S&T Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania bank holding company headquartered in Indiana, Pennsylvania, providing commercial and retail banking, insurance, wealth management, trust and brokerage services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015, compared primarily with the corresponding 2014 periods and December 31, 2014 balance-sheet data.
The company completed its acquisition of Integrity Bancshares, Inc. on March 4, 2015, adding eight branches, approximately $980.8 million of assets, $788.7 million of loans and $722.3 million of deposits. Integrity Bank was merged into S&T Bank on May 8, 2015.
Key financial metrics
| Metric | Three months ended September 30, 2015 | Three months ended September 30, 2014 | Nine months ended September 30, 2015 | Nine months ended September 30, 2014 |
|---|---|---|---|---|
| Net interest income | $49.6 million | $37.5 million | $138.7 million | $110.0 million |
| Provision for loan losses | $3.2 million | $1.5 million | $6.5 million | $0.6 million |
| Noninterest income | $12.5 million | $11.9 million | $37.9 million | $35.1 million |
| Noninterest expense | $33.8 million | $28.4 million | $102.9 million | $87.5 million |
| Net income | $18.6 million | $14.7 million | $49.7 million | $43.4 million |
| Diluted earnings per share | $0.54 | $0.49 | $1.48 | $1.46 |
| Dividends declared per share | $0.18 | $0.17 | $0.54 | $0.50 |
- Net income increased 27.1% in the third quarter and 14.4% for the first nine months.
- Net interest income increased 32.2% in the third quarter and 26.1% year to date, primarily from higher average earning assets following the merger and organic growth.
- Fully taxable equivalent net interest margin was 3.61% for the quarter and 3.59% year to date, compared with 3.50% and 3.52%, respectively, in 2014. Purchase-accounting accretion contributed approximately $2.2 million in the quarter and $4.9 million year to date.
- Total assets were $6.2 billion at September 30, 2015, up 25.2% from year-end 2014. Portfolio loans were $4.9 billion, up 27.3%, and deposits were $4.9 billion, up 24.8%.
- Commercial loans represented 75.8% of portfolio loans, with commercial real estate and commercial construction together representing approximately 51% of portfolio loans.
- The allowance for loan losses was $49.9 million, or 1.01% of portfolio loans, compared with $47.9 million, or 1.24%, at December 31, 2014. Net charge-offs were $2.1 million in the quarter and $4.5 million year to date.
- Nonperforming assets increased to $24.3 million, or 0.49% of total loans plus OREO, from $12.6 million, or 0.33%, at year-end. Nonaccrual loans totaled $23.8 million.
Cash flow, debt and liquidity
| Item | Nine months ended September 30, 2015 | Nine months ended September 30, 2014 |
|---|---|---|
| Cash provided by operating activities | $61.6 million | $58.5 million |
| Cash used in investing activities | $(303.5) million | $(349.1) million |
| Cash provided by financing activities | $247.6 million | $326.1 million |
| Net increase in cash and equivalents | $5.8 million | $35.5 million |
| Cash and equivalents at September 30 | $115.3 million | $143.8 million |
- Total borrowings were $486.2 million at September 30, 2015, up $100.5 million from year-end 2014. The increase primarily reflected additional funding for asset growth and a $100.0 million shift from short-term to long-term borrowing.
- FHLB borrowing capacity was approximately $1.9 billion, with $1.4 billion of remaining availability. Highly liquid assets totaled $415.6 million, equal to 6.7% of total assets.
- S&T Bancorp and S&T Bank remained well-capitalized under Basel III. The holding company’s total risk-based capital ratio was 11.58%; S&T Bank’s was 10.98%.
Material changes versus prior comparable periods
- The Integrity acquisition materially increased assets, loans, deposits, goodwill, equity and operating expenses. The company issued 4,933,115 common shares with a fair value of $142.5 million as part of the transaction and recorded $115.9 million of goodwill.
- Year-to-date merger-related expenses were $3.2 million, consisting primarily of data-processing termination and system-conversion costs, legal and professional fees, and severance. No merger-related expenses were recorded in the third quarter.
- Noninterest income increased 4.6% in the quarter and 8.1% year to date. Mortgage banking income increased substantially, while insurance fees declined because of competition and reduced energy-sector customers.
- Noninterest expense increased 18.9% in the quarter and 17.6% year to date, driven by merger-related operating costs, additional locations and employees, higher occupancy, data processing, FDIC insurance and other expenses.
- Credit costs increased materially. The provision for loan losses rose to $6.5 million year to date from $0.6 million, and total special-mention and substandard commercial loans increased to $182.6 million, primarily because of acquired loans.
- Shareholders’ equity increased 29.5% from year-end 2014 to $787.8 million, primarily from shares issued in the merger, retained earnings and higher accumulated other comprehensive income.
Outlook, risks, contingencies and unusual items
Management emphasized continued organic loan and deposit growth, fee-income opportunities, expense discipline and expansion into new markets, including western New York. No quantitative earnings or revenue guidance was provided.
- The prolonged low-interest-rate environment remains a challenge to net interest income. Management reported an asset-sensitive balance sheet, with modeled pretax net interest income increasing 2.6% under a +100-basis-point shock and declining 4.3% under a -100-basis-point shock at September 30, 2015.
- Key risks include credit losses, concentration in commercial real estate and construction lending, regional economic conditions, housing-market weakness, interest-rate changes, competition, regulatory requirements, cybersecurity, litigation, acquisition integration and potential goodwill impairment.
- The company’s geographic concentration is primarily in Pennsylvania and contiguous states. Management stated that underwriting, monitoring and stress testing are intended to mitigate concentration risk.
- Off-balance-sheet commitments to extend credit totaled $1.54 billion, and standby letters of credit totaled $96.6 million. The allowance for unfunded commitments was approximately $3.0 million.
- Management stated that pending legal proceedings were not expected to have a material adverse effect. No material changes were reported to previously disclosed risk factors.
- Disclosure controls and procedures were deemed effective, with no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether acquired loan credit quality and the increase in nonaccrual loans lead to further provisions or charge-offs.
- The sustainability of earnings growth after excluding merger-related effects and purchase-accounting accretion.
- Progress in realizing merger synergies while controlling the higher operating expense base.
- Commercial real estate and construction concentration, special-mention and substandard loan trends, and allowance adequacy.
- Funding mix, including the $452.7 million of brokered deposits, $486.2 million of borrowings and remaining FHLB capacity.
- The sensitivity of net interest income and deposit costs to changes in interest rates and the low-rate environment.
- The carrying value and future impairment risk of $291.7 million of goodwill, including $115.9 million recorded from the Integrity acquisition.