S&T Bancorp, Inc. — 2013 Q3 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 community banking, insurance, and wealth management services across western Pennsylvania and through a loan production office in northeast Ohio. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, with comparisons to the corresponding 2012 periods and December 31, 2012 balance-sheet data.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net interest income | $35.3 million | $33.8 million | $103.5 million | $100.9 million |
| Net interest income, FTE | $36.5 million | $34.9 million | $107.1 million | $104.3 million |
| Net interest margin, FTE | 3.50% | 3.50% | 3.50% | 3.58% |
| Provision for loan losses | $3.4 million | $2.3 million | $6.7 million | $18.6 million |
| Noninterest income | $12.5 million | $14.7 million | $40.2 million | $40.3 million |
| Noninterest expense | $27.9 million | $31.0 million | $87.9 million | $93.1 million |
| Net income | $12.2 million | $12.6 million | $38.7 million | $24.7 million |
| Diluted EPS | $0.41 | $0.43 | $1.30 | $0.85 |
| Dividends declared per share | $0.15 | $0.15 | $0.45 | $0.45 |
Total assets were $4.59 billion at September 30, 2013, up 1.4% from December 31, 2012. Portfolio loans rose 4.9% to $3.51 billion, led by commercial real estate, commercial and industrial, and residential mortgage lending. Total deposits increased 1.5% to $3.69 billion.
Cash and due from banks were $234.9 million, compared with $337.7 million at year-end 2012. Net cash provided by operating activities for the nine months was $67.9 million; investing activities used $226.5 million, primarily because of a $177.4 million increase in loans; and financing activities provided $55.8 million. Cash and cash equivalents declined $102.8 million to $234.9 million.
Total borrowings were $276.3 million, including $208.3 million of short-term borrowings and $68.0 million of long-term borrowings. S&T repaid $45.0 million of junior subordinated debt and replaced certain higher-cost funding with short-term borrowings. The company reported remaining FHLB borrowing availability of approximately $1.3 billion from a $1.5 billion capacity.
Shareholders’ equity was $555.4 million, compared with $537.4 million at December 31, 2012. S&T Bancorp remained well capitalized, with a 9.61% Tier 1 leverage ratio, 12.26% Tier 1 risk-based capital ratio, and 14.27% total risk-based capital ratio at September 30, 2013.
Material changes versus prior periods
- Third-quarter net income declined 2.8%, while nine-month net income increased 56.8%, primarily because of lower credit costs and reduced expenses in the nine-month period.
- Net interest income increased 4.4% in the quarter and 2.6% year to date. Growth in average loans and other interest-earning assets offset lower asset yields.
- The FTE net interest margin was unchanged at 3.50% in the quarter but declined from 3.58% to 3.50% for the nine-month period.
- The third-quarter loan-loss provision increased because of a $3.1 million specific reserve related to a commercial construction loan. The nine-month provision declined $11.9 million year over year.
- Noninterest income declined in the quarter because of lower securities gains, mortgage banking revenue, and card fees. The nine-month comparison includes a $3.1 million gain from the sale of the merchant card servicing business.
- Noninterest expense decreased 9.9% in the quarter and 5.6% year to date, primarily because of lower merger-related costs and other expenses. A $0.5 million IRS penalty contingency was reversed after the IRS waived the proposed penalty.
- Credit quality improved: nonperforming assets declined 34% to $36.9 million, nonaccrual loans declined to $36.4 million, and special mention and substandard loans declined 34% to $222.3 million.
- The allowance for loan losses increased modestly to $48.0 million, or 1.37% of portfolio loans, from $46.5 million, or 1.38%, at year-end 2012. Net charge-offs declined to $5.3 million for the first nine months from $21.2 million in the prior-year period.
Outlook, commentary, risks, and unusual items
Management identified loan growth, increased fee income, improved asset quality, and expense control as the principal priorities for the remainder of 2013. Loan growth initiatives included adding commercial lenders and expanding the northeast Ohio loan production office.
Management stated that economic conditions in its markets had stabilized and that credit quality had improved. The company lengthened loss-emergence-period assumptions in its allowance methodology prospectively; management said the change did not materially affect the total allowance at September 30, 2013.
The merchant card servicing business was sold for $4.8 million in the first quarter, with $1.7 million of deconversion and termination fees and a resulting $3.1 million gain. The company entered into a ten-year marketing and referral alliance with the purchaser, with future revenue dependent on referrals and merchant activity.
Principal risks include interest-rate and yield-curve changes, prolonged low rates or rapidly rising rates, commercial real estate and construction credit losses, local economic weakness, housing-market deterioration, cybersecurity and technology risks, regulatory and capital requirements, competition, litigation, acquisition integration, access to funding, and potential goodwill impairment. Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls.
The balance sheet was asset sensitive. Management’s rate-shock analysis indicated that a 300-basis-point increase could raise projected pretax net interest income by 9.6% and increase economic value of equity by 14.9%; a 100-basis-point decrease could reduce them by 3.6% and 9.8%, respectively. These are model-based estimates and not forecasts.
Important facts for investors to verify
- Reconcile reported earnings growth with the nonrecurring $3.1 million merchant card sale gain, the IRS contingency reversal, and changes in merger-related costs.
- Monitor commercial real estate and construction concentrations, including the $3.1 million specific reserve and the $5.9 million commercial construction loan placed on nonaccrual status during the quarter.
- Assess whether improving nonperforming-asset and charge-off trends continue as portfolio loans grow.
- Review the funding shift toward $175.0 million of short-term borrowings, brokered and CDARS deposits, and the implications for liquidity and interest-rate sensitivity.
- Evaluate the effect of the 45-basis-point year-to-date decline in FTE net interest margin and lower loan and securities yields.
- Confirm capital treatment and future earnings effects of the $45.0 million subordinated-debt repayment; total risk-based capital remained above the well-capitalized threshold but declined to 14.27%.
- Review commitments to extend credit of $1.04 billion, standby letters of credit of $80.7 million, and the $3.1 million allowance for unfunded commitments.