S&T Bancorp, Inc. 2013 Form 10-K Summary
Business context and reporting period
S&T Bancorp is a Pennsylvania-based financial holding company with Community Banking, Wealth Management and Insurance segments. It primarily serves Western Pennsylvania and Northeast Ohio through S&T Bank, 58 community-banking locations and Ohio loan-production offices. The filing covers the fiscal year ended December 31, 2013; fourth-quarter information is presented in the unaudited quarterly data.
- December 31, 2013 assets: $4.53 billion; portfolio loans: $3.57 billion; deposits: $3.67 billion; shareholders’ equity: $571.3 million.
- Wealth Management assets under management and administration increased to approximately $1.9 billion.
- The company had approximately 948 full-time equivalent employees.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net income available to common shareholders | $50.5 million | $34.2 million | Up 48% |
| Diluted EPS | $1.70 | $1.18 | Up $0.52 |
| Net interest income | $139.2 million | $135.2 million | Up 3% |
| Net interest income, FTE | $144.0 million | $139.7 million | Up $4.3 million |
| FTE net interest margin | 3.50% | 3.57% | Down 7 bps |
| Provision for loan losses | $8.3 million | $22.8 million | Down 64% |
| Noninterest income | $51.5 million | $51.9 million | Down 0.7% |
| Noninterest expense | $117.4 million | $122.9 million | Down 4.5% |
| Efficiency ratio | 60% | 65% | Improved |
| Common return on average assets | 1.12% | 0.79% | Improved |
| Common return on average equity | 9.21% | 6.62% | Improved |
Fourth-quarter 2013 net income available to common shareholders was $11.9 million, or $0.40 diluted EPS, compared with $9.5 million, or $0.32 diluted EPS, in fourth-quarter 2012.
- Portfolio loans grew $219.6 million, or 6.6%, led by commercial real estate, commercial and industrial, and residential mortgage lending.
- Commercial loans represented 72.7% of portfolio loans, including commercial real estate of $1.61 billion and commercial and industrial loans of $842.4 million.
- Net charge-offs declined to $8.5 million, or 0.25% of average loans, from $25.2 million, or 0.78%, in 2012.
- The allowance for loan losses was $46.3 million, or 1.30% of loans, compared with 1.38% in 2012.
- Cash provided by operating activities was $86.1 million. Investing activities used $309.7 million, primarily because of $241.2 million of net loan growth and securities purchases. Financing activities used $5.7 million.
- Cash and cash equivalents declined to $108.4 million from $337.7 million, reflecting deployment of liquidity into loans and securities.
Capital, debt and liquidity
- At year-end, S&T’s Tier 1 risk-based capital ratio was 12.37%, total risk-based capital ratio was 14.36%, and leverage ratio was 9.75%. S&T Bank’s corresponding ratios were 11.36%, 13.35% and 8.95%. Both were classified as well-capitalized.
- Total borrowings were $241.3 million, down from $262.3 million. Junior subordinated debt declined by $45.0 million following early repayment; short-term borrowings increased by $65.0 million to $140.0 million.
- The company reported $314.4 million of highly liquid assets, equal to a 7.0% asset-liquidity ratio, plus approximately $1.4 billion of remaining FHLB borrowing availability and $60.0 million of Federal Funds lines.
- Total deposits increased 0.9% to $3.67 billion. The mix shifted from higher-cost certificates of deposit toward savings, demand, CDARS and brokered deposits.
Material changes versus the prior comparable period
- Earnings improved substantially due to loan growth, lower funding costs, reduced credit costs and expense control.
- Net interest margin compressed despite higher net interest income because earning-asset yields declined faster than funding costs.
- Asset quality improved materially: nonperforming assets declined to $22.9 million, or 0.64% of loans plus OREO, from $55.9 million, or 1.66%; commercial special mention and substandard loans declined 47% to $163.0 million.
- Noninterest income was broadly stable. A $3.1 million net gain from the sale of the merchant card servicing business offset the absence of $3.0 million of 2012 securities gains and lower mortgage-banking income.
- Noninterest expense benefited from lower merger-related costs, OREO expense and unfunded-commitment expense, partially offset by higher salaries, data processing and occupancy costs.
- The company completed the Gateway Bank system conversion and merger into S&T Bank in February 2013.
- Accumulated other comprehensive income improved by $0.9 million, although the securities portfolio moved from a $14.9 million unrealized gain in 2012 to a $2.3 million unrealized loss in 2013 as interest rates rose. Management recorded no OTTI.
Guidance, outlook, commentary, risks and unusual items
Management’s 2014 priorities were continued loan growth, increased fee income, expense discipline, expansion of the Central Ohio loan-production office and evaluation of acquisition opportunities. Management expected the low-interest-rate environment to continue pressuring net interest income, with organic loan growth intended to mitigate that pressure.
- Key risks include concentration in Western Pennsylvania, commercial real estate and other commercial lending, borrower credit deterioration, collateral-value declines and the adequacy of the allowance for loan losses.
- Interest-rate risk remains material. The company describes its balance sheet as asset-sensitive; a rising-rate environment is expected to benefit pretax net interest income, while rates remaining low could compress spreads.
- At December 31, 2013, interest-rate shock analysis indicated a 7.6% increase in pretax net interest income under a +300-basis-point scenario and a 3.4% decline under a -100-basis-point scenario. The filing does not provide meaningful -200- or -300-basis-point scenarios because they were suspended in the low-rate environment.
- Regulatory changes, including Basel III and Dodd-Frank implementation, may increase capital, compliance and operating costs. Basel III was scheduled to apply to smaller banking organizations beginning January 1, 2015.
- The company had $1.12 billion of off-balance-sheet commitments, including $1.04 billion of commitments to extend credit and $78.6 million of standby letters of credit. The allowance for unfunded commitments was $2.9 million.
- Total troubled debt restructurings were $49.3 million, including $39.2 million performing and $10.1 million nonperforming.
- An outstanding warrant covers 517,012 shares at an exercise price of $31.53 and remains exercisable through January 2019, creating potential dilution.
- Management stated that pending litigation was not expected to have a material adverse effect. KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether strong 2013 loan growth can continue without reversing the improvement in nonperforming loans, charge-offs and provision expense.
- The sustainability of earnings after excluding the $3.1 million merchant-card sale gain, lower merger costs and other favorable expense items.
- The effect of continued low rates or a faster-than-expected rate increase on the 3.50% FTE net interest margin, deposit pricing and securities values.
- The concentration and performance of the commercial real estate and commercial loan portfolios, including the $49.3 million of TDRs and $52.9 million of impaired loans.
- Liquidity reliance on core deposits, CDARS and brokered deposits, FHLB advances and the availability of pledged collateral.
- The impact of Basel III, Dodd-Frank, consumer-mortgage rules and future regulatory assessments on capital and operating costs.
- Potential dilution from the 517,012-share warrant and the company’s ability to maintain dividends while funding growth.