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 retail and commercial banking, cash management, trust and financial services, and insurance-related products across five markets in Pennsylvania, Ohio, and New York. The filing covers the unaudited three and nine months ended September 30, 2019; balance-sheet comparisons are primarily with December 31, 2018 and income-statement comparisons with the corresponding 2018 periods. Dollar amounts are in thousands unless otherwise indicated.
Key financial metrics
| Metric | Three months ended September 30, 2019 | Nine months ended September 30, 2019 | Comparison |
|---|---|---|---|
| Net income | $26.9 million | $76.0 million | Down 12.8% and 3.2%, respectively |
| Diluted EPS | $0.79 | $2.21 | Down from $0.88 and $2.24 |
| Net interest income | $61.2 million | $182.4 million | Up 3.3% and 4.5%, respectively |
| FTE net interest margin | 3.62% | 3.67% | Down 5 basis points and up 4 basis points, respectively |
| Provision for loan losses | $4.9 million | $12.8 million | Up $4.4 million and $0.5 million |
| Noninterest income | $13.1 million | $37.3 million | Up 8.5% and down 2.0%, respectively |
| Noninterest expense | $37.7 million | $116.9 million | Up 1.6% and 7.3%, respectively |
| Effective tax rate | 15.0% | 15.6% | Up from 8.5% and 14.1% |
Total assets were $7.57 billion at September 30, 2019, up from $7.25 billion at December 31, 2018. Portfolio loans increased to $6.20 billion from $5.95 billion, led by commercial and industrial and commercial construction growth. Commercial loans represented 78.5% of portfolio loans.
Total deposits increased 5.4% to $5.98 billion, driven primarily by a $382.2 million increase in money market deposits and a $69.3 million increase in noninterest-bearing demand deposits. Total borrowings declined 17.5% to $498.7 million. Shareholders’ equity increased to $982.4 million from $935.8 million, supported by earnings and higher accumulated other comprehensive income, partly offset by dividends and share repurchases.
The allowance for loan losses was $62.1 million, or 1.00% of portfolio loans, compared with $61.0 million, or 1.03%, at year-end 2018. Nonperforming loans were $50.0 million and nonperforming assets were $51.7 million, representing 0.81% and 0.83% of relevant loan and asset balances, respectively.
Cash provided by operating activities was $92.8 million for the nine months ended September 30, 2019. Investing activities used $230.8 million, primarily due to a $263.2 million net increase in loans. Financing activities provided $156.2 million, mainly from core-deposit growth. Cash and cash equivalents increased to $173.6 million from $155.5 million at year-end.
Liquidity included $519.3 million of highly liquid assets, equal to 6.9% of total assets, and approximately $2.0 billion of remaining borrowing availability with the Federal Home Loan Bank of Pittsburgh. Regulatory capital ratios remained above “well-capitalized” thresholds; S&T Bancorp’s total risk-based capital ratio was 13.15% and S&T Bank’s was 12.68%.
Material changes versus prior comparable periods
- Net income declined despite higher net interest income, primarily because of higher loan-loss provisions, operating expenses, and income taxes.
- Loan growth increased interest income, but funding costs rose as average interest-bearing deposits increased and deposit rates rose.
- Credit costs increased materially. Net charge-offs were $4.3 million in the third quarter and $11.6 million year to date, compared with $0.4 million and $8.1 million in the corresponding 2018 periods.
- Impaired loans increased to $72.5 million from $49.5 million at December 31, 2018 and $30.7 million at September 30, 2018. Nonperforming loans increased from $46.1 million at year-end 2018.
- Noninterest income benefited from higher commercial loan swap fees and card revenue, but year-to-date results were reduced by the absence of the $1.9 million 2018 gain from the sale of a majority interest in the insurance business. Wealth management income also declined.
- Noninterest expense rose $7.9 million year to date, including $1.2 million of merger-related costs and higher salaries, technology, occupancy, and marketing expenses. Lower FDIC insurance expense partially offset these increases.
- The company adopted the new lease standard on January 1, 2019, recognizing $37.5 million of operating lease right-of-use assets at September 30, 2019. Management stated that adoption had no material income-statement impact.
- The securities portfolio declined modestly to $669.2 million, while its net unrealized gain improved to $13.6 million from a $5.1 million unrealized loss at December 31, 2018, primarily because of lower interest rates.
Guidance, outlook, commentary, risks, and unusual items
No formal earnings or financial guidance is provided. Management stated that its focus remains organic loan and deposit growth, increased fee income, expense control, and asset-quality monitoring.
S&T entered into an agreement to acquire DNB Financial Corporation in an all-stock transaction under which DNB shareholders would receive 1.22 S&T shares for each DNB share. DNB shareholders approved the merger and all required bank regulatory approvals had been received. Closing was expected on or about November 30, 2019, subject to customary conditions. DNB had approximately $1.2 billion of assets and 14 branches at June 30, 2019.
Key risks include higher credit losses, concentrations in commercial real estate and other commercial loans, interest-rate and deposit-cost pressure, economic and housing-market deterioration, cybersecurity and technology risks, regulatory changes, competition, litigation, and execution risk related to the DNB merger. Management specifically cited possible integration costs, business disruption, loss of customers or key employees, diversion of management attention, and failure to realize anticipated merger benefits.
A $19.9 million commercial real estate relationship was modified during the third quarter and classified as a performing troubled debt restructuring. Total TDRs increased to $52.9 million, including $14.5 million of nonperforming TDRs. The company also authorized a new $50 million share-repurchase plan effective through March 31, 2021; no shares had been repurchased under that new plan as of September 30, 2019.
The company expects to adopt the current expected credit loss model on January 1, 2020. A preliminary model had been completed, but the filing states that the financial impact remained uncertain and would depend on portfolio composition, economic forecasts, and loans acquired from DNB. Management anticipated an increase in the allowance for credit losses.
Important facts for investors to verify
- Whether the DNB merger closed as expected and the resulting purchase accounting, dilution, integration costs, and capital impact.
- Whether elevated impaired loans, TDRs, nonperforming loans, and net charge-offs continued or normalized after September 30, 2019.
- The magnitude of the January 1, 2020 CECL adoption adjustment and its effect on capital, earnings, and the allowance for credit losses.
- Whether money market deposit growth was retained after promotional pricing and how deposit repricing affected net interest margin.
- The sustainability of commercial loan growth, particularly given the 78.5% commercial concentration and significant commercial real estate exposure.
- Actual utilization of the new $50 million share-repurchase authorization and its effect on tangible capital and per-share results.
- Whether technology outsourcing, merger-related expenses, and other operating-cost increases remained elevated.