S&T BANCORP INC quarterly report, Q2 FY2019

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, operating across Western and Central Pennsylvania, Northeast and Central Ohio, and Upstate New York. It provides commercial and retail banking, cash management, trust and financial services, and insurance products. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods.

On June 5, 2019, S&T entered into an agreement to acquire DNB Financial Corporation in an all-stock transaction exchanging 1.22 S&T shares for each DNB share. The transaction was expected to close in the fourth quarter of 2019, subject to regulatory and shareholder approvals.

Key financial metrics

Metric	Three months ended June 30, 2019	Three months ended June 30, 2018	Six months ended June 30, 2019	Six months ended June 30, 2018
Net income	$26.1 million	$21.4 million	$49.0 million	$47.6 million
Diluted EPS	$0.76	$0.61	$1.43	$1.36
Net interest income	$60.8 million	$58.4 million	$121.2 million	$115.3 million
Provision for loan losses	$2.2 million	$9.3 million	$7.9 million	$11.8 million
Noninterest income	$12.9 million	$12.3 million	$24.3 million	$26.0 million
Noninterest expense	$40.4 million	$35.9 million	$79.3 million	$71.9 million
Comprehensive income	$33.5 million	$20.4 million	$62.6 million	$35.1 million

Net interest margin on a fully taxable-equivalent basis was 3.68% in the second quarter and 3.70% for the first six months, compared with 3.64% and 3.61%, respectively, in 2018. Management attributed the improvement primarily to higher short-term interest rates and loan growth.

Total assets were $7.33 billion at June 30, 2019, compared with $7.25 billion at December 31, 2018.
Portfolio loans increased to $6.03 billion from $5.95 billion, led by commercial and industrial and commercial construction lending. Commercial loans represented 78.5% of portfolio loans.
Total deposits increased to $5.86 billion from $5.67 billion, primarily from a $267.9 million increase in money-market deposits and a $41.2 million increase in noninterest-bearing demand deposits.
Total borrowings declined to $424.6 million from $604.3 million, principally because of a $175.0 million reduction in short-term borrowings.
Shareholders’ equity increased to $965.0 million from $935.8 million, supported by net income and an improvement in accumulated other comprehensive income.
The allowance for loan losses was $61.5 million, or 1.02% of portfolio loans, compared with $61.0 million, or 1.03%, at year-end 2018.

Cash flow, liquidity, capital, and debt

Six-month operating cash flow was $58.9 million, compared with $64.5 million in 2018.
Investing activities used $60.0 million, primarily reflecting a $95.7 million net increase in loans.
Financing activities used $31.5 million, including $18.6 million of dividends, $15.1 million of share repurchases, and a $175.0 million reduction in short-term borrowings.
Cash and cash equivalents declined to $122.9 million from $155.5 million at December 31, 2018.
Management reported $532.7 million of highly liquid assets, equal to 7.3% of total assets, and approximately $2.0 billion of remaining borrowing availability with the Federal Home Loan Bank of Pittsburgh.
S&T Bancorp reported a 10.12% Tier 1 leverage ratio, 11.35% common equity Tier 1 ratio, and 13.15% total capital ratio at June 30, 2019. S&T Bank reported a 9.71% Tier 1 leverage ratio and 12.68% total capital ratio; both entities exceeded well-capitalized thresholds.

Material changes versus the prior comparable periods

Second-quarter net income increased 21.8%, while six-month net income increased 3.0%. The quarterly improvement was driven mainly by lower loan-loss provision and higher net interest income.
Net interest income increased 4.2% in the quarter and 5.1% for the six months. Average interest-earning assets and average loans increased, while the fully taxable-equivalent margin expanded.
Credit costs declined, reflecting lower net charge-offs. Annualized net charge-offs to average loans were 0.14% for the quarter and 0.25% for the six months.
Noninterest expense rose 12.5% in the quarter and 10.2% for the six months. Salary and benefit costs increased, data-processing costs rose following an outsourcing arrangement, and $0.6 million of merger-related expense was recorded in the second quarter.
Six-month noninterest income declined 6.8%, partly because 2018 included a $1.9 million gain from the sale of a majority interest in the insurance business. Wealth-management and mortgage-banking income also declined, partly offset by higher commercial loan swap fees.
Nonperforming assets decreased to $46.5 million from $49.2 million at year-end 2018, but impaired loans increased to $51.3 million from $49.5 million and troubled debt restructurings increased to $30.6 million from $27.9 million.
The company repurchased 385,840 shares for $15.1 million during the first six months. Approximately $22.6 million remained available under the repurchase authorization through August 31, 2019.

Guidance, outlook, commentary, risks, and unusual items

Management did not provide a specific earnings or revenue forecast in the filing. It stated that its focus remained organic loan and deposit growth, increasing fee income, controlling operating expenses, monitoring asset quality, and executing the proposed DNB acquisition.

The DNB transaction is subject to Federal Reserve, FDIC, Pennsylvania Department of Banking and Securities, and DNB shareholder approvals. Delays, failure to close, regulatory conditions, integration costs, customer or employee attrition, and management distraction could adversely affect results.
The loan portfolio is concentrated in commercial lending and primarily serves Pennsylvania and contiguous states. Commercial real estate and commercial construction exposure, local economic conditions, borrower performance, and housing-market conditions are key credit risks.
Nonperforming loans were $45.0 million, or 0.75% of total loans, at June 30, 2019. Commercial real estate nonperforming loans increased by $12.3 million from year-end 2018.
The company is exposed to interest-rate risk. Its balance sheet is asset-sensitive; a 100-basis-point increase in rates was estimated to increase pretax net interest income by 3.2% over 1–12 months and 3.7% over 13–24 months, while a 100-basis-point decrease was estimated to reduce it by 4.7% and 5.7%, respectively.
S&T had not adopted the current expected credit loss standard, or CECL, as of June 30, 2019. It was developing and validating methodologies, but the filing does not provide a clear estimate of the eventual financial impact.
The company adopted the new lease standard on January 1, 2019, recognizing approximately $37.3 million of lease-related right-of-use assets and lease liabilities; management stated that the adoption had no material impact on earnings.
Management stated that pending litigation was not expected to have a material adverse effect, and that disclosure controls were effective with no material changes in internal control over financial reporting.

Important facts for investors to verify

Whether the DNB merger received all required regulatory and shareholder approvals and closed on the expected timetable.
The effect of merger consideration, integration expenses, branch and customer retention, and any purchase-accounting adjustments on future capital and earnings.
Trends in commercial real estate, commercial construction, nonperforming loans, impaired loans, TDRs, charge-offs, and the adequacy of the allowance for loan losses.
The eventual CECL adoption impact on the allowance, capital ratios, and reported earnings.
Whether promotional money-market deposit growth remains stable and how deposit pricing affects net interest margin.
The sustainability of higher net interest income amid changing interest rates, deposit costs, and the company’s asset-sensitive balance sheet.
Progress on the share repurchase plan and the resulting effect on outstanding shares, capital, and EPS.