Document
                                            
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 ______________________________________
FORM 10-Q
______________________________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            To                
Commission file number 0-12508
______________________________________ 
S&T BANCORP, INC.
(Exact name of registrant as specified in its charter)
______________________________________ 
Pennsylvania
 
25-1434426
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
800 Philadelphia Street, Indiana, PA
 
15701
(Address of principal executive offices)
 
(zip code)
800-325-2265
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
Common Stock, $2.50 Par Value - 34,913,023 shares as of October 31, 2016

Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

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




2
Table of Contents

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

 
September 30, 2016
December 31, 2015
(dollars in thousands, except per share data)
(Unaudited)
(Audited)
ASSETS
 
 
Cash and due from banks, including interest-bearing deposits of $68,961 and $41,639 at September 30, 2016 and December 31, 2015
$
125,163

$
99,399

Securities available-for-sale, at fair value
671,128

660,963

Loans held for sale
11,694

35,321

Portfolio loans, net of unearned income
5,418,234

5,027,612

Allowance for loan losses
(53,793
)
(48,147
)
Portfolio loans, net
5,364,441

4,979,465

Bank owned life insurance
71,523

70,175

Premises and equipment, net
47,122

49,127

Federal Home Loan Bank and other restricted stock, at cost
28,331

23,032

Goodwill
291,670

291,764

Other intangible assets, net
5,282

6,525

Other assets
101,851

102,583

Total Assets
$
6,718,205

$
6,318,354

LIABILITIES
 
 
Deposits:
 
 
Noninterest-bearing demand
$
1,232,469

$
1,227,766

Interest-bearing demand
657,326

616,188

Money market
764,125

605,184

Savings
1,026,234

1,061,265

Certificates of deposit
1,465,277

1,366,208

Total Deposits
5,145,431

4,876,611

Securities sold under repurchase agreements
40,949

62,086

Short-term borrowings
565,000

356,000

Long-term borrowings
15,303

117,043

Junior subordinated debt securities
45,619

45,619

Other liabilities
67,196

68,758

Total Liabilities
5,879,498

5,526,117

SHAREHOLDERS’ EQUITY
 
 
Common stock ($2.50 par value)
Authorized—50,000,000 shares
Issued—36,130,480 shares at September 30, 2016 and December 31, 2015
Outstanding—34,913,023 shares at September 30, 2016 and 34,810,374 shares at December 31, 2015
90,326

90,326

Additional paid-in capital
212,407

210,545

Retained earnings
575,192

544,228

Accumulated other comprehensive (loss) income
(5,643
)
(16,457
)
Treasury stock (1,217,457 shares at September 30, 2016 and 1,320,106 shares at December 31, 2015, at cost)
(33,575
)
(36,405
)
Total Shareholders’ Equity
838,707

792,237

Total Liabilities and Shareholders’ Equity
$
6,718,205

$
6,318,354

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 September 30,
 
Nine Months Ended September 30,
(dollars in thousands, except per share data)
2016
2015
 
2016
2015
INTEREST INCOME
 
 
 
 
 
Loans, including fees
$
53,956

$
49,578

 
$
157,133

$
138,438

Investment Securities:
 
 
 
 
 
Taxable
2,570

2,522

 
7,704

7,298

Tax-exempt
907

988

 
2,764

3,006

Dividends
375

581

 
1,077

1,453

Total Interest Income
57,808

53,669

 
168,678

150,195

INTEREST EXPENSE
 
 
 
 
 
Deposits
5,119

3,275

 
14,403

9,333

Borrowings and junior subordinated debt securities
1,234

798

 
3,474

2,196

Total Interest Expense
6,353

4,073

 
17,877

11,529

NET INTEREST INCOME
51,455

49,596

 
150,801

138,666

Provision for loan losses
2,516

3,206

 
12,379

6,473

Net Interest Income After Provision for Loan Losses
48,939

46,390

 
138,422

132,193

NONINTEREST INCOME
 
 
 
 
 
Securities (losses) gains, net
—

—

 
—

(34
)
Service charges on deposit accounts
3,208

3,069

 
9,272

8,529

Debit and credit card fees
3,163

2,996

 
8,818

8,732

Wealth management fees
2,565

2,814

 
7,947

8,667

Insurance fees
1,208

1,332

 
4,187

4,374

Mortgage banking
1,077

698

 
2,185

2,006

Gain on sale of credit card portfolio
—

—

 
2,066

—

Other
2,227

1,572

 
7,238

5,674

Total Noninterest Income
13,448

12,481

 
41,713

37,948

NONINTEREST EXPENSE
 
 
 
 
 
Salaries and employee benefits
19,011

16,789

 
57,539

51,024

Data processing
2,129

2,454

 
6,964

7,329

Net occupancy
2,776

2,744

 
8,413

8,014

Furniture and equipment
1,932

1,653

 
5,580

4,461

Marketing
896

895

 
2,872

2,905

Professional services and legal
1,041

946

 
3,035

2,270

FDIC insurance
1,005

990

 
2,938

2,493

Other taxes
1,080

719

 
3,076

2,721

Merger related expenses
—

—

 
—

3,167

Other
4,569

6,639

 
17,190

18,515

Total Noninterest Expense
34,439

33,829

 
107,607

102,899

Income Before Taxes
27,948

25,042

 
72,528

67,242

Provision for income taxes
7,367

6,407

 
18,795

17,584

Net Income
$
20,581

$
18,635

 
$
53,733

$
49,658

Earnings per share—basic
$
0.59

$
0.54

 
$
1.55

$
1.48

Earnings per share—diluted
$
0.59

$
0.54

 
$
1.54

$
1.48

Dividends declared per share
$
0.19

$
0.18

 
$
0.57

$
0.54

Comprehensive Income
$
19,686

$
22,420

 
$
64,547

$
53,755

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 share and per share data)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive (Loss)/Income
Treasury
Stock
Total
Balance at January 1, 2015
$
77,993

$
78,818

$
504,060

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

Net income for nine months ended September 30, 2015
—

—

49,658

—

—

49,658

Other comprehensive income (loss), net of tax
—

—

—

4,097

—

4,097

Cash dividends declared ($0.54 per share)
—

—

(17,886
)
—

—

(17,886
)
Common stock issued in acquisition (4,933,115 shares)
12,333

130,136

—

—

—

142,469

Treasury stock issued for restricted awards (87,841 shares, net of 5,717 forfeitures)
—

—

(2,390
)
—

2,279

(111
)
Recognition of restricted stock compensation expense
—

1,266

—

—

—

1,266

Tax benefit from stock-based compensation
—

53

—

—

—

53

Issuance costs
—

(132
)
—

—

—

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

$
210,141

$
533,442

$
(9,736
)
$
(36,370
)
$
787,803

 
 
 
 
 
 
 
Balance at January 1, 2016
$
90,326

$
210,545

$
544,228

$
(16,457
)
$
(36,405
)
$
792,237

Net income for nine months ended September 30, 2016
—

—

53,733

—

—

53,733

Other comprehensive income (loss), net of tax
—

—

—

10,814

—

10,814

Cash dividends declared ($0.57 per share)
—

—

(19,824
)
—

—

(19,824
)
Treasury stock issued for restricted awards (110,643) shares, net of 5,717 forfeitures)
—

—

(2,945
)
—

2,830

(115
)
Recognition of restricted stock compensation expense
—

1,862

—

—

—

1,862

Balance at September 30, 2016
$
90,326

$
212,407

$
575,192

$
(5,643
)
$
(33,575
)
$
838,707

See Notes to Consolidated Financial Statements


5
Table of Contents

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

 
Nine Months Ended September 30,
(dollars in thousands)
2016
2015
OPERATING ACTIVITIES
 
 
Net income
$
53,733

$
49,658

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


Provision for loan losses
12,379

6,473

Provision for unfunded loan commitments
90

687

Depreciation, amortization and accretion
2,858

(6
)
Net amortization of discounts and premiums on securities
2,816

2,682

Stock-based compensation expense
1,862

1,158

Securities losses, net
—

34

Tax benefit from stock-based compensation
—

(53
)
Mortgage loans originated for sale
(75,505
)
(81,966
)
Proceeds from the sale of mortgage loans
77,009

71,872

Gain on the sale of mortgage loans, net
(1,154
)
(730
)
Gain on the sale of credit card portfolio
(2,066
)
—

Pension plan curtailment gain
(1,017
)
—

Net increase in interest receivable
(4,019
)
(2,280
)
Net increase (decrease) in interest payable
1,117

(637
)
Net decrease in other assets
702

13,216

Net increase in other liabilities
3,586

1,531

Net Cash Provided by Operating Activities
72,391

61,639

INVESTING ACTIVITIES
 
 
Purchases of securities available-for-sale
(53,282
)
(54,465
)
Proceeds from maturities, prepayments and calls of securities available-for-sale
52,049

36,680

Proceeds from sales of securities available-for-sale
—

11,119

Net purchases of Federal Home Loan Bank stock
(5,298
)
(3,535
)
Net increase in loans
(406,370
)
(276,282
)
Proceeds from sale of loans not originated for resale
8,433

2,804

Purchases of premises and equipment
(2,744
)
(3,737
)
Proceeds from the sale of premises and equipment
20

264

Proceeds from the sale of credit card portfolio
25,019

—

Net cash paid in excess of cash acquired from bank merger
—

(16,347
)
Net Cash Used in Investing Activities
(382,173
)
(303,499
)
FINANCING ACTIVITIES
 
 
Net increase in deposits
169,751

259,725

Net increase (decrease) in certificates of deposit
99,612

(12,399
)
Net (decrease) increase in securities sold under repurchase agreements
(21,138
)
12,366

Net increase (decrease) in short-term borrowings
209,000

(78,660
)
Proceeds from long-term borrowings
—

100,000

Repayments of long-term borrowings
(101,740
)
(1,829
)
Repayment of junior subordinated debt
—

(13,500
)
Treasury shares issued-net
(115
)
(111
)
Common stock issuance costs
—

(132
)
Cash dividends paid to common shareholders
(19,824
)
(17,886
)
Tax benefit from stock-based compensation
—

53

Net Cash Provided by Financing Activities
335,546

247,627

Net increase in cash and cash equivalents
25,764

5,767

Cash and cash equivalents at beginning of period
99,399

109,580

Cash and Cash Equivalents at End of Period
$
125,163

$
115,347

Supplemental Disclosures
 
 
Loans transferred from held for sale to portfolio
$
1,540

$
—

Interest paid
$
16,761

$
11,853

Income taxes paid, net of refunds
$
17,974

$
15,675

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

$
43,433

Transfers of loans to other real estate owned
$
581

$
628

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, 2015, filed with the Securities and Exchange Commission, or SEC, on February 23, 2016. 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
Amounts in prior period financial statements and footnotes are reclassified whenever necessary to conform to the current period presentation. Reclassifications had no effect on our results of operations or financial condition.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
Recently Adopted Accounting Standards Updates, or ASU
Business Combinations - Simplifying the Accounting for Measurement Period Adjustments
In September 2015, the Financial Accounting Standards Board, or FASB, issued ASU No. 2015-16, Business Combinations - Simplifying the Accounting for Measurement Period Adjustments (Topic 805). The amendments in this ASU No. 2015-16 eliminate the requirement to retrospectively adjust the financial statements for measurement-period adjustments as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined. Additional disclosures are required about the impact on current-period income statement line items of adjustments that would have been recognized in prior periods if that information had been revised. The measurement period is a reasonable time period after the acquisition date when the acquirer may adjust the provisional amounts recognized for a business combination if the necessary information is not available by the end of the reporting period in which the acquisition occurs. The measurement periods cannot continue for more than one year from the acquisition date. The standard is effective for annual periods and interim periods beginning after December 15, 2015. The adoption of this ASU had no impact on our results of operations or financial position.
Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
In April 2015, the FASB issued ASU No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The main provisions of ASU No. 2015-05 provide a basis for evaluating whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, then the arrangement should be accounted for as a service contract. The standard is effective for annual periods and interim periods beginning after December 15, 2015. 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

Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2015. In September 2015, the FASB issued ASU No. 2015-15, Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU No. 2015-15 amends the SEC Content in Subtopic 835-30 by adding SEC paragraph 835-30-S35-1, Interest-Imputation of Interest Subsequent Measurement and paragraph 830-30-S45-1, Other Presentation Matters. These paragraphs were added because ASU No. 2015-03 issued in April 2015 does not address presentation or subsequent measurement of debt issuance costs related to "line-of-credit arrangements." The adoption of this ASU had no material impact on our results of operations or financial position.
Consolidation: Amendments to the Consolidation Analysis
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: 1. modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities, or VIEs, or voting interest entities; 2. eliminate the presumption that a general partner should consolidate a limited partnership; 3. affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and 4. provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2A-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this ASU are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this ASU had no impact on our results of operations or financial position.
Income Statement - Extraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary
In January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary. The amendments in this ASU No. 2015-01 eliminate from GAAP the concept of extraordinary items and eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2015. The adoption of this ASU had no 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

Recently Issued Accounting Standards Updates not yet Adopted
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The main objective of this ASU is to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in this Update provide guidance on the following eight specific cash flow issues: Debt prepayment or debt extinguishments costs, Settlement of zero-coupon debt instruments, Contingent consideration payments made after a business combination, Proceeds from the settlement of insurance claims, Proceeds from the settlement of bank-owned life insurance (BOLI) policies, Distributions received from equity method investments, Beneficial interests in securitization transactions, and Separately identifiable cash flows and application of the predominance principle. This Update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. We are evaluating the provisions of this ASU to determine the potential impact on our results of operations and financial position.
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments of this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The collective changes to the recognition and measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling have been universally referred to as the CECL, or current expected credit loss, model. This Update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019. Early adoption is permitted as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are evaluating the provisions of this ASU to determine the potential impact on our results of operations and financial position.
Revenue from Contracts with Customers

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue pronouncement creates a single source of revenue guidance for all companies in all industries and is more principles-based than current revenue guidance. The pronouncement provides a five-step model for a company to recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The five steps are: 1. identify the contract with the customer; 2. identify the separate performance obligations in the contract; 3. determine the transaction price; 4. allocate the transaction price to the separate performance obligations; and 5. recognize revenue when each performance obligation is satisfied. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This ASU defers the effective date of ASU No. 2014-09 for all entities by one year.

9
Table of Contents

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

NOTE 1. BASIS OF PRESENTATION - continued

In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), as an amendment to ASU No. 2014-09 to improve Topic 606, Revenue from Contracts with Customers by reducing: 1. The potential for diversity in practice arising from inconsistent and application of the principal versus agent guidance, and 2. The cost and complexity of applying Topic 606 both at transition and on an ongoing basis.
In April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing, as an amendment to ASU No. 2014-09 to improve Topic 606, Revenue from Contracts with Customers, by reducing: 1. The potential for diversity in practice at initial application, and 2. The cost and complexity of applying Topic 606 both at transition and on an ongoing basis.
In May 2016, the FASB issued ASU No. 2016-12, Narrow-scope Improvements and Practical Expedients. The amendments in this ASU do not change the core principles of Topic 606, Revenue from Contracts with Customers. These amendments affect only the narrow aspects of Topic 606: 1. Collectibility Criterion, 2. Presentation of Sales Taxes and Other Similar Taxes Collected from Customers, 3. Noncash Consideration, 4. Contract Modifications at Transition, and 5. Completed Contracts at Transition.
ASU 2014-09, including transition requirements for all amendments, is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the original effective date for interim and annual reporting periods in fiscal years beginning after December 15, 2016. We are evaluating the provisions of these ASUs to determine the potential impact to our results of operations and financial position.
Stock Compensation - Improvements to Employee Share-Based Payment Accounting
On March 31, 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to improve the accounting for share-based payment transactions as part of the FASB's simplification initiative. The ASU changes seven aspects of the accounting for share-based payment award transactions, including; 1. accounting for income taxes; 2. classification of excess tax benefits on the statement of cash flows; 3. forfeitures; 4. minimum statutory tax withholding requirements; 5. classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes; 6. practical expedient -- expected term (nonpublic only); and 7. intrinsic value (nonpublic only). This ASU is effective for fiscal years beginning after December 15, 2016 and interim periods within those years for public business entities. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. We do not expect that this ASU will have a material impact on our results of operations and financial position.
Equity Method and Joint Ventures - Simplifying the Transition to the Equity Method of Accounting
In March 2016, the FASB issued ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. We do not expect that this ASU will have a material impact on our results of operations and financial position.
Leases - Section A-Amendments to the FASB Accounting Standards Codification, Section B-Conforming Amendments Related to Leases and Section C-Background Information and Basis for Conclusions
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize a right-to-use asset and a lease obligation for all leases on the balance sheet. Lessor accounting remains substantially similar to current GAAP. ASU 2016-02 supersedes Topic 840, Leases. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method for all entities. Early adoption of this ASU is permitted. We anticipate that this ASU will impact our financial statements as it relates to the recognition of right-to-use assets and lease obligations on our Consolidated Balance Sheet. However, we do not expect that this ASU will have a material impact on our Consolidated Statement of Comprehensive Income.

10
Table of Contents

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

NOTE 1. BASIS OF PRESENTATION - continued

Accounting for Financial Instruments - Overall: Classification and Measurement
In January 2016, the FASB issued ASU No. 2016-01, Accounting for Financial Instruments - Overall: Classification and Measurement (Subtopic 825-10). The amendments in this ASU No. 2016-01 address the following: 1. require equity investments to be measured at fair value with changes in fair value recognized in net income; 2. simplify the impairment assessment of equity investments without readily-determinable fair values by requiring a qualitative assessment to identify impairment; 3. eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; 4. require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 5. require separate presentation in other comprehensive income for the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; 6. require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and 7. clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2017.
We anticipate that this ASU will have a significant impact on our financial statements and disclosures primarily as it relates to recognizing the fair value changes for equity securities in net income rather than an adjustment to equity through other comprehensive income.

11
Table of Contents

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

NOTE 2. BUSINESS COMBINATIONS


On March 4, 2015, S&T acquired 100 percent of the voting shares of Integrity Bancshares, Inc., or Integrity, located in Camp Hill, Pennsylvania, through a tax-free reorganization transaction structured as a merger of Integrity with and into S&T, with S&T being the surviving entity. As a result of the Integrity merger, or the Merger, Integrity Bank, the wholly owned subsidiary bank of Integrity, became a separate wholly owned subsidiary bank of S&T. The merger of Integrity Bank into S&T Bank, with S&T Bank surviving the merger, and the related system conversion occurred on May 8, 2015.
Integrity shareholders were entitled to elect to receive for each share of Integrity common stock either $52.50 in cash or 2.0627 shares of S&T common stock subject to allocation and proration procedures in the merger agreement. The total purchase price was approximately $172.0 million, which included $29.5 million of cash and 4,933,115 S&T common shares at a fair value of $28.88 per share. The fair value of $28.88 per share of S&T common stock was based on the March 4, 2015 closing price.
The Merger was accounted for under the acquisition method of accounting and our Consolidated Financial Statements include all Integrity Bank transactions from March 4, 2015, until it was merged into S&T Bank on May 8, 2015. The assets acquired and liabilities assumed were recorded at their respective fair values and represent management’s estimates based on available information. Purchase accounting guidance allows for a reasonable period of time following an acquisition for the acquirer to obtain the information necessary to complete the accounting for a business combination. This period is known as the measurement period. At the end of the measurement period, $1.1 million in purchase accounting adjustments were recognized that increased goodwill. The measurement period adjustments primarily related to changes to provisional amounts, a $0.8 million reduction in the fair value of land and $0.3 million in deferred taxes.
Goodwill of $115.9 million was calculated as the excess of the consideration exchanged over the fair value of the identifiable net assets acquired. The goodwill arising from the Merger consists largely of the synergies and economies of scale expected from combining the operations of S&T and Integrity. All of the goodwill was assigned to our Community Banking segment. The goodwill recognized will not be deductible for tax purposes.
The following table summarizes total consideration, assets acquired and liabilities assumed from the Merger:
(dollars in thousands)
 
Consideration Paid
 
Cash
$
29,510

Common stock
142,469

Fair Value of Total Consideration
$
171,979

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

Securities and other investments
11,502

Loans
788,687

Bank owned life insurance
15,974

Premises and equipment
10,855

Core deposit intangible
5,713

Other assets
19,088

Total Assets Acquired
864,982

 
 
Fair Value of Liabilities Assumed
 
Deposits
722,308

Borrowings
82,286

Other liabilities
4,259

Total Liabilities Assumed
808,853

Total Fair Value of Identifiable Net Assets
56,129

Goodwill
$
115,850


Loans acquired in the Merger were recorded at fair value with no carryover of the related Allowance for Loan Losses, or ALL. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The fair value of the loans acquired was $788.7 million net of a $14.8 million discount. The discount is accreted to interest income over the remaining contractual life of the loans. At March 4, 2015, acquired loans included $331.6 million of Commercial Real Estate, or CRE,

12
Table of Contents

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

NOTE 2. BUSINESS COMBINATIONS - continued

$184.2 million of Commercial and Industrial, or C&I, $92.4 million of commercial construction, $116.9 million of residential mortgage, $25.6 million of home equity, $36.1 million of installment and other consumer and $1.9 million of consumer construction.
Direct costs related to the Merger were expensed as incurred. No merger related expenses were recognized during the three month and nine month periods ended September 30, 2016 compared to no merger related expenses for the three month period and $3.2 million of Merger related expenses for the nine months ended September 30, 2015.

NOTE 3. EARNINGS PER SHARE
The following table reconciles the numerators and denominators of basic and diluted earnings per share for the periods presented:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except shares and per share data)
2016
 
2015
 
2016
 
2015
Numerator for Earnings per Share—Basic:

 

 

 

Net income
$
20,581

 
$
18,635

 
$
53,733

 
$
49,658

Less: Income allocated to participating shares
68

 
81

 
167

 
204

Net Income Allocated to Shareholders
$
20,513

 
$
18,554

 
$
53,566

 
$
49,454

 
 
 
 
 
 
 
 
Numerator for Earnings per Share—Diluted:

 

 

 

Net income
$
20,581

 
$
18,635

 
$
53,733

 
$
49,658

Net Income Available to Shareholders
$
20,581

 
$
18,635

 
$
53,733

 
$
49,658

 
 
 
 
 
 
 
 
Denominators for Earnings per Share:

 

 

 

Weighted Average Shares Outstanding—Basic
34,687,487

 
34,660,007

 
34,674,453

 
33,527,549

Add: Potentially dilutive shares
81,018

 
32,985

 
72,724

 
33,980

Denominator for Treasury Stock Method—Diluted
34,768,505

 
34,692,992

 
34,747,177

 
33,561,529

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding—Basic
34,687,487

 
34,660,007

 
34,674,453

 
33,527,549

Add: Average participating shares outstanding
114,746

 
151,972

 
108,414

 
138,441

Denominator for Two-Class Method—Diluted
34,802,233

 
34,811,979

 
34,782,867

 
33,665,990

 
 
 
 
 
 
 
 
Earnings per share—basic
$
0.59

 
$
0.54

 
$
1.55

 
$
1.48

Earnings per share—diluted
$
0.59

 
$
0.54

 
$
1.54

 
$
1.48

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

 
517,012

 
517,012

 
517,012

Stock options considered anti-dilutive excluded from potentially dilutive shares - expired in December 2015
—

 
155,500

 
—

 
155,500

Restricted stock considered anti-dilutive excluded from potentially dilutive shares
146,695

 
118,987

 
134,983

 
104,461


13
Table of Contents

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

NOTE 4. FAIR VALUE MEASUREMENT

We use fair value measurements when recording and disclosing certain financial assets and liabilities. Securities available-for-sale, trading assets and derivative financial instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans, other real estate owned, or OREO, and other repossessed assets, mortgage servicing rights, or MSRs, and certain other assets.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which is developed, based on market data we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.
The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.
Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.
Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our policy is to recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred.
The following are descriptions of the valuation methodologies that we use for financial instruments recorded at fair value on either a recurring or nonrecurring basis.
Recurring Basis
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 evaluation 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.

14
Table of Contents

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

NOTE 4. FAIR VALUE MEASUREMENTS – continued

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

15
Table of Contents

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

NOTE 4. FAIR VALUE MEASUREMENTS – continued

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

16
Table of Contents

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

NOTE 4. FAIR VALUE MEASUREMENTS – continued

Loan Commitments and Standby Letters of Credit
Off-balance sheet financial instruments consist of commitments to extend credit and letters of credit. Except for interest rate lock commitments, estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.
Other
Estimates of fair value are not made for items that are not defined as financial instruments, including such items as our core deposit intangibles and the value of our trust operations.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following tables present our assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy level at September 30, 2016 and December 31, 2015. There were no transfers between Level 1 and Level 2 for items measured at fair value on a recurring basis during the periods presented.
 
September 30, 2016
(dollars in thousands)
Level 1
Level 2
Level 3
Total
ASSETS
 
 
 
 
Securities available-for-sale:
 
 
 
 
U.S. Treasury securities
$
—

$
15,056

$
—

$
15,056

Obligations of U.S. government corporations and agencies
—

250,924

—

250,924

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

137,460

—

137,460

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

36,285

—

36,285

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

88,499

—

88,499

Obligations of states and political subdivisions
—

132,536

—

132,536

Marketable equity securities
—

10,368

—

10,368

Total securities available-for-sale
—

671,128

—

671,128

Trading securities held in a Rabbi Trust
4,312

—

—

4,312

Total securities
4,312

671,128

—

675,440

Derivative financial assets:
 
 
 
 
Interest rate swap contracts - commercial loans
—

15,255

—

15,255

Interest rate lock commitments - mortgage loans
—

739

—

739

Total Assets
$
4,312

$
687,122

$
—

$
691,434

LIABILITIES
 
 
 
 
Derivative financial liabilities:
 
 
 
 
Interest rate swap contracts - commercial loans
$
—

$
15,202

$
—

$
15,202

Forward sale contracts - mortgage loans
—

98

—

98

Total Liabilities
$
—

$
15,300

$
—

$
15,300


17
Table of Contents

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

NOTE 4. FAIR VALUE MEASUREMENTS – continued

 
December 31, 2015
(dollars in thousands)
Level 1
Level 2
Level 3
Total
ASSETS
 
 
 
 
Securities available-for-sale:
 
 
 
 
U.S. Treasury securities
$
—

$
14,941

$
—

$
14,941

Obligations of U.S. government corporations and agencies
—

263,303

—

263,303

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

128,835

—

128,835

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

40,125

—

40,125

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

69,204

—

69,204

Obligations of states and political subdivisions
—

134,886

—

134,886

Marketable equity securities
—

9,669

—

9,669

Total securities available-for-sale
—

660,963

—

660,963

Trading securities held in a Rabbi Trust
4,021

—

—

4,021

Total securities
4,021

660,963

—

664,984

Derivative financial assets:
 
 
 
 
Interest rate swap contracts - commercial loans
—

11,295

—

11,295

Interest rate lock commitments - mortgage loans
—

261

—

261

Total Assets
$
4,021

$
672,519

$
—

$
676,540

LIABILITIES
 
 
 
 
Derivative financial liabilities:
 
 
 
 
Interest rate swap contracts - commercial loans
$
—

$
11,276

$
—

$
11,276

Forward sale contracts - mortgage loans
—

5

—

5

Total Liabilities
$
—

$
11,281

$
—

$
11,281

We may be required to measure certain assets and liabilities at fair value on a nonrecurring basis. Nonrecurring assets are recorded at the lower of cost or fair value in our financial statements. There were no liabilities measured at fair value on a nonrecurring basis at either September 30, 2016 or December 31, 2015. The following table presents our assets that are measured at fair value on a nonrecurring basis by the fair value hierarchy level as of the dates presented:
 
September 30, 2016
 
December 31, 2015
(dollars in thousands)
Level 1
Level 2
Level 3
Total
 
Level 1
Level 2
Level 3
Total
ASSETS(1)
 
 
 
 
 
 
 
 
 
Impaired loans
—

—

9,000

9,000

 
—

—

9,373

9,373

Other real estate owned
—

—

181

181

 
—

—

158

158

Mortgage servicing rights
—

—

3,253

3,253

 
—

—

3,396

3,396

Total Assets
$
—

$
—

$
12,434

$
12,434

 
$
—

$
—

$
12,927

$
12,927

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

18
Table of Contents

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

NOTE 4. FAIR VALUE MEASUREMENTS – continued

The carrying values and fair values of our financial instruments at September 30, 2016 and December 31, 2015 are presented in the following tables:
 
Carrying
Value(1) 
Fair Value Measurements at September 30, 2016
(dollars in thousands)
Total
Level 1
Level 2
Level 3
ASSETS
 
 
 
 
 
Cash and due from banks, including interest-bearing deposits
$
125,163

$
125,163

$
125,163

$
—

$
—

Securities available-for-sale
671,128

671,128

—

671,128

—

Loans held for sale
11,695

12,176

—

—

12,176

Portfolio loans, net of unearned income
5,418,234

5,406,298

—

—

5,406,298

Bank owned life insurance
71,523

71,523

—

71,523

—

FHLB and other restricted stock
28,331

28,331

—

—

28,331

Trading securities held in a Rabbi Trust
4,312

4,312

4,312

—

—

Mortgage servicing rights
3,252

3,253

—

—

3,253

Interest rate swap contracts - commercial loans
15,255

15,255

—

15,255

—

Interest rate lock commitments - mortgage loans
739

739

—

739

—

LIABILITIES
 

 
 
 
Deposits
$
5,145,431

$
5,151,031

$
—

$
—

$
5,151,031

Securities sold under repurchase agreements
40,949

40,949

—

—

40,949

Short-term borrowings
565,000

565,000

—

—

565,000

Long-term borrowings
15,303

16,111

—

—

16,111

Junior subordinated debt securities
45,619

45,619

—

—

45,619

Interest rate swap contracts - commercial loans
15,202

15,202

—

15,202

—

Forward sale contracts - mortgage loans
98

98

—

98

—

(1) As reported in the Consolidated Balance Sheets
 
 
 
 
 
 
Carrying
Value(1)
Fair Value Measurements at December 31, 2015
(dollars in thousands)
Total
Level 1
Level 2
Level 3
ASSETS
 
 
 
 
 
Cash and due from banks, including interest-bearing deposits
$
99,399

$
99,399

$
99,399

$
—

$
—

Securities available-for-sale
660,963

660,963

—

660,963

—

Loans held for sale
35,321

35,500

—

—

35,500

Portfolio loans, net of unearned income
5,027,612

5,001,004

—

—

5,001,004

Bank owned life insurance
70,175

70,175

—

70,175

—

FHLB and other restricted stock
23,032

23,032

—

—

23,032

Trading securities held in a Rabbi Trust
4,021

4,021

4,021

—

—

Mortgage servicing rights
3,237

3,396

—

—

3,396

Interest rate swap contracts - commercial loans
11,295

11,295

—

11,295

—

Interest rate lock commitments - mortgage loans
261

261

—

261

—

LIABILITIES
 
 
 
 
 
Deposits
$
4,876,611

$
4,881,718

$
—

$
—

$
4,881,718

Securities sold under repurchase agreements
62,086

62,086

—

—

62,086

Short-term borrowings
356,000

356,000

—

—

356,000

Long-term borrowings
117,043

117,859

—

—

117,859

Junior subordinated debt securities
45,619

45,619

—

—

45,619

Interest rate swap contracts - commercial loans
11,276

11,276

—

11,276

—

Forward sale contracts - mortgage loans
5

5

—

5

—

(1) As reported in the Consolidated Balance Sheets 
 
 
 
 
 

19
Table of Contents

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

The following tables present the amortized cost and fair value of available-for-sale securities as of the dates presented:
 
September 30, 2016
 
December 31, 2015
(dollars in thousands)
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

 
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

U.S. treasury securities
$
14,944

$
112

$
—

$
15,056

 
$
14,914

$
27

$
—

$
14,941

Obligations of U.S. government corporations and agencies
246,259

4,665

—

250,924

 
262,045

1,825

(567
)
263,303

Collateralized mortgage obligations of U.S. government corporations and agencies
134,675

2,785

—

137,460

 
128,458

693

(316
)
128,835

Residential mortgage-backed securities of U.S. government corporations and agencies
34,685

1,600

—

36,285

 
39,185

1,091

(151
)
40,125

Commercial mortgage-backed securities of U.S. government corporations and agencies
86,827

1,680

(8
)
88,499

 
69,697

183

(676
)
69,204

Obligations of states and political subdivisions
124,229

8,307

—

132,536

 
128,904

5,988

(6
)
134,886

Debt Securities
641,619

19,149

(8
)
660,760

 
643,203

9,807

(1,716
)
651,294

Marketable equity securities
7,579

2,789

—

10,368

 
7,579

2,090

—

9,669

Total
$
649,198

$
21,938

$
(8
)
$
671,128

 
$
650,782

$
11,897

$
(1,716
)
$
660,963



20
Table of Contents

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

NOTE 5. SECURITIES AVAILABLE-FOR-SALE – continued

The following tables present the fair value and the age of gross unrealized losses by investment category as of the dates presented:
 
September 30, 2016
 
Less Than 12 Months
 
12 Months or More
 
Total
(dollars in thousands)
Number of Securities
Fair Value

Unrealized
Losses

 
Number of Securities
Fair Value

Unrealized
Losses

 
Number of Securities
Fair Value

Unrealized
Losses

U.S. Treasury securities
—
$
—

$
—

 
—
$
—

$
—

 
—
$
—

$
—

Obligations of U.S. government corporations and agencies
—
—

—

 
—
—

—

 
—
—

—

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

—

 
—
—

—

 
—
—

—

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

—

 
—
—

—

 
—
—

—

Commercial mortgage-backed securities of U.S. government corporations and agencies
1
7,841

(8
)
 
—
—

—

 
1
7,841

(8
)
Obligations of states and political subdivisions
—
—

—

 
—
—

—

 
—
—

—

Debt Securities
1
7,841

(8
)
 
—
—

—

 
1
7,841

(8
)
Marketable equity securities
1
71

—

 
—
—

—

 
1
71

—

Total Temporarily Impaired Securities
2
$
7,912

$
(8
)
 
—
$
—

$
—

 
2
$
7,912

$
(8
)

 
December 31, 2015
 
Less Than 12 Months
 
12 Months or More
 
Total
(dollars in thousands)
Number of Securities
Fair Value

Unrealized
Losses

 
Number of Securities
Fair Value

Unrealized
Losses

 
Number of Securities
Fair Value

Unrealized
Losses

U.S. Treasury securities
—
$
—

$
—

 
—
$
—

$
—

 
—
$
—

$
—

Obligations of U.S. government corporations and agencies
10
88,584

(379
)
 
2
14,542

(188
)
 
12
103,126

(567
)
Collateralized mortgage obligations of U.S. government corporations and agencies
6
61,211

(316
)
 
—
—

—

 
6
61,211

(316
)
Residential mortgage-backed securities of U.S. government corporations and agencies
1
7,993

(151
)
 
—
—

—

 
1
7,993

(151
)
Commercial mortgage-backed securities of U.S. government corporations and agencies
5
50,839

(450
)
 
1
9,472

(226
)
 
6
60,311

(676
)
Obligations of states and political subdivisions
1
5,370

(6
)
 
—
—

—

 
1
5,370

(6
)
Debt Securities
23
213,997

(1,302
)
 
3
24,014

(414
)
 
26
238,011

(1,716
)
Marketable equity securities
—
—

—

 
—
—

—

 
—
—

—

Total Temporarily Impaired Securities
23
$
213,997

$
(1,302
)
 
3
$
24,014

$
(414
)
 
26
$
238,011

$
(1,716
)
We do not believe any individual unrealized loss as of September 30, 2016 represents an other than temporary impairment. As of September 30, 2016, one debt security and one marketable equity security were in an unrealized loss position compared to unrealized losses on 26 debt securities at December 31, 2015. There were no unrealized losses on marketable equity securities at December 31, 2015. These unrealized losses were primarily 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. 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.

21
Table of Contents

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

NOTE 5. SECURITIES AVAILABLE-FOR-SALE – continued

The following table displays net unrealized gains and losses, net of tax on securities available for sale included in accumulated other comprehensive (loss)/income, for the periods presented:
 
September 30, 2016
 
December 31, 2015
(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
$
21,938

$
(8
)
$
21,930

 
$
11,897

$
(1,716
)
$
10,181

Income tax expense/(benefit)
7,678

(3
)
7,675

 
4,164

(601
)
3,563

Net unrealized gains/(losses), net of tax included in accumulated other comprehensive income/(loss)
$
14,260

$
(5
)
$
14,255

 
$
7,733

$
(1,115
)
$
6,618

The amortized cost and fair value of securities available-for-sale at September 30, 2016 by contractual maturity are included in the table below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
September 30, 2016
(dollars in thousands)
Amortized
Cost

 
Fair Value

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

 

Due in one year or less
$
52,302

 
$
52,439

Due after one year through five years
216,729

 
222,114

Due after five years through ten years
55,893

 
58,699

Due after ten years
60,508

 
65,264

 
385,432

 
398,516

Collateralized mortgage obligations of U.S. government corporations and agencies
134,675

 
137,460

Residential mortgage-backed securities of U.S. government corporations and agencies
34,685

 
36,285

Commercial mortgage-backed securities of U.S. government corporations and agencies
86,827

 
88,499

Debt Securities
641,619

 
660,760

Marketable equity securities
7,579

 
10,368

Total
$
649,198

 
$
671,128

At September 30, 2016 and December 31, 2015, securities with carrying values of $291.4 million and $278.4 million were pledged for various regulatory and legal requirements.


22
Table of Contents

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

NOTE 6. LOANS AND LOANS HELD FOR SALE

Loans are presented net of unearned income of $4.6 million and $3.2 million at September 30, 2016 and December 31, 2015 and net of a discount related to purchase accounting fair value adjustments of $8.2 million and $10.9 million at September 30, 2016 and December 31, 2015. The following table indicates the composition of loans as of the dates presented:
(dollars in thousands)
September 30, 2016
 
December 31, 2015
Commercial

 

Commercial real estate
$
2,427,164

 
$
2,166,603

Commercial and industrial
1,344,297

 
1,256,830

Commercial construction
402,124

 
413,444

Total Commercial Loans
4,173,585

 
3,836,877

Consumer

 

Residential mortgage
692,574

 
639,372

Home equity
483,935

 
470,845

Installment and other consumer
62,288

 
73,939

Consumer construction
5,852

 
6,579

Total Consumer Loans
1,244,649

 
1,190,735

Total Portfolio Loans
5,418,234

 
5,027,612

Loans held for sale
11,694

 
35,321

Total Loans
$
5,429,928

 
$
5,062,933

We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry and actively managing concentrations. When concentrations exist in certain segments, we monitor this risk by reviewing the relevant economic indicators and internal risk rating trends and through stress testing of the loans in these segments. Total commercial loans represented 77 percent of total portfolio loans at September 30, 2016 and 76 percent of total portfolio loans at December 31, 2015. Within our commercial portfolio, the CRE and Commercial Construction portfolios combined comprised $2.8 billion or 68 percent of total commercial loans and 52 percent of total portfolio loans at September 30, 2016 and comprised of $2.6 billion or 67 percent of total commercial loans and 51 percent of total portfolio loans at December 31, 2015. Further segmentation of the CRE and Commercial Construction portfolios by collateral type reveals no concentration in excess of seven percent of total loans at September 30, 2016 and December 31, 2015.
Our market area includes Pennsylvania and the contiguous states of Ohio, West Virginia, New York and Maryland. The majority of our commercial and consumer loans are made to businesses and individuals in this market area, resulting in a geographic concentration. We believe our knowledge and familiarity with customers and conditions locally outweighs this geographic concentration risk. The conditions of the local and regional economies are monitored closely through publicly available data as well as information supplied by our customers. Our CRE and Commercial Construction portfolios have out-of-market exposure of 5.4 percent of the combined portfolio and 2.8 percent of total loans at September 30, 2016 and 5.8 percent of the combined portfolio and 3.0 percent of total loans at December 31, 2015.
The decrease in loans held for sale of $23.6 million primarily related to the sale of our credit card portfolio, which was sold for $25.0 million and resulted in a $2.1 million gain for the nine months ended September 30, 2016.
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. We strive to identify borrowers with financial difficulty early and work with them to come to a mutual resolution to modify the terms of their loan before the loan goes nonaccrual. These modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates or principal deferment. While unusual, there may be instances of principal forgiveness. These modifications are generally for longer term periods that would not be considered insignificant. Additionally, we classify loans where the debt obligation has been discharged through a Chapter 7 Bankruptcy and not reaffirmed as TDRs.
We individually evaluate all substandard commercial loans that have experienced a forbearance or change in terms agreement, as well as all substandard consumer and residential mortgage loans that entered into an agreement to modify their existing loan to determine if they should be designated as TDRs. All TDRs are considered to be impaired loans and will be reported as impaired loans for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is fully expected that the remaining principal and interest will be collected according to the restructured agreement. Further, all impaired loans are reported as nonaccrual loans unless the loan is a TDR that has met the requirements to be returned to

23
Table of Contents

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

NOTE 6. LOANS AND LOANS HELD FOR SALE - continued

accruing status. TDRs can be returned to accruing status if the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and there is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the restructuring.
The following table summarizes the restructured loans as of the dates presented:
 
September 30, 2016
 
December 31, 2015
(dollars in thousands)
Performing
TDRs
Nonperforming
TDRs
Total
TDRs
 
Performing
TDRs
Nonperforming
TDRs
Total
TDRs
Commercial real estate
$
3,054

$
866

$
3,920

 
$
6,822

$
3,548

$
10,370

Commercial and industrial
863

7,007

7,870

 
6,321

1,570

7,891

Commercial construction
3,460

992

4,452

 
5,013

1,265

6,278

Residential mortgage
2,453

5,248

7,701

 
2,590

665

3,255

Home equity
3,084

973

4,057

 
3,184

523

3,707

Installment and other consumer
22

9

31

 
25

88

113

Total
$
12,936

$
15,095

$
28,031

 
$
23,955

$
7,659

$
31,614

There were no TDRs returned to accruing status during the three and nine months ended September 30, 2016 and there were six TDRs that returned to accruing status totaling $0.3 million during the three and nine months ended September 30, 2015.

24
Table of Contents

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

NOTE 6. LOANS AND LOANS HELD FOR SALE - continued

The following tables present the restructured loans during the periods presented:
 
Three Months Ended September 30, 2016

Three Months Ended September 30, 2015
(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
 
 
 
 





Interest rate reduction
1

$
250

$
248

$
(2
)
 
—

$
—

$
—

$
—

Maturity date extension
—

—

—

—


1

264

260

(4
)
Commercial and industrial
 
 
 
 

 
 
 


Maturity date extension
2

4,105

4,162

57


—

—

—

—

Commercial Construction
 
 
 
 

 
 
 


Maturity date extension
—

—

—

—

 
2

813

812

(1
)
Residential mortgage
 
 
 
 

 
 
 


Chapter 7 bankruptcy(2)
3

153

152

(1
)

2

74

74

—

Maturity date extension
—

—

—

—

 
1

180

180

—

Maturity date extension and interest rate reduction
1

280

280

—

 
—

—

—

—

Home equity
 
 
 
 

 
 
 


Chapter 7 bankruptcy(2)
7

163

161

(2
)

5

115

110

(5
)
Maturity date extension and interest rate reduction
—

—

—

—

 
2

138

138

—

Installment and other consumer
 
 
 
 

 
 
 

Chapter 7 bankruptcy(2)
—

—

—

—


1

9

4

(5
)
Total by Concession Type













Chapter 7 bankruptcy(2)
10

$
316

$
313

$
(3
)
 
8

$
198

$
188

$
(10
)
Interest rate reduction
1

250

248

(2
)
 
—

—

—

—

Maturity date extension and interest rate reduction
1

280

280

—

 
2

138

138

—

Maturity date extension
2

4,105

4,162

57

 
4

1,257

1,252

(5
)
Total
14

$
4,951

$
5,003

$
52


14

$
1,593

$
1,578

$
(15
)
(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.

25
Table of Contents

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

NOTE 6. LOANS AND LOANS HELD FOR SALE - continued

 
Nine Months Ended September 30, 2016
 
Nine Months Ended September 30, 2015
(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

$
4,721

$
2,270

$
(2,451
)
 
2

$
2,851

$
1,841

$
(1,010
)
Chapter 7 bankruptcy(2)
1

709

681

(28
)
 
—

—

—

—

Interest rate reduction
1

250

248

(2
)
 
—

—

—

—

Maturity date extension
—

—

—

—

 
1

264

260

(4
)
Commercial and industrial
 
 
 
 
 
 
 
 
 
Principal forgiveness 
—

—

—

—

 
1

400

273

(127
)
Principal deferral
5

985

985

—

 
6

661

363

(298
)
Chapter 7 bankruptcy(2)
—

—

—

—

 
1

3

—

(3
)
Maturity date extension
5

4,860

4,891

31

 
1

780

720

(60
)
Commercial Construction
 
 
 
 
 
 
 
 
 
Principal deferral
—

—

—

—

 
1

104

—

(104
)
Maturity date extension
5

1,357

1,302

(55
)
 
2

813

812

(1
)
Residential mortgage
 
 
 
 
 
 
 
 
 
Principal deferral
1

3,273

3,273

—

 
—

—

—

—

Chapter 7 bankruptcy(2)
7

439

433

(6
)
 
2

74

74

—

Maturity date extension
1

483

483

—

 
1

180

180

—

Maturity date extension and interest rate reduction
1

280

280

—

 
2

225

229

4

Home equity
 
 
 
 
 
 
 
 
 
Principal deferral
1

47

46

(1
)
 
—

—

—

—

Chapter 7 bankruptcy(2)
16

481

470

(11
)
 
17

428

389

(39
)
Maturity date extension and interest rate reduction
1

130

128

(2
)
 
2

138

138

—

Maturity date extension
4

274

272

(2
)
 
1

71

70

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

16

13

(3
)
 
1

9

4

(5
)
Total by Concession Type
 
 
 
 
 
 
 
 
 
Principal forgiveness
—

$
—

$
—

$
—

 
1

$
400

$
273

$
(127
)
Principal deferral
8

9,026

6,574

(2,452
)
 
9

3,616

2,204

(1,412
)
Chapter 7 bankruptcy(2)
26

1,645

1,597

(48
)
 
21

514

467

(47
)
Interest rate reduction
1

250

248

(2
)
 






—

Maturity date extension and interest rate reduction
2

410

408

(2
)
 
4

363

367

4

Maturity date extension
15

6,974

6,948

(26
)

6

2,108

2,042

(66
)
Total
52

$
18,305

$
15,775

$
(2,530
)
 
41

$
7,001

$
5,353

$
(1,648
)
(1) Excludes loans that were fully paid off or fully charged-off by period end. The pre-modification balance represents the balance outstanding prior to modification. The post-modification balance represents the outstanding balance at period end.
(2) Chapter 7 bankruptcy loans where the debt has been legally discharged through the bankruptcy court and not reaffirmed.
For the three months ended September 30, 2016, we modified 12 C&I loan totaling $16.9 million and one CRE loan totaling $1.9 million that were not considered to be TDRs. For the nine months ended September 30, 2016, we modified 15     C&I loans totaling $25.6 million and two CRE loans totaling $2.5 million that were not considered to be TDRs. The modifications were administrative extensions of maturity dates that were determined not to be a concession. As of September 30, 2016, we have $0.3 million of commitments to lend additional funds on TDRs.

26
Table of Contents

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

NOTE 6. LOANS AND LOANS HELD FOR SALE - continued

Defaulted TDRs are defined as loans having a payment default of 90 days or more after the restructuring takes place. The following tables present a summary of TDRs which defaulted during the periods presented that had been restructured within the last 12 months prior to defaulting:
 
Defaulted TDRs
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
(dollars in thousands)
Number of
Defaults
Recorded
Investment


Number of
Defaults
Recorded
Investment

 
Number of
Defaults
Recorded
Investment

 
Number of
Defaults
Recorded
Investment

Commercial real estate
—
$
—


—
$
—

 
—
$
—

 
—
$
—

Commercial and Industrial
—
—


—
—

 
—
—

 
—
—

Commercial construction
—
—


—
—

 
—
—

 
—
—

Residential mortgage
—
—


—
—

 
—
—

 
1
183

Home equity
—
—


—
—

 
—
—

 
3
124

Installment and other consumer
—
—

 
—
—

 
—
—

 
—
—

Consumer construction
—
—

 
—
—

 
—
—

 
—
—

Total
—
$
—


—
$
—

 
—
$
—

 
4
$
307

The following table is a summary of nonperforming assets as of the dates presented:
 
Nonperforming Assets
(dollars in thousands)
September 30, 2016
 
December 31, 2015
Nonperforming Assets

 

Nonaccrual loans
$
25,398

 
$
27,723

Nonaccrual TDRs
15,095

 
7,659

Total nonaccrual loans
40,493

 
35,382

OREO
512

 
354

Total Nonperforming Assets
$
41,005

 
$
35,736




27
Table of Contents

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

NOTE 7. ALLOWANCE FOR LOAN LOSSES

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

28
Table of Contents

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

NOTE 7. ALLOWANCE FOR LOAN LOSSES – continued

The following tables present the age analysis of past due loans segregated by class of loans as of the dates presented:
 
September 30, 2016
(dollars in thousands)
Current
30-59 Days
Past Due
60-89 Days
Past Due
Nonaccrual
Total Past
Due
Total Loans
Commercial real estate
$
2,413,004

$
3,286

$
3,323

$
7,551

$
14,160

$
2,427,164

Commercial and industrial
1,327,898

3,536

973

11,890

16,399

1,344,297

Commercial construction
394,812

456

203

6,653

7,312

402,124

Residential mortgage
679,237

585

1,352

11,400

13,337

692,574

Home equity
478,389

2,321

270

2,955

5,546

483,935

Installment and other consumer
61,954

205

85

44

334

62,288

Consumer construction
5,852

—

—

—

—

5,852

Loans held for sale
11,694

—

—

—

—

11,694

Total
$
5,372,840

$
10,389

$
6,206

$
40,493

$
57,088

$
5,429,928

 
December 31, 2015
(dollars in thousands)
Current
30-59 Days
Past Due
60-89 Days
Past Due
Nonaccrual
Total Past
Due
Total Loans
Commercial real estate
$
2,145,655

$
11,602

$
627

$
8,719

$
20,948

$
2,166,603

Commercial and industrial
1,244,802

2,453

296

9,279

12,028

1,256,830

Commercial construction
401,084

3,517

90

8,753

12,360

413,444

Residential mortgage
631,085

1,728

930

5,629

8,287

639,372

Home equity
465,055

2,365

523

2,902

5,790

470,845

Installment and other consumer
73,486

242

111

100

453

73,939

Consumer construction
6,579

—

—

—

—

6,579

Loans held for sale
35,179

94

48

—

142

35,321

Total
$
5,002,925

$
22,001

$
2,625

$
35,382

$
60,008

$
5,062,933

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.

29
Table of Contents

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

NOTE 7. ALLOWANCE FOR LOAN LOSSES – continued

The following tables present the recorded investment in commercial loan classes by internally assigned risk ratings as of the dates presented:
 
September 30, 2016
(dollars in thousands)
Commercial
Real Estate
% of
Total
 
Commercial
and Industrial
% of
Total
 
Commercial
Construction
% of
Total
 
Total
% of
Total
Pass
$
2,346,848

96.7
%
 
$
1,253,411

93.2
%
 
$
375,006

93.2
%
 
$
3,975,265

95.2
%
Special mention
30,050

1.2
%
 
37,079

2.8
%
 
14,335

3.6
%
 
81,464

2.0
%
Substandard
50,266

2.1
%
 
53,807

4.0
%
 
12,783

3.2
%
 
116,856

2.8
%
Total
$
2,427,164

100.0
%
 
$
1,344,297

100.0
%
 
$
402,124

100.0
%
 
$
4,173,585

100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
(dollars in thousands)
Commercial
Real Estate
% of
Total
 
Commercial
and Industrial
% of
Total
 
Commercial
Construction
% of
Total
 
Total
% of
Total
Pass
$
2,094,851

96.7
%
 
$
1,182,685

94.1
%
 
$
375,808

90.9
%
 
$
3,653,344

95.2
%
Special mention
19,938

0.9
%
 
43,896

3.5
%
 
19,846

4.8
%
 
83,680

2.2
%
Substandard
51,814

2.4
%
 
30,249

2.4
%
 
17,790

4.3
%
 
99,853

2.6
%
Total
$
2,166,603

100.0
%
 
$
1,256,830

100.0
%
 
$
413,444

100.0
%
 
$
3,836,877

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 present the recorded investment in consumer loan classes by performing and nonperforming status as of the dates presented:
 
September 30, 2016
(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
$
681,174

98.4
%
$
480,980

99.4
%
$
62,244

99.9
%
$
5,852

100.0
%
$
1,230,250

98.8
%
Nonperforming
11,400

1.6
%
2,955

0.6
%
44

0.1
%
—

—
%
14,399

1.2
%
Total
$
692,574

100.0
%
$
483,935

100.0
%
$
62,288

100.0
%
$
5,852

100.0
%
$
1,244,649

100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
(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
$
633,743

99.1
%
$
467,943

99.4
%
$
73,839

99.8
%
$
6,579

100.0
%
$
1,182,104

99.3
%
Nonperforming
5,629

0.9
%
2,902

0.6
%
100

0.2
%
—

—
%
8,631

0.7
%
Total
$
639,372

100.0
%
$
470,845

100.0
%
$
73,939

100.0
%
$
6,579

100.0
%
$
1,190,735

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 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.

30
Table of Contents

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

NOTE 7. ALLOWANCE FOR LOAN LOSSES – continued

The following tables summarize investments in loans considered to be impaired and related information on those impaired loans as of the dates presented:
 
September 30, 2016
 
December 31, 2015
(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
$
7,589

$
7,818

$
—

 
$
12,661

$
13,157

$
—

Commercial and industrial
8,261

9,730

—

 
14,417

15,220

—

Commercial construction
7,987

11,547

—

 
10,998

14,200

—

Consumer real estate
11,731

12,434

—

 
6,845

7,521

—

Other consumer
29

36

—

 
111

188

—

Total without a Related Allowance Recorded
35,597

41,565

—

 
45,032

50,286

—

With a related allowance recorded:
 
 
 
 
 
 
 
Commercial real estate
—

—

—

 
—

—

—

Commercial and industrial
2,433

2,433

2,206

 
—

—

—

Commercial construction
—

—

—

 
500

1,350

3

Consumer real estate
27

27

27

 
116

116

32

Other consumer
2

2

2

 
2

2

2

Total with a Related Allowance Recorded
2,462

2,462

2,235

 
618

1,468

37

Total:
 
 
 
 
 
 
 
Commercial real estate
7,589

7,818

—

 
12,661

13,157

—

Commercial and industrial
10,694

12,163

2,206

 
14,417

15,220

—

Commercial construction
7,987

11,547

—

 
11,498

15,550

3

Consumer real estate
11,758

12,461

27

 
6,961

7,637

32

Other consumer
31

38

2

 
113

190

2

Total
$
38,059

$
44,027

$
2,235

 
$
45,650

$
51,754

$
37

As of September 30, 2016, we had $38.1 million of impaired loans which included $14.4 million of acquired loans from the Merger that experienced credit deterioration since the acquisition date.

31
Table of Contents

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

NOTE 7. ALLOWANCE FOR LOAN LOSSES – continued

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
 
September 30, 2016
September 30, 2015
(dollars in thousands)
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Without a related allowance recorded:
 
 
 
 
Commercial real estate
$
7,582

$
38

$
14,101

$
352

Commercial and industrial
7,326

52

8,993

44

Commercial construction
8,039

49

11,034

67

Consumer real estate
11,686

159

6,829

92

Other consumer
32

—

183

—

Total without a Related Allowance Recorded
34,665

298

41,140

555

With a related allowance recorded:
 
 
 
 
Commercial real estate
—

—

—

—

Commercial and industrial
2,437

37

1,977

7

Commercial construction
—

—

—

—

Consumer real estate
28

—

119

2

Other consumer
2

—

2

—

Total with a Related Allowance Recorded
2,467

37

2,098

9

Total:
 
 
 
 
Commercial real estate
7,582

38

14,101

352

Commercial and industrial
9,763

89

10,970

51

Commercial construction
8,039

49

11,034

67

Consumer real estate
11,714

159

6,948

94

Other consumer
34

—

185

—

Total
$
37,132

$
335

$
43,238

$
564



32
Table of Contents

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

NOTE 7. ALLOWANCE FOR LOAN LOSSES – continued

 
For the Nine Months Ended
 
September 30, 2016
September 30, 2015
(dollars in thousands)
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Without a related allowance recorded:
 
 
 
 
Commercial real estate
$
7,551

$
106

$
14,994

$
731

Commercial and industrial
7,447

156

9,742

131

Commercial construction
8,498

143

8,920

200

Consumer real estate
11,831

400

6,856

279

Other consumer
38

1

119

1

Total without a Related Allowance Recorded
35,365

806

40,631

1,342

With a related allowance recorded:
 
 
 
 
Commercial real estate
—

—

—

—

Commercial and industrial
2,492

100

1,980

42

Commercial construction
—

—

—

—

Consumer real estate
29

2

121

5

Other consumer
2

—

2

—

Total with a Related Allowance Recorded
2,523

102

2,103

47

Total:
 
 
 
 
Commercial real estate
7,551

106

14,994

731

Commercial and industrial
9,939

256

11,722

173

Commercial construction
8,498

143

8,920

200

Consumer real estate
11,860

402

6,977

284

Other consumer
40

1

121

1

Total
$
37,888

$
908

$
42,734

$
1,389



33
Table of Contents

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

NOTE 7. ALLOWANCE FOR LOAN LOSSES – continued

The following tables detail activity in the ALL for the periods presented:
 
Three Months Ended September 30, 2016
(dollars in thousands)
Commercial
Real Estate

 
Commercial and
Industrial

 
Commercial
Construction

 
Consumer
Real Estate

 
Other
Consumer

 
Total
Loans

Balance at beginning of period
$
15,978

 
$
14,771

 
$
11,701

 
$
8,418

 
$
1,345

 
$
52,213

Charge-offs
(93
)
 
(414
)
 
(163
)
 
(369
)
 
(461
)
 
(1,500
)
Recoveries
264

 
169

 
17

 
44

 
70

 
564

Net (Charge-offs)/ Recoveries
171

 
(245
)
 
(146
)
 
(325
)
 
(391
)
 
(936
)
Provision for loan losses
4,244

 
(2,232
)
 
1,356

 
(1,760
)
 
908

 
2,516

Balance at End of Period
$
20,393

 
$
12,294

 
$
12,911

 
$
6,333

 
$
1,862

 
$
53,793

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2015
(dollars in thousands)
Commercial
Real Estate

 
Commercial and
Industrial

 
Commercial
Construction

 
Consumer
Real Estate

 
Other
Consumer

 
Total
Loans

Balance at beginning of period
$
19,018

 
$
13,308

 
$
7,671

 
$
7,027

 
$
1,790

 
$
48,814

Charge-offs
(2,361
)
 
(1,121
)
 
(1,247
)
 
(445
)
 
(467
)
 
(5,641
)
Recoveries
2,896

 
272

 
129

 
132

 
99

 
3,528

Net (Charge-offs)/ Recoveries
535

 
(849
)
 
(1,118
)
 
(313
)
 
(368
)
 
(2,113
)
Provision for loan losses
(2,575
)
 
12

 
4,983

 
302

 
484

 
3,206

Balance at End of Period
$
16,978

 
$
12,471

 
$
11,536

 
$
7,016

 
$
1,906

 
$
49,907

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
(dollars in thousands)
Commercial
Real Estate
 
Commercial and
Industrial
 
Commercial
Construction
 
Consumer
Real Estate
 
Other
Consumer
 
Total
Loans
Balance at beginning of period
$
15,043

 
$
10,853

 
$
12,625

 
$
8,400

 
$
1,226

 
$
48,147

Charge-offs
(1,808
)
 
(3,244
)
 
(1,108
)
 
(891
)
 
(1,572
)
 
(8,623
)
Recoveries
662

 
589

 
20

 
342

 
277

 
1,890

Net (Charge-offs)/Recoveries
(1,146
)
 
(2,655
)
 
(1,088
)
 
(549
)
 
(1,295
)
 
(6,733
)
Provision for loan losses
6,496

 
4,096

 
1,374

 
(1,518
)
 
1,931

 
12,379

Balance at End of Period
$
20,393

 
$
12,294

 
$
12,911

 
$
6,333

 
$
1,862

 
$
53,793

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
(dollars in thousands)
Commercial
Real Estate
 
Commercial and
Industrial
 
Commercial
Construction
 
Consumer
Real Estate
 
Other
Consumer
 
Total
Loans
Balance at beginning of period
$
20,164

 
$
13,668

 
$
6,093

 
$
6,333

 
$
1,653

 
$
47,911

Charge-offs
(2,738
)
 
(2,819
)
 
(1,247
)
 
(997
)
 
(1,046
)
 
(8,847
)
Recoveries
3,072

 
475

 
132

 
379

 
312

 
4,370

Net (Charge-offs)/Recoveries
334

 
(2,344
)
 
(1,115
)
 
(618
)
 
(734
)
 
(4,477
)
Provision for loan losses
(3,520
)
 
1,147

 
6,558

 
1,301

 
987

 
6,473

Balance at End of Period
$
16,978

 
$
12,471

 
$
11,536

 
$
7,016

 
$
1,906

 
$
49,907


34
Table of Contents

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

NOTE 7. ALLOWANCE FOR LOAN LOSSES – continued

The following tables present the ALL and recorded investments in loans by category as of the periods presented:
 
September 30, 2016
 
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
$
—

$
20,393

$
20,393

 
$
7,589

$
2,419,575

$
2,427,164

Commercial and industrial
2,206

10,088

12,294

 
10,694

1,333,603

1,344,297

Commercial construction
—

12,911

12,911

 
7,987

394,137

402,124

Consumer real estate
27

6,306

6,333

 
11,758

1,170,603

1,182,361

Other consumer
2

1,860

1,862

 
31

62,257

62,288

Total
$
2,235

$
51,558

$
53,793

 
$
38,059

$
5,380,175

$
5,418,234

 
 
December 31, 2015
 
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
$
—

$
15,043

$
15,043

 
$
12,661

$
2,153,942

$
2,166,603

Commercial and industrial
—

10,853

10,853

 
14,417

1,242,413

1,256,830

Commercial construction
3

12,622

12,625

 
11,498

401,946

413,444

Consumer real estate
32

8,368

8,400

 
6,961

1,109,835

1,116,796

Other consumer
2

1,224

1,226

 
113

73,826

73,939

Total
$
37

$
48,110

$
48,147

 
$
45,650

$
4,981,962

$
5,027,612

 


35
Table of Contents

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

NOTE 8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Interest Rate Swaps
In accordance with applicable accounting guidance for derivatives and hedging, all derivatives are recognized as either assets or liabilities on the balance sheet at fair value. 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, 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 estimated fair value of the derivatives are recorded in current earnings and included in other noninterest income in the Consolidated Statements of Net 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 a period of 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 may encounter pricing risks 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 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 estimated fair value of the derivatives during the commitment period are recorded in current earnings and included in mortgage banking in the Consolidated Statements of Net Income.

36
Table of Contents

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

NOTE 8. 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)
September 30, 2016
December 31, 2015
 
September 30, 2016
December 31, 2015
Derivatives not Designated as Hedging Instruments:


 


Interest Rate Swap Contracts- Commercial Loans


 


Fair value
$
15,255

$
11,295

 
$
15,202

$
11,276

Notional amount
264,655

245,595

 
264,655

245,595

Collateral posted
—

—

 
14,542

12,753

Interest Rate Lock Commitments- Mortgage Loans


 


Fair value
739

261

 
—

—

Notional amount
21,699

9,894

 
—

—

Forward Sale Contracts- Mortgage Loans


 


Fair value
—

—

 
98

5

Notional amount
$
—

$
—

 
$
16,892

$
9,800

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)
September 30, 2016
December 31, 2015
 
September 30, 2016
December 31, 2015
Derivatives not Designated as Hedging Instruments:


 


Gross amounts recognized
$
15,255

$
11,295

 
$
15,202

$
11,276

Gross amounts offset
—

—

 
—

—

Net amounts presented in the Consolidated Balance Sheets
15,255

11,295

 
15,202

11,276

Gross amounts not offset(1)
—

—

 
(14,542
)
(12,573
)
Net Amount
$
15,255

$
11,295

 
$
660

$
(1,297
)
(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 September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2016
2015
 
2016
2015
Derivatives not Designated as Hedging Instruments


 


Interest rate swap contracts—commercial loans
$
(87
)
$
29

 
$
34

$
20

Interest rate lock commitments—mortgage loans
97

208

 
478

339

Forward sale contracts—mortgage loans
106

(143
)
 
(93
)
(69
)
Total Derivatives Gain
$
116

$
94

 
$
419

$
290


37
Table of Contents

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

NOTE 9. BORROWINGS

Short-term borrowings are for terms under one year and were comprised of REPOs and FHLB advances. All REPOs are overnight short-term investments and are not insured by the Federal Deposit Insurance Corporation. 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. Mortgage-backed securities with a total carrying value of $47.4 million at September 30, 2016 and $67.0 million at December 31, 2015 were pledged as collateral for these secured transactions. The pledged securities are held in safekeeping at the Federal Reserve. Due to the overnight short-term nature of REPOs, potential risk due to a decline in the value of the pledged collateral is low. Collateral pledging requirements with REPOs are monitored daily. FHLB advances are for various terms and are secured by a blanket lien on residential mortgages and other real estate secured loans.
Long-term borrowings are for original terms greater than or equal to one year and were comprised of FHLB advances, a capital lease and junior subordinated debt securities. Long-term FHLB advances are secured by the same loans as short-term FHLB advances. We had total long-term borrowings outstanding of $12.1 million at a fixed rate and $3.1 million at a variable rate at September 30, 2016, excluding our capital lease of $0.1 million. On March 4, 2015 we assumed $13.5 million of junior subordinated debt in connection with the Merger. On March 5, 2015, we paid off $8.5 million and on June 18, 2015, we paid off the remaining $5.0 million.
Information pertaining to borrowings is summarized in the table below as of the dates presented:
 
September 30, 2016
 
December 31, 2015
(dollars in thousands)
Balance
Weighted
Average Rate
 
Balance
Weighted
Average Rate
Short-term borrowings


 


Securities sold under repurchase agreements
$
40,949

0.01
%
 
$
62,086

0.01
%
Short-term borrowings
565,000

0.60
%
 
356,000

0.52
%
Total short-term borrowings
605,949

0.56
%
 
418,086

0.44
%
Long-term borrowings

 
 


Other long-term borrowings
15,303

2.91
%
 
117,043

0.81
%
Junior subordinated debt securities
45,619

3.11
%
 
45,619

2.89
%
Total long-term borrowings
60,922

3.06
%
 
162,662

1.39
%
Total Borrowings
$
666,871

0.79
%
 
$
580,748

0.71
%
We had total borrowings at September 30, 2016 and December 31, 2015 at the FHLB of Pittsburgh of $580.2 million and $473.0 million. The $580.2 million at September 30, 2016 consisted of $565.0 million in short-term borrowings and $15.2 million in long-term borrowings. Our maximum borrowing capacity with the FHLB of Pittsburgh was $2.2 billion at September 30, 2016. Our remaining borrowing availability is $1.4 billion. We utilized $802.1 million of our borrowing capacity at September 30, 2016 consisting of $580.2 million for borrowings and $221.9 million for letters of credit to collateralize public funds.

38
Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 10. 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 the customer does not satisfy the terms of the 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. Because 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 $2.6 million at September 30, 2016 and $2.5 million at December 31, 2015. The allowance for unfunded commitments is included in other liabilities in the Consolidated Balance Sheets. The allowance for unfunded commitments is determined using a similar methodology as our ALL methodology. The reserve is calculated by applying historical loss rates and qualitative adjustments to our unfunded commitments.
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 our commitments and letters of credit as of the dates presented:
(dollars in thousands)
September 30, 2016

 
December 31, 2015

Commitments to extend credit
$
1,546,164

 
$
1,619,854

Standby letters of credit
80,181

 
97,676

Total
$
1,626,345

 
$
1,717,530

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 no outcome of any such proceedings or claims pending will have a material adverse effect on our consolidated financial position or results of operations.

39
Table of Contents
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 11. OTHER COMPREHENSIVE INCOME

The following table represents the change in components of other comprehensive income (loss) for the periods presented, net of tax effects.
 
Three Months Ended September 30, 2016
 
Three Months Ended September 30, 2015
(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 net unrealized gains/(losses) on securities available-for-sale
$
(1,921
)
$
672

$
(1,249
)
 
$
5,177

$
(1,812
)
$
3,365

Reclassification adjustment for net (gains)/losses on securities available-for-sale included in net income (1)
—

—

—

 
—

—

—

Adjustment to funded status of employee benefit plans
544

(190
)
354

 
647

(227
)
420

Other Comprehensive Income/(Loss)
$
(1,377
)
$
482

$
(895
)
 
$
5,824

$
(2,039
)
$
3,785

(1) Reclassification adjustments are comprised of realized security gains or losses. The realized gains or losses 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/losses-net, the tax expense amount is included in the provision for income taxes and the net of tax amount is included in net income.
 
 
 
 
 
Nine Months Ended September 30, 2016
 
Nine Months Ended September 30, 2015
(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 net unrealized gains/(losses) on securities available-for-sale
$
11,748

$
(4,112
)
$
7,636

 
$
4,288

$
(1,501
)
$
2,787

Reclassification adjustment for net (gains)/losses on securities available-for-sale included in net income (1)
—

—

—

 
34

(12
)
22

Adjustment to funded status of employee benefit plans
4,889

(1,711
)
3,178

 
1,839

(551
)
1,288

Other Comprehensive Income
$
16,637

$
(5,823
)
$
10,814

 
$
6,161

$
(2,064
)
$
4,097

(1) Reclassification adjustments are comprised of realized security gains or losses. The realized gains or losses 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/losses-net, the tax expense amount is included in the provision for income taxes and the net of tax amount is included in net income.

40
Table of Contents
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 12. EMPLOYEE BENEFITS

Effective March 31, 2016, the qualified and nonqualified defined benefit plans were amended to freeze benefit accruals for all persons entitled to benefits under the plan. We recorded a curtailment gain in the first quarter of 2016 resulting from the amendment. The curtailment gain totaled $1.0 million and represented the unrecognized benefits associated with prior plan amendments that would have been amortized into income over the next seven years. The qualified plan was previously closed to new participants effective December 31, 2007. We will continue recording pension expense related to this plan, primarily representing interest costs on the accumulated benefit obligation and amortization of actuarial losses accumulated in the plan, as well as income from expected investment returns on pension assets.
Prior to March 31, 2016, the accrued benefits were based on years of service and the employee’s compensation for the highest five consecutive years in the last ten years. Contributions were intended to provide for benefits attributed to employee service to date and for those benefits expected to be earned in the future. The expected long-term rate of return on plan assets is 7.50 percent. Effective January 1, 2015, the plan was amended to provide unmarried participants with the ability to name a beneficiary to receive a lump sum death benefit equal to 80 percent of the participant’s accrued benefit payable at normal retirement age, in the event the participant dies while employed by S&T.
The following table summarizes the components of net periodic pension cost for the periods presented:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2016
 
2015
 
2016
 
2015
Components of Net Periodic Pension Cost

 

 

 

Service cost—benefits earned during the period
$
(6
)
 
$
606

 
$
469

 
$
1,951

Interest cost on projected benefit obligation
1,099

 
1,120

 
3,200

 
3,319

Expected return on plan assets
(1,444
)
 
(1,772
)
 
(4,337
)
 
(5,385
)
Amortization of prior service credit
29

 
(34
)
 
(41
)
 
(104
)
Recognized net actuarial loss
638

 
586

 
1,708

 
1,521

Net Periodic Pension Expense
$
316

 
$
506

 
$
999

 
$
1,302




41
Table of Contents
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 13. SEGMENTS

We operate three reportable operating segments: Community Banking, Insurance and Wealth Management.
•
Our Community Banking segment offers services which include accepting time and demand deposits and originating commercial and consumer loans.
•
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)
September 30, 2016

 
December 31, 2015

Community Banking
$
6,706,383

 
$
6,305,046

Insurance
8,050

 
9,619

Wealth Management
3,772

 
3,689

Total Assets
$
6,718,205

 
$
6,318,354

The following tables provide financial information for our three operating segments for the three and nine month periods ended September 30, 2016 and 2015. The financial results of the business segments include allocations for shared services based on an internal analysis that supports line of business and branch performance measurements. Shared services include expenses such as employee benefits, occupancy expense, computer support and other corporate overhead. Even with these allocations, the financial results are not necessarily indicative of the business segments’ financial condition and results of operations as 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 September 30, 2016
(dollars in thousands)
Community
Banking

Insurance

Wealth Management

Eliminations

Consolidated

Interest income
$
57,804

$
1

$
98

$
(95
)
$
57,808

Interest expense
6,433

—

—

(80
)
6,353

Net interest income
51,371

1

98

(15
)
51,455

Provision for loan losses
2,516

—

—

—

2,516

Noninterest income
9,548

1,119

2,563

218

13,448

Noninterest expense
28,889

1,097

2,591

203

32,780

Depreciation expense
1,269

11

4

—

1,284

Amortization of intangible assets
359

12

4

—

375

Provision for income taxes
7,347

(1
)
21

—

7,367

Net Income
$
20,539

$
1

$
41

$
—

$
20,581

 
 
 
 
 
 
 
Three Months Ended September 30, 2015
(dollars in thousands)
Community
Banking

Insurance

Wealth Management

Eliminations

Consolidated

Interest income
$
53,625

$
1

$
108

$
(65
)
$
53,669

Interest expense
4,200

—

—

(127
)
4,073

Net interest income
49,425

1

108

62

49,596

Provision for loan losses
3,206

—

—

—

3,206

Noninterest income
8,651

1,197

2,806

(173
)
12,481

Noninterest expense
28,941

1,098

2,210

(111
)
32,138

Depreciation expense
1,192

13

6

—

1,211

Amortization of intangible assets
460

13

7

—

480

Provision for income taxes
6,139

26

242

—

6,407

Net Income
$
18,138

$
48

$
449

$
—

$
18,635


42
Table of Contents
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 13. SEGMENTS – continued

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
(dollars in thousands)
Community
Banking

Insurance

Wealth
Management

Eliminations

Consolidated

Interest income
$
168,661

$
2

$
343

$
(328
)
$
168,678

Interest expense
18,085

—

—

(208
)
17,877

Net interest income
150,576

2

343

(120
)
150,801

Provision for loan losses
12,379

—

—

—

12,379

Noninterest income
28,468

3,836

7,936

1,473

41,713

Noninterest expense
90,499

3,455

7,334

1,353

102,641

Depreciation expense
3,678

33

12

—

3,723

Amortization of intangible assets
1,189

37

17

—

1,243

Provision for income taxes
18,364

110

321

—

18,795

Net Income
$
52,935

$
203

$
595

$
—

$
53,733

 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
(dollars in thousands)
Community
Banking

Insurance

Wealth
Management

Eliminations

Consolidated

Interest income
$
150,108

$
2

$
406

$
(321
)
$
150,195

Interest expense
12,144

—

—

(615
)
11,529

Net interest income
137,964

2

406

294

138,666

Provision for loan losses
6,473

—

—

—

6,473

Noninterest income
25,056

4,079

8,639

174

37,948

Noninterest expense
87,542

3,288

6,716

468

98,014

Depreciation expense
3,482

39

19

—

3,540

Amortization of intangible assets
1,283

38

24

—

1,345

Provision for income taxes
16,534

250

800

—

17,584

Net Income
$
47,706

$
466

$
1,486

$
—

$
49,658



43
Table of Contents
S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 14. QUALIFIED AFFORDABLE HOUSING PROJECTS


We invest in affordable housing projects primarily to satisfy our Community Reinvestment Act requirements. As a limited partner in these operating partnerships, we receive tax credits and tax deductions for losses incurred by the underlying properties. We use the cost method to account for these partnerships. Our total investment in qualified affordable housing projects was $12.6 million at September 30, 2016 and $15.0 million at December 31, 2015. We had no open commitments to fund current or future investments in qualified affordable housing projects at September 30, 2016 or December 31, 2015. Amortization expense, included in other noninterest expense in the Consolidated Statements of Net Income, was $0.8 million and $2.5 million for the three and nine months ended September 30, 2016 and $0.9 million and $2.8 million for the three and nine months ended September 30, 2015. The amortization expense was offset by tax credits of $0.9 million and $2.7 million for the three and nine months ended September 30, 2016 and $1.0 million and $3.0 million for the three and nine months ended September 30, 2015 as a reduction to our federal tax provision.

44
Table of Contents

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 nine month periods ended September 30, 2016 and 2015. 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 and our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which is on file with the Securities and Exchange Commission, or SEC. 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. Forward looking statements are not guarantees of our future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and may change over time. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements.
Our forward looking statements are subject to the following principal risks and uncertanties:
•
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 S&T, 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, particularly our acquisition of Integrity Bancshares, Inc., or Integrity;
•
the possibility that the anticipated benefits from the Integrity acquisition and any other future acquisitions cannot be fully realized in a timely manner or at all, or that integrating the operations of Integrity or future acquired operations will be more difficult, disruptive or costly than anticipated;
•
containing costs and expenses;
•
reliance on significant customer relationships;
•
general economic or business conditions, either nationally or regionally in our 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 re-emergence 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 businesses.

45
Table of Contents

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

We provide greater detail about these and other risks in our "Risk Factor" section of our Annual Report on Form 10-K for the year ended December 31, 2015.
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 September 30, 2016 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2015 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 $6.7 billion at September 30, 2016.  We operate bank branches in Pennsylvania and Ohio and loan production offices in Pennsylvania, Ohio and New York. We provide a full range of financial services with retail and commercial banking products, cash management services, insurance and trust and brokerage services. 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 organic growth, which includes growth within our current footprint and growth through market expansion. We also actively evaluate acquisition opportunities as another source of 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.
Our focus continues to be on loan and deposit growth and implementing opportunities to increase fee income while closely monitoring our operating expenses and asset quality. With our recent expansion into new markets, we are focused on executing our strategy to successfully build our brand and grow our business in these markets. The low interest rate environment remains a challenge for our net interest income, but we expect that our organic growth will help to mitigate the impact.
Earnings Summary
Net income increased $2.0 million for the three months and increased $4.0 million for the nine months ended September 30, 2016 compared to the same periods in 2015. The timing of the Integrity merger, or Merger, on March 4, 2015 has impacted the comparability of financial results for the nine months ended September 30, 2016 and the nine months ended September 30, 2015 due to approximately only seven months of Integrity results being included in earnings in the prior year. Net income for the three and nine months ended September 30, 2016 was $20.6 million and $53.7 million resulting in diluted earnings per share of $0.59 and $1.54 compared to net income of $18.6 million and $49.7 million and $0.54 and $1.48 diluted earnings per share for the same periods in 2015. The increase in net income for the three month period was primarily driven by increases in the net interest income of $1.8 million and noninterest income of $1.0 million and decreases in our provision for loan losses of $0.7 million partially offset by increases in noninterest expense of $0.6 million and income taxes of $0.9 million. The increase in net income for the nine month period was primarily due to increases in the net interest income of $12.1 million and noninterest income of $3.8 million. These increases were partially offset by increases in our provision for loan losses of $5.9 million, noninterest expenses of $4.7 million and income taxes of $1.2 million. Noninterest expense included $3.2 million of Merger related expenses during the nine months ended September 30, 2015 and no Merger related expenses during the nine month period ended September 30, 2016.
Net interest income increased $1.8 million, or 3.8 percent, for the three months ended September 30, 2016 and increased $12.1 million, or 8.8 percent, for the nine months ended September 30, 2016 compared to the same periods in 2015. The increases for both the three and nine month periods were primarily due to the increases in average interest-earning assets, compared to the same periods in 2015. Average interest-earnings assets increased $495.0 million, or 8.8 percent, and $671.5 million, or 12.6 percent, for the three and nine month periods ended September 30, 2016 compared to the same periods in 2015. The increases in average interest-earning assets were due to our successful efforts in growing our loan portfolio organically and as a result of the Merger. These increases were partially offset by increases in average interest-bearing liabilities of $366.4 million, or 8.8 percent, and $536.1 million, or 13.9 percent, for the three and nine months ended September 30, 2016 compared to the same periods in 2015. The increases in average interest-bearing liabilities for the three and nine month periods are mainly due to successful deposit promotions and the Merger. Net interest income included purchase accounting fair value adjustments of $0.7 million and $2.1 million for the three and nine months ended September 30, 2016 compared to $2.2 million and $4.9 million for the same periods in 2015.

46
Table of Contents

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

The provision for loan losses decreased $0.7 million to $2.5 million and increased $5.9 million to $12.4 million for the three and nine months ended September 30, 2016 compared to $3.2 million and $6.5 million for the same periods in 2015. The decrease of $0.7 million in the provision for loan losses for the three months ended September 30, 2016 related primarily to a decrease of $1.2 million in net charge-offs to $0.9 million compared to $2.1 million for the same period in 2015. The increase in the provision for loan losses for the nine months ended September 30, 2016 is attributed to higher net charge-offs and specific reserves on impaired loans and loan growth. Net charge-offs increased $2.2 million to $6.7 million for the nine months ended September 30, 2016 compared to $4.5 million for the same period in 2015. Annualized net loan charge-offs to average loans were 0.07 percent and 0.17 percent for the three and nine months ended September 30, 2016 compared to 0.17 percent and 0.13 percent for the same periods in 2015. Specific reserves for impaired loans were $2.2 million at September 30, 2016 compared to $1.3 million at September 30, 2015.
Noninterest income increased $1.0 million to $13.4 million and increased $3.8 million to $41.7 million for the three and nine months ended September 30, 2016 compared to the same periods in 2015. The increase during the three month period was primarily related to increases in mortgage banking fees and other income. The increase in noninterest income for the nine months ended September 30, 2016 was primarily due to a curtailment gain of $1.0 million resulting from the amendment to freeze benefit accruals for all participants in our defined benefit plans, a gain of $2.1 million on the sale of our credit card portfolio in the first quarter of 2016 and increases in service charge fees of $0.7 million due to program changes and growth from the Merger for the period ended September 30, 2016 compared to the same period in 2015.
Noninterest expense increased $0.6 million to $34.4 million and increased $4.7 million to $107.6 million for the three and nine months ended September 30, 2016 compared to the same periods in 2015. The increase in noninterest expense for the three month period was due to higher salaries and employee benefits, furniture and equipment and other taxes offset by decreases in data processing and other noninterest expenses. The increase in noninterest expense for the nine months ended September was partly due to higher salaries and employee benefits expense, furniture and equipment and professional services and legal expenses offset by decreases in data processing and other noninterest expense. Additionally, our operating costs were higher during the full nine months ended September 30, 2016 compared to the same period last year when we incurred approximately seven months of additional expense resulting from the Merger.
The provision for income taxes increased $0.9 million for the three months and increased $1.2 million for the nine months ended September 30, 2016 compared to the same periods in 2015. The increases to the provision for income taxes for the three and nine months ended September 30, 2016 were primarily due to increases in pretax income compared to the same periods in 2015.
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 references a non-GAAP financial measure, net interest income on a fully taxable equivalent, or FTE basis. Management believes this measure provides information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates comparisons with the performance of other companies in the financial services industry. Although management believes that this non-GAAP financial measure enhance investors’ understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor is it necessarily comparable with non-GAAP measures which may be presented by other companies.
We believe the presentation of net interest income on an 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 an FTE basis in the Net Interest Income section of the "Results of Operations - Three and Nine Months Ended September 30, 2016 Compared to Three and Nine Months Ended September 30, 2015."


47
Table of Contents

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

RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2016 Compared to
Three and Nine Months Ended September 30, 2015
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. 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 produce what we believe is an acceptable level of net interest income.
The interest income on interest-earning assets and the net interest margin are presented on an 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 to be the preferred industry measurement of net interest income that provides a relevant comparison between taxable and non-taxable sources of interest income.
The following table reconciles interest income per the Consolidated Statements of Comprehensive Income to net interest income and rates on an FTE basis for the periods presented:
 
Three months ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2016
 
2015
 
2016
 
2015
Total interest income
$
57,808

 
$
53,669

 
$
168,678

 
$
150,195

Total interest expense
6,353

 
4,073

 
17,877

 
11,529

Net interest income per consolidated statements of comprehensive income
51,455

 
49,596

 
150,801

 
138,666

Adjustment to FTE basis
1,771

 
1,607

 
5,254

 
4,493

Net Interest Income on an FTE basis (non-GAAP)
$
53,226

 
$
51,203

 
$
156,055

 
$
143,159

Net interest margin
3.34
%
 
3.50
%
 
3.36
%
 
3.48
%
Adjustment to FTE basis
0.12
%
 
0.11
%
 
0.11
%
 
0.11
%
Net Interest Margin on an FTE basis (non-GAAP)
3.46
%
 
3.61
%
 
3.47
%
 
3.59
%
Income amounts are annualized for rate calculations.


48
Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES
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 September 30, 2016

Three months ended September 30, 2015
(dollars in thousands)
Average Balance
Interest
Rate

Average Balance
Interest
Rate
ASSETS







Loans (1) (2)
$
5,382,516

$
55,201

4.08
%

$
4,869,914

$
50,616

4.12
%
Interest-bearing deposits with banks
37,852

49

0.52
%

76,246

46

0.24
%
Taxable investment securities (3)
545,249

2,657

1.95
%

523,890

2,609

1.99
%
Tax-exempt investment securities (2)
133,661

1,395

4.17
%

138,514

1,520

4.39
%
Federal Home Loan Bank and other restricted stock
24,454

277

4.52
%

20,184

485

9.60
%
Total Interest-earning Assets
6,123,732

59,579

3.87
%

5,628,748

55,276

3.90
%
Noninterest-earning assets:
 
 
 

 
 
 
Cash and due from banks
54,505

 
 

60,782

 
 
Premises and equipment, net
47,132

 
 

48,613

 
 
Other assets
471,559

 
 

479,001

 
 
Less allowance for loan losses
(54,185
)
 
 

(51,023
)
 
 
Total Assets
$
6,642,743

 
 

$
6,166,121

 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY







Interest-bearing demand
$
663,477

$
286

0.17
%

$
663,834

$
242

0.14
%
Money market
540,891

575

0.42
%

385,520

174

0.18
%
Savings
1,034,018

507

0.20
%

1,091,482

447

0.16
%
Certificates of deposit
1,379,952

3,312

0.95
%

1,113,858

2,070

0.74
%
Brokered deposits(4)
309,413

439

0.56
%

394,415

342

0.34
%
Total Interest-bearing Deposits
3,927,751

5,119

0.52
%

3,649,109

3,275

0.36
%
Securities sold under repurchase agreements
44,927

1

0.01
%

42,937

1

0.01
%
Short-term borrowings
459,043

761

0.66
%

270,968

253

0.37
%
Long-term borrowings
15,545

111

2.85
%

117,864

228

0.77
%
Junior subordinated debt securities
45,619

361

3.15
%

45,619

316

2.75
%
Total Interest-bearing Liabilities
4,492,885

6,353

0.56
%

4,126,497

4,073

0.39
%
Noninterest-bearing liabilities:
 
 
 

 
 
 
Noninterest-bearing demand
1,247,884

 
 

1,196,200

 
 
Other liabilities
70,799

 
 

65,873

 
 
Shareholders’ equity
831,175

 
 

777,551

 
 
Total Liabilities and Shareholders’ Equity
$
6,642,743

 
 

$
6,166,121

 
 
Net Interest Income (2)(3)
 
$
53,226



 
$
51,203


Net Interest Margin (2) (3)
 
 
3.46
%

 
 
3.61
%
(1) Nonaccruing loans are included in the daily average loan amounts outstanding.
(2) Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 35 percent for 2016 and 2015.
(3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.
(4) Brokered deposits consist of certificates of deposit, money market, and interest-bearing demand funds.

49
Table of Contents

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

 
Nine Months Ended September 30, 2016
 
Nine Months Ended September 30, 2015
(dollars in thousands)
Average Balance
Interest
Rate
 
Average Balance
Interest
Rate
ASSETS
 
 
 
 
 
 
 
Loans (1) (2)
$
5,261,629

$
160,787

4.08
%
 
$
4,588,536

$
141,202

4.11
%
Interest-bearing deposits with banks
41,402

159

0.51
%
 
69,062

122

0.24
%
Taxable investment securities (3)
541,419

7,954

1.96
%
 
514,195

7,577

1.96
%
Tax-exempt investment securities (2)
134,271

4,251

4.22
%
 
139,171

4,625

4.43
%
Federal Home Loan Bank and other restricted stock
23,027

781

4.52
%
 
19,276

1,162

8.04
%
Total Interest-earning Assets
6,001,748

173,932

3.87
%
 
5,330,240

154,688

3.88
%
Noninterest-earning assets:
 
 
 
 
 
 
 
Cash and due from banks
54,609

 
 
 
55,040

 
 
Premises and equipment, net
47,606

 
 
 
46,222

 
 
Other assets
469,661

 
 
 
447,169

 
 
Less allowance for loan losses
(51,963
)
 
 
 
(49,388
)
 
 
Total Assets
$
6,521,661

 
 
 
$
5,829,283

 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Interest-bearing demand
$
635,479

$
751

0.16
%
 
$
586,149

$
569

0.13
%
Money market
476,768

1,243

0.35
%
 
392,021

539

0.18
%
Savings
1,041,802

1,474

0.19
%
 
1,072,539

1,270

0.16
%
Certificates of deposit
1,345,323

9,498

0.94
%
 
1,075,666

6,120

0.76
%
Brokered deposits(4)
358,568

1,437

0.54
%
 
334,485

835

0.33
%
Total Interest-bearing Deposits
3,857,940

14,403

0.50
%
 
3,460,860

9,333

0.36
%
Securities sold under repurchase agreements
53,858

4

0.01
%
 
42,675

3

0.01
%
Short-term borrowings
385,394

1,855

0.64
%
 
245,431

628

0.34
%
Long-term borrowings
62,109

563

1.21
%
 
72,316

562

1.04
%
Junior subordinated debt securities
45,619

1,052

3.08
%
 
47,561

1,003

2.82
%
Total Interest-bearing Liabilities
4,404,920

17,877

0.54
%
 
3,868,843

11,529

0.40
%
Noninterest-bearing liabilities:
 
 
 
 
 
 
 
Noninterest-bearing demand
1,227,426

 
 
 
1,158,217

 
 
Other liabilities
71,421

 
 
 
66,009

 
 
Shareholders’ equity
817,894

 
 
 
736,214

 
 
Total Liabilities and Shareholders’ Equity
$
6,521,661

 
 
 
$
5,829,283

 
 
Net Interest Income (2)(3)
 
$
156,055

 
 
 
$
143,159

 
Net Interest Margin (2) (3)
 
 
3.47
%
 
 
 
3.59
%
(1) Nonaccruing loans are included in the daily average loan amounts outstanding.
(2) Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 35 percent for 2016 and 2015.
(3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.
(4) Brokered deposits consist of certificates of deposit, money market, and interest-bearing demand funds.
Net interest income on an FTE basis increased $2.0 million, or 4.0 percent, for the three months and increased $12.9 million, or 9.0 percent, for the nine months ended September 30, 2016 compared to the same periods in 2015. The increases in net interest income on an FTE basis were due to the Merger and organic loan growth. Net interest income was unfavorably impacted by decreases in purchase accounting fair value adjustments of $1.6 million and $2.8 million for the three and nine months ended September 30, 2016 compared to the three and nine months in 2015. The net interest margin on an FTE basis decreased 15 and 12 basis points for the three and nine months ended September 30, 2016 compared to the same periods in 2015. The net interest margin rate was unfavorably impacted by 10 and six basis points for the three and nine months ended September 30, 2016 compared to the same periods in 2015 due to the decrease in purchase accounting fair value adjustments.
Interest income on an FTE basis increased $4.3 million, or 7.8 percent for the three months and increased $19.2 million, or 12.4 percent for the nine months ended September 30, 2016 compared to the same periods in 2015. The increase in interest income is primarily due to the increases in average interest-earning assets compared to the same periods in 2015. Interest

50
Table of Contents

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

income was unfavorably impacted by a decrease in loan purchase accounting fair value adjustments of $1.3 million and $2.3 million for the three and nine months ended September 30, 2016 compared to the same periods in 2015. Average interest-earning assets increased $495.0 million and $671.5 million for the three and nine months ended September 30, 2016 primarily due to increased average loan balances due to organic loan growth and the Merger. Average loan balances increased $512.6 million and $673.1 million for the three and nine months ended September 30, 2016. The rates earned on loans decreased four and three basis points for the three and nine months ended September 30, 2016 when compared to the same periods in 2015. A decrease in loan purchase accounting fair value adjustments negatively impacted loan rates by nine and six basis points compared to the same periods in 2015. Average interest-bearing deposits with banks, which is primarily cash at the Federal Reserve, decreased $38.4 million and $27.7 million and tax-exempt investment securities decreased $4.9 million and $4.9 million while average investment securities increased $21.4 million and $27.2 million for the three and nine months ended September 30, 2016. Federal Home Loan Bank, or FHLB, and other restricted stock increased $4.3 million and $3.8 million for the three and nine months ended September 30, 2016 with a significant decrease in the rate primarily due to a special dividend received of $0.3 million in the first quarter of 2015. Overall, the FTE rate on interest-earning assets decreased three basis points and one basis point for the three and nine months ended September 30, 2016 compared to the same periods in 2015.
Interest expense increased $2.3 million and $6.3 million for the three and nine months ended September 30, 2016 compared to the same periods in 2015. The increase in interest expense is primarily due to the increases in average interest-bearing liabilities compared to the same periods in 2015. Interest expense was unfavorably impacted by a decrease in certificate of deposit purchase accounting fair value adjustments of $0.3 million and $0.5 million for the three and nine months ended September 30, 2016 compared to the same periods in 2015. Average deposits increased $278.6 million and $397.1 million for the three and nine months ended September 30, 2016. Average brokered deposits decreased $85.0 million and increased $24.1 million and average short-term borrowings increased $188.1 million and $140.0 million for the three and nine months ended September 30, 2016 compared to the same periods in 2015. Average long-term borrowings decreased $102.3 million and $10.2 million for the three and nine months ended September 30, 2016. This is mainly due to a $100 million long-term variable rate borrowing in the second quarter of 2015 that matured in the second quarter of 2016. A decrease in certificate of deposit purchase accounting fair value adjustments negatively impacted interest-bearing liability rates by two basis points compared to the same periods in 2015. Overall, the cost of interest-bearing liabilities increased by 17 and 14 basis points for the three and nine months ended September 30, 2016 as compared to the same periods in 2015 primarily due to the increase in the Federal Funds rate at the end of 2015.


51
Table of Contents

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

The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:
 
Three Months Ended September 30, 2016 compared to September 30, 2015
 
Nine Months Ended September 30, 2016 compared to September 30, 2015
(dollars in thousands)
Volume (4)
Rate (4)
Net
 
Volume (4)
Rate (4)
Net
Interest earned on:
 
 
 
 
 
 
 
Loans (1) (2)
$
5,328

$
(743
)
$
4,585

 
$
20,713

$
(1,128
)
$
19,585

Interest-bearing deposits with banks
(23
)
26

3

 
(49
)
86

37

Taxable investment securities (3)
106

(57
)
49

 
401

(24
)
377

Tax-exempt investment securities (2)
(53
)
(72
)
(125
)
 
(163
)
(211
)
(374
)
Federal Home Loan Bank and other restricted stock
103

(310
)
(207
)
 
226

(607
)
(381
)
Change in Interest Earned on Interest-earning Assets
5,461

(1,156
)
4,305

 
21,128

(1,884
)
19,244

Interest paid on:
 
 
 
 



Interest-bearing demand
—

43

43

 
48

135

183

Money market
70

331

401

 
116

588

704

Savings
(24
)
84

60

 
(36
)
241

205

Certificates of deposit
494

747

1,241

 
1,534

1,843

3,377

Brokered deposits
(74
)
171

97

 
60

542

602

Securities sold under repurchase agreements
—

—

—

 
1

—

1

Short-term borrowings
176

332

508

 
358

868

1,226

Long-term borrowings
(198
)
81

(117
)
 
(79
)
81

2

Junior subordinated debt securities
—

45

45

 
(41
)
90

49

Change in Interest Paid on Interest-bearing Liabilities
444

1,834

2,278

 
1,961

4,388

6,349

Net Change in Net Interest Income
$
5,017

$
(2,990
)
$
2,027

 
$
19,167

$
(6,272
)
$
12,895

(1) Nonaccruing loans are included in the daily average loan amounts outstanding.
(2) Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 35 percent for 2016 and 2015.
(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 determined to be appropriate in management's judgment to absorb probable losses inherent in the loan portfolio. The provision for loan losses decreased $0.7 million to $2.5 million and increased $5.9 million to $12.4 million for the three and nine months ended September 30, 2016 compared to $3.2 million and $6.5 million for the same periods in 2015. The decrease of $0.7 million in the provision for loan losses for the three months ended September 30, 2016 related primarily to a decrease of $1.2 million in net charge-offs to $0.9 million compared to $2.1 million for the same period in 2015. The increase of $5.9 million in the provision for loan losses for the nine months ended September 2016 was attributed to higher net charge-offs and specific reserves on impaired loans and loan growth. Net charge-offs increased $2.2 million to $6.7 million for the nine months ended September 30, 2016 compared to $4.5 million for the same period in 2015. Annualized net loan charge-offs to average loans were 0.07 percent and 0.17 percent for the three and nine months ended September 30, 2016 compared to 0.17 percent and 0.13 percent for the same periods in 2015. Specific reserves for impaired loans were $2.2 million at September 30, 2016 compared to $1.3 million at September 30, 2015.
Nonperforming loans increased $16.7 million to $40.5 million at September 30, 2016 compared to $23.8 million at September 30, 2015 primarily due to additional deterioration of acquired loans, subsequent to the acquisition date. The ALL at September 30, 2016 was $53.8 million, or 0.99 percent of total portfolio loans, compared to 1.01 percent of total portfolio loans at September 30, 2015. Refer to “Allowance for Loan Losses” in the MD&A of this report for additional information.

52
Table of Contents

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

Noninterest Income
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2016

2015

$ Change

% Change

 
2016
2015
$ Change
% Change
Securities gains/(losses), net
$
—

$
—

$
—

NM

 
$
—

$
(34
)
$
34

NM

Service charges on deposit accounts
3,208

3,069

139

4.5

 
9,272

8,529

743

8.7

Debit and credit card fees
3,163

2,996

167

5.6

 
8,818

8,732

86

1.0

Wealth management fees
2,565

2,814

(249
)
(8.8
)
 
7,947

8,667

(720
)
(8.3
)
Insurance fees
1,208

1,332

(124
)
(9.3
)
 
4,187

4,374

(187
)
(4.3
)
Mortgage banking
1,077

698

379

54.3

 
2,185

2,006

179

8.9

Gain on sale of credit card portfolio
—

—

—

—

 
2,066

—

2,066

NM

Other
2,227

1,572

655

41.7

 
7,238

5,674

1,564

27.6

Total Noninterest Income
$
13,448

$
12,481

$
967

7.7
 %
 
$
41,713

$
37,948

$
3,765

9.9
 %
NM- Not meaningful
 
 
 
 
 
 
 
 
 
Noninterest income increased $1.0 million, or 7.7 percent, to $13.4 million for the three months ended September 30, 2016 and increased $3.8 million, or 9.9 percent, to $41.7 million for the nine months ended September 30, 2016 compared to the same periods in 2015. Noninterest income for the nine months ended September 30, 2016 includes a $2.1 million gain on the sale of our credit card portfolio. Subsequent to the sale of the credit card portfolio, we will continue to earn income based on the terms of the marketing agreement which provides incentives for new credit card accounts and a percentage of both interchange income and finance charges. Service charges on deposit accounts increased $0.1 million and $0.7 million for the three and nine months ended September 30, 2016 due to program changes for both periods and growth from the Merger for the nine month period. The decrease in wealth management fees of $0.2 million and $0.7 million for the three and nine months ended September 30, 2016 compared to the same periods in 2015 was due to a decline in market conditions and a decrease in assets under management. The increase in mortgage banking fees of $0.4 million and $0.2 million for the three and nine months ended September 30, 2016 related to an increase in the volume of loans originated for sale in the secondary market and more favorable pricing on loan sales. The increase of $0.7 million in other noninterest income for the three month period was primarily related to higher interest rate swap fees from our commercial customers. The $1.6 million increase in other noninterest income for the nine months ended September 30, 2016 was primarily related to the $1.0 million defined benefit plan curtailment gain.
Noninterest Expense
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2016
2015
$ Change
% Change
 
2016
2015
$ Change
% Change
Salaries and employee benefits (1)
$
19,011

$
16,789

$
2,222

13.2
 %
 
$
57,539

$
51,024

$
6,515

12.8
 %
Data processing (1)
2,129

2,454

(325
)
(13.2
)
 
6,964

7,329

(365
)
(5.0
)
Net occupancy (1)
2,776

2,744

32

1.2

 
8,413

8,014

399

5.0

Furniture and equipment
1,932

1,653

279

16.9

 
5,580

4,461

1,119

25.1

Marketing
896

895

1

0.1

 
2,872

2,905

(33
)
(1.1
)
Professional services and legal (1)
1,041

946

95

10.0

 
3,035

2,270

765

33.7

FDIC insurance
1,005

990

15

1.5

 
2,938

2,493

445

17.8

Other taxes
1,080

719

361

50.2

 
3,076

2,721

355

13.0

Merger related expense
—

—

—

NM

 
—

3,167

(3,167
)
NM

Other(1)
4,569

6,639

(2,070
)
(31.2
)
 
17,190

18,515

(1,325
)
(7.2
)
Total Noninterest Expense
$
34,439

$
33,829

$
610

1.8
 %
 
$
107,607

$
102,899

$
4,708

4.6
 %
(1) Excludes Merger related expenses for 2015 amounts only.
NM - not meaningful
Noninterest expense increased $0.6 million, or 1.8 percent, to $34.4 million for the three months ended September 30, 2016 and increased $4.7 million, or 4.6 percent, to $107.6 million for the nine months ended September 30, 2016 compared to the same periods in 2015.
Our operating costs were higher during the nine months ended September 30, 2016 compared to the same period last year when we incurred approximately seven months of additional expense resulting from the Merger. In 2015, we incurred merger related expense of $3.2 million for the nine months ended September 30, 2015.

53
Table of Contents

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

Salaries and employee benefits expense increased $2.2 million and $6.5 million for the three and nine months ended September 30, 2016 compared to the same periods in 2015. The increases were primarily due to additional employees, annual merit increases and higher restricted stock expense and medical claims. These increases were offset by a decrease in pension expense of $0.1 million and $0.2 million for the three and nine months ended September 30, 2016 related to the amendment to freeze benefit accruals for all participants in our defined benefit pension plans.
Other noninterest expense decreased $2.0 million and $1.3 million for the three and nine months ended September 30, 2016 compared to the same periods in 2015. The decrease primarily related to lower loan related expenses due to expense recoveries on impaired loans that paid off in third quarter of 2016, other real estate owned, or OREO, meals and entertainment expenses, amortization of both our core deposit intangible asset and qualified affordable housing projects.
Net occupancy expense increased $0.4 million and furniture and equipment expense increased $1.1 million for the nine months ended September 30, 2016 compared to the same period in 2015 primarily due to the additional locations acquired from the Merger and technology upgrades. Data processing decreased $0.3 million and $0.4 million for the three and nine months ended September 30, 2016 compared to the same period in 2015 primarily due to a renegotiation of a core data processing contract. Professional services and legal expense increased $0.1 million and $0.8 million due to systems and credit related issues that were incurred for the three and nine months ended September 30, 2016. Other taxes increased $0.4 million during both periods and Federal Deposit Insurance Corporation, or FDIC, insurance expense increased $0.4 million for the nine months ended September 30, 2016 compared to the same period in 2015 primarily due to expansion from the Merger and organic growth.
Provision for Income Taxes
The provision for income taxes increased $0.9 million to $7.4 million for the three months and increased $1.2 million to $18.8 million for the nine months ended September 30, 2016 compared to the same periods in 2015. The increases to the provision for income taxes for the three and nine months ended September 30, 2016 were primarily due to increases in pretax income compared to the same periods in 2015.
Financial Condition
September 30, 2016
Total assets increased $399.9 million, or 6.3 percent, to $6.7 billion at September 30, 2016 compared to $6.3 billion at December 31, 2015. Loan growth was strong resulting in an increase in total portfolio loans of $390.6 million, or 7.8 percent. Our commercial loan portfolio grew by $336.7 million, or 8.8 percent, to $4.2 billion with growth in the Commercial Real Estate, or CRE, and Commercial and Industrial, or C&I, portfolios. Our consumer loan portfolio increased $53.9 million, or 4.5 percent, with growth primarily in residential mortgages and home equity. Securities increased $10.2 million, or 1.5 percent, compared to December 31, 2015 primarily due to increases in market value.
Our deposits increased $268.8 million, or 5.5 percent, with total deposits of $5.1 billion at September 30, 2016 compared to $4.9 billion at December 31, 2015. The increase primarily related to a $99.1 million, or 7.3 percent, increase in certificates of deposits, or CDs, and a $158.9 million, or 26.3 percent, increase in money market accounts. Interest-bearing and noninterest-bearing demand accounts increased $41.1 million and $4.7 million while savings accounts decreased compared to December 31, 2015. The increases in CDs and money market accounts are related to rate promotions offered during 2016.
Total borrowings increased $86.1 million at September 30, 2016 to $666.8 million compared to $580.7 million at December 31, 2015. Short-term borrowings increased $209.0 million compared to December 31, 2015 primarily due to a $100 million long-term borrowing maturity in May 2016 that was replaced with FHLB short-term borrowings and to support our asset growth.
Total shareholders’ equity increased by $46.5 million, or 5.9 percent, at September 30, 2016 compared to December 31, 2015. The increase was primarily due to net income of $53.7 million offset partially by dividends of $19.8 million and a $10.8 million increase in accumulated other comprehensive income. The $10.8 million increase in accumulated other comprehensive income was due to an $7.6 million increase in unrealized gains on our available-for-sale investment securities and a $3.2 million change in the funded status of our employee benefit plans.

54
Table of Contents

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

Securities Activity
(dollars in thousands)
September 30, 2016
 
December 31, 2015
 
$ Change
U.S. treasury securities
$
15,056

 
$
14,941

 
$
115

Obligations of U.S. government corporations and agencies
250,924

 
263,303

 
(12,379
)
Collateralized mortgage obligations of U.S. government corporations and agencies
137,460

 
128,835

 
8,625

Residential mortgage-backed securities of U.S. government corporations and agencies
36,285

 
40,125

 
(3,840
)
Commercial mortgage-backed securities of U.S. government corporations and agencies
88,499

 
69,204

 
19,295

Obligations of states and political subdivisions
132,536

 
134,886

 
(2,350
)
Debt Securities Available-for-Sale
660,760

 
651,294

 
9,466

Marketable equity securities
10,368

 
9,669

 
699

Total Securities Available-for-Sale
$
671,128

 
$
660,963

 
$
10,165

We invest in various securities in order to maintain a source of liquidity, to satisfy various pledging requirements, to 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 risks that could negatively affect the level of liquidity available to us. Security purchases are subject to an investment policy approved annually by our Board of Directors and administered through ALCO and our treasury function. The securities portfolio increased $10.2 million, or 1.5 percent, at September 30, 2016 compared to December 31, 2015 primarily due to increases in market value.
Management evaluates the securities portfolio for other than temporary impairment, or OTTI, on a quarterly basis. At September 30, 2016 our bond portfolio was in a net unrealized gain position of $19.1 million compared to a net unrealized gain of $8.1 million at December 31, 2015. At September 30, 2016, total gross unrealized gains were $19.1 million offset by immaterial unrealized losses, compared to December 31, 2015, when total gross unrealized gains were $9.8 million offset by gross unrealized losses of $1.7 million. The increase in the value of our securities portfolio was a result of the changing interest rate environment in 2016. Total unrealized gains on marketable equity securities at September 30, 2016 were $2.8 million compared to $2.1 million at December 31, 2015. During the nine months ended September 30, 2016 and 2015 we did not record any OTTI. The performance of the debt and equity securities markets could generate impairments in future periods requiring realized losses to be reported.
Loan Composition
 
September 30, 2016
 
December 31, 2015
(dollars in thousands)
Amount
% of Loans
 
Amount
% of Loans
Commercial
 
 
 
 
 
Commercial real estate
$
2,427,164

44.8
%
 
$
2,166,603

43.1
%
Commercial and industrial
1,344,297

24.8
%
 
1,256,830

25.0
%
Construction
402,124

7.4
%
 
413,444

8.2
%
Total Commercial Loans
4,173,585

77.0
%
 
3,836,877

76.3
%
Consumer
 
 
 
 
 
Residential mortgage
692,574

12.8
%
 
639,372

12.7
%
Home equity
483,935

8.9
%
 
470,845

9.4
%
Installment and other consumer
62,288

1.2
%
 
73,939

1.5
%
Construction
5,852

0.1
%
 
6,579

0.1
%
Total Consumer Loans
1,244,649

23.0
%
 
1,190,735

23.7
%
Total Portfolio Loans
5,418,234

100.0
%
 
5,027,612

100.0
%
Loans Held for Sale
11,694


 
35,321


Total Loans
$
5,429,928


 
$
5,062,933


Our loan portfolio represents our most significant source of interest income. The risk that borrowers will be unable to pay such obligations is inherent in the loan portfolio. Other conditions such as downturns in the borrower's industry or the overall economic climate can significantly impact the borrower’s ability to pay.

55
Table of Contents

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

Total portfolio loans as of September 30, 2016 increased $390.6 million, or 7.8 percent, to $5.4 billion compared to $5.0 billion at December 31, 2015 primarily due to growth in our commercial loan portfolio. CRE loans increased $260.6 million, or 12.0 percent, and C&I loans increased $87.5 million, or 7.0 percent. Commercial organic loan growth was strong, with growth coming from our newer markets in New York, Ohio and southcentral Pennsylvania. Approximately $243.3 million of the organic loan growth came from our loan production offices in Ohio and New York and $30.9 million from our southcentral Pennsylvania market. Total consumer loans increased $53.9 million, or 4.5 percent, with growth primarily in residential mortgages and home equity loans. Loans held for sale decreased $23.6 million primarily due to the sale of our credit card portfolio during the first quarter of 2016.
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 and it is presented as a reserve against loans in the Consolidated Balance Sheets. Determination of an adequate ALL is inherently subjective and may be subject to significant changes from period to period. The methodology for determining the ALL has two main components: evaluation and impairment tests of individual loans and impairment tests 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 economy in our markets. In addition, each loan segment carries with it risks specific to the segment. 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 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. 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 are 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 does not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.
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. While the risk of these loans is generally confined to the construction period, 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 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 risks depending on the type of project and the experience and resources of the developer.
Consumer Real Estate loans are secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, 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 markets 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 are made to individuals and 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.

56
Table of Contents

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

The following tables summarize the ALL and recorded investments in loans by category for the dates presented:
 
September 30, 2016
 
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
$
—

$
20,393

$
20,393

 
$
7,589

$
2,419,575

$
2,427,164

Commercial and industrial
2,206

10,088

12,294

 
10,694

1,333,603

1,344,297

Commercial construction
—

12,911

12,911

 
7,987

394,137

402,124

Consumer real estate
27

6,306

6,333

 
11,758

1,170,603

1,182,361

Other consumer
2

1,860

1,862

 
31

62,257

62,288

Total
$
2,235

$
51,558

$
53,793

 
$
38,059

$
5,380,175

$
5,418,234

 
 
December 31, 2015
 
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
$
—

$
15,043

$
15,043

 
$
12,661

$
2,153,942

$
2,166,603

Commercial and industrial
—

10,853

10,853

 
14,417

1,242,413

1,256,830

Commercial construction
3

12,622

12,625

 
11,498

401,946

413,444

Consumer real estate
32

8,368

8,400

 
6,961

1,109,835

1,116,796

Other consumer
2

1,224

1,226

 
113

73,826

73,939

Total
$
37

$
48,110

$
48,147

 
$
45,650

$
4,981,962

$
5,027,612

 
 
September 30, 2016

 
December 31, 2015

Ratio of net charge-offs to average loans outstanding
0.17
%
* 
0.22
%
Allowance for loan losses as a percentage of total loans
0.99
%
 
0.96
%
Allowance for loan losses as a percentage of originated loans
1.11
%
 
1.10
%
Allowance for loan losses to nonperforming loans
133
%

136
%
* Annualized
The ALL was $53.8 million, or 0.99 percent of total portfolio loans and 1.11 percent of originated loans at September 30, 2016 compared to $48.1 million, or 0.96 percent of total portfolio loans and 1.10 percent of originated loans at December 31, 2015. Originated loans excludes acquired loans of $569.5 million as of September 30, 2016 related to the Merger.
The increase in the ALL of $5.7 million was primarily due to an increase in specific reserves for loans individually evaluated for impairment and loan growth. The increase in specific reserves related to a $4.2 million C&I relationship that became impaired during the three months ended March 31, 2016 requiring a $2.2 million specific reserve. Impaired loans decreased $7.6 million, or 16.6 percent, from December 31, 2015 to $38.1 million at September 30, 2016. The decrease was primarily due to loan pay-offs. The reserve for loans collectively evaluated for impairment increased at September 30, 2016 compared to December 31, 2015 primarily due to loan growth.
Net loan charge-offs were $6.7 million for the nine months ended September 30, 2016, which primarily related to a $4.3 million C&I loan requiring a $2.1 million charge-off and a $4.7 million CRE loan requiring a $2.4 million charge-off. Commercial special mention, substandard and doubtful loans at September 30, 2016 increased by $14.8 million to $198.3 million compared to $183.5 million at December 31, 2015.
We individually evaluate all substandard and nonaccrual commercial loans greater than $0.5 million for impairment. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the 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 primarily utilize fair market value of the collateral; however, we also use discounted cash flow when warranted.

57
Table of Contents

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

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. 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.
An accruing loan that is modified into a TDR can remain in accrual status if, based on a current credit analysis, collection of principal and interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical repayment performance for a reasonable period before the modification. All TDRs are considered to be impaired loans and will be reported as impaired loans for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is 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. 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.
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 given to the borrower is considered to be lower than the current market rate for new debt with similar risk 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 due to the long extension, resulting in payment delay as well as the rate being lower than current market rate for new debt with similar risk. The loan will be reported as a nonaccrual TDR and an impaired loan. 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 because 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.
TDRs decreased $3.6 million to $28.0 million at September 30, 2016 compared to $31.6 million at December 31, 2015. The decrease is primarily due to principal reductions and charge-offs of $17.2 million offset by new TDRs of $13.6 million. The $17.2 million of principal reductions and charge-offs included $10.5 million of loan payoffs from four commercial relationships. Total TDRs of $28.0 million at September 30, 2016 included $12.9 million, or 46.1 percent, that were accruing and $15.1 million, or 53.9 percent, that were nonaccrual.
Our 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.

58
Table of Contents

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

Our allowance for lending-related commitments is determined using a methodology similar to that used for the ALL. Amounts are added to the allowance for lending-related commitments by a charge to current earnings through noninterest expense. The reserve is calculated by applying historical loss rates to unfunded commitments and considering qualitative factors. The balance in the allowance for unfunded loan commitments was $2.6 million at September 30, 2016 compared to $2.5 million at December 31, 2015. The increase primarily related to an increase in the balance of unfunded commitments. The allowance for unfunded commitments is included in other liabilities in the Consolidated Balance Sheets.
Nonperforming assets consist of nonaccrual loans, nonaccrual TDRs and OREO. The following table summarizes nonperforming assets for the dates presented:
(dollars in thousands)
September 30, 2016

December 31, 2015

$ Change

Nonaccrual Loans
 
 
 
Commercial real estate
$
6,685

$
5,171

$
1,514

Commercial and industrial
4,883

7,709

(2,826
)
Commercial construction
5,661

7,488

(1,827
)
Residential mortgage
6,152

4,964

1,188

Home equity
1,982

2,379

(397
)
Installment and other consumer
35

12

23

Consumer construction
—

—

—

Total Nonaccrual Loans
25,398

27,723

(2,325
)
Nonaccrual Troubled Debt Restructurings
 


Commercial real estate
866

3,548

(2,682
)
Commercial and industrial
7,007

1,570

5,437

Commercial construction
992

1,265

(273
)
Residential mortgage
5,248

665

4,583

Home equity
973

523

450

Installment and other consumer
9

88

(79
)
Total Nonaccrual Troubled Debt Restructurings
15,095

7,659

7,436

Total Nonaccrual Loans
40,493

35,382

5,111

OREO
512

354

158

Total Nonperforming Assets
$
41,005

$
35,736

$
5,269

 
 
 
 
Asset Quality Ratios:
 
 
 
Nonperforming loans as a percent of total loans
0.75
%
0.70
%
 
Nonperforming assets as a percent of total loans plus OREO
0.76
%
0.71
%
 
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.
Nonperforming assets, or NPAs, increased $5.3 million to $41.0 million at September 30, 2016 compared to $35.7 million at December 31, 2015. The increase in NPAs was due to new nonperforming loans of approximately $21.7 million which were offset by $16.4 million of principal reductions and loan charge-offs. The increase in new nonperforming loans was primarily the result of credit deterioration in the acquired portfolio experienced since the Merger of $15.4 million and in one originated loan relationship of $4.4 million.

59
Table of Contents

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

Deposits
(dollars in thousands)
September 30, 2016

 
December 31, 2015

 
$ Change

Noninterest-bearing demand
$
1,232,469

 
$
1,227,766

 
$
4,703

Interest-bearing demand
649,610

 
586,936

 
62,674

Money market
557,940

 
384,725

 
173,215

Savings
1,026,234

 
1,061,265

 
(35,031
)
Certificates of deposit
1,374,906

 
1,197,030

 
177,876

Brokered deposits
304,272

 
418,889

 
(114,617
)
Total Deposits
$
5,145,431

 
$
4,876,611

 
$
268,820

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. Total deposits at September 30, 2016 increased $268.8 million, or 5.5 percent, primarily in CDs, money market and interest-bearing demand accounts. CDs and money market accounts increased due to sales efforts and rate promotions offered during 2016. Overall, our deposits, excluding brokered deposits, increased by $383.4 million, or 8.6 percent, from December 31, 2015. Our brokered deposits decreased $114.6 million compared to December 31, 2015. Brokered deposits consist of CDs, money market, and interest-bearing demand accounts and are an additional source of funds utilized by the ALCO as a way to diversify funding sources, as well as manage our funding costs and structure. The decrease in brokered deposits was primarily due to utilization of short-term borrowings to fund asset growth.
Borrowings
(dollars in thousands)
September 30, 2016

 
December 31, 2015

 
$ Change

Securities sold under repurchase agreements
$
40,949

 
$
62,086

 
$
(21,137
)
Short-term borrowings
565,000

 
356,000

 
209,000

Long-term borrowings
15,303

 
117,043

 
(101,740
)
Junior subordinated debt securities
45,619

 
45,619

 
—

Total Borrowings
$
666,871

 
$
580,748

 
$
86,123

Borrowings are an additional source of funding for us. Total borrowings increased by $86.1 million from December 31, 2015 to support our asset growth. The increase in short-term borrowings and decrease in long-term borrowings was partially due to a $100 million long-term borrowing maturity in May 2016 that was replaced by short-term borrowings. Additional short-term borrowings were used to support our asset growth.
Information pertaining to short-term borrowings is summarized in the tables below at and for the nine and twelve month periods ended September 30, 2016 and December 31, 2015. 
 
Securities Sold Under Repurchase Agreements
(dollars in thousands)
September 30, 2016
 
December 31, 2015
Balance at the period end
$
40,949

 
$
62,086

Average balance during the period
53,858

 
44,394

Average interest rate during the period
0.01
%
 
0.01
%
Maximum month-end balance during the period
$
68,216

 
$
62,086

Average interest rate at the period end
0.01
%
 
0.01
%
 
 
 
 
 
Short-Term Borrowings
(dollars in thousands)
September 30, 2016
 
December 31, 2015
Balance at the period end
$
565,000

 
$
356,000

Average balance during the period
385,394

 
257,117

Average interest rate during the period
0.64
%
 
0.36
%
Maximum month-end balance during the period
$
565,000

 
$
356,000

Average interest rate at the period end
0.60
%
 
0.52
%

60
Table of Contents

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

Information pertaining to long-term borrowings is summarized in the tables below at and for the nine and twelve month periods ended September 30, 2016 and December 31, 2015.
 
Long-Term Borrowings
(dollars in thousands)
September 30, 2016
 
December 31, 2015
Balance at the period end
$
15,303

 
$
117,043

Average balance during the period
62,109

 
83,648

Average interest rate during the period
1.21
%
 
0.94
%
Maximum month-end balance during the period
$
116,852

 
$
118,432

Average interest rate at the period end
2.91
%
 
0.81
%
 
 
 
 
 
Junior Subordinated Debt Securities
(dollars in thousands)
September 30, 2016
 
December 31, 2015
Balance at the period end
$
45,619

 
$
45,619

Average balance during the period
45,619

 
47,071

Average interest rate during the period
3.08
%
 
2.82
%
Maximum month-end balance during the period
$
45,619

 
$
45,619

Average interest rate at the period end
3.11
%
 
2.89
%
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. 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 define graduated risk tolerance levels. 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 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 Item 2, MD&A, for additional discussion on deposits. Although deposits are the primary source of funds, we have identified various other funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified. Additional funding sources accessible to S&T include borrowing availability at the FHLB of Pittsburgh, Federal Funds lines with other financial institutions, the brokered deposit market, and borrowing availability through the Federal Reserve Borrower-In-Custody program.
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 September 30, 2016, S&T had $437.6 million in highly liquid assets, which consisted of $68.3 million in interest-bearing deposits with banks, $357.6 million in unpledged securities and $11.7 million in loans held for sale. The highly liquid assets to total assets resulted in an asset liquidity ratio of 6.5 percent at September 30, 2016. Also, at September 30, 2016, S&T had a remaining borrowing availability of $1.4 billion with the FHLB of Pittsburgh. Refer to Note 9 Borrowings in the Notes to Consolidated Financial Statements, and the Borrowing section of Item 2, MD&A, for more details.

61
Table of Contents

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

The following summarizes capital amounts and ratios for S&T and S&T Bank for the dates presented:
(dollars in thousands)
Adequately
Capitalized
Well-
Capitalized
 
September 30, 2016
 
December 31, 2015
 
Amount
Ratio
 
Amount
Ratio
S&T Bancorp, Inc.
 
 
 
 
 
 
 
 
Tier 1 leverage
4.00
%
5.00
%
 
$
570,620

9.02
%
 
$
535,234

8.96
%
Common equity tier 1 to risk-weighted assets
4.50
%
6.50
%
 
550,620

10.01
%
 
515,234

9.77
%
Tier 1 capital to risk-weighted assets
6.00
%
8.00
%
 
570,620

10.37
%
 
535,234

10.15
%
Total capital to risk-weighted assets
8.00
%
10.00
%
 
653,296

11.87
%
 
611,859

11.60
%
S&T Bank
 
 
 
 
 
 
 
 
Tier 1 leverage
4.00
%
5.00
%
 
$
532,761

8.45
%
 
$
502,114

8.43
%
Common equity tier 1 to risk-weighted assets
4.50
%
6.50
%
 
532,761

9.72
%
 
502,114

9.55
%
Tier 1 capital to risk-weighted assets
6.00
%
8.00
%
 
532,761

9.72
%
 
502,114

9.55
%
Total capital to risk-weighted assets
8.00
%
10.00
%
 
614,212

11.20
%
 
577,824

11.00
%
In October 2015, we filed a new shelf registration statement on Form S-3 under the Securities Act of 1933 as amended, with the SEC, to replace the prior shelf registration statement that was due to expire. The new shelf registration statement allows for the issuance 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 September 30, 2016, we had not issued any securities pursuant to the new 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 enhancing 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 the 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 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. An 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 analysis 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 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.

62
Table of Contents

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

The table below reflects the rate shock analyses and EVE analysis results. Both are in the minimal risk tolerance level.
 
September 30, 2016
December 31, 2015
Change in Interest Rate (basis points)
% Change in Pretax
Net Interest Income

% Change in
EVE

% Change in Pretax
Net Interest Income

% Change in
EVE

+300
5.9

3.3

5.5

(0.8
)
+200
3.9

5.4

3.3

1.7

+100
2.1

5.7

1.6

2.3

-100
(4.3
)
(13.4
)
(5.1
)
(11.1
)
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.
Our rate shock analyses indicate that there was an improvement in the percent change in pretax net interest income for our rates up and rates down shock scenarios when comparing September 30, 2016 to December 31, 2015. The improvement is mainly a result of an increase in variable rate loans and certificates of deposit repricing.
When comparing the EVE results for September 30, 2016 and December 31, 2015 the percent change to EVE has improved in the rates up shock scenarios and decreased in the rate down shock scenario. The percent change to EVE in our rate shock scenarios is mainly attributed to the change in value of our core deposits.
In addition to rate shocks and EVE analyses, we perform a market risk stress test at least 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 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 September 30, 2016. 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.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2016, 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.

63
Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

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, 2015, as filed with the SEC on February 23, 2016.
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

64
Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

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 September 30, 2016 is formatted in eXtensible Business Reporting Language (XBRL): (i) Unaudited Consolidated Balance Sheet at September 30, 2016 and Audited Consolidated Balance Sheet at December 31, 2015, (ii) Unaudited Consolidated Statements of Comprehensive Income for the Three and Nine Months ended September 30, 2016 and 2015, (iii) Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months ended September 30, 2016 and 2015, (iv) Unaudited Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2016 and 2015 and (v) Notes to Unaudited Consolidated Financial Statements.


65

Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

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: November 2, 2016
/s/ Mark Kochvar
 
Mark Kochvar
Senior Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Signatory)


66