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, serving Western Pennsylvania through community banking, insurance and wealth-management businesses. The filing covers the quarter and six months ended June 30, 2012; interim financial statements are unaudited.
On March 9, 2012, S&T completed its acquisition of Mainline Bancorp, Inc., adding eight branches, approximately $236.2 million of assets, $129.5 million of loans and $206.0 million of deposits. S&T also entered into an agreement to acquire Gateway Bank of Pennsylvania, with an expected third-quarter 2012 closing subject to customary conditions.
Financial performance and key metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total interest income | $39.4 million | $41.8 million | $78.5 million | $84.0 million |
| Net interest income | $33.8 million | $34.5 million | $67.1 million | $69.4 million |
| Provision for loan losses | $7.0 million | $1.1 million | $16.3 million | $11.7 million |
| Noninterest income | $12.5 million | $11.1 million | $25.6 million | $22.1 million |
| Noninterest expense | $29.3 million | $25.6 million | $62.1 million | $53.0 million |
| Net income available to common | $8.6 million | $13.4 million | $12.1 million | $18.1 million |
| Diluted EPS | $0.30 | $0.48 | $0.42 | $0.65 |
Net interest income on a fully taxable-equivalent basis was $34.9 million in the second quarter and $69.4 million for the first six months. Net interest margin was 3.57% and 3.63%, respectively, compared with 3.85% and 3.88% in the comparable 2011 periods. The decline reflected lower loan yields, loan paydowns, slow commercial loan demand and a shift toward lower-yielding interest-bearing deposits.
Noninterest income increased primarily from wealth-management fees, mortgage banking, customer interest-rate swap fees and a $0.9 million year-to-date securities gain. The year-to-date effective tax rate was 15.6%, compared with 20.8% in 2011. The filing does not provide a consolidated net profit margin.
Balance sheet, credit quality, cash flow and liquidity
- Total assets were $4.35 billion at June 30, 2012, up $227.4 million from December 31, 2011, primarily because of the Mainline acquisition.
- Portfolio loans were $3.20 billion, up $65.7 million from year-end, while net loans were $3.15 billion. Commercial loans represented 71.4% of portfolio loans, including $1.40 billion of commercial real estate loans and $162.9 million of commercial construction loans.
- Total deposits were $3.52 billion, up $182.1 million. Core deposits increased, while certificates of deposit declined by $54.0 million.
- Cash and due from banks increased to $403.2 million from $270.5 million at year-end. Cash provided by operating activities was $42.4 million, cash provided by investing activities was $109.5 million and cash used in financing activities was $19.2 million, producing a $132.7 million increase in cash and cash equivalents.
- Total borrowings were $247.6 million, consisting of $46.7 million of repurchase agreements, $75.0 million of short-term borrowings, $35.2 million of long-term borrowings and $90.6 million of junior subordinated debt securities.
- S&T reported $1.1 billion of remaining borrowing capacity with the Federal Home Loan Bank of Pittsburgh and a maximum capacity of $1.3 billion. Management described its deposit base as stable and identified liquid assets, FHLB capacity, federal funds lines and brokered or CDARS deposits as additional funding sources.
- Shareholders’ equity was $510.6 million, compared with $490.5 million at year-end. S&T and S&T Bank exceeded regulatory well-capitalized thresholds; S&T’s total risk-based capital ratio was 15.33% and the bank’s was 14.34%.
- Nonperforming loans increased to $69.1 million from $56.1 million, and total nonperforming assets increased to $72.0 million from $60.1 million. Nonperforming loans were 2.16% of total loans.
- Net charge-offs were $8.2 million in the second quarter and $18.4 million year to date, compared with $4.8 million and $5.1 million in the prior-year periods. Commercial construction accounted for $8.2 million of year-to-date net charge-offs.
- The allowance for loan losses was $46.7 million, or 1.46% of total loans, compared with $48.8 million, or 1.56%, at year-end. The allowance covered 68% of nonperforming loans at June 30, versus 87% at year-end.
Material changes versus the prior comparable period
- Second-quarter net income available to common shareholders fell 36% and diluted EPS declined from $0.48 to $0.30. Six-month net income available to common shareholders fell 33% and diluted EPS declined from $0.65 to $0.42.
- Higher loan-loss provisions were the principal earnings headwind, increasing by $5.9 million in the quarter and $4.6 million year to date.
- Net interest income declined despite higher average interest-earning assets, primarily because of lower yields and an unfavorable asset mix.
- Noninterest income increased $1.4 million in the quarter and $3.5 million year to date, while noninterest expense increased $3.8 million and $9.1 million, respectively.
- Mainline-related merger expenses totaled approximately $4.3 million through June 30, including employee costs, data-processing termination and conversion costs, and legal and professional fees.
- Nonperforming assets increased materially, driven by new nonperforming loans, particularly in commercial real estate, commercial construction and nonaccrual troubled debt restructurings.
Outlook, management commentary, risks and unusual items
Management stated that commercial loan growth was expected to remain challenging through the rest of 2012 because of soft demand, loan paydowns and planned runoff of certain loans. Asset quality was identified as the primary driver of earnings, with continued stress in commercial construction projects and lower appraised collateral values.
The Gateway acquisition was expected to add approximately $100 million of loans and $100.5 million of deposits, but completion remained subject to regulatory and shareholder approvals. No formal earnings or revenue guidance was provided in the filing.
- Key risks include credit losses, commercial real estate and construction exposure, Western Pennsylvania economic conditions, housing-market deterioration, prolonged low interest rates, interest-rate sensitivity, funding access, competition, regulatory requirements, litigation and acquisition integration.
- S&T’s balance sheet was described as asset sensitive. A 300-basis-point rate increase was modeled to increase pretax net interest income by 14.2%, while a 300-basis-point decrease was modeled to reduce it by 7.0%.
- The filing identifies $62.8 million of troubled debt restructurings, including $25.3 million in nonaccrual status. No TDRs were returned to accruing status during the first six months.
- Off-balance-sheet commitments to extend credit totaled $848.7 million, and standby letters of credit totaled $109.7 million. The allowance for unfunded commitments increased to $2.1 million from $1.2 million at year-end.
- Management stated that pending litigation was not expected to have a material adverse effect. Disclosure controls were considered effective, and no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Whether the elevated commercial construction charge-offs and nonperforming assets continued or worsened after June 30, 2012.
- The ultimate credit marks, integration costs, synergies and earnings contribution from Mainline.
- Whether the Gateway acquisition closed as expected and whether its assets, liabilities and purchase accounting differed from the announced estimates.
- Trends in net interest margin, loan demand, loan yields and the mix between loans and lower-yielding bank deposits.
- Allowance adequacy relative to nonperforming loans, TDRs, collateral values and future commercial real estate losses.
- Maintenance of well-capitalized ratios and access to FHLB and other liquidity sources under stressed conditions.
- The sustainability of higher fee income, mortgage banking activity and the year-to-date securities gain.