S&T BANCORP INC quarterly report, Q3 FY2017

S&T Bancorp, Inc. — Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2017; filed November 1, 2017. S&T is a Pennsylvania bank holding company headquartered in Indiana, Pennsylvania, operating banking, insurance, trust and brokerage businesses in Pennsylvania, Ohio and nearby markets. The company reported approximately $7.2 billion of assets at quarter-end. Insurance and wealth management are no longer reported as separate segments because management determined they were not material.

Key Financial Metrics

Metric	Three months ended Sept. 30	Nine months ended Sept. 30
Net interest income	$57.5 million, up 11.7%	$167.9 million, up 11.3%
Net interest income, FTE	$59.3 million, up 11.5%	$173.5 million, up 11.2%
Net interest margin, FTE	3.59%, versus 3.46%	3.55%, versus 3.47%
Provision for loan losses	$2.9 million	$12.9 million
Noninterest income	$13.6 million, up 0.8%	$42.8 million, up 2.6%
Noninterest expense	$36.6 million, up 6.1%	$110.0 million, up 2.2%
Net income	$22.7 million, up 10.4%	$63.7 million, up 18.5%
Diluted EPS	$0.65, versus $0.59	$1.82, versus $1.54

All dollar amounts are in millions unless otherwise indicated. The filing does not present a consolidated revenue measure comparable to an industrial company; interest income and noninterest income are the principal revenue components. The nine-month effective tax rate was 27.5%, versus 25.9% in the prior year. The filing does not clearly state a consolidated operating margin or net profit margin; net income divided by reported total interest income plus noninterest income is approximately 20% for both the quarter and nine-month period, but this is not a company-defined margin.

Balance Sheet, Credit and Liquidity

Total assets were $7.17 billion at September 30, 2017, up $227 million, or 3.3%, from December 31, 2016.
Portfolio loans were $5.82 billion, up $209 million, or 3.7%. Commercial loans represented 78.4% of portfolio loans, led by commercial real estate of $2.68 billion and commercial and industrial loans of $1.45 billion.
Loans held for sale increased to $47.9 million from $3.8 million, primarily because $43.4 million of loans related to a planned branch sale were classified as held for sale.
The allowance for loan losses was $56.7 million, or 0.97% of portfolio loans, compared with $52.8 million, or 0.94%, at year-end 2016. Nine-month net charge-offs were $9.0 million, compared with $6.7 million in the prior-year period.
Nonperforming assets declined to $30.5 million from $43.3 million at year-end; nonperforming assets were 0.52% of total loans plus OREO. Total nonaccrual loans were $29.5 million, and OREO was $1.0 million.
Total deposits were $5.44 billion, up $171 million, or 3.2%. Customer deposits increased $75.6 million, while brokered deposits increased $56.3 million to $408.1 million. Deposits held for sale were $39.0 million.
Total borrowings were $783.5 million, up $12.3 million from year-end. FHLB borrowing capacity was approximately $2.5 billion; $1.6 billion remained available at September 30.
Highly liquid assets totaled approximately $510 million, or 7.1% of total assets, consisting primarily of interest-bearing deposits, unpledged securities and loans held for sale. Cash and cash equivalents were $114.4 million.
Regulatory capital ratios exceeded well-capitalized thresholds. S&T Bancorp’s total risk-based capital ratio was 12.54%, and S&T Bank’s was 11.75%.

Cash Flow and Capital Allocation

Nine-month operating cash flow was $83.4 million, compared with $72.4 million in the prior-year period.
Investing activities used $269.9 million, including a $268.1 million net increase in loans and $69.7 million of securities purchases, partly offset by securities maturities, sales and other proceeds.
Financing activities provided $161.4 million, primarily from deposit growth and a $25.0 million increase in short-term borrowings.
Cash and cash equivalents declined by $25.0 million during the nine months, compared with an increase of $25.8 million in the prior-year period.
Dividends declared were $0.20 per share for the quarter and $0.60 per share for the nine-month period, compared with $0.19 and $0.57, respectively, in 2016.

Material Changes and Unusual Items

Results benefited from organic loan growth, higher short-term interest rates and a 13-basis-point quarterly increase in FTE net interest margin. Management described the balance sheet as asset sensitive and expects rising rates, particularly a steeper yield curve, to generally benefit pretax net interest income.
Nine-month noninterest income included $4.0 million of securities gains and a $0.7 million bank-owned life insurance claim. These benefits were partly offset by the absence of a $2.1 million gain on the 2016 credit card portfolio sale and a $1.0 million 2016 pension curtailment gain.
Noninterest expense rose primarily from merit increases, incentive compensation, medical claims, higher FDIC insurance expense and certain loan-related costs.
On July 27, 2017, S&T agreed to sell its State College retail branch to First Citizens Community Bank. The all-cash transaction was expected to close in the fourth quarter, subject to regulatory and customary conditions. The related loans and deposits were classified as held for sale.
Management reported no material changes to previously disclosed risk factors, no material pending legal proceedings and effective disclosure controls as of September 30, 2017.

Outlook, Risks and Contingencies

Management’s strategy emphasizes organic loan and deposit growth, expansion in existing and newer markets, increased fee income, expense control and active asset-quality monitoring. Management stated that the low-interest-rate environment remained a challenge for net interest income, although recent short-term rate increases had been beneficial.

Key risks include credit losses, concentration in commercial real estate and other commercial lending, regional economic weakness, housing-market deterioration and higher loan charge-offs.
Interest-rate risk is material. A modeled 300-basis-point increase was associated with a 4.7% increase in 12-month pretax net interest income but a 6.8% decline in economic value of equity; a 100-basis-point decline was associated with a 4.1% decrease in pretax net interest income.
The company temporarily suspended its negative 200- and 300-basis-point rate-shock and economic-value-of-equity scenarios because management believed they provided limited insight in the low-rate environment.
Off-balance-sheet commitments to extend credit totaled $1.42 billion, and standby letters of credit totaled $85.4 million. The allowance for unfunded commitments was $2.1 million.
Management identified cybersecurity, technology, competition, regulatory change, litigation, acquisition integration, liquidity, deposit costs and potential goodwill impairment as additional risks.
S&T was evaluating the forthcoming current expected credit loss standard and other accounting updates. Management did not expect most identified updates to materially affect results, although the leases standard was expected to add right-of-use assets and lease liabilities to the balance sheet.

Investor Verification Priorities

Verify the closing, accounting treatment and final financial impact of the State College branch sale.
Monitor commercial real estate and commercial construction concentrations, special-mention loans and the allowance coverage ratio.
Reconcile loan growth with deposit growth, brokered-deposit usage and the increased reliance on short-term FHLB borrowings.
Assess whether securities gains and the BOLI claim represent nonrecurring contributors to 2017 earnings.
Track net interest margin sensitivity as market rates and deposit pricing change.
Review future implementation effects of CECL, revenue recognition and lease accounting standards.
Confirm the sustainability of earnings growth after adjusting for securities gains, prior-year portfolio-sale gains and other unusual items.