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, brokerage and related financial services through operations primarily in Pennsylvania and Ohio, with loan production offices in Pennsylvania, Ohio and New York. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods, and the balance sheet at September 30, 2018 compared with December 31, 2017.
Key financial metrics
| Metric | Three months ended Sept. 30, 2018 | Nine months ended Sept. 30, 2018 |
|---|---|---|
| Net interest income | $59.3 million | $174.6 million |
| Net interest margin, FTE | 3.67% | 3.63% |
| Provision for loan losses | $0.5 million | $12.3 million |
| Noninterest income | $12.0 million | $38.1 million |
| Noninterest expense | $37.1 million | $109.0 million |
| Net income | $30.9 million | $78.5 million |
| Diluted earnings per share | $0.88 | $2.24 |
| Effective tax rate | 8.5% | 14.1% |
| Dividends declared per share | $0.25 | $0.72 |
- Total assets were $7.105 billion at September 30, 2018; shareholders’ equity was $919.8 million.
- Portfolio loans, net of unearned income, were $5.808 billion, up $46.4 million from December 31, 2017. The allowance for loan losses was $60.6 million, or 1.04% of portfolio loans.
- Total deposits were $5.468 billion, up $39.6 million from year-end. Total borrowings were $671.3 million, down $11.8 million.
- Cash and cash equivalents were $132.7 million. Nine-month operating cash flow was $85.2 million; investing activities used $64.1 million and financing activities used $5.5 million, producing a $15.5 million increase in cash.
- Highly liquid assets totaled approximately $480 million, or 6.8% of assets. Remaining FHLB borrowing availability was approximately $1.7 billion.
- Regulatory capital remained well above “well-capitalized” thresholds. S&T Bancorp’s common equity tier 1 ratio was 11.42% and total capital ratio was 13.27% at September 30, 2018.
Material changes versus prior comparable periods
- Net income increased 35.9% year over year in the third quarter and 23.3% for the first nine months. Diluted EPS increased from $0.65 to $0.88 in the quarter and from $1.82 to $2.24 year to date.
- Net interest income increased 3.1% in the quarter and 4.0% year to date. FTE net interest margin increased eight basis points in both periods, benefiting from higher short-term interest rates despite higher funding costs.
- Noninterest income declined 11.1% in the quarter and 11.0% year to date. The principal factors were the absence of 2017 securities-sale gains and lower insurance revenue following the sale of a 70% interest in S&T Evergreen Insurance. The transaction generated a $1.9 million gain in the first quarter of 2018.
- Noninterest expense increased 1.5% in the quarter but decreased 0.8% year to date. Lower salaries and FDIC insurance costs were partly offset by higher information technology, other taxes, professional services and marketing expenses.
- The effective tax rate declined substantially from 28.1% to 8.5% in the quarter and from 27.5% to 14.1% year to date. The reduction reflects the Tax Cuts and Jobs Act and discrete tax benefits, including a $2.9 million third-quarter benefit associated with a $20.4 million pension contribution.
- Commercial real estate loans increased $140.4 million from year-end and commercial and industrial loans increased $18.1 million, while commercial construction loans declined $100.6 million. Consumer loans declined $11.6 million.
- Nonperforming loans declined to $20.7 million from $23.9 million at year-end, while nonperforming assets were $23.8 million. OREO increased $2.6 million because land lots no longer intended for future branch locations were reclassified to OREO.
- Commercial loans represented 78.6% of portfolio loans. Commercial special mention, substandard and doubtful loans increased to approximately $284 million from $201 million at year-end, primarily because updated borrower information resulted in downgrades.
- Accumulated other comprehensive loss increased to $33.3 million, primarily because of higher unrealized losses on available-for-sale securities as interest rates increased.
Guidance, outlook, commentary, risks and unusual items
- Management remains focused on organic loan and deposit growth, fee-income expansion, expense control and asset quality. Management stated that higher short-term rates have benefited net interest income and expects to benefit from future increases, although competitive pressures may reduce some benefits.
- The balance sheet is described as asset sensitive. A 100-basis-point rate increase was modeled to increase pretax net interest income by 2.8% over one year and 3.6% over two years; a 100-basis-point decline was modeled to reduce it by 4.3% and 5.8%, respectively. These scenarios remained within the company’s minimal risk tolerance levels.
- Nine-month net charge-offs were $8.1 million and included a $5.2 million charge-off related to a commercial participation loan involving alleged fraudulent activity by executives of the borrower. S&T received a $0.1 million recovery in the third quarter and does not expect further charge-offs from the relationship.
- The company adopted several accounting standards in 2018, including revenue recognition and financial-instrument classification guidance, with no material reported balance-sheet or income-statement impact. The adoption of ASU 2016-01 resulted in a $0.9 million reclassification from accumulated other comprehensive income to retained earnings.
- Upcoming CECL credit-loss guidance is effective for S&T in 2020. Management is developing its methodology with third-party assistance but had not quantified the potential financial impact.
- Lease accounting guidance is expected to require recognition of approximately $30 million to $35 million of right-of-use assets and lease liabilities beginning in the first quarter of 2019, with a minor expected effect on regulatory capital and no material expected income-statement impact.
- The company authorized a $50 million share repurchase program through August 31, 2019, but made no open-market repurchases through September 30, 2018. Separately, it repurchased an outstanding warrant for $7.7 million on September 11, 2018.
- Management identified and reported remediation of a previously disclosed material weakness involving inconsistent internal loan risk-rating assessments. Management concluded the weakness was remediated as of September 30, 2018.
- Principal risks include credit losses, concentrations in commercial real estate and other commercial lending, interest-rate and deposit-cost sensitivity, securities-market losses, liquidity and funding conditions, cybersecurity, regulatory changes, competition, economic deterioration, housing-market weakness, goodwill impairment and litigation.
Important facts for investors to verify
- Whether the increase in substandard commercial loans and the 1.04% allowance coverage ratio adequately reflect emerging credit risk.
- The sustainability of margin expansion as deposit and borrowing costs rise and as competition for funding intensifies.
- The recurring earnings impact of the insurance-business sale, the $1.9 million gain, and the absence of prior-period securities gains.
- The size and duration of unrealized securities losses and their potential effect on tangible capital and liquidity if securities must be sold.
- The eventual balance-sheet impact of CECL adoption and whether expected credit losses will materially increase reserves.
- Whether the reported remediation of the loan-risk-rating control weakness remains effective in future reporting periods.