S&T Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania-based bank holding company providing commercial and consumer banking, insurance, wealth management, trust and brokerage services primarily in Western Pennsylvania, with loan production offices in Ohio. The filing covers the quarter and six months ended June 30, 2014; financial statements are unaudited except for the December 31, 2013 balance sheet.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net interest income | $36.9 million | $72.4 million |
| Net interest income, FTE | $38.2 million | $75.2 million |
| Net interest margin, FTE | 3.56% | 3.54% |
| Noninterest income | $11.8 million | $23.2 million |
| Noninterest expense | $30.2 million | $59.1 million |
| Net income | $14.7 million | $28.8 million |
| Diluted EPS | $0.49 | $0.97 |
| Dividends declared per share | $0.17 | $0.33 |
- Total assets were $4.8 billion at June 30, 2014, up 5.6% from December 31, 2013.
- Portfolio loans were $3.725 billion, up $158.9 million, or 4.5%, with commercial loans representing 73.7% of the portfolio.
- Total deposits were $3.865 billion, up $192.9 million, or 5.3%, from year-end. Borrowings totaled $276.5 million, including $185.0 million of short-term borrowings and $45.6 million of junior subordinated debt securities.
- Shareholders’ equity was $597.2 million, up $25.9 million from year-end. Accumulated other comprehensive income improved to a loss of $6.0 million from a loss of $12.7 million.
- Cash and cash equivalents were $130.2 million at June 30, 2014. Six-month cash flow was $43.8 million from operating activities, $(240.0) million from investing activities and $218.1 million from financing activities, producing a $21.9 million increase in cash.
- The allowance for loan losses was $46.6 million, or 1.25% of portfolio loans. Nonperforming assets were $15.4 million, or 0.41% of loans plus OREO, compared with $22.9 million, or 0.64%, at year-end.
- Regulatory capital remained strong. S&T Bancorp’s total risk-based capital ratio was 14.26% and its Tier 1 leverage ratio was 9.91%; S&T Bank’s corresponding ratios were 13.24% and 9.09%. Both were classified as well capitalized.
Material changes versus the prior comparable period
- Second-quarter net income increased 4.4% and diluted EPS increased from $0.47 to $0.49. Six-month net income increased 8.8% and diluted EPS increased from $0.89 to $0.97.
- Net interest income increased 6.5% in the second quarter and 6.1% for the first six months, primarily due to growth in average loans and other interest-earning assets. FTE net interest margin increased five basis points for the quarter and four basis points year to date.
- The provision for loan losses changed to a benefit of $1.1 million in the second quarter and $0.8 million year to date, compared with provisions of $1.0 million and $3.3 million, respectively, in 2013. The change reflected net recoveries and improved credit quality.
- Noninterest income declined 8.5% in the quarter and 16.2% year to date. The six-month comparison was adversely affected by the $3.1 million gain on the 2013 sale of the merchant card servicing business. Mortgage banking, debit and credit card, and insurance fees also declined, partly offset by higher wealth management fees.
- Noninterest expense increased 6.3% in the quarter, primarily because of salaries, incentives and other expenses, but decreased 1.5% year to date due in part to the absence of 2013 merger-related expenses.
- Asset quality improved: nonaccrual loans declined to $14.9 million from $22.5 million at year-end, total TDRs declined to $42.4 million from $49.3 million, and six-month net loan recoveries were $1.2 million compared with $3.7 million of net charge-offs in 2013.
Guidance, outlook, management commentary and risks
Management did not provide quantitative earnings guidance. Its stated 2014 priorities were loan growth, increased fee income and expense discipline while acknowledging that the low-interest-rate environment would pressure net interest income. Management plans to continue organic expansion, evaluate new markets, develop the Central Ohio loan production office, and pursue acquisition opportunities when appropriate.
- Liquidity was supported by $358.1 million of highly liquid assets, a 7.5% asset liquidity ratio, $1.4 billion of remaining FHLB borrowing availability and $60.0 million of Federal Funds lines.
- The loan portfolio is concentrated in commercial lending and primarily serves Western Pennsylvania. Commercial real estate and commercial construction represented 49% of total portfolio loans combined, creating exposure to local economic conditions, property values, construction activity and borrower cash flows.
- Interest-rate risk is material. Management reported an asset-sensitive balance sheet; a 100-basis-point increase was estimated to raise pretax net interest income by 1.8%, while a 100-basis-point decrease was estimated to reduce it by 3.4%. The filing states that the negative 200- and 300-basis-point scenarios were temporarily suspended because of the low-rate environment.
- Other identified risks include credit losses, cybersecurity and technology risks, regulatory and Basel III requirements, competition, litigation, economic and housing-market deterioration, goodwill impairment, acquisition execution and access to capital.
- At June 30, 2014, commitments to extend credit and standby letters of credit totaled $1.196 billion. The allowance for unfunded commitments was approximately $3.1 million. Management stated that pending litigation was not expected to have a material adverse effect.
- No other-than-temporary impairment was recorded on securities. Unrealized losses were attributed to interest-rate changes, and management stated that the affected securities were investment grade and expected to recover.
Important facts for investors to verify
- Whether commercial loan growth and the elevated commercial real estate and construction concentration remain consistent with underwriting and risk limits.
- Whether the improvement in nonperforming assets and the negative loan-loss provision is sustainable, particularly after excluding recoveries and loan sales.
- Trends in mortgage banking, card, insurance and other fee income following the nonrecurring 2013 merchant card servicing gain.
- The funding mix, including increased short-term borrowings and CDARS, one-way buy and brokered deposits, and its sensitivity to higher interest rates.
- Future net interest margin performance under changing rates and the implications of the suspended downside rate scenarios.
- Execution and financial returns from the Central Ohio expansion, State College branch and any future acquisitions.