S&T Bancorp, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania-based bank holding company operating in Western and Central Pennsylvania, Northeast and Central Ohio, and Upstate New York. It provides retail and commercial banking, cash management, trust and financial services, and insurance-related products. The filing covers the unaudited three months ended March 31, 2019, compared primarily with the three months ended March 31, 2018 and December 31, 2018 balance-sheet amounts.
Key financial metrics
| Metric | Q1 2019 | Comparable / prior period |
|---|---|---|
| Net income | $22.9 million | $26.2 million in Q1 2018 |
| Diluted EPS | $0.66 | $0.75 in Q1 2018 |
| Net interest income | $60.4 million | $56.9 million in Q1 2018 |
| FTE net interest margin | 3.71% | 3.59% in Q1 2018 |
| Provision for loan losses | $5.7 million | $2.5 million in Q1 2018 |
| Noninterest income | $11.4 million | $13.8 million in Q1 2018 |
| Noninterest expense | $38.9 million | $36.1 million in Q1 2018 |
| Effective tax rate | 15.6% | 18.7% in Q1 2018 |
| Comprehensive income | $29.1 million | $14.6 million in Q1 2018 |
Interest income increased to $78.6 million from $68.0 million, while interest expense increased to $18.2 million from $11.1 million. Management attributed the improvement in net interest income and margin primarily to higher short-term interest rates and growth in average interest-earning assets. Average portfolio loans increased $188.0 million year over year, while average interest-bearing deposits increased $319.8 million.
Total assets were $7.23 billion at March 31, 2019, compared with $7.25 billion at December 31, 2018. Portfolio loans were $5.94 billion, down $11.2 million from year-end, and deposits were $5.83 billion, up $159.5 million. Shareholders’ equity was $943.2 million, up $7.4 million from year-end. The allowance for loan losses was $61.4 million, or 1.03% of portfolio loans.
Cash and due from banks totaled $116.8 million at quarter-end. Operating activities generated $30.5 million of cash and investing activities generated $23.7 million; financing activities used $92.8 million, primarily reflecting a $235.0 million reduction in short-term borrowings, $9.3 million of dividends, and $12.3 million of share repurchases. Cash and cash equivalents declined $38.7 million during the quarter to $116.8 million.
Total borrowings were $374.5 million, down $229.9 million from year-end. The company reported $2.1 billion of remaining borrowing availability with the Federal Home Loan Bank of Pittsburgh and $526 million of highly liquid assets, equal to 7.3% of total assets. S&T Bancorp reported a 9.96% Tier 1 leverage ratio, 11.35% common equity Tier 1 ratio, and 13.19% total risk-based capital ratio at March 31, 2019.
Material changes versus prior comparable periods
- Net income declined 12.4%, primarily because of higher loan-loss provisions, lower noninterest income, and higher operating expenses.
- Net interest income increased $3.4 million, and FTE net interest margin expanded 12 basis points to 3.71%.
- Noninterest income decreased $2.4 million. Q1 2018 included a $1.9 million gain from the sale of a majority interest in the insurance business; Q1 2019 also reflected lower wealth management and mortgage banking revenue.
- Noninterest expense increased $2.8 million, led by higher salaries and benefits, information technology costs, and marketing expense.
- Net loan charge-offs were $5.2 million, compared with net recoveries of $0.2 million in Q1 2018. Two commercial and industrial borrowers accounted for $5.1 million of the quarter’s charge-offs.
- Impaired loans were $56.3 million and nonperforming loans were $48.0 million at March 31, 2019, increases of $26.4 million and $26.6 million, respectively, from March 31, 2018.
- Customer deposits increased $215.2 million from year-end, primarily from money market accounts, while brokered deposits decreased $55.7 million. The company attributed the money market growth partly to competitively priced and promotional products.
- The company repurchased 313,904 shares for $12.3 million during the quarter. Approximately $25.5 million remained available under the $50 million authorization through August 31, 2019.
Outlook, risks, contingencies, and unusual items
No quantitative earnings or revenue guidance was provided. Management’s stated focus is organic loan and deposit growth, expansion of fee income, expense management, asset-quality monitoring, and evaluation of acquisition opportunities. Management noted that the company’s asset-sensitive balance sheet would generally benefit from rising rates but could experience lower net interest income in a declining-rate environment.
- Credit risk is concentrated in commercial lending: commercial loans represented 79% of portfolio loans, with commercial real estate and commercial construction representing 53% of total portfolio loans.
- Nonperforming assets were $50.8 million, or 0.85% of total loans plus OREO, compared with $49.2 million, or 0.83%, at year-end.
- Total troubled debt restructurings were $30.9 million, including $7.9 million of nonperforming TDRs. The company had 14 additional TDR commitments totaling $13.0 million.
- Off-balance-sheet commitments to extend credit and standby letters of credit totaled $1.54 billion. Management stated that pending litigation was not expected to have a material adverse effect.
- Unrealized losses on 54 debt securities were attributed primarily to interest-rate movements rather than issuer credit deterioration; management reported no other-than-temporary impairment.
- The company adopted the new lease standard on January 1, 2019, recognizing approximately $35.7 million of operating lease right-of-use assets and $40.2 million of operating lease liabilities at March 31, 2019, with no material income-statement impact.
- The company was evaluating the forthcoming current expected credit loss standard and had engaged a third party to assist with implementation; the filing does not provide a clear estimate of the potential balance-sheet or earnings impact.
- Management identified interest-rate volatility, credit losses, regional economic and real-estate conditions, cybersecurity, regulatory changes, competition, technology, litigation, goodwill impairment, and funding-market access as material risks.
Investor verification checklist
- Determine whether the elevated commercial charge-offs and increases in impaired and nonperforming loans are isolated events or indicate broader deterioration in the commercial portfolio.
- Assess the sustainability of the 3.71% FTE net interest margin as deposit costs and promotional pricing increase.
- Review deposit mix, customer-deposit retention, brokered-deposit usage, and funding costs after the substantial shift into money market products.
- Monitor remaining share-repurchase authorization, capital ratios, and the effect of repurchases on tangible capital and per-share results.
- Evaluate the eventual CECL adoption impact on the allowance for credit losses, retained earnings, and regulatory capital.
- Reconcile non-GAAP FTE measures with GAAP results and consider that interim results are not necessarily indicative of full-year performance.