S&T Bancorp, Inc. 2020 Q2 SEC Filing Summary
Business Context and Reporting Period
S&T Bancorp, Inc. is a Pennsylvania-based bank holding company operating in Western and Eastern Pennsylvania, Ohio, and Upstate New York. It provides retail and commercial banking, cash management, trust, brokerage, and related financial services. This Form 10-Q covers the three and six months ended June 30, 2020; financial statements are unaudited.
The company completed its acquisition of DNB Financial Corporation on November 30, 2019. DNB’s operations are included beginning December 1, 2019, and its systems conversion was completed on February 7, 2020.
Financial Metrics
| Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|---|---|
| Net interest income | $70.1 million | $60.8 million | $140.2 million | $121.2 million |
| Provision for credit losses | $86.8 million | $2.2 million | $106.8 million | $7.9 million |
| Noninterest income | $15.2 million | $12.9 million | $27.6 million | $24.3 million |
| Noninterest expense | $43.5 million | $40.4 million | $89.9 million | $79.3 million |
| Net income/(loss) | $(33.1) million | $26.1 million | $(19.8) million | $49.0 million |
| Diluted earnings/(loss) per share | $(0.85) | $0.76 | $(0.51) | $1.43 |
| Fully taxable-equivalent net interest margin | 3.31% | 3.68% | 3.42% | 3.70% |
- Total assets were $9.47 billion at June 30, 2020, up from $8.76 billion at December 31, 2019.
- Portfolio loans were $7.55 billion, compared with $7.14 billion at year-end 2019. Commercial loans represented 78.8% of portfolio loans.
- Deposits increased to $7.87 billion from $7.04 billion, primarily due to PPP-related funds, stimulus payments, and customers holding additional cash.
- Total borrowings declined to $290.2 million from $416.4 million. Long-term borrowings and junior subordinated debt totaled $113.5 million.
- Cash and due from banks increased to $351.4 million from $197.8 million. Six-month operating cash flow was negative $31.6 million, investing cash flow was negative $484.3 million, and financing cash flow was positive $669.4 million.
- The allowance for credit losses on loans was $114.6 million, or 1.52% of total portfolio loans and 1.64% excluding PPP loans. The allowance for unfunded commitments was $7.0 million.
- Nonperforming loans were $90.1 million and nonperforming assets were $92.9 million, compared with $54.1 million and $57.6 million, respectively, at December 31, 2019.
- Regulatory capital ratios remained above well-capitalized thresholds. S&T Bancorp’s total risk-based capital ratio was 12.74% and its common equity tier 1 ratio was 10.70% at June 30, 2020.
Material Changes Versus the Prior Comparable Period
- Second-quarter net income declined by $59.2 million year over year, primarily because of an unusual $58.7 million pre-tax loss from a customer check-kiting fraud. The fraud reduced net income by approximately $46.3 million, or $1.19 per diluted share.
- The fraud-related loss included a $58.7 million charge-off and a $4.2 million charge-off on the customer’s lending relationship; the remaining $10.9 million lending balance was classified as nonperforming.
- Net interest income increased 15.3% in the second quarter and 15.7% for the first six months, driven by higher average earning assets, the DNB acquisition, and PPP loan growth. Lower interest rates reduced the net interest margin by 37 basis points in the quarter and 28 basis points year to date.
- Noninterest income increased 18.0% in the second quarter, helped by mortgage banking income, which rose 311.7% because of elevated refinancing activity. Service charges on deposit accounts declined because of lower transaction volumes during the pandemic.
- Credit costs increased sharply because of the fraud, COVID-19-related economic deterioration, higher expected losses under CECL, and additional reserves for economic forecasts and hotel exposure. Six-month net charge-offs were $79.2 million versus $7.4 million in 2019.
- The January 1, 2020 adoption of CECL increased the loan allowance by $27.4 million and reduced retained earnings by $22.6 million.
- The DNB acquisition contributed to higher operating expenses, including occupancy, technology, FDIC insurance, employee costs, and merger-related expenses. Six-month merger-related expenses were $2.3 million.
- During the six months, S&T repurchased 411,430 shares for $12.6 million. Repurchases were suspended in March 2020 because of the COVID-19 environment.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management expects continued uncertainty from COVID-19 and evaluates goodwill for impairment quarterly in the current environment; the $373.3 million goodwill balance was not impaired at June 30, 2020.
- S&T originated $547.6 million of PPP loans at June 30, 2020. These loans carry a 1.00% rate, are generally SBA-guaranteed, and may be forgiven if program requirements are met.
- COVID-19 payment relief covered 2,360 loans totaling approximately $1.4 billion, including 1,289 commercial loans totaling $1.3 billion and 1,071 mortgage and consumer loans totaling $123.0 million. These modifications were not treated as troubled debt restructurings under applicable guidance as of June 30.
- Management states that it is well capitalized and has adequate capital cushions based on internal stress testing. Highly liquid assets totaled $751.3 million, and remaining FHLB borrowing availability was approximately $2.7 billion.
- Key risks include further COVID-19-related credit deterioration, additional charge-offs and provisions, prolonged low interest rates, concentration in commercial real estate and commercial lending, fraud and operational risk, liquidity and regulatory capital pressures, acquisition integration, and potential goodwill impairment.
- A criminal investigation related to the customer fraud was ongoing. Management is pursuing available recovery sources and has substantially implemented process and monitoring enhancements.
- Management reported no material legal proceedings and concluded that disclosure controls were effective as of June 30, 2020. The filing does not identify material changes to previously disclosed risk factors other than COVID-19 and fraud-related risks.
- On August 4, 2020, the company entered into a severance agreement providing a former executive with gross cash payments totaling $335,450, an additional $32,000 payment, up to 12 months of COBRA coverage, and certain company property.
Most Important Facts for Investors to Verify
- Whether the $58.7 million fraud loss is fully recoverable and whether additional losses, litigation, regulatory action, or reputational effects arise.
- The performance of the $1.4 billion of COVID-19-modified loans after deferrals expire, particularly commercial real estate, hotel, construction, and small-business exposures.
- Whether the $114.6 million loan allowance adequately covers losses under worsening economic forecasts and the CECL methodology.
- Trends in nonperforming loans, special mention and substandard loans, charge-offs, and the allowance ratio excluding PPP loans.
- The sustainability of the 3.31% quarterly net interest margin in a prolonged low-rate environment and after PPP loan fees and purchase-accounting accretion diminish.
- The stability of pandemic-related deposit inflows and the continued availability of FHLB, Federal Reserve, and other contingency funding sources.
- Future goodwill impairment analyses, DNB integration costs, and whether acquisition-related benefits offset higher operating expenses.