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EX-32 - EXHIBIT 32 - S&T BANCORP INCexhibit32q3-2018.htm
EX-31.2 - EXHIBIT 31.2 - S&T BANCORP INCexhibit312q3-2018.htm
EX-31.1 - EXHIBIT 31.1 - S&T BANCORP INCexhibit311q3-2018.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 ______________________________________
FORM 10-Q
______________________________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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 every Interactive Data File required to be submitted 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 such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ 
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 - 35,006,587 shares as of October 31, 2018



S&T BANCORP, INC. AND SUBSIDIARIES

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


1


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



 
September 30, 2018
 
December 31, 2017
(dollars in thousands, except per share data)
(Unaudited)
 
(Audited)
ASSETS
 
 
 
 
 
Cash and due from banks, including interest-bearing deposits of $68,018 and $61,965 at September 30, 2018 and December 31, 2017
 
$
132,650

 
 
$
117,152

Securities, at fair value
 
682,535

 
 
698,291

Loans held for sale
 
4,207

 
 
4,485

Portfolio loans, net of unearned income
 
5,807,807

 
 
5,761,449

Allowance for loan losses
 
(60,556
)
 
 
(56,390
)
Portfolio loans, net
 
5,747,251

 
 
5,705,059

Bank owned life insurance
 
73,626

 
 
72,150

Premises and equipment, net
 
41,403

 
 
42,702

Federal Home Loan Bank and other restricted stock, at cost
 
31,178

 
 
29,270

Goodwill
 
287,446

 
 
291,670

Other intangible assets, net
 
2,725

 
 
3,677

Other assets
 
102,342

 
 
95,799

Total Assets
 
$
7,105,363

 
 
$
7,060,255

LIABILITIES
 
 
 
 
 
Deposits:
 
 
 
 
 
Noninterest-bearing demand
 
$
1,412,127

 
 
$
1,387,712

Interest-bearing demand
 
561,191

 
 
603,141

Money market
 
1,367,181

 
 
1,146,156

Savings
 
817,545

 
 
893,119

Certificates of deposit
 
1,309,465

 
 
1,397,763

Total Deposits
 
5,467,509

 
 
5,427,891

Securities sold under repurchase agreements
 
45,200

 
 
50,161

Short-term borrowings
 
535,000

 
 
540,000

Long-term borrowings
 
45,434

 
 
47,301

Junior subordinated debt securities
 
45,619

 
 
45,619

Other liabilities
 
46,820

 
 
65,252

Total Liabilities
 
6,185,582

 
 
6,176,224

SHAREHOLDERS’ EQUITY
 
 
 
 
 
Common stock ($2.50 par value)
Authorized—50,000,000 shares
Issued—36,130,480 shares at September 30, 2018 and December 31, 2017
Outstanding— 35,006,587 shares at September 30, 2018 and 34,971,929 shares at December 31, 2017
 
90,326

 
 
90,326

Additional paid-in capital
 
209,685

 
 
216,106

Retained earnings
 
684,361

 
 
628,107

Accumulated other comprehensive loss
 
(33,253
)
 
 
(18,427
)
Treasury stock (1,123,893 shares at September 30, 2018 and 1,158,551 shares at December 31, 2017, at cost)
 
(31,338
)
 
 
(32,081
)
Total Shareholders’ Equity
 
919,781

 
 
884,031

Total Liabilities and Shareholders’ Equity
 
$
7,105,363

 
 
$
7,060,255

See Notes to Consolidated Financial Statements

2


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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands, except per share data)
2018
 
2017
 
2018
 
2017
INTEREST INCOME
 
 
 
 
 
 
 
 
 
 
 
Loans, including fees
 
$
68,631

 
 
$
62,450

 
 
$
198,296

 
 
$
179,908

Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
3,649

 
 
2,988

 
 
10,597

 
 
8,783

Tax-exempt
 
857

 
 
896

 
 
2,603

 
 
2,744

Dividends
 
490

 
 
389

 
 
1,741

 
 
1,352

Total Interest Income
 
73,627

 
 
66,723

 
 
213,237

 
 
192,787

INTEREST EXPENSE
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
10,871

 
 
6,748

 
 
27,883

 
 
18,103

Borrowings and junior subordinated debt securities
 
3,494

 
 
2,519

 
 
10,758

 
 
6,779

Total Interest Expense
 
14,365

 
 
9,267

 
 
38,641

 
 
24,882

NET INTEREST INCOME
 
59,262

 
 
57,456

 
 
174,596

 
 
167,905

Provision for loan losses
 
462

 
 
2,850

 
 
12,279

 
 
12,901

Net Interest Income After Provision for Loan Losses
 
58,800

 
 
54,606

 
 
162,317

 
 
155,004

NONINTEREST INCOME
 
 
 
 
 
 
 
 
 
 
 
Net gain on sale of securities
 

 
 

 
 

 
 
3,987

Service charges on deposit accounts
 
3,351

 
 
3,207

 
 
9,765

 
 
9,218

Debit and credit card
 
3,141

 
 
3,067

 
 
9,487

 
 
8,952

Wealth management
 
2,483

 
 
2,406

 
 
7,782

 
 
7,237

Mortgage banking
 
700

 
 
872

 
 
2,133

 
 
2,280

Insurance
 
101

 
 
1,318

 
 
404

 
 
4,232

Gain on sale of a majority interest of insurance business
 

 
 

 
 
1,873

 
 

Other
 
2,266

 
 
2,681

 
 
6,642

 
 
6,906

Total Noninterest Income
 
12,042

 
 
13,551

 
 
38,086

 
 
42,812

NONINTEREST EXPENSE
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
19,769

 
 
20,325

 
 
57,195

 
 
60,770

Data processing and information technology
 
2,906

 
 
2,284

 
 
7,610

 
 
6,670

Net occupancy
 
2,722

 
 
2,692

 
 
8,399

 
 
8,258

Furniture, equipment and software
 
2,005

 
 
1,890

 
 
6,096

 
 
5,746

Other taxes
 
1,341

 
 
1,208

 
 
4,928

 
 
3,268

Professional services and legal
 
1,181

 
 
869

 
 
3,120

 
 
2,868

Marketing
 
1,023

 
 
766

 
 
2,916

 
 
2,468

FDIC insurance
 
746

 
 
1,152

 
 
2,592

 
 
3,461

Other
 
5,392

 
 
5,367

 
 
16,174

 
 
16,451

Total Noninterest Expense
 
37,085

 
 
36,553

 
 
109,030

 
 
109,960

Income Before Taxes
 
33,757

 
 
31,604

 
 
91,373

 
 
87,856

Provision for income taxes
 
2,876

 
 
8,883

 
 
12,893

 
 
24,182

Net Income
 
$
30,881

 
 
$
22,721

 
 
$
78,480

 
 
$
63,674

Earnings per share—basic
 
$
0.89

 
 
$
0.65

 
 
$
2.26

 
 
$
1.83

Earnings per share—diluted
 
$
0.88

 
 
$
0.65

 
 
$
2.24

 
 
$
1.82

Dividends declared per share
 
$
0.25

 
 
$
0.20

 
 
$
0.72

 
 
$
0.60

Comprehensive Income
 
$
28,573

 
 
$
22,975

 
 
$
67,943

 
 
$
64,854

See Notes to Consolidated Financial Statements

3


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

(dollars in thousands, except share and per share data)
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive (Loss)/Income
 
Treasury
Stock
 
Total
Balance at January 1, 2017
 
$
90,326

 
 
$
213,098

 
 
$
585,891

 
 
$
(13,784
)
 
 
$
(33,575
)
 
 
$
841,956

Net income for nine months ended September 30, 2017
 

 
 

 
 
63,674

 
 

 
 

 
 
63,674

Other comprehensive income, net of tax
 

 
 

 
 

 
 
1,180

 
 

 
 
1,180

Cash dividends declared ($0.60 per share)
 

 
 

 
 
(20,899
)
 
 

 
 

 
 
(20,899
)
Treasury stock issued for restricted awards (90,115 shares, net of 23,946 forfeitures)
 

 
 

 
 
(2,383
)
 
 

 
 
1,695

 
 
(688
)
Recognition of restricted stock compensation expense
 

 
 
2,353

 
 

 
 

 
 

 
 
2,353

Balance at September 30, 2017
 
$
90,326

 
 
$
215,451

 
 
$
626,283

 
 
$
(12,604
)
 
 
$
(31,880
)
 
 
$
887,576

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
 
$
90,326

 
 
$
216,106

 
 
$
628,107

 
 
$
(18,427
)
 
 
$
(32,081
)
 
 
$
884,031

Net income for nine months ended September 30, 2018
 

 
 

 
 
78,480

 
 

 
 

 
 
78,480

Other comprehensive loss, net of tax
 

 
 

 
 

 
 
(10,537
)
 
 

 
 
(10,537
)
Reclassification of tax effects from the Tax Act(1)
 

 
 

 
 
3,427

 
 
(3,427
)
 
 

 
 

Reclassification of net unrealized gains on equity securities(2)
 

 
 

 
 
862

 
 
(862
)
 
 

 
 

Cash dividends declared ($0.72 per share)
 

 
 

 
 
(25,115
)
 
 

 
 

 
 
(25,115
)
Treasury stock issued for restricted awards (75,608 shares, net of 40,950 forfeitures)
 

 
 

 
 
(1,400
)
 
 

 
 
743

 
 
(657
)
Repurchase of warrant
 

 
 
(7,652
)
 
 

 
 

 
 

 
 
(7,652
)
Recognition of restricted stock compensation expense
 

 
 
1,231

 
 

 
 

 
 

 
 
1,231

Balance at September 30, 2018
 
$
90,326

 
 
$
209,685

 
 
$
684,361

 
 
$
(33,253
)
 
 
$
(31,338
)
 
 
$
919,781

See Notes to Consolidated Financial Statements
(1)Reclassification due to the adoption of ASU No. 2018-02, $(3,660) relates to funded status of pension and $233 relates to net unrealized gains on available-for-sale securities.
(2)Reclassification due to the adoption of ASU No. 2016-01.



4


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

 
Nine Months Ended September 30,
(dollars in thousands)
 
2018
 
 
2017
OPERATING ACTIVITIES
 
 
 
 
 
Net income
 
$
78,480

 
 
$
63,674

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

 
 

Provision for loan losses
 
12,279

 
 
12,901

Recovery for unfunded loan commitments
 
(39
)
 
 
(546
)
Net depreciation, amortization and accretion
 
3,309

 
 
1,597

Net amortization of discounts and premiums on securities
 
2,387

 
 
3,065

Stock-based compensation expense
 
1,231

 
 
2,353

Gain on sale of securities
 

 
 
(3,987
)
Mortgage loans originated for sale
 
(68,898
)
 
 
(66,535
)
Proceeds from the sale of mortgage loans
 
70,371

 
 
66,604

Gain on the sale of mortgage loans, net
 
(1,195
)
 
 
(1,061
)
Gain on the sale of majority interest of insurance business
 
(1,873
)
 
 

Pension contribution
 
(20,420
)
 
 

Net increase in interest receivable
 
(1,506
)
 
 
(3,886
)
Net increase in interest payable
 
803

 
 
448

Net decrease in other assets
 
352

 
 
8,735

Net increase in other liabilities
 
9,904

 
 
69

Net Cash Provided by Operating Activities
 
85,185

 
 
83,431

INVESTING ACTIVITIES
 
 
 
 
 
Purchases of securities
 
(79,068
)
 
 
(69,699
)
Proceeds from maturities, prepayments and calls of securities
 
71,433

 
 
58,601

Proceeds from sales of securities
 

 
 
7,751

Net (purchases) sales of Federal Home Loan Bank stock
 
(1,909
)
 
 
1,304

Net increase in loans
 
(64,387
)
 
 
(268,132
)
Proceeds from sale of loans not originated for resale
 
7,695

 
 
3,581

Purchases of premises and equipment
 
(2,588
)
 
 
(3,646
)
Proceeds from the sale of premises and equipment
 
135

 
 
376

Proceeds from the sale of majority interest of insurance business
 
4,540

 
 

Net Cash Used in Investing Activities
 
(64,149
)
 
 
(269,864
)
FINANCING ACTIVITIES
 
 
 
 
 
Net increase in core deposits
 
127,917

 
 
109,637

Net (decrease) increase in certificates of deposit
 
(88,203
)
 
 
61,048

Net decrease in securities sold under repurchase agreements
 
(4,961
)
 
 
(10,909
)
Net (decrease) increase in short-term borrowings
 
(5,000
)
 
 
25,000

Repayments of long-term borrowings
 
(1,867
)
 
 
(1,802
)
Treasury shares issued-net
 
(657
)
 
 
(688
)
Cash dividends paid to common shareholders
 
(25,115
)
 
 
(20,899
)
Repurchase of warrant
 
(7,652
)
 
 

Net Cash (Used) Provided by Financing Activities
 
(5,538
)
 
 
161,387

Net increase (decrease) in cash and cash equivalents
 
15,498

 
 
(25,046
)
Cash and cash equivalents at beginning of period
 
117,152

 
 
139,486

Cash and Cash Equivalents at End of Period
 
$
132,650

 
 
$
114,440

Supplemental Disclosures
 
 
 
 
 
Loans transferred to held for sale
 
$
7,695

 
 
$
43,151

Deposits transferred to held for sale
 
$

 
 
$
38,960

Interest paid
 
$
37,838

 
 
$
24,682

Income taxes paid, net of refunds
 
$
15,728

 
 
$
21,096

Transfer net assets to investment in insurance company partnership
 
$
1,917

 
 
$

Transfers of loans to other real estate owned
 
$
647

 
 
$
2,116

See Notes to Consolidated Financial Statements

5


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 the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission, or SEC, on March 1, 2018. In the opinion of management, the accompanying interim financial information reflects all adjustments, consisting of 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.
On January 1, 2018, we sold a 70 percent majority interest in the assets of our wholly-owned subsidiary S&T Evergreen Insurance, LLC. We transferred our remaining 30 percent ownership interest in the net assets of S&T Evergreen Insurance, LLC to a new entity for a 30 percent ownership interest in a new insurance entity (see Note 13: Sale of a Majority Interest of Insurance Business). We use the equity method of accounting to recognize our partial ownership interest in the new entity.
Reclassification
Amounts in prior period financial statements and footnotes are reclassified whenever necessary to conform to the current period presentation. Reclassifications had no 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.
Revenue from Contracts with Customers
We earn revenue from contracts with our customers when we have completed our performance obligations and recognize that revenue when services are provided to our customers. Our contracts with customers are primarily in the form of account agreements. Generally our services are transferred at a point in time in response to transactions initiated and controlled by our customers under service agreements with an expected duration of one year or less. Our customers have the right to terminate their services agreements at any time.
We do not defer incremental direct costs to obtain contracts with customers that would be amortized in one year or less. These costs are primarily salaries and employee benefits recognized as expense in the period incurred.
Service charges on deposit accounts - We recognize monthly service charges for both commercial and personal banking customers based on account fee schedules. Our performance obligation is generally satisfied and the related revenue recognized over the period in which the service is provided. Other fees are earned based on specific transactions or customer activity within the customers' deposit accounts. These are earned at the time the transaction or customer activity occurs.
Debit and credit card services - Interchange fees are earned whenever debit and credit cards are processed through third-party card payment networks. ATM fees are based on transactions by our customers' and other customers' use of our ATMs or other ATMs. Debit and credit card revenue is recognized at a point in time when the transaction is settled.
Wealth management services - Wealth management services is primarily comprised of fees earned from the management and administration of trusts, assets under management, brokerage and other financial advisory services. Fees are earned over a period of time per the related fee schedules. The fees are based on a fixed amount or a scale based on the level of services provided or assets under management.

6


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

NOTE 1. BASIS OF PRESENTATION - continued

Recently Adopted Accounting Standards Updates, or ASU or Update
Income Statement - Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the Financial Accounting Standards Board, or FASB, issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update allow a reclassification from accumulated other comprehensive income, or AOCI, to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act, or Tax Act. The amendments eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users and will require certain disclosures about the stranded tax effects. This Update is effective for all entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not been issued or made available for issuance. We have elected to reclassify all tax effects related to the Tax Act from AOCI to retained earnings as of January 1, 2018. As such, we have early adopted this Update and reclassified $3.4 million for the release of stranded income tax effects relating to unrealized gains and losses on our securities portfolio and our pension plan from AOCI to retained earnings as of March 31, 2018. The adoption of this ASU had no impact on our Consolidated Statements of Comprehensive Income. Our policy for releasing income tax effects from AOCI is to release them as investments are sold or mature and liabilities are extinguished.
Compensation - Retirement Benefits - Improving the Presentation of Net Periodic Pension Costs and Net Periodic Post Retirement Benefit Costs
In March 2017, the FASB issued ASU No. 2017-07, Compensation Retirement Benefits - Improving the Presentation of Net Periodic Pension Costs and Net Periodic Post Retirement Benefit Costs (Topic 715). The main objective of this ASU is to provide financial statement users with clearer and disaggregated information related to the components of net periodic benefit cost and improve transparency of the presentation of net periodic benefit cost in the financial statements. This Update was effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. Early adoption was permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. Effective March 31, 2016, our qualified and nonqualified defined benefit plans were amended to freeze benefit accruals for all persons entitled to benefits under the plan; as such, the adoption of this ASU had no impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets - Clarifying the Scope of Assets Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
In February 2017, the FASB issued ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). The main objective of this ASU is to provide greater detail on what types of transactions should be accounted for as partial sales of nonfinancial assets. This ASU, as originally issued in ASU No. 2014-09, is intended to reduce the complexity of current GAAP requirements by clarifying which accounting guidance applies to various types of contracts that transfer assets or ownership interests to another entity. This Update was effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017 which is the same time that ASU No. 2014-09 was effective. Early adoption was permitted, but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The adoption of this ASU was applied to the partial sale of our insurance subsidiary in January 2018. As such, the subsidiary is no longer included in our Consolidated Financial Statements and we recognized a $1.9 million gain on the transaction.
Business Combinations - Clarifying the Definition of a Business
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations - Clarifying the Definition of a Business (Topic 805). The main objective of this ASU is to help financial statement preparers evaluate whether a set of transferred assets and activities (either acquired or disposed of) is a business under Topic 805, Business Combinations by changing the definition of a business. The revised definition results in fewer acquisitions being accounted for as business combinations than under previous guidance. The definition of a business is significant because it affects the accounting for acquisitions, the identification of reporting units, consolidation evaluations and the accounting for dispositions. This Update was effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. Early adoption was permitted for transactions not

7


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

NOTE 1. BASIS OF PRESENTATION - continued

yet reflected in financial statements that have been issued or made available for issuance. The adoption of this ASU had no impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. The main objective of this ASU is to require companies to recognize the income tax effects of intercompany sales and transfers of assets other than inventory in the period in which the transfer occurs. This represents a change from previous guidance, which required companies to defer the income tax effects of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized. The new guidance requires companies to defer the income tax effects only of intercompany transfers of inventory. This Update was effective for annual periods beginning after December 15, 2017. Early adoption was permitted as of the beginning of an annual period. If an entity chose to early adopt the amendments in the ASU, it had to do so in the first interim period of its annual financial statements. That is, an entity could not have adopted the amendments in the ASU in a later interim period and apply them as if they were in effect as of the beginning of the year. The adoption of this ASU had no impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The main objective of this ASU is to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in this Update provide guidance on the following eight specific cash flow issues: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of bank-owned life insurance (BOLI) policies, distributions received from equity method investments, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. This Update was effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. Early adoption was permitted, provided that all of the amendments are adopted in the same period. The adoption of this ASU had no material impact to the presentation of activities in our Consolidated Statements of Cash Flows.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This revenue pronouncement established a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded most previous revenue recognition guidance in GAAP. We adopted the new standard as of January 1, 2018. Our primary sources of revenue are derived from interest and dividends earned on loans, investment securities and other financial instruments that are not within the scope of ASU No. 2014-09. We evaluated the nature of our contracts with customers and related revenue streams, including service charges on deposit accounts, debit and credit cards and wealth management and determined that revenue recognition did not change significantly from current practice. We evaluated certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue. The adoption of this ASU had no material impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
Accounting for Financial Instruments - Overall: Classification and Measurement
In January 2016, the FASB issued ASU No. 2016-01, Accounting for Financial Instruments - Overall: Classification and Measurement (Subtopic 825-10). The amendments in this ASU address the following: 1. require equity investments to be measured at fair value with changes in fair value recognized in net income; 2. simplify the impairment assessment of equity investments without readily-determinable fair values by requiring a qualitative assessment to identify impairment; 3. eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; 4. require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 5. require separate presentation in other comprehensive income for the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; 6. require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements; and 7. clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. This ASU was

8


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

NOTE 1. BASIS OF PRESENTATION - continued

effective for annual and interim periods in fiscal years beginning after December 15, 2017. We adopted ASU No. 2016-01 as of January 1, 2018 and have concluded that the provisions of this ASU did not materially impact our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income. The new guidance resulted in a change in the fair value measurement of our loan portfolio as of March 31, 2018 using an exit price notion (see Note 3: Fair Value Measurements). The new guidance also resulted in a cumulative-effect adjustment of $0.9 million from AOCI to retained earnings at January 1, 2018 for net unrealized gains on our marketable equities portfolio. As a result of the new guidance, we recognized $0.1 million of net unrealized losses during the three months ended September 30, 2018 and $0.2 million of net unrealized gains during the nine months ended September 30, 2018 on our marketable equity securities portfolio in our Consolidated Statements of Comprehensive Income.
Accounting Standards Issued But Not Yet Adopted
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU apply to entities that are a customer in a hosting arrangement that is a service contract. These amendments relate to accounting for implementation costs (e.g. implementation, setup and other upfront costs.) These amendments require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which cost to capitalize and which costs to expense. These amendments require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This ASU is effective for annual and interim periods beginning after December 15, 2019. Early adoption of the amendments is permitted, including adoption in any interim period. We are evaluating the amendments in this ASU; however, we do not anticipate that these amendments will materially impact our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU apply to all employers that sponsor defined benefit pension or other postretirement plans. These amendments remove certain disclosures from Topic 715-20 and require additional disclosures. The amendments in this ASU will require S&T to update our employee benefits disclosures beginning with our Form 10-Q for the period ended March 31, 2021. The amendments in this ASU will have no impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove certain disclosures from Topic 820, modify and/or require additional disclosures. The amendments in this Update will require us to change our Fair Value disclosures beginning with our Form 10-Q for the period ended March 31, 2020. The amendments in this ASU will have no impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
Leases - Land Easement Practical Expedient for Transition to Topic 842
In January 2018, the FASB issued ASU No. 2018-01, Leases - Land Easement Practical Expedient for Transition to Topic 842. The amendments in this ASU permit an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that existed or expired before the entity's adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018. We are evaluating the amendments in this ASU; however, we do not anticipate that these amendments will materially impact our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.

9


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

NOTE 1. BASIS OF PRESENTATION - continued

Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment (Topic 350). The main objective of this ASU is to simplify the current requirements for testing goodwill for impairment by eliminating step two from the goodwill impairment test. The amendments are expected to reduce the complexity and costs associated with performing the goodwill impairment test, which could result in recording impairment charges sooner than under the current guidance. This Update is effective for any interim and annual impairment tests in reporting periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are evaluating the provisions of this ASU; however, we do not anticipate that this ASU will materially impact our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments of this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The collective changes to the recognition and measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling have been universally referred to as CECL, or current expected credit loss, model. This Update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We have created a CECL Committee to govern the implementation of these amendments consisting of key stakeholders from Credit Administration, Finance, Risk Management and Internal Audit. We have engaged a third-party to assist us in developing our CECL methodology. We continue to evaluate the provisions of this ASU to determine the potential impact on our Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income.
Leases - Section A-Amendments to the FASB Accounting Standards Codification, Section B-Conforming Amendments Related to Leases and Section C-Background Information and Basis for Conclusions
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize a right-to-use asset and a lease obligation for all leases on the balance sheet. Lessor accounting remains substantially similar to current GAAP. ASU No. 2016-02 supersedes Topic 840, Leases. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018. ASU No. 2016-02 mandates a modified retrospective transition method for all entities. Early adoption of this ASU is permitted. We anticipate that this ASU will impact our financial statements as it relates to the recognition of right-to-use assets and lease obligations on our Consolidated Balance Sheets. We have approximately 50 lease agreements for our branch and loan production offices, which are currently accounted for as operating leases. We expect the new guidance will require recognition of right-to-use assets and corresponding lease liabilities in the range of $30 million to $35 million on our Consolidated Balance Sheets in the first quarter of 2019. We expect that these changes to our Consolidated Balance Sheets will have a minor impact to our regulatory capital ratios. We have compiled a preliminary inventory of our leases and continue to evaluate the standard as additional lease accounting guidance continues to be released. We anticipate that this ASU will impact total assets and total liabilities presented on our Balance Sheets; however, we do not believe that it will materially impact our Consolidated Statements of Comprehensive Income.

10


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

NOTE 2. EARNINGS PER SHARE

Diluted earnings per share is calculated using both the two-class and the treasury stock methods with the more dilutive method used to determine diluted earnings per share. For both the three months and nine months ended September 30, 2018, the treasury stock method is more dilutive and was used to determine diluted earnings per share. The following table reconciles the numerators and denominators of basic and diluted earnings per share calculations for the periods presented.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except share and per share data)
2018
 
2017
 
2018
 
2017
Numerator for Earnings per Share—Basic:
 

 
 

 
 

 
 

Net income
 
$
30,881

 
 
$
22,721

 
 
$
78,480

 
 
$
63,674

Less: Income allocated to participating shares
 
87

 
 
73

 
 
229

 
 
214

Net Income Allocated to Shareholders
 
$
30,794

 
 
$
22,648

 
 
$
78,251

 
 
$
63,460

 
 
 
 
 
 
 
 
 
 
 
 
Numerator for Earnings per Share—Diluted:
 

 
 

 
 

 
 

Net income
 
$
30,881

 
 
$
22,721

 
 
$
78,480

 
 
$
63,674

Net Income Available to Shareholders
 
$
30,881

 
 
$
22,721

 
 
$
78,480

 
 
$
63,674

 
 
 
 
 
 
 
 
 
 
 
 
Denominators for Earnings per Share:
 

 
 

 
 

 
 

Weighted Average Shares Outstanding—Basic
 
34,799,174

 
 
34,751,266

 
 
34,783,175

 
 
34,722,370

Add: Potentially dilutive shares
 
220,118

 
 
208,873

 
 
228,909

 
 
208,139

Denominator for Treasury Stock Method—Diluted
 
35,019,292

 
 
34,960,139

 
 
35,012,084

 
 
34,930,509

 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding—Basic
 
34,799,174

 
 
34,751,266

 
 
34,783,175

 
 
34,722,370

Add: Average participating shares outstanding
 
98,579

 
 
111,821

 
 
101,808

 
 
116,969

Denominator for Two-Class Method—Diluted
 
34,897,753

 
 
34,863,087

 
 
34,884,983

 
 
34,839,339

 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share—basic
 
$
0.89

 
 
$
0.65

 
 
$
2.26

 
 
$
1.83

Earnings per share—diluted
 
$
0.88

 
 
$
0.65

 
 
$
2.24

 
 
$
1.82

Warrants considered anti-dilutive excluded from potentially dilutive shares - exercise price $31.53 per share, expires January 2019 (1)
 
285,915

 
 
443,575

 
 
351,166

 
 
452,188

Restricted stock considered anti-dilutive excluded from potentially dilutive shares
 
113,451

 
 
92,577

 
 
113,390

 
 
95,707

(1)We repurchased our outstanding warrant on September 11, 2018 for $7.7 million. Prior to the repurchase, the warrant provided the holder the right to 517,012 shares of common stock at a strike price of $31.53 per share via cashless exercise.

11


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

NOTE 3. FAIR VALUE MEASUREMENTS

We use fair value measurements when recording and disclosing certain financial assets and liabilities. Debt securities, equity securities, trading assets and derivative financial instruments 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, and other repossessed assets, 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 are developed based on market data that we have obtained from independent sources. Unobservable inputs reflect our estimates 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
Debt Securities Available-for-Sale
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 provide 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, vast descriptive terms and conditions databases, and extensive quality control programs.

Equity Securities
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. Rabbi Trust assets are reported in other assets in the Consolidated Balance Sheets.

12


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

NOTE 3. 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 and any applicable credit enhancements and collateral postings.
Nonrecurring Basis
Loans Held for Sale
Loans held for sale consist of 1-4 family residential loans originated for sale in the secondary market and, from time to time, certain loans transferred from the loan portfolio to loans held for sale, all of which are carried at the lower of cost or fair value. The fair value of 1-4 family residential loans is based on the principal or most advantageous market currently offered for similar loans using observable market data. The fair value of the loans transferred from the loan portfolio is based on the amounts offered for these loans in currently pending sales transactions. Loans held for sale carried at fair value are classified as Level 3.
Impaired Loans
Impaired loans are carried at the lower of carrying value or fair value. Fair value is determined as the recorded investment balance less any specific reserve. We establish specific reserves 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. MSRs are reported in other assets in the Consolidated Balance Sheets and are amortized into noninterest income in the Consolidated Statements of Comprehensive Income.

13


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

NOTE 3. FAIR VALUE MEASUREMENTS – continued

Other Assets
We measure certain other assets at fair value on a nonrecurring basis. Fair value is based on the application of lower of cost or fair value accounting, or write-downs of individual assets. Valuation methodologies used to measure fair value are consistent with overall principles of fair value accounting and consistent with those described above.
Financial Instruments
In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and a 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
With the adoption of ASU No. 2016-01, Accounting for Financial Instruments - Overall: Classification and Measurement, on January 1, 2018, we refined our methodology to estimate the fair value of our loan portfolio to use the exit price notion as required by the standard. The guidance was applied on a prospective basis resulting in prior periods no longer being comparable.
The fair value of variable rate loans that may reprice frequently at short-term market rates is based on carrying values adjusted for liquidity and credit risk. The fair value of variable rate 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 liquidity and credit risk. The fair value of fixed rate loans is estimated using a discounted cash flow analysis that utilizes interest rates currently being offered for similar loans adjusted for liquidity and credit risk.
Bank Owned Life Insurance
Fair value approximates net cash surrender value of bank owned life insurance, or BOLI.
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; 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, or REPOs, and other short-term borrowings approximate their fair values.

14


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

NOTE 3. FAIR VALUE MEASUREMENTS – continued

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 interest rate on the variable rate junior subordinated debt securities is reset quarterly; therefore, the carrying values approximate their fair values.
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.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following tables present our assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy level at September 30, 2018 and December 31, 2017. There were no transfers between Level 1 and Level 2 for items measured at fair value on a recurring basis during the periods presented.
 
September 30, 2018
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
ASSETS
 
 
 
 
 
 
 
Debt securities available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$

 
$
9,556

 
$

 
$
9,556

Obligations of U.S. government corporations and agencies

 
136,984

 

 
136,984

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

 
137,660

 

 
137,660

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

 
26,450

 

 
26,450

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

 
244,596

 

 
244,596

Obligations of states and political subdivisions

 
121,975

 

 
121,975

Total Debt Securities Available-for-Sale

 
677,221

 

 
677,221

Marketable equity securities(1)

 
5,314

 

 
5,314

Total Securities

 
682,535

 

 
682,535

Trading securities held in a Rabbi Trust
5,377

 

 

 
5,377

Derivative financial assets:
 
 
 
 
 
 
 
Interest rate swaps

 
7,448

 

 
7,448

Interest rate lock commitments

 
229

 

 
229

Forward sale contracts - mortgage loans

 
61

 

 
61

Total Assets
$
5,377

 
$
690,273

 
$

 
$
695,650

LIABILITIES
 
 
 
 
 
 
 
Derivative financial liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
7,483

 
$

 
$
7,483

Total Liabilities
$

 
$
7,483

 
$

 
$
7,483

(1)ASU No. 2016-01 was adopted January 1, 2018, resulting in separate classification of our marketable equity securities previously included in available-for-sale securities.


15


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

NOTE 3. FAIR VALUE MEASUREMENTS – continued

 
 
December 31, 2017
(dollars in thousands)
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Debt securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$

 
 
$
19,789

 
 
$

 
 
$
19,789

Obligations of U.S. government corporations and agencies
 

 
 
162,193

 
 

 
 
162,193

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

 
 
108,688

 
 

 
 
108,688

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

 
 
32,854

 
 

 
 
32,854

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

 
 
242,221

 
 

 
 
242,221

Obligations of states and political subdivisions
 

 
 
127,402

 
 

 
 
127,402

Total Debt Securities Available-for-Sale
 

 
 
693,147

 
 

 
 
693,147

Marketable equity securities
 

 
 
5,144

 
 

 
 
5,144

Total Securities
 

 
 
698,291

 
 

 
 
698,291

Trading securities held in a Rabbi Trust
 
5,080

 
 

 
 

 
 
5,080

Derivative financial assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 

 
 
3,074

 
 

 
 
3,074

Interest rate lock commitments
 

 
 
226

 
 

 
 
226

Total Assets
 
$
5,080

 
 
$
701,591

 
 
$

 
 
$
706,671

LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
Derivative financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
 
$
3,055

 
 
$

 
 
$
3,055

Forward sale contracts
 

 
 
5

 
 

 
 
5

Total Liabilities
 
$

 
 
$
3,060

 
 
$

 
 
$
3,060


We classify financial instruments as Level 3 when valuation models are used because significant inputs are not observable in the market.     
We may be required to measure certain assets and liabilities at fair value on a nonrecurring basis. Nonrecurring assets are recorded at the lower of cost or fair value in our financial statements. There were no liabilities measured at fair value on a nonrecurring basis at either September 30, 2018 or December 31, 2017.
The following table presents our assets that are measured at fair value on a nonrecurring basis by the fair value hierarchy level as of the dates presented:
 
 
September 30, 2018
 
 
December 31, 2017
(dollars in thousands)
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
ASSETS(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
$

 
 
$

 
 
$
3,577

 
 
$
3,577

 
 
$

 
 
$

 
 
$
6,759

 
 
$
6,759

Other real estate owned
 

 
 

 
 
2,871

 
 
2,871

 
 

 
 

 
 
444

 
 
444

Mortgage servicing rights
 

 
 

 
 
85

 
 
85

 
 

 
 

 
 
178

 
 
178

Total Assets
 
$

 
 
$

 
 
$
6,533

 
 
$
6,533

 
 
$

 
 
$

 
 
$
7,381

 
 
$
7,381

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

16


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

NOTE 3. FAIR VALUE MEASUREMENTS – continued

The carrying values and fair values of our financial instruments at September 30, 2018 and December 31, 2017 are presented in the following tables:
 
Carrying
Value(1) 
 
Fair Value Measurements at September 30, 2018
(dollars in thousands)
 
Total
 
Level 1
 
Level 2
 
Level 3
ASSETS
 
 
 
 
 
 
 
 
 
Cash and due from banks, including interest-bearing deposits
$
132,650

 
$
132,650

 
$
132,650

 
$

 
$

Securities
682,535

 
682,535

 

 
682,535

 

Loans held for sale
4,207

 
4,377

 

 

 
4,377

Portfolio loans, net
5,747,251

 
5,585,934

 

 

 
5,585,934

Bank owned life insurance
73,626

 
73,626

 

 
73,626

 

FHLB and other restricted stock
31,178

 
31,178

 

 

 
31,178

Trading securities held in a Rabbi Trust
5,377

 
5,377

 
5,377

 

 

Mortgage servicing rights
4,421

 
5,456

 

 

 
5,456

Interest rate swaps
7,448

 
7,448

 

 
7,448

 

Interest rate lock commitments
229

 
229

 

 
229

 

Forward sale contracts - mortgage loans
61

 
61

 

 
61

 

LIABILITIES
 
 

 
 
 
 
 
 
Deposits
$
5,467,509

 
$
5,451,776

 
$

 
$

 
$
5,451,776

Securities sold under repurchase agreements
45,200

 
45,200

 

 

 
45,200

Short-term borrowings
535,000

 
535,000

 

 

 
535,000

Long-term borrowings
45,434

 
45,564

 

 

 
45,564

Junior subordinated debt securities
45,619

 
45,619

 

 

 
45,619

Interest rate swaps
7,483

 
7,483

 

 
7,483

 

(1) As reported in the Consolidated Balance Sheets
 
 
 
 
 
 
 
 
 
 
Carrying
Value(1)
 
Fair Value Measurements at December 31, 2017
(dollars in thousands)
 
Total
 
Level 1
 
Level 2
 
Level 3
ASSETS
 
 
 
 
 
 
 
 
 
Cash and due from banks, including interest-bearing deposits
$
117,152

 
$
117,152

 
$
117,152

 
$

 
$

Securities
698,291

 
698,291

 

 
698,291

 

Loans held for sale
4,485

 
4,583

 

 

 
4,583

Portfolio loans, net
5,705,059

 
5,690,292

 

 

 
5,690,292

Bank owned life insurance
72,150

 
72,150

 

 
72,150

 

FHLB and other restricted stock
29,270

 
29,270

 

 

 
29,270

Trading securities held in a Rabbi Trust
5,080

 
5,080

 
5,080

 

 

Mortgage servicing rights
4,133

 
4,571

 

 

 
4,571

Interest rate swaps
3,074

 
3,074

 

 
3,074

 

Interest rate lock commitments
226

 
226

 

 
226

 

LIABILITIES
 
 
 
 
 
 
 
 
 
Deposits
$
5,427,891

 
$
5,426,928

 
$

 
$

 
$
5,426,928

Securities sold under repurchase agreements
50,161

 
50,161

 

 

 
50,161

Short-term borrowings
540,000

 
540,000

 

 

 
540,000

Long-term borrowings
47,301

 
47,618

 

 

 
47,618

Junior subordinated debt securities
45,619

 
45,619

 

 

 
45,619

Interest rate swaps
3,055

 
3,055

 

 
3,055

 

Forward sales contracts
5

 
5

 

 
5

 

(1) As reported in the Consolidated Balance Sheets
 
 
 
 
 
 
 
 
 

17


S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 4. SECURITIES

The following table presents the fair values of our securities portfolio at the dates presented:
(dollars in thousands)
September 30, 2018
 
December 31, 2017
Debt securities available-for-sale
 
$
677,221

 
 
$
693,147

Marketable equity securities
 
5,314

 
 
5,144

Total Securities
 
$
682,535

 
 
$
698,291

Debt Securities Available-for-Sale
The following tables present the amortized cost and fair value of debt securities available-for-sale as of September 30, 2018 and debt and equity securities available-for-sale as of December 31, 2017:
 
September 30, 2018
 
December 31, 2017
(dollars in thousands)
Amortized
Cost
 
 
Gross
Unrealized
Gains
 
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
 
Amortized
Cost