S&T Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
S&T Bancorp, Inc. is a Western Pennsylvania bank holding company providing community banking, insurance, wealth management, commercial and consumer lending, deposits, mortgage banking and fiduciary services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, with comparisons to the corresponding 2011 periods and December 31, 2011 balance-sheet data.
During 2012, S&T completed the acquisitions of Mainline Bancorp on March 9 and Gateway Bank of Pennsylvania on August 13. The acquisitions expanded the company’s footprint in Cambria, Blair and Washington Counties and added approximately $368.5 million of assets, $231.9 million of gross loans and $311.4 million of deposits in aggregate.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net interest income | $33.8 million | $33.9 million | $100.9 million | $103.3 million |
| Net interest income, FTE | $34.9 million | $34.9 million | $104.3 million | $106.3 million |
| Provision for loan losses | $2.3 million | $1.5 million | $18.6 million | $13.3 million |
| Noninterest income | $14.7 million | $10.3 million | $40.3 million | $32.5 million |
| Noninterest expense | $31.0 million | $24.2 million | $93.1 million | $77.2 million |
| Net income available to common shareholders | $12.6 million | $12.2 million | $24.7 million | $30.3 million |
| Diluted EPS | $0.43 | $0.44 | $0.85 | $1.08 |
| Dividends declared per share | $0.15 | $0.15 | $0.45 | $0.45 |
The FTE net yield on interest-earning assets declined to 3.50% in the third quarter from 3.76% in the prior-year quarter and to 3.58% for the first nine months from 3.84%. Management attributed the 26-basis-point margin decline in both comparisons to lower loan yields and a shift toward lower-yielding securities and interest-bearing bank deposits, partially offset by lower deposit costs.
At September 30, 2012, total assets were $4.42 billion, up $302.3 million, or 7.3%, from December 31, 2011. Portfolio loans were $3.28 billion, up $149.4 million, or 4.8%; net portfolio loans were $3.23 billion. Securities available for sale were $415.4 million, up $57.8 million, or 16.2%.
Total deposits were $3.59 billion, up $258.5 million from year-end. Noninterest-bearing demand deposits increased to $928.0 million, while certificates of deposit declined to $1.08 billion. Total borrowings were $205.5 million, down $22.3 million from year-end, consisting primarily of $49.3 million of repurchase agreements, $25.0 million of short-term borrowings, $40.7 million of long-term borrowings and $90.6 million of junior subordinated debt securities.
Cash and cash equivalents were $347.1 million at September 30, 2012, up $76.6 million from year-end. For the first nine months, operating activities provided $78.5 million, investing activities provided $102.5 million and financing activities used $104.5 million, resulting in a $76.6 million increase in cash.
Shareholders’ equity was $534.2 million, compared with $490.5 million at December 31, 2011. S&T Bancorp and S&T Bank remained well capitalized. At September 30, S&T Bancorp reported a 9.27% Tier 1 leverage ratio, 12.01% Tier 1 risk-based capital ratio and 15.45% total risk-based capital ratio; S&T Bank reported 8.29%, 10.95% and 14.47%, respectively.
Material changes versus prior comparable periods
- Third-quarter net income available to common shareholders increased modestly from $12.2 million to $12.6 million, although diluted EPS declined from $0.44 to $0.43 because of a larger share count following the acquisitions.
- Nine-month net income available to common shareholders declined 18.7% to $24.7 million, and diluted EPS declined to $0.85 from $1.08. The primary pressures were higher loan-loss provisions, lower net interest income and higher operating expenses.
- Noninterest income rose $4.4 million in the quarter and $7.9 million year to date, driven by mortgage banking, wealth management fees and securities gains. Securities gains were $2.2 million in the quarter and $3.0 million year to date, compared with losses in the 2011 periods.
- Noninterest expense increased $6.8 million in the quarter and $15.9 million year to date. The increases reflected acquisition-related costs, additional employees and branches, higher pension expense, data-processing costs and the reserve for unfunded commitments.
- Loan-loss provisions increased $0.8 million in the quarter and $5.3 million year to date. Net charge-offs were $2.7 million in the quarter and $21.2 million year to date, compared with $8.0 million and $13.1 million in the prior-year periods.
- The allowance for loan losses declined to $46.3 million, or 1.41% of total loans, from $48.8 million, or 1.56%, at year-end. Commercial construction reserves increased by $4.8 million to $8.5 million, while commercial real estate and commercial and industrial reserves declined.
- Nonperforming loans increased to $66.1 million, or 2.01% of total loans, from $56.1 million, or 1.79%, at year-end. Total nonperforming assets increased to $67.6 million from $60.1 million, despite OREO declining to $1.5 million from $4.0 million.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management stated that it expects approximately $1.4 million of additional one-time Gateway merger costs through the first quarter of 2013, including change-in-control and data-conversion costs. Gateway was expected to merge into S&T Bank in the first quarter of 2013.
Management planned to retain 20-year residential mortgages beginning in the fourth quarter of 2012, selling only 30-year mortgages to Fannie Mae, in an effort to grow the loan portfolio. Management also described continued efforts to expand commercial lending staff and develop the acquired markets.
Key risks include commercial real estate and construction credit deterioration, declining collateral values, higher nonperforming assets, a prolonged low-interest-rate environment, margin compression, interest-rate sensitivity, acquisition integration risk, access to capital, regulatory changes, competition, technology costs, housing-market weakness, litigation and general economic conditions in Western Pennsylvania. Approximately 90% of the allowance for loan losses related to commercial loans, although commercial loans represented approximately 72% of total loans.
Commercial construction and commercial real estate experienced elevated stress. Commercial construction net charge-offs were $8.8 million for the first nine months, compared with net recoveries of $1.6 million in the prior-year period. Troubled debt restructurings totaled $60.5 million at September 30, including $23.4 million on nonaccrual status; no TDRs were returned to accrual status during the period.
Off-balance-sheet commitments to extend credit totaled $901.9 million and standby letters of credit totaled $108.6 million. The allowance for unfunded commitments increased to $3.1 million from $1.2 million at year-end. Management stated that outstanding litigation was not expected to have a material adverse effect. Disclosure controls were deemed effective, and no material changes in internal control over financial reporting were reported.
Interest-rate sensitivity analysis indicated an asset-sensitive balance sheet. A 300-basis-point increase was modeled to increase pretax net interest income by 13.3% and economic value of equity by 28.3%; a 300-basis-point decrease was modeled to reduce them by 7.2% and 7.1%, respectively.
In September 2012, S&T filed a shelf registration statement permitting issuance of up to $300 million of debt, capital securities, preferred or common stock and warrants. The filing also identifies an outstanding U.S. Treasury warrant for 517,012 common shares, expiring January 16, 2019.
Investor verification checklist
- Verify whether the Gateway integration and first-quarter 2013 merger timeline, costs and expected synergies were achieved.
- Monitor commercial real estate and construction nonperforming loans, charge-offs, collateral values and allowance adequacy.
- Reconcile reported earnings with and without the $5.3 million of 2012 merger-related expenses and the securities gains.
- Assess whether loan growth, mortgage-retention decisions and deposit growth offset continued margin compression.
- Review capital ratios, borrowing capacity, liquidity levels and the potential use of the $300 million shelf registration.
- Track the $901.9 million of unfunded credit commitments and the adequacy of the $3.1 million related allowance.
- Confirm the effects of the low-interest-rate environment and the reported asset-sensitive interest-rate position on future net interest income.