S&T Bancorp, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania bank holding company operating S&T Bank across Western and Eastern Pennsylvania, Ohio, and Upstate New York. The company provides commercial, consumer and small-business banking, mortgage, wealth management, brokerage, trust and insurance services. The filing covers the fiscal year ended December 31, 2020, including fourth-quarter results. The DNB Financial Corporation merger was completed November 30, 2019, and its results were included for a full year in 2020 versus one month in 2019.
At December 31, 2020, S&T reported approximately $9.0 billion of assets, $7.2 billion of portfolio loans, $7.4 billion of deposits, $1.2 billion of shareholders’ equity, 76 banking branches, five loan production offices and approximately 1,174 full-time-equivalent employees.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net income | $21.0 million | $98.2 million | Down 78.6% |
| Diluted EPS | $0.53 | $2.82 | Down $2.29 |
| Net interest income | $279.4 million | $246.8 million | Up 13.2% |
| Net interest margin, FTE | 3.38% | 3.64% | Down 26 bps |
| Provision for credit losses | $131.4 million | $14.9 million | Up $116.5 million |
| Noninterest income | $59.7 million | $52.6 million | Up 13.6% |
| Noninterest expense | $186.6 million | $167.1 million | Up 11.7% |
| Net cash provided by operating activities | $53.5 million | $138.4 million | Down $85.0 million |
- Total assets increased 2.3% to $8.97 billion. Portfolio loans increased 1.2% to $7.23 billion, but declined $376.8 million excluding Paycheck Protection Program loans.
- Deposits increased 5.5% to $7.42 billion, driven primarily by customer deposits related to PPP and stimulus programs and elevated cash holdings. Customer deposits increased $676.2 million, while brokered deposits declined $292.2 million.
- Total borrowings declined $188.4 million to $227.9 million, primarily because deposit growth reduced reliance on short-term borrowings.
- The allowance for credit losses increased to $117.6 million, or 1.63% of portfolio loans, from $62.2 million, or 0.87%, at year-end 2019. Net charge-offs rose to $103.4 million, or 1.40% of average loans, from $13.6 million, or 0.22%.
- Nonperforming loans increased to $146.8 million, or 2.03% of total loans, from $54.1 million, or 0.76%. Nonperforming assets increased to $148.9 million from $57.6 million.
- Commercial loans represented 78.5% of portfolio loans. Commercial real estate and construction loans represented approximately 51% of total portfolio loans.
- Noninterest income benefited from mortgage banking revenue of $10.9 million, up from $2.5 million, reflecting strong refinancing activity. Service charges declined because of lower customer activity during the pandemic.
- Common equity declined to $1.15 billion from $1.19 billion. Common tangible book value declined to $19.71 per share from $20.52. The company declared $1.12 per share of dividends, compared with $1.09 in 2019.
- Cash and cash equivalents increased to $229.7 million from $197.8 million. The company reported $639.4 million of highly liquid assets, equal to 7.1% of total assets, and $2.5 billion of remaining FHLB borrowing availability.
Fourth-quarter 2020 results
| Metric | Fourth quarter 2020 | Fourth quarter 2019 |
|---|---|---|
| Net income | $24.2 million | $22.3 million |
| Diluted EPS | $0.62 | $0.62 |
| Provision for credit losses | $7.1 million | $2.1 million |
| Income before taxes | $29.9 million | $27.4 million |
| Dividends declared per share | $0.28 | $0.28 |
Material changes versus the prior comparable period
- COVID-19, lower interest rates and deterioration in hospitality and other commercial credits materially weakened earnings and asset quality.
- A customer check-kiting fraud generated a $58.7 million pretax loss and reduced after-tax net income by $46.3 million, or $1.19 per diluted share. The company continues to pursue recovery sources and implemented process and monitoring enhancements.
- Commercial special mention, substandard and doubtful loans increased to approximately $572 million from $290 million, primarily because of hotel-loan downgrades.
- S&T adopted CECL on January 1, 2020. The adoption increased the ACL by $27.4 million and reduced retained earnings by $22.6 million.
- PPP activity partially offset broader loan contraction. S&T originated $555.9 million of PPP loans during 2020, with $465.5 million outstanding at year-end. PPP loans are 100% guaranteed by the SBA and generally carry a 1.00% fixed rate.
- The DNB integration produced a full-year contribution to 2020 revenue and expense, while merger-related expenses declined to $2.3 million from $11.4 million.
- The company repurchased 411,430 shares for $12.6 million during 2020, but suspended repurchases in March 2020 because of the pandemic.
Guidance, outlook, management commentary and risks
The filing does not provide specific quantitative earnings or revenue guidance. Management stated that it was taking a prudent approach to capital management, believed capital cushions were adequate and expected the pandemic to continue affecting customers, credit losses, loan demand, expenses and operating conditions. Management also stated that goodwill of $373.4 million was not impaired at December 31, 2020 after interim and annual impairment analyses.
- Key risks include the duration and severity of COVID-19, additional hospitality and commercial real estate losses, higher charge-offs, model uncertainty under CECL and declining collateral values.
- The asset-sensitive balance sheet makes net interest income vulnerable to prolonged low interest rates. Management estimated that a 100-basis-point rate decline would reduce pretax net interest income by 2.8% over the first 12 months and 5.7% over months 13–24, based on year-end 2020 modeling.
- PPP processing creates litigation, compliance and SBA-guarantee risks if loans are improperly originated, serviced or forgiven.
- The company disclosed a planned CEO transition: Todd D. Brice is scheduled to retire effective March 31, 2021, with an executive search underway and an advisory arrangement intended to support transition.
- LIBOR transition affects a significant number of loans, derivatives, borrowings and other financial instruments. The ultimate effect on operations and financial statements had not been determined.
- Other material risks include cybersecurity and third-party service-provider failures, regulatory changes, liquidity dependence on core deposits and FHLB access, geographic concentration, competition and potential litigation.
- S&T and S&T Bank remained well-capitalized. At year-end, S&T’s leverage ratio was 9.43%, common equity Tier 1 ratio was 11.33% and total risk-based capital ratio was 13.44%; S&T Bank’s corresponding ratios were 9.27%, 11.55% and 13.14%.
- The Federal Reserve issued non-objection letters permitting third- and fourth-quarter 2020 dividends despite reduced earnings and the inability to fully fund the dividend from prior-year earnings.
Most important facts for investors to verify
- Whether elevated nonperforming loans, criticized commercial credits and hotel exposure produce additional charge-offs after year-end 2020.
- Whether the $117.6 million ACL adequately covers lifetime expected losses under CECL and how forecast changes affect future provisions.
- The recoverability of the $58.7 million fraud loss and the remaining $5.9 million nonperforming loan tied to the customer relationship.
- The sustainability of the $0.28 quarterly dividend given the 2020 dividend payout ratio of approximately 201% and regulatory limitations on capital distributions.
- The pace and profitability of PPP loan forgiveness, fee accretion and any related SBA reimbursement issues.
- The effect of low interest rates, deposit repricing and any future rate increases on net interest margin and net interest income.
- Execution of the CEO transition, DNB integration benefits and expense controls.
- Liquidity availability, core-deposit retention, FHLB borrowing capacity and the $2.27 billion of unfunded commitments and standby letters of credit.