S&T Bancorp, Inc. — 2023 Q3 Form 10-Q Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania bank holding company headquartered in Indiana, Pennsylvania, serving Pennsylvania and Ohio through commercial and retail banking, cash management, trust, brokerage and related financial services. The filing covers the three and nine months ended September 30, 2023, with balance-sheet comparisons to December 31, 2022 and results comparisons to the periods ended September 30, 2022.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net income | $33.5 million | $37.2 million | $107.7 million | $95.3 million |
| Diluted EPS | $0.87 | $0.95 | $2.78 | $2.43 |
| Net interest income | $87.4 million | $83.8 million | $264.3 million | $226.7 million |
| Provision for credit losses | $5.5 million | $2.5 million | $16.9 million | $5.2 million |
| Noninterest income | $12.2 million | $14.8 million | $39.6 million | $42.6 million |
| Noninterest expense | $52.8 million | $49.6 million | $154.1 million | $145.5 million |
| Net interest margin, FTE | 4.09% | 4.04% | 4.21% | 3.58% |
| Return on average assets | 1.42% | 1.64% | 1.56% | 1.38% |
| Return on average equity | 10.84% | 12.47% | 11.80% | 10.73% |
At September 30, 2023, total assets were $9.47 billion, up from $9.11 billion at December 31, 2022. Portfolio loans were $7.52 billion, up 4.6%, while securities available for sale were $955.3 million, down 4.7%. Total deposits were $7.22 billion, essentially unchanged from year-end. Shareholders’ equity was $1.22 billion.
Cash and due from banks were $238.5 million. Net cash provided by operating activities for the first nine months was $132.1 million, compared with $205.2 million in the prior-year period. Investing activities used $328.8 million, primarily reflecting a $348.8 million net increase in loans. Financing activities provided $225.2 million, including $260.0 million of increased short-term borrowings and $553.3 million of increased certificates of deposit, partly offset by reductions in other deposit categories, dividends and share repurchases.
Total borrowings were $718.7 million, including $630.0 million of short-term borrowings, $39.4 million of long-term borrowings and $49.3 million of junior subordinated debt securities. The company reported $3.78 billion of available borrowing capacity, including FHLB, Federal Reserve Discount Window and BTFP capacity. Highly liquid assets were $885.6 million, or 9.4% of total assets.
Material changes versus prior comparable periods
- Q3 net income decreased $3.7 million, or approximately 10%, primarily because higher net interest income was more than offset by increased credit-loss provisions, lower noninterest income and higher operating expenses.
- Nine-month net income increased $12.4 million, or approximately 13%, as the $37.6 million increase in net interest income exceeded higher credit-loss provisions, increased expenses, lower noninterest income and higher taxes.
- Interest and dividend income increased $33.1 million in Q3 and $113.7 million year to date, driven primarily by higher rates and loan growth. Interest expense increased $29.5 million and $76.1 million, respectively, reflecting higher deposit and borrowing costs.
- Loan growth was concentrated in consumer real estate, which increased $277.9 million from year-end. Commercial real estate increased $158.1 million, while commercial and industrial loans declined $83.6 million and commercial construction loans declined $10.9 million.
- Deposit composition shifted toward higher-cost certificates of deposit, which increased $553.3 million. Noninterest-bearing demand deposits declined $312.7 million, money market deposits declined $116.1 million and savings deposits declined $143.6 million.
- The allowance for credit losses increased to $108.2 million, or 1.44% of portfolio loans, from $101.3 million, or 1.41%, at year-end. Net loan charge-offs rose to $9.6 million from $1.7 million in the prior-year nine-month period.
- Nonaccrual loans declined to $12.7 million from $19.1 million, and total nonperforming assets declined to $16.4 million from $22.1 million. Substandard loans increased to $177.4 million from $163.1 million, while special mention loans declined to $194.3 million from $221.1 million.
- The securities portfolio had $115.4 million of gross unrealized losses and no gross unrealized gains at September 30, 2023, compared with net unrealized losses of $102.3 million at year-end. Management attributed the losses primarily to interest-rate changes and stated that the securities remained investment grade and were not considered credit-impaired.
Guidance, outlook, commentary, risks and unusual items
Management did not provide specific earnings or revenue guidance in the filing. Strategic priorities for 2023 and beyond are the deposit franchise, core profitability, asset quality, and talent and engagement. Management stated that liquidity and the balance sheet remained well positioned despite industry volatility, while noting that higher rates are increasing deposit and funding costs.
The company reported a diversified deposit base consisting of 57.4% personal, 35.2% business, 5.0% public funds and 2.4% brokered deposits. Uninsured deposits were approximately $2.2 billion, or 31% of total deposits. Capital remained above well-capitalized regulatory thresholds, including a 13.11% Common Equity Tier 1 ratio, 15.01% total capital ratio and 11.12% leverage ratio at the holding-company level.
Credit risk increased in certain commercial portfolios. Management cited deterioration in the commercial real estate price index, additional qualitative reserves, C&I downgrades and loan growth in consumer real estate as factors affecting the allowance. Three C&I relationships generated $15.9 million of charge-offs during the first nine months, partly offset by a $9.3 million recovery related to customer fraud occurring in 2020.
Key risks include commercial real estate and commercial credit deterioration, rising funding costs, deposit outflows, interest-rate and securities valuation risk, liquidity stress, banking-industry disruption, regulatory changes, cybersecurity and operational risks, competition, litigation, macroeconomic weakness and potential goodwill impairment. The filing identifies $2.75 billion of commitments to extend credit and standby letters of credit. Management stated that pending litigation was not expected to have a material adverse effect.
The company adopted ASU 2022-02 on January 1, 2023, resulting in a $0.6 million increase to the allowance for credit losses and a corresponding reduction in retained earnings. The company redeemed $5.0 million of junior subordinated debt securities on July 25, 2023. The $50 million share-repurchase authorization was extended through March 31, 2024; $9.8 million remained available at September 30, 2023, and no shares were repurchased during the third quarter.
Important facts for investors to verify
- Whether deposit migration into certificates of deposit and increased short-term borrowings continue to pressure net interest margin and liquidity.
- Commercial real estate and C&I risk ratings, charge-offs, delinquencies and allowance coverage in subsequent quarters.
- Whether the $115.4 million of securities unrealized losses affect capital or liquidity if securities must be sold before recovery.
- The sustainability of loan growth, particularly the increase in consumer real estate loans and the related credit and interest-rate exposure.
- Future noninterest expense trends, including salaries, technology, FDIC insurance and marketing costs.
- Availability and terms of the reported $3.78 billion of borrowing capacity, including the Federal Reserve facilities.
- Execution of the share-repurchase plan and the effect of repurchases and dividends on capital.
- Potential effects of banking-industry volatility, macroeconomic deterioration, regulatory changes and interest-rate movements on earnings, liquidity and asset quality.