S&T Bancorp, Inc. 2016 Form 10-K Summary
Business Context and Reporting Period
Annual report for the fiscal year ended December 31, 2016, filed February 23, 2017. S&T Bancorp is a Pennsylvania-based bank holding company operating Community Banking, Wealth Management and Insurance segments across Pennsylvania, Ohio and New York. At year-end, the company had approximately $6.9 billion of assets, $5.6 billion of loans, $5.3 billion of deposits, $842.0 million of shareholders’ equity and 1,080 full-time equivalent employees. Wealth Management assets under administration were $1.9 billion.
| Key metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total assets | $6.943 billion | $6.318 billion | 9.9% |
| Portfolio loans | $5.611 billion | $5.028 billion | 11.6% |
| Total deposits | $5.272 billion | $4.877 billion | 8.1% |
| Shareholders’ equity | $842.0 million | $792.2 million | 6.3% |
Financial Performance and Key Metrics
- Net income was a record $71.4 million, up 6.4% from $67.1 million; diluted EPS was $2.05 versus $1.98.
- Net interest income increased 8.4% to $203.3 million. Fully taxable-equivalent net interest income rose 8.6% to $210.3 million, while FTE net interest margin declined to 3.47% from 3.56%.
- Noninterest income increased 7.1% to $54.6 million. Noninterest expense increased 4.8% to $143.2 million, producing a 54% efficiency ratio versus 56% in 2015.
- Return on average assets was 1.08%, return on average equity was 8.67%, and the effective tax rate was 26.2%.
- Provision for loan losses rose to $18.0 million from $10.4 million. Net charge-offs increased to $13.3 million, or 0.25% of average loans, from $10.2 million, or 0.22%.
- Cash flow from operating activities was $96.8 million. Investing activities used $616.7 million, principally because net loans increased by $599.3 million. Financing activities provided $559.9 million, mainly through deposit growth and $304.0 million of additional short-term borrowings. Cash and cash equivalents increased $40.1 million to $139.5 million.
- Commercial loans represented 77.6% of portfolio loans, including $2.498 billion of commercial real estate loans. The loan portfolio was geographically concentrated in Pennsylvania and contiguous states.
Material Changes Versus the Prior Comparable Period
- Loan growth was strong across commercial categories: commercial loans increased $518.5 million, or 13.5%, and consumer loans increased $65.3 million, or 5.5%.
- Deposit growth was concentrated in money market accounts and certificates of deposit. Non-brokered deposits increased 10.4%, while brokered deposits declined $67.0 million.
- Total borrowings increased $190.4 million to $771.2 million. Short-term borrowings increased $304.0 million, largely replacing a $100.0 million long-term borrowing that matured in 2016.
- Nonperforming assets increased to $43.3 million, or 0.77% of loans plus OREO, from $35.7 million, or 0.71%. Nonperforming loans increased to $42.6 million from $35.4 million, primarily because of deterioration in acquired and certain originated commercial relationships.
- The allowance for loan losses increased to $52.8 million, although it declined to 0.94% of portfolio loans from 0.96% because of loan growth.
- Noninterest income included a $2.1 million gain on the sale of the credit card portfolio and a $1.0 million pension curtailment gain. The pension plans were amended to freeze benefit accruals effective March 31, 2016.
- Unlike 2015, 2016 included no merger-related expenses. The 2015 comparison included only ten months of Integrity Bancshares results following the March 4, 2015 acquisition and $3.2 million of merger-related costs.
- Goodwill remained substantial at $291.7 million. Management’s 2016 impairment assessment found no impairment.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific quantitative earnings or revenue guidance in the filing. Its stated strategy is continued organic loan and deposit growth, expansion in newer markets, increased fee income and evaluation of acquisition opportunities. Management noted that the low-interest-rate environment pressured net interest income, while organic growth was expected to mitigate that pressure. The balance sheet was described as modestly asset-sensitive; modeled increases in rates were expected to improve pretax net interest income.
- Primary risks include credit losses, commercial real estate and commercial construction concentrations, regional economic weakness, interest-rate and liquidity risk, competition, regulatory changes, cybersecurity and third-party technology disruptions.
- Liquidity was supported by $430.6 million of highly liquid assets, equal to a 6.2% asset liquidity ratio, and approximately $1.4 billion of remaining FHLB borrowing availability.
- Regulatory capital remained strong. S&T’s leverage ratio was 8.98%, CET1 ratio was 10.04%, Tier 1 risk-based ratio was 10.39% and total risk-based capital ratio was 11.86%; S&T Bank was classified as well-capitalized.
- Off-balance-sheet commitments totaled $1.594 billion, including $1.510 billion of commitments to extend credit and $84.5 million of standby letters of credit. The allowance for unfunded commitments was $2.6 million.
- Management reported no material pending litigation, no unresolved SEC staff comments and effective disclosure controls and internal control over financial reporting. KPMG issued unqualified audit opinions.
- Future accounting changes under the expected credit loss, revenue recognition, leases and financial instruments standards could affect reporting, with the filing stating that the potential effect of several standards was still being evaluated.
Important Facts for Investors to Verify
- Whether elevated loan growth continues without a further increase in nonperforming assets, charge-offs or loan-loss provisions.
- The sustainability of net interest margin amid higher deposit and borrowing costs and changing interest rates.
- The funding implications of $660.0 million of short-term borrowings and continued reliance on FHLB availability.
- The performance and collateral coverage of commercial real estate, commercial construction and acquired Integrity loan relationships.
- The recurring nature of the $2.1 million credit-card sale gain and $1.0 million pension curtailment gain, which benefited 2016 results.
- The potential effect of future regulatory capital requirements, accounting changes and the company’s $291.7 million goodwill balance.