S&T BANCORP INC annual report, FY2023

S&T Bancorp, Inc. 2023 Form 10-K Summary

Business context and reporting period

S&T Bancorp, Inc. is a Pennsylvania bank holding company operating through S&T Bank and related financial-services subsidiaries in Pennsylvania and Ohio. The filing covers the fiscal year ended December 31, 2023, with comparisons primarily to 2022. The company provides commercial, consumer and small-business banking, wealth management, brokerage, trust and insurance services. At year-end, it reported approximately $9.6 billion of assets, $7.7 billion of portfolio loans, $7.5 billion of deposits and $1.3 billion of shareholders’ equity. Wealth management assets under administration were $2.2 billion and are excluded from consolidated assets.

Key financial metrics

Metric	2023	2022	Change
Net income	$144.8 million	$135.5 million	+6.8%
Diluted EPS	$3.74	$3.46	+8.1%
Net interest income	$349.4 million	$315.8 million	+10.7%
FTE net interest margin	4.13%	3.76%	+37 basis points
Provision for credit losses	$17.9 million	$8.4 million	+$9.5 million
Noninterest income	$57.6 million	$58.3 million	-1.1%
Noninterest expense	$210.3 million	$196.7 million	+6.9%
Efficiency ratio	51.35%	52.34%	Improved
Return on average assets	1.56%	1.48%	+8 basis points
Return on average equity	11.80%	11.47%	+33 basis points

Interest and dividend income increased to $477.9 million from $340.8 million, but interest expense rose substantially to $128.5 million from $25.0 million as deposit and borrowing costs increased. Management attributed the improvement in net interest income and margin primarily to higher interest rates and an asset-sensitive balance sheet.

Balance sheet, liquidity and capital

Total assets increased $441.0 million, or 4.8%, to $9.6 billion.
Portfolio loans increased $469.4 million, or 6.5%, to $7.65 billion. Commercial loans represented 70.1% of the portfolio, while consumer loans represented 29.9%.
Commercial real estate loans increased $229.4 million; consumer real estate loans increased $343.2 million. Approximately 65% of total loans were variable rate.
Deposits increased $301.8 million, or 4.2%, to $7.52 billion, primarily because of $375.7 million of brokered deposits. Customer deposits declined $73.9 million, with noninterest-bearing demand deposits down $366.8 million and certificates of deposit up $472.1 million.
Total uninsured deposits were approximately $2.3 billion, or 30% of total deposits, including $296.0 million of fully collateralized municipal deposits.
Total borrowings increased $64.4 million to $503.6 million, primarily to support loan growth.
Available borrowing capacity was $4.1 billion, including $2.7 billion with the Federal Home Loan Bank, $769.7 million through the Federal Reserve Borrower-in-Custody Program and $637.0 million through the Bank Term Funding Program. The BTFP was scheduled to stop making new loans on March 11, 2024.
Highly liquid assets were $897.4 million, or 9.4% of total assets.
At year-end, S&T’s leverage ratio was 11.21%, Common Equity Tier 1 ratio was 13.37%, Tier 1 ratio was 13.69% and total capital ratio was 15.27%. S&T Bank was classified as well-capitalized.

Material changes versus the prior comparable period

Profitability improved, with record net income increasing $9.3 million and diluted EPS increasing $0.28.
Net interest income benefited from higher asset yields, while funding costs rose sharply. Average interest-bearing deposit costs increased to 1.92% from 0.40%, and average borrowing costs increased to 5.59% from 3.01%.
Credit costs increased. Net loan charge-offs rose to $13.2 million, or 0.18% of average loans, from $2.6 million, or 0.04%. A $9.3 million recovery related to a 2020 customer fraud was included in 2023 recoveries.
The allowance for credit losses increased to $108.0 million from $101.3 million, while remaining 1.41% of total portfolio loans. The increase primarily reflected qualitative reserves related to commercial real estate pricing and commercial and industrial exposures.
Nonperforming assets increased modestly to $23.0 million from $22.1 million, while the ratio to total loans plus other real estate owned improved to 0.30% from 0.31%. Nonaccrual loans increased to $22.9 million from $19.1 million.
Mortgage banking income declined 47.4% to $1.2 million as higher rates reduced loan-sale activity and the company retained more originated mortgages on its balance sheet.
Noninterest expense increased because of wage inflation, additional personnel, loan workout costs, new software and higher FDIC insurance assessments.
Shareholders’ equity increased $98.8 million to $1.28 billion, reflecting net income and improved accumulated other comprehensive income, partly offset by $49.9 million of dividends and $20.0 million of share repurchases.
The available-for-sale securities portfolio declined to $970.4 million. Net unrealized losses improved to $82.0 million from $102.3 million; management attributed the losses to interest rates rather than credit deterioration.

Outlook, commentary, risks and unusual items

Management identified 2024 strategic priorities as strengthening the deposit franchise, core profitability, asset quality, talent and employee engagement. The filing does not provide formal earnings, revenue or margin guidance.

The principal earnings sensitivity is interest-rate risk. Management describes the balance sheet as asset-sensitive; a declining-rate environment could reduce net interest income, while higher rates may increase income but also raise deposit and borrowing costs.
Credit risk is concentrated in commercial lending, particularly commercial real estate and construction. CRE and commercial construction together represented 48.6% of total portfolio loans. Management reported limited criticized and classified exposure in its multifamily and office portfolios but highlighted the potential effects of weaker real estate values, borrower cash flows and regional economic conditions.
Liquidity risk remains relevant because of deposit competition, the 30% uninsured-deposit proportion, reliance on core deposits and the expiration of the BTFP as a new-lending source.
The company faces risks from inflation, recession, unemployment, banking-system volatility, securities valuations, cybersecurity incidents, fraud, third-party service providers, regulatory changes, competition and geopolitical conflicts.
No material cybersecurity incidents were identified individually or in aggregate through December 31, 2023. Management and the independent auditor concluded that internal control over financial reporting was effective, and the audit opinion was unqualified.
The allowance for credit losses and goodwill were identified as critical accounting estimates. Goodwill of $373.4 million was not impaired in the October 1, 2023 assessment.
The company adopted ASU 2022-02 on January 1, 2023, resulting in a $0.6 million increase to the allowance for credit losses and a $0.4 million reduction to retained earnings.
The board approved a $0.33-per-share quarterly dividend in January 2024 and authorized a new $50 million share repurchase plan expiring May 30, 2025. The plan does not require the company to repurchase shares.

Most important facts for investors to verify

Whether deposit pricing and the shift toward certificates of deposit and brokered deposits pressure future net interest margin.
Trends in commercial real estate, construction and commercial-and-industrial criticized loans, charge-offs and the allowance for credit losses.
The sustainability of loan growth relative to core deposit growth and wholesale funding usage.
Liquidity capacity after the BTFP’s scheduled termination and the amount of available FHLB and other Federal Reserve funding.
The effect of future interest-rate changes on net interest income, securities values, capital and deposit retention.
Whether mortgage banking, wealth management and other fee income recover from 2023 declines.
Future dividend and share-repurchase activity relative to capital requirements and regulatory guidance.
Potential changes to banking regulation, FDIC assessments, cybersecurity obligations and capital standards.