S&T Bancorp, Inc. 2015 Form 10-K Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania-based financial holding company operating through Community Banking, Wealth Management and Insurance segments. It serves customers in Pennsylvania, Ohio and New York. This Form 10-K covers the fiscal year ended December 31, 2015, with comparative information for 2014 and 2013. The company had approximately $6.3 billion of assets, $5.1 billion of loans, $4.9 billion of deposits and $792.2 million of shareholders’ equity at year-end.
On March 4, 2015, S&T completed its $172.0 million acquisition of Integrity Bancshares, adding approximately $980.8 million of assets, $788.7 million of loans, $722.3 million of deposits and $115.9 million of goodwill. Integrity Bank was merged into S&T Bank on May 8, 2015.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net income available to common shareholders | $67.1 million | $57.9 million | +15.8% |
| Diluted EPS | $1.98 | $1.95 | +$0.03 |
| Net interest income | $187.6 million | $148.0 million | +26.7% |
| Net interest margin, FTE | 3.56% | 3.50% | +6 basis points |
| Noninterest income | $51.0 million | $46.3 million | +10.1% |
| Noninterest expense | $136.7 million | $117.2 million | +16.6% |
| Provision for loan losses | $10.4 million | $1.7 million | +$8.7 million |
| Return on average assets | 1.13% | 1.22% | Down 9 basis points |
| Return on average equity | 8.94% | 9.71% | Down 77 basis points |
| Efficiency ratio | 56% | 59% | Improved |
Net interest income benefited from a 23.8% increase in average interest-earning assets and $6.2 million of purchase-accounting accretion from the Integrity acquisition. Total operating revenue, defined by management as net interest income plus noninterest income excluding security gains or losses and nonrecurring items, grew approximately 23%.
Fourth-quarter 2015 net income was $17.4 million, or $0.50 diluted EPS, compared with $14.5 million, or $0.49 diluted EPS, in the fourth quarter of 2014. Fourth-quarter provision expense was $3.9 million.
Balance sheet, credit quality, debt and liquidity
- Total assets increased 27.3% to $6.3 billion, primarily from a 30.0% increase in portfolio loans to $5.0 billion.
- Commercial loans represented 76% of portfolio loans, including $2.2 billion of commercial real estate, $1.3 billion of commercial and industrial loans and $413.4 million of commercial construction loans.
- Total deposits increased 24.8% to $4.9 billion. Brokered deposits increased 88.4% to $418.9 million, supporting asset growth.
- Total borrowings increased 50.6% to $580.7 million, including $356.0 million of short-term borrowings and $117.0 million of long-term borrowings. The company shifted $100.0 million of short-term funding into a long-term variable-rate borrowing during 2015.
- Net cash provided by operating activities was $60.6 million. Investing activities used $405.7 million, primarily for loan growth, while financing activities provided $335.0 million. Cash and cash equivalents declined $10.2 million to $99.4 million.
- S&T Bank reported $442.8 million of highly liquid assets, equal to a 7.0% asset liquidity ratio, and approximately $1.4 billion of additional borrowing availability at the Federal Home Loan Bank of Pittsburgh.
- Nonperforming assets increased to $35.7 million, or 0.71% of loans plus other real estate owned, from $12.6 million, or 0.33%, in 2014. Nonperforming loans included a subsequently identified $4.7 million commercial and industrial loan and approximately $16.2 million of loans acquired from Integrity.
- Net charge-offs increased to $10.2 million, or 0.22% of average loans, from $0.1 million in 2014. Approximately $6.0 million related to acquired loans that deteriorated after the acquisition.
- The allowance for loan losses was $48.1 million, or 0.96% of portfolio loans, compared with $47.9 million, or 1.24%, in 2014. The lower reserve ratio was partly attributable to acquired loans being recorded at fair value without a carryover allowance.
- S&T and S&T Bank remained well capitalized. S&T’s leverage, common equity Tier 1, Tier 1 and total risk-based capital ratios were 8.96%, 9.77%, 10.15% and 11.60%, respectively. S&T Bank’s corresponding ratios were 8.43%, 9.55%, 9.55% and 11.00%.
Material changes versus the prior comparable period
- The Integrity acquisition materially increased the company’s scale, geographic footprint, loan and deposit balances, goodwill and operating expenses.
- Organic loan growth was $370.2 million, in addition to the $788.7 million of acquired loans. Nearly 60% of organic loan growth came from newer Ohio and New York markets.
- Noninterest income growth was led by mortgage banking, debit and credit card fees and deposit service charges. Insurance fees declined 7.6%, primarily due to competition and customer declines in the energy sector.
- Noninterest expense growth reflected merger-related expenses, additional personnel and locations, higher pension expense, technology spending and FDIC insurance costs. Merger-related expense was $3.2 million in 2015 versus $0.7 million in 2014.
- Common shares issued in the acquisition increased shareholders’ equity by $142.5 million. Dividends declared increased to $0.73 per share from $0.68 per share.
- Goodwill increased to $291.8 million from $175.8 million, including $115.9 million attributable to Integrity. Management reported no goodwill impairment.
Guidance, outlook, risks and unusual items
The filing does not provide formal numerical earnings or revenue guidance. Management expects to continue pursuing organic growth, expansion into newer markets and selective acquisitions. Management identified the prolonged low-interest-rate environment as a challenge to net interest income, with loan growth expected to help mitigate spread pressure. The balance sheet was asset sensitive; management’s rate-shock analysis indicated that higher interest rates would generally increase pretax net interest income.
- Credit risk is elevated by the concentration in commercial lending, commercial real estate and commercial construction, as well as the geographic concentration in Pennsylvania and surrounding markets.
- Asset quality deterioration in acquired loans drove higher nonperforming assets, charge-offs and provision expense. The filing states that the fourth-quarter earnings-release asset-quality figures were revised to include the $4.7 million commercial and industrial loan identified before filing.
- Interest-rate risk includes potential margin compression in a low-rate environment and repricing or deposit-cost pressure if rates rise. Downward rate scenarios of negative 200 and negative 300 basis points were suspended because management considered them less meaningful at prevailing rates.
- Liquidity depends primarily on core deposits, with supplemental reliance on brokered deposits, Federal Home Loan Bank advances and other wholesale funding.
- Key operational risks include cybersecurity incidents, third-party service-provider disruptions, regulatory compliance, litigation, competition and acquisition integration.
- Off-balance-sheet commitments to extend credit and standby letters of credit totaled $1.7 billion, supported by a $2.5 million allowance for unfunded commitments.
- The company reported no material pending litigation and received unqualified audit opinions from KPMG on the consolidated financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Whether post-acquisition credit deterioration, particularly in commercial construction and acquired commercial loans, results in additional charge-offs or provisioning.
- The sustainability of loan and deposit growth, including the increased use of brokered deposits and wholesale borrowings.
- The effect of interest-rate changes on net interest margin, funding costs, liquidity and capital.
- Whether the Integrity acquisition delivers expected cost savings, revenue synergies and market expansion benefits without further material integration expenses.
- The adequacy of the allowance for loan losses relative to the commercial real estate, commercial construction and commercial and industrial portfolios.
- The carrying value and future impairment risk of $291.8 million of goodwill and other acquisition-related intangible assets.
- Future capital requirements under the phased-in Basel III capital conservation buffer and the company’s capacity to maintain dividends while supporting growth.