S&T Bancorp, Inc. — Q2 2013 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 primarily in Western Pennsylvania, with a loan production office in Akron, Ohio. The filing covers the three and six months ended June 30, 2013; interim financial statements are unaudited. Amounts are in thousands except per-share data and percentages.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total interest income | $38,553 | $39,370 | $76,396 | $78,510 |
| Net interest income | $34,596 | $33,819 | $68,265 | $67,140 |
| Net interest margin, FTE | 3.51% | 3.57% | 3.50% | 3.63% |
| Provision for loan losses | $1,023 | $7,023 | $3,330 | $16,296 |
| Noninterest income | $12,867 | $12,531 | $27,673 | $25,601 |
| Noninterest expense | $28,386 | $29,344 | $60,002 | $62,127 |
| Net income | $14,103 | $8,600 | $26,433 | $12,080 |
| Diluted EPS | $0.47 | $0.30 | $0.89 | $0.42 |
At June 30, 2013, total assets were $4.529 billion, portfolio loans were $3.443 billion, deposits were $3.649 billion and shareholders’ equity was $546.9 million. Cash and due from banks totaled $247.4 million. The allowance for loan losses was $46.1 million, or 1.34% of portfolio loans.
Six-month operating cash flow was $45.2 million. Investing activities used $141.7 million, primarily because net loans increased $103.8 million and securities purchases exceeded maturities and sales. Financing activities provided $6.2 million. Cash and cash equivalents declined from $337.7 million at December 31, 2012 to $247.4 million at June 30, 2013.
Total borrowings were $267.7 million, including $199.2 million of short-term borrowings and $68.6 million of long-term borrowings. The company had $1.2 billion of remaining borrowing availability from a $1.3 billion FHLB capacity. Regulatory capital remained above well-capitalized thresholds: holding-company total risk-based capital was 14.30%, Tier 1 risk-based capital was 12.28% and leverage was 9.54%.
Material changes versus comparable periods
- Net income increased 64% in Q2 and 119% for the first six months, primarily because the provision for loan losses declined by $6.0 million and $13.0 million, respectively.
- Net interest income increased modestly, but the FTE net interest margin declined six basis points in Q2 and 13 basis points year to date as asset yields fell in the low-interest-rate environment.
- Average loans increased $216.0 million in Q2 and $219.5 million year to date, while portfolio loans grew 2.9% from year-end to $3.443 billion. Commercial loans represented 72.5% of portfolio loans.
- Interest expense declined because higher-rate certificates of deposit matured and funding shifted toward lower-cost deposits. The cost of interest-bearing liabilities fell to 0.54% in Q2 from 0.77% in the prior-year quarter.
- Noninterest income increased 2.7% in Q2 and 8.1% year to date. First-half results included a $3.1 million net gain from the sale of the merchant card servicing business.
- Noninterest expense decreased 3.3% in Q2 and 3.4% year to date, largely because merger-related expenses fell by $0.3 million and $3.4 million, respectively.
- Asset quality improved. Nonperforming assets declined to $38.3 million from $55.9 million at year-end, nonaccrual loans declined to $37.9 million from $55.0 million, and net charge-offs fell to $0.9 million in Q2 from $8.2 million.
- The $45.0 million repayment of junior subordinated debt reduced the total risk-based capital ratio by 109 basis points from year-end, although the company remained well capitalized.
Guidance, outlook, commentary and risks
Management did not provide formal earnings guidance. Its stated priorities for the second half of 2013 were loan growth, increasing fee income, improving asset quality and closely monitoring operating expenses. Management expects loan growth to support net interest income, but recognizes continued pressure from low interest rates and declining asset yields.
The merchant card servicing sale generated a one-time gain and a ten-year marketing and referral alliance. Future revenue from the alliance depends on referrals, new merchant accounts and transaction volume. Management also reported a $0.5 million interest recovery on a previously charged-off loan in Q2, which benefited interest income.
Key risks include interest-rate and yield-curve changes, prolonged low rates or rapid rate increases, credit losses, concentrations in commercial real estate and Western Pennsylvania, housing-market weakness, liquidity and access to capital, regulatory and Basel III requirements, cybersecurity and technology risks, competition, litigation, acquisition integration, goodwill impairment and broader economic or financial-market deterioration.
Total troubled debt restructurings were $57.0 million at June 30, 2013, including $16.1 million nonaccruing. Lending commitments and standby letters of credit totaled $1.022 billion, supported by a $3.3 million allowance for unfunded commitments. Management stated that existing litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether loan growth and improved asset quality continue without a rebound in charge-offs or nonperforming assets.
- Whether the lower net interest margin persists as rates, loan yields and deposit costs change.
- The sustainability of earnings excluding the $3.1 million merchant card sale gain and the Q2 interest recovery.
- The impact of the $45.0 million debt repayment on future interest expense, capital ratios and funding needs.
- Commercial real estate and commercial construction exposure, Western Pennsylvania concentration and the adequacy of related reserves.
- Liquidity trends, including the $90.3 million first-half cash decline, increased short-term borrowings and use of CDARS or brokered deposits.
- Performance of the ten-year merchant card referral alliance and its ability to replace the sold servicing business over time.
- Interest-rate sensitivity: a 300-basis-point increase was estimated to increase pretax net interest income by 9.0% and economic value of equity by 15.3%; the filing temporarily suspended negative 200- and 300-basis-point scenarios.