S&T Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. The interim financial statements are unaudited. S&T is a Pennsylvania bank holding company providing commercial and consumer banking, insurance, wealth management, trust and brokerage services. Results include Integrity Bancshares from March 4, 2015; Integrity Bank was merged into S&T Bank on May 8, 2015.
Key Financial Metrics
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Net interest income | $48.8 million | $89.1 million |
| Net interest income, FTE | $50.3 million | $92.0 million |
| Net interest margin, FTE | 3.67% | 3.58% |
| Provision for loan losses | $2.1 million | $3.3 million |
| Noninterest income | $13.4 million | $25.5 million |
| Noninterest expense | $35.4 million | $69.1 million |
| Net income | $18.2 million | $31.0 million |
| Diluted earnings per share | $0.52 | $0.94 |
| Dividends declared per share | $0.18 | $0.36 |
- Balance sheet: Total assets were $6.13 billion at June 30, 2015, compared with $4.96 billion at December 31, 2014. Portfolio loans were $4.80 billion, up $929.8 million, and total deposits were $4.86 billion, up $950.6 million.
- Credit quality: The allowance for loan losses was $48.8 million, or 1.02% of portfolio loans. Nonperforming assets were $19.9 million, or 0.41% of total loans plus OREO, compared with $12.6 million and 0.33% at year-end.
- Cash flow: Six-month operating cash flow was $25.2 million, compared with $43.8 million in the prior-year period. Investing activities used $178.6 million, primarily for loan growth and $16.3 million of cash paid in the merger. Financing activities provided $190.4 million. Cash and cash equivalents ended at $146.6 million.
- Borrowings and liquidity: Total borrowings were $441.1 million, including $163.8 million of long-term borrowings and $45.6 million of junior subordinated debt. Highly liquid assets totaled $422.6 million, or 6.9% of total assets. Remaining borrowing availability at the Federal Home Loan Bank of Pittsburgh was $1.4 billion.
- Capital: S&T Bancorp remained well-capitalized under Basel III, with a 9.59% common equity tier 1 ratio, 9.97% tier 1 risk-based capital ratio and 11.48% total risk-based capital ratio.
Material Changes Versus Comparable Periods
- Second-quarter net income increased 23.6% from $14.7 million to $18.2 million; diluted EPS increased from $0.49 to $0.52. Six-month net income increased 7.9%, while diluted EPS declined from $0.97 to $0.94 because the merger increased the share count.
- Net interest income increased 32.4% in the quarter and 22.9% year to date, primarily from higher average interest-earning assets and approximately $2.7 million of purchase-accounting accretion. The FTE net interest margin increased to 3.67% from 3.56% in the quarter and to 3.58% from 3.54% year to date.
- Noninterest income increased 13.7% in the quarter and 9.8% year to date, led by mortgage banking, service charges, card fees and other income. Mortgage banking income increased to $1.3 million year to date from $0.4 million, with loan sales of $41.4 million versus $13.1 million.
- Noninterest expense increased 17.5% in the quarter and 16.9% year to date. Merger-related expenses were $0.9 million in the quarter and $3.2 million year to date, in addition to higher personnel, occupancy, data processing and other operating costs.
- The provision for loan losses shifted from a $1.1 million benefit in the second quarter of 2014 to a $2.1 million provision in 2015. Net charge-offs were $1.4 million in the quarter and $2.4 million year to date, compared with net recoveries in the prior-year periods.
Merger, Outlook and Risks
- The Integrity transaction had a total purchase price of approximately $172.0 million, including $142.5 million of S&T stock and $29.5 million of cash. It added approximately $980.7 million of assets, $788.7 million of loans, $722.3 million of deposits and $115.4 million of goodwill.
- Management’s strategy emphasizes organic loan and deposit growth, market expansion, fee-income growth and expense discipline. No specific earnings, revenue or margin guidance is provided in the filing.
- Management stated that the low-interest-rate environment remained a challenge to net interest income, although organic growth was expected to mitigate some of the impact. The balance sheet was asset-sensitive; modeled increases in interest rates were expected to improve pretax net interest income, while a 100-basis-point decline was modeled to reduce pretax net interest income by 3.8%.
- Key risks include credit losses, deterioration in commercial real estate or construction lending, regional economic weakness, interest-rate and spread changes, liquidity and capital access, cybersecurity, regulatory changes, competition, litigation and the ability to integrate Integrity and realize expected merger benefits.
- Commercial loans represented 75.8% of portfolio loans, with commercial real estate and commercial construction representing approximately 50% of portfolio loans combined. Special mention and substandard commercial loans increased primarily because of acquired loans.
- Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors and effective disclosure controls as of June 30, 2015.
Investor Verification Items
- Verify the sustainability of earnings growth after excluding purchase-accounting accretion and merger-related effects.
- Assess whether the increase in nonperforming assets, special mention loans and substandard loans leads to additional provisions or charge-offs.
- Monitor integration costs, branch performance, expense trends and the realization of expected Integrity merger synergies.
- Evaluate the effect of interest-rate changes on the reported asset-sensitive balance sheet, deposit costs and net interest margin.
- Confirm capital and liquidity ratios, reliance on brokered deposits and continued Federal Home Loan Bank borrowing capacity.
- Review goodwill of approximately $291.2 million and related impairment risk if regional or banking-market conditions deteriorate.