S&T Bancorp, Inc. — Q2 2017 Form 10-Q Summary
Business context and reporting period
S&T Bancorp is a Pennsylvania-based bank holding company operating branches in Pennsylvania and Ohio and loan production offices in Pennsylvania, Ohio and New York. It provides retail and commercial banking, cash management, insurance, trust and brokerage services. The filing covers the unaudited three and six months ended June 30, 2017, compared with the corresponding 2016 periods, and the balance sheet as of June 30, 2017 versus December 31, 2016.
Beginning January 1, 2017, the company stopped separately reporting its Insurance and Wealth Management activities because management determined they were not material to consolidated results.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Interest income | $64.9 million | $55.9 million | $126.1 million | $110.9 million |
| Net interest income | $56.6 million | $49.7 million | $110.4 million | $99.3 million |
| Net interest income, FTE | $58.4 million | $51.5 million | $114.2 million | $102.8 million |
| Net interest margin, FTE | 3.57% | 3.44% | 3.53% | 3.48% |
| Noninterest income | $16.3 million | $12.4 million | $29.3 million | $28.3 million |
| Provision for loan losses | $4.9 million | $4.8 million | $10.1 million | $9.9 million |
| Noninterest expense | $36.6 million | $34.8 million | $73.4 million | $73.2 million |
| Net income | $22.8 million | $17.1 million | $41.0 million | $33.2 million |
| Diluted EPS | $0.65 | $0.49 | $1.17 | $0.95 |
- Net income increased 33.4% in the quarter and 23.5% year to date. Growth was driven principally by higher net interest income from loan growth and higher short-term rates.
- Total assets were $7.1 billion at June 30, 2017, up 2.1% from year-end 2016. Portfolio loans increased 2.6% to $5.76 billion, led by a $166 million increase in commercial real estate loans.
- Deposits increased 2.6% to $5.41 billion. Brokered deposits rose $81.5 million, including a $98.9 million increase in brokered certificates of deposit.
- Total borrowings declined $20.5 million to $750.6 million. Junior subordinated debt securities were $45.6 million.
- Shareholders’ equity increased 3.5% to $871.1 million, primarily reflecting year-to-date net income, partly offset by $13.9 million of dividends. The quarterly dividend was $0.20 per share.
Cash flow, liquidity and capital
- For the six months ended June 30, 2017, operating activities generated $52.1 million of cash, investing activities used $167.9 million, and financing activities generated $102.2 million. Cash and cash equivalents declined $13.6 million to $125.9 million.
- Management identified $504 million of highly liquid assets, equal to 7.1% of total assets, comprising interest-bearing deposits, unpledged securities and loans held for sale.
- Remaining borrowing availability with the Federal Home Loan Bank of Pittsburgh was $1.6 billion; total capacity was $2.4 billion.
- At June 30, 2017, S&T Bancorp’s common equity tier 1, tier 1 capital and total capital ratios were 10.53%, 10.89% and 12.37%, respectively. S&T Bank’s corresponding ratios were 10.09%, 10.09% and 11.57%. Both entities exceeded regulatory well-capitalized thresholds.
Material changes versus comparable periods
- Net interest income increased 13.8% in Q2 and 11.2% year to date. Average interest-earning assets increased 9.0% in Q2 and 9.5% year to date, primarily because of organic commercial loan growth. Higher Federal Funds rates also improved asset yields and the FTE net interest margin.
- Interest expense increased $2.2 million in Q2 and $4.1 million year to date because of higher funding balances and rates, including increased short-term borrowings and money market deposits.
- Noninterest income increased 30.7% in Q2, mainly because of $3.6 million of net securities gains. Year-to-date noninterest income increased 3.5%, despite the absence of the $2.1 million gain from the 2016 credit card portfolio sale.
- Noninterest expense increased 5.3% in Q2 but only 0.3% year to date. Salaries and benefits increased because of merit increases and higher incentive costs, partly offset by lower processing, pension and other expenses.
- The effective tax rate increased to 27.4% in Q2 and 27.2% year to date, compared with 24.4% and 25.6% in the prior-year periods.
- Net charge-offs increased to $5.3 million in Q2 and $7.5 million year to date, compared with $3.0 million and $5.8 million, respectively. The allowance for loan losses increased to $55.4 million, or 0.96% of portfolio loans.
Outlook, commentary, risks and unusual items
Management’s strategy emphasizes organic loan and deposit growth, fee-income expansion, expense discipline and asset-quality monitoring. Management stated that recent short-term rate increases benefited net interest income and that additional rate increases could provide further benefit, although the low-rate environment remains challenging. Rate sensitivity analysis indicated an asset-sensitive balance sheet: a 100-basis-point increase was estimated to increase 12-month pretax net interest income by 0.8%, while a 100-basis-point decline was estimated to reduce it by 4.8%.
- Credit risk remains concentrated in commercial lending: commercial loans represented 78.0% of portfolio loans, and commercial real estate plus commercial construction represented approximately 54% of portfolio loans.
- Nonperforming assets declined to $38.3 million, or 0.66% of total loans plus OREO, from $43.3 million, or 0.77%, at year-end 2016. Nonperforming loans were $36.7 million, and OREO was $1.6 million.
- Commercial special mention, substandard and doubtful loans increased $39.8 million to $226 million from year-end 2016, primarily because of higher special-mention loans.
- Total troubled debt restructurings were $25.2 million, including $10.1 million of nonaccrual TDRs. The company had $0.6 million of commitments to lend additional funds on TDRs.
- Management identified interest-rate risk, credit losses, economic and housing-market conditions, regulatory changes, cybersecurity, competition, litigation, acquisition integration and potential goodwill impairment as material risks. Management reported no material change to previously disclosed risk factors.
- On July 27, 2017, the company agreed to sell its State College retail branch to First Citizens Community Bank in an all-cash transaction expected to close in December 2017, subject to regulatory approval and other customary conditions.
- The company recorded $4.0 million of net securities gains year to date. No other-than-temporary impairment was recorded on available-for-sale securities.
- Management concluded that disclosure controls were effective, with no material changes to internal control over financial reporting during the quarter. No material adverse litigation outcome was identified.
Important facts for investors to verify
- Whether commercial real estate and other commercial loan growth remains profitable without a material deterioration in credit quality.
- The trend in special-mention loans, net charge-offs, nonperforming assets, TDRs and the allowance for loan losses.
- The sustainability of earnings growth excluding the $4.0 million year-to-date securities gains.
- The cost and stability of funding, particularly the increased use of brokered deposits and short-term borrowings.
- The sensitivity of net interest income and capital to future interest-rate movements and deposit repricing.
- The regulatory approval, timing and financial impact of the planned State College branch sale.