Document
UNITED STATES                
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 ______________________________________
FORM 10-Q
______________________________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            To                
Commission file number 0-12508
______________________________________ 
S&T BANCORP, INC.
(Exact name of registrant as specified in its charter)
______________________________________ 
Pennsylvania
 
25-1434426
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
800 Philadelphia Street, Indiana, PA
 
15701
(Address of principal executive offices)
 
(zip code)
800-325-2265
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
Common Stock, $2.50 Par Value - 35,000,681 shares as of May 3, 2018


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)



 
March 31, 2018
 
December 31, 2017
(dollars in thousands, except per share data)
(Unaudited)
 
(Audited)
ASSETS
 
 
 
Cash and due from banks, including interest-bearing deposits of $67,831 and $61,965 at March 31, 2018 and December 31, 2017
$
112,849

 
$
117,152

Securities, at fair value
687,650

 
698,291

Loans held for sale
3,283

 
4,485

Portfolio loans, net of unearned income
5,730,613

 
5,761,449

Allowance for loan losses
(59,046
)
 
(56,390
)
Portfolio loans, net
5,671,567

 
5,705,059

Bank owned life insurance
72,629

 
72,150

Premises and equipment, net
41,635

 
42,702

Federal Home Loan Bank and other restricted stock, at cost
29,769

 
29,270

Goodwill
287,446

 
291,670

Other intangible assets, net
3,126

 
3,677

Other assets
95,375

 
95,799

Total Assets
$
7,005,329

 
$
7,060,255

LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing demand
$
1,368,350

 
$
1,387,712

Interest-bearing demand
560,711

 
603,141

Money market
1,239,400

 
1,146,156

Savings
876,459

 
893,119

Certificates of deposit
1,342,174

 
1,397,763

Total Deposits
5,387,094

 
5,427,891

Securities sold under repurchase agreements
44,617

 
50,161

Short-term borrowings
525,000

 
540,000

Long-term borrowings
46,684

 
47,301

Junior subordinated debt securities
45,619

 
45,619

Other liabilities
60,908

 
65,252

Total Liabilities
6,109,922

 
6,176,224

SHAREHOLDERS’ EQUITY
 
 
 
Common stock ($2.50 par value)
Authorized—50,000,000 shares
Issued—36,130,480 shares at March 31, 2018 and December 31, 2017
Outstanding— 35,000,502 shares at March 31, 2018 and 34,971,929 shares at December 31, 2017
90,326

 
90,326

Additional paid-in capital
216,618

 
216,106

Retained earnings
649,925

 
628,107

Accumulated other comprehensive (loss) income
(29,953
)
 
(18,427
)
Treasury stock (1,129,978 shares at March 31, 2018 and 1,158,551 shares at December 31, 2017, at cost)
(31,509
)
 
(32,081
)
Total Shareholders’ Equity
895,407

 
884,031

Total Liabilities and Shareholders’ Equity
$
7,005,329

 
$
7,060,255

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 March 31,
(dollars in thousands, except per share data)
2018
 
2017
INTEREST INCOME
 
 
 
Loans, including fees
$
63,055

 
$
56,900

Investment Securities:
 
 
 
Taxable
3,429

 
2,848

Tax-exempt
874

 
920

Dividends
671

 
482

Total Interest Income
68,029

 
61,150

INTEREST EXPENSE
 
 
 
Deposits
7,846

 
5,379

Borrowings and junior subordinated debt securities
3,251

 
1,893

Total Interest Expense
11,097

 
7,272

NET INTEREST INCOME
56,932

 
53,878

Provision for loan losses
2,472

 
5,183

Net Interest Income After Provision for Loan Losses
54,460

 
48,695

NONINTEREST INCOME
 
 
 
Net gain (loss) on sale of securities

 
370

Service charges on deposit accounts
3,241

 
3,014

Debit and credit card
3,037

 
2,843

Wealth management
2,682

 
2,403

Gain on sale of a majority interest of insurance business
1,873

 

Mortgage banking
602

 
733

Insurance
169

 
1,457

Other
2,188

 
2,176

Total Noninterest Income
13,792

 
12,996

NONINTEREST EXPENSE
 
 
 
Salaries and employee benefits
18,815

 
20,541

Net occupancy
2,873

 
2,815

Data processing
2,325

 
2,223

Furniture, equipment and software
1,957

 
2,047

Other taxes
1,848

 
976

FDIC insurance
1,108

 
1,123

Professional services and legal
1,051

 
1,068

Marketing
702

 
754

Other
5,403

 
5,261

Total Noninterest Expense
36,082

 
36,808

Income Before Taxes
32,170

 
24,883

Provision for income taxes
6,007

 
6,695

Net Income
$
26,163

 
$
18,188

Earnings per share—basic
$
0.75

 
$
0.52

Earnings per share—diluted
$
0.75

 
$
0.52

Dividends declared per share
$
0.22

 
$
0.20

Comprehensive Income
$
14,637

 
$
19,376

See Notes to Consolidated Financial Statements

3

Table of Contents

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

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

 
$
213,098

 
$
585,891

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

Net income for three months ended March 31, 2017

 

 
18,188

 

 

 
18,188

Other comprehensive income (loss), net of tax

 

 

 
1,188

 

 
1,188

Cash dividends declared ($0.20 per share)

 

 
(6,960
)
 

 

 
(6,960
)
Treasury stock issued for restricted awards (74,903 shares, net of 7,370 forfeitures)

 

 
(2,014
)
 

 
1,820

 
(194
)
Recognition of restricted stock compensation expense

 
1,002

 

 

 

 
1,002

Balance at March 31, 2017
$
90,326

 
$
214,100

 
$
595,105

 
$
(12,596
)
 
$
(31,755
)
 
$
855,180

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
$
90,326

 
$
216,106

 
$
628,107

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

Net income for three months ended March 31, 2018

 

 
26,163

 

 

 
26,163

Other comprehensive income (loss), net of tax

 

 

 
(6,973
)
 

 
(6,973
)
Reclassification of tax effects from the Tax Act(1)

 

 
3,691

 
(3,691
)
 

 

Reclassification of net unrealized gains on equity securities(2)

 

 
862

 
(862
)
 

 

Cash dividends declared ($0.22 per share)

 

 
(7,669
)
 

 

 
(7,669
)
Treasury stock issued for restricted awards (66,165 shares, net of 37,592 forfeitures)

 

 
(1,229
)
 

 
572

 
(657
)
Recognition of restricted stock compensation expense

 
512

 

 

 

 
512

Balance at March 31, 2018
$
90,326

 
$
216,618

 
$
649,925

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

See Notes to Consolidated Financial Statements
(1)Reclassification due to the adoption of ASU No. 2018-02 - $(3,924) relates to funded status of pension and $233 relates to net unrealized gains on available-for-sale securities.
(2)Reclassification due to the adoption of ASU No. 2016-01



4

Table of Contents

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

 
Three Months Ended March 31,
(dollars in thousands)
2018
 
2017
OPERATING ACTIVITIES
 
 
 
Net income
$
26,163

 
$
18,188

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

 

Provision for loan losses
2,472

 
5,183

Recovery for unfunded loan commitments
(71
)
 
(458
)
Net depreciation, amortization and accretion
1,017

 
369

Net amortization of discounts and premiums on securities
796

 
1,030

Stock-based compensation expense
512

 
1,002

Securities gains, net

 
(370
)
Mortgage loans originated for sale
(16,827
)
 
(15,694
)
Proceeds from the sale of mortgage loans
18,326

 
16,575

Gain on the sale of mortgage loans, net
(296
)
 
(193
)
Gain on the sale of majority interest of insurance business
(1,873
)
 

Net decrease (increase) in interest receivable
336

 
(62
)
Net decrease in interest payable
(720
)
 
(435
)
Net decrease in other assets
4,120

 
3,404

Net increase in other liabilities
3,836

 
1,768

Net Cash Provided by Operating Activities
37,791

 
30,307

INVESTING ACTIVITIES
 
 
 
Purchases of securities
(27,565
)
 
(36,604
)
Proceeds from maturities, prepayments and calls of securities
22,104

 
16,942

Proceeds from sales of securities

 
582

Net (purchases) sales of Federal Home Loan Bank stock
(499
)
 
2,078

Net decrease (increase) in loans
27,717

 
(151,438
)
Proceeds from sale of loans not originated for resale
2,060

 
2,657

Purchases of premises and equipment
(309
)
 
(745
)
Proceeds from the sale of premises and equipment
109

 
16

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

 

Net Cash Provided by (Used in) Investing Activities
28,157

 
(166,512
)
FINANCING ACTIVITIES
 
 
 
Net increase in core deposits
14,793

 
62,219

Net (decrease) increase in certificates of deposit
(55,557
)
 
100,799

Net decrease in securities sold under repurchase agreements
(5,544
)
 
(3,845
)
Net increase in short-term borrowings
(15,000
)
 
(50,000
)
Repayments of long-term borrowings
(617
)
 
(595
)
Treasury shares issued-net
(657
)
 
(194
)
Cash dividends paid to common shareholders
(7,669
)
 
(6,960
)
Net Cash (Used in) Provided by Financing Activities
(70,251
)
 
101,424

Net decrease in cash and cash equivalents
(4,303
)
 
(34,781
)
Cash and cash equivalents at beginning of period
117,152

 
139,486

Cash and Cash Equivalents at End of Period
$
112,849

 
$
104,705

Supplemental Disclosures
 
 
 
Loans transferred to held for sale
$
2,060

 
$

Loans transferred to portfolio from held for sale
$

 
$
250

Interest paid
$
11,817

 
$
7,706

Income taxes paid, net of refunds
$
108

 
$
172

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

 
$

Transfers to other real estate owned and other repossessed assets
$
2,599

 
$
397

See Notes to Consolidated Financial Statements

5

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, 2017, filed with the Securities and Exchange Commission, or SEC, on March 1, 2018. In the opinion of management, the accompanying interim financial information reflects all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position and the results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.
On January 1, 2018, we sold a 70 percent majority interest in the assets of our wholly-owned subsidiary S&T Evergreen Insurance, LLC. We transferred our remaining ownership interest in the net assets of S&T Evergreen Insurance, LLC for a 30 percent ownership interest in a new partnership entity. We will 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
Income Taxes - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
In March 2018, the FASB issued ASU No. 2018-05 Income Taxes - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendments in this ASU add various SEC paragraphs pursuant to the issuance of the SEC Staff Accounting Bulletin to the Accounting Standards Codification Subtopic 740-10. We adopted the amendments in this ASU in conjunction with ASU 2018-02 Reclassification of Certain Tax Effects from AOCI. This ASU had no impact to our Balance Sheets or Statements of Comprehensive Income.
Investments - Debt Securities and Regulated Operations - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273
In March 2018, the FASB issued ASU No. 2018-04 Investments - Debt Securities and Regulated Operations - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273. The amendments in this ASU add various SEC paragraphs pursuant to the issuance of the SEC Staff Accounting Bulletin to the Accounting Standards Codification Subtopics 320 and 980. We adopted the amendments in this ASU in conjunction with ASU 2016-01 as it relates to equity securities.

6

Table of Contents

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

NOTE 1. BASIS OF PRESENTATION - continued

Income Statement -- Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act, or Tax Act. The amendments eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users and will require certain disclosures about the stranded tax effects. This Update is effective for all entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not been issued or made available for issuance. We have elected to reclassify all tax effects related to the Tax Act from accumulated other comprehensive income, or AOCI, to retained earnings as of January 1, 2018. As such, we have early adopted this Update and reclassified $3.7 million for the release of stranded income tax effects relating to unrealized gains and losses on our securities portfolio and our pension plan from AOCI, to retained earnings as of March 31, 2018. The adoption of this ASU had no impact on our Statements of Comprehensive Income. Our policy for releasing income tax effects from AOCI is to release them as investments are sold or mature and liabilities are extinguished.
Compensation - Retirement Benefits - Improving the Presentation of Net Periodic Pension Costs and Net Periodic Post Retirement Benefit Costs
In March 2017, the FASB issued ASU No. 2017-07, Compensation Retirement Benefits - Improving the Presentation of Net Periodic Pension Costs and Net Periodic Post Retirement Benefit Costs (Topic 715). The main objective of this ASU is to provide financial statement users with clearer and disaggregated information related to the components of net periodic benefit cost and improve transparency of the presentation of net periodic benefit cost in the financial statements. This Update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. Effective March 31, 2016, our qualified and nonqualified defined benefit plans were amended to freeze benefit accruals for all persons entitled to benefits under the plan; as such, the adoption of this ASU had no impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.
Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets - Clarifying the Scope of Assets Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
In February 2017, the FASB issued ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). The main objective of this ASU is intended to provide greater detail on what types of transactions should be accounted for as partial sales of nonfinancial assets. The scope of this ASU, as originally issued in ASU No. 2014-09, is intended to reduce the complexity of current GAAP requirements by clarifying which accounting guidance applies to various types of contracts that transfer assets or ownership interest to another entity. This Update was effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017 and at the same time that ASU No. 2014-09 was effective. Early adoption was permitted, but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The adoption of this ASU was applied to the partial sale of our insurance subsidiary. As such, the subsidiary is no longer included in our consolidated financial statements and we recognized a $1.9 million gain on the transaction.
Business Combinations - Clarifying the Definition of a Business
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations - Clarifying the Definition of a Business (Topic 805). The main objective of this ASU is to help financial statement preparers evaluate whether a set of transferred assets and activities (either acquired or disposed of) is a business under Topic 805, Business Combinations by changing the definition of a business. The revised definition will result in fewer acquisitions being accounted for as business combinations than under existing guidance. The definition of a business is significant because it affects the accounting for acquisitions, the identification of reporting units, consolidation evaluations and the accounting for dispositions. This Update was effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. Early adoption was permitted for transactions not yet reflected in financial statements that have been issued or made available for issuance. The adoption of this ASU had no impact on our Balance Sheets or Statements of Comprehensive Income.

7

Table of Contents

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

NOTE 1. BASIS OF PRESENTATION - continued

Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. The main objective of this ASU is to require companies to recognize the income tax effects of intercompany sales and transfers of assets other than inventory in the period in which the transfer occurs. This represents a change from existing guidance, which requires companies to defer the income tax effects of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized. The new guidance will require companies to defer the income tax effects only of intercompany transfers of inventory. This Update is effective for annual periods beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period. If an entity chooses to early adopt the amendments in the ASU, it must do so in the first interim period of its annual financial statements. That is, an entity cannot adopt the amendments in the ASU in a later interim period and apply them as if they were in effect as of the beginning of the year. The adoption of this ASU had no impact on our Balance Sheets or Statements of Comprehensive Income.
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The main objective of this ASU is to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in this Update provide guidance on the following eight specific cash flow issues: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of bank-owned life insurance (BOLI) policies, distributions received from equity method investments, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. This Update was effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. Early adoption was permitted, provided that all of the amendments are adopted in the same period. The adoption of this ASU had no material impact to the presentation of activities in our Statements of Cash Flows.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue pronouncement creates a single source of revenue guidance for all companies in all industries and is more principles-based than current revenue guidance. The pronouncement provides a five-step model for a company to recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The five steps are: 1. identify the contract with the customer; 2. identify the separate performance obligations in the contract; 3. determine the transaction price; 4. allocate the transaction price to the separate performance obligations; and 5. recognize revenue when each performance obligation is satisfied. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This ASU defers the effective date of ASU No. 2014-09 for all entities by one year.
In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), as an amendment to ASU No. 2014-09 to improve Topic 606, Revenue from Contracts with Customers, by reducing: 1. the potential for diversity in practice arising from inconsistent application of the principal versus agent guidance, and; 2. the cost and complexity of applying Topic 606 both at transition and on an ongoing basis.
In April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing, as an amendment to ASU No. 2014-09 to improve Topic 606, Revenue from Contracts with Customers, by reducing: 1. the potential for diversity in practice at initial application and; 2. the cost and complexity of applying Topic 606 both at transition and on an ongoing basis.
In May 2016, the FASB issued ASU No. 2016-12, Narrow-scope Improvements and Practical Expedients. The amendments in this ASU do not change the core principles of Topic 606, Revenue from Contracts with Customers. These amendments affect only the narrow aspects of Topic 606: 1. Collectibility Criterion; 2. Presentation of Sales Taxes and Other Similar Taxes Collected from Customers; 3. Noncash Consideration; 4. Contract Modifications at Transition and; 5. Completed Contracts at Transition.
ASU 2014-09, including transition requirements for all amendments, was effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. Early adoption was permitted as of the original effective date for interim and annual reporting periods in fiscal years beginning after December 15, 2016. As of January 1, 2018, we adopted ASU 2014-09 Revenue from Contracts with Customers — Topic 606 and all subsequent ASUs that modified Topic 606. The ASU requires that we identify the contract with a customer, identity the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when we satisfy a performance obligation. We generally satisfy our performance obligations on our contracts with customers as services are

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Table of Contents

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

NOTE 1. BASIS OF PRESENTATION - continued

rendered and the transaction prices are typically fixed; charged whether on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods. The implementation guidance had no material impact on the measurement or timing of revenue recognition.
Our primary sources of revenue are derived from interest and dividends earned on loans, investment securities and other financial instruments that are not within the scope of Topic 606. We have evaluated the nature of our contracts with customers and related revenue streams, including services charges on deposit accounts, debit and credit cards and wealth management and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Comprehensive Income was not necessary. We have also completed our evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue. The adoption of this ASU had no material impact on our Balance Sheets or Statements of Comprehensive Income.
Accounting for Financial Instruments - Overall: Classification and Measurement
In January 2016, the FASB issued ASU No. 2016-01, Accounting for Financial Instruments - Overall: Classification and Measurement (Subtopic 825-10). The amendments in this ASU address the following: 1. require equity investments to be measured at fair value with changes in fair value recognized in net income; 2. simplify the impairment assessment of equity investments without readily-determinable fair values by requiring a qualitative assessment to identify impairment; 3. eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; 4. require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 5. require separate presentation in other comprehensive income for the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; 6. require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements; and 7. clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. This ASU was effective for annual and interim periods in fiscal years beginning after December 15, 2017. We adopted ASU No. 2016-01 January 1, 2018 and have concluded that the provisions of this ASU did not materially impact our Balance Sheets or Statements of Comprehensive Income. The new guidance resulted in a change in the fair value measurement of our loan portfolio as of March 31, 2018 using an exit price notion (see Note 3: Fair Value Measurements). The new guidance also resulted in a cumulative-effect adjustment of $0.9 million from AOCI, to retained earnings at January 1, 2018 for net unrealized gains on our marketable equities portfolio. As a result of the new guidance we recognized $0.1 million of net unrealized gains in our Statements of Comprehensive Income during the three months ended March 31, 2018 on our marketable equity securities portfolio.
Recently Issued Accounting Standards
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 exist or expired before the entity's adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. We are evaluating the amendments in this ASU; however, we do not anticipate that these amendments will materially impact to our Balance Sheets or Statements of Comprehensive Income.

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

NOTE 1. BASIS OF PRESENTATION - continued

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

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

NOTE 2. EARNINGS PER SHARE

The following table reconciles the numerators and denominators of basic and diluted earnings per share for the periods presented:
 
Three Months Ended March 31,
(in thousands, except share and per share data)
2018
 
2017
Numerator for Earnings per Share—Basic:

 

Net income
$
26,163

 
$
18,188

Less: Income allocated to participating shares
80

 
60

Net Income Allocated to Shareholders
$
26,083

 
$
18,128

 
 
 
 
Numerator for Earnings per Share—Diluted:

 

Net income
$
26,163

 
$
18,188

Net Income Available to Shareholders
$
26,163

 
$
18,188

 
 
 
 
Denominators for Earnings per Share:

 

Weighted Average Shares Outstanding—Basic
34,756,726

 
34,690,250

Add: Potentially dilutive shares
242,439

 
222,011

Denominator for Treasury Stock Method—Diluted
34,999,165

 
34,912,261

 
 
 
 
Weighted Average Shares Outstanding—Basic
34,756,726

 
34,690,250

Add: Average participating shares outstanding
106,722

 
115,395

Denominator for Two-Class Method—Diluted
34,863,448

 
34,805,645

 
 
 
 
Earnings per share—basic
$
0.75

 
$
0.52

Earnings per share—diluted
$
0.75

 
$
0.52

Warrants considered anti-dilutive excluded from potentially dilutive shares - exercise price $31.53 per share, expires January 2019
400,722

 
447,103

Restricted stock considered anti-dilutive excluded from potentially dilutive shares
90,298

 
79,544


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

NOTE 3. FAIR VALUE MEASUREMENTS

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

Equity Securities
Marketable equity securities that have an active, quotable market are classified as Level 1. Marketable equity securities that are quotable, but are thinly traded or inactive, are classified as Level 2. Marketable equity securities that are not readily traded and do not have a quotable market are classified as Level 3.
Trading Assets
We use quoted market prices to determine the fair value of our trading assets. Our trading assets are held in a Rabbi Trust under a deferred compensation plan and are invested in readily quoted mutual funds. Accordingly, these assets are classified as Level 1. Rabbi Trust assets are reported in other assets in the Consolidated Balance Sheets.

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

NOTE 3. FAIR VALUE MEASUREMENTS – continued

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

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

NOTE 3. FAIR VALUE MEASUREMENTS – continued

Other Assets
We measure certain other assets at fair value on a nonrecurring basis. Fair value is based on the application of lower of cost or fair value accounting, or write-downs of individual assets. Valuation methodologies used to measure fair value are consistent with overall principles of fair value accounting and consistent with those described above.
Financial Instruments
In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and willing seller engaged in an exchange transaction. Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities with respect to such financial instruments. For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments.
Cash and Cash Equivalents
The carrying amounts reported in the Consolidated Balance Sheets for cash and due from banks, including interest-bearing deposits, approximate fair value.
Loans
With the adoption of ASU 2016-01 on January 1, 2018, we refined our methodology to estimate the fair value of our loan portfolio to use the exit price notion as required by the standard. The guidance was applied on a prospective basis resulting in prior-periods no longer being comparable.
The fair value of variable rate loans that may reprice frequently at short-term market rates is based on carrying values adjusted for liquidity and credit risk. The fair value of variable rate loans that reprice at intervals of one year or longer, such as adjustable rate mortgage products, is estimated using discounted cash flow analyses that utilize interest rates currently being offered for similar loans and adjusted for liquidity and credit risk. The fair value of fixed rate loans is estimated using a discounted cash flow analysis that utilizes interest rates currently being offered for similar loans adjusted for liquidity and credit risk.
Bank Owned Life Insurance
Fair value approximates net cash surrender value of bank owned life insurance, or BOLI.
Federal Home Loan Bank, or FHLB, and Other Restricted Stock
It is not practical to determine the fair value of our FHLB and other restricted stock due to the restrictions placed on the transferability of these stocks; it is presented at carrying value.
Deposits
The fair values disclosed for deposits without defined maturities (e.g., noninterest and interest-bearing demand, money market and savings accounts) are by definition equal to the amounts payable on demand. The carrying amounts for variable rate, fixed-term time deposits approximate their fair values. Estimated fair values for fixed rate and other time deposits are based on discounted cash flow analysis using interest rates currently offered for time deposits with similar terms. The carrying amount of accrued interest approximates fair value.
Short-Term Borrowings
The carrying amounts of securities sold under repurchase agreements, or REPOs, and other short-term borrowings approximate their fair values.

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

NOTE 3. FAIR VALUE MEASUREMENTS – continued

Long-Term Borrowings
The fair values disclosed for fixed rate long-term borrowings are determined by discounting their contractual cash flows using current interest rates for long-term borrowings of similar remaining maturities. The carrying amounts of variable rate long-term borrowings approximate their fair values.
Junior Subordinated Debt Securities
The interest rate on the variable rate junior subordinated debt securities is reset quarterly; therefore, the carrying values approximate their fair values.
Loan Commitments and Standby Letters of Credit
Off-balance sheet financial instruments consist of commitments to extend credit and letters of credit. Except for interest rate lock commitments, estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.
Other
Estimates of fair value are not made for items that are not defined as financial instruments, including such items as our core deposit intangibles and the value of our trust operations.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following tables present our assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy level at March 31, 2018 and December 31, 2017. There were no transfers between Level 1 and Level 2 for items measured at fair value on a recurring basis during the periods presented.
 
March 31, 2018
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
ASSETS
 
 
 
 
 
 
 
Debt securities available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$

 
$
14,661

 
$

 
$
14,661

Obligations of U.S. government corporations and agencies

 
160,589

 

 
160,589

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

 
102,582

 

 
102,582

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

 
30,683

 

 
30,683

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

 
248,798

 

 
248,798

Obligations of states and political subdivisions

 
125,141

 

 
125,141

Total Debt Securities Available-for-Sale

 
682,454

 

 
682,454

Marketable equity securities(1)

 
5,196

 

 
5,196

Total Securities

 
687,650

 

 
687,650

Trading securities held in a Rabbi Trust
5,048

 

 

 
5,048

Derivative financial assets:
 
 
 
 
 
 
 
Interest rate swaps

 
4,669

 

 
4,669

Interest rate lock commitments

 
271

 

 
271

Total Assets
$
5,048

 
$
692,590

 
$

 
$
697,638

LIABILITIES
 
 
 
 
 
 
 
Derivative financial liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
4,765

 
$

 
$
4,765

Forward sale contracts

 
24

 

 
24

Total Liabilities
$

 
$
4,789

 
$

 
$
4,789

(1)ASU 2016-01 was adopted January 1, 2018, resulting in separate classification of our marketable equity securities previously included in available-for-sale securities.


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

NOTE 3. FAIR VALUE MEASUREMENTS – continued

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

 
$
19,789

 
$

 
$
19,789

Obligations of U.S. government corporations and agencies

 
162,193

 

 
162,193

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

 
108,688

 

 
108,688

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

 
32,854

 

 
32,854

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

 
242,221

 

 
242,221

Obligations of states and political subdivisions

 
127,402

 

 
127,402

Marketable equity securities

 
5,144

 

 
5,144

Total Debt Securities Available-for-Sale

 
698,291

 

 
698,291

Total Securities

 
698,291

 

 
698,291

Trading securities held in a Rabbi Trust
5,080

 

 

 
5,080

Derivative financial assets:
 
 
 
 
 
 
 
Interest rate swaps

 
3,074

 

 
3,074

Interest rate lock commitments

 
226

 

 
226

Total Assets
$
5,080

 
$
701,591

 
$

 
$
706,671

LIABILITIES
 
 
 
 
 
 
 
Derivative financial liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
3,055

 
$

 
$
3,055

Forward sale contracts

 
5

 

 
5

Total Liabilities
$

 
$
3,060

 
$

 
$
3,060


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

 
$

 
$

 
$

 
$

 
$

 
$

 
$

Impaired loans

 

 
6,551

 
6,551

 

 

 
6,759

 
6,759

Other real estate owned

 

 
2,880

 
2,880

 

 

 
444

 
444

Mortgage servicing rights

 

 
106

 
106

 

 

 
178

 
178

Total Assets
$

 
$

 
$
9,537

 
$
9,537

 
$

 
$

 
$
7,381

 
$
7,381

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

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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 March 31, 2018 and December 31, 2017 are presented in the following tables:
 
Carrying
Value(1) 
 
Fair Value Measurements at March 31, 2018
(dollars in thousands)
 
Total
 
Level 1
 
Level 2
 
Level 3
ASSETS
 
 
 
 
 
 
 
 
 
Cash and due from banks, including interest-bearing deposits
$
112,849

 
$
112,849

 
$
112,849

 
$

 
$

Securities
687,650

 
687,650

 

 
687,650

 

Loans held for sale
3,283

 
3,377

 

 

 
3,377

Portfolio loans, net
5,671,567

 
5,530,443

 

 

 
5,530,443

Bank owned life insurance
72,629

 
72,629

 

 
72,629

 

FHLB and other restricted stock
29,769

 
29,769

 

 

 
29,769

Trading securities held in a Rabbi Trust
5,048

 
5,048

 
5,048

 

 

Mortgage servicing rights
4,182

 
5,023

 

 

 
5,023

Interest rate swaps
4,669

 
4,669

 

 
4,669

 

Interest rate lock commitments
271

 
271

 

 
271

 

LIABILITIES
 
 

 
 
 
 
 
 
Deposits
$
5,387,094

 
$
5,372,506

 
$

 
$

 
$
5,372,506

Securities sold under repurchase agreements
44,617

 
44,617

 

 

 
44,617

Short-term borrowings
525,000

 
525,000

 

 

 
525,000

Long-term borrowings
46,684

 
46,892

 

 

 
46,892

Junior subordinated debt securities
45,619

 
45,619

 

 

 
45,619

Interest rate swaps
4,765

 
4,765

 

 
4,765

 

Interest rate lock commitments
24

 
24

 

 
24

 

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

 
$
117,152

 
$
117,152

 
$

 
$

Securities
698,291

 
698,291

 

 
698,291

 

Loans held for sale
4,485

 
4,583

 

 

 
4,583

Portfolio loans, net
5,705,059

 
5,690,292

 

 

 
5,690,292

Bank owned life insurance
72,150

 
72,150

 

 
72,150

 

FHLB and other restricted stock
29,270

 
29,270

 

 

 
29,270

Trading securities held in a Rabbi Trust
5,080

 
5,080

 
5,080

 

 

Mortgage servicing rights
4,133

 
4,571

 

 

 
4,571

Interest rate swaps
3,074

 
3,074

 

 
3,074

 

Interest rate lock commitments
226

 
226

 

 
226

 

LIABILITIES
 
 
 
 
 
 
 
 
 
Deposits
$
5,427,891

 
$
5,426,928

 
$

 
$

 
$
5,426,928

Securities sold under repurchase agreements
50,161

 
50,161

 

 

 
50,161

Short-term borrowings
540,000

 
540,000

 

 

 
540,000

Long-term borrowings
47,301

 
47,618

 

 

 
47,618

Junior subordinated debt securities
45,619

 
45,619

 

 

 
45,619

Interest rate swaps
3,055

 
3,055

 

 
3,055

 

Interest rate lock commitments
5

 
5

 

 
5

 

(1) As reported in the Consolidated Balance Sheets 
 
 
 
 
 
 
 
 
 

17

Table of Contents

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)
March 31, 2018
 
December 31, 2017
Debt securities available for sale
682,454

 
693,147

Marketable equity securities
5,196

 
5,144

Total Securities
687,650

 
698,291

Debt Securities Available for Sale
The following tables present the amortized cost and fair value of debt securities available for sale as of March 31, 2018 and debt and equity securities available for sale as of December 31, 2017:
 
March 31, 2018
 
December 31, 2017
(dollars in thousands)
Amortized
Cost

 
Gross
Unrealized
Gains

 
Gross
Unrealized
Losses

 
Fair
Value

 
Amortized
Cost

 
Gross
Unrealized
Gains

 
Gross
Unrealized
Losses

 
Fair
Value

U.S. Treasury securities
$
14,951

 
$

 
$
(290
)
 
$
14,661

 
$
19,943

 
$

 
$
(154
)
 
$
19,789

Obligations of U.S. government corporations and agencies
161,844

 
62

 
(1,317
)
 
160,589

 
162,045

 
341

 
(193
)
 
162,193

Collateralized mortgage obligations of U.S. government corporations and agencies
105,063

 
2

 
(2,483
)
 
102,582

 
109,916

 
93

 
(1,321
)
 
108,688

Residential mortgage-backed securities of U.S. government corporations and agencies
30,700

 
443

 
(460
)
 
30,683

 
32,388

 
679

 
(213
)
 
32,854

Commercial mortgage-backed securities of U.S. government corporations and agencies (1)
255,043

 

 
(6,245
)
 
248,798

 
244,018

 
247

 
(2,044
)
 
242,221

Obligations of states and political subdivisions
122,650

 
2,563

 
(72
)
 
125,141

 
123,159

 
4,285

 
(42
)
 
127,402

Total Debt Securities Available-for-Sale
690,251

 
3,070

 
(10,867
)
 
682,454

 
691,469

 
5,645

 
(3,967
)
 
693,147

Total equity securities (2)

 

 

 

 
3,815

 
1,330

 
(1
)
 
5,144

Total Securities
$
690,251

 
$
3,070

 
$
(10,867
)
 
$
682,454

 
$
695,284

 
$
6,975

 
$
(3,968
)
 
$
698,291

(1) Includes a $5.9 million security purchase that was pending settlement as of December 31, 2017.
(2) ASU 2016-01 was adopted January 1, 2018, resulting in separate classification of our marketable equity securities previously included in available-for-sale securities.

18

Table of Contents

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

NOTE 4. SECURITIES – continued

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:
 
March 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
2
 
$
14,661

 
$
(290
)
 
 
$

 
$

 
2
 
$
14,661

 
$
(290
)
Obligations of U.S. government corporations and agencies
16
 
130,823

 
(1,274
)
 
1
 
10,000

 
(43
)
 
17
 
140,823

 
(1,317
)
Collateralized mortgage obligations of U.S. government corporations and agencies
8
 
55,695

 
(800
)
 
7
 
43,184

 
(1,683
)
 
15
 
98,879

 
(2,483
)
Residential mortgage-backed securities of U.S. government corporations and agencies
3
 
4,861

 
(106
)
 
2
 
7,976

 
(354
)
 
5
 
12,837

 
(460
)
Commercial mortgage-backed securities of U.S. government corporations and agencies
22
 
201,051

 
(4,170
)
 
5
 
47,747

 
(2,075
)
 
27
 
248,798

 
(6,245
)
Obligations of states and political subdivisions
5
 
23,700

 
(72
)
 
 

 

 
5
 
23,700

 
(72
)
Total Temporarily Impaired Debt Securities
56
 
$
430,791

 
$
(6,712
)
 
15
 
$
108,907

 
$
(4,155
)
 
71
 
$
539,698

 
$
(10,867
)

 
December 31, 2017
 
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
3
 
$
19,789

 
$
(154
)
 
 
$

 
$

 
3
 
$
19,789

 
$
(154
)
Obligations of U.S. government corporations and agencies
9
 
63,635

 
(144
)
 
1
 
10,017

 
(49
)
 
10
 
73,652

 
(193
)
Collateralized mortgage obligations of U.S. government corporations and agencies
7
 
47,465

 
(248
)
 
7
 
45,809

 
(1,073
)
 
14
 
93,274

 
(1,321
)
Residential mortgage-backed securities of U.S. government corporations and agencies
1
 
2,333

 
(10
)
 
2
 
8,638

 
(203
)
 
3
 
10,971

 
(213
)
Commercial mortgage-backed securities of U.S. government corporations and agencies
14
 
128,300

 
(775
)
 
5
 
48,746

 
(1,269
)
 
19
 
177,046

 
(2,044
)
Obligations of states and political subdivisions
2
 
10,330

 
(42
)
 
 

 

 
2
 
10,330

 
(42
)
Total Temporarily Impaired Debt Securities
36
 
$
271,852

 
$
(1,373
)
 
15
 
$
113,210

 
$
(2,594
)
 
51
 
$
385,062

 
$
(3,967
)
We do not believe any individual unrealized loss as of March 31, 2018 represents an other than temporary impairment, or OTTI. At March 31, 2018 there were 71 debt securities and at December 31, 2017 there were 51 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 securities. All debt securities are determined to be investment grade and are paying principal and interest according to the contractual terms of the security. We do not intend to sell and it is 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

Table of Contents

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:
 
March 31, 2018
 
December 31, 2017
(dollars in thousands)
Gross Unrealized Gains

 
Gross Unrealized Losses

 
Net Unrealized Gains/ (Losses)

 
Gross Unrealized Gains

 
Gross Unrealized Losses

 
Net Unrealized Gains/ (Losses)

Total unrealized gains(losses) on debt securities available-for-sale
$
3,070

 
$
(10,867
)
 
$
(7,797
)
 
$
5,645

 
$
(3,967
)
 
$
1,678

Income tax (expense)benefit
(652
)
 
2,308

 
1,656

 
(1,982
)
 
1,393

 
(589
)
Net Unrealized Gains/(losses), Net of Tax Included in Accumulated Other Comprehensive Income/(Loss)
$
2,418

 
$
(8,559
)
 
$
(6,141
)
 
$
3,663

 
$
(2,574
)
 
$
1,089

The amortized cost and fair value of debt securities available-for-sale at March 31, 2018 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.
 
March 31, 2018
(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
$
43,472

 
$
43,372

Due after one year through five years
148,616

 
148,787

Due after five years through ten years
78,565

 
78,767

Due after ten years
28,792

 
29,465

 
299,445

 
300,391

Collateralized mortgage obligations of U.S. government corporations and agencies
105,063

 
102,582

Residential mortgage-backed securities of U.S. government corporations and agencies
30,700

 
30,683

Commercial mortgage-backed securities of U.S. government corporations and agencies
255,043

 
248,798

Total Debt Securities Available-for-Sale
$
690,251

 
$
682,454

At March 31, 2018 and December 31, 2017, debt securities with carrying values of $221 million and $249 million 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 March 31,
(dollars in thousands)
2018

 
2017

Marketable Equity Securities
 
 
 
Net gains/losses recognized during the period
$
52

 
$
733

Less: Net gains/losses recognized for equity securities sold during the period

 
370

Unrealized Gains/Losses Recognized on Equity Securities Still Held
$
52

 
$
363

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.


20

Table of Contents

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 $5.1 million and $5.2 million at March 31, 2018 and December 31, 2017.
The following table indicates the composition of loans as of the dates presented:
(dollars in thousands)
March 31, 2018
 
December 31, 2017
Commercial

 

Commercial real estate
$
2,760,891

 
$
2,685,994

Commercial and industrial
1,406,950

 
1,433,266

Commercial construction
324,141

 
384,334

Total Commercial Loans
4,491,982

 
4,503,594

Consumer

 

Residential mortgage
692,385

 
698,774

Home equity
474,850

 
487,326

Installment and other consumer
66,890

 
67,204

Consumer construction
4,506

 
4,551

Total Consumer Loans
1,238,631

 
1,257,855

Total Portfolio Loans
5,730,613

 
5,761,449

Loans held for sale
3,283

 
4,485

Total Loans
$
5,733,896

 
$
5,765,934


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 percent of total portfolio loans at both March 31, 2018 and December 31, 2017. Within our commercial portfolio, the CRE and Commercial Construction portfolios combined comprised $3.1 billion or 69 percent of total commercial loans and 54 percent of total portfolio loans at March 31, 2018 and comprised of $3.1 billion or 68 percent of total commercial loans and 53 percent of total portfolio loans at December 31, 2017. Further segmentation of the CRE and Commercial Construction portfolios by collateral type reveals no concentration in excess of 13 percent of both total CRE and Commercial Construction loans at March 31, 2018 and 14 percent at December 31, 2017.
Our market area includes Pennsylvania and the contiguous states of Ohio, West Virginia, New York and Maryland. The majority of our commercial and consumer loans are made to businesses and individuals in this market area, resulting in a geographic concentration. We believe our knowledge and familiarity with customers and conditions locally outweighs this geographic concentration risk. The conditions of the local and regional economies are monitored closely through publicly available data and information supplied by our customers. Our CRE and Commercial Construction portfolios have out-of-market exposure of 5.0 percent of their combined portfolios and 2.7 percent of total portfolio loans at March 31, 2018. This compares to 5.2 percent of their combined portfolios and 2.8 percent of total portfolio loans at December 31, 2017.
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

Table of Contents

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:
 
March 31, 2018
 
December 31, 2017
(dollars in thousands)
Performing
TDRs
 
Nonperforming
TDRs
 
Total
TDRs
 
Performing
TDRs
 
Nonperforming
TDRs
 
Total
TDRs
Commercial real estate
$
2,298

 
$
944

 
$
3,242

 
$
2,579

 
$
967

 
$
3,546

Commercial and industrial
9,403

 
3,036

 
12,439

 
3,946

 
3,197

 
7,143

Commercial construction
2,400

 
414

 
2,814

 
2,420

 
2,413

 
4,833

Residential mortgage
2,178

 
2,640

 
4,818

 
2,039

 
3,585

 
5,624

Home equity
3,713

 
1,520

 
5,233

 
3,885

 
979

 
4,864

Installment and other consumer
43

 
6

 
49

 
32

 
9

 
41

Total
$
20,035

 
$
8,560

 
$
28,595

 
$
14,901

 
$
11,150

 
$
26,051

There were no TDRs returned to accruing status during the three months ended March 31, 2018 and March 31, 2017.
The following tables present the restructured loans by loan segment and by type of concession for the three months ended March 31, 2018 and 2017:
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
(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