S&T Bancorp, Inc. — 2011 Q3 Form 10-Q Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania-based bank holding company providing community banking, wealth management, insurance, commercial and consumer lending, and fiduciary services primarily in western Pennsylvania. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, with comparisons to the corresponding 2010 periods and balance-sheet comparisons to December 31, 2010.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total interest income | $40.8 million | $45.3 million | $124.8 million | $136.2 million |
| Net interest income | $33.9 million | $37.0 million | $103.3 million | $109.5 million |
| Provision for loan losses | $1.5 million | $8.3 million | $13.3 million | $21.8 million |
| Noninterest income | $10.3 million | $12.3 million | $32.5 million | $35.2 million |
| Noninterest expense | $24.2 million | $24.9 million | $77.2 million | $78.6 million |
| Net income | $13.8 million | $12.5 million | $35.0 million | $33.2 million |
| Net income available to common shareholders | $12.2 million | $10.9 million | $30.3 million | $28.5 million |
| Diluted EPS | $0.44 | $0.39 | $1.08 | $1.03 |
- Fully taxable-equivalent net interest margin was 3.76% in Q3 2011 versus 4.09% in Q3 2010, and 3.84% for the first nine months versus 4.05% in the prior-year period.
- Common return on average assets was 1.20% for Q3 and 1.00% year to date; common return on average equity was 8.12% for Q3 and 6.90% year to date.
- Total assets were $4.092 billion at September 30, 2011, compared with $4.114 billion at December 31, 2010. Shareholders’ equity increased to $603.7 million from $578.7 million.
- Portfolio loans declined to $3.132 billion from $3.356 billion, primarily because of loan paydowns and weak demand. Commercial loans represented 73% of portfolio loans.
- Nonperforming loans were $59.2 million and nonperforming assets were $65.2 million, compared with $63.9 million and $69.7 million, respectively, at December 31, 2010. Nonperforming loans were 1.89% of total loans and nonperforming assets were 2.08% of loans plus OREO.
- The allowance for loan losses was $51.5 million, or 1.64% of total loans, compared with $51.4 million, or 1.53%, at year-end. Net charge-offs for the first nine months were $13.1 million versus $25.1 million in 2010.
- Cash and due from banks increased to $262.4 million from $108.2 million. Securities available-for-sale increased to $340.1 million from $288.0 million, reflecting reinvestment of loan paydowns.
- Deposits totaled $3.271 billion, down $46.1 million from year-end. Noninterest-bearing demand deposits increased $51.7 million, while certificates of deposit declined $105.5 million.
- Total borrowings were $165.3 million, including $42.4 million of repurchase agreements, $32.3 million of long-term borrowings, and $90.6 million of junior subordinated debt securities. S&T reported approximately $1.1 billion of borrowing capacity with the Federal Home Loan Bank of Pittsburgh.
- Operating cash flow for the first nine months was $58.4 million, investing cash flow was $152.6 million, and financing cash flow was negative $56.7 million. Cash and cash equivalents increased $154.2 million to $262.4 million.
- S&T Bancorp and S&T Bank exceeded applicable adequately capitalized and well-capitalized regulatory thresholds. At September 30, 2011, the holding company’s total risk-based capital ratio was 18.51% and the bank’s was 13.87%.
Material changes versus comparable periods
- Q3 net income available to common shareholders increased 12.0%, and diluted EPS increased from $0.39 to $0.44. The nine-month increases were approximately 6.3% for net income available to common shareholders and 4.9% for diluted EPS.
- The primary earnings benefit was a $6.8 million Q3 and $8.6 million year-to-date reduction in the provision for loan losses, supported by fewer new impaired loans requiring specific reserves and lower net charge-offs.
- Net interest income declined $3.1 million in Q3 and $6.2 million year to date. Average loans and loan yields decreased, while funds held at the Federal Reserve and securities increased at lower yields.
- Noninterest income declined $2.0 million in Q3 and $2.7 million year to date, mainly because of lower mortgage banking revenue, lower deposit service charges following Regulation E changes, and lower securities-related results.
- Noninterest expense declined $0.8 million in Q3 and $1.4 million year to date. Lower FDIC assessments and legal costs were partly offset by higher salaries, joint venture amortization, and data-processing costs.
- Mortgage banking revenue was pressured by lower mortgage sales and refinancing activity. S&T sold $52.3 million of mortgages during the first nine months of 2011 versus $65.1 million in the prior-year period and recorded mortgage servicing-rights impairment charges.
Guidance, outlook, commentary, risks, and unusual items
- S&T entered into an agreement on September 14, 2011 to acquire Mainline Bancorp, Inc., which had approximately $242 million of assets and eight offices. The approximately $21 million transaction was expected to close in the first quarter of 2012, subject to regulatory and shareholder approvals and other closing conditions.
- Management expected the Mainline transaction to add approximately $141.1 million of gross loans and $210.3 million of deposits and to be accretive to earnings in the first full year, excluding one-time costs.
- The company reported no material changes to previously disclosed risk factors. Key risks include interest-rate movements, prolonged low rates, credit losses, weak housing and regional economic conditions, regulatory changes, competition, liquidity and capital needs, litigation, acquisition integration, and potential goodwill impairment.
- S&T had an asset-sensitive balance sheet. Management estimated that an immediate 300-basis-point rate increase would increase one-year pretax net interest income by 14.32%, while a 300-basis-point decrease would reduce it by 9.05%; the low-rate scenario was modified because rates were already very low.
- Off-balance-sheet commitments to extend credit and standby letters of credit totaled $948.3 million at September 30, 2011, supported by a $1.6 million allowance for lending-related commitments.
- The company remained subject to restrictions associated with its $108.7 million U.S. Treasury Capital Purchase Program investment, including consent requirements for increasing the common dividend or repurchasing securities through January 16, 2012 unless the preferred stock was redeemed or transferred.
- Management stated that liquidity was sufficient to fund outstanding commitments and letters of credit. Litigation was described as ordinary course and not expected to have a material adverse effect.
Investor verification items
- Verify the sustainability of earnings growth, given that the improvement was driven substantially by lower loan-loss provisions while net interest income and fee income declined.
- Monitor commercial real estate and construction credit quality, nonaccrual loans, TDRs, OREO, charge-offs, and the adequacy of the $51.5 million loan-loss allowance.
- Assess the effect of continued weak loan demand, loan paydowns, low interest rates, and the asset-sensitive balance sheet on future net interest margin.
- Review the Mainline merger’s approval status, final consideration mix, integration costs, realized synergies, and expected earnings contribution.
- Evaluate deposit trends, the reduction in brokered certificates of deposit, borrowing capacity, and compliance with CPP-related restrictions.
- Reconcile non-GAAP fully taxable-equivalent measures with GAAP results and review the assumptions underlying mortgage servicing-rights and goodwill valuations.