S&T Bancorp, Inc. 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019, with fourth-quarter information included. S&T is a Pennsylvania bank holding company operating through S&T Bank and related financial-services subsidiaries across Pennsylvania, Ohio, New York and surrounding states. At year-end, it had approximately $8.8 billion of assets, $7.1 billion of loans, $7.0 billion of deposits, $1.2 billion of shareholders’ equity, 76 branches, five loan production offices and 1,201 full-time-equivalent employees.
Business Context and Material Transactions
- On November 30, 2019, S&T completed its all-stock merger with DNB Financial Corporation for approximately $201.0 million.
- The DNB transaction added approximately $1.1 billion of assets, $899.3 million of portfolio loans and $990.6 million of deposits at December 31, 2019, and generated $84.2 million of preliminary goodwill.
- The DNB acquisition contributed approximately $3.2 million of net interest income and $2.1 million of net income from the acquisition date through year-end. The systems conversion occurred on February 7, 2020.
- Management reported organic portfolio-loan growth of $291.2 million, or 4.9%, and organic deposit growth of $372.1 million, or 6.6%, excluding DNB.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net income | $98.2 million | $105.3 million | Down 6.7% |
| Diluted EPS | $2.82 | $3.01 | Down $0.19 |
| Net interest income | $246.8 million | $234.4 million | Up 5.3% |
| Net interest margin, FTE | 3.64% | 3.64% | Unchanged |
| Noninterest income | $52.6 million | $49.2 million | Up 6.9% |
| Noninterest expense | $167.1 million | $145.4 million | Up 14.9% |
| Provision for loan losses | $14.9 million | $15.0 million | Down $0.1 million |
| Return on average assets | 1.32% | 1.50% | Down 18 basis points |
| Return on average equity | 9.98% | 11.60% | Down 162 basis points |
| Common tangible book value per share | $20.52 | $18.63 | Up 10.1% |
| Dividends declared per share | $1.09 | $0.99 | Up 10.1% |
Balance Sheet, Credit Quality and Capital
- Total assets increased 20.9% to $8.76 billion; portfolio loans increased 20.0% to $7.14 billion; deposits increased 24.0% to $7.04 billion; and shareholders’ equity increased 27.4% to $1.19 billion.
- Commercial loans represented 77% of total portfolio loans. Commercial real estate and commercial construction together represented approximately 53% of total portfolio loans, creating meaningful exposure to commercial-property and regional economic conditions.
- Nonperforming loans increased to $54.1 million, or 0.76% of total loans, from $46.1 million, or 0.77%, in 2018. Nonperforming assets increased to $57.6 million from $49.2 million.
- Net charge-offs increased to $13.6 million, or 0.22% of average loans, from $10.4 million, or 0.18%. The allowance for loan losses increased to $62.2 million, but declined to 0.87% of portfolio loans from 1.03%, primarily because acquired DNB loans were recorded at fair value without a carryover allowance.
- Performing and nonperforming troubled debt restructurings totaled $45.9 million at year-end, including $37.0 million performing and $8.9 million nonperforming.
- S&T and S&T Bank were classified as well-capitalized. S&T reported a 10.29% leverage ratio, 11.43% common equity Tier 1 ratio, 11.84% Tier 1 risk-based ratio and 13.22% total risk-based capital ratio.
Cash Flow, Debt and Liquidity
| Metric | 2019 |
|---|---|
| Cash provided by operating activities | $138.4 million |
| Cash used in investing activities | $210.6 million |
| Cash provided by financing activities | $114.5 million |
| Year-end cash and cash equivalents | $197.8 million |
| Total borrowings | $416.4 million |
| Highly liquid assets | $615.5 million |
| Highly liquid assets to total assets | 7.0% |
| Remaining FHLB borrowing availability | $2.6 billion |
Borrowings declined $188.0 million, or 31.1%, as deposit growth reduced reliance on wholesale funding. Deposits remained the primary funding source. Contractual commitments included $1.91 billion of commitments to extend credit and $80.0 million of standby letters of credit. Total contractual obligations were $7.66 billion, excluding interest where specified.
Material Changes and Unusual Items
- Reported earnings were reduced by $11.4 million of DNB merger-related expenses, including data-processing and conversion costs, professional fees and severance. Excluding these costs, adjusted net income was $107.5 million, adjusted diluted EPS was $3.09, adjusted ROA was 1.45% and adjusted ROE was 10.92%.
- Net interest income benefited from higher average earning assets and loan growth, while higher deposit costs and short-term rates increased interest expense.
- Commercial loan swap income increased $4.3 million to $5.5 million. Wealth-management fees declined $1.5 million, and 2018’s $1.9 million gain on the sale of a majority interest in the insurance business did not recur.
- Shareholders’ equity included $200.6 million of common stock issued in the DNB merger. S&T repurchased $18.2 million of common stock during 2019 and had $50 million remaining under a new authorization effective through March 31, 2021.
- Management adopted the current expected credit loss standard, or CECL, on January 1, 2020. It estimated a cumulative increase in the allowance for credit losses of approximately $17 million to $20 million, or 27% to 32%, subject to final DNB purchase accounting.
- The company adopted the new lease standard in 2019, recognizing operating and finance right-of-use assets and lease liabilities; the adoption did not materially affect net income.
Outlook, Risks and Contingencies
- Management’s strategy emphasizes organic growth across five markets, technology and service investment, and selective acquisitions. No formal earnings guidance was provided in the filing.
- Key risks include credit losses, commercial real estate concentration, regional economic conditions, interest-rate and deposit-cost pressure, liquidity dependence on core deposits and FHLB access, acquisition integration, technology and cybersecurity incidents, regulatory changes, and potential goodwill impairment.
- The company relies substantially on dividends from S&T Bank; dividends may be limited by regulatory capital, earnings-retention and banking-law requirements.
- Management reported no material pending legal proceedings and no unresolved SEC staff comments.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019. The assessment excluded DNB’s controls because it was acquired late in the year; DNB represented approximately 14% of total assets and 19% of net assets at year-end.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Critical audit matters were the allowance for loan losses and accounting for the DNB acquisition.
Investor Verification Checklist
- Verify final purchase accounting for DNB, including acquired-loan fair values, goodwill, intangible assets and the resulting CECL adjustment.
- Monitor nonperforming loans, troubled debt restructurings, commercial real estate concentrations, charge-offs and allowance coverage.
- Reconcile reported earnings with adjusted earnings by removing the $11.4 million merger-related expense and assess whether cost synergies materialize.
- Assess deposit retention, deposit pricing, brokered deposits, FHLB borrowing capacity and liquidity under stressed conditions.
- Evaluate sensitivity of net interest income and economic value of equity to rising and falling interest rates.
- Review the integration and control environment following the February 2020 DNB systems conversion.
- Confirm the effect of CECL adoption on retained earnings, capital ratios, provision expense and future earnings volatility.