S&T Bancorp, Inc. — 2017 Form 10-K Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania bank holding company headquartered in Indiana, Pennsylvania. Through S&T Bank and nonbank subsidiaries, it provides commercial and consumer banking, wealth management, insurance, trust, brokerage and investment advisory services in Pennsylvania, Ohio and New York. The filing covers the fiscal year ended December 31, 2017, with quarterly data for the fourth quarter of 2017.
At year-end, S&T reported approximately $7.1 billion of assets, $5.8 billion of portfolio loans, $5.4 billion of deposits and $884.0 million of shareholders’ equity. Wealth management assets under administration were approximately $2.0 billion. The company had approximately 1,080 full-time equivalent employees and 62 banking locations.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total assets | $7.060 billion | $6.943 billion | 1.7% |
| Portfolio loans | $5.761 billion | $5.611 billion | 2.7% |
| Total deposits | $5.428 billion | $5.272 billion | 2.9% |
| Shareholders’ equity | $884.0 million | $842.0 million | 5.0% |
| Net interest income | $225.7 million | $203.3 million | 11.1% |
| Net interest margin, FTE | 3.56% | 3.47% | Up 9 basis points |
| Provision for loan losses | $13.9 million | $18.0 million | Down 22.7% |
| Noninterest income | $55.5 million | $54.6 million | Up 1.5% |
| Noninterest expense | $147.9 million | $143.2 million | Up 3.3% |
| Net income | $73.0 million | $71.4 million | Up 2.2% |
| Diluted EPS | $2.09 | $2.05 | Up $0.04 |
| Dividends declared per share | $0.82 | $0.77 | Up 6.5% |
| Net cash provided by operating activities | $114.2 million | $96.8 million | Up $17.4 million |
Reported return on average assets was 1.03% and return on average equity was 8.37%. Excluding the $13.4 million non-cash deferred tax asset remeasurement charge arising from the Tax Cuts and Jobs Act, adjusted net income was $86.4 million, adjusted diluted EPS was $2.47, adjusted return on average assets was 1.22% and adjusted return on average equity was 9.90%.
Capital remained above regulatory well-capitalized thresholds. S&T’s year-end leverage ratio was 9.17%, common equity Tier 1 ratio was 10.71%, Tier 1 risk-based capital ratio was 11.06% and total risk-based capital ratio was 12.55%. S&T Bank also exceeded applicable well-capitalized requirements.
Liquidity included $501 million of highly liquid assets, equal to 7.1% of total assets, and approximately $1.8 billion of remaining borrowing availability with the Federal Home Loan Bank of Pittsburgh. Year-end borrowings totaled $683.1 million, down from $771.2 million in 2016.
Material changes versus the prior comparable period
- Loan growth was concentrated in commercial lending: commercial real estate loans increased $188 million, or 7.5%, and commercial and industrial loans increased $32.2 million, or 2.3%. Commercial loans represented 78% of portfolio loans.
- Deposits increased $155.5 million. Money market deposits rose $210 million, while savings deposits declined $157 million as customers shifted toward higher-yielding products. Brokered deposits increased $27.9 million, including an $82.4 million increase in brokered certificates of deposit.
- Net interest income benefited from loan growth and higher short-term interest rates. Average loans increased 8.2%, while the FTE net interest margin expanded from 3.47% to 3.56%.
- Asset quality improved. Nonperforming loans declined to $23.9 million, or 0.42% of total loans, from $42.6 million, or 0.76%. Nonperforming assets declined to $24.4 million from $43.3 million, and net charge-offs decreased to $10.3 million, or 0.18% of average loans.
- The allowance for loan losses increased to $56.4 million, or 0.98% of portfolio loans, from $52.8 million, or 0.94%, primarily because of loan growth and higher estimated loss rates in commercial real estate.
- The non-GAAP efficiency ratio improved to 51.77% from 54.06%, despite higher salaries, incentive compensation, medical costs, technology expenses and professional fees.
- Noninterest income included $3.0 million of net securities gains, a $1.0 million branch-sale gain and a $0.7 million bank-owned life insurance claim. These items were partly offset by the absence of the $2.1 million credit-card-portfolio sale gain and $1.0 million pension curtailment gain recorded in 2016.
- The fourth quarter included a $13.4 million non-cash tax expense from remeasuring deferred tax assets and liabilities at the newly enacted 21% corporate tax rate. Fourth-quarter net income was $9.3 million, or $0.27 diluted EPS, compared with $17.7 million, or $0.51 diluted EPS, in the fourth quarter of 2016.
Guidance, outlook, risks and unusual items
Management emphasized continued organic loan and deposit growth, fee-income opportunities, expense control and asset-quality monitoring. Management expected higher short-term rates to continue supporting net interest income and anticipated that the lower corporate tax rate would improve 2018 performance. The filing does not provide formal numerical earnings or revenue guidance.
On January 1, 2018, S&T sold a majority interest in S&T-Evergreen Insurance, LLC for $5.0 million in cash consideration and retained a 30% equity interest. Management expected to recognize an approximately $1.0 million gain in the first quarter of 2018, with future insurance fee income and related expenses expected to decline.
The most significant control issue was a material weakness in internal control over financial reporting involving inconsistent assessment of internally assigned loan risk ratings, which are used in estimating the allowance for loan losses. Management stated that the weakness did not result in a misstatement of the financial statements, but both management and KPMG concluded that controls were ineffective as of December 31, 2017. Remediation plans included engaging an independent third party, improving documentation and providing additional training.
Principal risks include the concentration of lending in Pennsylvania and surrounding markets; commercial real estate and construction exposure equal to approximately 53% of total loans; interest-rate and deposit-pricing pressure; reliance on core deposits and Federal Home Loan Bank funding; cybersecurity and third-party technology risks; extensive banking regulation; competition from larger banks and nonbank providers; potential acquisition-integration risks; and the subjectivity of allowance-for-loan-loss and goodwill estimates.
The company had $1.501 billion of commitments to extend credit and standby letters of credit at year-end, supported by a $2.2 million allowance for unfunded commitments. Management reported no material pending litigation. The filing also disclosed a $19.5 million underfunded qualified pension obligation and approximately $72.5 million of operating and capital lease commitments.
Most important facts for investors to verify
- Whether the remediation of the material weakness in loan risk-rating controls was completed effectively and whether subsequent filings report any restatement or control deficiency.
- Whether commercial real estate and construction concentrations remain near 53% of total loans and how special mention, substandard and criticized assets develop.
- Whether the allowance for loan losses remains adequate as loan growth continues and as the company transitions to the current expected credit loss model.
- Whether deposit mix changes, brokered deposit usage and higher funding costs compress the net interest margin.
- The recurring earnings impact of the 2017 securities gains, branch-sale gain, insurance claim and fourth-quarter tax remeasurement.
- The financial and reporting effects of the January 2018 S&T-Evergreen transaction, including the retained 30% interest and expected gain.
- Whether capital ratios remain comfortably above the fully phased-in capital conservation buffer requirements and whether dividend capacity remains supported by subsidiary-bank earnings.
- The impact of the Tax Cuts and Jobs Act on the company’s ongoing effective tax rate and deferred tax assets.