S&T Bancorp, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania-based bank holding company headquartered in Indiana, Pennsylvania. It operates in Western and Eastern Pennsylvania, Ohio and Upstate New York, providing retail and commercial banking, cash management, wealth management, trust and brokerage services. The filing covers the three and six months ended June 30, 2022; balance-sheet comparisons are primarily with December 31, 2021.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Net interest income | $75.2 million | $68.3 million | $142.9 million | $139.0 million |
| Net interest margin, FTE | 3.56% | 3.16% | 3.35% | 3.31% |
| Provision for credit losses | $3.2 million | $2.6 million | $2.7 million | $5.7 million |
| Noninterest income | $12.6 million | $15.4 million | $27.9 million | $32.7 million |
| Noninterest expense | $48.4 million | $45.8 million | $95.8 million | $91.5 million |
| Net income | $28.9 million | $28.4 million | $58.0 million | $60.3 million |
| Diluted EPS | $0.74 | $0.72 | $1.48 | $1.54 |
| Dividends declared per share | $0.30 | $0.28 | $0.59 | $0.56 |
Second-quarter net income increased 1.7%, while six-month net income decreased 3.8%. Return on average assets was 1.25% for both the quarter and year-to-date period. Return on average equity was 9.83% for the quarter and 9.85% year to date.
- Total assets were $9.1 billion, down from $9.5 billion at December 31, 2021.
- Portfolio loans were $7.04 billion, up $40.9 million, or 0.6%. Commercial loans declined 2.0%, while consumer loans increased 9.4%.
- Total deposits were $7.61 billion, down $384.3 million, or 4.8%, primarily from declines in interest-bearing demand, money-market and certificate-of-deposit balances.
- Total borrowings were $115.7 million, down $45.6 million. The company no longer offers customer repurchase agreements and is transitioning the remaining balance to other deposit products.
- Cash and due from banks declined to $344.7 million from $922.2 million, while securities increased to $1.07 billion from $910.8 million.
- Six-month operating cash flow was $153.3 million. Investing activities used $273.2 million, and financing activities used $457.6 million, producing a $577.5 million decline in cash and equivalents.
- Shareholders’ equity was $1.18 billion, down from $1.21 billion, primarily because of $60.1 million of other comprehensive loss, dividends and share repurchases, partly offset by net income.
Material changes versus prior comparable periods
- Interest income and margin: Higher interest rates increased second-quarter net interest income by $6.9 million and FTE net interest margin by 40 basis points. Six-month net interest income increased $4.0 million and FTE margin increased 4 basis points.
- Fee income: Noninterest income declined 18.1% for the quarter and 14.9% year to date. Mortgage banking income fell 73.1% and 75.5%, respectively, as higher rates reduced mortgage loan sales. Service charges and card fees increased with higher customer activity.
- Expenses: Noninterest expense increased 5.7% for the quarter and 4.7% year to date, driven by professional services, marketing, technology and software implementation costs.
- Credit quality: The allowance for credit losses was $98.1 million, or 1.39% of portfolio loans, compared with $98.6 million, or 1.41%, at year-end. Net charge-offs were $3.0 million in the quarter and $1.0 million year to date, compared with $7.5 million and $13.3 million in the prior-year periods.
- Nonperforming assets: Nonperforming assets declined to $38.8 million from $79.6 million; nonperforming loans declined to $31.8 million from $66.3 million. Management attributed the improvement primarily to loan payoffs, hotel-loan upgrades and the sale of a property.
- Securities valuation: The available-for-sale bond portfolio moved from a $9.4 million net unrealized gain at year-end 2021 to a $61.9 million net unrealized loss at June 30, 2022, primarily because of rising interest rates. Management stated that the securities remained investment grade and that it did not intend or expect to be required to sell them before recovery.
Guidance, outlook, risks and unusual items
The filing does not provide specific earnings, revenue or margin guidance. Management’s stated priorities include organic growth within its existing footprint, market expansion, disciplined credit and enterprise governance, digital and infrastructure investment, talent development and selective evaluation of acquisitions.
- Liquidity remained supported by $991.2 million of highly liquid assets, equal to 10.9% of total assets, and $2.8 billion of remaining FHLB borrowing availability. However, highly liquid assets declined $309.8 million from year-end, primarily because of lower cash balances.
- Capital remained above regulatory well-capitalized thresholds. The company’s leverage ratio was 10.25%, common equity Tier 1 ratio was 12.34% and total risk-based capital ratio was 14.23%.
- The balance sheet was described as asset sensitive. A parallel 100-basis-point rate increase was modeled to increase pretax net interest income by 7.6% over 1–12 months and 9.4% over 13–24 months; a 100-basis-point decrease was modeled to reduce it by 9.2% and 11.8%, respectively.
- Key risks include credit losses, commercial real estate and construction exposure, deposit outflows, changing interest rates and spreads, inflation and regional economic weakness, liquidity stress, cybersecurity and operational risks, regulatory changes, LIBOR transition, litigation, competition and acquisition integration.
- The company identified Russia’s invasion of Ukraine as a new risk factor because of potential effects on financial markets, interest rates, inflation, liquidity, cybersecurity and customers.
- The company repurchased 151,220 shares for $4.2 million during the quarter at an average price of $27.46. The repurchase authorization had $33.3 million remaining at June 30, 2022 and expires March 31, 2023.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material legal proceedings were reported.
Investor verification checklist
- Verify whether deposit outflows continue and how the company replaces rate-sensitive funding at higher market rates.
- Review trends in net interest margin, loan yields, deposit costs and the impact of the company’s asset-sensitive balance sheet.
- Assess the sustainability of the sharp improvement in nonperforming loans and the allowance coverage ratio, including commercial real estate, construction and hotel exposures.
- Monitor unrealized securities losses, accumulated other comprehensive loss and their potential effect on tangible capital and liquidity if securities must be sold.
- Evaluate the decline in mortgage banking revenue and whether technology, marketing and consulting investments produce corresponding operating benefits.
- Confirm future share repurchase activity, dividend capacity and capital ratios under adverse credit, rate and liquidity scenarios.
- Review the company’s 2021 Form 10-K for complete risk factors, contractual obligations, regulatory capital details and the full accounting policy disclosures.