S&T Bancorp, Inc. — 2014 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2014, filed February 20, 2015. S&T Bancorp is a Pennsylvania-based financial holding company operating Community Banking, Wealth Management and Insurance segments. At year-end, it had approximately $5.0 billion of assets, $3.9 billion of loans, $3.9 billion of deposits, $608.4 million of shareholders’ equity and 945 full-time equivalent employees. Its primary market is western Pennsylvania, with loan production offices in Ohio and approximately $2.0 billion of wealth-management assets under management and administration.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total assets | $4.965 billion | $4.533 billion | +9.5% |
| Portfolio loans | $3.869 billion | $3.566 billion | +8.5% |
| Total deposits | $3.909 billion | $3.672 billion | +6.4% |
| Net interest income | $148.0 million | $139.2 million | +6.4% |
| Net interest income, FTE | $153.5 million | $144.0 million | +6.6% |
| Net interest margin, FTE | 3.50% | 3.50% | Unchanged |
| Provision for loan losses | $1.7 million | $8.3 million | -79% |
| Noninterest income | $46.3 million | $51.5 million | -10.1% |
| Noninterest expense | $117.2 million | $117.4 million | -0.1% |
| Net income available to common shareholders | $57.9 million | $50.5 million | +14.6% |
| Diluted EPS | $1.95 | $1.70 | +14.7% |
| Common ROAA | 1.22% | 1.12% | +10 basis points |
| Common ROAE | 9.71% | 9.21% | +50 basis points |
Operating cash flow was $78.1 million, compared with $86.1 million in 2013. Investing activities used $437.0 million, primarily because of $313.3 million of loan growth and $181.2 million of securities purchases. Financing activities provided $360.2 million, including a $240.9 million increase in core deposits and $150.0 million of additional short-term borrowings. Cash and cash equivalents ended at $109.6 million.
Commercial loans represented 74.8% of portfolio loans, including $1.682 billion of commercial real estate, $994.1 million of commercial and industrial loans and $216.1 million of commercial construction loans. The allowance for loan losses was $47.9 million, or 1.24% of loans, versus 1.30% in 2013. Total borrowings were $385.7 million, including $290.0 million of short-term borrowings and $45.6 million of junior subordinated debt securities.
Liquidity remained supported by a stable deposit base. S&T Bank reported $393.6 million of highly liquid assets, an 8.0% asset-liquidity ratio, $1.3 billion of remaining FHLB borrowing availability and $60 million of Federal Funds lines. Regulatory capital remained strong: S&T’s Tier 1 risk-based, total risk-based and leverage ratios were 12.34%, 14.27% and 9.80%, respectively; S&T Bank’s corresponding ratios were 10.76%, 12.68% and 8.53%.
Material changes versus the prior comparable period
- Loan growth accelerated, with portfolio loans increasing $302.5 million. Ohio loan production offices contributed approximately $146.0 million, or 48%, of the increase.
- Asset quality improved materially. Net charge-offs fell to $0.1 million from $8.5 million; nonperforming loans declined to $12.5 million, or 0.32% of loans, from $22.5 million, or 0.63%; and nonperforming assets declined to $12.6 million from $22.9 million.
- Net interest income increased primarily from average loan and earning-asset growth and lower funding costs. The FTE net interest margin remained 3.50% despite the low-rate environment.
- Noninterest income declined largely because 2013 included a $3.1 million net gain from selling the merchant card servicing business. Mortgage banking income fell 56.8% as higher mortgage rates reduced origination and sale volumes. Wealth-management fees increased 6.0%.
- Expenses were essentially flat. Lower pension expense, Pennsylvania shares tax and FDIC insurance costs offset higher data-processing, technology, marketing and telecommunications expenses.
- Deposits increased $236.5 million. Noninterest-bearing demand deposits increased $91.1 million, while brokered deposits increased $54.6 million. Short-term borrowings rose $150.0 million to fund asset growth.
- Available-for-sale securities increased $130.8 million to $640.3 million. The portfolio moved from a $2.3 million net unrealized loss at year-end 2013 to a $9.3 million net unrealized gain at year-end 2014. No other-than-temporary impairment was recorded.
Guidance, outlook, risks and unusual items
Management did not provide formal numerical earnings guidance. Its stated priorities were continued loan and deposit growth, increased fee income, disciplined expenses, expansion into additional markets and maintaining capital strength. Management expects the low interest-rate environment to continue pressuring net interest income, with organic loan growth expected to mitigate some of that pressure.
On October 29, 2014, S&T agreed to acquire Integrity Bancshares for approximately $155 million. Integrity had approximately $844 million of assets at December 31, 2014 and eight branches. The transaction was expected to close in the first quarter of 2015, subject to customary conditions and regulatory and shareholder approvals; the bank merger was expected in the second quarter of 2015. Integration, execution and acquisition-related costs are material considerations.
- Credit risk is concentrated geographically in western Pennsylvania and by portfolio in commercial real estate, commercial construction and other commercial lending. A regional economic or real-estate downturn could increase charge-offs and loan-loss provisions.
- Interest-rate risk is significant because net interest income is the primary revenue source. Management’s modeling indicates that a 300-basis-point increase would increase projected pretax net interest income by 6.7%, while a 100-basis-point decline would reduce it by 3.4%. Downward scenarios of 200 and 300 basis points were suspended because of the low-rate environment.
- Liquidity depends primarily on core deposits, FHLB access and other wholesale funding. The increase in short-term borrowings and brokered deposits should be monitored.
- Regulatory changes, including Basel III, Dodd-Frank requirements, FDIC assessments and consumer-protection rules, may increase compliance costs or constrain activities. Management expected capital ratios to remain above well-capitalized thresholds under Basel III.
- Cybersecurity incidents, third-party technology dependencies, competition, litigation, changes in mortgage activity and potential goodwill or securities impairment remain identified risks.
- The company had $1.232 billion of commitments to extend credit and standby letters of credit, with a $2.3 million allowance for unfunded commitments.
- The pension plan was underfunded by $19.6 million at year-end, although no cash contribution was required for 2015 according to the filing.
Quarterly fourth-quarter 2014 net income available to common shareholders was $14.5 million, or $0.49 diluted EPS, compared with $11.9 million, or $0.40 diluted EPS, in fourth-quarter 2013. The filing text does not provide a separate quarterly balance sheet or quarterly cash-flow statement.
Most important facts an investor should verify
- Completion timing, purchase accounting, consideration structure and integration results for the Integrity Bancshares acquisition.
- Sustainability of loan growth, particularly the concentration in commercial real estate, commercial construction and Ohio-originated loans.
- Whether the unusually low 2014 charge-off rate and reduced loan-loss provision persist through a full credit cycle.
- Deposit composition, brokered and insured-network deposit usage, and the continued reliance on short-term FHLB borrowings.
- Sensitivity of net interest income and economic value of equity to rising, falling and changing yield-curve scenarios.
- Future noninterest income trends after the 2013 merchant-card sale, including mortgage banking and wealth-management fees.
- Capital impacts from Basel III, acquisition growth, dividends and any future securities issuance.
- Potential effects of the underfunded pension obligation, goodwill, commercial-loan concentrations and regional economic conditions.