STBA-2014.6.30-10Q
Table of Contents

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



Table of Contents

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


2
Table of Contents

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



 
June 30, 2014
December 31, 2013
(dollars in thousands, except share data)
(Unaudited)
(Audited)
ASSETS
 
 
Cash and due from banks, including interest-bearing deposits of $54,575 and $53,594 at June 30, 2014 and December 31, 2013, respectively
$
130,235

$
108,356

Securities available-for-sale, at fair value
588,488

509,425

Loans held for sale
3,102

2,136

Portfolio loans, net of unearned income
3,725,079

3,566,199

Allowance for loan losses
(46,580
)
(46,255
)
Portfolio loans, net
3,678,499

3,519,944

Bank owned life insurance
61,348

60,480

Premises and equipment, net
36,665

36,615

Federal Home Loan Bank and other restricted stock, at cost
15,818

13,629

Goodwill
175,820

175,820

Other intangible assets, net
3,146

3,759

Other assets
94,909

103,026

Total Assets
$
4,788,030

$
4,533,190

LIABILITIES
 
 
Deposits:
 
 
Noninterest-bearing demand
$
1,089,999

$
992,779

Interest-bearing demand
307,897

312,790

Money market
301,719

281,403

Savings
1,024,050

994,805

Certificates of deposit
1,141,581

1,090,531

Total Deposits
3,865,246

3,672,308

Securities sold under repurchase agreements
25,269

33,847

Short-term borrowings
185,000

140,000

Long-term borrowings
20,636

21,810

Junior subordinated debt securities
45,619

45,619

Other liabilities
49,073

48,300

Total Liabilities
4,190,843

3,961,884

SHAREHOLDERS’ EQUITY
 
 
Common stock ($2.50 par value)
Authorized—50,000,000 shares
Issued—31,197,365 shares at June 30, 2014 and December 31, 2013
Outstanding—29,797,204 shares at June 30, 2014 and 29,737,725 shares at December 31, 2013
77,993

77,993

Additional paid-in capital
78,570

78,140

Retained earnings
485,277

468,158

Accumulated other comprehensive income (loss)
(6,026
)
(12,694
)
Treasury stock 1,400,161 shares at June 30, 2014 and 1,459,640 shares at December 31, 2013, (at cost)
(38,627
)
(40,291
)
Total Shareholders’ Equity
597,187

571,306

Total Liabilities and Shareholders’ Equity
$
4,788,030

$
4,533,190

See Notes to Consolidated Financial Statements

3
Table of Contents

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)
2014
2013
 
2014
2013
INTEREST INCOME
 
 
 
 
 
Loans, including fees
$
36,614

$
35,765

 
$
72,263

$
70,810

Investment Securities:
 
 
 
 
 
Taxable
2,184

1,879

 
4,167

3,742

Tax-exempt
979

815

 
1,908

1,648

Dividends
95

94

 
199

196

Total Interest Income
39,872

38,553

 
78,537

76,396

INTEREST EXPENSE
 
 
 
 
 
Deposits
2,476

2,951

 
4,986

6,153

Borrowings and junior subordinated debt securities
541

1,006

 
1,105

1,978

Total Interest Expense
3,017

3,957

 
6,091

8,131

NET INTEREST INCOME
36,855

34,596

 
72,446

68,265

Provision for loan losses
(1,134
)
1,023

 
(845
)
3,330

Net Interest Income After Provision for Loan Losses
37,989

33,573

 
73,291

64,935

NONINTEREST INCOME
 
 
 
 
 
Securities gains, net
40

—

 
41

2

Wealth management fees
2,837

2,820

 
5,792

5,396

Debit and credit card fees
2,724

3,150

 
5,226

5,601

Service charges on deposit accounts
2,574

2,495

 
5,083

4,943

Insurance fees
1,425

1,643

 
3,102

3,418

Mortgage banking
264

911

 
396

1,393

Gain on sale of merchant card servicing business
—

—

 
—

3,093

Other
1,907

1,848

 
3,547

3,827

Total Noninterest Income
11,771

12,867

 
23,187

27,673

NONINTEREST EXPENSE
 
 
 
 
 
Salaries and employee benefits
15,772

14,725

 
31,148

30,792

Data processing
2,219

2,137

 
4,314

4,801

Net occupancy
1,984

1,958

 
4,214

4,127

Furniture and equipment
1,277

1,230

 
2,548

2,538

Marketing
960

793

 
1,578

1,482

Other taxes
893

915

 
1,524

1,914

Professional services and legal
875

1,171

 
1,538

2,145

FDIC insurance
579

707

 
1,210

1,483

Other
5,606

4,750

 
11,005

10,720

Total Noninterest Expense
30,165

28,386

 
59,079

60,002

Income Before Taxes
19,595

18,054

 
37,399

32,606

Provision for income taxes
4,875

3,951

 
8,646

6,173

Net Income
$
14,720

$
14,103

 
$
28,753

$
26,433

Earnings per share—basic
$
0.49

$
0.47

 
$
0.97

$
0.89

Earnings per share—diluted
$
0.49

$
0.47

 
$
0.97

$
0.89

Dividends declared per share
$
0.17

$
0.15

 
$
0.33

$
0.30

Comprehensive Income
$
18,343

$
6,651

 
$
35,421

$
18,220

See Notes to Consolidated Financial Statements

4
Table of Contents

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

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

$
77,458

$
436,039

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

Net income for six months ended June 30, 2013
—

—

26,433

—

—

26,433

Other comprehensive income (loss), net of tax
—

—

—

(8,213
)
—

(8,213
)
Cash dividends declared ($0.30 per share)
—

—

(8,918
)
—

—

(8,918
)
Treasury stock issued for restricted awards (22,189 shares, net of 16,093 forfeitures)
—

—

(296
)
—

210

(86
)
Recognition of restricted stock compensation expense
—

261

—

—

—

261

Tax expense from stock-based compensation
—

(47
)
—

—

—

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

$
77,672

$
453,258

$
(21,795
)
$
(40,276
)
$
546,852

 
 
 
 
 
 
 
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

Tax expense from stock-based compensation
—

—

—

—

—

—

Balance at June 30, 2014
$
77,993

$
78,570

$
485,277

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

See Notes to Consolidated Financial Statements


5
Table of Contents

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


 
Six Months Ended June 30,
(dollars in thousands)
2014
2013
OPERATING ACTIVITIES
 
 
Net income
$
28,753

$
26,433

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


Provision for loan losses
(845
)
3,330

Provision for unfunded loan commitments
182

302

Depreciation and amortization
2,309

3,061

Net amortization of discounts and premiums
1,898

1,776

Stock-based compensation expense
395

254

Securities gains, net
(41
)
(2
)
Net gain on sale of merchant card servicing business
—

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

47

Mortgage loans originated for sale
(13,057
)
(37,706
)
Proceeds from the sale of loans
13,475

57,667

Gain on the sale of loans, net
(85
)
(647
)
Net increase in interest receivable
(243
)
(1,222
)
Net decrease in interest payable
(186
)
(1,241
)
Net decrease in other assets
10,016

17,243

Net increase (decrease) in other liabilities
1,199

(20,981
)
Net Cash Provided by Operating Activities
43,770

45,221

INVESTING ACTIVITIES
 
 
Purchases of securities available-for-sale
(108,845
)
(66,495
)
Proceeds from maturities, prepayments and calls of securities available-for-sale
36,343

23,240

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

94

Net (payments for) proceeds from Federal Home Loan Bank stock
(2,189
)
1,356

Net increase in loans
(169,209
)
(103,846
)
Proceeds from sale of loans not originated for resale
4,108

—

Purchases of premises and equipment
(1,719
)
(1,400
)
Proceeds from the sale of premises and equipment
64

576

Proceeds from the sale of merchant card servicing business
—

4,750

Net Cash Used in Investing Activities
(240,029
)
(141,725
)
FINANCING ACTIVITIES
 
 
Net increase (decrease) in core deposits
141,888

(26,999
)
Net increase in certificates of deposit
50,972

36,842

Net (decrease) increase in securities sold under repurchase agreements
(8,578
)
11,569

Net increase in short-term borrowings
45,000

50,000

Repayments of long-term borrowings
(1,174
)
(11,136
)
Repayment of junior subordinated debt
—

(45,000
)
Treasury shares purchased-net
(160
)
(86
)
Cash dividends paid to common shareholders
(9,810
)
(8,918
)
Tax expense from stock-based compensation
—

(47
)
Net Cash Provided by Financing Activities
218,138

6,225

Net increase (decrease) in cash and cash equivalents
21,879

(90,279
)
Cash and cash equivalents at beginning of period
108,356

337,711

Cash and Cash Equivalents at End of Period
$
130,235

$
247,432

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

$
—

Interest paid
6,278

9,372

Income taxes paid, net of refunds
8,400

5,155

Transfers of loans to other real estate owned
$
274

$
180

See Notes to Consolidated Financial Statements

6
Table of Contents

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


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

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

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







7
Table of Contents

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

NOTE 1. BASIS OF PRESENTATION – continued

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

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

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

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

8
Table of Contents

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

NOTE 1. BASIS OF PRESENTATION – continued

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

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


9
Table of Contents

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

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

 

 

 

Net income
$
14,720

 
$
14,103

 
$
28,753

 
$
26,433

Less: Income allocated to participating shares
29

 
36

 
64

 
81

Net Income Allocated to Shareholders
$
14,691

 
$
14,067

 
$
28,689

 
$
26,352

 
 
 
 
 
 
 
 
Numerator for Earnings per Share—Diluted:

 

 

 

Net income
14,720

 
14,103

 
$
28,753

 
$
26,433

Net Income Available to Shareholders
$
14,720

 
$
14,103

 
$
28,753

 
$
26,433

 
 
 
 
 
 
 
 
Denominators for Earnings per Share:

 

 

 

Weighted Average Shares Outstanding—Basic
29,684,300

 
29,654,018

 
29,672,611

 
29,637,825

Add: Dilutive potential shares
16,894

 
23,858

 
27,559

 
41,319

Denominator for Treasury Stock Method—Diluted
29,701,194

 
29,677,876

 
29,700,170

 
29,679,144

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding—Basic
29,684,300

 
29,654,018

 
29,672,611

 
29,637,825

Add: Average participating shares outstanding
58,973

 
74,994

 
66,563

 
91,530

Denominator for Two-Class Method—Diluted
29,743,273

 
29,729,012

 
29,739,174

 
29,729,355

Earnings per share—basic
$
0.49

 
$
0.47

 
$
0.97

 
$
0.89

Earnings per share—diluted
$
0.49

 
$
0.47

 
$
0.97

 
$
0.89

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

 
517,012

 
517,012

 
517,012

Stock options considered anti-dilutive excluded from dilutive potential shares
428,493

 
629,570

 
428,676

 
642,499

Restricted stock considered anti-dilutive excluded from dilutive potential shares
42,079

 
51,136

 
39,005

 
50,211


10
Table of Contents

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

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

11
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 3. FAIR VALUE MEASUREMENT – continued

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

12
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 3. FAIR VALUE MEASUREMENT – continued

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

13
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 3. FAIR VALUE MEASUREMENT – continued

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

$
270,248

$
—

$
270,248

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

94,604

—

94,604

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

46,389

—

46,389

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

39,920

—

39,920

Obligations of states and political subdivisions
—

128,313

—

128,313

Marketable equity securities
179

8,835

—

9,014

Total securities available-for-sale
179

588,309

—

588,488

Trading securities held in a Rabbi Trust
3,117

—

—

3,117

Total securities
3,296

588,309

—

591,605

Derivative financial assets:
 
 
 
 
Interest rate swaps
—

14,082

—

14,082

Interest rate lock commitments
—

292

—

292

Forward sale contracts
—

—

—

—

Total Assets
$
3,296

$
602,683

$
—

$
605,979

LIABILITIES
 
 
 
 
Derivative financial liabilities:
 
 
 
 
Interest rate swaps
$
—

$
14,050

$
—

$
14,050

Forward sale contracts
—

59

—

$
59

Total Liabilities
$
—

$
14,109

$
—

$
14,109


14
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 3. FAIR VALUE MEASUREMENT – continued

 
December 31, 2013
(dollars in thousands)
Level 1
Level 2
Level 3
Total
ASSETS
 
 
 
 
Securities available-for-sale:
 
 
 
 
Obligations of U.S. government corporations and agencies
$
—

$
234,751

$
—

$
234,751

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

63,774

—

63,774

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

48,669

—

48,669

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

39,052

—

39,052

Obligations of states and political subdivisions
—

114,264

—

114,264

Marketable equity securities
202

8,713

—

8,915

Total securities available-for-sale
202

509,223

—

509,425

Trading securities held in a Rabbi Trust
2,864

—

—

2,864

Total securities
3,066

509,223

—

512,289

Derivative financial assets:
 
 
 
 
Interest rate swaps
—

13,698

—

13,698

Interest rate lock commitments
—

85

—

85

Forward sale contracts
—

34

—

34

Total Assets
$
3,066

$
523,040

$
—

$
526,106

LIABILITIES
 
 
 
 
Derivative financial liabilities:
 
 
 
 
Interest rate swaps
$
—

$
13,647

$
—

$
13,647

Total Liabilities
$
—

$
13,647

$
—

$
13,647

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

$
312

 
$
—

$
300

Total gains included in other comprehensive income(1)
—

32

 
—

44

Net purchases, sales, issuances and settlements
—

—

 
—

—

Transfers out of Level 3
—

(344
)
 
—

(344
)
Balance at end of period
$
—

$
—

 
$
—

$
—

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

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

15
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 3. FAIR VALUE MEASUREMENT – continued

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

$
—

$
1,300

$
1,300

 
$
—

$
—

$
1,516

$
1,516

Impaired loans
—

—

14,483

14,483

 
—

—

19,197

19,197

Other real estate owned
—

—

317

317

 
—

—

317

317

Mortgage servicing rights
—

—

1,211

1,211

 
—

—

1,025

1,025

Total Assets
$
—

$
—

$
17,311

$
17,311

 
$
—

$
—

$
22,055

$
22,055



16
Table of Contents

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

NOTE 3. FAIR VALUE MEASUREMENT – continued

The carrying values and fair values of our financial instruments at June 30, 2014 and December 31, 2013 are presented in the following tables:
 
Carrying
Value(1) 
Fair Value Measurements at June 30, 2014
(dollars in thousands)
Total
Level 1
Level 2
Level 3
ASSETS
 
 
 
 
 
Cash and due from banks, including interest-bearing deposits
$
130,235

$
130,235

$
130,235

$
—

$
—

Securities available-for-sale
588,488

588,488

179

588,309

—

Loans held for sale
3,102

3,121

—

—

3,121

Portfolio loans, net of unearned income
3,725,079

3,691,807

—

—

3,691,807

Bank owned life insurance
61,348

61,348

—

61,348

—

FHLB and other restricted stock
15,818

15,818

—

—

15,818

Trading securities held in a Rabbi Trust
3,117

3,117

3,117

—

—

Mortgage servicing rights
2,743

2,890

—

—

2,890

Interest rate swaps
14,082

14,082

—

14,082

—

Interest rate lock commitments
292

292

—

292

—

LIABILITIES
 

 
 
 
Deposits
$
3,865,246

$
3,867,540

$
—

$
—

$
3,867,540

Securities sold under repurchase agreements
25,269

25,269

—

—

25,269

Short-term borrowings
185,000

185,000

—

—

185,000

Long-term borrowings
20,636

21,779

—

—

21,779

Junior subordinated debt securities
45,619

45,619

—

—

45,619

Interest rate swaps
14,050

14,050

—

14,050

—

Forward sale contracts
59

59

—

59
—

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

$
108,356

$
108,356

$
—

$
—

Securities available-for-sale
509,425

509,425

202

509,223

—

Loans held for sale
2,136

2,139

—

—

2,139

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

3,538,072

—

—

3,538,072

Bank owned life insurance
60,480

60,480

—

60,480

—

FHLB and other restricted stock
13,629

13,629

—

—

13,629

Trading securities held in a Rabbi Trust
2,864

2,864

2,864

—

—

Mortgage servicing rights
2,919

3,143

—

—

3,143

Interest rate swaps
13,698

13,698

—

13,698

—

Interest rate lock commitments
85

85

—

85

—

Forward sale contracts
34

34

—

34

—

LIABILITIES
 

 
 
 
Deposits
$
3,672,308

$
3,673,624

$
—

$
—

$
3,673,624

Securities sold under repurchase agreements
33,847

33,847

—

—

33,847

Short-term borrowings
140,000

140,000

—

—

140,000

Long-term borrowings
21,810

22,924

—

—

22,924

Junior subordinated debt securities
45,619

45,619

—

—

45,619

Interest rate swaps
13,647

13,647

—

13,647

—

(1) As reported in the Consolidated Balance Sheets 

17
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

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

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

 
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Obligations of U.S. government corporations and agencies
$
268,614

$
2,733

$
(1,099
)
$
270,248

 
$
235,181

$
2,151

$
(2,581
)
$
234,751

Collateralized mortgage obligations of U.S. government corporations and agencies
93,787

1,035

(218
)
94,604

 
63,776

601

(603
)
63,774

Residential mortgage-backed securities of U.S. government corporations and agencies
44,900

1,720

(231
)
46,389

 
47,934

1,420

(685
)
48,669

Commercial mortgage-backed securities of U.S. government corporations and agencies
40,098

224

(402
)
39,920

 
40,357

—

(1,305
)
39,052

Obligations of states and political subdivisions
124,648

4,017

(352
)
128,313

 
115,572

1,294

(2,602
)
114,264

Debt Securities
572,047

9,729

(2,302
)
579,474

 
502,820

5,466

(7,776
)
500,510

Marketable equity securities
7,579

1,435

—

9,014

 
7,579

1,336

—

8,915

Total
$
579,626

$
11,164

$
(2,302
)
$
588,488

 
$
510,399

$
6,802

$
(7,776
)
$
509,425


Realized gains and losses on the sale of securities are determined using the specific-identification method. The following table shows the composition of gross and net realized gains and losses for the periods presented:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2014
 
2013
 
2014
 
2013
Gross realized gains
$
40

 
$
—

 
$
41

 
$
2

Gross realized losses
—

 
—

 
—

 
—

Net Realized Gains
$
40

 
$
—

 
$
41

 
$
2



18
Table of Contents

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

NOTE 4. SECURITIES AVAILABLE-FOR-SALE – continued

The following tables indicate the fair value and the age of gross unrealized losses by investment category as of the dates presented:
 
June 30, 2014
 
Less Than 12 Months
 
12 Months or More
 
Total
(dollars in thousands)
Number of Securities
Fair Value
Unrealized
Losses
 
Number of Securities
Fair Value
Unrealized
Losses
 
Fair Value
Number of Securities
Unrealized
Losses
Obligations of U.S. government corporations and agencies
2
$
19,741

$
(78
)
 
8
$
63,265

$
(1,021
)
 
$
83,006

10
$
(1,099
)
Collateralized mortgage obligations of U.S. government corporations and agencies
1
11,420

(218
)
 
—
—

—

 
11,420

1
(218
)
Residential mortgage-backed securities of U.S. government corporations and agencies
—
—

—

 
1
9,414

(231
)
 
9,414

1
(231
)
Commercial mortgage-backed securities of U.S. government corporations and agencies
1
10,009

(16
)
 
2
20,837

(386
)
 
30,846

3
(402
)
Obligations of states and political subdivisions
1
264

(1
)
 
3
15,975

(351
)
 
16,239

4
(352
)
Debt Securities
5
41,434

(313
)
 
14
109,491

(1,989
)
 
150,925

19
(2,302
)
Marketable equity securities
—
—

—

 
—
—

—

 
—

—
—

Total Temporarily Impaired Securities
5
$
41,434

$
(313
)
 
14
$
109,491

$
(1,989
)
 
$
150,925

19
$
(2,302
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
Less Than 12 Months
 
12 Months or More
 
Total
(dollars in thousands)
Number of Securities
Fair Value
Unrealized
Losses
 
Number of Securities
Fair Value
Unrealized
Losses
 
Fair Value
Number of Securities
Unrealized
Losses
Obligations of U.S. government corporations and agencies
16
$
126,017

$
(2,581
)
 
—
$
—

$
—

 
$
126,017

16
$
(2,581
)
Collateralized mortgage obligations of U.S. government corporations and agencies
3
39,522

(603
)
 
—
—

—

 
39,522

3
(603
)
Residential mortgage-backed securities of U.S. government corporations and agencies
2
22,822

(685
)
 
—
—

—

 
22,822

2
(685
)
Commercial mortgage-backed securities of U.S. government corporations and agencies
4
39,052

(1,305
)
 
—
—

—

 
39,052

4
(1,305
)
Obligations of states and political subdivisions
16
47,529

(1,739
)
 
2
10,088

(863
)
 
57,617

18
(2,602
)
Debt Securities
41
274,942

(6,913
)
 
2
10,088

(863
)
 
285,030

43
(7,776
)
Marketable equity securities
—
—

—

 
—
—

—

 
—

—
—

Total Temporarily Impaired Securities
41
$
274,942

$
(6,913
)
 
2
$
10,088

$
(863
)
 
$
285,030

43
$
(7,776
)

19
Table of Contents

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

NOTE 4. SECURITIES AVAILABLE-FOR-SALE – continued

We do not believe any individual unrealized loss as of June 30, 2014 represents an other than temporary impairment, or OTTI. As of June 30, 2014, the unrealized losses on 19 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, 2014. We do not intend to sell and it is not more likely than not that we will be required to sell any of the securities, referenced in the table above, in an unrealized loss position before recovery of their amortized cost.
The following table displays net unrealized gains and losses, net of tax on securities available for sale included in accumulated other comprehensive income/(loss) for the periods presented.

June 30, 2014
 
December 31, 2013
(dollars in thousands)
Gross Unrealized Gains

Gross Unrealized Losses

Net Unrealized Gains/ (Losses)

 
Gross Unrealized Gains

Gross Unrealized Losses

Net Unrealized Gains/ (Losses)

Total unrealized gains/(losses) on securities available-for-sale
$
11,164

$
(2,302
)
$
8,862

 
$
6,802

$
(7,776
)
$
(974
)
Income tax expense/(benefit)
3,907

(806
)
3,101

 
2,381

(2,722
)
(341
)
Net unrealized gains/(losses), net of tax included in accumulated other comprehensive income/(loss)
$
7,257

$
(1,496
)
$
5,761

 
$
4,421

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

 

Due in one year or less
$
24,049

 
$
24,289

Due after one year through five years
182,816

 
184,074

Due after five years through ten years
98,068

 
99,420

Due after ten years
88,329

 
90,778

 
393,262

 
398,561

Collateralized mortgage obligations of U.S. government corporations and agencies
93,787

 
94,604

Residential mortgage-backed securities of U.S. government corporations and agencies
44,900

 
46,389

Commercial mortgage-backed securities of U.S. government corporations and agencies
40,098

 
39,920

Debt Securities
572,047

 
579,474

Marketable equity securities
7,579

 
9,014

Total
$
579,626

 
$
588,488

At June 30, 2014 and December 31, 2013, securities with carrying values of $273.5 million and $243.2 million were pledged for various regulatory and legal requirements.


20
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 5. LOANS AND LOANS HELD FOR SALE
     Loans are presented net of unearned income of $1.8 million and $1.3 million at June 30, 2014 and December 31, 2013. The following table indicates the composition of the loans as of the dates presented:
(dollars in thousands)
June 30, 2014
 
December 31, 2013
Commercial

 

Commercial real estate
$
1,636,383

 
$
1,607,756

Commercial and industrial
922,191

 
842,449

Commercial construction
188,311

 
143,675

Total Commercial Loans
2,746,885

 
2,593,880

Consumer

 

Residential mortgage
492,589

 
487,092

Home equity
416,226

 
414,195

Installment and other consumer
65,838

 
67,883

Consumer construction
3,541

 
3,149

Total Consumer Loans
978,194

 
972,319

Total Portfolio Loans
3,725,079

 
3,566,199

Loans held for sale
3,102

 
2,136

Total Loans
$
3,728,181

 
$
3,568,335


We attempt to limit our exposure to credit risk by diversifying our loan portfolio and actively managing concentrations. When concentrations exist in certain segments, we mitigate this risk by monitoring the relevant economic indicators and internal risk rating trends and through stress testing of the loans in these segments. Total commercial loans represented 74 percent of total portfolio loans at June 30, 2014 and 73 percent of total portfolio loans at December 31, 2013. Within our commercial portfolio, the commercial real estate, or CRE, and commercial construction portfolios combined comprised 66 percent of total commercial loans and 49 percent of total portfolio loans at June 30, 2014 and 68 percent of total commercial loans and 49 percent of total portfolio loans at December 31, 2013. Further segmentation of the CRE and commercial construction portfolios by industry and collateral type revealed no concentration in excess of nine percent of total loans at either June 30, 2014 or December 31, 2013. The majority of both commercial and consumer loans are made to businesses and individuals in Western Pennsylvania resulting in a geographic concentration. 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. Only the CRE and commercial construction portfolios combined have any significant out-of-state exposure, with 26 percent of the combined portfolio and 13 percent of total loans being out-of-state loans at June 30, 2014 and 23 percent of the combined portfolio and 11 percent of total loans being out-of-state loans at December 31, 2013. Our CRE and commercial construction portfolios combined out-of-state exposure, excluding the contiguous states of Ohio, West Virginia, New York and Maryland, was 7.2 percent of the combined portfolio and 3.6 percent of total loans at June 30, 2014 and 7.9 percent of the combined portfolio and 3.9 percent of total loans at December 31, 2013.
Troubled debt restructurings, or TDRs, are loans where we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise grant. We strive to identify borrowers in financial difficulty early and work with them to modify the terms before their loan reaches nonaccrual status. These modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates or principal deferment. While unusual, there may be instances of principal forgiveness. These modifications are generally for longer term periods that would not be considered insignificant. Additionally, we classify loans where the debt obligation has been discharged through a Chapter 7 Bankruptcy and not reaffirmed as TDRs.
We individually evaluate all substandard commercial loans that have experienced a forbearance or change in terms agreement, as well as all substandard consumer and residential mortgage loans that entered into an agreement to modify their existing loan to determine if they should be designated as TDRs. All TDRs are considered to be impaired loans and will be reported as impaired loans for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal

21
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 5. LOANS AND LOANS HELD FOR SALE – continued

to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is fully expected that the remaining principal and interest will be collected according to the restructured agreement. Further, all impaired loans are reported as nonaccrual loans unless the loan is a TDR that has met the requirements to be returned to 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, 2014
 
December 31, 2013
(dollars in thousands)
Accruing
TDRs
Nonaccruing
TDRs
Total
TDRs
 
Accruing
TDRs
Nonaccruing
TDRs
Total
TDRs
Commercial real estate
$
16,934

$
1,431

$
18,365

 
$
19,711

$
3,898

$
23,609

Commercial and industrial
7,390

1,170

8,560

 
7,521

1,884

9,405

Commercial construction
6,310

1,869

8,179

 
5,338

2,708

8,046

Residential mortgage
2,647

645

3,292

 
2,581

1,356

3,937

Home equity
3,712

125

3,837

 
3,924

218

4,142

Installment and other consumer
127

1

128

 
154

3

157

Total
$
37,120

$
5,241

$
42,361

 
$
39,229

$
10,067

$
49,296

We returned four TDRs for $1.4 million to accruing status during the three months ended June 30, 2014 and five TDRs for $1.5 million to accruing status during the six months ended June 30, 2014. There were no TDRs returned to accruing status during the three months ended June 30, 2013 and one TDR for $0.2 million was returned to accruing status during the six months ended June 30, 2013.

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

NOTE 5. LOANS AND LOANS HELD FOR SALE – continued

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

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

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









Principal forgiveness (3)
—

$
—

$
—

$
—


1
$
4,339

$
4,339

$
—

Principal deferral
1
129

127

(2
)

—
—

—

—

Chapter 7 bankruptcy(2)
—
—

—

—


4
53

51

(2
)
Commercial and industrial












Maturity date extension
—
—

—

—


1
751

751

—

Residential mortgage















Chapter 7 bankruptcy(2)
1
52

52

—


2
84

75

(9
)
Home equity












Chapter 7 bankruptcy(2)
4
43

41

(2
)

17
486

478

(8
)
Installment and other consumer












Chapter 7 bankruptcy(2)
1
9

9

—


—

—

—

—

Total by Concession Type












Principal forgiveness  (3)
—

—

—

—


1
4,339

4,339

—

Principal deferral
1
129

127

(2
)

—
—

—

—

Chapter 7 bankruptcy(2)
6
104

102

(2
)

23
623

604

(19
)
Maturity date extension
—
—

—

—


1
751

751

—

Total
7
$
233

$
229

$
4


25
5,713

5,694

(19
)
(1) Excludes loans that were fully paid off or fully charged-off by period end. The pre-modification balance represents the balance outstanding prior to modification. The post-modification balance represents the outstanding balance at period end.
(2) Chapter 7 bankruptcy loans where the debt has been legally discharged through the bankruptcy court and not reaffirmed.
(3) This loan had debt forgiveness of $0.l million to the customer; however, the loan was previously charged off to a balance below the actual contractual balance.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

23
Table of Contents

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

NOTE 5. LOANS AND LOANS HELD FOR SALE – continued

 
Six Months Ended June 30, 2014
 
Six Months Ended June 30, 2013
(dollars in thousands)
Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment(1)
Post-Modification
Outstanding
Recorded
Investment(1)
Total  Difference
in Recorded
Investment

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

$
129

$
127

$
(2
)
 
3

$
1,541

$
1,288

$
(253
)
Principal forgiveness(3)
—

—

—

—

 
1

4,339

4,339

—

Chapter 7 bankruptcy(2)
—

—

—

—

 
7

258

255

(3
)
Commercial and industrial
 
 
 
 
 
 
 
 
 
Principal deferral
—

—

—

—

 
1

392

387

(5
)
Maturity date extension
—

—

—

—

 
1

751

751

—

Chapter 7 bankruptcy(2)
1

287

286

(1
)
 
1

3

3

—

Commercial Construction
 
 
 
 
 
 
 
 
 
Maturity date extension
1

1,019

1,019

—

 
—

—

—

—

Residential mortgage
 
 
 
 
 
 
 
 
 
Principal deferral
—

—

—

—

 
2

153

153

—

Chapter 7 bankruptcy(2)
5

329

327

(2
)
 
8

353

344

(9
)
Home equity
 
 
 
 
 
 
 
 
 
Principal deferral
—

—

—

—

 
1

174

45

(129
)
Chapter 7 bankruptcy(2)
10

269

251

(18
)
 
23

648

640

(8
)
Installment and other consumer
 
 
 
 
 
 
 
 
 
Chapter 7 bankruptcy(2)
1

9

9

—

 
6

73

73

—

Total by Concession Type
 
 
 
 
 
 
 
 
 
Principal deferral
1

129

127

(2
)
 
7

2,260

1,873

(387
)
Principal forgiveness(3)
—

—

—

—

 
1

4,339

4,339

—

Maturity date extension
1

1,019

1,019

—

 
1

751

751

—

Chapter 7 bankruptcy(2)
17

894

873

(21
)
 
45

1,335

1,315

(20
)
Total
19

$
2,042

$
2,019

$
(23
)
 
54

$
8,685

8,278

(407
)
(1) Excludes loans that were fully paid off or fully charged-off by period end. The pre-modification balance represents the balance outstanding prior to modification. The post-modification balance represents the outstanding balance at period end.
(2) Chapter 7 bankruptcy loans where the debt has been legally discharged through the bankruptcy court and not reaffirmed.
(3) This loan had debt forgiveness of $0.l million to the customer; however, the loan was previously charged off to a balance below the actual contractual balance.
For the three months ended June 30, 2014, we modified two CRE loans totaling $1.2 million that were not considered to be TDRs. For the six months ended June 30, 2014, we modified three loans that were not considered to be TDRs, including a $0.4 million commercial and industrial, or C&I, loan and two CRE loans for $1.2 million. The modifications primarily represented instances where we were adequately compensated through additional collateral and a higher interest rate or there was an insignificant delay in payment. As of June 30, 2014 we have no commitments to lend additional funds on any TDRs.
Defaulted TDRs are defined as loans having a payment default of 90 days or more after the restructuring takes place. The following tables present a summary of TDRs which defaulted during the periods presented that had been restructured within the last twelve months prior to defaulting:

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Table of Contents

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

NOTE 5. LOANS AND LOANS HELD FOR SALE – continued

 
Defaulted TDRs
 
For the Three Months ended June 30, 2014

For the Three Months ended June 30, 2013
(dollars in thousands)
Number of
Defaults

Recorded
Investment


Number of
Defaults

Recorded
Investment

Commercial real estate
—

$
—


$
—

$
—

Commercial and Industrial
—

—


—

—

Commercial construction
—

—


—

—

Residential real estate
—

—


2

46

Home equity
—

—


2

33

Total
—

$
—


$
4

$
79

 
 
 
 
 
 
 
Defaulted TDRs
 
For the Six Months Ended
June 30, 2014
 
For the Six Months Ended
June 30, 2013
(dollars in thousands)
Number of
Defaults

Recorded
Investment

 
Number of
Defaults

Recorded
Investment

Commercial real estate
—

$
—

 
$
—

$
—

Commercial and Industrial
—

—

 
—

—

Commercial construction
—

—

 
—

—

Residential real estate
1

72

 
3

64

Home equity
—

—

 
4

151

Total
1

$
72

 
$
7

$
215

The following table is a summary of nonperforming assets as of the dates presented:
 
Nonperforming Assets
(dollars in thousands)
June 30, 2014
 
December 31, 2013
Nonperforming Assets

 

Nonaccrual loans
$
9,698

 
$
12,387

Nonaccrual TDRs
5,241

 
10,067

Total nonaccrual loans
14,939

 
22,454

OREO
431

 
410

Total Nonperforming Assets
$
15,370

 
$
22,864

OREO consists of eight properties and is included in other assets in the Consolidated Balance Sheets. It is our policy to obtain OREO appraisals on an annual basis.


25
Table of Contents

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

NOTE 6. ALLOWANCE FOR LOAN LOSSES

We maintain an allowance for loan losses, or ALL, at a level determined to be adequate to absorb estimated probable credit losses inherent in the loan portfolio as of the balance sheet date. We develop and document a systematic ALL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Commercial Construction, 4) Consumer Real Estate and 5) Other Consumer.
The following are key risks within each portfolio segment:
CRE—Loans secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business prospects of the lessee, if the project is not owner occupied.
C&I—Loans made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the company is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the company. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.
Commercial Construction—Loans made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be complete, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer.
Consumer Real Estate—Loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residences, including purchase money mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.
Other Consumer—Loans made to individuals that may be secured by assets other than 1-4 family residences, as well as unsecured loans. This segment includes auto loans, unsecured loans and lines and credit cards. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.
We further assess risk within each portfolio segment by pooling loans with similar risk characteristics. For the commercial loan classes, the most important indicator of risk is the internally assigned risk rating, including pass, special mention and substandard. Consumer loans are pooled by type of collateral, lien position and loan to value ratio for consumer real estate loans. Historical loss rates are applied to these loan pools to determine the reserve for loans collectively evaluated for impairment.
We continually monitor our ALL methodology to ensure that it is responsive to the current economic environment. No changes were made to our ALL methodology for the six months ended June 30, 2014.
Management monitors various credit quality indicators for both the commercial and consumer loan portfolios, including delinquency, nonperforming status and changes in risk ratings on a monthly basis.

26
Table of Contents

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

NOTE 6. ALLOWANCE FOR LOAN LOSSES

The following tables present the age analysis of past due loans segregated by class of loans as of June 30, 2014 and December 31, 2013:
 
June 30, 2014
(dollars in thousands)
Current
30-59 Days
Past Due
60-89 Days
Past Due
Nonaccrual
Total Past
Due
Total Loans
Commercial real estate
$
1,629,928

$
753

$
44

$
5,658

$
6,455

$
1,636,383

Commercial and industrial
918,846

559

249

2,537

3,345

922,191

Commercial construction
185,428

—

1,014

1,869

2,883

188,311

Residential mortgage
488,551

1,022

898

2,118

4,038

492,589

Home equity
412,851

1,466

478

1,431

3,375

416,226

Installment and other consumer
65,380

364

68

26

458

65,838

Consumer construction
3,541

—

—

—

—

3,541

Loans held for sale
1,802

—

—

1,300

1,300

3,102

Totals
$
3,706,327

$
4,164

$
2,751

$
14,939

$
21,854

$
3,728,181

 
 
 
 
 
 
 
 
December 31, 2013
(dollars in thousands)
Current
30-59 Days
Past Due
60-89 Days
Past Due
Nonaccrual
Total Past
Due
Total Loans
Commercial real estate
$
1,595,590

$
1,209

$
207

$
10,750

$
12,166

$
1,607,756

Commercial and industrial
836,276

2,599

278

3,296

6,173

842,449

Commercial construction
139,133

1,049

751

2,742

4,542

143,675

Residential mortgage
481,260

828

1,666

3,338

5,832

487,092

Home equity
408,777

2,468

659

2,291

5,418

414,195

Installment and other consumer
67,420

382

44

37

463

67,883

Consumer construction
3,149

—

—

—

—

3,149

Loans held for sale
2,136

—

—

—

—

2,136

Totals
$
3,533,741

$
8,535

$
3,605

$
22,454

$
34,594

$
3,568,335

We continually monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans within the pass rating generally have a lower risk of loss than loans risk rated as special mention or substandard.
Our risk ratings are consistent with regulatory guidance and are as follows:
Pass—The loan is currently performing and is of high quality.
Special Mention—A special mention loan has potential weaknesses that warrant management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects or in the strength of our credit position at some future date. Economic and market conditions, beyond the borrower’s control, may in the future necessitate this classification.
Substandard—A substandard loan is not adequately protected by the net worth and/or paying capacity of the borrower or by the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.


27
Table of Contents

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

NOTE 6. ALLOWANCE FOR LOAN LOSSES

The following tables summarize the recorded investment in commercial loan classes by internally assigned risk ratings as of the dates presented:
 
June 30, 2014
(dollars in thousands)
Commercial
Real Estate
% of
Total
 
Commercial
and Industrial
% of
Total
 
Commercial
Construction
% of
Total
 
Total
% of
Total
Pass
$
1,563,882

95.6
%
 
$
872,686

94.6
%
 
$
167,267

88.8
%
 
$
2,603,835

94.8
%
Special mention
45,275

2.8
%
 
33,966

3.7
%
 
12,882

6.8
%
 
92,123

3.4
%
Substandard
27,226

1.6
%
 
15,539

1.7
%
 
8,162

4.4
%
 
50,927

1.8
%
Total
$
1,636,383

100
%
 
$
922,191

100.0
%
 
$
188,311

100.0
%
 
$
2,746,885

100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
(dollars in thousands)
Commercial
Real Estate
% of
Total
 
Commercial
and Industrial
% of
Total
 
Commercial
Construction
% of
Total
 
Total
% of
Total
Pass
$
1,519,720

94.5
%
 
$
792,029

94.0
%
 
$
119,177

82.9
%
 
$
2,430,926

93.7
%
Special mention
57,073

3.6
%
 
34,085

4.1
%
 
15,621

10.9
%
 
106,779

4.1
%
Substandard
30,963

1.9
%
 
16,335

1.9
%
 
8,877

6.2
%
 
56,175

2.2
%
Total
$
1,607,756

100.0
%
 
$
842,449

100.0
%
 
$
143,675

100.0
%
 
$
2,593,880

100.0
%
We monitor the delinquent status of the consumer portfolio on a monthly basis. Loans are considered nonperforming when interest and principal are 90 days or more past due or management has determined that a material deterioration in the borrower’s financial condition exists. The risk of loss is generally highest for nonperforming loans.
The following tables indicate the recorded investment in consumer loan classes by performing and nonperforming status as of the dates presented:
 
June 30, 2014
(dollars in thousands)
Residential
Mortgage
% of
Total
Home
Equity
% of
Total
Installment
and other
consumer
% of
Total
Consumer
Construction
% of
Total
Total
% of
Total
Performing
$
490,471

99.6
%
$
414,795

99.7
%
$
65,812

99.9
%
$
3,541

100.0
%
$
974,619

99.6
%
Nonperforming
2,118

0.4
%
1,431

0.3
%
26

0.1
%
—

—
%
3,575

0.4
%
Total
$
492,589

100.0
%
$
416,226

100.0
%
$
65,838

100.0
%
$
3,541

100.0
%
$
978,194

100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
(dollars in thousands)
Residential
Mortgage
% of
Total
Home
Equity
% of
Total
Installment
and other
consumer
% of
Total
Consumer
Construction
% of
Total
Total
% of
Total
Performing
$
483,754

99.3
%
$
411,904

99.4
%
$
67,846

99.9
%
$
3,149

100.0
%
$
966,653

99.4
%
Nonperforming
3,338

0.7
%
2,291

0.6
%
37

0.1
%
—

—
%
5,666

0.6
%
Total
$
487,092

100.0
%
$
414,195

100.0
%
$
67,883

100.0
%
$
3,149

100.0
%
$
972,319

100.0
%
We individually evaluate all substandard and nonaccrual commercial loans greater than $0.5 million for impairment. Loans are considered to be impaired when based upon current information and events it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan agreement. All TDRs are considered to be impaired loans and will be reported as an impaired loan 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 expected that the remaining principal and interest will be fully collected according to the restructured agreement. For all TDRs, regardless of size, as well as all other impaired loans, we conduct further analysis to determine the probable loss and assign a specific reserve to the loan if deemed appropriate.

28
Table of Contents

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

NOTE 6. ALLOWANCE FOR LOAN LOSSES

The following table presents investments in loans considered to be impaired and related information on those impaired loans for the periods presented:
 
June 30, 2014
December 31, 2013
(dollars in thousands)
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Without a related allowance recorded:
 
 
 
 
 
 
Commercial real estate
$
21,228

$
28,296

$
—

$
26,968

$
35,474

$
—

Commercial and industrial
9,545

9,660

—

9,580

9,703

—

Commercial construction
8,179

11,866

—

7,391

12,353

—

Consumer real estate
7,082

7,629

—

8,026

9,464

—

Other consumer
107

109

—

124

128

—

Total without a Related Allowance Recorded
46,141

57,560

—

52,089

67,122

—

With a related allowance recorded:
 
 
 
 
 
 
Commercial real estate
—

—

—

—

—

—

Commercial and industrial
—

—

—

—

—

—

Commercial construction
—

—

—

681

1,383

25

Consumer real estate
47

47

47

53

53

53

Other consumer
21

21

11

33

33

19

Total with a Related Allowance Recorded
68

68

58

767

1,469

97

Total:
 
 
 
 
 
 
Commercial real estate
21,228

28,296

—

26,968

35,474

—

Commercial and industrial
9,545

9,660

—

9,580

9,703

—

Commercial construction
8,179

11,866

—

8,072

13,736

25

Consumer real estate
7,129

7,676

47

8,079

9,517

53

Other consumer
128

130

11

157

161

19

Total
$
46,209

$
57,628

$
58

$
52,856

$
68,591

$
97

As of June 30, 2014, CRE loans of $21.2 million comprised 46 percent of the total impaired loans of $46.2 million. These impaired loans are collateralized primarily by commercial real estate properties such as retail or strip malls, office buildings and various other types of commercial purpose properties. These loans are generally considered collateral dependent and charge-offs are recorded when a confirmed loss exists. Approximately $7.9 million of charge-offs have been recorded relating to these CRE loans over the life of these loans. It is our policy to order appraisals on an annual basis on impaired loans or sooner if facts and circumstances warrant. As of June 30, 2014, an estimated fair value less cost to sell of approximately $34.7 million existed for CRE impaired loans. We have current appraisals on all but $0.6 million of the $21.2 million of impaired CRE loans. We have not ordered an appraisal on this loan due to an outstanding settlement agreement with the borrower which would result in the collection of the remaining recorded investment in the loan.

29
Table of Contents

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

NOTE 6. ALLOWANCE FOR LOAN LOSSES

The following tables summarize investments in loans considered to be impaired and related information on those impaired loans for the periods presented:
 
For the Three Months Ended
 
June 30, 2014
June 30, 2013
(dollars in thousands)
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Without a related allowance recorded:
 
 
 
 
Commercial real estate
$
21,382

$
159

$
30,956

$
174

Commercial and industrial
9,317

57

12,452

66

Commercial construction
8,279

57

16,376

87

Consumer real estate
7,166

100

8,708

156

Other consumer
109

1

114

2

Total without a Related Allowance Recorded
46,253

374

68,606

485

With a related allowance recorded:
 
 
 
 
Commercial real estate
—

—

2,084

—

Commercial and industrial
—

—

—

—

Commercial construction
—

—

—

—

Consumer real estate
48

1

86

4

Other consumer
22

—

28

1

Total with a Related Allowance Recorded
70

1

2,198

5

Total:
 
 
 
 
Commercial real estate
21,382

159

33,040

174

Commercial and industrial
9,317

57

12,452

66

Commercial construction
8,279

57

16,376

87

Consumer real estate
7,214

101

8,794

160

Other consumer
131

1

142

3

Total
$
46,323

$
375

$
70,804

$
490

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

30
Table of Contents

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

NOTE 6. ALLOWANCE FOR LOAN LOSSES

 
For the Six Months Ended
 
June 30, 2014
June 30, 2013
(dollars in thousands)
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Without a related allowance recorded:






Commercial real estate
$
21,980

$
329

$
31,181

$
415

Commercial and industrial
9,066

114

12,449

135

Commercial construction
8,301

114

16,854

221

Consumer real estate
7,260

203

9,194

215

Other consumer
112

2

106

2

Total without a Related Allowance Recorded
46,719

762

69,784

988

With a related allowance recorded:




Commercial real estate
$
—

$
—

3,282

$
—

Commercial and industrial
—

—

—

—

Commercial construction
—

—

—

—

Consumer real estate
50

2

43

4

Other consumer
23

1

14

1

Total with a Related Allowance Recorded
73

3

3,339

5

Total:




Commercial real estate
21,980

329

34,463

415

Commercial and industrial
9,066

114

12,449

135

Commercial construction
8,301

114

16,854

221

Consumer real estate
7,310

205

9,237

219

Other consumer
135

3

120

3

Total
$
46,792

$
765

$
73,123

$
993




31
Table of Contents

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

NOTE 6. ALLOWANCE FOR LOAN LOSSES

The following tables detail activity in the ALL for the periods presented:

 
Three Months Ended June 30, 2014
(dollars in thousands)
Commercial
Real Estate
 
Commercial and
Industrial
 
Commercial
Construction
 
Consumer
Real Estate
 
Other
Consumer
 
Total
Loans
Balance at beginning of period
$
19,880

 
$
13,979

 
$
5,183

 
$
6,408

 
$
1,166

 
$
46,616

Charge-offs
(1,737
)
 
(743
)
 
(664
)
 
(425
)
 
(177
)
 
(3,746
)
Recoveries
1,294

 
2,936

 
324

 
164

 
126

 
4,844

Net Recoveries/ (Charge-offs)
(443
)
 
2,193

 
(340
)
 
(261
)
 
(51
)
 
1,098

Provision for loan losses
1,296

 
(3,168
)
 
(84
)
 
558

 
264

 
(1,134
)
Balance at End of Period
$
20,733

 
$
13,004

 
$
4,759

 
$
6,705

 
$
1,379

 
$
46,580

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2013
(dollars in thousands)
Commercial
Real Estate
 
Commercial and
Industrial
 
Commercial
Construction
 
Consumer
Real Estate
 
Other
Consumer
 
Total
Loans
Balance at beginning of period
$
24,442

 
$
8,676

 
$
6,603

 
$
5,259

 
$
956

 
$
45,936

Charge-offs
(1,170
)
 
(563
)
 
(54
)
 
(743
)
 
(399
)
 
(2,929
)
Recoveries
1,572

 
190

 
2

 
225

 
86

 
2,075

Net (Charge-offs)/ Recoveries
402

 
(373
)
 
(52
)
 
(518
)
 
(313
)
 
(854
)
Provision for loan losses
(1,360
)
 
820

 
(739
)
 
1,914

 
388

 
1,023

Balance at End of Period
$
23,484

 
$
9,123

 
$
5,812

 
$
6,655

 
$
1,031

 
$
46,105

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
(dollars in thousands)
Commercial
Real Estate
 
Commercial and
Industrial
 
Commercial
Construction
 
Consumer
Real Estate
 
Other
Consumer
 
Total
Loans
Balance at beginning of period
$
18,921

 
$
14,433

 
$
5,374

 
$
6,362

 
$
1,165

 
$
46,255

Charge-offs
(2,004
)
 
(1,033
)
 
(692
)
 
(547
)
 
(445
)
 
(4,721
)
Recoveries
1,834

 
3,249

 
375

 
223

 
210

 
5,891

Net Recoveries/ (Charge-offs)
(170
)
 
2,216

 
(317
)
 
(324
)
 
(235
)
 
1,170

Provision for loan losses
1,982

 
(3,645
)
 
(298
)
 
667

 
449

 
(845
)
Balance at End of Period
$
20,733

 
$
13,004

 
$
4,759

 
$
6,705

 
$
1,379

 
$
46,580

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2013
(dollars in thousands)
Commercial
Real Estate
 
Commercial and
Industrial
 
Commercial
Construction
 
Consumer
Real Estate
 
Other
Consumer
 
Total
Loans
Balance at beginning of period
$
25,246

 
$
7,759

 
$
7,500

 
$
5,058

 
$
921

 
$
46,484

Charge-offs
(2,809
)
 
(1,923
)
 
(443
)
 
(1,237
)
 
(651
)
 
(7,063
)
Recoveries
2,322

 
290

 
55

 
508

 
179

 
3,354

Net (Charge-offs)/ Recoveries
(487
)
 
(1,633
)
 
(388
)
 
(729
)
 
(472
)
 
(3,709
)
Provision for loan losses
(1,275
)
 
2,997

 
(1,300
)
 
2,326

 
582

 
3,330

Balance at End of Period
$
23,484

 
$
9,123

 
$
5,812

 
$
6,655

 
$
1,031

 
$
46,105


32
Table of Contents

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

NOTE 6. ALLOWANCE FOR LOAN LOSSES


The following tables present the ALL and recorded investments in loans by category as of June 30, 2014 and December 31, 2013:
 
June 30, 2014
 
Allowance for Loan Losses
 
Portfolio Loans
(dollars in thousands)
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
Total
 
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
Total
Commercial real estate
$
—

$
20,733

$
20,733

 
$
21,228

$
1,615,155

$
1,636,383

Commercial and industrial
—

13,004

13,004

 
9,545

912,646

922,191

Commercial construction
—

4,759

4,759

 
8,179

180,132

188,311

Consumer real estate
47

6,658

6,705

 
7,129

905,227

912,356

Other consumer
11

1,368

1,379

 
128

65,710

65,838

Total
$
58

$
46,522

$
46,580

 
$
46,209

$
3,678,870

$
3,725,079

 
 
 
 
 
 
 
 
 
December 31, 2013
 
Allowance for Loan Losses
 
Portfolio Loans
(dollars in thousands)
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
Total
 
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
Total
Commercial real estate
$
—

$
18,921

$
18,921

 
$
26,968

$
1,580,788

$
1,607,756

Commercial and industrial
—

14,433

14,433

 
9,580

832,869

842,449

Commercial construction
25

5,349

5,374

 
8,072

135,603

143,675

Consumer real estate
53

6,309

6,362

 
8,079

896,357

904,436

Other consumer
19

1,146

1,165

 
157

67,726

67,883

Total
$
97

$
46,158

$
46,255

 
$
52,856

$
3,513,343

$
3,566,199


33
Table of Contents

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

NOTE 7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Interest Rate Swaps
Interest rate swaps are contracts in which a series of interest rate flows (fixed and variable) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged. These derivative positions relate to transactions in which we enter into an interest rate swap with a commercial customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, we agree to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed rate. At the same time, we agree to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows our customer to effectively convert a variable rate loan to a fixed rate loan with us receiving a variable rate. These agreements could have floors or caps on the contracted interest rates.
Pursuant to our agreements with various financial institutions, we may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon our current positions and related future collateral requirements relating to them, we believe any effect on our cash flow or liquidity position to be immaterial.
Derivatives contain an element of credit risk, such as the possibility that we will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by our Asset and Liability Committee, or ALCO, and derivatives with customers may only be executed with customers within credit exposure limits approved by our Senior Loan Committee. Interest rate swaps are considered derivatives, but are not accounted for using hedge accounting. As such, changes in the fair value of the derivatives are recorded in current earnings and included in other noninterest income in the Consolidated Statements of Comprehensive Income.

Interest Rate Lock Commitments and Forward Sale Contracts

In the normal course of business, we sell originated mortgage loans into the secondary mortgage loan market. We also offer interest rate lock commitments to potential borrowers. The commitments are generally for 60 days and guarantee a specified interest rate for a loan if underwriting standards are met, but the commitment does not obligate the potential borrower to close on the loan. Accordingly, some commitments expire prior to becoming loans. We can encounter pricing risk if interest rates increase significantly before the loan can be closed and sold. We may utilize forward sale contracts in order to mitigate this pricing risk. Whenever a customer desires these products, a mortgage originator quotes a secondary market rate guaranteed for that day by the investor. The rate lock is executed between the mortgagee and us and in turn a forward sale contract may be executed between us and the investor. Both the interest rate lock commitment and the corresponding forward sale contract for each customer are considered derivatives, but are not accounted for using hedge accounting. As such, changes in the fair value of the derivatives during the commitment period are recorded in current earnings and included in mortgage banking in the Consolidated Statements of Comprehensive Income.

34
Table of Contents

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

NOTE 7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – continued

The following table indicates the amounts representing the value of derivative assets and derivative liabilities as of the dates presented:
 
Derivatives
(included in Other Assets)
 
Derivatives
(included in Other Liabilities)
(dollars in thousands)
June 30, 2014
December 31, 2013
 
June 30, 2014
December 31, 2013
Derivatives not Designated as Hedging Instruments


 


Interest Rate Swap Contracts—Commercial Loans


 


Fair value
$
14,082

$
13,698

 
$
14,050

$
13,647

Notional amount
245,865

261,754

 
245,865

261,754

Collateral posted
—

—

 
11,559

12,611

Interest Rate Lock Commitments—Mortgage Loans


 


Fair value
292

85

 
—

—

Notional amount
9,594

3,989

 
—

—

Forward Sale Contracts—Mortgage Loans


 


Fair value
—

34

 
59

—

Notional amount
$
—

$
5,250

 
$
7,210

$
—


Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted. For example, we may have a derivative asset as well as a derivative liability with the same counterparty to a swap transaction and are permitted to offset the asset position and the liability position resulting in a net presentation.
The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values in the Consolidated Balance Sheets as of the dates presented:
 
Derivatives
(included in Other Assets)
 
Derivatives
(included in Other Liabilities)
(dollars in thousands)
June 30, 2014
December 31, 2013
 
June 30, 2014
December 31, 2013
Derivatives not Designated as Hedging Instruments


 


Gross amounts recognized
$
14,349

$
14,012

 
$
14,317

$
13,961

Gross amounts offset
(267
)
(314
)
 
(267
)
(314
)
Net amounts presented in the Consolidated Balance Sheets
14,082

13,698

 
14,050

13,647

Gross amounts not offset(1)
—

—

 
(11,559
)
(12,611
)
Net Amount
$
14,082

$
13,698

 
$
2,491

$
1,036

(1) Amounts represent posted collateral.

The following table indicates the gain or loss recognized in income on derivatives for the periods presented:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2014
2013
 
2014
2013
Derivatives not Designated as Hedging Instruments


 


Interest rate swap contracts—commercial loans
$
(11
)
$
(27
)
 
$
(19
)
$
(156
)
Interest rate lock commitments—mortgage loans
199

(266
)
 
207

(492
)
Forward sale contracts—mortgage loans
(64
)
381

 
(93
)
405

Total Derivatives Gain (Loss)
$
124

$
88

 
$
95

$
(243
)

35
Table of Contents

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

NOTE 8. BORROWINGS
Short-term borrowings are for terms under one year and were comprised of securities sold under repurchase agreements, or REPOs, and Federal Home Loan Bank, or FHLB, advances. Our REPOs were with our local retail customers. Securities pledged as collateral under these REPO financing arrangements cannot be sold or repledged by the secured party and are therefore accounted for as a secured borrowing. FHLB advances are for various terms secured by a blanket lien on our residential mortgages and other real estate secured loans.
Long-term borrowings are for original terms greater than one year and were comprised of FHLB advances, a capital lease and junior subordinated debt securities. Long-term FHLB advances have the same collateral requirements as their short-term equivalents. We had total long-term borrowings outstanding of $17.3 million at a fixed rate and $48.7 million at a variable rate at June 30, 2014, excluding our capital lease of $0.2 million.
Information pertaining to borrowings is summarized in the table below as of the dates presented:
 
June 30, 2014
 
December 31, 2013
(dollars in thousands)
Balance
Weighted
Average Rate
 
Balance
Weighted
Average Rate
Short-term borrowings


 


Securities sold under repurchase agreements
$
25,269

0.01
%
 
$
33,847

0.01
%
Short-term borrowings
185,000

0.28
%
 
140,000

0.30
%
Total short-term borrowings
210,269

0.25
%
 
173,847

0.24
%
Long-term borrowings


 


Other long-term borrowings
20,636

2.98
%
 
21,810

3.01
%
Junior subordinated debt securities
45,619

2.69
%
 
45,619

2.70
%
Total long-term borrowings
66,255

2.78
%
 
67,429

2.80
%
Total Borrowings
$
276,524

0.85
%
 
$
241,276

0.96
%
We had total borrowings at June 30, 2014 and December 31, 2013 at the FHLB of Pittsburgh of $205.4 million and $161.6 million. This consisted of $185.0 million in short-term borrowings and $20.4 million in long-term borrowings at June 30, 2014. Our maximum borrowing capacity with the FHLB of Pittsburgh was $1.6 billion at June 30, 2014, with a remaining borrowing availability of $1.4 billion.

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

NOTE 9. COMMITMENTS AND CONTINGENCIES
Commitments
In the normal course of business, we offer off-balance sheet credit arrangements to enable our customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Our exposure to credit loss, in the event a customer does not satisfy the terms of their agreement, equals the contractual amount of the obligation less the value of any collateral. We apply the same credit policies in making commitments and standby letters of credit that are used for the underwriting of loans to customers. Commitments generally have fixed expiration dates, annual renewals or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon; the total commitment amounts do not necessarily represent future cash requirements. Our allowance for unfunded commitments totaled $3.1 million at June 30, 2014 and $2.9 million at December 31, 2013. The allowance for unfunded commitments is included in other liabilities in the Consolidated Balance Sheets.
Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.
The following table sets forth the commitments and letters of credit as of the dates presented:
(dollars in thousands)
June 30, 2014

 
December 31, 2013

Commitments to extend credit
$
1,117,511

 
$
1,038,529

Standby letters of credit
78,427

 
78,639

Total
$
1,195,938

 
$
1,117,168

Litigation
In the normal course of business, we are subject to various legal and administrative proceedings and claims. While any type of litigation contains a level of uncertainty, we believe that the outcome of such proceedings or claims will not have a material adverse effect on our consolidated financial position.

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

NOTE 10. OTHER COMPREHENSIVE INCOME
The following table presents the tax effects of the components of other comprehensive income (loss) for the periods presented: 
 
Three Months Ended June 30, 2014
 
Three Months Ended June 30, 2013
(dollars in thousands)
Pre-Tax
Amount

Tax
(Expense)
Benefit

Net of Tax
Amount

 
Pre-Tax
Amount

Tax
(Expense)
Benefit

Net of Tax
Amount

Change in unrealized gains/losses on securities available-for-sale
$
5,401

$
(1,891
)
$
3,510

 
$
(12,061
)
$
4,221

$
(7,840
)
Reclassification adjustment for net (gains)/losses on securities available-for-sale included in net income (1)
(40
)
15

(25
)
 
—

—

—

Adjustment to funded status of employee benefit plans
211

(74
)
137

 
598

(210
)
388

Other Comprehensive Income (Loss)
$
5,572

$
(1,950
)
$
3,622

 
$
(11,463
)
$
4,011

$
(7,452
)
(1) Reclassification adjustments are comprised of realized security gains. The gains have been reclassified out of accumulated other comprehensive income (loss) and have affected certain lines in the Consolidated Statements of Comprehensive Income as follows; the pre-tax amount is included in securities gains-net, the tax expense amount is included in the provision for income taxes and the net of tax amount is included in net income.
 
 
 
 
 
Six Months Ended June 30, 2014
 
Six Months Ended June 30, 2013
(dollars in thousands)
Pre-Tax
Amount

Tax
(Expense)
Benefit

Net of Tax
Amount

 
Pre-Tax
Amount

Tax
(Expense)
Benefit

Net of Tax
Amount

Change in unrealized gains/losses on securities available-for-sale
$
9,876

$
(3,457
)
$
6,419

 
$
(13,829
)
$
4,840

$
(8,989
)
Reclassification adjustment for net (gains)/losses on securities available-for-sale included in net income (1)
(41
)
15

(26
)
 
(2
)
1

(1
)
Adjustment to funded status of employee benefit plans
423

(148
)
275

 
1,196

(419
)
777

Other Comprehensive Income (Loss)
$
10,258

$
(3,590
)
$
6,668

 
$
(12,635
)
$
4,422

$
(8,213
)
(1) Reclassification adjustments are comprised of realized security gains. The gains have been reclassified out of accumulated other comprehensive income and have affected certain lines in the consolidated statement of comprehensive income as follows; the pre-tax amount is included in securities gains-net, the tax expense amount is included in the provision for income taxes and the net of tax amount is included in net income.

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

NOTE 11. EMPLOYEE BENEFITS

We maintain a defined benefit pension plan, or Plan, covering substantially all employees hired prior to January 1, 2008. The benefits are based on years of service and the employee’s compensation for the highest five consecutive years in the last ten years. Contributions are intended to provide for benefits attributed to employee service to date and for those benefits expected to be earned in the future. At this time, we are not required to make a cash contribution to the Plan in 2014. The expected long-term rate of return on plan assets is 8.00 percent. Through June 30, 2014, there have been no changes to the Plan.
The following table summarizes the components of net periodic pension cost for the periods presented: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2014
 
2013
 
2014
 
2013
Components of Net Periodic Pension Cost

 

 

 

Service cost—benefits earned during the period
$
631

 
$
708

 
$
1,262

 
$
1,416

Interest cost on projected benefit obligation
1,106

 
996

 
2,212

 
1,992

Expected return on plan assets
(1,735
)
 
(1,565
)
 
(3,470
)
 
(3,130
)
Amortization of prior service cost (credit)
(35
)
 
(34
)
 
(70
)
 
(68
)
Recognized net actuarial loss
209

 
588

 
418

 
1,176

Net Periodic Pension Expense
$
176

 
$
693

 
$
352

 
$
1,386


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

NOTE 12. SEGMENTS
We manage three reportable operating segments including Community Banking, Insurance and Wealth Management.
•
Our Community Banking segment offers services which include accepting time and demand deposit accounts, originating commercial and consumer loans and providing letters of credit and credit card services.
•
Our Insurance segment includes a full-service insurance agency offering commercial property and casualty insurance, group life and health coverage, employee benefit solutions and personal insurance lines.
•
Our Wealth Management segment offers discount brokerage services, services as executor and trustee under wills and deeds, guardian and custodian of employee benefits and other trust and brokerage services, as well as a registered investment advisor that manages private investment accounts for individuals and institutions.
The following table represents total assets by reportable operating segment as of the dates presented: 
(dollars in thousands)
June 30, 2014
 
December 31, 2013
Community Banking
$
4,778,233

 
$
4,524,939

Insurance
7,715

 
6,926

Wealth Management
2,082

 
1,325

Total Assets
$
4,788,030

 
$
4,533,190


The following tables provide financial information for our three segments for the three and six month periods ended June 30, 2014 and 2013. The financial results of the business segments include allocations for shared services based on an internal analysis that supports line of business performance measurement. Shared services include expenses such as employee benefits, occupancy expense, computer support and corporate overhead. Even with these allocations, the financial results are not necessarily indicative of the business segments’ financial condition and results of operations if they existed as independent entities. The information provided under the caption “Eliminations” represents operations not considered to be reportable segments and/or general operating expenses and eliminations and adjustments, which are necessary for purposes of reconciling to the Consolidated Financial Statements.
 
Three Months Ended June 30, 2014
(dollars in thousands)
Community
Banking

Insurance

Wealth Management

Eliminations

Consolidated

Interest income
$
39,845

$
—

$
136

$
(109
)
$
39,872

Interest expense
3,415

—

—

(398
)
3,017

Net interest income
36,430

—

136

289

36,855

Provision for loan losses
(1,134
)
—

—

—

(1,134
)
Noninterest income
7,522

1,245

2,828

176

11,771

Noninterest expense
25,092

1,044

2,442

465

29,043

Depreciation expense
805

13

7

—

825

Amortization of intangible assets
274

13

10

—

297

Provision for income taxes
4,637

61

177

—

4,875

Net Income
$
14,278

$
114

$
328

$
—

$
14,720

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

NOTE 12. SEGMENTS – continued

 
Three Months Ended June 30, 2013
(dollars in thousands)
Community
Banking

Insurance

Wealth Management

Eliminations

Consolidated

Interest income
$
38,505

$
—

$
135

$
(87
)
$
38,553

Interest expense
4,663

—

—

(706
)
3,957

Net interest income
33,842

—

135

619

34,596

Provision for loan losses
1,023

—

—

—

1,023

Noninterest income
8,467

1,349

2,812

239

12,867

Noninterest expense
21,786

1,105

2,389

1,797

27,077

Depreciation expense
876

12

8

—

896

Amortization of intangible assets
387

13

13

—

413

Provision (benefit) for income taxes
4,592

77

221

(939
)
3,951

Net Income
$
13,645

$
142

$
316

$
—

$
14,103

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
(dollars in thousands)
Community
Banking

Insurance

Wealth
Management

Eliminations

Consolidated

Interest income
$
78,475

$
—

$
310

$
(248
)
$
78,537

Interest expense
6,897

—

—

(806
)
6,091

Net interest income
71,578

—

310

558

72,446

Provision for loan losses
(845
)
—

—

—

(845
)
Noninterest income
14,375

2,766

5,764

282

23,187

Noninterest expense
49,066

2,199

4,716

840

56,821

Depreciation expense
1,607

25

13

—

1,645

Amortization of intangible assets
566

25

22

—

613

Provision for income taxes
8,002

181

463

—

8,646

Net Income
$
27,557

$
336

$
860

$
—

$
28,753

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2013
(dollars in thousands)
Community
Banking

Insurance

Wealth
Management

Eliminations

Consolidated

Interest income
$
76,194

$
1

$
273

$
(72
)
$
76,396

Interest expense
9,454

—

—

(1,323
)
8,131

Net interest income
66,740

1

273

1,251

68,265

Provision for loan losses
3,330

—

—

—

3,330

Noninterest income
18,823

2,947

5,386

517

27,673

Noninterest expense
46,427

2,552

4,878

3,468

57,325

Depreciation expense
1,795

22

16

—

1,833

Amortization of intangible assets
792

26

26

—

844

Provision (benefit) for income taxes
7,438

122

313

(1,700
)
6,173

Net Income
$
25,781

$
226

$
426

$
—

$
26,433



41
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S&T BANCORP, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, represents an overview of our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations at and for the three and six month periods ended June 30, 2014 and 2013. Our MD&A should be read in conjunction with our Consolidated Financial Statements and notes thereto. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods.
Important Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains or incorporates statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to our financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to” or other similar words. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including, but not limited to, those described in this Form 10-Q or the documents incorporated by reference. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to us at that time. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
These forward-looking statements are based on current expectations, estimates and projections about our business and beliefs and assumptions made by management. These Future Factors are not guarantees of our future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements.
Future Factors include:
•
credit losses;
•
cyber-security concerns, including an interruption or breach in the security of our information systems;
•
rapid technological developments and changes;
•
sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve;
•
a change in spreads on interest-earning assets and interest-bearing liabilities;
•
regulatory supervision and oversight, including Basel III required capital levels, and public policy changes, including environmental regulations;
•
legislation affecting the financial services industry as a whole, and/or S&T or S&T Bank, in particular, including the effects of the Dodd-Frank Act;
•
the outcome of pending and future litigation and governmental proceedings;
•
increasing price and product/service competition, including new entrants;
•
the ability to continue to introduce competitive new products and services on a timely, cost-effective basis;
•
managing our internal growth and acquisitions;
•
containing costs and expenses;
•
reliance on significant customer relationships;
•
the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating future acquired operations will be more difficult, disruptive or costly than anticipated;
•
general economic or business conditions, either nationally or regionally in Western Pennsylvania and our other market areas, may be less favorable than expected, resulting in among other things, a reduced demand for credit and other services;
•
deterioration of the housing market and reduced demand for mortgages;
•
a deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge to net income;
•
a reemergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities and indirectly, by affecting the economy generally; and
•
access to capital in the amounts, at the times and on the terms required to support our future business activities.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general economic conditions, including interest rate fluctuations, and other Future Factors.
Critical Accounting Policies and Estimates
Our critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2014 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2013 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Overview
We are a bank holding company headquartered in Indiana, Pennsylvania with assets of $4.8 billion at June 30, 2014. We provide a full range of financial services through offices in 12 Pennsylvania counties with retail and commercial banking products, cash management services, insurance and traditional trust and discount brokerage services. We also have two loan production offices, or LPOs, in Northeast and Central Ohio. Our common stock trades on the NASDAQ Global Select Market under the symbol “STBA.”
We earn revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers. Offsetting these revenues are the cost of deposits and other funding sources, provision for loan losses and other operating costs such as salaries and employee benefits, data processing, occupancy and tax expense.
Our mission is to become the financial services provider of choice within the markets that we serve. We strive to do this by delivering exceptional service and value, one customer at a time. Our strategic plan focuses on growth through expansion, acquisition and organic growth. Our strategic plan includes a collaborative model that combines expertise from all of our business segments and focuses on satisfying each customer’s individual financial objectives.
During the six months ended June 30, 2014, we successfully executed on our growth strategy through expanding into new markets and growing organically in our existing markets. On January 21, 2014, we announced the opening of an LPO in Central Ohio. On June 18, 2014, we opened a new branch with a team of experienced banking professionals in State College, Pennsylvania. During the six months ended June 30, 2014, we grew our business organically with portfolio loans increasing $158.9 million, or 4.5 percent, compared to December 31, 2013. This growth was primarily in our commercial loan portfolio.
Our focus throughout 2014 will be on loan growth and implementing opportunities to increase fee income while maintaining a strong expense discipline. The low interest rate environment will continue to challenge our net interest income, but our focus on an organic growth strategy will help to mitigate the impact in 2014. We plan to evaluate new markets and strive to replicate the success of our LPO in Northeast Ohio in our recently established LPO in Central Ohio. Our focus is also on maintaining and attracting new sales personnel to execute on our loan and fee growth strategies. Our capital position remains strong and we are well positioned to take advantage of acquisition opportunities as they arise.
Earnings Summary
Net income available to common shareholders for the three months ended June 30, 2014 was $14.7 million, or diluted earnings per share of $0.49, compared to $14.1 million, or $0.47 for the same period in 2013. Net income for the six months ended June 30, 2014 was $28.8 million, or diluted earnings per share of $0.97, compared to $26.4 million, or $0.89, for the same period in 2013. The increase in net income was primarily driven by an increase in net interest income and a lower provision for loan losses in both the three and six months ended June 30, 2014.
Net interest income increased $2.3 million, or 6.5 percent, and $4.2 million, or 6.1 percent, for the three and six month periods ended June 30, 2014 compared to the same periods in 2013. The increase in net interest income for both periods is mainly due to interest earning asset growth. Total average interest earning assets increased $219.1 million, or 5.4 percent, and $213.4 million, or 5.2 percent, for the three and six month periods ended June 30, 2014 compared to the same periods in 2013. The increase was driven by higher average loans, which is due to our successful efforts in growing our loan portfolio organically over the past year.
The provision for loan losses decreased $2.2 million for the three months ended June 30, 2014 and decreased $4.2 million for the six months ended June 30, 2014 compared to the same periods in 2013. The decrease in the provision for loan losses was due in part to net recoveries of $1.1 million and $1.2 million for the three and six months ended June 30, 2014. In addition, the lower provision was due to improving economic conditions which have positively impacted our asset quality metrics in all categories, including decreases in loan charge-offs, nonaccrual loans, special mention and substandard loans and the delinquency status of our loan portfolio.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Our total noninterest income decreased $1.1 million to $11.8 million for the three months ended June 30, 2014 and $4.5 million to $23.2 million for the six months ended June 30, 2014 compared to the same periods in 2013. The decrease in noninterest income for the three months ended June 30, 2014 was primarily related to a decline in mortgage banking income, debit and credit card fees and insurance fees. The decrease in noninterest income for the six months ended June 30, 2014 was primarily related to a $3.1 million gain on the sale of our merchant card servicing business that occurred in the first quarter of 2013 and decreases in mortgage banking income, debit and credit card fees and insurance fees. These decreases for the six months ended June 30, 2014 were partially offset by an increase in our wealth management fees due to new business development efforts and certain fee increases.
Total noninterest expense increased $1.8 million for the three months ended June 30, 2014 and decreased $0.9 million for the six months ended June 30, 2014 compared to the same periods in 2013. The increase for the three months ended June 30, 2014 primarily related to higher salaries and benefits due to higher incentives and other noninterest expense due to a higher provision for unfunded loan commitments. The decrease for the six months ended June 30, 2014 was due to no merger related expenses in 2014 compared to $0.8 million in 2013, and lower professional services and legal, other taxes and Federal Deposit Insurance Corporation, or FDIC, insurance.
Explanation of Use of Non-GAAP Financial Measures
In addition to the results of operations presented in accordance with generally accepted accounting principles, or GAAP, management uses, and this quarterly report contains or references, certain non-GAAP financial measures, such as net interest income on a fully taxable equivalent, or FTE, basis and operating revenue. Management believes these non-GAAP financial measures provide information useful to investors in understanding our underlying business, operational performance and performance trends as they facilitate comparisons with the performance of others in the financial services industry. Although management believes that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with non-GAAP measures which may be presented by other companies.
We believe the presentation of net interest income on a FTE basis ensures the comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the Consolidated Statements of Comprehensive Income is reconciled to net interest income adjusted to a FTE basis in the next section for the three and six months ended June 30, 2014 and 2013.
Operating revenue is the sum of net interest income and noninterest income less non-recurring income and expenses. In order to understand the significance of net interest income to our business and operating results, we believe it is appropriate to evaluate the significance of net interest income as a component of operating revenue.
 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2014 Compared to
Three and Six Months Ended June 30, 2013
Net Interest Income
Our principal source of revenue is net interest income. Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the average balance of interest-earning assets and interest-bearing liabilities and changes in interest rates and spreads. Maintaining consistent spreads between interest-earning assets and interest-bearing liabilities is significant to our financial performance because net interest income comprised 76 percent of operating revenue (net interest income plus noninterest income, excluding non-recurring income and expenses) for the three and six month periods ended June 30, 2014. The level and mix of interest-earning assets and interest-bearing liabilities is managed by our Asset and Liability Committee, or ALCO, in order to mitigate interest rate and liquidity risks of the balance sheet. A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to maintain an acceptable net interest margin on interest-earning assets.
The interest income on interest-earning assets and the net interest margin are presented on a FTE basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the federal statutory tax rate of 35 percent for each period and the dividend-received deduction for equity securities. We believe this measure to be the preferred industry measurement of net interest income that provides a relevant comparison between taxable and non-taxable amounts.
The following table reconciles interest income and interest rates per the Consolidated Statements of Comprehensive Income to net interest income and rates adjusted to a FTE basis for the periods presented:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2014
 
2013
 
2014
 
2013
Total interest income
$
39,872

 
$
38,553

 
$
78,537

 
$
76,396

Total interest expense
3,017

 
3,957

 
6,091

 
8,131

Net interest income per consolidated statements of comprehensive income
36,855

 
34,596

 
72,446

 
68,265

Adjustment to FTE basis
1,394

 
1,169

 
2,717

 
2,341

Net Interest Income (FTE) (non-GAAP)
$
38,249

 
$
35,765

 
$
75,163

 
$
70,606

Net interest margin
3.43
%
 
3.40
%
 
3.41
%
 
3.38
%
Adjustment to FTE basis
0.13
%
 
0.11
%
 
0.13
%
 
0.12
%
Net Interest Margin (FTE) (non-GAAP)
3.56
%
 
3.51
%
 
3.54
%
 
3.50
%
Income amounts are annualized for rate calculations.


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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Average Balance Sheet and Net Interest Income Analysis
The following table provides information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the periods presented: 
 
Three Months Ended June 30, 2014

Three Months Ended June 30, 2013
(dollars in thousands)
Average Balance
Interest
Rate

Average Balance
Interest
Rate
ASSETS







Loans (1) (2)
$
3,650,050

$
37,444

4.11
%

$
3,419,393

$
36,459

4.28
%
Interest-bearing deposits with banks
88,064

62

0.28
%

186,265

132

0.28
%
Taxable investment securities (3)
428,618

2,129

1.99
%

365,799

1,866

2.04
%
Tax-exempt investment securities (2)
129,687

1,507

4.65
%

106,194

1,255

4.73
%
Federal Home Loan Bank and other restricted stock
12,752

124

3.89
%

12,420

10

0.31
%
Total Interest-earning Assets
4,309,171

41,266

3.84
%

4,090,071

39,722

3.89
%
Noninterest-earning assets:
 
 
 

 
 
 
Cash and due from banks
48,846

 
 

52,219

 
 
Premises and equipment, net
35,689

 
 

36,881

 
 
Other assets
336,985

 
 

358,555

 
 
Less allowance for loan losses
(49,075
)
 
 

(47,063
)
 
 
Total Assets
$
4,681,616

 
 

$
4,490,663

 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY







Interest-bearing demand
$
311,719

$
20

0.03
%

$
303,461

$
18

0.02
%
Money market
327,666

125

0.15
%

327,733

112

0.14
%
Savings
1,035,691

403

0.16
%

1,001,258

452

0.18
%
Certificates of deposit
899,086

1,742

0.78
%

984,304

2,330

0.95
%
CDARS and brokered deposits
230,036

186

0.32
%

63,564

39

0.25
%
Total Interest-bearing deposits
2,804,198

2,476

0.35
%

2,680,320

2,951

0.44
%
Securities sold under repurchase agreements
30,718

2

0.01
%

67,461

22

0.13
%
Short-term borrowings
108,640

80

0.30
%

71,429

44

0.25
%
Long-term borrowings
20,873

156

3.01
%

23,196

176

3.05
%
Junior subordinated debt securities
45,619

303

2.66
%

82,817

764

3.70
%
Total Interest-bearing Liabilities
3,010,048

3,017

0.40
%

2,925,223

3,957

0.54
%
Noninterest-bearing liabilities:
 
 
 

 
 
 
Noninterest-bearing demand
1,028,997

 
 

946,862

 
 
Other liabilities
51,390

 
 

72,370

 
 
Shareholders’ equity
591,181

 
 

546,208

 
 
Total Liabilities and Shareholders’ Equity
$
4,681,616

 
 

$
4,490,663

 
 
Net Interest Income (2)(3)
 
$
38,249



 
$
35,765


Net Interest Margin (2) (3)
 
 
3.56
%

 
 
3.51
%
(1) Nonaccruing loans are included in the daily average loan amounts outstanding.
(2) Tax-exempt income is on a FTE basis using the statutory federal corporate income tax rate of 35 percent for 2014 and 2013.
(3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.


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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 
Six Months Ended June 30, 2014

Six Months Ended June 30, 2013
(dollars in thousands)
Average Balance
Interest
Rate

Average Balance
Interest
Rate
ASSETS
 
 
 
 
 
 
 
Loans (1) (2)
$
3,613,470

$
73,878

4.12
%
 
$
3,388,915

$
72,190

4.30
%
Interest-bearing deposits with banks
117,812

147

0.25
%
 
198,379

252

0.25
%
Taxable investment securities (3)
412,142

4,079

1.98
%
 
359,622

3,731

2.07
%
Tax-exempt investment securities (2)
125,591

2,936

4.68
%
 
108,310

2,536

4.68
%
Federal Home Loan Bank and other restricted stock
13,070

214

3.28
%
 
13,415

28

0.42
%
Total Interest-earning Assets
4,282,085

81,254

3.82
%
 
4,068,641

78,737

3.90
%
Noninterest-earning assets:
 
 
 
 
 
 
 
Cash and due from banks
48,463

 
 
 
52,116

 
 
Premises and equipment, net
35,662

 
 
 
37,316

 
 
Other assets
339,070

 
 
 
358,996

 
 
Less allowance for loan losses
(48,255
)
 
 
 
(47,527
)
 
 
Total Assets
$
4,657,025

 
 
 
$
4,469,542

 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Interest-bearing demand
$
312,565

$
35

0.02
%
 
$
306,792

$
37

0.02
%
Money market
338,928

253

0.15
%
 
332,961

237

0.14
%
Savings
1,025,007

791

0.16
%
 
987,616

945

0.19
%
Certificates of deposit
904,869

3,565

0.79
%
 
998,041

4,878

0.99
%
CDARS and brokered deposits
210,426

342

0.33
%
 
47,480

56

0.24
%
Total Interest-bearing deposits
2,791,795

4,986

0.36
%
 
2,672,890

6,153

0.46
%
Securities sold under repurchase agreements
33,641

2

0.01
%
 
65,411

48

0.15
%
Short-term borrowings
118,156

178

0.30
%
 
66,298

78

0.24
%
Long-term borrowings
21,168

320

3.04
%
 
26,323

407

3.12
%
Junior subordinated debt securities
45,619

605

2.68
%
 
86,696

1,445

3.36
%
Total Interest-bearing Liabilities
3,010,379

6,091

0.41
%
 
2,917,618

8,131

0.56
%
Noninterest-bearing liabilities:
 
 
 
 
 
 
 
Noninterest-bearing demand
1,009,506

 
 
 
936,141

 
 
Other liabilities
52,116

 
 
 
72,450

 
 
Shareholders’ equity
585,024

 
 
 
543,333

 
 
Total Liabilities and Shareholders’ Equity
$
4,657,025

 
 
 
$
4,469,542

 
 
Net Interest Income (2) (3)
 
$
75,163

 
 
 
$
70,606

 
Net Interest Margin (2) (3)
 
 
3.54
%
 
 
 
3.50
%
(1) Nonaccruing loans are included in the daily average loan amounts outstanding.
(2) Tax-exempt income is on a FTE basis using the statutory federal corporate income tax rate of 35 percent for 2014 and 2013.
(3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.

Net interest income on a FTE basis increased $2.5 million, or 6.9 percent, for the three months ended June 30, 2014 and $4.6 million, or 6.5 percent, for the six months ended June 30, 2014 compared to the same periods in 2013. The net interest margin on a FTE basis increased 5 basis points for the three months ended June 30, 2014 and 4 basis points for the six months ended June 30, 2014 compared to the same periods in 2013. The increase in net interest income is mainly due to interest earning asset growth.

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Interest income on a FTE basis increased $1.5 million, or 3.9 percent, and $2.5 million, or 3.2 percent, to $41.3 million and $81.3 million for the three and six months ended June 30, 2014 compared to the same periods in 2013. The increase in interest income was mainly driven by the $219.1 million and $213.4 million increases in interest-earning assets for the three and six month periods ended June 30, 2014 compared to the same periods in 2013. The interest-earning asset balance increase is mainly attributable to loan growth. Average loan balances increased by $230.7 million and $224.6 million for the three and six months ended June 30, 2014 compared to the same periods in 2013 as a result of organic growth, primarily in our commercial loan portfolio. Due to the continued low interest rate environment our rate earned on loans decreased 17 basis points and 18 basis points for the three and six months ended June 30, 2014 when compared to the three and six months ended June 30, 2013. Average interest-bearing deposits with banks, which is primarily cash at the Federal Reserve, decreased $98.2 million for the three months and $80.6 million for the six months ended June 30, 2014 when compared to the same periods in 2013. Average investment securities, including Federal Home Loan Bank, or FHLB, and other restricted stock, increased $86.6 million for the three months and $69.5 million for the six months ended June 30, 2014 compared to the same periods in 2013. The deployment of excess cash at the Federal Reserve to higher yielding investment securities had a positive impact on the interest-earning asset rate. Overall, the FTE rate on total interest-earning assets decreased 5 basis points to 3.84 percent for the three months ended June 30, 2014 and decreased 8 basis points to 3.82 percent for the six months ended June 30, 2014 as compared to 3.89 percent and 3.90 percent for the same periods in 2013.
Interest expense decreased $0.9 million and $2.0 million to $3.0 million and $6.1 million for the three and six months ended June 30, 2014 compared to the same periods in 2013. The decrease in interest expense is a result of a shift in the mix of our interest-bearing liabilities from higher rate certificates of deposit, or CDs, and subordinated debt to lower cost deposits and borrowings. Total interest-bearing deposits increased $123.9 million and $118.9 million for the three months and six months ended June 30, 2014 compared to the same periods in 2013. Higher interest-bearing deposits are due to an increase of $166.5 million and $162.9 million in brokered deposits and an increase of $42.6 million and $49.1 million in interest-bearing demand, money market and savings balances offset by a decrease in CDs of $85.2 million and $93.2 million for the three and six month periods ended June 30, 2014 compared to the same periods in 2013. The cost of total interest-bearing deposits was 0.35 percent and 0.36 percent for the three and six month periods ended June 30, 2014, compared to 0.44 percent and 0.46 percent for the three and six month periods ended June 30, 2013. The decrease in the cost of interest-bearing deposits was mainly due to the maturity of higher rate CDs being replaced by lower rate deposits. Interest expense on average borrowings decreased $0.5 million and $0.9 million over the three and six month periods ended June 30, 2014 compared to the same periods in 2013. The decrease was primarily a result of the redemption of $45.0 million of subordinated debt during the second quarter of 2013. Overall, the cost of interest-bearing liabilities decreased 14 basis points and 15 basis points for the three months and six months ended June 30, 2014 compared to the same periods in 2013.


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The following table sets forth for the periods indicated a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:
 
Three Months Ended June 30, 2014
Compared to June 30,  2013
 
Six Months Ended June 30, 2014
Compared to June 30,  2013
(dollars in thousands)
Volume (4)
Rate (4)
Net
 
Volume
Rate
Net
Interest earned on:
 
 
 
 
 
 
 
Loans (1) (2)
$
2,460

$
(1,475
)
$
985

 
$
4,784

$
(3,096
)
$
1,688

Interest-bearing deposits with banks
(70
)
—

(70
)
 
(103
)
(2
)
(105
)
Taxable investment securities (3)
320

(57
)
263

 
544

(196
)
348

Tax-exempt investment securities (2)
277

(25
)
252

 
404

(4
)
400

Federal Home Loan Bank and other restricted stock
—

114

114

 
(1
)
187

186

Total Interest-earning Assets
2,987

(1,443
)
1,544

 
5,628

(3,111
)
2,517

Interest paid on:
 
 
 
 



Interest-bearing demand
1

1

2

 
—

(2
)
(2
)
Money market
—

13

13

 
4

12

16

Savings
16

(65
)
(49
)
 
36

(190
)
(154
)
Certificates of deposit
(202
)
(385
)
(587
)
 
(455
)
(857
)
(1,312
)
CDARS and brokered deposits
102

45

147

 
194

92

286

Securities sold under repurchase agreements
(12
)
(9
)
(21
)
 
(23
)
(23
)
(46
)
Short-term borrowings
23

13

36

 
60

40

100

Long-term borrowings
(18
)
(2
)
(20
)
 
(79
)
(9
)
(88
)
Junior subordinated debt securities
(343
)
(118
)
(461
)
 
(686
)
(154
)
(840
)
Total Interest-bearing Liabilities
(433
)
(507
)
(940
)
 
(949
)
(1,091
)
(2,040
)
Net Change in Net Interest Income
$
3,420

$
(936
)
$
2,484

 
$
6,577

$
(2,020
)
$
4,557

(1) Nonaccruing loans are included in the daily average loan amounts outstanding.
(2) Tax-exempt income is on a FTE basis using the statutory federal corporate income tax rate of 35 percent for 2014 and 2013.
(3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.
(4) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.

Provision for Loan Losses
The provision for loan losses is the adjustment to the allowance for loan losses, or ALL, after considering loan charge-offs and recoveries to bring the ALL to a level appropriate to absorb probable losses inherent in the loan portfolio. The provision for loan losses decreased $2.1 million from $1.0 million to ($1.1) million for the three months ended June 30, 2014 and decreased $4.1 million from $3.3 million to ($0.8) million for the six months ended June 30, 2014 compared to the same periods in 2013. The negative provision for loan losses was primarily due to net recoveries of $1.1 million and $1.2 million for the three and six months ended June 30, 2014. We continue to experience favorable asset quality trends with decreases in loan charge-offs, nonaccrual loans, special mention and substandard loans and the delinquency status of our loan portfolio. Net loan charge-offs decreased $2.0 million to a net recovery of $1.1 million for the three months ended June 30, 2014 compared to a net charge-off of $0.9 million for the three months ended June 30, 2013 and decreased $4.9 million to a net recovery of $1.2 million for the six months ended June 30, 2014 compared to a net charge-off of $3.7 million for the six months ended June 30, 2013. Nonaccrual loans decreased 61 percent to $14.9 million at June 30, 2014 compared to $37.9 million at June 30, 2013. Total special mention and substandard commercial loans have decreased $98.5 million, or 41 percent, over the last twelve months to $143.1 million at June 30, 2014. The ALL was 1.25 percent of total loans at June 30, 2014 compared to 1.34 percent at June 30, 2013. Refer to “Allowance for Loan Losses” in the MD&A of this report for additional information.


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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Noninterest Income
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2014
2013
$ Change
% Change
 
2014
2013
$ Change
% Change
Securities gains, net
$
40

$
—

$
40

NM

 
$
41

$
2

$
39

NM
Wealth management fees
2,837

2,820

17

0.6

 
5,792

5,396

396

7.3

Debit and credit card fees
2,724

3,150

(426
)
(13.5
)
 
5,226

5,601

(375
)
(6.7
)
Service charges on deposit accounts
2,574

2,495

79

3.2

 
5,083

4,943

140

2.8

Insurance fees
1,425

1,643

(218
)
(13.3
)
 
3,102

3,418

(316
)
(9.2
)
Mortgage banking
264

911

(647
)
(71.0
)
 
396

1,393

(997
)
(71.6
)
Gain on sale of merchant card servicing business
—

—

—

—

 
—

3,093

(3,093
)
(100.0
)
Other
1,907

1,848

59

3.2

 
3,547

3,827

(280
)
(7.3
)
Total Noninterest Income
$
11,771

$
12,867

$
(1,096
)
(8.5
)%
 
$
23,187

$
27,673

$
(4,486
)
(16.2
)%
NM- percentage not meaningful
Noninterest income decreased $1.1 million, or 8.5 percent, and $4.5 million, or 16.2 percent, to $11.8 million and $23.2 million for the three and six month periods ended June 30, 2014 compared to the same periods in 2013. The decreases related to declines in fees from mortgage banking, debit and credit cards and insurance for both periods. Additional decreases in the six month period ended June 30, 2014 related to the sale of our merchant card servicing business and other noninterest income offset by an increase in wealth management fees.
During the first quarter of 2013, we sold our merchant card servicing business for $4.8 million and paid deconversion and termination fees of $1.7 million to the merchant processor resulting in a net gain of $3.1 million. In conjunction with the sale of the merchant card servicing business, we entered into a marketing and sales alliance agreement with the purchaser, providing transition fees, royalties and referral revenue. Income from the marketing and sales alliance agreement is included in debit and credit card fees. The decrease in debit and credit card fees for both the three and six month periods ended June 30, 2014 primarily relates to transition fees that we received during the first five months after the sale of the merchant card servicing business that did not recur during 2014, combined with the timing of referral revenue. Mortgage banking income decreased $0.6 million and $1.0 million for the three and six month periods ended June 30, 2014 compared to the same periods in 2013. The decrease in mortgage banking income relates to the increase in mortgage rates that occurred in the second quarter of 2013, resulting in a decrease in the volume of loans originated for sale in the secondary market and less favorable pricing on loan sales. During the six months ended June 30, 2014, we sold 65 percent fewer mortgages with $13.1 million in loan sales compared to $37.7 million during the same period in 2013. Insurance fees decreased $0.2 million and $0.3 million for the three and six month periods ended June 30, 2014 compared to the same periods in 2013 due to increased competition.
The decrease in other noninterest income of $0.3 million for the six month period ended June 30, 2014, as compared to the same period in 2013, was primarily due to a decrease in interest rate swap fees from our commercial customers. Wealth management fees increased $0.4 million for the six month period ended June 30, 2014, as compared to the same period in 2013, due to higher assets under management, new business development efforts and fee increases.


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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Noninterest Expense
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2014
2013
$ Change
% Change
 
2014
2013
$ Change
% Change
Salaries and employee benefits (1)
$
15,772

$
14,725

$
1,047

7.1
 %
 
$
31,148

$
30,737

$
411

1.3

Data processing (1)
2,219

2,110

109

5.2

 
4,314

4,043

$
271

6.7

Net occupancy (1)
1,984

1,958

26

1.3

 
4,214

4,122

$
92

2.2

Furniture and equipment
1,277

1,230

47

3.8

 
2,548

2,538

$
10

0.4

Marketing
960

793

167

21.1

 
1,578

1,482

$
96

6.5

Other Taxes
893

915

(22
)
(2.4
)
 
1,524

1,914

$
(390
)
(20.4
)
Professional services and legal (1)
875

1,171

(296
)
(25.3
)
 
1,538

2,143

$
(605
)
(28.2
)
FDIC insurance
579

707

(128
)
(18.1
)
 
1,210

1,483

$
(273
)
(18.4
)
Other noninterest expense (1)
5,606

4,749

857

18.0

 
11,005

10,702

$
303

2.8

Merger related expense
—

28

(28
)
(100.0
)
 
—

838

$
(838
)
(100.0
)
Total Noninterest Expense
$
30,165

$
28,386

$
1,779

6.3
 %
 
$
59,079

$
60,002

$
(923
)
(1.5
)
(1) Excludes one-time merger related expense for 2013.

Noninterest expense increased $1.8 million, or 6.3 percent, and decreased $0.9 million, or 1.5 percent, to $30.2 million and $59.1 million for the three and six month periods ended June 30, 2014 compared to the same periods in 2013. Increases in salaries and employee benefits expenses and other noninterest expenses were offset by decreases in professional services and legal for both periods. Additional decreases in merger related expenses, other taxes and FDIC insurance contributed to the decrease for the six month period ended June 30, 2014 as compared to the same period in 2013.
The $0.8 million of merger related expense recognized in the six months ended June 30, 2013 related primarily to the data processing system conversion of Gateway Bank. Although the Gateway Bank acquisition occurred in August 2012, the merger with S&T Bank and the system conversion was completed on February 8, 2013.
Salaries and employee benefits expenses increased $1.0 million and $0.4 million in the three and six month periods ended June 30, 2014, compared to the same periods in 2013, primarily due to an increase in incentive expense offset by a decrease in pension expense. Incentive expense increased $0.8 million and $1.3 million for the three and six months ended June 30, 2014, compared to the same periods in 2013, due to strong performance in the first half of 2014. Offsetting this increase to incentives was a reduction in our pension expense for the three and six months ended June 30, 2014, compared to the same periods in 2013, of $0.5 million and $1.0 million due to a decrease in our pension liability resulting from a change in actuarial assumptions. Other noninterest expense increased $0.9 million for the six months ended June 30, 2014 and was relatively unchanged for the three months ended June 30, 2014, compared to the same periods in 2013. The $0.9 million increase during the current period primarily relates to an increase in the provision for unfunded loan commitments. Data processing increased $0.1 million and $0.3 million for the three and six month periods ended June 30, 2014 primarily due to the implementation of software that strengthens the authentication of our customers that use our online banking product
Professional services and legal expense decreased $0.3 million and $0.6 million for the three and six months ended June 30, 2014, compared to the same periods in 2013, primarily due to additional external accounting and consulting charges that were incurred in 2013. The decrease of $0.4 million for the six months ended June 30, 2014 in other taxes primarily relates to legislative changes that have resulted in a reduction in Pennsylvania shares tax expense. FDIC insurance charges are based in part on our financial ratios which have improved, resulting in a decrease of $0.1 million and $0.3 million for the three and six month periods ended June 30, 2014, compared to the same periods in 2013.
Provision for Income Taxes
The provision for income taxes increased $0.9 million to $4.9 million for the three month period and increased $2.5 million to $8.6 million for the six month period ended June 30, 2014 compared to a provision of $4.0 million and $6.2 million for the same periods in 2013. The increases to the provision for income taxes for the three and six month periods ended June 30, 2014 were primarily due to increases of $1.5 million for the three month period and $4.8 million for the six month period in

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

pre-tax income and an increase in the expected full year tax rate. The effective tax rate for the six months ended June 30, 2014 increased to 23.1 percent compared to 18.9 percent for the same period in 2013. The increase in our effective tax rate was primarily due to increases in pre-tax income.

Financial Condition
June 30, 2014
Total assets increased by 5.6 percent to $4.8 billion at June 30, 2014 compared to $4.5 billion at December 31, 2013. Loan growth was strong, resulting in an increase to total portfolio loans of $158.9 million, or 4.5 percent, compared to December 31, 2013. Our commercial loan portfolio grew by $153.0 million, or 5.9 percent, to $2.7 billion and our consumer loan portfolio grew by $5.9 million, or 0.6 percent, to $978.2 million at June 30, 2014. Securities increased $79.1 million, or 15.5 percent, compared to December 31, 2013. Our deposit base increased $192.9 million, or 5.3 percent, with total deposits of $3.9 billion at June 30, 2014 compared to $3.7 billion at December 31, 2013. Demand deposits increased $92.3 million, or 7.1 percent, compared to December 31, 2013. Our Certificate of Deposit Account Registry Services, or CDARS, One Way Buy, or OWB, and brokered CDs increased by $83.0 million during the six month period ended June 30, 2014 compared to December 31, 2013. Borrowings increased by $35.2 million to $276.5 million at June 30, 2014 compared to $241.3 million at December 31, 2013. The short-term borrowing increase of $45.0 million was utilized as a source of funds to support our asset growth during the first half of 2014. Total shareholder’s equity increased by $25.9 million, or 4.5 percent, during the six months ended June 30, 2014 compared to December 31, 2013. The increase was primarily due to net income of $28.8 million and an increase to other comprehensive income of $6.7 million primarily resulting from higher market values on our available-for-sale securities offset by $9.8 million in dividends.

Securities Activity
(dollars in thousands)
June 30, 2014
 
December 31, 2013
 
$ Change
Obligations of U.S. government corporations and agencies
$
270,248

 
$
234,751

 
$
35,497

Collateralized mortgage obligations of U.S. government corporations and agencies
94,604

 
63,774

 
30,830

Residential mortgage-backed securities of U.S. government corporations and agencies
46,389

 
48,669

 
(2,280
)
Commercial mortgage-backed securities of U.S. government corporations and agencies
39,920

 
39,052

 
868

Obligations of states and political subdivisions
128,313

 
114,264

 
14,049

Debt Securities Available-for-Sale
579,474

 
500,510

 
78,964

Marketable equity securities
9,014

 
8,915

 
99

Total Securities Available-for-Sale
$
588,488

 
$
509,425

 
$
79,063

We invest in various securities in order to provide a source of liquidity, to satisfy various pledging requirements, increase net interest income and as a tool of the ALCO to reposition the balance sheet for interest rate risk purposes. Securities are subject to market risk that could negatively affect the level of liquidity available to us. Security purchases are subject to investment policies approved annually by our Board of Directors and administered through ALCO and our treasury function. The securities portfolio increased $79.1 million, or 15.5 percent, from December 31, 2013. The increase is primarily due to the investment of cash into higher yielding assets.
On a quarterly basis, management evaluates the securities portfolio for other than temporary impairment, or OTTI. The bond portfolio had a net unrealized gain of $7.4 million at June 30, 2014 compared to a net unrealized loss of $2.3 million at December 31, 2013. Net unrealized gains at June 30, 2014 included $9.7 million of unrealized gains offset by $2.3 million of unrealized losses. Net unrealized losses at December 31, 2013 included unrealized gains of $5.5 million offset by $7.8 million of unrealized losses. The changes in unrealized gains and losses during the six months ended June 30, 2014 was a result of the changing interest rate environment during the period and is not related to the underlying credit quality of the bond portfolio. 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, 2014. During the three and six months ended June 30, 2014, no OTTI was recorded. 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 in an unrealized loss position before recovery of their amortized cost.

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Loan Composition
 
June 30, 2014
 
December 31, 2013
(dollars in thousands)
Amount
% of Loans
 
Amount
% of Loans
Commercial
 
 
 
 
 
Commercial real estate
$
1,636,383

43.9
%
 
$
1,607,756

45.1
%
Commercial and industrial
922,191

24.8
%
 
842,449

23.6
%
Construction
188,311

5.1
%
 
143,675

4.0
%
Total Commercial Loans
2,746,885

73.7
%
 
2,593,880

72.7
%
Consumer
 
 
 
 
 
Residential mortgage
492,589

13.2
%
 
487,092

13.7
%
Home equity
416,226

11.2
%
 
414,195

11.6
%
Installment and other consumer
65,838

1.8
%
 
67,883

1.9
%
Construction
3,541

0.1
%
 
3,149

0.1
%
Total Consumer Loans
978,194

26.3
%
 
972,319

27.3
%
Total Portfolio Loans
3,725,079

100.0
%
 
3,566,199

100.0
%
Loans Held for Sale
3,102


 
2,136


Total Loans
$
3,728,181


 
$
3,568,335


Our loan portfolio represents the most significant source of interest income for us. The risk that borrowers will be unable to pay such obligations is inherent in the loan portfolio. Conditions such as the overall economic climate can significantly impact a borrower’s ability to pay. Total portfolio loans increased $158.9 million, or 4.5 percent, since December 31, 2013 to $3.7 billion at June 30, 2014 primarily due to organic loan growth in our commercial loan portfolios. The increase in loans can be attributed to the execution of our strategic initiative to grow our loan portfolio by adding seasoned lenders to our staff and our expansion through two LPO's in Ohio. Our expansion into new markets continued in the second quarter of 2014 with the opening of a branch in State College, Pennsylvania on June 18, 2014.
Total commercial loans have increased $153.0 million, or 5.9 percent, from December 31, 2013 with growth in all portfolios. C&I loans increased $79.7 million, or 9.5 percent, due to new loan originations and increased line utilization. CRE loans increased $28.6 million, or 1.8 percent, due to improved loan demand. Commercial construction loans increased $44.6 million, or 31.1 percent, due to an increase in activity and seasonality.
Residential mortgages increased $5.5 million, or 1.1 percent, from December 31, 2013 to June 30, 2014. Residential mortgage lending continues to be a strategic focus through a centralized mortgage origination department, ongoing product redesign, secondary market activities and the utilization of commission compensated originators. Management believes that continued adherence to our conservative mortgage lending policies for portfolio loans will be as important in a growing economy as it was during the downturn in recent years. At the end of the second quarter of 2014, we returned to selling all of our mortgage loan production priced for sale into the secondary market. Previously, we had been only selling 30 year mortgages. The rationale for these sales is to mitigate interest-rate risk associated with holding lower rate, long-term residential mortgages in the loan portfolio, generate fee revenue from sales and servicing and maintain the primary customer relationship. During the six months ended June 30, 2014, we sold 65 percent fewer mortgages with $12.5 million in loan sales compared to $35.6 million during the same period in 2013. We have experienced a decrease in the volume of loan sales from the prior year due to an increase in interest rates in mid-2013 which caused a significant decline in mortgage refinancings. As of June 30, 2014, we serviced $318.9 million of secondary market mortgage loans sold to Fannie Mae.

Allowance for Loan Losses
We maintain an ALL at a level determined to be adequate to absorb estimated probable credit losses inherent within the loan portfolio as of the balance sheet date. Determination of an adequate ALL is subjective, as it requires estimations of the occurrence of future events, as well as the timing of such events, and it may be subject to significant changes from period to period. The methodology for determining the ALL has two main components: 1) evaluation and impairment tests of individual loans, and 2) evaluation of certain groups of homogeneous loans with similar risk characteristics.
An inherent risk to the loan portfolio as a whole is the condition of the local economy. In addition, each loan segment carries with it risks specific to the segment. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ALL.
CRE loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties for various purposes such as hotels, strip malls and apartments. Individual project cash flows, as well as global cash

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flows, are generally the sources of repayment for these loans. Besides cash flow risks, CRE loans have collateral risk and risks based upon the business prospects of the lessee, if the project is not owner occupied.
C&I loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. Cash flow from the operations of the company is the primary source of repayment for these loans and the cash flow depends not only on the economy as a whole, but also on the health of the company’s industry.
Commercial construction loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. During the construction phase, a number of factors can result in delays and cost overruns. While the risk is generally confined to the construction and absorption periods, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or the value of the property securing the loan may not have sufficient value in a liquidation to cover the outstanding principal. There are also various risks depending on the type of project and the experience and resources of the developer.
Consumer real estate loans are secured by 1-4 family residences, including purchase money mortgages, first and second lien home equity loans and home equity lines of credit. The primary source of repayment for these loans is the income and assets of the borrower. The unemployment rate, as well as the state of the local housing market, had a significant impact on the risk determination since low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.
Other consumer loans are made to individuals and may be secured by assets other than 1-4 family residences, or may be unsecured. This class of loans includes auto loans, unsecured lines and credit cards. The primary source of repayment for these loans is the income and assets of the borrower so the local unemployment rate is an important indicator of risk. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.
At June 30, 2014, approximately 83 percent of the ALL was related to our commercial loan portfolio, while commercial loans comprised 74 percent of our loan portfolio. We believe that the inherent losses in the commercial portfolio are higher than in the consumer portfolio. Our historical losses in the commercial loan portfolio were higher than in the consumer loan portfolio in the last economic downturn.

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The following tables summarize the ALL and recorded investments in loans by category for the dates presented: 
 
June 30, 2014
 
Allowance for Loan Losses
Portfolio Loans
(dollars in thousands)
Individually
Evaluated for
Impairment

Collectively
Evaluated for
Impairment

Total

Individually
Evaluated for
Impairment

Collectively
Evaluated for
Impairment

Total

Commercial real estate
$
—

$
20,733

$
20,733

$
21,228

$
1,615,155

$
1,636,383

Commercial and industrial
—

13,004

13,004

9,545

912,646

922,191

Commercial construction
—

4,759

4,759

8,179

180,132

188,311

Consumer real estate
47

6,658

6,705

7,129

905,227

912,356

Other consumer
11

1,368

1,379

128

65,710

65,838

Total
$
58

$
46,522

$
46,580

$
46,209

$
3,678,870

$
3,725,079

 
 
December 31, 2013
 
Allowance for Loan Losses
Portfolio Loans
(dollars in thousands)
Individually
Evaluated for
Impairment

Collectively
Evaluated for
Impairment

Total
Individually
Evaluated for
Impairment

Collectively
Evaluated for
Impairment

Total
Commercial real estate
$
—

$
18,921

$
18,921

$
26,968

$
1,580,788

$
1,607,756

Commercial and industrial
—

14,433

14,433

9,580

832,869

842,449

Commercial construction
25

5,349

5,374

8,072

135,603

143,675

Consumer real estate
53

6,309

6,362

8,079

896,357

904,436

Other consumer
19

1,146

1,165

157

67,726

67,883

Total
$
97

$
46,158

$
46,255

$
52,856

$
3,513,343

$
3,566,199

 
 
June 30, 2014
 
December 31, 2013
Ratio of net charge-offs to average loans outstanding
(0.03
)%
* 
0.25
%
Allowance for loan losses as a percentage of total loans
1.25
 %

1.30
%
Allowance for loan losses to nonperforming loans
312
 %

206
%
* Annualized
The ALL was $46.6 million, or 1.25 percent, of total portfolio loans at June 30, 2014 compared to $46.3 million, or 1.30 percent, of total portfolio loans at December 31, 2013. Overall, the total ALL and the composition of the ALL remained relatively unchanged from December 31, 2013. Impaired loans decreased $6.6 million from December 31, 2013, primarily as a result of loan pay downs. New impaired loan formation has been low during 2014 at only $2.8 million. The reserve for loans collectively evaluated for impairment did not change significantly at June 30, 2014 compared to December 31, 2013.
Our asset quality continued to improve during the six months ended June 30, 2014 with net recoveries, decreases in nonperforming loans and decreases in special mention and substandard loans. We had gross loan charge-offs of $4.7 million offset by loan recoveries of $5.9 million resulting in net recoveries of $1.2 million for the six months ended June 30, 2014. Included in the $5.9 million of recoveries was a $2.5 million recovery for one loan in our C&I loan portfolio. Nonperforming loans decreased $7.5 million, or 33 percent, to $14.9 million at June 30, 2014 compared to $22.5 million at December 31, 2013. Commercial special mention and substandard loans decreased by $19.9 million, or 12 percent, to $143.1 million at June 30, 2014 from $163.0 million at December 31, 2013.
During the three months ended June 30, 2014, we sold a $3.5 million package of smaller commercial loans,
$3.2 million of which were on nonaccrual status, resulting in a charge-off of $1.3 million. We also sold two C&I loans totaling $4.8 million which resulted in a charge-off of $1.5 million. The $4.8 million of C&I loans were moved to nonaccrual status during the three months ended June 30, 2014 as a result of the loan sale agreement. We received approximately $2.0 million of the proceeds for the loans prior to June 30, 2014 and the remaining $1.3 million was classified as held-for-sale at June 30, 2014. Subsequent to June 30, 2014, the remaining $1.3 million was fully collected.
We determine loans to be impaired when based upon current information and events, it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan agreement. Our methodology for evaluating whether a loan is impaired includes risk-rating credits on an individual basis and consideration of the borrower’s overall financial condition, payment history and available cash resources. In measuring impairment, we

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primarily look to the value of the collateral, but may use discounted cash flows or other market data. We may consider the existence of guarantees and the financial strength of the guarantors involved. Guarantees may be considered as a source of repayment; however, absent a verifiable payment capacity, a guarantee alone would not be sufficient to avoid classifying the loan as impaired.
Troubled debt restructurings, or TDRs, whether on accrual or nonaccrual status, are also classified as impaired loans. 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. 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. Generally these concessions are for a period of at least six months. Additionally, we classify loans where the debt obligation has been discharged through a Chapter 7 Bankruptcy and not reaffirmed by the borrower as TDRs.
TDRs can be returned to accruing status if the following criteria are met: 1) the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and 2) there is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the restructuring. All TDRs are considered to be impaired loans and will be reported as impaired loans for their remaining lives, 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 we fully expected that the remaining principal and interest will be collected according to the restructured agreement. All impaired loans are reported as nonaccrual loans unless the loan is a TDR that has met the requirements noted above to be returned to accruing status.
As an example, consider a substandard commercial construction loan that is currently 90 days past due where the loan is restructured to extend the maturity date for a period longer than would be considered an insignificant period of time. The post-modification interest rate is not increased to correspond with the current credit risk of the borrower and all other terms remain the same according to the original loan agreement. This loan will be considered a TDR as the borrower is experiencing financial difficulty and a concession has been granted. The loan will be reported as nonaccrual and as an impaired loan and a TDR. In addition, the loan could be charged down to the fair value of the collateral if a confirmed loss exists. If the loan subsequently performs, by means of making on-time principal and interest payments according to the newly restructured terms for a period of six months, and it is expected that all remaining principal and interest will be collected according to the terms of the restructured agreement, the loan will be returned to accrual status and reported as an accruing TDR. The loan will remain an impaired loan for the remaining life of the loan since the interest rate was not adjusted to be equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk.
As of June 30, 2014, we had $42.4 million in total TDRs, including $37.1 million that were accruing and $5.3 million that were in nonaccrual. For the six months ended June 30, 2014, we had $2.0 million of new TDRs, the most significant of which was a Commercial Construction TDR for $1.0 million which had a maturity date extension and 17 loans totaling $0.9 million related to bankruptcy filings that were not reaffirmed resulting in discharged debt. During the six months ended June 30, 2014, we returned five TDRs to accrual status for $1.5 million, including one loan for $1.3 million upon a detailed credit evaluation supporting that we fully expect collection of the contractual amounts due and that the borrower had six months of satisfactory payment performance.
The charge-off policy for commercial loans requires that loans and other obligations that are not collectible be promptly charged-off when the loss becomes probable, regardless of the delinquency status of the loan. We may elect to recognize a partial charge-off when management has determined that the value of collateral is less than the remaining investment in the loan. A loan or obligation does not need to be charged-off, regardless of delinquency status, if (i) management has determined there exists sufficient collateral to protect the remaining loan balance and (ii) there exists a strategy to liquidate the collateral. Management may also consider a number of other factors to determine when a charge-off is appropriate. These factors may include, but are not limited to:
•
The status of a bankruptcy proceeding
•
The value of collateral and probability of successful liquidation; and/or
•
The status of adverse proceedings or litigation that may result in collection
Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due. Unsecured loans are fully charged-off and secured loans are charged-off to the estimated fair value of the collateral less the cost to sell.
Our allowance for lending-related commitments is computed using a methodology similar to that used to determine the ALL. Amounts are added to the allowance for lending-related commitments by a charge to current earnings through noninterest expense. The balance in the allowance for lending-related commitments was relatively unchanged at approximately $3.1 million at June 30, 2014 as compared to $2.9 million at December 31, 2013. The allowance for lending-related commitments is included in other liabilities in the Consolidated Balance Sheets.

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Nonperforming assets consist of nonaccrual loans, nonaccrual TDRs and OREO. The following summarizes nonperforming assets for the dates presented:
(dollars in thousands)
June 30, 2014
December 31, 2013
$ Change
Nonaccrual Loans
 
 
 
Commercial real estate
$
4,227

$
6,852

$
(2,625
)
Commercial and industrial
2,667

1,412

1,255

Commercial construction
—

34

(34
)
Residential mortgage
1,473

1,982

(509
)
Home equity
1,306

2,073

(767
)
Installment and other consumer
25

34

(9
)
Consumer construction
—

—

—

Total Nonaccrual Loans
9,698

12,387

(2,689
)
Nonaccrual Troubled Debt Restructurings



Commercial real estate
1,431

3,898

(2,467
)
Commercial and industrial
1,170

1,884

(714
)
Commercial construction
1,869

2,708

(839
)
Residential mortgage
645

1,356

(711
)
Home equity
125

218

(93
)
Installment and other consumer
1

3

(2
)
Total Nonaccrual Troubled Debt Restructurings
5,241

10,067

(4,826
)
Total Nonaccrual Loans
14,939

22,454

(7,515
)
OREO
431

410

21

Total Nonperforming Assets
$
15,370

$
22,864

$
(7,494
)
 
 
 
 
Asset Quality Ratios:
 
 
 
Nonperforming loans as a percent of total loans
0.40
%
0.63
%
 
Nonperforming assets as a percent of total loans plus OREO
0.41
%
0.64
%
 
Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due. There were no loans 90 days or more past due and still accruing at June 30, 2014 or December 31, 2013.
Nonperforming assets decreased $7.5 million, or 33 percent to $15.4 million at June 30, 2014 compared to $22.9 million at December 31, 2013. The decline in nonperforming assets is primarily the result of the sale of $3.2 million of nonaccrual loans, $4.8 million in nonperforming loan pay downs, $1.2 million of loan charge-offs and $2.9 million of loans returning to accrual status. New nonperforming loan formation was $4.8 million for the six months ended June 30, 2014. The new formation primarily consists of smaller loans of less than $0.5 million.
Deposits
(dollars in thousands)
June 30, 2014
 
December 31, 2013
 
$ Change
Noninterest-bearing demand
$
1,089,999

 
$
992,779

 
$
97,220

Interest-bearing demand
307,897

 
312,790

 
(4,893
)
Money market
301,719

 
281,403

 
20,316

Savings
1,024,050

 
994,805

 
29,245

Certificates of deposit
890,794

 
922,753

 
(31,959
)
CDARs OWB and brokered CDs
250,787

 
167,778

 
83,009

Total Deposits
$
3,865,246

 
$
3,672,308

 
$
192,938


Deposits are our primary source of funds. We believe that our deposit base is stable and that we have the ability to attract new deposits, mitigating a funding dependency on other more volatile sources. Total deposits increased $192.9 million at June 30, 2014 compared to December 31, 2013.

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Overall, our customer deposits increased by $109.9 million and our CDARS OWB and brokered CDs increased by $83.0 million from December 31, 2013. The CDARS OWB and brokered CDs increased as a result of utilizing this type of funding source to support the strong asset growth during the first half of 2014.
CDs of $100,000 and over, not including CDARs, decreased to 8.6 percent of total deposits at June 30, 2014 compared to 9.3 percent of total deposits at December 31, 2013. The percent decrease is a result of total deposit growth with no material change in total CDs of $100,000 and over. CDs of $100,000 and over primarily represent deposit relationships with local customers in our market area.
Borrowings
(dollars in thousands)
June 30, 2014
 
December 31, 2013
 
$ Change
Securities sold under repurchase agreements, retail
$
25,269

 
$
33,847

 
$
(8,578
)
Short-term borrowings
185,000

 
140,000

 
45,000

Long-term borrowings
20,636

 
21,810

 
(1,174
)
Junior subordinated debt securities
45,619

 
45,619

 
—

Total Borrowings
$
276,524

 
$
241,276

 
$
35,248


Borrowings are an additional source of funding for us. Total borrowings increased by $35.2 million from December 31, 2013. The short-term borrowing increase of $45.0 million was utilized as a source of funds to support our asset growth activity during the first half of 2014.
Information pertaining to short-term borrowings is summarized in the tables below for the six and twelve month periods ended June 30, 2014 and December 31, 2013. 
 
Securities Sold Under Repurchase Agreements
(dollars in thousands)
June 30, 2014
 
December 31, 2013
Balance at the period end
$
25,269

 
$
33,847

Average balance during the period
33,641

 
54,057

Average interest rate during the period
0.01
%
 
0.12
%
Maximum month-end balance during the period
$
40,983

 
$
83,766

Average interest rate at the period end
0.01
%
 
0.01
%
 
 
 
 
 
Short-Term Borrowings
(dollars in thousands)
June 30, 2014
 
December 31, 2013
Balance at the period end
$
185,000

 
$
140,000

Average balance during the period
118,156

 
101,973

Average interest rate during the period
0.30
%
 
0.27
%
Maximum month-end balance during the period
$
185,000

 
$
175,000

Average interest rate at the period end
0.28
%
 
0.30
%


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Information pertaining to long-term borrowings is summarized in the tables below for the six and twelve month periods ended June 30, 2014 and December 31, 2013. 
 
Long-Term Borrowings
(dollars in thousands)
June 30, 2014
 
December 31, 2013
Balance at the period end
$
20,636

 
$
21,810

Average balance during the period
21,168

 
24,312

Average interest rate during the period
3.04
%
 
3.07
%
Maximum month-end balance during the period
$
21,616

 
$
28,913

Average interest rate at the period end
2.98
%
 
3.01
%
 
 
 
 
 
Junior Subordinated Debt Securities
(dollars in thousands)
June 30, 2014
 
December 31, 2013
Balance at the period end
$
45,619

 
$
45,619

Average balance during the period
45,619

 
65,989

Average interest rate during the period
2.68
%
 
3.14
%
Maximum month-end balance during the period
$
45,619

 
$
90,619

Average interest rate at the period end
2.69
%
 
2.70
%
Liquidity and Capital Resources
Liquidity is defined as a financial institution’s ability to meet its cash and collateral obligations at a reasonable cost. This includes the ability to satisfy the financial needs of depositors who want to withdraw funds or of borrowers needing to access funds to meet their credit needs. In order to manage liquidity risk our Board of Directors has delegated authority to the ALCO for formulation, implementation and oversight of liquidity risk management for S&T and S&T Bank. ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet funding needs in both a normal operating environment and for potential liquidity stress events. ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests and by having a detailed contingency funding plan. ALCO policy guidelines are in place that define graduated risk tolerances. If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position.
Our primary funding and liquidity source is a stable customer deposit base. We believe S&T Bank has the ability to retain existing and attract new deposits, mitigating any funding dependency on other more volatile sources. Refer to the Deposits Section of this Part I, Item 2, MD&A, for additional discussion on deposits. Although deposits are the primary source of funds, we have identified various funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified. These funding sources include borrowing availability at the FHLB, Federal Funds lines with other financial institutions and access to the brokered certificates of deposit market including CDARS.
An important component of S&T’s ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high. At June 30, 2014 we had $358.1 million in highly liquid assets, which consisted of $54.6 million in interest-bearing deposits with banks, $300.4 million in unpledged securities and $3.1 million in loans held for sale. The highly liquid assets to total assets resulted in an asset liquidity ratio of 7.5 percent at June 30, 2014. Also, at June 30, 2014, we had a remaining borrowing availability of $1.4 billion with the FHLB of Pittsburgh. In addition, we have access to $60.0 million in Federal Funds lines with other financial institutions. Refer to Part I, Note 8 Borrowings and Part I, Item 2, MD&A, for more details on FHLB borrowings. S&T Bank is considered to be a well capitalized bank according to regulatory guidance, therefore access to brokered CDs is not restricted.
 

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The following summarizes capital amounts and ratios for S&T Bancorp, Inc. and S&T Bank for the dates presented:
(dollars in thousands)
Adequately
Capitalized (1)
Well-
Capitalized (2)
 
June 30, 2014
 
December 31, 2013
 
Amount
Ratio
 
Amount
Ratio
S&T Bancorp, Inc.
 
 
 
 
 
 
 
 
Tier 1 leverage
4.00
%
5.00
%
 
$
445,813

9.91
%
 
$
426,234

9.75
%
Tier 1 capital to risk-weighted assets
4.00
%
6.00
%
 
445,813

12.30
%
 
426,234

12.37
%
Total capital to risk-weighted assets
8.00
%
10.00
%
 
516,821

14.26
%
 
494,986

14.36
%
S&T Bank
 
 
 
 
 
 
 
 
Tier 1 leverage
4.00
%
5.00
%
 
$
407,243

9.09
%
 
$
389,584

8.95
%
Tier 1 capital to risk-weighted assets
4.00
%
6.00
%
 
407,243

11.29
%
 
389,584

11.36
%
Total capital to risk-weighted assets
8.00
%
10.00
%
 
477,399

13.24
%
 
457,540

13.35
%
(1) For an institution to qualify as “adequately capitalized” under regulatory guidelines, Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios must be at least 4 percent, 4 percent and 8 percent. At June 30, 2014, we exceeded those requirements.
(2) For an institution to qualify as “well capitalized” under regulatory guidelines, Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios must be at least 5 percent, 6 percent and 10 percent. At June 30, 2014, we exceeded those requirements.

In October 2012, we filed a shelf registration statement on Form S-3 under the Securities Act of 1933 as amended, with the SEC for the issuance of up to $300 million of a variety of securities including debt and capital securities, preferred and common stock and warrants. We may use the proceeds from the sale of securities for general corporate purposes, which could include investments at the holding company level, investing in, or extending credit to subsidiaries, possible acquisitions and stock repurchases. As of June 30, 2014 we had not issued any securities pursuant to the shelf registration statement.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is defined as the degree to which changes in interest rates, foreign exchange rates, commodity prices or equity prices can adversely affect a financial institution’s earnings or capital. For most financial institutions, including S&T, market risk primarily reflects exposures to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels. Interest rate changes affect capital by changing the net present value of a bank’s future cash flows, and the cash flows themselves, as rates change. Accepting this risk is a normal part of banking and can be an important source of profitability and shareholder value. However, excessive interest rate risk can threaten a bank’s earnings, capital, liquidity and solvency. Our sensitivity to changes in interest rate movements is continually monitored by ALCO. ALCO monitors and manages market risk through rate shock analyses, economic value of equity, or EVE, analysis and by performing stress tests in order to mitigate earnings and market value fluctuations due to changes in interest rates.
Rate shock analyses results are compared to a base case to provide an estimate of the impact that market rate changes may have on 12 months of pretax net interest income. The base case and rate shock analyses are performed on a static balance sheet. A static balance sheet is a no growth balance sheet in which all maturing and/or repricing cash flows are reinvested in the same product at the existing product spread. Rate shock analyses assume an immediate parallel shift in market interest rates and also include management assumptions regarding the impact of interest rate changes on non-maturity deposit products (noninterest-bearing demand, interest-bearing demand, money market and savings) and changes in the prepayment behavior of fixed rate loans and securities with optionality. S&T policy guidelines limit the change in pretax net interest income over a 12 month horizon using rate shocks of +/- 300 basis points. Policy guidelines define the percent change in pretax net interest income by graduated risk tolerance levels of minimal, moderate and high. We have temporarily suspended the -200 and -300 basis point rate shock analyses. Due to the low interest rate environment we believe the impact to net interest income when evaluating the -200 and -300 basis point rate shock scenarios does not provide meaningful insight into our interest rate risk position.
In order to monitor interest rate risk beyond the 12 month time horizon of rate shocks, we also perform EVE analysis. EVE represents the present value of all asset cash flows minus the present value of all liability cash flows. EVE rate change results are compared to a base case to determine the impact that market rate changes may have on our EVE. As with rate shock analysis, EVE incorporates management assumptions regarding prepayment behavior of fixed rate loans and securities with optionality and the behavior and value of non-maturity deposit products. S&T policy guidelines limit the change in EVE given changes in rates of +/- 300 basis points. Policy guidelines define the percent change in EVE by graduated risk tolerance levels

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S&T BANCORP, INC. AND SUBSIDIARIES
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - continued

of minimal, moderate and high. We have also temporarily suspended the EVE -200 and -300 basis point scenarios due to the low interest rate environment.
The table below reflects the rate shock analyses and EVE results. Both are in the minimal risk tolerance level.

 
June 30, 2014
December 31, 2013
Change in Interest Rate (basis points)
% Change in Pretax
Net Interest Income

% Change in
Economic Value of
Equity

% Change in Pretax
Net Interest Income

% Change in
Economic Value of
Equity

+300
6.8

(2.0
)
7.6

(6.1
)
+200
4.1

(1.0
)
5.3

(2.1
)
+100
1.8

1.9

2.3

—

-100
(3.4
)
(11.7
)
(3.4
)
(10.8
)
The results from the rate shock analyses are consistent with having an asset sensitive balance sheet. Having an asset sensitive balance sheet means more assets than liabilities will reprice during the measured time frames. The implications of an asset sensitive balance sheet will differ depending upon the change in market interest rates. For example, with an asset sensitive balance sheet in a declining interest rate environment, more assets than liabilities will decrease in rate. This situation could result in a decrease in net interest income and operating income. Conversely, with an asset sensitive balance sheet in a rising interest rate environment, more assets than liabilities will increase in rate. This situation could result in an increase in net interest income and operating income. As measured by rate shock analyses, an increase in interest rates would have a positive impact on pretax net interest income. However, there was a slight decline in the percent change in pretax net interest income for our rates up shock scenarios when comparing June 30, 2014 and December 31, 2013. The decline is a result of utilizing short term funding to support the asset growth during the first half of 2014.
When comparing the EVE results for June 30, 2014 and December 31, 2013 the percent change to EVE has improved in the rates up shock scenarios and decreased in the rate down shock scenario. The changes in EVE are due to the flattening of the yield curve between December 31, 2013 and June 30, 2014. The decrease in long term rates resulted in a lower June 30, 2014 base case EVE mainly as a result of lower non-maturity deposit values.
In addition to rate shocks and EVE, we perform a market risk stress test annually. The market risk stress test includes sensitivity analyses and simulations. Sensitivity analyses are performed to help us identify which model assumptions cause the greatest impact on pretax net interest income. Sensitivity analyses may include changing prepayment behavior of fixed rate loans and securities with optionality and the impact of interest rate changes on non-maturity deposit products. Simulation analyses may include the potential impact of rate shocks other than the policy guidelines of +/- 300 basis points, yield curve shape changes, significant balance mix changes and various growth scenarios. Simulations indicate that an increase in rates, particularly if the yield curve steepens, will most likely result in an improvement in pretax net interest income. We realize that some of the benefit reflected in our scenarios may be offset by a change in the competitive environment and a change in product preference by our customers.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of S&T’s Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO (its principal executive officer and principal financial officer, respectively), management has evaluated the effectiveness of the design and operation of S&T’s disclosure controls and procedures as of June 30, 2014. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, or the SEC, and that such information is accumulated and communicated to S&T’s management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Based on and as of the date of such evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were effective in all material respects, as of the end of the period covered by this report.

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Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2014, there were no changes made to S&T’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, S&T’s internal control over financial reporting.

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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
There have been no material changes to the risk factors that we have previously disclosed in Item 1A – “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC on February 21, 2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not Applicable
Item 5. Other Information
None
Item 6. Exhibits
 
 
31.1
Rule 13a-14(a) Certification of the Chief Executive Officer.
 
 
31.2
Rule 13a-14(a) Certification of the Chief Financial Officer.
 
 
32
Rule 13a-14(b) Certification of the Chief Executive Officer and Chief Financial Officer.
 
 
101
The following financial information from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 is formatted in eXtensible Business Reporting Language (XBRL): (i) Unaudited Consolidated Balance Sheet at June 30, 2014 and Audited Consolidated Balance Sheet at December 31, 2013, (ii) Unaudited Consolidated Statements of Comprehensive Income for the Three Months and Six Months ended June 30, 2014 and 2013, (iii) Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Six Months ended June 30, 2014 and 2013, (iv) Unaudited Consolidated Statements of Cash Flows for the Six Months ended June 30, 2014 and 2013 and (v) Notes to Unaudited Consolidated Financial Statements.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
S&T Bancorp, Inc.
(Registrant)
 
 
Date: August 6, 2014
/s/ Mark Kochvar
 
Mark Kochvar
Senior Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Signatory)


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