S&T Bancorp, Inc. — 2018 Form 10-K Summary
Business context and reporting period
S&T Bancorp, Inc. is a Pennsylvania-based bank holding company whose principal subsidiary, S&T Bank, provides commercial and consumer banking, wealth management, brokerage, trust, mortgage and insurance-related services in Pennsylvania, Ohio and New York. The filing covers the fiscal year ended December 31, 2018; fourth-quarter information is included where disclosed.
At year-end, the company reported approximately $7.3 billion of assets, $5.9 billion of portfolio loans, $5.7 billion of deposits and $935.8 million of shareholders’ equity. Wealth management assets under administration were $1.8 billion.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net income | $105.3 million | $73.0 million | 44.4% increase |
| Diluted EPS | $3.01 | $2.09 | 43.9% increase |
| Net interest income | $234.4 million | $225.7 million | 3.9% increase |
| Net interest margin, FTE | 3.64% | 3.56% | 8 basis-point increase |
| Noninterest income | $49.2 million | $55.5 million | 11.3% decrease |
| Noninterest expense | $145.4 million | $147.9 million | 1.7% decrease |
| Provision for loan losses | $15.0 million | $13.9 million | 8.0% increase |
| Effective tax rate | 14.5% | 38.9% | Lower primarily from tax reform |
| Return on average assets | 1.50% | 1.03% | Improved |
| Return on average equity | 11.60% | 8.37% | Improved |
| Efficiency ratio, non-GAAP | 50.60% | 51.77% | Improved |
Fourth-quarter 2018 net income available to common shareholders was $26.9 million, or $0.77 diluted EPS, compared with $9.3 million, or $0.27 diluted EPS, in fourth-quarter 2017. Fourth-quarter 2018 included $2.7 million of provision for loan losses and $5.0 million of income tax expense.
Net cash provided by operating activities was $128.0 million. Investing activities used $202.0 million, primarily because of net loan growth of $207.2 million. Financing activities provided $112.3 million. Cash and cash equivalents increased to $155.5 million from $117.2 million.
Balance sheet, debt and liquidity
- Total assets increased 2.7% to $7.25 billion, while portfolio loans increased 3.2% to $5.95 billion.
- Commercial loans represented 78.6% of portfolio loans, including commercial real estate of $2.92 billion, commercial and industrial loans of $1.49 billion and commercial construction loans of $257.2 million.
- Deposits increased 4.5% to $5.67 billion. Growth was concentrated in money market deposits, which increased $297.9 million, partly reflecting migration from other deposit categories.
- Total borrowings declined 11.5% to $604.3 million. Short-term borrowings were $470.0 million, long-term borrowings were $70.3 million and junior subordinated debt securities were $45.6 million.
- The company reported $529 million of highly liquid assets, equal to 7.3% of total assets, and approximately $1.8 billion of remaining borrowing availability with the Federal Home Loan Bank of Pittsburgh.
- Regulatory capital remained strong. S&T’s leverage ratio was 10.05%, common equity tier 1 ratio was 11.38%, tier 1 risk-based capital ratio was 11.72% and total risk-based capital ratio was 13.21%. S&T Bank was classified as well-capitalized.
Material changes versus the prior comparable period
- Net income benefited from higher net interest income, lower operating expenses and a substantially lower tax rate. The 2017 comparison was adversely affected by a $13.4 million non-cash deferred-tax-asset remeasurement charge resulting from the Tax Cuts and Jobs Act.
- Interest income increased with higher short-term interest rates, but interest expense also rose materially as deposit and borrowing costs increased.
- Noninterest income declined because of the absence of $3.0 million of 2017 securities gains, lower insurance income following the insurance transaction and the absence of certain 2017 one-time gains.
- On January 1, 2018, S&T sold a 70% majority interest in S&T-Evergreen Insurance, LLC, deconsolidated the business, retained a 30% partnership interest and recognized a $1.9 million gain.
- Asset quality weakened. Nonperforming loans increased to $46.1 million, or 0.77% of total loans, from $23.9 million, or 0.42%. Nonperforming assets increased to $49.2 million from $24.4 million.
- The allowance for loan losses increased to $61.0 million, or 1.03% of portfolio loans, from $56.4 million, or 0.98%.
- Shareholders’ equity increased 5.9% to $935.8 million, reflecting net income partly offset by $34.5 million of dividends and $12.3 million of share repurchases.
Guidance, outlook, risks and unusual items
Management did not provide specific quantitative earnings or revenue guidance in the filing. Management stated that its focus remains organic loan and deposit growth, fee-income opportunities, expense control and asset-quality monitoring, while continuing to evaluate acquisitions.
- Credit risk is a principal concern because 79% of loans were commercial and 53% of total loans were commercial real estate and construction loans. Commercial substandard loans increased to $181.2 million from $70.7 million.
- 2018 included a $5.2 million charge-off associated with alleged fraudulent activity by executives of a commercial borrower and a $2.4 million charge-off on a commercial construction loan.
- Interest-rate risk is material. Management describes the balance sheet as asset-sensitive; a 100-basis-point rate increase was estimated to raise pretax net interest income by 2.2% over 1–12 months, while a 100-basis-point decrease was estimated to reduce it by 3.8%.
- The securities portfolio had a $5.1 million net unrealized loss at year-end, compared with a $1.7 million net unrealized gain at year-end 2017. Management concluded that no other-than-temporary impairment was required.
- The company relies primarily on core deposits and has exposure to deposit pricing, brokered deposits, Federal Home Loan Bank funding and collateral availability.
- Cybersecurity, third-party technology providers, regulatory change, competition, regional economic conditions, commercial real estate values and litigation remain material risks.
- A material weakness in internal control over financial reporting identified in 2017 related to inconsistent loan risk-weighting assessments was reported as remediated as of September 30, 2018. Management and Ernst & Young concluded that internal control over financial reporting was effective as of December 31, 2018.
- The company adopted several accounting standards in 2018. The future current expected credit loss model was not yet adopted and its ultimate impact remained under evaluation. The company expected the 2019 lease standard to add approximately $34 million of right-of-use assets and corresponding liabilities.
Most important facts for investors to verify
- Whether the increase in nonperforming loans, substandard loans and impaired commercial credits persists or leads to higher provisions and charge-offs.
- The concentration and performance of commercial real estate and construction loans, including collateral values and borrower cash flows.
- The sustainability of the 2018 tax rate and the extent to which 2018 earnings benefited from tax reform, tax credits and other tax-exempt items.
- Deposit pricing, brokered-deposit reliance and the effect of higher interest rates on net interest margin and funding costs.
- The financial contribution and future economics of the retained 30% insurance partnership interest.
- Liquidity availability under stress, including access to Federal Home Loan Bank funding and the value of pledged collateral.
- Progress under the $50 million share-repurchase authorization, under which $37.7 million remained available at year-end.
- Implementation effects of the current expected credit loss and lease accounting standards, as well as continued effectiveness of internal controls.