S&T Bancorp, Inc. — Q1 2015 Form 10-Q Summary
Business Context and Reporting Period
S&T Bancorp, Inc. is a Pennsylvania-based bank holding company providing commercial and consumer banking, insurance, wealth management, trust and brokerage services. The filing covers the unaudited quarter ended March 31, 2015, compared primarily with the quarter ended March 31, 2014 and December 31, 2014 balance-sheet data.
On March 4, 2015, S&T completed its acquisition of Integrity Bancshares, Inc. for approximately $172.0 million, including $29.5 million of cash and 4,933,115 shares of S&T common stock. Integrity added eight branches in south-central Pennsylvania, approximately $788.7 million of loans, $722.3 million of deposits and $114.8 million of goodwill. S&T also opened a commercial loan production office in western New York during the quarter.
Financial Performance and Condition
| Metric | Q1 2015 | Comparable / Prior Period | Change |
|---|---|---|---|
| Total interest income | $43.9 million | $38.7 million | +$5.3 million |
| Net interest income | $40.3 million | $35.6 million | +13.1% |
| Net interest income, FTE | $41.7 million | $36.9 million | +12.8% |
| FTE net interest margin | 3.48% | 3.51% | Down 3 basis points |
| Provision for loan losses | $1.2 million | $0.3 million | +$0.9 million |
| Noninterest income | $12.1 million | $11.4 million | +5.9% |
| Noninterest expense | $33.6 million | $28.9 million | +16.3% |
| Income before taxes | $17.5 million | $17.8 million | Down 1.6% |
| Net income | $12.8 million | $14.0 million | Down 8.5% |
| Diluted EPS | $0.41 | $0.47 | Down $0.06 |
| Dividend per share | $0.18 | $0.16 | +$0.02 |
Net income declined despite higher revenue because merger-related expenses, acquired-bank operating costs, loan-loss provision and the effective tax rate increased. The effective tax rate was 26.7%, compared with 21.2% in Q1 2014.
- Assets: $6.0 billion at March 31, 2015, up $1.0 billion from December 31, 2014, principally from the Integrity acquisition.
- Loans: Portfolio loans were $4.684 billion, up $815.0 million from year-end; approximately $788.7 million came from acquired loans and $29.3 million from organic growth. Commercial loans represented 77.9% of portfolio loans.
- Deposits: $4.829 billion, up $919.7 million from year-end, including $722.3 million from the acquisition and approximately $133.0 million of organic customer-deposit growth.
- Allowance and credit quality: The allowance for loan losses was $48.1 million, or 1.03% of portfolio loans and 1.27% of originated loans. Net charge-offs were $1.0 million versus a $0.1 million net recovery in Q1 2014.
- Nonperforming assets: $19.4 million, or 0.41% of loans plus OREO, versus $12.6 million, or 0.33%, at December 31, 2014. The increase primarily reflected acquired commercial loans and OREO.
- Shareholders’ equity: $762.3 million, up $153.9 million from year-end, primarily from shares issued in the acquisition.
- Capital: S&T Bancorp and both banking subsidiaries remained well-capitalized under Basel III requirements. S&T Bancorp’s March 31 ratios included a 10.06% Tier 1 leverage ratio, 9.82% common equity Tier 1 ratio, 10.22% Tier 1 risk-based ratio and 11.86% total risk-based capital ratio.
Cash Flow, Debt and Liquidity
| Cash Flow / Funding Metric | Q1 2015 | Q1 2014 or Prior Period |
|---|---|---|
| Cash provided by operating activities | $19.3 million | $22.4 million |
| Cash used in investing activities | $(43.7) million | $(100.4) million |
| Cash provided by financing activities | $39.6 million | $155.0 million |
| Ending cash and cash equivalents | $124.7 million | $185.3 million at March 31, 2014 |
| Total borrowings | $315.8 million | $385.7 million at December 31, 2014 |
Cash increased $15.2 million during the quarter. Investing cash outflows included $30.6 million of net loan growth and $16.3 million of cash paid in excess of cash acquired in the merger. Financing cash flows benefited from a $240.7 million increase in core deposits, partly offset by a $159.2 million reduction in short-term borrowings, repayment of $8.5 million of junior subordinated debt and $5.4 million of dividends.
Management reported $383.8 million of highly liquid assets, equal to a 6.5% asset liquidity ratio, and $1.6 billion of remaining borrowing availability with the Federal Home Loan Bank of Pittsburgh.
Material Changes, Outlook and Risks
- Net interest income benefited from a 14.0% increase in average interest-earning assets, but the low-rate environment reduced loan yields and compressed the FTE net interest margin by 3 basis points.
- Noninterest income increased primarily through higher mortgage banking revenue, debit and credit card fees and acquisition-related activity. Mortgage loan sales rose to $21.6 million from $5.5 million in Q1 2014.
- Noninterest expense included $2.3 million of merger costs, consisting of data-processing termination and conversion costs, severance and legal and professional fees. Integrity contributed approximately $2.2 million of net interest income, $0.4 million of noninterest income and $0.3 million of net income after the March 4 closing.
- Management expects Integrity Bank to merge into S&T Bank in the second quarter of 2015 and intends to operate the acquired branches under the “Integrity Bank — A Division of S&T Bank” name for at least three years.
- Management’s stated priorities are loan and deposit growth, fee-income expansion, expense discipline and integration of Integrity. The filing does not provide specific earnings, revenue or margin guidance.
- Key risks include credit losses, the concentration in commercial real estate and other commercial lending, interest-rate and yield-curve changes, liquidity and funding conditions, regulatory and Basel III requirements, cybersecurity, competition, acquisition integration, economic weakness in the company’s regional markets, housing-market deterioration, potential goodwill impairment and litigation.
- Commercial special-mention and substandard loans increased to $191.1 million, primarily because of acquired loans. Total troubled debt restructurings were $46.3 million, including $9.9 million of nonaccrual TDRs.
- Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors and effective disclosure controls as of March 31, 2015.
Important Facts for Investors to Verify
- Whether the Integrity integration and planned second-quarter bank merger produce the expected operating efficiencies and revenue growth.
- Trends in commercial real estate, commercial construction and commercial-and-industrial credit quality, including special-mention, substandard, TDR and nonperforming balances.
- Whether net charge-offs and the provision for loan losses remain consistent with the $48.1 million allowance and acquired-loan credit marks.
- The effect of interest-rate movements on the 3.48% FTE net interest margin, deposit costs and asset-sensitive balance sheet.
- Organic loan and deposit growth after separating acquisition-related balances from internal growth.
- The sustainability of higher mortgage banking and other fee income and the company’s ability to control merger-related and ongoing operating expenses.
- Capital, liquidity and borrowing availability following the acquisition and implementation of Basel III requirements.