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2018-03-19 iso4217:USD iso4217:USD xbrli:shares stba:branch stba:lease xbrli:pure xbrli:shares stba:security stba:loan
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________________
FORM 10-Q
______________________________________ 
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $2.50 par value
STBA
The NASDAQ Stock Market LLC
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  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 


Large accelerated filer
☒
Accelerated filer
☐
 
 
 
 
Non-accelerated filer
☐ 
Smaller reporting company
☐
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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 - 34,309,170 shares as of July 30, 2019

Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES

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


1
Table of Contents

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



 
June 30, 2019
 
December 31, 2018
(dollars in thousands, except per share data)
(Unaudited)
 
(Audited)
ASSETS
 
 
 
 
 
Cash and due from banks, including interest-bearing deposits of $62,042 and $82,740 at June 30, 2019 and December 31, 2018
 
$
122,876

 
 
$
155,489

Securities, at fair value
 
668,588

 
 
684,872

Loans held for sale
 
8,135

 
 
2,371

Portfolio loans, net of unearned income
 
6,033,200

 
 
5,946,648

Allowance for loan losses
 
(61,479
)
 
 
(60,996
)
Portfolio loans, net
 
5,971,721

 
 
5,885,652

Bank owned life insurance
 
74,906

 
 
73,900

Premises and equipment, net
 
41,688

 
 
41,730

Federal Home Loan Bank and other restricted stock, at cost
 
22,491

 
 
29,435

Goodwill
 
287,446

 
 
287,446

Other intangible assets, net
 
2,255

 
 
2,601

Other assets
 
134,499

 
 
88,725

Total Assets
 
$
7,334,605

 
 
$
7,252,221

LIABILITIES
 
 
 
 
 
Deposits:
 
 
 
 
 
Noninterest-bearing demand
 
$
1,462,386

 
 
$
1,421,156

Interest-bearing demand
 
549,663

 
 
573,693

Money market
 
1,742,334

 
 
1,482,065

Savings
 
754,062

 
 
784,970

Certificates of deposit
 
1,348,255

 
 
1,412,038

Total Deposits
 
5,856,700

 
 
5,673,922

Securities sold under repurchase agreements
 
14,154

 
 
18,383

Short-term borrowings
 
295,000

 
 
470,000

Long-term borrowings
 
69,791

 
 
70,314

Junior subordinated debt securities
 
45,619

 
 
45,619

Other liabilities
 
88,388

 
 
38,222

Total Liabilities
 
6,369,652

 
 
6,316,460

SHAREHOLDERS’ EQUITY
 
 
 
 
 
Common stock ($2.50 par value)
Authorized—50,000,000 shares
Issued—36,130,480 shares at June 30, 2019 and at December 31, 2018
Outstanding— 34,330,338 shares at June 30, 2019 and 34,683,874 shares at December 31, 2018
 
90,326

 
 
90,326

Additional paid-in capital
 
211,325

 
 
210,345

Retained earnings
 
730,577

 
 
701,819

Accumulated other comprehensive loss
 
(9,519
)
 
 
(23,107
)
Treasury stock (1,800,142 shares at June 30, 2019 and 1,446,606 shares at December 31, 2018, at cost)
 
(57,756
)
 
 
(43,622
)
Total Shareholders’ Equity
 
964,953

 
 
935,761

Total Liabilities and Shareholders’ Equity
 
$
7,334,605

 
 
$
7,252,221

See Notes to Consolidated Financial Statements

2
Table of Contents

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands, except per share data)
2019
 
2018
 
2019
 
2018
INTEREST AND DIVIDEND INCOME
 
 
 
 
 
 
 
 
 
 
 
Loans, including fees
 
$
74,728

 
 
$
66,610

 
 
$
148,120

 
 
$
129,665

Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
3,647

 
 
3,519

 
 
7,437

 
 
6,948

Tax-exempt
 
834

 
 
872

 
 
1,679

 
 
1,746

Dividends
 
415

 
 
580

 
 
978

 
 
1,251

Total Interest and Dividend Income
 
79,624

 
 
71,581

 
 
158,214

 
 
139,610

INTEREST EXPENSE
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
16,055

 
 
9,166

 
 
31,036

 
 
17,012

Borrowings and junior subordinated debt securities
 
2,742

 
 
4,012

 
 
5,995

 
 
7,264

Total Interest Expense
 
18,797

 
 
13,178

 
 
37,031

 
 
24,276

NET INTEREST INCOME
 
60,827

 
 
58,403

 
 
121,183

 
 
115,334

Provision for loan losses
 
2,205

 
 
9,345

 
 
7,854

 
 
11,817

Net Interest Income After Provision for Loan Losses
 
58,622

 
 
49,058

 
 
113,329

 
 
103,517

NONINTEREST INCOME
 
 
 
 
 
 
 
 
 
 
 
Net gain on sale of securities
 
—

 
 
—

 
 
—

 
 
—

Debit and credit card
 
3,501

 
 
3,309

 
 
6,476

 
 
6,347

Service charges on deposit accounts
 
3,212

 
 
3,227

 
 
6,365

 
 
6,468

Wealth management
 
2,062

 
 
2,616

 
 
4,109

 
 
5,298

Mortgage banking
 
637

 
 
831

 
 
1,131

 
 
1,432

Gain on sale of a majority interest of insurance business
 
—

 
 
—

 
 
—

 
 
1,873

Other
 
3,489

 
 
2,268

 
 
6,182

 
 
4,626

Total Noninterest Income
 
12,901

 
 
12,251

 
 
24,263

 
 
26,044

NONINTEREST EXPENSE
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
20,290

 
 
18,611

 
 
41,199

 
 
37,426

Data processing and information technology
 
3,414

 
 
2,379

 
 
6,646

 
 
4,704

Net occupancy
 
2,949

 
 
2,804

 
 
5,986

 
 
5,677

Furniture, equipment and software
 
2,301

 
 
2,134

 
 
4,531

 
 
4,090

Other taxes
 
1,456

 
 
1,739

 
 
2,641

 
 
3,587

Marketing
 
1,310

 
 
1,190

 
 
2,452

 
 
1,892

Professional services and legal
 
1,145

 
 
888

 
 
2,329

 
 
1,939

FDIC insurance
 
695

 
 
739

 
 
1,211

 
 
1,847

Merger related expenses
 
618

 
 
—

 
 
618

 
 
—

Other
 
6,174

 
 
5,379

 
 
11,658

 
 
10,783

Total Noninterest Expense
 
40,352

 
 
35,863

 
 
79,271

 
 
71,945

Income Before Taxes
 
31,171

 
 
25,446

 
 
58,321



57,616

Provision for income taxes
 
5,070

 
 
4,010

 
 
9,292

 
 
10,017

Net Income
 
$
26,101

 
 
$
21,436

 
 
$
49,029

 
 
$
47,599

Earnings per share—basic
 
$
0.76

 
 
$
0.62

 
 
$
1.43

 
 
$
1.37

Earnings per share—diluted
 
$
0.76

 
 
$
0.61

 
 
$
1.43

 
 
$
1.36

Dividends declared per share
 
$
0.27

 
 
$
0.25

 
 
$
0.54

 
 
$
0.47

Comprehensive Income
 
$
33,513

 
 
$
20,444

 
 
$
62,617

 
 
$
35,081

See Notes to Consolidated Financial Statements

3
Table of Contents

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

 
For the three months ended June 30, 2018
(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 March 31, 2018
 
$
90,326

 
 
$
216,618

 
 
$
649,925

 
 
$
(29,953
)
 
 
$
(31,509
)
 
 
$
895,407

Net income for the three months ended June 30, 2018
 
—

 
 
—

 
 
21,436

 
 
—

 
 
—

 
 
21,436

Other comprehensive income (loss), net of tax
 
—

 
 
—

 
 
—

 
 
(1,256
)
 
 
—

 
 
(1,256
)
Reclassification of tax effects from the Tax Act (1)
 
—

 
 
—

 
 
(264
)
 
 
264

 
 
—

 
 
—

Cash dividends declared ($0.25 per share)
 
—

 
 
—

 
 
(8,722
)
 
 
—

 
 
—

 
 
(8,722
)
Treasury stock issued for restricted awards (9,443 shares, net of no forfeitures)
 
—

 
 
—

 
 
(263
)
 
 
—

 
 
264

 
 
1

Recognition of restricted stock compensation expense
 
—

 
 
267

 
 
—

 
 
—

 
 
—

 
 
267

Balance at June 30, 2018
 
$
90,326

 
 
$
216,885

 
 
$
662,112

 
 
$
(30,945
)
 
 
$
(31,245
)
 
 
$
907,133

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended June 30, 2019
(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 March 31, 2019
 
$
90,326

 
 
$
210,949

 
 
$
716,078

 
 
$
(16,931
)
 
 
$
(57,266
)
 
 
$
943,156

Net Income for the three months ended June 30, 2019
 
—

 
 
—

 
 
26,101

 
 
—

 
 
—

 
 
26,101

Other comprehensive income (loss), net of tax
 
—

 
 
—

 
 
—

 
 
7,412

 
 
—

 
 
7,412

Cash dividends declared ($0.27 per share)
 
—

 
 
—

 
 
(9,242
)
 
 
—

 
 
—

 
 
(9,242
)
Treasury stock issued for restricted stock awards (83,056 shares, net of forfeitures of 10,918 shares)
 
—

 
 
—

 
 
(2,360
)
 
 
—

 
 
2,345

 
 
(15
)
Repurchase of common stock (71,936 shares)
 
—

 
 
—

 
 
—

 
 
—

 
 
(2,835
)
 
 
(2,835
)
Recognition of restricted stock compensation expense
 
—

 
 
376

 
 
—

 
 
—

 
 
—

 
 
376

Balance at June 30, 2019
 
$
90,326

 
 
$
211,325

 
 
$
730,577

 
 
$
(9,519
)
 
 
$
(57,756
)
 
 
$
964,953

See Notes to Consolidated Financial Statements
(1)Reclassification due to the adoption of ASU No. 2018-02 related to funded status of pension.





4
Table of Contents

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

 
For the six months ended June 30, 2018
(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, 2018
 
$
90,326

 
 
$
216,106

 
 
$
628,107

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

Net income for the six months ended June 30, 2018
 
—

 
 
—

 
 
47,599

 
 
—

 
 
—

 
 
47,599

Other comprehensive income (loss), net of tax
 
—

 
 
—

 
 
—

 
 
(8,229
)
 
 
—

 
 
(8,229
)
Reclassification of tax effects from the Tax Act (1)
 
—

 
 
—

 
 
3,427

 
 
(3,427
)
 
 
—

 
 
—

Reclassification of net unrealized gains on equity securities (2)
 
—

 
 
—

 
 
862

 
 
(862
)
 
 
—

 
 
—

Cash dividends declared ($0.47 per share)
 
—

 
 
—

 
 
(16,391
)
 
 
—

 
 
—

 
 
(16,391
)
Treasury stock issued for restricted awards (75,608 shares, net of 37,592 forfeitures)
 
—

 
 
—

 
 
(1,492
)
 
 
—

 
 
836

 
 
(656
)
Recognition of restricted stock compensation expense
 
—

 
 
779

 
 
—

 
 
—

 
 
—

 
 
779

Balance at June 30, 2018
 
$
90,326

 
 
$
216,885

 
 
$
662,112

 
 
$
(30,945
)
 
 
$
(31,245
)
 
 
$
907,133

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the six months ended June 30, 2019
(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, 2019
 
$
90,326

 
 
$
210,345

 
 
$
701,819

 
 
$
(23,107
)
 
 
$
(43,622
)
 
 
$
935,761

Net Income for the six months ended June 30, 2019
 
—

 
 
—

 
 
49,029

 
 
—

 
 
—

 
 
49,029

Other comprehensive income (loss), net of tax
 
—

 
 
—

 
 
—

 
 
13,588

 
 
—

 
 
13,588

Impact of new lease standard
 
—

 
 
—

 
 
167

 
 
—

 
 
—

 
 
167

Cash dividends declared ($0.54 per share)
 
—

 
 
—

 
 
(18,559
)
 
 
—

 
 
—

 
 
(18,559
)
Treasury stock issued for restricted stock awards (83,056 shares, net of forfeitures of 50,752 shares)
 
—

 
 
—

 
 
(1,879
)
 
 
—

 
 
988

 
 
(891
)
Repurchase of common stock (385,840 shares)
 
—

 
 
—

 
 
—

 
 
—

 
 
(15,122
)
 
 
(15,122
)
Recognition of restricted stock compensation expense
 
—

 
 
980

 
 
—

 
 
—

 
 
—

 
 
980

Balance at June 30, 2019
 
$
90,326

 
 
$
211,325

 
 
$
730,577

 
 
$
(9,519
)
 
 
$
(57,756
)
 
 
$
964,953

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



5
Table of Contents

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

 
Six Months Ended June 30,
(dollars in thousands)
 
2019
 
 
2018
OPERATING ACTIVITIES
 
 
 
 
 
Net income
 
$
49,029

 
 
$
47,599

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Provision for loan losses
 
7,854

 
 
11,817

Net increase (decrease) in provision for unfunded loan commitments
 
208

 
 
(114
)
Net depreciation, amortization and accretion
 
2,872

 
 
2,174

Net amortization of discounts and premiums on securities
 
1,562

 
 
1,572

Stock-based compensation expense
 
980

 
 
779

Gain on the sale of mortgage loans, net
 
(683
)
 
 
(683
)
Gain on the sale of majority interest of insurance business
 
—

 
 
(1,873
)
Mortgage loans originated for sale
 
(38,720
)
 
 
(41,631
)
Proceeds from the sale of mortgage loans
 
33,639

 
 
42,998

Net change in:
 
 
 
 
 
Interest receivable
 
(1,235
)
 
 
(520
)
Interest payable
 
(1,582
)
 
 
699

Other assets
 
(11,006
)
 
 
(853
)
Other liabilities
 
15,978

 
 
2,529

Net Cash Provided by Operating Activities
 
58,896

 
 
64,493

INVESTING ACTIVITIES
 
 
 
 
 
Purchases of securities
 
(9,438
)
 
 
(54,481
)
Proceeds from maturities, prepayments and calls of securities
 
40,260

 
 
45,487

Net proceeds from sales (purchases) of Federal Home Loan Bank stock
 
6,944

 
 
(6,512
)
Net increase in loans
 
(95,691
)
 
 
(37,957
)
Proceeds from sale of loans not originated for resale
 
465

 
 
3,922

Purchases of premises and equipment
 
(2,559
)
 
 
(804
)
Proceeds from the sale of premises and equipment
 
9

 
 
110

Proceeds from the sale of majority interest of insurance business
 
—

 
 
4,540

Net Cash Used in Investing Activities
 
(60,010
)
 
 
(45,695
)
FINANCING ACTIVITIES
 
 
 
 
 
Net increase in core deposits
 
246,561

 
 
46,962

Net (decrease) in certificates of deposit
 
(63,736
)
 
 
(81,255
)
Net (decrease) in securities sold under repurchase agreements
 
(4,229
)
 
 
(5,437
)
Net (decrease) increase in short-term borrowings
 
(175,000
)
 
 
60,000

Repayments on long-term borrowings
 
(523
)
 
 
(1,239
)
Treasury shares issued-net
 
(891
)
 
 
(657
)
Cash dividends paid to common shareholders
 
(18,559
)
 
 
(16,391
)
Repurchase of common stock
 
(15,122
)
 
 
—

Net Cash (Used in) Provided by Financing Activities
 
(31,499
)
 
 
1,983

Net (decrease) increase in cash and cash equivalents
 
(32,613
)
 
 
20,781

Cash and cash equivalents at beginning of period
 
155,489

 
 
117,152

Cash and Cash Equivalents at End of Period
 
$
122,876

 
 
$
137,933

Supplemental Disclosures
 
 
 
 
 
Loans transferred to held for sale
 
$
—

 
 
$
3,922

Leased right-of-use operating assets and lease liabilities added to the balance sheet
 
$
37,263

 
 
$
—

Interest paid
 
$
38,612

 
 
$
23,576

Income taxes paid, net of refunds
 
$
4,557

 
 
$
11,103

Transfer net assets to investment in insurance company partnership
 
$
—

 
 
$
1,917

Transfers of loans to other real estate owned
 
$
215

 
 
$
2,841

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 the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission, or SEC, on February 21, 2019. In the opinion of management, the accompanying interim financial information reflects all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position and the results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.
On June 5, 2019, S&T and DNB Financial Corporation, or DNB, based in Downingtown, Pennsylvania with 14 branches in Chester, Delaware and Philadelphia counties and approximately $1.2 billion in assets as of March 31, 2019, entered into a definitive Agreement and Plan of Merger pursuant to which DNB will merge with and into S&T, with S&T continuing as the surviving entity. Under the terms of the Agreement and Plan of Merger, DNB shareholders will have the right to receive 1.22 shares of common stock, par value $2.50 per share, of S&T for each share of common stock, par value $1.00 per share, of DNB. Immediately following the merger of DNB and S&T, DNB’s wholly owned bank subsidiary, DNB First, National Association, will merge with and into S&T’s wholly owned bank subsidiary, S&T Bank, with S&T Bank as the surviving entity. The Agreement and Plan of Merger was unanimously approved by the Board of Directors of each of S&T and DNB. The transaction is expected to close in the fourth quarter of 2019, after satisfaction of customary closing conditions including regulatory approvals and approval of the shareholders of DNB.
On January 1, 2018, we sold a 70 percent majority interest in the assets of our wholly-owned subsidiary S&T Evergreen Insurance, LLC. We transferred our remaining 30 percent ownership interest in the net assets of S&T Evergreen Insurance, LLC to a new entity for a 30 percent ownership interest in a new insurance entity (see Note 15: Sale of a Majority Interest of Insurance Business). We use the equity method of accounting to recognize our partial ownership interest in the new entity.
Reclassification
Amounts in prior period financial statements and footnotes are reclassified whenever necessary to conform to the current period presentation. Reclassifications had no effect on our results of operations or financial condition.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
Recently Adopted Accounting Standards Updates, or ASU or Update
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 Financial Accounting Standards Board, or FASB, established ASC Topic 842, by issuing ASU No. 2016-02, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use, or ROU, model that requires a lessee to recognize ROU assets and lease liabilities on the balance sheet. Leases will be classified as finance or operating leases, with classification affecting the pattern and classification of expense recognition in the statement of operations. We adopted the new standard on January 1,

7
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 1. BASIS OF PRESENTATION - continued

2019 (see Note 7: Right-of-use Assets and Lease Liabilities).
The new standard provides several optional practical expedients to elect in transition to the new lease guidance. We have elected the "package of practical expedients," which permit us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected the "use-of-hindsight" practical expedient which allows us to use hindsight in judgments that impact the lease term. We have also elected an accounting policy not to restate comparative periods upon adoption.
The most significant effects of adopting the new standard relate to the recognition of ROU assets and lease liabilities on our balance sheet for our real estate leases and providing significant new disclosures about our leasing activities. The carrying value of our ROU assets will be tested annually for impairment or more frequently if events or changes in circumstances indicate that an impairment might exist.
Upon adoption, we recognized additional finance lease liabilities of approximately $1.2 million and operating lease liabilities, net of deferred rent, of approximately $33.7 million based on the present value of the remaining minimum rental payments under current leasing standards for existing leases. We also recognized corresponding finance ROU assets of $1.2 million and operating ROU assets of approximately $33.4 million. The adoption had no material impact on the Consolidated Statements of Comprehensive Income.
The new standard also provides practical expedients for our ongoing lease accounting. We elected the short-term lease recognition exemption for all leases with terms of 12 months or less. This means that we will not recognize ROU assets or lease liabilities for existing short-term leases of those assets in transition. Beginning in 2019, we made changes to our disclosed lease recognition policies and practices, as well as to other related financial statement disclosures due to the adoption of this standard (See Note 7: Right-of-use Assets and Lease Liabilities).
Leases - Land Easement Practical Expedient for Transition to Topic 842
In January 2018, the FASB issued ASU No. 2018-01, Leases - Land Easement Practical Expedient for Transition to Topic 842. The amendments in this ASU permit an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that existed or expired before the entity's adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. We have one land easement lease that we previously accounted for under Topic 840; as such, this lease has been recognized as an operating lease under Topic 842. We adopted the amendments in this ASU in conjunction with the adoption of the new lease standard, ASU 2016-02.
Accounting Standards Issued But Not Yet Adopted
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU apply to an entity that is a customer in a hosting arrangement that is a service contract. These amendments relate to accounting for implementation costs (e.g., implementation, setup and other upfront costs.) These amendments require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which costs to capitalize and which costs to expense. These amendments require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This ASU is effective for annual and interim periods beginning after December 15, 2019. Early adoption of the amendments is permitted, including adoption in any interim period. We are evaluating the amendments in this ASU; however, we do not anticipate that these amendments will materially impact our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.

8
Table of Contents

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

NOTE 1. BASIS OF PRESENTATION - continued

Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU apply to all employers that sponsor defined benefit pension or other postretirement plans. These amendments remove certain disclosures from Topic 715-20 and require additional disclosures. The amendments in this ASU will require S&T to update our employee benefits disclosures beginning with our Form 10-Q for the period ended March 31, 2021. The amendments in this ASU will have no impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove certain disclosures from Topic 820, modify disclosures and/or require additional disclosures. The amendments in this Update will require us to change our Fair Value disclosures beginning with our Form 10-Q for the period ended March 31, 2020. The amendments in this ASU will have no impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment (Topic 350). The main objective of this ASU is to simplify the current requirements for testing goodwill for impairment by eliminating step two from the goodwill impairment test. The amendments are expected to reduce the complexity and costs associated with performing the goodwill impairment test, which could result in recording impairment charges sooner than under the current guidance. This Update is effective for any interim and annual impairment tests in reporting periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this ASU is not expected to have any impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments of this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The collective changes to the recognition and measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling have been universally referred to as CECL, or current expected credit loss, model. This Update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We did not adopt this ASU at its early adoption date.
We have created a CECL Committee to govern the implementation of these amendments consisting of key stakeholders from Credit Administration, Finance, Accounting, Risk Management and Internal Audit. We have engaged a third-party to assist us in developing our CECL methodology. We have made our decision on loan segmentation and currently are in the process of testing and validating two methodologies for calculating the quantitative component of our CECL allowance. Our next steps include developing the qualitative allowance framework, and designing internal controls and financial statement disclosures. We continue to evaluate the provisions of this ASU to determine the potential impact on our Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income.


9
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 2. EARNINGS PER SHARE
Diluted earnings per share is calculated using both the two-class and the treasury stock methods with the more dilutive method used to determine diluted earnings per share. The following table reconciles the numerators and denominators of basic and diluted earnings per share calculations for the periods presented.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands, except share and per share data)
2019
 
2018
 
2019
 
2018
Numerator for Earnings per Share—Basic:
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
26,101

 
 
$
21,436

 
 
$
49,029

 
 
$
47,599

Less: Income allocated to participating shares
 
71

 
 
62

 
 
137

 
 
141

Net Income Allocated to Shareholders
 
$
26,029

 
 
$
21,374

 
 
$
48,892

 
 
$
47,458

 
 
 
 
 
 
 
 
 
 
 
 
Numerator for Earnings per Share—Diluted:
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
26,101

 
 
$
21,436

 
 
$
49,029

 
 
$
47,599

Net Income Available to Shareholders
 
$
26,101

 
 
$
21,436

 
 
$
49,029

 
 
$
47,599

 
 
 
 
 
 
 
 
 
 
 
 
Denominators for Earnings per Share:
 
 
 
 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding—Basic
 
34,158,136

 
 
34,793,160

 
 
34,298,185

 
 
34,775,043

Add: Potentially dilutive shares
 
52,850

 
 
264,416

 
 
88,121

 
 
267,998

Denominator for Treasury Stock Method—Diluted
 
34,210,986

 
 
35,057,576

 
 
34,386,306

 
 
35,043,041

 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding—Basic
 
34,158,136

 
 
34,793,160

 
 
34,298,185

 
 
34,775,043

Add: Average participating shares outstanding
 
93,433

 
 
100,212

 
 
96,261

 
 
103,449

Denominator for Two-Class Method—Diluted
 
34,251,569

 
 
34,893,372

 
 
34,394,446

 
 
34,878,492

 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share—basic
 
$
0.76

 
 
$
0.62

 
 
$
1.43

 
 
$
1.37

Earnings per share—diluted
 
$
0.76

 
 
$
0.61

 
 
$
1.43

 
 
$
1.36

Restricted stock considered anti-dilutive excluded from potentially dilutive shares
 
5,183

 
 
—

 
 
44,153

 
 
2,047




10
Table of Contents

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



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

Equity Securities
Marketable equity securities that have an active, quotable market are classified as Level 1. Marketable equity securities that are quotable, but are thinly traded or inactive, are classified as Level 2. Marketable equity securities that are not readily traded and do not have a quotable market are classified as Level 3.

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

NOTE 3. FAIR VALUE MEASUREMENTS – continued

Deferred Compensation Plan Assets
We use quoted market prices to determine the fair value of our equity security assets. These securities are reported at fair value with the gains and losses included in noninterest income in our Consolidated Statements of Comprehensive Income. These assets are held in a deferred compensation plan and are invested in readily quoted mutual funds. Accordingly, these assets are classified as Level 1. Deferred compensation plan assets are reported in other assets in the Consolidated Balance Sheets.
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 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.

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

NOTE 3. FAIR VALUE MEASUREMENTS – continued

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. Since the valuation model includes significant unobservable inputs as listed above, MSRs are classified as Level 3. MSRs are reported in other assets in the Consolidated Balance Sheets and are amortized into mortgage banking income in the Consolidated Statements of Comprehensive Income.
Other Assets
We measure certain other assets at fair value on a nonrecurring basis. Fair value is based on the application of lower of cost or fair value accounting, or write-downs of individual assets. Valuation methodologies used to measure fair value are consistent with overall principles of fair value accounting and consistent with those described above.
Financial Instruments
In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and a willing seller engaged in an exchange transaction. Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities with respect to such financial instruments. For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments.
Cash and Cash Equivalents
The carrying amounts reported in the Consolidated Balance Sheets for cash and due from banks, including interest-bearing deposits, approximate fair value.
Loans
The fair value of variable rate loans that may reprice frequently at short-term market rates is based on carrying values adjusted for liquidity and credit risk. The fair value of variable rate loans that reprice at intervals of one year or longer, such as adjustable rate mortgage products, is estimated using discounted cash flow analyses that utilize interest rates currently being offered for similar loans and adjusted for liquidity and credit risk. The fair value of fixed rate loans is estimated using a discounted cash flow analysis that utilizes interest rates currently being offered for similar loans adjusted for liquidity and credit risk.
Bank Owned Life Insurance
Fair value approximates net cash surrender value of bank owned life insurance, or BOLI.
Federal Home Loan Bank, or FHLB, and Other Restricted Stock
It is not practical to determine the fair value of our FHLB and other restricted stock due to the restrictions placed on the transferability of these stocks; it is presented at carrying value.
Deposits
The fair values disclosed for deposits without defined maturities (e.g., noninterest and interest-bearing demand, money market and savings accounts) are by definition equal to the amounts payable on demand. The carrying amounts for variable rate, fixed-term time deposits approximate their fair values. Estimated fair values for fixed rate and other time deposits are based on discounted cash flow analysis using interest rates currently offered for time deposits with similar terms. The carrying amount of accrued interest approximates fair value.

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

NOTE 3. FAIR VALUE MEASUREMENTS – continued

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.
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.

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

NOTE 3. FAIR VALUE MEASUREMENTS – continued

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 June 30, 2019 and December 31, 2018. There were no transfers between Level 1 and Level 2 for items measured at fair value on a recurring basis during the periods presented.
 
June 30, 2019
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
ASSETS
 
 
 
 
 
 
 
Debt securities available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
—

 
$
10,007

 
$
—

 
$
10,007

Obligations of U.S. government corporations and agencies
—

 
129,773

 
—

 
129,773

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

 
150,405

 
—

 
150,405

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

 
20,936

 
—

 
20,936

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

 
235,292

 
—

 
235,292

Obligations of states and political subdivisions
—

 
117,624

 
—

 
117,624

Total Debt Securities Available-for-Sale
—

 
664,037

 
—

 
664,037

Marketable equity securities
—

 
4,551

 
—

 
4,551

Total Securities
—

 
668,588

 
—

 
668,588

Securities held in a deferred compensation plan
5,532

 
—

 
—

 
5,532

Derivative financial assets:
 
 
 
 
 
 
 
Interest rate swaps
—

 
22,688

 
—

 
22,688

Interest rate lock commitments
—

 
649

 
—

 
649

Total Assets
$
5,532

 
$
691,925

 
$
—

 
$
697,457

LIABILITIES
 
 
 
 
 
 
 
Derivative financial liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$
—

 
$
22,620

 
$
—

 
$
22,620

Forward sale contracts
—

 
105

 
—

 
105

Total Liabilities
$
—

 
$
22,725

 
$
—

 
$
22,725





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

NOTE 3. FAIR VALUE MEASUREMENTS – continued

 
 
December 31, 2018
(dollars in thousands)
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Debt securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
—

 
 
$
9,736

 
 
$
—

 
 
$
9,736

Obligations of U.S. government corporations and agencies
 
—

 
 
128,261

 
 
—

 
 
128,261

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

 
 
148,659

 
 
—

 
 
148,659

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

 
 
24,350

 
 
—

 
 
24,350

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

 
 
246,784

 
 
—

 
 
246,784

Obligations of states and political subdivisions
 
—

 
 
122,266

 
 
—

 
 
122,266

Total Debt Securities Available-for-Sale
 
—

 
 
680,056

 
 
—

 
 
680,056

Marketable equity securities
 
—

 
 
4,816

 
 
—

 
 
4,816

Total Securities
 
—

 
 
684,872

 
 
—

 
 
684,872

Securities held in a deferred compensation plan
 
4,725

 
 
—

 
 
—

 
 
4,725

Derivative financial assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
—

 
 
5,504

 
 
—

 
 
5,504

Interest rate lock commitments
 
—

 
 
251

 
 
—

 
 
251

Forward sale contracts
 
—

 
 
55

 
 
—

 
 
55

Total Assets
 
$
4,725

 
 
$
690,682

 
 
$
—

 
 
$
695,407

LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
Derivative financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
—

 
 
$
5,340

 
 
$
—

 
 
$
5,340

Total Liabilities
 
$
—

 
 
$
5,340

 
 
$
—

 
 
$
5,340



Assets Recorded at Fair Value on a Nonrecurring Basis

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 June 30, 2019 or December 31, 2018.
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:
 
 
June 30, 2019
 
 
December 31, 2018
(dollars in thousands)
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
ASSETS(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
—

 
 
$
—

 
 
$
30,456

 
 
$
30,456

 
 
$
—

 
 
$
—

 
 
$
21,441

 
 
$
21,441

Other real estate owned
 
—

 
 
—

 
 
1,353

 
 
1,353

 
 
—

 
 
—

 
 
2,826

 
 
2,826

Mortgage servicing rights
 
—

 
 
—

 
 
1,141

 
 
1,141

 
 
—

 
 
—

 
 
1,197

 
 
1,197

Total Assets
 
$
—

 
 
$
—

 
 
$
32,950

 
 
$
32,950



$
—

 
 
$
—

 
 
$
25,464

 
 
$
25,464

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


16
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 3. FAIR VALUE MEASUREMENTS – continued

The carrying values and fair values of our financial instruments at June 30, 2019 and December 31, 2018 are presented in the following tables:
 
Carrying
Value(1) 
 
Fair Value Measurements at June 30, 2019
(dollars in thousands)
 
Total
 
Level 1
 
Level 2
 
Level 3
ASSETS
 
 
 
 
 
 
 
 
 
Cash and due from banks, including interest-bearing deposits
$
122,876

 
$
122,876

 
$
122,876

 
$
—

 
$
—

Securities
668,588

 
668,588

 
—

 
668,588

 
—

Loans held for sale
8,135

 
8,135

 
—

 
—

 
8,135

Portfolio loans, net
5,971,721

 
5,836,651

 
—

 
—

 
5,836,651

Bank owned life insurance
74,906

 
74,906

 
—

 
74,906

 
—

FHLB and other restricted stock
22,491

 
22,491

 
—

 
—

 
22,491

Securities held in a deferred compensation plan
5,532

 
5,532

 
5,532

 
—

 
—

Mortgage servicing rights
4,214

 
4,728

 
—

 
—

 
4,728

Interest rate swaps
22,688

 
22,688

 
—

 
22,688

 
—

Interest rate lock commitments
649

 
649

 
—

 
649

 
—

LIABILITIES
 
 

 
 
 
 
 
 
Deposits
$
5,856,700

 
$
5,854,053

 
$
4,508,445

 
$
1,345,608

 
$
—

Securities sold under repurchase agreements
14,154

 
14,154

 
14,154

 
—

 
—

Short-term borrowings
295,000

 
295,000

 
295,000

 
—

 
—

Long-term borrowings
69,791

 
70,405

 
39,334

 
31,071

 
—

Junior subordinated debt securities
45,619

 
45,619

 
45,619

 
—

 
—

Interest rate swaps
22,620

 
22,620

 
—

 
22,620

 
—

Forward sales contracts
105

 
105

 
—

 
105

 
—

(1) As reported in the Consolidated Balance Sheets
 
 
 
 
 
 
 
 
 

 
Carrying
Value(1)
 
Fair Value Measurements at December 31, 2018
(dollars in thousands)
 
Total
 
Level 1
 
Level 2
 
Level 3
ASSETS
 
 
 
 
 
 
 
 
 
Cash and due from banks, including interest-bearing deposits
$
155,489

 
$
155,489

 
$
155,489

 
$
—

 
$
—

Securities
684,872

 
684,872

 
—

 
684,872

 
—

Loans held for sale
2,371

 
2,469

 
—

 
—

 
2,469

Portfolio loans, net
5,885,652

 
5,728,843

 
—

 
—

 
5,728,843

Bank owned life insurance
73,900

 
73,900

 
—

 
73,900

 
—

FHLB and other restricted stock
29,435

 
29,435

 
—

 
—

 
29,435

Securities held in a Deferred Compensation Plan
4,725

 
4,725

 
4,725

 
—

 
—

Mortgage servicing rights
4,464

 
5,181

 
—

 
—

 
5,181

Interest rate swaps
5,504

 
5,504

 
—

 
5,504

 
—

Interest rate lock commitments
251

 
251

 
—

 
251

 
—

Forward sale contracts
55

 
55

 
—

 
55

 
—

LIABILITIES
 
 
 
 
 
 
 
 
 
Deposits
$
5,673,922

 
$
5,662,193

 
$
4,261,884

 
$
1,400,309

 
$
—

Securities sold under repurchase agreements
18,383

 
18,383

 
18,383

 
—

 
—

Short-term borrowings
470,000

 
470,000

 
470,000

 
—

 
—

Long-term borrowings
70,314

 
70,578

 
38,610

 
31,968

 
—

Junior subordinated debt securities
45,619

 
45,619

 
45,619

 
—

 
—

Interest rate swaps
5,340

 
5,340

 
—

 
5,340

 
—

(1) As reported in the Consolidated Balance Sheets
 
 
 
 
 
 
 
 
 


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


NOTE 4. SECURITIES

The following table presents the fair values of our securities portfolio at the dates presented:
(dollars in thousands)
June 30, 2019
 
December 31, 2018
Debt securities available-for-sale
 
$
664,037

 
 
$
680,056

Marketable equity securities
 
4,551

 
 
4,816

Total Securities
 
$
668,588

 
 
$
684,872


Debt Securities Available-for-Sale
The following tables present the amortized cost and fair value of debt securities available-for-sale as of the dates presented:
 
June 30, 2019
 
December 31, 2018
(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
 
$
9,964

 
 
$
43

 
 
$
—

 
 
$
10,007

 
 
$
9,958

 
 
$
—

 
 
$
(222
)
 
 
$
9,736

Obligations of U.S. government corporations and agencies
 
128,260

 
 
1,532

 
 
(19
)
 
 
129,773

 
 
129,267

 
 
68

 
 
(1,074
)
 
 
128,261

Collateralized mortgage obligations of U.S. government corporations and agencies
 
147,692

 
 
3,029

 
 
(316
)
 
 
150,405

 
 
149,849

 
 
795

 
 
(1,985
)
 
 
148,659

Residential mortgage-backed securities of U.S. government corporations and agencies
 
20,704

 
 
289

 
 
(57
)
 
 
20,936

 
 
24,564

 
 
203

 
 
(417
)
 
 
24,350

Commercial mortgage-backed securities of U.S. government corporations and agencies
 
232,657

 
 
2,807

 
 
(172
)
 
 
235,292

 
 
251,660

 
 
—

 
 
(4,876
)
 
 
246,784

Obligations of states and political subdivisions
 
113,508

 
 
4,116

 
 
—

 
 
117,624

 
 
119,872

 
 
2,448

 
 
(54
)
 
 
122,266

Total Debt Securities Available-for-Sale
 
$
652,785

 
 
$
11,816

 
 
$
(564
)
 
 
$
664,037

 
 
$
685,170

 
 
$
3,514

 
 
$
(8,628
)
 
 
$
680,056



The following tables present the fair value and the age of gross unrealized losses on debt securities available-for-sale by investment category as of the dates presented:
 
June 30, 2019
 
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
—
 
—

 
—

 
3
 
24,932

 
(19
)
 
3
 
24,932

 
(19
)
Collateralized mortgage obligations of U.S. government corporations and agencies
1
 
3,613

 
(6
)
 
8
 
41,602

 
(310
)
 
9
 
45,215

 
(316
)
Residential mortgage-backed securities of U.S. government corporations and agencies
—
 
—

 
—

 
2
 
6,740

 
(57
)
 
2
 
6,740

 
(57
)
Commercial mortgage-backed securities of U.S. government corporations and agencies
—
 
—

 
—

 
5
 
48,119

 
(172
)
 
5
 
48,119

 
(172
)
Obligations of states and political subdivisions
—
 
—

 
—

 
—
 
—

 
—

 
—
 
—

 
—

Total Temporarily Impaired Debt Securities
1
 
$
3,613

 
$
(6
)
 
18
 
$
121,393

 
$
(558
)
 
19
 
$
125,006

 
$
(564
)



18
Table of Contents

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

NOTE 4. SECURITIES – continued

 
December 31, 2018
 
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
—
 
$
—

 
$
—

 
1
 
$
9,736

 
$
(222
)
 
1
 
$
9,736

 
$
(222
)
Obligations of U.S. government corporations and agencies
7
 
67,649

 
(613
)
 
6
 
35,760

 
(461
)
 
13
 
103,409

 
(1,074
)
Collateralized mortgage obligations of U.S. government corporations and agencies
2
 
12,495

 
(44
)
 
14
 
76,179

 
(1,941
)
 
16
 
88,674

 
(1,985
)
Residential mortgage-backed securities of U.S. government corporations and agencies
2
 
2,327

 
(45
)
 
3
 
9,241

 
(372
)
 
5
 
11,568

 
(417
)
Commercial mortgage-backed securities of U.S. government corporations and agencies
8
 
75,466

 
(1,032
)
 
19
 
171,318

 
(3,844
)
 
27
 
246,784

 
(4,876
)
Obligations of states and political subdivisions
2
 
9,902

 
(23
)
 
1
 
5,247

 
(31
)
 
3
 
15,149

 
(54
)
Total Temporarily Impaired Debt Securities
21
 
$
167,839

 
$
(1,757
)
 
44
 
$
307,481

 
$
(6,871
)
 
65
 
$
475,320

 
$
(8,628
)

We do not believe any individual unrealized loss as of June 30, 2019 represents an other than temporary impairment, or OTTI. At June 30, 2019 there were 19 debt securities in an unrealized loss position and at December 31, 2018, there were 65 debt securities in an unrealized loss position. The unrealized losses on debt securities were primarily attributable to changes in interest rates and not related to the credit quality of these issuers. All debt securities were determined to be investment grade and paying principal and interest according to the contractual terms of the security. We do not intend to sell and it is more likely than not that we will not be required to sell any of the securities in an unrealized loss position before recovery of their amortized cost.

19
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 4. SECURITIES – continued

The following table presents net unrealized gains and losses, net of tax, on debt securities available-for-sale included in accumulated other comprehensive income/(loss), for the periods presented:
 
June 30, 2019
 
December 31, 2018
(dollars in thousands)
Gross Unrealized Gains

 
Gross Unrealized Losses

 
Net Unrealized (Losses)/Gains

 
Gross Unrealized Gains

 
Gross Unrealized Losses

 
Net Unrealized Gains/(Losses)

Total unrealized gains/(losses) on debt securities available-for-sale
$
11,816

 
$
(564
)
 
$
11,252

 
$
3,514

 
$
(8,628
)
 
$
(5,114
)
Income tax (expense) benefit
(2,520
)
 
120

 
(2,400
)
 
(746
)
 
1,832

 
1,086

Net Unrealized Gains/(Losses), Net of Tax Included in Accumulated Other Comprehensive Income/(Loss)
$
9,296

 
$
(444
)
 
$
8,852

 
$
2,768

 
$
(6,796
)
 
$
(4,028
)
The amortized cost and fair value of debt securities available-for-sale at June 30, 2019 by contractual maturity are included in the table below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
June 30, 2019
(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
$
47,630

 
$
47,770

Due after one year through five years
122,824

 
124,741

Due after five years through ten years
63,472

 
66,144

Due after ten years
17,805

 
18,750

Debt Securities Available-for-Sale With Maturities
251,731

 
257,405

Collateralized mortgage obligations of U.S. government corporations and agencies
147,692

 
150,405

Residential mortgage-backed securities of U.S. government corporations and agencies
20,705

 
20,936

Commercial mortgage-backed securities of U.S. government corporations and agencies
232,657

 
235,291

Total Debt Securities Available-for-Sale
$
652,785

 
$
664,037


Debt securities with carrying values of $201.2 million at June 30, 2019 and $236.0 million at December 31, 2018 were pledged for various regulatory and legal requirements.
Marketable Equity Securities
The following table presents realized and unrealized net gains and losses for our marketable equity securities for the periods presented:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(dollars in thousands)
2019

 
2018

 
2019

 
2018

Marketable Equity Securities
 
 
 
 
 
 
 
Net market (losses)/gains recognized
$
52

 
$
230

 
$
(266
)
 
$
282

Less: Net gains recognized for equity securities sold
—

 
—

 
—

 
—

Unrealized (Losses)/Gains on Equity Securities Still Held
$
52

 
$
230

 
$
(266
)
 
$
282


Prior to January 1, 2018, net unrealized gains and losses, net of tax, on marketable equity securities were included in AOCI for the periods presented. Net unrealized gains and losses, net of tax, on marketable equity securities of $0.9 million were reclassified from AOCI to retained earnings at January 1, 2018. As of January 1, 2018, gains and losses on marketable equity securities are included in other noninterest income on the Consolidated Statements of Comprehensive Income.

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



NOTE 5. LOANS AND LOANS HELD FOR SALE

Loans are presented net of unearned income of $5.3 million at June 30, 2019 and December 31, 2018. The following table indicates the composition of loans as of the dates presented:
(dollars in thousands)
June 30, 2019
 
December 31, 2018
Commercial
 
 
 
Commercial real estate
$
2,906,895

 
$
2,921,832

Commercial and industrial
1,559,727

 
1,493,416

Commercial construction
267,203

 
257,197

Total Commercial Loans
4,733,825

 
4,672,445

Consumer
 
 
 
Residential mortgage
751,355

 
726,679

Home equity
464,195

 
471,562

Installment and other consumer
72,041

 
67,546

Consumer construction
11,784

 
8,416

Total Consumer Loans
1,299,375

 
1,274,203

Total Portfolio Loans
6,033,200

 
5,946,648

Loans held for sale
8,135

 
2,371

Total Loans
$
6,041,335

 
$
5,949,019



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 mitigate 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 78.5 percent of total portfolio loans at June 30, 2019 and 78.6 percent at December 31, 2018. Within our commercial portfolio, the Commercial Real Estate, or CRE, and Commercial Construction portfolios combined comprised $3.2 billion or 67 percent of total commercial loans at June 30, 2019 and $3.2 billion or 68 percent of total commercial loans at December 31, 2018 and 53 percent of total portfolio loans at both June 30, 2019 and December 31, 2018. Further segmentation of the CRE and Commercial Construction portfolios by collateral type reveals no concentration in excess of 14 percent of both total CRE and Commercial Construction loans at both June 30, 2019 and December 31, 2018.
We lend primarily in Pennsylvania and the contiguous states of Ohio, New York, West Virginia and Maryland. The majority of our commercial and consumer loans are made to businesses and individuals in this geography, resulting in a 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 and information supplied by our customers. We also use subscription services for additional geographic and industry specific information. Our CRE and Commercial Construction portfolios have exposure outside of this geography of 6.4 percent of the combined portfolios and 3.4 percent of total portfolio loans at June 30, 2019. This compares to 5.4 percent of the combined portfolios and 2.9 percent of total portfolio loans at December 31, 2018.
We individually evaluate all substandard commercial loans that have experienced a forbearance or change in terms agreement, and 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 troubled debt restructurings, or 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 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.

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

NOTE 5. LOANS AND LOANS HELD FOR SALE - continued

The following table summarizes restructured loans as of the dates presented:
 
June 30, 2019
 
December 31, 2018
(dollars in thousands)
Performing
TDRs
 
Nonperforming
TDRs
 
Total
TDRs
 
Performing
TDRs
 
Nonperforming
TDRs
 
Total
TDRs
Commercial real estate
$
3,519

 
$
5,600

 
$
9,119

 
$
2,054

 
$
1,139

 
$
3,193

Commercial and industrial
9,671

 
980

 
10,651

 
7,026

 
6,646

 
13,672

Commercial construction
1,913

 
406

 
2,319

 
1,912

 
406

 
2,318

Residential mortgage
1,997

 
1,497

 
3,494

 
2,214

 
1,543

 
3,757

Home equity
3,577

 
1,458

 
5,035

 
3,568

 
1,349

 
4,917

Installment and other consumer
13

 
3

 
16

 
12

 
5

 
17

Total
$
20,690

 
$
9,944

 
$
30,634

 
$
16,786

 
$
11,088

 
$
27,874


There were three TDRs totaling $0.1 million that returned to accruing status during the three months ended June 30, 2019 and four TDRs totaling $1.8 million that returned to accruing status during the six months ended June 30, 2019. There were no TDRs that returned to accruing status during the three and six months ended June 30, 2018.

22
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 5. LOANS AND LOANS HELD FOR SALE - continued

The following tables present the restructured loans by loan segment and by type of concession for the three and six months ended June 30, 2019 and 2018:
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
(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
Totals by Loan Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maturity date extension
1

 
$
1,322

 
$
1,311

 
$
(11
)
 
—

 
$
—

 
$
—

 
$
—

Maturity date extension and interest rate reduction
1

 
151

 
148

 
(3
)
 
—

 
—

 
—

 
—

Principal forgiveness
1

 
4,690

 
4,631

 
(59
)
 
—

 
—

 
—

 
—

Total Commercial Real Estate
3

 
6,163

 
6,090

 
(73
)
 
—

 
—

 
—

 
—

Commercial and Industrial
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Principal deferral
—

 
—

 
—

 
—

 
3

 
4,815

 
5,034

 
219

Total Commercial and Industrial
—

 
—

 
—

 
—

 
3

 
4,815

 
5,034

 
219

Residential Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Chapter 7 bankruptcy(2)
2

 
116

 
115

 
(1
)
 
1

 
41

 
41

 
—

Total Residential Mortgage
2

 
116

 
115

 
(1
)
 
1

 
41

 
41

 
—

Home equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Chapter 7 bankruptcy(2)
6

 
107

 
105

 
(2
)
 
2

 
26

 
26

 
—

Interest rate reduction
1

 
109

 
108

 
(1
)
 
—

 
—

 
—

 
—

Maturity date extension and interest rate reduction
—

 
—

 
—

 
—

 
2

 
47

 
47

 
—

Total Home Equity
7

 
216

 
214

 
(3
)
 
4

 
73

 
73

 
—

Installment and Other Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Chapter 7 bankruptcy(2)
2

 
9

 
9

 
—

 
2

 
8

 
7

 
(1
)
Total Installment and Other Consumer
2

 
$
9

 
$
9

 
$
—

 
2

 
$
8

 
$
7

 
$
(1
)
Totals by Concession Type
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Maturity date extension
1


$
1,322


$
1,311


$
(11
)

—


$
—


$
—

 
$
—

Chapter 7 bankruptcy(2)
10


232


229

 
(3
)
 
5


75


74

 
(1
)
Maturity date extension and interest rate reduction
1


151


148


(3
)

2


47


47

 
—

Principal deferral
—


—


—


—


3


4,815


5,034

 
219

Interest rate reduction
1

 
109

 
108

 
—

 
—


—


—


—

Principal forgiveness
1


4,690


4,631


(59
)

—


—


—

 
—

Total
14

 
$
6,504

 
$
6,427

 
$
(76
)
 
10

 
$
4,937

 
$
5,155

 
$
218

(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.




23
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 5. LOANS AND LOANS HELD FOR SALE - continued

 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
(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
 
Number of
Loans
 
Pre-Modification
Outstanding
Recorded
Investment(1)
 
Post-Modification
Outstanding
Recorded
Investment(1)
Totals by Loan Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maturity date extension
1

 
$
1,322

 
$
1,311

 
$
(11
)
 
—

 
$
—

 
$
—

 
$
—

Maturity date extension and interest rate reduction
1

 
151

 
148

 
(3
)
 
—

 
—

 
—

 
—

Principal forgiveness
1

 
4,690

 
4,631

 
(59
)
 
—

 
—

 
—

 
—

Total Commercial Real Estate
3

 
6,163

 
6,090

 
(73
)
 
—

 
—

 
—

 
—

Commercial and Industrial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maturity date extension
—

 
—

 
—

 
—

 
2

 
768

 
582

 
(186
)
Maturity date extension and interest rate reduction
1

 
4,751

 
4,529

 
(222
)
 
—

 
—

 
—

 
—

Principal deferral
—

 
—

 
—

 
—

 
3

 
4,815

 
5,034

 
219

Principal deferral and Maturity date extension
—

 
—

 
—

 
—

 
6

 
5,355

 
5,229

 
(126
)
Total Commercial and Industrial
1

 
4,751

 
4,529

 
(222
)
 
11

 
10,938

 
10,845

 
(93
)
Residential Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Chapter 7 bankruptcy(2)
3

 
166

 
163

 
(3
)
 
3

 
199

 
196

 
(3
)
Total Residential Mortgage
3

 
166

 
163

 
(3
)
 
3

 
199

 
196

 
(3
)
Home equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Chapter 7 bankruptcy(2)
13

 
298

 
268

 
(30
)
 
11

 
605

 
574

 
(31
)
Interest rate reduction
2

 
190

 
189

 
(1
)
 
—

 
—

 
—

 
—

Maturity date extension and interest rate reduction
—

 
—

 
—

 
—

 
2

 
47

 
47

 
—

Total Home Equity
15

 
488

 
457

 
(31
)
 
13

 
652

 
621

 
(31
)
Installment and Other Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Chapter 7 bankruptcy(2)
3

 
9

 
9

 
—

 
4

 
25

 
23

 
(2
)
Total Installment and Other Consumer
3

 
$
9

 
$
9

 
$
—

 
4

 
25

 
$
23

 
$
(2
)
Totals by Concession Type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maturity date extension
1

 
1,322

 
1,311

 
(11
)
 
2


768


582

 
(186
)
Maturity date extension and interest rate reduction
2

 
4,902

 
4,677

 
(225
)
 
2


47

 
47

 
—

Principal deferral
—

 
—

 
—

 
—

 
3


4,815


5,034

 
219

Principal deferral and Maturity date extension
—

 
—

 
—

 
—

 
6

 
5,355

 
5,229

 
(126
)
Chapter 7 bankruptcy(2)
19

 
473

 
440

 
(33
)
 
18


829


793

 
(36
)
Interest rate reduction
2

 
190

 
189

 
—

 
—


—


—

 
—

Principal forgiveness
1

 
4,690

 
4,631

 
(59
)
 
—

 
—

 
4,690

 
4,690

Total
25

 
$
11,577

 
$
11,248

 
$
(328
)
 
31

 
$
11,814

 
$
16,375

 
$
4,561

(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.




24
Table of Contents

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

NOTE 5. LOANS AND LOANS HELD FOR SALE - continued

As of June 30, 2019, we had 8 commitments to lend an additional $10.8 million on TDRs. Defaulted TDRs are defined as loans having a payment default of 90 days or more after the restructuring takes place. There were no TDRs that defaulted during the three and six months ended June 30, 2019 and 2018 that were restructured within the last 12 months prior to defaulting.
The following table is a summary of nonperforming assets as of the dates presented:
 
 
Nonperforming Assets
(dollars in thousands)
June 30, 2019
 
 
December 31, 2018
 
Nonperforming Assets
 
 
 
 
 
Nonaccrual loans
 
$
35,083

 
 
$
34,985

Nonaccrual TDRs
 
9,944

 
 
11,088

Total Nonaccrual Loans
 
45,027

 
 
46,073

OREO
 
1,495

 
 
3,092

Total Nonperforming Assets
 
$
46,522

 
 
$
49,165



NOTE 6. ALLOWANCE FOR LOAN LOSSES
We maintain an allowance for loan losses, or ALL, at a level determined to be adequate to absorb estimated probable credit losses inherent within the loan portfolio as of the balance sheet date. We develop and document a systematic ALL methodology based on the following portfolio segments: 1) Commercial Real Estate, or CRE, 2) Commercial and Industrial, or 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 and 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 and 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 of credit. 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.

25
Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 6. ALLOWANCE FOR LOAN LOSSES – continued

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, 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 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.
The following tables present the age analysis of past due loans segregated by class of loans as of the dates presented:
 
June 30, 2019
(dollars in thousands)
Current

 
30-59 Days
Past Due

 
60-89 Days
Past Due

 
Non - performing

 
Total Past
Due Loans

 
Total Loans

Commercial real estate
$
2,875,439

 
$
1,456

 
$
1,217

 
$
28,783

 
$
31,456

 
$
2,906,895

Commercial and industrial
1,554,081

 
606

 
910

 
4,130

 
5,646

 
1,559,727

Commercial construction
265,977

 
—

 
—

 
1,226

 
1,226

 
267,203

Residential mortgage
741,453

 
1,900

 
1,220

 
6,782

 
9,902

 
751,355

Home equity
457,296

 
2,555

 
264

 
4,081

 
6,900

 
464,195

Installment and other consumer
71,808

 
126

 
81

 
25

 
232

 
72,041

Consumer construction
11,784

 
—

 
—

 
—

 
—

 
11,784

Loans held for sale
8,135

 
—

 
—

 
—

 
—

 
8,135

Total
$
5,985,973

 
$
6,643

 
$
3,692

 
$
45,027

 
$
55,362

 
$
6,041,335


 
December 31, 2018
(dollars in thousands)
Current

 
30-59 Days
Past Due

 
60-89 Days
Past Due

 
Non - performing

 
Total Past
Due Loans

 
Total Loans

Commercial real estate
$
2,903,997

 
$
3,638

 
$
2,145

 
$
12,052

 
$
17,835

 
$
2,921,832

Commercial and industrial
1,482,473

 
1,000

 
983

 
8,960

 
10,943

 
1,493,416

Commercial construction
243,004

 
—

 
—

 
14,193

 
14,193

 
257,197

Residential mortgage
717,447

 
1,584

 
520

 
7,128

 
9,232

 
726,679

Home equity
465,152

 
2,103

 
609

 
3,698

 
6,410

 
471,562

Installment and other consumer
67,281

 
148

 
75

 
42

 
265

 
67,546

Consumer construction
8,416

 
—

 
—

 
—

 
—

 
8,416

Loans held for sale
2,371

 
—

 
—

 
—

 
—

 
2,371

Total
$
5,890,141

 
$
8,473

 
$
4,332

 
$
46,073

 
$
58,878

 
$
5,949,019


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.

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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 6. ALLOWANCE FOR LOAN LOSSES – continued

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.
The following tables present the recorded investment in commercial loan classes by internally assigned risk ratings as of the dates presented:
 
June 30, 2019
(dollars in thousands)
Commercial
Real Estate
% of
Total
 
Commercial
and Industrial
% of
Total
 
Commercial
Construction
% of
Total
 
Total
% of
Total
Pass
$
2,750,338

94.6
%
 
$
1,483,519

95.1
%
 
$
256,351

95.9
%
 
$
4,490,208

94.9
%
Special mention
63,993

2.2
%
 
34,527

2.2
%
 
7,189

2.7
%
 
105,708

2.2
%
Substandard
92,564

3.2
%
 
41,681

2.7
%
 
3,664

1.4
%
 
137,909

2.9
%
Total
$
2,906,895

100.0
%
 
$
1,559,727

100.0
%
 
$
267,203

100.0
%
 
$
4,733,825

100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
(dollars in thousands)
Commercial
Real Estate
% of
Total
 
Commercial
and Industrial
% of
Total
 
Commercial
Construction
% of
Total
 
Total
% of
Total
Pass
$
2,776,292

95.0
%
 
$
1,394,427

93.4
%
 
$
233,190

90.7
%
 
$
4,403,909

94.3
%
Special mention
54,627

1.9
%
 
25,368

1.7
%
 
7,349

2.8
%
 
87,344

1.8
%
Substandard
90,913

3.1
%
 
73,621

4.9
%
 
16,658

6.5
%
 
181,192

3.9
%
Total
$
2,921,832

100.0
%
 
$
1,493,416

100.0
%
 
$
257,197

100.0
%
 
$
4,672,445

100.0
%

Substandard loans decreased $43.3 million to $137.9 million at June 30, 2019 compared to $181.2 million at December 31, 2018 mainly due to loan pay-offs and upgrades of risk ratings. Special mention loans increased $18.4 million to $105.7 million at June 30, 2019 compared to $87.3 million at December 31, 2018 due to downgrades as a result of updated financial information.
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:
 
June 30, 2019
(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
$
744,573

99.1
%
 
$
460,114

99.1
%
 
$
72,016

100.0
%
 
$
11,784

100.0
%
 
$
1,288,487

99.2
%
Nonperforming
6,782

0.9
%
 
4,081

0.9
%
 
25

—
%
 
—

—
%
 
10,888

0.8
%
Total
$
751,355

100.0
%
 
$
464,195

100.0
%
 
$
72,041

100.0
%
 
$
11,784

100.0
%
 
$
1,299,375

100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
(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
$
719,551

99.0
%
 
$
467,864

99.2
%
 
$
67,504

99.9
%
 
$
8,416

100.0
%
 
$
1,263,335

99.1
%
Nonperforming
7,128

1.0
%
 
3,698

0.8
%
 
42

0.1
%
 
—

—
%
 
10,868

0.9
%
Total
$
726,679

100.0
%
 
$
471,562

100.0
%
 
$
67,546

100.0
%
 
$
8,416

100.0
%
 
$
1,274,203

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. A TDR 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 each TDR

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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 6. ALLOWANCE FOR LOAN LOSSES – continued

or other impaired loan, we conduct further analysis to determine the probable loss and assign a specific reserve to the loan if deemed appropriate.
The following table summarizes investments in loans considered to be impaired and related information on those impaired loans as of the dates presented:
 
June 30, 2019
 
December 31, 2018
(dollars in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
With a related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
7,703

 
$
7,703

 
$
1,530

 
$
7,733

 
$
7,733

 
$
1,295

Commercial and industrial
834

 
761

 
204

 
884

 
893

 
360

Commercial construction
490

 
489

 
157

 
489

 
489

 
87

Consumer real estate
666

 
666

 
307

 
15

 
14

 
10

Other consumer
13

 
14

 
14

 
11

 
12

 
11

Total with a Related Allowance Recorded
9,706

 
9,633

 
2,212

 
9,132

 
9,141

 
1,763

Without a related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
21,592

 
24,894

 
—

 
3,636

 
4,046

 
—

Commercial and industrial
9,817

 
12,550

 
—

 
12,788

 
14,452

 
—

Commercial construction
2,318

 
3,828

 
—

 
15,286

 
19,198

 
—

Consumer real estate
7,863

 
8,415

 
—

 
8,659

 
9,635

 
—

Other consumer
3

 
9

 
—

 
5

 
18

 
—

Total without a Related Allowance Recorded
41,593

 
49,696

 
—

 
40,374

 
47,349

 
—

Total:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
29,295

 
32,597

 
1,530

 
11,369

 
11,779

 
1,295

Commercial and industrial
10,651

 
13,311

 
204

 
13,672

 
15,345

 
360

Commercial construction
2,808

 
4,317

 
157

 
15,775

 
19,687

 
87

Consumer real estate
8,529

 
9,081

 
307

 
8,674

 
9,649

 
10

Other consumer
16

 
23

 
14

 
16

 
30

 
11

Total
$
51,299

 
$
59,329

 
$
2,212

 
$
49,506

 
$
56,490

 
$
1,763




28
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 6. ALLOWANCE FOR LOAN LOSSES – continued

The following tables summarize average recorded investment in and interest income recognized on loans considered to be impaired for the periods presented:
 
Three Months Ended
 
June 30, 2019
 
June 30, 2018
(dollars in thousands)
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With a related allowance recorded:
 
 
 
 
 
 
 
Commercial real estate
$
7,703

 
$
—

 
$
—

 
$
—

Commercial and industrial
758

 
13

 
—

 
—

Commercial construction
489

 
—

 
—

 
—

Consumer real estate
666

 
—

 
—

 
—

Other consumer
16

 
—

 
38

 
1

Total with a Related Allowance Recorded
9,633

 
13

 
38

 
1

Without a related allowance recorded:
 
 
 
 
 
 
 
Commercial real estate
21,802

 
77

 
3,609

 
54

Commercial and industrial
7,568

 
131

 
8,060

 
210

Commercial construction
2,319

 
48

 
3,443

 
33

Consumer real estate
7,952

 
93

 
9,483

 
118

Other consumer
3

 
—

 
10

 
—

Total without a Related Allowance Recorded
39,643

 
349

 
24,605

 
415

Total:
 
 
 
 
 
 
 
Commercial real estate
29,505

 
77

 
3,609

 
54

Commercial and industrial
8,326

 
144

 
8,060

 
210

Commercial construction
2,808

 
48

 
3,443

 
33

Consumer real estate
8,618

 
93

 
9,483

 
118

Other consumer
19

 
—

 
48

 
1

Total
$
49,276

 
$
362

 
$
24,643

 
$
416




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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 6. ALLOWANCE FOR LOAN LOSSES – continued

 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
(dollars in thousands)
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With a related allowance recorded:
 
 
 
 
 
 
 
Commercial real estate
$
7,704

 
$
—

 
$
—

 
$
—

Commercial and industrial
772

 
26

 
—

 
—

Commercial construction
489

 
—

 
—

 
—

Consumer real estate
666

 
—

 
—

 
—

Other consumer
18

 
1

 
40

 
2

Total with a Related Allowance Recorded
9,649

 
27

 
40

 
2

Without a related allowance recorded:
 
 
 
 
 
 
 
Commercial real estate
22,093

 
124

 
3,712

 
85

Commercial and industrial
5,329

 
189

 
7,796

 
218

Commercial construction
2,319

 
83

 
3,445

 
73

Consumer real estate
7,979

 
188

 
10,128

 
253

Other consumer
4

 
—

 
11

 
—

Total without a Related Allowance Recorded
37,723

 
584

 
25,092

 
629

Total:
 
 
 
 
 
 
 
Commercial real estate
29,797

 
124

 
3,712

 
85

Commercial and industrial
6,101

 
215

 
7,796

 
218

Commercial construction
2,808

 
83

 
3,445

 
73

Consumer real estate
8,645

 
188

 
10,128

 
253

Other consumer
22

 
1

 
51

 
2

Total
$
47,373

 
$
611

 
$
25,132

 
$
631



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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 6. ALLOWANCE FOR LOAN LOSSES – continued

The following tables detail activity in the ALL for the periods presented:
 
Three Months Ended June 30, 2019
(dollars in thousands)
Commercial
Real Estate
 
Commercial and
Industrial
 
Commercial
Construction
 
Consumer
Real Estate
 
Other
Consumer
 
Total
Loans
Balance at beginning of period
$
34,903

 
$
11,996

 
$
6,757

 
$
6,178

 
$
1,575

 
$
61,409

Charge-offs
(528
)
 
(1,435
)
 
—

 
(247
)
 
(457
)
 
(2,667
)
Recoveries
6

 
91

 
2

 
344

 
89

 
532

Net Recoveries/(Charge-offs)
(522
)

(1,344
)

2


97


(368
)
 
(2,135
)
Provision for loan losses
(1,545
)

2,575


495


296


384


2,205

Balance at End of Period
$
32,836

 
$
13,227

 
$
7,254

 
$
6,571

 
$
1,591

 
$
61,479

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
(dollars in thousands)
Commercial
Real Estate
 
Commercial and
Industrial
 
Commercial
Construction
 
Consumer
Real Estate
 
Other
Consumer
 
Total
Loans
Balance at beginning of period
$
30,963

 
$
10,472

 
$
10,721

 
$
5,418

 
$
1,472

 
$
59,046

Charge-offs
(237
)
 
(7,392
)
 
(321
)
 
(268
)
 
(414
)
 
(8,632
)
Recoveries
185

 
362

 
1

 
85

 
125

 
758

Net Recoveries/(Charge-offs)
(52
)
 
(7,030
)
 
(320
)
 
(183
)
 
(289
)
 
(7,874
)
Provision for loan losses
321

 
7,432

 
1,275

 
6

 
311

 
9,345

Balance at End of Period
$
31,232

 
$
10,874

 
$
11,676

 
$
5,241

 
$
1,494

 
$
60,517

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2019
(dollars in thousands)
Commercial
Real Estate
 
Commercial and
Industrial
 
Commercial
Construction
 
Consumer
Real Estate
 
Other
Consumer
 
Total
Loans
Balance at beginning of period
$
33,707

 
$
11,596

 
$
7,983

 
$
6,187

 
$
1,523

 
$
60,996

Charge-offs
(529
)
 
(6,912
)
 
—

 
(410
)
 
(840
)
 
(8,691
)
Recoveries
128

 
508

 
3

 
492

 
189

 
1,320

Net (Charge-offs)/Recoveries
(401
)

(6,404
)

3


82


(651
)

(7,371
)
Provision for loan losses
(470
)

8,035


(732
)

302


719


7,854

Balance at End of Period
$
32,836

 
$
13,227

 
$
7,254

 
$
6,571

 
$
1,591

 
$
61,479

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
(dollars in thousands)
Commercial
Real Estate
 
Commercial and
Industrial
 
Commercial
Construction
 
Consumer
Real Estate
 
Other
Consumer
 
Total
Loans
Balance at beginning of period
$
27,235

 
$
8,966

 
$
13,167

 
$
5,479

 
$
1,543

 
$
56,390

Charge-offs
(232
)
 
(8,222
)
 
(321
)
 
(429
)
 
(872
)
 
(10,076
)
Recoveries
228

 
480

 
1,130

 
323

 
225

 
2,386

Net Charge-offs
(4
)
 
(7,742
)
 
809

 
(106
)
 
(647
)
 
(7,690
)
Provision for loan losses
4,001

 
9,650

 
(2,300
)
 
(132
)
 
598

 
11,817

Balance at End of Period
$
31,232

 
$
10,874

 
$
11,676

 
$
5,241

 
$
1,494

 
$
60,517






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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 6. ALLOWANCE FOR LOAN LOSSES – continued

The following tables present the ALL and recorded investments in loans by category as of the periods presented:
 
June 30, 2019
 
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
$
1,530

 
$
31,306

 
$
32,836

 
$
29,295

 
$
2,877,600

 
$
2,906,895

Commercial and industrial
204

 
13,023

 
13,227

 
10,651

 
1,549,076

 
1,559,727

Commercial construction
157

 
7,097

 
7,254

 
2,808

 
264,395

 
267,203

Consumer real estate
307

 
6,264

 
6,571

 
8,529

 
1,218,805

 
1,227,334

Other consumer
14

 
1,577

 
1,591

 
16

 
72,025

 
72,041

Total
$
2,212


$
59,267


$
61,479


$
51,299


$
5,981,901


$
6,033,200

 
 
December 31, 2018
 
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
$
1,295

 
$
32,412

 
$
33,707

 
$
11,369

 
$
2,910,463

 
$
2,921,832

Commercial and industrial
360

 
11,236

 
11,596

 
13,672

 
1,479,744

 
1,493,416

Commercial construction
87

 
7,896

 
7,983

 
15,775

 
241,422

 
257,197

Consumer real estate
10

 
6,177

 
6,187

 
8,674

 
1,197,983

 
1,206,657

Other consumer
11

 
1,512

 
1,523

 
16

 
67,530

 
67,546

Total
$
1,763

 
$
59,233

 
$
60,996

 
$
49,506

 
$
5,897,142

 
$
5,946,648

 



32
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued


NOTE 7. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES
We determine if a contract is or contains a lease at inception. Leases are classified as either finance or operating leases. We recognize leases on our Consolidated Balance Sheets as ROU assets and related lease liabilities. Finance ROU assets are included in property and equipment and related finance lease liabilities are included in long-term borrowings. Operating lease ROU assets are included in other assets and related operating lease liabilities are included in other liabilities. We estimate lease liabilities and ROU assets using our estimated incremental borrowing rate with similar terms at commencement date. Lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term for operating leases. Interest and amortization expenses are recognized for finance leases over the lease term.
We have 44 lease contracts that we have recognized under the new lease standard, ASC Topic 842. These leases are for our branch, loan production and support services facilities. We have recognized 42 operating leases and two finance leases under the new lease accounting standard. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term in Net Occupancy on our Consolidated Statements of Comprehensive Income.
The following tables present our ROU assets, lease expense, weighted average term, discount rate and maturity analysis of lease liabilities for finance and operating leases as of June 30, 2019 and for the periods presented:
 
 
June 30, 2019
(in thousands, except weighted-averages)
 
Three months ended
 
 
Six months ended
 
Operating lease expense
 
 
$
1,034

 
 
$
2,066

Amortization of ROU assets - finance leases
 
 
23

 
 
45

Interest on lease liabilities - finance leases (1)
 
 
18

 
 
36

Total Lease Expense
 
 
$
1,075

 
 
$
2,147

Operating Leases
 
 
 
 
 
 
ROU assets
 
 
 
 
 
$
36,417

Operating cash flows
 
 
 
 
 
$
662

Finance Leases
 
 
 
 
 
 
ROU assets
 
 
 
 
 
$
1,191

Operating cash flows
 
 
 
 
 
$
36

Financing cash flows
 
 
 
 
 
$
22

Weighted Average Lease Term - Years
 
 
 
 
 
 
Operating leases
 
 
 
 
 
20.14

Finance leases
 
 
 
 
 
15.34

Weighted Average Discount Rate
 
 
 
 
 
 
Operating leases
 
 
 
 
 
6.15
%
Finance leases
 
 
 
 
 
5.98
%
(1) Included in borrowings interest expense in our consolidated statements of comprehensive income. All other lease costs in this table are included in net occupancy expense.

(dollars in thousands)
 
 
 
 
 
 
Maturity Analysis
 
Finance

Operating
 
 
Total

2019
 
$
117

 
$
3,744

 
$
3,861

2020
 
126

 
3,623

 
3,749

2021
 
126

 
3,686

 
3,812

2022
 
128

 
3,768

 
3,896

2023
 
130

 
3,703

 
3,833

Thereafter
 
1,342

 
58,045

 
59,387

Total
 
$
1,969

 
$
76,569

 
$
78,538

Less: Present value discount
 
(735
)
 
(35,507
)
 
(36,242
)
Lease Liabilities
 
$
1,234

 
$
41,062

 
$
42,296




33
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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, 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 Comprehensive Income.
Interest Rate Lock Commitments and Forward Sale Contracts
In the normal course of business, we sell originated mortgage loans into the secondary mortgage loan market. We also offer interest rate lock commitments to potential borrowers. The commitments are generally for 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 Comprehensive Income.

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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)
June 30, 2019
 
 
December 31, 2018
 
 
June 30, 2019
 
 
December 31, 2018
 
Derivatives not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap Contracts - Commercial Loans
 
 
 
 
 
 
 
 
 
 
 
Fair value
 
$
22,688

 
 
$
5,504

 
 
$
22,620

 
 
$
5,340

Notional amount
 
449,576

 
 
325,750

 
 
449,576

 
 
325,750

Collateral received/posted
 
—

 
 
160

 
 
21,556

 
 
—

Interest Rate Lock Commitments - Mortgage Loans
 
 
 
 

 
 
 
 
 
 
Fair value
 
649

 
 
251

 
 
—

 
 
—

Notional amount
 
15,104

 
 
6,054

 
 
—

 
 
—

Forward Sale Contracts - Mortgage Loans
 
 
 
 

 
 
 
 
 
 
Fair value
 
—

 
 
55

 
 
105

 
 
—

Notional amount
 
$
—

 
 
$
6,000

 
 
$
15,404

 
 
$
—


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 and a derivative liability with the same counterparty to a swap transaction and are permitted to offset the asset position and the liability position resulting in a net presentation.
The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values in the Consolidated Balance Sheets as of the dates presented:
 
Derivatives
(included in Other Assets)
 
Derivatives
(included in Other Liabilities)
(dollars in thousands)
June 30, 2019
 
December 31, 2018
 
June 30, 2019
 
December 31, 2018
Derivatives not Designated as Hedging Instruments:
 

 
 

 
 
 
 
 
 
Gross amounts recognized
 
$
22,810

 
 
$
8,733

 
 
$
22,742

 
 
$
8,569

Gross amounts offset
 
(122
)
 
 
(3,229
)
 
 
(122
)
 
 
(3,229
)
Net Amounts Presented in the Consolidated Balance Sheets
 
22,688

 
 
5,504

 
 
22,620

 
 
5,340

Gross amounts not offset(1)
 
—

 
 
(160
)
 
 
(21,556
)
 
 
—

Net Amount
 
$
22,688

 
 
$
5,344

 
 
$
1,064

 
 
$
5,340

(1) Amounts represent collateral received/posted for the periods presented.
The following table indicates the gain or loss recognized in income on derivatives for the periods presented:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2019
 
2018
 
2019
 
2018
Derivatives not Designated as Hedging Instruments
 

 
 

 
 
 
 
 
 
Interest rate swap contracts—commercial loans
 
$
26

 
 
$
(201
)
 
 
$
(96
)
 
 
$
(85
)
Interest rate lock commitments—mortgage loans
 
310

 
 
128

 
 
398

 
 
172

Forward sale contracts—mortgage loans
 
(193
)
 
 
(15
)
 
 
(160
)
 
 
(33
)
Total Derivatives Gain/(Loss)
 
$
143

 
 
$
(88
)
 
 
$
142

 
 
$
54




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


NOTE 9. BORROWINGS
Short-term borrowings are for terms under or equal to one year and are comprised of securities sold under repurchase agreements, or REPOs and FHLB advances. All REPOs are overnight short-term investments and are not insured by the Federal Deposit Insurance Corporation, or FDIC. Securities pledged as collateral under these REPO financing arrangements cannot be sold or repledged by the secured party and, therefore, the REPOs are accounted for as secured borrowings. Mortgage-backed securities with amortized cost of $16.5 million and carrying value of $16.7 million at June 30, 2019 and amortized cost of $24.2 million and carrying value of $23.9 million at December 31, 2018, 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 one year and are comprised of FHLB advances, two capital leases 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 $5.5 million at a fixed rate and $63.1 million at a variable rate at June 30, 2019, excluding our capital leases.
Information pertaining to borrowings is summarized in the table below as of the dates presented:
 
June 30, 2019
 
December 31, 2018
(dollars in thousands)
Balance
Weighted
Average Rate
 
Balance
Weighted
Average Rate
Short-term Borrowings
 
 
 
 
 
 
 
 
 
Securities sold under repurchase agreements
 
$
14,154

 
0.74
%
 
 
$
18,383

 
0.46
%
Short-term borrowings
 
295,000

 
2.50
%
 
 
470,000

 
2.65
%
Total Short-term Borrowings
 
309,154

 
2.42
%
 
 
488,383

 
2.57
%
Long-term Borrowings
 
 
 
 
 
 
 
 
 
Long-term borrowings
 
69,791

 
2.73
%
 
 
70,314

 
2.84
%
Junior subordinated debt securities
 
45,619

 
4.87
%
 
 
45,619

 
5.25
%
Total Long-term Borrowings
 
115,410

 
3.58
%
 
 
115,933

 
3.79
%
Total Borrowings
 
$
424,564

 
2.74
%
 
 
$
604,316

 
2.80
%

We had total borrowings at the FHLB of Pittsburgh of $363.6 million at June 30, 2019 and $540.3 million at December 31, 2018. The $363.6 million at June 30, 2019 consisted of $295.0 million in short-term borrowings and $68.6 million in long-term borrowings. Our maximum borrowing capacity with the FHLB of Pittsburgh was $2.6 billion at June 30, 2019. We utilized $545.5 million of our borrowing capacity at June 30, 2019 consisting of $363.6 million for borrowings and $181.9 million for letters of credit to collateralize public funds. Our remaining borrowing availability at June 30, 2019 is $2.1 billion.

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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.
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)
June 30, 2019
 
 
December 31, 2018
 
Commitments to extend credit
 
$
1,561,464

 
 
$
1,464,892

Standby letters of credit
 
74,270

 
 
77,134

Total
 
$
1,635,734

 
 
$
1,542,026


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

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


NOTE 11. REVENUE FROM CONTRACTS WITH CUSTOMERS
We earn revenue from contracts with our customers when we have completed our performance obligations and recognize that revenue when services are provided to our customers. Our contracts with customers are primarily in the form of account agreements. Generally, our services are transferred at a point in time in response to transactions initiated and controlled by our customers under service agreements with an expected duration of one year or less. Our customers have the right to terminate their services agreements at any time.
We do not defer incremental direct costs to obtain contracts with customers that would be amortized in one year or less. These costs are primarily salaries and employee benefits recognized as expense in the period incurred.
Service charges on deposit accounts - We recognize monthly service charges for both commercial and personal banking customers based on account fee schedules. Our performance obligation is generally satisfied and the related revenue recognized at a point in time or over time when the services are provided. Other fees are earned based on specific transactions or customer activity within the customers' deposit accounts. These are earned at the time the transaction or customer activity occurs.
Debit and credit card services - Interchange fees are earned whenever debit and credit cards are processed through third-party card payment networks. ATM fees are based on transactions by our customers' and other customers' use of our ATMs or other ATMs. Debit and credit card revenue is recognized at a point in time when the transaction is settled. Our performance obligation to our customers is generally satisfied and the related revenue is recognized at a point in time when the service is provided. Third-party service contracts include annual volume and marketing incentives which are recognized over a period of twelve months when we meet thresholds as stated in the service contract.
Wealth management services - Wealth management services are primarily comprised of fees earned from the management and administration of trusts, assets under administration and other financial advisory services. Generally, wealth management fees are earned over a period of time between monthly and annually, per the related fee schedules. Our performance obligations with our customers are generally satisfied when we provide the services as stated in the customers' agreements. The fees are based on a fixed amount or a scale based on the level of services provided or amount of assets under management.
Other fee revenue - Other fee revenue includes a variety of other traditional banking services such as, electronic banking fees, letters of credit origination fees, wire transfer fees, money orders, treasury checks, checksale fees and transfer fees. Our performance obligations are generally satisfied at a point in time, fee revenue is recognized when the services are provided or the transaction is settled.
The information presented in the following table presents the point of revenue recognition for revenue from contracts with customers. Other revenue streams such as: interest income, net securities gains and losses, insurance, mortgage banking and other revenues that are accounted for under other generally accepted accounting principles are excluded.
(dollars in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Revenue Streams
Point of Revenue Recognition
2019

 
2018

 
2019

 
2018

Service charges on deposit accounts
Over a period of time
$
451

 
$
453

 
$
908

 
$
987

 
At a point in time
2,761

 
2,774

 
5,457

 
5,481

 
 
$
3,212

 
$
3,227

 
$
6,365

 
$
6,468

 
 
 
 
 
 
 
 
 
Debit and credit card
Over a period time
$
177

 
$
151

 
$
362

 
$
339

 
At a point in time
3,324

 
3,158

 
6,114

 
6,008

 
 
$
3,501

 
$
3,309

 
$
6,476

 
$
6,347

 
 
 
 
 
 
 
 
 
Wealth management
Over a period of time
$
409

 
$
793

 
$
822

 
$
1,596

 
At a point in time
1,653

 
1,823

 
3,288

 
3,702

 
 
$
2,062

 
$
2,616

 
$
4,109

 
$
5,298

 
 
 
 
 
 
 
 
 
Other fee revenue
At a point in time
$
1,145

 
$
887

 
$
2,064

 
$
1,754




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


NOTE 12. OTHER COMPREHENSIVE INCOME/(LOSS)
The following tables present the change in components of other comprehensive income/(loss) for the periods presented, net of tax effects.
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
(dollars in thousands)
Pre-Tax
Amount
 
 
Tax
(Expense)
Benefit
 
 
Net of Tax
Amount
 
 
Pre-Tax
Amount
 
 
Tax Benefit (Expense)
 
 
Net of Tax
Amount
 
Change in net unrealized gains/(losses) on debt securities available-for-sale 
 
$
8,968

 
 
$
(1,912
)
 
 
$
7,056

 
 
$
(2,296
)
 
 
$
487

 
 
$
(1,809
)
Adjustment to funded status of employee benefit plans
 
452

 
 
(96
)
 
 
356

 
 
702

 
 
(149
)
 
 
553

Other Comprehensive Income/(Loss)
 
$
9,420

 
 
$
(2,008
)
 
 
$
7,412

 
 
$
(1,594
)
 
 
$
338

 
 
$
(1,256
)
 
 
 
 
 
 
 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
(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 (losses)/gains on debt securities available-for-sale (1)
 
$
16,366

 
 
$
(3,490
)
 
 
$
12,876

 
 
$
(11,770
)
 
 
$
2,499

 
 
$
(9,271
)
Adjustment to funded status of employee benefit plans
 
905

 
 
(193
)
 
 
712

 
 
1,323

 
 
(281
)
 
 
1,042

Other Comprehensive (Loss)/Income
 
$
17,271

 
 
$
(3,683
)
 
 
$
13,588

 
 
$
(10,447
)
 
 
$
2,218

 
 
$
(8,229
)
(1) Due to the adoption of ASU No. 2016-01, net unrealized gains on marketable equity securities were reclassified from accumulated other comprehensive income to retained earnings during the three months ended March 31, 2018.
(2) 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.


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



NOTE 13. EMPLOYEE BENEFITS

Our qualified and nonqualified defined benefit plans were amended to freeze benefit accruals for all persons entitled to benefits under the plans in 2016. We will continue recording pension expense related to these plans, primarily representing interest costs on the accumulated benefit obligation and amortization of actuarial losses accumulated in the plans, as well as income from expected investment returns on pension assets. Since the plans have been frozen, no service costs are included in net periodic pension expense.
At the end of the third quarter of 2018, we made a $20.4 million contribution to our qualified defined benefit plan. The investment policy for the Plan now is 85 percent to 95 percent fixed income and 5 percent to 15 percent equity and cash, which is a shift from 50 percent to 70 percent in equities and 30 percent to 50 percent fixed income and cash in 2018. The expected long-term rate of return on plan assets is 4.80 percent compared to 7.50 percent in prior periods.
The pension contribution was deducted on our 2017 Consolidated Federal Income Tax Return and we recognized a return to provision discrete tax benefit of $2.9 million due to the decrease in the federal statutory rate of 35 percent to 21 percent resulting from tax legislation in December 2017.
The following table summarizes the components of net periodic pension cost for the periods presented:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2019
 
2018
 
2019
 
2018
Components of Net Periodic Pension Cost
 

 
 

 
 
 
 
 
 
Interest cost on projected benefit obligation
 
$
989

 
 
$
967

 
 
$
1,978

 
 
$
1,934

Expected return on plan assets
 
(1,181
)
 
 
(1,567
)
 
 
(2,361
)
 
 
(3,134
)
Net amortization
 
395

 
 
545

 
 
789

 
 
1,089

Net Periodic Pension Expense
 
$
203

 
 
$
(55
)
 
 
$
406

 
 
$
(111
)

The components of net periodic pension expense are included in salaries and employee benefits on the Consolidated Statements of Comprehensive Income.
NOTE 14. QUALIFIED AFFORDABLE HOUSING AND HISTORIC REHABILITATION PROJECTS

As part of our responsibilities under the Community Reinvestment Act and due to their favorable federal income tax benefits, we invest in Low Income Housing and Historic Rehabilitation projects. 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 $4.6 million at June 30, 2019 and $6.0 million at December 31, 2018. Amortization expense, included in other noninterest expense in the Consolidated Statements of Comprehensive Income, was $0.7 million and $1.4 million for the three and six months ended June 30, 2019 and June 30, 2018. The amortization expense was offset by tax credits of $0.7 million and $1.5 million for the three and six months ended June 30, 2019 and $0.8 million and $1.5 million for the three and six months ended June 30, 2018 as a reduction to our federal tax provision.
Our total investment in historic rehabilitation was $0.3 million at June 30, 2019 and December 31, 2018. Federal tax credits of $0.2 million and $0.5 million were recognized as a reduction to our federal tax provision for the three and six months ended June 30, 2019. No federal historic rehabilitation tax credits were earned in 2018.
NOTE 15. SALE OF A MAJORITY INTEREST OF INSURANCE BUSINESS
On November 9, 2017, we entered into an asset purchase agreement to sell a 70 percent ownership interest in the assets of our subsidiary, S&T Evergreen Insurance, LLC. The partial sale was accounted for as the sale of a business. At the date of the sale, January 1, 2018, we ceased to have a controlling financial interest, deconsolidated the subsidiary and recognized a gain of $1.9 million. We transferred our remaining 30 percent share of net assets from S&T Evergreen Insurance, LLC to a new entity for a 30 percent partnership interest in a new insurance entity. We use the equity method of accounting to recognize changes in the value of our investment in the new insurance entity for our proportional share of income and losses of the new insurance entity.

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


NOTE 16. SHARE REPURCHASE PLAN
On March 19, 2018, our Board of Directors authorized a $50 million share repurchase plan. This repurchase authorization, which is effective through August 31, 2019, permits us to repurchase from time to time up to $50 million in aggregate value of shares of our common stock through a combination of open market and privately negotiated repurchases. The specific timing, price and quantity of repurchases will be at our discretion and will depend on a variety of factors, including general market conditions, the trading price of the common stock, legal and contractual requirements and our financial performance. The repurchase plan does not obligate us to repurchase any particular number of shares. We expect to fund any repurchases from cash on hand and internally generated funds. During the three months ended June 30, 2019, we repurchased 71,936 common shares at a total cost of $2.8 million, or an average of $39.41 per share. For the six months ended June 30, 2019, we repurchased 385,840 common shares under this plan at a total cost of $15.1 million, or an average of $39.19 per share. Up to an additional $22.6 million of our common stock may be repurchased under this plan through August 31, 2019.

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


Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, represents an overview of our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations at and for the three and six month periods ended June 30, 2019 and 2018. Our MD&A should be read in conjunction with our Consolidated Financial Statements and Notes. 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. Forward-looking statements generally relate to our financial condition, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting S&T and its future business and operations including statements related to the expected timing of the closing of the proposed merger and the expected returns and other benefits of the proposed merger to shareholders. Forward looking statements are typically identified by words or phrases such as “will likely result”, “expect”, “anticipate”, “estimate”, “forecast”, “project”, “intend”, “ believe”, “assume”, “strategy”, “trend”, “plan”, “outlook”, “outcome”, “continue”, “remain”, “potential”, “opportunity”, “believe”, “comfortable”, “current”, “position”, “maintain”, “sustain”, “seek”, “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may. Forward-looking statements represent management’s beliefs, based upon information available at the time the statements are made, with regard to the matters addressed; they are not guarantees of future performance. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to: credit losses; cyber-security concerns; 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; legislation affecting the financial services industry as a whole, and S&T, in particular; the outcome of pending and future litigation and governmental proceedings; increasing price and product/service competition; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; managing our internal growth and acquisitions; the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the 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; deterioration of the housing market and reduced demand for mortgages; 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; and 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. Additionally, there can be no assurances that the proposed merger with DNB will close when expected or the expected returns and other benefits of the proposed merger to shareholders will be achieved. Factors that could cause or contribute to such differences include, but are not limited to, the possibility that expected benefits may not materialize in the time frames expected or at all, or may be more costly to achieve; that the merger transaction may not be timely completed, if at all; that prior to completion of the merger transaction or thereafter, the parties’ respective businesses may not perform as expected due to transaction-related uncertainties or other factors; that the parties are unable to implement successful integration strategies; that the required regulatory, shareholder, or other closing conditions are not satisfied in a timely manner, or at all; reputational risks and the reaction of the parties’ customers to the merger transaction; diversion of management time to merger-related issues. Many of these factors, as well as other factors, are described in our Annual Report on Form 10-K for the year ended December 31, 2018, including Part I, Item 1A-"Risk Factors" and any of our subsequent filings with the SEC. Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events may and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made and we undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.

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

Critical Accounting Policies and Estimates
Our critical accounting policies involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2019 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2018 under Part II, Item 7-“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Overview
We are a bank holding company that is headquartered in Indiana, Pennsylvania with assets of $7.3 billion at June 30, 2019.  We operate in five markets including Western Pennsylvania, Central Pennsylvania, Northeast Ohio, Central Ohio, and Upstate New York. We employ a geographic market based strategy in order to drive organic growth. Each of our five markets is led by a Market President who is responsible for developing strategic initiatives specific to each market. We acknowledge that each of our five markets are in different stages of development and that our market based strategy will allow us to customize our approach to each market given its developmental stage and unique characteristics. 
We provide a full range of financial services with retail and commercial banking products, cash management services, trust and financial services and insurance products. 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. We incur expenses for the cost of deposits and other funding sources, provision for loan losses and other operating costs such as salaries and employee benefits, data processing and information technology, 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. Our strategic plan focuses on organic growth, which includes both 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 areas of our business and focuses on satisfying each customer’s individual financial objectives.
On June 5, 2019, we entered into a definitive Agreement and Plan of Merger to acquire DNB Financial Corporation, or DNB, based in Downingtown, Pennsylvania. DNB had approximately $1.2 billion in assets at March 31, 2019 and maintains 14 branches in Chester, Delaware and Philadelphia counties. The acquisition will expand our footprint into Southeastern Pennsylvania. Pursuant to the Agreement and Plan of Merger, DNB will merge with and into S&T, with S&T continuing as the surviving entity. Under the terms of the Agreement and Plan of Merger, DNB shareholders will have the right to receive 1.22 shares of common stock, par value $2.50 per share, of S&T for each share of common stock, par value $1.00 per share, of DNB. Immediately following the merger of DNB and S&T, DNB’s wholly owned bank subsidiary, DNB First, National Association, will merge with and into S&T’s wholly owned bank subsidiary, S&T Bank, with S&T Bank as the surviving entity. The Agreement and Plan of Merger was unanimously approved by the Board of Directors of each of S&T and DNB. The transaction is expected to close in the fourth quarter of 2019 after satisfaction of customary closing conditions, including regulatory approvals and approval of the shareholders of DNB.
Our focus continues to be on organic loan and deposit growth and implementing opportunities to increase fee income while closely monitoring our operating expenses and asset quality. We are focused on executing our strategy to successfully build our brand and grow our business in all of our markets.
Earnings Summary
Net income increased $4.7 million, or 21.8 percent, for the three months ended June 30, 2019 and increased $1.4 million, or 3.0 percent, for the six months ended June 30, 2019 compared to the same periods in 2018. Net income for the three and six months ended June 30, 2019 was $26.1 million and $49.0 million, or $0.76 and $1.43 diluted earnings per share, as compared to $21.4 million and $47.6 million, or $0.61 and $1.36 diluted earnings per share for the same periods in 2018.
The increase in net income for the three month period ended June 30, 2019 of $4.7 million was primarily due to a decrease in the provision for loan losses of $7.1 million and an increase in net interest income of $2.4 million offset by an increase in noninterest expense of $4.5 million and an increase of $1.1 million in the provision for income taxes. The increase in net income for the six month period ended June 30, 2019 of $1.4 million was primarily due to an increase in net interest income of $5.9 million, a decrease in the provision for loan losses of $3.9 million and a decrease of $0.7 million in the provision for income taxes offset by a decrease noninterest income of $1.8 million and an increase of $7.3 million in noninterest expense.
Net interest income increased $2.4 million and $5.9 million to $60.8 million and $121.2 million for the three and six months ended June 30, 2019 compared to net interest income of $58.4 million and $115.3 million for the same periods in 2018. Average interest-earning assets increased $178.6 million and $175.5 million for the three and six months ended June 30, 2019

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compared to the same periods in 2018. Average interest-bearing liabilities increased $42.6 million and $42.2 for the three and six months ended June 30, 2019 compared to the same periods in 2018. Net interest margin, on a fully taxable-equivalent, or FTE basis (non-GAAP), increased four and nine basis points to 3.68 percent and 3.70 percent in the three and six months ended June 30, 2019 compared to 3.64 percent and 3.61 percent for the same periods in 2018. The increases in short-term interest rates over the past year positively impacted both net interest income and net interest margin. Net interest margin is reconciled to net interest income adjusted to an FTE basis in the "Results of Operations - Three and Six Months Ended June 30, 2019 Compared to Three and Six Months Ended June 30, 2018 - Net Interest Income" section of this MD&A.
The provision for loan losses decreased $7.1 million and $3.9 million to $2.2 million and $7.9 million for the three and six months ended June 30, 2019 compared to $9.3 million and $11.8 million for the same periods in 2018. The decrease in the provision for loan losses for both periods mainly related to a decrease in loan charge-offs. For the three and six months ended June 30, 2019, we had net charges-offs of $2.1 million and $7.4 million compared to $7.9 million and $7.7 million for the same periods in 2018. Annualized net loan charge-offs to average loans was 0.14 percent and 0.25 percent for the three and six months ended June 30, 2019 compared to 0.55 percent and 0.27 percent for the same periods in 2018. Impaired loans increased $17.5 million to $51.3 million at June 30, 2019 compared to $33.8 million at June 30, 2018 and specific reserves on impaired loans increased $2.2 million compared to the same period in the prior year. Nonperforming loans increased $23.6 million to $45.0 million at June 30, 2019 compared to $21.4 million at June 30, 2018.
Noninterest income increased $0.7 million to $12.9 million for the three months ended June 30, 2019 and decreased $1.8 million to $24.3 million for the six months ended June 30, 2019 compared to the same periods in 2018. The decrease for the six months ending June 30, 2019 was partially related to a $1.9 million gain on the sale of a majority interest in S&T Evergreen Insurance, LLC in the first quarter of 2018. Wealth management fees decreased $0.6 million for the three months ended and $1.2 million for the six months ended June 30, 2019 due to a decline in financial service revenue and market conditions. Offsetting these decreases were increases of $1.2 million and $1.6 million in other income primarily related to higher commercial loan swap fees of $0.9 million and $1.4 million due to an increase in customer demand for this product.
Noninterest expense increased $4.5 million to $40.4 million for the three months ended June 30, 2019 and $7.3 million to $79.3 million for the six months ended June 30, 2019 compared to the same periods in 2018. The most significant increases in expense related to salaries and employee benefits and data processing and information technology. Salaries and employee benefits expense increased $1.7 million for the three months ended and $3.8 million for the six months ended June 30, 2019 compared to the same periods in 2018 mainly due to annual merit increases and higher severance, incentive and pension costs. Data processing and information technology increased $1.0 million for the three months ended and $1.9 million for the six months ended June 30, 2019 compared to the same periods in 2018 due to the recent outsourcing arrangement for certain components of our IT function and the annual increase with our third-party data processor. Additionally, we incurred merger related expenses of $0.6 million for professional services during the second quarter of 2019.
The provision for income taxes increased $1.1 million for the three months ended June 30, 2019 as a result of an increase in pretax income of $5.7 million compared to the same period in 2018. The provision for income taxes decreased $0.7 million for the six months ended June 30, 2019 compared to the same periods in 2018 primarily due to non-recurring discrete items of $0.9 million related to the sale of a majority interest of our insurance business in the first quarter of 2018. Our effective tax rate increased to 16.3 percent for the three month period ended June 30, 2019 and decreased to 15.9 percent for the six month period ended June 30, 2019 compared to 15.8 percent and 17.4 percent for the same periods in 2018.

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, in the United States, management uses, and this quarterly report references, net interest income and net interest margin on a fully taxable equivalent, or FTE, basis, which are non-GAAP financial measures. Management believes net interest income and net interest margin on an FTE basis provide information useful to investors in understanding our underlying business, operational performance and performance trends as they facilitate comparisons with the performance of other companies in the financial services industry. Although management believes that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered alternatives to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with non-GAAP measures which may be presented by other companies.
We believe the presentation of net interest income and net interest margin 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 (GAAP) per the Consolidated Statements of Comprehensive Income is reconciled to net interest income adjusted on an FTE basis and net interest margin adjusted on an FTE basis in the "Results of Operations - Three and Six Months Ended June 30, 2019 Compared to Three and Six Months Ended June 30, 2018 - Net Interest Income" section of this MD&A.

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RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2019 Compared to
Three and Six Months Ended June 30, 2018
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 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 21 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 June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2019
 
2018
 
2019
 
2018
Total interest income
 
$
79,624

 
 
$
71,581

 
 
$
158,214

 
 
$
139,610

Total interest expense
 
18,797

 
 
13,178

 
 
37,031

 
 
24,276

Net Interest Income per Consolidated Statements of Comprehensive Income
 
60,827

 
 
58,403

 
 
121,183

 
 
115,334

Adjustment to FTE basis
 
958

 
 
938

 
 
1,919

 
 
1,878

Net Interest Income on an FTE Basis (Non-GAAP)
 
$
61,785

 
 
$
59,341

 
 
$
123,102

 
 
$
117,212

Net interest margin
 
3.63
%
 
 
3.58
%
 
 
3.64
%
 
 
3.56
%
Adjustment to FTE basis
 
0.05
%
 
 
0.06
%
 
 
0.06
%
 
 
0.05
%
Net Interest Margin on an FTE Basis (Non-GAAP)
 
3.68
%
 
 
3.64
%
 
 
3.70
%
 
 
3.61
%
Income amounts are annualized for rate calculations.


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Average Balance Sheet and Net Interest Income Analysis (FTE)
The following tables provide information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the periods presented: 
 
Three Months Ended June 30, 2019

Three Months Ended June 30, 2018
(dollars in thousands)
Average Balance
Interest
Rate

Average Balance
Interest
Rate
ASSETS

 




 


Interest-bearing deposits with banks
$
49,949

 
$
274

2.19
%
 
$
55,015

 
$
221

1.60
%
Securities, at fair value(2)(3)
673,117

 
4,482

2.66
%
 
685,132

 
4,450

2.60
%
Loans held for sale
1,452

 
16

4.44
%
 
1,528

 
28

7.43
%
Commercial real estate
2,895,146

 
36,158

5.01
%
 
2,774,882

 
32,617

4.71
%
Commercial and industrial
1,559,222

 
20,087

5.17
%
 
1,431,861

 
16,627

4.66
%
Commercial construction
242,192

 
3,242

5.37
%
 
324,934

 
3,857

4.76
%
Total Commercial Loans
4,696,560

 
59,487

5.08
%
 
4,531,677

 
53,101

4.70
%
Residential mortgage
734,372

 
8,253

4.50
%
 
691,634

 
7,314

4.23
%
Home equity
463,480

 
6,267

5.42
%
 
472,927

 
5,676

4.81
%
Installment and other consumer
71,319

 
1,286

7.23
%
 
67,186

 
1,138

6.79
%
Consumer construction
11,014

 
149

5.41
%
 
4,570

 
54

4.76
%
Total Consumer Loans
1,280,185

 
15,955

4.99
%
 
1,236,317

 
14,182

4.60
%
Total Portfolio Loans
5,976,745

 
75,442

5.06
%
 
5,767,994

 
67,283

4.68
%
Total Loans(1)(2)
5,978,197

 
75,458

5.06
%
 
5,769,522

 
67,311

4.68
%
Federal Home Loan Bank and other restricted stock
21,141

 
368

6.97
%

34,130

 
537

6.30
%
Total Interest-earning Assets
6,722,404

 
80,582

4.81
%
 
6,543,799

 
72,519

4.44
%
Noninterest-earning assets
523,636

 
 
 

491,246

 
 
 
Total Assets
$
7,246,040

 
 
 
 
$
7,035,045

 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 




 


Interest-bearing demand
$
550,200

 
631

0.46
%

$
571,260

 
437

0.31
%
Money market
1,695,349

 
8,169

1.93
%

1,251,171

 
4,027

1.29
%
Savings
760,743

 
484

0.26
%

851,702

 
429

0.20
%
Certificates of deposit
1,389,968

 
6,771

1.95
%

1,295,473

 
4,273

1.32
%
Total Interest-bearing Deposits
4,396,260

 
16,055

1.46
%

3,969,606

 
9,166

0.93
%
Securities sold under repurchase agreements
16,337

 
28

0.69
%

48,980

 
50

0.41
%
Short-term borrowings
242,759

 
1,642

2.71
%

617,891

 
3,179

2.06
%
Long-term borrowings
70,049

 
500

2.86
%

46,317

 
259

2.24
%
Junior subordinated debt securities
45,619

 
572

5.03
%

45,619

 
525

4.61
%
Total Borrowings
374,764

 
2,742

2.94
%
 
758,807

 
4,012

2.12
%
Total Interest-bearing Liabilities
4,771,024

 
18,797

1.58
%

4,728,413

 
13,178

1.12
%
Noninterest-bearing liabilities
1,523,676

 
 
 

1,403,771

 
 
 
Shareholders’ equity
951,340

 
 
 

902,861

 
 
 
Total Liabilities and Shareholders’ Equity
$
7,246,040

 
 
 
 
$
7,035,045

 
 
 
Net Interest Income (2)(3)
 
 
$
61,785

 
 
 
 
$
59,341

 
Net Interest Margin (2)(3)
 
 
 
3.68
%

 
 
 
3.64
%
(1) Nonaccruing loans are included in the daily average loan amounts outstanding.
(2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent for 2019 and 2018.
(3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.

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Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
(dollars in thousands)
Average Balance
Interest
Rate
 
Average Balance
Interest
Rate
ASSETS
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with banks
$
51,758

 
$
626

2.42
%
 
$
55,509

 
$
451

1.63
%
Securities, at fair value(2)(3)
676,797

 
9,039

2.67
%
 
686,017

 
8,803

2.57
%
Loans held for sale
1,175

 
25

4.29
%
 
1,737

 
56

6.44
%
Commercial real estate
2,900,181

 
72,122

5.01
%
 
2,733,168

 
62,924

4.64
%
Commercial and industrial
1,534,080

 
39,420

5.18
%
 
1,431,725

 
32,187

4.53
%
Commercial construction
246,073

 
6,554

5.37
%
 
349,893

 
8,032

4.63
%
Total Commercial Loans
4,680,334

 
118,096

5.09
%
 
4,514,786

 
103,143

4.61
%
Residential mortgage
728,495

 
16,123

4.44
%
 
692,961

 
14,554

4.21
%
Home equity
465,598

 
12,536

5.43
%
 
476,967

 
10,975

4.64
%
Installment and other consumer
70,215

 
2,508

7.20
%
 
67,025

 
2,241

6.74
%
Consumer construction
10,244

 
293

5.77
%
 
4,192

 
98

4.73
%
Total Consumer Loans
1,274,552

 
31,460

4.96
%
 
1,241,145

 
27,868

4.52
%
Total Portfolio Loans
5,954,886

 
149,556

5.06
%
 
5,755,931

 
131,011

4.59
%
Total Loans(1)(2)
5,956,061

 
149,581

5.06
%
 
5,757,668

 
131,067

4.59
%
Federal Home Loan Bank and other restricted stock
22,797

 
887

7.79
%
 
32,681

 
1,167

7.13
%
Total Interest-earning Assets
6,707,413

 
160,133

4.81
%
 
6,531,875

 
141,488

4.36
%
Noninterest-earning assets
521,082

 
 
 
 
490,476

 
 
 
Total Assets
$
7,228,495

 
 
 
 
$
7,022,351

 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Interest-bearing demand
$
547,960

 
1,183

0.44
%
 
$
573,307

 
806

0.28
%
Money market
1,632,234

 
15,461

1.91
%
 
1,222,770

 
7,259

1.20
%
Savings
765,638

 
957

0.25
%
 
862,947

 
866

0.20
%
Certificates of deposit
1,412,117

 
13,435

1.92
%
 
1,325,379

 
8,081

1.23
%
Total Interest-bearing Deposits
4,357,949

 
31,036

1.44
%
 
3,984,403

 
17,012

0.86
%
Securities sold under repurchase agreements
19,735

 
57

0.59
%
 
48,380

 
96

0.40
%
Short-term borrowings
280,862

 
3,787

2.72
%
 
607,013

 
5,687

1.89
%
Long-term borrowings
70,122

 
993

2.85
%
 
46,626

 
490

2.12
%
Junior subordinated debt securities
45,619

 
1,158

5.12
%
 
45,619

 
991

4.38
%
Total Borrowings
416,338

 
5,995

2.90
%
 
747,638

 
7,264

1.96
%
Total Interest-bearing Liabilities
4,774,287

 
37,031

1.56
%
 
4,732,041

 
24,276

1.03
%
Noninterest-bearing liabilities
1,505,964

 
 
 
 
1,393,939

 
 
 
Shareholders’ equity
948,244

 
 
 
 
896,371

 
 
 
Total Liabilities and Shareholders’ Equity
$
7,228,495

 
 
 
 
$
7,022,351

 
 
 
Net Interest Income (2)(3)
 
 
$
123,102

 
 
 
 
$
117,212

 
Net Interest Margin (2)(3)
 
 
 
3.70
%
 
 
 
 
3.61
%
(1) Nonaccruing loans are included in the daily average loan amounts outstanding.
(2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent for 2019 and 2018.
(3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.
Net interest income on an FTE basis (non-GAAP) increased $2.4 million, or 4.1 percent, for the three months ended June 30, 2019 and increased $5.9 million, or 5.0 percent, for the six months ended June 30, 2019, compared to the same periods in 2018. The net interest margin on an FTE basis (non-GAAP) increased four basis points for the three months ended June 30, 2019 and nine basis points for the six months ended June 30, 2019, compared to the same periods in 2018. The increases were primarily due to higher short-term interest rates.
Interest income on an FTE basis (non-GAAP) increased $8.1 million, or 11.1 percent, for the three months ended June 30, 2019 and increased $18.6 million, or 13.2 percent, for the six months ended June 30, 2019, compared to the same periods in

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2018. The increases were primarily due to increases in average interest-earning assets of $178.6 million and $175.5 million for the three and six months ended June 30, 2019 and higher short-term interest rates, compared to the same periods in 2018. Average loan balances increased $208.7 million and $198.4 million compared to the same periods in 2018, due to organic loan growth, primarily in the commercial loan portfolio. The average rate earned on loans increased 38 and 47 basis points compared to the same periods in 2018, primarily due to higher short-term interest rates. Average investment securities decreased $12.0 million and $9.2 million and the average rate earned increased six and ten basis points due to higher rates, compared to the same periods in 2018. Overall, the FTE rate on interest-earning assets (non-GAAP) increased 37 and 45 basis points for the three and six months ended June 30, 2019, compared to the same periods in 2018.
Interest expense increased $5.6 million and $12.8 million for the three and six months ended June 30, 2019, compared to the same periods in 2018. The increases were primarily due to higher short-term interest rates. Average interest-bearing deposits increased $426.7 million and $373.5 million for the three and six months ended June 30, 2019, compared to the same periods in 2018. Average money market balances increased $444.2 million and the average rate paid increased 64 basis points for the three months ended June 30, 2019 and increased $409.5 million and 71 basis points for the six months ended June 30, 2019, compared to the same periods in 2018, due to higher short-term interest rates and promotional pricing. The money market balance increases are partially attributable to a shift in deposit mix, as average interest-bearing demand and savings balances declined during these periods. The growth in average interest-bearing deposits is complemented by average noninterest-bearing demand balance increases of $103.9 million and $98.0 million for the three and six months ended June 30, 2019, compared to the same periods in 2018. Average total borrowings decreased $384.0 million and $331.3 million for the three and six months ended June 30, 2019, compared to the same periods in 2018, due to increased deposits. Overall, the cost of interest-bearing liabilities increased 46 and 53 basis points for the three and six months ended June 30, 2019, compared to the same periods in 2018.









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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 June 30, 2019 Compared to June 30, 2018
 
Six Months Ended June 30, 2019 Compared to June 30, 2018
(dollars in thousands)
Volume (4)
Rate (4)
Total
 
Volume (4)
Rate (4)
Total
Interest earned on:
 
 
 
 
 
 
 
Interest-bearing deposits with banks
$
(20
)
$
73

$
53

 
$
(30
)
$
205

$
175

Securities, at fair value(2)(3)
(78
)
110

32

 
(119
)
355

236

Loans held for sale
(1
)
(11
)
(12
)
 
(18
)
(13
)
(31
)
Commercial real estate
1,414

2,127

3,541

 
3,845

5,353

9,198

Commercial and industrial
1,479

1,981

3,460

 
2,301

4,932

7,233

Commercial construction
(982
)
367

(615
)
 
(2,383
)
905

(1,478
)
Total Commercial Loans
1,911

4,475

6,386

 
3,763

11,190

14,953

Residential mortgage
451

488

939

 
747

822

1,569

Home equity
(113
)
704

591

 
(261
)
1,822

1,561

Installment and other consumer
70

78

148

 
107

160

267

Consumer construction
77

18

95

 
142

53

195

Total Consumer Loans
485

1,288

1,773

 
735

2,857

3,592

Total Portfolio Loans
2,396

5,763

8,159

 
4,498

14,047

18,545

Total Loans (1)(2)
2,395

5,752

8,147

 
4,480

14,034

18,514

Federal Home Loan Bank and other restricted stock
(204
)
35

(169
)
 
(355
)
75

(280
)
Change in Interest Earned on Interest-earning Assets
2,093

5,970

8,063

 
3,976

14,669

18,645

Interest paid on:
 
 
 
 
 
 
 
Interest-bearing demand

($15
)

$209


$194

 

($36
)

$413


$377

Money market
1,430

2,712

4,142

 
2,432

5,770

8,202

Savings
(46
)
101

55

 
(98
)
189

91

Certificates of deposit
312

2,186

2,498

 
529

4,825

5,354

Total Interest-bearing Deposits
1,681

5,208

6,889

 
2,827

11,197

14,024

Securities sold under repurchase agreements
(33
)
11

(22
)
 
(57
)
18

(39
)
Short-term borrowings
(1,930
)
393

(1,537
)
 
(3,056
)
1,156

(1,900
)
Long-term borrowings
132

109

241

 
248

255

503

Junior subordinated debt securities
—

47

47

 
—

167

167

Total Borrowings
(1,831
)
560

(1,271
)
 
(2,865
)
1,596

(1,269
)
Change in Interest Paid on Interest-bearing Liabilities
(150
)
5,768

5,618

 
(38
)
12,793

12,755

Change in Net Interest Income
$
2,243

$
202

$
2,445

 
$
4,014

$
1,876

$
5,890

(1) Nonaccruing loans are included in the daily average loan amounts outstanding.
(2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent for 2019 and 2018.
(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 net loan charge-offs have been deducted to bring the ALL to a level determined to be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses decreased $7.1 million and $3.9 million to $2.2 million and $7.9 million for the three and six months ended June 30, 2019 compared to $9.3 million and $11.8 million for the same periods in 2018.
The decrease in the provision for loan losses was mainly due to lower net charge-offs for both periods. For the three and six months ended June 30, 2019, we had net charges-offs of $2.1 million and $7.4 million compared to $7.9 million and $7.7 million for the same periods in 2018. Net charge-offs for the three months ended June 30, 2018 was significantly impacted by a $5.2 million loan charge-off for a commercial customer arising from a participation loan agreement with a lead bank and other participating banks. The loss resulted from fraudulent activities believed to be perpetrated by one or more executives employed by the borrower and its related entities. Annualized net loan charge-offs to average loans for the three and six months ended June 30, 2019 were 0.14 percent and 0.25 percent compared to 0.55 percent and 0.27 percent for the same periods in 2018.

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

Impaired loans increased $17.5 million to $51.3 million at June 30, 2019 compared to $33.8 million at June 30, 2018 and specific reserves on impaired loans increased $2.2 million compared to the same period in the prior year. The increase in specific reserves related to a $7.7 million commercial real estate loan that had a specific reserve of $1.3 million recorded in the fourth quarter of 2018. Nonperforming loans also increased $23.6 million to $45.0 million at June 30, 2019 compared to $21.4 million at June 30, 2018.
The ALL at June 30, 2019 was $61.5 million compared to $60.5 million at June 30, 2018. The ALL as a percent of total portfolio loans was 1.02 percent at June 30, 2019 and 1.05 percent at June 30, 2018. Refer to “Financial Condition as of June 30, 2019 - Allowance for Loan Losses” in this MD&A for additional information.
Noninterest Income
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2019
 
2018
 
$ Change
 
% Change
 
 
2019
2018
$ Change
% Change
Net gain on sale of securities
 
$
—

 
$
—

 
$
—

 
NM

 
 
$
—

 
$
—

 
$
—

 
NM

Debit and credit card
 
3,501

 
3,309

 
192

 
5.8

 
 
6,476

 
6,347

 
129

 
2.0
 %
Service charges on deposit accounts
 
3,212

 
3,227

 
(15
)
 
(0.5
)
 
 
6,365

 
6,468

 
(103
)
 
(1.6
)
Wealth management
 
2,062

 
2,616

 
(554
)
 
(21.2
)
 
 
4,109

 
5,298

 
(1,189
)
 
(22.4
)
Mortgage banking
 
637

 
831

 
(194
)
 
(23.3
)
 
 
1,131

 
1,432

 
(301
)
 
(21.0
)
Gain on sale of a majority interest of insurance business
 
—

 
—

 
—

 
NM

 
 
—

 
1,873

 
(1,873
)
 
NM

Other
 
3,489

 
2,268

 
1,221

 
53.8

 
 
6,182

 
4,626

 
1,556

 
33.6

Total Noninterest Income
 
$
12,901

 
$
12,251

 
$
650

 
5.3
 %
 
 
$
24,263

 
$
26,044

 
$
(1,781
)
 
(6.8
)%

Noninterest income increased $0.7 million to $12.9 million for the three months ended June 30, 2019 and decreased $1.8 million to $24.3 million for the six months ended June 30, 2019 compared to the same periods in 2018. The decrease for the six months ended June 30, 2019 was partially related to a $1.9 million gain on the sale of a majority interest in S&T Evergreen Insurance, LLC in the first quarter of 2018. Wealth management fees decreased $0.6 million for the three months ended and $1.2 million for the six months ended June 30, 2019 due to a decline in financial service revenue and market conditions. Offsetting these decreases were increases of $1.2 million and $1.6 million in other income primarily related to higher commercial loan swap fees of $0.9 million and $1.4 million due to an increase in customer demand for this product.
Noninterest Expense
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2019
 
2018
 
$ Change
 
% Change
 
 
2019
2018
$ Change
% Change
Salaries and employee benefits
 
$
20,290

 
$
18,611

 
$
1,679

 
9.0
 %
 
 
$
41,199

 
$
37,426

 
$
3,773

 
10.1
 %
Data processing and information technology
 
3,414

 
2,379

 
1,035

 
43.5

 
 
6,646

 
4,704

 
1,942

 
41.3

Net occupancy
 
2,949

 
2,804

 
145

 
5.2

 
 
5,986

 
5,677

 
309

 
5.4

Furniture, equipment and software
 
2,301

 
2,134

 
167

 
7.8

 
 
4,531

 
4,090

 
441

 
10.8

Other taxes
 
1,456

 
1,739

 
(283
)
 
(16.3
)
 
 
2,641

 
3,587

 
(946
)
 
(26.4
)
Marketing
 
1,310

 
1,190

 
120

 
10.1

 
 
2,452

 
1,892

 
560

 
29.6

Professional services and legal(1)
 
1,145

 
888

 
257

 
28.9

 
 
2,329

 
1,939

 
390

 
20.1

FDIC insurance
 
695

 
739

 
(44
)
 
(6.0
)
 
 
1,211

 
1,847

 
(636
)
 
(34.5
)
Merger related expenses
 
618

 
—

 
618

 
NM

 
 
618

 
—

 
618

 
NM

Other
 
6,174

 
5,379

 
795

 
14.8

 
 
11,658

 
10,783

 
875

 
8.1

Total Noninterest Expense
 
$
40,352

 
$
35,863

 
$
4,489

 
12.5
 %
 
 
$
79,271

 
$
71,945

 
$
7,326

 
10.2
 %
(1)Excludes Merger related expenses for 2019 amounts only.
NM - not meaningful


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

Noninterest expense increased $4.5 million to $40.4 million for the three months ended June 30, 2019 and $7.3 million to $79.3 million for the six months ended June 30, 2019 compared to the same periods in 2018. During the second quarter of 2019, we incurred merger related expenses of $0.6 million for professional services in the three and six months ended June 30, 2019. Salaries and employee benefits expense increased $1.7 million for the three months ended and $3.8 million for the six months ended June 30, 2019 compared to the same periods in 2018 mainly due to annual merit increases and higher severance, higher incentives and higher pension costs. Data processing and information technology increased $1.0 million for the three months ended and $1.9 million for the six months ended June 30, 2019 compared to the same periods in 2018 due the recent outsourcing arrangement for certain components of our IT function and the annual increase with our third-party data processor. Other noninterest expense increased $0.8 million for the three months ended and $0.9 million for the six months ended June 30, 2019 compared to the same periods in 2018 due to higher loan related expenses and other real estate owned, or OREO, losses and expenses. These increases were partially offset by a decrease in other taxes of $0.3 million for the three months ended and $0.9 million for the six months ended June 30, 2018 due to a state sales tax assessment in 2018. FDIC insurance remained relatively unchanged for the three months ended but decreased $0.6 million for the six months ended June 30, 2019 compared to the same periods in 2018 due to improvements in the financial ratios used to determine the assessment.
Provision for Income Taxes
The provision for income taxes increased $1.1 million for the three months ended June 30, 2019 as a result of an increase in pretax income of $5.7 million compared to the same period in 2018. The provision for income taxes decreased $0.7 million for the six months ended June 30, 2019 compared to the same periods in 2018 primarily due to non-recurring discrete items of $0.9 million related to the sale of a majority interest of our insurance business in the first quarter of 2018. Our effective tax rate increased to 16.3 percent for the three month period ended June 30, 2019 and decreased to 15.9 percent for the six month period ended June 30, 2019 compared to 15.8 percent and 17.4 percent for the same periods in 2018.
Financial Condition as of June 30, 2019
Total assets were relatively unchanged at $7.3 billion at June 30, 2019 compared to December 31, 2018. Total portfolio loans increased $86.6 million with increases primarily in the commercial loan portfolio. The Commercial and Industrial and Commercial Construction loans increased $66.3 million and $10.0 million offset by a decrease of $14.9 million in CRE loans. Consumer loans increased $25.2 million primarily as a result of the $24.7 million increase in residential mortgages and minor increases in all other consumer categories except the home equity portfolio. Securities decreased $16.3 million to $668.6 million at June 30, 2019 from $684.9 million at December 31, 2018. The decrease in securities is due to pay downs on mortgage-backed securities offset by limited purchases and an increase in the unrealized gain during the six months ended June 30, 2019. The bond portfolio had an unrealized gain of $11.3 million at June 30, 2019 compared to an unrealized loss of $5.1 million at December 31, 2018 due to a decrease in interest rates.
Our deposits increased $182.8 million, or 3.2 percent, with total deposits of $5.9 billion at June 30, 2019 compared to $5.7 billion at December 31, 2018. Customer deposits increased $291.5 million with growth in money market of $267.9 million, or 22.7 percent, in noninterest-bearing demand accounts of $41.2 million and certificates of deposit of $36.5 million which was offset by declines in savings accounts of $30.9 million and interest-bearing demand accounts of $23.2 million. The significant increase of $267.9 million in money market deposits is related to a competitively-priced indexed product and a promotional rate product offered in selected markets. Total brokered deposits decreased $108.7 million at June 30, 2019 compared to December 31, 2018.
Total borrowings decreased $179.7 million compared to December 31, 2018 due to a decrease in funding needs. Total short-term borrowings decreased by $179.2 million, or 36.7 percent, and long-term borrowings decreased $0.5 million.
Total shareholders’ equity increased by $29.2 million to $965.0 million at June 30, 2019 compared to $935.8 million at December 31, 2018. The increase was primarily due to net income of $49.0 million offset partially by dividends of $18.6 million and share repurchases of $15.1 million. The $13.6 million increase in other comprehensive income was due to a $12.9 million increase in unrealized gains on our available-for-sale investment securities and a $0.7 million change in the funded status of our employee benefit plans.

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

Securities Activity
(dollars in thousands)
June 30, 2019
 
 
December 31, 2018
 
 
$ Change
 
U.S. treasury securities
 
$
10,007

 
 
$
9,736

 
 
$
271

Obligations of U.S. government corporations and agencies
 
129,773

 
 
128,261

 
 
1,512

Collateralized mortgage obligations of U.S. government corporations and agencies
 
150,405

 
 
148,659

 
 
1,746

Residential mortgage-backed securities of U.S. government corporations and agencies
 
20,936

 
 
24,350

 
 
(3,414
)
Commercial mortgage-backed securities of U.S. government corporations and agencies
 
235,292

 
 
246,784

 
 
(11,492
)
Obligations of states and political subdivisions
 
117,624

 
 
122,266

 
 
(4,642
)
Debt Securities Available-for-Sale
 
664,037

 
 
680,056

 
 
(16,019
)
Marketable equity securities
 
4,551

 
 
4,816

 
 
(265
)
Total Securities
 
$
668,588

 
 
$
684,872

 
 
$
(16,284
)
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 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. Securities decreased $16.3 million to $668.6 million at June 30, 2019 from $684.9 million at December 31, 2018. The decrease in securities is due to pay downs on mortgage-backed securities offset by limited purchases and an increase in the unrealized gain during the six months ended June 30, 2019.
At June 30, 2019 our bond portfolio was in a net unrealized gain position of $11.3 million compared to a net unrealized loss position of $5.1 million at December 31, 2018. At June 30, 2019 total gross unrealized gains in the bond portfolio were $11.8 million offset by $0.5 million of gross unrealized losses, compared to December 31, 2018, when total gross unrealized gains were $3.5 million offset by gross unrealized losses of $8.6 million. Management evaluates the securities portfolio for other than temporary impairment, or OTTI, on a quarterly basis. During the six months ended June 30, 2019 and 2018, we did not record any OTTI.
Loan Composition
 
June 30, 2019
 
 
December 31, 2018
(dollars in thousands)
Amount
% of Loans
 
 
Amount
% of Loans
Commercial
 
 
 
 
 
 
Commercial real estate
$
2,906,895

48.18
%
 
 
$
2,921,832

49.13
%
Commercial and industrial
1,559,727

25.85

 
 
1,493,416

25.11

Construction
267,203

4.43

 
 
257,197

4.33

Total Commercial Loans
4,733,825

78.46
%
 
 
4,672,445

78.57
%
Consumer
 
 
 
 
 
 
Residential mortgage
751,355

12.45
%
 
 
726,679

12.22
%
Home equity
464,195

7.69

 
 
471,562

7.93

Installment and other consumer
72,041

1.19

 
 
67,546

1.13

Construction
11,784

0.20

 
 
8,416

0.14

Total Consumer Loans
1,299,375

21.54
%
 
 
1,274,203

21.43
%
Total Portfolio Loans
6,033,200

100.00
%
 
 
5,946,648

100.00
%
Loans held for sale
8,135

 
 
 
2,371

 
Total Loans
$
6,041,335

 
 
 
$
5,949,019

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

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

Commercial loans, including CRE, C&I and Commercial Construction, comprised 78.5 percent of total portfolio loans at June 30, 2019 and 78.6 percent at December 31, 2018. Total portfolio loans increased $86.6 million to $6.0 billion at June 30, 2019 compared to $5.9 billion at December 31, 2018. The increase was primarily due to $61.4 million in our commercial loan portfolio. C&I portfolio increased $66.3 million and Commercial Construction loans increased $10.0 million offset by a decrease of $14.9 million in the CRE portfolio compared to December 31, 2018.
Consumer loans represent 21.5 percent of our total portfolio loans at June 30, 2019 and 21.4 percent at December 31, 2018. Consumer loans increased $25.2 million compared to December 31, 2018 with minor increases in all categories except the home equity portfolio. Residential mortgages increased $24.7 million, installment and other consumer increased $4.5 million and consumer construction loans increased $3.4 million offset by a decrease of $7.4 million in home equity loans.
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 evaluation 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 specific 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.

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

The following tables summarize the ALL and recorded investments in loans by category and the related ratios for the dates presented:
 
June 30, 2019
 
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
 
$
1,530

 
 
$
31,306

 
 
$
32,836

 
 
$
29,295

 
 
$
2,877,600

 
 
$
2,906,895

Commercial and industrial
 
204

 
 
13,023

 
 
13,227

 
 
10,651

 
 
1,549,076

 
 
1,559,727

Commercial construction
 
157

 
 
7,097

 
 
7,254

 
 
2,808

 
 
264,395

 
 
267,203

Consumer real estate
 
307

 
 
6,264

 
 
6,571

 
 
8,529

 
 
1,218,805

 
 
1,227,334

Other consumer
 
14

 
 
1,577

 
 
1,591

 
 
16

 
 
72,025

 
 
72,041

Total
 
$
2,212

 
 
$
59,267

 
 
$
61,479

 
 
$
51,299

 
 
$
5,981,901

 
 
$
6,033,200

 
 
December 31, 2018
 
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
 
$
1,295

 
 
$
32,412

 
 
$
33,707

 
 
$
11,369

 
 
$
2,910,463

 
 
$
2,921,832

Commercial and industrial
 
360

 
 
11,236

 
 
11,596

 
 
13,672

 
 
1,479,744

 
 
1,493,416

Commercial construction
 
87

 
 
7,896

 
 
7,983

 
 
15,775

 
 
241,422

 
 
257,197

Consumer real estate
 
10

 
 
6,177

 
 
6,187

 
 
8,674

 
 
1,197,983

 
 
1,206,657

Other consumer
 
11

 
 
1,512

 
 
1,523

 
 
16

 
 
67,530

 
 
67,546

Total
 
$
1,763

 
 
$
59,233

 
 
$
60,996

 
 
$
49,506

 
 
$
5,897,142

 
 
$
5,946,648

 
 
June 30, 2019

 
December 31, 2018

Ratio of net charge-offs to average loans outstanding
0.25
%
* 
0.18
%
Allowance for loan losses as a percentage of total loans
1.02
%
 
1.03
%
Allowance for loan losses to nonperforming loans
137
%
 
144
%
* Annualized
The ALL was $61.5 million, or 1.02 percent of total portfolio loans, at June 30, 2019 compared to $61.0 million, or 1.03 percent of total portfolio loans at December 31, 2018. The minor increase in the ALL of $0.5 million was primarily due to a $0.4 million increase in the reserve for loans individually evaluated for impairment compared to December 31, 2018. Impaired loans increased $1.8 million to $51.3 million compared to $49.5 million at December 31, 2018. Commercial special mention, substandard and doubtful loans decreased $24.9 million to $243.6 million from $268.5 million at December 31, 2018. Substandard loans decreased $43.3 million and special mention increased $18.4 million. The decrease in substandard loans from December 31, 2018 was mainly due to pay-offs and loan risk rating upgrades. Special mention loans increased due to downgrades as a result of updated financial information.
For the three and six months ended June 30, 2019, we had net charges-offs of $2.1 million and $7.4 million compared to $7.9 million and $7.7 million for the same periods in 2018. The provision for loan losses decreased $7.1 million and $3.9 million to $2.2 million and $7.9 million for the three and six months ended June 30, 2019 compared to $9.3 million and $11.8 million for the same periods in 2018. The decrease in the provision for loan losses was mainly due to lower net charge-offs for both periods.
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.

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

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 by the borrower 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 their remaining lives, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and we fully expect that the remaining principal and interest will be 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 increased $2.7million to $30.6 million at June 30, 2019 compared to $27.9 million at December 31, 2018. The increase is primarily due to new TDRs totaling $11.2 million in 2019, which were offset by principal reductions and charge-offs. Total TDRs of $30.6 million at June 30, 2019 included $20.7 million, or 67.5 percent, that were accruing and $9.9 million, or 32.5 percent, that were nonaccruing.
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.
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 allowance for unfunded loan commitments was $2.3 million at June 30, 2019 and $2.2 million at December 31, 2018. The allowance for unfunded commitments is included in other liabilities in the Consolidated Balance Sheets.

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

Nonperforming assets consist of nonaccrual loans, nonaccrual TDRs and OREO. The following table summarizes nonperforming assets for the dates presented:
(dollars in thousands)
June 30, 2019
 
 
December 31, 2018
 
 
$ Change
 
Nonperforming Loans
 
 
 
 
 
 
 
 
Commercial real estate
 
$
23,184

 
 
$
10,913

 
 
$
12,271

Commercial and industrial
 
3,150

 
 
2,314

 
 
836

Commercial construction
 
820

 
 
13,787

 
 
(12,967
)
Residential mortgage
 
5,285

 
 
5,585

 
 
(300
)
Home equity
 
2,623

 
 
2,349

 
 
274

Installment and other consumer
 
22

 
 
37

 
 
(15
)
Total Nonperforming Loans
 
35,083

 
 
34,985

 
 
98

Nonperforming Troubled Debt Restructurings
 
 
 
 

 
 
 
Commercial real estate
 
5,600

 
 
1,139

 
 
4,461

Commercial and industrial
 
980

 
 
6,646

 
 
(5,666
)
Commercial construction
 
406

 
 
406

 
 
—

Residential mortgage
 
1,497

 
 
1,543

 
 
(46
)
Home equity
 
1,458

 
 
1,349

 
 
109

Installment and other consumer
 
3

 
 
5

 
 
(2
)
Total Nonperforming Troubled Debt Restructurings
 
9,944

 
 
11,088

 
 
(1,145
)
Total Nonperforming Loans
 
45,027

 
 
46,073

 
 
(1,046
)
OREO
 
1,495

 
 
3,092

 
 
(1,597
)
Total Nonperforming Assets
 
$
46,522

 
 
$
49,165

 
 
$
(2,643
)
 
 
 
 
 
 
 
 
 
Asset Quality Ratios:
 
 
 
 
 
 
 
 
Nonperforming loans as a percent of total loans
 
0.75
%
 
 
0.77
%
 
 
 
Nonperforming assets as a percent of total loans plus OREO
 
0.77
%
 
 
0.83
%
 
 
 
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 loans decreased $1.1 million to $45.0 million at June 30, 2019 compared to $46.1 million at
December 31, 2018.
Deposits
(dollars in thousands)
June 30, 2019
 
 
December 31, 2018
 
 
$ Change
 
Customer Deposits
 
 
 
 
 
 
 
 
Noninterest-bearing demand
 
$
1,462,386

 
 
$
1,421,156

 
 
$
41,230

Interest-bearing demand
 
544,265

 
 
567,492

 
 
(23,227
)
Money market
 
1,446,086

 
 
1,178,211

 
 
267,875

Savings
 
754,062

 
 
784,970

 
 
(30,908
)
Certificates of deposit
 
1,298,255

 
 
1,261,704

 
 
36,551

Total Customer Deposits
 
5,505,054

 
 
5,213,533

 
 
291,521

Brokered Deposits
 
 
 
 
 
 
 
 
Interest-bearing demand
 
5,398

 
 
6,201

 
 
(803
)
Money market
 
296,248

 
 
303,854

 
 
(7,606
)
Certificates of deposit
 
50,000

 
 
150,334

 
 
(100,334
)
Total Brokered Deposits
 
351,646

 
 
460,389

 
 
(108,743
)
Total Deposits
 
$
5,856,700

 
 
$
5,673,922

 
 
$
182,778



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

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 June 30, 2019 increased $182.8 million from December 31, 2018. Total customer deposits increased $291.5 million from December 31, 2018. Money market deposits primarily accounted for this change with an increase of $267.9 million, noninterest-bearing demand deposits increased $41.2 million and certificate of deposits increased $36.5 million. The significant increase in money market deposits is related to a competitively-priced indexed product and a promotional rate product offered in selected markets. These increases were offset by declines in savings deposits of $30.9 million and interest-bearing demand deposits of $23.2 million. These decreases were mainly a result of migration into the indexed money market product and outflows due to repositioning by our customers. Total brokered deposits decreased $108.7 million from December 31, 2018. Brokered deposits are an additional source of funds utilized by ALCO as a way to diversify funding sources, as well as manage our funding costs and structure.
Borrowings
(dollars in thousands)
June 30, 2019
 
 
December 31, 2018
 
 
$ Change
 
Securities sold under repurchase agreements
 
$
14,154

 
 
$
18,383

 
 
$
(4,229
)
Short-term borrowings
 
295,000

 
 
470,000

 
 
(175,000
)
Long-term borrowings
 
69,791

 
 
70,314

 
 
(523
)
Junior subordinated debt securities
 
45,619

 
 
45,619

 
 
—

Total Borrowings
 
$
424,564

 
 
$
604,316

 
 
$
(179,752
)
Borrowings are an additional source of funding for us. At June 30, 2019 total borrowings decreased $179.8 million, or 29.7 percent, compared to December 31, 2018 due to a decrease in funding needs as a result of strong customer deposit growth. Total short-term borrowings decreased by $175.0 million, or 37.2 percent, compared to December 31, 2018.

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

Information pertaining to short-term borrowings is summarized in the tables below for the six and twelve months ended June 30, 2019 and December 31, 2018.
 
Securities Sold Under Repurchase Agreements
(dollars in thousands)
June 30, 2019
 
December 31, 2018
Balance at the period end
$
14,154

 
$
18,383

Average balance during the period
19,735

 
45,992

Average interest rate during the period
0.59
%
 
0.48
%
Maximum month-end balance during the period
$
23,427

 
$
54,579

Average interest rate at the period end
0.74
%
 
0.46
%
 
 
 
 
 
Short-Term Borrowings
(dollars in thousands)
June 30, 2019
 
December 31, 2018
Balance at the period end
$
295,000

 
$
470,000

Average balance during the period
280,862

 
525,172

Average interest rate during the period
2.72
%
 
2.11
%
Maximum month-end balance during the period
$
425,000

 
$
690,000

Average interest rate at the period end
2.71
%
 
2.65
%
Information pertaining to long-term borrowings is summarized in the tables below for the six and twelve months ended June 30, 2019 and December 31, 2018.
 
Long-Term Borrowings
(dollars in thousands)
June 30, 2019
 
December 31, 2018
Balance at the period end
$
69,791

 
$
70,314

Average balance during the period
70,122

 
47,986

Average interest rate during the period
2.85
%
 
2.35
%
Maximum month-end balance during the period
$
70,418

 
$
70,314

Average interest rate at the period end
2.73
%
 
2.84
%
 
 
 
 
 
Junior Subordinated Debt Securities
(dollars in thousands)
June 30, 2019
 
December 31, 2018
Balance at the period end
$
45,619

 
$
45,619

Average balance during the period
45,619

 
45,619

Average interest rate during the period
5.03
%
 
4.60
%
Maximum month-end balance during the period
$
45,619

 
$
45,619

Average interest rate at the period end
5.07
%
 
5.25
%

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

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 ALCO for formulation, implementation, and oversight of liquidity risk management for S&T. The 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. The ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests, and having a detailed contingency funding plan. The 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 "Financial Condition- Deposits" section of this 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 our ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate, and high. At June 30, 2019, we had $532.7 million in highly liquid assets, which consisted of $61.8 million in interest-bearing deposits with banks, $462.8 million in unpledged securities and $8.1 million in loans held for sale. This resulted in a highly liquid assets to total assets ratio of 7.3 percent at June 30, 2019. Also, at June 30, 2019, we had a remaining borrowing availability of $2.0 billion with the FHLB of Pittsburgh. Refer to Note 9: Borrowings in the Notes to Consolidated Financial Statements and the "Financial Condition- Borrowings" section of this MD&A for more details.
The following table summarizes capital amounts and ratios for S&T and S&T Bank for the dates presented:
(dollars in thousands)
Adequately
Capitalized
Well-
Capitalized
 
June 30, 2019
 
December 31, 2018
 
Amount
Ratio
 
Amount
Ratio
S&T Bancorp, Inc.
 
 
 
 
 
 
 
 
Tier 1 leverage
4.00
%
5.00
%
 
$
705,600

10.12
%
 
$
689,778

10.05
%
Common equity tier 1 to risk-weighted assets
4.50
%
6.50
%
 
685,600

11.35
%
 
669,778

11.38
%
Tier 1 capital to risk-weighted assets
6.00
%
8.00
%
 
705,600

11.68
%
 
689,778

11.72
%
Total capital to risk-weighted assets
8.00
%
10.00
%
 
794,426

13.15
%
 
777,913

13.21
%
S&T Bank
 
 
 
 
 
 
 
 
Tier 1 leverage
4.00
%
5.00
%
 
$
675,236

9.71
%
 
$
659,304

9.63
%
Common equity tier 1 to risk-weighted assets
4.50
%
6.50
%
 
675,236

11.20
%
 
659,304

11.23
%
Tier 1 capital to risk-weighted assets
6.00
%
8.00
%
 
675,236

11.20
%
 
659,304

11.23
%
Total capital to risk-weighted assets
8.00
%
10.00
%
 
764,061

12.68
%
 
747,438

12.73
%
We have filed a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended, with the SEC, which 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 June 30, 2019, we had not issued any securities pursuant to this shelf registration statement.

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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 also 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 ALCO. ALCO monitors and manages market risk through rate shock analyses, economic value of equity, or EVE, analyses and by performing stress tests and simulations 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 and 24 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 12 and 24 month horizons using rate shocks in increments of +/- 100 basis points. Policy guidelines define the percentage change in pretax net interest income by graduated risk tolerance levels of minimal, moderate and high. We have temporarily suspended the analyses on downward rate shocks of 300 basis points or more because they do not provide meaningful insight into our interest rate risk position.
In order to monitor interest rate risk beyond the 24 month time horizon of rate shocks on pretax net interest income, we also perform EVE analyses. EVE represents the present value of all asset cash flows minus the present value of all liability cash flows. EVE 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 analyses on pretax net interest income, EVE analyses incorporate 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 using rate shocks in increments of +/- 100 basis points. Policy guidelines define the percentage change in EVE by graduated risk tolerance levels of minimal, moderate and high. We have also temporarily suspended the downward rate shocks of 300 basis points or more for EVE.
The table below reflects the rate shock analyses results for the 1 - 12 and 13 - 24 month periods of pretax net interest income and EVE. All results are in the minimal risk tolerance level.
 
June 30, 2019
 
December 31, 2018
 
1 - 12 Months

 
13 - 24 Months

 
% Change in EVE

 
1 - 12 Months

 
13 - 24 Months

 
% Change in EVE

Change in Interest Rate (basis points)
% Change in Pretax Net Interest Income

 
% Change in Pretax Net Interest Income

 
 
% Change in Pretax Net Interest Income

 
% Change in Pretax Net Interest Income

 
 400
11.9
 %
 
13.3
 %
 
(0.3
)%
 
8.3
 %
 
11.6
 %
 
(10.0
)%
 300
8.9

 
9.8

 
4.0

 
6.1

 
8.5

 
(4.6
)
 200
6.0

 
6.6

 
6.1

 
4.0

 
5.6

 
0.6

 100
3.2

 
3.7

 
5.4

 
2.2

 
3.1

 
1.4

(100)
(4.7
)
 
(5.7
)
 
(11.3
)
 
(3.8
)
 
(5.4
)
 
(7.5
)
(200)
(9.3
)
 
(11.5
)
 
(25.4
)
 
(7.8
)
 
(11.2
)
 
(16.8
)
The results from the rate shock analyses on net interest income 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.
Our rate shock analyses show an improvement in the percentage change in pretax net interest income in the rates up scenarios and a decline in the rates down scenarios in months 1 - 12 and 13 - 24 when comparing December 31, 2018 to June 30, 2019. Our EVE analyses show an improvement in the percentage change in EVE in the rates up scenarios and a decline in the rates down scenario when comparing December 31, 2018 to June 30, 2019.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


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 changes other than the policy guidelines, yield curve shape changes, significant balance mix changes and various growth scenarios.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of S&T’s Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO (its principal executive officer and principal financial officer, respectively), management has evaluated the effectiveness of the design and operation of S&T’s disclosure controls and procedures as of June 30, 2019. 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 June 30, 2019, there were no changes made to S&T’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, S&T’s internal control over financial reporting.



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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
There have been no material changes to the risk factors that we have previously disclosed in Part I, Item 1A – “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 21, 2019 other than the risks described below related to the pending merger with DNB.
The market price of S&T common stock after the merger may be affected by factors different from those affecting the shares of S&T currently.
Upon completion of the merger, holders of DNB common stock will become holders of S&T common stock. S&T’s business differs in important respects from that of DNB, and, accordingly, the results of operations of the combined company and the market price of S&T common stock after the completion of the merger may be affected by factors different from those currently affecting the independent results of operations of S&T.
Approvals required to complete the merger may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the merger.
Before the merger and the bank merger may be completed, S&T and DNB must obtain approvals from the Federal Reserve Board, the FDIC and the Pennsylvania Department of Banking and Securities, as well as from the shareholders of DNB. Other approvals, waivers or consents from regulators may also be required. If these approvals are not obtained or waived, to the extent permitted by law or stock exchange rules, the merger may not occur or may be delayed. Additionally, regulators may impose conditions on the completion of the merger or require changes to the terms of the merger. Such conditions or changes could have the effect of delaying or preventing completion of the merger or imposing additional costs on or limiting the revenues of the combined company following the merger, any of which might have an adverse effect on the combined company following the merger.
Combining the two companies may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of the merger may not be realized.
S&T and DNB have operated and, until the completion of the merger, will continue to operate, independently. The success of the merger, including anticipated benefits and cost savings, will depend, in part, on S&T’s ability to successfully combine the businesses of S&T and DNB. To realize these anticipated benefits and cost savings, after the completion of the merger, S&T expects to integrate DNB’s business into its own.
It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. The loss of key employees could adversely affect S&T’s ability to successfully conduct its business in the markets in which DNB now operates, which could have an adverse effect on S&T’s financial results and the value of its common stock. If S&T experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected.
As with any merger of financial institutions, there also may be business disruptions that cause S&T and/or DNB to lose customers or cause customers to remove their accounts from S&T and/or DNB and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of S&T and DNB during this transition period and for an undetermined period after completion of the merger on the combined company. In addition, the actual cost savings of the merger could be less than anticipated.
Termination of the merger agreement could negatively impact S&T.
There may be various negative consequences if the merger agreement is terminated. For example, S&T’s businesses may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is

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terminated, the market price of S&T’s common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be completed.
Failure to complete the merger could negatively impact the stock price and the future business and financial results of S&T.
If the merger is not completed for any reason, including as a result of DNB shareholders declining to approve the merger agreement and the transactions contemplated by the merger agreement, the ongoing business of S&T may be adversely affected and, without realizing any of the benefits of having completed the merger, S&T would be subject to a number of risks, including the following:
•
S&T may experience negative reactions from the financial markets, including negative impacts on its stock price;
•
S&T may experience negative reactions from its customers, vendors and employees;
•
The merger agreement places certain restrictions on the conduct of S&T’s business prior to completion of the merger, such restrictions, the waiver of which is subject to the consent of DNB (not to be unreasonably withheld or delayed) may prevent S&T from taking certain specified actions during the pendency of the merger; and
•
Matters relating to the merger (including integration planning) will require substantial commitments of time and resources by S&T management, which would otherwise have been devoted to other opportunities that may have been beneficial to S&T as an independent company.
If the merger is not completed, S&T will have incurred substantial expenses without realizing the expected benefits of the merger.
S&T has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement. If the merger is not completed, S&T would have to recognize these and other expenses without realizing the expected benefits of the merger.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities
The following table is a summary of our purchases of common stock during the second quarter of 2019:
Period
 
Total number of shares purchased

 
Average price paid per share

 
Total number of shares purchased as part of publicly announced plan(1)

 
Approximate dollar value of shares that may yet be purchased under the plan

 
 
 
 
 
 
 
 

$25,456,631

04/01/2019 - 04/30/2019
 
71,936

 

$39.41

 
71,936

 
22,621,633

 
 
 
 
 
 
 
 
 
05/01/2019 - 05/31/2019
 
—

 
—

 
—

 
22,621,633

 
 
 
 
 
 
 
 
 
06/01/2019 - 06/30/2019
 
—

 
—

 
—

 
22,621,633

Total
 
71,936

 

$39.41

 
71,936

 

$22,621,633

(1)On March 19, 2018, our Board of Directors authorized a $50 million share repurchase plan. This repurchase authorization, which is effective through August 31, 2019, permits us to repurchase from time to time up to $50 million in aggregate value of shares of our common stock through a combination of open market and privately negotiated repurchases. The specific timing, price and quantity of repurchases will be at our discretion and will depend on a variety of factors, including general market conditions, the trading price of the common stock, legal and contractual requirements and our financial performance. The repurchase plan does not obligate us to repurchase any particular number of shares. We expect to fund any repurchases from cash on hand and internally generated funds. As of June 30, 2019, there were 707,571 common shares repurchased under this plan at a total cost of $27.4 million, or an average of $38.69 per share. Up to an additional $22.6 million of our common stock may be repurchased under this plan through August 31, 2019.
Item 3. Defaults Upon Senior Securities
None

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S&T BANCORP, INC. AND SUBSIDIARIES

Item 4. Mine Safety Disclosures
Not Applicable
Item 5. Other Information
None
Item 6. Exhibits
Agreement and Plan of Merger, dated as of June 5, 2019, by and between DNB Financial Corporation and S&T Bancorp, Inc. Filed as Exhibit 2.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on June 4, 2019, and incorporated herein by reference.
 
Severance Agreement, by and between David G. Antolik and S&T Bancorp, Inc., dated May 17, 2019.
Filed herewith
Rule 13a-14(a) Certification of the Chief Executive Officer.
Filed herewith
Rule 13a-14(a) Certification of the Chief Financial Officer.
Filed herewith
Rule 13a-14(b) Certification of the Chief Executive Officer and Chief Financial Officer.
Filed herewith
101.INS
XBRL Instance Document
 
101.SCH
XBRL Taxonomy Extension Schema
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 


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S&T BANCORP, INC. AND SUBSIDIARIES

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
S&T Bancorp, Inc.
(Registrant)
 
 
July 31, 2019
/s Mark Kochvar
 
Mark Kochvar
Senior Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Signatory)


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