S&T Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. The filing is unaudited and covers S&T Bancorp, Inc. and its subsidiaries. S&T is a Pennsylvania-based bank holding company operating primarily in Pennsylvania and Ohio, with loan production offices in Pennsylvania, Ohio and New York. It provides commercial and retail banking, cash management, trust, brokerage and related financial services.
Financial performance and condition
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Total interest income | $71.6 million | $64.9 million | $139.6 million | $126.1 million |
| Net interest income | $58.4 million | $56.6 million | $115.3 million | $110.4 million |
| Net interest margin, FTE | 3.64% | 3.57% | 3.61% | 3.53% |
| Provision for loan losses | $9.3 million | $4.9 million | $11.8 million | $10.1 million |
| Noninterest income | $12.3 million | $16.3 million | $26.0 million | $29.3 million |
| Noninterest expense | $35.9 million | $36.6 million | $71.9 million | $73.4 million |
| Net income | $21.4 million | $22.8 million | $47.6 million | $41.0 million |
| Diluted EPS | $0.61 | $0.65 | $1.36 | $1.17 |
| Dividends declared per share | $0.25 | $0.20 | $0.47 | $0.40 |
- Second-quarter net income declined 5.8%, while year-to-date net income increased 16.2%.
- Net interest income increased 3.2% in the quarter and 4.4% year to date, supported by higher short-term interest rates. FTE net interest income increased 1.5% and 2.6%, respectively.
- The effective tax rate declined to 15.8% for the quarter and 17.4% year to date, compared with 27.4% and 27.2% in the prior-year periods, primarily because of the Tax Cuts and Jobs Act.
- Total assets were $7.10 billion at June 30, 2018, compared with $7.06 billion at December 31, 2017.
- Portfolio loans increased to $5.79 billion from $5.76 billion. Commercial loans represented 78.5% of portfolio loans, with commercial real estate of $2.79 billion and commercial and industrial loans of $1.46 billion.
- Total deposits were $5.39 billion, down $34.4 million from year-end. Money market and noninterest-bearing demand deposits increased, while certificates of deposit, savings and interest-bearing demand deposits declined.
- Total borrowings increased to $736.4 million from $683.1 million. The filing reports $1.7 billion of remaining borrowing availability at the Federal Home Loan Bank of Pittsburgh.
- Shareholders’ equity increased to $907.1 million from $884.0 million, primarily reflecting year-to-date net income partly offset by dividends and other comprehensive losses.
Cash flow, liquidity and capital
- Six-month cash provided by operating activities was $64.5 million, compared with $52.1 million in the prior-year period.
- Investing activities used $45.7 million, compared with $167.9 million used in the prior-year period, primarily because net loan growth was lower.
- Financing activities provided $2.0 million, compared with $102.2 million in the prior-year period.
- Cash and cash equivalents increased to $137.9 million from $117.2 million at year-end.
- Highly liquid assets totaled approximately $534 million, or 7.6% of total assets, consisting primarily of interest-bearing deposits, unpledged securities and loans held for sale.
- At June 30, 2018, S&T Bancorp reported a Tier 1 leverage ratio of 9.87%, common equity Tier 1 ratio of 11.18% and total capital ratio of 13.04%. S&T Bank reported corresponding ratios of 9.19%, 10.75% and 12.26%. Both were above regulatory well-capitalized thresholds.
Material changes and unusual items
- Credit loss event: Second-quarter and year-to-date net charge-offs were materially affected by a $5.2 million commercial loan charge-off related to suspected fraudulent activities by executives of a borrower and related entities. S&T’s exposure consisted of a $4.9 million participation loan and a $950,000 direct exposure secured by vehicles and equipment.
- Asset quality: The allowance for loan losses increased to $60.5 million, or 1.05% of portfolio loans, from $56.4 million, or 0.98%, at year-end. Substandard commercial loans increased to approximately $165 million from $70.7 million at year-end and $89.7 million at June 30, 2017.
- Nonperforming loans declined to $21.4 million from $23.9 million at year-end, but other real estate owned increased to $3.0 million from $469,000 because two land lots were reclassified from other assets.
- Insurance business sale: On January 1, 2018, S&T sold a 70% majority interest in S&T Evergreen Insurance, LLC, recognized a $1.9 million gain and retained a 30% interest accounted for under the equity method. Insurance income declined materially as a result.
- Securities: Securities declined to $688.3 million from $698.3 million. The debt securities portfolio moved from a $1.7 million net unrealized gain at year-end to a $10.1 million net unrealized loss at June 30, 2018, primarily due to interest-rate changes. Management reported no other-than-temporary impairment.
- Share repurchase authorization: The board authorized a $50 million repurchase plan through August 31, 2019. No repurchases were made during the quarter or six months ended June 30, 2018.
- The company adopted several accounting standards in 2018, including guidance affecting revenue recognition and equity securities. The filing states that these adoptions had no material effect on the financial statements, except for specified reclassifications and recognition of approximately $0.3 million of net unrealized gains on marketable equity securities.
Outlook, risks and contingencies
- Management focuses on organic loan and deposit growth, fee-income expansion, expense management and asset quality. It stated that recent increases in short-term interest rates benefited results and that future increases could continue to benefit net interest income.
- The balance sheet is described as asset sensitive; rising rates are expected to benefit pretax net interest income, while declining rates could reduce it. Rate-shock analyses remained within the company’s minimal risk-tolerance level.
- Key risks include commercial real estate and commercial credit concentrations, geographic concentration in Pennsylvania and surrounding states, interest-rate and funding risks, competition for deposits, economic and housing-market conditions, cybersecurity, regulatory developments, litigation, technology changes and potential goodwill impairment.
- The company had $1.41 billion of commitments to extend credit and $80.7 million of standby letters of credit at June 30, 2018. The allowance for unfunded commitments was $2.1 million.
- Management reported no material pending legal proceedings and stated that existing litigation was not expected to materially affect consolidated financial position or results.
- Control deficiency: Disclosure controls were not effective as of June 30, 2018 because of a previously reported material weakness involving inconsistent assessment of internally assigned loan risk ratings, an input into the allowance for loan losses. Management engaged an independent third party, provided additional training and improved documentation, with remediation expected to be completed during the third quarter of 2018.
- The company is implementing the current expected credit loss model and continues to evaluate its impact. The filing also expects lease accounting changes to increase reported assets and liabilities and potentially affect regulatory capital ratios.
Investor verification checklist
- Verify the remediation status and subsequent auditor or management conclusions regarding the material weakness in loan risk-rating controls.
- Assess whether the increase in substandard commercial loans and the $5.2 million fraud-related charge-off represent isolated events or indicate broader credit deterioration.
- Track allowance coverage, net charge-offs, nonperforming loans, troubled debt restructurings and other real estate owned in subsequent filings.
- Evaluate the effect of rising deposit costs, increased short-term borrowings and changing interest rates on future net interest margin and liquidity.
- Separate recurring earnings from the $1.9 million insurance-business sale gain, prior-year securities gains and the lower 2018 tax rate.
- Monitor the implementation impact of CECL and lease accounting, including any effect on capital ratios.
- Confirm whether the authorized $50 million share repurchase plan is used and how repurchases affect capital, liquidity and per-share results.