S&T Bancorp, Inc. — Q3 2014 Form 10-Q Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania-based bank holding company providing commercial and retail banking, lending, insurance, wealth management, trust and brokerage services. The filing covers the three and nine months ended September 30, 2014. S&T reported total assets of $4.9 billion at quarter-end and operated primarily across Pennsylvania, with loan production offices in Ohio.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net interest income | $37.5 million | $35.3 million | $110.0 million | $103.5 million |
| Net interest income, FTE | $38.9 million | $36.5 million | $114.1 million | $107.1 million |
| Net interest margin, FTE | 3.50% | 3.50% | 3.52% | 3.50% |
| Provision for loan losses | $1.5 million | $3.4 million | $0.6 million | $6.7 million |
| Noninterest income | $11.9 million | $12.5 million | $35.1 million | $40.2 million |
| Noninterest expense | $28.4 million | $27.9 million | $87.5 million | $87.9 million |
| Net income | $14.7 million | $12.2 million | $43.4 million | $38.7 million |
| Diluted EPS | $0.49 | $0.41 | $1.46 | $1.30 |
Net income increased 19.7% in the quarter and 12.2% for the first nine months. Improvement was driven mainly by higher net interest income, loan and interest-earning asset growth, lower funding costs and materially lower credit-loss provisions. The effective tax rate for the nine-month period was 23.8%, compared with 21.2% in the prior-year period.
- Total assets increased 8.2% from December 31, 2013 to $4.91 billion.
- Portfolio loans increased 6.6% to $3.80 billion, led by commercial and industrial, commercial real estate and commercial construction lending. Commercial loans represented 74.2% of portfolio loans.
- Deposits increased 6.2% to $3.90 billion. Noninterest-bearing demand deposits increased 8.5%; CDARS, one-way-buy and brokered CDs also increased.
- The allowance for loan losses was $47.3 million, or 1.24% of portfolio loans, versus 1.30% at year-end 2013.
- Nonperforming assets declined 40% to $13.7 million, or 0.36% of loans plus OREO, from $22.9 million at December 31, 2013.
- Shareholders’ equity increased 6.1% to $605.9 million, supported by net income and higher accumulated other comprehensive income, partially offset by $14.9 million of dividends.
Cash flow, debt and liquidity
- Operating activities provided $58.5 million of cash during the first nine months, compared with $67.9 million in the prior-year period.
- Investing activities used $349.1 million, primarily reflecting $244.8 million of net loan growth and $149.3 million of securities purchases.
- Financing activities provided $326.1 million, including $228.7 million of deposit growth and $125.0 million of increased short-term borrowings.
- Cash and cash equivalents increased to $143.8 million from $108.4 million at year-end 2013.
- Total borrowings were $353.7 million, up from $241.3 million, primarily due to higher short-term FHLB borrowings. Remaining FHLB borrowing availability was approximately $1.3 billion, and federal funds lines totaled $60.0 million.
- Highly liquid assets totaled $381.6 million, equal to 7.8% of total assets.
- S&T Bancorp and S&T Bank remained well capitalized. The holding company’s total risk-based capital ratio was 14.29%, and S&T Bank’s was 13.26%.
Material changes versus the prior comparable period
- Net interest income increased 6.4% in Q3 and 6.2% for nine months, principally because average interest-earning assets and average loans grew. The FTE net interest margin was flat in Q3 and improved modestly for nine months.
- Interest expense declined as higher-cost certificates of deposit matured and were replaced by lower-cost deposits and borrowings. The 2013 redemption of $45 million of subordinated debt also reduced year-to-date interest expense.
- Credit performance improved: nine-month net recoveries were $0.5 million versus $5.3 million of net charge-offs in 2013, and nonaccrual loans declined to $13.5 million.
- Noninterest income declined 4.9% in Q3 and 12.7% for nine months. The year-to-date comparison was negatively affected by the absence of the $3.1 million net gain from the 2013 sale of the merchant card servicing business, lower mortgage banking income and lower insurance and card-related fees.
- Noninterest expense declined slightly for nine months, partly because 2014 had no comparable $0.8 million of merger-related expense. Q3 expense increased partly because a $0.5 million IRS penalty contingency had been reversed in 2013.
- Accumulated other comprehensive income improved by $5.5 million from year-end, primarily from higher available-for-sale securities values.
Outlook, management commentary, risks and unusual items
Management emphasized continued organic loan and deposit growth, expansion into new markets, increased fee income and expense discipline. Management expects the low-interest-rate environment to continue pressuring net interest income, although asset growth is expected to help offset the effect. The company also plans to evaluate additional markets and continue investing in sales personnel and technology.
On October 29, 2014, after the reporting date, S&T agreed to acquire Integrity Bancshares, Inc., which had approximately $860 million of assets and eight branches. The transaction was valued at approximately $155 million, with consideration targeted at 80% stock and 20% cash. Closing was expected in the first quarter of 2015, subject to regulatory and shareholder approvals; the related bank merger was expected in the second quarter of 2015.
- Key risks include credit losses, commercial real estate and construction exposure, regional economic conditions, interest-rate and yield-curve changes, funding costs, liquidity, competition, cybersecurity, regulatory capital requirements and acquisition integration.
- Commercial loans comprised 74% of portfolio loans, creating heightened sensitivity to commercial credit conditions. No industry concentration exceeded 9% of total loans, according to the filing.
- Total troubled debt restructurings were $42.2 million, including $4.9 million nonaccrual. The company reported no commitments to lend additional funds on TDRs.
- The company reported no material litigation proceedings and no material changes to previously disclosed risk factors.
- Management stated that no other-than-temporary impairment was recorded on securities and that unrealized losses were primarily related to interest-rate movements rather than credit deterioration.
- The filing states that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether commercial loan growth and the high commercial-loan mix remain sustainable without reversing the recent improvement in asset quality.
- Whether the $0.6 million year-to-date provision and net recoveries are representative or unusually favorable.
- The effect of increased short-term borrowing and brokered or other nontraditional deposits on funding costs and liquidity risk.
- The final terms, regulatory approvals, accounting treatment, integration costs and capital impact of the proposed Integrity Bancshares acquisition.
- Whether persistent low rates, or a rapid rise in rates, changes net interest margin and the value of the securities portfolio.
- The recurring level of fee income after the nonrecurring 2013 merchant card servicing gain and related transition fees ended.