interest income, deposit costs, securities values and economic value of equity.
- The eventual implementation effects of the expected credit loss, revenue recognition, leases and financial-instrument accounting standards.