S&T Bancorp, Inc. — 2016 Second-Quarter Form 10-Q Summary
Business context and reporting period
S&T Bancorp is a Pennsylvania-based bank holding company providing commercial and consumer banking, insurance, wealth management, trust and brokerage services in Pennsylvania, Ohio, New York and surrounding markets. The filing covers the quarter and six months ended June 30, 2016. Results are not fully comparable with the prior-year six-month period because the Integrity Bancshares acquisition was completed in March 2015 and contributed only approximately four months of results in the 2015 first half.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Net interest income | $49.7 million | $99.3 million |
| Net interest income, FTE | $51.5 million | $102.8 million |
| Net interest margin, FTE | 3.44% | 3.48% |
| Provision for loan losses | $4.8 million | $9.9 million |
| Noninterest income | $12.4 million | $28.3 million |
| Noninterest expense | $34.8 million | $73.2 million |
| Net income | $17.1 million | $33.2 million |
| Diluted earnings per share | $0.49 | $0.95 |
- Quarterly net income declined from $18.2 million to $17.1 million, while six-month net income increased from $31.0 million to $33.2 million.
- Quarterly net interest income increased 1.8%; six-month net interest income increased 11.5%. Average interest-earning assets grew 9.5% in the quarter and 14.7% year to date, primarily from loan growth and the Integrity acquisition.
- FTE net interest margin declined from 3.67% to 3.44% for the quarter and from 3.58% to 3.48% for the six months, reflecting higher funding costs and lower purchase-accounting accretion.
- Net charge-offs were $3.0 million in the quarter and $5.8 million year to date, compared with $1.4 million and $2.4 million in the respective 2015 periods.
- Total assets increased 5.6% from year-end 2015 to $6.67 billion. Portfolio loans increased 7.2% to $5.39 billion, led by commercial real estate and commercial and industrial loans.
- Deposits increased 5.0% to $5.12 billion. Total borrowings increased to $660.0 million from $580.7 million, principally because a $100 million long-term borrowing maturity was replaced with short-term FHLB borrowings.
- Shareholders’ equity increased to $825.1 million from $792.2 million. The company declared dividends of $0.19 per share for the quarter and $0.38 per share for the first half.
- Six-month cash flow provided by operating activities was $44.0 million. Investing activities used $358.4 million, primarily for net loan growth, while financing activities provided $310.0 million. Cash and equivalents ended at $95.0 million, down from $99.4 million at year-end.
Material changes versus the prior comparable period
- The quarterly earnings decline was driven by a $2.8 million increase in the provision for loan losses and a $0.9 million decrease in noninterest income. These effects were partly offset by higher net interest income, lower taxes and lower operating expense.
- Six-month noninterest income increased 11.0%, including a $2.1 million gain on the sale of the credit card portfolio and a $1.0 million pension-plan curtailment gain. The company expects to continue earning certain incentive, interchange and finance-charge income under a related marketing agreement.
- Six-month noninterest expense increased 5.9%, despite the absence of 2015 merger-related expenses of $3.2 million. Higher salaries, occupancy, equipment, professional services and FDIC insurance costs reflected the expanded operations.
- Nonperforming assets increased to $43.2 million from $35.7 million at December 31, 2015. Nonaccrual loans increased to $42.9 million, and nonaccrual troubled debt restructurings increased to $15.0 million.
- The allowance for loan losses increased to $52.2 million from $48.1 million. It equaled 0.97% of portfolio loans and 122% of nonperforming loans at June 30, 2016.
- Accumulated other comprehensive income improved by $11.7 million, principally from higher unrealized gains on available-for-sale securities and changes in pension-plan funded status.
Outlook, management commentary, risks and unusual items
Management continued to emphasize organic loan and deposit growth, expansion in newer markets, increased fee income and expense control. The low-interest-rate environment remained a challenge for net interest income, although management expected organic growth to mitigate some of the pressure. No formal earnings or financial guidance was provided in the filing.
- Management characterized commercial loan growth as strong, particularly in commercial real estate and commercial and industrial lending in New York, Ohio and southcentral Pennsylvania.
- Liquidity appeared supported by $462.0 million of highly liquid assets, equal to 6.9% of total assets, and $1.3 billion of remaining FHLB borrowing availability.
- Regulatory capital ratios exceeded well-capitalized thresholds. At S&T Bancorp, the common equity tier 1 ratio was 9.70% and total capital ratio was 11.52%; at S&T Bank, the corresponding ratios were 9.44% and 10.89%.
- Interest-rate sensitivity analysis indicated an asset-sensitive balance sheet: a 300-basis-point rate increase was estimated to increase pretax 12-month net interest income by 7.9%, while a 100-basis-point decrease was estimated to reduce it by 4.4%. Downward rate shock scenarios of 200 and 300 basis points were temporarily suspended because of the low-rate environment.
- Principal risks include credit losses, concentration in commercial real estate and commercial construction, regional economic weakness, interest-rate and funding risk, cybersecurity and technology disruptions, regulatory changes, competition, acquisition integration, litigation, goodwill impairment and access to capital.
- The company recorded a $1.0 million pension curtailment gain, a $2.1 million credit-card portfolio sale gain and no merger-related expenses in 2016. Litigation was described as routine, with no material adverse outcome expected.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Investor verification checklist
- Verify whether the increase in nonperforming loans and troubled debt restructurings represents a continuing deterioration in acquired and originated commercial credits.
- Monitor provision expense, net charge-offs, specific reserves and allowance coverage as loan growth continues.
- Assess the sustainability of loan growth and the related dependence on higher-cost certificates of deposit and short-term borrowings.
- Separate recurring operating performance from the nonrecurring credit-card sale gain and pension curtailment gain.
- Evaluate the effect of lower net interest margins and changing interest rates on future earnings.
- Review commercial real estate, commercial construction and geographic concentrations, including exposure to Pennsylvania, Ohio, New York, West Virginia and Maryland.
- Confirm liquidity availability, pledged collateral, capital ratios and compliance with regulatory requirements.
- Review the company’s expected implementation effects of pending accounting standards, particularly the current expected credit loss, financial instruments, leases and financial-instrument classification standards.