S&T Bancorp, Inc. — Form 10-Q Summary
Business Context and Reporting Period
S&T Bancorp, Inc. is a regional bank holding company headquartered in Indiana, Pennsylvania, serving 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 months ended March 31, 2020, with comparisons to March 31, 2019, and balance-sheet comparisons to December 31, 2019.
The November 30, 2019 acquisition of DNB Financial Corporation expanded S&T’s Eastern Pennsylvania footprint. DNB’s systems conversion occurred February 7, 2020, and its results have been included since December 1, 2019.
Financial Results and Key Metrics
| Metric | Q1 2020 | Q1 2019 / Prior Period | Change |
|---|---|---|---|
| Net interest income | $70.0 million | $60.4 million | Up 16.0% |
| Net interest margin, FTE | 3.53% | 3.71% | Down 18 basis points |
| Provision for credit losses | $20.1 million | $5.7 million | Up $14.4 million |
| Noninterest income | $12.4 million | $11.4 million | Up 9.2% |
| Noninterest expense | $46.4 million | $38.9 million | Up 19.3% |
| Income before taxes | $16.0 million | $27.2 million | Down $11.2 million |
| Net income | $13.2 million | $22.9 million | Down 42.3% |
| Diluted earnings per share | $0.34 | $0.66 | Down $0.32 |
| Dividends declared per share | $0.28 | $0.27 | Up $0.01 |
- Total assets were $9.005 billion at March 31, 2020, up from $8.765 billion at December 31, 2019.
- Portfolio loans were $7.247 billion, up $109.6 million, with commercial loans representing 77.6% of the portfolio. Commercial real estate and construction exposure totaled approximately $3.839 billion.
- Total deposits were $7.058 billion, up $21.3 million from year-end. Customer deposits increased $37.3 million, partly offset by a $16.0 million decline in brokered deposits.
- Total borrowings were $594.1 million, up $177.8 million from year-end, principally due to higher short-term borrowings and repurchase agreements.
- Cash and due from banks ended at $187.7 million. Cash flow was negative $10.1 million for the quarter, compared with negative $38.7 million in Q1 2019.
- Operating cash flow was negative $60.0 million and investing cash flow was negative $125.6 million, primarily reflecting loan growth. Financing cash flow was positive $175.5 million, mainly from short-term borrowings.
- The allowance for credit losses on loans was $96.9 million, or 1.34% of total portfolio loans, compared with $62.2 million, or 0.87%, at December 31, 2019. The allowance for unfunded commitments was $6.1 million.
- Net loan charge-offs were $11.2 million, or 0.63% of average loans, compared with $5.2 million, or 0.36%, in Q1 2019.
- Nonperforming loans were $73.8 million, or 1.02% of total loans, and nonperforming assets were $77.2 million, or 1.06% of total loans plus other real estate owned.
- Capital ratios remained above well-capitalized thresholds. S&T Bancorp reported a 10.03% Tier 1 leverage ratio, 10.93% common equity Tier 1 ratio, and 12.73% total capital ratio at March 31, 2020.
- Highly liquid assets totaled $618.0 million, or 6.9% of total assets. Remaining borrowing availability at the Federal Home Loan Bank of Pittsburgh was approximately $2.4 billion.
Material Changes Versus Comparable Periods
- Net income declined primarily because of higher credit-loss provisions, COVID-19-related reserve increases, higher operating costs, and $2.3 million of DNB merger-related expenses.
- Net interest income increased because average interest-earning assets rose by approximately $1.4 billion, including about $1.2 billion of higher average loans from organic growth and the DNB acquisition. The benefit was partly offset by lower rates and a lower net interest margin.
- Noninterest income benefited from higher commercial loan swap income, mortgage banking revenue, card fees, service charges, and wealth management income. Other income declined because of market-related losses and lower equity-security valuations.
- Noninterest expense increased $7.5 million. In addition to merger costs, increases reflected DNB-related operating expenses, additional locations and employees, information technology costs, taxes, and amortization.
- Accumulated other comprehensive income improved by $17.3 million, primarily because of higher unrealized gains on available-for-sale securities. Total shareholders’ equity nevertheless declined to $1.176 billion from $1.192 billion, primarily because of CECL adoption, share repurchases, and dividends.
- The company adopted the CECL accounting model on January 1, 2020. The adoption increased the loan allowance by $27.4 million and reduced retained earnings by $22.6 million. A $9.9 million day-one adjustment primarily related to a commercial and industrial relationship was also recorded.
Guidance, Outlook, Risks, and Unusual Items
- The filing provides no formal earnings or financial guidance. Management states that results for the interim period are not necessarily indicative of full-year or future results.
- COVID-19 materially affected management’s credit-loss estimates. The company added approximately $14.9 million to the loan allowance for qualitative factors, including $11.2 million related to revised economic forecasts and $3.7 million related to current conditions.
- S&T implemented payment deferrals and other short-term modifications for affected commercial and consumer borrowers. As of March 31, 2020, the company had not classified these CARES Act-related modifications as troubled debt restructurings under applicable guidance.
- Nonperforming loans increased primarily because a $20.9 million commercial real estate relationship moved from performing TDR status to nonperforming after borrower cash-flow deterioration. Management reported that the relationship was fully collateralized and required no allowance at March 31, 2020.
- A $9.9 million commercial and industrial relationship was charged off due to potential borrower irregularities that remained under review.
- As of May 5, 2020, S&T had obtained approvals for 2,959 Paycheck Protection Program loans totaling $548.0 million. These loans carry a 1.00% fixed rate, are 100% SBA-guaranteed, and may be forgiven in whole or in part if applicable requirements are met.
- Share repurchase activity was suspended in March 2020 because of the pandemic. The company had repurchased 411,430 shares for $12.6 million during the quarter, leaving approximately $37.4 million available under its $50 million authorization.
- Principal risks include further COVID-19-related credit deterioration, higher charge-offs and provisions, low interest rates and margin pressure, liquidity and capital stress, regional economic weakness, commercial real estate concentration, acquisition-integration risks, cybersecurity and third-party service risks, regulatory changes, and potential goodwill impairment.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors other than COVID-19-related risks, and effective disclosure controls as of March 31, 2020.
Investor Verification Checklist
- Verify subsequent trends in loan deferrals, PPP loan forgiveness, nonperforming loans, charge-offs, and the adequacy of the $96.9 million loan allowance.
- Assess the sensitivity of earnings and capital to COVID-19 economic forecasts, commercial real estate exposure, and the company’s Pennsylvania and contiguous-state market concentration.
- Monitor whether the 3.53% FTE net interest margin remains under pressure in the low-rate environment.
- Review the funding impact of the $177.8 million increase in borrowings and the company’s continued access to FHLB and Federal Reserve facilities.
- Evaluate DNB integration costs, remaining purchase-accounting adjustments, goodwill of approximately $86.0 million, and whether anticipated acquisition benefits are realized.
- Confirm the status of the $50 million share repurchase authorization and dividend policy given pandemic-related capital management decisions.