S&T Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania bank holding company headquartered in Indiana, Pennsylvania. Its principal businesses are Community Banking, Insurance, and Wealth Management, with operations concentrated in Western Pennsylvania and a loan production office in Akron, Ohio. The filing covers the unaudited quarter ended March 31, 2013, with comparisons to March 31, 2012 and December 31, 2012.
Key financial metrics
| Metric | Q1 2013 | Comparable period |
|---|---|---|
| Net income available to common shareholders | $12.3 million | $3.5 million in Q1 2012 |
| Diluted EPS | $0.41 | $0.12 in Q1 2012 |
| Net interest income | $33.7 million | $33.3 million in Q1 2012 |
| Net interest income, FTE | $34.8 million | $34.4 million in Q1 2012 |
| Net interest margin, FTE | 3.49% | 3.69% in Q1 2012 |
| Total noninterest income | $14.8 million | $13.1 million in Q1 2012 |
| Total noninterest expense | $31.6 million | $32.8 million in Q1 2012 |
| Provision for loan losses | $2.3 million | $9.3 million in Q1 2012 |
| Net charge-offs | $2.9 million | $10.3 million in Q1 2012 |
| Effective tax rate | 15.3% | 19.7% in Q1 2012 |
| Comprehensive income | $11.6 million | $3.5 million in Q1 2012 |
All dollar amounts are from the filing and are stated in thousands unless otherwise indicated. Total assets were $4.480 billion at March 31, 2013, compared with $4.527 billion at December 31, 2012. Shareholders’ equity was $544.6 million, up $7.2 million from year-end 2012. The company declared a quarterly dividend of $0.15 per common share.
Portfolio loans increased 1.1% to $3.382 billion from $3.347 billion at year-end. Commercial loans represented approximately 72.5% of portfolio loans, including commercial real estate of $1.480 billion, commercial and industrial loans of $806.2 million, and construction loans of $164.9 million. Consumer loans totaled $931.1 million.
Cash and due from banks declined to $261.1 million from $337.7 million at year-end. Operating activities generated $14.5 million of cash, while investing activities used $52.7 million and financing activities used $38.3 million. Net cash decreased $76.6 million during the quarter.
Total deposits were essentially unchanged at $3.639 billion. Total borrowings declined to $228.5 million from $262.3 million, including short-term borrowings of $50.0 million, long-term borrowings of $23.5 million, repurchase agreements of $64.4 million, and junior subordinated debt securities of $90.6 million. The company reported $1.2 billion of remaining borrowing availability from the Federal Home Loan Bank of Pittsburgh.
Regulatory capital remained well above the stated well-capitalized thresholds. At March 31, 2013, S&T Bancorp reported a 9.42% Tier 1 leverage ratio, a 12.20% Tier 1 risk-based capital ratio, and a 15.60% total risk-based capital ratio.
Material changes versus prior periods
- Profitability improved substantially: Net income increased $8.9 million, or approximately 255%, primarily because of lower credit-loss provisions, a gain on the merchant card servicing sale, and lower merger-related expenses.
- Credit costs declined: The provision for loan losses decreased $7.0 million. The allowance for loan losses was $45.9 million, or 1.36% of total loans, versus $46.5 million, or 1.38%, at year-end.
- Asset quality improved: Nonperforming assets declined 16% to $46.9 million from $55.9 million at year-end. Nonperforming loans declined to $46.3 million, or 1.37% of total loans. Total troubled debt restructurings were $56.2 million, including $14.8 million on nonaccrual status.
- Loan growth continued: Commercial loans increased $39.2 million, led by commercial real estate and commercial and industrial lending. Residential mortgages increased $15.4 million, partially offset by a $14.8 million decline in home equity loans.
- Margin pressure persisted: FTE net interest margin declined 20 basis points to 3.49%, as earning-asset yields fell faster than funding costs. Average loan yield declined to 4.32% from 4.74%.
- Funding mix shifted: The company repaid $25.0 million of short-term Federal Home Loan Bank borrowings and added deposits, including $51.0 million of CDARS One-Way Buy deposits. Certificates of deposit increased $29.0 million.
- Capital strengthened: Capital ratios increased from December 31, 2012, supported primarily by quarterly earnings exceeding dividends.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide formal numerical earnings or revenue guidance. Its stated 2013 priorities are increasing loan growth to support the net interest margin, expanding fee income, improving asset quality, and closely monitoring operating expenses. Management indicated that the Northeast Ohio loan production office was performing ahead of expectations and that additional lenders were being recruited.
S&T sold its merchant card servicing business for $4.8 million, paid a $1.7 million termination fee, and recognized a $3.1 million net gain in the quarter. It entered into a ten-year marketing and sales alliance with the purchaser, but future revenue will depend on referrals, new merchant accounts, and transaction volume. This gain is nonrecurring and should not be treated as an ongoing operating run rate.
Merger-related expenses declined to $0.8 million from $3.9 million in Q1 2012. The 2013 amount primarily related to the Gateway Bank systems conversion, while the 2012 amount largely related to the Mainline acquisition.
Management identified risks from prolonged low interest rates, changes in the yield curve, credit losses, Western Pennsylvania economic conditions, housing-market weakness, competition, regulatory requirements, cybersecurity and technology changes, access to capital, litigation, acquisitions and integration, and potential goodwill impairment. The balance sheet remained asset sensitive; management’s scenarios indicated that rising rates would generally improve pretax net interest income, while falling rates could reduce it. No material changes to previously disclosed risk factors were reported.
Off-balance-sheet commitments to extend credit totaled $941.3 million and standby letters of credit totaled $83.2 million. The allowance for unfunded commitments increased to $3.7 million from $3.0 million, primarily because of higher construction commitments. Management stated that pending litigation was not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether loan growth can continue without reversing the improvement in nonperforming loans, charge-offs, and credit provisions.
- Whether the 3.49% net interest margin stabilizes in the low-rate environment and how sensitive earnings are to future rate changes.
- The sustainability of earnings excluding the $3.1 million merchant card servicing gain and unusually low loan-loss provision.
- The composition and cost of deposits, particularly the $51.0 million of CDARS One-Way Buy deposits and the level of higher-cost certificates of deposit.
- Exposure to commercial real estate and construction lending, which comprised a significant portion of the portfolio and credit-risk reserves.
- Future revenue generated under the ten-year merchant services marketing alliance and the effects of the business sale on card-fee income.
- The adequacy of the $45.9 million loan-loss allowance and $3.7 million unfunded-commitment allowance under changing economic and collateral conditions.
- Liquidity availability, pledged securities, Federal Home Loan Bank borrowing capacity, and the ability to fund approximately $1.0 billion of off-balance-sheet commitments.