S&T Bancorp, Inc. — First Quarter 2018 Form 10-Q Summary
Business context and reporting period
S&T Bancorp is a Pennsylvania bank holding company headquartered in Indiana, Pennsylvania, operating branches in Pennsylvania and Ohio and loan production offices in Pennsylvania, Ohio and New York. It provides retail and commercial banking, cash management, trust and brokerage services. The filing covers the three months ended March 31, 2018, with comparisons to the three months ended March 31, 2017; balance-sheet comparisons are primarily to December 31, 2017.
Key financial metrics
| Metric | Q1 2018 | Comparable or prior period |
|---|---|---|
| Total assets | $7.005 billion | $7.060 billion at December 31, 2017 |
| Net income | $26.2 million | $18.2 million in Q1 2017 |
| Diluted earnings per share | $0.75 | $0.52 in Q1 2017 |
| Net interest income | $56.9 million | $53.9 million in Q1 2017 |
| FTE net interest margin | 3.59% | 3.50% in Q1 2017 |
| Provision for loan losses | $2.5 million | $5.2 million in Q1 2017 |
| Noninterest income | $13.8 million | $13.0 million in Q1 2017 |
| Noninterest expense | $36.1 million | $36.8 million in Q1 2017 |
| Comprehensive income | $14.6 million | $19.4 million in Q1 2017 |
| Dividends declared per share | $0.22 | $0.20 in Q1 2017 |
Net income increased 43.8%, driven by higher net interest income, lower loan-loss provision, modestly higher fee income, lower operating expense and a lower effective tax rate. The effective tax rate was 18.7%, compared with 26.9% in the prior-year quarter, primarily reflecting the Tax Cuts and Jobs Act; the current period also included $0.9 million of nonrecurring discrete tax expense, primarily related to the insurance-business transaction.
Portfolio loans were $5.731 billion at March 31, 2018, down $30.8 million from year-end. Commercial loans represented 78.4% of portfolio loans, including $2.761 billion of commercial real estate loans. The allowance for loan losses was $59.0 million, or 1.03% of portfolio loans, compared with $56.4 million, or 0.98%, at year-end. Net recoveries were $0.2 million in Q1 2018 versus $2.1 million of net charge-offs in Q1 2017.
Deposits were $5.387 billion, down $40.8 million from December 31, 2017. Total borrowings were $661.9 million, down $21.2 million. Cash and cash equivalents were $112.8 million at quarter-end. Management reported $531 million of highly liquid assets, equal to 7.6% of total assets, and $1.8 billion of remaining borrowing availability with the Federal Home Loan Bank of Pittsburgh. Regulatory capital ratios exceeded well-capitalized thresholds, including an 11.02% common equity tier 1 ratio at the holding company and 10.60% at the bank.
Material changes versus comparable periods
- Net interest income increased 5.7% to $56.9 million; FTE net interest margin increased nine basis points to 3.59%. Management attributed the improvement primarily to higher short-term interest rates and organic commercial-loan growth.
- Average loans increased $96.1 million year over year, while average interest-bearing liabilities declined $61.6 million. Funding costs nevertheless rose as market rates increased.
- Noninterest income increased 6.1%, including a $1.9 million gain from selling a 70% majority interest in S&T Evergreen Insurance, LLC. Insurance fee income declined $1.3 million following the transaction.
- Noninterest expense declined 2.0%, primarily from lower salaries and employee benefits, partly offset by a $0.9 million increase in other taxes related to a state sales-tax assessment.
- Nonperforming loans declined to $21.3 million from $23.9 million at year-end, but other real estate owned increased to $2.9 million from $0.5 million. Total nonperforming assets were $24.3 million, broadly unchanged from year-end.
- Commercial special mention, substandard and doubtful loans increased to $268 million from $201 million at year-end, and impaired loans increased to $29.9 million from $26.8 million.
- Accumulated other comprehensive loss worsened by $11.5 million from year-end, primarily reflecting declines in the fair value of available-for-sale securities. The bond portfolio moved from a $1.7 million net unrealized gain to a $7.8 million net unrealized loss.
- Operating cash flow was $37.8 million, compared with $30.3 million in Q1 2017. Investing activities provided $28.2 million, largely because of a net decrease in loans and $4.5 million of proceeds from the insurance transaction. Financing activities used $70.3 million, including $7.7 million of dividends; cash declined $4.3 million during the quarter.
Guidance, outlook, risks and unusual items
No formal earnings or financial guidance is provided. Management expects to benefit from future increases in short-term interest rates and continues to focus on organic loan and deposit growth, fee-income opportunities, expense control and asset quality. The balance sheet is described as asset sensitive; management’s scenarios indicate higher rates would generally improve pretax net interest income, while declining rates would reduce it.
On January 1, 2018, S&T sold a 70% interest in its insurance business, deconsolidated the subsidiary and retained a 30% partnership interest accounted for under the equity method. The transaction produced a $1.9 million gain and is not necessarily recurring.
The company adopted several accounting standards in 2018, including revenue recognition and financial-instrument guidance. Management reported no material effect on the financial statements from the adoption of these standards. The company is evaluating the future current expected credit loss model and expects the new lease standard to increase reported assets and liabilities and potentially affect regulatory capital ratios.
Forward-looking risks include credit losses, concentration in commercial real estate and construction lending, local and regional economic conditions, interest-rate and yield-curve changes, deposit competition, liquidity and funding conditions, regulatory developments, cybersecurity, technology, litigation, housing-market weakness, competition and potential goodwill impairment.
A material weakness in internal control over financial reporting remained outstanding as of March 31, 2018. It relates to inconsistent assessment of internally assigned loan risk ratings, which affects the allowance for loan losses. Management is using an independent third party, additional training and improved documentation as remediation measures. Management nevertheless concluded that the financial statements fairly present the company’s financial position and results under GAAP.
The board authorized a $50 million share-repurchase plan on March 19, 2018, effective through August 31, 2019. No open-market repurchases occurred during the quarter; 15,474 shares were acquired for employee tax-withholding obligations.
Important facts for investors to verify
- Whether the material weakness in loan risk-rating controls is remediated and whether future allowance adjustments result.
- The sustainability of margin expansion as deposit and borrowing costs rise with interest rates.
- Credit trends in the concentrated commercial real estate, commercial and industrial, and construction portfolios, including the increase in criticized loans.
- Whether nonperforming assets remain stable after the increase in other real estate owned.
- The recurring earnings impact of the insurance-business sale, including reduced insurance fees and future equity-method income.
- The effect of unrealized securities losses, interest-rate movements and deposit competition on capital, liquidity and comprehensive income.
- The eventual balance-sheet and regulatory-capital impact of the CECL and lease accounting standards.
- The timing and funding of any repurchases under the $50 million authorization.