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EX-31.1 - EX-31.1 - S&T BANCORP INCexhibit311q32014.htm
EX-32 - EX-32 - S&T BANCORP INCexhibit32q32014.htm
EX-31.2 - EX-31.2 - S&T BANCORP INCexhibit312q32014.htm

                                            
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 ______________________________________
FORM 10-Q
______________________________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            To                
Commission file number 0-12508
______________________________________ 
S&T BANCORP, INC.
(Exact name of registrant as specified in its charter)
______________________________________ 
Pennsylvania
 
25-1434426
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
800 Philadelphia Street, Indiana, PA
 
15701
(Address of principal executive offices)
 
(zip code)
800-325-2265
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
¨
Accelerated filer
x
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
Common Stock, $2.50 Par Value - 29,796,397 shares as of October 31, 2014



INDEX
S&T BANCORP, INC. AND SUBSIDIARIES
 
 
 
Page No.    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




2


S&T BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
September 30, 2014
December 31, 2013
(dollars in thousands, except share data)
(Unaudited)
(Audited)
ASSETS
 
 
Cash and due from banks, including interest-bearing deposits of $92,443 and $53,594 at September 30, 2014 and December 31, 2013, respectively
$
143,831

$
108,356

Securities available-for-sale, at fair value
615,657

509,425

Loans held for sale
3,126

2,136

Portfolio loans, net of unearned income
3,801,189

3,566,199

Allowance for loan losses
(47,316
)
(46,255
)
Portfolio loans, net
3,753,873

3,519,944

Bank owned life insurance
61,794

60,480

Premises and equipment, net
37,240

36,615

Federal Home Loan Bank and other restricted stock, at cost
18,995

13,629

Goodwill
175,820

175,820

Other intangible assets, net
2,886

3,759

Other assets
93,522

103,026

Total Assets
$
4,906,744

$
4,533,190

LIABILITIES
 
 
Deposits:
 
 
Noninterest-bearing demand
$
1,077,505

$
992,779

Interest-bearing demand
336,720

312,790

Money market
295,559

281,403

Savings
1,048,175

994,805

Certificates of deposit
1,143,142

1,090,531

Total Deposits
3,901,101

3,672,308

Securities sold under repurchase agreements
23,084

33,847

Short-term borrowings
265,000

140,000

Long-term borrowings
20,042

21,810

Junior subordinated debt securities
45,619

45,619

Other liabilities
46,001

48,300

Total Liabilities
4,300,847

3,961,884

SHAREHOLDERS’ EQUITY
 
 
Common stock ($2.50 par value)
Authorized—50,000,000 shares
Issued—31,197,365 shares at September 30, 2014 and December 31, 2013
Outstanding—29,796,397 shares at September 30, 2014 and 29,737,725 shares at December 31, 2013
77,993

77,993

Additional paid-in capital
78,816

78,140

Retained earnings
494,909

468,158

Accumulated other comprehensive income (loss)
(7,172
)
(12,694
)
Treasury stock 1,400,968 shares at September 30, 2014 and 1,459,640 shares at December 31, 2013, (at cost)
(38,649
)
(40,291
)
Total Shareholders’ Equity
605,897

571,306

Total Liabilities and Shareholders’ Equity
$
4,906,744

$
4,533,190

See Notes to Consolidated Financial Statements

3


S&T BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands, except per share data)
2014
2013
 
2014
2013
INTEREST INCOME
 
 
 
 
 
Loans, including fees
$
37,233

$
35,733

 
$
109,496

$
106,543

Investment Securities:
 
 
 
 
 
Taxable
2,313

1,889

 
6,480

5,631

Tax-exempt
964

865

 
2,872

2,513

Dividends
95

94

 
294

290

Total Interest Income
40,605

38,581

 
119,142

114,977

INTEREST EXPENSE
 
 
 
 
 
Deposits
2,480

2,717

 
7,466

8,870

Borrowings and junior subordinated debt securities
596

590

 
1,701

2,568

Total Interest Expense
3,076

3,307

 
9,167

11,438

NET INTEREST INCOME
37,529

35,274

 
109,975

103,539

Provision for loan losses
1,454

3,419

 
608

6,749

Net Interest Income After Provision for Loan Losses
36,075

31,855

 
109,367

96,790

NONINTEREST INCOME
 
 
 
 
 
Securities gains, net

3

 
41

5

Debit and credit card fees
2,909

2,764

 
8,135

8,365

Service charges on deposit accounts
2,799

2,801

 
7,882

7,744

Wealth management fees
2,756

2,747

 
8,548

8,143

Insurance fees
1,722

1,738

 
4,824

5,156

Mortgage banking
270

265

 
666

1,658

Gain on sale of merchant card servicing business


 

3,093

Other
1,475

2,224

 
5,022

6,051

Total Noninterest Income
11,931

12,542

 
35,118

40,215

NONINTEREST EXPENSE
 
 
 
 
 
Salaries and employee benefits
14,823

14,910

 
45,971

45,701

Data processing
2,152

2,137

 
6,466

6,938

Net occupancy
2,004

1,910

 
6,218

6,037

Furniture and equipment
1,308

1,084

 
3,856

3,623

Professional services and legal
950

996

 
2,488

3,141

Other taxes
839

1,039

 
2,363

2,953

Marketing
757

607

 
2,335

2,088

FDIC insurance
607

629

 
1,817

2,112

Other
5,000

4,631

 
16,005

15,352

Total Noninterest Expense
28,440

27,943

 
87,519

87,945

Income Before Taxes
19,566

16,454

 
56,966

49,060

Provision for income taxes
4,906

4,207

 
13,552

10,380

Net Income
$
14,660

$
12,247

 
$
43,414

$
38,680

Earnings per share—basic
$
0.49

$
0.41

 
$
1.46

$
1.30

Earnings per share—diluted
$
0.49

$
0.41

 
$
1.46

$
1.30

Dividends declared per share
$
0.17

$
0.15

 
$
0.50

$
0.45

Comprehensive Income
$
13,515

$
12,874

 
$
48,936

$
31,094

See Notes to Consolidated Financial Statements

4


S&T BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)

(dollars in thousands, except shares and per share data)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Balance at January 1, 2013
$
77,993

$
77,458

$
436,039

$
(13,582
)
$
(40,486
)
$
537,422

Net income for nine months ended September 30, 2013


38,680



38,680

Other comprehensive income (loss), net of tax



(7,586
)

(7,586
)
Cash dividends declared ($0.45 per share)


(13,379
)


(13,379
)
Treasury stock issued for restricted awards (22,189 shares, net of 16,093 forfeitures)


(296
)

210

(86
)
Recognition of restricted stock compensation expense

424




424

Tax expense from stock-based compensation

(47
)



(47
)
Balance at September 30, 2013
$
77,993

$
77,835

$
461,044

$
(21,168
)
$
(40,276
)
$
555,428

 
 
 
 
 
 
 
Balance at January 1, 2014
$
77,993

$
78,140

$
468,158

$
(12,694
)
$
(40,291
)
$
571,306

Net income for nine months ended September 30, 2014


43,414



43,414

Other comprehensive income (loss), net of tax



5,522


5,522

Cash dividends declared ($0.50 per share)


(14,858
)


(14,858
)
Treasury stock issued for restricted awards (80,455 shares, net of 21,783 forfeitures)


(1,805
)

1,642

(163
)
Recognition of restricted stock compensation expense

676




676

Tax expense from stock-based compensation






Balance at September 30, 2014
$
77,993

$
78,816

$
494,909

$
(7,172
)
$
(38,649
)
$
605,897

See Notes to Consolidated Financial Statements


5


S&T BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Nine Months Ended September 30,
(dollars in thousands)
2014
2013
OPERATING ACTIVITIES
 
 
Net income
$
43,414

$
38,680

Adjustments to reconcile net income to net cash provided by operating activities:


Provision for loan losses
608

6,749

Provision for unfunded loan commitments
(262
)
143

Depreciation and amortization
3,510

4,320

Net amortization of discounts and premiums
2,800

2,757

Stock-based compensation expense
594

508

Securities gains, net
(41
)
(5
)
Net gain on sale of merchant card servicing business

(3,093
)
Tax expense from stock-based compensation

47

Mortgage loans originated for sale
(28,652
)
(55,702
)
Proceeds from the sale of loans
27,894

77,540

Gain on the sale of loans, net
(232
)
(776
)
Net increase in interest receivable
(604
)
(21
)
Net decrease in interest payable
(423
)
(2,230
)
Net decrease in other assets
10,749

21,543

Net decrease in other liabilities
(897
)
(22,543
)
Net Cash Provided by Operating Activities
58,458

67,917

INVESTING ACTIVITIES
 
 
Purchases of securities available-for-sale
(149,268
)
(102,419
)
Proceeds from maturities, prepayments and calls of securities available-for-sale
46,662

50,177

Proceeds from sales of securities available-for-sale
1,418

94

Net (payments for) proceeds from Federal Home Loan Bank stock
(5,366
)
265

Net increase in loans
(244,836
)
(177,433
)
Proceeds from sale of loans not originated for resale
5,408


Purchases of premises and equipment
(3,220
)
(2,599
)
Proceeds from the sale of premises and equipment
98

625

Proceeds from the sale of merchant card servicing business

4,750

Net Cash Used in Investing Activities
(349,104
)
(226,540
)
FINANCING ACTIVITIES
 
 
Net increase in core deposits
176,182

41,570

Net increase in certificates of deposit
52,491

13,785

Net decrease in securities sold under repurchase agreements
(10,763
)
(29,292
)
Net increase in short-term borrowings
125,000

100,000

Repayments of long-term borrowings
(1,768
)
(11,711
)
Repayment of junior subordinated debt

(45,000
)
Treasury shares issued-net
(163
)
(86
)
Cash dividends paid to common shareholders
(14,858
)
(13,379
)
Tax expense from stock-based compensation

(47
)
Net Cash Provided by Financing Activities
326,121

55,840

Net increase (decrease) in cash and cash equivalents
35,475

(102,783
)
Cash and cash equivalents at beginning of period
108,356

337,711

Cash and Cash Equivalents at End of Period
$
143,831

$
234,928

Supplemental Disclosures
 
 
Loans transferred to held for sale
$
1,300

$

Interest paid
9,590

13,668

Income taxes paid, net of refunds
12,900

8,130

Transfers of loans to other real estate owned
$
430

$
493

See Notes to Consolidated Financial Statements

6


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. BASIS OF PRESENTATION
Principles of Consolidation
The interim Consolidated Financial Statements include the accounts of S&T Bancorp, Inc., or S&T, and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Investments of 20 percent to 50 percent of the outstanding common stock of investees are accounted for using the equity method of accounting.
Basis of Presentation
The accompanying unaudited interim Consolidated Financial Statements of S&T have been prepared in accordance with generally accepted accounting principles, or GAAP, in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission, or SEC, on February 21, 2014. In the opinion of management, the accompanying interim financial information reflects all adjustments, including normal recurring adjustments, necessary to present fairly our financial position and the results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.
Reclassification
Certain amounts in the prior periods’ financial statements and footnotes have been reclassified to conform to the current period’s presentation. The reclassifications had no significant effect on our results of operations or financial condition.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

Recently Adopted Accounting Standards Updates, or ASU
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Tax Credit Carryforward Exists
In July 2013, the Financial Accounting Standards Board (FASB) issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Tax Credit Carryforward Exists. The ASU requires that entities should present an unrecognized tax benefit as a reduction of the deferred tax asset for a net operating loss, or NOL, or similar tax loss or tax credit carry forward rather than as a liability when the uncertain tax position would reduce the NOL or other carry forward under the tax law. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this ASU had no impact on our results of operations or financial position.

Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date
In February 2013, the FASB issued ASU No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. The ASU requires the measurement of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement with its co-obligors as well as any additional amount that the entity expects to pay on behalf of its co-obligors. The new standard is effective retrospectively for fiscal years and interim periods within those years, beginning after December 15, 2013, and early adoption is permitted. The adoption of this ASU had no impact on our results of operations or financial position.







7


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 1. BASIS OF PRESENTATION – continued


Recently Issued Accounting Standards Updates not yet Adopted

Share-Based Payment Awards with Performance Targets
In June 2014, the FASB issued ASU No. 2014-12, Share-Based Payment Awards with Performance Targets. The main provisions of ASU 2014-12 require that a performance target included in a share-based payment award that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Therefore, under the existing stock compensation guidance in ASC Topic 718, the performance target should not be reflected in estimating the grant-date fair value of the award. The standard is effective for annual periods and interim periods beginning after December 15, 2015. We do not expect that this ASU will have a material impact on our results of operations or financial position.

Repurchase-To-Maturity Transactions, Repurchase Financings and New Disclosures
In June 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings and New Disclosures to change the accounting for repurchase-to-maturity transactions and certain linked repurchase financings. This will result in accounting for both types of arrangements as secured borrowings on the balance sheet and require new disclosures to (i) increase transparency about the types of collateral pledged in secured borrowing transactions and (ii) enable users to better understand transactions in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. The disclosure for repurchase agreements, securities lending transactions and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. All other accounting and disclosure amendments in the ASU are effective for the first interim or annual period beginning after December 15, 2014. Earlier application for a public business entity is prohibited. We do not expect that this ASU will have a material impact on our results of operations or financial position.

Revenues from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, Revenues from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2016. The provisions do not apply to lease contracts, insurance contracts, financial instruments and other contractual rights or obligations (e.g. receivables, debt and equity securities, liabilities, debt, derivatives transfers, and servicing, etc.), guarantees, or non-monetary exchanges between entities. We are currently evaluating the impact of the adoption of this pronouncement on our consolidated financial statements.

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The guidance applies to all entities that dispose of components. It will significantly change current practices for assessing discontinued operations and affect an entity’s income and earnings per share from continuing operations. An entity is required to reclassify assets and liabilities of a discontinued operation that are classified as held for sale or disposed of in the current period for all comparative periods presented. The ASU requires that an entity present in the statement of cash flows or disclose in a note either total operating and investing cash flows for discontinued operations, or depreciation, amortization, capital expenditures and significant operating and investing noncash items related to discontinued operations. Additional disclosures are required when an entity retains significant continuing involvement with a discontinued operation after its disposal, including the amount of cash flows to and from a discontinued operation. The new standard applies prospectively after the effective date of December 15, 2014, and early adoption is permitted. We do not expect that this ASU will have a material impact on our results of operations or financial position.

8


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 1. BASIS OF PRESENTATION – continued


Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure
In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The ASU clarifies that an in substance repossession or foreclosure has occurred and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure. Interim and annual disclosure is required of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The new standard is effective using either the modified retrospective transition method or a prospective transition method for fiscal years and interim periods within those years, beginning after December 15, 2014, and early adoption is permitted. We do not expect that this ASU will have a material impact on our results of operations or financial position.

Accounting for Investments in Qualified Affordable Housing Projects
In January 2014, the FASB issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. The ASU permits reporting entities to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The proportional amortization method permits the amortization of the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The new standard is effective retrospectively for fiscal years and interim periods within those years, beginning after December 15, 2014, and early adoption is permitted. We do not expect that this ASU will have a material impact on our results of operations or financial position.


9


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 2. EARNINGS PER SHARE
The following table reconciles the numerators and denominators of basic earnings per share with that of diluted earnings per share for the periods presented:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands, except shares and per share data)
2014
 
2013
 
2014
 
2013
Numerator for Earnings per Share—Basic:

 

 

 

Net income
$
14,660

 
$
12,247

 
$
43,414

 
$
38,680

Less: Income allocated to participating shares
51

 
33

 
115

 
114

Net Income Allocated to Shareholders
$
14,609

 
$
12,214

 
$
43,299

 
$
38,566

 
 
 
 
 
 
 
 
Numerator for Earnings per Share—Diluted:

 

 

 

Net income
14,660

 
12,247

 
$
43,414

 
$
38,680

Net Income Available to Shareholders
$
14,660

 
$
12,247

 
$
43,414

 
$
38,680

 
 
 
 
 
 
 
 
Denominators for Earnings per Share:

 

 

 

Weighted Average Shares Outstanding—Basic
29,693,417

 
29,658,065

 
29,679,623

 
29,644,646

Add: Potentially dilutive shares
21,195

 
27,535

 
25,732

 
35,132

Denominator for Treasury Stock Method—Diluted
29,714,612

 
29,685,600

 
29,705,355

 
29,679,778

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding—Basic
29,693,417

 
29,658,065

 
29,679,623

 
29,644,646

Add: Average participating shares outstanding
102,980

 
80,240

 
78,835

 
87,725

Denominator for Two-Class Method—Diluted
29,796,397

 
29,738,305

 
29,758,458

 
29,732,371

Earnings per share—basic
$
0.49

 
$
0.41

 
$
1.46

 
$
1.30

Earnings per share—diluted
$
0.49

 
$
0.41

 
$
1.46

 
$
1.30

Warrants considered anti-dilutive excluded from potentially dilutive shares
517,012

 
517,012

 
517,012

 
517,012

Stock options considered anti-dilutive excluded from potentially dilutive shares
427,362

 
612,768

 
428,233

 
632,481

Restricted stock considered anti-dilutive excluded from potentially dilutive shares
81,785

 
52,705

 
53,103

 
52,593


10


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 3. FAIR VALUE MEASUREMENT
We use fair value measurements when recording and disclosing certain financial assets and liabilities. Securities available-for-sale, trading assets and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans, other real estate owned, or OREO, mortgage servicing rights, or MSRs, and certain other assets.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which is developed, based on market data we have obtained from independent sources. Unobservable inputs reflect our estimate of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.
The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.
Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.
Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our policy is to recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred.
The following are descriptions of the valuation methodologies that we use for financial instruments recorded at fair value on either a recurring or nonrecurring basis.
Recurring Basis
Securities Available-for-Sale
Securities available-for-sale include both debt and equity securities. We obtain fair values for debt securities from a third-party pricing service which utilizes several sources for valuing fixed-income securities. We validate prices received from our pricing service through comparison to a secondary pricing service and broker quotes. We review the methodologies of the pricing service which provides us with a sufficient understanding of the valuation models, assumptions, inputs and pricing to reasonably measure the fair value of our debt securities. The market valuation sources for debt securities include observable inputs rather than significant unobservable inputs and are classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid and other market information. Generally, the methodologies include broker quotes, proprietary models and vast descriptive terms and conditions databases, as well as extensive quality control programs.
Marketable equity securities that have an active, quotable market are classified as Level 1. Marketable equity securities that are quotable, but are thinly traded or inactive, are classified as Level 2. Marketable equity securities that are not readily traded and do not have a quotable market are classified as Level 3.
Trading Assets
We use quoted market prices to determine the fair value of our trading assets. Our trading assets are held in a Rabbi Trust under a deferred compensation plan and are invested in readily quoted mutual funds. Accordingly, these assets are classified as Level 1.

11


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 3. FAIR VALUE MEASUREMENT – continued

Derivative Financial Instruments
We use derivative instruments including interest rate swaps for commercial loans with our customers and we sell mortgage loans in the secondary market and enter into interest rate lock commitments. We calculate the fair value for derivatives using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market based inputs, such as interest rate curves and implied volatilities. Accordingly, derivatives are classified as Level 2.
We incorporate credit valuation adjustments into the valuation models to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in calculating fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements and collateral postings.
Nonrecurring Basis
Loans Held for Sale
Loans held for sale consist of 1-4 family residential loans originated for sale in the secondary market and, from time to time, certain loans transferred from the loan portfolio to loans held for sale, all of which are carried at the lower of cost or fair value. The fair value of 1-4 family residential loans is based on the principal or most advantageous market currently offered for similar loans using observable market data. The fair value of the loans transferred from the loan portfolio is based on the amounts offered for these loans in currently pending sales transactions. Loans held for sale carried at fair value are classified as Level 3.
Impaired Loans
Impaired loans are carried at the lower of carrying value or fair value. Fair value is determined as the recorded investment balance less any specific reserve. We establish a specific reserve based on the following three impairment methods: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate, 2) the loan’s observable market price or 3) the fair value of the collateral less estimated selling costs when the loan is collateral dependent and we expect to liquidate the collateral. However, if repayment is expected to come from the operation of the collateral, rather than liquidation, then we do not consider estimated selling costs in determining the fair value of the collateral. Collateral values are generally based upon appraisals by approved, independent state certified appraisers.
Appraisals may be discounted based on our historical knowledge of the type of property and market area, changes in market conditions from the time of appraisal or our knowledge of the borrower and the borrower’s business. Impaired loans carried at fair value are classified as Level 3.
OREO and Other Repossessed Assets
OREO and other repossessed assets obtained in partial or total satisfaction of a loan are recorded at the lower of recorded investment in the loan or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Like impaired loans, appraisals on OREO may be discounted based on our historical knowledge of the type of property and market area, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets are classified as Level 3.
Mortgage Servicing Rights
The fair value of MSRs is determined by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rate of mortgage loan prepayments is the most significant factor affecting the value of MSRs. MSRs are considered impaired if the carrying value exceeds fair value. The valuation model includes significant unobservable inputs; therefore, MSRs are classified as Level 3.

12


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 3. FAIR VALUE MEASUREMENT – continued

Other Assets
We measure certain other assets at fair value on a nonrecurring basis. Fair value is based on the application of lower of cost or fair value accounting, or write-downs of individual assets. Valuation methodologies used to measure fair value are consistent with overall principles of fair value accounting and consistent with those described above.
Financial Instruments
In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and willing seller engaged in an exchange transaction. Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities with respect to such financial instruments. For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments.
Cash and Cash Equivalents and Other Short-Term Assets
The carrying amounts reported in the Consolidated Balance Sheets for cash and due from banks, including interest-bearing deposits, approximate fair value.
Loans
The fair value of variable rate performing loans that may reprice frequently at short-term market rates is based on carrying values adjusted for credit risk. The fair value of variable rate performing loans that reprice at intervals of one year or longer, such as adjustable rate mortgage products, is estimated using discounted cash flow analyses that utilize interest rates currently being offered for similar loans and adjusted for credit risk. The fair value of fixed rate performing loans is estimated using discounted cash flow analyses that utilize interest rates currently being offered for similar loans and adjusted for credit risk. The fair value of nonperforming loans is based on their carrying values less any specific reserve. The carrying amount of accrued interest approximates fair value.
Bank Owned Life Insurance
Fair value approximates net cash surrender value.
Deposits
The fair values disclosed for deposits without defined maturities (e.g., noninterest and interest-bearing demand, money market and savings accounts) are by definition equal to the amounts payable on demand. The carrying amounts for variable rate, fixed-term time deposits approximate their fair values. Estimated fair values for fixed rate and other time deposits are based on discounted cash flow analysis using interest rates currently offered for time deposits with similar terms. The carrying amount of accrued interest approximates fair value.
Short-Term Borrowings
The carrying amounts of securities sold under repurchase agreements, federal funds purchased and other short-term borrowings approximate their fair values.
Long-Term Borrowings
The fair values disclosed for fixed rate long-term borrowings are determined by discounting their contractual cash flows using current interest rates for long-term borrowings of similar remaining maturities. The carrying amounts of variable rate long-term borrowings approximate their fair values.
Junior Subordinated Debt Securities
The variable rate junior subordinated debt securities reprice quarterly; therefore, the fair values are based on the carrying values.

13


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 3. FAIR VALUE MEASUREMENT – continued

Loan Commitments and Standby Letters of Credit
Off-balance sheet financial instruments consist of commitments to extend credit and letters of credit. Except for interest rate lock commitments, estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.
Other
Estimates of fair value are not made for items that are not defined as financial instruments, including such items as our core deposit intangibles and the value of our trust operations.
The following tables present our assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy level at September 30, 2014 and December 31, 2013. There were no transfers between Level 1 and Level 2 for items measured at fair value on a recurring basis during the periods presented.
 
September 30, 2014
(dollars in thousands)
Level 1
Level 2
Level 3
Total
ASSETS
 
 
 
 
Securities available-for-sale:
 
 
 
 
U.S. Treasury securities
$

$
14,803

$

$
14,803

Obligations of U.S. government corporations and agencies

263,406


263,406

Collateralized mortgage obligations of U.S. government corporations and agencies

111,053


111,053

Residential mortgage-backed securities of U.S. government corporations and agencies

44,581


44,581

Commercial mortgage-backed securities of U.S. government corporations and agencies

39,380


39,380

Obligations of states and political subdivisions

133,945


133,945

Marketable equity securities
179

8,310


8,489

Total securities available-for-sale
179

615,478


615,657

Trading securities held in a Rabbi Trust
3,286



3,286

Total securities
3,465

615,478


618,943

Derivative financial assets:
 
 
 
 
Interest rate swaps

12,125


12,125

Interest rate lock commitments

187


187

Forward sale contracts




Total Assets
$
3,465

$
627,790

$

$
631,255

LIABILITIES
 
 
 
 
Derivative financial liabilities:
 
 
 
 
Interest rate swaps
$

$
12,103

$

$
12,103

Forward sale contracts

10


10

Total Liabilities
$

$
12,113

$

$
12,113


14


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 3. FAIR VALUE MEASUREMENT – continued

 
December 31, 2013
(dollars in thousands)
Level 1
Level 2
Level 3
Total
ASSETS
 
 
 
 
Securities available-for-sale:
 
 
 
 
U.S. Treasury securities
$

$

$

$

Obligations of U.S. government corporations and agencies

234,751


234,751

Collateralized mortgage obligations of U.S. government corporations and agencies

63,774


63,774

Residential mortgage-backed securities of U.S. government corporations and agencies

48,669


48,669

Commercial mortgage-backed securities of U.S. government corporations and agencies

39,052


39,052

Obligations of states and political subdivisions

114,264


114,264

Marketable equity securities
202

8,713


8,915

Total securities available-for-sale
202

509,223


509,425

Trading securities held in a Rabbi Trust
2,864



2,864

Total securities
3,066

509,223


512,289

Derivative financial assets:
 
 
 
 
Interest rate swaps

13,698


13,698

Interest rate lock commitments

85


85

Forward sale contracts

34


34

Total Assets
$
3,066

$
523,040

$

$
526,106

LIABILITIES
 
 
 
 
Derivative financial liabilities:
 
 
 
 
Interest rate swaps
$

$
13,647

$

$
13,647

Total Liabilities
$

$
13,647

$

$
13,647

We classify financial instruments as Level 3 when valuation models are used because significant inputs are not observable in the market. The following table presents the changes in assets measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine the fair value:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2014
2013
 
2014
2013
Balance at beginning of period
$

$

 
$

$
300

Total gains included in other comprehensive income(1)


 

44

Net purchases, sales, issuances and settlements


 


Transfers out of Level 3


 

(344
)
Balance at end of period
$

$

 
$

$

(1) Changes in estimated fair value of available-for-sale investments are recorded in accumulated other comprehensive income (loss), while realized gains and losses from sales are recorded in security gains (losses), net in the Consolidated Statements of Comprehensive Income.

We may be required to measure certain assets and liabilities on a nonrecurring basis. The following table presents our assets that were measured at fair value on a nonrecurring basis by the fair value hierarchy level at September 30, 2014 and December 31, 2013. There were no liabilities measured at fair value on a nonrecurring basis during these periods.

15


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 3. FAIR VALUE MEASUREMENT – continued

 
September 30, 2014
 
December 31, 2013
(dollars in thousands)
Level 1
Level 2
Level 3
Total
 
Level 1
Level 2
Level 3
Total
ASSETS
 
 
 
 
 
 
 
 
 
Loans held for sale
$

$

$

$

 
$

$

$
1,516

$
1,516

Impaired loans


13,331

13,331

 


19,197

19,197

Other real estate owned


74

74

 


317

317

Mortgage servicing rights


2,977

2,977

 


1,025

1,025

Total Assets
$

$

$
16,382

$
16,382

 
$

$

$
22,055

$
22,055


The carrying values and fair values of our financial instruments at September 30, 2014 and December 31, 2013 are presented in the following tables:
 
Carrying
Value(1) 
Fair Value Measurements at September 30, 2014
(dollars in thousands)
Total
Level 1
Level 2
Level 3
ASSETS
 
 
 
 
 
Cash and due from banks, including interest-bearing deposits
$
143,831

$
143,831

$
143,831

$

$

Securities available-for-sale
615,657

615,657

179

615,478


Loans held for sale
3,126

3,167



3,167

Portfolio loans, net of unearned income
3,801,189

3,764,172



3,764,172

Bank owned life insurance
61,794

61,794


61,794


FHLB and other restricted stock
18,995

18,995



18,995

Trading securities held in a Rabbi Trust
3,286

3,286

3,286



Mortgage servicing rights
2,792

2,977



2,977

Interest rate swaps
12,125

12,125


12,125


Interest rate lock commitments
187

187


187


LIABILITIES
 

 
 
 
Deposits
$
3,901,101

$
3,903,211

$

$

$
3,903,211

Securities sold under repurchase agreements
23,084

23,084



23,084

Short-term borrowings
265,000

265,000



265,000

Long-term borrowings
20,042

21,022



21,022

Junior subordinated debt securities
45,619

45,619



45,619

Interest rate swaps
12,103

12,103


12,103


Forward sale contracts
10

10


10

(1) As reported in the Consolidated Balance Sheets
 
 
 
 
 

16


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 3. FAIR VALUE MEASUREMENT – continued

 
Carrying
Value(1)
Fair Value Measurements at December 31, 2013
(dollars in thousands)
Total
Level 1
Level 2
Level 3
ASSETS
 
 
 
 
 
Cash and due from banks, including interest-bearing deposits
$
108,356

$
108,356

$
108,356

$

$

Securities available-for-sale
509,425

509,425

202

509,223


Loans held for sale
2,136

2,139



2,139

Portfolio loans, net of unearned income
3,566,199

3,538,072



3,538,072

Bank owned life insurance
60,480

60,480


60,480


FHLB and other restricted stock
13,629

13,629



13,629

Trading securities held in a Rabbi Trust
2,864

2,864

2,864



Mortgage servicing rights
2,919

3,143



3,143

Interest rate swaps
13,698

13,698


13,698


Interest rate lock commitments
85

85


85


Forward sale contracts
34

34


34


LIABILITIES
 
 
 
 
 
Deposits
$
3,672,308

$
3,673,624

$

$

$
3,673,624

Securities sold under repurchase agreements
33,847

33,847



33,847

Short-term borrowings
140,000

140,000



140,000

Long-term borrowings
21,810

22,924



22,924

Junior subordinated debt securities
45,619

45,619



45,619

Interest rate swaps
13,647

13,647


13,647


(1) As reported in the Consolidated Balance Sheets 
 
 
 
 
 

17


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 4. SECURITIES AVAILABLE-FOR-SALE
The following table indicates the composition of the securities available-for-sale portfolio as of the dates presented:
 
September 30, 2014
 
December 31, 2013
(dollars in thousands)
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

 
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

U.S. Treasury securities
$
14,863

$

$
(60
)
$
14,803

 
$

$

$

$

Obligations of U.S. government corporations and agencies
263,254

1,930

(1,778
)
263,406

 
235,181

2,151

(2,581
)
234,751

Collateralized mortgage obligations of U.S. government corporations and agencies
110,626

644

(217
)
111,053

 
63,776

601

(603
)
63,774

Residential mortgage-backed securities of U.S. government corporations and agencies
43,405

1,429

(253
)
44,581

 
47,934

1,420

(685
)
48,669

Commercial mortgage-backed securities of U.S. government corporations and agencies
39,967

80

(667
)
39,380

 
40,357


(1,305
)
39,052

Obligations of states and political subdivisions
129,133

4,952

(140
)
133,945

 
115,572

1,294

(2,602
)
114,264

Debt Securities
601,248

9,035

(3,115
)
607,168

 
502,820

5,466

(7,776
)
500,510

Marketable equity securities
7,579

910


8,489

 
7,579

1,336


8,915

Total
$
608,827

$
9,945

$
(3,115
)
$
615,657

 
$
510,399

$
6,802

$
(7,776
)
$
509,425


Realized gains and losses on the sale of securities are determined using the specific-identification method. The following table shows the composition of gross and net realized gains and losses for the periods presented:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2014
 
2013
 
2014
 
2013
Gross realized gains
$

 
$
3

 
$
41

 
$
5

Gross realized losses

 

 

 

Net Realized Gains
$

 
$
3

 
$
41

 
$
5



18


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 4. SECURITIES AVAILABLE-FOR-SALE – continued

The following tables indicate the fair value and the age of gross unrealized losses by investment category as of the dates presented:
 
September 30, 2014
 
Less Than 12 Months
 
12 Months or More
 
Total
(dollars in thousands)
Number of Securities
Fair Value
Unrealized
Losses
 
Number of Securities
Fair Value
Unrealized
Losses
 
Number of Securities
Fair Value
Unrealized
Losses
U.S. Treasury securities
3
$
14,803

$
(60
)
 
$

$

 
3
$
14,803

$
(60
)
Obligations of U.S. government corporations and agencies
9
83,654

(377
)
 
8
62,754

(1,401
)
 
17
146,408

(1,778
)
Collateralized mortgage obligations of U.S. government corporations and agencies
6
71,273

(217
)
 


 
6
71,273

(217
)
Residential mortgage-backed securities of U.S. government corporations and agencies


 
1
9,118

(253
)
 
1
9,118

(253
)
Commercial mortgage-backed securities of U.S. government corporations and agencies
1
9,927

(97
)
 
2
20,546

(570
)
 
3
30,473

(667
)
Obligations of states and political subdivisions
3
12,313

(3
)
 
2
10,715

(137
)
 
5
23,028

(140
)
Total Temporarily Impaired Securities
22
$
191,970

$
(754
)
 
13
$
103,133

$
(2,361
)
 
35
$
295,103

$
(3,115
)

19


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 4. SECURITIES AVAILABLE-FOR-SALE – continued

 
December 31, 2013
 
Less Than 12 Months
 
12 Months or More
 
Total
(dollars in thousands)
Number of Securities
Fair Value
Unrealized
Losses
 
Number of Securities
Fair Value
Unrealized
Losses
 
Number of Securities
Fair Value
Unrealized
Losses
U.S. Treasury securities
$

$

 
$

$

 
$

$

$

Obligations of U.S. government corporations and agencies
16
126,017

(2,581
)
 


 
16
126,017

(2,581
)
Collateralized mortgage obligations of U.S. government corporations and agencies
3
39,522

(603
)
 


 
3
39,522

(603
)
Residential mortgage-backed securities of U.S. government corporations and agencies
2
22,822

(685
)
 


 
2
22,822

(685
)
Commercial mortgage-backed securities of U.S. government corporations and agencies
4
39,052

(1,305
)
 


 
4
39,052

(1,305
)
Obligations of states and political subdivisions
16
47,529

(1,739
)
 
2
10,088

(863
)
 
18
57,617

(2,602
)
Debt Securities
41
274,942

(6,913
)
 
2
10,088

(863
)
 
43
285,030

(7,776
)
Marketable equity securities


 


 


Total Temporarily Impaired Securities
41
$
274,942

$
(6,913
)
 
2
$
10,088

$
(863
)
 
43
$
285,030

$
(7,776
)


We do not believe any individual unrealized loss as of September 30, 2014 represents an other than temporary impairment, or OTTI. As of September 30, 2014, the unrealized losses on 35 debt securities were attributable to changes in interest rates and not related to the credit quality of these securities. All debt securities are determined to be investment grade and are paying principal and interest according to the contractual terms of the security. There were no unrealized losses on marketable equity securities as of September 30, 2014. We do not intend to sell and it is not more likely than not that we will be required to sell any of the securities, referenced in the table above, in an unrealized loss position before recovery of their amortized cost.

20


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 4. SECURITIES AVAILABLE-FOR-SALE – continued

The following table displays net unrealized gains and losses, net of tax on securities available for sale included in accumulated other comprehensive income/(loss) for the periods presented:
 
September 30, 2014
 
December 31, 2013
(dollars in thousands)
Gross Unrealized Gains

Gross Unrealized Losses

Net Unrealized Gains/ (Losses)

 
Gross Unrealized Gains

Gross Unrealized Losses

Net Unrealized Gains/ (Losses)

Total unrealized gains/(losses) on securities available-for-sale
$
9,945

$
(3,115
)
$
6,830

 
$
6,802

$
(7,776
)
$
(974
)
Income tax expense/(benefit)
3,480

(1,090
)
2,390

 
2,381

(2,722
)
(341
)
Net unrealized gains/(losses), net of tax included in accumulated other comprehensive income/(loss)
$
6,465

$
(2,025
)
$
4,440

 
$
4,421

$
(5,054
)
$
(633
)
The amortized cost and fair value of securities available-for-sale at September 30, 2014, by contractual maturity, are included in the table below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
September 30, 2014
(dollars in thousands)
Amortized
Cost
 
Fair Value
Obligations of the U.S. Treasury and U.S. government corporations and agencies, and obligations of states and political subdivisions

 

Due in one year or less
$
20,713

 
$
20,936

Due after one year through five years
202,379

 
202,439

Due after five years through ten years
90,813

 
91,899

Due after ten years
93,345

 
96,880

 
407,250

 
412,154

Collateralized mortgage obligations of U.S. government corporations and agencies
110,626

 
111,053

Residential mortgage-backed securities of U.S. government corporations and agencies
43,405

 
44,581

Commercial mortgage-backed securities of U.S. government corporations and agencies
39,967

 
39,380

Debt Securities
601,248

 
607,168

Marketable equity securities
7,579

 
8,489

Total
$
608,827

 
$
615,657

At September 30, 2014 and December 31, 2013, securities with carrying values of $314.8 million and $243.2 million were pledged for various regulatory and legal requirements.


21


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 5. LOANS AND LOANS HELD FOR SALE
 Loans are presented net of unearned income of $2.0 million and $1.3 million at September 30, 2014 and December 31, 2013. The following table indicates the composition of the loans as of the dates presented:
(dollars in thousands)
September 30, 2014
 
December 31, 2013
Commercial

 

Commercial real estate
$
1,691,649

 
$
1,607,756

Commercial and industrial
946,366

 
842,449

Commercial construction
183,509

 
143,675

Total Commercial Loans
2,821,524

 
2,593,880

Consumer

 

Residential mortgage
491,404

 
487,092

Home equity
418,659

 
414,195

Installment and other consumer
66,607

 
67,883

Consumer construction
2,995

 
3,149

Total Consumer Loans
979,665

 
972,319

Total Portfolio Loans
3,801,189

 
3,566,199

Loans held for sale
3,126

 
2,136

Total Loans
$
3,804,315

 
$
3,568,335


We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, collateral and industry and actively managing concentrations. When concentrations exist in certain segments, we mitigate this risk by monitoring the relevant economic indicators and internal risk rating trends and through stress testing of the loans in these segments. Total commercial loans represented 74 percent of total portfolio loans at September 30, 2014 and 73 percent of total portfolio loans at December 31, 2013. Within our commercial portfolio, the commercial real estate, or CRE, and commercial construction portfolios combined comprised 66 percent of total commercial loans and 49 percent of total portfolio loans at September 30, 2014 and 68 percent of total commercial loans and 49 percent of total portfolio loans at December 31, 2013. Further segmentation of the CRE and commercial construction portfolios by industry and collateral type revealed no concentration in excess of nine percent of total loans at either September 30, 2014 or December 31, 2013.
Our market area includes Pennsylvania and the contiguous states of Ohio, West Virginia, New York and Maryland. The majority of our commercial and consumer loans are made to businesses and individuals in this market area resulting in a geographic concentration. We believe our knowledge and familiarity with customers and conditions locally outweighs this geographic concentration risk. The conditions of the local and regional economies are monitored closely through publicly available data as well as information supplied by our customers. Management believes underwriting guidelines, active monitoring of economic conditions and ongoing review by credit administration mitigates the concentration risk present in the loan portfolio. Our CRE and commercial construction portfolios have out of market exposure of 7.7 percent of the combined portfolio and 3.8 percent of total loans at September 30, 2014 and 7.9 percent of the combined portfolio and 3.9 percent of total loans at December 31, 2013.
Troubled debt restructurings, or TDRs, are loans where we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise grant. We strive to identify borrowers in financial difficulty early and work with them to modify the terms before their loan reaches nonaccrual status. These modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates or principal deferment. While unusual, there may be instances of principal forgiveness. These modifications are generally for longer term periods that would not be considered insignificant. Additionally, we classify loans where the debt obligation has been discharged through a Chapter 7 Bankruptcy and not reaffirmed as TDRs.
We individually evaluate all substandard commercial loans that have experienced a forbearance or change in terms agreement, as well as all substandard consumer and residential mortgage loans that entered into an agreement to modify their existing loan to determine if they should be designated as TDRs. All TDRs are considered to be impaired loans and will be reported as impaired loans for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is fully expected that the remaining principal and interest will be collected according to the restructured agreement. Further, all impaired loans are reported as nonaccrual loans unless the loan is a TDR that has met the requirements to be returned to

22


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 5. LOANS AND LOANS HELD FOR SALE – continued

accruing status. TDRs can be returned to accruing status if the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and there is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the restructuring.
The following table summarizes the restructured loans as of the dates presented:
 
September 30, 2014
 
December 31, 2013
(dollars in thousands)
Accruing
TDRs
Nonaccruing
TDRs
Total
TDRs
 
Accruing
TDRs
Nonaccruing
TDRs
Total
TDRs
Commercial real estate
$
17,140

$
898

$
18,038

 
$
19,711

$
3,898

$
23,609

Commercial and industrial
7,401

1,443

8,844

 
7,521

1,884

9,405

Commercial construction
6,273

1,869

8,142

 
5,338

2,708

8,046

Residential mortgage
2,743

486

3,229

 
2,581

1,356

3,937

Home equity
3,594

223

3,817

 
3,924

218

4,142

Installment and other consumer
122

10

132

 
154

3

157

Total
$
37,273

$
4,929

$
42,202

 
$
39,229

$
10,067

$
49,296

There were five TDRs for $0.5 million returned to accruing status during the three months ended September 30, 2014 and ten TDRs for $2.0 million were returned to accruing status during the nine months ended September 30, 2014. There were no TDRs returned to accruing status during the three months ended September 30, 2013 and one TDR for $0.2 million was returned to accruing status during the nine months ended September 30, 2013.

23


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 5. LOANS AND LOANS HELD FOR SALE – continued

The following tables present the restructured loans for the three and nine month periods ended September 30, 2014 and September 30, 2013:
 
Three Months Ended September 30, 2014

Three Months Ended September 30, 2013
(dollars in thousands)
Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment(1)
Post-Modification
Outstanding
Recorded
Investment(1)
Total  Difference
in Recorded
Investment

Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment
(1)
Post-Modification
Outstanding
Recorded
Investment
(1)
Total  Difference
in Recorded
Investment
Commercial real estate









Principal deferral
1
$
487

$
475

$
(12
)

$

$

$

Chapter 7 bankruptcy(2)
1
83

83






Maturity date extension and interest rate reduction



 
2
664

644

(20
)
Commercial and industrial













Principal deferral
2
381

366

(15
)

1
278

278


Residential mortgage















Chapter 7 bankruptcy(2)
2
135

134

(1
)




Interest rate reduction



 
1
54

54


Home equity













Chapter 7 bankruptcy(2)
2
14

14



8
772

767

(5
)
Maturity date extension and interest rate reduction
2
96

96


 



Installment and other consumer












Chapter 7 bankruptcy(2)
2
14

11

(3
)

3
17

15

(2
)
Total by Concession Type












Principal deferral
3
868

841

(27
)

1
278

278


Chapter 7 bankruptcy(2)
7
246

242

(4
)
 
11
789

782

(7
)
Interest rate reduction



 
1
54

54


Maturity date extension and interest rate reduction
2
96

96



2
664

644

(20
)
Total
12
$
1,210

$
1,179

$
(31
)

15
1,785

1,758

(27
)
(1) Excludes loans that were fully paid off or fully charged-off by period end. The pre-modification balance represents the balance outstanding prior to modification. The post-modification balance represents the outstanding balance at period end.
(2) Chapter 7 bankruptcy loans where the debt has been legally discharged through the bankruptcy court and not reaffirmed.