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EX-32 - EXHIBIT 32 - S&T BANCORP INCexhibit32q12015.htm
EX-31.1 - EXHIBIT 31.1 - S&T BANCORP INCexhibit311q12015.htm
EX-31.2 - EXHIBIT 31.2 - S&T BANCORP INCexhibit312q12015.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 March 31, 2015
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
x
Accelerated filer
¨
 
 
 
 
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 - 34,796,390 shares as of April 30, 2015



S&T BANCORP, INC. AND SUBSIDIARIES

INDEX
S&T BANCORP, INC. AND SUBSIDIARIES
 
 
 
Page No.    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




2


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

 
March 31, 2015
December 31, 2014
(dollars in thousands, except per share data)
(Unaudited)
(Audited)
ASSETS
 
 
Cash and due from banks, including interest-bearing deposits of $69,110 and $57,048 at March 31, 2015 and December 31, 2014
$
124,737

$
109,580

Securities available-for-sale, at fair value
655,829

640,273

Loans held for sale
6,126

2,970

Portfolio loans, net of unearned income
4,683,698

3,868,746

Allowance for loan losses
(48,106
)
(47,911
)
Portfolio loans, net
4,635,592

3,820,835

Bank owned life insurance
78,738

62,252

Premises and equipment, net
49,660

38,166

Federal Home Loan Bank and other restricted stock, at cost
19,729

15,135

Goodwill
290,617

175,820

Other intangible assets, net
7,996

2,631

Other assets
102,269

97,024

Total Assets
$
5,971,293

$
4,964,686

LIABILITIES
 
 
Deposits:
 
 
Noninterest-bearing demand
$
1,177,623

$
1,083,919

Interest-bearing demand
686,546

335,099

Money market
617,609

376,612

Savings
1,073,755

1,027,095

Certificates of deposit
1,272,998

1,086,117

Total Deposits
4,828,531

3,908,842

Securities sold under repurchase agreements
46,721

30,605

Short-term borrowings
199,573

290,000

Long-term borrowings
18,838

19,442

Junior subordinated debt securities
50,619

45,619

Other liabilities
64,753

61,789

Total Liabilities
5,209,035

4,356,297

SHAREHOLDERS’ EQUITY
 
 
Common stock ($2.50 par value)
Authorized—50,000,000 shares
Issued—36,130,480 shares at March 31, 2015 and 31,197,365 at December 31, 2014
Outstanding—34,797,526 shares at March 31, 2015 and 29,796,397 shares at December 31, 2014
90,326

77,993

Additional paid-in capital
209,150

78,818

Retained earnings
509,575

504,060

Accumulated other comprehensive income (loss)
(10,028
)
(13,833
)
Treasury stock (1,332,954 shares at March 31, 2015 and 1,400,968 shares at December 31, 2014, at cost)
(36,765
)
(38,649
)
Total Shareholders’ Equity
762,258

608,389

Total Liabilities and Shareholders’ Equity
$
5,971,293

$
4,964,686

See Notes to Consolidated Financial Statements

3


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

 
Three Months Ended March 31,
(dollars in thousands, except per share data)
2015
2014
INTEREST INCOME
 
 
Loans, including fees
$
39,927

$
35,649

Investment Securities:
 
 
Taxable
2,383

1,900

Tax-exempt
1,020

929

Dividends
586

187

Total Interest Income
43,916

38,665

INTEREST EXPENSE
 
 
Deposits
3,007

2,510

Borrowings and junior subordinated debt securities
650

564

Total Interest Expense
3,657

3,074

NET INTEREST INCOME
40,259

35,591

Provision for loan losses
1,207

289

Net Interest Income After Provision for Loan Losses
39,052

35,302

NONINTEREST INCOME
 
 
Securities gains, net

1

Wealth management fees
2,923

2,955

Debit and credit card fees
2,715

2,502

Service charges on deposit accounts
2,583

2,509

Insurance fees
1,651

1,677

Mortgage banking
525

132

Other
1,687

1,640

Total Noninterest Income
12,084

11,416

NONINTEREST EXPENSE
 
 
Salaries and employee benefits
16,780

15,376

Net occupancy
2,588

2,230

Data processing
2,320

2,095

Furniture and equipment
1,226

1,271

Other taxes
842

631

Marketing
816

618

FDIC insurance
695

631

Professional services and legal
523

663

Merger related expenses
2,301


Other
5,530

5,399

Total Noninterest Expense
33,621

28,914

Income Before Taxes
17,515

17,804

Provision for income taxes
4,680

3,771

Net Income
$
12,835

$
14,033

Earnings per share—basic
$
0.41

$
0.47

Earnings per share—diluted
$
0.41

$
0.47

Dividends declared per share
$
0.18

$
0.16

Comprehensive Income
$
16,640

$
17,079

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, 2014
$
77,993

$
78,140

$
468,158

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

Net income for three months ended March 31, 2014


14,033



14,033

Other comprehensive income (loss), net of tax



3,046


3,046

Cash dividends declared ($0.16 per share)


(4,758
)


(4,758
)
Treasury stock issued for restricted awards (0 shares, net of 19,599 forfeitures)


357


(518
)
(161
)
Recognition of restricted stock compensation expense

185




185

Balance at March 31, 2014
$
77,993

$
78,325

$
477,790

$
(9,648
)
$
(40,809
)
$
583,651

 
 
 
 
 
 
 
Balance at January 1, 2015
$
77,993

$
78,818

$
504,060

$
(13,833
)
$
(38,649
)
$
608,389

Net income for three months ended March 31, 2015


12,835



12,835

Other comprehensive income (loss), net of tax



3,805


3,805

Cash dividends declared ($0.18 per share)


(5,357
)


(5,357
)
Common stock issued in acquisition (4,933,115 shares)
12,333

130,136




142,469

Treasury stock issued for restricted awards (71,699 shares, net of 3,685 forfeitures)


(1,963
)

1,884

(79
)
Recognition of restricted stock compensation expense

319




319

Issuance costs

(123
)



(123
)
Balance at March 31, 2015
$
90,326

$
209,150

$
509,575

$
(10,028
)
$
(36,765
)
$
762,258

See Notes to Consolidated Financial Statements


5


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

 
Three Months Ended March 31,
(dollars in thousands)
2015
2014
OPERATING ACTIVITIES
 
 
Net income
$
12,835

$
14,033

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


Provision for loan losses
1,207

289

Provision for unfunded loan commitments
198

(57
)
Depreciation and amortization
1,460

1,115

Net amortization of discounts and premiums
913

966

Stock-based compensation expense
240

135

Securities gains, net

(1
)
Mortgage loans originated for sale
(21,481
)
(4,897
)
Proceeds from the sale of loans
21,777

5,922

Gain on the sale of loans, net
(203
)
(22
)
Net increase in interest receivable
(2,288
)
(543
)
Net decrease in interest payable
(374
)
(284
)
Net decrease in other assets
2,945

3,648

Net increase in other liabilities
2,061

2,061

Net Cash Provided by Operating Activities
19,290

22,365

INVESTING ACTIVITIES
 
 
Purchases of securities available-for-sale
(6,373
)
(60,559
)
Proceeds from maturities, prepayments and calls of securities available-for-sale
6,389

21,598

Net proceeds from Federal Home Loan Bank stock
4,024

1,666

Net increase in loans
(30,588
)
(62,749
)
Purchases of premises and equipment
(849
)
(457
)
Proceeds from the sale of premises and equipment
7

64

Net cash paid in excess of cash acquired from bank merger
(16,347
)

Net Cash Used in Investing Activities
(43,737
)
(100,437
)
FINANCING ACTIVITIES
 
 
Net increase in core deposits
240,719

157,874

Net (decrease) increase in certificates of deposit
(43,417
)
38,061

Net increase in securities sold under repurchase agreements
16,116

4,587

Net decrease in short-term borrowings
(159,150
)
(40,000
)
Repayments of long-term borrowings
(605
)
(584
)
Repayment of junior subordinated debt
(8,500
)

Treasury shares issued-net
(79
)
(161
)
Issuance costs
(123
)

Cash dividends paid to common shareholders
(5,357
)
(4,758
)
Net Cash Provided by Financing Activities
39,604

155,019

Net increase in cash and cash equivalents
15,157

76,947

Cash and cash equivalents at beginning of period
109,580

108,356

Cash and Cash Equivalents at End of Period
$
124,737

$
185,303

Supplemental Disclosures
 
 
Interest paid
$
3,781

$
3,358

Income taxes paid, net of refunds
$
1,500

$

Net assets acquired from bank merger, excluding cash and cash equivalents
$
44,019

$

Transfers of loans to other real estate owned
$

$
186

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, 2014, filed with the Securities and Exchange Commission, or SEC, on February 20, 2015. 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
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
In April 2014, the Financial Accounting Standards Board, or 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. 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

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. The adoption of this ASU had no 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. This ASU did not have a material impact on our results of operations or financial position. We did not adopt the proportional amortization method. Refer to Note 14 for additional disclosure.
Recently Issued Accounting Standards Updates not yet Adopted
IntangiblesGoodwill and OtherInternal-Use Software: Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
In April 2015, the FASB issued ASU No. 2015-05, IntangiblesGoodwill and OtherInternal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The main provisions of ASU 2015-05 provide a basis for evaluating whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, then the arrangement should be accounted for as a service contract. 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.
InterestImputation of Interest: Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued ASU No. 2015-03, InterestImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2016. 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

Consolidation: Amendments to the Consolidation Analysis
In April 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: 1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, 2) Eliminate the presumption that a general partner should consolidate a limited partnership, 3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and party relationships, 4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2A-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We are currently evaluating the impact that these amendments may have on our consolidated financial statements.
Income StatementExtraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary
In January 2015, the FASB issued ASU No. 2015-01, Income StatementExtraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary. The amendments of this ASU eliminate from GAAP the concept of extraordinary items and eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2015. We are currently evaluating the impact of the adoption of this pronouncement on our consolidated financial statements.




9


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

NOTE 2. BUSINESS COMBINATIONS


On March 4, 2015, we completed the acquisition of 100 percent of the voting shares of Integrity Bancshares, Inc., or Integrity, located in Camp Hill, Pennsylvania, in a tax-free reorganization transaction structured as a merger of Integrity with and into S&T, with S&T being the surviving entity. As a result of the Integrity merger, or the merger, Integrity Bank, the wholly owned subsidiary bank of Integrity, became a separate wholly owned subsidiary bank of S&T.
Integrity shareholders were entitled to elect to receive for each share of Integrity common stock either $52.50 in cash or 2.0627 shares of S&T common stock subject to allocation and proration procedures in the merger agreement. The total purchase price was approximately $172.0 million which included $29.5 million of cash and 4,933,115 S&T common shares at a fair value of $28.88 per share. The fair value of $28.88 per share of S&T common stock was based on the March 4, 2015 closing price.
The merger was accounted for under the acquisition method of accounting and our consolidated financial statements include all Integrity Bank transactions since March 4, 2015. Preliminary estimates of fair value have been recorded for loans, premises and other equipment, deposits, the core deposit intangible and other assets at March 31, 2015. Additional adjustments may be required to finalize the acquisition accounting.
Goodwill of $114.8 million was calculated as the excess of the consideration exchanged over the fair value of the identifiable net assets acquired. The goodwill arising from the merger consists largely of the synergies and economies of scale expected from combining the operations of S&T and Integrity. All of the goodwill was assigned to our Community Banking segment. The goodwill recognized will not be deductible for tax purposes.
The following table summarizes total consideration, assets acquired and liabilities assumed at March 4, 2015:
(dollars in thousands)
 
Consideration Paid
 
Cash
$
29,510

Common stock
142,469

Fair Value of Total Consideration
$
171,979

 
 
Fair Value of Assets Acquired
 
Cash and cash equivalents
$
13,163

Securities and other investments
11,502

Loans
788,687

Bank owned life insurance
15,974

Premises and equipment
11,685

Core deposit intangible
5,713

Other assets
19,050

Total Assets Acquired
865,774

 
 
Fair Value of Liabilities Assumed
 
Deposits
722,308

Borrowings
82,286

Other liabilities
3,998

Total Liabilities Assumed
808,592

Total Fair Value of Identifiable Net Assets
57,182

Goodwill
$
114,797


Loans acquired in the merger were recorded at fair value with no carryover of the related allowance for loan losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Loans acquired with evidence of credit quality deterioration were evaluated and not considered to be significant. The fair value of the loans acquired was $788.7 million net of a $14.8 million discount. The discount will be accreted to interest income over the remaining contractual life of the loans. Acquired loans included $481.4 million of commercial real estate, or CRE, $193.9 million of commercial & industrial, or C&I, $44.8 million of commercial construction $32.7 million of residential mortgage $28.8 million of home equity $5.6 million of installment and other consumer and $1.5 million of consumer construction.

10


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

NOTE 2. BUSINESS COMBINATIONS - continued

Direct costs related to the merger were expensed as incurred. During the first quarter of 2015, we recognized $2.3 million of merger related expenses, including $0.9 million for data processing contract termination and conversion costs, $0.3 million in severance payments and $1.1 million in legal and professional expenses.
The consolidated statements of comprehensive income for the three months ended March 31, 2015 include net interest income of $2.2 million and net income of $0.3 million from Integrity Bank since the March 4, 2015 acquisition date.
The following table presents unaudited pro forma financial information which combines the historical consolidated statements of income of S&T and Integrity to give effect to the merger as if it had occurred on January 1, 2014, for the periods presented.
 
Unaudited Pro Forma Information
 
Three Months Ended March 31,
(dollars in thousands, except per share data)
2015

2014

Total revenue
$
58,208

$
53,996

Net income (1)
$
14,502

$
16,052

 
 
 
Earnings per common share: (1)
 
 
Basic
$
0.42

$
0.46

Diluted
$
0.42

$
0.46

(1)Excludes merger expenses
Total pro forma revenue is defined as net interest income plus non-interest income, excluding gains and losses on sales of investment securities available-for-sale. Pro forma adjustments include intangible amortization expense, net amortization or accretion of valuation amounts and income tax expense.

11


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

NOTE 3. 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 March 31,
(dollars in thousands, except shares and per share data)
2015
 
2014
Numerator for Earnings per Share—Basic:

 

Net income
$
12,835

 
$
14,033

Less: Income allocated to participating shares
46

 
35

Net Income Allocated to Shareholders
$
12,789

 
$
13,998

 
 
 
 
Numerator for Earnings per Share—Diluted:

 

Net income
12,835

 
14,033

Net Income Available to Shareholders
$
12,835

 
$
14,033

 
 
 
 
Denominators for Earnings per Share:

 

Weighted Average Shares Outstanding—Basic
31,232,075

 
29,660,794

Add: Potentially dilutive shares
28,873

 
37,253

Denominator for Treasury Stock Method—Diluted
31,260,948

 
29,698,047

 
 
 
 
Weighted Average Shares Outstanding—Basic
31,232,075

 
29,660,794

Add: Average participating shares outstanding
111,774

 
74,237

Denominator for Two-Class Method—Diluted
31,343,849

 
29,735,031

 
 
 
 
Earnings per share—basic
$
0.41

 
$
0.47

Earnings per share—diluted
$
0.41

 
$
0.47

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

 
517,012

Stock options considered anti-dilutive excluded from potentially dilutive shares
155,500

 
428,863

Restricted stock considered anti-dilutive excluded from potentially dilutive shares
82,901

 
36,984


12


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

NOTE 4. 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 and 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.

13


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

NOTE 4. FAIR VALUE MEASUREMENTS – continued

Derivative Financial Instruments
We use derivative instruments including interest rate swaps for commercial loans with our customers, interest rate lock commitments and the sale of mortgage loans in the secondary market. 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 counterparties' 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 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, 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, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets carried at fair value 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 driving 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.


14


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

NOTE 4. FAIR VALUE MEASUREMENTS – continued

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
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 a discounted cash flow analysis that utilizes 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 of bank owned life insurance, or BOLI.
FHLB and Other Restricted Stock
It is not practical to determine the fair value of our FHLB and other restricted stock due to the restrictions placed on the transferability of these stocks.
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 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.

15


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

NOTE 4. FAIR VALUE MEASUREMENTS – continued

Junior Subordinated Debt Securities
The variable rate junior subordinated debt securities reprice quarterly; therefore, the fair values approximate the carrying values. The fair value of the fixed rate junior subordinated debt securities assumed from the merger also approximates the carrying value due to our ability and intension to pay off the subordinated debt in the near future.
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 March 31, 2015 and December 31, 2014. Due to limited trading volume, we transferred marketable equity securities with a fair value of $0.2 million from Level 1 to Level 2 during the period ended March 31, 2015. There were no other transfers between Level 1 and Level 2 for items measured at fair value on a recurring basis during the periods presented.
 
March 31, 2015
(dollars in thousands)
Level 1
Level 2
Level 3
Total
ASSETS
 
 
 
 
Securities available-for-sale:
 
 
 
 
U.S. Treasury securities
$

$
15,030

$

$
15,030

Obligations of U.S. government corporations and agencies

271,383


271,383

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

131,404


131,404

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

48,165


48,165

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

40,080


40,080

Obligations of states and political subdivisions

140,676


140,676

Marketable equity securities

9,091


9,091

Total securities available-for-sale

655,829


655,829

Trading securities held in a Rabbi Trust
3,505



3,505

Total securities
3,505

655,829


659,334

Derivative financial assets:
 
 
 
 
Interest rate swaps

14,020


14,020

Interest rate lock commitments

371


371

Total Assets
$
3,505

$
670,220

$

$
673,725

LIABILITIES
 
 
 
 
Derivative financial liabilities:
 
 
 
 
Interest rate swaps
$

$
13,979

$

$
13,979

Forward sale contracts

74


74

Total Liabilities
$

$
14,053

$

$
14,053


16


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

NOTE 4. FAIR VALUE MEASUREMENTS – continued

 
December 31, 2014
(dollars in thousands)
Level 1
Level 2
Level 3
Total
ASSETS
 
 
 
 
Securities available-for-sale:
 
 
 
 
U.S. Treasury securities
$

$
14,880

$

$
14,880

Obligations of U.S. government corporations and agencies

269,285


269,285

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

118,006


118,006

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

46,668


46,668

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

39,673


39,673

Obligations of states and political subdivisions

142,702


142,702

Marketable equity securities
178

8,881


9,059

Total securities available-for-sale
178

640,095


640,273

Trading securities held in a Rabbi Trust
3,456



3,456

Total securities
3,634

640,095


643,729

Derivative financial assets:
 
 
 
 
Interest rate swaps

12,981


12,981

Interest rate lock commitments

235


235

Forward sale contracts




Total Assets
$
3,634

$
653,311

$

$
656,945

LIABILITIES
 
 
 
 
Derivative financial liabilities:
 
 
 
 
Interest rate swaps
$

$
12,953

$

$
12,953

Forward sale contracts

57


57

Total Liabilities
$

$
13,010

$

$
13,010

We classify financial instruments as Level 3 when valuation models are used because significant inputs are not observable in the market. We had no assets measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine the fair value at either March 31, 2015 or March 31, 2014.
We may be required to measure certain assets and liabilities on a nonrecurring basis. Nonrecurring assets are recorded at the lower of cost or fair value in our financial statements. The following table presents our assets that were measured at fair value on a nonrecurring basis by the fair value hierarchy level at March 31, 2015 and December 31, 2014. There were no liabilities measured at fair value on a nonrecurring basis during these periods.
 
March 31, 2015
 
December 31, 2014
(dollars in thousands)
Level 1
Level 2
Level 3
Total
 
Level 1
Level 2
Level 3
Total
ASSETS(1)
 
 
 
 
 
 
 
 
 
Loans held for sale
$

$

$

$

 
$

$

$

$

Impaired loans


14,940

14,940

 


12,916

12,916

Other real estate owned


1,294

1,294

 


117

117

Mortgage servicing rights


2,865

2,865

 


2,934

2,934

Total Assets
$

$

$
19,099

$
19,099

 
$

$

$
15,967

$
15,967

(1)This table presents only the nonrecurring items that are recorded at fair value in our financial statements.

17


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

NOTE 4. FAIR VALUE MEASUREMENTS – continued

The carrying values and fair values of our financial instruments at March 31, 2015 and December 31, 2014 are presented in the following tables:
 
Carrying
Value(1) 
Fair Value Measurements at March 31, 2015
(dollars in thousands)
Total
Level 1
Level 2
Level 3
ASSETS
 
 
 
 
 
Cash and due from banks, including interest-bearing deposits
$
124,737

$
124,737

$
124,737

$

$

Securities available-for-sale
655,829

655,829


655,829


Loans held for sale
6,126

6,160



6,160

Portfolio loans, net of unearned income
4,683,698

4,673,187



4,673,187

Bank owned life insurance
78,738

78,738


78,738


FHLB and other restricted stock
19,729

19,729



19,729

Trading securities held in a Rabbi Trust
3,505

3,505

3,505



Mortgage servicing rights
2,788

2,865



2,865

Interest rate swaps
14,020

14,020


14,020


Interest rate lock commitments
371

371


371


LIABILITIES
 

 
 
 
Deposits
$
4,828,531

$
4,834,805

$

$

$
4,834,805

Securities sold under repurchase agreements
46,721

46,721



46,721

Short-term borrowings
199,573

199,573



199,573

Long-term borrowings
18,838

19,928



19,928

Junior subordinated debt securities
50,619

50,619



50,619

Interest rate swaps
13,979

13,979


13,979


Forward sale contracts
74

74


74

(1) As reported in the Consolidated Balance Sheets
 
 
 
 
 

18


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

NOTE 4. FAIR VALUE MEASUREMENTS – continued

 
Carrying
Value(1)
Fair Value Measurements at December 31, 2014
(dollars in thousands)
Total
Level 1
Level 2
Level 3
ASSETS
 
 
 
 
 
Cash and due from banks, including interest-bearing deposits
$
109,580

$
109,580

$
109,580

$

$

Securities available-for-sale
640,273

640,273

178

640,095


Loans held for sale
2,970

2,991



2,991

Portfolio loans, net of unearned income
3,868,746

3,827,634



3,827,634

Bank owned life insurance
62,252

62,252


62,252


FHLB and other restricted stock
15,135

15,135



15,135

Trading securities held in a Rabbi Trust
3,456

3,456

3,456



Mortgage servicing rights
2,817

2,934



2,934

Interest rate swaps
12,981

12,981


12,981


Interest rate lock commitments
235

235


235


LIABILITIES
 
 
 
 
 
Deposits
$
3,908,842

$
3,910,342

$

$

$
3,910,342

Securities sold under repurchase agreements
30,605

30,605



30,605

Short-term borrowings
290,000

290,000



290,000

Long-term borrowings
19,442

20,462



20,462

Junior subordinated debt securities
45,619

45,619



45,619

Interest rate swaps
12,953

12,953


12,953


Forward sale contracts
57

57


57


(1) As reported in the Consolidated Balance Sheets 
 
 
 
 
 

19


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 5. SECURITIES AVAILABLE-FOR-SALE

The following tables present the amortized cost and fair value of available-for-sale securities as of the dates presented:
 
March 31, 2015
 
December 31, 2014
(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
$
14,883

$
147

$

$
15,030

 
$
14,873

$
7

$

$
14,880

Obligations of U.S. government corporations and agencies
267,686

3,900

(203
)
271,383

 
268,029

2,334

(1,078
)
269,285

Collateralized mortgage obligations of U.S. government corporations and agencies
129,010

2,419

(25
)
131,404

 
116,897

1,257

(148
)
118,006

Residential mortgage-backed securities of U.S. government corporations and agencies
46,412

1,802

(49
)
48,165

 
45,274

1,548

(154
)
46,668

Commercial mortgage-backed securities of U.S. government corporations and agencies
39,701

517

(138
)
40,080

 
39,834

232

(393
)
39,673

Obligations of states and political subdivisions
134,765

5,953

(42
)
140,676

 
136,977

5,789

(64
)
142,702

Debt Securities
632,457

14,738

(457
)
646,738

 
621,884

11,167

(1,837
)
631,214

Marketable equity securities
7,579

1,512


9,091

 
7,579

1,480


9,059

Total
$
640,036

$
16,250

$
(457
)
$
655,829

 
$
629,463

$
12,647

$
(1,837
)
$
640,273

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 March 31,
(dollars in thousands)
2015
 
2014
Gross realized gains
$

 
$
1

Gross realized losses

 

Net Realized Gains
$

 
$
1



20


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

NOTE 5. SECURITIES AVAILABLE-FOR-SALE – continued

The following tables present the fair value and the age of gross unrealized losses by investment category as of the dates presented:
 
March 31, 2015
 
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

Obligations of U.S. government corporations and agencies
3
$
23,523

$
(55
)
 
4
$
30,157

$
(148
)
 
7
$
53,680

$
(203
)
Collateralized mortgage obligations of U.S. government corporations and agencies
3
7,868

(25
)
 


 
3
7,868

(25
)
Residential mortgage-backed securities of U.S. government corporations and agencies
5
11,361

(49
)
 


 
5
11,361

(49
)
Commercial mortgage-backed securities of U.S. government corporations and agencies


 
1
9,717

(138
)
 
1
9,717

(138
)
Obligations of states and political subdivisions
1
5,385

(42
)
 


 
1
5,385

(42
)
Total Temporarily Impaired Securities
12
$
48,137

$
(171
)
 
5
$
39,874

$
(286
)
 
17
$
88,011

$
(457
)

 
December 31, 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

Obligations of U.S. government corporations and agencies
4
$
39,745

$
(207
)
 
8
$
63,149

$
(871
)
 
12
$
102,894

$
(1,078
)
Collateralized mortgage obligations of U.S. government corporations and agencies
1
9,323

(148
)
 


 
1
9,323

(148
)
Residential mortgage-backed securities of U.S. government corporations and agencies


 
1
8,982

(154
)
 
1
8,982

(154
)
Commercial mortgage-backed securities of U.S. government corporations and agencies
1
9,998

(25
)
 
2
20,640

(368
)
 
3
30,638

(393
)
Obligations of states and political subdivisions
1
263

(1
)
 
2
10,756

(63
)
 
3
11,019

(64
)
Total Temporarily Impaired Securities
7
$
59,329

$
(381
)
 
13
$
103,527

$
(1,456
)
 
20
$
162,856

$
(1,837
)
We do not believe any individual unrealized loss as of March 31, 2015 represents an other than temporary impairment, or OTTI. As of March 31, 2015, the unrealized losses on 17 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 March 31, 2015. 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.

21


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

NOTE 5. 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:
 
March 31, 2015
 
December 31, 2014
(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
$
16,250

$
(457
)
$
15,793

 
$
12,647

$
(1,837
)
$
10,810

Income tax expense/(benefit)
5,688

(160
)
5,528

 
4,426

(643
)
3,783

Net unrealized gains/(losses), net of tax included in accumulated other comprehensive income/(loss)
$
10,562

$
(297
)
$
10,265

 
$
8,221

$
(1,194
)
$
7,027

The amortized cost and fair value of securities available-for-sale at March 31, 2015 by contractual maturity are included in the table below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
March 31, 2015
(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
$
29,757

 
$
30,068

Due after one year through five years
206,322

 
208,787

Due after five years through ten years
80,865

 
83,329

Due after ten years
100,390

 
104,905

 
417,334

 
427,089

Collateralized mortgage obligations of U.S. government corporations and agencies
129,010

 
131,404

Residential mortgage-backed securities of U.S. government corporations and agencies
46,412

 
48,165

Commercial mortgage-backed securities of U.S. government corporations and agencies
39,701

 
40,080

Debt Securities
632,457

 
646,738

Marketable equity securities
7,579

 
9,091

Total
$
640,036

 
$
655,829

At March 31, 2015 and December 31, 2014, securities with carrying values of $334.6 million and $289.1 million were pledged for various regulatory and legal requirements.


22


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

NOTE 6. LOANS AND LOANS HELD FOR SALE

 Loans are presented net of unearned income of $2.5 million and $2.1 million at March 31, 2015 and December 31, 2014. The following table indicates the composition of the loans as of the dates presented:
(dollars in thousands)
March 31, 2015
 
December 31, 2014
Commercial

 

Commercial real estate
$
2,152,413

 
$
1,682,236

Commercial and industrial
1,211,053

 
994,138

Commercial construction
286,166

 
216,148

Total Commercial Loans
3,649,632

 
2,892,522

Consumer

 

Residential mortgage
521,506

 
489,586

Home equity
442,396

 
418,563

Installment and other consumer
65,754

 
65,567

Consumer construction
4,410

 
2,508

Total Consumer Loans
1,034,066

 
976,224

Total Portfolio Loans
4,683,698

 
3,868,746

Loans held for sale
6,126

 
2,970

Total Loans
$
4,689,824

 
$
3,871,716

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 78 percent of total portfolio loans at March 31, 2015 and 75 percent of total portfolio loans at December 31, 2014. Within our commercial portfolio, CRE and commercial construction portfolios combined comprised $2.4 billion or 67 percent of total commercial loans and 52 percent of total portfolio loans at March 31, 2015 and 66 percent of total commercial loans and 49 percent of total portfolio loans at December 31, 2014. Of the $2.4 billion of CRE and commercial construction loans, $527.9 million were added as a result of the merger. Further segmentation of the CRE and commercial construction portfolios by industry and collateral type reveal no concentration in excess of 9.0 percent of total loans at March 31, 2015 and December 31, 2014.
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 had out of market exposure of 6.1 percent of the combined portfolio and 3.2 percent of total loans at March 31, 2015 and 8.0 percent of the combined portfolio and 3.9 percent of total loans at December 31, 2014.
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

23


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

NOTE 6. 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:
 
March 31, 2015
 
December 31, 2014
(dollars in thousands)
Performing
TDRs
Nonperforming
TDRs
Total
TDRs
 
Performing
TDRs
Nonperforming
TDRs
Total
TDRs
Commercial real estate
$
16,722

$
5,030

$
21,752

 
$
16,939

$
2,180

$
19,119

Commercial and industrial
7,988

1,772

9,760

 
8,074

356

8,430

Commercial construction
5,724

1,973

7,697

 
5,736

1,869

7,605

Residential mortgage
2,507

625

3,132

 
2,839

459

3,298

Home equity
3,438

510

3,948

 
3,342

562

3,904

Installment and other consumer
44

6

50

 
53

10

63

Total
$
36,423

$
9,916

$
46,339

 
$
36,983

$
5,436

$
42,419

There were no TDRs returned to accruing status during the three months ended March 31, 2015 or three months ended March 31, 2014.

24


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

NOTE 6. LOANS AND LOANS HELD FOR SALE - continued

The following tables present the restructured loans for the three month periods ended March 31, 2015 and March 31, 2014:
 
Three Months Ended March 31, 2015
(dollars in thousands)
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
2

$
2,851

$
2,851

$

Commercial and industrial
 
 
 
 
Principal deferral
6

661

661


Chapter 7 bankruptcy(2)
1

3

1

(2
)
Maturity date extension
1

780

765

(15
)
Commercial Construction
 
 
 
 
Principal deferral
1

104

103

(1
)
Home equity
 
 
 
 
Chapter 7 bankruptcy(2)
8

142

133

(9
)
Maturity date extension
1

71

71


Total by Concession Type








Principal deferral
9

3,616

3,615

(1
)
Chapter 7 bankruptcy(2)
9

145

134

(11
)
Maturity date extension
2

851

836

(15
)
Total
20

$
4,612

$
4,585

$
(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.
 
Three Months Ended March 31, 2014
(dollars in thousands)
Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment
(1)
Post-Modification
Outstanding
Recorded
Investment
(1)
Total  Difference
in Recorded
Investment
Commercial and industrial
 
 
 
 
Chapter 7 bankruptcy(2)
1

$
287

$
286

$
(1
)
Commercial Construction
 
 
 
 
Principal deferral
1

1,019

1,019


Residential mortgage
 
 
 
 
Chapter 7 bankruptcy(2)
4

277

276

(1
)
Home equity
 
 
 
 
Chapter 7 bankruptcy(2)
6

225

210

(15
)
Total by Concession Type
 
 
 
 
Principal deferral
1

1,019

1,019


Chapter 7 bankruptcy(2)
11

789

772

(17
)
Total
12

$
1,808

$
1,791

$
(17
)

(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.

For the three months ended March 31, 2015, we modified 2 commercial and industrial, or C&I, loans totaling $0.2 million, and 2 CRE loans totaling $0.2 million that were not considered to be TDRs. The modifications represented instances where there was an insignificant delay in payment. As of March 31, 2015 we have no commitments to lend additional funds on any TDRs.

25


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

NOTE 6. LOANS AND LOANS HELD FOR SALE - continued

Defaulted TDRs are defined as loans having a payment default of 90 days or more after the restructuring takes place. The following tables present a summary of TDRs which defaulted during the periods presented that had been restructured within the last 12 months prior to defaulting:
 
Defaulted TDRs
 
For the Three Months Ended
 
March 31, 2015

March 31, 2014
(dollars in thousands)
Number of
Defaults
Recorded
Investment


Number of
Defaults
Recorded
Investment

Residential mortgage
1
$
183


1
$
72

Home equity
1
5



Total
2
$
188


1
$
72

The following table is a summary of nonperforming assets as of the dates presented:
 
Nonperforming Assets
(dollars in thousands)
March 31, 2015
 
December 31, 2014
Nonperforming Assets

 

Nonaccrual loans
$
8,218

 
$
7,021

Nonaccrual TDRs
9,916

 
5,436

Total nonaccrual loans
18,134

 
12,457

OREO
1,294

 
166

Total Nonperforming Assets
$
19,428

 
$
12,623




26


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

NOTE 7. ALLOWANCE FOR LOAN LOSSES

We maintain an allowance for loan losses, or ALL, at a level determined to be adequate to absorb estimated probable credit losses inherent in the loan portfolio as of the balance sheet date. We develop and document a systematic ALL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Commercial Construction, 4) Consumer Real Estate and 5) Other Consumer.
The following are key risks within each portfolio segment:
CRE—Loans secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business prospects of the lessee, if the project is not owner occupied.
C&I—Loans made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the company is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the company. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.
Commercial Construction—Loans made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be complete, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer.
Consumer Real Estate—Loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residences, including purchase money mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.
Other Consumer—Loans made to individuals that may be secured by assets other than 1-4 family residences, as well as unsecured loans. This segment includes auto loans, unsecured loans and lines and credit cards. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.
We further assess risk within each portfolio segment by pooling loans with similar risk characteristics. For the commercial loan classes, the most important indicator of risk is the internally assigned risk rating, including pass, special mention and substandard. Consumer loans are pooled by type of collateral, lien position and loan to value, or LTV, ratio for Consumer Real Estate loans. Historical loss rates are applied to these loan pools to determine the reserve for loans collectively evaluated for impairment.
The ALL methodology for groups of loans collectively evaluated for impairment is comprised of both a quantitative and qualitative analysis. A key assumption in the quantitative component of the reserve is the loss emergence period, or LEP. The LEP is an estimate of the average amount of time from the point at which a loss is incurred on a loan to the point at which the loss is confirmed. In general, the LEP will be shorter in an economic slowdown or recession and longer during times of economic stability or growth, as customers are better able to delay loss confirmation after a potential loss event has occurred. 
Another key assumption is the look-back period, or LBP, which represents the historical data period utilized to calculate loss rates.
Management monitors various credit quality indicators for both the commercial and consumer loan portfolios, including delinquency, nonperforming status and changes in risk ratings on a monthly basis.

27


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

NOTE 7. ALLOWANCE FOR LOAN LOSSES – continued

The following tables present the age analysis of past due loans segregated by class of loans as of March 31, 2015 and December 31, 2014:
 
March 31, 2015
(dollars in thousands)
Current
30-59 Days
Past Due
60-89 Days
Past Due
90 Days Past Due(1)
Nonaccrual
Total Past
Due
Total Loans
Commercial real estate
$
2,138,815

$
2,955

$
522

$
1,735

$
8,386

$
13,598

$
2,152,413

Commercial and industrial
1,202,897

4,089

517


3,550

8,156

1,211,053

Commercial construction
281,084

969


2,140

1,973

5,082

286,166

Residential mortgage
516,515

1,548

63

1,154

2,226

4,991

521,506

Home equity
438,629

1,583

198


1,986

3,767

442,396

Installment and other consumer
65,465

249

27


13

289

65,754

Consumer construction
4,410






4,410

Loans held for sale
6,126






6,126

Totals
$
4,653,941

$
11,393

$
1,327

$
5,029

$
18,134

$
35,883

$
4,689,824

(1)Represents acquired loans that were recorded at fair value at the acquisition date.
 
December 31, 2014
(dollars in thousands)
Current
30-59 Days
Past Due
60-89 Days
Past Due
90 Days Past Due
Nonaccrual
Total Past
Due
Total Loans
Commercial real estate
$
1,674,930

$
2,548

$
323

$

$
4,435

$
7,306

$
1,682,236

Commercial and industrial
991,136

1,227

153


1,622

3,002

994,138

Commercial construction
214,174




1,974

1,974

216,148

Residential mortgage
485,465

565

1,220


2,336

4,121

489,586

Home equity
414,303

1,756

445


2,059

4,260

418,563

Installment and other consumer
65,111

352

73


31

456

65,567

Consumer construction
2,508






2,508

Loans held for sale
2,970






2,970

Totals
$
3,850,597

$
6,448

$
2,214

$