S&T Bancorp, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
S&T Bancorp is a Pennsylvania-based bank holding company providing commercial and retail banking, insurance, wealth management, trust and brokerage services across Pennsylvania and selected markets in Ohio and New York. This unaudited Form 10-Q covers the three months ended March 31, 2016. Results are affected by the March 2015 Integrity Bancshares acquisition; the first quarter of 2015 included only 26 days of Integrity results.
Financial performance and condition
| Metric | Q1 2016 | Q1 2015 or period-end comparison |
|---|---|---|
| Total assets | $6.479 billion at March 31, 2016 | $6.318 billion at December 31, 2015; up 2.5% |
| Net income | $16.1 million | $12.8 million; up $3.3 million |
| Diluted EPS | $0.46 | $0.41 |
| Net interest income | $49.6 million | $40.3 million; up 23% |
| FTE net interest margin | 3.53% | 3.48%; up 5 basis points |
| Provision for loan losses | $5.0 million | $1.2 million |
| Noninterest income | $15.8 million | $12.1 million; up 30.9% |
| Noninterest expense | $38.4 million | $33.6 million; up 14.3% |
| Cash flow from operating activities | $25.7 million | $19.3 million |
| Cash flow from investing activities | $(135.7) million | $(43.7) million |
| Cash flow from financing activities | $132.3 million | $39.6 million |
| Cash and cash equivalents | $121.7 million | $99.4 million at December 31, 2015 |
Portfolio loans increased 3.0% to $5.177 billion, led by commercial real estate and commercial and industrial lending. Commercial loans represented 76.8% of portfolio loans. Deposits rose 2.9% to $5.018 billion, primarily from certificates of deposit and money-market accounts. Total borrowings declined modestly to $577.1 million.
Shareholders’ equity increased 2.3% to $810.8 million. The quarterly dividend was $0.19 per share. Regulatory capital ratios remained above “well-capitalized” thresholds; the holding company’s total capital ratio was 11.57% and S&T Bank’s was 10.95%.
Liquidity remained substantial: highly liquid assets were $442.3 million, or 6.9% of total assets, and remaining Federal Home Loan Bank borrowing availability was approximately $1.4 billion.
Material changes versus the prior comparable period
- Net income increased 25%, primarily from higher net interest income and noninterest income, partly offset by higher credit provisions and operating expenses.
- Average interest-earning assets increased approximately $1.0 billion, or 21%, largely from the Integrity acquisition and organic loan growth.
- Net interest income benefited from loan growth, higher short-term rates and $0.8 million of purchase-accounting accretion related to the Integrity acquisition.
- Noninterest income included a $2.1 million gain on the sale of the credit card portfolio and a $1.0 million pension curtailment gain.
- Noninterest expense increased as the quarter included a full quarter of post-acquisition staffing and operating costs, whereas Q1 2015 included only 26 days of such costs. Q1 2015 also included $2.3 million of merger-related expenses that did not recur in Q1 2016.
- Asset quality weakened: nonperforming loans increased to $51.8 million from $35.4 million at December 31, 2015, and total nonperforming assets increased to $52.1 million from $35.7 million.
- The allowance for loan losses increased to $50.3 million from $48.1 million. Annualized net charge-offs rose to 0.22% of average loans from 0.11% in Q1 2015.
Guidance, outlook, risks and unusual items
Management provided no formal quantitative earnings or revenue guidance. Management’s stated priorities are loan and deposit growth, expansion in newer markets, increased fee income and expense control. The low-interest-rate environment remains a challenge for net interest income, although management describes the balance sheet as asset-sensitive and expects rising rates to generally benefit pretax net interest income.
- Credit risk is elevated by rising nonperforming loans, impaired loans of $60.2 million and commercial special mention and substandard loans of $199.6 million.
- Commercial real estate and commercial construction exposure represented approximately 51% of total portfolio loans, creating sensitivity to regional economic and real estate conditions.
- Management identifies interest-rate movements, spread compression, liquidity, regulatory capital requirements, cybersecurity, competition, economic conditions, housing markets, acquisition integration and potential goodwill impairment as material risks.
- The company temporarily suspended its minus-200 and minus-300 basis-point interest-rate shock and EVE scenarios because of the low-rate environment.
- The defined benefit plans were frozen effective March 31, 2016, producing a $1.0 million curtailment gain. This is a nonrecurring item.
- The credit card portfolio sale generated $25.0 million of cash proceeds and a $2.1 million gain; the company expects to continue receiving certain marketing-related income.
- No material legal proceedings were reported, and management stated that pending litigation is not expected to materially affect consolidated results.
- Recently adopted accounting standards had no material impact. The future lease standard is expected to significantly increase recognized right-of-use assets and lease liabilities, while the company expects no material income-statement impact.
Important facts for investors to verify
- Whether the increase in nonperforming and impaired loans, particularly acquired Integrity loans, persists or requires additional provisions and charge-offs.
- The sustainability of loan growth and deposit growth, including the cost and retention implications of promotional certificates of deposit.
- The recurring earnings profile after excluding the $2.1 million credit-card-sale gain, $1.0 million pension curtailment gain and purchase-accounting accretion.
- The effect of rising funding costs and interest-rate changes on the 3.53% FTE net interest margin.
- Progress in integrating the Integrity acquisition and controlling the related staffing and operating costs.
- Capital and liquidity levels relative to continued loan growth, regulatory requirements and potential acquisition or repurchase activity.