S&T BANCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations, or MD&A, represents an overview of our consolidated results of
operations and financial condition and highlights material changes in our
financial condition and results of operations for the three months ended
Important Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains or incorporates statements that we believe are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally relate to our financial condition, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position and other matters regarding or affecting S&T and its future business and operations. Forward-looking statements are typically identified by words or phrases such as "will likely result," "expect," "anticipate," "estimate," "forecast," "project," "intend," "believe," "assume," "strategy," "trend," "plan," "outlook," "outcome," "continue," "remain," "potential," "opportunity," "comfortable," "current," "position," "maintain," "sustain," "seek," "achieve," and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to: credit losses and the credit risk of our commercial and consumer loan products; changes in the level of charge-offs and changes in estimates of the adequacy of the allowance for credit losses, or ACL; cyber-security concerns; rapid technological developments and changes; operational risks or risk management failures by us or critical third parties, including fraud risk; our ability to manage our reputational risks; sensitivity to the interest rate environment, a rapid increase in interest rates or a change in the shape of the yield curve; a change in spreads on interest-earning assets and interest-bearing liabilities; the transition from LIBOR as a reference rate; regulatory supervision and oversight, including changes in regulatory capital requirements and our ability to address those requirements; unanticipated changes in our liquidity position; unanticipated changes in regulatory and governmental policies impacting interest rates and financial markets; changes in accounting policies, practices or guidance; legislation affecting the financial services industry as a whole, and S&T, in particular; developments affecting the industry and the soundness of financial institutions and further disruption to the economy andU.S. banking system; the outcome of pending and future litigation and governmental proceedings; increasing price and product/service competition; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; managing our internal growth and acquisitions; the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or costly than anticipated; containing costs and expenses; reliance on significant customer relationships; an interruption or cessation of an important service by a third-party provider; our ability to attract and retain talented executives and employees; general economic or business conditions, including the strength of regional economic conditions in our market area; environmental, social and governance practices and disclosures, including climate change, hiring practices, the diversity of the work force, and racial and social justice issues; deterioration of the housing market and reduced demand for mortgages; deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge to net income; the stability of our core deposit base and access to contingency funding; re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses. Many of these factors, as well as other factors, are described elsewhere in this report, and in our 2022 Form 10-K, including Part I, Item 1A, Risk Factors and any of our subsequent filings with theSEC . Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made. 28
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S&T BANCORP, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
We view critical accounting policies to be those which are highly dependent on subjective or complex estimates, assumptions and judgments and where changes in those estimates and assumptions could have a significant impact on the Consolidated Financial Statements. Further, we view critical accounting estimates as those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Our critical accounting policies and estimates as ofMarch 31, 2023 remained unchanged from the disclosures presented in our 2022 Form 10-K under Part II, Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations." Overview We are a bank holding company that is headquartered inIndiana ,Pennsylvania with assets of$9.2 billion atMarch 31, 2023 . We operate inPennsylvania andOhio . We provide a full range of financial services with retail and commercial banking products, cash management services, trust and brokerage services. Our common stock trades on the NASDAQ Global Select Market under the symbol "STBA". We earn revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers. We incur expenses for the cost of deposits and other funding sources, provision for credit losses and other operating costs such as salaries and employee benefits, data processing, occupancy and tax expense. Our purpose is building a better future together through people-forward banking. We believe that all banking should be personal. We cultivate relationships rooted in trust, strengthened by going above and beyond and renewed with every interaction. Our strategic priorities for 2023 and beyond will be focused on our deposit franchise, core profitability, asset quality and talent and engagement. During the first quarter of 2023, the banking industry experienced significant volatility with several high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system. Despite these negative industry developments, our liquidity position and balance sheet remain strong. We have a well-diversified deposit base with a balance mix of 59 percent personal and 41 percent business accounts. Our total deposits decreased by less than 1 percent compared toDecember 31, 2022 and can be attributed to normal deposit fluctuations and competition in a higher interest rate environment. We have total uninsured deposits of$2.4 billion , or 33 percent of our total deposit base. We have a strong liquidity position. In addition to our deposit base, we had remaining borrowing availability of$2.3 billion with the FHLB ofPittsburgh ,$794 million from the Federal Reserve Borrower-In-Custody program and$731 million from the Federal Reserve Bank Term Funding Program atMarch 31, 2023 . Furthermore, our capital remains strong with a Common Equity Tier 1 Ratio of 13.10 percent and a total capital ratio of 15.09 percent atMarch 31, 2023 .
Earnings Summary
The following table presents a summary of key profitability metrics for the periods presented:
Three Months Ended March 31,
(dollars in thousands) 2023 2022
Net income $ 39,799 $ 29,143
Earnings per share - diluted $ 1.02 $ 0.74
Return on average assets 1.77 % 1.25 %
Return on average shareholders' equity 13.38 % 9.88 %
Return on average tangible shareholders' equity (non-GAAP) 19.61 % 14.61 %
We recognized net income of $39.8 million , or $1.02 per diluted share, for the
three months ended March 31, 2023 compared to net income of $29.1 million , or
$0.74 per diluted share for the same period in 2022. Net income increased $10.7
million for the three months ended March 31, 2023 compared to the same period in
2022 primarily due to an increase in net interest income of $21.1 million offset
by a decrease in noninterest income of $2.0 million , an increase in provision
for credit losses of $1.4 million , an increase in noninterest expense of $4.3
million and an increase in income tax expense of $2.7 million .
Net interest income increased $21.1 million for the three months ended March 31,
2023 compared to the same period in 2022. Interest and dividend income increased
$40.8 million for the three months ended March 31, 2023 . Interest expense
increased $19.7 million for the three months ended March 31, 2023 . The net
interest margin, or NIM, on an FTE basis (non-GAAP) increased 116 basis points
to 4.32% for the three months ended March 31, 2023 compared to 3.16% for the
same period in 2022. The increases in net interest income and NIM on an FTE
basis (non-GAAP) were primarily due to higher interest rates
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S&T BANCORP, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS during 2023. NIM is reconciled to net interest margin adjusted to an FTE basis (non-GAAP) below in the "Explanation of Use of Non-GAAP Financial Measures" section of this MD&A. The increase in the provision for credit losses for the three months endedMarch 31, 2023 compared to the same period in 2022 was primarily related to a$4.2 million specific reserve for a C&I relationship and a$1.8 million increase in qualitative reserve related to the macro environment. Offsetting the increase in the provision for credit losses during the three months endedMarch 31, 2023 was a$9.3 million recovery from a customer fraud that occurred in 2020. Noninterest income decreased$2.0 million to$13.2 million for the three months endedMarch 31, 2023 compared to the same period in 2022. Mortgage banking income decreased$0.7 million for the three months endedMarch 31, 2023 due to a decline in loan sale activity caused by rising interest rates and a shift to holding originated mortgage loans. Debit and credit card income decreased$0.7 million for the three months endedMarch 31, 2023 due to decreased debit card incentive income and timing of referral merchant revenue. Noninterest expense increased$4.3 million to$51.7 million for the three months endedMarch 31, 2023 compared to the same period in 2022. Salaries and employee benefits increased$3.9 million for the three months endedMarch 31, 2023 due to decreases in the fair market value of assets in a nonqualified defined benefit plan, incentives, base rate increases and higher medical costs. Marketing costs increased$0.5 million for the three months endedMarch 31, 2023 due to increased marketing efforts and timing of various promotions. The provision for income taxes increased$2.7 million to$9.6 million for the three months endedMarch 31, 2023 compared to$6.9 million for the same period in 2022. Our effective tax rate was 19.4 percent for the three months endedMarch 31, 2023 compared to 19.2 percent for the three months endedMarch 31, 2022 . The increase in our effective tax rate for the three month period endedMarch 31, 2023 was primarily due to an increase in pretax income compared to the same period in 2022.
Explanation of Use of Non-GAAP Financial Measures
In addition to traditional financial measures presented in accordance with GAAP,
our management uses, and this quarterly report contains or references, certain
non-GAAP financial measures discussed below. We believe these non-GAAP financial
measures provide information useful to investors in understanding our underlying
business, operational performance and performance trends as they facilitate
comparisons with the performance of other companies in the financial services
industry. Although we believe that these non-GAAP financial measures enhance
investors' understanding of our business and performance, these non-GAAP
financial measures should not be considered alternatives to GAAP or considered
to be more important than financial results determined in accordance with GAAP,
nor are they necessarily comparable with non-GAAP measures which may be
presented by other companies.
The interest income on interest-earning assets, net interest income and net
interest margin are presented on an FTE basis (non-GAAP). The FTE basis
(non-GAAP) adjusts for the tax benefit of income on certain tax-exempt loans and
securities and the dividend-received deduction for equity securities using the
federal statutory tax rate of 21 percent for each period. We believe this to be
the preferred industry measurement of net interest income that provides a
relevant comparison between taxable and non-taxable sources of interest income.
The following table reconciles interest and dividend income and net interest
income per the Condensed Consolidated Statements of Comprehensive Income (Loss)
to interest income, net interest income and net interest margin on an FTE basis
(non-GAAP) for the periods presented:
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S&T BANCORP, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended March 31, (dollars in thousands) 2023 2022
Total interest and dividend income per Condensed Consolidated Statements of Comprehensive Income (Loss)
$ 110,903 $ 70,109 Adjustment to FTE basis 555 493 Interest Income on an FTE Basis (Non-GAAP)$ 111,458 $ 70,602
Total interest and dividend income per Condensed Consolidated Statements of Comprehensive Income (Loss)
$ 110,903 $ 70,109 Total interest expense 22,112 2,376
Net Interest Income per Condensed Consolidated Statements of Comprehensive Income (Loss)
88,791 67,733
Adjustment to FTE basis 555 493
Net Interest Income on an FTE Basis (Non-GAAP) $ 89,346 $ 68,226
Net interest margin 4.29 % 3.14 %
Adjustment to FTE basis 0.03 % 0.02 %
Net Interest Margin on an FTE Basis (Non-GAAP) 4.32 % 3.16 %
Return on average tangible shareholders' equity (non-GAAP) is a key
profitability metric used by management to measure financial performance. The
following table provides a reconciliation of return on average tangible
shareholders' equity (non-GAAP) by reconciling net income (GAAP) per the
Condensed Consolidated Statements of Comprehensive Income (Loss) to net income
before amortization and intangibles and average shareholder's equity to average
tangible shareholders' equity for the periods presented:
Three Months Ended March 31,
(dollars in thousands) 2023 2022
Net income (annualized) $ 161,407 $ 118,192
Plus: amortization of intangibles (annualized), net of tax 1,085 1,276
Net income before amortization of intangibles (annualized) $ 162,492 $ 119,468
Average shareholders' equity $ 1,206,358 $ 1,196,694 Less: average goodwill and other intangible assets, net of deferred tax liability
(377,576) (378,761)
Average tangible shareholders' equity $ 828,782 $ 817,933
Return on Average Tangible Shareholders' Equity (non-GAAP) 19.61 % 14.61 %
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S&T BANCORP, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS
Three Months Ended March 31, 2023 Compared to
Three Months Ended March 31, 2022 Net Interest Income
Our principal source of revenue is net interest income. Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the average balance of interest-earning assets and interest-bearing liabilities and changes in interest rates and spreads. The level and mix of interest-earning assets and interest-bearing liabilities is managed by ourAsset and Liability Committee , or ALCO, in order to mitigate interest rate and liquidity risks of the balance sheet. A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to produce what we believe is an acceptable level of net interest income. 32
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S&T BANCORP, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Average Balance Sheet and Net Interest Income Analysis (FTE) (non-GAAP)
The following tables provide information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the periods presented:
Three Months Ended March 31, 2023 Three Months Ended March 31, 2022
(dollars in thousands) Average Balance Interest Rate Average Balance Interest Rate
ASSETS
Interest-bearing deposits with banks
4.22 %$ 756,141 $ 303 0.16 % Securities, at fair value(1)(2) 1,000,609 6,269 2.51 % 1,002,212 5,265 2.10 % Loans held for sale 126 2 6.39 % 1,545 14 3.51 % Commercial real estate 3,132,382 42,104 5.45 % 3,257,238 29,345 3.65 % Commercial and industrial 1,711,113 28,515 6.76 % 1,712,865 16,827 3.98 % Commercial construction 388,795 6,932 7.23 % 409,264 3,329 3.30 % Total Commercial Loans 5,232,290 77,551 6.01 % 5,379,367 49,501 3.73 % Residential mortgage 1,144,821 12,613 4.43 % 896,268 8,962 4.02 % Home equity 650,385 10,067 6.28 % 570,781 4,823 3.43 % Installment and other consumer 122,873 2,364 7.80 % 109,972 1,475 5.44 % Consumer construction 45,870 528 4.67 % 21,833 181 3.37 % Total Consumer Loans 1,963,949 25,572 5.26 % 1,598,854 15,441 3.90 % Total Portfolio Loans 7,196,239 103,123 5.81 % 6,978,221 64,942 3.77 % Total Loans(1)(3) 7,196,365 103,125 5.81 % 6,979,765 64,955 3.77 % Total other earning assets 34,720 581 6.71 % 9,280 79 3.40 % Total Interest-earning Assets 8,372,193 111,458 5.39 % 8,747,398 70,602 3.27 % Noninterest-earning assets 754,677 709,246 Total Assets$ 9,126,870 $ 9,456,644 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing demand$ 824,623 $ 673 0.33 %$ 986,639 $ 185 0.08 % Money market 1,670,988 7,748 1.88 % 2,055,857 746 0.15 % Savings 1,090,137 806 0.30 % 1,109,048 78 0.03 % Certificates of deposit 1,052,460 5,676 2.19 % 1,070,189 844 0.32 % Total Interest-bearing Deposits 4,638,208 14,903 1.30 % 5,221,733 1,853 0.14 % Securities sold under repurchase agreements - - - % 81,790 20 0.10 % Short-term borrowings 451,668 5,487 4.93 % - - - % Long-term borrowings 14,689 98 2.71 % 22,310 107 1.95 % Junior subordinated debt securities 54,458 1,007 7.50 % 54,398 395 2.95 % Total Borrowings 520,815 6,592 5.13 % 158,498 523 1.34 % Other interest-bearing liabilities 54,669 617 4.58 % - - - % Total Interest-bearing Liabilities 5,213,692 22,112 1.72 % 5,380,231 2,376 0.18 % Noninterest-bearing liabilities 2,706,820 2,879,718 Shareholders' equity 1,206,358 1,196,694 Total Liabilities and Shareholders' Equity$ 9,126,870 $ 9,456,644 Net Interest Income (1)(2)$ 89,345 $ 68,226 Net Interest Margin (1)(2) 4.32 % 3.16 % (1) Tax-exempt interest income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent. (2) Taxable investment income is adjusted for the dividend-received deduction for equity securities. (3) Nonaccruing loans are included in the daily average loan amounts outstanding. 33
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S&T BANCORP, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net interest income on an FTE basis (non-GAAP) increased$21.1 million , or 31.0%, for the three months endedMarch 31, 2023 compared to the same period in 2022. The net interest margin, or NIM, on an FTE basis (non-GAAP) increased 116 basis points for the three months endedMarch 31, 2023 compared to the same period in 2022. The increases in net interest income and NIM on an FTE basis (non-GAAP) were primarily due to higher interest rates during 2023. Interest income on an FTE basis (non-GAAP) increased$40.9 million for the three months endedMarch 31, 2023 compared to the same period in 2022. The increase in interest income on an FTE basis (non-GAAP) was primarily due to higher interest rates. Average loan balances increased$216.6 million for the three months endedMarch 31, 2023 compared to the same period in 2022. The average yield on loans increased 204 basis points for the three months endedMarch 31, 2023 compared to the same period in 2022 due to increased interest rates. Average interest-bearing deposits with banks decreased$615.6 million for the three months endedMarch 31, 2023 compared to the same period in 2022 due to decreased deposit balances and increased loans. Overall, the FTE rate (non-GAAP) on interest-earning assets increased 212 basis points for the three months endedMarch 31, 2023 compared to the same period in 2022. Interest expense increased$19.7 million for the three months endedMarch 31, 2023 compared to the same period in 2022. The increase in interest expense was primarily due to higher interest rates. Average interest-bearing deposits decreased$583.5 million for the three months endedMarch 31, 2023 compared to the same period in 2022. The decrease was due to the competitive market driven by rising interest rates. The average rate paid on interest-bearing deposits increased 116 basis points for the three months endedMarch 31, 2023 compared to the same period in 2022. Average borrowings increased$362.3 million and the average rate paid on borrowings increased 379 basis points for the three months endedMarch 31, 2023 compared to the same period in 2022 primarily due to decreased deposit balances and increased loans. Overall, the cost of interest-bearing liabilities increased 154 basis points for the three months endedMarch 31, 2023 compared to the same period in 2022. 34
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S&T BANCORP, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates: Three Months Ended March 31, 2023 Compared to March 31, 2022 (dollars in thousands) Volume (4) Rate (4) Total Interest earned on: Interest-bearing deposits with banks$ (247) $ 1,426 $ 1,179 Securities, at fair value(1)(2) (8) 1,012 1,004 Loans held for sale (12) 1 (12) Commercial real estate (1,125) 13,884 12,759 Commercial and industrial (17) 11,705 11,688 Commercial construction (167) 3,770 3,603 Total Commercial Loans (1,309) 29,359 28,050 Residential mortgage 2,485 1,165 3,651 Home equity 673 4,571 5,244 Installment and other consumer 173 716 889 Consumer construction 200 148 347 Total Consumer Loans 3,531 6,600 10,131 Total Portfolio Loans 2,222 35,959 38,181 Total Loans (1)(3) 2,210 35,960 38,169 Total other earning assets 216 286 502 Change in Interest Earned on Interest-earning Assets$ 2,171 $ 38,684 $ 40,854 Interest paid on: Interest-bearing demand$ (30) $ 518 $ 487 Money market (140) 7,141 7,002 Savings (1) 730 728 Certificates of deposit (14) 4,846 4,832 Total Interest-bearing Deposits (185) 13,235 13,049 Securities sold under repurchase agreements (20) - (20) Short-term borrowings 5,487 - 5,487 Long-term borrowings (37) 28 (9) Junior subordinated debt securities - 611 611 Total Borrowings 5,430 639 6,069 Change in Interest Paid on Interest-bearing Liabilities 5,862 13,874 19,735 Change in Net Interest Income $
(3,691)
(1) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent. (2) Taxable investment income is adjusted for the dividend-received deduction for equity securities. (3) Nonaccruing loans are included in the daily average loan amounts outstanding. (4) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.
Provision for Credit Losses
The provision for credit losses includes a provision for losses on loans and on unfunded commitments. The provision for credit losses fluctuates based on changes in loan balances, risk ratings, net loan charge-offs/recoveries, the macro environment and our CECL forecast. The provision for credit losses increased$1.4 million to$0.9 million for the three months endedMarch 31, 2023 compared to a negative$0.5 million for the same period in 2022. The provision for credit losses included a negative$0.2 million for the reserve for unfunded commitments for the three months endedMarch 31, 2023 compared to$0.2 million for the same period in 2022. The increase in the provision for credit losses for the three months endedMarch 31, 2023 compared to the same period in 2022 was primarily related to a$4.2 million specific reserve for a C&I relationship and a$1.8 million increase in qualitative reserve related to the macro environment. Offsetting the increase in the provision for credit losses during the three months endedMarch 31, 2023 was a$9.3 million recovery from a customer fraud in 2020. Net loan recoveries were$5.1 million for the three months endedMarch 31, 2023 compared to$2.0 million for the same period in 2022. The net recovery was primarily due to the$9.3 million recovery mentioned above. Total gross charge-offs were$4.5 million primarily related to a$3.4 million charge-off related to a strategic note sale of a C&I relationship. 35
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S&T BANCORP, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Refer to the "Allowance for Credit Losses" section of this MD&A for further details. Noninterest Income Three Months Ended March 31, (dollars in thousands) 2023 2022 $ Change % Change Debit and credit card$ 4,373 $ 5,063 $ (690) (13.6) % Service charges on deposit accounts 4,076 3,974 102 2.6 % Wealth management 2,948 3,242 (294) (9.1) % Mortgage banking 301 1,015 (714) (70.3) % Other 1,492 1,932 (440) (22.8) % Total Noninterest Income$ 13,190 $ 15,226 $ (2,036) (13.4) % Noninterest income decreased$2.0 million to$13.2 million for the three months endedMarch 31, 2023 compared to the same period in 2022. Mortgage banking decreased$0.7 million for the three months endedMarch 31, 2023 due to a decline in loan sale activity caused by rising interest rates and a shift to holding originated mortgage loans on our balance sheet. Debit and credit card income decreased$0.7 million for the three months endedMarch 31, 2023 due to decreased debit card incentive income and timing of referral merchant revenue. Wealth management income decreased$0.3 million due to lower assets under management primarily related to declines in the stock market compared to the three months endedMarch 31, 2022 . Other noninterest income decreased$0.4 million for the three months endedMarch 31, 2023 primarily due to a net gain on sale of OREO in 2022. Noninterest Expense Three Months Ended March 31, (dollars in thousands) 2023 2022 $ Change % Change Salaries and employee benefits$ 27,601 $ 23,712 $ 3,889 16.4 % Data processing and information technology 4,258 4,435 (177) (4.0) % Occupancy 3,835 3,882 (47) (1.2) % Furniture, equipment and software 2,861 2,777 84 3.0 % Professional services and legal 1,821 1,949 (128) (6.6) % Other taxes 1,790 1,537 253 16.5 % Marketing 1,853 1,361 492 36.1 % FDIC insurance 1,012 937 75 8.0 % Other 6,668 6,824 (156) (2.3) % Total Noninterest Expense$ 51,699 $ 47,414 $ 4,285 9.0 % Noninterest expense increased$4.3 million to$51.7 million for the three months endedMarch 31, 2023 compared to the same period in 2022. Salaries and employee benefits increased$3.9 million for the three months endedMarch 31, 2023 due to increases in the fair market value of assets in a nonqualified defined benefit plan, incentives, base rate increases and higher medical costs. Marketing costs increased$0.5 million for the three months endedMarch 31, 2023 due to increased marketing efforts and timing of various promotions.
Provision for Income Taxes
The provision for income taxes increased$2.7 million to$9.6 million for the three months endedMarch 31, 2023 compared to$6.9 million for the same period in 2022. Our effective tax rate was 19.4 percent for the three months endedMarch 31, 2023 compared to 19.2 percent for the three months endedMarch 31, 2022 . The increase in our effective tax rate for the three month period endedMarch 31, 2023 was primarily due to an increase in pretax income compared to the same period in 2022. 36
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S&T BANCORP, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition as of
Total assets increased$82.9 million to$9.2 billion atMarch 31, 2023 compared to$9.1 billion atDecember 31, 2022 . Cash and due from banks increased$34.2 million to$244.2 million atMarch 31, 2023 compared to$210.0 million atDecember 31, 2022 . Total portfolio loans increased$67.1 million to$7.3 billion atMarch 31, 2023 compared to$7.2 billion atDecember 31, 2022 . The increase in loans primarily related to consumer loan growth of$65.3 million with an increase in consumer real estate of$70.3 million compared toDecember 31, 2022 . Securities remained relatively unchanged at$998.7 million atMarch 31, 2023 from$1.0 billion atDecember 31, 2022 . The bond portfolio was in a net unrealized loss position of$88.3 million atMarch 31, 2023 compared to a net unrealized loss position of$102.3 million atDecember 31, 2022 . Our deposits decreased$66.9 million to$7.2 billion atMarch 31, 2023 compared toDecember 31, 2022 . Certificates of deposit increased$240.6 million mainly due to migration from other deposit categories. Noninterest-bearing demand deposits decreased$120.1 million , money market decreased$131.7 million and savings decreased$50.2 million compared toDecember 31, 2022 . The decreases were primarily attributed to normal deposit fluctuations and competition in a higher interest rate environment. Total borrowings increased$124.9 million to$564.1 million atMarch 31, 2023 compared to$439.2 million atDecember 31, 2022 primarily due to loan growth and lower deposit levels. Total shareholders' equity increased by$43.1 million to$1.2 billion atMarch 31, 2023 compared toDecember 31, 2022 . The increase was primarily due to net income of$39.8 million , other comprehensive income of$15.5 million offset by dividends of$12.5 million .
Securities Activity
(dollars in thousands) March 31, 2023 December 31, 2022 $ Change U.S. Treasury securities$ 133,704 $ 131,695 $ 2,009 Obligations ofU.S. government corporations and agencies 42,095 41,811 284
Collateralized mortgage obligations of
432,739 428,407 4,332
Residential mortgage-backed securities of U.S.
government corporations and agencies 41,170 41,587 (417)
Commercial mortgage-backed securities of U.S.
government corporations and agencies 317,099 327,313 (10,214)
Corporate obligations - 500 (500)
Obligations of states and political subdivisions 30,895 30,471 424
Available-for-Sale Debt Securities 997,702 1,001,784 (4,082)
Marketable equity securities 1,006 994 12
Total Securities $ 998,708 $ 1,002,778 $ (4,070)
We invest in various securities in order to maintain a source of liquidity, to
satisfy various pledging requirements, to increase net interest income and as a
tool of ALCO to reposition the balance sheet for interest rate risk purposes.
Securities are subject to market risks that could negatively affect the level of
liquidity available to us. Security purchases are subject to an investment
policy approved annually by our Board of Directors and administered through ALCO
and our treasury function. Securities remained relatively unchanged at $998.7
million at March 31, 2023 compared to $1.0 billion at December 31, 2022 .
At March 31, 2023 , our bond portfolio was in a net unrealized loss position of
$88.3 million compared to a net unrealized loss position of $102.3 million at
December 31, 2022 . The decline in our net unrealized losses was due to a
decrease in long term interest rates since December 31, 2022 . At March 31, 2023 ,
our bond portfolio had gross unrealized losses of $88.9 million offset by gross
unrealized gains of $0.6 million compared to December 31, 2022 , when total gross
unrealized losses were $102.6 million offset by gross unrealized gains of $0.3
million .
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S&T BANCORP, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Loan CompositionMarch 31, 2023 December 31, 2022
(dollars in thousands) Amount % of Loans Amount % of Loans $ Change % Change Commercial Commercial real estate$ 3,145,079 43.4 %$ 3,128,187 43.5 %$ 16,892 0.5 % Commercial and industrial 1,709,612 23.6 % 1,718,976 23.9 % (9,364) (0.5) % Commercial construction 393,658 5.4 % 399,371 5.6 % (5,713) (1.4) % Total Commercial Loans 5,248,349 72.4 % 5,246,534 73.0 % 1,815 - % Consumer Consumer real estate 1,882,872 26.0 % 1,812,539 25.2 % 70,333 3.9 % Other consumer 119,843 1.6 % 124,896 1.8 % (5,053) (4.0) % Total Consumer Loans 2,002,715 27.6 % 1,937,435 27.0 % 65,280 3.4 % Total Portfolio Loans 7,251,064 100.0 % 7,183,969 100.0 % 67,095 0.9 % Loans held for sale 81 16 65 406.3 % Total Loans$ 7,251,145 $ 7,183,985 $ 67,160 0.9 % The loan portfolio represents the most significant source of interest income for us. The risk that borrowers will be unable to pay such obligations is inherent in the loan portfolio. Other conditions such as downturns in the borrower's industry or the overall economic climate can significantly impact the borrower's ability to pay. Total portfolio loans increased$67.1 million , or 0.9 percent, to$7.3 billion atMarch 31, 2023 compared to$7.2 billion atDecember 31, 2022 . As ofMarch 31, 2023 , 71.0 percent of our total loans were variable rate loans and 29.0 percent were fixed rate loans. Commercial loans, including CRE, C&I and commercial construction, comprised 72.4 percent of total portfolio loans atMarch 31, 2023 and 73.0 percent atDecember 31, 2022 . The commercial loan portfolio increased$1.8 million atMarch 31, 2023 compared toDecember 31, 2022 due to an increase in CRE loans of$16.9 million , which was related to growth in business banking loans. C&I loans decreased$9.4 million and construction decreased$5.7 million compared toDecember 31, 2022 due to loan pay-offs and lower origination volume due to the current macro environment. Consumer loans represent 27.6 percent of our total portfolio loans atMarch 31, 2023 and 27.0 percent atDecember 31, 2022 . The consumer loan portfolio increased$65.3 million atMarch 31, 2023 due to growth in our consumer real estate portfolio of$70.3 million compared toDecember 31, 2022 . Consistent with 2022, we continue to retain consumer real estate loans on our balance sheet as portfolio loans versus selling these loans in the secondary market due to a higher volume of jumbo loans and the pricing of loans in the secondary market.
Allowance for Credit Losses
We maintain an ACL at a level determined to be adequate to absorb estimated expected credit losses within the loan portfolio over the contractual life of an instrument that considers our historical loss experience, current conditions and forecasts of future economic conditions as of the balance sheet date. We develop and document a systematic ACL methodology based on the following portfolio segments: 1)Commercial Real Estate , or CRE, 2) Commercial and Industrial, or C&I, 3)Commercial Construction , 4) Business Banking, 5)Consumer Real Estate and 6) Other Consumer. Refer to Part 1. Financial Information, Note 5. Loans and Allowance for Credit Losses for details on our portfolio segments. 38
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S&T BANCORP, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents activity in the ACL for the periods presented:
Three Months Ended March 31, 2023
Commercial Commercial and Commercial Business Consumer Other Total
(dollars in thousands) Real Estate Industrial Construction Banking Real Estate Consumer Loans
Allowance for credit losses on loans:
Balance at beginning of period $ 41,428 $ 25,710 $ 6,264 $ 12,547 $ 12,105 $ 3,286 $ 101,340
Impact of ASU 2022-02 - 75 215 251 278 (251) 568
Provision for credit losses on loans(1) (1,011) (476) 412 1,497 488 180 1,090
Charge-offs - (3,412) - (652) (77) (318) (4,459)
Recoveries 9 9,400 2 37 61 65 9,574
Net Recoveries/(Charge-offs) 9 5,988 2 (615) (16) (253) 5,115
Balance at End of Period $ 40,426 $ 31,297 $ 6,893 $ 13,680 $ 12,855 $ 2,962 $ 108,113
(1) Excludes the provision for credit losses for unfunded commitments.
The following table presents key ACL ratios for the periods presented:
March
31, 2023
(0.29) % 0.04 %
Allowance for credit losses as a percentage of total portfolio loans
1.49 % 1.41 %
Allowance for credit losses to nonaccrual loans 439 % 532 %
(1) Year-to-date net charge-offs annualized
The ACL was$108.1 million , or 1.49 percent of total portfolio loans, atMarch 31, 2023 compared to$101.3 million , or 1.41 percent of total portfolio loans, atDecember 31, 2022 . The increase in the ACL of$6.8 million was related to increases in our qualitative reserve, specific reserves on loans individually assessed and loan growth. The qualitative reserve increased$1.8 million due to a$2.2 million increase in qualitative factors related to the macro environment, which was partially offset by a$0.5 million reduction in qualitative segment specific reserves primarily due to improvement in our hotel portfolio. Specific reserves on loans individually assessed increased$4.2 million , related to a$6.8 million C&I relationship, compared toDecember 31, 2022 . Net loan recoveries were$5.1 million , or negative 0.29 percent of average loans, for the three months endedMarch 31, 2023 . Refer to the "Provision for Credit Losses" section of this MD&A for further details. Substandard loans decreased$9.5 million to$153.6 million atMarch 31, 2023 compared to$163.1 million atDecember 31, 2022 . The decrease in substandard loans was primarily due to loan payoffs. Special mention loans increased$40.7 million to$261.7 million atMarch 31, 2023 compared to$221.0 million atDecember 31, 2022 . The increase in special mention loans was due primarily to$27.9 million of downgrades in CRE and$15.2 million in C&I. Our allowance for credit losses on unfunded commercial loan commitments and letters of credit provide for the risk of expected loss in these arrangements. The allowance is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a draw-down on the commitment. The provision for credit losses on unfunded loan commitments is included in the provision for credit losses on our Condensed Consolidated Statements of Comprehensive Income (Loss). The allowance for unfunded loan commitments decreased$0.2 million to$8.0 million atMarch 31, 2023 compared to$8.2 million atDecember 31, 2022 . This change was primarily related to lower unused commitments in our construction portfolio. The allowance for unfunded commitments is included in other liabilities in the Consolidated Balance Sheets. 39
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S&T BANCORP, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nonperforming assets, or NPA's, consist of nonaccrual loans and OREO. The following represents NPA's as of the dates presented: (dollars in thousands) March 31, 2023 December 31, 2022 $ Change Nonaccrual Loans Commercial real estate$ 7,931 $ 7,323 $ 608 Commercial and industrial 9,348 2,974 6,374 Commercial construction 384 384 - Consumer real estate 6,664 8,093 (1,429) Other Consumer 317 278 39 Total Nonaccrual Loans 24,644 19,052 5,592 OREO 3,076 3,065 11 Total Nonperforming Assets$ 27,720 $ 22,117 $ 5,603 Asset Quality Ratios: Nonaccrual loans as a percent of total portfolio loans 0.34 % 0.27 % Nonperforming assets as a percent of total portfolio loans plus OREO 0.38 % 0.31 % Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past the contractual due date. Nonaccrual loans increased$5.6 million , or 29.4 percent, to$24.6 million atMarch 31, 2023 compared to$19.0 million atDecember 31, 2022 . The increase in nonaccrual loans primarily related to the addition of the$6.8 million C&I relationship.
Deposits
Deposits are our primary source of funds. We have a well-diversified deposit base with a balance mix of 59 percent personal, 36 percent business and 5 percent public funds.
(dollars in thousands) March 31, 2023 % December 31, 2022 % $ Change % Personal$ 4,205,608 58.8 %$ 4,171,701 57.8 %$ 33,907 0.8 % Business 2,584,246 36.1 % 2,666,995 36.9 % (82,749) (3.1) % Public funds 363,240 5.1 % 381,274 5.3 % (18,034) (4.7) % Total Deposits$ 7,153,094 100.0 %$ 7,219,970 100.0 %$ (66,876) (0.9) % The following table presents the composition of deposits for the periods presented: (dollars in thousands) March 31, 2023 December 31, 2022 $ Change Noninterest-bearing demand$ 2,468,638 $ 2,588,692 $ (120,054) Interest-bearing demand 841,130 846,653 (5,523) Money market 1,599,814 1,731,521 (131,707) Savings 1,068,274 1,118,511 (50,237) Certificates of deposit 1,175,238 934,593 240,645 Total Deposits$ 7,153,094 $ 7,219,970 $ (66,876) Our total deposits decreased by less than 1 percent compared toDecember 31, 2022 and can be attributed to normal deposit fluctuations and competition in a higher interest rate environment. Certificates of deposit increased$240.6 million compared toDecember 31, 2022 mainly due to the migration of$153.0 million from other deposit categories as customers seek higher interest rates. We have total uninsured deposits of$2.4 billion , or 33 percent, of our total deposit base compared to$2.5 billion , or 34 percent atDecember 31, 2022 . 40
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S&T BANCORP, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Borrowings (dollars in thousands) March 31, 2023 December 31, 2022 $ Change Short-term borrowings$ 495,000 $ 370,000 $ 125,000 Long-term borrowings 14,628 14,741 (113) Junior subordinated debt securities 54,468 54,453 15 Total Borrowings$ 564,096 $ 439,194 $ 124,902
Borrowings are an additional source of funding for us. Total borrowings
increased
Short-Term Borrowings
(dollars in thousands) March 31, 2023 December 31, 2022
Balance at the period end $ 495,000 $ 370,000
Average balance during the period$ 451,668 $
40,013
Average interest rate during the period 4.93 % 4.15 % Maximum month-end balance during the period$ 495,000 $ 370,000 Average interest rate at the period end 5.11 %
4.49 %
Information pertaining to long-term borrowings is summarized in the tables below for the three months endedMarch 31, 2023 and for the twelve months endedDecember 31, 2022 . Long-Term Borrowings (dollars in thousands) March 31, 2023 December 31, 2022 Balance at the period end $ 14,628 $ 14,741 Average balance during the period $ 14,689 $
19,090
Average interest rate during the period 2.71 % 2.15 % Maximum month-end balance during the period $ 14,704 $
22,344
Average interest rate at the period end 2.70 % 2.61 %
Junior Subordinated Debt Securities
(dollars in thousands) March 31, 2023 December 31, 2022
Balance at the period end $ 54,468 $ 54,453
Average balance during the period $ 54,458 $ 54,421
Average interest rate during the period 7.50 % 4.40 % Maximum month-end balance during the period $ 54,468 $
54,453
Average interest rate at the period end 7.34 %
7.09 %
Liquidity and Capital Resources
Liquidity is defined as a financial institution's ability to meet its cash and
collateral obligations at a reasonable cost. Our primary future cash needs are
centered on the ability to (i) satisfy the financial needs of depositors who may
want to withdraw funds or of borrowers needing to access funds to meet their
credit needs and (ii) to meet our future cash commitments under contractual
obligations with third parties. In order to manage liquidity risk, our Board of
Directors has delegated authority to ALCO for the formulation, implementation
and oversight of liquidity risk management for S&T. The ALCO's goal is to
maintain adequate levels of liquidity at a reasonable cost to meet funding needs
in both a normal operating environment and for potential liquidity stress
events. The ALCO monitors and manages liquidity through various ratios,
reviewing cash flow projections, performing stress tests and having a detailed
contingency funding plan. The ALCO policy guidelines define graduated risk
tolerance levels. If our liquidity position moves to a level that has been
defined as high risk, specific actions are required, such as increased
monitoring or the development of an action plan to reduce the risk position.
Our primary funding and liquidity source is a stable customer deposit base. We
believe S&T has the ability to retain existing and attract new deposits,
mitigating any funding dependency on other more volatile sources. Refer to the
"Financial
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S&T BANCORP, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Condition as ofMarch 31, 2023 - Deposits" section of this MD&A, for additional discussion on deposits. Although deposits are the primary source of funds, we have identified various other funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified. Additional funding sources accessible to S&T include borrowing availability at theFederal Home Loan Bank , or FHLB, ofPittsburgh , federal funds lines with other financial institutions, the brokered deposit market and borrowing availability through the Federal Reserve Borrower-In-Custody program and the Bank Term Funding Program. In response to recent bank failures, theFederal Reserve authorized additional funding availability to eligible depository institutions through the Bank Term Funding Program. The program is intended to help assure depositors that their institutions have an additional source of liquidity to meet their needs. Under the program, any collateral eligible for purchase by the Federal Reserve Banks in open market operations can be pledged includingU.S. Treasuries,U.S. Agencies,U.S. Agency mortgage-backed securities. Collateral advances will be equal to 100% of the par value of the collateral pledged with a term of up to one year. Interest is charged at a fixed rate equal to the one-year overnight index swap rate plus 10 basis points with no prepayment penalty. As ofMarch 31, 2023 , we have$731 million of collateral available to pledge under the program and no outstanding balance. The following table summarizes funding sources available as of the dates presented: March 31, 2023 December 31, 2022 Borrowing Borrowing (dollars in thousands) Capacity Balance Available Capacity Balance Available FHLB$ 2,964,932 $ 624,079 $ 2,340,853 $ 2,925,614 $ 491,288 $ 2,434,326 Federal Reserve Window 794,393 - 794,393 839,836 - 839,836 Federal Reserve BTLF 730,500 - 730,500 - - - Total$ 4,489,825 $ 624,079 $ 3,865,746 $ 3,765,450 $ 491,288 $ 3,274,162 We have contractual obligations representing required future payments on certificates of deposit, junior subordinated debt securities, operating and capital leases and purchase obligations. See the Liquidity and Capital Resources portion of our Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Form 10-K for more information on these future cash outflows. Certificates of deposit increased$240.6 million to$1.2 billion atMarch 31, 2023 compared toDecember 31, 2022 . Short-term borrowings increased$125.0 million to$495.0 million atMarch 31, 2023 compared toDecember 31, 2022 . Other than these changes, there have been no material changes to the contractual obligations previously disclosed in our 2022 Form 10-K, An important component of our ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high. AtMarch 31, 2023 ,S&T Bank had$917.9 million in highly liquid assets which consisted of$150.7 million in interest-bearing deposits with banks and$767.1 million in unpledged securities. This resulted in a highly liquid assets to total assets ratio of 10.0 percent atMarch 31, 2023 . We continue to maintain a strong capital position with our leverage ratio at 11.15 percent atMarch 31, 2023 compared to 11.06 percent atDecember 31, 2022 , both in excess of the regulatory guideline of 5.00 percent. We continue to be well-capitalized with a risk-based Common Equity Tier 1 ratio of 13.10 percent atMarch 31, 2023 compared to 12.81 percent atDecember 31, 2022 , both in excess of the regulatory guideline of 6.50 percent to be well-capitalized. 42
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S&T BANCORP, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table summarizes capital amounts and ratios forS&T andS&T Bank for the dates presented: Adequately Well- March 31, 2023 December 31, 2022 (dollars in thousands) Capitalized Capitalized Amount Ratio Amount RatioS&T Bancorp, Inc. Tier 1 leverage 4.00 % 5.00 %$ 989,316 11.15 %$ 967,708 11.06 % Common equity tier 1 to risk-weighted assets 4.50 % 6.50 % 960,316 13.10 % 938,708 12.81 % Tier 1 capital to risk-weighted assets 6.00 % 8.00 % 989,316 13.50 % 967,708 13.21 % Total capital to risk-weighted assets 8.00 % 10.00 % 1,106,039 15.09 % 1,078,897 14.73 % S&T Bank Tier 1 leverage 4.00 % 5.00 %$ 957,491 10.80 %$ 938,377 10.73 % Common equity tier 1 to risk-weighted assets 4.50 % 6.50 % 957,491 13.07 % 938,377 12.81 % Tier 1 capital to risk-weighted assets 6.00 % 8.00 % 957,491 13.07 % 938,377 12.81 % Total capital to risk-weighted assets 8.00 % 10.00 % 1,074,177 14.66 % 1,049,566 14.33 % OnMarch 27, 2020 , the regulators issued interim final rule, or IFR, "Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances" in response to the disrupted economic activity due to the COVID-19 pandemic. The IFR provides financial institutions that adopted CECL during 2020 with the option to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided by the initial two-year delay ("five-year transition"). We adopted CECL effectiveJanuary 1, 2020 and elected to implement the five-year transition. We have filed a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended, with theSEC , which allows for the issuance of a variety of securities including debt and capital securities, preferred and common stock and warrants. We may use the proceeds from the sale of securities for general corporate purposes, which could include investments at the holding company level, investing in, or extending credit to subsidiaries, possible acquisitions and stock repurchases. As ofMarch 31, 2023 , we had not issued any securities pursuant to this shelf registration statement. 43
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