S&T Bancorp, Inc. — 2021 Q2 Form 10-Q Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania-based bank holding company operating in Western and Eastern Pennsylvania, Ohio, and Upstate New York. It provides retail and commercial banking, cash management, trust, brokerage, and related financial services. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, with comparisons to the same periods in 2020 and to December 31, 2020 for balance-sheet items.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $68.3 million | $70.1 million | $139.0 million | $140.2 million |
| Provision for credit losses | $2.6 million | $86.8 million | $5.7 million | $106.8 million |
| Noninterest income | $15.4 million | $15.2 million | $32.7 million | $27.6 million |
| Noninterest expense | $45.8 million | $43.5 million | $91.4 million | $89.9 million |
| Net income | $28.4 million | $(33.1) million | $60.3 million | $(19.8) million |
| Diluted EPS | $0.72 | $(0.85) | $1.54 | $(0.51) |
| FTE net interest margin | 3.16% | 3.31% | 3.31% | 3.42% |
At June 30, 2021, total assets were $9.50 billion, portfolio loans were $7.01 billion net of unearned income, deposits were $8.02 billion, and shareholders’ equity was $1.19 billion. The allowance for credit losses on loans was $109.6 million, or 1.56% of portfolio loans. Nonperforming loans were $112.6 million, or 1.61% of portfolio loans, and nonperforming assets were $113.8 million, or 1.62% of portfolio loans plus other real estate owned.
Cash and due from banks increased to $985.3 million from $229.7 million at December 31, 2020. Six-month operating cash flow was $128.0 million, investing cash flow was $127.3 million, and financing cash flow was $500.2 million, producing a $755.6 million increase in cash and cash equivalents. Highly liquid assets totaled approximately $1.4 billion, or 14.4% of total assets, and remaining Federal Home Loan Bank borrowing availability was approximately $2.5 billion.
Total borrowings were $155.7 million, down from $227.9 million at year-end, primarily because short-term borrowings declined by $75.0 million to zero. Regulatory capital ratios exceeded well-capitalized thresholds, including a 9.52% Tier 1 leverage ratio and a 14.00% total risk-based capital ratio at the holding-company level.
Material changes versus comparable periods
- Net income improved substantially from losses in 2020, primarily because the provision for credit losses declined by $84.2 million in the quarter and $101.1 million year to date. The 2020 provision included a $58.7 million charge-off related to customer fraud involving a check-kiting scheme.
- Net interest income declined 2.6% in the quarter and 0.9% year to date. Management attributed the decline to lower short-term interest rates and lower average loan balances. The FTE net interest margin decreased 15 basis points in the quarter and 11 basis points year to date.
- Noninterest income increased $0.2 million in the quarter and $5.0 million year to date, supported by debit and credit card, service-charge, wealth-management, and mortgage-banking revenue. Commercial loan swap income declined materially.
- Noninterest expense increased $2.4 million in the quarter and $1.5 million year to date, mainly because of higher salaries and employee benefits. The 2020 year-to-date comparison included $2.3 million of merger-related expenses that did not recur in 2021.
- Total assets increased $527.9 million from year-end. Cash increased substantially, while portfolio loans declined $218.5 million and securities increased $66.7 million.
- Total deposits increased $594.7 million, including a $658.0 million increase in customer deposits, driven by government stimulus programs, PPP activity, and customer liquidity preferences. Brokered deposits declined $63.2 million.
- PPP loans included in commercial and industrial loans declined to $336.1 million from $465.0 million at year-end. Excluding PPP loans, portfolio loans declined $89.6 million from December 31, 2020.
- Asset quality improved from year-end: nonperforming loans declined $34.2 million, nonperforming assets declined $35.2 million, TDRs declined $11.8 million, and the ACL ratio declined from 1.63% to 1.56%.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide specific earnings, revenue, loan-growth, or margin guidance. Management reported some improvement in asset quality but remained cautious because of the continuing uncertainty surrounding COVID-19, particularly in pandemic-sensitive portfolios such as hotels. PPP loans contributed $4.1 million of interest income in the quarter and $9.9 million year to date.
- The balance sheet is asset sensitive. Management stated that a prolonged low-rate environment has pressured net interest income and margin, while rising rates could benefit earnings; rate-shock analysis indicated higher projected pretax net interest income under rising-rate scenarios.
- Commercial loans represented 78.5% of portfolio loans, and commercial real estate and commercial construction represented 53.2% of portfolio loans. Regional economic conditions, real estate values, hotel performance, unemployment, and borrower cash flows remain important credit risks.
- COVID-19-related loan modifications totaled $68.7 million across 42 commercial loans at June 30, 2021. These loans were not classified as restructured under applicable guidance, and management cautioned that delinquency data may not fully reflect their credit risk.
- Net charge-offs were $7.4 million in the quarter and $13.3 million year to date. A $4.9 million CRE charge-off resulted from deterioration in collateral value, and a $3.9 million C&I charge-off also occurred year to date.
- The company had $2.56 billion of commitments to extend credit and standby letters of credit at June 30, 2021, supported by a $4.9 million allowance for unfunded commitments.
- Management identified risks related to credit losses, interest rates, liquidity, cybersecurity, fraud, technology, regulatory changes, LIBOR transition, litigation, competition, acquisitions, the COVID-19 pandemic, housing and real estate markets, goodwill impairment, and dependence on key employees and service providers.
- Christopher J. McComish was scheduled to become CEO effective August 23, 2021, following an interim CEO period. Management identified the transition as a potential business and execution risk.
- The $50 million share-repurchase authorization was extended through March 31, 2022. No shares were repurchased during the quarter, and approximately $37.4 million remained available at June 30, 2021.
- The company reported no material legal proceedings and no material changes to previously disclosed risk factors other than the CEO-transition risk. Disclosure controls were deemed effective.
Most important facts for investors to verify
- Whether the sharp improvement in earnings is sustainable after the unusually high 2020 credit-loss provision and fraud-related charge-off are excluded.
- Loan demand, PPP forgiveness and runoff, and the effect of declining loan balances on net interest income and margin.
- Credit performance in commercial real estate, hotel, commercial construction, and C&I portfolios, including modified loans and nonperforming exposures.
- Whether the $109.6 million loan ACL remains adequate as COVID-19 support programs expire and economic forecasts change.
- The stability and pricing of the $8.0 billion deposit base, the reduction in borrowings, and continued access to contingent liquidity sources.
- The effect of interest-rate movements on net interest income, securities’ unrealized gains, capital, and economic value of equity.
- Execution of the August 2021 CEO transition and any resulting changes to strategy or financial targets.
- The company’s future use of the remaining share-repurchase authorization and compliance with applicable regulatory restrictions.