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EX-32 - EXHIBIT 32 - S&T BANCORP INCexhibit32q22015.htm
EX-31.2 - EXHIBIT 31.2 - S&T BANCORP INCexhibit312q22015.htm
EX-31.1 - EXHIBIT 31.1 - S&T BANCORP INCexhibit311q22015.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 June 30, 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 - 34,811,636 shares as of July 31, 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)

 
June 30, 2015
December 31, 2014
(dollars in thousands, except per share data)
(Unaudited)
(Audited)
ASSETS
 
 
Cash and due from banks, including interest-bearing deposits of $83,701 and $57,048 at June 30, 2015 and December 31, 2014
$
146,582

$
109,580

Securities available-for-sale, at fair value
666,624

640,273

Loans held for sale
13,634

2,970

Portfolio loans, net of unearned income
4,798,498

3,868,746

Allowance for loan losses
(48,814
)
(47,911
)
Portfolio loans, net
4,749,684

3,820,835

Bank owned life insurance
79,314

62,252

Premises and equipment, net
49,032

38,166

Federal Home Loan Bank and other restricted stock, at cost
23,553

15,135

Goodwill
291,204

175,820

Other intangible assets, net
7,479

2,631

Other assets
106,622

97,024

Total Assets
$
6,133,728

$
4,964,686

LIABILITIES
 
 
Deposits:
 
 
Noninterest-bearing demand
$
1,182,124

$
1,083,919

Interest-bearing demand
703,797

335,099

Money market
633,175

376,612

Savings
1,093,057

1,027,095

Certificates of deposit
1,247,262

1,086,117

Total Deposits
4,859,415

3,908,842

Securities sold under repurchase agreements
46,235

30,605

Short-term borrowings
230,975

290,000

Long-term borrowings
118,228

19,442

Junior subordinated debt securities
45,619

45,619

Other liabilities
62,027

61,789

Total Liabilities
5,362,499

4,356,297

SHAREHOLDERS’ EQUITY
 
 
Common stock ($2.50 par value)
Authorized—50,000,000 shares
Issued—36,130,480 shares at June 30, 2015 and 31,197,365 at December 31, 2014
Outstanding—34,812,723 shares at June 30, 2015 and 29,796,397 shares at December 31, 2014
90,326

77,993

Additional paid-in capital
209,709

78,818

Retained earnings
521,056

504,060

Accumulated other comprehensive (loss) income
(13,521
)
(13,833
)
Treasury stock (1,317,757 shares at June 30, 2015 and 1,400,968 shares at December 31, 2014, at cost)
(36,341
)
(38,649
)
Total Shareholders’ Equity
771,229

608,389

Total Liabilities and Shareholders’ Equity
$
6,133,728

$
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 June 30,
 
Six Months Ended June 30,
(dollars in thousands, except per share data)
2015
2014
 
2015
2014
INTEREST INCOME
 
 
 
 
 
Loans, including fees
$
48,933

$
36,614

 
$
88,859

$
72,263

Investment Securities:
 
 
 
 
 
Taxable
2,394

2,060

 
4,777

3,960

Tax-exempt
998

979

 
2,018

1,908

Dividends
286

219

 
872

406

Total Interest Income
52,611

39,872

 
96,526

78,537

INTEREST EXPENSE
 
 
 
 
 
Deposits
3,051

2,476

 
6,058

4,986

Borrowings and junior subordinated debt securities
749

541

 
1,398

1,105

Total Interest Expense
3,800

3,017

 
7,456

6,091

NET INTEREST INCOME
48,811

36,855

 
89,070

72,446

Provision for loan losses
2,059

(1,134
)
 
3,266

(845
)
Net Interest Income After Provision for Loan Losses
46,752

37,989

 
85,804

73,291

NONINTEREST INCOME
 
 
 
 
 
Securities (losses) gains, net
(34
)
40

 
(34
)
41

Debit and credit card fees
3,020

2,724

 
5,736

5,226

Wealth management fees
2,930

2,837

 
5,853

5,792

Service charges on deposit accounts
2,877

2,574

 
5,459

5,083

Insurance fees
1,391

1,425

 
3,041

3,102

Mortgage banking
782

264

 
1,308

396

Other
2,417

1,907

 
4,104

3,547

Total Noninterest Income
13,383

11,771

 
25,467

23,187

NONINTEREST EXPENSE
 
 
 
 
 
Salaries and employee benefits
17,455

15,772

 
34,235

31,148

Net occupancy
2,682

1,984

 
5,270

4,214

Data processing
2,555

2,219

 
4,876

4,314

Furniture and equipment
1,582

1,277

 
2,808

2,548

Marketing
1,193

960

 
2,009

1,578

Other taxes
1,159

893

 
2,002

1,524

Merger related expenses
866


 
3,167


FDIC insurance
808

579

 
1,503

1,210

Professional services and legal
801

875

 
1,324

1,538

Other
6,348

5,606

 
11,876

11,005

Total Noninterest Expense
35,449

30,165

 
69,070

59,079

Income Before Taxes
24,686

19,595

 
42,201

37,399

Provision for income taxes
6,498

4,875

 
11,178

8,646

Net Income
$
18,188

$
14,720

 
$
31,023

$
28,753

Earnings per share—basic
$
0.52

$
0.49

 
$
0.94

$
0.97

Earnings per share—diluted
$
0.52

$
0.49

 
$
0.94

$
0.97

Dividends declared per share
$
0.18

$
0.17

 
$
0.36

$
0.33

Comprehensive Income
$
14,695

$
18,343

 
$
31,335

$
35,421

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 (Loss)/Income
Treasury
Stock
Total
Balance at January 1, 2014
$
77,993

$
78,140

$
468,158

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

Net income for six months ended June 30, 2014


28,753



28,753

Other comprehensive income (loss), net of tax



6,668


6,668

Cash dividends declared ($0.33 per share)


(9,810
)


(9,810
)
Treasury stock issued for restricted awards (80,455 shares, net of 20,976 forfeitures)


(1,824
)

1,664

(160
)
Recognition of restricted stock compensation expense

430




430

Balance at June 30, 2014
$
77,993

$
78,570

$
485,277

$
(6,026
)
$
(38,627
)
$
597,187

 
 
 
 
 
 
 
Balance at January 1, 2015
$
77,993

$
78,818

$
504,060

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

Net income for six months ended June 30, 2015


31,023



31,023

Other comprehensive income (loss), net of tax



312


312

Cash dividends declared ($0.36 per share)


(11,608
)


(11,608
)
Common stock issued in acquisition (4,933,115 shares)
12,333

130,136




142,469

Treasury stock issued for restricted awards (87,841 shares, net of 4,630 forfeitures)


(2,419
)

2,308

(111
)
Recognition of restricted stock compensation expense

858




858

Tax benefit from stock-based compensation
 
29

 
 
 
29

Issuance costs

(132
)



(132
)
Balance at June 30, 2015
$
90,326

$
209,709

$
521,056

$
(13,521
)
$
(36,341
)
$
771,229

See Notes to Consolidated Financial Statements


5


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

 
Six Months Ended June 30,
(dollars in thousands)
2015
2014
OPERATING ACTIVITIES
 
 
Net income
$
31,023

$
28,753

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


Provision for loan losses
3,266

(845
)
Provision for unfunded loan commitments
605

182

Depreciation, amortization and accretion
388

2,309

Net amortization of discounts and premiums on securities
1,802

1,898

Stock-based compensation expense
769

395

Securities losses (gains), net
34

(41
)
Tax benefit from stock-based compensation
(29
)

Mortgage loans originated for sale
(52,075
)
(13,057
)
Proceeds from the sale of loans
42,008

13,475

Gain on the sale of loans, net
(597
)
(85
)
Net increase in interest receivable
(2,542
)
(243
)
Net decrease in interest payable
(475
)
(186
)
Net decrease in other assets
1,854

10,016

Net (decrease) increase in other liabilities
(811
)
1,199

Net Cash Provided by Operating Activities
25,220

43,770

INVESTING ACTIVITIES
 
 
Purchases of securities available-for-sale
(54,754
)
(108,845
)
Proceeds from maturities, prepayments and calls of securities available-for-sale
26,096

36,343

Proceeds from sales of securities available-for-sale
11,119

1,418

Net purchases of Federal Home Loan Bank stock
(334
)
(2,189
)
Net increase in loans
(141,911
)
(169,209
)
Proceeds from sale of loans not originated for resale

4,108

Purchases of premises and equipment
(2,465
)
(1,719
)
Proceeds from the sale of premises and equipment
27

64

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

Net Cash Used in Investing Activities
(178,569
)
(240,029
)
FINANCING ACTIVITIES
 
 
Net increase in core deposits
297,340

141,888

Net (decrease) increase in certificates of deposit
(68,397
)
50,972

Net increase (decrease) in securities sold under repurchase agreements
15,630

(8,578
)
Net (decrease) increase in short-term borrowings
(127,686
)
45,000

Proceeds from long-term borrowings
100,000


Repayments of long-term borrowings
(1,214
)
(1,174
)
Repayment of junior subordinated debt
(13,500
)

Treasury shares issued-net
(111
)
(160
)
Issuance costs
(132
)

Cash dividends paid to common shareholders
(11,608
)
(9,810
)
Tax benefit from stock-based compensation
29


Net Cash Provided by Financing Activities
190,351

218,138

Net increase in cash and cash equivalents
37,002

21,879

Cash and cash equivalents at beginning of period
109,580

108,356

Cash and Cash Equivalents at End of Period
$
146,582

$
130,235

Supplemental Disclosures
 
 
Loans transferred to held for sale
$

$
1,300

Interest paid
$
7,619

$
6,278

Income taxes paid, net of refunds
$
9,275

$
8,400

Net assets acquired from bank merger, excluding cash and cash equivalents
$
43,433

$

Transfers of loans to other real estate owned
$
137

$
274

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
Repurchase-To-Maturity Transactions, Repurchase Financings, and Disclosures
In June 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures which introduces two accounting changes to the Transfers and Servicing guidance (Topic 860). Repurchase-to-maturity transactions will be accounted for as secured borrowing transactions on the balance sheet and for repurchase financing arrangements, an entity will account separately for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. This will also generally result in secured borrowing accounting for the repurchase agreement. With respect to disclosures, a transferor is required to disclose information about transactions accounted for as a sale in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets through an agreement with the transferee. Additionally, new disclosures are required for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. The new disclosure for transactions accounted for as secured borrowings is required for interim periods beginning after March 15, 2015. These new disclosures are included in Note 9. Borrowings. The adoption of this ASU had no impact on our results of operations or financial position.

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

7


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

NOTE 1. BASIS OF PRESENTATION - continued

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 was permitted. The adoption of this ASU had no impact on our results of operations or financial position.
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 was 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 was 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 related 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 ASU 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. We do not expect that this ASU will have a material impact on our results of operations or financial position.
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 in 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 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. 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. The merger of Integrity Bank into S&T Bank, with S&T Bank surviving the merger, and related system conversion occurred on May 8, 2015.
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 from March 4, 2015, until it was merged into S&T Bank on May 8, 2015. The assets acquired and liabilities assumed were recorded at their respective fair values and represent management’s estimates based on available information. During the three months ended June 30, 2015, an additional $0.6 million of purchase accounting adjustments were recognized that increased goodwill. The change to goodwill primarily related to a fair value adjustment made on land acquired in the Merger where we own a branch office.
Goodwill of $115.4 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 as of June 30, 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
10,855

Core deposit intangible
5,713

Other assets
19,555

Total Assets Acquired
865,449

 
 
Fair Value of Liabilities Assumed
 
Deposits
722,308

Borrowings
82,286

Other liabilities
4,259

Total Liabilities Assumed
808,853

Total Fair Value of Identifiable Net Assets
56,596

Goodwill
$
115,383


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 may be accreted to interest income over the remaining contractual life of the loans. Acquired loans included $331.6 million of commercial real estate, or CRE, $184.2 million of commercial and

10


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

NOTE 2. BUSINESS COMBINATIONS - continued

industrial, or C&I, $92.4 million of commercial construction, $116.9 million of residential mortgage, $25.6 million of home equity, $36.1 million of installment and other consumer and $1.9 million of consumer construction.
Direct costs related to the Merger were expensed as incurred. During the six months ended June 30, 2015, we recognized $3.2 million of merger related expenses, including $1.3 million for data processing contract termination and system conversion costs, $1.2 million in legal and professional expenses, $0.4 million in severance payments and $0.3 million in other expenses.
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 June 30,
 
Six Months Ended June 30,
(dollars in thousands, except per share data)
2015

2014

 
2015

2014

Total revenue(1)
$
60,307

$
57,921

 
$
118,992

$
115,045

Net income (2)
$
18,816

$
17,765

 
$
32,728

$
33,697

 
 
 
 
 
 
Earnings per common share: (2)
 
 
 
 
 
Basic
$
0.54

$
0.51

 
$
0.95

$
0.97

Diluted
$
0.54

$
0.51

 
$
0.94

$
0.97

(1)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.
(2)Excludes merger expenses
Pro forma adjustments include intangible amortization expense, net amortization or accretion of valuation amounts and income tax expense. The pro forma results are not indicative of the results of operations that would have occurred had the Merger taken place at the beginning of the periods presented nor are they intended to be indicative of results that may occur in the future.

11


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

NOTE 3. EARNINGS PER SHARE

The following table reconciles the components of basic earnings per share with that of diluted earnings per share for the periods presented:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands, except shares and per share data)
2015
 
2014
 
2015
 
2014
Numerator for Earnings per Share—Basic:

 

 

 

Net income
$
18,188

 
$
14,720

 
$
31,023

 
$
28,753

Less: Income allocated to participating shares
79

 
29

 
123

 
64

Net Income Allocated to Shareholders
$
18,109

 
$
14,691

 
$
30,900

 
$
28,689

 
 
 
 
 
 
 
 
Numerator for Earnings per Share—Diluted:

 

 

 

Net income
18,188

 
14,720

 
$
31,023

 
$
28,753

Net Income Available to Shareholders
$
18,188

 
$
14,720

 
$
31,023

 
$
28,753

 
 
 
 
 
 
 
 
Denominators for Earnings per Share:

 

 

 

Weighted Average Shares Outstanding—Basic
34,652,895

 
29,684,300

 
32,951,936

 
29,672,611

Add: Potentially dilutive shares
28,283

 
16,894

 
36,359

 
27,559

Denominator for Treasury Stock Method—Diluted
34,681,178

 
29,701,194

 
32,988,295

 
29,700,170

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding—Basic
34,652,895

 
29,684,300

 
32,951,936

 
29,672,611

Add: Average participating shares outstanding
151,134

 
58,973

 
131,563

 
66,563

Denominator for Two-Class Method—Diluted
34,804,029

 
29,743,273

 
33,083,499

 
29,739,174

 
 
 
 
 
 
 
 
Earnings per share—basic
$
0.52

 
$
0.49

 
$
0.94

 
$
0.97

Earnings per share—diluted
$
0.52

 
$
0.49

 
$
0.94

 
$
0.97

Warrants considered anti-dilutive excluded from potentially dilutive shares - exercise price $31.53 per share, expires January 2019
517,012

 
517,012

 
517,012

 
517,012

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

 
428,493

 
155,500

 
428,676

Restricted stock considered anti-dilutive excluded from potentially dilutive shares
122,851

 
42,079

 
95,204

 
39,005


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 marketable 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.

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 impaired 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.
Federal Home Loan Bank, or 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; therefore, it is presented at carrying 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 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 approximate the carrying values.

15


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

NOTE 4. FAIR VALUE MEASUREMENTS – 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 June 30, 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 six month period ended June 30, 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.
 
June 30, 2015
(dollars in thousands)
Level 1
Level 2
Level 3
Total
ASSETS
 
 
 
 
Securities available-for-sale:
 
 
 
 
U.S. Treasury securities
$

$
15,018

$

$
15,018

Obligations of U.S. government corporations and agencies

270,112


270,112

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

139,577


139,577

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

43,419


43,419

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

49,676


49,676

Obligations of states and political subdivisions

139,947


139,947

Marketable equity securities

8,875


8,875

Total securities available-for-sale

666,624


666,624

Trading securities held in a Rabbi Trust
3,796



3,796

Total securities
3,796

666,624


670,420

Derivative financial assets:
 
 
 
 
Interest rate swaps

11,013


11,013

Interest rate lock commitments

366


366

Forward sale contracts

17


17

Total Assets
$
3,796

$
678,020

$

$
681,816

LIABILITIES
 
 
 
 
Derivative financial liabilities:
 
 
 
 
Interest rate swaps
$

$
10,994

$

$
10,994

Total Liabilities
$

$
10,994

$

$
10,994


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 or liabilities measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine the fair value at either June 30, 2015 or December 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 June 30, 2015 and December 31, 2014. There were no liabilities measured at fair value on a nonrecurring basis during these periods.
 
June 30, 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
$

$

$
2,900

$
2,900

 
$

$

$

$

Impaired loans


13,913

13,913

 


12,916

12,916

Other real estate owned


747

747

 


117

117

Mortgage servicing rights


721

721

 


1,176

1,176

Total Assets
$

$

$
18,281

$
18,281

 
$

$

$
14,209

$
14,209

(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 June 30, 2015 and December 31, 2014 are presented in the following tables:
 
Carrying
Value(1) 
Fair Value Measurements at June 30, 2015
(dollars in thousands)
Total
Level 1
Level 2
Level 3
ASSETS
 
 
 
 
 
Cash and due from banks, including interest-bearing deposits
$
146,582

$
146,582

$
146,582

$

$

Securities available-for-sale
666,624

666,624


666,624


Loans held for sale
13,634

13,722



13,722

Portfolio loans, net of unearned income
4,798,498

4,774,871



4,774,871

Bank owned life insurance
79,314

79,314


79,314


FHLB and other restricted stock
23,553

23,553



23,553

Trading securities held in a Rabbi Trust
3,796

3,796

3,796



Mortgage servicing rights
2,974

3,137



3,137

Interest rate swaps
11,013

11,013


11,013


Interest rate lock commitments
366

366


366


Forward sale contracts
17

17


17


LIABILITIES
 

 
 
 
Deposits
$
4,859,415

$
4,865,521

$

$

$
4,865,521

Securities sold under repurchase agreements
46,235

46,235



46,235

Short-term borrowings
230,975

230,975



230,975

Long-term borrowings
118,228

119,148



119,148

Junior subordinated debt securities
45,619

45,619



45,619

Interest rate swaps
10,994

10,994


10,994


(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:
 
June 30, 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
$
14,893

$
125

$

$
15,018

 
$
14,873

$
7

$

$
14,880

Obligations of U.S. government corporations and agencies
267,604

2,935

(427
)
270,112

 
268,029

2,334

(1,078
)
269,285

Collateralized mortgage obligations of U.S. government corporations and agencies
138,160

1,549

(132
)
139,577

 
116,897

1,257

(148
)
118,006

Residential mortgage-backed securities of U.S. government corporations and agencies
42,155

1,450

(186
)
43,419

 
45,274

1,548

(154
)
46,668

Commercial mortgage-backed securities of U.S. government corporations and agencies
49,737

312

(373
)
49,676

 
39,834

232

(393
)
39,673

Obligations of states and political subdivisions
136,540

3,927

(520
)
139,947

 
136,977

5,789

(64
)
142,702

Debt Securities
649,089

10,298

(1,638
)
657,749

 
621,884

11,167

(1,837
)
631,214

Marketable equity securities
7,579

1,296


8,875

 
7,579

1,480


9,059

Total
$
656,668

$
11,594

$
(1,638
)
$
666,624

 
$
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 June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2015
 
2014
 
2015
 
2014
Gross realized gains
$

 
$
40

 
$

 
$
41

Gross realized losses
34

 

 
34

 

Net Realized Gains
$
(34
)
 
$
40

 
$
(34
)
 
$
41



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:
 
June 30, 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
4
$
33,489

$
(215
)
 
4
$
30,033

$
(212
)
 
8
$
63,522

$
(427
)
Collateralized mortgage obligations of U.S. government corporations and agencies
2
17,288

(132
)
 


 
2
17,288

(132
)
Residential mortgage-backed securities of U.S. government corporations and agencies
2
10,704

(186
)
 


 
2
10,704

(186
)
Commercial mortgage-backed securities of U.S. government corporations and agencies
2
20,976

(180
)
 
1
9,610

(193
)
 
3
30,586

(373
)
Obligations of states and political subdivisions
10
42,967

(520
)
 


 
10
42,967

(520
)
Total Temporarily Impaired Securities
20
$
125,424

$
(1,233
)
 
5
$
39,643

$
(405
)
 
25
$
165,067

$
(1,638
)

 
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 June 30, 2015 represents an other than temporary impairment. As of June 30, 2015, the unrealized losses on 25 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 June 30, 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 (loss)/income for the periods presented:
 
June 30, 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
$
11,594

$
(1,638
)
$
9,956

 
$
12,647

$
(1,837
)
$
10,810

Income tax expense/(benefit)
4,058

(573
)
3,485

 
4,426

(643
)
3,783

Net unrealized gains/(losses), net of tax included in accumulated other comprehensive income/(loss)
$
7,536

$
(1,065
)
$
6,471

 
$
8,221

$
(1,194
)
$
7,027

The amortized cost and fair value of securities available-for-sale at June 30, 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.
 
June 30, 2015
(dollars in thousands)
Amortized
Cost

 
Fair Value

Obligations of the U.S. Treasury, U.S. government corporations and agencies, and obligations of states and political subdivisions

 

Due in one year or less
$
29,892

 
$
30,223

Due after one year through five years
215,038

 
217,163

Due after five years through ten years
80,796

 
82,406

Due after ten years
93,311

 
95,285

 
419,037

 
425,077

Collateralized mortgage obligations of U.S. government corporations and agencies
138,160

 
139,577

Residential mortgage-backed securities of U.S. government corporations and agencies
42,155

 
43,419

Commercial mortgage-backed securities of U.S. government corporations and agencies
49,737

 
49,676

Debt Securities
649,089

 
657,749

Marketable equity securities
7,579

 
8,875

Total
$
656,668

 
$
666,624

At June 30, 2015 and December 31, 2014, securities with carrying values of $326.3 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 $14.0 million and $2.1 million at June 30, 2015 and December 31, 2014. Included in the $14.0 million is a $14.7 million net discount related to purchase accounting fair value adjustments. The following table indicates the composition of the loans as of the dates presented:
(dollars in thousands)
June 30, 2015
 
December 31, 2014
Commercial

 

Commercial real estate
$
2,054,935

 
$
1,682,236

Commercial and industrial
1,239,382

 
994,138

Commercial construction
344,983

 
216,148

Total Commercial Loans
3,639,300

 
2,892,522

Consumer

 

Residential mortgage
599,502

 
489,586

Home equity
457,813

 
418,563

Installment and other consumer
94,437

 
65,567

Consumer construction
7,446

 
2,508

Total Consumer Loans
1,159,198

 
976,224

Total Portfolio Loans
4,798,498

 
3,868,746

Loans held for sale
13,634

 
2,970

Total Loans
$
4,812,132

 
$
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 76 percent of total portfolio loans at June 30, 2015 and 75 percent of total portfolio loans at December 31, 2014. Within our commercial portfolio, the CRE and commercial construction portfolios combined comprised $2.4 billion or 66 percent of total commercial loans and 50 percent of total portfolio loans at June 30, 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, $424.0 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 7.0 percent of total loans at June 30, 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 6.3 percent of the combined portfolio and 3.1 percent of total loans at June 30, 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

23


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

NOTE 6. LOANS AND LOANS HELD FOR SALE - continued

impaired loans are reported as nonaccrual loans unless the loan is a TDR that has met the requirements to be returned to 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:
 
June 30, 2015
 
December 31, 2014
(dollars in thousands)
Performing
TDRs
Nonperforming
TDRs
Total
TDRs
 
Performing
TDRs
Nonperforming
TDRs
Total
TDRs
Commercial real estate
$
13,045

$
3,553

$
16,598

 
$
16,939

$
2,180

$
19,119

Commercial and industrial
7,899

2,226

10,125

 
8,074

356

8,430

Commercial construction
5,655

1,969

7,624

 
5,736

1,869

7,605

Residential mortgage
2,622

609

3,231

 
2,839

459

3,298

Home equity
3,302

411

3,713

 
3,342

562

3,904

Installment and other consumer
36

160

196

 
53

10

63

Total
$
32,559

$
8,928

$
41,487

 
$
36,983

$
5,436

$
42,419

There were six TDRs that returned to accruing status totaling $0.3 million during the three and six months ended June 30, 2015 and there were no TDRs that returned to accruing status for the three and six months ended June 30, 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 during the periods presented:
 
Three Months Ended June 30, 2015

Three Months Ended June 30, 2014
(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

$
129

$
127

$
(2
)
Commercial and industrial
 
 
 
 

 
 
 


Principal forgiveness
1

400

400


 




Residential mortgage
 
 
 
 

 
 
 


Chapter 7 bankruptcy(2)





1

52

52


Maturity date extension and interest rate reduction
2

225

225


 




Home equity
 
 
 
 

 
 
 


Chapter 7 bankruptcy(2)
4

171

171



4

43

41

(2
)
Installment and other consumer
 
 
 
 

 
 
 

Chapter 7 bankruptcy(2)



$


1

9

9

$

Total by Concession Type













Principal forgiveness
1

$
400

$
400

$



$

$

$

Principal deferral





1